Services Marketing

Indira Gandhi
National Open University MS-65

School of Management Studies Marketing of Services
Block
1
MARKETING OF SERVICES: AN INTRODUCTION
UNIT 1
Marketing of Services: Conceptual Framework 5
UNIT 2
Role of Services in Economy 20
UNIT 3
International Trade in Services, The WTO, and India 37
UNIT 4
Consumer Behaviour in Services 53
1
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
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IMI, New Delhi
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June, 2004 (Revision)

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BLOCK 1 MARKETING OF SERVICES :
AN INTRODUCTION
The first block of the course is concerned with the conceptual framework
regarding services marketing and also gives the role of services in national
economies as well as international trade. The block consists of four units. The
first unit entitled ‘Marketing of Services : Conceptual Framework’ explains as
to why marketing practices and applications need to be specifically evolved for
services, as they are in certain characteristics distinct from goods. The unit
deals with the concept of a service and its classifications, the difference
between goods and services, the marketing implications of these differences and
the service marketing mix.
The second unit on ‘Role of Services in Economy’ brings about the importance
of service sector in the national economies. The unit outlines details of
international as well as Indian scenario. It also brings out brief details of some
important service sectors in India. The next unit is on ‘International Trade in
Services, The WTO, and India’. It outlines recent trends in international trade
in services, provides an overview of GATS and India’s negotiating strategy and
domestic reforms. The last unit of the block gives details of consumer
behaviour in services.
3
An Introduction
MS-65: MARKETING OF SERVICES

Course Components
BLOCK UNIT UNIT TITLE AUDIO VIDEO

NOS. PROGRAMME PROGRAMME
1. MARKETING OF SERVICES:
AN INTRODUCTION
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
2. SERVICES MARKETING MIX
5. Product and Pricing Decisions

6. Place and Promotion Decisions
7. Extended Marketing Mix for Services
3. STRATEGIC ISSUES
8. Service Quality
9. Managing Capacity/Demand
10. Retaining Customers
4. SECTORAL APPLICATIONS–I
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
5. SECTORAL APPLICATIONS–II
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.
4
UNIT 1 MARKETING OF SERVICES :
CONCEPTUAL FRAMEWORK
Objectives
After going through this unit you should be able to:
define the concept of services,
identify the reasons for growth of the service sector,
explain the characteristics that distinguish services from products,
explain the implications of these characteristics in terms of designing a
marketing strategy,
explain the ways in which services can be classified so as to develop
frameworks for managing them, and
identify the services marketing mix.
Structure
1.1 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
1.1 INTRODUCTION
Economists have divided all industrial and economic activities into three main
groups: primary, secondary, and tertiary. Primary activities include agriculture,
fishing and forestry. Secondary activities cover manufacturing and construction;
tertiary activities refer to the services and distribution. In the pre-industrialised
era, primary activities were the mainstay of the economy. The Industrial
Revolution marked the beginning of increasing importance of secondary
activities and the gradually decreasing the status of agriculture and allied
activities. The period following World War II saw USA become the 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.”
1.2 THE CONCEPT OF SERVICE

Widespread interest in the effective management and marketing of services as
well as the inconclusive debate on how distinct is the marketing of intangible
services from that of the tangible products, have enriched the literature by
highlighting the service characteristics as that of intangibility, immediacy,
individuality, perishability, heterogeneity, ownership, inseparability of production
from consumption, and being experimental. In common parlance, these
characteristics are also referred as:
Services are performed, not produced.
Services are more people-based than technology-based.
Services supply cannot be easily changed to meet the suddenly changed
market needs.
Service demand has greater elasticity.
Services face unique quality control issues and a larger number of problems
in customer servicing.
Service quality is an amalgam of services.
Activity 1
If we take tangibility and intangibility as the opposite ends of a continuum, can
you by looking around identify services which can be classified along this
continuum? Think of the services utilized by you as an individual, as a family
and as an organisation.
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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
6
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)
Leasing
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
Casinos
Distributive Trades Self-improvement Courses
Wholesale Distribution Miscellaneous
Retail Distribution Beauty Parlors
Dealers, Agents Health Clubs
Domestic Help
Drycleaning
Matrimonial Service
Source: Adapted from Donald Cowell, ‘The Marketing of Services’, Heinemann, London.
another service. To produce a service may or may not require the use of
tangible goods. However, when such use is required, there is no transfer of title
(permanent ownership) to these tangible goods.”3 As in the case of a product,
in the case of services also your starting point for understanding the marketing
dynamics is the want satisfaction of the customers. It is important to correctly
identify the particular want(s) which your service is fulfilling, since this will
provide the clue for designing the most appropriate marketing strategy.
A restaurant provides satisfaction to its customers on the basis of type and

quality of its food, its decor and environment and the behaviour of its staff and
its location in a busy commercial-cum office complex. For instance, ‘Class
Touch’ was started as a restaurant serving exclusive Western and Chinese
cuisine with an expensive decor, a live band, beautifully liveried waiters and a
high-price menu. The venture was a flop right from the start. On the advice
of its marketing consultant, the restaurant changed over from serving elaborate,
expensive meals to a ‘fast-food’ outlet providing quick, reasonably priced meals
7
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?
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1.3 REASONS FOR GROWTH OF THE SERVICE

SECTOR
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.
8
Table 1.2: Reasons for Growth of Service Industries Marketing of Services:
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
courses.
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
services.
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
sharing.
Source: Schoell, K.F. and J.T. Ivy, 1981 “Marketing : Contemporary Concepts and Practices,“
Allyn and Bacon; Boston.
1.4 CHARACTERISTICS OF SERVICES

Services have a number of unique characteristics that make them so different
from products. Some of the most commonly accepted characteristics are:
a) Intangibility
b) Inseparability
c) Heterogeneity
d) Perishability
e) Ownership
9
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

Detergents
Automobiles Fast-food
Cosmetics outlets
Intangible
Dominant
Tangible
Dominant
Fast-food
outlets Advertising
agencies Airlines
Invest-
ment Consulting Teaching
management
Source: G. Lynn Shostack, “Breaking Free From Product Marketing,” Journal of Marketing 41
(April 1977): 73-80. American Marketing Association.
The distinguishing feature of a service is that its intangible aspect is dominant.

J. Bateson has described the intangible characteristics of services which make
them distinct from products4. These intangible features are:
A service cannot be touched
Precise strandardisation is not possible
There is no ownership transfer
A service cannot be patented
Production and consumption are inseparable
There are no inventories of the service
Middlemen roles are different
The consumer is part of the production process so the delivery system must
go to the market or the customer must come to the delivery system.
Inseparability
In most cases a service cannot be separated from the person or firm providing
it. A service is provided by a person who possesses a particular skill (singer),
by using equipment to handle a tangible product (dry cleaning) or by allowing
access to or use of physical infrastructure (hotel, train). A plumber has to be
10
physically present to provide the service, the beautician has to be available to Marketing of Services:
perform the massage. This is in direct contrast to products which can be
produced in the factory today, stocked for the next two, three or more months
and sold when an order is procured.
Heterogeneity
The human element is very much involved in providing and rendering services
and this makes standardisation a very difficult task to achieve. The doctor who
gave you his complete attention in your last visit may behave a little differently
the next time. The new bank clerk who cashed your cheques may not be as
efficient as the previous one and you have to spend more time for the same
activity. This is despite the fact that rules and procedures have been laid down
to reduce the role of the human element and ensure maximum efficiency.
Airlines, restaurants, banks, hotels have large number of standardised
procedures. You have to reserve a room in a hotel and this is a straight
forward procedure for which all the steps are clearly defined. Human contact
is minimal in the computerised reservation systems, but when you go to the
hotel there will be a person at the reception to hand over the key of your
room. The way this person interacts with you will be an important factor in
your overall assessment of the service provided by the hotel. The rooms, the
food, the facilities may be all perfect, but it is the people interacting with you
who make all the difference between a favourable and unfavourable perception
of the hotel.
Perishability
Services cannot be stored and are perishable. A car mechanic who has no
cars to repair today, spare berths on a train, or unsold seats in a cinema hall
represent a service capacity which is lost forever. Apart from the fact that a
service not fully utilised represents a total loss, the other dimension of this
perishability aspect is that most services may face a fluctuating demand. There
is a peak demand time for buses in the morning and evening (office hours).
Certain train routes are always more heavily booked than others. This
fluctuating demand pattern aggravates the perishability characteristic of services.
Ownership
When you buy a product you become its owner-be it a pencil, book, shirt,
refrigerator or car. In the case of a service, you may pay for its use but you
never own it. By buying a ticket you can see the evening film show in the
local cinema theater; by paying wages you can hire the services of a chauffeur
who will drive your car; by paying the required charges you can have a
marketing research firm survey into the reasons for you 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
11
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

characteristics
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)
promote.
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
market
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
operations.
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.
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1.5 SERVICES CLASSIFIED

A larger number of classification schemes for services have been developed to
provide strategic insights in managing them. Utilizing different bases, these
schemes allow us to understand the nature of the service act, the relationship
between service organisation and its customers, the nature of service demand
and the attributes of a service product. Let us discuss the schemes briefly.
1. The Nature of the Service Act
Using two dimension of tangibility of the service act and to whom services are
directed at. Lovelock5 has classified services according to whether services are
directed at people or possessions, at minds, physical possessions or assets.
Table 1.4 will help you understand this classification scheme.
Table 1.4
Nature of the Service Act 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
Banking
Discrete Theatre seat subscription Car rental

commuter tickets Pay telephone
Restaurant
13
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:
and medical advice. The implications underlined by this classification manifest
themselves in issues regarding planning and design of service for public vs.
private consumption. Involved here are issues of process, volume and
distribution of services when they are designed as public services. Services
have also been classified by Kotler8 as services designed for profit and non
profit services, depending upon the marketing objectives to be pursued in the
exchange of services.
1.6 THE SERVICES MARKETING MIX

The unique characteristics of services make the traditional 4 P marketing mix
seem inadequate. Careful management of these 4 Ps – Product, Price, Place
and Promotion though essential, are not sufficient for successful marketing of
services. Further the strategies for the four Ps require some modification while
applying to services.
Since services are produced and consumed simultaneously, the contact

personnel or the service delivery personnel become extremely important. It is
during these encounter of service providers and customers i.e. the process – on
which a lot depends with regards to the final outcome as well as the overall
perception of the service by the customer. The actual physical surroundings
during these encounters have also a substantial bearing on the service delivery.
All these facts lead to the development of an expanded marketing mix with
three new 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
PRODUCT PRICE PLACE PROMOTION PEOPLE PHYSICAL PROCESS

EVIDENCE
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
involvement
Customer
contact
Source: Booms, B.H. and Bitner, M.J, Marketing Strategies and Organisation Structure for
Services Firms, in Donnelly J and George W.R. (eds), Marketing of Services, AMA,
1981
15
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
Company
(Management)
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.
1.7 SUMMARY
The term service is rather general in concept and includes a wide variety of
services. Services are essentially performance. The service sector has grown
substantially in all the developed economies as well as in India. The reasons for
growth in service industries include increasing affluence, more leisure time,
greater life expectancy, increasing complexity of life etc. Marketing of services
need a different treatment because of the unique characteristics of services
that distinguish them from tangible goods. These characteristics are intangibility,
16
inseparability, heterogeneity, perishability and ownership. The unit discussed Marketing of Services:
their marketing implications and means of overcoming them. A number of
classification schemes for services have been identified and discussed to
provide strategic insights in managing them. The unit ends with the identification
of the service marketing mix which includes product, price, place, promotion,
people, process and physical evidence.
1.8 SELF–ASSESSMENT QUESTIONS
1) What do you understand by the term ‘service? Describe the reasons

behind the rapid growth of service sector.
2) How do services differ from products? What are the marketing implications
of service characteristics?
3) Explain the different classification schemes for services giving suitable
examples.
4) Briefly discuss the services marketing mix and the services marketing
triangle.
5) Attempt the following objective type questions:
Q.1: In the pre-industrialised era which activity/activities are/were the mainstay
of the economy?
1. Primary and Secondary
2. Primary, Secondary and Tertiary
3. Secondary and Tertiary
4. Primary only
Q.2: The first service economy of the world was/were:
1. Those countries which participated in the World War-II
2. USA
3. USA and Japan
4. Russia, Japan and United States
Q.3: Marketing implications of the service characteristic “Intangibility” are all
of the following, except:
1. Sampling difficult
2. Difficult to judge quality and value in advance
3. Relatively easy to promote
4. Not possible to patent or to have copyright
Q.4: Marketing implications of the service characteristic “Inseparability” are all
of the following, except:
1. Limited scale of operations
2. Geographically distributed market
3. Requires presence of performer
4. Direct sale
Q.5: The marketing solution to the problems posed by service characteristic
“Intangibility” are all of the following, except:
1. Use of brand name
2. Increase the tangibility
3. Increase the production of service
4. Create “world-of-mouth” 17
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
Answers:
1. 4 2. 2 3. 3 4. 2 5. 3 6. 1
7. 1 8. 3 9. 4 10. 2 11.2
1.9 FURTHER READINGS

Adrian Palmer, Principles of Services Marketing, (New York: McGraw Hill),
1998.
Christian Groonross, Service Management and Marketing, New York. John
18 Wiley, 2000.
Christopher H. Lovelock, Services Marketing: People, Technology, Strategy, Marketing of Services:
(New Jersey: Pearson), 2001.
Donald W. Cowell, The Marketing of Services, (London: Heineman), 1996.
Hans Kaper, Piet Van Helsdinger and Wonter de Vries Jr, Services Marketing
Management (New York: John Wiley), 1999.
John E.G. Bateson, Managing Services Marketing, (III ed), (Oriando: Dryden
Press), 1995.
K. Douglas Hotfman John E. G. Bateson, Essentials of Services Marketing,
(Orlando: Harcourt College Publishers), 2002.
Payne: Essence of Services Marketing, (New Delhi: Prentice Hall of India).
Ravi Shanker, “Services Marketing: Text and Readings,” (New Delhi: Excel
Books, 2002).
Teresa A. Swartz and Dawn Iacobncci, Handbook of Services Marketing
and Management, (New Delhi: Sage),2000.
Valarie A. Zeithaml and Mary Jo Bitner, Services Marketing, (New Delhi,
Tata McGraw-Hill), 2000.
1.10 REFERENCES
1. Bell, Daniel “The Coming of the Pass Industrial society” as qusted in
Cowel Donald, 1985, The Marketing of Services, Hinemann; London
2. Kotler, Philip, 1989, “Marketing Management – Analysis Planning and
Control”, Prentice Hall of India Private Limited: New Delhi.
3. Stanton, W.J., 1981, “Fundamentals of Marketing”, McGraw Hill; New
York.
4. Batesou J, “Do We Need Services Marketing”, Marketing Consumer
Services, New Insights, Report 75-115, Marketing Science Institute, Boston
1977.
5. Love lock, Christopher H. 1991, “Services Marketing”, Prentice Hall
Englewood Cliffs, N.J.
6. Shostack, G.Lynn, 1977, Breaking Free from Product Marketing, “Journal
o f Marketing”, Vol. 41, No.2.
7. Philip Kotler, 1991.
8. Ibid. (7).
19
An Introduction UNIT 2 ROLE OF SERVICES IN ECONOMY
Objectives
explain the International scenario regarding service sector and trends in
service trade,
understand how India is also becoming a service economy, employment in
service sector, and the emerging national scenario on services, and
identify key service sectors and discuss their present scenario.
Structure
2.1 Introduction
2.2 International Scenario
2.3 Service Sector in India
2.4 Analysis of Specific Service Sectors
2.5 Summary
2.7 Appendix : Service Tax in India
2.1 INTRODUCTION
The unit beings with an introduction on how globalization has given a boost to
the services sector. Thereafter, the international scenario showing the
contribution of services sector, as against agriculture and industry, to the GDP
of various countries across the globe, has been described. This section also
covers Service sector liberalization, role of WTO and the share of services
sector in the world trade. The next section of this unit details the Indian
scenario and the growth in specific sectors like, tourism, financial services,
telecom services, health services and information technology.
Services are extensively used by people day to day in all aspects of life. From
education to entertainment, finance to fast food, travel to telephone,
advertisement to amusement parks, market research to maintenance services,
and retailing to 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
research.
20
It is quite obvious from Figure 2.1 that while the role of agriculture has been Role of Services in
Economy
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
Primary
Primary
% of Output and Employment
Manufacturing
Manufacturing
Services
Services
0
1700 1800 1900 2000
YEAR
Source: J. Geruhuny and I. Miles, The New Service Economy, London, 1983.
In US economy, the fastest growing segment is services. The economies of

other developed countries are also dominated by services. This trend of growing
dominance of services has been so strong that some people term it as the
Second Industrial Revolution.
At times it is argued that growth in services is at the expense of manufacturing

sector of the economy. However, it is not true. In fact services and
manufacturing are positively linked to each other. Micheal Porter in his book,
‘The Competitive Advantage of Nations’ identified three distinct links between
manufacturing and services as explained below:
i) Buyer/supplier relationship: Many service industries have come into

existence through the de-integration of service activities by manufacturing firms.
An automobile manufacturer may outsource number of service activities like
transportation, warehousing, marketing research, legal services, education and
training of its employees, information processing etc. Service industries depend
a lot on manufacturing firms for a significant share of their sales.
ii) Services tied to the sale of manufactured goods: Sale of a wide variety
of manufactured goods creates demand for associated services. The sale of
consumer durables require ongoing need for servicing, sale of computers leads
to demand for training services and after sales services, exports of any
manufactured goods would require sale of insurance, financial services and
transportation services.
21
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.
2.2 INTERNATIONAL SCENARIO

The tremendous growth of service sector has resulted in its increased
importance to the world economies. As early as in 1948, US service sector
contributed 54% of GDP, and with the increasing trend in the use of services it
now generates 80% of the GDP.
Table 2.1: Sectoral Distribution of GDP (in %), 2002 (Estimates)
GDP
Country 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, www.cia.gov
Service sector dominates the economies of other developed nations as well. As

countries develop, the role of agriculture in the economy declines and that of
services rises. Highly developed countries all have more than 50% of GDP and
employment derived from services. A particular characteristic of the
development of service employment over time is that it is less sensitive to
business cycle fluctuations than other types of employment.
The service sector comprises 80% of US employment, up from 55% in 1950.

Most of the absolute growth in number of jobs in US in recent years is in
service sector. According to University of Michigan study, a 1/3rd cut in global
barriers to trade in services would increase US annual income by $150 billion
($ 2,100 per American family of four). Total elimination of barriers in services
would raise US annual income gain by over $ 450 billion ($ 6,380 per family of
four). Apart from US, leaders of major global service industry associations
representing the EU, Australia, Hong Kong, and Japan called for urgent
progress in the multilateral liberalization of trade in services.
Trade in services also benefits developing countries greatly. The infrastructure

of modern and growing economies and the gains made from liberalizing trade in
services and agriculture are enhanced with open service sectors. The benefits
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
Economy
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: http://www.esf.be/)
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.
23
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
Exporters
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 ... ... ... ...
Importers
United States 86.2 8.5 12.5 13 12 8 11
Germany 65.3 10.6 9.5 5 -2 8 -1
24
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,
Entertainment
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.
25
An Introduction 2.3 SERVICE SECTOR IN INDIA
The service sector is also assuming increasing importance in Indian economy.
In line with the global trend, the services sector in India is growing rapidly. In
2002, 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
sustainable.
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
26
growth rate of GDP. Thus, the service sector has grown at a higher rate than Role of Services in
Economy
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
happen.
2.4 ANALYSIS OF SPECIFIC SERVICE SECTORS

The fact that the service sector now accounts for more than half the GDP
probably marks a watershed in the evolution of the Indian economy. 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
world.
The entertainment industry, particularly films and TV, which happen to be

among the fastest growing in the world. Indian films are popular across West
Asia, Afghanistan, Central Asia, Russia and in South East Asia and are now
penetrating the Western world. India, the second largest scientific and technical
manpower in the world, has been providing varied consultancy and other
services to the world.
There is immense scope for India to undertake project and management

consultancy, repair and maintenance work pre-publishing services, and R&D in
various disciplines, and interested parties from across the world are welcome to
tap these and other capabilities available in abundance in the country. The
tourism industry in the country is well equipped, and also fast growing to offer
28
tourists with diverse interests and means, all the services needed to make their Role of Services in
Economy
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
growth.
The number of government approved hotels increased from 348 in 1980 to

1,490 in 2002 bringing in a corresponding increase in number of hotel rooms
available from 21,581 to 80,936. Table 2.7 gives the details of foreign tourist
arrival in India and earnings from tourism.
Table 2.7: Foreign Tourist Arrivals and Earnings from Tourism
Year Foreign Tourist Arrivals Earnings (US$ Billion)

(Million)
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
29
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 infoline.com
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
350
10
300
Rs. 8
250
Billion
200 6
150
4
100
50 2
0 0
6
7
0
n u lan 1
85
8
6
69
an 2
-6
-9
-9
-6
-5
-7
-8
9
-7
0-
-
0-
61
92
85
56
66
69
78
74
51
VI n 8
9
n
n u lan
n
n
n u lan
la
la
la
la
la
la
la
Pl
P
P
P
Ip
P
P
III
II
II
I
al
IV
al
al
V
VI
VI
An
An
An
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
Economy
million (Fixed including WLL-F) in 2003-04. Mobile telephony has brought about
a revolution in Indian telecom sector. During the year 2003-04 it witnessed a
growth of 160% over 2002-03. The growth of fixed and mobile subscribers
during 2003-2004 is shown below in Table 2.9.
Table 2.9: Fixed and Mobile Subscribers (in Million) in India
Service March 2003 March 2004 % growth

during the
year
Fixed including 41.48 42.58 3
WLL(F)
Mobile including 13.00 33.58 160
Cellular and
WLL(M)
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.
31
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
India.
The Indian ITES industry is estimated to grow to Rs. 810 bn in 2008. In India,
ITES-BPO segment registered a growth of 59% to reach Rs. 113 bn (US $2.3
billion). The ITES contributed 25% to the total IT Software and Service
exports from India during FY03. Captive ITES-BPO players have almost
doubled their share in Indian software exports, growing by a phenomenal 90%
in last financial year. ITES-BPO segment is projected to register a growth of
54% to clock revenues of US $ 3.6 billion during FY 2003-04. India continues
to offer great value proposition for the ITES companies. “Outsourcing to India
has helped companies achieve 40-50 per cent cost savings. Companies are also
able to generate higher free cash flows due to reduced investments in physical
infrastructure, telecom and equipment.” (Source: India Infoline)
2.5 SUMMARY
This unit explained the role of services in national economies and their
significance in international trade. Services are used by individual as well as
corporations. All the developed economies have more than sixty percent of their
GDP contributions from the service sector. As the economies develop, the role
of agriculture declines and that of service rises. The world exports of
commercial services was valued at U.S. $ 1,570 billion in 2003 with U.S.A,
U.K. Germany, Japan, France being the leading exporters while U.S.A,
Germany, Japan, U.K. and Ireland were the leading importers. 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.
2.6 SELF ASSESSMENT QUESTIONS
1. Discuss the international scenario of role played by services sector in

national economies. Do you feel India is following the trend displayed by
developed economies in this regard?
2. Explain the trends in international trade in services and identify the key
exporting and importing nations?
3. Select any three major service industries in India and explain the trends of
growth in them.
32
Role of Services in
2.7 APPENDIX Economy
SERVICE TAX IN INDIA*

1. INTRODUCTION OF SERVICE TAX IN INDIA
Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech
for the year 1994-95 introduced the new concept of Service Tax and stated
that ‘’ There is no sound reason for exempting services from taxation,
therefore, I propose to make a modest effort in this direction by imposing a tax
on services of telephones, non-life insurance and stock brokers.’’
Service Tax had been levied on the recommendations made in early 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
nation.
Bringing services under taxation is not simple as the services are intangible and
are provided by large groups of organized as well as unorganized service
providers including retailers who are scattered across the country. Further, there
are several services, which are of intermediate nature. The low level of
education of service providers also poses difficulties to both-tax administration
and assessees. As stated earlier, service tax was introduced in India for the
first time in 1994.
The Finance Acts of 1996, 1997, 1998, 2001, 2002 and 2003 added more
services to tax net by way of amendments to Finance Act, 1994. As of 2003,
total number of services on which Service Tax is levied has gone upto 58
despite withdrawal of certain Services from the tax net or grant of exemptions
(Goods Transport Operators, Outdoor Caterers, Pandal and Shamiana
Contractors, and Mechanized Slaughter Houses).
2. SERVICES COVERED UNDER SERVICE TAX
The provisions relating to Service Tax were brought into force with effect from
1st July 1994. It extends to whole of India except the state of Jammu &
Kashmir. The services, brought under the tax net in the year 1994-95 ,are as
below:
1. Telephone
2. Stockbroker
3. General Insurance
The Finance Act (2) 1996 enlarged the scope of levy of Service Tax covering
three more services, viz.,
4. Advertising agencies
5. Courier agencies
6. Radio pager services.
But tax on these services was made applicable from 1st November, 1996.
The Finance Acts of 1997 and 1998 further extended the scope of service tax
to cover a larger number of services rendered by the following service
providers, from the dates indicated against each of them.
7. Consulting engineers (7th July, 1997)
* www.servicetax.gov.in (part of CBEC website) 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.
1.4.2000)
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
34. Video-tape production Role of Services in
Economy
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
aforesaid.
1. Foreign Exchange broking services
2. Maxicab repair services
3. Minor ports (other than major ports)
The rate of Service Tax has also been increased from 5% to 8% on all the
taxable services w.e.f. 14.5.2003.
Service Tax is administered by the Central Excise Commissionerates working

under the Central Board of Excise and Customs, Department of Revenue,
35
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
compliance.
3. SERVICE TAX REVENUE

The Service Tax collections have shown a steady rise since its inception in
1994. They have grown almost to 10 folds since 1994-95 i.e. Rs. 410 crores
(1994-95) to Rs. 4125 crores (2002-03).
The revenue and assessee statistics from the year 1994-95 to 2002-03 are
shown in Table 1.
Table 1
Financial 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: www.servicetax.gov.in (Part of CBEC website).
36
UNIT 3 INTERNATIONAL TRADE IN
SERVICES, THE WTO, AND INDIA
Objectives
After studying this unit you should be able:
to outline recent trends in service sector trade and investment flows with
particular focus on 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.
Structure
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
3.9 References
3.1 INTRODUCTION
The service sector today encompasses a wide range of areas and activities. It
extends beyond the traditional areas of finance, insurance, transport,
communication, and tourism to new and dynamic areas such as software and
information technology services, environmental, and consultancy services. Over
the past two decades, the service sector has expanded rapidly and has come to
play an increasingly important role in national economies and in the international
economy. Given the growing role of services in the Indian economy and 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.
3.2 GLOBAL TRENDS IN SERVICES

Around the world, there has been a structural shift away from primary
activities and manufacturing towards services. Services today account for over
70 per cent of production and employment in many advanced countries with
producer services such as transport, communication, and distribution alone
accounting for 20 per cent of GDP. In developing countries, services have
similarly risen in importance, accounting for 40 per cent or more of total output
in some countries and also constituting a significant share of total employment.
37
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
services.
iii) Commercial Presence: Mode 3
Commercial presence is when services trade involves the establishment of
service operations in the consuming country as in the case of setting up bank
branch offices or law offices overseas. It is analogous to foreign direct
investment. Mode 3 covers juridical persons and legal entities that share
characteristics of corporations, joint ventures, partnerships, and representative
offices and branches. In existing BoP statistics, commercial presence is
recorded in the form of data on international FDI flows and income stocks in
financial accounts.
However, FDI information alone does not provide an accurate picture of the
total value of operations by service firms overseas. For instance, if a foreign
affiliate is treated as a resident in the host country, the value of its services is
not recorded in the BoP. An important supplementary measure of mode 3 based
services trade is provided by the Foreign Affiliates Trade in Services (FATS)
statistics. The FATS collects both inward and outward information on
commercial presence through indicators such as sales, employment, and value
added of majority owned enterprises located in foreign countries. Inward FATS
statistics deal with the value of services provided by foreign affiliates
established in the home country while outward FATS statistics deal with the
value of services provided by foreign affiliates owned abroad by residents of
the home country5. Gross output of foreign affiliates for 1997 is estimated at $
820 billion, or about 38 per cent of total services trade. The value of production
by foreign affiliates constituted 2.9 per cent of world GDP and 12.1 per cent of
world exports of goods and services.
iv) Movement of Natural Persons: Mode 4
This mode involves the delivery of the service through the temporary 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,
40
conceptual, and methodological difficulties in measuring this sector. There are International Trade in
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.
3.3 INDIA’S OPPORTUNITIES AND CONSTRAINTS

IN THE SERVICE SECTOR
Over the past two decades, the service sector has replaced agriculture as the
dominant sector in India. The service 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.
41
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 (www.rbi.org)
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
role.
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
42
subsector within this segment is software services which relies on cross border International Trade in
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.
43
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
44
also specify in their schedules, the limitations and exceptions they wish to International Trade in
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
credits
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
services
Commercial E.g., “25 percent of senior E.g., “Unbound”
presence management should be
nationals
Temporary entry E.g., “Unbound, except as E.g., “Unbound,
of natural persons indicated in Horizontal except as indicated in
Commitments Horizontal
Commitments”.
Source: Hoekman in (eds.) W. Martin and A. Winters (1995).

45
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
benefits.
An entry of “none” in the above schedule means that a member binds himself
not to have any measures, which violate market access and national treatment
for a specific sector and mode of supply. These are also termed full
commitments. Unbound implies that no commitment is made for a particular
mode of supply. The rest of the entries, which include specification of some
conditions and limitations are known as partial commitments. Thus, the GATS
not only gives countries the discretion to choose sectors for negotiations but
also gives them the flexibility to decide the degree of liberalization which they
wish to commit in these tabled sectors.
GATS Commitments
Liberalization has been limited thus far under the GATS. Given the discretionary
nature of the commitment process, countries have typically not scheduled the
more sensitive and regulated service sectors. More commitments have been
forthcoming in sectors like tourism and software which are relatively open and
unregulated as opposed to services like education, health, distribution, and
transport where there may be equity, employment, and government monopoly
related considerations. Moreover, even in sectors that have been scheduled,
often the coverage of subsectors and activities is quite limited. Commitments
are mostly partial in nature and tend to bind less than the status quo, especially
in the case of developing country commitments on commercial presence.
Hence, existing policies have often not been locked in through commitments.
Liberalization in mode 1 has also been limited as commitments in this mode are
mostly unbound for reasons of technical infeasibility, indicating the uncertainty
about telecom based delivery of services and e-commerce at the time of the
Uruguay Round. However, the most strikingly limited liberalization has been in
the case of mode 4 where countries have refrained from making sector
specific commitments and have made broad horizontal commitments for select
categories of service suppliers, namely those associated with commercial
presence and at higher skill and professional levels. Moreover, even these
horizontal commitments have been subject to a large number of restrictions
relating to immigration and labour market policies, recognition requirements,
nationality and residency conditions, and differential treatment in terms of taxes,
subsidies, and procurement policies. Thus, the interest of developing countries in
exporting labour based services, especially through cross border movement of
semi-skilled and unskilled service providers, has been completely unmet.
India has made limited commitments in the Uruguay Round. It did not schedule
major sectors like energy, distribution, accountancy, and legal services and even
in sectors like financial services, which it did schedule, its commitments did not
extend to subsectors like life insurance. 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
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
abuse;
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
47
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.
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3.5 NEGOTIATING STRATEGY AND DOMESTIC

REFORMS
In order to benefit from the GATS negotiations, India needs to have a coherent
external and domestic strategy. It needs to: (a) identify the 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
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
49
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.
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3.6 SUMMARY
Service sector trade and investment are likely to grow rapidly in the coming
years. The prospects for further liberalization of these flows are also promising
given heightened awareness about the importance of a competitive and efficient
service sector and much greater willingness on the part of governments across
developed and developing countries to deregulate and liberalize services
autonomously. The GATS framework provides countries with the opportunity to
lock in their liberalization in the service sector. India is likely to emerge as an
important player in both exports and imports of services. So far, India has
taken a very cautious and conservative approach to the GATS negotiations. But
if India is to realize significant market access gains in sectors and modes of
interest, then it must also be willing to make substantial market access
commitments in services and to overcome its defensive posture in these
negotiations.
1. What are the four modes of service delivery? Explain by taking examples.
2. What is your understanding of GATS and its implications for India?
3. In what specific Services sector, India has core competence, which can be
strategically exported. Give Justifications.
50
International Trade in
3.8 FURTHER READINGS Services, the WTO, and
India
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,
1995.
IMF, Balance of Payments Statistics, Washington, DC, 1999.
Karsenty, G., “Just How Big are the Stakes? An Assessment of Trade in
Services by Mode of Supply”, WTO, Geneva, 1999.
NASSCOM, The IT Software and Services Industry in India: A Strategic
Review, New Delhi, 2000.
Sauve, P. and R. Stern (eds.), GATS 2000-New Directions in Services Trade
Liberalization: An Overview, Centre for Business and Government, Harvard
University and Brookings Institution Press, Washington, DC, 2000.
Warren, T. And C. Findlay, “How Significant are the Barriers? Measuring
Impediments to Trade in Services,” in Sauve and Stern (eds.), Washington, DC,
2000.
WTO, Annual Reports, Geneva.
WTO, Council for Trade in Services, Special Session, “Proposed Liberalization
of Movement of Professionals under the General Agreement on Trade in
Service”, Communication from India, S/CSS/W/12, Geneva, 24 November, 2000.
WTO, Initial Offers and Requests, Geneva, 2002 and 2003.
3.9 REFERENCES
1. Warren and Findlay (2000), p.5.

2. WTO Annual Report (1999 and 2000).
3. Stern and Sauve (2000) and Karsenty (1999).
4. Estimates for the different modes of supply were obtained from Karsenty
(1999). The latest available estimates are for 1997 for such a mode-wise
allocation of services trade.
5. There are differences, however, between the GATS and the FATS concepts
of foreign affiliates and related service trade statistics. GATS refers to all
foreign affiliates while the FATS only refers to the majority owned affiliates.
GATS covers services provided by service and manufacturing companies
while the FATS covers the output of companies by primary activity. Since
FATS proxies service products with total production of companies in service
sectors and leaves out the value of service activities undertaken by
51
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.
52
UNIT 4 CONSUMER BEHAVIOUR IN
SERVICES
Objectives
After studying this unit you should be able to:
review the basic concepts of Consumer Behaviour;
outline the stages in consumer decision making process;
explain the factors influencing buyer behaviour; and
understand the concepts of search, experience and credence qualities and
their implications on consumer decisions making process for services.
Structure
4.1 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
4.1 INTRODUCTION
All of us buy different services for various reasons. One person may prefer to
go to a restaurant for good food while the other may opt for an exclusive
restaurant, for status. One person may prefer to read ‘The Times of India’
early in the morning, while the other may prefer to read the same newspaper
after coming back from the office. There are women who 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
buyer.
4.2 DECISION MAKING ROLES

It is being said, that for the purchase decision some other people might also be
involved and they may have different roles to play. But generally, and more
often for services, both individual or organizational, these roles are played by
more than one person. For a marketing person, it is important to know who
plays what role in the purchase decision, so as to adapt the service format and
promotional efforts to these key players.
53
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
are:
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
set.
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.
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54 ...........................................................................................................................
Consumer Behaviour in
4.3 CLASSIFICATION OF BUYERS Services
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.
4.4 CONSUMER DECISION MAKING

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
Socio-cultural
Environemtn
Field
INPUT PROCESS OUTPUT

55
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
buyer.
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.
56
Activity 2 Consumer Behaviour in
Services
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.
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4.5 FACTORS INFLUENCING BUYER BEHAVIOUR

There are a number of factors or variables which affect the buying behaviour.
For example; people go on holiday during the vacation time so vacations
become a variable. Similarly, a person may not buy any of the saving schemes
till he comes in the tax bracket, so “tax payer” becomes a variable. A person
may visit an exclusive restaurant during ‘happy hours’, which he does not visit
normally. In this case the marketing efforts of the organization (sales person
and the scheme) becomes the factor influencing to buy. Similarly, there are
other factors which affect the buying decision. These factors can be classified
into four major categories, namely: situational factors, 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
etc.
Culture, Reference Groups,

Family
Socio-Cultural Factors
57
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,
etc.
The knowledge of reference group behaviour helps in not only offering

substitutes but also in pricing and positioning them. It is important to note that
there are ‘negative’ reference groups also and some persons 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
ones.
3. Psychological Factors
a) Perceptions: It is the process by which buyers select, organize and
interpret information into a meaningful impression in their mind. Perception is
also selective in which only a small part is perceived out of the total what is
perceptible. 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
Services
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
Media
Achievements
Life styles suggests differences in the way people opt to spend on different
products differently. Life style variables (psychographics variables) help a firm
to identify the ‘Inner consumer’ or the feelings of the consumer about their
products which needs to be stressed in advertising campaigns. 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.
4.6 SEARCH, EXPERIENCE, AND CREDENCE

QUALITIES
One of the most significant differences between goods and services is that in
goods “Search Qualities” dominate while services are dominated by
“Experience and Credence Qualities”.
Figure 4.3: Continuum of evaluation for different types of products
Most Most
goods Services
Easy to evaluate Difficult to evaluate

Jewelry
Furniture
Houses
Restaurant meals
Television repair
Root canal
Medical diagnosis
Clothing
Automobiles
Vacation
Haircuts
Child care
Legal services
Auto repair
High in search High in High in credence

qualities experience qualities
qualities
Source: Zeithaml and Bitner, Services Marketing, Tata McGraw-Hill.
Search qualities are those attributes of a product which the consumer can
determine before the purchase. This is more common in physical goods. For
example colour, style, fit, feel, smell etc.
The second is the experience qualities, which are the attributes which can only
be determined after the purchase, or during the process of consumption. The
third, is the credence qualities i.e. characteristics which the consumer can not
evaluate even after the consumption, like auto repair or medial diagnosis. For
example, it may be difficult for a patient to assess whether or not a hospital
provided appropriate services. Such characteristics exist invariably in services.
In nutshell, most goods are high in search qualities and most services are high
in experience or credence qualities. Figure 4.3 gives a continuum of evaluation
for different types of products based on search, experience and credence qualities.
As services are rich in experience and credence qualities, the following

important aspects related to consumer decisions making process need to be
understood.
60
Information Search: In the case of services, consumers rely more on Consumer Behaviour in
Services
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
area.
ii) The consideration set is small as very little information is available
prior to purchase.
In case of Non-professional services the evoked set includes self provision of
services. e.g. housekeeping, laundry etc.
Innovation Diffusion: Consumer adoption of innovations is much slower in
case of services than in products. This is because consumers have to find a
distinct benefit in the offering of the competitor to shift to that. Complexity
of services makes it difficult to evaluate the ability of the provider and
indivisibility does not allow trying the service before consumption.
Perceived Risk: Consumers associate greater risk with buying services
than with goods. This is on account of intangibility of services which makes
it difficult to get information about the offering. Most services are not
standardized even if they are provided by the same provider because a lot
depends on the 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
61
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.
4.7 SUMMARY
The buying process of services are typically different from the manufactured
goods. Since the services are intangible, it is difficult to evaluate them before
the purchase. Though similar to manufactured goods, the three stages of
consumer decision making, input variables, process variables and output
variables are the same, but in services, the process variable differs significantly.
There are a number of factors which influence buyer behaviour. These include
socio-cultural factors, psychological factors, personal factors and situational
factors. The buyer behaviour for services is quite different from goods as
services are rich in experience and credence qualities unlike goods, which are
rich in search qualities.
1. In what ways the buying process differs between individual buyer and the
organizational buyer?
2. What are the differences between ‘search’ , ‘experience’ and ‘credence’
qualities? Explain with the help of examples.
3. Why do consumers of services perceive higher levels of risks associated
with their purchases? Discuss with the help of examples.
4. Briefly describe the buying process taking the example of ‘Home-Loan
Financial Services’.
1. Adrian Palmer, Principles of Services Marketing, London: McGraw Hill,

1998, p.87
2. J.A. Howard and J.N. Sheth, The Theory of Buyer Behaviour, New York,
John Wiley and Sons; 1969
3. R.P. Fisk, Toward a Consumption/Evaluation Process Model for
Services, in Donnelly and George, Marketing of Services, 1981 pp.191-195.
4. Valarie A. Zeithaml, How Consumer Evaluation Processes Differ Between
Goods and Services, in (Donnelly and George, Marketing of Services, 1981
pp.191-195) pp.39-47.
5. John E.G. Bateson, “Perceived Control and the Service Encounter, in,
John A.Czepiel, Michael R. Solomon, and Carol F. Suprenanat, eds., The
Service Encounter, (Health: Lexington Mass), 67-82.
62
FURTHER READINGS : BOOKS ON SERVICES
MARKETING
Given below is a list of books on “Marketing of Services” which you may find
useful for further reading for this course.
S. Baron and K. Harris, Services Marketing – Text and Cases , Palgrave,
2003
J. Bateson, Managing Services Marketing: Text and Readings, Dryden,
1995
L.L. Berry and A. Parasuraman, Marketing Services : Competing
Through Quality, The Free Press, 1991
D. Carson and A. Gilmore (eds.), Service Marketing- Text and Readings,
Mercury Publications, 1996
D. Cowell, The Marketing of Services, Heinemann, 1996
W.J. Glynn and J.G. Barnes (eds.), Understanding Service Management,
John Wiley and Sons, 1995
C. Groonross, Service Management and Marketing, Lexington Books,
1990
J.L. Heskett, W.E. Sasser, Jr. and C.W.L. Hart, Service Breakthroughs -
Changing the Rules of the Game, The Free Press, 1990
D.L. Kurtz and K.E. Clow, Service Marketing, John Wiley, 2002
C. H. Lovelock, Services Marketing, Prentice Hall
A. Payne, Essence of Services Marketing, Prentice Hall of India, 1996
R.T. Rust, A.J. Zahorik and T.L. Keiningham, Service Marketing, Harper
Collins, 1996
Ravi Shanker, Services Marketing- The Indian Perspective, Excel Books,
2002
T.A. Swartz, and D. Iacobucci (eds.), Handbook of Services Marketing
and Management, Sage Publications, 2000
H. Woodruffe, Services Marketing, Macmillan India, 1997
V.A. Zeithaml , A. Parasuraman and L.L. Berry, Delivering Quality
Service – Balancing Customer Perceptions and Expectations, The Free
Press, 1990
V.A. Zeithaml and M.J. Bitner, Services Marketing, , Tata McGraw-Hill,
New Delhi, 2003.
63
Indira Gandhi
Block
2
SERVICES MARKETING MIX
UNIT 5
Product and Pricing Decisions 5
UNIT 6
Place and Promotion Decisions 17
UNIT 7
Extended Marketing Mix for Services 29
1
Services Marketing Mix
Course Preparation Team*
FMS, Delhi University Mahindra Days Hotels & Resorts Goa University
Delhi Bangalore Goa



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



New Delhi New Delhi

Course Editor IIM Khozikode Director
IGNOU, New Delhi

School of Management Studies IIM Bangalore Course Coordinator and Editor
IGNOU, New Delhi
IMI, New Delhi
Print Production
Mr. A.S. Chhatwal, Asstt. Registrar (Publication),
Sr. Scale, SOMS, IGNOU

ISBN-81-266-1263-0
2 Printed at:
BLOCK 2 STRATEGIC ISSUES
In unit 1 of the course you were introduced to the marketing mix for services.
As you are now aware, in addition to the traditional 4Ps of marketing 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.
3
Services Marketing Mix MS-65: MARKETING OF SERVICES
Course Components

AN INTRODUCTION


3. STRATEGIC ISSUES
8. Service Quality

14. Case Study: Serving the Global Indian

19. Case Studies
4
UNIT 5 PRODUCT AND PRICING
DECISIONS
Objectives
After studying this unit, you should be able to:
Define the service product concept , describe the various elements of the
total service package and suggest how to go about developing a new
service offering.
Understand the concepts of service branding and positioning.
Describe how characteristics of the services influence the pricing decisions.
Discuss the pricing strategies that may be used to sell services.
Structure
5.1 Introduction
5.2 The Service Product
5.3 Developing New Service Offerings
5.4 Service Branding and Positioning
5.5 Pricing
5.6 Summary
5.8 References
5.1 INTRODUCTION
In practice the core of marketing is considered to be the marketing mix. Neil
Borden1, while quoting from an article of James Culliton2, wrote that a
marketer is viewed as a "decider", or an "artist" or a "mixer of ingredients"
who plans various means of competition. "He may follow a recipe prepared by
others, or prepare his own as he goes along, or adopt a recipe to the
ingredients immediately available, or experiment with or invent ingredients no
one else has tried." If a marketer was a "mixer of ingredients", what he
designed was a marketing mix.
Borden further wrote that "it was logical to proceed from a realization of the
existence of a variety of marketing mixes to the development of a concept that
would comprehend not only this variety, but also the market forces that cause
managements to produce a variety of mixes. It is the problems raised by these
forces that lead marketing managers to exercise their wits in devising mixes or
programmes to fight competition."
As discussed in Unit1, the marketing mix in services includes 7 Ps. This unit
covers two of the marketing mix elements i.e. Product and Price.
5.2 THE SERVICE PRODUCT

Product, in the marketing context is anything which is offered to the market for
exchange or consumption. In goods marketing we always say that there is a
tangible component to which some intangibles like style, aftersales service,
credit, etc., are integrated. In the case of services, on the contrary, the
tangible component is nil or minimal. 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
FIVE PRODUCT LEVELS

1 CORE BENEFIT The fundamental benefit or service the
customer is buying (Hotel : Rest / Sleep)
2 BASIC PRODUCT Basic, Functional Attributes (Room; Bed;
Bath…)
3 EXPECTED PRODUCT Set of attributes / Conditions the buyer
normally expects (clean room, large towel,
quietness)
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

1 CORE BENEFIT
2 BASIC PRODUCT
3 EXPECTED PRODUCT
4 AUGMENTED PRODUCT
5 POTENTIAL PRODUCT
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
6
main or substantive or 'core' service and around it are built the auxiliary or Product and Pricing
Decisions
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
WORD OF
CORPORATE
MOUTH
IMAGE
Core
Accessibility Service
of the Facilitating Supporting
Services Services Services
Consumer
Participation
MARKETING
COMMUNICATION
Source: Christian Gronroos, Service Management and Marketing, Lexington Books, 1990
Nevertheless, it is important while developing the service product package to

consider all the three levels of service: core, facilitating and supporting.
2. The Augmented Service Offering
It has been said that the basic service package is not equivalent to the service
product the customer perceives, which is, in fact based on customer's
experience and evaluation. Therefore, there is a need to involve the customer
in the production of service offering and thereby reinforcing that the basic
service package has to be expanded to a more holistic model of augmented
service offering.
Here the suggestion is that issues related to the accessibility of the service,
interaction with the service organization and consumer participation are also
integral elements of the service product. Gronross identified the relevance of
these issues in relation to the augmented services offering. The details are
summarized in the Table 5.2. Some of these aspects are covered in the Unit on
extended marketing mix.
7
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
tasks
– Location of service outlet
– Exterior and interior of service outlet
– Infrastructure, hardware, documentation
– The number and knowledge of consumers
simultaneously involved in the process.
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
process
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
information
– 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.
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5.3 DEVELOPING NEW SERVICE OFFERINGS

