The Importance of Services

The Service Economy

The world economy is evolving into a service-driven economy as reliance on value-based service increases.

Learning Objective

Define the role of a service economy in developed and developing countries

Key Takeaways

Key Points

  • The growth of the service sector has long been considered as an indicator of a country’s economic progress.
  • Services are continually being launched to satisfy our existing needs and to meet needs that we did not even know we had.
  • Service organizations can vary in size from large corporations to small, locally owned businesses.

Key Terms

  • primary: The primary sector of the economy is the sector of an economy making direct use of natural resources.
  • secondary: The secondary sector of the economy or industrial sector includes those economic sectors that create a finished, tangible product, such as production and construction.
  • Service: Action or work that is produced, then traded, bought or sold, and then finally consumed.

Example

The way consumers handle financial transactions with banks, such as Chase Bank in this image has evolved as our needs as a society have evolved. Fifteen years ago, no one would have anticipated the need for online banking and yet today many of us feel we can’t live without it. This is a service that has continually changed to satisfy existing needs.

The Service Economy

The world economy is increasingly characterized as a service economy. This is primarily due to the increasing importance and share of the service sector in the economies of most developed and developing countries. In fact, the growth of the service sector has long been considered as an indicator of a country’s economic progress. Economic history tells us that all developing nations have invariably experienced a shift from agriculture to industry and then to the service sector as the mainstay of the economy. This shift has also brought about a change in the definition of goods and services themselves.

Service organizations vary widely in size. At one end of the scale are huge international corporations operating in such industries as airlines, banking, insurance, telecommunications, and hotels. At the other end of the scale are a vast array of locally owned and operated small businesses, such as restaurants, laundries, optometrists, beauty parlors, and numerous business-to-business services.

The service sector is going through revolutionary change, which dramatically affects the way in which we live and work. New services are continually being launched to satisfy our existing needs and to meet needs that we did not even know we had. Nearly fifty years ago, when the first electronic file sharing system was created, few people likely anticipated the future demand for online banking, website hosting, or email providers. Today, many of us feel we can’t do without them. Similar transformations are occurring in business-to-business markets.

The Role Of the Service Economy In Development

As of 2008, services constituted over 50% of GDP in low income countries. As their economies continue to develop, the importance of the service sector continues to grow. For instance, services accounted for 47% of economic growth in sub-Saharan Africa over the period 2000–2005, while industry only contributed 37% and agriculture only 16% in that same period. This means that recent economic growth in Africa relied as much on services as on natural resources or textiles, despite many of those countries benefiting from trade preferences in primary and secondary goods.

A Chase Bank building

Banking Services: Most financial transactions within a bank can be done online. The service was not available 15 years ago.

As a result of these changes, people are leaving the agricultural sector to find work in the service economy. This job creation is particularly useful as often it provides employment for unskilled workers in the tourism and retail sectors, which benefits the poor and represents an overall net increase in employment. The service economy in developing countries is most often made up of the following industries: financial services, tourism, distribution, health, and education.

Services as Solutions

Firms need to understand their service and their customers to ensure that their services will be viewed as solutions to consumer needs.

Learning Objective

Demonstrate knowledge of the skills required to sell services as solutions to customers and prospects

Key Takeaways

Key Points

  • If you want customers to buy your services, you need offer them a solution that costs less than the problem is costing them.
  • No customer will renew a subscription service or buy more consulting services if they don’t see genuine value in these services as it relates to fulfilling their business objectives.
  • Selling services as solutions is different from solution selling because instead of defining the solution and then looking for applicable problems, you are tailoring your services to fit your prospective customer’s day-to-day problems.

