Service Management and Marketing

Fourth Edition
Christian Grönroos
SERVICE MANAGEMENT
AND MARKETING
Managing the Service
Profit Logic
SERVICE
MANAGEMENT AND
MARKETING
SERVICE
MANAGEMENT AND
MARKETING
Managing the Service
Profit Logic
Fourth Edition
CHRISTIAN GRÖNROOS
First edition
c Christian Grönroos 1990 (0-669-2035-2). Published by Lexington Books.
Second edition c Christian Grönroos 2000 (0-471-47034-8). Published by John Wiley & Sons Ltd.
Third edition c Christian Grönroos 2007 (0-470-02862-9). Published by John Wiley & Sons Ltd.
Copyright 2015 Christian Grönroos

Published by John Wiley & Sons Ltd.
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Library of Congress Cataloging-in-Publication Data

Grönroos, Christian, 1947-
Service management and marketing : managing the service profit logic / Christian Grönroos. —
Fourth edition.
pages cm
Includes index.
ISBN 978-1-118-92144-9 (pbk.)
1. Service industries — Marketing. 2. Customer services. I. Title.
HD9980.5.G776 2015
658.8–dc23
2015005386
ISBN: 9781119159865 (CourseSmart)
ISBN: 9781119092841 (ePUB)
A catalogue record for this book is available from the British Library.
Typeset in 10/11pt Bembo by Aptara Inc., New Delhi, India.

Printed and bound in Great Britain by Scotprint, Haddington, East Lothian.
CONTENTS
Preface vii
1 The Service and Relationship Imperative: Managing in Service Competition 1
2 The Nature of Service and Service Consumption, and its Customer

Management Implications 47
3 The Service Profit Logic and Service Management Principles 69
4 Service and Relationship Quality 93
5 Quality Management in Service 127
6 Return on Service and Relationships 157
7 Managing the Augmented Service Offering 205
8 Managing Productivity in Service Organizations 235
9 Managing Marketing or Customer-Focused Management 267
10 Managing Integrated Marketing Communication and Relationship

Communication 311
11 Managing Brand Relationships and Image 337
12 Social Media in Service Management and Marketing

Written by Johanna Gummerus 357
vi CONTENTS
13 Customer-Focused Organization: Structure, Resources and Service

Processes 373
14 People Management: Internal Marketing as a Prerequisite for Successful

Customer Management 409
15 Managing Service Culture: The Internal Service Imperative 445
16 Transforming a Manufacturing Firm into a Service Business 463
17 Conclusions: Managing Service and Relationships 493
Index 513
PREFACE
This book is about the service perspective in business, that is, how to adopt service logic in management,
regardless of whether the core of the offering is a service or a physical product. It is a how-to-think
rather than a how-to-do book. Therefore, it is not a traditional textbook with all the usual chapters.
It is intended to help readers – students and practitioners alike – to realize the importance of service
in today’s competitive environment, and to see the opportunities for creating and maintaining a
sustainable competitive advantage in any kind of market.
The text takes a unique approach to management and marketing from a service logic perspective.
Previous editions have served well in academic education, especially on masters and doctoral levels.
The book has also been used successfully by top- and middle-level managers, at board level, and in
executive education to introduce the service perspective on business as well as service management
and marketing in service competition for service firms and manufacturing firms alike.
Services exist alongside goods and other types of resources of course, but following the research on
service as logic rather than as a category of products only, here service is first and foremost considered
a way of approaching customers and facilitating their life and business processes by supporting their
everyday practices rather than only delivering products and services as resources for their use.
Customers integrate anything they buy in their consumption or usage processes, that is, they use
it in a process which can be characterized as a service process. Hence, customers consume and use
goods, services or any resource as service to achieve something. As a consequence, firms will be better
off directing their activities and processes towards facilitating these customer processes in a value-
supporting manner. This requires service logic to be adopted in the firm, and that management
thinking and attitudes, and management behaviour are geared towards this perspective. A service
perspective cannot be adopted by implementing conventional manufacturing-oriented management
attitudes and models. New service-focused thinking and, to a large extent, new management models
and instruments are needed. The term service management is used for this new attitude to management
and the new theories and models that go with it. This is what this book is all about.
Service logic and a service perspective require that the firm knows its customers well enough to
be able to support their processes successfully. Although customers are by no means always right –
they do not always have enough information to be able to make optimal purchasing decisions – the
obligation of a firm is to help their customers to achieve their goals as well as possible. This makes
the firm meaningful to its customers. To be able to implement such a service approach to customers
requires that the firm’s processes and activities are indeed customer-focused throughout the organiza-
tion. Therefore, service management is a truly customer-focused management approach. This has consequences
for marketing.
Traditionally, when delivering resources such as consumer goods, marketing is treated as one busi-
ness function alongside other functions, and in business practice marketing is implemented as an
isolated process in the firm. However, facilitating customers’ life and business processes by success-
fully supporting their everyday practices, requires that all processes of a firm, which one way or the
viii PREFACE
other have an impact on this, are focused on the customer. In other words, all such processes must
be implemented in a marketing-like manner, with the interest of the customer in mind. Otherwise
the customers will become unsatisfied with the firm’s way of supporting them.
Hence, marketing is more a customer-focused attitude than one separate business function only.
Such a customer-focused attitude is needed throughout the organization. This means that the customer
becomes a top management issue. The importance of marketing-like attitudes in the whole organization –
in managerial decision making and implementation alike – is the reason for the title of this book:
Service Management and Marketing.
Every firm, regardless of whether it is a one which is traditionally categorized as a service firm
or as a product manufacturer or as any other type of organization, faces what can be labelled service
competition. Service competition can be defined as a competitive situation where the core of a firm’s
offering – a physical product or a service concept – is a prerequisite only for a sustainable competitive
advantage, but where the firm, by taking a service perspective, competes with an integrated offering – or
more accurately an integrated service offering – which also includes all additional resources and activities
needed to facilitate the customer’s processes in a satisfactory, value-supporting way. If the firm does
not function like this, it will not act in a way its customers are expecting. Then the firm’s logic and the
customers’ logic will collide. Firms that manage to support their customers’ processes more effectively
and efficiently than their competitors will survive in this competitive situation. The challenges are the
same for firms operating on business-to-business and business-to-consumer markets, and for firms in
what are traditionally called service industries and manufacturing industries. As a matter of fact, the
biggest challenge of all is for traditional manufacturers to manage to transform themselves into service
businesses and learn how to adopt service logic in management.
In management and marketing books, service firms have always been considered a special case,
if considered at all. However, now we are approaching a point where the scale is tipping in the
other direction. Service as a perspective on management is becoming the norm, and goods-based
logics special cases that may sometimes apply. We are not there yet, and it may still take more time
than firms deserve until management attitudes have changed. It is fascinating, and unfortunate, how
steadfast the grip of the traditions from the industrial era is on management and all its subfields, and
how slowly old and outdated corporate cultures let go. However, in the not-too-distant future the
service-led environment and service economy in which firms have already competed for a long time
will break down the resistance of the old world attitudes, and management approaches will change.
Inside-out management will be replaced by outside-in management.
As national statistics demonstrate, in the developed world and beyond, services and what is labelled
the service sector dominate economies and employment. No statistical proof is needed anymore
to justify a book on service management, and therefore, there are no such statistics in these pages.
However, official statistics do not tell the whole truth. Instead they underestimate the role of services.
For example, the official figures do not include the many service activities which manufacturing
firms produce and perform and which may amount to a remarkable value. If these service activities
are removed from the manufacturing sector in the statistics, this sector shrinks dramatically, and the
service sector grows correspondingly. Furthermore, when putting statistics aside and considering how
large a part of product manufacturers and organizations in the agricultural sector, in reality faces service
competition, the importance of service, and of understanding service management, grows even more.
It is my intention that this book will help students and managers to cope with the competitive
environment – service competition – which is already here, but which is not yet properly recognized.
Furthermore, it will help them to understand the nature and scope of a service perspective and the role
of customer relationships therein, the characteristics of service competition, and what adopting service
logic demands from management and from the whole organization. The book also demonstrates what
PREFACE ix
it takes to manage the firm and to take care of the firm’s customers from the perspective of service
logic.
For this fourth edition, in addition to an upgrading of the content warranted by new research,
some structural changes have been made. For example, the two first chapters of the previous edition
have been merged into a new introductory chapter, where service logic and strategic and tactical
aspects of a service and relationship strategy are discussed. The service profit logic and the corresponding
need for an outside-in management approach form the foundation of the service perspective. The chapter
on return on service and relationships has been updated with models of reciprocal return on relationship
(RORR ), and metrics needed for calculation of reciprocal returns are presented. The use of RORR
is illustrated with a case study based on research by Pekka Helle at Hanken School of Economics.
The discussion of the marketing implications of service logic has been further developed. Marketing
is understood as customer-focused management with the ultimate goal to make a firm meaningful to
its customers. The chapter on internal marketing has been restructured. In the chapter on how to
transform a manufacturing firm into a service business, a major new case study illustrating such a
process has been added. In other chapters some new short cases have also been included. A totally
new chapter on social media in service written by Johanna Gummerus at Hanken School of Economics
has also been included. I want to thank her especially for contributing this important chapter.
I also want to thank Aaro Cantell, Ray Fisk, Peter Murphy and Kaj Storbacka, who have con-
tributed to this book with cases and illustrations. I also appreciate the continuous support that Steve
Hardman, Georgia King and Juliet Booker from John Wiley & Sons have provided throughout
the writing process. Last but not least I would like to acknowledge the support I have received
from colleagues at Hanken School of Economics, Finland and from my wife Viveca throughout this
endeavour.
Please note that ‘he’ and ‘his’ have been used in this book to mean ‘he/she’ and ‘his/her’. This is
intended to ensure that the text flows more smoothly and is not meant to be sexist.
Christian Grönroos
Tölö, Finland
CHAPTER 1
THE SERVICE AND
RELATIONSHIP IMPERATIVE:
MANAGING IN SERVICE
COMPETITION
“ ” Everyone faces service competition. By providing service, firms make themselves meaningful for their
customers.
INTRODUCTION
In this introductory chapter the logic of service as a business perspective and the relationship between
service and customer interactions are discussed, and the concept of service competition is introduced.
Service as a strategy in comparison with other strategic approaches is considered in detail. Strategic and
tactical implications of a service strategy and of a relationship approach to customers are outlined. The
concept of service logic and its implications for the value generation process and value co-creation are
then presented. Further, the meaning of a customer relationship approach and a number of aspects
of customer relationships are discussed. Finally, some central aspects of the book are presented as
guidelines for the reader. After having read this chapter the reader should understand the logic of
service and the characteristics of a service strategy, and know which strategic and tactical implications
follow from such a strategy. It should also be clear how value evolves for customers as value-in-use
and what roles the firm and customer have in the value process.
O N C E U P O N A T I M E : A C A S E O F S E RV I C E
A N D C U S T O M E R R E L AT I O N S H I P S
In a village in ancient China there was a young rice merchant, Ming Hua.1 He was one of six rice
merchants in that village. He was sitting in his store waiting for customers, but business was not
good.
2 THE SERVICE AND RELATIONSHIP IMPERATIVE: MANAGING IN SERVICE COMPETITION
One day Ming Hua realized that he had to think more about the villagers, what they were doing,
their needs and desires, and not just distribute rice to those who came into his store. He understood
that he had to provide the villagers with something that was more valuable for them, and something
different, from what other merchants offered. He decided to develop a record of his customers’ eating
habits and ordering periods and to start delivering rice to them. To begin with Ming Hua walked
around the village and knocked on the doors of his customers’ houses asking:
● how many members there were in the household;

● how many bowls of rice they cooked on any given day; and
● the size of the rice jar in the household.
Then he offered every customer:
● free home delivery; and

● a service to replenish the household’s rice jar automatically at regular intervals.
For example, in one household with four persons, every person would consume on average two bowls
of rice a day, and therefore the household would need eight bowls of rice every day for their meals.
From his records Ming Hua could see that the rice jar of that particular household contained rice for
60 bowls, or approximately one bag of rice, and that a full jar would last for 15 days. Consequently,
he offered to deliver a bag of rice every 15 days to this house.
By establishing these records and developing this new service, Ming Hua managed to create more
extensive and deeper relationships with the villagers; first with his old customers, then gradually with
other villagers. Eventually the size of his business increased and he had to employ more people: one
person to keep records of customers, one to take care of book-keeping, one to sell over the counter
in the store, and two to take care of deliveries. Ming Hua spent his time visiting villagers and handling
contacts with his suppliers, a limited number of rice farmers whom he knew well. Meanwhile his
business prospered.
T H E N AT U R E O F S E RV I C E A N D C U S T O M E R
R E L AT I O N S H I P S
The story of Ming Hua, the rice merchant, demonstrates significant aspects of a service perspective
on business, and includes all basic elements of a relationship approach to customers. Key aspects of
service are:
● Service is support for customers’ individual processes in a way that facilitates their value creation,2
and this support is enabled when knowledge and skills are used on resources.3
● The ultimate goal of service-based business is to facilitate value creation for the customer, which
in return enables the service provider to capture value from the relationship,4 with service as a
mediator.
● Service is a process, where the service provider’s resources and the customer often interact to some
extent.
THE NATURE OF SERVICE AND CUSTOMER RELATIONSHIPS 3
● To become a service provider, the resources of the firm’s offering can be of any kind, such as
physical goods (e.g. rice), service activities (services), information, or combinations of these and
other types of resources.
Key relationship-based characteristics are:5
● The service provider and customer engage in long-term business contact.
● The relationship requires that the service provider gains insight into the customer’s everyday
processes.
● The goal of the relationship is mutual value creation, i.e. a win–win situation.
As demonstrated, Ming Hua created a process for supporting the villagers’ cooking, which made
their cooking process easier and acquiring rice more convenient, thus increasing value in their life.
At the same time, the rice merchant’s business improved, i.e. he managed to capture more value than
before from serving the villagers. For this to take place, he had to gain enough knowledge about the
villagers’ cooking habits and cooking equipment, such as the size of each family and their rice bowls
and jars. Once he had this insight, he could develop long-term contact with the villagers and engage
them with his new service process. Finally, this arrangement became a win–win situation for both
parties.
The story about the rice merchant, shows how, through what today would be called a relationship
marketing strategy, he changed his role from a transaction-oriented channel member to a service-
providing, value-supporting relationship manager. In that way he created a competitive advantage
over rivals who continued to pursue a traditional strategy. Three important strategic requirements of a
relationship strategy can distinguished:6
1. Redefine the business as a service business and the key competitive element as service competition
(competing with service and a total service offering, not just the sale of rice alone).
2. Look at the organization from a process management perspective and not from a functionalistic per-
spective (to manage the process of supporting and facilitating value creation for the villagers, not
only to distribute rice).
3. Establish partnerships and a network to handle the whole service process (close contacts with well-
known rice farmers).
As can be seen from the story, three tactical elements of a relationship strategy are included:7
1. Seek direct contacts with customers and other business partners (such as rice farmers).
2. Build a database covering necessary information about customers and others.
3. Develop a customer-centric service system.
The three strategic requirements set the strategic base for the successful management of relationships.
The three tactical elements are required to successfully provide service and implement customer
management.
Later on in this chapter, strategic requirements and then the tactical elements will be discussed
in some detail. However, using Ming Hua’s new service-based relational business as an example, an
analysis of the commercial focus of service providers and product distributors will first be made and
discussed.
A C O M M E R C I A L A N A LY S I S : F R O M
P R O D U C T- F O C U S E D T O S E RV I C E - F O C U S E D
MANAGEMENT
A first customer satisfaction-based analysis of a service strategy, Ming Hua’s tale, clearly shows that the
customers were satisfied, the customer base grew, and the business prospered. However, a customer
satisfaction analysis is not enough to understand the effect of a service approach and the implemen-
tation of a service strategy. We also have to do a commercial analysis. Basically, the commercial
outcome of a business can be described with three elements, namely revenues, costs and capital. A firm’s
profitability is a function of all three elements, whereas the profit level is a function of the revenue generation
capability and the cost level. Finally, the revenue generation capability is dependent on how well the
firm understands its customers and their processes, and how well it manages to gear its resources, such
as skills and knowledge, technologies, systems, products and service activities, towards supporting its
customers’ processes and goals in life (consumer markets) or business (business-to-business markets).
In the continued analysis, we exclude the influence of capital, and analyse the impact on the profit
equation of various management approaches.
In Chapter 3 on the service profit logic and service management principles, the profit logic in service is
analysed in detail. At this point we only note that a service provider’s revenue generation capability is
not only dependent on sales and traditional marketing of a more or less standardized product. Because
the customer interface is much broader than that, the customers’ interest in paying for the firm’s
service is influenced by a whole host of other activities and processes managed by the service provider.
For example, in the rice merchant’s story, selling rice is not enough for the new service strategy to
succeed; the rice delivery system supported by the customer information system as a service process
is the most important reason why customers wanted to buy from Ming Hua.
For understanding the business from a commercial point of view, therefore, two variables are
enough, namely the profit variable and the process variable. A chart for analysing the business from a
commercial perspective based on these two variables is illustrated in Figure 1.1, with the profit variable
as the vertical scale and the process variable as the horizontal scale.
The end points of the profit and resource variables, respectively, are the following:
● Dominating focus on revenues and revenue generation, or dominating focus on costs.

● Dominating focus on the firm’s resources and processes, or dominating focus on the customers’ resources
and processes.
It is important to realize the customers’ focus is always, with few exceptions, in the upper right quadrant
of Figure 1.1, ‘focus on revenues (and revenue generation)/focus on the customers’ resources and
processes’. The reason for this is simple. Customers are interested in the price they are requested to
pay for a solution, and of course also in their own processes which they want to have supported: for
example, in what life or business processes are they involved and what do they wish to achieve, what
skills and knowledge to make use of a solution offered to them do they hold and what complementary
resources required to make use of the solution offered do they have access to? Hence, a firm’s customers
are always interested in the firm’s revenues and revenue generation capability. It is ironic that far too often
firms are more interested in their cost level and in focusing on cost efficiency, and consequently, a
clash with the customers’ interests occurs.
Frequently, another clash between firms and their customers also happens. The customers are, of
course, more or less only interested in their own resources and processes. Firms, on the other hand,
SERVICE MANAGEMENT REQUIRES AN OUTSIDE-IN MANAGEMENT APPROACH 5
Focus on revenues
(equals customers’ focus on price)
Focus on Focus on
the firm’s the customers’
resources and resources and
processes processes
Focus on costs
F I G U R E 1.1
Chart for analysing commercial focus.
are often predominantly focused on their own resources and processes, and gather only too-superficial
market research data about their customers, but limited insight into the customers’ processes, goals,
and thoughts which steer their buying and usage/consumption behaviour.
If these conflicts occur, a firm – its management and the whole organization – is mentally positioned
in the lower left quadrant of Figure 1.1, whereas its customers are mentally positioned in the upper right
quadrant. First of all, it is a mental positioning, which reflects, respectively, the dominating thoughts
and dominating focus of interest of a firm and its management, and of the customers. However,
this mental focus influences how the firm is managed and how its processes are implemented, and it
reflects the customers’ buying behaviour as well.
S E RV I C E M A N A G E M E N T R E Q U I R E S A N
OUTSIDE-IN MANAGEMENT APPROACH
In the four parts of Figure 1.2, various positions of firms in the commercial analysis chart of Figure 1.1
are depicted, depending on their mental managerial and operational foci. In the upper left corner of
Figure 1.2 (Part A) customers’ typical mental focus is positioned in the upper left quadrant, with a
dominating interest in their own resources and processes as well as in the price they are required to
pay, and therefore also, indirectly, in the firm’s revenue generating capability.
In Part B of the figure, in the upper right corner, the different mental foci and the corresponding
business approach of the rice merchants in the village are illustrated, as examples of typical firms’
positions. The focus of the traditional merchants is in the lower left quadrant, where the business is
based on an interest in the firm’s own resources (rice) and processes (rice-selling shops), and a focus
on the costs of running the business is dominatant, i.e. the business is based on selling the product
(rice). Ming Hua, however, moved his focus towards the upper right quadrant by turning to a strategy
of developing relationships with his customers and providing service to them. Doing this required
a shift of interest from his old processes of selling rice from a shop to understanding the customers’
Focus on revenues Focus on revenues

A. (equals customers’ focus on price) B. (equals customers’ focus on price)
Customers’ Ming Hua’s

focus focus
Focus on Focus on Focus on Focus on
the firm’s the customers’ the firm’s the customers’
resources and resources and resources and resources and
processes processes processes Traditional processes
merchants’
focus
Focus on costs Focus on costs
Focus on revenues Focus on revenues

C. (equals customers’ focus on price) D. (equals customers’ focus on price)
Service Outside-In
business management
Focus on focus Focus on Focus on Focus on
the firm’s the customers’ the firm’s the customers’
resources and resources and resources and resources and
processes Product processes processes Inside-Out processes
business management
focus
Focus on costs Focus on costs
F I G U R E 1.2
From product-focused inside-out management to service-focused outside-in management.
relevant processes and resources, such as their cooking routines and sizes of rice cups and jars. Based
on this customer insight, he adjusted his own processes from selling rice from a shop to servicing the
customers by delivering rice to their homes according to a customized schedule, and to creating a
network of rice farmers to make sure that he had products to deliver. To make his business prosper,
which it did, he of course also had to adjust his cost level to the revenue generation capability of the
new service strategy.
In the lower left corner of Figure 1.2 (Part C) the two strategies described above are summarized.
If, as illustrated by the lower left quadrant of Part C, management’s and the organization’s mental focus
is dominated by an interest in the firm’s own resources (e.g. technologies and products) and processes,
and by an overwhelming concern for costs and cost efficiency, the firm’s business approach will be
driven by its resources, and overly focused on delivering such resources to its customers. This can
be characterized as a product business focus, regardless of whether the core of the offering is a physical
good or a service activity, such as rice or, say, transportation. In the upper right quadrant of Part C, a
service business focus is positioned. Such a business approach is characterized by a dominating focus on
gaining in-depth insight into the customers’ processes and resources (e.g. skills, capabilities and access
to complementary resources) and on how revenues are generated for the firm.
Firms are often mentally in the lower left quadrant and take a product business focus. This applies
equally to so-called service firms, such as banks, insurance companies, airlines and those in hospitality
SERVICE MANAGEMENT REQUIRES AN OUTSIDE-IN MANAGEMENT APPROACH 7
industries, and organizations in the public sector, and to goods manufacturers. It is not the core of the
offering that determines what kind of business a firm is conducting; it is the mental focus of management
and the organization that counts. A firm that wants to move towards adopting a service strategy and
pursuing a service perspective in its business performance must follow the black arrow in Part C of
the figure, and change its mental focus and corresponding behaviour accordingly. In this way any
firm, regardless of its business or industry, can transform itself into a service business.
Finally, in Part D of Figure 1.2, in the lower right corner, the underpinning logic of, respectively,
a product business and a service business is characterized. A service business logic is basically grounded
in a dominating interest in thoroughly understanding the processes and resources of the firm’s customers, and in
its revenue generation capabilities. Of course, this does not mean that a focus on the firm’s own resources
and processes and on cost efficiency would be less important than otherwise. In absolute terms they
are equally important as before but, relatively speaking, focus on the customer and revenues is more
important. Hence, service business management can be characterized as outside-in management. In
contrast, product business management with its dominating interest in issues internal to the firm, such
as the firm’s resources, processes and costs, can be characterized as inside-out management.
In conclusion, service management requires a mental focus on customers and revenues, and an outside-
in management approach. In Table 1.1 fundamental differences between a service-focused outside-in
management approach and a product-focused inside-out approach are summarized.
In view of the preceding discussion, the two first rows of the table – core competence and core
process – are self-explanatory. However, the two sales-related issues require some clarification. In
conventional product selling based on an inside-out approach, the technical specifications qualify
the offering. However, as there often are several competitors offering similar technical solutions,
price becomes the distinguishing sales argument. In service selling, regardless of whether the core
of the offering is a physical good or a service concept, the aim of the total offering is to provide
value-creating support for the customers’ processes and thereby contribute to their goal achievement.
Hence, the offering’s value-creating support becomes the qualifying characteristic. As price is only one ele-
ment of customer value (this is developed further in Chapter 6 on return on service and relationships),
TA B L E 1.1
Fundamental differences between outside-in and inside-out management.
Outside-in management Inside-out management
Core competence Understanding customers’ everyday Understanding technology,

processes and how they affect their products and production
life/business goals. processes.
Core process Providing value-creating support to Production of goods and/or
the customers’ everyday processes, services.
which contributes to their
life/business goals.
Major sales pitch Value-creating support. Product (goods or services)
specifications.
Determining sales Long-term value for customers Price.
argument relating to their life/business goals.
other sacrifice-related or revenue-related elements may well compensate for a high price. For exam-
ple, an unattractive price can be balanced by lower operational and/or administrative costs in the long
run, and also by the prospect of growing sales and/or increasing revenues. Therefore, long-term value
is the determinant sales argument.
In the following sections, the strategic and tactical requirements of a service strategy based
on customer relationships referred to above will be discussed in some detail. The three strategic
requirements – redefining the firm as service business, taking a process management perspective, and
developing partnerships and networks – set the strategic base for the successful management of rela-
tionships. The three tactical elements – seeking direct contacts with customers, building customer
insight, and developing a customer-focused service system – are required to successfully implement
customer management.
D E F I N I N G T H E F I R M A S A S E RV I C E B U S I N E S S
A key requirement in a service and relationship strategy is that a manufacturer, wholesaler, retailer,
service firm or supplier has a thorough insight into the customers’ everyday processes, and into the
relationship between them and the customers’ life or business processes, and the long-term needs and
desires of their customers. Another requirement is that value-supporting service is offered based on
the technical solutions imbedded in consumer goods and industrial equipment, or in service activities.
The core of a service firm’s offering is by definition a service activity, but if it takes an inside-out
management approach, such a firm may nevertheless operate as a product business.
The service approach to customers applies to any type of firm, and if they choose to do it, any firm –
so-called service firms and goods manufacturers alike – can adopt a service strategy. Customers do not
only look for goods or services, they demand a much more holistic service offering, including everything from
information about how best to use a product, to delivering, installing, updating, repairing, maintaining
and correcting solutions they have bought. Moreover, they demand all this, and much more, to be
delivered in a friendly, trustworthy and timely manner.
In a customer relationship that goes beyond a single transaction of goods or services, the product
itself as a technical solution involving goods, service activities or industrial equipment becomes just
one element in the holistic ongoing service to the customers. For a goods manufacturing firm, the physical
good is a core element of the service offering, because it is a prerequisite for a successful service. For a
service firm it is the service concept. In today’s competitive situation this core is very seldom sufficient
to produce successful results and a lasting position in the marketplace. What counts is the ability of
the firm, regardless of its position in the distribution channel, to manage the additional elements of
the offering better than its competitors. Moreover, the core physical product or service concept is
less often the reason for dissatisfaction than the elements surrounding the core. For example, when
buying a car, the car is seldom the reason for customer dissatisfaction; the after-sales service is the main
reason. Or in a restaurant, the meal may be good but poor service is the reason for dissatisfaction. In
other words, competing with the core product or service concept is not enough; competing with the
total offering, where the core of the offering is only one element of a total service offering, is what
counts. The transition from the product or service concept as the dominating element of the offering
to management of human resources, technology, knowledge and time in order for the firm to create
successful market offerings is evident.
In Figure 1.3 the thick black arrow from the factory or back office of a service firm out towards
the customer demonstrates the traditional product-oriented approach, where the factory (and the
management of what takes place in the factory) is considered the key to success in the marketplace.
A PROCESS MANAGEMENT PERSPECTIVE 9
Factory/Back office Services Customers
Factory focus
Customer focus (‘service management’)
F I G U R E 1.3
A customer focus: the firm as a service business.
Source: Grönroos, C., Relationship marketing logic.
Asia–Australia Marketing Journal, 4(1); 1996:
p. 13. Reproduced by the permission of the ANZMAC
(The Australasia and New Zealand Marketing Academy).
For a manufacturing firm, services are considered add-ons to the factory output. In service firms
interactions in the service process are often considered less important to the customer than what is
produced in the back office. This management approach is based on a factory or back office focus.
Although this approach to management may have been highly successful in the past, it does not reflect
the current competitive situation, where a new management perspective is needed. As indicated by the
second arrow in the figure, from the customer towards the factory or back office, the various service
elements of the firm are the first elements of the output of the firm that the customer encounters and
experiences. These service processes support the customer’s perception of value, whereas the factory
or back office output is only a prerequisite for value.
A growing number of industries, manufacturers and service firms now face a competitive situation
for which we have coined the term service competition. They have to understand the nature of service
management as a management approach geared to the demands of the new competitive situation.
The solution to customer problems seen as a total service offering thus becomes service, and this total offering
becomes service provision, instead of mere delivery of a physical product or a service. When service
competition is the key to success for everybody, the firm has to offer service, irrespective of its
traditional business, and consequently every business is a service business.
A PROCESS MANAGEMENT PERSPECTIVE