In order to develop a service product, as a manager you will have to follow
the following stages:
i) the customer benefit concept;
ii) the service concept;
8
iii) the service offer; Product and Pricing
Decisions
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
in?'
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
how)
service levels (quality and
quantity)
Translated into
Level 4 Service Delivery System Creation and delivery of

service using guidelines built
into the service offer.
Concerned with people
processes, facilities etc.
As a manager marketing services, you would like to market not just one
service but a range of services. You would need to take decisions on the length
and width of the range of services, the manner in which they complement and
support each other, and how well they face up to the competitor's offerings.
Table 5.3 illustrates the concept of a range of services, using the example of a
club.
Table 5.3: Examples of Range of Service
Customer Groups
Children 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
10
The service or services which you offer must be targeted at specific market Product and Pricing
Decisions
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.
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5.4 SERVICE BRANDING AND POSITIONING

Choosing a brand name for a consumer product or service is one of the most
important decisions. A well chosen brand name can provide a number of
specific advantages to the organisation. These include suggesting product
benefits, evoking feeling of trust, confidence, security and simplifying shopping.
The American Marketing Association defines a brand as follows: 'A brand is a
name , term, sign, symbol, or design, or a combination of these, intended to
identify the goods or services of one seller or group of sellers and to
differentiate them from those of competitors.' Though branding has received
considerable attention from marketers and academicians, the main focus has
been on physical goods rather than services. However, services branding has
started to receive considerable attention lately. The intangibility factor associated
with services has led to the suggestion that branding and image creation may
be even more critical for services. For a service brand to be effective it should
possess distinctiveness, relevance and memorability.
Keeping in view the transition of Indian economy to one which is dominated by

services, The Economic Times in its survey of India's most trusted brands has
started including a separate category of service brands. According to its survey
Table 5.4: Top Service Brands of India 2003
Category Telecom Airlines Food Hotels Pvt. Sector Life

Services Banks Insurance
Rank
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
Life
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
consumers
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.).
5.5 PRICING
In the case of products, the term 'price' is used for all kinds of goods- fruits,
clothes, computers, building etc. but in the case of services, different terms are
used for different services. Table 5.5 represents the term used for some
selected services.
Table 5.5: Price Terminology for Selected Services
Terminology 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
Decisions
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
13
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
discount).
c) Diversionary Pricing refers to a low price which is quoted for a basic
service to attract customers. A restaurant may offer a basic meal at a low
price but one which includes no soft drink or sweet dish. Once the
customer is attracted because of the initial low price he may be tempted to
buy a drink or an ice-cream or an additional dish. Thus he may end up
buying more than just the basic meal.
d) Guaranteed Pricing refers to pricing strategy in which payment is to be
made only after the results are achieved. Employment agencies charge their
fee only when a person actually gets a job, a property dealer charges his
commission only after the deal is actually transacted.
e) High Price Maintenance Pricing strategy is used when the high price is
associated with the quality of the service. Many doctors, lawyers and other
14
professionals follow this pricing strategy. Product and Pricing
Decisions
f) Loss Leader Pricing is one in which an initial low price is charged in the
hope of getting more business at subsequently better prices. The danger is
that the initial low price may become the price for all times to come.
g) Offset Pricing is quite similar to diversionary pricing in which a basic low
price is quoted but the extra services are rather highly priced. A
gynecologist may charge a low fee for the nine months of pregnancy
through which she regularly checks her patient, but many charge extra for
performing the actual delivery and post-delivery visits.
h) Price Bundling: Some services are consumed more effectively in
combination with other services. When customer perceive value in package
of services that are interrelated, price bundling is an appropriate strategy. It
basically means pricing and selling services as a group rather than
individually.
In addition to deciding on what to charge, the pricing strategy of a service firm

should also address the following issues:
Who should collect payment? (Organisation or a specialist intermediary)
Where should payment be made? (Location of service delivery or a
convenient outlet or customer's home)
Where should payment be made? (Before or after delivery, timings)
How should payment be made ? (Cash, credit card , third party payment etc.)
How should prices be communicated to the target market? (Communication
medium, message content etc.)
5.6 SUMMARY
This unit covered two elements of the seven marketing mix elements for
service - Product and Price. Service Product was explained to you with the
help of Kotler's five product level concept and Gronroos's three level concept.
The steps in developing a new service were identified and discussed. These
include developing a consumer benefit concept which should be translated into
service concept. Service concept then helps the organisation in detailed
designing of the service offer which is to be translated into the service delivery
system. The unit also explained the issues related to service branding and
positioning
While determining the prices of services it is important to consider the

perishability and intangibility aspects. Also, a number of services are subject to
price regulations by the government. A number of pricing strategies can be
used by services marketers. These include differential pricing, discount pricing,
loss leader pricing etc. In addition a number of other decisions related to pricing
have to be undertaken like who should collect the payment, where, when and how.
1. Differentiate between core, facilitating and supporting services, giving

suitable examples.
2. Discuss the various stages in the development of a new service offering.
3. What are the basic differences between pricing of goods and pricing of
services? Does characteristics of services influence their pricing? Discuss,
taking each service characteristic, one by one. 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
services.
6. Read the case on "Dosa King" given in the last unit (Unit 19) of this
course and answer the questions asked in the case.
5.8 REFERENCES
1. Neil H.Borden, "The Concept of Marketing Mix", Journal of Advertising
Research, June 1964, pp. 2-7.
2. James W.Culliton, The Management of Marketing Costs, (Boston :
Graduate School of Business Administration, Harvard University), 1948.
3. Philip Kolter, Marketing Management : Millenium Edition, (New Delhi :
Practice Hall of India, 2000).
4. Christian Gronross, "Developing the Service Offering - A Source of
Competitive Advantage," in C.Susprenant (ed), Add Value to Your Services,
(Chicago : American Marketing Association), p.83, 1987.
16
UNIT 6 PLACE AND PROMOTION
DECISIONS
Objectives
The objectives of this unit are:
To examine how service characteristics influence distribution decisions.
To identify the methods of distribution for service industries.
To propose guidelines for advertising, sales promotion and other promotional
methods for service industries.
Structure
6.1 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
6.1 INTRODUCTION
Distribution means 'PLACE' decisions and like manufactured goods such
decisions are important in service industries as these decisions relate to
Location, Delivery and Coverage. Though it might be easy to understand these
concepts for 'physical items', however we have examples of unsold or spare
seats in Airlines sectors, unsold rooms in hotels and unsold table covers in
restaurants. The service characteristics have direct impact on distribution
decisions and in this unit we shell examine the same. We will also be taking up
another marketing mix element - Promotion. The various components of
'promotion mix' viz. - advertising, sales promotion, publicity and public relations -
will be discussed in relation to services.
6.2 PLACE OR DISTRIBUTION

The most important decision element in the distribution strategy relates to the
issue of location of the service so as to attract the maximum number of
consumers. The inseparability characteristic of service such as those of doctors,
teachers, consultants, mechanics etc. poses a distribution constraint since they
are able to serve only a limited, localised market. The other characteristic of
services which affects the distribution strategy is the fixed location of services
such as universities, restaurants, and hospitals which necessitates the customer
to go to the service location rather than vice-versa.
The first decision variable in planning the distribution strategy relates to the
location of the service. In deciding where to locate your service, you should
raise the following questions as they would help you arrive at the right decision.
i) How important is the location of the service to the customers? Will an
inconvenient location lead to purchase being postponed or being taken over
by a competitor? The answer is 'yes' in case of services such as dry
cleaning, fast food outlets where convenience is the most critical factor. The
17
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.
6.3 METHODS OF DISTRIBUTION IN SERVICES

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

Electronic channels e.g., 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
18
Customer choice and ability to customize Place and Promotion
Decisions
Quick customer feedback
Activity 1
Compare the advantages (or disadvantages) of online railway reservation
system with conventional reservation window system.
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b) Franchising
The other recent trend in distribution of services is that of franchising.
Franchising is the granting of rights to another person or institution to exploit a
trade name, trade mark or product in return for a lump-sum payment or a
royalty. Franchise is characteristed by the following features:
a) Ownership by one person of a name, an idea, a secret process or
specialised piece of equipment and the goodwill associated with it.
b) The grant of a licence by that person to another permitting the exploitation
of such name, idea process or equipment and the goodwill associated his
rights.
c) The inclusion in the licence agreement of regulations relating to operation of
the business in the conduct of which the licencee exploits his rights.
d) The payment by the licencee of a royalty or some other consideration for
the rights that are obtained.
In service Industries franchises operate in the area of hotels, restaurants, car

rentals, fast food outlets, beauty parlours, pest control, travel agencies, office
services, packers and movers, couriers, business centres, etc.
The advantages provided by a franchising arrangement are as follows:

1. There are usually training materials already developed, for both franchisees
and their workers.
2. Expansion through franching can proceed quickly.
3. The franchiser need apply only minimal controls; it does not have to develop
as large a bureaucracy to govern the business.
4. A franchiser's overhead is lower because the franchisee does hiring,
collections, local promotions, etc.
5. There are economies of scale to advertising and promotion.
6. The franchisee is responsible for most of the cost control.
7. There is often less risk attached to franchise expansion than with the
creation of new service ventures that may not have been tested as well.
8. Franchises usually have a better record for staying viable business than the
typical service business startup.
9. Local operators are committed because they have their own capital at risk.
10. The service tasks, service standards, and service delivery systems are
usually well defined and structured, and thus they work well. They have
been prototyped, and many of the potential problems with the operations
have already been identified and ironed out.
c) Quasi Retailing
The quasi-retail outlets, sell services rather than goods, 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
otherwise.
Arguments for Quasi-Retail are that many complement other retail businesses.
For example users of facilities like banks and building societies may use shops
selling goods on the same shopping trip. Service outlets can have imaginative
window displays to encourage window shopping. There are some suggestions
for quasi retail establishments to succeed. Firstly, they should encourage
customers to travel longer distances, as the retail radius of the outlet might
otherwise remain small. This can be done by special promotions and displays.
The Golden arch of McDonald's can be seen from a distance and can help the
people to identify it. The second suggestion is to locate service outlets near
complementary facilities, like: multiple theatre complexes and entertainment
centers.
The third suggestion which can be considered is to centralize service production

facilities but decentralize customer contact facilities (e.g. photograph processing,
pathological labs, etc.), which will help in expansion of the market and
reduction in service production cost.
The fourth suggestion is to reduce the range of service offer at individual

service outlets to match the market requirements and also to reduce the
overheads. For example the Apollo Clinics are not the full service hospitals but
they help in market coverage and delivery of services. There could be many
more suggestions and therefore each service organization must evaluate how it
can be benefited from quasi retailing.
Activity 2
Do you think that a specialty hospital like Escorts or Apollo can cater to the
requirements of the public through one main hospital in a particular region of
the country? If no, then what relative advantages you see in "Quasi Retail
Outlets" of the health care organization?
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2) Sales via Intermediaries
To the extent the middlemen exist in a service channel, they are typically sales
agents, brokers since there are no inventories to be purchased or distributed.
Service Channel tends to be direct. Therefore, this Production/Distribution house
should be located, to 'sell' whatever you have in the inventory where it is
possible. Place decisions are therefore, all extra-corporate entities between
producer and prospective users that is utilized to make the service available
and/or convenient. A Distribution Channel for a service organization is,
therefore, is a sequence of firms (or units) involved is moving a service from
producer to consumer.
20
Key Issues Involving Intermediaries Place and Promotion
Decisions
The following are the major issues which should be addressed before hand in
deciding the distribution strategy involving intermediaries:
conflict over objectives and performance
conflict over costs and rewards
control of service quality
empowerment versus control
channel ambiguity
A service organization can develop an effective channel system if it helps the

intermediary to develop customer-based service processes by providing the
required support. Also through training it may develop the intermediary to
deliver service quality and gradually move to a cooperative management system
and controls.
Keeping in view the characteristics of services and the potential management

problems in retailing of services, as shown in Fig 6.1, there are distinct channel
configurations, which one can notice in service sector. Rathmell has suggested
the dominant channel configuration in the service sector where agents and
brokers play the key role in distribution of services.
Figure 6.1: Channel Configurations of Services
Product or Creator of Service
Agent or Broker
(Selling)
Agent or Broker
Agent or Broker
(Buying)
Customer or Industrial Customer
Agent: An agent is an independent intermediary, who may act in the name of,
or for a principal. His contract will define these provisions along with territorial
rights, exclusivity and sales commissions.
Broker: A broker is an independent intermediary between buyer and seller

who bring parties together to facilitate the conclusion of sales contract. A
broker may have continuing relationship for his client under a contract period;
for which he may charge fee for assistance. Alternately, a broker may be for a
special job to be undertaken.
There are obvious benefits in distributing services through Agents and Brokers.
Firstly, they help in reducing the selling and distribution costs besides a wider
representation in the market. Secondly, such intermediary's possess special skills
21
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:
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Functions of Agents and Brokers
The major function of these agents and brokers is, like any other intermediary,
to bring the producer of service and the user or consumer together.
For certain services, agents can be identified and deployed with selling as the
chief function to be performed by them. These agents can be compared with
the agents for goods and they are classified as brokers or sales agents. The
example of this kind of channel is transportation (travel agents) and office or
factory workers (employment agencies). However in some cases the agents
may be trained in the creation and production of service and then franchised to
sell it (eg, Shahnaz Hussain Beauty Parlors).
In case of certain services, actual product is not transferable and therefore

tangible representations are created and transferred. This type of channel is
used for marketing insurance services, where a contact document exists as a
physical and tangible representation of the services.
Another characteristic of services is that the services are generally not

delivered to the buyer and the creation of time and place utilities is a vital
function in the services marketing. Irrespective of whether one uses agents or
middlemen or direct sales channel the factor of location keeping in view the
potential markets will be the most significant factor in channel selection
decision. Duane David et.al, are of the view that location considerations along
with personal sources of information are two of the critical factors in final
purchase decision of many services.
The problem of standardization and uniformity restrains the service organization

to use middlemen to any great extent and limit the geographical area which the
service organisations propose to reach and cover. This lays emphasis on the
significance of good selection to attain maximum coverage at the market place.
Banking organizations have started reliving this fact and introduced extension
counters, mobile banking apart from opening branches in rural areas.
Logistics in Services
The field of logistics has not been recognized as an area of consideration for
effective distribution of services, it could be the issue of locating a site for the
new branch of a bank or delivering health care facilities or location of
educational institutions, etc. In India these logistical problems are always
overshadowed by the Government policy or interventions. There are guidelines
suggesting that to open a single branch in any urban area, a nationalized bank
has to first open a fixed number of branches in rural areas. For promoting the
concept of smaller family and immunization a number of Primary Health
Centers have been opened but neither have they had the required staff nor the
22
infrastructure. The significance of logistics is increasingly felt in the services Place and Promotion
Decisions
sector as the field of logistic is gaining importance in the manufacturing
industries.
6.4 PROMOTION
It is now established that there are clear differences in information usages
between goods and services. First, the difference is that consumers of services
are less likely to purchase without information than those of buying goods.
Secondly, the consumer of services will prefer personal sources over impersonal
sources of information. And thirdly, the basic characteristics of services have
implications for communication strategy. For example, in hospitality industry the
intangible service offer is tangibalized and represented in the promotional
material and customers decide to buy or not to buy on the strengths of the
descriptions and representations of the service offer in the promotional material.
Therefore, the above three differences influence the decisions with regard to
with regard to (a) the communications objectives (b) target audiences and (c)
planning of each of the sub elements of the promotion mix.
Promotion Objectives
Although there could be a variety of objectives to promote, but the basic
objectives of the promotion mix for services may fall under one of the
following:
1. Develop personal relations with client (personal relations might result in
satisfaction, more than their service offer).
2. Make a strong impression of competency, honesty and sincerity (professional
orientation to service transaction so as to win buyers confidence in sellers
abilities to deliver the services).
3. Should be able to use indirect selling techniques (creating derived demand or
act as a buying consultant).
4. Manage to maintain a fine image by positive word of mouth.
5. Packaging and customization.
Activity 4
SBI has recently launched Credit Cards and Insurance services. What would
be the possible advertising objectives for there services?
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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
follows:
a) use simple, clear messages;
b) emphasise the benefits of service;
c) promise only that which can be delivered and do not exaggerate claims;
d) build on word-of-mouth communication by using testimony of actual
consumers in advertisements; and
e) provide tangible clues to services by using well-known personalities or
objects to help customers identify the service.
One other aspect which is of importance in designing an appropriate advertising

strategy is the high level of consumer-organisation interaction required in certain
types of services (beauty saloons, management consultant, doctor). In these
types of services, the objectives of advertising have been identified as:
a) creating an understanding of the company in the customers' minds by
describing the company's services, activities and its areas of expertise
b) creating a positive image for the company
c) building a strong sense of identification with the customer by turning his
needs, values and attitudes
d) creating a positive background for the sales people to sell the services by
providing all relevant information about the company.
George and Berry, keeping in view the intangibility of services, proposed that in
the case of services a customers is buying the performance of the service
personnel and therefore the advertising in service industries should not only
restrict itself to encouraging consumption, but also it should encourage
employees to perform well. They proposed the following six basic guidelines to
help design effective advertising programmes.
– The advertising should have positive effects on contact personnel.
– The advertising should capitalize on the word of mouth.
– The advertising should provide tangible clues to the customers.
– The advertising should make the service offering easily understood.
– The advertising should contribute to the continuity.
– The advertising should promise what is possible.
ii) Consumer Promotions: Lovelock and Quelch, while listing the various
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
Decisions
one should carefully consider the six basic elements, namely, product scope,
market scope, value, timing, identification of the beneficiary and protection
against competition. They further suggested that unlike physical goods the
varieties of schemes available as consumer sales promotion schemes are highly
limited. For example,
– Sampling cannot be used frequently because of the cost of service.
– Premiums are frequently used to give an element of tangibility.
– Price/quantity promotion can help generating long term commitment from
consumers e.g. group rates for hotels.
– Coupons are lesser in use.
– Refunds and future discounts not much in practice.
– Prize Promotions can be used effectively and add excitement and
involvement.
Activity 5
Identify promotions which you have recently seen offered by
a. Commercial Banks
b. Hospitals
c. Retail Chains
d. Multiplex Cinema Houses
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iii) Guidelines for Selling Services: Much has been written on the sales
management, primarily in the context of product marketing. Johnson observed
that for a service sales personnel the following do's and don'ts should be
followed.
First, the service sales person should develop a personal relationship with the
client. Quite often it is the personal relationship rather than the service itself
that results in satisfaction or dissatisfaction with the service. If there is a
distinct need for a high quality personalized service, then one must pay more
attention to its organizational structure.
Secondly, it is suggested that one must adopt a professional orientation as the

key to most service transactions is the buyer's confidence in the seller's ability
to deliver the desired results. It is therefore important that a service sales
person must make a strong impression of competency, honesty and sincerity.
Thirdly, a service sales personnel has to use indirect selling techniques, as what
he/she is promoting is an intangible. This can be done either by creating a
derived demand or by playing the role of buying consultant. Most hotels first
sell the location and then their hotel to the customer.
Fourthly, they have to build and maintain a favourable image. The public
opinion plays a greater role in marketing a service; therefore managing 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
25
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
Decisions
care running his own clinic-cum-nursing home and organizing free eye camps in
all over the region. This community service not only spread his name but also
proved his competence. The local newspapers might carry stories about such
camps to give further boost to the promotion.
Therefore promotional activities like community relations, event management,

media blitz, corporate identity programmes have relevance and they should be
used innovatively and effectively.
v) Word of Mouth: Services being rich in experience qualities, word of mouth

plays an important role in promoting services. Services are adopted, if not more,
as much because of word of mouth communications as because of active
promotion by marketers. However, people seldom pass on information about a
product or service without some reasons. Managers who want to take
advantage of word of mouth communication should make specific efforts in this
direction. Given below are some suggestions for stimulating a positive word of
mouth (apart from providing excellent service quality)
Offering a gift, discount or other reward to customers who bring in new
customers.
Asking customers who express satisfaction, to tell their friends.
Running a newsletter and asking customers to contribute. Contribution may
be in terms of letters, stories or ideas. This can also be done through
website.
Reward your regular customers with some freebies.
Target opinion formers.
Activity 6
Identify the role of PR for Delhi Police. Do you think any other communication
tool can be more effective:
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6.5 SUMMARY
When it comes to distribution of services the channels are direct or short, with
maximum of one-to-two level. Direct distribution of services can be through
electronic channels, franchising or retailing. Services can also be distributed
through intermediaries like agents or brokers. Promotional issues are also unique
in service industries and typically public relations takes a front seat, while
advertising is more of 'corporate advertising.' The unit provides you guidelines
on different elements of promotional mix.
6.6 SELF-ASSESSMENT QUESTIONS
1. Differentiate between the channels of distribution and distribution logistics, as

applicable in the Services Sector. Explain both these concepts in the context
of a courier company.
2. What are the relative advantages (or disadvantages) of direct sales vs. sales
via intermediaries? Give specific examples in support. 27
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.
Discuss.
6.7 REFERENCES AND FURTHER READINGS
1. John M.Rathmell, Marketing in Service Sector (Cambridge Mass: Winthrop

publishers), 1974, p.110.
2. Duane L.David, Joseph P.Guiltinan and Wesley H.Jones, “Service
Characteristics, Consumer Research, and the Classification of Retail
Services”, Journal of Retailing, Fall 1979, pp. 3-23.
3. Ravi Shanker, “Distribution of Services”, Managing Distribution, (New
Delhi : Manas Publication), 1992, p.125
4. William R. George and Leonard L Berry :”Guidelines for the Advertising of
Services”, Business Horizons, July-August, 1981.
5. Christopher H.Lovelock and John A. Quelch, “Consumer Promotions in
Service Marketing,” Business Horizons, May-June, 1983.
6. Eugene M.Johnson, “The Selling of Services” In :Victor P.Nuell, eds;
Handbook of Modern Marketing, (New York : Mc Graw Hills), 1987.
7. Tom Duncan, A Study of How Manufacturers and Service Companies
Perceive and Use Marketing Public Relations, (muncie, Ind :Ball State
University), December 1985.
8. Philip Kotler, “Megamarketing”, Harvard Business Review, March-April,
1986, pp. 117-124.
28
UNIT 7 EXTENDED MARKETING MIX
FOR SERVICES
Objectives
The objectives of this unit are:
To introduce the extended marketing mix for services
To describe the fifth ‘P’ of the marketing mix called ‘People’ and
emphasize on the need for internal marketing in a service organization
To discuss the relevance and roles of ‘Physical Evidence’ in service
marketing
To explain the meaning and significance of ‘Process Management’ in
marketing of services and the issues involved therein.
Structure
7.1 Introduction
7.2 People
7.3 Internal Marketing
7.4 Physical Evidence
7.5 Process
7.6 Summary
7.7 Self Assessment-Questions
7.1 INTRODUCTION
For service industries, it was observed that the traditional marketing mix was
inadequate because of three main reasons. The first reason was that the
original marketing mix was developed for manufacturing industries, which
implies that the services offered by service companies ought to be changed in a
more product like manner so that the existing marketing tools can be applied.
This was practically difficult.
The second reason was that the marketing practitioners in the service sector
found that the marketing mix does not address to their needs. They observed
that the services have certain basic characteristics, which in turn have
marketing implications (as discussed in Unit 1). For example there is a
problem as regard to maintaining the quality due to lack of standardization or
services 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:
7.2 PEOPLE
People constitute an important dimension in the management of services in their
role both as performers of services and as customers. People as performers of
services are important because, “A customer sees a company through its
employees. The employees represent the first line of contact with the customer.
They must, therefore, be well informed and provide the kind of service that
wins customer approval. The firm must recognise that each employee is a
salesman for the 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)
30
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.
7.3 INTERNAL MARKETING

Although the discussion on significance of employees in the business activity
started in mid-seventies the concept of internal marketing was introduced only
afterwards. One school of advocates of this concept initially suggested that the
employer should apply market research, market segmentation and traditional
marketing activities like advertising in order to attract employees and make
them perform in the desired way. Such traditional marketing efforts should be
used internally.
It was Gronross who suggested that internal marketing should be broader than
the traditional marketing. He suggested that internal marketing should be
viewed as a managerial philosophy. According to him, “The internal marketing
concept states that the internal market of employees is best motivated for
service-mindedness and customer-oriented performance by an active marketing
like approach, where a variety of activities are used internally in an active,
marketing like and coordinated way.” The starting point in internal marketing is
that the employees are the first internal market for the organization.
a) Strategic and Tactical Objectives of Internal Marketing
Gronrooss clarified that the basic objective of internal marketing is to develop
motivated and customer conscious employees. If this is the case, then it has
strategic as well tactical implications. His point of view has been summarized
in Table 7.1.
Table 7.1: Strategic and Tactical Objectives of Internal Marketing
Overall Objective 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
company;
the employees must understand why they are
expected to perform in a certain manner, or in a
certain situation, actively support a given
31
service or supporting service;
the employees must accept the services and
other activities of the company in order to
support the service in their contact with the
consumers;
a service must be fully developed and internally
accepted before it is launched; and
the internal information channels must work;
personnel selling is needed internally, too.
Source: Christian Gronross, “Internal Marketing: An Integral Part of Marketing Theory.” In:
J.H. Donnelly and W.R. George, Eds., Marketing of Services, (Chicago: American
Marketing Association), 1981.
Parsuraman and Berry suggested that a service company can only be as good
as its people. A service is a performance, and it is usually difficult to separate
the performance from the people. If the people 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
excellently;
4. bring people together to benefit from the fruits of team play;
5. leverage the freedom factor;
6. nurture achievement through measurement and rewards; and
7. base job-product design decisions on research.
The seven components of internal marketing practice, as indicated above lend

us to an action checklist, which is given in Table 7.2.
Table 7.2: Action checklist on Internal Marketing
1. Do we compete as hard for employees as we do for end-customers? Are we

imaginative in how we compete for talent? Are we bold? Do we experiment
and try new strategies? Do we use a variety of media? Do we use the right
people to recruit and interview- people who will make a strong impression,
people who can sell?
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
32
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
culture?
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
High
customer
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
le
yc
ee
C
oy
Employees
become bored pl Minimization of
Customer Em selection effort
dissatisfaction Minimization
of training
Employees can’t
cle
le
respond to customer Cy
yc
err
C
problems me
sotom Source:
Cus t
Cu
Source: Schlesinger and Heskett 33

Services Marketing Mix Figure 7.2: Cycle of Success
Low
customer
turnover Repeat emphasis on
customer loyalty and
retention
Customer
loyalty
Higher
profit
margins
Broadened
Lowered turnover, job designs
high service quality
Continuity in
relationship with Train, empower frontline
customer Employee satisfaction, personnel to control quality
positive service attitude
cle
Cy
ee
y Above average
Extensive plo wages
training Em
High customer Intensified
satisfaction selection effort
cle
cle
Cy
er r
Cy
me
stom
Custo
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
needs.
3. Remove the barriers: Once the CEOs have a strategic plan, they need to
tackle organisational elements that will inhibit its success. For example, are
there too many layers of management? Do incentives and compensation
plans mesh with the strategic goal?
4. Identify information needs for decision making: Make sure that information
needs are met at all levels of the hospital-from CEO to clerk.
5. Develop a process of continual improvement: Once you have translated your
strategy into action, constantly assess its performance and ways that
performance can be improved.
6. Empower and motivate your staff: This is the only way that total quality
management can be fully integrated into every aspect of the hospital.
7.4 PHYSICAL EVIDENCE

Cleanliness in a doctor’s clinic, the exterior appearance and interior decor of a
restaurant, the comfort of the seating arrangement in a cinema hall, adequate
34
facility for personal needs at the airport all contribute towards the image of the 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.
35
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
PHYSICAL ENVIRONMENT
Ð Ð Ð
( , ,
, ,
) , .
.
Ð . 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
impression
Socializing
employees
Managing trust
ROLE
OF
Providing EVIDENCE
sensory stimuli
Facilitating
quality of
Changing the service
image
Depending on the competitive situation, marketing objective and the resources,

an organization can use evidence for some or all of the above roles, though
these roles are not mutually exclusive. Arising out of the above reasons the
services organization are expected to use a two prong marketing
communication strategy aimed at not only tangibalizing the message but also
the service.
Tangibalizing the service implies that tangibles associated with the service are
emphasized in communication as if they themselves form the service. For
example, DHL courier service is advertised with a visual of an airport showing
a fleet of their aircrafts and Benz trucks. Alternately, you create tangible
representations of the service to symbolize. For example, ‘comfort’ in air travel
can be tangiblized using comfortable seats with extra leg-space. This can also
be emphasized in advertising.
The second step of marketing communication, tools aim at tangibalizing the

message by creative use of evidence in messages, by guaranteeing the service
and by encouraging positive word of mouth. By tangibalizing the message the
service organization makes the advertising message less abstract and more
credible through the use of physical evidence. For example, “Personal Point” is
giving physical evidences as regard to the weight loss of their customers. The
other method of tangibalizing the message is to guarantee the service. For
example, some of the private airlines emphasize on a higher percentage of on
time arrivals and departures.
Hart suggested that though warranties are effectively used in manufacturing

goods quite successfully, they can equally be applicable in service industries. If
the quality of the service and the service delivery of an organization are
excellent, a service organization then can possibly guarantee it to gain
competitive advantage. We will discuss the issues related to service guarantees
in the next block.
37
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.
7.5 PROCESS
In a service organisation, the system by which you receive delivery of the
service constitutes the process. In fast food outlets the process comprises
buying the coupons at one counter and picking up the food against that at
another counter.
The process of a delivery function which can be compared with that of

operations management implies the conversion of input into the finished product.
But in a service organisation there is no clear cut input or output. Rather it is
the process of adding ‘value’ or ‘utility’ to system inputs to create outputs
which are useful for the customers.
Services can be described on the basis of the types of processes used in the
delivery of the services. The three kinds of delivery processes that are
applicable in case of service products are line operations, job shop operations
and intermittent operations. Self-service restaurants and shops are examples of
line operations. The consumer moves through logically arranged operations
which are arranged in a sequence. In a self-service departmental store, the
consumer starts picking up the items he needs and pays for them near the exit.
This kind of delivery process is relevant when the service you are providing is
fairly standard and the consumers’ requirement is of a routine nature.
When the consumers require a combination of services using different

sequences, the job shop type of operation is more useful. Hospitals, restaurants
and educational institutions usually have this type of delivery process. In a
hospital, some patients need only consultation in the Out Patient Department,
some others may need consultation as well as medication or X-ray, some
patients require hospitalisation for surgery, medication or investigations. All these
categories of consumers require a different combination of dishes. A college
may offer courses for full-time students as well as for working people through
correspondence.
Intermittent operations are useful when the type of service is rarely repeated.
Firms offering consultancy for projects use this kind of delivery system.
Advertising agencies also use the intermittent delivery system since each
advertising campaign requires a unique set of input factors.
As a manager you are interested in optimising the efficiency of your

organisation without sacrificing the qualitative aspect. Some of the critical
questions you need to focus upon are:
a) What are the steps involved in delivering the service to the consumer?
b) Are they arranged in the most logical sequence?
c) If not, can some steps be eliminated, combined or rearranged to form a
smoother sequence?
d) What are the steps in which the consumer is involved?
e) Can the consumers’ contact be reduced or totally eliminated?
f) Can we introduce automation to speed up the delivery process?
38
You will appreciate that the importance of process management is that it 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
organization.
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
system.
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
system.
Shostack gave a much-simplified version and described the ‘process’ in three

stages. First, a process can be broken down in logical steps to facilitate
analysis and control. Secondly, there are more than one available options of
processes in which output may differ. Finally, each system includes the
concept of deviation or tolerance standards in recognition that the processes are
‘real time’ phenomena that do not conform perfectly to any model or
description, but functions within a norm.
Shostack further observed that in marketing literature no description on process

is found although concepts, which relate to process like ‘standardization’ and
‘customization’, are frequently mentioned. In her article Shostack described
processes in two ways.
39
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.
40
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.”
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
7.6 SUMMARY
Service industries have typically lagged behind manufacturing firms in adopting
and using marketing concepts. But this is now changing. It is said that
services marketing strategy calls not for external marketing but also for internal
marketing to motivate the employees and interactive marketing to create skills
in the service provides. The unit provided you an action checklist on internal
marketing. The importance of internal marketing was highlighted using cycle of
success and cycle of failure. The next element of extended marketing mix
discussed in the unit is Physical Evidence, which includes both peripheral as
well as essential evidence. The various elements of physical evidence are
ambient factors, design factors and social factors. The unit outlines the role of
physical evidence as well. The last part of the unit was devoted on ‘process
management’. The various aspects involved in process management were
outlined. These include process planning and control, operations planning,
facilities design, scheduling inventory planning and control, quality control,
operations control and forecasting.
1. What do you think are the main reasons for including the element of people
in the marketing mix for services?
2. Do you think that physical evidence really matters in marketing of services?
Discuss with the help of examples.
3. Can varied process management be followed in marketing the same
service? Discuss by taking an example.
4. Write short notes on the following:
a) Physical evidence as an element of Marketing Mix.
b) Significance of Internal Marketing..
5. Compare and contrast the 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.
41
7.8 REFERENCES AND FURTHER READINGS
1. B.H.Booms and M.J.Bitner, “Marketing Strategies and Organisation
Structure for Service Firms,” in J.Donnelly and W.R.George (eds.),
Marketing of Services, (Chicago :American Marketing Association),
1981.
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.
42
Extended Marketing
FURTHER READINGS : BOOKS ON SERVICES Mix for Services
MARKETING
Given below is a list of books on “Marketing of Services” which you may
find useful for further reading for this course.
S. Baron and K. Harris, Services Marketing – Text and Cases , Palgrave,
2003
J. Bateson, Managing Services Marketing: Text and Readings, Dryden,
1995
L.L. Berry and A. Parasuraman, Marketing Services : Competing
Through Quality, The Free Press, 1991
D. Carson and A. Gilmore (eds.), Service Marketing- Text and Readings,
Mercury Publications, 1996
D. Cowell, The Marketing of Services, Heinemann, 1996
W.J. Glynn and J.G. Barnes (eds.), Understanding Service Management,
John Wiley and Sons, 1995
C. Groonross, Service Management and Marketing, Lexington Books,
1990
J.L. Heskett, W.E. Sasser, Jr. and C.W.L. Hart, Service Breakthroughs -
Changing the Rules of the Game, The Free Press, 1990
D.L. Kurtz and K.E. Clow, Service Marketing, John Wiley, 2002
C. H. Lovelock, Services Marketing, Prentice Hall
A. Payne, Essence of Services Marketing, Prentice Hall of India, 1996
R.T. Rust, A.J. Zahorik and T.L. Keiningham, Service Marketing, Harper
Collins, 1996
Ravi Shanker, Services Marketing- The Indian Perspective, Excel Books,
2002
T.A. Swartz, and D. Iacobucci (eds.), Handbook of Services Marketing
and Management, Sage Publications, 2000
H. Woodruffe, Services Marketing, Macmillan India, 1997
V.A. Zeithaml , A. Parasuraman and L.L. Berry, Delivering Quality
Service – Balancing Customer Perceptions and Expectations, The Free
Press, 1990
V.A. Zeithaml and M.J. Bitner, Services Marketing, , Tata McGraw-Hill,
New Delhi, 2003
43
Indira Gandhi
Block
3
STRATEGIC ISSUES
UNIT 8
Service Quality 5
UNIT 9
Managing Demand and Capacity 24
UNIT 10
Customer Retention 38
1
Strategic Issues
Delhi Bangalore Goa



Bhutan



New Delhi New Delhi

IGNOU, New Delhi

IGNOU, New Delhi
IMI, New Delhi
Print Production

ISBN-81-266-1264-9
2 Printed at:
BLOCK 3 STRATEGIC ISSUES
Block 3 of this course deals with strategic issues concerning services
marketers. The block consists of three units. The first unit (Unit 8) deals with
Service Quality. In the last two decades interest in the issues related to service
quality has increased tremendously and a number of researchers have been
working on it. In this unit you will be acquainted with a wide range of topics
on Service Quality including service quality models and measurement of service
quality. Unit 9, the second unit of this block, discusses management of demand
and capacity. Because of the perishability aspect of services, services
marketers face a major challenge in matching demand and capacity. In this unit
strategies for matching capacity and demand and for managing customer
waiting have been discussed. The last unit of the block titled ‘Customer
Retention’ highlights the importance of retaining customers for service firms and
outlines issues related to customer retention and loyalty including service
recovery and service guarantees.
3
Strategic Issues MS-65: MARKETING OF SERVICES
Course Components

AN INTRODUCTION


3. STRATEGIC ISSUES
8. Service Quality


19. Case Studies
4
UNIT 8 SERVICE QUALITY
Objectives
define service quality,
identify the reasons for a different approach to service quality,
explain the determinants of service quality,
understand service quality models and their application,
understand the linkage between service quality and profitability, and
measure service quality.
Structure
8.1 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
8.1 INTRODUCTION
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
difficult.
The conceptualization and measurement of service quality perceptions have

been one of the most debated and controversial topics in the service marketing
literature.
The term ‘Service Quality’ has been defined in different ways. Given below
are some of the definitions :
5
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,
1987)
Service quality is the delivery of excellent or superior service relative to
customer expectations (Zeithaml and Bitner, 1996)
Quality of a service, as perceived by the customer is the result of a
comparison between the expectations of the customer and his real-life
experiences (Gronroos, 1982)
You will notice that all these definitions revolve around the fact that service
quality is essentially what customers perceive. Only customers judge quality and
all other judgments are irrelevant. Therefore, the ultimate aim of an excellent
service quality system is to satisfy the 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.
8.2 REASONS FOR DIFFERENT APPROACH TO

SERVICE QUALITY
You may recollect the characteristics of services that distinguish them from
goods, as explained in Unit 1. This would help you in understanding the reasons
for different approach to service quality, as explained below:
i) Services are predominantly intangible in nature. Since services are

performances, acts and experiences, it is not possible to have exact
specifications for them, unlike physical objects like automobile, machine
tools, television set etc. for which exact specifications can be set and
communicated. Further, services 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’
123456789012
123456789012
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Production Consumption Production 123456789012
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Consumption
GOODS SERVICES
controlled prior to sending them to customer for consumption.
iii) Services are ‘heterogeneous’ in nature. The service performance may vary
from producer to producer for the same service
from customer to customer even with the same producer
from day to day for the same producer
Therefore, ensuring consistent service quality is a big challenge to organizations.
Based on what you have studied so far in this unit you will appreciate the
following underlying themes about service quality as highlighted by
Pasasuraman, Zeithaml & Berry (1985):
Service quality is more difficult for the consumer to evaluate than
goods quality.
Service quality evaluations are not made solely on the basis of the
outcome of service, they also involve evaluation of the process of
service delivery.
Service quality perceptions result from a comparison of consumer
expectations with actual service performance.
8.3 SERVICE QUALITY MODELS

Considering the complex nature of how customers judge service quality, number
of researches have been done in the area and models have been developed to
explain the nature of service quality evaluation. However, two major works
have received widespread attention and acceptance. The first is the ‘Nordic’
perspective (Gronroos) which defines the dimensions of service quality in broad
terms consisting of functional and technical quality. The second, the ‘American’
perspective (Parasuraman, Zeithaml and Berry) uses five service quality
dimensions. The two models are discussed in detail here below:
Gronroos Model
This model suggests that the quality of a service as it is perceived by
customers has two dimensions, namely, a technical or outcome dimension i.e.
what the customers get and a functional or process related dimension i.e. how
the process and service encounter are perceived. These two have been termed
as ‘technical quality’ and ‘functional quality’. For example, a restaurant
customer will judge the service on the basis of his perception of the food (what
is being delivered-technical quality) as well as how the food was served
(functional quality). A patient will judge the services of a hospital not only on
the basis of cure element (technical quality) but on care element (functional
quality) as well. Gronroos postulated that as long as the outcome or the
7
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.
8.2:
Expected Quality Total Perceived Quality Experienced Quality
Image
Market Communication
Image
Word-of-Mouth
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
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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
name).
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
problems.
PZB further focused on finding the deficiencies within companies that result in
poor quality perceptions by customers. The reasons for gap between customers’
perceptions and expectations (Gap5 – Customer Gap) were identified as :
9
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
Specifications
GAP 2
Perception of
Customer
Expectations
1. Provider Gap1 : Not knowing what customers expect: This gap is the
difference between customer expectations of service and company
understanding of these expectations. Service firms executive may not always
understand what features connote high quality to consumers in advance,
what features a service must have in order to meet customer needs and
what levels of performance on those features are needed to deliver high
quality service.
2. Provide Gap 2 : Not selecting the right service designs and standards:
A company might correctly perceive the customers’ needs but may not set a
specificied performance standard. This may occur because management
sometimes believes that customer expectations are unreasonable or
unrealistic. Also availing of other factors like resources constraints, market
conditions and/or management indifference – may result in discrepancy
between company perception of consumer expectation and the actual
specification established for a service.
3. Provider Gap 3: Not delivering the service standards: This is the gap
between service quality specifications and actual service delivery. Even if
there are customer driven service standards, a high quality service delivery
is not a certainty. The main reason for this gap is involvement of human
beings in the service delivery – especially the role of contact personnel. The
variability in employee performances makes it hard to maintain standardized
quality. Failure to match demand and supply, customers not fulfilling their
roles and problem with service intermediaries may also result in creating this
gap.
10
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 CAUSES OF GAP STRATEGIES TO REDUCE GAP

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
standards
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
communication
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.
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8.4 BENEFITS OF SERVICE QUALITY TO THE

ORGANIZATION
A good or excellent service quality would result in customer satisfaction or
customer delight. But how does it have a positive impact on the bottom lines of
11
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

share
Mechanism by which quality influences profits include increased market
share and premium prices.
Business in the top quintile of relative service quality on average realize an
8% higher price than their competition.
The Hospital Corporation of America found a strong link between perceived
quality of patient care and profitability across its many hospitals.
Improved service quality increases favourable behaviour intention and
decreases unfavourable intention of customers. Behavioural intention can be
viewed as indication that signal whether customer will remain with or defect
from the Company.
Ford Motor Company has demonstrated that dealers with high service
quality scores have higher than normal profit, return on investment and profit
per new vehicle sold.
Positive and significant relation exists between customers perception of
service quality and their willingness to recommend the company.
Positive co-relation exists between service quality and repurchase intention
and willingness to recommend.
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
12
8.4: Service Quality
Improvement Effort
Improvement Effort
Service Quality Improvement

Service Quality Improvement
Perceived
Perceived Service Qualityand
Service Quality and
Customer
Customer Satisfaction
Satisfaction
Word - of - Mouth
Word-of-Mouth Cost Reduction
Customer Retention Cost Reduction
Customer Retention
Attraction of
Attraction of New
New
Customers
Customer
Revenues and Market Share
Revenues and Market Share
Profitability
Profitability
Source: Return on Quality : Making Service Quality Financially Accountable, Rust, Zahorik
and Keiningham, Journal of Marketing, April, 1995, p-60
higher level of customer retention and also positive word of mouth. New
customers attracted by positive word of mouth coupled with retention of
existing customers result in higher revenues and market share. The increased
revenues combined with the decreased costs, lead to greater profitability. The
effect of word of mouth, which is difficult to measure in practical business
situation, is thus shown in dotted lines.
The biggest responsibility for a good service quality system rests with the
management of the organization. It should establish a policy for service quality
and customer satisfaction. Successful implementation of this policy depends
upon management commitment to the development and effective operation of a
quality system. It should also provide sufficient and appropriate resources to
implement the quality system and achieve the quality objectives. The resources
include personnel as well as material resources. Human resources play an
extremely critical role in service firms and therefore proper attention has to be
given to employee motivation, training and development. Regular communication
within the service organization should be a feature at all levels of management.
The service organization should develop, establish, document, implement a
quality system as a means by which stated policies and objectives for service
quality may be accomplished. The quality system elements should be structured
to establish adequate control and assurance over all operational processes
affecting service quality. The quality system should emphasize preventive action
that avoid the occurrence of problems while not sacrificing the ability to
respond to and correct failures, should they occur. Services companies can also
benefit by benchmarking which is defined as the ‘continuous process of
measuring products, services and practices against the toughest competitors or
those companies recognized as industry leaders’. This concept was originally
developed in the manufacturing sector, but is now being used successfully in
service sector as well.
13
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
8.5 MEASURING SERVICE QUALITY

The most widely-used measure for service quality has been the ‘SERVQUAL’
measure of Parasuraman, Zeithaml and Berry, according to which customer
assessment of service quality results from a comparison of service expectations
and actual performance. The SERVQUAL scale was first published in 1988
and has undergone numerous improvements and revisions since then. This scale
was developed and validated using service providers in four service sectors :
retail banking, credit cards, securities brokerage and product repair and
maintenance. The developers of the scale acknowledge that the five service
quality dimensions are general dimensions that relate to most of the services. It
measures the service quality on the five service quality dimensions discussed
earlier in this unit viz. Reliability, Responsiveness, Assurance, Empathy and
Tangibles. Reliability largely concerns whether the outcome of service delivery
was as promised. The other four dimensions relate to the process of service
delivery or how the service was delivered. Servqual scores are expressed as
the difference between expectations and perceptions i.e. it measures the gap
between the service that consumer think should be provided and what they
think actually has been provided. Respondents complete a series of scale,
which measure their expectations on five service quality dimensions and
subsequently, they are asked to record their perceptions of that 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.
Example:
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
14
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
competitors.
As mentioned earlier the SERVQUAL instrument has been used with

modifications in a number of studies. Though it is a widely used instrument,
some researchers have also identified problems in using the instrument as well
as the gap theory methodology. Cronin & Taylor suggest that instead of
measuring expectations and perceptions, measurement of performance alone
would be enough for measuring service quality. They have suggested that the
performance based scale developed (SERVPERF) is efficient in comparison
with the SERVQUAL scale as it reduces by 50% the number of items that
must be measured.
15
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
16
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.
8.6 COMMUNICATING WITH CUSTOMERS ABOUT

SERVICE QUALITY
Communication with customers involves listening to them and keeping them
informed. The ISO standard brings about the various elements of an effective
communication with customers. This involves :
Describing the service, its scope, its availability and timeliness of delivery.
Stating how much the service will cost.
Explaining the inter-relationship between service delivery and cost.
Explaining to customers the effect of any problems, and how they will be
resolved, should they arise.
Ensuring that customers are aware of the contributions they can make to
service quality.
Providing adequate and readily accessible facilities for effective
communication.
Determining the relationship between the service offered and the real needs
of the customer.
The need for proper communication is highlighted by the fact that the
customers’ perceptions of service quality are acquired often through
communication with the service 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
interact.
The more vivid the advertisement, the stronger the effect in influencing
customer expectations about quality.
Advertising that features actual employees doing their jobs is more effective
in communicating excellence than advertising that uses professional talent.
The more positive employees feel about the advertising that the company
runs, the more willing they will be to provide service.
Activity 3
Collect a few print advertisements of different service companies and identify
the service quality dimensions(s) being emphasized in them.
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A case study, titled “Turnaround through Service Quality — British Airways”

has been presented below to demonstrate as to how service quality can be a
real winner in transforming an ailing organization into industry leader and the
way British Airways succeeded in achieving it.
8.7 CASE STUDY: TURNAROUND THROUGH

