Download CHAPTER 2: FUNDAMENTAL DIFFERENCES BETWEEN GOODS

CHAPTER 2: FUNDAMENTAL DIFFERENCES BETWEEN GOODS AND
SERVICES
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"It is wrong to imply that services are just like goods ‘except’ for intangibility. By such logic,
apples are just like oranges, except for their ‘appleness.’”
G. Lynn Shostack
Chapter Objectives:
This chapter discusses the basic differences between goods and services, the
marketing problems that arise due to these differences, and possible solutions to the
problems created by these differences.
Learning Objectives:
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After reading this chapter, you should be able to
1. Understand the characteristics of intangibility, inseparability, heterogeneity,
and perishability.

Simply stated, intangibility means that services have no substance and therefore
cannot be touched or evaluated like goods. Inseparability refers to the
interaction and physical presence of the service provider and the consumer
throughout the service experience. The heterogeneity of services pertains to the
variability that is inherent in the service delivery process. Perishability refers to
the service provider’s inability to store or inventory services. Services which are
not used at their appointed time, cease to exist.
2. Discuss the marketing problems associated with intangibility and their
possible solutions.

Since services are intangible, the marketing problems that arise include: (1) it is
difficult to easily display or communicate the properties of services to consumers;
(2) prices are difficult to set; (3) services are not patentable, thus they are easily
copied by competitors; and (4) services cannot be stored for future use.
Solutions suggested to minimize the problems associated with intangibility
include: (1) utilizing tangible clues to influence customer perceptions of service
delivery; (2) developing promotional plans that emphasize personal sources of
information as opposed to nonpersonal; and (3) developing the organization's
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image to reduce customer levels of perceived risk.
3. Describe the marketing problems associated with inseparability and their
possible solutions.

The marketing problems associated with inseparability are directly related to: (1)
the service provider's face-to-face interactions with the customer; (2) the
customer's involvement in the service delivery process; (3) the impact of "other
customers" that are sharing the service experience with each other; and the
difficulty involved in the centralized mass production of services. Suggested
solutions to minimize the impact of inseparability include: (1) the careful
selection and thorough training of public contact personnel; (2) a variety of
strategies which may be used to manage customers to enhance their service
experience; and (3) the use of multi-site locations to increase the convenience of
the service firm to the customer and to overcome the difficulties associated with
centralized mass production.
4. Explain the marketing problems associated with heterogeneity and their
possible solutions.

The primary marketing problem associated with heterogeneity is that
standardization and quality control are difficult for the service firm to provide on a
regular basis. The chapter suggests that standardization may be achieved via
automation--replacing human labor with machines. In contrast, many service
firms are taking advantage of the variability that is inherent in service delivery by
offering customized services. The tradeoffs associated with customer
preferences with standardization and customization include price, speed of
delivery, and consistency of performance.
5. Identify the marketing problems associated with perishability and their
possible solutions.

Due to the characteristic of perishability, it is not possible to inventory services.
Due to the lack of an inventory, the only time that demand truly matches supply
in the service sector is by accident. Strategies utilized to minimize the impact of
perishability include strategies to increase supply and/or alter demand.
Strategies which increase the supply of service include utilizing part-time
employees, sharing capacity with other service providers, making preparations in
advance with regards to future expansion, utilizing third-parties, and increasing
the amount of customer participation during the service process. Strategies to
alter demand include developing creative pricing strategies, utilizing reservation
systems, developing complementary services, and developing nonpeak demand.
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6. Consider the impact of intangibility, inseparability, heterogeneity, and
perishability on marketing’s relationship to other functions within the service
organization.

Marketing plays a very different role in service-oriented organizations than it
does in pure goods organizations. The concept of operations being responsible
for producing the product and marketing being responsible for selling it, cannot
work in a service firm. The invisible and visible parts of the organization, the
contact personnel and the physical environment, the organization and its
customers, and the customers themselves are all bound together by a complex
series of relationships. Consequently, the marketing department must maintain
a much closer relationship with the rest of the service organization than is
customary in many goods businesses.
Opening Vignette: GEICO and the Gecko
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
One company that has excelled in the insurance sector is GEICO. The company
was based on the idea that if it could lower costs by focusing on specific target
markets, the company could charge lower premiums and still be profitable.