An ongoing relationship with customers, where customers look for value support by the total service
offering, requires internal collaboration among departments that are responsible for different elements
of the offering, such as the core product (goods or services), advertising the product, delivering the
product, taking care of complaints and rectifying mistakes and quality faults, maintaining the product,
billing routines, product documentation, etc. The whole chain of activities has to be co-ordinated
and managed as a total process. Moreover, from profitability and productivity perspectives only activ-
ities that support value for customers should be carried out. Other resources and activities should
Functions Customers
Processes
F I G U R E 1.4
A process focus: the firm as a value-generating operation.
Source: Grönroos, C., Relationship marketing logic.
Asia–Australia Marketing Journal, 4(1); 1996: p. 14.
Reproduced by permission of the ANZMAC
(The Australasia and New Zealand Marketing Academy).
be excluded from the process. In a traditional functionalistic organizational setting this cannot be
achieved. Therefore, a service and relationship approach to customers requires a process management approach.
A process management perspective is very different from the functionalistic management approach.
A functionalistic organization allows for sub-optimization, because every activity and correspond-
ing department within a company is more oriented towards specialization within departments than
collaboration between them. As indicated in Figure 1.4, the various departments do not necessarily
direct their efforts towards the demands and expectations of the customers. This does not necessarily
support customers’ total requirements. Customers do not look for a combination of sub-optimized
outputs of different departments of a firm that is not supporting total value for them. For example,
an outstanding technical solution and a cost-effective transportation system may be optimal from the
supplier’s point of view, but for the customer it is often equivalent to an unreliable supplier. An
unreliable supplier equals low value for the customer.
Project and task force organizations are first attempts to break free from the strait-jacket of a func-
tionalistic organization, so that the various departments are geared towards working according to the
horizontal arrows in the figure. However, in order to be able to create maximum total value in a
coordinated relationship with customers, the firm should strive to go further. A process management
approach should be taken. In such an approach traditional departmental boundaries are torn down and
the workflow (including, for example, traditional sales and marketing activities, production, logistics,
general administration and distribution activities with a host of customer contact activities involved)
is organized and managed as a value-supporting process that enables and strengthens relationship-
building and management.
PA RT N E R S H I P S A N D N E T W O R K S
A service and relationship approach to customers is based on cooperation. Service providers and cus-
tomers will not view each other from a win–lose perspective but will rather benefit from a win–win
situation, where the parties involved will be best off as partners. Furthermore, frequently manufactur-
ing and service firms will find that they cannot by themselves supply customers with a total offering
DEVELOPING A CUSTOMER DATABASE 11
needed, and that it is too expensive to acquire the necessary additional knowledge and resources to
produce the required elements of the offering themselves. Hence, it may be more effective and prof-
itable to find a partner who can offer the complementary elements of the offering needed to develop
a successful relationship with a customer. Partnerships and networks of firms are formed horizontally and
vertically in the distribution channel and in the supply chain. Although firms compete with each other, they
may sometimes find it effective and profitable to collaborate in some areas to serve mutual customers.
This of course demands the existence of one key ingredient of relationship marketing; trust between
the parties in a network. Otherwise they will not feel committed to the mutual cause.
The next sections turn to the tactical elements of relationship marketing.
S E E K I N G D I R E C T C O N TA C T S W I T H C U S T O M E R S
A service and relationship approach to customers is based on a notion of trusting cooperation between
the business partners. Hence, firms have to get to know their customers much better than has normally
been the case. In an extreme situation, which is quite possible in many consumer service markets such
as household insurance and industrial markets such as merchant banking and industrial equipment
provision, a firm can treat each customer individually. At the other extreme of consumer goods and
mass markets, customers cannot be identified in the same way. However, the manufacturer or retailer
should develop systems that provide them with as much insight about their customers’ processes and
behaviours as possible so that, for example, advertising campaigns, sales contacts and every interaction
with customers can be made as relationship-oriented as possible. Modern information technology
provides the firm with ample opportunities to develop ways of showing a customer that he is known
and valued. Also, traditional advertising campaigns become too expensive and ineffective if they are
not directed towards customers so that a dialogue can be initiated. One-way market communication
costs too much and produces too little.
Regardless of how close a firm can get to the situation of knowing and treating customers as indi-
viduals, one should always use face-to-face contacts with customers or means provided by information
technology to get as close as possible to customers. In every face-to-face service encounter, regardless
of whether there is a mass market of customers or not, the firm interacts with each customer as an individual
and should treat the customer as an individual and not as a member of a mass. In addition, each such
encounter is a source of insight into the customer’s processes, thoughts, needs, wishes and values.
This is a source of customer information which most often is unused.
D E V E L O P I N G A C U S T O M E R D ATA B A S E
Traditionally, marketing operates with limited and incomplete information about customers. In order
to pursue a relationship marketing strategy, a firm cannot let such ignorance last. A customer infor-
mation database must be established, which can be turned into actionable knowledge about the
customers. If such a database does not exist, customer contacts will only be handled partially in a
relationship-oriented manner. If the person involved in a particular interaction with a customer has
first-hand information about the customer and knows the person he is in contact with, the interaction
may go well. However, in many situations – for example, employees who answer customers’ phone
calls, meet customers at a reception desk or make maintenance calls – they will not personally know
the customer. A well-prepared, updated, easily retrievable and easy-to-read customer information
file is needed in such cases to make it possible for the employee to pursue a relationship-oriented
customer contact. In addition, a good database will be an effective support for cross-sales and new
product offerings.
In addition to their primary use to maintain customer relationships, databases can be used for a
variety of marketing activities, such as segmenting the customer base, tailoring marketing activities,
generating profiles of customer types, supporting service activities and identifying likely purchasers.
A customer information database should also include profitability information, so that one knows
the long-term profitability of customers in the database. If such long-term profitability information
is lacking, the firm may easily include segments of unprofitable customers in its customer base.
C R E AT I N G A C U S T O M E R - O R I E N T E D S E RV I C E
SYSTEM
Successful customer management demands that the firm defines its business as a service business
and understands how to create and manage a total service offering, i.e. it adopts a service strategy.
The organization’s processes thus have to be designed to make it possible to serve customers and
produce and deliver a total service offering. In other words, the firm has to know and practise service
management. The philosophy and principles of service management are in many respects different from
those of a traditional management philosophy. In Chapter 3 we will discuss such differences. Four
types of resources are central to the development of a successful service system: customers, technology,
employees and time.
Customers take a much more active role than they normally do. The perceived quality of the service
offering partly depends on the impact of the customer. The service system is increasingly built upon
technology. Computerized systems and information technology used in design, production, admin-
istration, service and maintenance have to be designed from a customer-oriented perspective, and
not only from internal production and productivity-oriented viewpoints. The success of relationship
marketing is highly dependent on the attitudes, commitment and performance of the employees. If
they are not committed to their role as true service employees and are not motivated to perform in
a customer-oriented fashion, the strategy fails. Hence, success in the external marketplace requires
success internally in motivating employees and making them committed to the pursuit of a relation-
ship marketing strategy. Marketing based on a service and relationship strategy is, therefore, highly
dependent on a well-organized and continuous internal marketing process. Internal marketing will be
discussed in some detail in Chapter 14. Time is also a critical resource. Customers have to feel that the
time they spend on their relationship with a supplier or service firm is not wasted. Badly managed
time creates extra costs for all parties in a relationship.
C U S T O M E R VA L U E A N D VA L U E C R E AT I O N
Value is an elusive concept, and it has been approached and defined in many different ways. In some
situations, especially but not only in business-to-business markets, it can be measured in monetary
terms. In other contexts, mostly in consumer markets, value is merely a perception. However, even
when value is calculated in monetary terms, there is often this element to it, for example perceived
ease of doing business with a firm, or trust in a firm. A value perception can be based on experiences
with a service provider in a variety of different ways.8 Here we do not go into the various ways value
can be calculated or perceived. Instead we define value in a simple but practical way as ‘being better off’.
More value means that a customer, after having been supported by a service provider, is or feels better
off than before.9 What ‘better off’ means in any given situation must be analysed and, if possible,
calculated. In Chapter 6, Return on service and relationships, how to calculate value for both a customer
and the service provider is discussed and appropriate metrics presented. It should be observed that a
VALUE CREATION AND THE VALUE-GENERATING PROCESS 13
customer does not always have positive experiences, and sometimes the customer may also be ‘worse
off’, which means that value deterioration has taken place, at least temporarily.
Service management requires a customer-focused outside-in approach. Value for customers, and
the service provider’s capability to support its customers’ processes in a way that enables the customers
to create value and achieve their goals, are key aspects of outside-in service management. In marketing,
value for customers has for decades been considered a key aspect of service management,10 which
has been re-emphasized during the past few decades.11
Traditionally, value creation is seen as a value chain,12 which is dominated by various activities of
a supplier, whereas the role of customers is marginalized and often neglected. This model of value
creation is based on a labour theory view of value, according to which value is gradually worked on
in the supplier’s processes, or in a wider context in a supply chain’s different processes. As a result,
value is considered embedded in the supplier’s output, and materializes when customers pay money
for this output. Therefore, this value concept is labelled value-in-exchange. Normann and Ramı́rez,
suggesting a value constellation model,13 were the first to criticize this view as being provider-centric,
excluding the important impact on value by other parties in the supplier-customer ecosystem, and by
the customers as users of the output.
As we have demonstrated, all kinds of resources can be offered as service, and as Gummesson14
points out, are used by customers as service that renders value for them. This is supported by Normann and
Ramı́rez,15 who emphasize that a defining aspect of a service perspective is ‘. . . the role (or roles) that
the seller plays in helping customers to create value for themselves’. According to the contemporary
view, value for customers is created by the customer in the customer’s processes, supported by the resources and
processes of service providers. This notion leads to an alternative value concept based on utility theory
labelled value-in-use, meaning that value for a customer is created during usage. Another notable
difference between value-in-use and value-in-exchange is that value-in-exchange materializes at one
particular point of time, i.e. when a sale is concluded and money is paid for the resource, whereas
value-in-use evolves over time during the usage or consumption process.16
Another important difference between the two concepts is that value-in-exchange is always positive
on some level determined by the price paid, whereas the evolvement of value-in-use can be both
positive, ‘value creation; better off’, and negative, ‘value destruction; worse off’.17
In conclusion we may state that customers do not buy goods or services, or any other resources or
resource constellations as such, but instead the service the resources can provide them with, which
enables value creation in their processes.18 Resources provided to customers over time in a relationship are
only facilitators of value. As service providers get in touch with their customers and direct interactions
between the provider’s resources and the customer occur, the service provider will engage with the
customer’s processes and have opportunities to influence them. Consequently, we can conclude that
value for customers is created throughout the relationship by the customer, partly in interactions between the
customer and the supplier or service provider.19 The focus is not on the resources, such as goods or services,
but on the customers’ processes where value creation occurs.20
VA L U E C R E AT I O N A N D T H E VA L U E - G E N E R AT I N G
PROCESS
In 1993 Normann and Ramı́rez pointed out that several parties, such as a supplier, subcontractors
to the supplier, financing institutions and the customer itself, contribute to the value that in the end
emerges for the customer.21 Some ten years later, Vargo and Lusch stated the same conclusion in
their service-dominant logic of value creation and marketing by claiming that customers and firms are
always co-creators of value.22 However, as service-dominant logic is more of a systemic approach

on a societal level, discussing value co-creation in a metaphorical manner, it is less applicable for
management practice. Here we use the management-oriented view of value creation of the service logic
approach instead. It provides concepts and instruments that help managers to understand the different
roles and goals in value creation of service providers and customers, respectively.23 In Appendix 1,
similarities and differences between service logic and service-dominant logic are summarized.24
As value for a customer is defined as value-in-use and created by the customer, from a management
point of view it is important to clearly define what the service provider does and what the customer does in
the total process of creating value for the customer. This total process can be labelled value generation.
The value-generation process and its sub-processes are illustrated in Figure 1.5.
As the figure demonstrates, the value generation process can be divided into three spheres: a customer
sphere, a provider sphere, and a joint sphere. From a management point of view, keeping these value
creation spheres apart is important, because the roles and goals of the service provider and customer
respectively differ between spheres.
The customer’s creation of value-in-use takes place in the customer and joint spheres. In the
customer sphere two types of value creation take place:
● The customer creates value independently from the service provider.
● The customer engages in social value co-creation with members of his ecosystem, such as family,
friends, business associates, or social media connections.
Independent value creation means that the customer makes use of acquired resources, such as goods or
services or combinations of these and other resources, and integrates them with other available and
Provider sphere Joint sphere Customer sphere Value-in-use

evolving over
Customer’s value creation
time during
Design Development Manufacturing Delivery value creation
(cumulative
Back office Front office
process)
Resource compilation Co-creation Customer alone Customer’s

platform ecosystem
Provider’s creation of Independent
potential value-in-use Co-creation of creation of Social value
(value facilitation) value-in-use value-in-use co-creation
Potential
value-in-use
(output)
Note: The value spheres do not necessarily follow in a linear manner.
F I G U R E 1.5
Value generation process: value creation and co-creation according to the service logic.
Source: Adapted from Grönroos, C. and Voima, P., Critical service logic: making sense of value creation
and co-creation. Journal of the Academy of Marketing Science, 41(2); 2013: p. 136. With kind
permission from Springer Science and Business Media.
VALUE CREATION AND THE VALUE-GENERATING PROCESS 15
needed resources in a usage process. The customer interacts only indirectly with the firm through its
products and non-interactive systems which do not respond in more than one way when operated
on by the customer. Most products and systems, but of course not all, are like that.
Social value co-creation means that a customer interacts with people in his social ecosystem, and during
these interactions the value that evolves for the customer from using goods and services may change
in any direction. The customer may become better off or worse off.25
The joint sphere refers to the part of the service process where the customer directly interacts with the
service provider. During these direct interactions the provider’s process and the customer’s process do
not run in parallel but merge into one interactive, collaborative and dialogical process. In this merged process
the two parties relate to each other, work together and communicate in a dialogical fashion. The two
parties in the process engage with each other’s processes.26 Hence, they may directly influence each
other’s perception of value created in the interactions through communication, actions and reactions.
During this merged interactive process a co-creation platform is formed. On this co-creation platform
such interactions occur, and they enable the service provider to engage with the customer’s value-creating
process and influence this process, and thus co-create value together with the customer.
From a management standpoint, value co-creation between the customer and the service provider
occurs only when a co-creation platform has been formed and direct interactions between the two
parties take place. Furthermore, it should be observed that it is the customer who drives and is in charge
of the value creation process. On the co-creation platform the service provider can be invited to join
this process as a value co-creator, but if the customer does not want to listen to the provider, and to
communicate and work with the provider, no co-creation takes place. It is the customer’s decision.27
For example, in a restaurant, a guest may choose to listen to the waiter’s explanation about why an
item on the menu is missing, and based on a dialogue with the waiter moderate a negative feeling of
value, or he may choose not to listen and his value experience will remain negative. In the former
situation, the customer invites the provider to co-create value with him, but in the latter situation he
does not allow co-creation.
Other than value co-creation in such direct interactions, what is the service provider’s role and goal
in the value generation process? In the provider sphere the firm compiles resources, such as products, ser-
vices, information and other types, or resource constellations, which are offered to customers. These
offerings include potential value-in-use as an output from the firm’s resource compilation process. The
service provider’s goal is to facilitate the customer’s creation of value-in-use by providing value-supporting
resources as potential value-in-use, which this customer may convert into realized value-in-use in their
own sphere.28 If and only if a co-creation platform of direct interactions exists or can be established,
in addition to the role of value facilitator the service provider may also co-create value-in-use with
its customers.29
In conclusion, according to a service logic:
● The customer is the value creator (of value-in-use) in the customer sphere and in the joint sphere (if such
a sphere has been established).
● The service provider is fundamentally a value facilitator in the provider sphere through resource com-
pilation aimed at provision of potential value-in-use.
● Provided that direct interactions between the firm and the customer occur or can be created, a
co-creation platform is formed, and the service provider has an opportunity to engage with the
customer’s value-creating process and co-create value with the customer as well in the joint sphere.
● If interactions between the customer and people in his ecosystem occur, social value co-creation takes
place in the customer sphere.
In the following section the co-creation platform will be discussed and two models of value co-
creation presented.
M O D E L S O F VA L U E C O - C R E AT I O N
There have been some attempts to develop models of value co-creation, but this has turned out
to be difficult, probably because co-creation has been considered an omnipresent phenomenon in
the relationship between a firm and a customer, where everything is co-creation. In this section we
present models of value co-creation, which are based on the service logic view, according to which
co-creation of value requires a co-creation platform of direct interactions between a service provider
and a customer. Value co-creation is a reciprocal process. On the co-creation platform it is not only
the firm that may influence the customer’s value creation; it works the other way as well. In addition
to the price paid for service, the customer may also provide other value-supporting service in return,
such as feedback about how the provider’s systems function and information about how to improve
them to make them more competitive.
Hence, two models of value co-creation are presented, one about value for the customer, and a reverse
model about value for the service provider. In Figure 1.6 a model of co-creating value for the customer,
RESOURCE
CATEGORIES ACTIVITIES
Physical
resources
Accessibility
(goods, tangibles,
effect
systems)
(physical,
mental, virtual) EXPERIENCED
SERVICE Contact SERVICE
CONCEPT employees (Outcome + Process)
Interactive
communication
Focal
customer
Peer
communication
Fellow
customers
Note: The area inside the dotted circle denotes the value co-creation platform. Depending
on how actively and successfully it is used by the parties, the co-created value effect differs.
F I G U R E 1.6
Value co-creation: value for the customer.
Source: Grönroos, C., Conceptualising value co-creation: a journey to the 1970s and back
to the future. Journal of Marketing Management, 28(13–14); 2012: p. 1528. Reproduced by
permission of Taylor & Francis.
MODELS OF VALUE CO-CREATION 17
based on the servuction model by Eiglier and Langeard and the interactive marketing model by Grönroos,
is illustrated.30 The servuction model provides the resource categories to the left in the circle in the
middle of the figure. The different activities to the right in this circle are suggested in the interactive
marketing model.
The model moves from the left to the right. The starting point is a governing service concept, which
states what the service provider attempts to do for its customers. There are four resource categories:
physical resources, including goods, other tangible elements and systems, and of course also IT-based
technologies,31 contact employees interacting with the customers, the focal customer, for whom service is
provided, and fellow customers simultaneously present in the service process.
In the direct interactions between the resources on the co-creation platform, three types of influ-
ence on the focal customer’s value creation may take place. The physical resources and contact employees
create an accessibility effect in the service process, which makes the service easier or more complicated
to access and use, and therefore influences the customer’s perception of the service. This effect may
be physical, mental, or even virtual. The contact employees and the focal customer engage in a dialogical
interactive communication, which also influences the focal customer’s perception of the service. Finally,
the focal customer and fellow customers may communicate with each other (peer communication), which can
have a similar effect. These influences on the service have a continuous separate and/or combined
effect on the focal customer’s service experience, both with the outcome of the service process and
with the process itself (in Chapter 4, Service and relationship quality, the quality effects of the outcome
and the service process will be further discussed). The focal customer’s co-created value perception
is grounded in this experience, and may continue to evolve during an independent value creation and
social value co-creation phase that may follow.
As an example, we can think about a restaurant. The waiter (contact employee) and the various
physical resources and systems, such as the food, tables and chairs, atmospheric artefacts, menus and
serving and paying systems, and other resources, together make the restaurant service accessible both
from a physical and mental standpoint. In the interactions between the restaurant guest as the focal
customer and the waiter, the guest asks, for example, clarifying questions about items on the menu, the
waiter responds and makes suggestions, and on top of that non-task related communication may take
place. These discussions form interactive communication between the guest and the contact employee.
If there are fellow customers in the restaurant, the guest may discuss the restaurant or the menu with
them, or the behaviour of fellow customers may in many other ways communicate something, good
or bad, about being in the restaurant. For example, too noisy a company at a nearby table may create
negative communication. All this is peer communication.
The various activities exemplified above in a restaurant context form a co-creation platform with
direct interactions. These various types of interactions form the restaurant guest’s, the focal customer’s,
experience with the restaurant service. This experience makes the customer better off in various
degrees, or in a negative situation, worse off. Hence, value-in-use co-created by the resources on the co-
creation platform emerges. After the customer has left the restaurant, this value may evolve further, for
example, when he continues to think about it or about an element of it, such as the excellent food
or impeccable service.
However, continuing the restaurant example, value is not only co-created for the customer. Co-
created value may flow in the other direction as well, forming a reverse value co-creation model.
Figure 1.7 includes a model of co-creating value for the service provider.
In this model, as illustrated by the figure, the value process moves from right to left. The start-
ing point is the customer’s participation in the restaurant’s service process. In this reverse value co-
creation model there are three resource categories: physical resources and systems, the customer, and contact
employees. The activities in the value co-creation process are accessibility of customer feedback and
RESOURCE
ACTIVITIES CATEGORIES
Physical
resources
and systems
Internal Customer Accessibility
ACTIONABLE of customer CUSTOMER
support feedback
INFORMATION feedback PARTICIPATION
system input
Customer
Interactive
communication
Contact
employees
Note: The area inside the dotted circle denotes the platform for value co-creation. The level of customer
feedback input varies, depending on how effectively the firm manages to make use of it.
F I G U R E 1.7
Value co-creation in service: value for the service provider.
Source: Grönroos, C., Conceptualising value co-creation: a journey to the 1970s and
back to the future. Journal of Marketing Management, 28(13–14); 2012: p. 1530. Reproduced
by permission of Taylor & Francis.
interactive communication. The output of this reverse model is actionable information which the firm can
use for developing its resources, systems and processes, and even its service concept. The amount of
information depends on how prepared the firm is to register customer feedback. There must be some
kind of internal support system – either formal or informal, but still supporting an internal flow of cus-
tomer feedback – for registering feedback and analysing it and turning it into actionable information
and knowledge.
In the restaurant example, the customer interacts with the waiter and other employees, and interac-
tive communication occurs. This communication may include either direct complaints or direct sugges-
tions about improvements, or it may in a more subtle way include ideas for future use. If the contact
employees are encouraged to gather such information, and have the skill to do it, and if there is a
system for registering it for management use, this is co-created value for the restaurant.
Furthermore, in addition to interactions with the waiter, the customer also interacts with and
perceives the many physical resources and systems of the restaurant. Sometimes the customer does
not voice his perceptions of these interactions with contact employees and physical resources and
systems in interactive communication with employees, but still he wants to make them known to
the service provider. In order to make such feedback information accessible to the restaurant, or any
firm, an easily usable system for customer complaints and feedback through various means should
be used. Internet-based systems for gathering customer feedback are frequently used, but old-fashioned
paper-based systems can also exist. The important thing is that customers who did not want to give
THE SERVICE PERSPECTIVE COMPARED WITH OTHER STRATEGIC PERSPECTIVES 19
feedback directly, for example in the restaurant, or who later came to think about something to com-
municate, should be offered an easily accessible feedback system, which in turn makes the feedback
information accessible to the firm.32
If the firm manages to register customer feedback information either based on interactive commu-
nication during the service process or from a feedback system that makes it easy to give feedback after
the service process, then actionable information to be used to change or improve the service process
or some part of it, or to develop the service concept, is accessed. This is a reverse value co-creation
process, which gives the provider valuable means for improving its operations.
T H E S E RV I C E P E R S P E C T I V E
Here and in the following sections we will discuss in more detail what a service perspective on business
means, and contrast this perspective with three other strategic perspectives.
Many firms fall into the trap of competing with low prices, which may sometimes be effective, but
most often is a way of giving away the revenue that is needed to create and maintain a sustainable
advantage over the competition. Price is never a sustainable advantage. As soon as a competitor can
offer a lower price, the customer will be gone. Every firm, regardless of whether its core product
is a physical good or a service, or whether the firm is operating in consumer markets or business-
to-business markets, has the option of taking a service perspective. A service perspective will enable
management to see different opportunities to create a competitive advantage compared with other
strategic perspectives, and more importantly, it forces the firm to get closer to its customers and
acquire much more insight about the customers’ life and business than is normally the case. By adopt-
ing a service perspective and providing service, the likelihood that a firm becomes meaningful for its customers
increases.
T H E S E RV I C E P E R S P E C T I V E C O M PA R E D W I T H
O T H E R S T R AT E G I C P E R S P E C T I V E S
Firms can choose from a number of strategic perspectives, of which a service perspective is one. For
example, four major strategic perspectives can be distinguished as follows:
● Service perspective.
● Core product perspective.
● Price perspective.
● Image perspective.
First, the three comparison perspectives will be described briefly, followed by the service
perspective.
A core product perspective is a traditional scientific management-based approach,33 where the quality
of the core solution is considered to be the main source of competitive advantage. A firm that, for
example, has a sustainable technological advantage can benefit from applying such a perspective.
The core product is supposed to be the sole or major carrier of potential value for customers. In
such cases, services or singular service activities may be included as necessary elements in customer
relationships, but their role is not strategic. A firm that adopts a core product perspective without
having a technological advantage often falls into the price trap. In the long run, this is not a sustainable
strategy. Such a core product perspective is often also adopted by service firms, such as banks and
insurance companies, where the core service, for example a loan concept or an insurance policy, is
considered the key source of competitive advantage. In a competitive situation, this seldom works
well. Such a service firm reverts to being a product firm taking an inside-out management approach.
Taking a price perspective means that the firm considers a continuously low price to be the major
means of competition. If a sustainable cost advantage can be achieved and maintained, this is a possible
perspective to take. The firm may still obtain an acceptable profit margin so that it can invest in
its future. However, if the cost advantage is lost, a strategic approach based on a price perspective
becomes dangerous. Prices are pressed further down by the competition, and the firm loses its chance
to develop for the future. Adopting a price strategy leads to an inside-out management approach. Such
a strategy works if the customers accept the lower level of service which goes with the lower price.
An image perspective will make the firm use mostly marketing communications to create imaginary
values in addition to the potential value of the core offering. For some types of goods and services –
for example, fashion products such as designer clothes and perfumes, some consumer packaged goods
such as soft drinks and some service such as fast-food restaurants – an image approach has been
effective. Such a strategic approach requires there to be an attractive and functioning core product
as a starting point. The offering also easily becomes very dependent on the imaginary extras created
by the firm’s marketing strategy. If the firm stops reinforcing them, they may eventually deteriorate
to just another physical product or service in the marketplace. Therefore, pursuing an image strategy
demands continuous heavy investment in marketing communication. If the firm cannot afford this,
the offering (consisting of a core physical good or service and a weakening image-boosting support)
will lose its attractiveness, and competitors who can continue to invest extensively in marketing
communication will take over. Also in an image strategy management is easily dominated by an
inside-out approach.
A service perspective is based on an outside-in management approach, whereby the firm aims
to support its customers’ everyday processes in a way that facilitates value creation in individual
customers’ life processes and business-to-business customers’ business processes. The core solution,
whether a physical good or a service, has to be good enough to provide a competitive advantage,
but this is not enough for success in the marketplace, or in the digital marketspace. What creates
a sustainable competitive advantage is the development of every element of the customer relation-
ship, including all types of resources and processes, into one overall service offering. The driving
force is the service perspective, according to which customers are served with a value-supporting
combination of goods and services, additional separately billable services, such as repair and mainte-
nance, and other non-billable services, such as invoicing, complaints handling, advice and personal
attention, information and other value-supporting components. This situation can be described as
service competition.34 This is a competitive situation where the core solution is the prerequisite for
success, but where the management of a number of other required resources, together with the core
solution, forms a total service offering, aiming at supporting customer processes. The total service
offering determines whether or not the firm will be successful. This book is about how to manage
an organization and its customer relationships in service competition.
The central requirement of management in service competition is to appreciate the service perspec-
tive as a strategic approach and understand how to manage the firm in order to develop a total service
offering. This is called service management, and can be seen as an alternative management approach
to scientific management,35 geared to the demands of service competition. Service management as a
management focus will be discussed in detail in Chapter 3 on the service profit logic and service management
principles and in subsequent chapters.
CHOOSING STRATEGIC PERSPECTIVE 21
H I D D E N A N D R E C O G N I Z E D S E RV I C E S
In order for firms to develop a total service offering successfully, they must observe that two kinds of
service elements are included in such an offering:
● Recognized services.
● Hidden services.
Recognized services, such as repair and maintenance and consultancy, are thought of as service activ-
ities by management. Sometimes, but not always, they are billable, which means that a price can be
put on them. These services form only a part of the service offered to customers. For example, all
customers, individual consumers as well as organizations and business-to-business customers, note the
way a firm handles invoicing, takes care of quality problems, mistakes and service failures, manages
complaints, offers documentation and directions for the use of goods and services, offers customer
training on how to use machines, equipment and software, handles queries and answers questions
and e-mails, pays attention to customers and their special requests and wishes, keeps promises and
delivers promptly, etc. The clarity and accuracy of invoices, speed and efficiency in managing failures
and complaints, the attention that employees show customers and the promptness with which actions
are taken all influence a customer’s perception of the value of being a customer of a given supplier
or service provider. In addition, this also creates more or less costs for the customer, for example
costs of processing invoices and following up on complaints, and corrections of the problems causing
the need to complain. They either make it easier or more troublesome to be a customer and also
frequently help the customer to save money. The way these services function contributes to making
it worthwhile for customers to continue purchasing from the same firm, and prevents customers from
considering alternative options. Hence, these normally non-billable types of service components also
contribute to the creation of a competitive advantage.
The problem with hidden services such as invoicing, complaints handling, documentation and cus-
tomer training is that they are seldom perceived as service by management, and therefore are frequently
not designed and managed as value-supporting service to customers. Instead, they are managed as
administrative, legal or operational routines with internal efficiency criteria and cost consideration as
the main guidelines. As a result, customers generally do not perceive most of these as value-enhancing
activities. However, the use of hidden services in customer relationships is a powerful way of setting apart
a firm from its competitors and of supporting a sustainable competitive advantage.
C H O O S I N G S T R AT E G I C P E R S P E C T I V E
A firm can choose any one of the perspectives discussed above. Following this choice it will develop
a strategic approach which differs from the approach that would have been taken if another strategic
perspective had been adopted. Choosing one strategic perspective does not mean that aspects of the
other perspectives are not important. However, the choice of a perspective determines the way a firm
will develop resources and competencies. For example, choosing a service perspective as the main
strategy does not mean that less attention than otherwise will be paid to production technologies and
the technical quality of the core solution. Elements from perspectives other than the dominating one,
however, have always to be geared to the requirements of the dominating perspective. The fine-
tuning of a strategic approach varies, of course, but Table 1.2 shows in a simplified way the strategic
orientation of the four strategic perspectives.
TA B L E 1.2
Characteristics of strategic perspectives.
Strategic Characteristic of a corresponding strategic approach

perspective
Service The firm takes the view that a service offering is required to support the
perspective customer’s value creation, and that the core solution (a physical
product, service or combination of goods and services) is not sufficient
to differentiate the offering from those of competitors. Physical
product components, service components, information, personal
attention and other elements of customer relationships are combined
into a total service offering. Because it provides service to the customer,
the offering is labelled a service offering, although the core solution
may be based on a physical product, because all elements of the
offering are combined to provide a value-supporting service for
customers. Developing such a total service offering is seen to be
of strategic importance and therefore given highest priority by
management. Hidden services, both billable and non-billable, are
considered part of this offering and supportive to the customer’s
value-creating processes. Price is considered less important for
customers than long-term costs. A firm that adopts a service
perspective will consider itself a service business.
Core product The firm concentrates on the development of the core solution, whether
perspective this is a physical product or a service, as the main provider of value for
the customer’s value-creating processes (the customer’s use of solutions
to create value for himself or for an organizational user). Additional
services may be considered necessary but not of strategic importance,
and therefore they have a low level of priority. Hidden services,
especially non-billable ones, are not recognized as value-enhancing
services. The firm differentiates its package from others through
providing an excellent core solution.
Price The firm takes the view that price is the dominating purchasing criterion
perspective of its customers, and that being able to offer a low price is a necessity
for survival in the marketplace. Price is seen as the main contribution
to the customer’s value-creating processes. The provision of additional
services is not considered value-enhancing and is therefore of lower
priority than the capability to offer a low-price solution. Price is
considered more value-enhancing than the long-term cost effects of a
solution. The firm is differentiating its offering by being the cheapest
alternative available, or one of the cheapest.
THE LOGIC OF SERVICE COMPETITION 23
Image The firm differentiates its offering by creating imaginary extras (a brand
perspective image) around its core product. Such extras are mainly created in the
minds of customers by advertising and marketing communication. The
core solution is seen as a starting point for the development of
customer value, but the brand image that is created by marketing is
considered to be the major contribution to the customer’s
value-creating processes.
A C U S T O M E R R E L AT I O N S H I P P E R S P E C T I V E
Service as a perspective and service activities are inherently relational. A service encounter, where a
customer, for example, is a restaurant guest or has a machine repaired, is a process. At some point
in this process the service provider is normally present, interacting with the customer. Even a single
encounter includes relational elements. If several encounters follow each other in a continuous or
discrete fashion, and if both parties want it, a relationship may emerge. If a customer feels that there is
something special and valuable in his contacts with a given firm, a relationship may develop. Perceived
relationships are not enough to make customers loyal, but they are a central part of loyalty, and loyal
customers are normally, but not always,36 profitable customers.
Relationship marketing has emerged, or rather re-emerged, as a marketing paradigm.37 Marketing
and management based on customer relationships is seen as an alternative to focusing on transactions
or exchanges of goods and services for money. Firms choosing a service perspective as their strategic
approach almost inevitably have to focus on relationships with their customers and other stakeholders,
such as suppliers, distributors, financial institutions and shareholders. Thus, understanding relationship
marketing and how to manage customer relationships becomes a necessity for understanding how to manage a firm
in service competition. Hence, the approach to managing in service competition taken in this book is
geared towards a customer relationship-based view as a dominating marketing perspective.
T H E L O G I C O F S E RV I C E C O M P E T I T I O N
Service competition is nothing new. Service firms such as banks, hotels, restaurants and transportation
companies have always faced such situations. They have not always realized what this requires of them,
and therefore sometimes reverted to a product strategy and inside-out management. However, firms
in more and more industries, regardless of whether they are traditionally categorized as service or man-
ufacturing industries, now find themselves in a situation where the core product only offers a starting
point for the development of a competing advantage, but does not guarantee it any more. In such
a situation a service perspective offers an approach to the strategic reorientation. The development
of the core product into a service offering, including product elements and recognized and hidden
services, may make the firm competitive again. Service competition has become a reality for most firms.
There are at least three reasons for the need to focus on service. The demand for adopting a service
perspective, and thus for learning how to cope with service competition, is partly customer-driven,
partly competition-driven and partly technology-driven. First, customers in a greater number of markets
demand more than a mere technical solution to a problem provided by a service firm or a manu-
facturer. Customers are gradually becoming more sophisticated, more informed and, consequently,
more demanding. By and large, they are looking for more comfort, fewer problems, lower additional
costs and less trouble caused by the use of goods and services; in short, they are looking for better
value. Second, this demand by customers is constantly enhanced by competition, which is becom-
ing increasingly global. In the pursuit of more valuable offerings for their customers, firms turn to
service, and thus force competitors to appreciate the importance of service too. Third, technological
developments, especially in the area of information technology and digital solutions, enable firms to
create new service more easily. An early example of this was the just-in-time approach to logistics,
which to be successfully implemented required high-powered computerized information systems.
More recently, the development of the Internet and e-business and mobile commerce has also made
it possible to create new service. The Internet is a highly relational tool, making it possible for firms to
develop interactive and relationship-building contacts with their customers, thus enhancing the value
support of their core solution. The emergence of mobile commerce reinforces this trend. By and
large, new information technology often makes it easier to maintain relationships with customers, as
well as creating new ways of doing so.38 At the same time electronic and mobile technologies make
it possible for customers to maintain contact with service providers and use their service free from
time and spatial restrictions, thereby providing the everyday activities of customers who appreciate
this with additional value-creating support.39
When new elements are added to the goods and service components of customer relationships,
these relationships are expanded. Traditionally, marketing and sales organized in marketing and sales
departments have been responsible for customers. The other departments of the firm were involved
only to a limited extent. As the relationship grows in scope, more functions are in immediate con-
tact with customers: for example, bank tellers and ATMs, service technicians involved in the repair
and maintenance of machines and equipment, telephone receptionists, call centre and contact cen-
tre systems, people in R&D departments. Responsibility for developing and maintaining customer
relationships, which is normally called ‘marketing’, is no longer solely related to the marketing depart-
ment and the marketing director. In the organizational structure this new shared responsibility for
the customer has to be recognized and accepted.
As mentioned, in the literature there are two major ways of understanding the service perspective
on business, service logic and service-dominant logic. Because the latter approach tends be basically systemic
and societal and advances the understanding of the service perspective on a systemic level, in this
book, which is about service management, we follow the service logic approach. Service logic takes
a management-level approach to understanding and managing a service perspective.40 In Appendix
2 the managerial principles of service logic are summarized. Table 1.3 provides a comparison between
some central elements of service logic and goods logic relating to, respectively, a service perspective and
product perspective on business.
Finally, it is important to realize that although customers’ experiences with service and a service
provider is considered important for value creation, most service situations are very ordinary and
mundane, such as travelling on a bus, operating a vending machine or making a phone call. Although
experiences sometimes can be enhanced and made exclusive, as suggested by Pine and Gilmore,41
the ordinary service situations must also be handled successfully, such that the customer’s processes
are supported successfully.
W H AT I S A R E L AT I O N S H I P ?
Relationships occur between two or more parties. In much of the management and marketing liter-
ature on the subject the questions ‘what is a relationship?’ or ‘when do we know that a relationship
has developed?’ are not discussed.
WHAT IS A RELATIONSHIP? 25
TA B L E 1.3
Service logic versus goods logic.
Service is a holistic process aiming at Goods are resources delivered to

