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Chapter 9
Balancing Demand
and Productive
Capacity
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 1
Learning Objectives - Chapter 9
 Study service capacity
 Consider how variations in demand can be predicted
 Explore how capacity management techniques can be
employed to match variations in demand
 Assess how marketing strategies can smooth out
fluctuations in demand
 Reveal what can be done to reduce the waiting time
discomfort
 Uncover what makes a reservation system effective
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 2
Fluctuations in Demand Threaten
Service Productivity
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 3
Productive Capacity and Service Success
 Services cannot be stockpiled
 This is problematic for people or physical possession
services due to wide swings in demand
 Goal is to utilize staff, equipment, and facilities as
productively as possible
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 4
From Excess Demand to
Excess Capacity
Four conditions potentially faced by fixed-capacity services:
 Excess demand
 Too much demand relative to capacity at a given time
 Demand exceeds optimum capacity
 Upper limit to a firm’s ability to meet demand at a given time
 Optimum capacity
 Point beyond which service quality declines as more customers are
serviced
 Excess capacity
 Too much capacity relative to demand at a given time
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 5
Addressing Problem of
Fluctuating Demand
Two basic approaches:
 Adjust level of capacity to meet demand
 Need to understand productive capacity and how it varies on an
incremental basis
 Manage level of demand
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 6
Variations in Demand Relative to
Capacity (Fig 9.1)
 Use marketing strategies to smooth out peaks, fill in valleys
VOLUME DEMANDED
 Many firms use a mix of both approaches
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Maximum Available
Capacity
Demand exceeds
optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced)
Excess capacity
Low Utilization
(May Send Bad Signals)
(wasted resources)
TIME CYCLE 1
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
TIME CYCLE 2
Chapter 9- 7
Many Service Organizations Are
Capacity Constrained
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 8
Defining Productive Capacity in
Services
 Physical facilities to contain customers
 Physical facilities to store or process goods
 Physical equipment to process people, possessions, or
information
 Labour used for physical or mental work
 Public/private infrastructure
 See Best Practice In Action 9.1: Improving
Check-In Service at Logan Airport
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 9
Alternative Capacity Management
Strategies
 Level capacity (fixed level at all times)
 Stretch and shrink
 Offer inferior extra capacity at peaks (e.g., bus/train standees)
 Vary seated space per customer (e.g., elbow room, leg room)
 Extend/cut hours of service
 Chase demand (adjust capacity to match demand)
 Flexible capacity (vary mix by segment)
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 10
Adjusting Capacity to Match Demand
 Schedule downtime during periods of low demand
 Use part-time employees
 Rent or share extra facilities and equipment
 Ask customers to share
 Invite customers to perform self-service
 Cross-train employees
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 11
Patterns and Determinants of
Demand
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 12
Predictable Demand Patterns and
Their Underlying Causes (Table 9.1)
Predictable Cycles
of Demand Levels





day
week
month
year
other
Copyright © 2008 Pearson Education Canada
Underlying Causes of
Cyclical Variations
 employment
 billing or tax
payments/refunds
 pay days
 school hours/holidays
 seasonal climate
changes
 public/religious holidays
 natural cycles
(e.g., coastal tides)
Services Marketing, Canadian Edition
Chapter 9- 13
Causes of Seemingly
Random Changes in Demand Levels
 Weather
 Health problems
 Accidents, Fires, Crime
 Natural disasters
Question: Which of these events can be predicted?
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 14
Analyzing Drivers of Demand
 Understand why customers from specific
market segments select this service
 Keep good records of transactions to
analyze demand patterns
 Sophisticated software can help to track
customer consumption patterns
 Record weather conditions and other
special factors that might influence
demand
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 15
Overall Usage Levels Comprise
Demand from Different Segments
 Not all demand is desirable
 Keep peak demand levels within service capacity of
organization
 Marketing cannot smooth out random fluctuations
in demand
 Fluctuations caused by factors beyond organization’s control
(for example: weather)
 Detailed market analysis may reveal that one segment’s demand
cycle is concealed within a broader, random pattern
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 16
Demand Levels Can Be Managed
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 17
Alternative Demand-Management
Strategies (Table 9.2)
 Take no action
 Let customers sort it out
 Reduce demand
 Higher prices
 Communication promoting alternative times
 Increase demand