Key Term

value: a customer’s perception of relative price (the cost to own and use) and performance (quality)

Example

The use of technological advances in service and product offerings can be very beneficial to a company. For example, Visa has embedded security chips, such as the one displayed in this picture, into their Visa credit cards. This chip will ensure the card cannot be duplicated and provides extra security measures to consumers who use the credit cards and reduces the threat of identity theft. Applying this technology is just one of the many services Visa can implement to protect their consumer product offerings against identity theft. It may not be the only solution, but it is a fairly effective one. Visa was able to change their marketing strategy due to the changing nature of the environment.

If you want customers to buy your services, you need offer them a solution that costs less than the problem is costing them. Your solution might:

  • Save your customer money;
  • Save your customer time: or
  • Improve your customer’s productivity.

This is different from solution selling because instead of defining the solution and then looking for applicable problems, you are tailoring your services to fit your prospective customer’s day-to-day problems. In essence, you are in the problem-solving business and if you can prove that you can solve your customer’s present problems, you’ll have a long-term customer who will come back for more and more.

In order to accomplish this task you, and anyone involved in selling your services, need to:

  • Have an excellent understanding of the services you’re offering and what can and can’t be tailored to a customer’s requirement;
  • Have an solid understanding of the common problems your prospects face and those that your services can solve; and
  • Prepare 20-25 questions to identify possible problems and generate credibility and confidence in your company’s abilities.

Selling Services As Solutions

An illustration called "Honoré Daumier" that's displayed at the Brooklyn Museum. A man is pushing a large bag labeled "budget" up a hill.

Budgets: Services have to be priced fairly in order to attract customers. People aren’t willing to pay for services that are too expensive or that they do not need.

Without genuinely valuable services for your customer, you have no revenue. While “what’s the value proposition? ” is an over-used term, below is a more specific definition of value, particularly as it applies to application software (in contrast with infrastructure software).

It’s about selling a meaningful solution bundle

When selling services rather than technology, the focus should be on people and organizations—listening to and understanding their internal projects, and being considerate of their timelines and budgets. It is important to listen and provide a fair offer for services that genuinely meet a customer’s need. Budgets are much too constrained these days for anyone to buy services they don’t really need. This model can be a good foundation for a company, leading to a sustainable revenue stream that can help to further fund the development of the product.

In other words, create revenue that can sustain and grow the business, to make the product better in the long run, and to enable customers to better deploy the software. This only happens if the software and the services provide real value to an organization.

It’s about customer engagement

Years ago, the Red Hat Network offered a valuable service for those who purchased a software subscription. If you passively wait for the renewal, you can expect that some customers will ask themselves, “Do we use this subscription service or not? Do we really need to continue to pay for it? ” A proactive approach in this scenario is to demonstrate ongoing value by regular customer engagement, showing the customer new features they can access via their subscription, reviewing their current use of the product, and offering add-on services to help them be better trained or better able to use more of the product for more of their organization.

The fundamental principle here is value. No customer will renew a subscription service or buy more consulting services if they don’t see genuine value in these services as it relates to fulfilling their business objectives, whether that be better customer service, better IT responsiveness, or better IT management.

Services as Products

Services represent an integral part of many products and the correlation of goods and services is represented on a goods-services continuum.

Learning Objective

Describe the characteristics of service products

Key Takeaways

Key Points

  • Services can be products that are both tangible and intangible. Typically, the dominant form will classify the product as a good or as a service.
  • Many theorists see a continuum with pure services on one end and pure commodity goods on the other. Most products fall between these two extremes.
  • Service products are often difficult to identify, because they come into existence at the same time that they are bought and consumed.

Key Terms

tangible: Touchable; able to be touched or felt; perceptible by the sense of touch; palpable.

intangible: Incapable of being perceived by the senses.

Example

A taxi service is a service that is tangible. Taxi drivers, such as the one in the image, provide both the good (a car), which provides the means of travel, as well as the act of driving to a place – which is measurable and essentially a service. Therefore a taxi cab driver provides both a good and a service, so he is providing a product.

Services As Products

The increasing importance of the service market in the economy has brought about a change in the definition of goods and services. No longer are goods considered separate from services. Rather, services now increasingly represent an integral part of the product. It is this interconnectedness between goods and services that is represented on a goods-services continuum.