supporting customers’ processes. customers for their use.
Value evolves over time during the customers’ Value is embedded in resources.
use of resources.
Direct interaction between the firm and its Customers interact only indirectly with
customers exist and form a co-creation the firm through their use of products
platform. and non-interactive systems. No
co-creation platforms exist.
The firm may co-create value with its Firms cannot co-create value with its
customers on the co-creation platform. customers.
By compiling resources to be used by its Value for customers is embedded in
customers, the firm provides potential resources, and materializes as
value-in-use for them. Through co-creational value-in-exchange at the point and time
and independent value creation as well as of purchase.
social value co-creation, the value potential
is realized by the customers as value-in-use
which evolves during the value creation
process.
The firm can go beyond promising value for its Because a co-creation platform is missing,
customers, and influence its customers’ value the firm is restricted to making promises
creation directly and actively on the about customer value only, through
co-creation platform, and thus marketing offering value propositions.
breaks free from its traditional restriction of
only being able to make promises offered
through value propositions.
One thing is quite clear: a relationship with a customer has not been established only because
the marketer has said it has, or believes it has. Far too often marketers state that they have turned
to relationship marketing and believe that their marketing efforts are relationship-oriented, without
making sure that the customers see it in the same way. In reality, if one asks the customers, much
of what marketing practitioners call relationship marketing has very little to do with creating or
maintaining customer relationships.42 A firm may provide more tailor-made direct mail, customized
e-mail or mobile contacts, membership of a loyalty club or the like, but for the customer this may
mean the same slow service and uninterested service personnel, no or late responses to e-mails or
phone calls, or slow complaints handling. The customer may benefit from improved direct contacts
and membership in a loyalty club, but this is not relationship-based customer management, and no
relationship has developed. A relationship can develop only when all, or at least most, important customer
contacts and interactions are relationship-oriented.
One way of defining when a relationship has developed is to measure how many times a given
customer has made purchases from the same firm. If there have been a number of continuous pur-
chases, or a contract has been effective for a certain period of time, one might say that a relationship
with this customer has developed. Repetitive purchases by a customer can be a sign of the devel-
opment of a relationship between the firm and this customer, but this measure is not a good way
of assessing whether a relationship has developed or not. There are many reasons for a customer to
continue buying from one supplier or service provider for some time without perceiving that he
has a relationship with that firm. Low prices may be one such reason. When a competitor offers a
better price, the customer will turn to that firm. Convenient location may be another such reason.
For example, a supermarket may be conveniently placed on a person’s way home from work and is
therefore patronized by him.
There are a number of other bonds that keep a customer attached to a firm, even though the
customer does not feel that there is any relationship with that firm. If these bonds are removed, there
is a high likelihood that such a customer will be lost. Such bonds may, for example, be technological,
geographical or knowledge-based in nature, or they may be of some other type.
Therefore, it is important that one has some other conception of what a relationship is. A rela-
tionship is by and large related to an attitude. A relationship is not only manifested by the customer’s
purchasing behaviour; their hearts and minds must also be devoted to the relationship and the rela-
tionship partner.43 A person or a group of people feel that there is something that ties them to another
party. This feeling does not develop out of nothing. It has to be earned by the supplier or service
provider. The relationship is earned by the way customers are treated. Hence, a firm should cre-
ate interaction and communication processes that facilitate a relationship, but it is the customer, not
the firm, who determines whether or not a relationship has developed. This is further discussed in
Chapter 9 on marketing and customer-focused management.
The following attitude-oriented description of a relationship may be useful for an understanding of
a relationship: a relationship has developed when a customer perceives that a mutual way of thinking
exists between customer and supplier or service provider.44
From the customer’s point of view this can be stated in another way: ‘I am not there for the
supplier only, the supplier is there for me as well.’ A mutual way of thinking means that there is
two-way commitment. The firm should understand its customers and continuously demonstrate this
by actions. Loyalty45 does not only mean that the customer should stay loyal to the firm, but that the
latter should stay loyal to the former as well. This mutual way of thinking develops over time. This
development process includes interactions between the supplier or service provider and the customer
and communication between them. Interaction includes all sorts of exchanges of goods, recognized
and hidden services, information, administrative, legal and operational routines; in fact, any contact
that occurs between the two parties. Communication takes place as part of all interactions, but in
addition, a series of separate planned communication efforts, such as direct mail, advertising, sales
negotiation, etc. occur. Interaction and communication activities and processes continue over time
and become integrated into one value-creating relationship process. If they do not develop in that way,
a relationship will not emerge. In Chapter 10 we shall go into these interaction and communication
issues in more detail.
It is of course not an easy task to measure whether or not a relationship has emerged based on this
description. However, the marketer should measure the existence of a relationship on this level as
well. Even though an ideal measurement instrument cannot be developed, this is not an excuse for
not trying to create an instrument that comes as close as possible.
The inherent mutuality in the relationship perspective creates a win–win situation, where both
parties should gain something. Effective collaboration in a long-term relationship between a supplier
ARE ALL CUSTOMERS INTERESTED IN RELATIONSHIPS? 27
or service provider and a customer can continue only if the parties involved feel like ‘winners’,
or at least feel that they continuously gain more from the situation than from any other option
available.46 An adversarial situation, where the marketer aims at doing something to the customer
and not with and for the customer, which is far too common in much marketing practice, is not part
of relationship marketing. Hence, correctly understood and implemented relationship marketing can
foster mechanisms that create ethical values in an organization and support ethical decision-making.47
WHEN IS THE CUSTOMER A CUSTOMER?

In a transactional approach to marketing the customer is considered a customer when he (or the buying
organization) is the target of marketing and sales efforts. According to the relationship perspective, the
situation is different. A relationship is an ongoing process. From time to time transactions of goods,
services, information and other resources for money take place, but the relationship exists all the time,
including the time in between such transactions. Customers should continuously feel that the other
party is there to help and support them, not just when they make a purchase. Hence, once a relationship
has been established, customers are customers on a continuous basis – and they should be treated as such regardless
of whether at any given point in time they are making a purchase or not. Firms that understand this, and
perform like this, treat their customers as relational customers.
For several years SAS Scandinavian Airlines showed that they understood the meaning of their
most valued customers, holders of the most prestigious frequent traveller cards, and hence the most
frequent users of the airline’s service, and regarded them as relational customers. Such card holders
were invited to use the airline’s lounges regardless of whether they travelled on a flight operated
by this airline or not. Customers felt that they were respected as relational customers and frequent
users of the airline’s service. It is not always possible to use a given firm’s service all the time. As all
frequent travellers know, access to airport lounges is a real value-supporting service. For some reason,
this policy was suddenly abolished. ‘Why should we bear the extra costs of serving other airline’s
customers?’ may have been the question asked by somebody in a top management position. The result
is that customers now know that they are no longer relational customers but are treated as valued
passengers only when they actually use the airline’s service. In other situations they are nobodies for
the firm.
To sum up, unless customers are treated as customers between purchases as well, the firm does not
show a genuine relational intent.
ARE ALL CUSTOMERS INTERESTED

I N R E L AT I O N S H I P S ?
Not all customers are always interested in relationships with a firm. Generally speaking, customers
are interested in either a relational or transactional contact with a firm. Thus, in a given marketing
situation the customer is either in a relational mode or in a transactional mode.48 Some customers who, for
example, buy books from Amazon.com or any other bookstore on the Internet welcome continuous
information about new books that fit their past purchasing history. Others only get annoyed by such
messages showing up in their e-mail inbox.
Furthermore, consumers or users in a relational mode can either be in an active or a passive relational
mode.49 For example, marketers of canned juice can provide web page and e-mail addresses, or fax
or telephone numbers on the can, so that customers have an opportunity to get in contact with the
TA B L E 1.4
Relational and transactional customers.
Customer mode Customers’ expectations
Transactional Transactional customers are looking for solutions to their needs at an

mode acceptable price, and they do not appreciate contacts from the
supplier or service provider in between purchases.
Active relational Active relational customers are looking for opportunities to interact
mode with the supplier or service provider in order to get additional value.
A lack of such contacts makes them disappointed, because the value
inherent in the relationship is missing.
Passive relational Passive relational customers are looking for the knowledge that they
mode could contact the supplier or service provider if they wanted to. In
this sense they too are seeking contact, but they seldom respond to
invitations to interact.
firm, give feedback, make suggestions, file complaints, etc. Customers in an active relational mode
seek contact, whereas customers in a passive relational mode are satisfied with the understanding that,
if needed, the firm will be there for them. They will not make use of the contact opportunity, but
if it is missing they will nevertheless feel disappointed. For customers in a passive relational mode, a
relationship-oriented marketing strategy is important, although it may not seem so. In Table 1.4 the
different customer modes are summarized.
C U S T O M E R B E N E F I T S I N A R E L AT I O N S H I P
Why people enter a relational mode and choose to react favourably to a relationship marketing
approach by a firm is a topic that has not been studied very much. It could be that the primary
reason is to reduce choice. After having found a reliable relationship partner, other alternatives are
less attractive for the customer in a relative sense and thus do not have to be considered on a regular
basis.50 Another reason is that by entering a relationship customers can more effectively fulfil goals
that they had earlier committed to or tentatively committed to, such as profitability, cost reduction,
comfort, health or self-esteem. Finally, for some customers being involved in a relationship is an end
in itself.51
In a study of the benefits for customers of maintaining a relationship with a service provider,
Gwinner et al.52 concluded that benefits can be of three types.
● Confidence: reduced anxiety, faith in the service provider, feeling of trustworthiness of the service
provider.
● Social benefits: personal recognition by employees, customer being familiar with employees, the
development of friendship with employees.
● Special treatment: extra services, special prices, higher priority than other customers.
TRUST, COMMITMENT AND ATTRACTION 29
The confidence types of special relational benefits were considered most important by customers across
all categories of services studied. This means that customers feel more secure by their choice than
they would feel by patronizing any other firm. In this way cognitive dissonance, or a feeling of having
made a less than optimal choice after all, can be minimized or altogether eliminated.
The other types of relational benefits are also important. Wherever interpersonal contacts exist,
social benefits can be developed. Customers may, for example, have a sense of ‘my own contact
employee’ or in some other way feel that there is a special connection to employees. Clearly,
this also has a positive effect on the confidence type of relational benefits. Although special treatments
were also considered important by customers, their role was found to be less important in this
study.
The ultimate benefits for customers of being involved in a relationship should be financial. Espe-
cially in business markets such benefits can be calculated, whereas individual consumers may perceive
them. The financial benefits are of two kinds:
● Increased wealth and/or revenue-generating capability.

● Lower costs of being a customer.
In a well-functioning relationship a business customer can, on a continuous basis, and with the
support of a relationship partner, run its (for example, production, administrative or sales) processes in
a way that generates a higher or steadier flow of revenues. For example, a supplier that can guarantee
that a manufacturer will never be out of raw material or components can support its customer’s
production process in that way. Due to the well-functioning and trustworthy relationship partner the
risk of standstill is eliminated or at least minimized and potential lost sales avoided. In this way the
customer’s financial result will be improved.
A supplier that, for example, can guarantee that quality problems will not occur, or that lengthy
and time/cost-consuming complaints handling procedures will be replaced by smooth service recov-
ery processes, will eliminate unwanted and unnecessary costs for the customer, thus improving the
financial result of the customer.
Both types of benefit can occur simultaneously or sometimes only one of them will be achieved.
Often firms do not calculate these financial effects, and in sales negotiations they are not always
pointed out. However, they should be calculated and sales representatives should develop means of
demonstrating the financial effects of functioning relationships for their negotiation partners.
In consumer markets it is more difficult to calculate financial effects of relationships. For example,
in the case of financial service or insurance service, individual consumers may be able to calculate
similar financial effects of a relationship. In other situations such effects are more or less only sensed.
In many situations the benefits of a relationship are perceived as convenience, increased comfort and
special treatments only.
T R U S T, C O M M I T M E N T A N D AT T R A C T I O N
In the literature the concepts of trust, commitment and attraction play an important role. However,
in spite of numerous studies, especially of trust and commitment, it is not clear how these concepts
function. One reason for this may be the effect of other variables in the customer relationship, such
as bonds between a customer and a supplier or service provider, or boredom, inertia and curiosity on
the part of the customer.
Trust in another party can, for example, be described as one party’s expectation that the other
party will behave in a certain predictable way in a given situation. If the other party does not behave
in the expected way, the trusting party (for example the customer) will experience more negative
outcomes than they otherwise would.53 Another commonly cited definition of trust states that trust
is a willingness to rely on a business partner in whom one has confidence.54
Trust can stem from different sources.55 Generalized trust is derived from social norms. For exam-
ple, a customer knows that a large supplier can be expected to stay in business and offer the same
components and parts in the future due to its size and reputation; he therefore trusts this supplier
to be the continuous source of the components that he is looking for. System trust depends on laws,
industry regulations and contracts but also on the professionalism of the other party. If a customer,
for example, has entered into a long-term contract with a supplier, the customer trusts that the
supplier will perform according to expectations. Personality-based trust is based on the human ten-
dency to rely upon another person to behave in a predictable way according to expectations because
of personality traits. If a person considers that he can rely upon the word or statement of another
person representing a supplier or service provider, trust exists and the customer is prepared to con-
tinue a business relationship with that other party. Finally, process-based trust follows from experience
of business and contacts that have taken place over time in an ongoing relationship between two
parties.
Trust partly depends on past experiences from interacting with another party; partly on other fac-
tors, such as contracts, regulations and social norms on the one hand, and personality factors on the other
hand, which can be expected to make the other party in a relationship behave in a predictable way
according to expectations. The existence of trust in a relationship is a kind of insurance against risks
and unexpected behaviour by the other party in the future.
How trust develops in the marketplace is a debated issue. Is trust built in an ongoing relationship,
or must there be trust in a supplier for a potential customer to engage in a business relationship with
this supplier? There are no clear answers to these questions. However, recent research indicates that if
a supplier is considered trustworthy, it will be easier for this firm to connect with potential customers
and establish a relationship with them.56
Commitment means that one party in a relationship feels motivated to some extent to do business
with another party. Commitment has also been defined as an enduring desire to maintain a valued
relationship.57 A customer is committed to a supplier, for example, because the latter has proved to be
trustworthy and has shown that it is able to offer solutions that successfully support value creation. A
manufacturer may feel committed to a repair and maintenance provider who has consistently proved
that it can offer skilful and timely service of its production machines. If the service provider has taken
extra trouble to do so, for example in spite of excess demand for its service at some point in time, the
sense of commitment is even deeper.
A third key concept in relationship marketing is attraction.58 This means that there should be some-
thing that makes a supplier interesting to a given customer, or the other way round. Attraction can be
based on, for example, financial, technological or social factors. A globally operating certified accountant
will probably find a large firm with affiliations in several countries an attractive potential customer,
which offers large financial opportunities. In the same way a supplier of the latest technology for a
manufacturing process is an attractive partner for a manufacturing firm. Even social contacts that are
highly appreciated may form a source of attraction that can lead to a business relationship. If attraction
between two parties exists, there is a basis for a relationship to develop. If attraction is lacking, the
parties will probably not start doing business with each other.
THE OBJECTIVE AND APPROACH OF THIS BOOK 31
The relation between trust, commitment and attraction and the development of commercial rela-
tionships is not clear.59 However, it seems as if the existence of trust in a business partner and commit-
ment to that partner (probably in consumer as well as in business-to-business markets) may be more
important for customers who see more value in the relationship itself. Such relationship-oriented cus-
tomers may appreciate the existence of trust and commitment more than being satisfied with every
single exchange in an ongoing relationship, whereas customers who are more transactionally-oriented
demand that every transaction should be satisfactory.
Long-term relationships should increase business between two parties. It is, however, not clear that
this is always the case. There may also be negative effects of long-standing relationships that make
customers look for alternative solutions. Curiosity or boredom may be such reasons. The customer
wants to experience other alternatives for a change. There may also be good reason for customers
to look for alternatives. Overlong relationships with one supplier or service provider may create
blindness. The customer may not see, for example, new technologies or new financial opportunities
developed by competing suppliers. The existing relationship partner may not have been able to follow
the developments that have taken place, and as a consequence the customer is locked up with a low-
quality or old-fashioned supplier. The trust and commitment in the relationship partner has remained,
but the customer has observed that the financial or technological attraction that initially may have been
the reason for the relationship to start to develop does not exist anymore. In relationships, customers
must always be aware of this risk. It has sometimes been called ‘the dark side of a relationship’.60
The relationship philosophy in business relies on cooperation and a trusting relationship with cus-
tomers and other stakeholders and network partners instead of an adversarial approach to customers;
on collaboration within the company instead of specialization of roles and the division of labour only;
and on the notion of marketing as a customer-focused management approach, where marketing is
spread throughout the organization, rather than as a separate function for specialists only.
THE OBJECTIVE AND APPROACH OF THIS BOOK

The main objective of this book is to describe the nature and scope of customer-focused management in
service competition in an innovative way. It takes a management approach and a strategy focus; therefore,
tactical issues and instruments are only discussed briefly. Instead, the strategic issues are discussed in
greater detail. It is not a ‘what to do’ handbook, but a how to think and what to think book. Topics
such as personal selling and pricing, which are typical parts of standard textbooks, are not addressed
here, other than as parts of larger strategic issues.
Although this text is based on international research into various areas of service management and
marketing, it is geared to the service-based school of thought, which has internationally been labelled
the Nordic School.61 The main characteristic of this school of thought is the notion that, in service
as well as relationship contexts, marketing decisions cannot be separated from overall management
and the management of other business functions. Neither top management decisions nor decisions
concerning any business functions can be made without considering the external implications of such
decisions. On a research-oriented note, the Nordic School has encouraged qualitative research and
conceptual development, rather than jumping into theory testing when there is no theory to test.
When appropriate, theory testing and quantitative research approaches have of course been used.
The position of the Nordic School has always been that the sound development of context-oriented
theories is a prerequisite for any meaningful testing of theories. No quantum leaps are made based
on quantitative testing of pre-existing theories; only conceptual work can provide new perspectives
suited to new or changing conditions.
This book is intended for people who, as educators, researchers, students or practitioners, are
interested in how to cope with service competition in a customer-focused manner. It is not a book
for service firms only. It is equally intended for manufacturers of physical goods operating in business-
to-business or consumer markets, because the importance of service to success is constantly growing
for such firms. Finally, because service and relationships are interrelated, the present book is as equally
based on customer relationships and relationship management as it is on service management and
managing customers in service contexts.
Today, the traditional context of consumer goods still dominates but the scale is tipping. The
importance of service has already been extended far beyond what are traditionally termed service
industries and the service sector. In fact, it can be argued that everybody is in service. The service
perspective has slowly won more ground and will soon, in the form of service management, take
over and become the norm.62
S U M M A RY
In this introductory chapter the nature of service competition and customer relationships were presented,
and the differences between outside-in management and inside-out management were analysed. The
reasons for taking a service perspective were discussed, and this perspective was contrasted with other
business perspectives. The logic underpinning the service perspective on business was described. Then
value creation and models of value co-creation were presented. In the final part, relationships, who decides
when a relationship has been established, and what relationship benefits there are, were discussed.
QUESTIONS FOR DISCUSSION

1. What is the difference between outside-in management and inside-out management? Why
does a service perspective on business require an outside-in management approach?
2. Which are the three strategic requirements for the implementation of a relationship-based
service approach? What challenges for an organization are created by them?
3. Which are the three tactical elements of a relationship strategy?
4. Describe the spheres of the value generation process, and how the firm and the customer
respectively contribute to value for the customer.
5. Which is the nature of value-in-use? How does it differ from value-in-exchange?
6. Which are the differences between a service logic and a goods logic?
7. What benefits are customers in any given industry looking for that can be offered by a
relationship-based strategy?
NOTES 33
NOTES
1. I was told the story of Ming Hua, the Chinese rice merchant, by a student attending a course on
service management that I was teaching in an executive programme at Thammasat University in
Bangkok. This story is a true relationship marketing case, which illustrates the nature of service
and demonstrates the ingredients of a relationship perspective, and also shows that service and
relationship marketing are not new.
2. See, for example, Grönroos, C. & Gummerus, J., The service revolution and its marketing
implications: service logic versus service-dominant logic. Managing Service Quality, 24(3), 2014,
206–229, and Grönroos, C., Value co-creation in service logic: a critical analysis. Marketing
Theory, 11(3), 2011, 279–301.
3. See Vargo, S.L. & Lusch, R.F., Service dominant logic: continuing the evolution. Journal of
the Academy of Marketing Science, 36(1), 2008, 1–10, where service is defined as using skills and
knowledge on resources for the benefit of someone (or oneself).
4. Grönroos, C & Ravald, A., Service business logic: implications for value creation and marketing.
Journal of Service Management, 22(1), 2011, 5–22.
5. Grönroos, C., Value-driven relational marketing: from products to resources and competencies.
Journal of Marketing Management, 13(5), 1997, 407–420.
6. Grönroos, C., Relationship marketing logic. Asia-Australia Marketing Journal, 4(1), 1996, 7–18.
7. Grönroos, 1996, op. cit.
8. See, for example, Holbrook, M.B., Introduction to consumer value. In Hobrook, M.B. (ed.),
Customer Value. A Framework for Analysis and Research. London: Routledge, 1999, pp. 1–28, and
Sánchez-Fernández, R., Iniesta-Bonillo, Á. M., & Holbrook, M. B., The conceptualisation and
measurement of consumer value in services. International Journal of Market Research, 51(1), 2009,
93–113.
9. Grönroos, C., Service logic revisited: who creates value? And who co-creates? European Business
Review, 20(4), 2008, 208–314, where value in this way is defined as follows: ‘Value for customers
means that after they have been assisted by a self-service process (cooking a meal or withdrawing
cash from an ATM) or a full-service process (eating out at a restaurant or withdrawing cash over
the counter in a bank) they are or feel better off than before.’ (303).
10. Already Wroe Alderson called for ‘a marketing interpretation of the whole process of cus-
tomer utility’ (p. 69). See Alderson, W., Marketing Behavior and Executive Action. Homewood,
IL: Richard D. Irwin, 1957. In Rust, R.T. & Oliver, R.L., Service quality: insights and man-
agerial implications from the frontier. In Rust, R.T. & Oliver (eds), Service Quality: New Direc-
tions for Theory and Practice. Sage: Thousand Oaks, CA, 1994, pp. 1–20, the authors claim that
‘. . . ultimately it is perceived value that attracts a customer and lures away a customer from a
competitor’ (p. 7). See also Sheth, J.N. & Uslay, C., Implications of the revised definition of
marketing: from exchange to value creation. Journal of Public Policy & Marketing, 26(2), 2007,
302–307.
11. In the American Marketing Association’s two attempts in 2004 and 2007 to redefine marketing,
value for customers was explicitly included. Also in research into service as a perspective, value
for customers has been emphasized. See, for example, Vargo, S.L. & Lusch, 2008, op. cit. and
Grönroos, C., Adopting a service logic for marketing. Marketing Theory, 6(3), 2006, 317–334.
12. See Porter, M.E., Competitive Advantage. New York: The Free Press, 1985.
13. See Normann, R. & Ramı́rez, R., From value chain to value constellation. Harvard Business
Review, 71(Jul–Aug), 1993, 65–77.
14. Gummesson, E., Relationship marketing: its role in the service economy. In Glynn, W.J. &
Barnes, J.G. (eds), Understanding Service Management, New York: John Wiley & Sons, 1995, pp.
244–268.
15. Normann, R. & Ramı́rez, R., A theory of the offering: toward a neo-industrial business strategy.
In Snow, C.C. (ed.), Strategy, Organization Design, and Human Resource Management, Greenwich,
CN: JAI Press, 1988, pp. 111–128 (quote on p. 116).
16. See, for example, Grönroos, 2008, op. cit. and Grönroos, C. & Gummerus, J., The service revolu-
tion and its marketing implications. Service logic versus service-dominant logic. Managing Service
Quality, 24(3), 2014, 206–229. It is interesting to note that more than two millenia ago Aristotle,
in his value theory, defined the value-in-use and value-in-exchange concepts, and claimed that
the former is the more important one to understand market activities, because value-in-exchange
is a function of value-in-use. See Gorden, B.J., Aristotle and the development of the value theory.
Quarterly Journal of Economics, 78(1), 1964, 114–128.
17. Echeverri, P. & Skålén, P., Co-creation and co-destruction – a practice theory based study of
interactive value formation. Marketing Theory, 11(3), 2011, 351–373.
18. Gummesson, 1995, op. cit.
19. See Grönroos, C., Service Management and Marketing. A Customer Relationship Management
Approach. Chichester: John Wiley & Sons, 2000, p. 24.
20. As is the norm in the management and marketing literature, and in this book, the expression
value creation is used. However, because this phrase implies that value is instrumentally created
through deliberate actions by a customer, it is not really an accurate expression. Obviously, value
is sometimes instrumentally created, but often value emerges for customers, without any deliberate
value-creating steps by them. Hence, the reader must observe that value creation in this book, as
NOTES 35
in other contemporary publications, may mean either instrumentally created value or value that
just emerges for customers. The notion that value rather emerges than is created is emphasized by
the customer-dominant logic literature. See, for example, Heinonen, K., Strandvik, T. & Voima, P.,
Customer dominant value generation in service. European Business Review, 25(2), 2013, 531–538.
21. Normann & Ramı́rez, 1993, op. cit.
22. Vargo & Lusch, 2008, op. cit., and Vargo, S.L. & Lusch, R.F., Evolving to a new dominant logic
for marketing. Journal of Marketing, 68(Jan), 2004, 1–17.
23. See, for example, Grönroos, 2008, op. cit., Grönroos, 2011, op. cit., Grönroos & Ravald, 2011,
op. cit., Grönroos, C. & Voima, P., Critical service logic: making sense of value creation and
co-creation. Journal of the Academy of Marketing Science, 41(2), 2013, 133–150, and Grönroos, C.
& Gummerus, J., 2014, op. cit.
24. This comparison between service logic and service-dominant logic was first published in
Grönroos & Gummerus, op. cit.
25. The importance of the customers’ ecosystem for value creation is pointed out in the customer-
dominant logic field of research. See Heinonen, Strandvik & Voima, op. cit.
26. Grönroos & Voima, 2014, op. cit.
27. Unlike in service-dominant logic, in the service logic approach to the service perspective, it is
observed that the value-in-use concept, where the customer is the value creator, requires that
the customer is in charge of value creation and can invite the service provider to engage. See, for
example, Grönroos, 2011, op. cit. and Grönroos & Voima, 2013, op. cit. Service-dominant logic
claims that the customer is invited to engage with the service provider as co-creator of value.
See, for example, Vargo & Lusch, 2008, op. cit.
28. Grönroos & Voima, 2014, op. cit. See also Grönroos & Ravald, 2011, op. cit.
29. In service-dominant logic the whole value generation process is treated as an all-encompassing
value creation process, and the firm and the customer as value co-creators throughout this process,
without specified roles and goals. This functions metaphorically as an eye-opener for researchers
and practitioners, showing that it is not only the firm that creates value for the customer, and
for a systemic analysis on a societal level it makes sense. However, it does not offer a meaningful
and useful instrument on a management level to understand the roles and goals of the service
provider and customer, respectively, and hence is less useful for planning and decision making
on this level.
30. The models of value co-creation are based on two service marketing and management models
from the early years of modern service research, namely the servuction model by Pierre Eiglier and
Eric Langeard in France and the interactive marketing model by Christian Grönroos in Finland. See
Eiglier, P. & Langeard, E., Une approche nouvelle du marketing des services. Revue Française de
Gestion, 2(Nov), 1975, 97–114, and Grönroos, C., A service-orientated model of the marketing
of services. European Journal of Marketing, 12(8), 1978, 588–601.
31. ICT (Information and Communication Technology) is of course used to an extended degree
in service encounters, and such systems may have a positive effect on customers’ value percep-
tions. See Polo Pena, A.I., Frı́as Jamilena, D.M. & Rodriguez Molina, M.A., Value co-creation
via information and communication technology. The Service Industries Journal, 34(13–14), 2014,
1043–1059.
32. However, creating functioning feedback systems, and making the information created in such
systems accessible in a way that leads to actionable information and corresponding actions turns
out to be difficult. See, for example, Höykinpuro, R., Service Firms’ Actions Upon Negative Incident
in High Tough Services. A Narrative Study. Helsinki: Hanken School of Economics, Finland, 2009.
33. Taylor, F.W., Scientific Management. London: Harper & Row, 1947 (a volume of two papers
originally published in 1903 and 1911, and a written testimony for a Special House Committee
in the USA in 1912).
34. Grönroos, C., Service Management and Marketing. Managing Moments of Truth in Service Competition.
Lexington, MA: Lexington Books, 1990.
35. Grönroos, C., Service management: a management focus for service competition. International
Journal of Service Industry Management, 1(1), 1990, 6–14.
36. See Storbacka, K., The Nature of Customer Relationship Profitability – Analysis of Relationships
and Customer Bases in Retail Banking. Helsinki/Helsingfors: Swedish School of Economics
Finland/CERS Centre for Relationship Marketing and Service Management, 1994.
37. Gummesson, op. cit. and Sheth, J.N. & Parvatiyar, A., The evolution of relationship marketing.
International Business Review, 4(4), 1995, 397–418.
38. Sisodia, R.S. & Wolfe, D.B., Information technology. Its role in building, maintaining, and
enhancing relationships. In Sheth, J.N. & Parvatiyar, A. (eds), Handbook of Relationship Marketing.
Thousand Oaks, CA: Sage Publications, 2000, pp. 525–563. See also Zeithaml, V.A., Service
excellence in electronic channels. Managing Service Quality, 12(3), 2002, 134–138 and Meuter,
M.L., Bitner, M.J., Ostrom, A.L. & Brown, S.W., Choosing among alternative service delivery
modes: an investigation of customer trial of self-service technologies. Journal of Marketing, 69(2),
2005, 61–83.
39. Heinonen, K., Temporal and spatial e-service value. International Journal of Service Industry Manage-
ment, 17(4), 2006, 380–400. See also Baron, S., Patterson, A. & Harris, K., Beyond technology
acceptance: understanding consumer practice. International Journal of Service Industry Management,
17(2), 2006, 111–135.
NOTES 37
40. Grönroos, C. & Gummerus, 2014, op. cit.