Contributing to the company’s success has been the introduction of the GEICO
“gecko”. The gecko with his English voice has become a recognizable tangible
symbol and an advertising icon for the company.
Lecture Outline:
I.
II.
Introduction
A.
Marketing educators felt the marketing of services was not significantly
different from the marketing of goods.
B.
However, specific differences are primarily attributed to four unique
characteristics – intangibility, inseparability, heterogeneity, and perishability.
Intangibility: The Mother of All Unique Differences
- a distinguishing characteristic of services that makes them unable to seen, felt,
tasted, or touched in the same manner as physical goods.
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A.
Intangibility is the primary source from which the other three
characteristics emerge.
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1. For example a good [described as object, device, and thing] such as
purchasing a pair of shoes, you can




Pick up the shoes
Feel the quality of materials
View specific style and color
Sample the fit
2. Verses a service [described as deeds, efforts, and performances] such
as purchasing a movie ticket
 Entitles the consumer to an experience
 Subjectively evaluated
 Retain the physical ownership of only a ticket stub
B.
Marketing Problems caused by Intangibility
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1. Lack of service inventories
2. Lack of patent protection
3. Difficulty in displaying or communicating services
4. Difficulty in Pricing Services
 No cost of goods sold
C.
Possible Solutions to Intangibility Problems
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1. The use of tangible clues
-the physical characteristics that surround a service to assist
consumers in making service evaluations, such as the quality of
furnishings, the appearance of personnel, or the quality of paper stock
used for an insurance policy.
2. The use of personal sources of information to help spread the word
about service alternatives
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-Personal sources such as friends, family, and other opinion leaders
that consumers use to gather information about a service
-Nonpersonal sources such as mass advertising that consumers use to
gather information about a service
3. The creation of strong organizational images to reduce the amount of
perceived risk associated with service purchases.
-Organizational image is the perception an organization presents to the
public, and if well-known and respected, lowers the perceived risk of
potential customers making service provider choices.
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4. Table 2.1 Intangibility:
Summary of the marketing problems and possible solutions
III.
Inseparability
-a distinguishing characteristic of services that reflects the interconnection
among the service provider, the customer involved in receiving the service, and
other customers sharing the service experience
-critical incident is the interaction between customer and service provider
A.
Marketing problems caused by Inseparability
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1. Physical connection of the service provider to the service
a. Tangible clues, particularly the use of language, clothing,
personal hygiene, and interpersonal communication skills
b. Face-to-face interaction with customers makes employees
satisfaction critical
2. Involvement of the customer in the production processes
a. Customer’s involvement may vary
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1. requirement that the customer be physically present to
receive the service, i.e. dental service or a haircut
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2. A need for the customer to be present only to start and
stop the service, i.e. dry cleaning and auto repair
3. A need for the customer to be only mentally present, i.e.
participation in a online college course
b. Customer’s impact the type of service desired
1. The cycle of demand, i.e. customers go to restaurants
primarily during breakfast, lunch and dinner hours
2. The length of demand, i.e. customers ask more
questions and/or need more attention
c. Customer’s present in the service factory
1. Concerns about the appearance of the service factory
itself
3. Involvement of other customers in the production process
a. Several customers often share a common service experience
b. This “shared experience” can be negative or positive
c. Primary challenge concerns effectively managing different
market segments with different needs within a single service
environment
4. Special challenges in mass production of services
a. Individual service provider can produce only a limited supply
b. Customers interested in a particular provider’s services would
have to travel to the provider’s location
B.
Possible Solutions to Inseparability Problems
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a. Increased emphasis placed on the selection and training of
public contact personnel to ensure that the right types of
employees are in the right jobs
-A case in point is UPS. The company is virtually 100
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percent employee owned.
-Selection and training is a strategy that minimize the impact of
inseparability by hiring and educating employees in such a way that
the customer’s service experience is positive and the employees are
properly equipped to handle customers and their needs
2. Implementation of consumer management strategies that facilitate a
positive service encounter for all consumers sharing the same service
experience
-Consumer Management is a strategy service personnel can
implement that minimizes the impact of inseparability, such as
separating smokers from nonsmokers in a restaurant
3. Use of multisite locations to offset the mass production challenges
posed by inseparability
-A case in point is Lenscrafters (an eye-care service firm)
with over 850 locations.
-Multisite locations is a way service firms that mass produce
combat inseparability, involving multiple locations to limit the
distance the consumers have to travel and staffing each location
differently to serve a local market
-factories in the field is another name for multisite locations
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4. Table 2.2 Inseparability:
Summary of the marketing problems and possible solutions
IV.
Heterogeneity
-a distinguishing characteristic of services that reflects the variation in
consistency from one service transaction to the next
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A.
Marketing problems caused by Heterogeneity
1.
Standardization and quality control are difficult to achieve
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a. Services are often provided by different providers within the
same location
b. The mood and skills of a single provider differ from day-to-day
B.
Possible solutions to Heterogeneity Problems
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1. Customization develops services that meet each customer’s individual
needs
-taking advantage of the variation inherent in each service
encounter by developing services that meet each customer’s exact
specifications
-Downside of providing customized services