Services can be alternatively defined as products, such as a bank loan or a home security, that are to some extent intangible. If totally intangible, they are exchanged directly from the producer to the user, cannot be transported or stored, and are almost instantly perishable.

Service products are often difficult to identify, because they come into existence at the same time that they are bought and consumed. They comprise intangible elements that are inseparable; they usually involve customer participation in some important way; they cannot be sold in the sense of ownership transfer; and they have no title. Today, however, most products are partly tangible and partly intangible, so the dominant form is to classify them as either goods or services (all are products).

Taxi Services

Taxi Services: A taxi cab driver provides both a good and a service, so he provides a product.

The dichotomy between physical goods and intangible services should not be given too much credence. These are not discrete categories. Most business theorists see a continuum with pure services on one terminal point and pure commodity goods on the other terminal point. Most products fall between these two extremes. For example, a restaurant provides a physical good (the food), but also provides service in the form of ambiance, the cooking and the serving of the food, and the setting and the clearing of the table. And although some utilities actually deliver physical goods — like water utilities which actually deliver water — utilities are usually treated as services.

Service Marketing Management and Metrics

Service marketing management oversees the implementation of marketing programs, while metrics measure their effectiveness and performance.

Learning Objective

Explain how marketing management and metrics allow service organizations to implement and measure their marketing strategy

Key Takeaways

Key Points

  • To create an effective, cost-efficient marketing management strategy, firms must possess a detailed, objective understanding of their own business and the market in which they operate.
  • After the firm’s strategic objectives have been identified, the target market selected, and the desired positioning for the company, product, service or brand has been determined, marketing managers focus on how to best implement the chosen strategy.
  • Marketing management often makes use of various organizational control systems to ensure marketing programs achieve desired objectives, and do so in a cost effective manner.
  • It is the responsibility of marketing managers to ensure that the execution of marketing programs achieves the desired objectives in a cost-efficient manner.
  • Common service marketing metrics include net sales billed, number of product or design registrations, brand surveys to measure brand awareness, return on the investment, and website hits.

Key Terms

Marketing Management: Marketing management is a business discipline which is focused on the practical application of marketing techniques and the management of a firm’s marketing resources and activities

value-chain: The value chain categorizes the generic value-adding activities of an organization.

marketing strategy: a process that can allow an organization to concentrate its resources on the optimal opportunities with the goals of increasing sales and achieving a sustainable competitive advantage

Service Marketing Management & Metrics

Marketing management is a business discipline which is focused on the practical application of marketing techniques and the management of a firm’s marketing resources and activities. Rapid globalization has led service providers to market beyond the borders of their home countries, making marketing management and metrics and integral part of implementing and measuring an effective marketing strategy.

Service Marketing Management

To create an effective, cost-efficient marketing management strategy, firms must possess a detailed, objective understanding of their own business and the market in which they operate. In analyzing these issues, the discipline of marketing management often overlaps with the related discipline of strategic planning.

After the firm’s strategic objectives have been identified, the target market selected, and the desired positioning for the company, product, service or brand has been determined, marketing managers focus on how to best implement the chosen strategy. Traditionally, this has involved implementation planning across the “4 Ps” of marketing: product (or service) management, pricing , place and Promotion. A new P has been added making it a total of five P’s. The fifth P is politics, which affects service marketing in a significant way.

Part of a service marketing manager’s job is analyzing external influences and current marketing conditions that are directly or indirectly impacting the business. Tasks for marketing management may include conducting a competitor and value chain analysis, putting together a brand audit, and assembling qualitative and quantitative research. This research, along with an assessment of the business’ own strengths and weaknesses, go into a marketing plan used to launch future marketing programs and initiatives. Overseeing the successful development and execution of the marketing plan falls under service marketing management roles.