Lower prices
Communication, including promotional incentives
Vary product features to increase desirability
More convenient delivery times and places
 Inventory demand by reservation system
 Inventory demand by formalized queuing
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 18
Marketing Strategies Can
Reshape Some Demand Patterns
 Use price and other costs to manage demand
 Change product elements
 Modify place and time of delivery
 No change
 Vary times when service is available
 Offer service to customers at a new location
 Promotion and education
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 19
Hotel Room Demand Curves by
Segment and Season (Fig 9.3)
Price per
room night
Bl
Bh
Bh = business travelers in high season
Th
Bl = business travelers in low season
Tl
Th = tourist in high season
Tl = tourist in low season
Bl
Bh
Th
Tl
Quantity of rooms demanded at each price
by travelers in each segment in each season
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Note: hypothetical example
Chapter 9- 20
Inventory Demand through Waiting
Lines and Reservations
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 21
Waiting Is a Universal Phenomenon!
 An average person may spend up to 30 minutes/day waiting
in line—equivalent to over a week per year!
 Almost nobody likes to wait
 It's boring, time-wasting, and sometimes physically
uncomfortable
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 22
Why Do Waiting Lines Occur?
 Because the number of arrivals at a facility
exceeds capacity of system to process them at
a specific point in the process
 Queues are basically a symptom of unresolved
capacity management problems
Not all queues take form of a physical waiting
line in a single location
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 23
Saving Customers from
Burdensome Waits
 Add extra capacity so that demand can be met at most
times (problem: may increase costs too much)
 Rethink design of queuing system to give priority to certain
customers or transactions
 Redesign processes to shorten transaction time
 Manage customer behaviour and perceptions of wait
 Install a reservations system
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 24
Alternative Queue Configurations
(Fig 9.5)
Single line, single server, single stage
Single line, single servers, sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
28
“Take a number” (single or multiple servers)
Services Marketing, Canadian Edition
24
26
27
32
Copyright © 2008 Pearson Education Canada
21
20
25
30
31
29
23
Chapter 9- 25
Criteria for Allocating Different Market
Segments to Designated Lines
 Urgency of job
 Emergencies versus non-emergencies
 Duration of service transaction
 Number of items to transact
 Complexity of task
 Payment of premium price
 First class versus economy
 Importance of customer
 Frequent users/high volume purchasers
versus others
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 26
Minimize Perceptions of Waiting Time
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 27
Ten Propositions on Psychology of
Waiting Lines (1) (Table 9.3)

Unoccupied time feels longer than occupied time

Pre- and post-process 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
Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services
Marketing text, page 275 for full source information.
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 28
Ten Propositions on Psychology of
Waiting Lines (2) (Table 9.3)
6. Unfair waits are longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than waiting in groups
9. Physically uncomfortable waits feel longer
10. Waits seem longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services
Marketing text, page 275 for full source information.
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 29
Create an Effective Reservation System
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 30
Benefits of Reservations
 Controls and smoothes demand
 Pre-sells service
 Informs and educates customers in advance of arrival
 Saves customers from having to wait in line for service (if
reservation times are honored)
 Data captured helps organizations
 Prepare financial projections
 Plan operations and staffing levels
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 31
Characteristics of Well-Designed
Reservations System
 Fast and user-friendly for customers and staff
 Answers customer questions
 Offers options for self service (e.g., the Web)
 Accommodates preferences (e.g., room with view)
 Deflects demand from unavailable first choices to
alternative times and locations
 Includes strategies for no-shows and overbooking
 Requiring deposits to discourage no-shows
 Canceling unpaid bookings after designated time
 Compensating victims of over-booking
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 32
Setting Hotel Room Sales Targets by
Segment and Time Period (Fig.9.7)
Capacity
(% rooms)
100%
Week 7
Week 36
(Low Season)
(High Season)
Out of commission for renovation
Loyalty Program Members
Loyalty Program
Members
Transient guests
50%
Weekend
package
Transient guests
W/E
package
Groups and conventions
Groups (no conventions)
Airline contracts
Time Nights: M
Tu
W
Copyright © 2008 Pearson Education Canada
Th
Airline contracts
F
S
Su
M
Tu
W
Services Marketing, Canadian Edition
Th
F
S
Su
Chapter 9- 33
Information Needed for Demand and
Capacity Management Strategies
 Historical data on demand level and composition, noting responses to
marketing variables
 Demand forecasts by segment under specified conditions
 Segment-by-segment data
 Fixed and variable cost data, profitability of incremental sales
 Meaningful location-by-location demand variations
 Customer attitudes toward queuing
 Customer opinions of quality at different levels of capacity utilization
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 34
Summary – Chapter 9
 Service capacity may face four types of demand
 Service capacity can be adjusted to match demand by using temporary
employees, cross-training employees etc
 Variations in demand can be predicted through good record keeping
and analysis
 Firms have many options on how they can match capacity to variations
in demand
 Marketing strategies can smooth out fluctuations in demand by
deploying the four traditional Ps of the marketing mix
 There are five different approaches to reducing waiting time
discomfort
 Reservation systems are when they are customer focussed and provide
actionable information
Copyright © 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 35