41. Pine, B.J. & Gilmore, J.H., The Experience Economy: Work is Theatre & Every Business a Stage.
Cambridge, MA: Harvard Business School Press, 1999.
42. A discussion of the misuse of the relationship marketing concept can be found in Fournier, S.,
Dobscha, S. & Mick, D.G., Preventing the premature death of relationship marketing. Harvard
Business Review, Jan/Feb, 1998, 42–51.
43. Storbacka, K. & Lehtinen, J.R., Customer Relationship Management. Singapore: McGraw-Hill,
2001.
44. This description is adapted from a definition used by Håkan Håkansson and Ivan Snehota in a
discussion of relationships in a business-to-business context. They, however, interpret the defi-
nition in a somewhat different way. See Håkansson, H. & Snehota, I., Developing Relationships in
Business. London: Routledge, 1995.
45. For an extensive discussion of the loyalty concept see Nordman, C., Understanding Customer Loy-
alty and Disloyalty – The Effect of Loyalty-supporting and Loyalty-repressing Factors. Helsinki, Finland:
Hanken Swedish School of Economics Finland/CERS, 2004.
46. Gummesson, E., Internal marketing in the light of relationship marketing and virtual organiza-
tions. In Lewis, B. & Varey, R. (eds), Internal Marketing. London: Routledge, 2000.
47. Kavall, S.G., Tzokas, N.X. & Saren, M.J., Relationship marketing as an ethical approach: philo-
sophical and managerial considerations. Management Decision, 37(7), 1999, 573–581.
50. Sheth, J.N. & Parvatiyar, A., Relationship marketing in consumer markets: antecedents and con-
sequences. Journal of the Academy of Marketing Science, 23(4), 1995, 255–271.
51. Bagozzi, R.P., Reflections on relationship marketing in consumer markets. Journal of the Academy
of Marketing Science, 23(1), 1995, 272–277.
52. Gwinner, K.P., Gremler, D.D. & Bitner, M.J., Relational benefits in service industries: the cus-
tomer’s perspective. Journal of the Academy of Marketing Science, 26(2), 1998, 101–114. See also
Dimitriadis, S. & Koritos, C., Core service versus relational benefits: what matters most? The
Service Industries Journal, 34(13–14), 2014, 1092–1112, where the relationship between the core
service and additional relational benefits is discussed.
53. See Johnson, D.S. & Grayson, K., Sources and dimensions of trust in service relationships. In
Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Marketing & Management. Thousand Oaks,
CA: Sage Publications, 2000, pp. 357–370.
54. Moorman, C., Deshpandá, R. & Zaltman, G., Factors affecting trust in market relationships.
Journal of Marketing, 57(Jan), 1993, 81–101.
55. Johnson & Grayson, op. cit. and Lane, C. & Bachmann, R., The social construction of trust:
supplier relations in Britain and Germany. Organizational Studies, 17, 1996, 365–395.
56. See Sekhon, H., Ennew, C., Kharout, H. & Devlin, J., Trustworthiness and trust: influences
and implications. Journal of Marketing Management, 30(3–4), 2014, 409–430, where it is concluded
that if a service provider is considered trustworthy, this has a favourable impact on the cognitive
dimension of trust, but also, to a lesser degree however, on the affective dimension.
57. Moorman, C., Zaltman, G. & Deshpandá, R., Relationships between providers and users of
market research: the dynamics of trust within and between organizations. Journal of Marketing
Research, 29(Aug), 1992, 314–329.
58. Halinen, A., Relationship Marketing in Professional Services: A Study of Agency–Client Dynamics in the
Advertising Sector. New York: Routledge, 1997.
59. See Garbarino, E. & Johnson, M.A., The different roles of satisfaction, trust, and commitment in
customer relationships. Journal of Marketing, 63(Apr), 1999, 70–87, who studied satisfaction, trust
and commitment as mediating constructs between attitudes and future purchasing intentions in
a repertory theatre environment.
60. Grayson, K. & Ambler, T., The dark side of long-term relationships in marketing services. Journal
of Marketing Research, 36(Feb), 1999, 132–141. See also Moorman, Zaltman & Deshpandá, op. cit.
61. See Berry, L.L. & Parasuraman, A., Building a new academic field – the case of services marketing.
Journal of Retailing, 69(1), 1993, 13–60, where the Nordic School is described as one of three
main approaches to service marketing research. The scope and history of the Nordic School is
discussed in Gummesson, E. & Grönroos, C., The emergence of the new service marketing:
Nordic School perspectives. Journal of Service Management, 23(4), 2012, 479–497, and in Grönroos,
C., In Search of a New Logic for Marketing. Foundations of Contemporary Theory. Chichester: John
Wiley & Sons, 2007.
62. We have elaborated on this argument in, for example, Grönroos, C., Service reflections: service
marketing comes of age. In Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Marketing &
Management. Thousand Oaks, CA: Sage Publications, 2000, pp. 13–16.
F U RT H E R R E A D I N G
Alderson, W. (1957) Marketing Behavior and Executive Action. Homewood, IL: Richard D. Irwin.
Bagozzi, R.P. (1995) Reflections on relationship marketing in consumer markets. Journal of the
Academy of Marketing Science, 23(1), 272–277.
FURTHER READING 39
Baron, S., Patterson, A. & Harris, K. (2006) Beyond technology acceptance: understanding consumer
practice. International Journal of Service Industry Management, 17(2), 111–135.
Berry, L.L. & Parasuraman, A. (1993) Building a new academic field – the case of services marketing.
Journal of Retailing, 69(1), 13–60.
Brown, S.W. (2005) Marketing renaissance: opportunities and imperatives for improving marketing
thought, practice, and infrastructure. Journal of Marketing, 69(4), 1–25.
Dimitriadis, S. & Koritos, C. (2014) Core service versus relational benefits: what matters most? The
Service Industries Journal, 34(13–14), 1092–1112.
Echeverri, P. & Skålén, P. (2011) Co-creation and co-destruction – a practice theory based study of
interactive value formation. Marketing Theory, 11(3), 351–373.
Eiglier, P. & Langeard, E. (1975) Une approche nouvelle du marketing des services. Revue Française
de Gestion, 2(Nov), 97–114.
Fournier, S., Dobscha, S. & Mick, D.G. (1998) Preventing the premature death of relationship mar-
keting. Harvard Business Review, Jan/Feb, 42–51.
Garbarino, E. & Johnson, M.A. (1999) The different roles of satisfaction, trust, and commitment in
customer relationships. Journal of Marketing, 63(Apr), 70–87.
Gorden, B.J. (1964) Aristotle and the development of the value theory. Quarterly Journal of Economics,
78(1), 114–128.
Grayson, K. & Ambler, T. (1999) The dark side of long-term relationships in marketing services.
Journal of Marketing Research, 36(Feb), 132–141.
Grönroos, C. (1978) A service-orientated model of the marketing of services. European Journal of
Marketing, 12(8), 588–601.
Grönroos, C. (1990a) Service Management and Marketing. Managing Moments of Truth in Service Compe-
tition. Lexington, MA: Lexington Books.
Grönroos, C. (1990b) Service management: a management focus for service competition. International
Journal of Service Industry Management, 1(1), 6–14.
Grönroos, C. (1996) Relationship marketing logic. Asia-Australia Marketing Journal, 4(1), 7–18.
Grönroos, C. (1997) Value-driven relational marketing: from products to resources and competencies.
Journal of Marketing Management, 13(5), 407–420.
Grönroos, C. (2000) Service Management and Marketing. A Customer Relationship Management Approach.
Chichester, UK: John Wiley & Sons, p. 24.
Grönroos, C. (2000) Service reflections: service marketing comes of age. In Swartz, T.A. & Iacobucci,
D. (eds), Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage Publications,
pp. 13–16.
Grönroos, C. (2006) Adopting a service logic for marketing. Marketing Theory, 6(3), 317–334.
Grönroos, C. (2007) In Search of a New Logic for Marketing. Foundations of Contemporary Theory. Chich-
ester, UK: John Wiley & Sons.
Grönroos, C. (2008) Service logic revisited: who creates value? And who co-creates? European Business
Review, 20(4), 208–314.
Grönroos, C. (2011) Value co-creation in service logic: a critical analysis. Marketing Theory, 11(3),
279–301.
Grönroos, C. & Gummerus, J. (2014) The service revolution and its marketing implications: service
logic versus service-dominant logic. Managing Service Quality, 24(3), 206–229.
Grönroos, C. & Ravald, A. (2011) Service business logic: implications for value creation and mar-
keting. Journal of Service Management, 22(1), 5–22.
Grönroos, C. & Voima, P. (2013) Critical service logic: making sense of value creation and co-
creation. Journal of the Academy of Marketing Science, 41(2), 133–150.
Gummesson, E. (1995) Relationship marketing: its role in the service economy. In Glynn, W.J. &
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perspectives. Journal of Service Management, 23(4), 479–497.
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FURTHER READING 41
Holbrook, M.B. (1999) Introduction to consumer value. In Holbrook, M.B. (ed.), Customer Value.
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a service system perspective. Journal of Service Research, 17(3), 247–261.
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philosophical and managerial considerations. Management Decision, 37(7), 573–581.
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APPENDIX 1 43
APPENDIX 1
SERVICE LOGIC (SL) VERSUS SERVICE-DOMINANT LOGIC (SDL):
SIMILARITIES AND DIFFERENCES
Source: Grönroos, C. & Gummerus, J., The service revolution and its marketing implications. Service logic
versus service-dominant logic. Managing Service Quality, 24(3); 2014: 213–214.
Similarities
Objective A perspective on value creation for business and marketing.
Meaning of Application of knowledge and skills to resources to support someone’s value
service creation.
Resources used The type of resources used by a provider (goods, service activities,
information, or any other type of tangible or intangible resources) are
not important for the implementation of a service perspective.
Differences
SL SDL
Level of perspective Managerial; defined concepts. Systemic; abstract; metaphorical.

Goal of the service Value creation, where service Service is exchanged for service.
perspective functions as a facilitator; through
service, the user’s value creation
gets facilitated, which enables
the provider to capture value by
providing service.
Value Defined as value-in-use. Value used with different meanings
in different contexts.
Value generation A process including all actions by all Not explicitly discussed; implicitly,
process actors involved, which ultimately an all-encompassing value
leads to value for a user (as creation process including all
exemplified by the customer). actors (e.g., provider, customer,
others) involved.
Locus of value Customer’s creation of value-in-use. Not explicitly defined; implicitly, an
creation all-encompassing process
including actions by providers,
customers, and other actors.
The nature of value Evolving as value-in-use in a
as value-in-use cumulative process, with
favourable and unfavourable
phases throughout the
customer’s value creation.
(continued )
(continued )
SL SDL
Value in use: The qualifying dimension of a Sometimes replaced by the

contextual utility-based value concept expression value-in-context,
influence evolving during use; when social, which disguises the qualifying
physical, mental, or other aspect of value-in-use as being
contextual factors are altered, created during the many forms
the level of value-in-use changes. of use.
Value spheres Three, distinctly different, value Not explicitly included; implicitly,
spheres: a provider sphere closed one value sphere for an
to the customer, a customer all-encompassing value creation
sphere closed to the provider, process, in which all actors
and a joint sphere where involved co-create value.
customers and providers directly
interact and may co-create value.
Interaction Explicitly defined with a clear, Not explicitly defined, only
conceptual distinction between implicitly addressed through
direct and indirect interactions; foundational premises.
direct interactions with
intelligent resources (people,
intelligent systems) enable
co-creation; indirect interaction
with non-intelligent resources
(most products and systems) do
not.
Co-creation A joint directly interactive process Actions taken by all actors involved
in which the actors’ (e.g., in a process (e.g., providers,
provider’s and customer’s) customers), regardless of how
processes merge into one they relate to each other.
collaborative, dialogical process,
such that a co-creation platform
forms.
Value co-creation Actions taken by the actors on a Actions contributing to value
co-creation platform, where the for customers during an
actors may directly and actively all-encompassing value creation
influence each other’s processes process by all actors involved
(e.g., supplier service process and (e.g., providers, customers,
customer consumption and value others), regardless of how they
creation processes). relate to one another or the
process.
Driver of value The customer drives value creation The provider drives value creation
creation and is in charge of it. and is in charge of it.
APPENDIX 1 45
Division of roles in The provider may engage with the The customer may engage with the
value co-creation customer’s value creation and provider’s process and co-create
co-create value with the value with the provider.
customer.
Value creation: The customer both creates The customer only determines
customer’s role and determines value (as value (as value-in-use).
value-in-use).
Value creation: The provider compiles resources The provider co-creates value.
provider’s role embedded with potential
value-in-use through which the
customer’s value creation is
facilitated.
Value co-creation: During interactions with persons in Abstract; not explicitly discussed.
customer the social ecosystem, the
ecosystem’s role customer may socially co-create
value with them.
Marketing: making The provider can go beyond The provider can only offer value
promises through making promises by offering propositions.
value propositions value propositions and
undertake direct, interactive
actions on a co-creation platform
to actively and directly influence
the customer’s value creation
and value fulfilment.
Marketing: keeping By co-creating value with its Not explicitly discussed.
promises customers, the provider may
extend the keeping of promises
beyond product performance;
from passive to active promise
keeping.
Reinventing Marketing extends beyond a Not explicitly discussed.
marketing single-function, one-department
process of making promises and
creating brand awareness; it may
become an organization-wide
promise management process.
APPENDIX 2
SERVICE LOGIC: TEN MANAGERIAL PRINCIPLES ABOUT SERVICE
P R O V I D E R - C U S T O M E R R E L AT I O N S H I P S
Source: Grönroos, C. & Gummerus, J., The service revolution and its marketing implications. Service logic
versus service-dominant logic. Managing Service Quality, 24(3); 2014: 222–223.
1. In a value generation sphere closed to the service provider (a customer sphere), customers, or any
users, create value in the form of value-in-use, emerging out of or being created from integrating new
resources with existing resources and applying previously held knowledge and skills.
2. Value (as value-in-use) evolves in a cumulative process, or is sometimes destroyed, throughout the
customer’s value-creating process.
3. Value (as value-in-use) is uniquely, experientially and contextually perceived and determined by
customers.
4. Firms as service providers are fundamentally value facilitators in a value generation sphere closed to the
customer (a provider sphere), such that they develop and provide potential value-in-use for customers
and other users.
5. If a platform of co-creation exists or can be established through direct interactions among actors in
the value generation process, the service provider can engage with customers’ value creation, and
opportunities for co-creation of value among actors arise.
6. Between the customers and individuals in their ecosystem, social value co-creational activities that
influence the customers’ independent value creation process may take place.
7. Service is the use of resources in a way that supports customers’ everyday practices – physical, mental,
virtual, possessive – and thereby facilitates their value creation.
8. The goal of marketing is to engage the service provider with customers’ processes to enable reciprocal
value creation among the actors, with service as a facilitator.
9. As service providers, firms are not restricted to making promises through value propositions.
10. In direct interactions, using a platform of co-creation, through interactive marketing, firms as service
providers can directly and actively influence customers’ value fulfilment and thereby keep promises
made, as well as contribute to the establishment and maintenance of customer relationships; marketing
is extended beyond a predominantly promise-making function.
CHAPTER 2
THE NATURE OF
SERVICE AND SERVICE
CONSUMPTION, AND ITS
CUSTOMER MANAGEMENT
IMPLICATIONS
“ ”
Goods and services merge – but on the conditions of service.
INTRODUCTION
In this chapter the nature and characteristics of service are discussed. The consequences of the process
of how service is consumed and used as well as the difference between process consumption and
outcome consumption are also covered. Finally, the implications of process consumption, which
characterizes service and the content and scope of marketing, are described. After having read this
chapter the reader should understand the nature of service and of service consumption as compared
to the consumption or use of physical products, as well as the scope and content of marketing in
service contexts compared to goods marketing. The reader should also understand what main sources
of competitive advantage exist for service businesses.
W H AT I S A S E RV I C E ? A N AT T E M P T T O D E F I N E
THE PHENOMENON
A service is a complicated phenomenon. The word has many meanings, ranging from personal service
to service as a product or offering. The term can be even broader in scope. A machine, or almost
any physical product, can be turned into service to a customer if the seller makes efforts to tailor
48 THE NATURE OF SERVICE AND SERVICE CONSUMPTION, AND ITS CUSTOMER MANAGEMENT IMPLICATIONS
the solution to meet the most detailed demands of that customer. By adopting a service logic a
firm can turn any resource into service for customers. A machine is still a physical good, of course,
but the way of treating the customer with an appropriately designed machine is service. Sir John
Harvey-Jones, former chairman of ICI, said almost three decades ago, referring to some successful
firms in the chemical industry, that they had developed an ability to provide a chemical service
to customers, rather than selling chemical products.1 The Kone Corporation, one of the world’s
leading elevator and escalator manufacturers, headquartered in Finland, has successfully transformed its
manufacturing and service businesses into one business, ‘dedicated to people flow’. A growing number
of manufacturing firms have changed their focus and claimed at least that they are becoming service
businesses.
Moreover, as we have discussed previously, there is a variety of administratively managed activities,
such as invoicing and handling claims, which in reality are service to the customer. Because of the
passive way in which they are handled, they remain ‘hidden services’ for customers. In fact, they are
usually taken care of in such a way that they are perceived not as service but rather as nuisances.
Obviously, this offers several opportunities to create a competitive advantage for organizations that
can innovatively develop and make use of such ‘hidden services’ and integrate them with the core of
the offering, such as a physical product or a service concept, into a total service offering.
A range of definitions of service have been suggested. Traditionally these definitions focus upon
the service activity, and mainly include only those services rendered by so-called service firms.2 As a
criticism of the variety of definitions suggested, Gummesson, referring to an unidentified source, put
forward the following definition: ‘A service is something which can be bought and sold but which
you cannot drop on your feet.’3
Although this definition in a way criticizes attempts to find a definition that could be agreed upon
by everyone, it points out one of the basic characteristics of services; that is, that they can be exchanged
although they often are not tangible as physical products.
Today, service carries at least two distinctly different meanings:
1. Service as a perspective on business and marketing (service logic).

2. Service as an activity.
Service as a perspective was discussed in Chapter 1. Here we discuss the latter meaning of service.
One should, however, keep in mind that these two ways of understanding service are intertwined.
When adopting a service logic (the perspective), all kinds of resources – goods as well as service activ-
ities and other types of resources – are presented to customers in a way resembling service activities.
In principle, there is no difference between the beef in a restaurant’s service activity and an elevator
in an offering aiming at ‘supporting people flow’ (the Kone Corporation). They are both resources
needed to provide service to customers. Hence, the discussion of service as activities is relevant for
understanding service as a perspective. Since the 1980s much less discussion of how to define service
as an activity has taken place, and no ultimate definition has been agreed upon. Nevertheless, in 1990
the following definition4 was proposed (here slightly modified):
A service is a process consisting of a series of more or less intangible activities that normally, but not necessarily
always, take place in interactions between the customer and service employees and/or physical resources or goods
and/or systems of the service provider, which are provided as solutions to customer problems.
Most often a service does involve interactions of some sort with the service provider. However,
there are situations where the customer as an individual does not interact with the service firm. For
SOME COMMON CHARACTERISTICS OF SERVICE 49
example, when a plumber using the main keys of an apartment complex goes into an apartment
to fix a leak when the tenant is out, there are no immediate interactions between the plumber, his
physical resources or systems of operating and the customer. On the other hand, many situations
where interactions do not seem to be present nevertheless do involve interactions. For instance, when
a car problem is taken care of at a garage, the customer is not present and interacting with anybody
or anything. However, when the car is taken in by the garage and later delivered to the customer,
interactions occur. These interactions are part of the service. Moreover, they may be extremely critical
to the customer experience. The customer probably cannot properly evaluate the job done in the
garage but can, however, evaluate it based on the interactions that occur at both ends of the service
process. Sometimes, as in the case of Internet banking or phone calls, the customer interacts with
an infrastructure and systems provided by the bank or telecom operator. Although customers tend
to notice them only when they fail, these interactions are equally important to the success of this
service as interactions with employees. Consequently, in service, interactions are usually present and
of substantial importance, although the parties involved are not always aware of this. Furthermore,
service is not a thing, it is a process or activities, and these activities are more or less intangible in
nature.
Since 1990 the importance of information technology to service has increased dramatically. Systems
indicated in the definition of service are increasingly based on IT and Internet-related solutions and
mobile technologies.
The most important contribution to marketing theory and practice by service research, espe-
cially emphasized by the Nordic School, is the notion of interaction instead of exchange as a focal
phenomenon.5 Without including interactions between the service provider and the customer during
the consumption process as an integrated part of marketing, successful marketing cannot be imple-
mented and realistic marketing models cannot be developed. Although at some point exchanges have
taken place, it is successful management of interactions that makes exchanges possible. A first exchange
may occur, but without successful interactions continuous exchanges will not take place. Moreover,
as service is a process rather than an object of transaction it is impossible to assess at which point
in time an exchange takes place. Money can be transferred to the service provider either before the
service process or after the process, or continuously on a regular basis over time.
S O M E C O M M O N C H A R A C T E R I S T I C S O F S E RV I C E
Service, both as a perspective and an activity, has specific characteristics. A whole range of char-
acteristics has been suggested and discussed in the literature. Traditionally service is compared with
physical goods.6 This is, however, not a very fruitful way of developing service models. Service and
the nature of service management and marketing should be understood in their own right.
The specific models and concepts of service management and marketing follow from the fact that
the customer is present to a certain degree in the service process, where service is produced and
provided to him, and that the customer also participates in the process and perceives how the process
functions at the same time as the process develops. This is the case also when customers are serviced
seemingly on their own, such as paying invoices using an Internet banking option or a vending
machine to get a cup of coffee. The customer is involved in a service process, interacting with systems
and infrastructures provided by the service firm and, as in the case of making a phone call, also with
another customer. In these interactions as a co-producer the customer influences the progress of the
service process and the outcome of it just as much as when having dinner in a restaurant. One of
the reasons that understanding service management is of interest to manufacturers of goods is that
customers are now more involved in various processes of the manufacturer such as the design of
goods, modular production, delivery, maintenance, helpdesk functions, information sharing and a
host of other processes which, in today’s competitive environment, have become important for the
creation of a competitive advantage. When manufacturers take a lifecycle approach to managing their
customer relationships, i.e. set out to take care of their customers’ varying needs of support over
time instead of only selling products or delivering services to them at a discrete point in time with a
transaction approach, taking care of their customers becomes a service management issue.
For service in general, three basic and more or less generic characteristics can be identified:
1. Service is a process consisting of a series of activities.

2. Service is at least to some extent produced and consumed simultaneously.
3. The customer participates as a co-producer in the service production process at least to some extent.
By far the most important characteristic is the process nature of service and service activities. Service
is a process consisting of a series of activities where a number of different types of resources – people
as well as goods and other physical resources, information, systems and infrastructures – are used,
often in direct interactions with the customer, so that a solution is found and thus value emerges
for the customer. Because the customer participates in it, the process, especially the part in which
the customer is participating, becomes part of the solution. Most other characteristics follow from
the process characteristic. In later sections we shall go into the implications for management and
marketing of this process nature of service.
Because service is not a thing but a process consisting of a series of activities – produced and consumed
simultaneously (this is also called the ‘inseparability’ characteristic) – it is difficult to manage quality
control and to do marketing in the traditional sense, since there is no pre-produced quality to control
before the service is sold and consumed. Of course, situations vary, depending on what kind of service
is being considered. A hairstylist’s service is obviously almost totally produced when the customer
is present and receives it. When delivering goods, only part of the service (production) process is
experienced and, thus, simultaneously consumed by the customer. Most of the process is invisible
for the customer. However, in both cases, one should realize that it is the visible part of the service
process that matters in the customer’s mind. As far as the rest is concerned, he can only experience the
outcome; but the visible activities are experienced and evaluated in every detail. Quality control and
marketing must therefore take place at the time and place of simultaneous service production and
consumption. If the firm relies on traditional quality control and marketing approaches, the part of
the service process where the customer is involved may go uncontrolled and include negative quality
and marketing experiences.
The third basic characteristic of service points out that the customer is not only a receiver of the
service; the customer participates in the service process as a production resource as well. Hence, the
customer co-produces the service and when there are interactions with the firm’s resources he may
also co-create value with the firm.
In addition to the three basic characteristics, other important aspects of service can be distinguished.
For example, it is not possible to keep service in stock in the same way goods are. If an airplane
leaves the airport half-full, the empty seats cannot be sold the next day; they are lost. Instead, capacity
planning becomes a critical issue. Even though service cannot be kept in stock, one can try to keep
customers in stock. For example, if a restaurant is full, it is always possible to try to keep a customer
waiting in the bar until there is a free table.
In much of the service literature intangibility is said to be the most important characteristic of a
service. However, physical goods are not always tangible either in the minds of customers. A kilo
CLASSIFICATION SCHEMES FOR SERVICE 51
of tomatoes or a car may be perceived in a subjective and intangible way. Hence, the intangibility
characteristic does not distinguish service from physical goods as clearly as is usually stated in the
literature. And intangibility is certainly not the most important characteristic. However, service is
characterized by varying degrees of intangibility. Normally service cannot be tried out before it is
purchased. One cannot make a trial trip on a new airline or try out an inclusive tour before buying
it. Furthermore, being on a holiday at a resort is largely an experience or a feeling that as such cannot
be captured in a physical way.
Service is normally perceived in a subjective manner. When service is described by customers,
words such as ‘experience’, ‘trust’, ‘feeling’ and ‘security’ are used. These are highly abstract ways
of formulating what service is. The reason for this, of course, lies in the intangible nature of service.
Often service include highly tangible elements as well: for example, the bed and amenities in a holiday
resort, the food in a restaurant, the documents used by a forwarding company, the spare parts used by
a repair shop. The essence of service, however, is the intangibility of the phenomenon itself. Because
of the high degree of intangibility, it is frequently difficult for the customer to evaluate a service. How
do you give a distinct value to ‘trust’, or to a ‘feeling’, for example? Therefore, it is often suggested in
the literature that one should make service more tangible for the customer by using concrete, physical
evidence, such as plastic cards (in banking) and various kinds of atmosphere-related artefacts (in a
restaurant). However, many physical goods, such as a sports car or luxury cellular phone, are equally
intangible and perceived in a subjective way by customers.
Furthermore, many definitions imply that service does not result in ownership of anything.7 Nor-
mally this is true. When we use an airline’s service, we are entitled, for example, to be transported
from one place to another, but when we arrive at our destination, there is nothing left but the board-
ing card. When we withdraw money from our current account we may feel that the bank’s service
resulted in our ownership of the withdrawn money. After the service process, we undoubtedly have
the sum of money in our hands and we own it. However, the bank’s service did not create this own-
ership. We, of course, owned the money all the time. On the other hand, retailing is service, and
after using service provided by, say, a grocery store, the customer undoubtedly owns the groceries.
Finally, because of the impact of personnel and customers or both, on the service production and
delivery process, it is often difficult to maintain consistency in the process. Service to one customer is
not exactly the same as the ‘same’ service to the next customer. If nothing else, the social relationship
in the two situations is different and the customer may act in different ways. The service a customer
receives by using an ATM may differ from the ‘same’ service received by the next customer because,
for instance, the second person has a problem understanding the instructions on the screen. The
inconsistency in service processes creates one of the major problems in service management; that is,
how to maintain an evenly perceived quality of the service rendered to customers.
C L A S S I F I C AT I O N S C H E M E S F O R S E RV I C E
In many publications from the early days of service marketing research, service was classified in a
number of different ways.8 Here we are only going to discuss two classifications:
1. High-touch/high-tech service.
2. Discretely/continuously rendered service.
First, service can be divided into high-touch or high-tech. High-touch service is mostly dependent
on people in the service process, whereas high-tech service is predominantly based on the use of
automated systems, information technology and other types of physical resources. This is of course an
important distinction to make. However, one should always remember that high-touch also includes
physical resources and technology-based systems that have to be managed and integrated into the
service process in a customer-oriented fashion. While high-tech service, such as telecommunications
or Internet shopping, by and large is technology-based, in critical moments, such as complaints situa-
tions or technology failures, or in built-in contacts with service employees representing, for example,
helpdesk operations, the high-touch characteristic of the technology-based service takes over. In fact,
one can say that high-tech service is often even more dependent on the service orientation and
customer-consciousness of its personnel than high-touch service, because human interactions occur
so seldom and when they occur they do so in critical situations. If these high-touch interactions of the
high-tech service process fail, there are fewer opportunities to recover the mistake than in high-touch
processes. In these cases high-touch contacts are true moments of truth for a firm, making it possible
to secure a favourable quality perception in the end.9
Second, based on the nature of the relationship with customers, service can be divided into con-
tinuously rendered service and discrete transactions. Service such as industrial cleaning, security service,
goods deliveries, banking, etc. involve a continuous flow of interactions between the customer and
the service provider. This creates ample opportunity for the development of valued relationships with
customers. For providers of discretely used service, such as hair stylists, many types of firms in the
hospitality industry, providers of ad hoc repair service to equipment and so on, it is often more diffi-
cult to create a relationship that customers appreciate and value. However, as we know from many
hair stylists, hotels and restaurants and other providers of discretely used service, this is possible and is
considered a profitable strategy. Firms that offer service which are used on a continuous basis cannot
afford to lose customers, because the cost of finding new customers is often high. On the other hand,
firms offering service that is used in a discrete fashion may also develop a profitable business based on
transaction-oriented strategies, although a relationship orientation is probably to be recommended in
most cases.
The models and concepts of service management discussed in this book are intended to be useful for
all types of service firms and manufacturers for which service competition is important, and therefore
useful for high-touch as well as for high-tech service, and for continuously rendered service as well as
for discretely used service. However, service is always in some respect unique, and when developing
strategies and implementing them this should be taken into consideration.
T H E C O N S U M P T I O N O F S E RV I C E : P R O C E S S A N D
OUTCOME CONSUMPTION
The focus on the interactions between the service firm and its customers in service research made
consumption of service an important marketing issue. In traditional marketing models consumption
is not a central issue. Marketing is geared towards sales and making customers buy. In goods-oriented
models consumption is more or less a black box. In service marketing research the black box of
consumption was opened up and explored. From a marketing point of view, consuming service is
seamlessly integrated with buying service.10 Interactive marketing (which will be explored further in
Chapter 9) is the part of total marketing that is geared towards managing interactions with the cus-
tomer during the consumption process in a value-supporting way, in order to increase the likelihood
that the customers decide to stay with the firm.
In service research there has been no attempt to define the scope of the consumption process. In
reality it is difficult to determine when consumption and customers’ value creation starts and ends.
For example, depending on how broadly consumption is defined, the consumption of an inclusive
THE CONSUMPTION OF SERVICE: PROCESS AND OUTCOME CONSUMPTION 53
tour to a tourist destination may begin already when the customer starts thinking about taking the
trip, or when the first interaction with an advertisement by the tour operator is seen. There may be a
mental pre-consumption even before interactions with the tour operator’s processes commence. Also,
it may be difficult to determine when consumption ends. A similar mental post-consumption may
take place. Using the inclusive tour example, one could say that consumption does not necessarily end
when the customer returns home, but when memories of the trip are not brought up in discussions
or entering the person’s mind anymore.11
In order to understand service management and the marketing of service it is critical that one real-
izes that the consumption of service is process consumption rather than outcome consumption. In the case
of physical goods, customers consume the outcome of the production process. In contrast, when con-
suming service customers perceive the process of producing service to a greater or smaller degree, but
always to a critical extent, as well as take part in the process as co-producers. Thus, the consumption
of the service process is a critical part of the service experience.
As service quality research demonstrates (see Chapters 4 and 5), experience of the process is impor-
tant for the perception of the total quality of a service, even though a satisfactory outcome is necessary
and a prerequisite for good quality. Often the service firm cannot differentiate its outcomes from
those of its competitors. Withdrawing a given sum of money from a current account leads to the same
result; the customer gets the requested amount, regardless of which bank is rendering the service.
Flying from one place to another takes the passenger to the destination, regardless of which airline
he patronizes. In some situations customers take the quality of an outcome for granted, and in many
situations it is difficult for a customer to evaluate the quality of the outcome of the service process.
For example, it is difficult to evaluate whether an Internet website provided by one firm is better
than that which another firm could have offered. However, in every situation customers take part
in the service processes and interact with the employees, physical resources, technologies and system
of the service provider to some extent. The process easily distinguishes one service from another.
Because of this inseparability of the service process and the consumption of a service, the process can
be characterized as an open process. Hence, regardless of how the customer perceives the outcome of
a service process, service consumption is basically process consumption.
In Figure 2.1 the nature of the consumption of physical goods (outcome consumption) and the
consumption of service (process consumption) is illustrated. The relationships between production,
consumption and marketing are shown in the figure. In the case of outcome consumption of physical
goods, which is illustrated in the upper part of the figure, production and consumption are processes
that are separated from each other in time and space. The traditional role of marketing, which is
defined by the requirements of consumer goods, follows from this situation. A bridge between pro-
duction and consumption that closes the gap between these two processes is needed. This bridge has,
since the early twentieth century, been labelled marketing.
In the lower part of the figure, process consumption of service is illustrated. Production and
consumption are simultaneous processes with interactions between the consumer and the service
provider’s production resources – people, physical resources, operational systems and infrastructures,
information technology, etc. The obvious conclusion that can be drawn from this is that there is no
gap between production and consumption that needs to be closed by a separate activity or function. There is
no room for marketing’s traditional bridge-building role in this situation. This can be considered to
be the essence of service marketing. Marketing has to be included in the system in a different way
than in traditional models. The heart of marketing service is how the service (production) process and service
consumption process match each other, so that consumers perceive good service quality and value-creation support,
and are willing to continue the relationship with the service provider.12 Of course, some activities of a bridge-
building nature remain. For example, market research, as well as efforts, such as pricing, advertising
and other kinds of marketing communication, to create an interest among potential customers in the
Physical goods: Outcome consumption
Marketing
Production Consumption
Services: Process consumption
Service (production) process

Marketing?
Service consumption
F I G U R E 2.1
The nature of consumption of physical goods and services and
the role of marketing.
service provider and its service offerings and to create trial purchases, is still required. However, the
major part of marketing, managing the firm’s customer relationships and other market relationships,
becomes an integral part of the simultaneous service production and service consumption processes.
Thus service consumption and production have interfaces that are always critical to customers’ per-
ception of the service and consequently to their long-term purchasing behaviour. For example, in the
bank and airline examples used earlier, the location and security of an ATM or the interaction process
in a bank, as well as the check-in, in-flight and luggage claim processes in an airline experience, have a
decisive effect on customers’ perception of the service and its quality. Hence, for the long-term success
of a service firm the customer orientation of the service processes is crucial. If the process fails from the
customer’s point of view, no traditional marketing efforts, and frequently not even a good outcome of
the service process, will make them stay with a company in the long run, if they can find an alternative.
It is interesting to observe that in the production of a variety of physical goods, everything from cars
and computers to jeans and dolls, customers can be drawn into the planning of goods and the manufac-
turing processes of the factory, through the use of modern information technology and the Internet,
and modern design and modular production techniques. This enables mass customization and inter-
actions between the manufacturer and marketer on the one hand and the customer on the other.13
Levi Strauss makes jeans to order, and Mattel offers customized ‘friends of Barbie’ dolls. One can buy
a customer-ordered BMW, and even made-to-order vitamin pills.14 In manufacturing in general this
is the case both for consumer markets and business-to-business markets. The physical goods become
more and more service-like, and service marketing knowledge and a service management framework
are required to successfully manage the business.
Thus it seems inevitable that understanding service processes is becoming an imperative for all types
of business, not only for what used to be called service firms. One central reason for management to
understand the logic of service management is the fact that the main sources of competitive advantage
are different for a service business as compared to a traditional product business.
SOURCES OF COMPETITIVE ADVANTAGE IN SERVICE 55
S O U R C E S O F C O M P E T I T I V E A D VA N TA G E
I N S E RV I C E
The main sources of competitive advantage are different in service compared to a product business.
For a product business there are of course also other sources of competitive advantage, but the most
basic and generic one is standardization and the possibility to produce an item on a large scale with a
guaranteed quality. If a product with standardized and to some extent unique features can be devel-
oped, it can be reproduced as many times as the available production capacity allows. The drawback
is of course rigidity, and any customer who prefers something even slightly different will not buy.
The sources of competitive advantage are different for service businesses mainly because of the
process nature of service. Service as a business perspective and also as an activity are ongoing processes
which are inherently relational. Relational processes include both social and physical interactions,
which are difficult to standardize. Attempts to do that normally leads to a rigid process, which neither
the customers nor the firm’s employees feel comfortable with. Employees become frustrated and in
the end demotivated to provide good service. Customers see the quality of the service deteriorate,
become frustrated and are demotivated to continue buying from the service provider. Unsatisfied
customers defect, and business is lost. Lost customers must be replaced by new ones, which increases
the firm’s customer acquisition costs. Price pressure may also develop.
Further, service processes have to be systematized in some way, so that unnecessarily complicated
and bureaucratic parts can be avoided. However, systematizing is not the same as standardizing. For
example, an elevator repair process can be systematized, for example to avoid overlapping activities
and delays caused by the wrong sequence of activities, without standardizing the process. Unfortu-
nately, firms often mistake systematizing processes for creating standardized processes.
Service processes can, and should, be systematized, but without destroying the two key sources of
competitive advantage of service businesses. These are:
1. Flexibility when designing service processes.