SERVICE QUALITY — BRITISH AIRWAYS
Introduction
This illustrative case study has been developed to highlight the importance of
service quality in achieving success for an airline and to determine the ways
and means by which this could be achieved by British Airways (BA). The
transformation of BA from a state owned airlines making huge losses in early
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
achieved?
After deregulation of airline industry in the west, a number of carriers became

too focused on prices and lowering them that they simply overlooked the fact
that the industry was basically built on service. Some airlines made the mistake
of thinking themselves as simply transportation companies which took people
from one airport to another. However, to succeed airlines have to think
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
organization.
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.
Conclusion
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.”
8.8 SUMMARY
The unit described the concept of service quality to you. The term service
quality can be described as the delivery of excellent or superior service relative
to customer expectations. Because of some basic differences between goods
and services with regards how they are produced, consumed and evaluated,
service quality requires a different approach as compared to goods quality. You
have also learnt the underlying themes of service quality that it is more difficult
for the consumers to evaluate than goods quality, that service quality
evaluations are made on the basis of outcome as well as process of service
delivery and that service quality perceptions result from a comparison of
consumer expectations with actual service performance. Two specific models of
service quality, Gronroos Model and Gaps Model developed by Parasuraman,
20
Zeithaml and Berry have been discussed. Gronroos models suggests that the 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
21
Strategic Issues iii) Directions for questions 7-10. Given below are examples of specific
questions raised by customers regarding different dimensions of service
quality. Identify the service quality dimensions.
7) Do the tools used by the service engineer look modern?
8) Is my bank statement free of errors?
9) Does some one in the bank recognize me as a regular customer?
10) When there is a problem with my bank statement, does the bank
resolve them quickly?
Answers
1) 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,
1987.
6. Rust, Zahorik and Keningham, “Return on Quality - Making Service
Quality Financially Accountable”, Journal of Marketing, April, 1995,
pp.58-70
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.
22
9. Zeithaml, Parasuraman and Berry, “Delivering Quality Service - Service Quality
Balancing Customer Perceptions and Expectations,” Free Press, NY,
1990.
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.
23
Strategic Issues
UNIT 9 MANAGING DEMAND AND
CAPACITY
Objectives
After studying this unit, you should be able to
Explain the importance of managing demand and capacity for service
organizations.
Identify the demand patterns and their underlying reasons.
Develop strategies for matching demand and capacity.
Understand the concept of yield management.
Provide strategies for managing customer waiting.
Structure
9.1 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
9.1 INTRODUCTION
In the first unit of this course you have studied the characteristics of services
which distinguish them from goods. One of the characteristics is perishablity
which means that services cannot be saved or stored. While marketers of
physical goods hold inventories to buffer fluctuations in demand and supply, it is
difficult or impossible for services marketers to do so. Therefore, many service
businesses frequently find it difficult to match supply (capacity) and demand. At
times there may be too much of demand (movie halls or restaurants on
weekend evenings) and sometimes too little demand may exist (low weekend
occupancies in business hotels). However, a theater owner or a restaurant
cannot take an empty seat from Thursday night and add it to the capacity on
Friday or Saturday night. A low occupation for a business hotel on weekends is
an irretrievable loss. Similarly a hospital bed or an airline seat left vacant is a
loss for ever. Inability to synchronize supply and demand has a significant
impact on the service 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
Capacity
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?
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9.2 UNDERSTANDING DEMAND PATTERNS

A service organization with a fixed capacity may be faced with one of the
following four conditions:
1. Excess demand: The demand exceeds the maximum available capacity.
This results in some customers being turned away. Also, even for the
customers receiving the service, the quality of service may get affected
(refer service delivery gap in the gaps model discussed in the previous unit).
This may happen because of overcrowding and/or overstretching of
resources.
2. Demand exceeds the optimum capacity level: Optimum capacity refers
to the best use of capacity from the perspective of both, customers and the
company. In most of the cases it is less than the maximum capacity. For
example, in the counseling session at your study centre, while the maximum
capacity of the rooms may be 60-70, the optimum capacity for conducting
the session may be 30-40 only for ensuring proper interaction. In the
situation when demand exceeds optimum capacity, while no one is turned
away, customers may perceive deterioration in the quality of service
delivered.
3. Demand and supply are balanced at the optimum capacity: This is the
ideal situation. No one is turned away, no one is overworked in the staff and
customers receives quality service.
4. Excess capacity : Demand is less than optimum capacity and therefore
resources are underutilized. In certain cases this may also pose the risk that
customers may have doubts about the service provider.
All the above four possibilities have been given in Fig. 9.1. The capacity of the
service organization includes physical facilities, equipments and human resources.
The first step in finding out ways to manage demand and capacity is to
understand the demand patterns and the factors which affect it. Better
knowledge of demand patterns leads to better managerial decision making. The
demand patterns may have a regular and predictable cycle or in some cases it
may be largely random in nature and difficult to predict. 25
Strategic Issues 9.1:
Demand Exceeds Capacity

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

resources, may send bad
signals)
TIME
(Source: Christopher Lovelock, Managing Services- Marketing Operations and Human

Resources, 2nd Edn. Prentice Hall, p.155)
a) Predictable Demand Variations: Many businesses are subject to periodic

cycles. These cycles may be daily (variations by hour), weekly (variation by
day), monthly, seasonal and/or yearly. Try to identify services which may
exhibit these types of predictable demand variations. For example, in case of
a hotel there may be variation in demand on different days with business
travelers going back on weekends, thereby reducing the demand. A hotel
may also witness seasonal variation with high demand during a particular
season due to large inflow of tourists. A restaurant faces hourly variations
with low demand during 3.00 – 7.00 pm. (happy hours being offered by
many restaurants during these times, with large price discounts). Amusement
parks have greater demand during weekends as compared to weekdays and
also greater demand is witnessed during school vacations.
As marketers you must find out if such predictable cycles exist in your
business. If it is so, then you must find out and analyze the causes of these
cyclical demand variations. Do these happen because of seasonal change,
employment schedule, salary dates, school vacations, public or regional
holidays etc? A proper analysis of these causes will help you in devising
suitable strategy for managing the demand fluctuations.
b) Random Demand Fluctuations: At times the demand pattern may appear
to be random with no apparently predictable cycle. Some degree of random
variation in demand is faced by virtually all service firms. Although such
variations cannot be predicted, marketers should nevertheless understand the
underlying causes that typically cause them. For example bad weather may
result in an unexpectedly low customer turnout at a movie hall or an
amusement park. A disaster like accident, floods etc. may result in higher
demand for health services and telecommunication services. A proper
understanding of the underlying causes will prepare you to deal with such
random demand fluctuations.
In order to understand the demand patterns and underlying causes, it may be
useful to do a segmentation analysis. Different segments of customers may
reveal different patterns as well as causes. Such an analysis will help you in
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
Capacity
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.
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9.3 STRATEGIES FOR MATCHING CAPACITY AND

DEMAND
Managers can use a wide variety of strategies for matching capacity and
demand. This requires a clear understanding of demand patterns as well as the
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
capacity.
a) Product: As a service provider you can alter the service offering to
even the demand. The changes in service offering may be seasonal or
based on days of the week or time of the day depending on the nature
of demand fluctuations. A hotel for example may focus on weekend
family entertainment and recreation package to cope up with low demand
from business executives during weekends. A management institute may
offer more management development programmes during the vacation
period of its regular management programme students. However, as
marketers you must ensure that by offering different types of services the
image or positioning of the service firm is not diluted or confused.
Increasing demand during slack period 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
27
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.
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2) Strategies for Managing Capacity
Managing capacity involves changes in different components of the resources
of a firm like people, facilities, equipments, time etc. By making changes in
these components you can achieve a better match between demand and
capacity.
a) Using Part-time Employees: During periods of peak demand, service
firm may hire additional part-time employees. This helps in increasing
capacity as well as reducing costs. However, issues like attitude of part
time employees, training concerns, higher turnover etc have to be properly
addressed.
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
28
employee may move from ticketing to gate counters. This helps in Managing Demand and
Capacity
avoiding underutilization of resources and also increasing the efficiency of
the employees.
d) Scheduling: During peak demand periods people, facilities, and
equipments are used at full capacity. However, facilities and equipments
also require proper maintenance. This can be scheduled during periods of
low demand. Similarly, for human resources, off-peak periods can be
used for training purposes as well as for granting vacations.
In addition to the above, service firms can also meaningfully manage its
capacity by increasing customer participation (customers can be used as
productive resources e.g. self-service in restaurants), outsourcing, modifying the
capacity (e.g. reconfiguring hotel rooms), renting facilities or equipments, and
taking a subcontract work.
The strategies discussed above for managing demand and capacity have been
summarized in Table 9.1
9.1:
High Demand/Slack Supply 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
pricing
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
9.4 YIELD MANAGEMENT

Yield management is a method for managing demand and capacity profitably by
service organizations. It extensively uses computer based technology to study
patterns in consumer behaviour in order to manage differential pricing. Yield
management has gained widespread acceptance in airline and hotel industry. It
helps a firm sell the right capacity to the right type of customer, at the right
time for the right price. Put in simple terms,
Yield = Actual revenue = 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
29
Strategic Issues fluctuates substantially, and vi) where marginal sales cost is low, but capacity
change costs are high (Sherly Kimes, 1989). Yield management may require a
lot of mathematical programming, economic models and expert systems.
Take the example of an airline. It may not be in a position to sell all its seats
at full prices. This may result in a number of seats remaining vacant. Once an
aircraft takes off with vacant seats, that capacity is lost for ever. Considering
that incremental cost of taking additional passengers is low, airlines offer
discounted / apex fares with certain conditions, in order to bring in more
revenues and increase the yield. Same is the case with hotels.
Yield in case of hotel would be = room – nights sold X actual average room rate
room – nights available X published room rate
Take a hypothetical example of a 100 room hotel with a rate of Rs. 2,000 per
night i.e. potential revenue is Rs. 2 lakh per night. However, it 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
Capacity
system within the organization as well as commitment from the top
management is essential.
9.5 MANAGING CUSTOMER WAITING

In the previous sections you have learnt about demand patterns and strategies
to match demand and capacity. However sometimes it is not possible to match
demand and capacity and waiting by customers become inevitable. Waiting is a
common phenomenon at hospitals, restaurants, banks, hair cutting saloons etc.
In such situations waiting time becomes one of the key factors in 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
customers.
Exhibit 9.1. Managing Waiting Lines at Sri Venkateswara Temple, Tirupati
More than fifty thousand pilgrims visit the Sri Venkateswara Temple every day.
‘Sarvadarsanam’ (darshan for all) timings are different on different days of week. On
normal days, about 18 hours are allotted for Sarvadarsanam and on peak days it is open
for 20 hours. There is also a provision of ‘Special Darshan’ on purchase of tickets.
Pilgrims who use the queue for Special Darshan have a shorter waiting time. This queue
merges with the Sarvadarsanam queue at a fixed point and the darshan timings are the
same as that for Sarvadarsanam.
The Sudarsanam token system was introduced to minimize the waiting time for
Sarvadarsanam, Special Darshan and other paid darshan/sevas. Some of its features:
The tokens are available free of cost at a number of convenient places in the town.
The time for darshan is indicated on the token.
Pilgrims can enter the Vaikuntam Queue Complex at Tirumala at the time indicated on
31
Strategic Issues
the tokens.
They can have darshan within two hours of entering the Queue Complex.
As this system saves on waiting time, it provides pilgrims with enough time to visit
temples in the vicinity.
In order to keep a track of the number of pilgrims and ensure their smooth flow, one
token is issued per head. Collective tokens for groups are not issued.
Source: www.tirumala.org
2) Perception Management: Limited success of operations management in

waiting line management has led to increased interest in managing the
perceptions of wait experience. If you cannot control the actual wait
duration, then control the 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
Capacity
information may be collected from the patient prior to actually meeting the
doctor.
8) A smiling service person who knows his job well can be very helpful in
overcoming many negative effects of waiting. Therefore, training and
incentives / rewards for providing good service should be made.
Exhibit 9.2. “Waiting in line : Experiment by Bank of America”
Bank of America through their review of data realized that there might be opportunities to
reduce perceived wait times without reducing actual wait times. An earlier study by market
researchers had also revealed (the study was conducted by intercepting some 1000
customers standing in bank lines) that after a person stands in line for more than three
minutes, a wide gap opens between actual and perceived times. While a two-minute wait
may usually feel like a two-minute wait, a five minute wait may feel like a ten-minute
wait. Also, psychological studies have revealed that if you distract a person from a boring
chore, time seems to pass much faster.
In the summer of 2001 the bank installed television sets over the teller booths at one of
its branches to test its hypothesis that “if you entertain people in line by putting
television sets in the transaction zone – above the row of tellers in a branch lobby – you
will reduce perceived wait times by at least 15%”. The results obtained were significant.
After the installation of the T.V. sets the degree of overestimation of wait times dropped
from 32% to 15% at the test branch. Before the implementation of this experiment,
customers who waited longer than five minutes, significantly overestimated their waiting
time by 32%. (Average actual time : 6.17 minute, Average perceived time : 8.16 min).
After the installation of monitors in the bank lobby these overestimates for the same
customer groups dropped to 15% (Average actual time : 6.14 minutes, Average perceived
time : 7.04 min). Considering that long waits have direct impact on customer satisfaction,
the bank through a research also concluded that a branch with more than a thousand
households in its customer base would be able to recoup up the cost of installing T.V. sets
in less than a year because of increased customer purchases and retention due to higher
customer satisfaction. (Based on the study analysis that every one point improvement in
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.
9.6 MANAGING DEMAND AND WAITING LINES:

CASE OF AN AMUSEMENT PARK
Introduction: In this section we are giving you a brief case situation
concerning an amusement park. Also given are the comments and possible
solutions to the problems raised, given by top executives of service companies
(The case situation and the comments / solutions have been excerpted from a
Harvard Business Review Case Study – details given in sources at the bottom
of this section). In the last part of this section we have also brought out some
of the innovative practices adopted by successful amusement parks with regards
to managing demand and waiting lines. Before we move over to the case
situation, let us fist take a brief look at the amusement park industry as such.
The industry has it origin about 400 years ago in the Danish capital
Copenhagen. In India the industry is in the growth stage with around 1000
crore said to have been invested in the last few years. This growth is primarily
a result of higher disposable incomes and an increasing willingness on the part
of the customers to consider new forms of entertainment. Foreign companies
like Universal Studio, Time Warner and Disney are eyeing the Indian market.
Presently the leading players in the Indian market include Appu Ghar in Delhi
and Essel World near Mumbai with a lot of new players like 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
day.
Some Practices in Successful Amusements Parks: Disney lands offer a

form of reservation – Fastpass – by which guests may go up to one of the
rides offering the Fastpass service and obtain reservation to come at a certain
34
time. At the specified time they come back and bypass the waiting line saving Managing Demand and
Capacity
an hour or more in waiting. However, the customers are limited to one
Fastpass every four hours in order to ensure that the rides are able to
accommodate both Fastpass and regular customers. Further, line management at
Disney also involves continuously entertaining waiting customers and providing
them with the information regarding the duration of their waits. Signs are
posted at intervals in the queue, stating the expected time until service
commencement. Because of Fastpass, rather than waiting in line, customers
spend more money in the restaurant and shops. Dreamworld in Australia caters
to both international as well as local customers. Considering different price
sensitivities of local and international customers (while a Japanese couple will
pay $78 - $39 per person entrance fees – without hesitation as this is a small
portion of their vacations, a local family of four looking for weekend
entertainment may view $136- $39 adult charge and $ 29 charge for children
— amounts to a large portion of their entertainment expenses). Dreamworld
offers a separate package to local customers involving yearly passes at much
lower prices. It is a common practice for tourist attractions such as
Dreamworld to offer special rates for local residents. It is however very
important for the parks to know its customer mix.
Sources
i) 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.
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...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
9.7 SUMMARY
This unit deals with issues related to managing demand and capacity in service
organizations. Considering the fact that services are perishable, demand
fluctuation is considered to be a somewhat serious problem for services
marketers. A service organization with a fixed capacity may be faced with four
different situations viz. excess demand, demand exceeding the optimum
capacity level, demand and supply being balanced at the optimum capacity and
excess capacity. The first step towards developing strategies for matching
demand and capacity is to study the demand patterns and the underlying
causes. The strategies for matching demand and capacity can be broadly
divided into two categories – changing demand to fit supply and changing
supply to fit demand. These two strategies have been discussed in detail in this
unit. Subsequently yield management technique for managing demand and
35
Strategic Issues capacity profitably has been explained. Despite strategies for matching demand
and capacity being in place, waiting by customers becomes inevitable in a
number of service industries. Service waits can be controlled by operations
management and perceptions management. This unit outlines certain suggestions
which can help you in better management of waiting lines. The last section of
the unit gives you a brief case situation concerning demand management and
waiting lines issues in an amusement park.

A) Objective Types Questions
1. Which of the following strategies would you recommend to manage demand

when it is too high?
a. offer discounts
b. bring the service to the customers
c. offer incentive to customers for usage during non-peak times
d. all of the above
2. Providing separate check-in lines for first class passengers by an airlines is
an example of differentiating waiting customers on the basis of
a. urgency of the job
b. payment of premium price
c. duration of service transaction
d. none of the above
3. Which of the following is not true regarding waiting by customers?
a. uncertain waits are longer than known waits
b. unexplained waits are longer than explained waits
c. in-process waits feels longer than the pre-process waits
d. unoccupied time feels longer than occupied time.
4. In which of the following demand conditions would you witness the situation
in which no customer is being turned away but the quality of service may
still suffer due to crowding or staffing being pushed beyond their abilities to
deliver consistent quality?
a. excess demand
b. demand exceeds optimum capacity
c. demand and supply are balanced at the level of optimum capacity
d. excess capacity
5. Appropriate situation for effective yield management application includes:
a. ability to segment markets
b. product sold in advance
c. fluctuating demand
d. all of the above
6. Which of the following strategies for flexing capacity to match demand
would be appropriate when demand is too low?
a. perform maintenance, repairs
b. schedule vacations
c. schedule employee training
36 d. all of the above
7. Several major restaurant chains offer discounts on days when business is Managing Demand and
Capacity
normally slow. This strategy is employed because service are
a. perishable
b. variable
c. inseparable
d. intangible
Answers
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
examples.
4. Explain the term ‘Yield Management’. Identify some of the managerial
issues to be taken into account while implementing a yield management
system.
5. Select a service organization you are familiar with, where customers have to
wait in line for service. Develop a waiting line strategy for the organization.
Donald J Shemwell, Jr. And J. Joseph Cronin, Jr. “Services Marketing

Strategies for coping with demand/supply imbalances” Journal for
Services Marketing, Vol. 8, No. 4, 1994.
Shirley Taylor, “Waiting for Service: The relationship between delays and
evaluation of services” Journal of Marketing, April 1994.
Sherlyl E. Kimes, “Yield Management: A Tool for Capacity-Constrained
Service Firms” Journal of Operations Management, Vol. 8 No. 4, 1989.
Karen Katz, Blaire Larson, Richard Larson, “Perceptions for the waiting-in
line blues: Entertain, Enlighten and Engage” Sloan Management Review,
Winter 1991.
Paul F. Nunes and Brain A. Johnson, HBR Case Study “Are Some
Customers More Equal Than Others”, Harvard Business Review, Nov.
2001.
Stefen Thomke, “R & D Comes to Services: Bank of 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.
37
Strategic Issues
UNIT 10 CUSTOMER RETENTION
Objectives
explain significance of retaining customers for service companies,
identify the reasons of customer switching and ways of managing it,
understand the need and importance of complaints handling,
discuss strategies for effective service recovery after a service failure,
explain the significance of service guarantees,
list the components of a good service guarantee.
Structure
10.1 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
10.1 INTRODUCTION
Ramesh walks into an empty PCO to make a phone call. He pulls out a
crumpled piece of paper from his pocket and dials the number on it. The
PCO owner 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 ecustomerserviceworld.com)
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.
10.2 IMPORTANCE OF CUSTOMER RETENTION

The importance of retaining customers should be properly understood by the
services marketers. It is the cornerstone of a successful service. Generally, the
longer a customer stays with a company the more that customer is worth. It
influences employee and supplier loyalty as well, as people like to work for
companies where customers are loyal. It also produces profits that influence
share holder loyalty. In fact this all results in a positive spiral. Employee
retention and loyalty results in high quality of services which leads to customer
satisfaction and delight which makes the customer stay with the organization
and increases its profitability which in turn brings employee loyalty. This
sequence is shown diagrammatically in Figure 10.1.
10.1:
Customer Satisfaction
Customer Retention and 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
39
Strategic Issues individualized services which may be difficult for the competitors to offer.
Indian service companies are increasingly recognizing the importance of
retaining existing customers. “We believe that if we are able to satisfy existing
customers; it will enable us to gain new customers through word-of-mouth”
says ICICI Bank General Manager (Business World, 4 Nov. 2002).
Considering the importance of retaining customers in service business,

Reichheld & Sasser coined a term ‘Zero defection’. They highlighted that
companies can boost profits by almost 100% by retaining just 5% more of their
customers. In their pathbreaking article “Zero Deflections: Quality comes to
services” (Harvard Business Review, Sept. – Oct., 1990) they conclude that
“Just as the quality revolution in manufacturing had a profound impact on the
competitiveness of companies, the quality revolution in services will create a
new set of winners and losers. The winners will be those who lead the way in
managing towards zero defection”. You should appreciate as services
marketers that when you lose a single customer you do not lose a single order
but a lifetime opportunity of profitability with that individual. You must therefore
understand the lifetime value of a customer. Consider a simple example of a
telephone company. For example, if on an average customer pays Rs. 500 a
month and stays with the company for 20 years, his average life time value
for the company will be Rs. 500 X 12 X 20= Rs. 1,20,000. Further, if by a
positive word-of-mouth, he brings just one more customer to the organization
his value to the organization doubles. Therefore, it is important for all the
employees within an organization to understand the lifetime value of their
customers. Once they understand it, they will treat the customer accordingly
and will focus on building relationship with the very people who keep them in
business.
The following is an interesting illustration of Southwest Airlines of U.S.A.

Southwest Airlines is amongst the most profitable US airlines and have made
profits all through its existence. It is well known in the industry for its service
quality and customer focus. As part of its effort to keep employees informed,
Southwest Airlines communicates the importance of every single customer by
educating employees about how many customers the company actually need to
make a profit. By demonstrating to employees how just a few people can
make the critical difference, the company encourages them to think about how
their individual behaviours influence customer service. The company newsletter,
LUV lines, put customer service in perspective with the following piece on
profitability:
“How important is every Customer to our future? The break-even

customers per flight was 74.5, which means that, on average, only when
customer #75 came on board did a flight become profitable. The data on
our annual profit and total flights flown to clearly illustrate how vital
each customer is to our profitability and our very existence.
When you divide last 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 :
40
$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: www.ecustomerserviceworld.com and Kevin Freiberg & Jackie Freiberg, “NUTS!

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

By now, you will have well appreciated that in service business having
customers, not merely acquiring them is crucial. Therefore, it becomes
important to understand what actions of service companies or their employees
make customers switch from one service provided to another. Customers leave
a provider for a wide variety of reasons. Consider when you were last
dissatisfied with a service provider or changed a service provider. What were
the specific reasons for your reaction? Was it because of perception of poor
quality or failure of a service encounter? Susan Keavenly identified following
reasons for customer switching in service industries.
a) Pricing (high price, price increase, unfair pricing , deceptive pricing)
b) Inconvenience (location /hours, wait for appointment, wait for service)
c) Core service failure (service mistakes, billing errors)
d) Service encounter failures (uncaring, impolite, unresponsive,
unknowledgeable)
e) Response to service failures (negative response, no response, reluctant
response)
f) Competition (found better service)
g) Ethical problem (cheating, unsafe)
h) Involuntary switching (customer moved, provider closed)
An important aspect of the above to be understood by you is that six of the

eight service switching factors are controllable from a service 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.
41
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.
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
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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
42
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.
10.4 COMPLAINING AND SERVICE RECOVERY

As highlighted in the introductory part of this unit, complaints are a natural
consequence of any service activity. Mistakes are critical part of every service.
Since services are generally performed in the presence of customers, errors are
bound to happen. While it may not be possible to prevent all the errors,
companies can learn to recover from them. ‘Service Recovery’ refers to the
action taken by the service provider in response to a service failure. Tad and
Brown define Service recovery “as a process that identifies service failures,
effectively resolves customer problems, classify their root cause(s), and yields
data that can be integrated with other measures of performance to assess and
improve the service system.” A good recovery can turn angry, frustrated
customers into loyal ones. Further more, customers who have been successfully
recovered not only remain loyal but can become advocates for the organisation
spreading a positive word-of-mouth.
When an error or service failure occurs the customer may or may not
complain. A customer who 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
friend.
Complaint Management
Bill Dee (Convener of the ISO Technical Committee ISO/TC 176 subcommittee
3 working group on complaint handling) opines that any worthwhile complaints
management system has to have certain basis features :
a) Visibility : 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
43
Strategic Issues lodging complaints, the less accessible it is to
customers.
c) Responsiveness: Complains need to be dealt with quickly. The
quicker the complains are dealt with, the higher
the customer satisfaction.
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 :
Customer
Customer
satisfaction
retention
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.
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
10.5 SERVICE RECOVERY STRATEGIES

The above discussion gives you a fair idea of need for complaint management,
its components and the importance of service recovery. Let us now focus on
strategies for service recovery. Consider the following incident regarding an
airlines (British Airways). “ An aircraft door was left open in a rainstorm
before take off and a passenger near the door unfortunately got showered”.
Now imagine that you were a part of the airlines. What steps you would have
taken in such a situation? Now let us see what was actually done by the
service provider. “The flight attendant not only did everything that was routine
– offered to have the 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
employees.
Train and Empower Employees: The organization must train the front line
people and empower them. Simulated real life situations can be an effective
way to develop recovery skills among employees. The company should
empower the front line employees to act and should give them the authority,
responsibility and incentives to follow with customer.
Close the Loop: If a customer complaint leads to corrective measure the

company should tell the customer about the improvement. Even if something
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
46
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
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...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
10.6 SERVICE GUARANTEES

When you buy consumer durables like refrigerator, T.V., Washing machine etc.,
they invariably came with a product warranty wherein the company agrees to
replace or repair the product if something goes wrong. But what about
services? As compared to manufactured products, guarantees in case of
services are a more recent phenomenon. Because of the intangible nature of
services it was often thought as to what can be guaranteed. Products being
tangible, can be returned but can services be returned back if something goes
wrong? However, now more and more service firms are offering service
guarantees which may take the form of a satisfaction guarantee or guaranting
specific aspect of service delivery. Try to recollect any service guarantee that
you have come across as a consumer of services.
A bank may offer a guarantee that an account will be opened or a credit card
will be issued within a specified number of working days otherwise it will pay 47
Strategic Issues the customer a specified amount depending on the period of delay. A restaurant
may offer home delivery within a guaranteed time, say 30 minutes, failing
which the customer may be given specified price-offs. A hotel may offer a
unconditional satisfaction guarantee.
Why offer a Service Guarantee?
More and more service firms have started to realize that a good guarantee can
act as a marketing tool for attracting customers as well as help in retaining
customers. It also helps in cultivating and maintaining quality throughout an
organization. Some of the benefits of an effective service guarantee are
highlighted below.
i) 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
delivery.
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
10.3:
Guarantee
Advertising featuring People invoking the

the guarantee guarantee +
- Increased sales
Increased sales Increased from positive word
from advertising repurchase of mouth
message
+ +
+ Market share and
profitability
improvement
Source: Rust, Zahorik and Keiningham, ‘Service Marketing’, Harper Collins, 1996, p.204
48
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
above.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
b) Critically evaluate the following service guarantee offered by a Delhi based

multiple chain restaurant for its home delivery
“30 MINUTES GUARANTEE
10% DISCOUNT ON DELAYED DELIVERY ORDERS*
* DISCOUNTS NOT APPLICABLE FOR ORDERS OVER RS.500/-”
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
...................................................................................................................... 49
Strategic Issues It is often feared that a service guarantee especially an unconditional service
guarantee may spell financial disaster for the company. However, it should be
noted that a service guarantee is not a panacea and will not be beneficial for
all the service firms. To begin with, a low quality firm should not offer them.
Also there are situations which involve uncontrollable variables which 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.
A Service Leader – DELTA DENTAL OF MASSACHUSETTS
On April 1, 1990, Delta Dental of Massachusetts, that sells dental insurance in USA,
launched a Service Guarantee. They had 15% market share and lots of competition. In
2003 they have 55 percent market share and NOT ONE competitor has copied their
service guarantee.
Delta promises money if they fail on any of their seven guarantees, no questions asked.
They have three types of customers; the organization that selects their insurance and pays
them, the employees of the organization, and the dentists. The guarantees were put
together after finding out in early 1990 from the organizations, what was the most
important thing Delta Dental needed to deliver.
A sample :
THE GUARANTEE: Accurate and quick turnaround of ID card. A complete and accurate
identification card for each subscriber will be mailed to the group or 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)!
Source: www.customer-service.com
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
guarantee.
Benefits of a guarantee would also be positive, but less so for an already
highly reputed firms. Therefore firms with a reputation for service excellence
should carefully consider whether the costs of implementing a service
guarantee are justifiable in terms of its market and/or operational impacts.
Customer of even the best providers may prefer the certainty of an explicit
guarantee over the uncertainty intrinsic in an implicit guarantee.
10.7 SUMMARY
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.
Answers
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.
52
Indira Gandhi
Block
4
SECTORAL APPLICATIONS-I
UNIT 11
Financial Services 5
UNIT 12
Tourism and Hospitality Services 23
UNIT 13
Health Services 46
UNIT 14
Case Study: Serving the Global Indian 62
1
Sectoral Applications-I
Delhi Bangalore Goa



Bhutan



New Delhi New Delhi

IGNOU, New Delhi

IGNOU, New Delhi
IMI, New Delhi
Print Production

ISBN-81-266-1265-7
2 Printed at:
BLOCK 4 SECTORAL APPLICATIONS-I
In the first three blocks of the course we have covered the concepts and
theoretical framework underlying services marketing. The remaining two blocks
i.e. Block 4 and Block 5, are geared towards exposing you to the actual
application of marketing concepts in diverse service sectors. In this block three
specific sectors will be covered. Unit 11 is on 'Financial Services'. In the last
couple of decades, India has witnessed a drastic change in the financial
services sector. This unit explains application of various marketing issues in
Banking and Insurance services. Unit 12 covers 'Tourism and Hospitality
Services'. As you are aware, marketing of tourism and hospitality services has
special significance in terms of its economic contribution to the economy of any
society today. This unit explains the reasons behind the rapid development of
this sector and the variables affecting the demand and supply of the tourism
products. It also discusses the marketing mix for hotels in detail. Unit 13 is
concerned with the application of principles of services marketing to one of
the most vital services sectors in any society, the 'health sector'. The last unit
of the block is a case study on financial service marketing and relates to
various issues concerning the banking industry in India.
3
Sectoral Applications-I MS-65: MARKETING OF SERVICES
Course Components

AN INTRODUCTION


3. STRATEGIC ISSUES
8. Service Quality


19. Case Studies
4
UNIT 11 FINANCIAL SERVICES
Objectives
After studying this unit you should be able to :
familiarise with the range of financial services available in India,
explain the consumer behaviour in the context of financial services,
explain the product, brand and other elements of marketing mix for the
banking services, and
understand the marketing strategies for the insurance services.
Structure
11.1 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
11.1 INTRODUCTION
Financial services markets play a prominent role in the mobilization of savings
from all quarters of economy for useful inputs and for necessary formulation
and implementation of various policies. This facilitates liquidity management in
consonance with the macro economic environment. Regulators like SEBI, RBI
and the Government of India monitor for the suitable sustained economic
growth in the economy. In the Indian financial system funds flow into the main
economy for growth, from financial institutions, commercial banks, insurance
companies, mutual funds, provident funds, and from non banking finance
companies. Of course the deposits and shares are mobilized from supplier of
funds like individuals, businesses and governments.
Till early eighties, no one in the highly regulated banking/finance industry

showed any inclination to innovate or market new financial products, given their
respective roles as bankers or finance companies all offered absolutely the
same products.
Product development or innovation of financial products interestingly requires

very little or no additional investment. But the downside is that no brand can
boast of a Unique Selling Proposition (USP) for long, as it can be copied
immediately. Of course, the safeguard to some extent here is the very branding
of the product.
Following is the list of some typical financial products available in the market:
Savings and Recurring Account
Current Account
Fixed Deposits
Retail Loan Products
5
Sectoral Applications-I Commercial Loans
Leasing and Hire Purchase
Credit Cards
Insurance
Mutual Funds
Beside these, banks and finance companies provide a number of fee-based

services such as merchant banking, issue management for raising equity from
the market, foreign exchange advisory services etc.
In this unit we will be focusing on marketing issues related to banking and

insurance.
Activity 1
Visit a commercial bank in your city and enlist the financial services offered
by it.
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...........................................................................................................................
11.2 BUYER BEHAVIOUR FOR FINANCIAL SERVICES

While making even the simplest purchase, consumers go through a complicated
mental process. For us to appreciate the complexity of the consumer's buying
decision, we need to understand the variety of individual influences on
consumer behaviour; the impact of environmental factors such as family,
social, and cultural influences on the consumer; and how these components are
integrated in the consumer's mind.
A firm's marketing efforts interacts with non-commercial sources of

information to stimulate the purchase decision process. This process is
tempered by the individual influences on consumer behaviour, including
motivation, personality, learning and perception. The process stops when the
consumers lose interest or evaluates the product and decides not to make a
purchase. If the purchase is made, the consumer has an opportunity to see
whether the product satisfies his or her needs. If not, the consumer will
discontinue the use of the product.
1. Individual Influences on Consumer Behaviour

The effort of the all marketing is to influences people's buying behaviour, but it
is difficult to foresee the success of planned marketing programs because
human beings are all individuals. Each behaves differently, thereby making mass
consumer behaviour patterns we see everyday:
People vary in their persuability. Some are easily persuaded to do
something; others are skeptical and difficult to convince.
Some people have very 'cool heads' and control their emotions. Others are
'hot heads' and get angry easily.
Some people are loner, whereas others need the security of a crowd.
Many people are oriented towards the acquisition of material things while
some people are motivated mainly by spiritual matters.
Some people spend their money cautiously while others spend their money
extravagantly.
6
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
group.
Activity 2
Talk to your colleagues about some of the purchases of financial services that
they have been making. Ascertain how over a period of time.
i) Their preferences have been changed.
ii) Their buying patterns have changed.
Can you furnish some explanation for these changes?

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2. Family Influences on Buying Behaviour

We are aware as to how our needs and expectations change over different
stages of our lifecycle. Your priorities as a teenager or a young adult or a
family man are very different. These differences are important as they enable
the marketer to fine tune his marketing effort by using family life cycle as a
segmentation variable.
The family life cycle was developed in 1960 and was based on variables like
martial status, number and ages of children, work status and age. It has since
then, been widely used as a segmentation tool.
Because our age, income and family requirements, except for the basic
necessities change over time, the family life cycle and identification of family
needs over various stages of the FLC are useful inputs to the marketer. The
family life cycle consists of 5 stages, the young bachelor stage, the full nest I,
the full nest II, the empty nest and the solitary survivor stage. Expenditure
priorities and need for money at different stages have interesting implication for
the demand for various financial services. Table 11.1 gives you an idea of
varying requirements of consumers for banking services.
7
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.
11.3 BRANDING OF FINANCIAL PRODUCTS

Branding, which is a major input in the marketing strategy of commercial
products, can be successfully used in the marketing of financial services too.
Brand is a broad term that includes practically all means of identifying a
product e.g., the LIC logo, 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
cigarettes.
Activity 3
Identify any financial services offered by bank, where an attempt was made to
create a successful brand. Also identify the reasons, which make you think that
it is a successful brand.
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9
11.4 CHANNELS OF DISTRIBUTION FOR BANKS
The channels of distribution in financial services perform a number of key
functions, as follows:
Sales and offer of services and products, as well as advising customers.
Contact and liaison with advertising and public relations agencies to assist in
designing more effective advertising/promotional campaigns.
Gathering of information necessary for planning marketing activities, strategy
decision and product development.
In distributing financial services, firms employ a number of channels. The

advantages of direct distribution channels – for example branches, used to be
lower operational costs and more efficiency. In comparison, the selling through
indirect channels offers convenience to the customers and more “impartial”
advice, as in the case of agencies.
The Branch Network
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:
10
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
include:
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?
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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.
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11
11.5 PRICING OF BANKING PRODUCTS/SERVICES
No discussion on marketing mix for banking services can be complete without
understanding the concept of pricing and its importance, in detail. Pricing can
be strategically used as a tool to meet/reduce the competition.
Pricing affects the product cost and also plays a key role in decision making of
the buyers (customers). Pricing is affected by competition, seasonality and
general trend of demand and supply. In short it can be said that the price is
determined by cost, demand and competition in the market.
Price in the eyes of the consumer is the evaluation of the total product offering
which includes the brand name, package, product benefits, service, delivery,
credit extended etc. Price can be defined as the money value of a product or
service agreed upon in a market transaction and can be shown as – PRICE =
sum of expectations + satisfactions.
In a competitive market, price is determined by free play of demand and

supply. Price will increase or decrease depending on increase or decrease in
demand for product. Pricing decisions link the marketing actions with financial
objectives of organisations.
Pricing affects:
1) Sales volume
2) Profit margin
3) Rate of return on investment
4) Product position
5) Image of the organisation
Price simply read can be described as “cost plus profit”. Therefore, proper
analysis of cost and proper decisions regarding profit level have direct impact
on pricing decisions/strategy.
Normally direct expenses which vary with volume of production/sales are

variable costs and indirect expenses are fixed cost.
A) Pricing Objectives
The pricing strategy to be adopted depends on the objective to be achieved.
These objectives can be:
1) Growth in Sales – A low price can achieve higher growth in sales volume
but may affect the profit level adversely.
2) Market Share- The customer acceptance is reflected by market share of a

product and is an indicator of acceptability of price.
3) Competition- To face the competition, prices can be lowered to maintain

sales or in the absence of it, prices can be revised but stable prices help in
maintaining image or brand name and quality.
4) Pre-determined Profit – If a profit level is pre-decided as a policy, the

price has to be maintained at a particular level despite other factors as to
ensure attaining that objective.
5) Corporate objectives to have pay-back in a specific period also can affect

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
quality.
Many other times the price will be just below a round figure say Rs.
99.90 (to show it is less than Rs. 100) or Rs. 499.00 (i.e. not Rs. 500/-
or above).
Sometimes instead of giving a 20% discount, the price per unit per-se will
be constant (uncharged) but it is advertised that on purchase of 4 units
one unit will be free.
iii) 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
producers.
II) Cost Based Pricing
There are four main cost based pricing methods which are :
1) Standard cost pricing
2) Cost-plus pricing
3) Break-even analysis
4) Managerial pricing
III) Competition Related Pricing Strategies
The competitive pricing means pricing to compete with the leader in the market
with respect to the price. It can be either to set higher price initially and then
to offer discounts known as ‘discount pricing’ or to significantly increase sales
volume by competing with others already leading in the market by undercutting
the prices significantly with the sole idea of penetrating the market.
11.6 PROMOTION OF BANKING PRODUCTS /

SERVICES
Promotion is a generic term used for the communication efforts of the firm that
are directed towards achieving the objectives of a marketing strategy.
13
Sectoral Applications-I The promotion efforts include the marketing communication through
Advertising
Sales Promotion
Personal Selling
Publicity
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
mind.
In the service industry like Banking, promotion assumes all the more important
position as what we really sell is ‘abstract’ thing i.e. service with the interest
rates, range of product etc. being more or less same, the service given through
proper promotional channel makes all the difference between two Banks in
marketing context.
Promotion can thus mean ‘communicating with the buyers (customer), in order
to strengthen his attitudes that are favourable to the (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.
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Do the promotion efforts vary? How?

i) With the type of Bank i.e. public, private or foreign?
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ii) With the type of product being marketed?
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b) Sales Promotion
Advertising and Sales Promotion as parts of the marketing mix are integrated
with the marketing objectives and they are often co-ordinated with other selling
efforts.
As the name suggests, sales promotion is a collective name given to all

measures used to promote the sales. Any sales by an intending seller of a
product presupposes a corresponding buyer and , therefore, to sell anything the
buyer has to be made aware about the product and its advantages to the buyer.
The visible benefits of the product have to be demonstrated to facilitate 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
undermined.
In Indian context in general and in marketing of banking services in particular

during the launching of product, sales promotion is an important task.
Before deciding the sales promotion strategy it is important to keep in mind

following three essentials:
i) Product Knowledge: This is first essential. The employees and specialized

staff promoting a scheme/product must have the through knowledge of both the
advantages and disadvantages of the product. Only after ensuring the market
demand and specific needs of customers, the product/scheme has to be
launched with full details made available to staff before hand to promote this
product in a better way. 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
demand.
Personal Selling: Sales promotion also can be done through personal selling.
In banking context, it is the person at the counter who is the primary contact
point with both existing and potential buyers (customers). Well informed and
well-trained staff at the counter, eager to explain the schemes to the customer
using smile, courtesy and proper communication process can ensure successful
sales promotion through personal selling, within the branch, across the counter.
The pro-active approach of the staff and projecting a harmonious image of the
bank taking keen interest in customers’ interest can do wonders to boost the
image and increase business of the bank. Seminar, exhibitions, deposit
mobilization-month/fortnight, branch anniversary etc. are some of the other
special sales promotion measures taken by banks.
The sales promotion is very important instrument which smoothens the process
of selling a product to the customer successfully. A well thought strategy of
sales promotion, like planned advertising, should be looked at as an investment
and not just another expenditure. Sales promotion is a bridge between
advertising and actual selling in the field. Like the sum 2 + 5 = 5, when proper
advertising is added with sales promotion, publicity and personalized services it
can bring rich dividends in promotional efforts.
c) Publicity
The Oxford English Dictionary gives definition of word “Publicity” as : “The
quality of being public, the condition or fact being open to public observation or
knowledge- the business of making goods or persons publicly known”.
The publicity differs from advertising not in its aim but in its technique/s. While
the latter has a more specific job to do i.e. inform and motivate, publicity seeks
to interest and draw attention, without essentially motivating or informing the
public
Publicity can be good or bad. With high customer expectations and presence of
various consumer councils these days it is just possible that a branch of a bank
can get wide bad publicity for some mistakes/flaws or inadequacies in giving
service.
The publicity handouts or press releases are the commonest form of publicity.
Such a press release must
i) 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
banks.
In order to supplement such external communication measures, most of the

banks also have internal communication strategies in the form of an annual
budget or business and corporate plan which spell out its goals, objectives and
targets during the financial year.
The expectations of the CMD are conveyed with respect to corporate goals
using past data and changes in economy and business environment appealing to
the managers/staff to realistically assess the business potential in the common
area of their branches and to arrive at revised business targets as expected by
corporate goals based on analysis of market and potential of branches.
Motivational techniques and recognition measures are used in such an exercise
of budget or business plan.
The success of such an exercise largely depends on the realistic assessment of

past data and realistic targets set. The utilization of the top-bottom
communication ensures positive feedback/response from bottom to top.
Besides business plan exercise, internal communication also involves:

1) House Journals
2) Circulars
3) Corporate objective/Business plan booklets
4) D.O. letter for encouragement/appreciation
5) Posters etc.
11.7 INSURANCE
a) Need for Marketing Insurance Services
Thre is an enormous scope to exploit the potential market and raise per capita
life premium. The need for marketing insurance services also arises due to
following factors:
– The insurance products have a distinct feature where benefits of the
product comes at the later date and at times after a considerable time.
– The demand unlike consumers products is not inbuilt.
– Among the financial services too the insurance sector gets the least priority
as other investments avenues provide immediate yields.
– In case of life insurance the case is further complicated as in India people
have belief, traditional culture and religious background and tendency to
leave everything to fate. This happens specially in rural areas.
– The rural market is still untapped. The insurance sector is yet to exploit this
segment which have vast potentialities. 17
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
schemes.
b) Scope for Growth of Marketing Insurance Services
The scope for marketing insurance services is vast and thereby marketing of
insurance services needs a re-look. There are number of impending changes
that are likely to make this sector more dynamic. The Insurance Regulatory
and Development Authority (IRDA) has been established in 1999 for promoting,
regulating and strengthening the insurance sector. The following factors may
further induce promotion of marketing activities in the insurance sector.
a) IRDA aims at promoting the regulating professional organizations connected
with insurance and re-insurance business.
b) The insurance sector is thrown open to private and corporate sector. This
will certainly expand the business dimensions.
c) There is also a move to specify the percentage of life insurance business as
well as general insurance in rural and social sector.
d) With the increased spirit of investment education and awareness there are
already indications of increased participation.
e) The yield on other avenues of investments such as banks, other financial
institutions, mutual funds, capital market have come down and almost at par
with insurance investments. This trend will further enhance the scope of
marketing insurance services.
f) Service standards are bound to improve and insurance premium should
come down once the insurance reforms takes place. With such a positive
development the marketing scope would further increase.
g) The process of privatization will bring in many customer friendly insurance
products.
h) The marketing of insurance services would take together new shape once
banking services, insurance selling and fund management are all inter-
related.
i) Though the market of general insurance is smaller in comparison to life
insurance nevertheless the scope of growth is ample.
j) The Budgetary provision have provided additional tax saving opportunity to
certain specified insurance products such as pension policies. This will give
further fillip to marketing strategies.
Activity 6
Against the backdrop of recent opening up of the insurance sector, what do
you think are the marketing implications for nationalist providers like LIC and
GIC?
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18
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
consumed.
Services also have particular characteristics such as their intangibility and

variability where they are difficult to standardize. This makes it more difficult
for customers to evaluate them (especially when they have no understanding of
the service being provided and are relying on professional competence). This
assumes significant importance in case of insurance services.
Opening of insurance to private insurers has potential of increasing sales in

different segments because of:
1) Sophisticated and knowledgeable selling by qualified agents,
2) Cost effective products,
3) Increased use of “Family Package” policies (A good product-mix)
i) 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
profession.
Consumer Orientation: A customer is always right because he is the cause

of your profession. You are for him. There may be many agents who are
interested in him. Why he should be interested in you only? Here lies the 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
policy.
Activity 4
Contact at least 5 people who have tried to claim their motor insurance or
household insurance policy in the event of a mishap. On the basis of their
feedbak, note the kind of problems customers may face while collecting policy
claims. What is the advise that you would have for the marketers of insurance
on the basis of the feedback collected by you.
...........................................................................................................................
...........................................................................................................................
...........................................................................................................................
d) Role of other Institutions in Marketing of Insurance Services
An open entry has been permitted to private corporate sector, foreign
institutions, banks and other financial institutions to the insurance sector. The
systematic and planned marketing strategies by new entrants in the market will
certainly give a different shape to marketing practices for various kinds of
insurance services. We may mention the possible out come benefits as under:
a) Banking services, insurance selling and fund management are inter related
synergies. Therefore insurance selling by banks are mutually beneficial to
banks and insurance companies. Banking products offer insurance product
through the banking channel will complement banking.
b) With the entry of corporate sector with sophisticated technology, the quality
of services will improve significantly and so is the cost effective products.
This will certainly widen the market horizons.
c) The regulations and controlling measures by IRDA would provide protection
to investor.
d) The professional training institutes will also have important contribution in
training the personnel and thereby sharpening their professional skills. It will
have positive development on marketing of insurance services.
e) There is also a need to expose institutional structure more particularly in the
marketing segment to rural and semi-urban areas.
The efficient and well organized marketing strategies will bring more number of
investors to insurance services and large population uncovered so far will have
advantage of access to this sector.
Exhibit 11.1
Financial Services Firms and Product Innovations
Developing new products is of prime importance for organisations. The

financial sector is also recognizing the increasing importance of new
products. Due to the rapidly increasing level of international competition
there is a growing need for product innovation in banking and insurance
20
Financial Services
products. The service characteristics of intangibility and inseparability raise
a number of issues related to new service development. The main problem
regarding intangibility is that people cannot feel, see or touch the product
being developed, which means that people should work closely together in
the development process. Prototype is hardly possible. Intensive
communication is needed between the people involved in developing the
new services, maybe even more than would be the case in manufacturing.
The simultaneity of production and consumption (inseparability) warrants
strong customer and user involvement in the process.
Becoming more innovative requires alterations at the deepest levels of the

organisation. They key changes that are required to become more
innovative are concerned with the organisational structure, the underlying
values and beliefs and information technology. An important issue in
becoming more innovative in the financial services is to designate explicitly
a ‘place’ for product development. Also, considerable attention has to be
given to changes in the value system of the organisation. Generally, banks
and insurance companies are diffused with stability. Employees in these
companies have to get used to a special product development function and
its importance. Role of IT in product innovations has also to be understood.
Changing the perspective and investing in IT would help in increasing the
innovations potential of many banks and insurances companies
Source: Patrick Vermeulen, “Managing Product Innovation in Financial Services Firms”,