Marketing Performance Metrics

Marketing management employs a variety of metrics to measure progress against objectives. It is the responsibility of marketing managers–in the marketing department or elsewhere–to ensure that the execution of marketing programs achieves the desired objectives in a cost-efficient manner. Marketing management therefore often makes use of various organizational control systems, such as sales forecasts, sales force and seller incentive programs, sales force management systems, and customer relationship management tools (CRM).

The marketing metrics continuum, shown here , provides a good framework for categorizing metrics. Metrics enable marketing professionals to justify budgets based on returns and to drive organizational growth and innovation. Some common metrics used to measure performance include lead to conversion rate, click-through rate and number of new opportunities (i.e., new business deals). Other elements of measurement include net sales billed, number of product or design registrations, brand surveys to measure brand awareness, the return on the investment, and website hits. Numeric data for these metrics can come from a variety of sources such as the service provider’s website, and industry trade show, or word-of-mouth marketing. Marketers use these metrics and performance measurement as way to prove value and demonstrate the contribution of marketing to the organization.

Marketing Metrics Continuum

Marketing Metrics Continuum: The Marketing Metrics Continuum provides a framework for categorizing metrics from tactical to strategic.

The Marketing Metrics Continuum categorizes metrics (activity-based, operational, outcome-based, leading indicators, and predictive) and looks at counting, efficiency, business outcome, and likelihood of outcome.

New Service Development

The new service development process involves recognizing chances and opportunities in a fast changing technological environment.

Learning Objective

Discuss the activities involved in developing new service opportunities

Key Takeaways

Key Points

  • New service development concerns all the activities involved in realizing new service opportunities, including product or service design, business model design, and marketing.
  • Service development is mostly seen as growing an enterprise through a number of marketing techniques. The two main questions necessary to this approach are: How do we find, reach, and approach customers? How do we keep these customers satisfied with new possible services?
  • Innovative technology provides important opportunities for new service development. For a company to stay competitive, it is important to keep services and processes up to date.

Key Term

Contingency Theory: Contingency theory is a class of behavioral theory that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action is contingent upon the internal and external situation.

New service development concerns all the activities involved in realizing new service opportunities, including product or service design, business model design, and marketing.

When splitting service development into two parts, we have “service” and “development. ” The first things that come into mind when looking at service are: economics, finance, managerial activities, competition, prices, and marketing. All of these keywords are related to risk and entrepreneurship and clearly indicate the primary scope of the term “service development. ”

Development is very abstract and can be linked with some of the following keywords: technological improvement, cost reduction, general welfare, improved relations, and movement in a positive direction. Service development is mostly seen as growing an enterprise through a number of techniques. The mentioned techniques differ, but in fact all of them are about traditional marketing. The two main questions necessary to this approach are: How do we find, reach, and approach customers? How do we keep these customers satisfied with new possible services?

When supplying a solution, it is important to focus on the total offering you give instead of only focusing on the product or service. An offering is a package consisting of different proportions of a physical product, service, advice, delivery, and the costs.

Drawing on contingency theory, an idea central to new service development is that different service, market, and technology combinations can require different marketing strategies and business models to make them a success. To chart the factors that are involved and create synergy between them, new service development draws heavily upon the fields of technology and business networks. The new service development process involves recognizing chances and opportunities in a fast changing technological environment. For example, car manufacturers should recognize that rising gas prices are an opportunity to create fuel efficient cars.

A man and woman ride bicycles in traffic.

Economical Transportation: As gas prices increase, we see less cars on the road. People turn to alternate modes of transportation including taxis, public transportation, and bikes.

Economical Transportation

Innovative technology provides important opportunities for new service development. For a company to stay competitive, it is important to keep services and processes up to date. Continuous investment in innovation for both services and processes makes it more difficult for others to gain a large technological functionality advantage. Technological development can occur through making decisions about acquiring, exploiting, and managing technologies. These decisions should be made by involving the research and development staff, purchasing staff, and marketers.