2. Adaptability when situations which differ from the normal procedure occur.
Flexibility means that a service process is designed such that it allows for deviations from a normal, or
standard, procedure. Flexibility must be built into the service process However, it must be planned,
so that limits of allowed deviations are known. Otherwise, employees do not know how far from the
standard they are allowed to go. The limit of flexibility is a strategic decision. Refunding customers
who want to return something they have bought ‘no questions asked’ is one extreme flexibility limit.
On the other hand one can go even further. In the management literature there is a supposedly true
anecdote about the Nordstroms stores in the US. This is a top end department store, and when a
person returned four new tyres with the wrong dimensions for his car, he was refunded. However,
Nordstroms do not sell tyres. Most flexibility limits are of course less extreme. For example, in a
restaurant with set menus the waiters can suggest or allow some combinations between menus and
à la carte lists. An airline employee knows how to compensate passengers for flight delays or lost
luggage, what can be offered automatically, and when a decision by a supervisor is required.
To make sure that customers will get good quality, flexibility must be a forethought, not an
afterthought. If it is an afterthought, inconsistent behaviour will follow and customers will be lost.
Lack of in-built flexibility leads to rigidity, and one of the central sources of competitive advantage
is lost.
Adaptability relates to ad hoc situations that occur in a service process, and is therefore required for
successful implementation of flexible processes. Flexibility means that a service process is designed in
a certain way. Adaptability means that employees and systems can observe the need for out-of-the-
normal behaviour in customer contacts. This requires that customer contact employees have the skills
and knowledge to register a need for deviations from the normal procedure and to perform their tasks
accordingly in a flexible manner, and are motivated to do so. Systems in the service process must be
designed to support adaptability and not to make it impossible. For example, if a waiter observes that
a restaurant guest is uncomfortable with the items on the menu, he could ask whether the guest has
some special wishes, and then try to offer something that meets the guest’s requirements.
If service processes are standardized, flexibility and adaptability are lost, and the offering reverts to
a standardized product. As a consequence, the service firm becomes a product business. On the other
hand, if a goods manufacturer adds flexibility to its ways of taking care of its customers, for example in
deliveries or maintenance or in hidden services such as invoicing and complaints handling, it moves
away from being a product business towards becoming a service business and makes use of sources
of competitive advantage in service. (Chapter 16 discusses at length how a manufacturing firm can
transform into a service business.)
CASE STUDY
C O F F E E S H O P : T H E I M P O R TA N C E O F A V O I D I N G I N F L E X I B I L I T Y
Early one morning a guest in a coffee shop asked for a ham omelette, although the menu
did not include such an item. The waiter responded that the coffee shop did not serve ham
omelettes. But the guest really fancied such a dish and asked whether they had ham and
eggs and other required ingredients in the kitchen. The waiter admitted that all ingredi-
ents were available. ‘Then ask the kitchen to make a ham omelette,’ said the guest. To
this the waiter, at this point clearly feeling awkward, responded that it was impossible.
‘Why is that? You have all the ingredients,’ the guest prompted. The final words in this
dialogue were voiced by the waiter: ‘We have no code.’
It turned out that the coffee shop had preprogrammed the prices of all available dishes
in the computer, and there was no way of calculating a price for anything outside this
predetermined list of items.
Flexibility was removed from the process, the waiter had no means of adapting to the
situation, and the customer left and never came back. However, through word-of-mouth
the story lives.
CUSTOMER MANAGEMENT IN A PHYSICAL

G O O D S C O N T E X T: T H E T R A D I T I O N A L G O O D S
MARKETING TRIANGLE
In this and the following section we shall explore how the role of marketing differs between a physical
goods and a service context. As a means of illustration we use a marketing triangle. This way of
representing the field of marketing is adapted from Philip Kotler,15 who introduced it, to illustrate
CUSTOMER MANAGEMENT IN A PHYSICAL GOODS CONTEXT 57
FIRM
Marketing/sales staff
Enabling promises Making promises

Continuous product External marketing
development Customer’s
value Sales
creation
PRODUCT MARKET
Keeping promises
Support to the customers’
value creation through
PRODUCT FEATURES
F I G U R E 2.2
The product marketing triangle.
Source: Adapted from Grönroos, C., Relationship marketing
logic. Asia-Australia Marketing Journal, 4(1); 1996: p. 9.
Reproduced by the permission of the Australasian and New
Zealand Marketing Academy.
the holistic concept of marketing suggested by the Nordic School approach to service marketing and
management. This triangle’s sides represent making promises, keeping promises and enabling promises.
A physical product, in the traditional sense, is the result of how various resources, such as people,
technologies, raw materials, knowledge and information, have been managed in a factory to incorpo-
rate a number of features that customers in target markets are looking for. The production process can
be characterized as a closed process, where the customer takes no direct part. Thus a product evolves
as a pre-produced package of resources and features ready to be exchanged. The task of marketing
(including sales) is to find out what product features the customers are interested in and to make
promises about such features to a segment of potential customers through external marketing activi-
ties such as sales and advertising campaigns, and to take the product to locations where customers are
willing to purchase it. If the product includes features that customers want, it will fulfil the promises
that have been made to them. This marketing situation is illustrated in the product marketing triangle
in Figure 2.2. Customers’ willingness to buy a product and satisfaction with the product are due
to how well it supports their value creation, which is indicated by the circle in the centre of the
triangle.
In the figure the three key parts of marketing in a goods context are shown. These are the firm,
represented by a marketing and/or sales department, the market, and the product. Normally, market-
ing (including sales) is the responsibility of a department (or departments) of specialists or full-time
marketers (and salespeople). Customers are viewed in terms of markets of anonymous individuals.
The market offering is a pre-produced physical product. Along the sides of the triangle three key
functions of marketing are displayed, to make promises, to keep promises and to enable promises. Promises
are normally made through external mass marketing, and in business-to-business marketing, as well
as through sales. Promises are kept through a number of product features and enabled through the
process of continuous product development based on market research performed by full-time mar-
keters and the technological capabilities of the firm. Marketing is very much directed towards making
promises through external marketing campaigns. The value customers are looking for is guaranteed
by appropriate product features, and the existence of a product with the appropriate features will
make sure that promises made are also kept.
C U S T O M E R M A N A G E M E N T I N A S E RV I C E
C O N T E X T: T H E S E RV I C E M A R K E T I N G T R I A N G L E
For a service business, the scope and content of marketing become more complicated. The notion
of a pre-produced product with features that customers are looking for is too limited to be useful
here. Also, in the context of business-to-business marketing, the traditional product construct is too
restrictive, because a customer relationship often includes many more elements than physical goods,
normally various types of service processes, including hidden services.
In many cases what the customer wants and expects is not known in detail at the beginning of
the service (production) process or, consequently, what resources are needed, to what extent and
in what configuration they should be used is partly unclear. For example, the service requirements
of a machine that has been delivered to a customer may vary; the need to provide training for the
customer’s personnel and the need to handle claims may vary; a bank customer may only realize what
his needs actually are during interactions with a teller or a loan officer. Thus, the firm has to adjust
its resources and its ways of using its resources accordingly.
In Figure 2.3, the service marketing triangle,16 marketing in a service context is illustrated. As can be
seen, compared to the goods marketing triangle in Figure 2.2 most elements are different. Customers’
willingness to buy service and satisfaction with it are due to how well the service supports their value
creation, which is indicated by the circle in the centre of the triangle.
FIRM
Full-time marketers and salespeople
Enabling promises Making promises

Internal marketing External marketing
Customer’s
Development of systems value Sales
and other resources creation
VALUE-SUPPORTING CUSTOMER
Keeping promises
RESOURCES:
Employees Support to the customers’
Goods and tangible elements value creation through
THE SERVICE PROCESS
Knowledge
Systems and technologies
Interactive marketing
Customers
F I G U R E 2.3
The service marketing triangle.
Source: Adapted from Grönroos, C., Relationship marketing logic.
Asia-Australia Marketing Journal, 4(1); 1996: p. 10. Reproduced by the
permission of the Australasian and New Zealand Marketing Academy.
CUSTOMER MANAGEMENT IN A SERVICE CONTEXT: THE SERVICE MARKETING TRIANGLE 59
The most important change from the goods marketing situation is the fact that the pre-produced
product is missing.17 In process consumption, no pre-produced bundle of features that constitutes a
product can be present. Only service concepts and preparations for a service process can be made
beforehand and partly prepared service can exist. In many service contexts, such as fast-food restaurants
or car rental service, physical product elements with specific features are also present as integral parts of
the service process. These product elements are sometimes, as in the case of car rental, pre-produced,
and sometimes (as in the case of the hamburger in a fast-food operation) partly pre-produced, partly
made to order. However, such physical products have no meaning as such, unless they fit the service
process. They become one type of resource among many other types that have to be integrated into
a functioning service process. A bundle of different types of resources creates value for customers
when these resources are used in their presence and in interactions with them. Even if service firms
try to create products out of the resources available, they cannot come up with more than a standard-
ized plan to guide the ways of using existing resources in the simultaneous service production and
service consumption processes. Customer-perceived value follows from a successful and customer-
oriented management of resources relative to customer sacrifice, not from a pre-produced bundle of
features.
The firm may still have a centralized marketing and sales staff, the full-time marketers, but they do
not represent all the marketers and salespeople of the firm. In most cases the service firm has direct
contact with its customers, and information about each and every customer can be obtained on an
individual basis. This is beneficial because, in many cases, customers (business-to-business customers
and individual consumers and households alike) like to be treated individually.
In Figure 2.3, the pre-produced product is replaced by an offering consisting of a set of value-
supporting resources functioning together with the customer in a service process. These resources
of a firm are divided into five groups: personnel, technology, goods, knowledge, and the customer.
Many of the people representing the firm influence the customers’ perception of quality and value
creation in various service processes, such as deliveries, restaurant service, customer training, claims
handling, repair and maintenance, etc. Their way of handling their tasks influences the customers’
perception of quality and willingness to do business with them and the organization they represent in
the future as well. Thus, their way of serving customers has a decisive marketing impact. Gummesson
has called these customer contact service employees part-time marketers.18 In many service firms they
outnumber the full-time marketers many times. In addition, they have customer contacts during the
crucial moments of truth when the service is produced for the customer, often together with the
customer, something that full-time marketers seldom have.
In addition to part-time marketers, other types of resource influence the quality and value perceived
by the customer and are hence important from a marketing perspective. Technologies,19 goods, the
knowledge that employees have and that is embedded in technical solutions, and the firm’s way of
managing the customer’s time are such resources. By participating in the service process, the customers as
individual consumers or as users representing organizations often become a value-creating resource.
In summary, from the customer’s point of view, in process consumption the solutions to their prob-
lems are formed by a process and a set of resources needed to create a good customer-perceived service
quality. In addition, the firm must have competencies to acquire and/or develop the resources needed
and to manage and implement the service process in a way that creates value for each customer. Thus,
a governing system is needed for the integration of the various types of resources and for the manage-
ment of the service processes. In the service marketing literature, the way these resources are managed
and implemented in interactions with the customers is called the interactive marketing function. We
shall return to this concept in Chapter 9 on managing marketing or customer-focused management.
Promises made by sales and external marketing are fulfilled through the use of all types of resources.
In order to prepare an appropriate set of resources, continuous product development in its traditional
form is not enough, because the service process encompasses a large part of the activities of the service
firm. Instead, to enable the fulfilment of promises, continuous resource development including internal
marketing and a continuous development of the competencies and the resource structure of the firm
are needed. Internal marketing will be discussed in depth in Chapter 14.
S E RV I C E M A N A G E M E N T A N D M A R K E T I N G :
A CASE OF A MISSING PRODUCT
The conclusion of the discussion in the previous sections is that service businesses – service firms and
product manufacturers adopting a service logic – do not have products (understood as pre-produced
bundles of resources and features); they only have processes, including a set of resources of many
kinds, to offer their customers. Of course, these processes also lead to an outcome that is important for
the customer. However, as the outcome of, for example, a management consultancy assignment or
hotel accommodation cannot exist without the process, and because from the customer’s perspective
the process is an open process, it is fruitful to view the outcome as a part of the process. Both
the process and its outcome have an impact on customer perception of the quality of service and
consequently on customers’ value creation.
A major challenge for service providers is, therefore, to develop innovative ways of managing
processes as solutions to customer problems. The value support that a firm can offer is not embedded in
the resources used in the service process, but it emerges in customers’ consumption or usage processes,
when they use these resources in interaction with the service provider in order to achieve an outcome
for themselves. Models and concepts of service management – perceived service quality, customer-
perceived value, service production systems, internal marketing and other models and concepts –
have been developed to help managers cope with this challenge.
C U S T O M E R - T O - C U S T O M E R C O M M U N I C AT I O N :
E X P E R I E N T I A L I Z I N G S E RV I C E P R O C E S S E S
The customers have many roles in the service process. In the previous section customers interacting
with the service provider’s resources were considered participants in the process as co-producers.
Furthermore, customers experience the service process and perceive the service they get. These are
the traditional customer roles in service processes. However, with the emergence of Internet and
mobile-mediated ways of interacting and communicating, such as Facebook and Twitter, customers
can also interact during a service process while consuming the service. Twitter especially provides a
means of on-the-spot interactions through live tweeting, where tweets can be responded to instantly
or forwarded immediately to other persons. This, of course, has a dramatic effect on word-of-mouth,
where customers can share experiences with a huge number of peers for their further consideration
when looking for purchasing options. However, it also has an effect which changes the nature of
service experiences and therefore also of service processes, and the perception of the service.
Kai Huotari, who has studied the use of Twitter during TV shows and ice hockey games on TV,
introduces the term experientializing for this phenomenon.20 A group of people sharing an interest in,
for example, a given TV show, who watch the show in different locations, establish a contact with
Twitter and, using live-tweeting, share their experiences with others in the group. In this way the personal
service experiences change due to the experience sharing throughout the process, through customer-to-
customer communication. Because the service provider has no control over how the service is experientialized,
CUSTOMER-TO-CUSTOMER COMMUNICATION: EXPERIENTIALIZING SERVICE PROCESSES 61
the service experiences and how they are developing and changing through experientializing may
cause new challenges. Of course, experientializing has existed before, for example when a group of
people gather at home or in a bar to watch a TV programme, but Twitter and live-tweeting add a
totally new dimension to this phenomenon.
The experientializing concept also helps to understand other consumption situations, where con-
sumers interact, either in person or through live-tweeting or any other similar means, and even where
a single consumer without any C2C interactions adds an aspect to the service process which is not
originally part of the planned service. For example, a person reading a newspaper or book during a
bus or train trip experientializes the travel process, and the experience is different from a trip without
a newspaper or book, and therefore the service is also different.21 For example, cafés, train companies
and airlines have offered newspapers and magazines to their customers, in order to make their service
experience more enjoyable.
CASE STUDY
T H E M I S S I N G P R O D U C T I N A N E L E VAT O R R E PA I R A N D
MAINTENANCE FIRM
This case study of a firm providing elevator repair and maintenance service is an illus-
tration of how the missing product of a service provider has been replaced by a quality-
generating service system to promote enduring customer relationships. The case company
is a large elevator manufacturer, and repair and maintenance provider, operating glob-
ally. Its repair and maintenance business had, however, been unprofitable for some time
and it had problems in maintaining its customer relationships.22
To find out the reason behind the loss of customers, a large-scale survey was conducted
among the firm’s customers. The questionnaire was based on the assumption that the
company offered a product that could be described as the outcome of repair and mainte-
nance activities. This quantitative study indicated that the repair and maintenance service
of the firm was low quality and that its prices were considered high. This result led to great
consternation among top management and the marketing and sales group, because they
knew that the firm as a major service provider had by far the best-trained service tech-
nicians, the best possible instruments for diagnosing problems, the best tools and equip-
ment for taking care of any repair and maintenance job, and the widest possible assort-
ment of spare parts. Everybody in the firm considered it to have the best service on the
market, and they could not understand why the customers considered the quality of the
repair and maintenance service to be low. High prices were easier to understand because
being a large company, it had high overhead costs and had to maintain a high price level.
Because top management had difficulty in accepting the results of the study, a second,
qualitative study was initiated. One hundred former customers, mostly representing busi-
ness customers such as office buildings and institutions but also residential buildings, were
interviewed in an unstructured fashion. The main interview question could be phrased as
‘What went wrong?’
In spite of some variations in results, the average lost customer expressed the following
opinion:
We realize that you have the best capabilities on the market to repair and maintain ele-
vators, and in most cases you do a good job. However, we do not feel comfortable with
the way you are doing the job. We cannot trust your service technicians to start doing the
repair or maintenance task according to what has been promised, and quite often you do
not give exact promises about when the job will start. Although some of your people are
attentive and show an interest in our concerns regarding the elevator and its problems,
most of them could not care less about us as people and the need for information that
we sometimes have. Sometimes we do not even recognize them as your employees. Quite
often the service technician just leaves a job unfinished and we do not know why or when
he will be back to finish it. Because we cannot always trust your way of doing the job and
because it is therefore complicated for us to be your customers, we think that the quality
of your service is low and that we, therefore, pay too much for them.
The implications of the second study were quite obvious. Top management and the
marketing and sales group thought that the company had ready-made products to be
delivered to their repair and maintenance customers (more or less equalling the outcome
of repair and maintenance), whereas the customers considered the company to be offer-
ing processes. Furthermore, although the customers recognized that the processes had to
include a successful outcome, their concerns regarding the repair and maintenance ser-
vice and its quality were associated with the process and with problems occurring in the
process.
The second study helped management to understand that the object of the elevator
repair and maintenance business was the service process, and that it really was a case of a
missing product. It was realized that the solution to the customers’ problems consisted of
the outcome of the service process as well as of the process itself. Moreover, the customers
clearly indicated that the outcome had to be of on acceptable quality, but when this was
the case the outcome (the successful result of the repair and maintenance process) was
obvious to the customers and the service process became the issue. Both the outcome
and the process have to be carefully planned and well implemented, if the repair and
maintenance service is to be considered good. Both the outcome and the service process
have to be of good quality. It turned out that the former was perceived by the customers
as a prerequisite, and in the final analysis it was the quality of the process that counted.
Clearly the firm thought that it was offering and delivering pre-produced products to
its repair and maintenance customers, whereas the customers considered the offering to
be quite different. They saw a process which created quality and value for them, and no
ready-made solution. Although the outcome of the service process had to be good, it was
the quality of the service process and the value provided by it that determined whether or
not the repair and maintenance service was considered good. This case will be continued
in Chapter 13. In that context the actions taken to improve the perceived quality of the
service as a process will be discussed.
NOTES 63
S U M M A RY
This chapter discussed the characteristics of service and observed that their processes form their major
feature. The difference between process consumption and outcome consumption was analysed, and it was
concluded that the consumption or use of service can be characterized as process consumption. Sources
of competitive advantage in service due to their process nature were then discussed. Finally, implications
for marketing of the process nature of service was discussed at some length. It was concluded that the
scope of marketing is different in services to that in physical goods.

1. Why is the process nature of services their most important feature? What other distinguish-
ing characteristics of service can be identified?
2. What impact does the process nature and other characteristics of service have on the scope
and content of marketing?
3. What are the differences between outcome consumption and process consumption?
4. Which sources of competitive advantage exist for service businesses? How do they differ
from those of a product business?
5. What are the major managerial consequences of the fact that service to a critical extent is
consumed at the same time as it is produced?
6. What is meant by experientializing, and how is a given service experientialized, for example,
through live tweeting.
NOTES
1. Harvey-Jones, J., Making It Happen. Reflections on Leadership. Glasgow: Fontana/Collins, 1989.
2. A range of such definitions is discussed in Grönroos, C., Service Management and Marketing. Man-
aging the Moments of Truth in Service Competition. Lexington, MA: Lexington Books, 1990.
3. Gummesson, E., Lip services – a neglected area in services marketing. Journal of Services Marketing,
1, 1987.
5. See Grönroos, C., Adopting a service logic for marketing. Marketing Theory, 6(3), 2006, 317–333.
6. Since the beginning of systematized research into service marketing in the 1970s, four generic
characteristics of services that distinguish services from physical goods have invariably been
included in articles and textbooks; that is, intangibility, heterogeneity, inseparability and perisha-
bility. This set of characteristics and the fact that services are described in relation to goods have
seldom been disputed. In the Nordic School research this set of characteristics has never been
used as such. However, lately the relevance of this way of describing services has been criticized.
See, for example, Lovelock, C.H. & Gummesson, E., Whither service marketing? In search of a
new paradigm and fresh perspectives. Journal of Service Research, 7(1), 2004, 20–41 and Edvardsson,
B., Gustafsson, A. & Roos, I., Service portraits in service research: a critical review. International
7. For a recent discussion of the ownership issue, see Lovelock & Gummesson, 2004, op. cit.
8. A comprehensive discussion of classification schemes can be found in Lovelock, C.H., Classifying

services to gain strategic marketing insights. Journal of Marketing, 47(3), 1983, 9–20. See also
Grönroos, 1990, op. cit.
9. Wünderlich, N.V., von Wangenheim, F. & Bitner, M.J., High tech and high touch: a framework
for understanding user attitudes and behaviors related to smart interactive services. Journal of Service
Research, 16(1), 2013, 3–20. See also Berry, L.L. & Parasuraman, A., Marketing Services. Competing
Through Quality. New York: Free Press, 1991.
10. Grönroos, C., What can a service logic offer marketing theory? In Lusch, R.F. and Vargo, S.L.
(eds), The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions. Armonk, NY: M.E.
Sharpe, 2006, pp. 354–364.
11. As observed in the customer-dominant logic research stream, the question of when consumption
starts and when it ends has not been problematized in the service management and marketing
literature. See Heinonen, K, Strandvik, T. & Voima, P., Customer dominant value formation in
service. European Business Review, 25(2), 2013, 104–123.
12. See Grönroos, C., Service reflections: service marketing comes of age. In Swartz, T.A. &
Iacobucci, D. (eds), Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage
Publications, 2000, pp. 13–16.
13. Peppers, D. & Rogers, M., Enterprise One-to-One. London: Currency/Doubleday, 1997.
14. See Schonfeld, E., The customized, digitized, have-it-your-way economy. Fortune, 28 Septem-
ber, 1998, 69–74.
15. Kotler, P., Marketing Management. Analysis, Planning, Implementation and Control, 8th edn.
Englewood Cliffs, NJ: Prentice-Hall, 1994. However, Kotler only included people in his triangle
model and omitted the physical resource (technology, goods and systems) elements of the Nordic
School approach to service marketing.
FURTHER READING 65
16. In a service context the marketing triangle issue has been developed by Mary Jo Bitner and
Christian Grönroos. See Bitner M.J., Building service relationships: it’s all about promises. Journal
of the Academy of Marketing Science, 23, 1995, 246–251 and Grönroos, C., Relationship marketing:
strategic and tactical implications. Management Decision, 34(3), 1996, 5–14. Since then the service
marketing triangle concept has been applied in several contexts. See, for example, Yadav, R.K. &
Dabhade, N., Service marketing triangle and GAP model in hospital industry. International Letters
of Social and Humanistic Sciences, 8, 2013, 77–85.
17. See Grönroos, C., Marketing services: a case of a missing product. Journal of Business & Industrial
Marketing, 13(4–5), 1998, 322–338.
18. See, for example, Gummesson, E., Total Relationship Marketing. Rethinking Marketing Management:
From 4Ps to 30Rs. London: Butterworth-Heinemann, 1999.
19. Parasuraman has also recognized the importance of adding technology to the product marketing
triangle, which he illustrates using a pyramid metaphor. See, for example, Parasuraman, A. &
Grewal, D., The impact of technology on the quality–value–loyalty chain: a research agenda.
Journal of the Academy of Marketing Science, 28(1), 2000, 168–174.
20. Huotari, K., Experientializing – how C2C communication becomes part of the service expe-
rience. The case of live-tweeting and TV-viewing. Helsinki: Hanken School of Economics,
Finland, 2014.
21. See Huotari, op. cit.
22. This case is based on a situation that occurred roughly 25 years ago. However, because it is
pedagogically the best case about the ‘missing product’ in a service operation that the author
knows about, it is used here. Moreover, although the case company successfully solved their
problems, situations like the one presented in the case study are not uncommon today.
Berry, L.L. & Parasuraman, A. (1991) Marketing Services. Competing Through Quality. New York: Free
Press.
Bitner M.O. (1995). Building service relationships: it’s all about promises. Journal of the Academy of
Marketing Science, 23, 246–251.
Edvardsson, B., Gustafsson, A. & Roos, I. (2005) Service portraits in service research: a critical review.
International Journal of Service Industry Management, 16(1), 107–121.
Grönroos, C. (1990) Service Management and Marketing. Managing the Moments of Truth in Service Com-
petition. Lexington, MA: Lexington Books.
Grönroos, C. (1996) Relationship marketing: strategic and tactical implications. Management Decision,
34(3), 5–14.
Grönroos, C. (1998) Marketing services: a case of a missing product. Journal of Business & Industrial
Marketing, 13(4–5), 322–338.
Grönroos, C. (2000) Service reflections: service marketing comes of age. In Swartz, T.A. & Iacobucci,
D. (eds), Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage Publications,
pp. 13–16.
Grönroos, C. (2006a) What can a service logic offer marketing theory? In Lusch, R.F. and Vargo,
S.L. (eds), The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions. Armonk, NY: M.E.
Sharpe, pp. 354–364.
Grönroos, C. (2006b) Adopting a service logic for marketing. Marketing Theory, 3(3), 313–337.
Gummesson, E. (1987) Lip services – a neglected area in services marketing. Journal of Services
Marketing, 2(1), 19–24.
Gummesson, E. (1999) Total Relationship Marketing. Rethinking Marketing Management: From 4Ps to
30Rs. London: Butterworth-Heinemann.
Harvey-Jones, J. (1989) Making It Happen. Reflections on Leadership. Glasgow: Fontana/Collins.
Heinonen, K, Strandvik, T. & Voima, P. (2013) Customer dominant value formation in service.
European Business Review, 25(2), 104–123.
Huotari, K. (2014) Experientializing – how C2C communication becomes part of the service experience. The
case of live-tweeting and TV-viewing. Helsinki: Hanken School of Economics, Finland.
Khalifa, A.S. (2004) Customer value: a review of recent literature and an integrative configuration.
Management Decision, 42(5), 645–666.
Korkman, O. (2006) Customer Value Formation in Practice. A Practice-Theoretical Approach. Helsinki:
Hanken Swedish School of Economics, Finland.
Kotler, P. (1994) Marketing Management. Analysis, Planning, Implementation and Control, 8th edn.
Englewood Cliffs, NJ: Prentice-Hall.
Lovelock, C.H. (1983) Classifying services to gain strategic marketing insights. Journal of Marketing,
47(3), 9–20.
Lovelock, C.H. (1991) Services Marketing. Englewood Cliffs, NJ: Prentice-Hall.
Lovelock, C.H. & Gummesson, E. (2004) Whither service marketing? In search of a new paradigm
and fresh perspectives. Journal of Service Research, 7(1), 20–41.
FURTHER READING 67
Parasuraman, A. & Grewal, D. (2000) The impact of technology on the quality–value–loyalty chain:
a research agenda. Journal of the Academy of Marketing Science, 28(1), 168–174.
Peppers, D. & Rogers, M. (1997) Enterprise One-to-One. London: Currency/Doubleday.
Prahalad, C.K. & Ramaswamy, V. (2004) The Future of Competition: Co-Creating Unique Value with
Customers. Boston, MA: Harvard Business School Press.
Ravald, A. & Grönroos, C. (1996) The value concept in relationship. European Journal of Marketing,
30(2), 19–30.
Schonfeld, E. (1998) The customized, digitized, have-it-your-way economy. Fortune, September 28,
pp. 69–74.
Wünderlich, N.V., von Wangenheim, F. & Bitner, M.J. (2013) High tech and high touch: a frame-
work for understanding user attitudes and behaviors related to smart interactive services. Journal of
Service Research, 16(1), 3–20.
Yadav, R.K. & Dabhade, N. (2013), Service marketing triangle and the GAP model in hospital
industry. International Letters of Social and Humanistic Sciences, 8, 77–85.
Zeithaml, V.A. & Bitner, M.J. (2000) Services Marketing. Integrating Customer Focus Across the Firm, 2nd
edn. New York: McGraw-Hill.
CHAPTER 3
THE SERVICE PROFIT
LOGIC AND SERVICE
MANAGEMENT PRINCIPLES
“ In service, costs and revenues are inseparable. The same resources, activities and processes drive both
”
costs and revenues – and ultimately profits.
INTRODUCTION
This chapter will discuss the nature of a service strategy, based on the service profit logic, and the
importance of customer perceived quality. This includes a discussion of the pitfalls for service organi-
zations of strategic management from a traditional manufacturing perspective, and the development
of a service-oriented view of the business logic. Thus, the importance of a service-oriented approach
to strategy and management is emphasized. Finally, service management as a management philoso-
phy is defined and principles of this approach to management are discussed. After having read this
chapter the reader should understand the Service Profit Logic and how it differs from a conventional
manufacturing profit logic, and be familiar with the pitfalls of a traditional management approach in
service contexts. Finally the reader should know how to apply a service logic to management and
service management principles.
S O M E T R A D I T I O N A L A N D P O T E N T I A L LY
D A N G E R O U S S T R AT E G Y L E S S O N S F R O M
M A N U FA C T U R I N G
For a manufacturer of goods, conventional managerial thinking generally includes, among other ele-
ments, three rules of thumb to follow in order to strengthen or maintain the competitive edge of a
firm:
70 THE SERVICE PROFIT LOGIC AND SERVICE MANAGEMENT PRINCIPLES
1. Decrease production and administration costs, to decrease the unit cost of products.
2. If needed, increase the budget for traditional marketing efforts such as advertising, sales and sales
promotion in order to make the market buy the goods produced.
3. Strengthen product development efforts.
For conventional product manufacturing, these rules of thumb usually make sense. If production
costs can be decreased, lower prices can be offered, or higher margins can be obtained. The con-
sumption of physical goods can be characterized as outcome consumption – the customer consumes
the outcome of the production process – and, regardless of the new, more effective and efficient
production technologies and methods used, the outcome and the product quality remains the same.
Economies of scale normally pay off. Moreover, sales and marketing efforts usually have a positive
effect on demand. Continuous product development is of vital importance to manufacturing.
Assuming that the management of capital is sound, the long-term business success of any business
is to manage revenues and costs successfully, such that a positive economic outcome is achieved. It
is simplistic to say that profit equals revenues minus costs, but the business implications of this are
far from simplistic. Misunderstanding these implications may turn out to be fatal. For conventional
product manufacturing the business implications can be illustrated as the Manufacturing Profit Logic in
Figure 3.1.
As illustrated by the Manufacturing Profit Logic, and the ground rules for product management
outlined earlier, revenues are driven by sales and conventional external marketing mix activities –
traditional marketing such as product design and packaging, advertising and other means of mar-
keting communication, pricing and distribution. Marketing and sales are given the responsibility
for successful external impact in the marketplace and marketspace. Production and a whole host of
production-related and administrative processes, such as R&D, product development, manufacturing,
logistics, order-taking, invoicing, complaints handling, human resource management, accounting and
budgeting processes, and general administration are considered cost driving. Their immediate impact
on revenues is thought to be minimal, and mostly only indirect through the manufactured products.
This is due the fact the most of the manufacturing firm’s processes are closed to the customer. In other
words, the internal efficiency of the firm’s processes, how the firm’s production and many administrative
functions work, are considered to drive costs only, but not revenues, other than indirectly through
the quality of the goods produced. The firm’s external effectiveness, how customers perceive the quality
of products and why they are willing to purchase them, is mainly considered the responsibility of
traditional marketing and sales.
Profit = Revenues − Costs Promise making and