European Management Journal, Vol.22 No.1 pp. 43-50, Feb 2004.
11.8 SUMMARY
This unit explored the basic concepts for understanding the way a consumer
believes in selecting and consuming financial products and services. In order to
be able to manage their marketing effectively, marketers of financial services
must understand why and how people believe, so that the pricing, distribution
and communication of the 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.
21
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
services.
2. Explain the importance of branding in marketing of financial services with
the help of suitable examples.
3. Explain the development of different types of bank branches and other
models of delivery of banking service.
4. Explain briefly various methods of pricing financial products.
5. Define Promotion. What should be a ‘Good Promotion Blend’, for marketing
banking services?
6. Explain with the help of examples how effective marketing can be useful in
enhancing the insurance business.
22
UNIT 12 TOURISM AND HOSPITALITY
SERVICES
Objectives
After going through this unit you should be able to :
describe the nature of tourism as a service industry and identify the
participants in the tourism process,
discuss the factors governing tourism supply and demand,
apply the various segmentation criteria to the tourism market,
identify the levels of demand for hotels, and
discuss the components of the hotel marketing mix.
Structure
12.1 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
12.1 INTRODUCTION
The tourism and hospitality industry is identified by the products which are
needed to satisfy the demand for travel, accommodation, food and beverage
away from home. Demand for accommodation is a function of travel and
tourism. A tourist is often defined as an individual spending at least 24 hours
away from home for the purposes of pleasure, holiday, sports, business or
family reasons. Tourism is one the major industries today, with over 720 million
tourist traveling annually. The annual average growth rate for the industry is
estimated to be between 9% to 12% globally. Tourism as a service industry
comprises of several allied activities which together produce the tourism
product. We find involved in the tourism product development, three major 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
23
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
accessibility
hotel companies
education
nature of tourist
transport
product
marketing companies
search for foreign
exchange
Source: John Lea, “Toursim and Development in the Third World”, Routledge, Chapman and
Hall Inc. 1991
Some of the pointers to nature of tourism as a service industry are:

1) Tourism accounts for nearly 6% of world trade.
2) Bulk of the tourism business is located in Europe and North America, with
1/8 of the market share being shared between the other world regions.
3) The highest growth rate in tourism in recent years has been in the third
world
4) Tourism, like most pure services, because of the characteristic of
inseparability, exemplifies a product which cannot be sampled before
purchase, the prospective consumers have to travel to a foreign destination
in order to consume the product. Technology today provides the opportunity
of some assessment of sorts, through net generated images and rich
information. While these do provide some basis for evaluation, only the
actual transaction of the service act would lead to realistic assessment of
the product.
5) The major players in the tourism market include a number of intermediary
companies. Some of them transnational in character, some of them exhibit
vertical integration, both backward and forward, acquiring interests in all
major sectors in this service industry. Quite common is the existence of
loose coalitions between intermediaries so that a more complete range of
services can be offered to the consumer.
12.2 FACTORS GOVERNING TOURISM DEMAND

AND SUPPLY
Because of the unique nature of the tourism product-it being an amalgam of
the physical characteristics of a destination and the infrastructural as well as
managerial efforts of the promoter; the determinants of tourism demand
emanate from both individual; tourist motivations and the economic, social and
technological factors. Not quite so apparent is the creation of tourism demand
as result of sophisticated tourism promotion.
The economic, social, and technological determinants of tourism demand include

high and rising incomes, increased leisure time, good-education, new, cheaper
and faster modes of transport. Some of the important factors are discussed
here.
24
a) Income Levels Tourism and Hospitality
Services
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.
25
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
categories:
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
places.
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
abroad.
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
significance.
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
26
offers a range of facilities and services “just like back home”, which Tourism and Hospitality
Services
incidentally change its identity from the natural geographic and social locales
which initially lured the allocentrics.
Generalisations like these help tourism marketers to view tourism from he

perspectives of both the tourists’ personal motivations (what does it do for me)
and the host society. There is, for example, evidence to show that the
aspirations of westerns tourists (comprising a major chunk of tourism traffic
today) may not tally with the priorities held by third world host countries for the
development of their industry.
Some governments may wish to maximize income from the industry by

encouraging mass tourism with a minimum of local contact (as in case of
beach resorts in Mexico). Others may wish to make their tourist trade
upmarket to gain the same benefit from a smaller number of top spending
investors (as in the case of Bali) while still others may want to encourage
mass tourism with maximum visitor-host interaction by encouraging the use of
village accommodation and hotels.
The Tourism Products and the Supply Factors
The supply factors, as the mix of destination, facilities and services is usually
called, can be broadly classified into five broad types.
a) Attractions: These may be natural (land forms, flora, fauna) or man made
(historic or modern) or by reason of cultural or sociological destinations
(music, art, folk lore).
b) Transport: Tourism growth is closely related to the supply and extent of
development in transport systems. Certain third world destinations and
certain locations within these countries are rendered in an advantageous
position, by easy access to the world air routes.
c) Accommodation: A critical component of the supply factor, accommodation
can be further divided into commercial sectors (hotels, guest houses, holiday
camps) and private residences or evencamping/canvassing sites.
d) Support and auxiliary services: Cover a large array of supporting
services such as shops, restaurants, banks and medical centres.
e) Physical and communication infrastructure: To make available the
facilities noted above, the infrastructural requirements needed are covered
under this head. Examples are roads, airports, electricity, sewage disposal
and so on. These are generally provided by government because of high
capital costs.
12.3 SEGMENTATION IN THE TOURISM MARKET

The tourism market can be segmented by using variables like: (a) age groups;
(b) number of trips taken per annum/season; (c) income and education; (d)
purpose of the trip. In contrast to the first three the last variable i.e. purpose of
the trip has been fairly extensively used by the major players in the tourism
industry – hotels, tour operators and travel agents, and airlines.
Using this criterion segments have been identified as travel for business,
vacation, convention, personal emergencies, visits to relatives and other types.
The different elements in tourism marketing mix are then tailored to suit the
different demand elasticities of these segments. Table 12.1 gives an idea of the
tourism market as segmented by purpose of travel, along with their major
market characteristics. Other bases sometimes used to segment Tourism Market
are: 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,

relatives,
education,
pilgrimage
2. Seasonality High, marketing mix No seasonality Partial seasonality

can assist however in
spreading demand
levels
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
‘reasonable’
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
important
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.
28
b) Psychographic Segmentation: Using lifestyle and personality variations Tourism and Hospitality
Services
among consumers, psychographic segmentation seeks to determine variance in
consumer demand for tourism and then tailor or package the product to these
demands. For example, travel agencies and tour operators market differently to
ordinary families seeking a relatively cheap summer holiday than to swingers
(young unmarried, fun-loving people seeking ‘up-to-date’ destinations and
hedonistic living)
c) Distance traveled: As a generalization, long distance travelers comprise

the larger and more profitable segment in the tourism market while nearer
travelers may be seen as representing the low margin high traffic consumer
groups. Marketers depending upon their marketing objectives and the need to
balance margins and volumes, use differential marketing mix to attract both
segments.
12.4 THE HOTEL MARKET

The total hotel market, which consists of the total demand for hotel facilities,
may be divided into various segments. These segments are determined as per
the needs of the people and the means they possess to pay for their
satisfaction. The market for the hotel will be served according to what is
provided, how it is provided, and for how much. At a managerial level, it is
relevant to conceptualise the demand for the hotel sector at both the primary
and secondary levels, to be able to assess the requirements on the supply side.
Table 12.2: Primary and Secondary Levels of Demand
Primary level i. Basic demand which exists for hotel

facilities but not being served at
present.
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
area.
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
journey.
Traveling businessmen.
Visiting personnel, i.e., business or
industrial employees for whom
travel is an occasional part of their
job.
Organised tours.
Conventions, conferences,
workshops, meetings, where the
location is pre-fixed by the
organisers.
Social visitors, i.e., guests to
weddings or other social functions.
Catering Occupant customers staying in the

hotel.
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
unison.
Local business customers who
patronise the hotel due to local
industrial or commercial activity.
Meeting and conferences organised
by agencies from outside areas.
People on tour who step into the
hotel for meals, refreshments, etc.
12.5 THE HOTEL PRODUCT

The hotel product has a number of components like accommodation, food and
beverage, recreation and health, shops, car rental service, apart from others.
But of all these, the accommodation and food and beverage components are
the primary ones.
30
Philip Kolter has identified 5 levels of a hotel product. These levels are: Tourism and Hospitality
Services
1. CORE BENEFIT THE FUNDAMENTAL BENEFIT THE CUSTOMER IS

BUYING (HOTEL: REST/ SLEEP)
2. BASIC PRODUCT BASIC, FUNCTIONAL ATTRIBUTES (ROOM; BED,

BATH…)
3. EXPECTED PRODUCT SET OF ATTRIBUTES/CONDITIONS THE BUYER

NORMALLY EXPECTS (CLEAN ROOM, LARGE
TOWEL, QUIETER LOCATION)
4. AUGMENTED PRODUCT THAT MEETS THE CUSTOMERS’ DESIRES BEYOND

EXPECTATIONS (PROMPT ROOM SERVICE, MUSIC,
CHECK IN/ OUT, AROMA)
5. POTENTIAL PRODUCT THE POSSIBLE EVOLUTION TO DISTINGUISH THE

OFFER (ALL-SUITE HOTEL)
From the above table it is quite clear that at the “Core” level all hotels are
alike and the differentiation starts as you start moving up.
The accommodation component of the hotel product requires a clear

identification of the type of clientele the hotel wishes to attract and serve.
Regardless of ‘star’ categorisation, as customers tend to graduate from one
‘star’ category to another, accommodation can be either of the luxury type
almost regardless of the price, or the economy type providing the essentials of
shelter frugally. Between these two there are a variety of accommodation
facilities-catering to customer whose accommodation is paid for; leisure
customers who pay for their accommodation; customers who are part of groups
either on business or on pleasure. However, once the hotel property has been
constructed to serve identified and specific customer segments, the possibility of
variation is severely restricted. Admittedly, the economy type property cannot be
moved up into a luxury one without considerable expense and time although a
reversal from the luxury to the economy class is more feasible and less
problematic.
To tide over the above difficulties, hotel architects, the world over, are now
designing properties with as much flexibility as possible to make multipurpose
adjustable public rooms feasible. In the case of a hotel where such flexibility
does not exist, the hotel product decision for accommodation will depend
entirely on the accuracy of selling rooms to the right type of customer.
On the other hand, the food and beverage component of the basic hotel product
offers greater scope for flexibility. Qualitative differentials can be very wide
and would range from high class a la carte high-price menu restaurants with
complete table service to the medium or low-priced menu dining rooms.
Capital expenditure is relatively lower- decor, furnishings and fittings can be
changed more easily to transform the image of a restaurant or dining room in
either way. Availability of room service from either the 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.
31
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
Entertainment
Privacy / discretions
Source: Francis and Buttle, “Hotel and Food Service Marketing”
Activity 2
Compare the product mix of a city hotel with a resort hotel. Also identify those
services which may create a competitive differentiation for both types of hotels.
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12.6 HOTEL PRICING AND DISTRIBUTION

Pricing
It is difficult for a hotel to exercise differential pricing except for certain
specific purpose. These may typically be differentials in tariffs and prices
during the peak and lean seasons; group rates; contract rates for airline crew;
special conference rates or special concessions to attract customers etc.
However, by and large, hotel pricing tends to follow or conform to pricing
standards applicable to the particular city area or resort, to competitive hotels,
to the amount of traffic being generated in the hotel location, tourist location,
international or national conference venue, and so on. Nevertheless, hotel
pricing also suffers from a degree of lack of flexibility, although to a lesser
extent than that of the hotel product. The depreciated valuation of the hotel
property, its financial management efficiencies, credit policies and other factors,
specially cost of empty room-nights, fixed overheads, also have a bearing on
tariffs and menu prices.
Distribution
Hotel distribution relies on interdependence with other industries serving
travellers and tourists such as the transportation industry (airlines, railways,
32
roadways, shipping lines), travel agents and tour operators, national and state Tourism and Hospitality
Services
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.
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12.7 COMMUNICATIONS
Perhaps this element of the hotel marketing mix is the most important one as it
is directly responsible for bringing customers to the hotel. Hotel marketing
communications are either direct or indirect. The direct communications are
through personal selling, advertising, sales promotion and direct mail. Appropriate
messages are conveyed to those who are potential buyers of the hotel product
and those who directly influence decisions to buy the hotel product. Personal
selling of the hotel product is effective when long-term relationship between the
hotel and the customer is sought. It is also required where the level of business
per customer is likely to be significant. Indirect marketing communications for
hotels include public relations and publicity, both of which may or may not form
a part of the 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
publicity.
1) Advertising
Hotel advertising is an effective and, generally, a long-term effort to inform the
customer about the existence of the property, giving details about the location
and types of facilities offered. Advertising is also aimed at influencing the
attitude of the customer to bring about his acceptance of the particular service
offered. Informative advertising is necessary for a new hotel or a hotel offering
new facilities or services which are different from the past. Persuasive
advertising is aimed at a more competitive situation..
33
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
organisation.
Effective advertising not only gains the attention of the prospective guest,
advertising will be the first introduction of the area, location and the hotel itself.
The success of this introduction will invariably depend upon the impressions
made. To ensure that this impression is favourable, all advertising should have
the touch of quality or class. A flavour of showmanship and originality in
concepts are required to make advertising efforts effective, distinctive,
interesting and compelling. Further, to meet the competition, effective advertising
must stand out as superior to competing advertisements, which, in turn, need an
effective advertising campaign.
In the hotel industry, planning the advertising campaign is very important as the
hotel product has certain unique characteristics: it being highly intangible cannot
be exhibited; it is normally purchased in advance and from a distance; since it
cannot be transported, it cannot be taken to the market-place. Hence one has
to depend on the descriptions and the representations of the hotel product
rather than the actual product in the market-place. Additionally, if the hotel
product in the market-place can only be promoted on the strength of these
descriptions and representations, then its competitive position is a direct result
of the quality of those descriptions and representations. Therefore, the
advertising campaign should be planned carefully and well in advance.
The rationale behind identifying the target audiences and creating proper
message is that there is a need to differentiate marketing communication or
advertising approach to different target audiences. Market segments are
different because they have different needs, they have different requirements;
they want to buy different products or they want to buy the same product, but
for different reasons. Hence, while making an attempt to communicate with
different target segments, there should be a differentiated communication
approach. In communicating with the travel trade a hotel must provide the facts
and figures in simple language whereas a consumer may like to listen to
evocative language. While communicating with the prospective hotel guest, it is
essential to identify psychological motivation and try to motivate the prospective
hotel guest through a message which promises a benefit – a benefit that will
satisfy the 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
34
The objective of advertising in hotel industry vary from image building to Tourism and Hospitality
Services
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,
etc.
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
menu
– To create awareness or interest in ‘Versatile advantage of hotel’.
– Mini- Frigidaire in guest room “do-it-yourself” tea/coffee/breakfast kit in
guest room
– Multipurpose meeting room-cum-wedding hall
– Collapsible bed-cum-divan/room convertible into meeting and private
dining room
– “Wake-up call”-cum-”appointment reminder” device in guest room
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
35
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
36
kind towards advertising expenditure. A fourth method is to achieve competitive Tourism and Hospitality
Services
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.
38
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
publicity.
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.
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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
40
frustrated. So another area to exercise good public relations is employee Tourism and Hospitality
Services
relations.
There can be a wide variation in the objectives of PR from one organisation to

another. The nature of the relationship between an organisation and public
varies, depending on factors such as the size of the organisation and community
within which it operates; the product; types of services or faculties offered; the
type of target market segment, etc. Some of the public relations activities all of
which may not be applicable in case of a hotel are as follows:
Listening to the public to determine their attitude about the organisation and
its policies, programmes, products, personnel and practices.
Satisfying hotel customers or removing guest dissatisfaction through prompt
handling of complaints, correcting the causes of the complaint or any
irritants and making need based adjustments in the policies, practices or
products (as a package of services) of the hotel organisation.
Establishing a customer or travel trade correspondence function to answer
enquiries about any matters regarding the hotel or hotel organisation.
Getting feedback and creating/developing promotional material, advertising
appeal, or total advertising campaigns, sales letters, direct mail material, etc.
Training of employees to provide prompt, pleasant, courteous, accurate and
friendly service to anyone who contacts the hotel organisation personally, on
phone or through correspondence.
Assisting the managers and employees of the various departments of the
hotel in improving their own communication and public relations efforts so
that their is an air of efficiency.
Working with the personnel in advertising (can be the advertising agency),
sales promotion and personal sales to create consistent, effective, honest and
persuasive messages for all of the hotel or hotel 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
publics.
These are only few samples of the kind of objectives public relations personnel
have established in a hotel or a hotel organisation. Some of these objectives
may appear to be quite broad in their content and scope for operational
purposes. If, however, a constant and in-depth attempt is made, these can help
to a great extent in promoting the hotel package of product and service.
4) Publicity
Another aspect of marketing communication is publicity which is the promotion
not necessarily created by the organisation and usually generated by the media.
Thus, publicity is not a marketing function like marketing research, product
planning, distribution system, advertising, sales promotion, public relations, etc.,
which are the marketing activities/techniques. Publicity is rather an objective of
public relations as through good public relations one tries to get publicity and
generate publicity.
News media in every community do look upon industries, hotels and other
business for news. This occurs because every enterprise has an important and
even direct bearing on the social, economic and sometimes political life of the
community. Newspapers present news of public interest to the readers. 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.
12.8 EXTENDED MARKETING MIX FOR HOTELS

The conceptual framework of the extended marketing mix, as applicable to
services has been discussed in Unit 7. Let us see how these concepts are
applicable in the hospitality sector.
The first element of the extended marketing mix for services is physical
evidence which includes servicescape as well as other tangibles. Tangibles are
those objects and physical clues which might represent the service. For
example dress code of staff, etc. The servicescape relates to the setting in
which the service is delivered. Servicescape issues are particularly significant in
all services where “customer goes”. (You may be aware that services can be
classified into three broad categories. First are those service organisations
where customer goes. Like, we go to a hotel, hospital, bank, restaurant,
health club, etc. The second is those service organisations which go the
customer. For example, an AMC provider goes to the customer to service
the computer hardware. The third type of service organisation are those in
which neither the customer goes nor the organisation and both transact
from the distance, like a mobile phone service provider, credit card,
insurance services etc.). From Table 12.7, we can identify how these
servicescape elements and physical evidences are relevant in the hospitality
industry
Table 12.7: Servicescape and Other Tangibles in a Hotel
Servicescape 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
Services
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.
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b) Also study the relative importance of those aspects in marketing hospitality
services.
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12.9 MARKETING CONSORTIUM OR

COOPERATIVES
There is need for cooperation among the small and medium independent hotel
operators due to increase in the pressure put on them by chains and also by
the travel and tourism industry as a whole – like, airlines getting into hotel and
travel trade; tour operators getting integrated, etc. So, the marketing of the
hotel product has become a problem for the smaller hotel operators. The
solution to this problem perhaps lies in cooperative marketing efforts which
could be either ‘group marketing’ or ‘area marketing’.
In ‘group marketing’, the basis of cooperation is similarity in standards – the

standards may be according to ‘Star’ categorisation, similarity of services,
similarity of attractions, etc. In group marketing, one way is for hotels to
cooperate throughout the country thus offering a total India to a budget tourist
or group of tourists.
The rationale behind getting together is naturally ‘gain’. A small operator

operating a small hotel independently in a town cannot really afford to spend
even on the minimum promotional effort that is required of a hotel (assuming
that particular hotel is not in a monopoly situation), on the other hand, if hotels
join together they can afford to send their sales representative to the travel
agents to sell their hotels abroad. Further, this cooperation can be extended to
referrals and recommendations also.
43
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.
12.10 SUMMARY
Tourism and Hospitality is one of the major industries today. This unit explains
you the various marketing aspects related to tourism and hotels. The unit began
with an understanding of various elements of international tourism industry and
the factors governing demand and supply. You were also explained the major
tourist segments and their main marketing characteristics. Subsequently
marketing issues related to hotels have been discussed. Some of the key
decisions relating to hotel marketing are: the products, the price or tariffs,
distribution and marketing communication. Just as the chef prepares varied and
tasty dishes with the same basic ingredients, the marketer can also vary the
quantum and proportion of the elements of the marketing mix to achieve
appropriate marketing goals and sales targets. A hotel where the product is
already designed and fixed, one cannot change the prices quite often and the
distribution is limited to a few selected outlets, it is marketing communication
which is the most significant component of the marketing activity. Although the
various marketing communication activities are undertaken separately, it is
necessary to undertake an interrelated approach so that messages conveyed
through personal selling, advertising, sales promotion, public relations and
publicity are not at cross-purposes. These may tend to confuse rather than
clarify the single important communication of the hotel, which is the product the
hotel offers to the customers it wishes to serve on terms that are both
acceptable to the customers and economically viable for the hotel. In the
ultimate analysis, the marketing communication effort generates a conviction
and confidence whether the hotel is worth patronising or not. It is, therefore,
difficult to assess a marketing communication programme in terms of sales and
revenue of t he operating departments, unless the trends of such sales and
connected transactions are monitored carefully over a period of time, especially
in these days of competition.

1. Describe the main participants in the international tourism process and
discuss the factors responsible for growth of tourism industry.
2. What is a hotel product? Identify the support and facilitating services for a
business hotel in a metropolitan city.
3. Do you think that the concept of marketing mix is applicable to the hotel
industry? If yes, how?
4. Explain the distribution strategy you would follow for a budget hotel located
at a popular hill resort.
5. Recall your experiences of staying in a particular hotel more than once. Did
the “Heterogeneity of Service”, each time you visited, affect your
satisfaction levels? Would you recommend some practical tips for
standardisation? Also identify the marketing communication mix of the above
hotel and recommend improvements in it.
44
Tourism and Hospitality
12.12 REFERENCES AND FURTHER READINGS Services
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.
45
UNIT 13 HEATH SERVICES
Objectives
describe the types and segments of health services in Indian market,
explain the concept underlying pricing of health services,
understand the strategic considerations in implementing the pricing policy,
explain the service quality issues in health services, and
understand the role of marketing communication for health care services.
Structure
13.1 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
13.1 INTRODUCTION
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.
46
Health Services
13.2 TYPES OF HEALTH SERVICES
The type of health services available in India can be broadly categorised into
two :
a) Government owned
b) Privately owned / commercial
The Government (both Central and State) has a network of institutions at

primary, secondary, and tertiary levels. These include sub-centers, primary
health centers, community health centers, rural hospitals and dispensaries in
rural areas, sub-divisional and divisional hospitals , medical college hospitals and
specialised hospitals. One important government health care scheme is the
Employee State Insurance scheme designed for industrial workers. The scheme
is mainly financed by contributions from employers and employees in the
implemented areas. The scheme provides both medical benefits as well as cash
benefit like sickness benefits, disablement benefit, maternity benefits etc.
During the last couple of decades a lot of private nursing homes, diagnostic
centres and specialty hospitals have come up in urban areas, with their major
market being middle and high income group people. The healthcare market has
also witnessed the emergence of ‘Corporate Hospitals’ in India. Apollo
Hospitals, a Rs. 10.24 crore public limited venture opened at Chennai on
September 18,1983 has the distinction of being the first corporate hospital in
the country. Medical care is now emerging as a big industry in the private
sector. This has resulted in some competition and better availability of advanced
technologies/super specialties, which were so far available in western countries
only. Since large investments are required for setting up of such hospitals, it
was beyond the scope of an individual and the most viable alternatives was to
have corporate hospitals. However, most the these recent developments are
again mainly targeted at middle and high income groups.
Raju and Joshi have classified the health care needs in India into three main
categories:
1) Emergency Care: As the name suggests, this is required in situations of
dire necessity like accidents, fire, stroke etc. These are the situations when
the survival of the patient is in question.
2) Routine Care: This refer to periodic patient visits to the medial
professional involving checkups and for ailments where meeting a doctor is
essential but an immediate meeting is not critical.
3) Elective Treatment: This is a medical procedure that a patient chooses to
undertake on his or her own initiative. These include ‘Life Stage
Treatments’ (associated with events which people typically plan for at some
stage in their life like permanent birth control procedures, teeth removal in
old age etc) and ‘Life Style Treatments’ (associated with activities that
people undertake to improve their ‘Self’, boost their image e.g. cosmetic
surgeries, weight reducing treatments, hair implantation etc.). Life Style
Treatment segment is likely to grow in India at a fast rate.
13.3 PRICING OF HEALTH SERVICES

Pricing is one of the most important decisions that you as a provider of health
services will have to take. The sheer variety of available price levels for similar
services among different providers of medical and health services is indicative
of the differential practices that are being used to arrive at the ultimate price
for various services. 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 is to earn
profits. Costs thus represent the lowest limit below which in the long run,
prices cannot be set. On the other hand, you cannot set the price, beyond the
value that your customers assign to the service, simply because at that price
level, exchanges (or purchse of service) will not take place. Consumer’s
perception of value of a given service would thus set the upper limit beyond
which prices cannot be set. Between these two limits service organisations may
have the freedom to charge whatever prices they determine, but for the
presence of a third variable, the competition. You are not the only provider of
health services in the market. There may be several other providers with
similar or better services. The prices that your competitors charge for a similar
service will limit your freedom of setting prices between the two limits provided
by the costs and the consumer’s concepts of value. The prices being charged
by the competition would thus determine the actual level at which prices for a
given treatment or service may finally be set in between these two limits. To
recapitulate the three basic variables that are fundamental to any pricing
decision are:
how does my consumer define value for a given service.
what are my costs in providing that service.
how does my competitor price the same service.
Activity 1
Identify any basic hospital service like an X-ray analysis, a complete health
check examination or a medical consultation for suspected typhoid in three
medical establishments in your city. Do you find any price variatins? What in
your view are the reasons for these variations?
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Why is Pricing for Medical/Hospital Services Different from Pricing

for Goods
In order to realistically set your prices, you should be able to have an
appreciation of what role does price play in the customers’ decisions to avail a
given medical service or health plan. Health providers must, therefore, have a
clear idea about how their prospective client population perceive prices and
price changes of various medical services offered by them. The three basic
ways, in which pricing for hospital/clinical/medical services differ from pricing
for goods are the issue of customer’s knowledge of prices, the role of prices in
indicating quality of services and the issue of non-monetary costs.
a) Prices of Hospital Services and Customer Knowledge: How important

is price to the customer when he/she tries to select a particular hospital/
practitioner for a particular treatment? Do customers have any idea at all about
the costs associated with such services? Do customers really have clear
awareness about the exact prices they would be required to pay for a given
treatment before they decide to avail of a given treatment? Let us briefly look
at these issues and their implication for pricing of health services. To take a
simple exercise, ask adult people around you a few questions about health
services and their prices. For example, what is the price for a medical checkup
in your city? What is the price for a service like a root canal operation, or a
48
simple tooth extraction? What is the price one is likely to pay for a bone Health Services
setting process after a fracture and so on. You will find that few people will be
able to answer accurately on the basis of their memory alone, because clear
ideas about such prices are not available. The price point in our memory for a
product or service is called the ‘reference price’ for that product or service.
Very few prospective patients have a clear reference price for the range of
health services provided by hospitals and clinics. Let us examine some of the
reasons for this phenomenon.
Health services are intangible, and can be offered in a variety of configurations

with variation in accompanying services. Hospitals, therefore, are able to create
a number of permutations and combinations of a given treatment package,
resulting in complex pricing structures. If a prospective customer wanted to
have comparative assessments of prices for a Ceaserian section, she/he would
find that the type of package varies (length of stay, associated services
provided), patient particulars may vary and necessitate price variation
(complexities, age, medical condition), the level of services may vary (single vs.
double room, patient to nurse ratio etc.) Few hospitals would offer exactly the
same features or package of services. Prices are, therefore, not strictly
comparable.
The problem becomes compounded on account of the fact that in quite a few
cases medical providers may be unable to give an accurate price figure in
advance as they may not, at the very outset know what a given treatment
would ultimately involve. In case of health services, customer’s individuals
needs also result in different prices being charged. Previous history, general
medical condition, age related health complications etc. may often determine
the course of action that would need to be taken for a given patient, final
prices, therefore, may also be a function of individual needs of different
patients.
It is also comparatively difficult to gather accurate pricing information of all

comparable hospitals, because unlike retail outlets displaying prices on their
merchandise, prices of health services are not really displayed except for
routine services and consultation charges.
It must now be clear to you that prospective customers often possess

inaccurate information about prices of health services. The implication of the
fact for your pricing strategy are important. The first implication is that
consumer uncertainty can be reduced by finding some ways of communicating
prices at least for all routine services; creating of price visibility is an issue that
many hospitals consider seriously.
The second implication is that while the customer may not ‘know’ the final
price until after he has been in the service transaction for sometime for his
initial treatment, prices become an important criterion for repurchase of the
service as the customers’ knowledge of the service costs has now become
more accurate.
b) Prices and Quality of Health Services: One of the interesting things

about service prices is that because other cues to quality of service are seldom
available, customers tend to use prices as indicators of service quality. In case
of goods, the tangible nature of the product and the possibility of physical
examination by touching, smelling, feeling enables a customer to have an
assessment of the quality of the product before he buys it. In case of services
which are intangible, such pre-purchase assessment is difficult. Research shows
that in case of most services, because other tangible indications to assess
quality are not available, consumers use physical evidence and price as 49
Sectoral Applications-I surrogate indicators of service quality. Wherever pre-purchase assessment of
quality is not easily assessable high prices in the consumer mind get associated
with high perceived quality. Medical services are among the services which are
high on credence qualities, where evaluation of service quality even after
experiencing a given service (for example a by pass surgery) is difficult to
make. In such situation consumers depend on prices as a cue to quality. Prices
for medical services, therefore, must be determined keeping in mind the fact
that price and quality for such services are positively associated. In addition to
cost coverage and/or meeting the competition, prices must be set to convey an
appropriate and desired quality image.
c) Costs other than the Monetary Cost: There is an increasing realisation

on part of service providers that apart from the monetary cost, customers have
to bear several non monetary costs also while availaing a given service.
Sometimes these costs affect consumer valuation and affect his choice of
alternative service offers. These costs include time costs, search costs and
psychic costs.
Health services require direct participation of the patient and thus require him
to spend both waiting time and interaction time with the hospital subsystems –
registration, specific tests and of course the doctors. For any given appointment
his time spent may comprise both waiting time and time with the doctor. Time
spent in availing a given service represents a specific cost to the customer.
Some health services, specially the costlier ones like a by pass surgery require
the customers to go through a lot of information search to identify the best
possible alternative offers are comparable, one variable may include apart from
the prices, the expertise of the doctors, facilities offered, location etc., such
costs are sometimes considerable and also have to be borne by the customer.
Sensory costs are the other class of costs that may make a difference.
Unpleasant sounds, noise, crowds are some of the sensations that most people
are uncomfortable with. In hospitals that are located in crowded or squalid
neighbourhoods, or are overcrowded customers may have to bear these costs.
If there are alternatives which are comparable on other variables mentioned
earlier, customer may like to avoid the sensory costs, even if they have to pay
a little higher.
For health services, one of the most potent costs are the psychic costs – not
understanding the service, fear of uncertainty, fear of undesirable consequences
like pain, disability or loss of control are very important in the customer’s
decision to avail or postpone a given medical transaction. Providers of health
services, therefore, must be aware of not only the monetary costs like cost of
time, cost of search, sensory and psyche costs because there costs offset
consumer valuation significantly and should this be an input in pricing
consideration.
Activity 2
Talk to two patients of a premium private clinic/hospital in your town and to
two patients from the Government hospital. Discuss with them their reason for
selecting the hospital they chose. From the former, try to find out, why inspite
of high price, was their choice made in favour of this hospital. How does their
answer reflect the concepts studied above?
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50
Health Services
13.4 IMPLEMENTING THE PRICING POLICY:
STRATEGIC CONSIDERATIONS
In addition to variables like costs, demand and competition and the
considerations of your own objectives in arriving at a pricing figure, there are
certain issues which demand decision before you can implement and administer
a pricing strategy. Lovclock has clearly focussed on these issues in terms of
key questions that must be addressed while determining the pricing strategies.
The following discussion highlights these issues and the underlying decision that
must be made in order to be able to define and implement your pricing
strategy.
i) How Much to Charge: The issue of costs is important for the pricing
decision. The health service provider, however, would need to decide upon the
relevant costs that must be considered while arriving at the pricing decision. Is
the hospital trying to cover only the variable costs or all the costs, whether it
has decided to allocate a share of the fixed costs across all priced services and
is seeking to get them also covered? Is there a way in which costs of fixed
goods such as land and building can be spread over all services or over a
period of few years? Should the hospital have a basic package of core services
priced at a certain level and then keep on adding to the price depending upon
the combination of value added services availed along with the core service?
Answers to these questions would depend upon the choices you make and will
thus determine the actual figure you want to finalise as the price for a given
service.
For the market/markets that you cater to, you would also need to assess the
prospective customers’ sensitivity to prices. While for a lot of health services,
because of their necessity and expediency nature, customer do not display high
levels of price sensitivity, yet for frequently availed routine services like medical
checkups, ultrasounds, dental fillings etc. wide price differential may make
customers go to alternative providers unless they are supported by superior
value through accompanying services.
Price discounts should be carefully used. All discounts affect the overall total
revenue to the organisations and reduce the contribution margin from each
transaction. While offering specific price discounts to attract a given segment
may create marketing opportunities in new segments, heavy discounting may
actually interfere with the valuation of the service in the eyes of the high
paying customers. Discounting over time, however is prevalent in the health
sector, where understanding the customer reluctances to stay in a hospital over
weekends some hospitals offset the dip in weekend utilisation of operating and
post-operating services by offering substantial discount on operations during the
weekend.
Advocates of psychological pricing suggest that when prices of services are in

term of an odd figure e.g. a sonography costing Rs. 490.95 as opposed to
Rs. 500, it gives the consumer the feeling of paying “somewhere around 400”
rather than almost 500. Since people rarely carry an absolute figure in their
mind as the price for a given service this perception of the price as
“somewhere around 400” is likely to give a substantial competitive pricing edge
to your prices if odd pricing or psychological pricing is used. Hospital
administrators on the other hand and sometimes customer as well may actually
welcome the convenience of round price figures.
ii) On What Basis should Prices be Charged: As a complete service

provider, you will need to identify the basis on which prices would be charged
51
Sectoral Applications-I in your hospital. You would recognise that in your case, there could be actually
more than one basis on which price could be charged. For example, fee could
be charged for admission (or registration) and then on a time basis (duration of
stay on a per day basis in the hospital) or on the basis of resources consumed
(additional nurses hired for round the clock care). Different establishments also
vary in their practices as to whether they should bill each element of the
treatment separately or charge a single ‘package price’ for the whole transaction.
It is however a good practice to have a price figure for each service element,
even though the policy is to quote a package price to the customer.
iii) Where should Payment be Made: You must clearly indicate the payment
procedures in terms of whether the payments should be made and receipts
collected at the reception counter or at the Accounts and Billing department if
you have a separate section like that. Increasingly consumers today are using
their credit cards to make payments, where customers simply give their card
number and ask for their account be billed directly. Policies allowing cheque
payments for government employees may allow greater willingness for patients
to choose one particular hospital over another. All these are example of
facilitation provided especially if the payments are large.
iv) Where and How should the Payment be Made: The two alternative
options that service organisations use are asking the customers to pay in
advance or to ask for payment once the treatment is completed. Most
prevalent in case of medical care is the practice of asking the customer for an
initial advance deposit, with the balance being billed later as the treatment
progresses or is completed. This practice makes sense because specialist
services or time of specialists may need to be allocated or services brought in,
expensive resources may need to be appointed and scheduled in advance of the
acutal treatment. In addition, very often in the beginning of the treatment, the
service provider is rarely ever completely sure as to what costs the treatment
will actually entail, the complication that may arise, the additional services that
may need to be provided. It is, therefore, prudent to ask for an initial deposit
and then identify the billing inputs as they accrue.
v) How should Prices be Communicated: Once the decision on how much

a charge and how the payments are taken, the hospital must at a policy level
decide how the prices are to be communicated to the customers. Since prices
constitute an important input in the purchase of at least some of the medical
services, creating information acces to prices can enable customer to minimise
some of the uncertainty in decision making. Not only do customers need to
have some information on prices in advance, they also need to have information
on how and when would they be required to pay. It is, therefore, advisable to
institutionally decide, how much information on prices is to be communicated
and how? Should rate lists for various services be on display or the rate cards
be given to customers once they seek that information. Decision on how public
should know pricing information needs to be institutionally taken and then clear
unambiguous communication of prices needs to be managed.
To define the term in the most comprehensive way we can say value to the
customer is the sum total of all perceived benefits minus the sum of all the
perceived costs. Looking at this concept of value, it must be clear to you that
the larger the gap between perceived total benefits and perceived total costs,
the greater is the value that the customer would perceive in a given service.
To enhance this perception of value in a given price category, therefore, as a
provider of health services you may follow two alternative strategies or follow
a combination of both. Value can be enhanced by increasing the benefits that
you give to your customers or by rendering costs. On the side of costs, apart
52 from the monetary costs, in services like health, other costs like cost of time
(waiting in the reception, waiting for an appointment), cost of effort (in terms Health Services
of access to location), cost on account of stress and sensory costs like fear are
very relevant. If the provider can manage to reduce some of these costs, he
can alter the customers perception of value of his own service. What you must
appreciate is that while comparing alternative providers of health services,
customers use this perception of ‘net’ value i.e. the difference between
perceived benefits and perceived costs, rather than just the figure of monetary
prices. You must, therefore, consider carefully the perceived benefits that are
associated with your hospital services and the perceived costs that the customer
has to bear, before arriving at a monetary price figure for your services.
Activity 3
Based on your knowledge of practices regarding communication of prices by
clinics/hospitals, prepare a note on what needs to be done further looking at the
customers need for information on the one hand and the peculiar nature of the
health service on the other hand.
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13.5 SERVICE QUALITY IN HEALTH CARE

As discussed in Unit 8, Gronroos suggested that the quality of service as it is
perceived by consumer has two dimensions – a technical or outcome dimension
and a functional or process related dimension. That means, the consumer judges
the quality not only on the basis of what is being delivered but also how that
outcome is delivered. For example for consumer of health care services the
primary expectation is related to the response to the illness–‘cure’. The process
of achieving this end is characterized by the delivery of service experience –
‘care’. As health care services are rich in credence qualities and, therefore, the
technical outcome is dfficult to evaluate, consumer would tend to make the
assessment of the technically complex cure dimensions on the basis of the
more familiar ‘care’ experience. Gabbott and Hogg suggest that evaluation of
the clinical aspect of the service is particularly complex for individual patients
but the impact of it upon overall satisfaction is unquestionable i.e. if the patient
considers the medical response to have been inadequate, aspects of care can’t
compensate sufficiently to result in overall satisfaction. However, given the
difficulties in adequately evaluating “cure” and the investment that a patient has
in believing in the doctor’s ability to treat illness, it is suggested that patients
take this aspect of the service for granted and evaluate their service provision
on the other aspects of service delivery.
Recollect the five dimensions of service quality developed by Parasuraman,

Zeithaml and Berry as discussed in unit 8. Let us apply them to the health care
services.
Reliability: Ability to perform the promised service dependably and accurately

(example – doctor keeps the appointment on schedule, diagnosis prove to be
accurate).
Responsiveness: Willingness to help customers and provide prompt service

(example – no waiting, doctor’s willingness to listen).
Assurance: Employees’ knowledge and courtesy and their ability to inspire

trust and confidence (Example – reputation, credentials and skills.
53
Sectoral Applications-I Empathy: Caring individualized attention given to customers (Example –
acknowledging patient as a person, remembers previous problems, patience).
Tangibles: Appearance of physical facilities, equipment, personnel and written

materials (Example – waiting room, examination room, equipment, report cards).
Zeithaml and Bitner suggest that since health care services involve some
amount of uncertainty/high risk, assurance dimension would be of great
importance to the consumers. In the early stages of relationship, the consumer
may use tangible evidence to assess the assurance dimensions. Visible evidence
of degree, honours and awards and special certifications may give new
customer confidence in a professional service provider.
Raju and Joshi suggest that the hospitality level offered by the healthcare
provider is more important for life stage and life style treatments and goes a
long way in making the patient feel safe and secure about undergoing a
procedure, as well as assuring that the hospital would provide all the requisite
services prior to and after the treatment. Also patients from different strata of
society are starting to have differing expectations from hospitals about the level
of service they should be provided while being treated. Some providers have,
therefore, developed capabilities for providing differential levels of service at
regular, premium and luxury levels. For this health care providers should use
research techniques to map out the consumer decision making process and the
relative importance consumers assign to expertise and hospitality. The next
logical step would be to understand service features that relate to consumer
perceptions of expertise and hospitality. Finally, the provider should understand
the cost implications of making changes in these features and their relative
impact on consumer choice and revenues.
Poor service quality can be caused by a number of factors. These include

organisations’s lack of understanding of customers expectations; not selecting
the right service design and standards; inability or unwillingness to meet the
standards i.e. not delivering as per the service standards; not matching
performance to premises. To provide quality services, an organisation should
first learn about consumer expectations through market research. Even in the
developed countries, in the not-too distant past, health care organisations had
little first hand familiarity with marketing research. (Marketing Research is the
objective and systematic process of gathering, analyzing and interpreting data
relevant to a specific situation or problem facing an institution). However, as
hospitals increasingly have adopted a marketing orientation, they are choosing to
use marketing research to help them understand marketing problems and
opportunities. Loubean and Jantzen (1998) conducted a survey of 230 hospital
executives in USA to assess the kind of marketing research activities being
conducted by hospitals. Hospital’s administrators reported that satisfaction
surveys of both inpatients and outpatients are the most widely used research
applications with more than 80% of the respondents reported usage of these
two methods within the last year. Of the surveyed respondents 48% performed
a competitive analysis of other institution within the last year and 78%
performed the analysis within the last three years. The researchers go on to
suggest that “hospitals seeking effective marketing strategies need to recognize
that a broad array of marketing research information is available to them.
Research is not inexpensive, but it can be one of the hospital’s best values
because, if done properly, it leads to better decision making. Hospitals should
develop and fund annual research activities’.
Activity 4
Talk to different consumers of health care services and determine the relative
54 importance of the five service quality dimensions as perceived by them.
........................................................................................................................... Health Services
...........................................................................................................................
...........................................................................................................................
Internal Marketing and Service Quality
As you would have noticed earlier in the service marketing triangle (unit 1) that
internal marketing plays a critical role in services marketing. Also internal
marketing was discussed in detail in Unit 7. It enables the employees to keep
the promises that have been made to customers. Internal marketing can be
viewed as the building of customer orientation among employees by training and
motivating both customer-contact and support staff to work as a team. The role
of employees in a service organisation is very dramatically highlighted by Hal
Rosenbluth; owner of a chain of successful travel agencies, in his book titled
“The Customer Comes Second” wherein he argues that a company’s first focus
should be on its employees. “Only when people know what it feels like to be
first in someone else’s eyes can they sincerely share that feeling with them”.
Similarly Benoy mentions that for service business such as health care that are
labour intensive and demand high levels of personal contact between the
service provider and the customer, no marketing plan can be considered
complete unless it includes strategies for reaching and winning over its internal
customers. He further goes on to define internal marketing as “the application
of marketing, human resources management and allied theories, techniques and
principles to motivate, mobilize, co-opt and manage employees at all levels of
the organisation to continuously improve the way they serve external customers
and each other. Effective internal marketing responds to employee needs as it
advances the organisation’s missions and goals.” The activities involved in
internal marketing income competing for the talent, training employees,
empowerment, knowing employee needs, good internal communication,
measuring and rewarding quality. You will study more about some of these
aspects in the section on Human Resources Mangement.
Knowledge is empowering. When customers and visitors ask, the employees know
what is going on and why. They feel they are the hospital, rather than answering.
“They tell me nothing!” If you don’t tell them, if they don’t know, then distorted
rumours start circulating. Worse yet, they feel excluded and not a true part of the
hospital. Employees, in general, are well motivated and want to do well. Further
more, no one knows the job better than individual employees themselves.
Therefore, if you create an environment in which they feel comfortable enough,
knowledgeable enough, about the business to feel that they own the business in
a sense, they will contribute – providing, of course, that their capacity to
contribute is enhanced by a responsive upper structure of the organisation.
(Rabkin and Avakian, 1991)
13.6 MARKETING COMMUNICATION FOR HEALTH