Customers may not be willing to pay the higher prices

The speed of service delivery may be an issue

Customers may not be willing to face the uncertainty
2. Standardization
-reducing variability in service production through intensive training
of providers and/or replacing human labor with machines
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3. Table 2.3 Heterogeneity:
Summary of the marketing problems and possible solutions
V.
Perishability
-A distinguishing characteristic of services in that they cannot be saved, their
unused capacity cannot be reserved, and they cannot be inventoried
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A.
Marketing problems caused by Perishability
1. Matching supply and demand is a major challenge
a. Higher demand than maximum available supply
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b. Higher demand than optimal supply level
c. Lower demand than optimal supply level
d. Demand and supply at optimal levels
B.
Possible Solutions to Perishability Problems
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1. Demand Strategies
a. Creative Pricing-pricing strategies often used by service firms to
help smooth demand fluctuations, such as offering “matinee”
prices or “earlybird specials” to shift demand from peak to
nonpeak periods.
i. Used to target specific groups such as senior citizens,
children and their parents (families), and college students
ii. Price incentives to use the company’s web site
b. Reservation Systems-a strategy to help smooth demand
fluctuations in which consumers ultimately request a portion of
the firm’s services for a particular time slot.
i. Typical service firms that use reservation systems
include restaurants, doctors of all varieties, golf courses
(tee times), and day spas.
ii. Advantage of a reservation system
1. Reduce the customer’s risk of not receiving the
service
2. Minimize the time spent waiting in line for the
service to be available
3. Allow service firms to prepare in advance for a
known quantity of demand
iii. Disadvantage of a reservation system
1. Someone must maintain the system, which adds
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additional cost to the operation
2. Customers do not always show up on time or
sometimes fail to show up at all
3. Offer to the customer an implied guarantee that
the service will be available at a specified time,
thereby increasing the customer’s expectation
c. Development of Complementary Services-services provided for
consumers to minimize their perceived waiting time, such as
driving ranges at golf courses, arcades at movie theaters, or
reading materials of doctors’ offices.
d. Development of Nonpeak Demand-utilizes service downtime to
prepare in advance for peak periods, and/or to market to
different market segments with different demand patterns.
i. Can reduce the effects of perishability
1. Employees can be cross-trained during nonpeak
demand periods to perform a variety of other
duties to assist fellow personnel during peak
demand periods
2. Can be developed to generate additional revenues
by marketing to a different market segment that
has a different demand pattern than the firm’s
traditional segment
2. Supply Strategies
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a. Part-time Employee Utilization-employees who typically assist
during peak demand periods and who generally work fewer
than 40 hours per week
i. Advantage of employing part-time workers
1. Lower labor costs
2. Flexible labor force that can be employed when
needed and released during nonpeak periods
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ii. Disadvantage of employing part-time workers
1. Causes consumers to associate the firm with
lower job skills and lack of motivation and
organizational commitment
b. Capacity Sharing-a strategy to increase the supply of service by
forming a type of co-op among service providers that permits
co-op members to expand their supply or service as a whole.
c. Advance preparation for Expansion-planning for future
expansion in advance and taking a long-term orientation to
physical facilities and growth
d. Utilization of Third Parties-a supply strategy in which a service
firm utilizes an outside party to service customers and thereby
save on costs, personnel, etc
e. Increase in customer participation-a supply strategy that
increases the supply of service by having the customer perform
part of the service, such as providing a salad bar or dessert bar
in a restaurant
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3. Table 2.4 Perishability:
Summary of the marketing problems and possible solutions
C. The Role of Marketing in the Service Firm
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1. The different components of the service organization are interwoven.
2. Marketing staff must maintain a much closer relationship with the rest
of the service organization than is customary in many goods
businesses.
VI.
Summary
The major differences between the marketing of goods and the marketing of
services are most commonly attributed to four distinguishing characteristicsintangibility, inseparability, heterogeneity, and perishability.
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DISCUSSION QUESTIONS:
1. Briefly describe how the unique service characteristics of intangibility,
inseparability, heterogeneity, and perishability apply to your educational
experience in your services marketing class.