influence on quality
experience (product) and
external effectiveness
Traditional marketing Influence on cost
Other business
(external marketing) level and
functions
and sales internal efficiency
F I G U R E 3.1
The Manufacturing Profit Logic.
THE SERVICE PROFIT LOGIC 71
Internal efficiency and external effectiveness can be defined and described in the following way:
● Internal efficiency: efficient use of production (and administrative) resources; what traditionally, but
not totally accurately, is called ‘productivity’.
● External effectiveness: the external effectiveness of the firm’s operations as perceived by its customers
(in the form of customer perceived quality and customers’ willingness to pay a given price for an
offering).
Internal efficiency is related to the way a firm operates and the productivity of labour and capital. It
can, for example, be measured by the unit cost of the production output. External effectiveness, on
the other hand, is the way customers perceive the processes and the process outcomes of the firm, or
in other words, how customers perceive quality.
In conventional product manufacturing, internal efficiency and external effectiveness are treated as sep-
arate management issues, and cost drivers are not considered revenue drivers. Conventional management
models are based on the situation described by the manufacturing profit logic. In conventional prod-
uct manufacturing it works.
To sum up, according to this profit logic, sales and marketing are expected to be promise making,
and therefore to acquire paying customers, as indicated by the thick arrow in Figure 3.1. By pro-
ducing products for sales and marketing, business function other than these functions create costs and
determine the firm’s level of internal efficiency (indicated by the dotted arrow in the figure).
Profit orientation is needed in service, too. However, if lessons from the manufacturing sector,
and the Manufacturing Profit Logic, are followed unchanged, there is a risk that the firm will fall
into a strategic management trap, or what Richard Normann called a vicious circle.1 Before we discuss the
strategic management trap further, it is important to define the commercial foundation of service, or
the Service Profit Logic.
T H E S E RV I C E P R O F I T L O G I C
According to the characteristics of service and the service quality models (see Chapters 4 and 5
where perceived service quality is discussed in detail), resources and activities that have an impact on
customer perceived quality and future buying and consumption behaviour can be found in most
departments of the service firm. Production and other business functions traditionally considered
internal to the firm affect customers’ behaviour. In service, operations management, management of
human resources and marketing management are interrelated. Peter Drucker’s view that marketing,
from the customer’s point of view, is too important to the firm’s economic result to be treated as a
separate function is very valid indeed.2
As a consequence, other than partly, the profit and cost drivers in service are not the same as in
product manufacturing. Because of this, managers in service business must consider the Service Profit
Logic as a starting point for any strategies and business decisions. As Figure 3.2 shows, the Service
Profit Logic is dramatically different from the corresponding Manufacturing Profit Logic.
We demonstrate in Figure 3.2 that decisions concerning business functions other than traditional
marketing and sales, such as production and those functions responsible for a variety of customer
contacts and what, in the previous chapter, was labelled recognized and hidden services, not only affect
internal efficiency and costs, but also have a decisive impact on external effectiveness and revenues.
Recognized services such as repair and maintenance, as well as hidden services, such as invoicing and
recovering failures and quality problems, not only drive costs but often have a major impact on
the firm’s power to generate revenues. Thus, the profit logic and how profit is formed through revenue
Profit = Revenues − Costs Influence on quality

perception (service) and
external effectiveness
Traditional marketing Interactive functions
Other business
(external marketing) (Service encounter) Influence on cost
level and
functions
and sales
Supportive functions internal efficiency
External effectiveness (Back office)
Promise making
Non-customer
(about future value-
influencing functions
enhancing support)
External effectiveness and
internal efficiency inseparable
F I G U R E 3.2
The Service Profit Logic.
and cost drivers change altogether. Decisions regarding internal efficiency and costs are to a large extent
intertwined with external effectiveness decisions affecting the firm’s ability to generate revenues. In
strategic management and in strategic as well as tactical planning processes, the revenue-generating
effects of business processes other than conventional marketing and sales must be included.
As further shown by the Service Profit Logic, decisions that simultaneously influence internal
efficiency and external effectiveness should not be made before both the revenue-generating effects
(external effectiveness) and the cost-generating effects (internal efficiency) of such decisions have been
taken into consideration and analysed.
Because revenue-generating costs are needed to maintain a level of perceived service quality which
makes customers willing to become and remain customers, revenue-generating costs and costs which
predominantly enhance bureaucracy should be kept apart and treated in different ways. Moreover,
from a business point of view, in relative terms, the effects on external effectiveness of planning the
firm’s many processes is more important than the cost efficiency aspect, which of course must not
be neglected either. In the long run at least, revenue generation is more important than cost consideration. Of
course, in the short run, a firm’s situation may at times require more attention to costs. However,
in the final analysis, external effectiveness and customer perceived quality drives revenues and profit.
Costs have to be adjusted to meet this level of external effectiveness.
In other words, strategic planning and management should begin with the revenue-generating
implications of a given decision, but of course, as an integrated process, cost implications should
be considered. This is not to say that costs are of minor importance. Although perceived quality
drives revenues, profits suffer if the service is produced with too high costs. Saving costs, in particular
costs that do not contribute to the generation of revenues, is necessary in most firms, and monitor-
ing costs is always of crucial importance. Sometimes the cost level can be reduced by encouraging
customers to change their consumption habits. For example, banks have persuaded customers to use
ATMs, and computer-based and Internet-based payment of bills instead of withdrawing money at
bank counters, which costs more for the bank to administer. Airlines and airports are persuading trav-
ellers to use check-in machines instead of going to check-in encounters. And as research into the use
THE SERVICE PROFIT LOGIC 73
TA B L E 3.1
The profit logic in manufacturing and in service organizations.
Manufacturing Service
Internal efficiency and external effectiveness Internal efficiency and external effectiveness
are separable. cannot be separated other than partly.
Revenues and costs are driven by different Revenues and costs are largely driven by the
processes. same processes.
Decisions regarding internal efficiency and Decisions regarding internal efficiency and
external effectiveness can be taken external effectiveness cannot be taken
separately, i.e. they can be managed as separately, i.e. they have to be managed in
different processes by different business an integrated process.
functions.
of information technology in service shows, customers often appreciate the freedom from time and
space restriction offered by Internet and mobile technologies.3 However if, for example, a cost-saving
decision can be expected to have a negative impact on quality and revenues which is bigger than the
cost reduction, it should probably not be made.
Not all production and administration resources and processes can be expected to have effects on
revenue. As shown in Figure 3.1, there are interactive functions, with which customers have direct
contact, and supporting functions, such as warehousing, information processing and other back-office
activities, that through internal service indirectly influence perceived quality. Such functions are crit-
ical because they drive both revenues and costs. However, there are functions that, from the customer’s
point of view, are totally invisible – such as some back-office and general administration processes.
These functions are only cost-generating.
The differences in the profit logic between traditional manufacturing and service organizations are
summarized in Table 3.1.
Standardization of service production, industrialization in a manufacturer-like manner, can be done
in the truly invisible part of the organization. In the other parts of the organization, industrialization
has to be implemented much more carefully if one wants to make cost savings without damaging
perceived quality and the generation of revenue, and avoid destroying the competitive advantage of
service (flexibility and adaptability; see Chapter 2).
Traditionally, external marketing activities and sales are considered to be more or less solely
responsible for revenues. However, this is not true as far as service is concerned, and firms offering
projects and any manufacturers of goods with extensive customer contacts by non-marketing persons
face a new service-based reality as well. If the organization produces bad service quality, marketing
communicaton and selling will not satisfy customers and make them buy again from that organization.
The scope of marketing will have to be broadened. If the firm has to increase its traditional marketing
and sales budget to maintain revenues and profit, this causes additional costs, as indicated in Figure 3.2.
To sum up, in addition to creating costs and influencing internal efficiency, as the thick arrow
in Figure 3.2 indicates, other business functions than sales and marketing have an impact on the
customers’ quality perception and willingness to pay a given price (external effectiveness), and thereby
contribute to the firm’s revenue-generating capability in a decisive way. Sales and marketing make
promises (the thin arrow) about the potential quality and value-creating support the firm intends to
provide.
The Service Profit Logic has much more far-reaching management implications than for marketing
only. The interconnectedness of revenue and cost drivers – external effectiveness and internal effi-
ciency intertwined – influences, often even to a dramatic extent, at least the following management
areas, which will be discussed in separate chapters in this book:
● Quality management (Chapters 4 and 5).
● Offering management (Chapter 7).
● Productivity management (Chapter 8).
● Marketing management (Chapter 9).
● Marketing communication management (Chapter 10).
● Brand management (Chapter 11).
● Human resource management (Chapters 14 and 15).
In the following sections we will first demonstrate the pitfalls of following a goods profit logic in
service organizations (the strategic management trap), and then discuss how to avoid falling into this
trap by implementing a service-oriented strategy based on the Service Profit Logic.
T H E S T R AT E G I C M A N A G E M E N T T R A P
When the goods profit logic and manufacturing-based rules of thumb for management are followed,
the consequences for a service provider may be those illustrated in Figure 3.3. We may assume, for
example, that the service firm or any service organization, for example in the public sector, either has
financial problems or foresees such problems, or is facing increasing competition, or both. Or the firm
may for some other reason, for example in order to please shareholders, want to improve its internal
efficiency. Irrespective of the impact of technology, labour costs are high in most service operations. In
order to control costs, strategic decisions concerning personnel are often made: personnel reductions,
a hiring freeze, full-time employees replaced by temporary staff, a greater degree of customer self-
service, people being replaced by machines, and so on.
In manufacturing, such decisions should improve production efficiency, lower costs, yet have no
effect on the output. They may even improve the quality of the goods produced. A favourable effect
on productivity could be expected. In a service context some of this may happen. However, far too
often none of these effects will occur, at least not in the long run.
As we have noted, in traditional manufacturing, the interrelationship between internal efficiency
and external effectiveness is less important. Customers only perceive the physical output of the pro-
duction process. In service organizations the situation is different. The consumption of service is
process consumption and, according to the basic characteristics of service, the customer as a co-producer
is involved in the production process and perceives not only the output of the process but parts
of the process itself. In a service process an efficient manufacturing orientation, focusing primarily
on internal efficiency, may easily alienate the customers, make the customers’ perception of quality
deteriorate and in the end chase customers away. Hence, opportunities are missed to sell more and
obtain repeat business in ongoing customer relationships. However, in back-office processes, where
customers are not involved and which are not visible to them, a manufacturer-oriented approach
THE STRATEGIC MANAGEMENT TRAP 75
Financial
problems or increasing
competition
Deteriorating Decisions concerning

corporate image internal efficiency
(often influencing
personnel)
Customers still
dissatisfied
Deteriorating
More traditional service quality
occasional
marketing efforts
Dissatisfied Marginal
Deteriorating customers cost
service quality savings
Deteriorating
working atmosphere
F I G U R E 3.3
The strategic management trap.
Source: Grönroos, C., Strategic Management and Marketing in the Service Sector.
Cambridge, MA: Marketing Science Institute, 1983, p. 41. Reproduced by
permission of the Marketing Science Institute.
to developing the processes may pay off.4 On the other hand, improved back-office efficiency may
make the internal support to those who serve external customers deteriorate. In that case the effect
on external effectiveness and customer perceived quality is probably negative.
Management decisions concerning the production process in a service context are too often thought
of as having an impact only on internal efficiency. This often leads to operations and reward systems
supporting the wrong actions. For example, restaurant managers are frequently rewarded for low food
costs, which are of no interest to customers, who are looking for good food and attentive service.
Doing what is important to customers and means value for them should be rewarded instead.
In reality, the external effectiveness issue is highly relevant. If only internal efficiency goals are
pursued, the perceived service quality changes; too often it deteriorates. Thus, an improved internal
efficiency may in service operations lead to a negative shift in perceived quality. Personnel have
less time for a single customer, or for paying attention to the customer, and solving the customer’s
problems are not rewarded. This may increase waiting times, decrease the employee’s likelihood of
penetrating to the problems of a given customer, and leave less time for employee flexibility. Self-
service procedures and technology, which may be introduced as a substitute for personal service,
may help the customer. Information technology may also improve the service. However, often this
unfavourably changes the perceived quality, because the customer either does not accept the new
system or is not prepared, trained or motivated to operate it.
When the perceived quality of the service starts to deteriorate, the outcome of the service process is
usually not the most critical aspect, but the impact on the quality perception of the process has a more
immediate effect and is immediately critical. Customers may feel that they get the same outcome as
before, but that the manner in which the service is provided has deteriorated.
If customers are dissatisfied, they normally show it to the employees and to fellow customers.
Employees in contact with such customers are easily affected by such feedback. The result may be
a deteriorating work atmosphere, where the employees no longer feel satisfied with their jobs or
as motivated to provide service to the customers as they may have been initially. Moreover, the
direction of decisions taken in the organization, where people are treated mainly as a cost-generating
burden, also has a demotivating impact on performance. The decision-making of management has
a negative effect on the employees. The service employees become under a negative pressure from
both customers and management.
This process may be fatal to the service operation and the whole service organization. As the
atmosphere in the workplace is affected, the customer perceived quality of the service may continue
to deteriorate. Employees may have less time to perform well, but they may also be less motivated to
do so. Such negative sequences of management decisions easily lead to a vicious circle.5 Once a firm
has entered into such a circle, its growth potential may be seriously affected.
The destructive process illustrated here and in Figure 3.3 seems to be caused by a lack of understand-
ing of how the service profit logic differs from the traditional goods logic, and of the interrelationship
between internal efficiency and external effectiveness in service organizations. Decisions made to help
cost savings have an unexpected external effect. The output of the service operation, the service and
the quality of the service are not the same as they were, or as they are supposed to be according to
traditional management thinking from manufacturing.
At this point the firm sometimes turns to traditional external marketing in order to keep its cus-
tomers. A temporary boom may be achieved by, for example, heavy advertising, but in the long term
the new customers as well as the old ones will observe the decrease in quality and become dissatisfied
with what they receive. If external marketing campaigns make unrealistic promises, which in situa-
tions like this are not uncommon, disappointment will be severe among newcomers who wanted to
give the firm’s service a try. Furthermore, unrealistic promise-making has a negative and discouraging
internal effect as well.
Consequently, in spite of traditional marketing efforts, in the long term one often ends up with
dissatisfied customers. At the same time the firm’s corporate image will change. Decreasing per-
ceived quality and unrealistic promises by external marketing efforts have a negative impact on image.
Moreover, a growing number of dissatisfied customers and ex-customers creates a substantial negative
word-of-mouth effect on image, as well as on purchase decisions.
In the end one will probably find that the decisions taken may have caused varying degrees of
damage. In the worst case, service quality has decreased, the work atmosphere has deteriorated, word
of mouth has become a problem instead of a support, negative comments in social media explode,
the corporate image has been affected, and finally, the problems caused by the financial problem or
increased competition have not been solved. In summary, a bad situation has become even worse.
A VICIOUS CIRCLE: AN EXAMPLE

What is going on in many hospitals with their for-profit service providers seems to be an example
of a bad situation becoming worse, caused, to a greater or lesser extent, by the wrong management
approach and a lack of understanding of the characteristics of service. If there are financial problems,
doctors are urged to concentrate on professional and technical issues, which they do, and nurses
COST EFFICIENCY AND THE RISK OF FALLING INTO THE TRAP 77
are requested not to interact too much with patients and maybe not at all with family members.
The intention here is, of course, to achieve a more effective use of time and, as a consequence, to
cut costs.
The consequences of these actions are a lower level of service quality as perceived by the customers –
the patients and their relatives and friends. But this approach from management has a much more
severe internal effect, which is eventually perceived by the customers as well. The employees, proba-
bly the nurses and staff personnel first, start to feel a role conflict. Patients and relatives demand more,
but management says no. They are not encouraged or authorized to give good service. This quickly
affects the working atmosphere, which in turn leads to a deterioration of the customer perceived
quality of the service. At this point, external marketing communication and PR activities commu-
nicating a ‘we care’ image have no significant positive effect on customers or potential customers.
They know better, or will soon find out what the truth is. Moreover, they will create a substantial
amount of bad word of mouth.
However, in one respect, such promotional campaigns clearly have an effect. This effect is not
normally recognized by managers, or by communications people. It is an internal effect, and it is neg-
ative. Employees realize that management has deliberately attempted to fool customers and potential
customers. It may, in reality, not be deliberate, it may just be a result of bad and thoughtless man-
agement, but it is easily perceived as deliberate. For example, nurses know that they cannot fulfil the
promise ‘we care’. They just do not have the time, and they are encouraged not to do so. This, of
course, by itself hurts morale and damages the internal atmosphere even more. Second, nobody wants
to deliberately take part in lies and cheating, which such promotional efforts are in this situation. It
goes against the ethics of most people, and increasingly damages the working atmosphere. Conse-
quently, good employees start looking for another job and eventually quit; they have no interest in
helping the employer, and quality continues to deteriorate. If the financial problems were initially
minor, they grow as the internal crisis deepens and the service quality (the reason for the external
crisis) decreases. A few wrong management decisions can easily lead to a downward spiral, a negative
trend which gains momentum once it has started.
C O S T E F F I C I E N C Y A N D T H E R I S K O F FA L L I N G
INTO THE TRAP
Initial cost savings often turn out to be marginal in the long run. Employee absence due to illness
or other reasons such as job dissatisfaction tends to increase. Extra personnel, without proper train-
ing, have to be hired. The work surroundings and the technology used may not be handled with
appropriate care by less motivated and temporary personnel.
The process illustrated in Figure 3.3, and in a sketchy way by the hospital example above, is a true
and real strategic management trap. By making the wrong decisions based only on product manufacturing
know-how and models, the organization may be thrown into a vicious circle6 or negative downward
spiral, which weakens the competitiveness of its operations and causes or intensifies the financial
problems that are often the reason for making inappropriate decisions in the first place.
Why does it go wrong? Why do conventional wisdom and guidelines from manufacturing not help?
The main reason is the fact that a service organization is not a traditional manufacturing firm. Instead
it is an organization with characteristics of its own where a different profit logic forms the commercial
basis of management and a different service-based management logic should, therefore, be adopted.
Service consumption is process consumption, not outcome consumption. The service production process
is a partly open system, where at the same time as he perceives and consumes a service the customer
also participates in the process as a co-producer. The nature of service and service competition requires
a different approach to strategic thinking and management.
In traditional management thinking the productivity of capital and labour, and internal efficiency
considerations, are the factors that predominantly drive profit. However, a service firm, or any service
operation, is different in some vital aspects. As noted earlier in this chapter, external effectiveness, how
the organization performs and the output of its operations – in short, the perceived service quality with
both its process- and outcome-related features – is what customers experience and evaluate. Actions
to improve internal efficiency and productivity as traditionally measured can easily have a negative
external impact on perceived quality. For service organizations, external effectiveness and customer
perceived service quality drives profit, provided of course that customers consume the service in such a
way that the cost of producing the service does not exceed revenues from that service.7 Conceptually
and operationally, productivity has to be treated differently in service than in manufacturing. We shall
return to this issue in Chapter 8.
However, this does not mean that decisions which are only or predominantly related to internal
efficiency always lead to negative consequences. This also does not mean that cost savings and the
more effective use of resources are wrong and should not be attempted. On the contrary, improved
productivity of resources – labour as well as capital, and information – and better internal efficiency
should always be an objective, and new technology and production processes that save costs should
be used. Moving from one technology level to another, for example from traditional face-to-face
bank service to Internet banking, often improves internal efficiency and external effectiveness and
customers’ quality perception at the same time. However, there may be a time lag before customers
learn to appreciate a new technology. The main point here is that internal developments aimed at
improving internal efficiency should be based on the characteristics of service, so that the interrelation-
ships between the internal and external effects are taken into account. It should be emphasized that all costs
are not equal. There is a difference between various types of costs which has to be taken into account.
Some costs are revenue-generating, some are not.
A S E RV I C E - O R I E N T E D S T R AT E G Y
Figure 3.4 illustrates schematically a favourable process which may occur if a service strategy, and a
service-based management approach, is followed.8 Figure 3.4 can be compared with Figure 3.3,
which demonstrates the strategic management trap. To give an example, if financial problems or
problems with increased competition make it necessary to change the strategies of, say, an airline
company, cost considerations and internal efficiency should not govern the strategic thinking in the
firm. Instead, management should focus upon the interactions with customers and customer relation-
ships. Effects on external effectiveness and customer relationships should primarily guide the decisions
to be made. Of course, cost considerations and the implications for internal efficiency must not be
overlooked. Concern for internal efficiency can be given priority in the part of the organization invis-
ible to customers. Moreover, a distinction between revenue-enhancing costs and bureaucracy-caused
costs should always be made.
External effectiveness and service quality concerns should be given top priority in the interactive
functions. In an airline, for example, improving buyer–seller interactions in the service encounters,
for instance, by increasing seat size in planes, paying attention to in-flight services, and offering the
employees appropriate customer contact training, to mention a few possibilities, would probably lead
to improved perceived quality from the customers’ point of view.
Such decisions may or may not necessitate more personnel, or more advanced technology, but if
the effects on revenues make up for the additional costs, such revenue-creating cost increases should
A SERVICE-ORIENTED STRATEGY 79
Financial
problems or increasing
competition
Improving buyer – seller

Increasing interactions (external
sales volume efficiency) with cost
control
Improved (or at least

Improving
controlled) perceived
corporate image
service quality
More satisfied
Improving working customers
atmosphere
F I G U R E 3.4
A service-oriented approach.
Source: Grönroos, C., Strategic Management and Marketing in the Service
Sector. Cambridge, MA: Marketing Science Institute, 1983, p. 58. Reproduced
by permission of the Marketing Science Institute.
obviously be allowed. Here, difficulties in calculating the effects on revenue are no excuse for ignoring
the effects on external effectiveness. It should be noted that improved service quality often does not
require additional costs. The only thing that is needed, in many cases, is a better understanding of
customer relationships, how quality is perceived, and finally, the importance of the process-related
quality dimension. Once these points are made clear, internal arrangements for using existing resources
in a more systematic and market-oriented way can usually be made. Service quality management will
be discussed in detail in Chapters 4 and 5.
To return to Figure 3.4, improved quality usually means greater customer satisfaction, which in
turn has a twofold effect. Internally, the work atmosphere will probably improve. Increased customer
satisfaction is noticed by the employees. The positive effects are often very obvious. This favourable
trend is supported by the service-oriented strategic direction that is chosen by management. Deci-
sions directed towards improving the service encounters and service quality imply that management is
prepared to accept the revenue-generating power of the employees and to support it. Such a strategic
attitude has a considerable positive effect on the internal environment of the firm and on employee
motivation. Employees are encouraged by both management and customers. Again, this results in
increased internal efficiency. In some situations the service process can of course be improved by
introducing technology-based solutions, in which cases fewer personnel may be needed and/or the
role of employees may change. Customers of insurance companies are often requested to ask routine
questions over the phone or to use the Internet instead of visiting an office in person, whereas service
employees are supposed to provide customers with more knowledge-intensive service, such as finan-
cial advice. In such situations a critical challenge for management is to maintain and even improve
the work atmosphere for personnel.9
Improved customer satisfaction also has other external effects. Favourable word of mouth is created.
Existing customers may increase their business with the service provider and new customers will
be attracted to the organization. The corporate image and/or local image are enhanced by positive
customer experience and by favourable word of mouth and positive comments in social media.
Finally, sales volume will probably increase. If internal efficiency, external effectiveness and service
quality are controlled simultaneously, a larger volume of sales can be expected to have a sound financial
effect and to improve the firm’s competitive position. Such a positive trend may well continue. The
improved atmosphere in the company makes the buyer–seller interactions even better, and the firm
will generate more financial resources to be used to back up this trend.
C U S T O M E R B E N E F I T S O F A S E RV I C E S T R AT E G Y
Good service means certain benefits for the customer. Especially in business-to-business markets,
customers may be able to calculate these benefits and see the results on the bottom line. For example,
reliable and timely repair and maintenance service may reduce downtime costs, which otherwise
could amount to considerable sums. Such costs can easily be calculated. Individual consumers may
sense these benefits more than see them. Such cost effects will be discussed in Chapter 6.
The better the total customer relationship is taken care of, the better the quality impact of the
service process will be, and the less complicated it is for the customer to maintain the relationship
with the service provider. Co-operation between the two parties becomes easier. For example, the
buyer can rely on the seller that deliveries will always be made on time, technical service will be good
and personal contacts will be accessible when needed, claims will be handled promptly and with the
buyer’s interest in mind, and social contacts will be satisfactory. Not only is it more convenient for
the buyer to do business with a service provider who can be trusted in all respects, in many situations
such a relationship equals a cost reduction for the buyer as well.
If the level of perceived quality is high and co-operation between the two parties is smooth, three
sources of cost reduction for the customer can be distinguished:
1. Fewer resources/personnel are needed to maintain contact with the service provider.
2. The person involved in contacts with the provider will need less of their time for handling these
contacts.
3. It is psychologically less demanding to maintain contact with the provider, which in turn increases
the mental capacity of personnel to be used for other tasks.
In many cases the cost reductions that can thus be achieved are easy to calculate. The psychological
effects of good service may be less so, but the other effects can easily be transformed into euros,
pounds sterling or dollars – money that, for the buyer/customer, can be used productively elsewhere.
The service provider, in turn, can transfer some of this cost reduction to the price. The benefits of
improved customer relationships by a service strategy can thus be shared between the buyer and the
seller. This should have a favourable impact on profitability.
T H E B U S I N E S S M I S S I O N A N D S E RV I C E C O N C E P T
Every service provider needs some performance guidelines. Overall, the concept of a business mission
is used to determine in which markets the firm should operate and what kinds of problems it should
try to solve. In generic terms a business mission, or service vision, for any firm that wishes to be a
true service organization can be formulated as follows:
THE BUSINESS MISSION AND SERVICE CONCEPT 81
The firm’s business mission is to provide target customers with service that supports their everyday activities and
processes, thereby contributing to their goals in life or business in a value-enhancing way.
The expression ‘supports . . . in a value enhancing way’ means that the service provided should
impact a customer’s activities and processes so that value emerges for the customer, i.e. the customer is
better off than before the service had been produced and used. A firm can develop a service-focused,
and customer-focused, business mission based on this generic formulation by specifying:
1. Which process or processes in a customer’s everyday activities it aims to support.

2. How this support is intended to enable and enhance value creation in the customer’s life or
business.
3. With what resources, processes and interactions the customer’s process should be supported.
3. What should be achieved for the customer (value-in-use; goal achievement) and service provider
(value capture) respectively.
In Figure 3.5 a business mission formulation based on service logic is schematically illustrated. In
the figure an example from car rental, further discussed in Chapter 7, is also included.
Within the framework of the business mission, concrete guidelines for developing service offerings
have to be developed. These can be called service concepts. The service concept is a way of expressing
the notion that the organization intends to solve certain types of problems in a certain manner. This
The Firm
Facilitate (add how)
Its customers’ (add a description of customer segments)
Life processes/Business processes (define the processes; if appropriate, add
what everyday processes facilitate these life/business processes)
By supporting their appropriate everyday process or processes (define
which everyday process/processes)
By operating in a given manner (add in what manner, through what processes;
both outcome-related and process-related aspects)
Such that the Customers achieves (add in value terms (monetary and/or other)
what the firm wants the customers to achieve)
Such that the Firm achieves (add what the firm should achieve; financially and
otherwise)
An example from car rental (excluding outcome- and process-related aspects of

how to operate)
“The firm aims at providing immediately accessible solutions to
temporarily occurring transportation problems”
The customers’ everyday process: Temporarily occurring transportation problems
Base for value perception in everyday life: An immediately accessible solution
Which type of customer (which segment): Business travellers
F I G U R E 3.5
Service logic-based business mission.
means that the service concept has to include information about what the firm intends to do for a
certain customer segment, how this should be achieved, and with what kinds of resources. If there is no
service concept agreed upon and accepted, the risk of inconsistent behaviour is high. Supervisors do
not know what should be achieved and what priorities to set. The same goes for other personnel. A
situation would develop in which different parts of the organization perform inconsistently. This, of
course, adds to confusion. And in an Internet-based virtual organizational setting with more or less
loosely connected network partners, a clear and easily communicated service concept is of utmost
importance.
The service concept should be as concrete as possible so that it can be understood by everybody.
To give an example, in a car rental company case discussed in Chapter 7, the firm stated their service
concept as follows: ‘To offer immediately accessible solutions to temporary transportation problems.’ This
service concept states that since problems are immediate and temporary, therefore the solutions to
them must be quick and easy to obtain. This firm became very successful.
Depending on how differentiated the operations are and how many different customer segments
exist, there can be one or several service concepts. It is, however, important that they all fit the
overall service vision or business mission. Before a service concept can be determined, careful market
research must be carried out, otherwise there is always a risk that there will be an insufficient market
for service produced according to the service concept.
I N C R E A S I N G T H E S E RV I C E I M PA C T
I N C U S T O M E R R E L AT I O N S H I P S
Implementing a service strategy requires appropriate action at the operational level. Here one should
notice that a service strategy can be pursued by actions of many kinds. However, what is often needed
is a new way of thinking, i.e. adopting a new logic. Old rules and ways of thinking may misguide
management and leave opportunities unexploited.
The service impact on customer relationships can be increased in three ways:
1. Developing new services to offer to the customer.

2. Activating existing but hidden services or service elements in a business relationship.
3. Turning the goods component into a service element in the customer relationship.
Too often only the first possibility is taken into account, but there are many additional opportunities
for strengthening customer relationships through a better service impact.
Increasing the service impact by adding new services. The first category of activities literally means that
new services are added to the offering. New services are typically various consultancy services, infor-
mation services, repair and maintenance services, software development, websites, logistical services,
customer training or joint R&D activities. Clearly, this may be a powerful means of differentiating
one firm’s offering from that of the competition. Such efforts should be used whenever appropriate.
However, such new services require new investments and increase the cost level. These must be
justified by expected additional revenue.
Increasing the service impact by activating existing but hidden services. The second type of activity seems
much less dramatic and is therefore frequently not thought of as a strategic issue that should initiate
major changes in the customer relationship. It may, nevertheless, have a dramatic impact on the
offering, perhaps even more of an impact than the first type. It is a matter of actively using existing
INCREASING THE SERVICE IMPACT IN CUSTOMER RELATIONSHIPS 83
but hidden, often non-billable, service elements in the relationship between the buyer and the seller in order
to differentiate the offering and increase the support provided to the customers’ processes, and thus
make use of these services as a means of competition.
Such service elements in customer relations are, for instance, casual advice, order taking, deliveries,
claims handling, invoicing, demonstration of manufacturing processes, technical quality control, call
centres, help desks and telephone reception services, and frequently asked questions on a website.
Customers do pay for these services, too, although one seldom thinks about it. However, such service
elements are far too often perceived as nuisances rather than as services by most customers. The reason
for this is, of course, that they are frequently handled as mere administrative routines and not as actively
rendered services. If these service elements are thought of as service and the value support that can be
provided by them is recognized, the firm may improve its position and strengthen its competitive
edge.
It is important to realize that these potential services already exist in the customer relationships – they
only have to be managed in a different way so that their value-supporting possibilities are utilized,
and customers start to experience them as service. For example, complaints handling is far too often
managed as an administrative task with the seller’s interest as the top priority. Instead a complaint
could be taken care of in a service recovery fashion, quickly, preferably even before a formal complaint
has been made by the customer, with the customer’s interest as the first priority. In the former
situation, customers consider the complaints-handling process a nuisance, which in addition may cause
considerable sacrifice for them. In the latter situation, the quality problem or service breakdown is
recovered in a way that the customer perceives as quality-enhancing and most often also cost-saving.
Changed invoicing systems may also have similar effects.
Many of the services that are managed as administrative routines, or in some other way without
taking the customer’s interests into account, are truly hidden services. On the one hand, service firms
or manufacturers do not see them as potential value-creating service. On the other hand, customers
often do not think of them as anything other than a necessary evil. Hence, the firm that manages to
turn such hidden services or ‘non-services’ into real service to its customers can easily provide them
with a series of positive surprises, and enhance perceived quality in the minds of the customers. From
this should follow strengthened customer relationships.
Developing hidden services often does not demand big investments or extra costs. Rearrang-
ing existing resources and routines may frequently be all that is needed. In fact, more service-
oriented invoicing and complaints handling may ensure that these activities are more effectively dealt
with internally as well, and operating costs can thus be saved. The customer benefits that can be
achieved frequently exceed the additional efforts. Furthermore, hidden services, which are managed as
non-service – for example, invoices including mistakes or failures managed with delays – cause costs
for the customer and the firm alike. If they are not activated and turned into true value-supporting
service for customers, they remain a cost burden for both parties, and the service provider loses the
revenue potential of improved overall service.
Increasing the service impact by turning goods components into service. If the goods component is offered
in a flexible manner and tailor-made to fit the needs and wishes of the customer, or made easy to
install, maintain and upgrade, it is turned into service for the customer. Consequently, it is turned
into a service element in the customer relationship. A good salesperson uses such a sales strategy.
However, turning the goods component into a service goes far beyond sales. In production, logistics,
installation, IT applications, and so on the same approach is required.
A manufacturer of industrial equipment may try to tailor its goods as much as possible to the specific
needs of its customers and make them easy to understand and easy to maintain. A restaurant may cook
meals and even add seasoning according to the wishes of a specific customer. In both cases, the goods
component is transformed from being a physical thing to customized service.
S E RV I C E M A N A G E M E N T: A D O P T I N G A S E RV I C E
LOGIC IN MANAGEMENT
Having demonstrated the nature and characteristics of a service strategy, we now turn to the princi-
ples of management which guide decision-making and managerial behaviour in service competition.
This approach to management has been labelled service management.10 It is a methodology in which
management procedures are geared to the characteristics of service and the nature of service compe-
tition. Service management is also very much a customer-oriented approach. Often the term ‘service
management’ is used instead of the term ‘service marketing’. Sometimes the phrase ‘service marketing
and management’ is also used in the literature to describe this field.11 The use of the term ‘service
management’ indicates the cross-functional nature of marketing in service contexts. Marketing is not
a separate function, but in the management of all business functions the interests of the customer, i.e.
a customer focus, has to be taken into account. It is a matter of customer-oriented or market-oriented manage-
ment. Chapter 9 discusses marketing in service competition and the relationship between marketing
and customer-oriented management.
Service management is understanding how to manage a business in service competition, that is, in
a competitive situation where service is the key to success in the marketplace, regardless of whether
the core of the offering is a service or a manufactured product.
Service management can be described as follows:12
1. Understanding the value that emerges for customers by consuming or using the offerings of an
organization and knowing how service, provided through goods, service activities, information,
and other resources, and combinations of such resources, contributes to this value.
2. Understanding how total quality is perceived in customer relationships to facilitate such value and
how it changes over time.
3. Understanding how an organization (people, technology and physical resources, systems and cus-
tomers) will be able to produce and deliver this perceived quality and support customers’ value-
creation, and during direct interactions also co-create value with customers.
4. Understanding how an organization should be developed and managed so that the intended per-
ceived quality and value are achieved.
5. Making an organization function so that this perceived quality and value are achieved and the
objectives of the parties involved (the organization, the customers, other parties, etc.) are met.
This means that the firm has to understand the following:
1. The perceived quality and value in their everyday activities and processes customers are looking
for in service competition.
2. How to create that value support for customers.
3. How to manage the resources available to the organization to be able to support such service-based
value creation.13
SERVICE MANAGEMENT: A SHIFT IN MANAGEMENT FOCUS 85
This description of service management is rather exhaustive. Shorter definitions lose some of the
information content, but may still be clear to readers, and they are easier to remember. According
to another definition in the literature, ‘service management is a total organizational approach that
makes quality of service, as perceived by the customer, the number one driving force for the opera-
tion of the business’.14 Applying service management principles means that service is considered the
organizational imperative.15
‘Organization’ in these contexts, of course, refers to the bundle of quality-supporting resources
involved in producing the service, that is, people (personnel and customers alike) as well as technology
and physical resources, and information and operating systems, and administration. As organizations
increasingly move towards being network organizations, many of these resources are outside the
boundaries of traditional organizational constructs. It is also important to observe that the definition
of service management requires a dynamic approach to management. It is not enough to understand
which values or benefits customers are seeking; one must also understand that the benefits customers
are looking for will change over time, and that the customer perceived quality and value which is
produced has to change accordingly.
A service management perspective changes the general focus of management in service firms as
well as in manufacturing firms adopting a service logic in the following ways:16
1. From product-based value (‘value-in-exchange’) to total value emerging in customers’ processes