CARE SERVICES
Communication is an essential part of marketing. In fact it is one of the
elements of marketing mix i.e., promotion. Few goods or services, despite being
well developed, priced and distributed can sustain the market place without
effective promotion. Promotion can broadly be understood as “communication
by marketers that informs, persuades and reminds potential buyers of a product
to influence an opinion or elicit a response.” The various elements of
promotional mix are advertising, sales promotion, public relations and personal
selling.
However, in this section we are going to focus on word of mouth

communication, since in case of services, especially services which involve 55
Sectoral Applications-I some amount of uncertainty or risk (like health services), consumers tend to
rely more on information from personal sources (e.g. friends) than from non-
personal sources (e.g. mass media). Therefore, word of mouth (w.o.m.)
communication becomes a critical part of health care marketing. Before moving
further let us study a definition of w.o.m. communication. It may be defined as
“Oral, person-to-person communication between a receiver and communicator
whom the receiver perceives as non commercial regarding a brand, a product
or a service.” Though not under the direct control of marketer, they can still
influence it. A health care marketer might ask how favourable word of mouth
can be prompted, unfavourable word of mouth reduced – and since either
effort will likely require marketing expenditures, what results can be expected.
Besty and Madeline have highlighted a number of issues regarding w.o.m.
communication in health care marketing:
i) Word of mouth is more effective than advertising. And in the health care
field, the difference is even more striking than in other purchase
categories.
ii) The effectiveness of word of mouth applies across the board in terms of
the kinds of responses marketers traditionally seek. Word of mouth
communication not only increases awareness and knowledge, but is also
persuades and lead to action, such as actually choosing the provider one
has heard about.
iii) Favourable w.o.m. communication can’t overcome personal negative
experience.
iv) Health care organisations should encourage its employees, their spouses
to become involved in community and neighbourhood groups and to
educate them on what to say when they get there, in the hope that a
source of word of mouth communication is listening.
v) Word of mouth increases as the level of satisfaction increases. An
emotionally positive experience with a health care provider increases
w.o.m. and satisfaction which in turn, raises the odds that w.o.m. will be
positive. A marketer, therefore, has an opportunity to enhance experience
that leads to positive w.o.m. So, health care marketers should seek a
mandate to provide emotional highs to the patients and prevent strong
emotional negatives, even if these goals involve serious trade-off.
vi) Consumers of medical care are more likely to engage in negative w.o.m.
than they are to complain to their health care provider. Health care
providers, therefore, must make a greater effort than marketers in other
industries to make complaining easy and acceptable.
Activity 5
Find out the information acquisition activities undertaken by consumers for
selecting a health care provider.
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................
Advertising
Though advertising is not being used substantially by hospitals in India, it can be
a significant means of communication to the customer. Clow suggests that by
incorporating the five dimensions of service quality (discussed earlier in this
unit) – assurance, reliability, empathy, responsiveness and tangibles into their
advertising, health care providers can increase the level of perceived quality
and thereby reducing the perceived risk. To be effective, health care
56
advertisements must contain one or more of these dimensions in the form of Health Services
headlines, copy or captions. Pictures and drawings can also be used. To
prevent clutter and confusion, an advertisement should focus on only one or
two clues; more can be used by cycling several advertisements.
13.7 CASE STUDY

Marketing of Cardiac Care at Ehirc
Escorts Heart Institute and Research Centre (EHIRC) is the first
comprehensive research facility dedicated to the study, treatment and prevention
of heart diseases in India. It has been truly a quantum leap in the cardiac care
field of health care in India. Heart disease is recognised as one of the world’s
largest killers. In India, the incidence of heart disease is rising at an alarming
rate. As compared to western countries, the type of coronary artery disease in
India differs in its patterns. Even the age of onset of coronary artery disease is
much lower so that many Indians are getting heart attacks at as young an age
as 30 to 40 years. It has been proved that adequate preventive measures and
early detection is extremely successful in reducing the incidence of heart
attacks.
Since the research data generated in the West is not totally applicable to the
causes and factors of heart disease in India, in-depth investigation on a national
level is vital, so that our own environment, dietary, socio-economic, ethnic
factors, etc. can be modified to reduce heart attacks in our country. To
accomplish this goal, EHIRC was setup in 1988 at a cost of Rs. 20 crores and
has undergone a major expansion recently .
The costs of surgery and investigations in India are a fraction of costs incurred
for similar services abroad. Today, an open heart operation inclusive of all
hospital costs, an attendant’s fare, boarding etc., for the three weeks would
cost at least 6 to 8 times in USA as compared to the cost at the institute,
with the added advantage of continued after-care as well as cardiac patient
being in his or her own environment and among his or her relatives. The costs
of other services like angiography, angioplasty, examinations, etc. are
significantly lower than in any foreign country.
The Health Care Industry in USA has become very competitive and it is
becoming increasingly more competitive. This has necessitated each hospital to
identify and develop any function or service which can provide a competitive
edge. As a result, many health care providers are now recognizing the
important role that the sales function can play as an integral part of the total
marketing mix.
We in India, to some extent, feel uncomfortable in selling hospital services. This

is due to our culture and heritage. This need not be so. Patients need education.
They need information. And each person is a patient! So the task of a salesman
for health services is unlimited. This is what marketing can do, and will do.
The following can be used effectively in this regard :

patient educational folders and leaflets which are interesting to read and
absorb, well-illustrated using Indian scenarios.
regular patient clinics in satellite towns to educate and inform and to
encourage to get the comprehensive cardiac check-up done.
use of TV, CCTV and video films to inform the educated people and
promote the institute.
57
Sectoral Applications-I spread of insurance idea.
health clinics and camps in companies, colleges, schools, and similar
organisations.
informing physicians, primary and secondary health centres in regard to
facilities available.
educational write ups in main line and regional newspapers to increase
awareness of cardiac ailments.
mass contact programmes – arranging public lectures by medical super
stars.
Twelve Noble ways to get More Patients
1. Put yourself in your patient’s shoes: It is a basic and commonsensical
concept . Sometime should be spent every day thinking from the patient’s point
of view. It may be difficult but it will mean more sales of hospital services.
Listen to the patients
Ask questions from them
Do something extra for each patient
Admit mistakes to the patients gracefully.
2. Patient Satisfaction: A patient can take away his business to a hospital

wherever he gets better value for his money and better service. He does not
have to give reasons for his action. It is his money and he can spend it where
he likes or the way he likes. Technicians and assistants in the hospitals are
people and if they are not satisfied, one can never have satisfied patients. This
is simple but often ignored fact. Many hospitals have succeeded without
proper medical facilities, none without proper technicians. Employees with
average intelligence and initiative, when treated with respect and dignity as
individuals, given training and motivation will turn out to be good technicians.
3. Continuous communication with the patients: Communication with the

prospects and the patients is the core of good marketing. How to achieve it?
There is no magic wand in the world that will help achieve it; only patience
and persistence pays. Each employee should be trained to be good listener to
the patients when they come into the hospital or when they write to the
hospital. This includes encouraging the patients to open up and express
themselves clearly.
In our country with so many festivals for Devis and Devtaas, a health provider
has several ‘excuses’ to send a postcard to his patients. The postcards can
contain simple messages to help the patients. And when a patient comes in, he
should really be helped, otherwise it will result in stinking publicity. A
promotional mailer can be so fine tuned that it can reach the individual on his
birthday, on his anniversary and so on.
4. Patient oriented hospital: It is not a simple task, but can be done by

following the patient by patient approach. When does a hospital becomes
patient oriented? As soon as the facility starts rendering, through thoughts and
actions, the best possible service to each of its patients. This way a hospital
becomes great for its patients. Patients do not like to come to a big hospital
where they get lost, but they love coming to a great hospital where they will
be given the best possible attention. Also a big hospital does not necessarily
make more profits than a great hospital.
5. Patient oriented polices and procedures: A hospital exists so long as the

patients keep on coming. Hospital policies and procedures, even if they have
58
been given by the best business management professor, are suicidal if they Health Services
inconvenience the patients.
6. Patients must be given the best possible services: Patients should be

given “USA” - Unique Service Advantage – and once they get it, they will
become repeat patients and bring more patients. It simply means some extra
and individual care to show that the business of patients mattes a lot for the
hospital. May be the best equipment can be installed, hospital be opened for
longer hours for the convenience of patients, and so on. It also involves
studying the competitors and to start serving the patients better.
7. Patients want answers to their problems; they are not impressed by

the 3 Cs: A hospital where the patients get answers to their problems is a
better “mousetrap” than a hospital where the patient’s problems don’t get
solved. Patients are not impressed by the carpets, chrome and chandeliers
(3Cs) in the hospital. Patients will flock to that hospital which follows a more
helpful attitude. The 3Cs won’t help if they are shown the rules and regulations
whenever they come with problems. A health provider should not only work
harder to satisfy his patients but must also appear to be doing so. Patients with
complaints must immediately get the feeling that they are still welcome – rather
more welcome- than when they had come in the first place. A bit of additional
consideration is all that is required to convince the patients that they are
wanted at the hospital.
8. Listen, listen , listen …… to your patients: The patients should be

given a proper hearing. Very often, their complaints are like burning embers and
if ignored, may become huge fires, or on the other hand can be turned into
ashes by merely dropping a few drops of cold water in the form of an instant
helpful attitude. If properly attended to, complaints can be turned into
opportunities. A health facility that wants to earn a good reputation in the long
run also ensures that the patients are encouraged to lodge complaints and each
complaints is fully investigated.
9. Each of the employees should visit patients: In a health facility , every

employee does something – directly or indirectly for the patients. Otherwise,
he does not have a right to be on the payroll of hospital. If so, how is it that
some of employees never see the faces of their patients, as least, not away
form the hospital. In the hospital , a selling atmosphere should be created
wherein every employee gets an opportunity to market the services.
10. Checking with patients about employees attitude: Why customers

(patients) quit?
1% Die
3% Move away
5% Form other friendships
9% For competitive reasons
14% Because of product dissatisfaction
68% Quit because of attitude of indifference towards customer by some
employees
Notice the last line carefully. A continuous follow up , therefore, should be done
with the patients to find out how they feel about the hospital employees and
how they are treated by them.
11. Solve the small problems of patients today: A hospital is not a bed
of roses. Of course, most of us feel that it is a bed of roses when we see it 59
Sectoral Applications-I from a distance. It is only when we touch the bush to pluck the roses that we
get pricked by the thorns too. And every hospital must learn how to handle
difficult patients with extra care. A difficult patient is like a dark cloud with a
silver lining. He presents an opportunity in disguise to test the hospital’s
orientation to him. Fortunately, patients are people and the rule of 80:20 applies
to them too, i.e. 80 percent of patients are reasonable and they forgive very
quickly while it is only 20 per cent who carry their grievances on and on.
12. Dissatisfied patients are best teacher: One can never please 100
percent of patients, 100 percent of the times and 100 per cent of the days. If
one can do so it is either a sellers market or he is a genius or he is not taking
takeable risks. Generally for an average hospital one-third of patients are very
satisfied, another one-third are reasonably satisfied and the balance one third
are not fully satisfied and, in fact may be 10 percent are fully dissatisfied.
These dissatisfied patients should be searched for and once they are located,
one- third of the problems are solved. Close attention should be paid to every
word they say and it should be noted down. This conveys that personal interest
is being taken in the matter. The objective is not to win the argument but to
come to an agreement that satisfies a dissatisfied patient.
13.8 SUMMARY
Application of marketing concepts in health care services in India is gaining
widespread importance. This has happened because of a number of changes
taking place like setting up of corporate hospitals, growing consumer awareness,
increasing purchasing power, growing market for elective treatment. Pricing is
one of the crucial issues in healthcare marketing. In this unit you have studied
the basis for pricing and the ways in which pricing for health services differ
from pricing for goods. The various strategic considerations in implementing the
pricing policy have also been explained to you. For health care marketers it is
crucial to appreciate the importance of not only what is being delivered but also
how it is being delivered. That is, they have to take care of the ‘cure’ as well
as the ‘care’ aspects. Further, for health care services, which involve some
amount of uncertainty or risk from customers’ point of view, word of mouth
communication plays an important role.

1. Why is pricing for health services unlike the pricing of a product? What
difficulties can be envisaged while pricing health services? Discuss with the
help of examples.
2. ‘Pricing strategy includes much more than determining what to charge’.
Examine the statement with regards to pricing of health services.
3. What are the components of service quality? How would you apply these to
health care services?
4. Discuss the importance of word of mouth communication for health care services.
5. What changes do you envisage in the Indian health care market with the
emergence of corporate hospitals?

Benoy, J.W. (1996) “Internal Marketing Builds Service Quality”, Marketing
60 Health Services, Chicago, Vol. 16, Issue 1, p. 54.
Besty, G. and Madeline, J. (1995) “Word of Mouth Communication: Causes Health Services
and Consequences”, Marketing Health Services, Chicago, Vol. 15, Issue 3.
Clow, K.E. (1995) “Advertising Health Care Services”, Marketing Health
Services, Chicago, Vol. 15, Issue 2.
Engelberg, M. and Neubrand, S. (1997) “Building Sensible Segmentation
Strategies in Managed Care Setting”, Marketing Health Services, Chicago,
Vol. 17, Issue 2, p. 50-55.
Gabbott, M. and Hogg, G. (1996) “The Glory of Stories: Using Critical
Incidents to Understand Service Evaluation in the Primary Health Care
Context”, Journal of Marketing Management, 12, p. 490-503.
Glynn, W.J. and Barnes, J.G. (1995) (Ed.) “Understanding Service
Management”, John Wiley & Sons.
Gronroos, C. (1990) “Service Management and Marketing”, Lexington Books
p. 37-39.
Loubean, P.R. and Jantzen, R. (1998) “Marketing Research Activities in
Hospitals”, Marketing Health Services, Chicago, Vol. 18, Issue 1, p. 12-17.
Rabkin, M.T. and Avakain, L. (1992) “Participatory Management at Boston’s
Beth Israel Hospital”, Academic Medicine, Vol. 67, May, p. 289-294.
Raju, J. and Joshi Y. “Come Health or High Water.” Brand Equity, The
Economic Times, 25 June 2003.
Rust, R.T., Zohorik, A.J. and Keiningham, T.L. (1996) “Services Marketing”,
Harper Collins College Publishing.
Zeithaml, V.A., and Bitner, M.J. (1996), “Services Marketing”, McGraw Hill
International, p. 117-122.
Zeithaml, V.A., Parasuraman A. and Berry, L.L. (1998) “Delivering Quality
Service: Balancing Customers Perceptions and Expectations”, Free Press,
NY.
Zeithaml, V.A., Parasuraman A. and Berry, L.L. (1985) “Problems and
Strategies in Services Marketing”, Journal of Marketing, Spring, p. 33-46.
61
UNIT 14 CASE STUDY :
SERVING THE GLOBAL INDIAN*
Objectives
This unit is a case study on financial services marketing and relates to various
issues concerning the banking industry in India. After studying this case, you
should be able to :
understand the changes coming out in the Indian Banking Sector,
examine different products being offered in retail as well as corporate
segments of the banking industry, and
explore strategies for globalization of Indian Banks.
Structure
14.1 Introduction
14.2 Changing Face of Indian Banking Industry
14.3 Transformation in the Indian Banking Sector
14.4 ICICI Bank Ltd
14.5 Retail Banking Business of ICICI Bank
14.6 Corporate Banking Business of ICICI Bank
14.7 Organisation Structure of ICICI Bank
14.8 The Global Growth Strategies of ICICI Bank
14.9 Discussion Questions
14.10 Appendix
14.1 INTRODUCTION
Mr. Bhargava Dasgupta heads the international business operations of ICICI
bank and he has to travel a lot these days. He is busy in building the ICICI
bank’s next big platform- globalization. He feels that it is impossible to reach to
the clients everywhere across the world physically for providing the financial
services, so it will be strategically sound to leverage the relationships with other
banks in serving the global consumer. The success of the bank in the domestic
market is largely credited to the customer orientation, high quality of customer
service, innovative financial product introductions and active involvement in
serving the emerging and latent needs of the Indian consumer.
They want to take their domestic market success to the global level. The
recent spot of operations by the bank is an indicator of becoming a global
financial service provider. ICICI bank has opened its first overseas branch in
Singapore in 2003; in mid 2003, they opened the representative offices in
London. They are close to acquire properties by the year 2003 end in Pundong
and have already procured properties in East London to start their business
operations including strategies to open offices in Toronto and Bahrain.
They have to decide about how to reach out to the global Indian in the large
part of the globe within their financial limits compared to global giants like ABN
* This case has been developed for academic purpose, for the students to have an
understanding of financial services marketing. It has been prepared from the data available
from public domain and interviews conducted in the bank by the author. This case is not to
62 illustrate effective or ineffective handling of administrative situation.
AMRO, Citi Bank and other banks. Their global rollout expenditures are around Case Study:
Serving the Global Indian
Rs. 450 crores (100 Million USD) which they can fund from the domestic
balance sheet. The subsidiaries in Canada and England have already used
70 million USD of this capita.
They are also toying with an idea that some of the representative offices can
be converted to subsidiaries where they will be looking for their own capital for
operation in future period than relying on the parent company capital.
Mr. Dasgupta is of the opinion that the entry strategy in different countries is a
function of the local regulations. Many countries have the rules to run the bank
as a representative office offshore branch before they are permitted to be a
subsidiary of the parent company.
ICICI bank’s biggest business was in the area of industrial lending and few
years before they have derisked the portfolio in entering into the consumer
finance business quite aggressively. They are in the process of next growth
opportunity by serving the financial needs of the global Indian consumer. The
banks target is to make this SBU (global business) contributing one third of the
bank’s business in the coming five years (by 2008). Mr. Bhargav Dasgupta was
pulled from the Venture capital subsidiary to head this global financial service
initiative. Mr. Dasgupta is scheduled to give a presentation to the board about
the strategy to make this initiative achieve its goal. Prior to preparing his plan
for the proposed meeting, he thought of giving a bird’s eye view on the bank’s
emergence and growth as a strong player in the domestic market and also
evaluating the possible alternatives before him for serving the global Indian
consumer.
14.2 CHANGING FACE OF INDIAN BANKING

INDUSTRY
Financial sector reforms were initiated in India in early 90s with a view to
improving efficiency in the process of financial intermediation; these reforms
have facilitated greater choice for consumers, who have become more
discerning and demanding, compelling banks to offer a broader range of
products through diverse distribution channels. The traditional face of banks as
mere financial intermediaries has since altered and risk management has
emerged as their defining attribute.
The Indian financial system is identified with two set of institutions viz.
regulators and intermediaries. Regulatory Institutions are statutory bodies
assigned with the job of monitoring and controlling different segments of the
Indian Financial System (IFS). These Institutions are given adequate powers
through the vehicle of their respective Acts to enable them to supervise the
segments assigned to them. It is the job of the regulator to ensure that the
players in the segment work within recognized business parameters maintain
sufficient level of disclosure and transparency of operations and do not act
against the national interests. At present, there are two regulators directly
connected to Indian financial system. They are Reserve Bank of India and
Security and Exchange Board of India. Intermediary financial institutions include
banking and non banking financial institutions.
The banking financial institutions participate in the economy’s payments

mechanism, i.e., they provide transaction services, their deposit liabilities
constitute a major part of the national money supply, and they can, as a whole,
create deposits or credit, which is money. Banks, subject to legal reserve
requirements, can advance credit by creating claims against themselves. Other
63
Sectoral Applications-I financial institutions can lend only out of resources put at their disposal by the
savers.
Financial institutions are the primary source of long term lending for large
projects. Conventionally, they raised their resources in the form of bonds
subscribed by RBI, Public Sector Enterprises, Banks and others. With the
drying up of concessional long term operations funds from the Reserve Bank in
the early 1990s, financial institutions have increasingly raised resources at the
short end of the deposit market.
The Banking Segment in India functions under the regulation of Reserve Bank
of India. This segment broadly consists of commercial banks and co-operative
banks. Non-banking Financial Institutions carry out financing activities but their
resources are not directly obtained from the savers as debt. Instead, these
Institutions mobilize the public savings for rendering other financial services
including investment. All such Institutions are financial intermediaries and when
they lend, they are known as non-banking financial intermediaries (NBFIs) or
investment institutions. Some of the major non-banking financial intermediaries
include Unit Trust Of India, Life Insurance Corporation (LIC) and General
Insurance Corporation (GIC). Apart from these NBFIs, another part of Indian
financial system consists of a large number of privately owned, decentralized,
and relatively small-sized financial intermediaries. Most work in different,
miniscule niches and make the market more broad-based and competitive.
While some of them restrict themselves to fund-based business, many others
provide financial services of various types. The entities of the former type are
termed as “non-bank financial companies (NBFCs)”. The latter type is called
“non-bank financial services companies (NBFSCs)”.
The commercial banking structure in India consists of two major set of players
scheduled commercial banks and unscheduled banks. The scheduled commercial
banks constitute those banks which have been included in the Second Schedule
of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those
banks in this schedule which satisfy the criteria laid down vide section 42 (60)
of the Act. This sub sector broadly consists of private sector banks, foreign
banks. The banking sector is dominated by Scheduled Commercial Banks
(SCBs). As at end-March 2002, there were 296 Commercial banks operating in
India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and
196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks
consisting of 51 scheduled urban co-operative banks and 16 scheduled state
co-operative banks.
14.3 TRANSFORMATION IN THE INDIAN BANKING

SECTOR
Financial sector reforms were initiated in India in early 90s with a view to
improving efficiency in the process of financial intermediation, enhancing the
effectiveness in the conduct of monetary policy and creating conditions for
integration of the domestic financial sector with the global financial system. The
first phase of reforms had an approach of ensuring that ‘the financial services
industry operates on the basis of operational flexibility and functional autonomy
with a view to enhancing efficiency, productivity and profitability’. The second
phase, guided by Narasimham Committee II, focused on strengthening the
foundations of the banking system and bringing about structural improvements.
Among others, the important issues relate to corporate governance, reform of
the capital structure (in the context of Basel II norms), retail banking, risk
management technology and human resources development
64
The significant transformation of the banking industry in India is evident from Case Study:
the changes that have occurred in the financial markets, institutions and
products. While deregulation has opened up new vistas for banks to augment
revenues, it has entailed greater competition and consequently greater risks.
Cross-border flows and entry of new products, particularly derivative
instruments, have affected significantly on the domestic banking sector, forcing
banks to adjust the product mix, as also to effect rapid changes in their
processes and operations in order to remain competitive in the global
environment. These developments have facilitated greater choice for consumers,
who have become more discerning and demanding compelling banks to offer a
broader range of products through diverse distribution channels. The traditional
face of banks as mere financial intermediaries has since altered and risk
management has emerged as their defining attribute.
The Growth of Universal Banking

A universal bank is a supermarket for financial products. Under one roof,
corporate can get loans and avail of other services, while individuals can bank
and borrow. To convert itself into a universal bank, an entity has to negotiate
several regulatory requirements. Therefore, universal banks in the Indian context
have been in the form of a group offering a variety of services under an
umbrella brand such as ICICI or HDFC. In universal banking, large banks
operate extensive networks of branches, provide many different services, hold
several claims on firms (including equity and debt), and participate directly in
the corporate governance of firms that rely on the banks for funding or as
insurance underwriters.
14.4 ICICI BANK LTD

ICICI Bank is India’s second-largest bank with total assets of about Rs. 1
trillion and a network of about 540 branches and offices and over 1,000 ATMs.
ICICI Bank offers a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries and affiliates in the areas of investment
banking, life and non-life insurance, venture capital, asset management and
information technology.
ICICI Bank’s equity shares are listed in India on stock exchanges at Chennai,
Delhi, Kolkata and Vadodara, the Stock Exchange, Mumbai and the National
Stock Exchange of India Limited and its American Depositary Receipts (ADRs)
are listed on the New York Stock Exchange (NYSE).
One of the biggest mergers in the Indian financial system has been the merger
of the ICICI with ICICI bank, which helped them move towards the universal
banking. The management was of the view that the merger of ICICI with
ICICI Bank would create the optimal legal structure for the ICICI group’s
universal banking strategy. The merger would enhance value for ICICI
shareholders through the merged entity’s access to low-cost deposits, greater
opportunities for earning fee-based income and the ability to participate in the
payments system and provide transaction-banking services. The merger would
enhance value for ICICI Bank shareholders through a large capital base and
scale of operations, seamless access to ICICI’s strong corporate relationships
built up over five decades, entry into new business segments, higher market
share in various business segments including fee-based services and access to
the vast talent pool of ICICI and its subsidiaries.
65
Sectoral Applications-I In October 2001, the Boards of Directors of ICICI and ICICI Bank approved
the merger of ICICI and two of its wholly owned retail finance subsidiaries,
ICICI Personal Financial Services Limited and ICICI Capital Services Limited,
Shareholders of ICICI and ICICI Bank approved the merger in January 2002,
the high court of Gujrat in March 2002 and the High Court of Judicature at
Mumbai and the Reserve Bank of India in April 2002. Consequent to the
merger, the ICICI group’s financing and banking operations, both wholesale and
retail are integrated as single entity.
14.5 RETAIL BANKING BUSINESS OF ICICI BANK

Retail banking is a key element of ICICI’s growth strategy. With upward
migration of household income levels, increasing affordability of retail finance
and acceptance of use of credit to finance purchases, retail credit has emerged
as a rapidly growing opportunity for banks that have the necessary skills and
infrastructure to succeed in this business. ICICI Bank has capitalized on the
growing retail opportunity in India and has emerged as a market leader in retail
credit. The dimensions of the retail strategy include innovative products, parity
pricing, customer convenience, strong processes and customer focus.
Cross-selling of the entire range of credit and investment products and banking
services to customers is a critical aspect of ICICI’s retail strategy. ICICI Bank
offers a wide range of retail credit products. It has expanded the market
significantly over the last few years by taking organized retail credit to a large
number of high-potential markets in India, by penetrating deeper into existing
markets and by offering customized solutions to meet the varying credit needs
of the Indian consumer.
ICICI Bank is one of the leading providers of mortgage loans, two-wheeler

loans, commercial vehicle loans and personal unsecured loans, and continues to
maintain leadership in automobile finance. ICICI Bank’s total retail
disbursements in fiscal 2003 are approximately Rs. 200 billion. Retail credit
constituted 18% of ICICI Bank’s balance sheet at March 31, 2003, compared
to only 6% at March 31, 2002.
Cross selling has emerged as one of the significant drivers of retail credit
growth. In fiscal 2003, cross selling accounted for about 20% of mortgage
loans and auto loans and about 25% of credit cards issued. In May 2003,
ICICI Bank acquired the entire paid-up capital of Transamerica Apple
Distribution Finance Private Limited (TADFL), which is renamed as ICICI
Distribution Finance Private Limited (IDFL). IDFL is primarily engaged in
providing distribution financing in the two-wheeler segment. The acquisition is
expected to supplement the Bank’s retail franchise, especially in the
two-wheeler segment.
Retail Deposits
During fiscal 2003, ICICI continued its focus on retail deposits. This has
reduced its funding cost and has enabled it to create a stable funding base,
with over 4.7 million deposit customers. Following a life stage segmentation
strategy, ICICI Bank offers differentiated liability products to various categories
of customers depending on their age group (Young Star Accounts for children
below the age of 18 years, Student Banking Services for students, Salary
Accounts for salaried employees, Roaming Current Accounts for businessmen,
Private Banking for high net worth individuals and Senior Citizens Accounts for
individuals above the age of 60 years). ICICI Bank has further micro-
segmented various categories of customers in order to offer products catering
to specific needs of each customer segment, like defence banking services for
66
defence personnel. This strategy has contributed significantly to the rapid Case Study:
growth in the retail liability base.
Credit Cards
ICICI Bank is also the largest incremental issuer of cards (including both debit
and credit cards) in India. At March 31, 2003, ICICI Bank had issued over 3.4
million debit cards and 1.0 million credit cards. Its multi-channel distribution
strategy provides its customers 24%7 accesses to banking services. This
distribution strategy not only offers enhanced convenience and mobility to the
customer but also supports its customer acquisition and channel migration
efforts.
Electronic Channels
During the year, ICICI has expanded its electronic channels and migrated large
volumes of customer transactions to these channels. Seventy percent of
customer induced transactions take place through electronic channels.
ATMs
During fiscal 2003, the Bank significantly strengthened its ATM network, taking
the total number of ICICI Bank ATMs to 1,675. ICICI Bank has also
pioneered the concept of mobile ATMs to reach out to remote/rural areas.
Other facilities offered through multilingual screen ATMs include bill payments
and prepaid mobile card recharge facility. ICICI bank is also planning to share
the network with other key players in financial services market to give a wider
access to its customers.
Internet Banking
ICICI Bank has about 3.4 million customers with Internet banking access, who
can undertake all their banking transactions (other than physical cash
transactions) on the Internet. ICICI Bank’s Internet banking customers can also
pay their bills for more than 45 billers and shop on 85 online shopping portals.
Phone Banking
ICICI Bank considers phone banking to be a key channel of service delivery
and cross-sell. ICICI Bank’s 1,750-seat call centre, the largest domestic call
centre in India, can now be accessed by customers in over 355 cities across
the country. The call centre handles more than 2.5 million customer contacts
per month. The call centre services all retail customers across the ICICI group.
The call center uses state-of-the-art voice-over-Internet-protocol technology and
cutting-edge desktop applications to provide a single view of the customer’s
relationship.
Mobile Banking
ICICI Bank’s mobile banking services provide the latest information on account
balances, previous transactions, credit card outstanding and payment status and
allow customers to request a cheque book or account statement. ICICI Bank
has now extended its mobile banking services to all cellular service providers
across the country and NRI customers in the United States, United Kingdom,
Middle East and Singapore.
Service Delivery through Multi Channel Distribution Network

With the foundation of a strong multi-channel distribution network, it has
successfully developed a robust model for distribution of third party products
like mutual funds, Reserve Bank of India (RBI) relief bonds, and insurance
products, with market leadership in these areas. This model also allows it to
67
Sectoral Applications-I meet all customer needs by offering the customer the complete basket of
financial products, while leveraging its distribution capability to earn fee income
from third parties.
Online Trading
ICICI direct (www.icicidirect.com) is the market leader in Internet based share
trading, with complete end-to-end integration for seamless electronic trading on
stock exchanges. ICICIdirect has a rating of “TXA1” from CRISIL, indicating
highest ability to service broking transactions. During the year, ICICIdirect
launched online trading in the derivatives segment of the NSE.
14.6 CORPORATE BANKING BUSINESS OF ICICI

BANK
ICICI Bank provides innovative financial solutions to its corporate clients,
tailored to meet their requirements, while diversifying its revenue streams and
generating adequate return on risk capital through risk-based pricing models and
proactive portfolio management.
Its focus in the financial year 2003 is on technology-driven enhancement of

delivery capabilities to offer improved service levels to clients. It set up centralized
processing facilities for back office operations where technology is leveraged to
benefit from economies of scale arising out of large transaction volumes.
During the year it continued to expand the scope of its Web-based services.
ICICI Bank provides corporate internet banking services through

ICICIebusiness.com, a single point web-based interface for all corporate
products. The portal enables clients to conduct their banking business with
ICICI Bank through the Internet in a secure environment. ICICI Bank offers
online foreign exchange and debt securities trading services.
A dedicated product and technology group develops and manages back-office

processing and delivery systems. Dedicated relationship groups for corporate
clients and the government sector focusses on expanding the range and depth
of its relationships in these sectors. In the corporate segment, it focusses on
leveraging its relationships to expand the range of products and services to
channel finance, transaction banking and non-fund based products.
ICICI Bank has strong relationships with several large public sector companies
and state governments and it is leveraging these relationships to expand the
range of transaction banking services. It has already been empanelled for
collection of sales tax in eight states. It continued to focus on corporate lending
transactions including working capital finance to highly rated corporate,
structured transactions and channel financing. It also focused on leveraging its
skills in originating and structuring transactions as well as on its ability to take
large exposures to adopt an originate-and-sell-down strategy.
This not only increased the risk-adjusted return on the capital employed but also
enabled it to offer a comprehensive solution to its corporate clients. ICICI
Bank’s dedicated structured finance, credit and markets group, with expertise in
financial structuring and related legal, accounting and tax issues, actively supports
the business groups in designing financial products and solutions. This group is
also responsible for managing the asset portfolio by structuring portfolio buy outs
and sell-downs with a view to increase the risk-adjusted return on the capital.
During fiscal 2003, ICICI Bank focused on the agri-financing segment and
68 developed several innovative structures for agri-business, including dairy
farming, farmer financing and warehouse-receipt-based financing. It achieved Case Study:
robust growth in this segment and is working with state governments and agri-
based corporate to evolve viable and sustainable systems for financing
agriculture. It has also integrated its rural banking, micro-finance and agri-
financing activity to offer integrated banking services in rural areas.
Treasury
The principal responsibilities of the Treasury included management of liquidity
and exposure to market risks, mobilization of resources from domestic
institutions and banks and international multilateral and bilateral institutions and
banks, and proprietary trading. Further, the treasury leveraged its strong
relationships with financial sector players to provide a wide range of banking
services in addition to its liability products. In fiscal 2003, the balance sheet
management function within treasury, managed interest-rate sensitivity by
actively using rupee-interest-rate swaps as well as by adjusting the duration of
the Government securities portfolio held for compliance with Statutory Liquidity
Reserve (SLR) norms. Further, efforts are undertaken to make the banking-
book-interest-rate positions more liquid by selling illiquid loans and substituting
them with marketable securities.
The focus of trading operations was active, broad-based market making in key
markets including corporate bonds, government securities, interest-rate swap and
foreign exchange markets. A focus area in fiscal 2003 is the delivery of market
solutions to corporate clients in various areas such as foreign exchange, fixed
income and swaps. There is a significant increase in both the volumes and
profits from foreign exchange transactions, swaps and loan syndication. As one
of the largest players in the corporate debt market, it offered two-way quotes
for many corporate debt papers, thereby increasing the liquidity and depth of
the market. Effective fiscal 2004, it has restructured its treasury operations to
separate the balance-sheet management function (which now forms part of the
finance group), the corporate markets business (which has been integrated into
the structured finance, credit & markets group) and the proprietary trading
activity (which is now housed in a separate proprietary trading group).
14.7 ORGANIZATION STRUCTURE OF ICICI BANK

ICICI Bank’s organizational structure is designed to support its business goals,
and is flexible while at the same time seeking to ensure effective control,
supervision, and consistency in standards across business groups. The
organization structure is divided into five principal groups namely Retail Banking,
Wholesale Banking, Project Finance & Special Assets Management,
International Business and Corporate Centre.
The Retail Banking Group comprises ICICI Bank’s retail assets business
including various retail credit products, retail liabilities (including own deposit
accounts and services as well as distribution of third party liability products),
and credit products and banking services for the small enterprises segment.
The Wholesale Banking Group comprises ICICI Bank’s corporate banking
business including credit products and banking services, with dedicated
groups for corporate clients, Government sector clients, financial institutions
and rural and micro-banking and agri-business. Structured finance, credit
portfolio management and proprietary trading also form part of this group.
The Project Finance Group comprises our project finance operations for
infrastructure, oil & gas and manufacturing sectors. The Special Assets
Management Group is responsible for large non-performing and restructured
loans.
69
Sectoral Applications-I The International Business Group is responsible for ICICI Bank’s
international operations, including its entry into various geographies as well
as products and services for non-resident Indians (NRIs).
The Corporate Centre comprises all shared services and corporate functions,
including finance and balance sheet management, secretarial, investor
relations, risk management, legal, human resources and corporate branding
and communications.
14.8 THE GLOBAL GROWTH STRATEGIES OF

ICICI BANK
Mr. Dasgupta was looking at the future proposition of earning one third of the
total revenue from the international business operations by the year 2008. There
are four alternative strategies available for ICICI bank to provide financial
services to the global Indian.
The first strategy is to build a regional base in neighboring countries like Nepal,
Bangladesh and Sri Lanka. Some of the banks have followed this strategy in
the past. Standard Bank had used this strategy to expand its business in Africa,
but the neighbours around India are not economic powerhouses for which the
opportunity to grow in these markets are limited.
The second strategy is to enter growth markets aggressively through the

process of acquisitions. Mr Rana Talwar of Standard Chartered Bank followed
this strategy by buying banks in Asia and Latin America. There is a risk
involved in the acquisition process in the foreign country from two points. The
legal procedures for acquisitions varies from country to country and secondly
the issue of non performing assets of the existing banks may create problem to
the ambitious growth plan of the bank. But he was sure some of these banks
may serve as gold mine with higher return potential in developing nations. This
also needs a bigger balance sheet that the current balance sheet of ICICI bank
for a high level of acquisition.
The third strategy is to take a strong product and make it global. Identification
of a core competitive advantage and then building a strategy on this particular
advantage may also bring success to the banks global vision. Citibank expanded
in the recent decades by following such a strategy of building the credit card
business as its core competency for entering in to new markets. The complex
financial service mix as well as the rapid change in level and type of technology
as the enabler to the service provider brings doubt about such a strategy.
However, ICICI bank has a set of successful products but they do not have a
solid financial product as the unique selling proposition for the global market.
The fourth strategy is to follow the customer. Many Spanish banks followed
this strategy to enter in to the Latina American market. The non resident
Indian business is growing in countries like Dubai and Bahrain, there is a Sino-
Indian trade boom which can be financed from the Shanghai operations, the
growing link with the ASEAN nations can be serviced from Singapore. There
are also traditional business interests in countries like USA and UK but there
are also potential risks involved in the form of operating with international
partners for some period until they establish the offshore subsidiaries. Similarly
selected market coverage may limit the scope and image of the bank as a
global financial service provider.
Mr. Dasgupta has to consider other issues. ICICI bank is still the number two
bank in the country with ample scope for growing its business in the domestic
market. The internationalization of other global players have come only after
70
securing the home business and channelizing the liquid funds from the domestic Case Study:
market for international operations. HSBC bank moved out of Hong Kong when
it had a substantial position in the domestic market for international shores.
Many financial experts are still of the opinion that the balance sheet of ICICI
bank is still weighed down by problem loans to industries such as textiles, steel
and telecom. The NRI as a business proposition has to be evaluated. The
recent spike in the NRI deposits is because of the higher interest rates in India
compared to global rates. As Reserve Bank of India is cutting down the
interest rates to make it at par with global rates, it may hit the whole business
proposition. Mr. K.V. Kamath, the CEO of the company thinks that the global
Indian consumer is not bothered about the exchange rate risks and NRI
remittances can be a good business proposition with a mix of portfolio
management to mortgages rather than ordinary deposits.
Mr. Dasgupta believes that it is right time to go global as major economies are
still recovering from a recession. Therefore, an opportunity for cheaper deals
and quality recruitment exists for the bank. The decisions to enter in to
International operation seem very complex for the bank. In addition, he has to
decide about the strategies to handle global risk in the business and the
structure of the global organization, as he has to operate in a multi cultural
environment. He was sure that one of the strategic options explained above
could take ICICI bank to the global platform as a financial service provider. He
was not sure which one.
One thing he was sure about the future of the International operations. ICICI
bank is going to concentrate on India related business in all these places rather
than competing with global players with higher financial muscles and better
service offers. ICICI is there to look after the Indian companies that are
rapidly globalizing their operations. The motto should be to serve the customers
at anywhere in the world with a correspondent relationship with other banks.
14.9 DISCUSSION QUESTIONS

1. What problem Mr. Bhargava Dasgupta is facing in this case?
2. What are the strategic alternatives available for Mr. Dasgupta to serve the
Global Indian Consumer?
3. What do you mean by originate-and-sell-down strategy?
4. Explain the financial service mix portfolio of ICICI bank in retail sector? In
corporate sector?
5. What recommendations will you make to Mr. Bhargava Dasgupta? Should
he go global? Give your reasons.
14.10 APPENDIX
ICICI Bank: Sales and Profit Analysis
Operating Net
Year Sales Profit Profit
1998 1666.40 723.70 421.00
1999 6972.20 867.00 732.60
2000 8730.00 1465.10 1107.00
2001 14745.90 2908.70 2014.20
2002 69340.40 4556.00 8685.00 71
Sectoral Applications-I Ratio Analysis of ICICI and Other Players
Bank SBI ICICI HDFC UTI Bank

CAPITAL 13.50 11.10 11.12 9.00
ADEQUACY RATIO
EARNING RATIOS
Fund based 91.75 93.37 89.91 92.26
income as a %
of Op Income
Fee based income 8.24 6.62 10.08 7.73
as a % of Op
Income
PROFITABILITY RATIOS
Cost of Funds 6.91 9.63 4.83 6.46
Ratio
Net Profit 8.43 9.62 15.53 10.23
Margin
Return on Net 18.05 17.49 17.21 21.09
Worth
DEPOSIT RATIOS
Demand Deposit 15.11 7.65 22.12 14.65
of Total Deposits
Saving Deposit 22.21 7.87 20.83 8.38
of Total Deposits
Time Deposit of 62.66 84.46 57.03 76.95
Total Deposits
Deposits within 97.54 100.00 100.00 100.00
India as % to
Total Deposits
PER BRANCH RATIOS
Operating Income 40.28 120.39 105.70 133.95
Per Branch
Operating Profit 8.83 45.78 33.08 32.79
Per Branch
Net Profit Per 3.42 27.80 16.73 13.84
Branch
Personnel 6.26 6.04 6.58 6.09
Expenses Per
Branch
Borrowings 10.25 100.43 98.90 51.38
Per Branch
Deposits Per 326.09 1,325.87 968.66 1,211.77
Branch
PER EMPLOYEE
RATIOS
(Rs. in Units)
Operating Income 1,749,960.13 11,285,851.51 5,096,576.92 8,021,214.71
Income Per
Employee
Operating Profit 383,526.38 2,370,995.47 1,594,907.12 1,963,259.20
Per Employee
Personnel 272,189.95 380,211.89 317,157.17 364,542.34
Expenses Per
Employee
Deposits Per 14,168,713.69 45,442,741.79 46,704,383.22 72,560,821.21
Employee
72
P Product Mix Width (Personal Finance)
r Banking Loans Online Services NRI Service Investments Cards Demat Mobile Banking
o Savings Account Home Loan Bill Payment Rupee Savings ICICI Bank Bonds Credit Credit Banking Alerts
Account
d
Fixed Deposit Personal Loan Shopping High interest GI Bonds Debit cum Credit Card Alert
u Fixed Deposits ATM card
c Easy FD Car Loan Share Trading Account for Mutual Funds
Returning Indians
t
Recurring Deposit Two Wheeler Loan Charity Money2India IPO
Private Banking Commercial Anywhere Banking Donate2India
L Vehicle Loan
i Roaming Current Loans against Home Loans
n Account Securities
e Young Stars Farm Equipment Home Search

Loans
Bank@campus Construction Online Stock
L
Salary Account Office Equipment Investment
e
Women Medical Customer Service
n
EEFC (Exchange) Consumer Tax queries
g Durables and answered
t Resident Foreign
Currency
h
(Domestic)
73
Case Study:
74
Product Mix Width (Corporate Finance)
P
Transaction Treasury Solutions Invesment Capital markets Securities International Agri business Corporate &
r Banking Solutions Management Banking Services business Structured
Services Finance
o Cash management Forex markets Central Government Collecting Bankers Equities Automated INR Working capital Working Capital
services Securities Payment Services finance Financing
d
General Banking Bond markets Treasury Bills – Escrow & Paying Equity Derivatives VOSTRO Accounts Term loans Auto Loan
u (T-Bills) Bankers Receivables
Trade finance Commodity markets Call Money/Notice Initial Public Offer GDR/ADR/Euro Cross Border Forex Credit Card
c Money, Term (IPO) Funding Issues and Trade Services Receivables
Money and Fixed arbitrage
t Deposit
Lending rates Repos/Reverse Clearing & Debt Trust & Retention Fertilizer Subsidy
Repos Settlement Bankers Account Services Receivables
L Bonds and Bank Guarantees SGL settlements INR Agency Export Receivables
Debentures through Clearing Services
i Constituent
account with
n ICICI Bank
Inter Corporate Overdraft Against Dealer financing
e
Deposits Shares
Certificates of DVP Funding EPC Contract
Deposit Financing
L Commercial Paper Intra Day Funding Investment
Monetisation
e
Bills Rediscounting Temporary Trade financing
n Scheme (BRDS) Overdrafts (long term)
(REIT) / (REMIC)
g structures
t Brand financing
Vendor financing,
h Transporter
financing
PROFIT AND LOSS ACCOUNT Case Study:
Schedule (Rs.in '000s) As on 31.03.2002
I. INCOME
Interest earned 13 93,680,561 21,519,297

Other Income 14 19,677,741 5,746,598
Profit on sale of shares of
ICICI Bank Ltd held
by erstwhile ICICI Ltd 11,910,517 -
TOTAL 125, 268, 819 27, 265, 895
II. EXPENDITURE
Interest expended 15 79,439,989 15,589,235

Operating expenses 16 20,116,900 6,225,770
Provisions and contingencies 17 13,650,139 2,867,900
TOTAL 113, 207, 028 24, 682, 905
III. PROFIT/LOSS
Net profit for the year 12,061,791 2,582,990

Profit brought forward 195,614 8,294
TOTAL 12, 257, 405 2, 591, 284
IV. APPROPRIATES/TRANSFERS
Statutory Reserve 3,020,000 650,000

Transfer from Debenture Redemption Reserve (100,000) --
Capital Reserves 2,000,000 --
Investments Fluctuations Reserve 1,000,000 160,000
Special Reserve 500,000 140,000
Revenue and other Reserves 600,000 960,000
Proposed equity share Dividend 4,597,758 --
Proposed preference share Dividend 35 --
Interim dividend paid -- 440,717
Corporate dividend tax 589,092 44,953
Balance carried over to Balance sheet 50,520 195,614
TOTAL 12, 257, 405 2, 591, 284
Significant Accounting Policies and

Notes to Accounts 18
Cash Flow statement 19
Earning per share (Refer Note B.9)
Basic (Rs.) 19.68 11.61

Diluted (Rs.) 19.65 11.61
75
BALANCE SHEET
Schedule (Rs.in '000s) As on 31.03.2002
CAPITAL AND LIABILITIES
Capital 1 9,626,600 9,625,472

Reserves and Surplus 2 63,206,538 56,324,080
Deposits 3 481,693,063 320,851,111
Borrowings 4 343,024,203 492,186,592
Other liabilities and provisions 5 170,569,258 162,075,756
TOTAL 1, 068, 119, 662 1, 041, 063, 011
ASSETS
Cash and balance with Reserve Bank of India 6 48,861,445 17,744,682

Balances with banks and money at call and
short notice 7 16,028,581 110,118,817
Investments 8 354,623,002 358,910,797
Advances 9 532,794,144 470,348,661
Fixed Assets 10 40,607,274 42,393,443
Other Assets 11 75,505,216 41,546,611
TOTAL 1, 068, 119, 662 1, 041, 063, 011
Contingent liabilities 12 894,385,070 394,465,858

Bills for collection 13,367,843 13,234,184
Significant Accounting Policies and
Notes Accounts 18
Cash Flow Statement
76
Indira Gandhi
Block
5
SECTORAL APPLICATIONS-II
UNIT 15
Educational Services 5
UNIT 16
Professional Support Services: Advertising Agencies 21
UNIT 17
Telecommunication Services 31
UNIT 18
Product Support Services 47
UNIT 19
Case Studies 59
1
Sectoral Applications-II
Delhi Bangalore Goa