Intangibility means that services lack physical substance and therefore cannot be
touched or evaluated like goods. Services marketing class is an educational
experience. Inseparability reflects the interconnection between service providers and
their customers. The professors of services marketing classes engage in face-toface interaction with their students, who are directly involved in the educational
experience. Heterogeneity pertains to the variability inherent in the service delivery
process. The services marketing class has variability from semester to semester,
student to student, and professor to professor. Perishability refers to the service
provider’s inability to store or inventory services. Services (like services marketing
class) that are not used at their appointed time cease to exist (missing class).
2. Why is the pricing of services particularly difficult in comparison with the
pricing of goods?
Typically, products' prices are often based on cost-plus pricing. This means that the
producing firm figures the cost of producing the product and adds a markup to that
figure. The challenge involved in pricing services is that there is no cost of goods
sold. The primary cost of producing a service is labor.
3. What strategies have the insurance industry utilized in its attempt to
minimize the effects of intangibility? Of the companies that have actively
attempted to minimize the effects, have some companies done a better job than
others? Please explain.
Tangible clues are the physical evidence that surrounds the service. In the absence
of a physical product to evaluate, consumers look for tangible clues to base
evaluations. Insurance firms have attempted to minimize the effects of intangibility
by using tangible clues in their advertising such as Prudential's "piece of the rock."
Yes, some companies have done a better job. Answers will vary. Other uses of
tangible clues include the appearance of personnel, the office decor, and the quality
of paper used to produce insurance policies and company brochures.
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4. Discuss the implications of having the customer involved in the production
process.
The customer's involvement in the service production process is an operation's
nightmare. Customers influence the type of demand, the cycle of demand, and the
duration of the service production process. However, on the positive side, since
service customers are part of the process they can often produce some of the service
themselves, thereby, increasing the amount of service that can be provided by a
single provider. Due to consumer involvement, service factories must be built with
the consumer's presence in mind.
Another consideration is the level of customer involvement necessary. Do customers
need to be physically present throughout the experience, or just to start and stop the
process, or do they just need to be mentally present. The level of involvement will
impact the design of facilities as well as location decisions.
5. Discuss the reasons that centralized mass production of services is limited.
The problems pertaining to mass production are twofold. First, because the service
provider is directly linked to the service being produced, an individual service provider
can produce only a limited supply. Hence, meeting the demand of the mass market
with a single provider becomes a major challenge.
The second problem directly relates to the consumer's involvement in the production
process. How can a service firm market to a geographically widespread target
market from a single location? The use of multi-site locations is one solution.
6. Why are standardization and quality control difficult to maintain throughout
the service delivery process?
Each service organization may have several people providing the same basic
service. As individuals, each employee has their own unique personality and set of
skills and will likely interact with customers differently than other employees. Even
when dealing with the same provider from one service encounter to another
variations in the delivery process are likely to occur.
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7. Which is better for consumers: (1) a customized service or (2) a
standardized service? Explain.
The answer depends on the needs of the consumers. Customization may provide
services that meet the exact needs of the consumer, however, the price for the
service is likely to be higher, the delivery process will be slower, and there is
uncertainty associated with the final outcome. On the other hand, standardization
may not meet an individual's specific needs but is likely to be cheaper, delivered
faster, and the uncertainty associated with the final outcome will be minimized.
8. What are the limitations associated with a service firm’s inability to maintain
inventories?
The primary difficulty associated with the inability to maintain service inventories is
balancing supply and demand. In addition, the lack of inventories limits the firm's
ability to separate production and consumption by time and space. Statistical
sampling techniques that ensure quality control of goods inventories are of little use
in service settings. Finally, because of no inventories, marketing and operations
must work much closer together than in traditional manufacturing settings.
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