(‘value-in-use’).
2. From short-term transactions to long-term relationships.
3. From core product (goods or services) quality (the quality of the outcome only) to total customer
perceived quality in customer relationships.
4. From production of the technical solution (of a product or service) as the key process in the
organization to developing total perceived quality and supporting customer value as the key process.
The expression value-in-exchange refers to the view that value for a customer is embedded in a pre-
produced product. Value-in-use means that value for a customer evolves in the customer’s activities
and processes.
S E RV I C E M A N A G E M E N T: A S H I F T
IN MANAGEMENT FOCUS
Two basic shifts in focus are implicit in the service management principles when compared with the
traditional management approach used in manufacturing. These are:
1. A shift from an interest in the internal consequences for the firm of performance to an interest in
the external consequences for customers and other parties.
2. A shift from a focus on structure to a focus on process.
These two shifts imply a shift of focus from inside-out management to outside-in management, as discussed
in Chapter 1, and they are of paramount importance. A service strategy, to be successfully imple-
mented, requires both. As a management philosophy, service management is predominantly related to
managing processes in which the underlying structures are of less importance. If the structures take
over, the flexibility of operations and the handling of customer contacts suffer. The encouragement
and support of managers and supervisors decreases, and thus motivation among personnel suffers as
well. In the following phase, the perceived service quality starts to deteriorate and customers are prob-
ably lost. The new emphasis on process and external consequences changes the focus on (1) the profit
logic as the driving force of a business, (2) decision-making authority, (3) organizational structure,
(4) supervisory control and (5) reward systems; and when there is a shift in the focus on reward sys-
tems, other tasks and types of achievement have to be (6) monitored and measured. These six principles
of service management are summarized in Table 3.2 and discussed below.
TA B L E 3.2
Principles of service management: a summary.
Principle Remarks
1. The service profit Customer perceived service Decisions on external efficiency

logic as business quality drives profit. and internal efficiency (customer
driver satisfaction and productivity of
capital and labour) have to be
totally integrated.
2. Decision-making Decision-making has Some strategically important
authority to be decentralized as decisions have to be made
close as possible to the centrally.
organization–customer
interface.
3. Organizational The organization has to be This may often require a ‘flat’
structure structured and functioning so organization with no
that its main goal is the unnecessary layers.
mobilization of resources to
support frontline operations.
4. Supervisory Managers and supervisors focus As few legislative control
control on the encouragement and procedures as possible, although
support of employees. some may be required.
5. Reward systems Producing customer perceived All relevant facets of service
quality should be the focus of quality should be considered,
reward systems. although they cannot always all
be built into a reward system.
6. Measurement Customer satisfaction with To monitor productivity and
focus service quality should be internal efficiency, internal
the focus of measuring measurement criteria may have
achievements. to be used as well.
SERVICE MANAGEMENT: A SHIFT IN MANAGEMENT FOCUS 87
The service profit logic as the driver of business. As discussed in some detail in this chapter, the general
economic focus or the business logic is shifted from managing internal efficiency and the productivity of
capital and labour to managing total business effectiveness, including both internal efficiency and exter-
nal effectiveness considerations, where customer perceived quality drives profit. However, there are
several interrelated factors influencing how, and indeed if, perceived quality leads to sound economic
results. Service management appreciates the importance to success of managing external effectiveness
and customer relationships. Internal efficiency needed to function profitably is an inevitable issue,
but it is not a top priority in itself. It must be totally integrated with external effectiveness issues and
geared to managing customer perceived quality. As soon as the internal perspective begins to domi-
nate, an interest in costs and managing internal efficiency will take over, but without a simultaneous
consideration of the quality implications. Inside-out management starts to dominate at the expense of
outside-in management. Issues related to creating and maintaining excellence and revenue generation
will then become secondary and receive less or no management attention.
Decision-making authority. Because of the characteristics of service (e.g. the inseparability of critical
parts of production and consumption) and the facets of customer perceived service quality (e.g. a
demand for flexibility and recovery capabilities), decisions concerning how a service operation should
function have to be made as close as possible to the interface between the organization and its customers. Ide-
ally, customer contact employees who are involved in service encounters should have the authority to
make prompt decisions. Otherwise sales opportunities and opportunities for service recovery, correct-
ing quality mistakes and problems will not be used intelligently. If the moments of truth in the service
encounters go unmanaged, service quality deteriorates quickly. Of course, a contact employee, for
example a bank clerk or a service technician, cannot always have the professional knowledge required
if a customer wants, for example, a sophisticated financial solution for his international business or an
estimate of expected future repair costs. However, the customer contact employee should neverthe-
less have the decision-making authority, for example, to ask for assistance from the back office and
support staff professionals.
If the employees in customer contacts are not given authority to think and make decisions for
themselves, they become victims of a rigid system. Customer contact employees may be demotivated
by rigid rules and systems which hamper them instead of empowering them to handle deviations from
standard operational procedures. ‘Empowering’ personnel is a powerful way of motivating people
(empowerment will be discussed in Chapter 14 on internal marketing). It means that employees are
encouraged, and trained, to recognize the diversity of customer contact situations and to use their
judgement in handling situations and solving problems following on from deviations from standard
procedures so that customer satisfaction is created.
Thus, operational decision-making needs to be decentralized. However, some strategically important
decisions have to be kept centralized; for example, decisions concerning overall strategies, business
missions and service concepts. The unique knowledge among contact personnel of aspects of the
business that are vital to making such strategic decisions should, however, always be used in cen-
tral decision-making. First, this improves the quality of decisions, and second, it creates a stronger
commitment to these decisions among those who will have to live with them and carry them out.
The ‘local’ manager, whether he is the head of a branch of a multi-outlet organization, such
as a bank or hotel chain, or the head of a department in a firm which produces service has, of
course, the overall responsibility for his team. The manager is also responsible for the total opera-
tion, service consciousness and profitability of his ‘local’ organization. One can say that the manager
has dual responsibility: responsibility towards the customers and towards the corporation. Svenska
Handelsbanken, a nationwide and internationalizing retail and commercial bank based in Sweden, has
formulated the following ground rule for their local branch managers: ‘The local manager is responsi-
ble for perceived service quality and value for the customers and for profitability for the corporation.’
This bank is probably the most decentralized and customer-oriented bank in Scandinavia. It is also
one of the most profitable banks and has invariably been rated highest by customers in satisfaction
studies.
Organizational structure. Traditionally, the organizational focus is geared to building up and maintain-
ing a structure in which management decisions are cascaded through processes involving legislative
control. This often creates a lack of flexibility, fuels centralization tendencies, and can be a hindrance
to the vertical flow of information in the organization. Service management shifts management focus
away from structure and control procedures towards improved external efficiency with acceptable
internal efficiency. This requires a more flexible organizational solution, where the mobilization of
resources – management, staff, systems – to support customer contact activities is imperative. The
organizational structure that suits this requirement may differ from situation to situation, but some
common principles can be identified. Organization for service will be discussed in more detail in
Chapter 13.
Supervisory control. In traditional management approaches, supervisory systems are closely related
to monitoring the capability of the organization and its various departments in performing their
tasks according to predetermined standards. If such standards are met, the employee, or a group of
employees, has performed satisfactorily, and may be rewarded.
However, such a supervisory control system does not fit the nature of service and service produc-
tion very well. By its very nature, service cannot often be completely standardized. Moreover, for
employees to deliver quality service, some degree of flexibility is needed to meet the special wishes
of customers or to successfully recover negative situations in service encounters. Here, guidelines
and visions are better than rigidly defined standards. Only the technical quality aspects of service can
be monitored by standards; whereas, from a competitive standpoint, the highly important process-
related quality aspects are not well suited for the development of traditional standards. Process-related
quality-creating performance cannot easily, if at all, be monitored by comparing it with predeter-
mined standards. Instead, service management requires that the supervisory focus be on the support
and encouragement of employees. This may require new management and leadership methods. Sub-
sequent chapters on service culture and internal marketing will touch upon this issue to some extent.
Reward systems. Normally, reward systems are geared to the focus of supervisory control. What is
monitored can be measured, and what is measured can be controlled and rewarded. Of course, not
all, if any, of the tasks and factors that are controlled are geared to reward systems. However, a
shift in supervisory focus requires a corresponding shift of focus on rewarding. Generally speaking,
service management requires that producing perceived service quality and supporting customers’ value creation
at some level – excellent or otherwise acceptable – should be rewarded, not just compliance with
predetermined, easily measurable standards.
Measurement focus. What is controlled and rewarded has first to be measured. The focus here must of
course also be shifted, or at least expanded. The ultimate signs of success are customer satisfaction with
total perceived quality, loyal customers and improved profits. Thus, according to service management
principles, for service-oriented supervisory approaches and reward systems, customer satisfaction with
service quality as well as tasks that boost satisfaction and loyalty has to be measured. Measuring how
standards are met and the bottom line are not enough. Internal efficiency criteria may have to be used
as well, so that internal efficiency is kept under control. However, the external effectiveness criteria
always dominate.
NOTES 89
S U M M A RY
There are clear and well-defined customer benefits in pursuing a service strategy. However, doing so
requires different knowledge on the part of management as well as those implementing a service strategy.
The service profit logic has to be understood, and the issues of quality, marketing, human resource man-
agement, productivity and profitability have to be addressed differently from a traditional manufacturing
context. This, of course, is due to the characteristics of service and service consumption, and the nature of
customer relationships in service contexts. What is standard in managing a traditional manufacturing firm
may turn out to be inappropriate and even counterproductive for a service business or for a manufacturer
pursuing a service strategy. A ‘service imperative’ and the management of service quality are at the heart
of service management.

1. How could traditional management wisdom from manufacturing become a trap for a service
firm?
2. Discuss the profit logic and the factors influencing its components in service and manufac-
turing respectively. What are the specific characteristics of the service profit logic?
3. What characterizes service management as a management approach?
4. Discuss how applying the service management principles would change the strategic focus,
structure and governance systems of a firm.
NOTES
1. Grönroos, C., Strategic Management and Marketing in the Service Sector. Cambridge, MA: Marketing
Science Institute, 1983 (first published in 1982 as a research report by Hanken Swedish School of
Economics, Finland). Compare Richard Normann’s discussion of how it is possible to get into a
good circle and avoid falling into such a trap. See Normann, R., Service Management. New York:
John Wiley & Sons, 1984, where he uses the expression vicious circle for this trap.
2. Drucker, P., Management: Tasks, Responsibilities, Practices. New York: Harper & Row, 1973.
3. Heinonen, K., Temporal and spatial e-service value. International Journal of Service Industry Man-
agement, 17(4), 2006, 380–400.
4. Chase, R.B. & Haynes, R.M., Service operations management: a field guide. In Swartz, T.A.
& Iacobucci, D. (eds), Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage
Publications, 2000, pp. 455–471. The classic article on the manufacturing orientation of service
processes is Levitt, T., Production-line approach to service. Harvard Business Review, 50(Sept–
Oct), 1972, 41–52.
5. See Normann, op. cit., where the existence of – and internal effects of – such vicious circles are
discussed extensively.
6. Normann, op. cit.
7. In a major study in the financial services sector in Scandinavia, Kaj Storbacka has demonstrated
that 20% of the customers do not stand for 80% of profits but for 180% to 200% of profits.
Other customers do not contribute to total profits or are directly unprofitable, thus eroding
the total profitability accumulated by the group of profitable customers. Moreover, many of
the unprofitable customers or customers who do not contribute to profits are what he calls
‘satisfied small customers’ and sometimes also big customers, that is customers who are satisfied
with the perceived service quality but who consume the services in such a way that the cost
of producing them exceeds the revenues from those services. See Storbacka, K., The Nature of
Customer Relationship Profitability – Analysis of Relationships and Customer Bases in Retail Banking.
Helsinki/Helsingfors, Finland: Hanken Swedish School of Economics, Finland/CERS, 1994.
8. Compare Richard Normann’s discussion of how, by strengthening peripheral services, it is pos-

sible to get into a good circle and avoid a vicious circle. See Normann, op. cit.
9. This effect is discussed and pointed out by Heskett, J., Guru’s View. Notes from the search for
deep indicators in services. Journal of Service Management, 25(3), 2014, 298–309.
10. Grönroos, C., Service management: a management focus for service competition. International
Journal of Service Industry Management, 1(1), 1990a, 6–14. This service management concept should
not be mixed up with the concept of service management, which is used to denote the man-
agement of service operations. See, for example, Fitzsimmons, J.A. & Fitzsimmons, M.J., Service
Management. San Francisco, CA: McGraw-Hill, 2006.
11. The title of the handbook in the field, Handbook of Services Marketing and Management, is a good
example.
12. See Grönroos, C., Service Management and Marketing. Managing the Moments of Truth in Service
Competition. Lexington, MA: Lexington Books, 1990b.
13. Grönroos, 1990a, op. cit.
14. Albrecht, K., At America’s Service. Homewood, IL: Dow Jones-Irwin, 1988.
FURTHER READING 91
15. Schneider, B. & Rentsch, J., The management of climate and culture: a futures perspective. In
Hage, J. (ed.), Futures of Organizations. Lexington, MA: Lexington Books, 1987.
16. See Grönroos, 1990b, op. cit.
Albrecht, K. (1988) At America’s Service. Homewood, IL: Dow Jones-Irwin.
Chase, R.B. & Haynes, R.M. (2000) Service operations management: a field guide. In Swartz, T.A.
& Iacobucci, D. (eds), Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage Pub-
lications, pp. 455–471.
Drucker, P. (1973) Management: Tasks, Responsibilities, Practices. New York: Harper & Row.
Fitzsimmons, J.A. & Fitzsimmons, M.J. (2006) Service Management. San Francisco, CA: McGraw-Hill.
Grönroos, C. (1983) Strategic Management and Marketing in the Service Sector. Cambridge, MA: Mar-
keting Science Institute.
Grönroos, C. (1990a) Service management: a management focus for service competition. International
Grönroos, C. (1990b) Service Management and Marketing. Managing the Moments of Truth in Service
Competition. Lexington, MA: Lexington Books.
Heinonen, K. (2006) Temporal and spatial e-service value. International Journal of Service Industry
Management, 17(4), 2006, 380–400.
Heskett, J. (2014) Guru’s view. Notes from the search for deep indicators in services. Journal of Service
Management, 25(3), 298–309.
Levitt, T. (1972) Production-line approach to service. Harvard Business Review, 50(Sept–Oct), 41–52.
Normann, R. (1984) Service Management, 2nd edn. New York: John Wiley & Sons.
Schneider, B. & Rentsch, J. (1987) The management of climate and culture: a futures perspective.
In Hage, J. (ed.), Futures of Organizations. Lexington, MA: Lexington Books.
Storbacka, K. (1994) The Nature of Customer Relationship Profitability – Analysis of Relationships and
Customer Bases in Retail Banking. Helsinki/Helsingfors: Hanken Swedish School of Economics,
Finland/CERS Centre for Relationship Marketing and Service Management.
CHAPTER 4
SERVICE AND RELATIONSHIP
QUALITY
“ An acceptable outcome is a prerequisite for good perceived quality and a satisfied customer, but an
”
excellent service process creates customer satisfaction and a distinct and sustainable competitive edge.
INTRODUCTION
Based on the discussion of the characteristics of service and service consumption, and on the customer
management approach to marketing in the previous chapters, this chapter explains how the quality
of service is perceived in service encounters as well as in ongoing relationships. The perceived service
quality model is presented as a basic model of the perception of total service quality. The characteristics
and determinants of good service quality, such as the seven criteria of good perceived service quality, are then
discussed, followed by a description of instruments for measuring perceived service quality. Attribute-
based approaches, such as the SERVQUAL instrument, are presented as well as the critical incident
approach. In the latter part of the chapter, dynamic approaches to understanding service quality in a
relationship context are described. After having read the chapter, the reader should understand the
nature of perceived service quality and the determinants or criteria of service quality as well as know
how to measure perceived service quality. The reader should also understand how perceived service
quality develops into relationship quality in a long-term relationship context.
R E S E A R C H I N T O S E RV I C E Q U A L I T Y
Chapter 2 illustrated the complexity of service and most service activities. Consequently, the quality
of service is complex, too. The quality of goods is traditionally related to the technical specifications
of the goods, although, even in a goods context, a firm using an image strategy, for example, tries to
add to the quality of their goods component by creating imaginative extra value for their customers
using, for example, fashion, status or lifestyle aspects.
Service as a process and a series of activities, where production and consumption cannot be totally
separated, and where the customer often actively participates in the production process, is bound to
94 SERVICE AND RELATIONSHIP QUALITY
be perceived as extremely complex. In order to develop service management and marketing models,
it is important to understand what customers are really looking for and what they evaluate.
When the service provider understands how service is perceived and evaluated by the users, it will
be possible to identify ways of managing these evaluations and influencing them in a desired direction.
The relationship between the service concept, the service offered to customers and customer benefits
has to be clarified.
Grönroos introduced a service-oriented approach to quality in 1982 (in English) with the concept
of perceived service quality and the model of total perceived service quality.1 This approach is based on
research into consumer behaviour and the effects of expectations concerning goods performance on
post-consumption evaluations. The perceived service quality approach with its disconfirmation construct
(that is, it measures how well experiences of the service process and its outcome meet expectations)
still forms the foundation of most ongoing service quality research.2
The original perceived quality model was developed as a conceptual guideline to help managers
and researchers understand what constitutes service in the minds of customers. Goods have physical
features which can be perceived and evaluated. Service does not exist before it is consumed. When a
customer asks for service the service production process can begin. Eventually it ends and the customer
is left with an outcome. Features of service emerge during the simultaneous service production and
consumption processes. In the model that was developed the term ‘quality’ was used. In the same way
as a marketer of physical goods needs to know how customers perceive the quality of product features,
the service marketer has to assess how customers perceive the quality of the ‘service features’ implied
by the perceived service quality framework. The perceived service quality model was introduced as a
conceptual framework that describes how customers perceive the ‘features’ of service. Originally there
was no intention to develop quality measurement models based on a service quality model. Once it
is known how customers perceive the quality of the ‘service features’, normal customer satisfaction
studies can be conducted to find out how satisfied customers are with a certain service. Customer
satisfaction measurement models are also based on the disconfirmation construct and fit service well.
However, research into service quality took another avenue, and parallel models for the assessment
of service quality were developed.
In addition to research into service quality, there is also an existing quality management establish-
ment with roots that go a long way back in the twentieth century. During the 1990s this took the
form of total quality management. However, this quality movement is overwhelmingly devoted to
issues related to goods quality. Because of the characteristics of service, much of the goods-related
quality know-how is not directly applicable in service organizations.
Of course, on the other hand, much of this is useful for service, too. This should not be forgotten,
although this chapter concentrates on what is unique to quality and quality management in service
contexts.
Q U A L I T Y I S W H AT C U S T O M E R S P E R C E I V E
Quality has to be defined and how customers perceive quality understood before decisions about
quality development can be made. Otherwise quality decisions only become paying lip service to
service quality improvement. In service quality literature it is noted that the quality of a particular
product or service is whatever the customer perceives it to be.
If quality is defined too narrowly, quality programmes become too narrow in scope. For example,
the technical specification of a service, or a product, is frequently considered the only or the most
QUALITY DIMENSIONS: WHAT AND HOW 95
important feature of the perceived quality. The more technology-oriented the firm is, the bigger this
risk tends to be. In reality, customers perceive that quality is a much broader concept and moreover,
features other than technical ones frequently dominate the quality experience. One has to define
quality in the same way customers do, otherwise the wrong actions may be taken and money and time
may be poorly invested. It should always be remembered that what counts is quality as it is perceived by
customers.
Q U A L I T Y D I M E N S I O N S : W H AT A N D H O W
Service is a more or less subjectively experienced process where production and consumption activities
take place simultaneously. Interactions, including a series of moments of truth between the customer
and the service provider, occur. What happens in these interactions, so-called buyer–seller interactions
or service encounters, will obviously have a critical impact on the perceived service.
Basically, the quality of a service as it is perceived by customers has two dimensions: a technical
outcome-related dimension and a functional process-related dimension. The hotel guest will be provided with
a room and a bed to sleep in, the consumer of a restaurant’s service will get a meal, the airline passenger
will be transported from one place to another, the client of a business consultant may receive a new
organization scheme, a factory may have its goods transported from its warehouse to a customer,
the bank customer may be granted a loan, the servicing of a machine may be taken care of by the
manufacturer, a claim by an unsatisfied customer may be settled by a retail store, and so on. All of
these outcomes of service processes are obviously part of the quality experience.
What customers receive in their interactions with a firm is clearly important to them and their
quality evaluation. Internally though, this is often thought of as the quality of the service. However,
this is not the whole truth. It is merely one quality dimension, called the technical quality of the outcome of
the service production process. In service management literature the term ‘outcome quality’ has also
been used for this dimension. It is what the customer is left with, when the service production process
and its buyer–seller interactions are over. Frequently, but by no means always, this dimension can be
measured relatively objectively by customers, because of its characteristic as a technical solution to a
problem.
However, as there are a number of interactions between the service provider and the customer,
including various series of moments of truth, the technical quality dimension will not count for
the total quality that the customer perceives he has received. The customer will obviously also be
influenced by the way in which the technical quality – the outcome or end result of the process –
is transferred to him. The accessibility of an ATM, a website, a restaurant or a business consultant,
the appearance and behaviour of waiters, bank clerks, travel agency representatives, bus drivers, cabin
attendants, repairmen and service and maintenance technicians, and how these service employees
perform their tasks, what they say and how they do it, also influence the customer’s view of the
service.
Furthermore, in the case of self-service, the more customers accept and understand self-service
activities or co-production routines, the better they will, probably, regard the service. Also, other
customers simultaneously consuming the same or similar service may influence the way in which
a given customer will perceive a service. Other customers may cause long queues, or disturb the
customer; on the other hand, they may have a positive impact on the atmosphere of the buyer–seller
interactions in these service encounters.
Total perceived quality
Image (corporate/local)
Technical quality Functional quality

of the outcome: of the process:
What How
F I G U R E 4.1
Two service quality dimensions.
In summary, the customer is also influenced by how he receives the service and how he experiences
the simultaneous production and consumption process (the service encounter). This is another quality
dimension, which is related to how the moments of truth of the service encounters are taken care
of and how the service provider functions. Therefore, this is called the functional quality of the process.
In the literature this dimension is also labelled ‘process quality’. Hence, as illustrated in Figure 4.1,
we have two basic quality dimensions, namely, WHAT the customer receives and HOW the cus-
tomer receives it; the technical result or outcome of the process (technical quality) and the functional
dimension of the process (functional quality).3 It is easy to see that the functional quality dimen-
sion cannot be evaluated as objectively as the technical dimension; frequently, it is perceived very
subjectively.
Moreover, unlike goods consumption, in most cases the customers knows which organization
produces the service. Company and/or local image is therefore of utmost importance to most services.
It can affect the perception of quality in various ways. If the provider is good in the minds of the
customers, that is, if it has a favourable image, minor mistakes will probably be forgiven. If mistakes
often occur, the image will be damaged. If the image is negative, the impact of any mistake will often
be considerably greater than it otherwise would be. As far as the quality perception is concerned,
image can be viewed as a filter.
The two quality dimensions, that is, what and how, are not only valid for service activities. The
technical solution for a customer – provided by, for example, a machine or another good – is part of
the overall technical quality perceived by this customer. But attempts to tailor the machine according
to the specific demands of a customer are an additional value of a functional nature and therefore part
of the overall functional quality which this customer experiences.
It should be observed that hidden services, such as invoicing and complaints handling, have a
quality impact on customers as well. For example, if a claim is settled with satisfactory results for
QUALITY AND THE COMPETITIVE EDGE 97
the customer, the outcome of the claims handling process has good technical quality. However, the
total customer influence of the claims handling process also depends on how the process flows. For
instance, if it was complicated and time-consuming to get results, the functional quality of the claims
handling process has been low and total perceived quality lower than it otherwise would have been.
ADDITIONAL DIMENSIONS
Quality dimensions other than the two basic ones (what and how) have been suggested in the lit-
erature. Rust and Oliver discussed the need for explicitly recognizing the physical environment of
the service encounter as a third dimension.4 Thus, the where of the service quality perception would
be added to the what and how.5 In the perceived service quality model the service processes include
the environment of the process, and thus the functional quality perception is influenced by elements of
the physical environment. Therefore, the where aspect is part of the how dimension, which is logical
because the perception of the process is clearly dependent on the context of that process. For example,
shabby decor influences the perception of the service process in a restaurant. However, as a way of
increasing the clarity of the model, if needed a distinction between ‘how’ and ‘where’ could very well
be made. Hence, a third basic dimension (not counting image) would be introduced into the model.
This dimension could, for example, be labelled servicescape quality, using the term ‘servicescape’6
introduced by Bitner to describe various elements of the physical environment of the service
encounter.
The economic consequence is another aspect of perceived service quality that Holmlund has sug-
gested in a business-to-business context.7 Economic quality would denote the perceived economic
consequences of a certain solution. It is not directly a question of price or other kinds of sacrifice for a
customer, but rather the perception of, for example, possible economic sacrifice caused by a solution.
In some situations, not only in industrial markets, it may very well be justified to take this aspect of
perceived service quality into account.
QUALITY AND THE COMPETITIVE EDGE

Quality is often considered to be one of the keys to success. In service contexts, quality is often the
foundation of creating a competitive advantage, but which quality dimension (what or how) is the
vital part of excellent total quality? If this question is not answered correctly, the wrong actions may
be taken, and the company would lose its chance to achieve a stronger competitive position.
Too often technical quality considerations are thought of as the paramount quality issues. A tech-
nical quality strategy is successful if a firm succeeds in achieving a desired technical outcome that
the competition cannot match. Today, this is rarely the case; there are a number of firms that
can produce approximately the same technical quality. Creating a technical advantage is difficult
because, in many industries, competitors can introduce similar solutions relatively quickly. In ser-
vice, creating a technical advantage seems to be even more difficult than in manufacturing. For
example, in financial service or insurance competitors often launch a similar service in a technical
sense in response to competition within weeks or even days. Even when an excellent solution is
achieved, the firm may be unsuccessful, if excellent technical quality is counteracted or nullified by
badly managed or handled service encounters; that is, by an unsatisfactory functional quality of the
process.
Implementing a service strategy is a viable option for most firms, service firms and manufacturers
of physical goods alike. This means, in principle, that improving the service process and service
encounters becomes the basis for quality programmes. Developing the functional quality dimension
may add substantial value for the customers and thus create the necessary competitive edge. To state
this in a more simplified way, you can beat the competition if you provide your customers with
more and better service where functional quality is emphasized. Of course, this does not mean that
technical quality issues are not important, and that technical quality should not be developed as well.
The technical quality of the outcome of a service process is normally a prerequisite for good perceived
quality. It has to be at an acceptable level. The definition of an acceptable level depends on the strategy
of a firm and the needs and expectations of its customers. However, once the outcome is good
enough, this becomes transparent. Good technical quality alone does not mean that customers perceive that
the service quality is good. If customers are to consider total service quality good, functional quality has
to be good as well. In a situation where a number of firms are competing with similar outcomes or
technical quality, the functional quality impact of the service process counts. In that situation, firms compete
with their service processes and the functional quality impact created by them. However, if technical
quality fails, total perceived quality fails as well.
In conclusion, the technical quality has to be good enough, as defined by the firm’s strategy and
its customers’ needs and expectations, but a service provider competes with functional quality, that
is, with how its service process is experienced by its customers.
T H E P E R C E I V E D S E RV I C E Q U A L I T Y
In previous sections we discussed the two basic quality dimensions – the what and the how. We also
noted that quality is to a large extent perceived subjectively. However, the quality perception process
is more complicated. It is not just the experiences of the quality dimensions that determine whether
quality is perceived as good, neutral or bad.
Figure 4.2 illustrates how quality experiences are connected to traditional marketing activities
resulting in a perceived service quality. Good perceived quality is obtained when the experienced quality
meets the expectations of the customer; that is, the expected quality. If expectations are unrealistic, the
total perceived quality will be low, even if the experienced quality measured in an objective way
is good. As shown in Figure 4.2, the expected quality is a function of a number of factors, namely
marketing communication, word of mouth and discussions in social media, company/local image,
price, customer needs and values. Marketing communication includes, for example, advertising, direct
mail, sales promotion, websites, Internet communication and sales campaigns, which are under the
direct control of the firm. Image, social media and word of mouth, as well as public relations, are only
indirectly controlled by the firm. Image also includes a customer’s prior experiences. External impact
on these factors may also occur, but they are basically a function of the previous performance of the
firm, supported by, for example, advertising. Finally, the needs of the customer as well as the values
of the customer that determine his choice also have an impact on his expectations.
A service quality programme may be unsuccessful, or even lead to deteriorated perceived quality, if
the firm simultaneously runs advertising campaigns that promise too much or are inadequate in some
other respect. The level of total perceived quality is not determined simply by the level of technical
and functional quality dimensions, but rather by the gap between the expected and experienced quality
(the disconfirmation notion). Consequently, every quality programme should involve not only those
involved in operations, but also those responsible for external marketing and market communication.
Image plays a central role in customer perception of service quality, and is as important to a ser-
vice firm as to any other organization. Hence, it is imperative that image be managed in a proper
MANAGING EXPECTATIONS TO SECURE THE QUALITY PERCEPTION 99
Image
Total perceived
Expected quality Experienced quality
quality
• Marketing communication Image

• Sales
• Image
• Word of mouth/social media
• Public relations
• Customer needs and values Technical quality: Functional quality:
What How
F I G U R E 4.2
Total perceived quality.
manner. The issues of how image develops and what causes image problems are not always very well
understood. Therefore these issues will be dealt with at length in Chapter 11 on managing brand
relationships and image.
M A N A G I N G E X P E C TAT I O N S T O S E C U R E T H E
QUALITY PERCEPTION
As the perceived service quality model shows, customer expectations have a decisive impact on
customers’ quality perceptions. If a service provider overpromises, it raises customers’ expectations
too high and, consequently, customers will perceive that they get low quality. The level of quality
may very well still be high, objectively measured, but as customer expectations were not in balance
with experiences, the perceived quality is nevertheless low. Many quality development processes are
destroyed by too much promise of improved service, too early. The marketer has to be very careful
when designing external marketing campaigns and activities, so that he avoids making promises that
cannot be kept. Indeed, it may be wiser to try to keep promises on a lower level than actual customer
experiences. In that way customers will at least not be dissatisfied with the quality they perceive. At
the same time it allows the service provider to offer its customers unexpected surprises, which much
more effectively create loyalty and repurchases than simply satisfactorily perceived quality. We shall
return to this issue in the next chapter.
In conclusion, from a marketing point of view it is better to underpromise in order to be sure
that the organization can fulfil the promise that has been given. It is even better to underpromise and
overdeliver.
CASE STUDY
M A N A G I N G E X P E C TAT I O N S : T H E S A B E L W I L D E R N E S S H O T E L
The Sabel Wilderness Hotel is situated in a large natural park and wilderness area in Scan-
dinavia. Several other hotels operate in the vicinity. The Sabel is a hotel with some 80 beds
and is well known for its high standard of service. The hotel has invested in large and
well-furnished rooms as well as in a cosy restaurant serving local and international dishes.
Over the years it has invested substantial sums in training its employees to offer excellent
service to the hotel guests in a personal and flexible way. The most recent theme of the
managing director’s regular meetings with the employees has been service recovery. A
support system for service recovery has been developed. In every customer satisfaction
study made over the years the Sabel has been given the best possible rating by most cus-
tomers. Over 75% of the guests say that they are very satisfied with the hotel overall, and
under 5% indicate that they are less than satisfied. Almost all guests who stay at the Sabel
and who come back to the national park area make new reservations at the Sabel. How-
ever, as the area continuously attracts new visitors, the Sabel has a substantial number of
first-time guests every year.
The management of the Sabel was recently offered an opportunity to upgrade the hotel
to the highest class in the unofficial rating system used for hotels in the country. However,
Mr Leopold, the managing director, also directly responsible for marketing and customer
service, turned down this offer. He did not want hotel guests to expect the best, although
he is convinced that the hotel indeed offers its guests the highest quality service. Says
Mr Leopold, ‘It is much better that guests come to us with lower expectations based on
our next-to-highest rating, because then we can always surprise them with better service
than they thought they would get.’ He continues, ‘I believe it is much better for us to
underpromise and overdeliver.’ According to Leopold, guests perceive that they get a
better quality this way, and this has a favourable impact on the image of the Sabel. In
addition, it reinforces positive word of mouth behaviour.
THE MOMENTS OF TRUTH AND QUALITY