Bhutan



New Delhi New Delhi

IGNOU, New Delhi

IGNOU, New Delhi
IMI, New Delhi
Print Production

ISBN-81-266-1276-2
2 Printed at:
BLOCK 5 SECTORAL APPLICATIONS-II
In the previous block (Block 4) we have discussed marketing issues related to
three specific service sectors namely ‘financial services’, ‘hospitality and
tourism services’ and ‘health services’. In this last block of the course we will
cover four more service sectors. Unit 15 on ‘Educational Services’ gives you
an indepth exposure to the concept of education as a service, the marketing
implications of service characteristics in the context of education, marketing
strategy issues, and planning of the marketing mix for education. Unit 16 on
‘Professional Support Services’ relates to one of the vital support services to
commercial world i.e. advertising. It discusses in detail services marketing
applications for advertising agencies, various marketing options that can be
exercised by agencies and the positioning strategies.
Unit 17 covers the ‘Telecommunication Services’, which have witnessed a

revolution in the last few years. The unit covers the growth of telecom sector
in India, regulatory framework, the changing market structure, tariff issues and
service quality parameters. You will appreciate that services marketing is not
only relevant to services sector but to goods manufacturers as well. Unit 18
titled ‘Product Support Services’ explains the concept of product support
services and describes the different categories of these services. The unit also
includes a case study. The last unit of the block contains two small Case
Studies. The first case presents an interesting study on customer expectation
and customer orientation in an insurance company. The second case relates to
service concept and distribution aspects.
3
Sectoral Applications-II MS-65: MARKETING OF SERVICES
Course Components

AN INTRODUCTION


3. STRATEGIC ISSUES
8. Service Quality


19. Case Studies
4
UNIT 15 EDUCATIONAL SERVICES
Objectives
classify education as a service along the various classification schemes;
describe the marketing implications of service characteristics in the context
of educational services;
analyse the issues to be addressed in service strategy formulation for
education;
discuss the service mix elements for educational services and draw
generalisations for design of educational service;
apply the concepts developed for pricing, promoting, designing and
delivering educational products.
Structure
15.1 Introduction
15.2 Service Classification and Education
15.3 Service Characteristics and Implications for Marketing of Education
15.4 Marketing Strategy and Education
15.5 The Marketing Mix
15.6 Conclusion
15.9 References
15.1 INTRODUCTION
Marketing of education is a subject with very wide coverage if one considers
that formal education begins at the school age and depending upon the choice,
vocation and circumstance of the persuants, matures into intermediate and
higher levels of learning including professional and specialised fields. Apparently,
benefits sought from higher and professional or vocational courses are more
tangible or measurable in terms of entry qualifications to a chosen profession,
certification to enable practicing a profession or relative ease of access to a
suitable form of livelihood. Not attempting to cover the marketing of education
per se, the scope of this unit is limited to the post school or higher education.
Table 15.1 gives the details of growth in higher education in India.
Table 15.1: College Education in India
(Nos.)
2001-02 2000-01 1999-00 1990-91
General Education 8, 361 7, 834 7, 782 4, 862
Colleges
Professional Colleges* 2, 340 2, 169 2, 124 886
+
Universities 261 251 244 184
* Medicine, Engg. & Technology and Architecture, Teachers training colleges only
+ Including deemed universities and institutions of national importance
Source : Statistical Outline of India 2003-2004, Tata Services Ltd; p.215
5
Sectoral Applications-II Without making specific commends about any particular discipline, the unit
deliberately seeks to keep the treatment of the subject general, as the objective
is to develop a basic understanding of the concepts involved in the marketing of
education as a special case of marketing of services.
Interestingly, the need to ‘market’ their services has not really been felt by the
education sector, as educational institutions, be they colleges or Universities or
institutions catering to specific fields like ours, have faced more demand than
they could cope with. For specialised fields like management and computer
education, where attractive market potential has increasingly caused more and
more institutions to be set up, competitive situation is changing. Even the
institutions facing heavy demand have been confronted with the question of
being able to choose the desired target customers, and therefore face issues
like product differentiation, product extention, diversification and service
integration. There is a basic concern with building and retaining organisational
reputation for creating a ‘pull’ in the market. All this has activated some
interest in the hitherto neglected area of marketing of education services. Let
us try to understand some of the basic services marketing concepts, relevant to
marketing of education.
Before going into the subject of education services marketing it is important to

understand the concept of education as a service. Going by the AMA definition
“services are those separately identifiable, essentially intangible activities, which
provide want satisfaction and are not necessarily tied to the sale of a product
or another service”1. Providing a service may or may not require the use of
tangible goods. However, when such use is required, there is no ownership
transfer of these tangible goods in service buying transaction. Education as a
service, then, can be said to be fulfilling the need for learning, acquiring
knowledge-providing an intangible benefit (increment in knowledge, professional
expertise, skills) produced with the help of a set of tangible (infrastructure) and
intangible components (faculty expertise and learning), where the buyer of the
service does not get any ownership. He may have tangible physical evidence to
show for the service exchange transaction but the actual benefit accrued is
purely intangible in nature.
15.2 SERVICE CLASSIFICATION AND EDUCATION

A number of classification schemes have been developed to classify the whole
array of services according to some chosen variables. One of the simplest
schemes classifies services as consumer, intermediate and industrial service.
Education is a service that is geared primarily to the consumer market,
therefore it can be classified as a consumer service rather than an intermediate
or industrial service, though packages of industrial training are also designed for
the organisational customers.
On the basis of the way in which services have been bought, education,
depending upon the type and level can be classified both as a shopping service
and as a speciality service. Swan and Pruden have suggested that establishing
whether service is bought for instrumental motives (i.e. as a means to an end)
or an expressive motive (as an end in itself) provides a useful framework for
service designers.2 For majority of customers education may fulfill the
instrumental function, but there is always a category of customer from whom
education and the pursuit of knowledge are expressive motives.
Another classification scheme categorises services as equipment based and

people based services, depending upon which resource is primarily used in the
6 production of the service.3 By its very nature, education is essentially a people
based service though some service delivery systems may make heavy use of Educational Services
technology and equipment. Services have also been classified on the level of
personal contact as low contact or high contact services.4 Recent developments
in open and distance learning systems have successfully countered the challenge
of constantly maintaining high levels of contact, by creating specialised kinds of
user friendly course material and using multi-media technology to gain access to
students. Shostack, who in her studies has stressed the intangibility
characteristic of services has classified services on the bases of dominance of
tangibility/intangibility, along a continuum of a pure tangible product with high
tangibility dominance to a pure service with intangibility dominance.5 Accordingly
education can be classified as a pure service with dominant intangibility content.
15.3 SERVICE CHARACTERISTICS AND

IMPLICATIONS FOR MARKETING OF
EDUCATION
1. Intangibility
Education like most ‘pure’ services is an intangible dominant service, impossible
to touch, see or feel. Evaluation of this service however can be obtained by
judging service content (curricula, course material, student workload, constituent
faculty) and the service delivery system. The consumer, based on these
evaluations, has a number of alternative choices before him and may make
selection on the basis of his own evaluation referrals, opinions sought from
others and of course a brand or corporate image of the organisation providing
education. At the end of the service experience, the consumer gets something
tangible to show for his efforts i.e. a certificate or a grade card denoting his
level of proficiency at the given course/programme. According to Bateson, finer
distinction of intangibility into palpable and mental intangibility, has implications
for the marketing of the educational services.6 For reasons of both mental and
palpable intangibility:
Education cannot be seen or touched and is often difficult to
evaluate: It is therefore, imperative to build in “service differentaition” in
the basic product to enable competitive positioning.
Precise standardisation is difficult: For educational packages of same
levels and bearing similar certification (e.g. B.A., B.Sc., and B.Com.
degree programmes, postgraduate commerce and science programmes,
management diploma and degree programmes) across universities and
colleges, it is often difficult to bring about standardisation of course design
as resources/needs/objectives of different institutions may differ. Institutions
like Universities, though, try to manage equivalence in standards through
Boards of Studies which are generally inter-university bodies. Technical
education is sought to be standardised through bodies like the All India
Council for Technical Education. Interestingly, the lack of standardisation
also opens up the marketing opportunity of creating highly differentiated,
need based course packages, suited to chosen target groups of customers
or serving specialised/localised needs.
Education as a service cannot be patented: This feature implies that
courses designed or developed at one institution can be replicated and
offered at other institutions. It also implies that as far as the service
product features are concerned, all advantages of a given competitor have
an essentially perishable character. Only those discernible strengths which
have their basis in the people resource, cannot be easily replicated. Hence,
the added importance of faculty selection and motivation for educational
institutions.
7
Sectoral Applications-II As these implications of intangibility become apparent to the service product
designers and providers in the field of education, the following pointers to
marketing planning emerge:
i) Focus on account of intangibility should increasingly be on benefits
delivered by the service system and the uniqueness of the package that
is being offered. The benefit accruing to the student may emanate from
the service product-its depth, width, level or variety or from the
uniqueness of the delivery system, the evaluation system or the extremely
high goodwill enjoyed by the institution.
ii) Education, like most other pure services, should be tangibalised so that
the beneficiary has some physical evidence to show for his
achievements. Certifications for various levels of attainment, citations and
separate certificates for any special achievements or activities should be
duly prepared and delivered in time to be meaningful.
iii) Branding through effective use of Institute/University acronym, to aid
instant identification and recognition should be practiced. Concerted
efforts at building up organisation’s reputation through performance
as well as through skillful use of communication tools would need to
be carried out to associate this ‘brand name’ with a desired ‘brand
image’.
2. Perishability
Services are perishable and cannot be stored. To an extent, education displays
this characteristic which results in certain features.
Production and consumption are simultaneous activities: This is true
of most conventional teaching institutions where face to face teaching
necessitates simultaneous production and consumption. Open and distance
learning systems which make substantial use of technology, however, have
made it possible for production and consumption of the service to be
carried out at different times-the use of audio-video units and preparation
of course materials sent to the students across the consumer population,
are designed to meet the challenge posed by the perishability character of
services.
No inventories can be build up: This is true of most services, as well
as education, as an unutilised service like a course on offer, or a lecture
scheduled to be delivered, cannot be stored, if there are no students
enrolling for the course or to attend the lecture. This factor opens up the
challenge of managing the service in the face of fluctuating demand.
Nearly all universities at one time or the other have faced the problem of
overstaffing, when certain disciplines went out of vogue, like pure sciences
and post graduate courses in languages. The marketing implications of
perishability necessitate that a better match between supply and demand
for educational packages would need to be made. Course design and
course offers need to be preceded by a need analysis of the target
population before the decision to launch them is made. This points towards
the use of marketing research techniques for service development
(designing the course concept) and planning, but more than that it
necessitates a shift from ‘institution orientation’ to a student or ‘customer
orientation’. Courses need not be offered because the institutions have
available expertise in an area or it is something that the institution has been
traditionally doing. In consonance with the marketing concept, the capability
of finding a better fit between the needs of the society and the design of
the offering, would define the difference between an effective and a non
effective institution.
8
3. Inseparability Educational Services
Services are also characterised by the factor of inseparability in the sense that
it is usually impossible to separate a service from the person of the provider. In
the context of education, this translates into the need for the presence of the
performer (the instructor) when the service is to be performed and consumed.
This necessarily limits the scale of operations to the number of instructors
available, it also means that the distribution mode is more often than not direct
in the sense that no intermediaries are involved; the transfer of knowledge is
directly from the provider to the learner. As noted before, open learning
systems have overcome the characteristic of inseparability by incorporating the
teacher into the material and bringing about a separation between the producer
and the service. A direct marketing implication of this inseparability is the need
for obtaining/training more service providers as well as the need for more
effective scheduling of operations.
4. Heterogenity
Heterogenity in the context of services means that unlike product manufacturing
situations where design specifications can be minutely standardised and
followed, the standards of services, educational services included, would depend
upon who provides the service and how. This heterogenity of performance
renders service offers for the same basic “service product” from different
institutes vastly different from each other. Even though standardisation of
courses according to some prescribed norms may be attained, it is difficult to
‘standardise’ individual performance i.e. that of the faculty resource person.
That, perhaps, is not even a desirable goal in education, but maintenance of a
certain quality standard across ‘performers’ certainly is. In the absence of
accepted quality standardisation mechanisms in this context, it is the market
forces alone, which would force quality standards on education. Dwindling
registrations in institutions, snatching away of “market shares” by more
effective competitors is what is making institutions take a renewed look at
quality of service delivery and mechanisms for maintenance of standards.
In terms of marketing implications, the hetrogenity characteristic of educational

services, necessitates careful personnel selection and planning, constant and
careful monitoring of standards which can provide cues to the prospective
customers to aid choice of institutions. Examples of these cues could be
success rates of the placement programme, the absorption of the institutions
product in the job market, or the performance of the pass-outs at other
competitive examinations.
5. Ownership
Ownership or the lack of it also characterises service. In the context of
education, the customer only buys access to education, or derives the learning
benefit from the services provided. There is no transfer of the ownership of
tangibles and intangibles which have gone into creation of the service product.
Payment of fees (price for the service) is just the consideration for access to
knowledge and for the use of facilities for a given tenure.
Activity 1
Study a few educational institutions around you, if possible let these include a
University, a professional institution and a private college. How do these
institutions address the issue of standardisation of services? Do the processes to
achieve standardisation vary with the type of institution?
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9
15.4 MARKETING STRATEGY AND EDUCATION
It has been pointed out in almost all studies on the subject of services
marketing that strategic management and marketing strategy for each
organisation needs to be unique in itself as it is organisation and situation
specific. Some directions for marketing strategy for education may, however, be
drawn keeping in mind the special characteristics of education as an intangible
dominant, people based, high contact consumer service. These are outlined
below.
1. The dominantly intangible nature of education service may make the
consumer’s choice of competitive offers more difficult.
2. In case of delivery systems where the performance of the service
demands the presence of the instructor, marketing of education would need
to be localised and offer the consumer a more restricted choice. Of
course, as institutions build up their “pull” in the market, consumers are
willing to relocate themselves to avail of the service.
3. Perishability may prevent storage of the service product and may add risk
and uncertainty to the marketing of education, specially in the event of
fluctuating demand for courses/instructors/disciplines.
The basic question for strategic marketing planning that need to be answered are:
i) What business are we in? In order to properly define the mission and
the overall objective of the organisation it is essential to define what
business we are in. Are we in the business of transmission and
propagation of knowledge? Are we in the business of creating new
knowledge? Are we in the business of developing professional skills? Are
we in the business of creating special skills or preparing people for a
specific vocation? Or are we there to provide basic knowledge and training
to people which will enable them to reach a level where they can make
further choices? Answers to these questions will lead the institution to
identify what it holds to itself as the organisational mission and overall
objective.
ii) Who are our customers and what benefits do they seek?
Identification of target markets and understanding the needs of customers,
as well as the criteria they use to make choices, represents an important
step in marketing strategy formulation. For an educational institution, the
task translates to determining what is the nature of the benefits sought by
its set of ‘customers’. Are they merely seeking a certification, or
development of a specific kind of expertise or is accumulation of
knowledge the real value sought? Since the purchaser of the educational
service is primarily buying the expertise or knowledge he believes that the
institution has at its disposal, it is important for the institution to be able to
define the kind of expertise it is capable of producing. It is also important
to develop an understanding of the criteria prospective students apply when
they choose between competing institutions. A study in the Indian context,
for managment education, reveals that some of the criteria used by
students to choose between institutions were:
a) reputation of the institution,
b) number of applicants keen to enroll in the course,
c) past success rate of placement,
d) faculty expertise,
e) width of specialisation offered,
f) infrastructural facilities, and
10 g) fees.
Identification of criteria used to differentiate between competing offers may Educational Services
lead institutions to lay emphasis on developing competing strengths and creating
perceived differences between their offers and the competitor’s offer.
Activity 2
Talk to ten students of a computer education programme or institute, to find out
what are the precise benefits that each seeks from the experience. Then, study
the programme/institute to find out how well the service product design and
delivery at the institute are capable of delivering these benefits sought.
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iii) How can we build or defend own competitive position? Every

organisation has to consider an entry strategy into a market and then
creation and protection of a competitive position. Though a number of
alternative positioning choices are possible for educational institutions, task
of positioning is a slightly more difficult proposition here, because of the
absence of a strong tangible core to the service offer. One of the basic
ways to achieve a strong competitive position is to build up strong service
differentiation which can generate a clearly focused organisational and
product image in the consumer’s mind. Examples can be found in the case
of NIIT which identified the need for computer education and training in
the Indian market and built up expertise to cater to clearly defined need
segments in terms of basic learners, job aspirants, people needing to update
their knowledge, organisational customers needing customised packages and
so on. Another example is that of Indian Institute of Management,
Ahmedabad, which through development and nurturance of highly
specialised faculty resource and excellent industry interaction has built up
formidable barriers to competition. These clearly differentiated positions
enable these institutions to generate large number of aspirants and select
the desirable quality of students.
iv) How should we offer new service offers that help/strengthen the
competitive position? As needs and wants of the consumer population
change, existing course packages or delivery systems may cease to satisfy
them. A preemptive approach to education planning suggests that
‘satisfiers’ to such needs be preemptively developed and offered before the
need really becomes apparent to the consumers themselves. Since
education to an extent, represents a derived demand dependent upon the
final demand for desired qualifications for employment, changing job
scenarios, industry requirements and consequent need for qualifications may
be one indicator to watch, for generation of new service offer ideas.
Though a highly structured approach to research and development in a new
service may be difficult, there is no reason why systematic organisational
processes for generating and testing new course package concepts and
weeding out old and unprofitable services shoud not be designed.
Activity 3
Identify educational institutions in your area which can be termed ‘highly
successful’. What are the ingredients of their competitive strength?
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15.5 THE MARKETING MIX
As you know the traditional 4 P concept developed for marketing of products
has been conceptually extended by Booms and Bitner to include 3 more Ps i.e.
People, Physical evidence and Process.
Developing the right marketing mix for marketing of education would mean
constantly fashioning and reshaping the components of the mix into the most
effective combination of the components at any point of time. Let us, by
considering these components, try to study what considerations do education
planners and dispensers need to keep in mind, with respect to these elements
of services marketing. We shall mainly concentrate on the aspects of the
service product and promotion, as concepts of process and people have been
integrated in the concept of the augmented service product. Considerations of
price and place have also been discussed.
1. The Service Product-The Education Package

While deciding on the education packages to be offered to a consumer
population, the starting point obviously has to be the consumer. It in imperative
at the very outset of deciding the service product, to outline the distinction
between what an educational institution offers in terms of its service and what
benefit does its larger population derive from it. Central to the idea of a service
product, are the consumer benefit concept, the service concept, the service
offer and the service delivery system. While the consumer benefit concept
defines what benefits do consumer derive from a particular educational package
offered, the service concept is concerned with the definition of the general
benefit the service organisation offers on the basis of the consumer benefits
sought. Thus at the very basic stage of the design of the education offer,
marketing orientation suggests that the offer should be fashioned as a response
to the identification of the consumer benefits sought.
According to Groonroos, the service concept has to be defined at two levels8.

The general service concept refers to the essential utility being offered (a
computer training organisation offers solution to the problem of keeping up to
date information flows within the organisation) while at the core of the service
offer are specific offers (software training packages for bank employees). Let
us try to elaborate the concept of service offer a little more as it has specific
implications for marketing of education. Developing the education product,
according to the conceptualisation developed by Groonroos entails:
developing the service concept,
developing a basic service package,
developing an augmented service offering and finally, and
managing image and communication.
(As explained in Unit 5 also)
As already noted, the service concept defines the intentions of the organisation
in respect of offering a certain benefit to the consumers. The ‘basic service
package’ described the bundle of services that are needed to fulfill the needs
of the target market. Extending this to the education sector, the basic service
package determines the entire package offer which is a designed to fulfill the
learning needs of a target population. For decision making purposes it is essential
to recognise this basic package as consisting of three elements. These are:
the core service,
the facilitating service (and goods), and
12 the supporting service
The core service is the reason for being in the market. A management institute Educational Services
exists because it equips people with skills and abilities to manage organisations.
Faculty expertise and the accumulated experience at the institute represent the
core resource for supplying this benefit. However, in order to make it possible
for students to avail these services, additional services are required. A
registration and admission service, class schedules, counselling service, enabling
students to make relevant specialisation choices, and library facility are required
so that the students are facilitated in deriving the benefits of the core service
i.e. the learning. These services are called the facilitating services. It is
important for the planners to realise that if the facilitating services are not
adequately provided, the core benefit cannot be consumed. Sometimes tangible
goods are also required to avail the benefit of the core service. Course
material, in the form of books and prepared course notes, instruction manuals,
computers, classrooms and class equipments are examples of facilitating goods
that help access the core benefit.
The third element of service that goes to make the basic service package is
the supporting services. Like facilitating services, they are also auxiliary to the
core benefit but their objective does not lie in facilitating the use of core
service, rather they are used to enhance the value of the core product and to
differentiate the service offer from other comparable offers. An efficient
placement cell in the above mentioned example, high quality residential facilities,
good network of exchange relationships with business organisations, do not
facilitate the learning process but add value to the service offer by adding to
the utility derived from the total offer.
From a managerial viewpoint, it is important to make a distinction between

facilitating and supporting services. In order to effectively access the core
package, the facilitating services are necessary and the service package would
collapse, if the facilitating services are not provided. The marketing strategy
directive that can be developed here is that for highly intangible core service
products like education, facilitating services should aspire to attain a quality level
which enables them to become a competitive strength. Supporting services
which are essentially designed as a means of competition, diminish the value of
the package if they are lacking. The core benefit, learning however, can still be
derived if the supporting services are deficient or absent.
The basic service package, however, is not equal to the service perceived by
the consumer. An excellent basic education package, along with its facilitating
and support service elements may be made ineffective by the way students are
handled or student interactions are managed. How the whole service offer is
perceived forms an integral part of the total product. The basic service package
and the elements that go into the service perception form what has been
termed as the augmented service product. The Augmented Service Product
integrates the concept of service process with the services offer. Three distinct
elements which along with the basic offer go into the creation of the
augmented service product as components of the perceived service process are:
i) accessibility of the service,
ii) interactions with the service organisation, and
iii) consumer participation.
Taking the example of a university, accessibility of the service would depend

upon:
The number and skills of the persons associated with providing the core,
facilitating, and supporting service.
Office hours, class and seminar schedules, time used for other services
13
Sectoral Applications-II Exterior and interior of offices, classrooms, facilities.
Tools, equipments, study materials etc.
The number, quantity and aptitude levels of students involved in the
learning process.
The interaction between the service provider (the University) and its customer
can be in terms of :
Interaction with resource faculty (their expertise, skill, attention, attitudes)
Interaction with other service interfaces (admission, evaluation, students
inquiries, students welfare office, office staff, hostel wardens and proctors.
Reception-attitudes and willingness of response, accurate answers.)
Interaction with the physical environment (space, cleanliness, maintenance,
noise levels)
Interaction with accessory service system (waiting line for admission,
results, enquiries, payment receipts etc.)
Interaction between students and,
Interaction of the various subsystems with each other (faculty, facilities,
office personnel, other service departments).
Customer participation is a concept which identifies the impact the receiver of

the benefit has on the service he perceives. In the above example the student
is expected to fill in various forms, exercise choices of disciplines and subject
combinations and participate in the learning process through interaction and
attention. The service rendered by the University would be dependent upon the
quality of student participation in the above and allied activities. Specifically the
aspect of student participation that are relevant are :
Are students knowledgeable enough to identify their need or problem, and
to exercise choice options offered by the University?
Are they reasonably aware of the time and flexibility dimensions offered to
them?
Are they prepared and willing to share information and feed back?
Are there any quicker and more efficient ways of motivating participation?
The augmented service offer can be diagramatically represented as shown in

Figure 16.1
Figure 16.1: The Augmented Service Offer
The Service Concept
The Core Service
Accessibility Facilitating Supporting Interaction

of the Service Services Services
Consumer Participation
Source: Groonroos, C. “Services Management and Marketing”, Lexington Books,

Lexington 1990.
14
In planning the total educational package offer, therefore the focus of the Educational Services
concern is not the course alone, the package has to be seen as a total offer
along with its facilitating and supporting services. As planners identify that
consumer perceptions are also affected by inputs other than the core service,
attention needs to be focused on the accessibility, interaction and consumer
participation aspects as well as the basic service offer, so that the augmented
education service offering can be effectively created and positioned.
Activity 4
For the following products, on account of your familiarity with them identify the
core service, the facilitating and the support services, in each case :
(a) the university/college that you attended for your degree level;
(b) the training programmes offered to various cadres in your organisation;
(c) the distance learning programme that you are undergoing now.
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2. Pricing of the Education Service

Pricing decisions for the service offer are of a major importance and shoud
ideally be related to achievement of marketing and organizational goals. Pricing
of the educational offer however, typically represented as ‘tution fees’, is
subject to certain constraints and characteristics.
Most educational institutions, in fact all public institutions like the Universities,
institutes of technology, medical and engineering colleges, come under the
category of services where price are subject to public regulation. In all such
cases the price element is not controllable by the marketer, instead it becomes
a subject matter of public policy, where political, environmental and social
considerations take priority over purely economic considerations. Prices may be
based on the ability to pay (fee structure relating to parents’ income in case of
Universities) or some socially desirable goals (total fee exemption for women
candidates in states like Rajasthan and Gujarat). Autonomous institutions also
subject themselves to formal self regulation of price for example, the institutions
like AICWA, and AICA are subject to institutional regulations relating to fee
structures which they decide for themselves. On the other hand private
institutions, typically in specialised fields like medicine, engineering, computers
and management tend to price their services on what the mrket would bear. As
most of these institutions operate in subject fields where demand far exceeds
supply, prices charged depend upon economic condition, consumer feelings about
prices, buyer need urgency, competition in the market place, level of demand
etc.
Heterogenity of services and different pricing considerations used by different

types of institutions make price a less important determinant of consumer
choice in educational services.
The more the services are homogenous (undergraduate, graduate courses in the
basic disciplines) the more competitive would tend to be the pricing. Another
generalisation that can be drawn from product marketing is that the more
unique the education service offer, the greater would be the ability of the
providers to vary prices according to the buying capacity of the consumer
population.
15
Sectoral Applications-II Differential pricing, based on the consumer’s willingness to pay may also be
utilized for the education service. The practice of charging different fees for
the sponsored candidates and the non sponsored ones is common in
professional courses, so is the practice of charging differential fees from full
time and part time evening participants of the study programme.
3. Promotion and the Education Services Offer
The objective of promotion in education services is akin to its role in other
marketing endeavours. Accordingly, the basic objective that promotion as a
marketing tools is expected to play for marketing of education would include:
Building awareness of the education offer package and organisation
providing it.
Creating and sustaining differentiation of the organisation and its offer from
its competitors.
Communicating and portraing the benefits to be provided.
Building and maintaining overall image and reputation of the service
organisation.
Persuading customers to use or buy the service.
Generating detailed information about core, facilitating, supporting and
augmented service offer.
Advising existing and potential customers of any special offers or
modifications or new service offer packages.
Eliminating perceived misconception.
Educational institutions however, have not been able to use promotional tools
effectively because of certain perceived notional barriers. Some of these
barriers are:
i) Most educational institutions are product oriented rather than market or
student oriented. They perceive themselves as producers of certain
educational programmes, rather than as satisfiers of certain learning
needs. This lack of marketing orientation, keeps those managing
educational institutions from realising and exploiting the role that
promotion could play in attaining their organisational objectives.
ii) Professional and ethical considerations may prevent the use of certain
forms of promotion. Established educational institutions may regard the
use of mass media advertising and sales promotion as being in bad taste.
iii) The nature of competition in case of educational institutions like
Universities, technology and management institutes is such that they are
unable to cope with their present demands and work loads. They
therefore may not feel the need to promote for demand generation
purposes. What has to be realised however, is that even such institutions
need to use promotion for image creation and to sustain as well to
maintain a secure market position, and to improve the quality of
customers (students) seeking their services.
iv) The nature of consumer attitudes regarding education and their perception
of mass media information sources may sometimes preclude the use of
intensive promotion. For making their choices regarding a particular
institution or a course package, prospective students rely mostly on
subjective impressions of the institution, or use surrogate indicators of
quality like the provider’s reputation or image. They also tend to rely
heavily on word of mouth referrals rather than published literature or
material supplied by the institution.
16
Due to some of the above considerations, as also because of prevailing Educational Services
‘industry tradition,’ promotion of educational service has tended to rely more
heavily on the component of publicity rather than any other element.
Studies in the field of marketing of services indicate that the reluctance towards
using mass media advertising or sales promotion is partly due to the inherent
psychological barrier and partly due to the misunderstood role of these tools.
Restrictions on advertising for several professional services are being slowly

relaxed. Growing competition and the threat of losing market shares has
awakened many a institution to realise the importance of mass media tools like
advertising for organizational as well as service offer promotion. Some
guidelines that can be used while applying this powerful tool for generating
awareness, interest and enrollment are summarised below:
a) Create Clear, Simple Messages
The real challenge in advertising educational services lies in communicating the
range, depth, quality and level of service offers by a given institution, in simple,
unambiguous form. The need of giving pertinent information has to be balanced
against the need to avoid wordy copy.
b) Emphasise Service Benefits
Based on an identification of benefits sought, advertising for the educational
product should emphasise the benefits to be provided rather than the technical
details of the offer.
c) Make Realistic, Attainable Promises
Education by its very nature is a high reliability service, where expectations are
high. Unfulfilled promises create dissonnance. Promises in terms of
performance of services therefore should be realistic.
d) Build on Word of Mouth Communication and Referrals
As noted earlier, non marketer dominated sources in case of education
marketing may be more important to the consumer. Educational organisational
should therefore build upon the importance of word of mouth communication by
persuading satisfied consumers to share their sense of satisfaction with
others;
directing ad campaigns at opinion leaders; and
encouraging potential consumers to talk to existing consumers.
e) Provide Tangible Clues
In terms of certification, records of attainments and past success figures,
provide the prospective target population with tangible clues to enable them to
make choices.
f) Develop Continuity in Advertising
Most successful institutions position themselves in different ways, so that their
images are discernibly different in the eyes of the consumer population.
Positions could be built around innovative teaching methods, faculty expertise,
research and development possibilities, international orientation, tradition of
quality, range and depth of specialisations offered, progressiveness, delivery
system, flexibility, supporting services or a combination of any of the above.
Once a theme has been identified, consistent use of themes, formats, symbols
and images enables recognition of the organisation and its association with the
desired values.
17
Sectoral Applications-II 4. Place Decision and the Education Service
In most cases the educational services represent the single location and direct
distribution processes with no intermediary between the producer and the
consumers of the service. The learning process is usually accomplished by the
user of the service going to the service provider. However, because of buyer
need urgency and the nature of the utility derived, accessibility and convenience
for educational service location are not as critical a factor as in case of, say, a
banking service. Depending upon the competitive situation, the factors that have
marketing implications in terms of location are:
a) What is the market demand? Will the purchase of service be postponed
or negated if the institution is not conveniently located? How critical are
accessibility and convenience in service choice decision?
b) Are competitors finding alternative ways to reach to the markets? (for
e.g. distance learning in education) Can some competitive advantage be
gained by developing alternate/different norms of service location and
delivery?
c) How do flexibility, being technology or people based, affect the
educational service offer in terms of flexibility in location and relocation?
d) Is there an obligation on part of the institution to be located in a
convenient site? (e.g. public health education centres, family planning
training centres, vocational training centres etc.)
e) How critical are complementary services to the location decision?
(Transport to and fro, residential and canteen facilities and so on)
Answers to issues like the above underline the critical importance of the
location decision and may result in more systematic approaches than in the
past.
Activity 5
Promotional activity in most educational institutions barring the private ones is
noticeable by its absence. Most of the public institutions, however have a public
relations office. Talk to the public relations officer of a few public institutions to
find out the type of ‘communication-mix’ used by the institutions. Also, try to
explore in each case why mass media advertising is not being used for market
cultivation?
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15.6 CONCLUSION
In the present era, it is not natural resources or natural wealth which
distinguish an affluent society from a backward one, it is the accumulation and
development of the knowledge resource. Education was never as important a
utility as it is today. People however differ in the benefits they seek from the
educational services offered to them. It is important, then, in order to be able
to satisfy these needs and wants effectively, that a marketing orientation be
applied to the conceptualisation, design and delivery of educational service. This
is even more imperative in a developing country like India, where resources are
scarce and a better match between needs and services provided needs to be
attained. Education planners, in order to plan the service offer well and deliver
it effectively, need to understand the behaviour of the target population, and the
criteria they use to exercise choice. The key to better delivery of the education
18
service is not that it is performed by people but that it is performed for people. Educational Services
People therefore represent the starting point for analysis to precede
conceptualising the service offer and developing it into a marketable service
package. The education service offered by the institution must reflect the
organisational response to the identified needs and wants of the target segment,
in a given socio-economic context.
1) What are the marketing implications of intangibility, inseparability,

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

1) Kotler, Philip, Marketing for Non-Profit Organisations (Englewood Cliffs,
N.J., Prentice Hall, 1982).
2) Wilson, Aubrey, The Marketing of Professional Service (London : McGraw
Hill 1972).
3) Gummersson, Evert, Toward a Theory of Professional Service
Marketing (Industrial Marketing Management, Vol. 7, 1978).
15.9 REFERENCES
1) AMA Definition of ‘Service’ as quoted in, Stanton, W.J., Fundamentals of
Marketing, McGraw Hill, New York, 1981, p. 441.
2) Swan J.E. and Pruden H.O., Marketing Insights from a Classification of
Services, American Journal of Small Business, july, 1977 Vol 11, no 1. 19
Sectoral Applications-II 3) Classification by Thomas T. from Levelock C.H., Classifying Services to Gain
Strategic Marketing Insights, Journal of Marketing, Summer pp. 11-12, 1983.
4) Kotler, Philip, 1986 Marketing Management, Analysis Planning Implementation
and Control. Prentice. Hall of India, New Delhi.
5) Shostack G.L., Breaking free from Product Marketing, Journal of Marketing,
Vol 41, no. 2, April 1971, p. 77.
6) Bateson, J., Do we Need Service Marketing? Marketing Consumer Services:
New Insights, Report 75-115, Marketing Science Institute, Boston 1977.
7) Booms, B.H. and Bitner M.J., Marketing Strategics and Organisation Structure
for Service firms in Donnelly J. and George W.R., (Eds), Marketing of Services
AMA, 1981.
8) Grooroos, C., Services Management and Marketing, Lexington Books,
Lexington 1990.
9) Cowell, D., The Marketing of Services. William Heinemann, London, 1984.
20
UNIT 16 PROFESSIONAL SUPPORT
SERVICES : ADVERTISING
AGENCIES
Objectives
evaluate the importance of marketing applications to advertising agencies;
apply the general concepts of marketing, to advertising industry;
identify the various styles of growth in the context of advertising agencies;
discuss the content of growth strategies for advertising agencies;
explain the positioning and competitive strategies for advertising agencies.
Structure
16.1 Introduction
16.2 Application of the General Concepts of Marketing to an Agency Setup
16.3 Agency Growth : Its Style and Content
16.4 Agency Positioning
16.5 How Does Strategy Vary with the Size of the Client?
16.6 How Does Strategy Vary According to Size of Agency?
16.7 Conclusion
16.1 INTRODUCTION
The growth of study of modern medicine around 1700 witnessed a movement
from panaceas to specific diagnosis and the search for specific remedies
against specific ills. Similarly the study of services marketing can benefit more
by concentrating on specifics, focussing at smaller sub-groups of services
business and identifying what can be done with the marketing variables in each
of these fields.
With the advertising business in India growing rapidly, with many new small
agencies entering the market, some even closing shop and brand casualties
increasing, the need to look at the marketing concepts that apply in this industry
is stronger than ever before. If advertising is looked upon as the brand building
activity, then future brands need to be invested in by studying the marketing of
professional advertising services. An attempt in this direction is being made in
this unit.
This attempt shall be broken up into three parts.

a) Application of the general concepts of marketing of services to the
advertising industry.
b) Identifying the style & content of agency growth.
c) Understanding Agency Positioning & Strategy.
21
16.2 APPLICATION OF THE GENERAL CONCEPTS
OF MARKETING TO AN AGENCY SET UP
i) The 4 Ps : Kotler defines a generic marketeer as one creating value

through configuration, valuation, symbolisation & facilitation. In an
advertising agency scenario this includes the design of the advertising
services package, whether the services offered are inhouse or from
freelancers, the range of services offered and the intensity of service
offering of each of the services in the range. Valuation is the media
commission earnings of an agency which are fixed at 15% (until an
agency offers unethical discounts). However, valuation of other services in
its package can vary as can its art charges. Symbolisation is what the
agency is perceived as by its target audience. Alternate sysmbolisation
alternatives can include positioning by size, by creative talent, by auxiliary
services, by markets etc. Facilitation has more to do with accessibility of
service and ease with which client can tap each of the service offerings of
the agency. The production consumption interaction in advertising allows for
direct distrubution only.
ii) Three More Ps : The above four concepts corresponds broadly with the
four Ps of marketing. However, in the marketing of services 3 more Ps
are important. These are personnel, physical facilities and process
management. Though these three Ps deal with the preparation of the
service, they are as important as the other 4Ps. This is so because the
consumer is very often taking part in the shaping of the service offering.
The production and consumption interaction is a unique characteristic of the
service industry. Consumers can influence not only accessibility of a
service but also communication about it. A dissatisfied consumer, research
proves, will influence a large number of people to abstain from using the
service. The process management and physical facilities are critical as they
work together every time to prepare the service for the consumer.
iii) Service : A Non-standardised Product : Factories have set formulas
for ingredients so that the consumer knows exactly the type of product he
is going to consume. For an advertising agency, there is usually no
standardised product. When an agency is called by client for consultation
on a problem, the solution to the client’s problem may well lie with the
three other Ps (Product, Price, Place), than with promotion. Interaction
between client and agency may bring out the fact that advertising is not
the right tool to use at this point of time. Should the client’s problem lie in
the area of promotion, the solution may demand market research or it may
need a direct marketing campaign instead of media releases. Hence a good
client servicing person in an advertising agency can not be given a pre-
determined product to sell.
iv) Service : Where Product Quality needs Renewal on Every
Purchase : While all products produced by a factory may meet pre-
determined quality norms, in the service industry giving the consumer
consistent quality may not be as easy. This is because the service has to
be renewed with every purchase.
Because a service has to be created every time the customer demands it,
there is a production consumption interaction while the demand is being
fulfilled. As service is usually given personally, the interpersonnel dynamics
between the people offering the service and the consumer has to be
nurtured so that the renewal of the service meets certain norms of both
service quality and consumer satisfaction. In advertising, agencies giving
good creative inputs may also be changed by clients because servicing may
not be able to create a positive experience in the client’s mind. The
22 production consumption interaction in such a case does not meet client’s
demand of service quality, hence consumer dissatisfaction is expressed. An Professional Support
Services : Advertising
appreciation of the renewal aspect of service brings out the importance of Agencies
people and process (Two of the three new Ps.)
v) Service : An Intangible : With no physical ownership rights existing on
the offering to the customer, no transfer of ownership can take place as in
a tangible product. Also, unlike a physical product, they can’t be evaluated
easily by taste, smell, feel etc. While the agency’s output may help to sell
physical products (sometimes services too) of the client, the agency has no
physical product itself to sell. Its physical products at best may be
artworks, which by themselves have no value. Alternatively the agency
could be considered as selling time and space on the air and in the press.
Evaluation of its service, however, can only be done overtime by the
response it generates. There are no tangible ways of measuring it today.
Activity 1
Visit an advertising agency and collect information to analyse the way the 7Ps
have been applied to the service.
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16.3 AGENCY GROWTH: ITS STYLE AND CONTENT

A) Content/philosophy of Growth
Agency growth is a dependent variable. The business philosophy of a good
agency defines its growth, as a dependent variable of the client’s growth. Thus
the primary task of an agency is to make its client’s products grow. In the long
run when planning for growth of the agency, it becomes very important to
develop skills that nurture and foster the growth of the client organisatioin.
Though physically agencies may execute artworks, write copy, produce
films, plan for media buying and provide routine servicing to clients, this is
only the outer manifestation of its real business.
The real job of the agency is to build brands, increase market shares,
penetrate new markets, influence product development and planning,
understand, participate in and may be, even influence marketing strategies.
The job again may not end here.
A client organisation is different from a brand. It may have needs of
corporate communication which may have to be identified and then fulfilled.
The client as a corporate identity may be evolving. The agency could
participate in its process of identifying new markets, new products and new
business. Thus an agency should grow not only with the brands that it
helps to build but also evolve and grow with its client organisations.
B) Style of growth
As with marketing of any business firm, there are three objectives that
professional firms also seek: sufficient demand, sustained growth and profitable
volume.
To achieve these objectives professional firms need to market themselves. The

three styles of marketing for an agency (as for any professional firm) can be:
minimal, hard-sell and professional marketing.
23
Sectoral Applications-II Minimal Marketing : Minimal marketing is practiced by many firms offering
professional services. These firms dislike thinking of themselves as
businessmen, instead state that they are motivated by service. They think of
marketing as a salesman’s job and look down on business solicitation. They
believe that their good work will get more clients.
Hard Sell Marketing : Hard sell marketing is at the opposite end of the
spectrum to minimal marketing. It reflects a total sales orientation, offering
price discounts, bad mouthing competition, offering referral commissions and
indulging in practices bordering on violating professional codes of ethics. This
approach forgets like any sales oriented approach, that there is more to
business than attracting clients. Marketing involves a discipline of identifying
and cultivating a market, choosing targets, developing services, formulating plans
etc.
Professional Marketing : This approach to marketing of professional services

is in consonance with the professional code of ethics. Such an approach
involves:
planning for long-range marketing objectives and works out strategies to
match;
training staff to improve the efficiency and effectiveness of marketing and
personal selling;
allocating time and budget to support marketing activity; and
ensuring that quality of professional services offered currently does not
suffer as marketing activity is increased.
Such effort is usually preceeded by gathering data about the market. Strategies
are evolved thereafter. These strategies may include “service” or “market”
sepecialisation. Specialisation in any particular service/range of services may
give and agency a cutting edge with clients who are looking for those services.
Similarly specialising in certain type of markets (say “public issues” market)
may pre-empt segments of the market to the agency. Another strategy may be
of expanding services to current clients.
Activity 2
Study the advertising scene in India by looking at agency profiles reported in
magazines like A & M, Business Today, Business India, etc. Analyse the
patterns of agency growth to give examples of minimal marketing, hardsell
marketing and professional marketing.
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16.4 AGENCY POSITIONING

One way of defining Positioning of an advertising agency could be:
“Bringing the right people together and making them work effectively for a
brand”. This is an incomplete definition for it ignores the ‘consumer benefit’
approach or the client’s point of view. Clients have specific needs when
searching for agencies. Agencies have more strengths in certain areas.
Symbolisation (or positioning) is the ‘value added’ dimension agencies give to
24 these strengths so that the client perceives them as fulfilling his specific needs.
Positioning by Size Professional Support
Agencies
A client may be looking at a “big” or a “small” agency. The positioning
statement for a “big” agency includes “full infrastructural back up, many
branches, the ability to think and act big, benefit of experience of handling
many product categories etc.” Positioning staement for a “small” agency
includes “flexibility, personalised service and attention, innovation, quick
turnaround time and ability to go that extra mile for a client and his product
etc.”
Positioning by Talent
It must be remembered here that an agency has to offer full fledged services.
However its positioning may be decided by the strength it creates in one
particular area.
Creative oriented : The client may be looking for agencies which are
capable of delivering strikingly different creative output. This positioning can
cut across the size barrier. The “small” agency too can position itself in
this slot, earning the label as “creatives hot shot” for itself. Clients may
find strikingly different creative output very suitable in product categories
where technology has matured and no distinct product advantages exist. A
client may need to bank upon creative to create a “communication
difference”.
Marketing input oriented : Some agencies may have strengths of having
good brand thinkers. This, then, becomes the point of differentiation for the
agency. Clients, too, may look for such agencies with whom they can
discuss marketing strategies. The benefit offered by this positioning to
the client is a better interpretation of the marketing concept into
advertising.
Others : Other alternatives could be based on talent in the agency. For
example an agency may be able to offer good “servicing input”, another
may have excellent “media planning” skills etc.
Positioning by Auxiliary Services
Agencies can position themselves by offering additional services like in-house
“market research” services. Further alternatives are “Direct Marketing”, “Public
Relations” etc. These package of services can help give and agency the extra
edge with clients whose usage level of such services are high. The synergy of
advertising with market research or direct marketing is the consumer benefit
offered by agencies choosing this positioning alternative.
Positioning by Markets
It is possible for an agency to position itself by markets, too. Some agencies in
India specialise in “public issue” advertising. Their positioning in this segment is
so strong that few consumer product launches are done by these agencies
while the bulk of the public issues business in the country is diverted to them.
There are also some agencies whose bulk business comes through publishing
“Tender Notices” of public sector undertakings. This is another example of
specialisation by markets. It is possible for agencies to specialise in industrial
products advertising or retail advertising.
Positioning by Price
Though professional code of ethics do not allow any discounting practices on
media commission earnings, some agencies position themselves by offering
discounts to clients.
25
Sectoral Applications-II Activity 3
Look at the advertising agency that you studied for Activity 1. Can you analyse
the positioning the agency has sought to achieve? What are the alternative
positions for this agency, looking at its infrastructure, resources and markets?
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16.5 HOW DOES STRATEGY VARY WITH THE SIZE

OF THE CLIENT?
The nature of inputs required from an agency vary with the size of the client
and the brand. Different expectations from agency in enterpreneurial, medium
size and dominant brand positions are discussed here.
a) Client: Enterpreneurial
Agency Task: “Nurturing of new brand”, “Create positioning”
When the client is young and small and is launching a new product, this is an
enterpreneurial phase for the client. The services the client demands of the
agency must be able to comprehend the growth pangs of an enterpreneurial
organisation and even though such brands usually bring low levels of billing, an
agency must devote time to their needs which are usually unique and require
an enterpreneurial decision making streak in the agency as well. Quick
decisions and quick reflexes of an agency are critical as enterprenuerial
marketing is like guerilla warfare. Such tactics, if backed by sound marketing
thinking at client/agency end usually lead to success and rising brand shares.
The basic agency task is however to create a brand positioning strategy for the
client. Quick responses of client and agency as they fine tune the positioning in
the market place are critical.
The demands from various departments of the agency for an enterpreneurial

client are as follows:
Servicing: Personalised to the enterpreneur. Decision Making: Quick, based on

gut feel.
Servicing person: Should be senior, capable of thinking on his feet. Must have
knowledge of Account Planning.
Media Planning: Should focus on low cost, unconventional media.
Account Planning: Should be capable of evaluating if client’s gut feel meets marketing
logic.
Creative: Should never let the focus shift from the brand positioning in the
flood or ideas coming in.
Client Focus: In early enterpreneurial phase may be survival. Agency should
understand this.
b) Client: Medium Size

Agency Task: “Strengthen brand positioning” to build brand leader.
Two scenarios are discussed here:
i) When client’s growth is faster than the market growth
Here the focus moves to one of strategic planning for a brand to become
a leader. Even when a brand has succeeded in an enterpreneurial set-up,
26
the agency for its next phase of growth may have to alter its style as the Professional Support
client may enter new markets and segments by now and even though Agencies
servicing may still be personalised, account planning will need to be more
formalised keeping many more variables in mind, which, at an
enterpreneurial risk-taking stage may have been ignored. The basic agency
task here is to sterngthen brand positioning to build a brand leader.
ii) When market growth is faster than client’s growth rate.
Where a medium-size brand has been dormant for a long period of time in
a market which is otherwise growing at a healthy rate, it may be useful
for the agency to use some enterpreneurial concepts in both product and
promotion design to make the brand an active player again. Repositioning
of a brand becomes the major brand building task of the agency. The client
should be motivated to relook at pricing and distribution strategies by the
agency.
The focus for different departments of the agency for a medium size client are
as follows:
Servicing: May be personalised still. But agency should meet second line
marketing people to receive market feedback directly (In non-
enterpreneurial situation: It is heirarchial and partly personalised).
Decision Making: Agency should promote formalised decision making based on
Account Planning recommendations, to dilute focus on gut feel
only.
Media planning: Has to think of using mass media judiciously. For building brand
leaders, Media Dominance Strategy has to be worked out.
Account planning: Should be the key agency focus so as to heighten brand
positioning or to “reposition”a slow moving brand.
Creative: To make brand distinction totally different from others, it should use
media differently or design the message differently.
Client focus: It must be made long term here by agency advice.
c) Client: Market Leader

Agency Task: “Maintaining” dominant brands
When brands are dominating ones in their product category, and market share
can be increased only marginally, with the category itself nearing maturity stage,
the key function is of maintaining brand shares. The focus is on “pre-emptive”
strategies and not “attacking” strategies. Competitors’ strategies have to be
preempted and defensive mechanisms worked out. Aggressive strategies at this
stage may drain more financial resources than they can generate. The brand
positioning has to be guarded here against imitators.
The focus of various departments of the agency for a large size client is
outlined below:
Servicing: Formal, following heirarchial structure.

Decision Making: Formalised
Account planning: The key input to strategy here is Market Intelligence (what the
competitors plan to do) as as to pre-empt. Client’s marketing has to
participate in this.
Creative: Defensive strategy for brand position.
Media Planning: Focussed for those target audiences which competitors are planning
to tap. In other media, reminder level to be maintained.
Client focus: Defensive for brand position and share, offensive for competitive
threats.
27
Sectoral Applications-II Viewing the above analysis according to the stage of the product life cycle of
the product would generate the following conclusion:
A. “Create Brand Positioning”
Enterpreneurial needs in servicing, planning & execution.
B. “Strenghten Brand Position”
Account planning needs dominant.
Or
If brand not moving well: “Reposition” it.
C. “Guard Positioning”
Maintenence for dominant brands.
Activity 4
Select an agency which caters to several clients. Analyse the‘Agency Task’
with respect to each type of client. How would you say the task varies
between clients, if at all.
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16.6 HOW DOES STRATEGY VARY ACCORDING

TO SIZE OF AGENCY?
The strategy options for small, medium & large size agencies are discussed
here.
i) The Small Size Agency
Small agencies by their very size usually do not have very large brands to
work on. The agency focus then largely becomes enterpreneurial, where the
agency should have an ability to select clients whose products have a USP
which is capable of becoming a benefit, highly desirable to a particular target
audience in the market. At this stage, agency strategy involves a search for
the right clients i.e. the agency should catch the enterpreneur who has a
good product. The success of the brand then becomes the sucess of the
agency. However, faulty selection and non-payment by the client is a risk.
Hence mortality rate of small agencies is higher than for medium and large
scale agencies. The other alternative strategy for a small size agency could be
to offer some specialised services. Clients, irrespective of size, needing
strengths in certain service areas would find such agencies useful. For example,
agencies having good studio facilities could cater to clients who have needs of
printing or other work requiring high quality artwork.
In case a small agency has a large brand, its revenues become largely
dependent on the brand. This is both a constraint and an opportunity. The
constraint is that the brand portfolio of the agency is very narrow. Hence the
agency could become overdependent on the brand. Such dependence may
hamper giving professional advice, especially when it is unpleasant for the
client. The opportunity is that the success of the brand is the key of the
agency’s success. If the agency realises this fully and establishes a healthy
professional working relationship with the client it could be mutually very
beneficial. The agency would devote its fullest energies to the success of the
brand, giving a growing brand the attention it deserves. In the long run, it
28
would be advisable for the agency to diversify its client mix, for recessionary Professional Support
market conditions in the agency’s major brands market and a subsequent Agencies
financial involvement would be unmanageable for a small agency.
ii) Medium Size Agencies
A medium size agency should invest in tomorrow with small brands that it
builds into leaders. It should have a balanced client mix. With more than a
couple of brand leaders bringing the front, half a dozen or more, major brand
players in their market and a handful of small clients who have a potential for
becoming leaders tomorrow. The advantage of the medium size agency is clear.
it is neither too big to be unaffected by a change in any client’s health neither
is it too small to avoid offering comprehensive advertising services. Its product
portfolio, should consist of “today’s bread winners” who are some large brands
as well as “tomorrows bread winners” which are small brands the agency is
nurturing to become brand leaders. The key benefit a medium size agency
offers its clients (its positioning statement) is that it is not too big for its clients
to lack personalised agency attention. Neither is it too small to avoid investing
in full fledged infrustructural support services. Therefore it can claim to offer
the best of both worlds to a client.
iii) Large size agencies
A large agency must heighten its positioning as a leader. This can be done by
setting industry standards. A leading agency, for example, produced an
Urban Market Index and Rural Market Index which not only helps other
agencies but also clients in their planning. “Another strategy is to help in
creating better training facilities to train professionals for advertising. This
creates goodwill as many students may move to client organisations. It also
helps to attract the best talent, hence preserving the pre-eminent place for the
agency in the long run. This could also be done through organising seminars for
both agencies and clients. Yet another strategy could be to create industry
standards in auxiliary services like market reserach by setting up
independent companies to handle these services. Such services can be used by
both, clients and other agencies. Hence a large agency’s client list reads like a
who’s who of brands. The advantages of such a scenario are obvious. The
disadvantages need looking at. Due to the size of such agencies, it becomes
unviable to handle brands which generate turnovers below a certain size. This
leads the “innovator enterpreneurs” who are creating new product categories
and attacking new markets to look elsewhere. It therefore makes eminent
sense for large agencies to set up smaller “sister” agencies who can not
only handle such clients but can also pick up competitive brands to the parent
agency’s brands. The latter is identical to a “multi branding” strategy used by
dominant companies to maximise market share in large markets. The launch
strategy for these “sister” agencies could well be a positioning stance that is
the antithesis to the larger parent agency. If the larger agency is perceived as
one following classical rules of advertising, the sister agency could well be a
maverick. This would get both type of clients and brands and diversify the
product/client mix of the group. Such an anti-thesis positioning would be useful
when a larger growing segment of brands have a potential of succeeding using
such a positioning stance. Usually the anit-thesis positioning of the smaller
agency is “better servicing”, “more time for client” etc. The positioning also
reflects itself in clients chosen: they could be smaller say retail v/s.
manufacturers etc.
16.7 CONCLUSION
In short, unlike factories, which have standardised products, advertising is a
dynamic situation where every output of the agency is different from the
previous one. The production consumption interaction not only calls for direct 29
Sectoral Applications-II distribution but is the prime determinant of the output. Advertising is a business
of managing people: clients, on one hand and agency personnel on the other.
The key task is to maintain enthusiasm and a desire for excellence among all
of them. Advertising is a game of bringing out the differences among two
products, and creating a USP for a brand. An agency must develop this ability
to make a difference for a brand and therefore for itself. That is what
successful agency positioning and agency growth are all about. An agency, in
the final analysis is known by the brands it builds.

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

1) Maister David H., Professional Service Firm Management, 4th ed.,
(Boston, MA: Maister Associates, 1989)
2) Wilson, Aubrey, The Marketing of Professional Service (London :
McGraw Hill, 1972)
3) Philip Kotler and Paul N. Bloom, Marketing Professional Services
(Englewood Cliffs, N.J. : Prentice-Hall, 1984).
30
UNIT 17 TELECOMMUNICATION
SERVICES
Objectives

understand the growth trends in the telecom sector in India;
highlight the competitive structure in the telecom industry;
understand the key issues related to pricing of telecom services;
describe the service quality parameters for telecom service providers.
Structure
17.1 Introduction
17.2 Growth of Telecom Sector in India
17.3 Tariff Issues
17.4 Sector Dynamics and Implications for Firm Level Competition
17.5 The Changing Market Structure
17.6 Service Quality
17.7 Summary
17.9 Appendix
Appendix 1 : Chronology of Indian Telecom Deregulation
Appendix 2 : Key Features of NTP 99
17.1 INTRODUCTION
The telecom sector in India has witnessed rapid changes in the last few years.
There have been far reaching developments in Information Technology (IT),
consumer electronics and media industries across the globe. The Government
of India has recognized that provision of world-class telecommunications
infrastructure and information is the key to rapid economic and social
development of the country. This will not only help in the development of the
IT industry, but will also provide for widespread spillover benefits to other
sectors of the economy.
The first step in this direction was the announcement of the National Telecom
Policy in 1994 (NTP 94). This provided for opening up the telecom sector to
competition in Basic Services as well as Value Added Services like Cellular
Mobile Services, Radio Paging, VSAT Services, etc. It also set targets for
provision of telephone on demand and opening up of long-distance telephony.
This was followed by a New Telecom Policy declaration in March 1999 (NTP
99) to remove some of the bottlenecks and push the liberalization process
forward.
The policy maker for India’s telecommunications sector is the Ministry of

Communications and Information Technology, which operates through two
government bodies — the Telecom Commission and the Department of
Telecommunications (DoT). The Telecom Regulatory Authority of India (TRAI)
is an independent regulator that reports to Parliament through the Minister.
The Telecom Commission performs the executive and policy-making function,
the DoT is the executive and policy-implementing body while the TRAI 31
Sectoral Applications-II performs the function of an independent regulator. Secretary, DOT, is the ex-
officio Chairman of the Telecom Commission.
17.2 GROWTH OF TELECOM SECTOR IN INDIA

Telecommunications was not perceived as one of the key infrastructure sectors
for rapid economic development during the formative years of the Indian
economy. The relatively low levels of investment in this sector affected the
quality, quantity and range of services provided. In 1998, number of phone
connections per 100 persons in India was 2.2 while the world average was
14.26 (World Telecommunication Development Report, ITU, 1999).
According to a report by Ernst and Young (E&Y) this teledensity is expected
to cross 20 percent by 2008. According to the report the total telecom
revenues in India are expected to almost triple from $9 billion in 2002 to $23-
25 billion by 2007. As in the other parts of the world, the global wireless
revolution has been the principal growth engine in India.
For the provision of basic services (fixed line), the entire country is divided
into 21 telecom circles, excluding Delhi and Mumbai. Bharat Sanchar Nigam
Limited i.e. BSNL (erstwhile Department of Telecommunications (DoT))
provides basic services in the 21 telecom circles, while Mahanagar Telephone
Nigam Limited (MTNL) serves Delhi and Mumbai, which are two metro
license areas. Table 17.1 shows the list of basic services operators in India ,
while Table 17.2 presents the subscriber base corresponding to each operator.
BSNL’s market share has increased from about 80 per cent to 84 per cent
between March, 1997 and March, 2003, while the share for MTNL has
dropped considerably.
Table 17.1: List of Basic Service Providers and their Area of Operation
Area of Operation Name of Service Provider

All over India Department of Telecommunications, now BSNL
Delhi & Mumbai MTNL
M.P., Delhi, Haryana, Bharti Telenet Ltd.
Karnataka, TN
Maharashtra Tata Teleservices Pvt. Ltd. (earlier Hughes Ispat
Ltd.)
A.P., Delhi, Gujarat, Tata Teleservices Pvt. Ltd.
Karnataka, TN
Gujarat, AP, Bihar, Delhi, Reliance Telecom Pvt. Ltd.
Haryana, HP, Karnataka, Kerala,
MP, Mah., Orissa, Punjab,
Rajasthan , TN, UP(E),
UP(W), WB
Punjab HFCL
Rajasthan Shyam Telelink Ltd.
In the early years after liberalization, India restricted the number of licenses
awarded for basic services. The market was divided into separate circles and
the policy admitted one private operator in each to compete with the incumbent
DoT (now BSNL) and MTNL. New entrants were allowed to offer intra-circle
long distance services, but DoT maintained its monopoly on inter-circle National
Long Distance (NLD) telephony. Initially, the bidding process led to six new
entrants in basic services. In the year 2001, the policy was changed to allow
unlimited entry into each circle for basic services and subsequently 22 additional
32
license agreements have been signed. For the list of basic service providers Telecommunication
Services
and their area of operation refer to Table 17.1. As of December 31, 2003
BSNL controlled 84.8%, MTNL 10.6% and other private operators 4.6% of the
fixed service market.
Table 17.2: Subscriber Base – Basic Services
Service 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Provider
DoT/BSNL 11,530,276 14,394,956 17,927,526 22,479,721 28,108,976 33,218,498 35,932,877
MTNL 3,012,324 3,406,740 3,653,913 4,031,624 4,327,158 4,629,709 4,690,080
Bharti Nil Nil 13,980 91,967 115,212 180,989 370,973
Telenet Ltd.
Hughes Nil Nil 6,070 22,110 69,599 160,672 233,397
Ispat Ltd.
Tata Tele- Nil Nil Nil 26,713 58,736 150,400 365,190
services
Reliance Nil Nil Nil Nil 109 140 958,534
STL Nil Nil Nil Nil 8,998 27,150 82,265
HFCL Nil Nil Nil Nil 13,441 64,926 111,647
Total 14,542,600 17,801,696 21,601,489 26,652,135 32,702,229 38,432,484 42,744,963
In the year 2003-04 while the fixed lines including WLL (F) showed an
increase of 3% over the previous year, during the same period the mobile
services including Cellular and WLL (M) showed a spectacular growth of
160% i.e. from 13 million to 33.58 million subscribers. This trend is not unique
to India. Worldwide trends also confirm the same results i.e. higher growth in
the mobile sector.
Figure 17.1: Actual and projected subscriber growth, fixed-lines and
mobile, millions, 1990-2010
2'00 0
Mobile hashas
¾ Mobile overtaken
ov ertake n
fixed-lines in iCambodia,
fixed -lines n Ca mb odia,
Finla nd,
Finland, I tal Korea
Italy, y, K orea 1'50 0
¾ Mobile
Mobile subscribers
s ubscri bers to to
ov ertake
overtake fixed-line
fixed-line Fixed
worl dwibefore
worldwide de be fore 20 05?
2005? 1'00 0
¾ Mobile
Mobile rev enue
revenue to to Mobile
ov ertake
overtake fixed-lineafter
fixed-line after
2004? 500
2004?
¾ Fastes
Fastest t gr owth
growth in i n
dev eloping
developing coun tries
countries 0
199 0 200 0 201 0
Source: 1990-1998 data from ITU World Telecommunication Indicators Database. 1999-2010 ITU
Figure 17.1 shows the prediction made by International Telecommunications

Union (ITU) that mobile will overtake fixed worldwide, perhaps by 2005.
Interestingly, this has already happened in a few countries. In India, it is
envisaged that by 2007 mobile phones will surpass fixed phones. However,
with the current structural changes in the telecom sector including the move
towards unified licensing it is more than likely that this will happen earlier.
Private participation in the cellular-mobile market in India has been very

successful. Eight cellular licenses, two in each of the four metros, were
awarded in October 1994. Subsequently, bidding resulted in the award of
licenses in 18 Circles. (Circles have been classified as category A, B and C
based on market characteristics and telephony potential in diminishing order of
attractiveness). For two circles, Jammu and Kashmir, and Andaman and
Nicobar Islands, no bids were received, while for West Bengal and Assam,
only one bid each was made. A list of existing cellular operators and their area
of operation is provided in Table 17.3. The subscriber base crossed 3.5 million 33
Sectoral Applications-II by the last quarter of 2001, at the end of March, 2003 it reached to about 13
million and was more than 33 million by the end of March 2004. (Cellular and
WLL – M combined). The top five mobile operators (Cellular and WLL-M
combined) as of December 2003 in terms of market shares were Reliance
(21.9%), Bharti (19.34%), BSNL (17.34 %), Hutchison (13.26%) and Idea
(7.88%). Table 17.4 gives the details of growth in subscriber base for cellular
services.
Table 17.3: List of Cellular Service Providers and their Area of Operation
Category City/Circle Operator 1 Operator 2 Operator 3 Operator 4
Metros Delhi Bharti Hutch MTNL Batata
Mumbai BPL HMTL MTNL Bharti
Chennai RPG Bharti BSNL Hutch
Kolkatta Bharti Hutch BSNL Reliance
A’ Circle Maharashtra BPL IDEA BSNL Bharti
Gujarat Hutch IDEA BSNL Bharti
A.P. IDEA Bharti BSNL Hutch
Karnatka Bharti Spice Comm BSNL Hutch
T.N. BPL Aircel BSNL Bharti
B’ Circle Kerala Escotel BPL BSNL Bharti
Punjab Spice Comm - BSNL Escotel
Haryana Escotel ADL BSNL Bharti
U.P.(W) Escotel - BSNL Bharti
U.P.(E) ADL - BSNL Escotel
Rajasthan ADL Hexacom BSNL Escotel
M.P. IDEA Reliance BSNL Bharti
W.B. Reliance - BSNL -
C’ Circle H.P. Bharti Reliance BSNL Escotel
Bihar - Reliance BSNL -
Orissa - Reliance BSNL -
Assam Reliance - BSNL -
N.E. Reliance - BSNL -
J&K - - BSNL -
Source: www.coai.com
Table 17.4: Subscriber Base – Cellular Services
Category March March March March March March March March

'97 '98 '99 '00 '01 '02 '03 '04
All Metros 325,967 551,757 519,543 795,931 1,362,592 2,567,757 4,439,524 7,941,766
‘A’ Circle 9,698 176,954 354,799 585,653 1,165,778 2,134,333 4,364,943 9,698,299
‘B’ Circle 3,000 138,309 284,189 460,094 932,685 1,501,151 3,374,538 7,402,067
‘C’ Circle 366 15,296 36,915 42,633 116,040 227,573 508,632 1,112,273
All India 339,031 882,316 1,195,446 1,884,311 3,577,095 6,430,814 12,687,637 26,154,405
Source: www.coai.com
34
Activity 1 Telecommunication
Services
Visit the website www.coai.com and find out the market positions of the
various cellular service providers.
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17.3 TARIFF ISSUES

It is now widely recognized that enhancing efficiency and investment in telecom
requires the introduction of competition, which in turn needs a regulatory
mechanism to facilitate competition. An essential ingredient of transition from a
protected market to competition is alignment of prices to costs (i.e., cost-
oriented or cost-based prices), so that prices better reflect their likely levels in
a competitive environment. In basic telecom, for example, a major departure in
pricing of services involves cross-subsidization. Cross subsidization involves
providing one service such as monthly rental below cost and another such as
Domestic Long Distance (DLD) and International Long Distance (ILD) above
cost to recover cost and also to generate surplus for investment. Table 17.5
shows that in 1998, 70 per cent of BSNL’s (then DoT) revenue was due to
only 13 percent of the subscribers. This can be estimated by calculating the
cumulative distribution of subscribers and revenues from Table 17.5. For
example, 2.7% of subscribers contributed 46.1% of revenue. The next 2.5% of
subscribers contributed 9.8% of revenue, implying that 5.2% of subscribers
contribute 55.9% of revenue and so on. One reason for this was the very high
price of long distance calls compared to local calls. The considerable
difference between the price of a local call and that of DLD and ILD calls
was policy driven. Empirical evidence shows that it was 90 times more
expensive to make a long distance call from Delhi to Mumbai in 1998
compared to local call and the corresponding ratio for an ILD call to USA.
This implies that those who made long distance calls were cross subsidizing
those who used the telephone for only local calling.
Table 17.5: Revenue Contribution by Different Subscriber Groups
Share of Total Subscribers The Contribution of These

Subscribers to Call Revenue
2.7 % (those making more than 10,000 call bi-monthly) 46.1 %
2.5 % (those making between 5001 and 10,000 call bi-monthly 9.8 %
7.9 % (those making between 2,001 and 5,000 calls bi-monthly) 13.4 %
14 % (those making between 1,001 and 2,000 calls bi-monthly) 11.6 %
21.3 % (those making between 501 and 1,000 calls bi-monthly) 10 %
51.7 % (those making 0 to 500 calls bi-monthly) 8.1 %
Source: Telecom Regulatory Authority of India (TRAI). 1999, “Telecommunication Tariff

Order.”
Traditionally, BSNL (DoT earlier) tariffs cross-subsidized the cost of access (as
reflected by rentals) by domestic and international long-distance usage charges.
In order to promote desired efficiencies, ‘re-balancing’ of tariffs is a necessity,
and, therefore an important policy issue. Re-balancing of tariffs involves
reducing tariffs that are above costs while increasing those below costs. Thus,
re-balancing implies a reduction in the extent of cross-subsidisation in the fixed-
services sector. Such a rationalization is required as a condition precedent to 35
Sectoral Applications-II the conversion of a single operator system to a multi-operator one. A small
proportion of the subscribers account for a major share of call revenue, and
these subscribers would be the subject of competitive churn when private
sector operators enter the market. For example, Hughes teleservices (now
TATA) targeted the high revenue paying subscribers when it entered the
market in Mumbai and made attractive offers to corporates and potential clients
in the rich districts of Nariman point and Colaba. Similarly, Bharti in Madhya
Pradesh acted likewise in the cities of Indore and Bhopal when it newly
entered the market in 1996. Such cream skimming or cherry picking is a
commonly adopted pricing strategy for new entrants in telecommunication
markets when facing entrenched incumbents. Loss of high revenue customers
will have a significant effect on the revenue situation of the incumbent, making
it difficult to meet its revenue objectives. Thus, while tariffs have to be reduced
for the services that are priced much above cost (e.g., long distance and
international calls), tariffs for below-cost items need to be increased. Such a
re-balancing exercise is common when preparing the situation for competition.
Otherwise, competition will result in a decline in above cost prices without any
compensating charge in the below cost prices. Cost-based prices restrict the
possibility of cream skimming by operators.
The methodology of specifying tariffs included the following feature to impart

flexibility. For certain services, TRAI specified particular tariff levels while for
several others it allowed forbearance. Forbearance is a feature that permits
service providers to set their own tariffs without approval from the regulator.
Usually it is a practice followed in markets where there is substantial or
adequate competition. Even for those services for which tariff levels are
specified, the framework includes the possibility of providing alternative tariffs.
The tariffs specified by TRAI form a package that is termed the “standard
tariff package.” This package must always be provided to the customer. In
addition, the service provider is left free to provide any “alternative tariff
package.” Since the standard tariff package is always available to the
customer, any alternative tariff package has to be better in order to attract any
customer. Therefore, the standard tariff package provides a minimum
guarantee to the customer. In one sense, it specifies the peak expenditure
level for the customer, with the alternative tariff packages being attractive only
if the expenditure involved in them is lower than that for the standard tariff
package. This method of flexibility was adopted because of the growing
tendency in telecom markets to provide different tariff combinations for various
baskets of services. Thus the standard tariff package could be viewed as a
ceiling tariff, with operators free to provide alternative tariffs that were below
this level. For cellular mobile, tariffs were restructured because the prevailing
rentals were low and call charges were high. This resulted in a tariff structure
that dissuaded usage and loaded the subscriber base. Thus, call charges were
reduced and rentals were increased. The methodology clearly included license
fee as costs and showed that a high license fee translates into higher tariffs.
Standard monthly rental for mobile cellular was increased from Rs 156 to
Rs. 600, but the maximum call charge was reduced from a peak of Rs. 16.80
per minute to Rs. 6 per minute. The service providers were allowed to give
alternative tariff packages which resulted in lower tariffs.
The possibility of giving alternative tariffs provided a means of addressing

several concerns. Over time, with greater competition in the market, tariffs for
long distance calls and for cellular mobile have seen dramatic declines within
such a framework. The reduction in tariffs has also been spurred by the
introduction of wireless in local loop (with limited mobility) and the major cost
reduction due to technological change. With the new service providers relying
on more recent, cost efficient technologies, Indian telecom market is emerging
36 with very strong competitive pressure.
The basic driving force of growing competition in what was once thought to be Telecommunication
Services
a natural monopoly is the increasing versatility with which services can be
provided, based on the digitisation of all signal-transfer technology. As the
manner in which signals are transferred from one location to another becomes
common, it is possible for a service provider in one segment of
telecommunication, say network television services, to perform the functions of
another, say, the local phone company. Efforts to maintain barriers across such
segments will eventually be overwhelmed by technology. Regulation will follow
convergence rather than the other way around. Convergence will eliminate the
existing barriers between different types of services, for example, between
basic and cellular and allow service providers and, thus, consumers to benefit
from scale and scope economies. This has already been initiated in India with
a move towards unifying the licenses for Basic and Cellular services.
17.4 SECTOR DYNAMICS AND IMPLICATIONS FOR

FIRM LEVEL COMPETITION
a) Basic Services
After NTP 1994 was announced, move was made to include private
participation in providing telecom services. During September 1994 guidelines
were issued for private sector participation in basic services. In January 1995
tenders (circle-wise) were invited for the 2nd operator in Basic service. In the
year 1997 private operators started providing basic services.
Table 17.6: Extent of Competition as on 31st March 1997
Circle/City Number of Basic players Number of Cellular players

A&N 1 0
AP 1 1
Assam 1 0
Bihar 1 0
Gujarat 1 2
Haryana 1 2
HP 1 1
J&K 1 0
Kerala 1 0
Karnataka 1 0
Maharashtra 1 0
MP 1 0
NE 1 0
Orissa 1 0
Punjab 1 0
Rajasthan 1 0
TN 1 0
U P (E) 1 0
U P (W) 1 0
WB 1 0
Mumbai 1 2
Kalkatu 1 2
Delhi 1 2
Chennai 1 2
b) Cellular Services
Licences were issued for Cellular Services for metros in November 1994. In
December 1994 tenders were invited for 19 circles apart from 4 metros. In
most of the circles/metros two operators began service, making the market a
duopoly.
37
Sectoral Applications-II c) State of Telecom Market as on 31st March 1997
Basic subscriber base 14.54 Million
Cellular Subscriber base 0.34 Million
Teledensity 1.56
Number of NLD players: 1 (BSNL)
Number of ILD players: 1 (VSNL)
The data shown above demonstrates that the telecom sector in 1997 was
dominated by the government owned monopoly, with a few private operators in
the cellular mobile segment. Teledensity was low and prices were relatively
high. Although the market had been opened to competition in the basic and
cellular segments, the structure remained concentrated i.e. the market was
fairly monopolistic.
In the year 1999, NTP-99 was announced. Its main objectives are shown in
Appendix 2. In 1999, DoT was divided into DTS (Department of Telecom
Services) for service provision and DoT for policy making. In the year 2000
DTS was corporatised as BSNL, which is the name under which it operates
today. Until June 2001, there were only 6 private operators in operation
apart from BSNL (operating all over India except Delhi and Mumbai) and
MTNL (operating in Delhi and Mumbai). During this period, existence of
private operators did not provide adequate competition to force down
prices. There was virtually no competition in Basic services. As on 31st
December 2003, share of private operator in basic service market was less
than 5%.
Licence for 3rd Cellular operator was granted to the Government owned
service providers, BSNL & MTNL. MTNL started its Cellular services in
2001 while BSNL started its services in 2002. An interesting development in
cellular tariffs was witnessed at this time. There was a steep and sudden
decline in tariffs by the private operators in anticipation of entry of 3rd cellular
service provider. However, an analysis of market shares of cellular operators
shows that MTNL has not been able to make a significant impact in the
Cellular Market. At the end of September 2003, MTNL’s share in Delhi was
6% and 8% in Mumbai. An interesting fact is that the private operator that
entered the markets of Delhi and Mumbai almost a year after MTNL, has
acquired a larger share of the market. Whereas, BSNL as the 3rd entrant has
had relatively more success achieving a 22% market share on an all India basis
as of September 2003 (operating in 19 circles). The fourth Cellular operator
also started service along with BSNL in the year 2002. As one would expect,
the entry of competition in cellular mobile has provided a boost to the market in
terms of subscriber acquisition, tariff changes and value added services like
roaming, SMS, cricket updates, stock market news etc. Based on the prevailing
tariffs in the market, costs and extent of competition, TRAI decided to
introduce forbearance in the year 2002. Thus cellular service providers are now
free to determine the price of tariff offerings to subscribers.
17.5 THE CHANGING MARKET STRUCTURE

Several parts of the sector have been liberalised and along with reforms the
market structure has also undergone a significant change. Unlimited entry of
new players has been allowed in basic, NLD, ILD, ISP and infrastructure
businesses. Cellular mobile has upto 4 operators in each service area. As a
result of these changes, the sector presents a very different picture from the
one that obtained in 1997. There are 8 different operators in certain lucrative
38
service areas such as Delhi, Chennai, Karnataka etc. There are 4 NLD and 5 Telecommunication
Services
ILD operators in India.
The way in which the structure of the industry is changing at a phenomenal

speed seems unending at the moment. The Reliance launch has been a catalyst
not just in the ensuing price competition but even more significantly in
attempting to alter the mindset of all the stake holders of the telecom business.
One early casualty is going to be the most conventional way of looking at the
business: henceforth the services and the tariff on offer cannot be fitted so
easily into neat compartments such as basic telephone services, mobile services
or local calls, STD calls and so on. Bundling, which is examined later in this
section is one example of this.
Three to four leading private players are likely to emerge as competition to the
incumbents, BSNL and MTNL, which have a significant presence across the
value chain. The Tata Group, Reliance Infocom and Bharti Televentures have
announced plans to emerge as integrated telecom companies offering
end-to-end services to customers. Hutchison, on the other hand, appears to be
focused on cellular services, with no stated intention of entering other
businesses.
The VSNL acquisition has catapulted the Tata Group to the leading position
among private Indian telecom players. With a 100 per cent share in the
lucrative ILD business, a leading share in Internet services, and a favourable
NLD license, VSNL fits in perfectly with the group’s plans of providing
integrated telecom solutions. The Tata-VSNL team will now embark on its next
challenge - ensuring a smooth transition at VSNL and integrating business plans
for ILD, NLD and Internet/data services to enhance value for its customers
and shareholders.
This increase in competition has not only increased the market size for telecom,
but has also resulted in substantial tariff declines. The next section analyses
this phenomena.
a) Trend in tariffs
There can be no question about the direction of change in average tariff in the
sector. The trend has been consistently downward. There are many ways to
estimate the decline in tariffs for telecom services and some may be subjective.
While different methods may result in different estimates, the message that
comes through is that substantial declines in tariffs have occurred that can only
be attributed to the intense competition in the market.
The reason why estimates of tariff declines could vary is because prices vary
depending on the nature of usage and the package of services viz. local NLD,
ILD, value added services etc. chosen by the subscriber. Another complexity
in telecom is the widespread use of multi part pricing i.e. a fixed monthly rental
for access to the service and a variable charge depending upon usage and the
nature of calls. Moreover service providers have attempted to segment the
market according to subscriber types and have tried to customize tariff
offerings to best meet the needs of different subscribers. Thus a number of
tariff plans are available which subscribers choose according to their
requirements.
In September 2003, TRAI did a study on trends in tariffs for Fixed, Cellular
and WLL (M) services. The following graph shows the results of that
study.
39
Comparison of effective charge per minute for 400 MOU/month (Rs.)
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Mar.-01 Jun.-01 Sep.-01 Dec.-01 Mar.-02 Jun.-02 Sep.-02 Dec.-02 Mar.-03 Jun.-03
Fixed 0.69 0.69 0.69 0.69 0.69 0.69 0.69 0.69 0.69 0.78
WLL(M) 1.25 1.37 1.37 1.37 1.37 1.37 0.71 0.71 0.71 0.67
Cellular 2.42 2.41 2.06 2.06 1.89 1.89 1.70 1.70 1.63 1.12
MOU: Minutes of Use
The above graph is based on the calculations performed on the minimum tariffs
prevailing in the market at various points of time for average local usage of
400 minutes (outgoing + incoming). As stated above, tariff decreases have
been an unmistakable feature of the telecom market in India over the last few
years, although different analysts could come up with different estimates
depending on the methodology adopted for the purpose.
b) Innovations in Tariff offerings
Technological progress has blurred the boundaries between different platforms
for access services. Thus, competition is not only within the service but also
between the services, viz, cellular and WLL (M). One manifestation of this
competition has been examined in the previous section on tariff declines.
Another is the frequency of change in tariff plans offered by operators. Not
only is the frequency of change high, service providers are also designing
innovative tariff plans to attract subscribers. Further, service providers are
striving to lock their customers for a longer period of time to prevent churn.
Acquiring subscribers is passé; customer retention has become vital.
c) Bundling of services
Another interesting change in the sector is the multiple licenses owned by a
single company. As stated earlier, India has issued separate licenses for Basic,
Cellular, NLD, ILD, ISP services. In view of the fact that a single operator
has acquired multiple licenses and can thus offer multiple services, one of the
innovations that have occurred relates to bundled offers. An integrated
operator (Integrated operator means that one business house possesses cellular
or basic i.e. access, NLD, ILD and ISP license. This enables the service
provider to offer end-to-end services to the customer under its own brand
name) can design more bundles and innovative schemes compared to a stand-
alone operator. Some of the bundled offers are described below.
CUG (Closed User Group) : Forming a group of customers where the
calls within group are either not charged or are charged very low and the
calls made outside the group are charged higher.
Friends and Family : Unlimited free talktime to a selected number for a
cost of a fixed monthly charge.
40
Free VAS (Value Added Services): such as SMS, CLIP free with Telecommunication
Services
certain tariff plans.
Unlimited usage free: Tariffs with high monthly rental and unlimited free
usage. This may attract the high callers and this type of packages also
ensures a minimum ARPU (Average Revenue per User) to the service
provider.
Zero Rental: Packages with no or zero rental and high calls charges. This
type of package may attract very low users, who want to own a phone
but use it very rarely.
Prepaid plans with no administrative charges or plan fee: This
ensures a fixed ARPU to the service provider. Also, customer gets a
chance to use his net payout to the fullest.
Plans to lock customers for a longer period of time: Tariff plan for
minimum commitment of 3 years. Although it provides a facility to the
customer to exit the plan but at a very high cost, which discourages the
customer from exiting the plan.
Plans with very low rental but outgoing calls are barred: At a very
low monthly cost ranging between Rs. 70 to Rs. 150, customer can receive
any number of calls. Also if someone wants to make outgoing calls, he can
use VCC (Virtual Calling Card). It is a perfect substitute of pager or may
be one step ahead.
The intense competition witnessed in telecommunications has several

implications that go well beyond the immediate sectoral interests. Such
competition has been price-driven; with the existing service providers hoping to
retain their market share through tariff cuts in the wake of strong emerging
challenge. The immediate gainers are the consumers, especially users of mobile.
Activity 2
Try to find out examples of bundling in other industries (sectors) in India.
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17.6 SERVICE QUALITY

The Telecom. Regulatory Authority of India Act 1997 11(1) (b) (v) as amended
by TRAI (Amendment Act, 2000) mandates TRAI to “lay down the standard
of quality of service (QOS) to be provided by the service provider and ensure
the Quality of Service and conduct the periodical survey of such service
provided by the service providers so as to protect interest of the consumer of
Telecom Services”. One could argue that in a competitive environment,
Regulator need not bother about QOS Parameters and competition will
automatically take care of it. Unfortunately, in reality it is not so. Even in the
countries, where there has been competition in various telecom services for a
long time, the QOS is a major concern to protect consumer interest.
After going through a consultation process through written comments and open
house discussions, TRAI issued a QOS Regulation on 5th July, 2000 both for
Basic as well as Cellular Services. This Regulation has laid down benchmarks
for various QOS parameters with the following objectives:
41
Sectoral Applications-II i) Create conditions for customer satisfaction by making known the quality
of service which the service provider is required to provide and the user
has a right to expect.
ii) Measure the Quality of Service provided by the Service Providers from
time to time and to compare them with the norms so as to assess the
level of performance.
iii) To generally protect the interests of consumers of telecommunication
services.
QOS Parameters for Basic Telecom Services
The following key benchmarks have been set for basic services
i) Provision of a telephone after registration of demand for exchange areas
declared on demand : 100% within 7 days.
ii) Fault incidences (No. of faults / 100 subscribers / month): <3
iii) Fault repair by next working day: >90%
iv) Mean Time To Repair (MTTR): <8 hours
v) Call Completion Rate within a local network: >65%
vi) Metering and billing credibility: Not more than 0.1% of bills should be
disputed.
vii) Operator Assisted Trunk Calls: Urgent <1 hour, ordinary <2 hours
viii) Customer Care (Promptness in attending to customers requests) 95% of
requests: a) Shifts : <3 days b) Closures: <24 hours c) Additional
facility : < 24 hours
ix) Percentage of repeat faults: <1%
QOS Parameters for Cellular Services
On similar basis QOS Regulation have been laid out along with the benchmarks
for cellular services.
A) Fault incidence and Repair
i) Fault incidence (Number of faults /100 subscribers/month): <1
ii) Faults cleared with 24 hours : 100%
iii) Accumulated down time of Community isolation: <24 hours
B) Network Performance
i) Call Success Rate (within licensees own network): >99%
ii) Service Access Delay : Between 9 to 20
iii) Call Drop Rate : <3%
iv) Percentage of connections with good voice quality : >95%
C) Billing Complaints
i) Billing complaints per 100 bills issues: <0.1%
ii) Percentage of billing complaints resolved within 4 weeks: 100%
iii) Period of all refunds/payments due to customers from the date of
resolution of complaints as in (ii) above: <4 weeks
In a survey conducted by IMRB on behalf of TRAI to assess the quality of

services provided by the service providers (for the period Oct. – Dec. 2003)
following issues emerged.
a) The basic services being provided are not upto the desired standards. The
situation is particularly bad in respect of provision of new connection within
7 days, number of faults per 100 subscribers per month, time taken to
42 repair faults, and time taken to shift connections and closures.
b) Cellular operators are providing much better quality of service than their Telecommunication
Services
basic counterparts. Fierce competition in the cellular market has forced
operators to constantly keep improving their networks, resulting in
acceptable levels of service. The key concern areas for CDMA operators
are billing complaint incidence, billing complaint resolution and fault
incidence, in that order. The performance of the CDMA operators on
the remaining parameters is good.
The details of QOS regulation and detailed reports on surveys conducted are
available on TRAI’s website : www.trai.gov.in
Activity 3
As a user of telecom services, try to evaluate the service quality of your
service provider(s) based on the parameters given in this section.
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17.7 SUMMARY
This unit gave you an overview of fixed line and cellular mobile industry in
India. There has been a significant growth in the Indian telecom market during
the last few years. A number of steps have been taken by the Indian
government which have resulted in a dynamic change in the competitive
structure of the industry. The unit outlines the steps taken and analyses the
competitive structure prevailing in the industry. Issues related to pricing (tariffs)
have been discussed in detail. The unit ends with the service quality parameters
relevant to telecom service providers.
1. Discuss the major trends in the growth of telecom sector in India during
the last few years.
2. What are the important issues that should be kept in mind while deciding
on the pricing issues for telecom services?
3. Explain the nature of competition prevailing in the telecom industry in India.
What are its implications for the telecom firms?
4. What is bundling? Why do you think bundling has emerged as an important
aspect of customer pricing, especially in context of telecom service
provision inIndia. Do you think bundling is always in customer interest?
Give Reasons.
5. What are the service quality parameters for basic telecom services and for
cellular mobile services? Why have such parameters been introduced by
the regulatory authority?
43
17.9 APPENDIX
Appendix 1 : Chronology of Indian Telecom De-regulation
Year Event
1992 Bids invited for radio paging services in 27 cities
Bids invited for cellular mobile services in four metro cities
1994 National Telecom Policy announced
Radio paging, V-SAT data services, electronic mail services, voice – mail
and video – text services opened to private providers
DoT guidelines for private sector entry into basic telecom services in the
country
Eight cellular licensees for four metros finalized after over two years of
litigation
1995 DoT calls for proposal to operate basic, cellular telecom services and
public mobile radio trunked (PMRT) services
DoT receives bids for basic, cellular and PMRT services
Most cellular operators in circles sign license agreements
DoT announces cap on the number of circles basic operators can roll out
services in. Licensees selected for five circles.
1996 After setting reserve prices for circles, DoT invites fresh bids for basic
services in 13 circles
Five successful bidders short-listed for providing basic services
Poor response to third round of basic telecom bidding. Only on company
bids - for Madhya Pradesh.
Selected bidder of first round refuses to extend bank guarantees for its
four circles. Challenges in court DoT move to encash guarantees.
Three more companies move court against DoT move to encash
guarantees.
1997 Telecom Regulatory Authority of India (TRAI) formed.
First basic telecom service company signs license and interconnect
agreements with DoT for Madhya Pradesh
Second basic service provider signs basic telecom license pact for Gujarat
TRAI quashes DoT move to increase tariffs for calls from fixed-line
telephone to cellular phones
VSNL calls for global tenders to find a partner for its South Asian
regional hub project
Internet Policy cleared; license agreement for basic services in
Maharashtra also becomes operational
Basic service licensees for Andhra Pradesh and Punjab sign basic telecom
agreements with DoT.
1999 TRAI Issued First Tariff Order.
New Telecom Policy announced.
TRAI Issues First Regulation on Interconnection and Usage Charge
Conditions for migration to revenue sharing from fixed license fee regime
issued
Cellular operators allowed the use of any digital technology;MTNL
given a license to provide cellular mobile service under these flexible
technology conditions.
2000 Ordinance promulgated divesting TRAI of adjudicatory role. TDSAT
created to settle disputes between licensor and licensee. Appeals against
TRAI decisions to be heard by TDSAT.
TRAI implements second phase of tariff re-balancing
44
Telecommunication
Policies announced for easier entry/operation of new service providers in
Services
the various sectors, e.g., VSAT, PMRTS, Radio Paging, Unified Messaging,
Voice Mail
Government has allowed the setting up of international gateways to
private internet operators
Guidelines for Issue of Licence for National Long Distance Service
Guidelines for Issue of Licence for Cellular Mobile Telephone Service
2001 Guidelines for Issue of Licence for Basic Telephone
Convergence Commission of India Bill laid in Parliament.
Open competition policy announced for International Telephony Service
Usage of Voice Over Internet Protocol permitted for international telephony
service
First License for National Long Distance service signed
Launch of WLL(M) services by Basic service provider in the market
2002 Guidelines for Issue of International Long Distance Licence
First License for International Long Distance service signed
First private operator begins ILD service
TRAI revises tariffs for WLL(M)
TRAI leaves Cellular tariffs to market forces, service providers to notify
their Reference Tariff plans
TRAI introduces the Reference Interconnect Offer (RIO) regulation
TRAI introduces Regulation on Quality of Service For VOIP Based
International Long Distance Service
2003 TRAI introduces the Telecommunication INTERCONNECTION USAGE
CHARGES (IUC) Regulation
TRAI leaves NLD sector left under forbearance subject to a ceiling tariff
TRAI leaves ILD sector left under forbearance
TRAI mandates Basic Service Operators (BSO) to be non-discriminatory in
provision of Infrastructure facilities to ISPs
TRAI gives its recommendations on unified licensing for basic and cellular
mobile services
TRAI gives its recommendations on “WLL(M) Issues Pertaining To TRAI
Based On HON’BLE TDSAT’S Order
TRAI Forbears Basic Service Tariffs Except Rural Tariffs
45
Sectoral Applications-II Appendix 2 : Key Features of NTP 99
Some of the notable advances marked by the NTP 99 are as follows:

Speeding up competition in long distance, including usage of the existing
backbone network of public and private entities in Rail transport, Power
and Energy sectors for data (immediately) and for domestic, long-distance
voice communication when the latter is opened to competition from
January 2000. This increases the scope for entry of a new category of
‘infrastructure providers’ or ‘carrier’s carrier’.
Fixed Service Providers (FSP) shall be freely permitted to establish ‘last-
mile’ linkages to provide fixed services and carry long-distance traffic
within their service area without seeking an additional licence. Direct
interconnectivity between FSPs and any other type of service provider
(including another FSP) in their area of operation and sharing of
infrastructure with any other type of service provider shall be permitted.
Policy to convert Public Call Offices (PCOs), wherever justified, into
Public Teleinfo centres having multimedia capability like Integrated Services
Digital Network (ISDN) services, remote database access, government and
community information systems etc.
Transforming, in a time-bound manner, the telecommunications sector to a
greater competitive environment in both urban and rural areas providing
equal opportunities and level playing field for all players.
Strengthening research and development efforts in the country and provide
an impetus to build world-class manufacturing capabilities.
Achieving efficiency and transparency in spectrum management.
Commitment to restructure DoT.
Interconnect between private-service providers in the same Circle and
between service provider and VSNL along with introduction of competition
in Domestic Long Distance.
Undertaking to review interconnectivity between private-service providers
of different service areas, in consultation with TRAI.
Permission for ‘resale’ of domestic telephony.
Clarity regarding number of licenses that each operator may be granted.
(This could lead to consolidation of industry operators over the long term).
Emphasis on certain other issues including Standardisation, Human
Resource Development and Training, Disaster Management and Change in
Legislation.
46
UNIT 18 PRODUCT SUPPORT SERVICES
Objectives
understand the concept of product support services;
describe the different categories of product support services;
explain the service quality issues related to product support services; and
apply the key learning to the case study given at the end of the unit.
Structure
18.1 Introduction
18.2 Characteristics of Product Support Services
18.3 Classification of Product Support Services
18.4 Goal of Product Support Services: Customer Satisfaction
18.5 Summary
18.7 Case Study
18.1 INTRODUCTION
In this unit, you will be able to understand the concept of product support
services which is important for goods as well as services marketers. After
sales Service is normally referred as customer service. Customer service is a
philosophy in which all employees feel and act accountable for creating satisfied
customer. Value added customer service is the responsibility of all the
employees of the organization. Accountability is vital to customer service and in
a successful service oriented organization every one is accountable for the
customer satisfaction. It is the job of every marketer to create satisfied
customer.
In many organizations product support service or customer service is a

department or a section where customers with complains are guided for a
reactionary solution to the problem that he experiences with the use of the
product. Customer services or after sales service should be an attitude of the
organization. It should become a part of the corporate culture .It should be the
fundamental aspect of a business philosophy and should be a commitment to
ensure that customers leave more excited than when they walked in the door.
A popular saying is that advertising brings customers to the stores where as
poor customer service takes them away from the store and the brand.
The product support service is a value-added service to match the customer

expectations. It is also necessary to know what consumer’s value in the
product support services. They can be grouped as quality, availability, knowledge
of the people with whom they work, ease of doing business, support services,
performance of the product, follow through by the people with whom they deal
and the price. All these elements are more important to the consumer than the
element of price in a post purchase situation. So though the performance of the
product support service staff one can also increase the profitability and profit
potential of the organization.
There are various myths about product support services and their lesser
relevance in the Indian context. They are because Indian marketers think that
good customer service is time consuming. The research speaks otherwise. It
47
Sectoral Applications-II says that getting a new customer takes more time than getting more business
out of an existing and satisfied customer. Some people are of the opinion that
serving existing customers is expensive. Quality gurus are of the opinion that
35% of the customer complaints are about the poor quality of the service
delivery than the customer complaints on product performance or the price of
the product. There is a high sense of gratification among managers and they
often tend to forget that the expectation of the customers increase over a
period of time. It is always prudent to benchmark against evolving customer
service expectations than benchmarking against competitors in the industry. In a
surplus demand market, the marketer does not care for the concept of
customer service as he realizes that the customers are going to come to them
anyway. A strategic outlook to the business will always goad managers to look
at customer service as a strategic tool than a complaint management system in
the organization.
Many a times companies have a philosophy of properly serviced. It means:

Identify customer service needs requirements.
Develop appropriate products and services to meet those needs which are
consistent with your business strategy and profit objectives.
Match the product to the needs, with appropriate prices, channels of
delivery, presentation and communication to the consumers.
Develop and maintenance a continuous service process for the target
customers.
Activity 1
Visit an after sales service station of any consumer durable, and conduct an in
depth interview of the customers on what constitutes ‘after sales service’ and
how are they satisfied with their products
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18.2 CHARACTERISTICS OF PRODUCT SUPPORT

SERVICES
Most companies in manufacturing and service business offer their customers a
package of a product called a solution, which is a combination of the core
product and a variety of service related activities. These services provide the
differentiation that separates successful firms from the also-rans. Performing
well in service delivery requires modern marketers to understand.
What action and reaction consumer expect from the organization.
Grouping of these actions in to core and support service elements.
Evaluate how well the organization is performing on each one.
Redesign existing service packages in order to offer customers in each
target market segment a product offering and delivery system that meets
their expectations for performance and value within the constraints of a
price that will allow the service provider to have an allowable profit.
The concept of an augmented product is an explanation of the package of

services that are bundled with the core and tangible product as a complete
offer to the consumer. According to Theodore Levitt “ We live in an age in
48
which our thinking about what a product or a service is must be quite different Product Support
Services
from what it ever was before. It is not so much the basic, generic central thing
we are selling that counts, but the whole cluster of satisfactions with which we
surround it.” According to Levitt, the total product concept consists of core or
generic product; the inner band surrounding this core is termed as expected
product, representing customer’s minimal expectations, It includes pricing,
delivery, appearance of facilities and personnel, personality of the service people
and so forth. The next encircling band is called the augmented product which
includes further benefits, added to enhance the appeal of the product; as the
market becomes accustomed to specific augmentations, these may eventually
turn to the expected product level. The area encircling the outermost concentric
band is called the potential product. Which consists of everything potentially
feasible to attract and hold customers in contrast to the augmented product that
means everything that has already been done to the product.
Shostack distinguished between the tangible and intangible elements involved in

service delivery. For example in an airline business, the intangible elements
include transportation itself, service frequency and preflight, in-flight and post
flight services. The aircraft, food and drinks that are served are tangible. By
highlighting the tangible components marketers can determine whether the
organization is tangible dominant or intangible dominant. The performance of
each service influences the quality of the others, the product support services
should contribute to the over all service perception. It is necessary to obtain
information about consumers over all satisfaction on core as well as split
services. Management must decide what is the right set of support services to
be offered to the customers. Decisions can also be made to unbundle the
prices by charging for each set of services after the period of warranty is over
for an extended product support service.
18.3 CLASSIFICATION OF PRODUCT SUPPORT

SERVICES
Product support services are broadly classified in to the following eight
categories.
Product Support Services
Information Consultation Ordering Hospitality
Safekeeping Exceptions Billing Payments
1. Information: New customers and prospects need information to make

decisions about a product. They want to know what product will best meet
their needs. The existing customers also need information regarding the
usage, maintenance of the product during the life of the product. The
prospects in on line buying also need information that will guide them to
move to the site that will provide information to them. Traditional ways to
provide information is through the support literature, printed notices, flyers,
brochures and instruction books. Current methods include videotapes,
compact disks, software driven tutorials, touch screen video display,
computer accessed bulletin boards and menu driven recorded telephone
messages.
49
Sectoral Applications-II 2. Consultation: Providing information suggests a simple response to
customers’ questions. Consultations involve dialogue to probe customer
requirements and then develop a tailored solution. The services under
consulting covers advice, auditing, personal counseling, tutoring and training
in product usage, managing or technical consulting. The solution selling
approaches by software measures is an example of technical consulting in
software markets.
3. Order Taking: Once the selling process is over, acceptance of
applications, orders, reservations are components of order taking. Unless
the service organization is accessible to its customers the real business
may not happen. Some service providers establish formal member
relationships with customers like Insurance companies and utilities, credit
card companies and clubs. A reservation is a special type of order taking
which entitles customers to a special type of order taking. Examples
include the airlines, cinema halls, and restaurant tables.
4. Hospitality: Certain service requires customers to enter the service
factory and stay there till service delivery is complete. Well-managed
businesses try to treat the customers as guests. Examples of hospitality
elements include greeting, food and beverages, toilets and wash rooms,
bathroom kits, waiting facilities and amenities, including lounges, waiting
areas, seating facility, weather protection, magazines, entertainment and
newspapers, transportation and securities. Airlines, Service stations,
personal service providers follow this kind of an orientation in business.
5. Safekeeping: While visiting a service site customers want assistance with
their personal possessions. Unless certain care taking services are provided,
they might find the support services infeasible. The examples of
safekeeping include provisions for the coatrooms, baggage transport,
handling and storage, safekeeping of the valuables and childcare and pet
care. The second category of safekeeping involved the physical delivery of
goods when the consumers buy them over phone or Internet. Support
services of this nature may include packaging; pick up, delivery, assembly,
installation, cleaning and inspection. Customers buying consumer durable
are also looking for safekeeping in the form of maintenance and warranty
and whether they can purchase the maintenance contract as a part of
insurance.
6. Exceptions: It includes a group of services that fall outside the routine of
the normal service delivery. The exceptions include special request where
individual or corporate customer may request some degree of customized
treatment that requires a departure from the normal operating procedures.
Advance requests include personal concerns related to stages in life cycle
or personal disabilities. Problem Solving involves situations when normal
service delivery fails to run smoothly as a result of accidents, delays,
equipment failures or customers experiencing difficulty in using the product.
Handling of complaints/suggestions/complements requires well-defined
procedures. When the consumer wants to express dissatisfaction, offer
suggestions for improvement, or pass on compliments, it should be easy for
the customer to do so and the service provider should be able to respond
at the earliest to these problems. Restitution is the process by which the
customers are redressed. Customers expect to be compensated for serious
performance failures. This compensation may take the form of repairs
under warranty, legal settlements, refunds, an offer of free service in the
future or other forms of payments in kind.
7. Billing: It is common to almost all services unless the service is provided
free or as a part of the deal. Inaccurate, illegible or incomplete bills offer
an opportunity to disappoint customers. Billing should be also done timely
so that it will result in faster payments. Various forms of billing procedures
50 exist including verbal billing practices to machine driven billing procedures
and online billing procedures. Different kind of billing services include Product Support
Services
periodic statement of account activities, invoices for individual transactions,
verbal statements of amount due, machine display of amount due, self-
billing by the customer and the online billing.
8. Payments: A bill requires a customer to take action on payment either on
personal basis or through the bank advice. Customers expect ease and
convenience of payment including credit when purchasing goods. The
payment elements include self service, direct to payee or intermediary,
automatic deductions from financial deposits and control and verifications.
The self service include exact change in machine, cash in machine with
change returned, insertion of prepayment cards, insertions of tokens,
electronic fund transfer, mail a check. Direct to payee or intermediaries
include cash handling and change giving, check handling, credit charge,
debit card handling, coupon redemption, tokens and vouchers etc. Control
and verification include automated systems like machine-readable tickets at
entry gates and personal systems like gate controllers and ticket inspectors.
You will appreciate that the eight product support services explained above are
important not only for the services marketers but for the marketers of tangibles
goods as well (Also, It is possible to outsource many of these services). In
mature industries the core product becomes a commodity. The competitive
advantage is derived out of value creating support services that surround the
core product and is used for creating differentiation. Customer satisfaction is
the measure and goal of an effective customer service program.
18.4 GOAL OF PRODUCT SUPPORT SERVICES-

CUSTOMER SATISFACTION
Customer satisfaction occurs when the performance meets customer
expectations. In a competitive environment, with frequent new product
introduction, merely meeting expectation may not be sufficient Organizations
that challenge themselves to exceed rather than meet expectations are more
likely to pleasantly surprise their customers, cement loyalties, and invest in
developing new products and processes that enhance customer value. The
‘exceed’ definition is compatible with the definition of customer satisfaction –
meeting the customer’s stated and latent requirements. Customer expectations
are a function of the past experience with the company’s products and
competitor’s products and communication messages from the company and its
competitors. If expectations are hard to match then performance is much more
within the company’s control for managing customer satisfaction level. The
organization first identifies the components of product or service performance
that are especially valued by its target customers and then deliver superior
satisfaction on those dimensions.
Activity 2
It is said that most of the Indian organizations provide very poor quality of after
sales service. Make it a point to visit a petrol pump, a multi brand outlet of
refrigerators and a company showroom of a motor cycle company and conduct
an interview with each of the service managers by asking a question “what is
the meaning of customer satisfaction for their organization and how do they
measure it with their customers.”
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51
Sectoral Applications-II Quality is a concept related to the attitude of the customers and their
comprehensive evaluation of the product support services. It is built up from a
series of evaluative experiences of the service delivery of the organization to
the customers. The quality of a product support service can be only accessed
after the service is consumed. The assessment of the quality of the service is
made during the delivery of the service and encounter of the customer with the
service personnel. Customer satisfaction with service quality can be defined by
comparing perceptions of service received with expectations of service desired
by the consumers. When the expectations exceeded, service is perceived to be
of exceptional quality and also to be a pleasant surprise. So dimensions of
service quality refers to process quality as judged by consumers during service
and output quality judged after a service is performed. Parasuraman, Zeithaml
and Berry suggested that the criteria used by consumers that are important in
molding their expectations and perceptions have five dimensions viz. Reliability,
Assurance, Responsiveness, Empathy and Tangibles. These have been
discussed in detail in Unit 8 on Service Quality.
There are four key factors that can influence a customer’s expectations, which
may help customers in shaping their expectations of a support service
Word of Mouth Communication: This is the communication that flows
from one person to another in a social loop and helps in formulating
service quality perceptions.
Personal Needs and Preferences: The relative importance that the
person gives to the product support service as an essential part of the
offer also influences the service perception
Past Experience: The customer expectations also depend upon past
experiences with the service provider of the customer.
External Communications: External communication like advertising, public
relation and other publicity tools also influence the quality of service
perception
There are various issues involved in the quality of product support service
productivity. The managerial task is to transform the service inputs in to
outputs, to bring a balance between the productivity of services and quality of
services. If the productivity will increase then there is a chance that the quality
will be compromised. Productivity helps to keep the costs down as lowering
prices helps in building the market and compete better. Higher productivity
helps in generating additional revenue that helps in enhancing marketing budget
and program and rising profits helps in investing in innovative product support
programs. Quality helps in gaining competitive advantage particularly in a
commodity market where every product looks similar. It also helps in increasing
customer value that contributes towards improving the bottom line. The quality
of the product support service is measured by three parameters. They are
efficiency, effectiveness and productivity. Efficiency is a comparison to a
standard, which is usually a time-based phenomenon that explains how long the
employee, takes to perform the service function. Effectiveness is the degree to
which the firm is meeting its goals where as productivity is the financial
valuation of output to inputs i.e. consistent delivery of output desired by
customers should command higher price.
Leading service and consumer durable companies measure the gap between the
customer’s expected supports services against the perceived services as a
routine feed back process. Zeithaml, Parasuraman and Berry developed a
model which suggest that customers becomes dissatisfied when their
perceptions about service performance don’t match their expectations and the
model explains five gaps that can lead to customer dissatisfaction. The Gaps
52 Model has been explained to you in Unit 8 (Block 3).
Activity 3 Product Support
Services
From the activity 1 and activity 2 study build up the service quality diagram of
the automobile company and identify the key gaps for the dealer.
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18.5 SUMMARY
In this unit we have essentially looked in to the issue of product support
services for the organizations. The complete product solution constitutes an
intangible component to augment the physical product in the form of product
support service. The objective of any product support service is to create a
satisfied and loyal set of customers who will rebuy the product as well as get
involved in cross selling and up selling. These customers will also play the role
of an advocate for the product. Product support services augment the core
product by delivering higher quality. There are various types of product support
services like information, ordering, hospitality, safekeeping, exceptions, billing and
payments. These services help in building higher level of customer satisfaction.
The level of satisfaction largely depends on the type and quality of services
provided to the customer. Research has identified five key and independent
dimensions of service quality. They are reliability, responsiveness, assurances,
empathy and tangibility of services. A service provider has to give attention to
these dimensions failing which there can be service quality delivery gaps.. A
suitable understanding of the service quality gaps can help a manager to
develop strategies to maintain service quality and achieve greater customer
satisfaction.
1. Describe the concept of product support services? What is the importance

of these services for marketers of tangibles?
2. What are the various kinds of product support services? Discuss with the
help of examples.
3. What is the goal of any product support services and what dimensions can
lead to an effective service quality delivery?
18.7 CASE STUDY

Customer Satisfaction Program
Of DBCL
DBCL is a multi crore company in Indian market. The company markets a

wide variety of products in the market. It started as a small company during
pre-independence India and was marketing locks for the mass market. Over the
years the company has grown into a large corporate house and markets a
range of products starting from the locks to refrigerators, edible oil, office
equipments and furniture, manual and electronic typewriters, store wells and
computers in Indian market. The company has a sister concern which
concentrates in to soaps only and is a leading player in the Indian soap market.
They manufacture and market both washing soaps and bathing soaps. The
company has its headquarter in Mumbai, the commercial capital of India.
53
Sectoral Applications-II Mr Chintamani Rao is the CEO of the computer and office equipment division.
Recently the company has conducted a study and has identified that
multinationals and some Indian joint ventures are making inroads in to its
office equipment and furniture division. Traditionally they were the market
leader in this segment and for long they have a premium image as the
quality producer and supplier of the office equipments and furniture. They
were the number one player in the typewriter market, be it electronic or
manual but due to rapid adoption of computers, the typewriter market has
undergone a change and there is a large-scale switch to computer typing and
printing from the traditional typewriters. The company could foresee this well in
advance and decided to launch computer and office equipments for this
emerging market segment in Indian market. They started an ambitious program
to become the market leader in the office equipment and computer business in
the early 1999.
They could find out from customer survey that the erstwhile customers are
frustrated with the quality of services provided by the product support service
staff in the company. They lost significant amount of the market share to the
new multinationals like IBM, Compaq, HCL, Zenith and some local
manufacturers. Taking quality and customer satisfaction as the strategic goal
and undertaking cost reductions, restructuring of the organization and
introduction of new products, DBCL could fight back the market share war
and increased market share by 7% in the office equipment and computers
division in three years period of time. They were in the process of gaining
almost 2% market share every year since 1999. Leadership through quality
service has been the motto of the company and customer satisfaction has
become the mascot of the company over these years reflected in all the
activities in the organization, be it strategic or tactical. In June 2003 Mr
Chintamani was reviewing the customer satisfaction program at DBCL and
was seriously considering with ideas to make changes in the existing product
support service and consumer satisfaction program or modify any of the
existing programs for better service delivery.
The Office Computer Market In India
The penetration of personal computers in Indian market has been very slow at
the household level. The total sales were confined to the upper class Indians.
Various factors are attributed to this phenomenon. The disposable income level
of average Indian, the concentration of the purchasing power in urban centers,
the level of adoption of computer education in the school and college curricula,
the career opportunities in the filed of computers, application of computers and
computer related technology in the business domain are some of the factors
that contributed to the poor penetration of personal computers at the household
level. However there was a big change happening in the business area.
Companies were eager to leverage the benefits of the liberalization and working
very fast to catch up business to cater to the global volumes. Many
multinationals entered in to the Indian market through both organic and
inorganic route. There were takeovers and buyouts in Indian markets where the
multinationals were buying Indian companies with substantial business presence
for inorganic growth.
Large corporate houses were either undergoing joint ventures or increasing their
market presence by expanding and restructuring their organizations to suit to
the liberalized competition. These kinds of anthromorphic changes made the
companies to invest substantially in information technology infrastructure. There
were two kinds of investments seen in the organizations viz. huge investments
in procuring the hardware and also for procurement of software.
54
Market Segments and their Characteristics Product Support
Services
It was this kind of investment on hardware where DBCL saw an opportunity to
grow with its office equipment and computer business. The total market for
office equipment was largely divided in to three tiers. The low tier represented
the market where people were buying computers to support their business.
These are the people who were in to the business of providing services of
typewriting, photocopying and was a captive market for DBCL for a long time.
But this market was price sensitive and gave lesser value to the concept of
product support services. So local small time vendors who were doing assembly
of components and selling computers at a lower rate and providing after sales
service locally were a big threat to the DBCL market which was selling
products with a higher price tag compared to the assemblers in the local
markets.
The mid tier consisted of offices whose requirements were more than ten but
less than twenty-five personal computers. These business houses were
conscious about quality but were not ready to depart a large sum for the
concept of product quality and superior service. Mostly, industry treated them
as also ran customers. There were low end players like Zenith, Piramals in
western Indian market, Monosoft in the eastern Indian markets and few of the
Korean majors (other than LG and Samsung) playing a mid price and average
service game in this market. These players targeted majority of small and
medium business. There was a price advantage in these markets for the
medium operators where their brand name did not play any role.
The top tier consisted of large corporate houses who were going for a large
scale investment and information technology restructuring in their organizations,
not only by buying hardware but also investing substantially on software,
operating systems, servers and solution providers like SAP and other supply
chain and customer relationship management software. The companies were
investing heavily and they were quality conscious. They were giving high
importance to the product support services in their purchase decision due to the
simple fact that their business model was more driven on information
technology platform, so a longer downtime of the systems means loss of
business and chaos in business operations.
The companies were looking for quality product support services as the key
differentiation in business due to high level of commoditization in the hardware
product market. Profit margins in this market were quite high, so also the
demands of product support services. Many companies were providing different
kind of warranty schemes also to attract the customers including onsite service
by the vendors. DBCL looked in to this market for quality hardware provider
because the company was perceived as a quality player when there were no
computers in the office equipment market.
The Nature of Competition
The market was highly competitive. At the low end were the unbranded local
players who were providing excellent support services due to the small market
size and closeness with the customer and the price advantage. On the mid
segment the customers were bargain hunters and expect everything under the
sun as a part of the deal. A large number of national and Indian players were
operating in this segment. This market was purely a commodity market and
decisions were made on the basis of price though they valued customer service
and after sales support as important. The top end of the market was quality
conscious and was mostly dominated by players like IBM, Compaq, Apple, Dell,
LG, Samsung, HCL and of course DBCL. The customers were more sensitive
to services and valued the quality and type of service as the key differentiator
before making a purchase decision. 55
Sectoral Applications-II DBCL saw an opportunity to grow in this market and regain its market share
but Mr Chintamani from his market visits was not sure about the perception of
customers about the product support services provided by DBCL to the existing
customers. He was of the opinion that the best way to enter in to this market
is to provide the computer related products to the existing customers who are
using DBCL products in their offices. He was sure they can use the same
concept of “office face lift” that they were using for marketing office furniture
including and cabinets and separators with a proposition of giving a modern
look to the office for marketing computers.
He had a faint idea that the customers don’t perceive the company was quality
service provider. He was curious to know what were the reasons for which
DBCL was perceived the way it was. He decided to conduct a marketing
research on these issues and in order to get a neutral view contacted Prof
Tapan K.Panda (TKP) of Indian Institute of Management Kozhikode (IIMK) to
conduct a survey on the perception of customers on DBCL as a quality service
provider. The research report revealed horrible stories about the company.
People perceived DBCL as a traditional organization still living in the pre-
liberalization era. They are of the opinion that customer care department was
not prompt enough to respond to their complains and the grievances were
redressed after a long period of time. This has spoiled the goodwill of the
company as a good service provider. Historically the low wend of the market
was serviced by the dealers and distributors and the high end of the market by
the company service personnel. The perception of the customers about DBCL
as a quality service provider has eroded over years.
So the priorities for the company in its new vision statement was to achieve a
higher return on investment, market share and customer satisfaction. The earlier
customer satisfaction program brought this into light that customer satisfaction
was not a priority of the company as they were operating in the same mindset
of pre-liberalized era. Mr Chintamani was convinced that customer satisfaction
goal can itself bring more closer to the other two objectives. He announced
customer satisfaction as the sole goal of the organization in a series of
meetings and discussions platforms in the organization. He issued a set of
guidelines and requirements to make customer satisfaction as the key goal of
the organization, to all its operating units. Operating units were asked to
prepare their own strategies to achieve the goal of customer satisfaction
through voluntary quality circles. He insisted that a common and uniform
measure should be used across the country for measurement of customer
satisfaction.
The units were allowed to conduct their own market survey, asking different
questions on the dimensions of service quality as briefed by Zeithaml,
Parasuraman and Berry (See Unit 8). The external corporate goal was to cross
all the competitive benchmarks in the industry and the internal goal was to
improve the service quality five times over two years from the current level on
all the dimensions of quality. The top managers were trained to become quality
leaders and role models for the subordinates on service behavior to the
customer. They should personally take the lead and satisfy customer
requirements and resolve customer complaints by themselves.
It was also the responsibility of all the executives in the hierarchy to develop a
responsive mechanism and attitude at each level towards customer problems.
Each customer interaction was treated as an opportunity to enhance the
experience of customers with DBCL. Customer relations groups were initiated
at each level to have direct customer contact and do the follow up for finding
out reasons of customer dissatisfaction and to resolve customer objections at
56 the earliest. The perceived benefits of the customer relations groups were to
stay closer to the customers, having a cross functional outlook to customer Product Support
Services
issues and having a closed loop process to identify problems, to conduct a root
cause analysis, and provide recommendations for avoidance and elimination of
the customer problem. The staffs at the local level were empowered to take
collective action for enhancing customer satisfaction.
Attempts were also made to establish customer support teams for post sales
follow up and customer complaint management systems across the organization.
The customer satisfaction were measured by the external customer satisfaction
data collected through a mail questionnaire method from the customers who had
obtained services in a month time from the service personnel and internal
quality workshop improvement programs done at various levels of the
organization. The external data collection was done through periodic survey,
new establishment surveys, opinion of the decision makers as well as that of
the users of the products collected across the industries to measure the
universal application of the customer satisfaction program. The internal measure
of the customer satisfaction and service delivery was done by analyzing and
bench marking the processes and standards set for the purpose. All the
research results were made available to the service employees to build their
awareness and commitment to the customer satisfaction program and invite
their recommendations to bring improvements in the level of customer
satisfaction.
Summer of 2003 and The Future
Mr Chintamani could find out that the customer satisfaction program in DBCL
has brought very good results but he was planning to take the strategy further
and delight the customer by outsmarting the competitive benchmarks through
the introduction of a new customer guarantee program. This satisfaction
guarantee program will lead to greater customer satisfaction and higher loyalty
rate among its existing customers helping them for cross selling and up selling
the new innovative products of the office equipment division. It wanted to come
out with a guarantee program that will be difficult for the competitors to
compete. (You may also refer to Unit 10 wherein issues related to service
guarantees have been discussed)
Many senior managers are of the opinion that they should come out with
money back guarantee program, which is based on a proposition that if one is
not satisfied with the product or service, he can return the product, and take
back the money.
Others are of the opinion that service guarantee will be a better option which is
based on a proposition that if the machines are not operating as per the
promise then the customer will receive five to fifteen percent off in the next
deal.
The third option is a product performance guarantee in which the proposition is

that if the machine does not perform as per the specifications for the period of
warranty, then the whole unit shall be replaced at no charge.
The fourth option is a product fit guarantee in which the proposition is that if
the product does not fit to the promised level during the period of warranty
then the customers can trade it in for full credit towards any other product as
desired by the customers.
All these options were quite unique in the Indian market and if the customer
satisfaction programs are not properly executed then may cost very heavily to
the company. Yet Mr Chintamani was sure that the board will definitely
approve the idea that quality of the customer service should be the 57
Sectoral Applications-II differentiator in the market where customers are quality conscious and market
is slowly moving towards commoditization. It is the over all experience of the
solution and not the physical features of the product that will drive the brand
value and business profit in the future.
IIMK conducted research for DBCL on the above propositions. They

conducted both qualitative research through focus group and in depth interview
of the existing customers and a personal survey in selected cities of India
having corporate headquarters of large concerns. Some key issues came out of
the study that include the credibility of a guarantee program. Customers are of
the opinion that any body can offer a guarantee program but customers will
look at the credibility of the organization offering the guarantee in terms of its
capability in delivering it and its past practices and intentions in delivering it to
the customers. The length of the guarantee is also an important factor. If the
guarantee is for a year or two then in a durable like computers and office
equipments, it is treated as a sales plea. If it is offered for a longer period of
time then the customer must be indirectly paying a premium for the purchase.
For the service guarantee, the time taken to respond to the customer’s problem
and the down time of the machine at the customer’s point will be the deciding
factor. The money back guarantee is a low commitment from the supplier as
the supplier wants to escape the route of providing the quality after sales
service through paying the cash back to the consumers than solving the
problem. Again the dissatisfied customer will walk to the competitor with the
cash for a deal and companies will lose the opportunity of generating business
from the customers. The product performance guarantee should be provided at
the customer’s request than by the company policy and company should not
ask any questions for the same service. The product fit guarantee was not
found suitable among many customers, as they do not want a machine
replacement rather, they prefer the machines to function properly and without
much trouble to the organization.
Mr. Chintamani dropped the idea of money back guarantee as it shows a lower
commitment to the service quality and he also decided against the product fit
as it was not preferred by customers. A guarantee program should not be a
replacement program. It should be a strategy of building relationship and
commitment being responsive to the customer problems. The service guarantee
should be linked to the response time and the performance guarantee to decider
of the product performance standard. In majority of the Indian organizations,
the performance guarantee was decided by the supplier and manufacturer, Mr
Chintamani is thinking whether this can be left to the consumer to decide the
level of the performance guarantee, which can be put to the market as a value
differentiator for higher customer satisfaction. He has to suggest what kind of
customer guarantee program DBCL should offer to the market.
Questions
1. What problem DBCL is facing in this case? What factors have contributed
to such a situation for the company?
2. Evaluate the options available to Mr. Chintamani for developing the
customer guarantee program?
3. Should Mr Chintamani decide in favor of performance guarantee program?
If yes then develop a customer guarantee program for DBCL?
4. What kind of internal orientation is necessary in the product support
service department for making your suggestion a successful strategy in
building customer loyalty and goodwill for DBCL?
58
UNIT 19 CASE STUDIES
This unit consists of two cases- ‘Is the Customer Always Right?’ and Dosa
King’.
CASE 1: IS THE CUSTOMER ALWAYS RIGHT?

Objectives
After going through this case you should be able to:
identify the main issue in the case;
analyse the facts of the case to comment upon the issue in the case;
provide suggestions for decision making in relation to the main and
attendent issues in the case.
After reading the case, try to attempt the following.
Discussion Questions
1) Do you think the customer in this case is justified in making the kind of
complaints he did? How do you interpret the difference between the
accounts rendered by the customer and the Assistant Branch Manager?
2) Give suggestions to resolve the matter between the customer and the
insurance company.
Case
On August 28, Mr. Gurucharan Singh joined as Regional Manager, ABC
Insurance Company (AIC), Chandigarh. As he had risen through the ranks, he
had a lot of experience behind him. His recent two visits abroad had
completely changed his perspective of services marketing. “There is a lot to be
done in the service sector in India” - was his conviction. With this objective in
mind - the day he joined as the Regional Manager, he called a meeting of all
Divisional and Branch Managers, to share his views on “Challenges for
Insurance Industry”. Since then, all was going fine until he received an angry
letter (Exhibit 1) from Mr. Chawla who was disgusted with the working of the
company and with the behaviour of an Assistant Branch Manager (ABM) of
one of the branches of ABC Insurance Company. To respond the customer
complaint he marked the letter to the ABM for his comments. The reply came
back (Exhibit 2). After reading the observations made by the ABM he raises
his head and wonders–who is right? Where should the company draw the line
on compensation and service? What is the best way to handle cases of
complaining customers? He thinks for a while and then reacts. He has a few
challenges ahead.
EXHIBIT 1
The Regional Manager

ABC Insurance Company Ltd.
Chandigarh.
Sir,
I am angry, frustrated and a disappointed ex-customer of your company. Prior

to the recent set of events, which have really put me off, I viewed your
company to be the best. Hence, although your company’s Branch Office is far
off from my place I opted doing business with you. Not only have I insured my
59
Sectoral Applications-II vehicles—a car and a scooter—with your company, but am also a holder of
your household and mediclaim policies.
It all happened this way:

July 28: Your Development Officer, Mr. R.K. Singh came to my place and
informed me that the insurance policies of my car and scooter expire on July
30, hence, have to be renewed. As I was satisfied with the service of your
company I drew post dated cheques of July 30 in favour of the Branch
Manager, AIC, and handed it over to Mr. R.K. Singh. I also requested Mr.
Singh to hand over the cover note of the policy to my son as I was to be out
of station between July 30 and August 5.
August 6: On my return to Chandigarh on 6th evening I enquired from my

son about the cover note of my renewed policy. I was told that he has not
received any policy or a cover note from Mr. R.K. Singh.
August 7: On August 7 I rang up your branch office and enquired for

Mr. R.K. Singh. I was told that Mr. Singh is in the field and the Branch
Manager is on one month leave ending on August 30. The same day my son
met with an accident. Although he escaped unhurt, my scooter was badly
damaged. As Mr. Singh had neither given us the covernote of our renewed
insurance policy nor had he intimated us anything about it, my worry now was-
whether my scooter was insured on July 30 or not?
August 8: I did not attend my office and went to your branch office. I waited
there for two hours until Mr. R.K. Singh showed up. On enquiring whether my
vehicles were insured on the 30th of July or not, he very apologetically
informed me that although the policy was drawn on the 30th of last month it
could not be delivered, as he was extremely busy with his sister’s marriage. I
thanked my stars that the policy was issued prior to the accident. I appraised
Mr. Singh of the accident and requested him to send his surveyor to assess the
loss. Mr. Singh assured me that the surveyor will reach my place the same
evening. Sir, the surveyor did not come. Promise was not kept.
Augst 9: Saturday (Holiday) Surveyor did not come.
August 10: Sunday (Holiday) Surveyor did not come.
August 11: I visited your branch office again and met the Assistant Branch Manager.
He was aware of the accident. Sir, if at all he was aware of the accident why
did he not send the surveyor in the last three days? Anyway, he assured me that
the surveyor will visit my place the same evening and the surveyor did come.
August 20: I called the Assistant Branch Manager from work and enquired
about the progress made in my case. I was told that the surveyor has not yet
submitted his report.
August 27: I again rang up the Assistant Branch Manager and enquired about
the progress. He informed me that although the surveyor has not yet submitted
the report but has informed him that the loss is to the tune of Rs. 800/-. You
know sir, I was shocked. I was shocked because any one could look at my
scooter and assess the loss to be over Rs. 800/. Our mechanic had estimated
the loss well over Rs. 1500/. Can you understand my frustration? With a view
to discuss the issue in detail I suggested a meeting with the ABM at 3 p.m.
the same day. He said he was busy that day, and suggested the next morning
10.30 A.M. He also promised to get the surveyor’s report by then. I agreed to
60 it.
August 28: Instead of attending to my office I reached the branch office at Case Studies
10.30 AM sharp only to be told the ABM is away to the Regional Office and
shall be back soon. Frustrated and irritated, I waited for him for about an hour
and then left for my office. In the afternoon, I again rang up your branch
office. The ABM was not there. I left a message for him that he should speak
to me on 25468 the moment he is back. No call came from the ABM.
August 29: Instead of going to my office I again visited your branch office
and fortunately met the ABM. I expressed my displeasure at the treatment
meted to me at his hands the day before. Shockingly, instead of being
apologetic for his conduct he told me that since the surveyor had not yet
submitted the report he could not do anything about my problem of claim
assessment. Sir, is it the way that your company treats customers? If he could
not get the surveyor’s report by then and could do nothing about my problem
why did he agree to meet me and waste my time the earlier day and this day?
When I insisted that I must speak to his superior he said—I could meet the
Branch Manager as he was joining on the 31st but he will also not be able to
do anything about it. Your ABM was so unprofessional, that he also remarked
that “all customers estimate their losses on the higher side”. What did he mean
by this statement? Do you think we are swindlers who earn profit out of our
insurance policies? Over the years I have done Rs. 20,000 worth of business
with your company and I have never made a claim. I was so disgusted with
your ABM that I could do nothing else but walk out of his office, with a hope
to meet the Branch Manager on Monday the September 1.
September 1: I met the Branch Manager. He was understanding and gave me

a patient hearing. He suggested that since he was away for long he does not
know anything about this case, hence, it would be better if I could contact him
the day after.
September 3: I called the Branch Manager from work. He informed me that

the actual loss assessed by the surveyor is Rs. 1,300/ and not Rs. 800/. I
blessed my stars. Thank God, something was moving in the positive direction.
Even though I was sure Rs. 1,300/ shall not meet the actual expenses on
repairs I agreed for the settlement of claim at Rs. 1300/. The Branch Manager
asked me to go ahead with the repairs and submit all bills in original.
September 15: I went to your branch office with required relevant documents
for my claim. In the mean time I got my scooter repaired which had actually
cost me Rs. 2,200/. The BM informed me that it would take 15 days to
process my papers and for the funds to come, hence, it would be better if I
collected my claims cheque in the first week of October.
October 5: When I reached your office on October 5 there were lot of

bombshells in store for me. My misery had not ended. It was just the beginning
of it.
1. I was told that the Branch Manager has gone on a three week training
program to Calcutta and much against my wishes I had to meet the ABM.
2. Your ABM informs me that the claim could not be settled as it had to be
reassessed.
Sir, I lost my temper and enquired your ABM about the whole reassessment
business—“Office confidentials can not be shared with customers” was your
ABM’s reply. Helpless and frustrated as I was—I left his office telling him that
if he wants my business back he’d better contact me.
Sir, that was more than two weeks ago and I haven’t heard from your ABM. I
61
Sectoral Applications-II am outraged at this entire episode, by the way your company treats its
customers, by ABM’s conduct, by the lack of communication and by the
ridiculous system of working you have. If you want me back as your customer
I expect full claim of Rs. 2200/- (for which I have documents) and apology
from your ABM, or else you can kiss our business good-bye, along with that of
our friends and colleagues at work, who would soon hear all about the AIC
way of doing business.
Yours Sincerely
Rajesh Chawla
EXHIBIT 2
The Regional Manager,

ABC Insurance Company Ltd.,
Chandigarh.
Sir,
This is in response to your letter requesting detailed information on customer

complaint of Mr. Rajesh Chawla. I read Mr. Chawla’s letter and reviewed the
whole case. I am convinced that this office made all efforts to set things right
for Mr. Chawla, although he may not accept it. Nevertheless, should you feel
that we have fallen short of company’s expectations we shall love to be
portrayed as bad boys in the eyes of the customer, if it helps in any way.
However, I deem it fit to make you aware of some mitigating circumstances

which I can share only with you and not with the customer. Unfolding these
shall help you understand the case more accurately and fully.
1. That the customer received the covernote of his insurance policy a week
late is a news for me. He never mentioned about this delay to me. Then
how could I react to his problem unaware? However, I agree Sir, it was a
lapse on our part. Hence, after receiving the letter and knowing about this
lapse we have instructed the Development Officers accordingly.
2. Although, the company should not appoint surveyors of customer’s choice,
after years of experience we have all realized that the customers get only
more dissatisfied if we appoint surveyors against their wish. We appointed
Mr. Jaiswal as surveyor on August 8 (Friday) to assess Mr. Chawla’s loss
on the following grounds.
a. Mr. Chawla expressed his wish to our Development Officer (Mr. R.K.
Singh) that if possible Mr. Jaiswal be appointed as the surveyor.
b. As Mr. Jaiswal and Mr. Chawla stay in the same colony, I felt that
the proximity of their residence shall enable Mr. Jaiswal to complete
the survey early and to the customer’s satisfaction.
3. Why Mr. Jaiswal could not perform survey on August 8, 9, and 10 (Fri,
Sat and Sun) needs some explanation.
On August 8, the day Mr. Chawla intimated Mr. Singh (Development Officer),
about the accident I called Mr. Jaiswal’s residence. I was informed by his wife
that Mr. Jaiswal is away to Pathankot and will be back by 6 p.m. the same
evening. I left clear instructions with her for Mr. Jaiswal that he has to
perform a survey the moment he is back. I also left Mr. Chawla’s address
with her. As a follow up measure when I rang up Mr. Jaiswal’s residence on
62 Aug 9 (holiday) I learnt that he shall be back from Pathankot only by Monday
morning. At this, I could have appointed some other surveyor even on a Case Studies
holiday—but would Mr. Chawla have liked it? In his letter Sir, Mr. Chawla has
conveniently not mentioned that Mr. Jaiswal was his choice.
4. Much of Mr. Chawla’s gripe concerns with my absence from office on
August 28 when he had come to meet me. If you recall Sir, on August 27
evening-following the traditions of the company we had a welcome party
for you. In the party Sir, you had wished to meet all Divisional and Branch
Managers the following day at 10 am, in your office. As I was acting BM
then, I had to set priorities—either to attend the meeting or to attend to
Mr. Chawla. I chose the former as it was your first day in office as
Regional Manager and the first formal meeting with you.Nevertheless,
before leaving for your office on August 28, I made attempts to contact
Mr. Chawla and inform him about the change in my program.
Unfortunately, the office neither had Mr. Chawla’s contact number nor was
he listed in the telephone directory. Hence, I could do nothing else but
leave instructions with my office to request Mr. Chawla to wait as I
expected the meeting to be over soon. The meeting got stretched and I got
delayed in reaching my office. By that time Mr. Chawla had already left
after creating a scene in the office. The same afternoon while I was away
to meet a client, Mr. Chawla rings up at our office at about 4 p.m. Not
finding me he left his telephone number which I presume is his office
number. When I reached back office at 5.30 p.m. I tried my best to
contact him but in vain. Probably his office was closed by then.
5. Sir, as you can tell from the tone of Mr. Chawla’s letter, he is a very
demanding, persistent individual. What his letter does not tell you, however,
is that he inundated us with the sheer volume of calls between August 20
and 27. Given the number of calls, there was no way for me to
demonstrate progress in his case, when he called again on August 27, but
to mention my casual conversation with Mr. Jaiswal that he expects the
loss to be to the tune of Rs. 800/ to Rs. 1000/. Agreed, I failed in getting
the surveyors report by Aug 28 as promised. But that was because Mr.
Jaiswal fell ill and could not prepare the report. Necessary to mention that
Mr. Jaiswal submitted his report on Sept 1 while he was still down with
flu, only on my insistence.
6. With regard to reassessment, we have just followed company’s standing
policy. As Mr. Jaiswal was black listed as a surveyor by our regional
office on October 1 we have sent all pending claims assessed by
Mr. Jaiswal for reassessment.
7. Mr. Chawla’s letter has several misstatement of facts. While there is no
point in disputing these with him, you would like to know the following.
a. I never said that neither the BM nor can I do anything about his
problem of claim assessment. My statement was — “Although we do
not interfere with the surveyor’s report because it reflects upon our
professional integrity, but I shall speak to the surveyor and see what
can be done about it. However, no one can do anything till we receive
Mr. Jaiswal’s report”.
b. No way did I give an impression that Mr. Chawla is a swindler. I just
appraised him of the fact that when customers assess their loss they
do not deduct depreciation and accessory losses out of the total loss.
Hence, the actual assessment is always lesser than the actual loss.
c. With regard to the reassessment Sir, I never said “office confidentials
can not be shared with customers”. My statement was “although there
is nothing confidential, we do not generally share such information with
customers”. Above all, I made it clear to Mr. Chawla that Mr. Jaiswal
is blacklisted.
63
Sectoral Applications-II 7. Agreed, I have maintained silence for two weeks since his last visit to our
office. This is because I strongly believed that:
a. Mr. Chawla just did not want to see me—he also makes mention of
this in his letter.
b. I would have hurt him more with the reassessment business.
c. Mr. Chawla had more confidence in the BM. Hence, I felt it would be
better that the BM comes back from his training and sorts out the
issue.
If Mr. Chawla is unhappy with the idea of reassessment and delay in his claim
settlement, I can suggest nothing to rebuild his confidence in us. His demand to
recover Rs. 2200/ is a bit far fetched. For apology I am always there.
Sir, this brings up two questions: While protecting the interests of the customer
should we also not protect the interest of the company? Should we mind losing
business of such customers?
With regards,
Sincerely yours
(A.B.M.)
CASE 2 DOSA KING

Objectives
The learning objectives of this small case study are to enable you to
understand the service offer concept behind the proposed new service;
explain the service process, as applicable to the service in question;
analyse the issues of distribution and delivery as relevant to this service.
After going through the case you are expected to
define the basic issues in the case;
analyse the information given in the case to attempt the following.
Discussion Questions
1) Comment upon the service offer as conceptualised by Mr. Narayanan.
How are the issues of service product standardisation and service quality
addressed by the service concept?
2) Suggest possible launch strategy for Dosa King.
3) Evaluate the price and distribution strategies decided by Mr. Narayanan.
Do you think he should go ahead with the franchising option? Give reasons
for your answer.
4) How do you assess the success of this service concept?
5) What do you think would be a better course of action for Mr. Narayanan,
allowing Dosa King machines to be operated from established restuarants
or insisting upon separate booths independent of the restaurants.
Case
In 1989, Mr. Narayanan, Chief Executive and Promoter of Gum India Limited
(makers of Big Fun & Champs Chewing Gum) came up with the concept of a
chain of Masala Dosa outlets serving a standardised, economically priced
64 masala dosa in a “fast food” environment.
Starting with this concept, he conceptualised a machine that would manufacture Case Studies
dosas automatically. A company was registered under the name and style of
“Indian Food Fermentations Limited” and work commenced upon developing the
automatic Dosa Maker.
A year later, after over 5000 man hours of R & D effort, a machine was
evolved which could make dosas automatically. In this electrically operated
machine, a dollop of batter would drop on the heated tawa; once the dosa was
ready, a dollop of masala would drop onto the dosa and the dosa would be
automatically folded and picked up and inserted into a paper bag for handing
over to the customer. The batter and masala mix would be manufactured in a
central plant at Nagpur and supplied to the numerous outlets all over India.
The company plans to give the dosa making machines on lease to franchisees
all over India and eventually also enter markets in the Gulf and SE Asia where
large Indian ethnic communities exist. A promotion is planned on a co-operative
basis with the franchisees.
Mr. Narayanan is confident that his Dosa King dosas shall be of uniform,
standardised quality and taste at all outlets and can be marketed at a very
reasonable price of Rs. 4.00 per dosa leaving a 20% margin for the franchisee.
He hopes to have 100 outlets in selected cities by mid 1992 and to enter about
50 towns with a network of 500 outlets by end 1993. Now Mr. Narayanan is
wondering which market/town he should select for his test marketing. He also
has to decide whether he should give higher priority to launching Dosa King
franchise in Metros or mini Metros or whether he should go first to state
capitals and other large to medium cities. He has also to decide whether his
initial foray should be in North, East or Western India. He has ruled out South
India as he feels the customers are likely to be very discriminating and might
not accept his machine made dosa. Further more, he felt a dosa was not as
much of a “fun” or “speciality” or “eating out” food in the South as in the rest
of India.
Recently, Mr. Narayanan was beset with another dilemma. Although the Dosa
King machine requires only a 8 sq. ft booth for operating and can therefore be
installed just about anywhere, he has been approached by a few restaurant
operators who want to instal it because of its novelty appeal. He has to decide
whether to insist upon a separate booth independent of any restaurant or allow
his machines to be operated from established restaurants.
65
Indira Gandhi National Open University
School of Management Studies
MS-65
MARKETING OF SERVICES
Marketing of Services: An Introduction 1

MS-65
Services Marketing Mix 2

MS-65
Strategic Issues 3
MS-65
Sectoral Applications-I 4
MS-65
Sectoral Applications-II 5

Services Marketing

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Indira Gandhi

National Open University MS-65

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

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

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

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

Prof. M.L. Agarwal Mr. Saurabh Khosla

Mr. Arun Shankar Mr. Sanjeev Bhikchandani

Course Revision Team (2004)

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

June, 2004 (Revision)

Paper Used: Agro-based Environment Friendly

Cover Design by: H.D. Computers, Inderpuri, New Delhi.

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

MS-65: MARKETING OF SERVICES

BLOCK UNIT UNIT TITLE AUDIO VIDEO

1. Marketing of Services: Conceptual Framework

2. SERVICES MARKETING MIX

5. Product and Pricing Decisions

11. Financial Services Issues in Social Destination

15. Educational Services

This pattern of economic development is not universally applicable to all

1.2 THE CONCEPT OF SERVICE

Utilities Insurance, Banking, Finance

A restaurant provides satisfaction to its customers on the basis of type and

1.3 REASONS FOR GROWTH OF THE SERVICE

Sometimes, the growth of a specific service industry is the result of a

Reasons Types of services required

2 More leisure time Greater demand for recreation and

4 Greater life expectancy Greater demand for nursing homes

5 Greater Complexity of products Greater demand for skilled

6 Increasing complexity of life Greater demand for specialists in

7 Greater concern about ecology and Greater demand for purchased or

8 Increasing number of new products The computer-sparked development

1.4 CHARACTERISTICS OF SERVICES

Figure 1.1: Goods Services Continuum

Salt Soft drinks

The distinguishing feature of a service is that its intangible aspect is dominant.

A service is purchased for the benefits it provides. If we closely examine the

Table: 1.3: Implication of service characteristics and

Service characteristics Implications Means of overcoming

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

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

3 Heterogeneity Difficult to standardise Careful selection and training of

4 Perishability Cannot be stored. Problem Better match between supply

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

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

1.5 SERVICES CLASSIFIED

Nature of the Service Act Services Directed At

Healthcare, Salons, Transportation

2. Relationship between Service Organisation and Customers

Table 1.5: Services and Customer Relationships

Discrete Theatre seat subscription Car rental

Service Delivery Modes

4. Proportion of Tangibility and Intangibility

1.6 THE SERVICES MARKETING MIX

Since services are produced and consumed simultaneously, the contact

Figure 1.2: The Marketing Mix for Services

PRODUCT PRICE PLACE PROMOTION PEOPLE PHYSICAL PROCESS

Range Level Location Advertising Training Environment Polices

Because of the simultaneous production/delivery and consumption of services,

A traditional marketing department in services can only control a minor part of