As noted in this chapter, the situations in which the customer meets and interacts with the service
provider’s resources and processes are critical to the quality experience. In these interactions most
or all of the technical quality of the outcome is transferred to the customer, but often even more
importantly, these buyer–seller interactions or service encounters determine the level of the functional
quality. In service management such situations are often called moments of truth, to use a term that was
introduced into the service management literature by Richard Normann.8
The ‘moments of truth’ concept literally means that this is the time and place when and where
the service provider has the opportunity to demonstrate to the customer the quality of its service. It
is a true moment of opportunity. In the next moment the opportunity will be lost. The customer will
have gone, and so will the moment of opportunity. If a quality problem has occurred, it is too late
MEASURING SERVICE QUALITY 101
to take corrective action. In order to do so, a new moment of truth has to be created. The service
provider can, for example, actively contact the customer to correct a mistake or to at least explain
why things went wrong. This is, of course, much more troublesome and probably less effective than
a well-managed moment of truth.
In reality, the customer will experience a whole series of moments of truth when patronizing a
service organization. When using the service of an airline the passenger goes through a number of
such moments, beginning with arrival at the airport and ending with baggage claim and transportation
away from the airport.
The service process must always be planned and executed so that no badly handled moments of
truth take place. If such situations go unmanaged there is an evident risk that unexpected quality
problems may occur.
THE EFFECT OF EMOTIONS AND MOOD

Emotions that customers feel when consuming a service have not been included in the perceived
service quality model, or in models for measuring satisfaction with service quality. However, it is quite
obvious that felt emotions, such as anger and depression, guilt or happiness, delight and hopefulness,
somehow affect the pure cognitive perception of service processes. Some services, such as theatre
or an ice hockey game, should arouse emotions, but emotions also form either a filter mediating
experiences of the service process, or are variables that influence the experiences alongside cognitively
perceived quality elements.
Managers should always bear in mind the potential effects of emotions on perceived service quality.
There have been some minor studies of the effects of emotions on satisfaction with service quality.
One such study indicated that negative emotions may have a stronger effect on satisfaction with
quality than positive emotions.9 However, no conclusive guidance for management has yet been
found.
Mood is a related concept, which may also have a decisive effect on how the quality of a service
is perceived. Previous research on consumer behaviour has shown that customers’ mood – positive
or negative – has an effect on their evaluations and behavioural responses to, among other things,
service encounters.10 As with emotions, research into the effects of mood on how service quality is
perceived is very scarce. However, based on existing research, it seems that mood may only have a
limited impact on how customers perceive service encounters.11
M E A S U R I N G S E RV I C E Q U A L I T Y
Customers’ perception of the quality of service features must, of course, be assessed. The natural
way of doing it would be to measure customers’ satisfaction with the quality they have perceived, as
was originally intended with the perceived service quality model. However, a major part of service
quality research has been geared towards the development of instruments for measuring service quality
directly. In the literature, two types of measurement instruments have been discussed and used.
1. Attribute-based measurement instruments: measurement models based on attributes describing the

features of a service.
2. Qualitative measurement instruments: for example, measurement models based on the assessment
of critical incidents.
Attribute-based models are the most widely used measurement instruments in academic research
as well as in business practice. The most well-known instrument is the SERVQUAL instrument.
According to this measurement approach a number of attributes that describe the features of a service
are defined, and after that respondents are asked to rate the service on these attributes.
Qualitative measurement approaches are used to a much lesser extent. Here respondents are asked
to describe their perception of the service or the service encounters. The critical incident method is
the most often used qualitative method. In a subsequent section this method will be described.
AT T R I B U T E - B A S E D M O D E L S : S E RV I C E Q U A L I T Y
D E T E R M I N A N T S A N D T H E S E RV Q U A L
INSTRUMENT
How service quality can be measured using attribute-based models has been studied extensively. In the
mid-1980s. Berry and his colleague began to study service quality determinants and how customers
evaluate the quality of service based on the perceived service quality concept.12 In Figure 4.3 the
results of their initial study, the 10 service quality determinants, are summarized.
The 10 determinants were found to characterize customers’ perception of the service. One of the
determinants, competence, is clearly related to the technical quality of the outcome, and another, credibility,
is closely connected to the image aspect of perceived quality. However, it is interesting to observe that
the rest of the determinants are more or less related to the process dimension of perceived quality.
The importance of the functional quality dimension is very much stressed by these findings.
As a result of a later study the 10 determinants of service quality were decreased to the following
five:13
1. Tangibles. This determinant is related to the appeal of facilities, equipment and material used by a
service firm as well as to the appearance of service employees.
2. Reliability. This means that the service firm provides its customers with accurate service the first
time without making any mistakes and delivers what it has promised to do by the time that has
been agreed upon.
3. Responsiveness. This means that the employees of a service firm are willing to help customers and
respond to their requests as well as to inform customers when service will be provided, and then
give prompt service.
4. Assurance. This means that employees’ behaviour will give customers confidence in the firm and
that the firm makes customers feel safe. It also means that the employees are always courteous and
have the necessary knowledge to respond to customers’ questions.
5. Empathy. This means that the firm understands customers’ problems and performs in their best
interests as well as giving customers individual personal attention and having convenient operating
hours.
SERVQUAL is an instrument for measuring how customers perceive the quality of a service.
This instrument is based on the five determinants above and on a comparison between customers’
expectations of how the service should be performed and their experiences of how the service is rendered
(disconfirmation or confirmation of expectations). Usually 22 attributes are used to describe the five
determinants and respondents are asked to state (on a seven-point scale from ‘Strongly Disagree’ to
ATTRIBUTE-BASED MODELS: SERVICE QUALITY DETERMINANTS AND THE SERVQUAL INSTRUMENT 103
1. Reliability involves consistency of performance and dependability:

● the firm performs the service right the first time
● accuracy in billing
● keeping records correctly
● performing the service at the designated time
2. Responsiveness concerns the willingness or readiness of employees to provide service:
● timeliness of service
● mailing transaction slips immediately
● calling the customer back quickly
● giving prompt service
3. Competence means possession of the required skills and knowledge:
● knowledge and skills of the contact employees
● knowledge and skills of operational support personnel
● research capability of the organization
4. Access involves approachability and ease of contact:
● the service is easily accessible by telephone
● waiting time to receive service is not extensive
● convenient hours of operation
● convenient location of service facility
5. Courtesy involves politeness, respect, consideration, and friendliness of contact personnel:
● consideration for the consumer’s property
● clean and neat appearance of contact personnel
6. Communication means keeping customers informed in language they can understand and listening
to them:
● explaining the service itself
● explaining how much the service will cost
● explaining the trade-offs between service and cost
● assuring the consumers that a problem will be handled
7. Credibility involves trustworthiness, believability, honesty, and having the customer’s best interests at
heart:
● company name
● company reputation
● personal characteristics of the contact personnel
● the degree of hard sell involved in interactions
8. Security is the freedom from danger, risk, or doubt:
● physical safety
● financial security
● confidentiality
9. Understanding/Knowing the Customer involves making the effort to understand the customer’s needs:
● learning the customer’s specific requirements
● providing individualized attention
● recognizing regular customers
10. Tangibles include physical evidence of the service:
● physical facilities
● appearance of personnel
● tools or equipment used to provide the service
● physical representations of the service (cards, etc.)
● other customers in the service facility
F I G U R E 4.3
Determinants of perceived service quality.
Source: Parasuraman, A., Zeithaml, V.A. & Berry, L.L., A conceptual model of service quality and its
implications for future research. Journal of Marketing, 49(Fall); 1985: p. 47. Reproduced by permission of
the American Marketing Association.
‘Strongly Agree’) what they expected from the service and how they perceived the service. Based on
the discrepancies between expectations and experiences over the 22 attributes, an overall quality score
can be calculated. The more this score shows that experiences are below expectation, the lower the
perceived quality.14 However, more important than calculating the overall score may be the scores
on the individual attribute scales.
There has been some controversy regarding the use of the SERVQUAL instrument. In many
studies the determinants have been reported to be stable over various types of service, but in other
studies the set of five standard determinants has not been found. Moreover, sometimes in a factor
analysis one set of determinants emerges for expectations and another set for experiences. In addition,
the 22 attributes used in the original instrument do not always accurately describe all aspects of a
given service.15
The SERVQUAL scale should be applied carefully, and the determinants and attributes of the
instrument should always be reassessed in any situation, before the instrument is used. The services, as
well as markets and cultural environments, are different. It may be necessary to add new aspects of the
service to be studied to the original set of determinants and attributes, and sometimes to exclude some
from the measurement instrument used. From a managerial point of view, when trying to understand
what constitutes a given service, the five determinants, and also the original 10 determinants, give
a valuable starting point for the development of an understanding of what aspects characterize the
service that is provided. However, when using a SERVQUAL-type approach to measuring perceived
service quality one should always carefully customize the set of determinants and attributes used to
the specific situation at hand.
P R O B L E M S W I T H E X P E C TAT I O N S / E X P E R I E N C E S
M E A S U R E M E N T S A N D C O M PA R I S O N S
There has been a considerable amount of debate regarding what kind of expectations the real experi-
ences of a given service should be compared with. In the original SERVQUAL instrument, customers
were asked what they expected from the service they had consumed, so the expectations and expe-
riences measurements related to the same service. Later the measurement method was changed so
that customers were asked what they expected from an excellent or ideal service in the same cate-
gory as the one they had consumed. The original perceived service quality model from which the
expectations/experiences comparison originates in service quality contexts was developed to help
managers and researchers understand how customers perceive features of a given service. Hence, the
expectations concept in that model is quite clearly related to the same service that is also experienced.
Following the original model, the expectations should be measured as the expectations of the service
that is consumed.
However, independent of what one wants to know about a given service, different kinds of expec-
tations could be measured. If one wants to assess how good a given service is considered to be
compared with the best in its category, expectations of the best-in-the-category service or an ideal
service should be measured. On the other hand, if one wants to find out how customers perceive the
quality of a given service, both expectations and experiences regarding this particular service should
be measured.
There is another problem with measurement instruments that are based on comparisons between
expectations and experiences over a number of attributes. This is because there are certain validity
STUDYING CRITICAL INCIDENTS: A QUALITATIVE APPROACH TO MEASURING SERVICE QUALITY 105
problems related to the measurement of expectations. These problems can be summarized in the
following three points:16
1. If expectations are measured after the service experience or at the same time as the experiences
occur, which for practical reasons they often are, then what is measured is not really expectation
but something that has been biased by experience.
2. It does not necessarily make sense to measure expectations prior to the service experience either,
because the expectations that customers have beforehand are perhaps not the expectations with
which they will compare their experiences. The customer’s experiences of the service process may
change his expectations, and altered expectations are ones with which the experiences should be
compared to determine the actual quality perception of a customer.
3. Measuring expectations is not a sound way of proceeding in any case, because experiences are
perceptions of reality, and inherent in these perceptions are prior expectations. Consequently, if
first, one way or the other, expectations are measured and then experiences are measured, then
the expectations are measured twice.
When measuring perceived service quality, the problems described above are not easy to solve. The-
oretically, a comparison of experiences and expectations still makes sense, because expectations clearly
influence the perception of quality. Managers need to observe the management of expectations when
developing quality programmes. However, in practice we may have to find alternative ways of mea-
suring perceived quality.
In her study on the restaurant industry, Liljander17 compared a number of different standards to
relate experiences to, expectations being one of them. Her conclusion was that making no compar-
isons at all seems to be a good approach to measuring perceived service quality. This means that by
measuring experiences only over a set of appropriate attributes, one can get a good approximation of the
perceived quality. In a North American study, based on similar arguments as Liljander’s, a measure-
ment instrument called SERVPERF (service performance only) was suggested.18 Indeed, measuring
customers’ experiences only may be the best and most valid way of assessing perceived service quality.
Thus, the researcher develops a set of attributes that describes the service as conclusively as possible
and only measures how customers experience the service on scales that measure these attributes. This
way of measuring perceived service quality is also much easier to administer and the data is easier to
analyse.
S T U D Y I N G C R I T I C A L I N C I D E N T S : A Q U A L I TAT I V E
A P P R O A C H T O M E A S U R I N G S E RV I C E Q U A L I T Y
An alternative to attribute-based methods to study how customers perceive the quality of a given
service is the critical incident method. This method has been used a great deal in various studies in the
service field.19
The methodological approach is to ask respondents, in this case customers with experiences of a
given service, to think of situations where the service, or any part of the service process including the
outcome of that process, clearly deviated from the norm, either in a favourable or unfavourable way.
These are critical incidents. Then the respondent is asked to describe, in as much detail as possible, what
happened and what made him consider the incident critical. Finally, the researcher analyses the descriptions
of the critical incidents and the reasons for them in order to find out what kind of quality problems
exist and why these problems occur. Favourable quality perceptions and the reasons for them are also
categorized in the same fashion.
A study using critical incidents gives the marketer rich material indicating problem areas and
strengths as well as what should be developed in order for the firm to improve the perceived quality
of its service. One may find out, for example, that a lack of resources, problems with the technical
skills of service employees or negative attitudes towards customers are frequently occurring reasons
for negative critical incidents, causing low service quality perception. If needed, the marketer can
use these findings as a basis for further research on actions necessary to improve service quality. Fre-
quently the findings from a critical incident study give direct indications about what actions need to be
taken.
P E R C E I V E D S E RV I C E Q U A L I T Y V E R S U S
C U S T O M E R S AT I S FA C T I O N
Customer satisfaction with a physical product is often measured using an instrument where a given
physical product is described by a set of attributes that reflect key product features. A comparison
of experiences with prior expectations is also often made. Probably because the development of
measurement models for perceived service quality included similar elements to models for measuring
satisfaction with goods features, the question whether there is a difference between service quality
and customer satisfaction has been debated in the literature. Furthermore, if there is a difference, the
question whether quality is perceived first and then satisfaction, or satisfaction with a service comes
first and then leads to a quality perception has also been discussed. This discussion has been extensive
and even heated at times; however, it is quite unnecessary.
The perceived service quality model is intended to offer a conceptual framework for understanding
the features of a service, including its outcome, process and image dimensions. It is not a measurement
model. Instead it should give the researcher and marketer a basis for developing a service offering
with a certain quality. In the same way as a customer first perceives the quality of the features of a
physical product, and only then, perhaps taking into account price and other sacrifice-related issues,
finds out whether or not he is satisfied with the product, a person consuming a service first perceives
the quality of the dimensions of the service, and only then, again perhaps considering other issues as
well, is either satisfied or not with the quality of that service.
A logical analysis clearly shows that a perception of service quality comes first, followed by a
perception of satisfaction or dissatisfaction with this quality.
A S U M M A RY: T H E S E V E N C R I T E R I A O F G O O D
P E R C E I V E D S E RV I C E Q U A L I T Y
There has been a range of studies of service quality conducted in many countries. From them various
lists of attributes or factors of good quality can be collated. Such lists are useful as starting points
for managers who want to develop an appropriate list of attributes or features that describe a given
service. However, in order to make such lists of determinants or factors of good service quality useful
for managerial purposes, they have to be short, yet still provide a comprehensive list of aspects of
A SUMMARY: THE SEVEN CRITERIA OF GOOD PERCEIVED SERVICE QUALITY 107
1. Professionalism and Skills

Customers realize that the service provider, its employees, operational systems, and physical
resources have the knowledge and skills required to solve their problems in a professional way
(outcome-related criteria).
2. Attitudes and Behaviour
Customers feel that the service employees (contact persons) are concerned about them and interested
in solving their problems in a friendly and spontaneous way (process-related criteria).
3. Accessibility and Flexibility
Customers feel that the service provider, its location, operating hours, employees, and operational
systems are designed and operate so that it is easy to get access to the service and are prepared to
adjust to the demands and wishes of the customer in a flexible way (process-related criteria).
4. Reliability and Trustworthiness
Customers know that whatever takes place or has been agreed upon, they can rely on the service
provider, its employees and systems, to keep promises and perform with the best interest of the cus-
tomers at heart (process-related criteria).
5. Service Recovery
Customers realize that whenever something goes wrong or something unpredictable happens the
service provider will immediately and actively take action to keep them in control of the situation and
find a new, acceptable solution (process-related criteria).
6. Servicescape
Customers feel that the physical surrounding and other aspects of the environment of the service
encounter support a positive experience of the service process (process-related criteria).
7. Reputation and Credibility
Customers believe that the service provider’s business can be trusted and gives adequate value for
money, and that it stands for good performance and values which can be shared by customers and
the service provider (image-related criteria).
F I G U R E 4.4
The seven criteria of good perceived service quality.
good quality. Figure 4.4 provides such a list. These seven criteria of good perceived service quality
are an integration of available studies and conceptual work. Some of these studies have been discussed
in this chapter. One of the seven, professionalism and skills, is outcome-related and thus a technical
quality dimension. Another criterion, reputation and credibility, is image-related, thus fulfilling a filtering
function. However, four other criteria, attitudes and behaviour, accessibility and flexibility, reliability and
trustworthiness and service recovery, are clearly process-related and thus represent the functional quality
dimension. Finally, following the conceptual work by Bitner et al.,20 the impact of the servicescape is
introduced as a seventh criterion. This is clearly a process-related, functional quality criterion.
These seven criteria of good perceived service quality can be viewed as guidelines based on a solid
body of empirical and conceptual research as well as on practical experience. Therefore, they should
be useful as managerial principles. Of course, the list is not exhaustive. In various industries and for
various customers certain criteria are more important than others. And of course, there may in specific
situations be other determinants of good quality that are not covered by these criteria.
The role of price in a quality context is not very clear. Normally, however, the price of a service
can be viewed in relation to the quality expectations of customers or to their previously perceived
service quality. If the price of a service is considered too high, customers will not buy. Price also
has an impact on expectations. But in some situations price seems to be a quality criterion. A higher
price level may equal a better quality in the minds of customers, especially when the service is highly
intangible. In many cases professional service is an example of such service.
R E L AT I O N S H I P Q U A L I T Y: A D Y N A M I C
APPROACH TO PERCEIVED QUALITY
The perceived service quality model is basically static, although the image factor adds dynamism to it.
Most service quality models and instruments are static. As service is a process and inherently relational,
clearly customers’ quality perceptions develop and undergo change over time as the relationship con-
tinues. Even if there is only one single service encounter, this encounter is a process that includes
a series of moments of truth and the customer’s quality perception develops in a dynamic fashion
throughout this interaction process. The need for dynamic models to further develop the understand-
ing of how service quality is perceived by customers was expressed at the beginning of the 1990s.21
Driven by service quality research, an interest in relationship quality emerged.22 Relationship quality
can be described as the dynamics of long-term quality formation in ongoing customer relationships. In the last
part of this chapter models that describe how long-term quality perceptions can be understood and
analysed are described.23
From the customer’s point of view, relationship quality is their continuously developing quality
perception over time. However, as a relationship includes at least two parties, the supplier or service
provider and the customer, a quality perception is really developing on both sides. The supplier
or service provider forms an impression of the quality of the customer and, especially in business
relationships, there may be ongoing reciprocal business developing over time with continuous quality
perceptions by both parties related to the two-way exchanges of goods, service activities, information
or other items of value.
A R E L AT I O N S H I P F R A M E W O R K F O R T H E
A N A LY S I S O F R E L AT I O N S H I P Q U A L I T Y
In any commercial relationship between two parties, interaction is the key concept. Interactions are
the basic phenomena in quality and customers’ value creation.24 The perception of relationship quality
occurs in ongoing interactions, which may be either continuous, such as in security and cleaning
services, or discrete, such as in bank service or goods transportation. Maria Holmlund has developed
a framework for understanding and analysing ongoing interactions.25 Such interactions may be very
different depending on the type of marketing situation involved. Some contacts are between people,
some between customers and machines and systems, and some between systems of the supplier and
customer, respectively. In every case interactions are involved. The framework is equally valid for
describing and analysing relationships in consumer markets and in business-to-business markets.
The framework consists of a continuous flow of acts, episodes and sequences, which form the
relationships.26 Figure 4.5 illustrates this relationship framework.
Acts are the smallest unit of analysis in the interaction process. Examples of acts could include phone
calls, factory visits, service calls and hotel registration. These are moments of truth. Acts may be related
to any kind of interaction elements, physical goods, services, information, financial aspects or social
contacts.
Interrelated acts form a minor part of a relationship. These are called episodes (or service encounters
to use a concept frequently used in the service management literature) and examples of these include
paying bills from a home computer or visiting a bank office to withdraw money, a negotiation, a
shipment of goods, or dinner at a hotel restaurant during a stay at that hotel. Every episode includes
a series of acts, and consequently a series of moments of truth. For example, a shipment may include
such acts as the placement of an order by telephone, assembling and packing the products, transporting
the products, unpacking them, making a complaint, and sending and paying an invoice.
PERCEIVED QUALITY IN A RELATIONSHIP FRAMEWORK 109
Relationship
Sequence Sequence Sequence
Episode Episode Episode Episode Episode

A A A A A A A A A A A A A A A A
A = act
F I G U R E 4.5
A relationship framework: interaction levels in a relationship.
Source: Holmlund, M., Perceived Quality in Business Relationships. Helsinki:
Hanken Swedish School of Economics, Finland/CERS, 1997, p. 96. Reproduced by
permission.
Interrelated episodes form the next level of analysis in the interaction process, a sequence. Sequences
can be defined in terms of a time period, a product offering, a campaign or a project, or a combina-
tion of these. The analysis of a sequence may contain all kinds of interactions related to a particular
project, which may take up to a year or even longer. As an example, in a hotel context, a sequence
comprises everything that takes place during one stay at a particular hotel, including episodes such
as accommodation, eating in the hotel restaurant and using the hotel’s gym or pool. Sequences may
naturally overlap, so that episodes belonging to one sequence may also be part of another sequence.
The final and most aggregated level of analysis is the relationship. Several sequences form a relation-
ship. Sequences may follow each other directly, may overlap or may follow after longer or shorter
intervals depending, for example, on the type of business or on whether the service is of a continuous
or discrete nature. This way of dividing the interaction process into several layers on different levels
of aggregation gives the marketer a detailed enough instrument to be used in the analysis of inter-
actions between a supplier or service provider and his customers. All different types of elements in
the interaction process – goods and service outcomes, service processes, information, social contacts,
financial activities, etc. – can be identified and put into their correct perspective in the formation of
a relationship over time.
P E R C E I V E D Q U A L I T Y I N A R E L AT I O N S H I P
FRAMEWORK
The more or less static models of perceived service quality describe how quality is perceived at the
episode (or service encounter) level, and the measurement instruments that have been developed
measure perceived quality on that level. From a dynamic perspective, quality is perceived at every
level of the relationship framework, thus accumulating to an overall perception of quality at any given
point of time. The quality perception at a certain time reflects on the perception of quality in, for
example, single acts and episodes, for example by continuously forming and reforming the customer’s
image of the service provider. Thus, single acts such as visiting a movie theatre’s website, buying
tickets for a certain movie and finally paying for the tickets over the Internet form the episode (or
service encounter) of buying cinema tickets. The customer forms a perception of the quality of an act,
and this perception, or image, is reflected in the expectations of and perceptions of the next act. Some
of these quality perceptions may be good, others neutral or poor. Together these quality perceptions
form the perception of the quality of the buying-cinema-ticket-over-the-Internet episode.
Act-level, or first-level, quality perception reflects upon the episode-level, or second-level, quality
perception. However, the dynamics of relationship quality formation then make upper-level quality
perceptions (in this case the perceived quality of the Internet ticket purchase) reflect back on the
perception of lower-level acts of following episodes. The quality perception of the purchase episode
forms customer expectations and the image of the firm, and these influence the perception of fol-
lowing lower-level acts; in this case, the act of picking up tickets at the ticket counter of the movie
theatre, the comfort of the seat and visibility of the screen from the seat, and the movie experience
itself, which together form a second episode. The perceptions of these visit-the-cinema-related acts
accumulate into the perceived quality of this whole second episode as a second, second-level quality
perception. According to the relationship quality dynamics, the quality experiences of continuous
episodes, some good, some neutral or poor, accumulate into an overall third-level quality perception
of the whole sequence of going to the movie theatre on a particular evening, including buying the
tickets over the Internet and going to the movie theatre to see the movie. This third-level qual-
ity perception then reflects back on continuing lower-level perceptions of episodes and acts in the
relationship between a given customer and this particular movie theatre in the future.
Finally, the quality perceptions of sequences of episodes accumulate into a fourth-level quality per-
ception; that is, into relationship quality. This quality perception in turn, following the logic of rela-
tionship quality dynamics, reflects back on how quality is perceived in the future on lower levels.
The dynamics of relationship quality are illustrated schematically in Figure 4.6. The arrows indicate
how perceptions of quality reflect up onto higher levels and then back again in the form of image and
expectations. For the sake of clarity, the figure does not show all influences. The grade of shading
of the boxes depicting acts, episodes, sequences and the relationship illustrate whether the quality is
Relationship
level
Sequence
level
Episode
level
Act
level
Good quality
Neutral quality
Poor quality
F I G U R E 4.6
Inherent dynamics in the formation of quality in a relationship.
Source: Adapted from Holmlund, M., Perceived Quality in Business
Relationships. Helsinki: Hanken Swedish School of Economics, Finland/CERS,
p. 160. Reproduced by permission.
THE LILJANDER–STRANDVIK MODEL OF RELATIONSHIP QUALITY 111
perceived as good, neutral, or poor. For the sake of simplicity, only a three-grade scale is used here to
show the level of the quality perception. As the figure shows, the level of quality may vary and this
influences the formation of the quality perception on higher levels. In practical quality management
it is of course important to build as much consistency and continuously good quality perceptions
as possible into the process, because unfavourable quality experiences always have a negative effect,
which in turn will reflect on future quality perceptions.
The strength of this relationship framework, with its four levels of analysis, is that it enables the
supplier or service provider to study in detail the development of a relationship with a customer and
also makes it possible to understand and analyse how the development of a series of customer contacts
adds to an overall relationship quality. It clarifies the multi-faceted dynamics involved in customers’
perceptions of quality. An analysis of the relationship demonstrates the multitude of acts and episodes
(service encounters) that contribute to the long-term formation of quality and makes managers more
aware of the range of customer contacts that have to be managed from a quality perspective. It shows
which acts or episodes are relationship-breaking and which are less critical for the continuation of the
relationship. It does not, however, go into the detailed aspects of the dynamics in long-term quality
formation. The next section deals with this issue.
THE LILJANDER–STRANDVIK MODEL OF

R E L AT I O N S H I P Q U A L I T Y
The Liljander–Strandvik model of relationship quality includes four important aspects:27
1. It makes a distinction between episode-level quality (the perceived quality of a service encounter)
and relationship-level quality.
2. It incorporates satisfaction and customer perceived value in a quality framework.
3. It enables an extension of the traditional limited disconfirmation notion used in static models of
perceived service quality to include a range of comparison standards.
4. It includes customer behaviour variables.
The model is illustrated in Figure 4.7. Concepts used in the model are described in Table 4.1. The
lower part of the Liljander–Strandvik model is related to the perception of service quality in a single
service encounter (episode-level quality). Episode performance – that is, the service experienced in one
service encounter – can be compared with any comparison standard, not only predictive expectations
as is traditionally the case in service quality models (see Table 4.1), or it can be compared with no
comparison standards, depending on what seems to generate the most valid result. By comparing the
episode quality that emerges with the customer’s perceived sacrifice (such as price, queuing time, lost
earnings opportunities and standstill costs), the customer forms his (or the organization’s) perception
of the value for him (or the organization) provided by the episode. This in turn leads to satisfaction (or
dissatisfaction) with the service. The zone of tolerance is an accepted variation in performance levels.
The satisfaction with a given service encounter (episode) influences the future behaviour of the
customer. The customer’s behaviour is dependent on his feelings of loyalty and commitment to the
firm. However, there are also other factors that have an impact on behaviour. These are bonds that
exist between the customer and the service provider. Some bonds, such as legal, economic, technological,
geographical and time-related bonds, often constitute barriers to exiting from the relationship. Other
bonds, such as knowledge-related, social, cultural, ideological and psychological bonds, may glue the customer
Relationship Relationship Comparison

performance quality standard
Zone of tolerance
Relationship value
Relationship Relationship
quality sacrifice
Relationship
satisfaction
Behaviour Image/
• loyalty Bonds
commitment
• commitment
Episode Comparison
Episode quality
performance standard
Zone of tolerance
Episode value
Episode Episode
quality sacrifice
Episode
satisfaction
F I G U R E 4.7
The Liljander-Strandvik relationship quality model.
Source: Adapted from Liljander, V. & Strandvik, T., The nature of relationships in
services. In Advances in Services Marketing and Management, Vol. 4. Greenwich: CT:
The JAI Press, copyright 1995,
c p. 143 with permission from Elsevier.
TA B L E 4.1
The Liljander–Strandvik model of relationship quality.
Concept Episode level Relationship level
Comparison All comparison standards All comparison standards suggested

standard suggested in the literature (e.g. in the literature except predictive
predictive expectations, brand expectations.
norm, adequate, product norm,
best brand norm, excellent
service, ideal, competitor).
Disconfirmation Direct or inferred disconfirmation Direct or inferred disconfirmation of
of any comparison standard. any comparison standard except
predictive expectations.
Performance Perceived performance of one Perceived performance across all
particular episode. episodes in the relationship.
Zone of The accepted variation in The accepted accumulation
tolerance performance levels. A plateau in variation in the performance
the quality function. within the relationship.
Quality Customers’ cognitive evaluation of Customers’ cognitive evaluation of
the service of one episode the service across episodes
compared with some explicit or compared with some explicit or
implicit comparison standard. implicit comparison standard.
Sacrifice Perceived sacrifices (price, etc.) Perceived sacrifices (price, etc.)
connected to the service episode across all service episodes in the
compared with some explicit or relationship compared with some
implicit comparison standard. explicit or implicit comparison
standard.
Value Episode quality compared with Relationship quality compared with
episode sacrifice. relationship sacrifice.
Satisfaction Customers’ cognitive and affective Customers’ cognitive and affective
evaluation based on the evaluation based on the personal
personal experience of one experience across all service
service episode. episodes within the relationship.
Image The holistic perception of a service provider that filters performance
evaluations and can in itself constitute a comparison standard. It is also
the attitudinal component of commitment in a relationship. All types of
bonds can affect the image positively or negatively. Image itself is more
likely to affect and strengthen the psychological bonds.
Commitment Commitment is defined as the parties’ intentions to act and their attitude
towards interacting with each other. High relationship value will positively
affect commitment.
TA B L E 4.1
(continued )
Concept Episode level Relationship level
Behaviour Purchase behaviour and communication behaviour (word of mouth,

complaints). Loyalty, which is based also on positive commitment by the
customer, indicates a stronger relationship than if it is based on mere
repetitive purchase behaviour. The behaviour is also affected by the bonds
between the customer and the service provider. By using the same service
provider the bonds may be strengthened.
Bonds Exit barriers that tie the customer to the service provider and maintain the
relationship. These are legal, economic, technological, geographical,
time-related, knowledge-related, social, cultural, ideological and
psychological bonds.
Source: Adapted from Liljander, V. & Strandvik, T., The nature of relationships in services. In Advances in Services Marketing
and Management, Vol. 4. Greenwich, CT: The JAI Press, copyright c 1995, p. 144 with permission from Elsevier.
to the service provider in a positive fashion. The 10 different types of bonds are described in some
detail in Table 4.2.
The customer-perceived episode-level value, as well as bonds that exist in the relationship, influ-
ence the customer’s image of the service provider. As in the image concept in the basic perceived
service quality model, the image incorporates the customers’ old and recent experiences with the
firm and builds a bridge to the relationship level of the model. The image functions as a filter when
the customer perceives the next episode or service encounter. As in the model of perceived quality
described in the previous section, perceptions of quality and value of episodes or service encoun-
ters following each other accumulate into perceived quality of the relationship. According to the
Liljander–Strandvik model the customer compares the firm’s ongoing performance in subsequent ser-
vice encounters (relationship performance) with a comparison standard and, based on that comparison,
relationship quality emerges. When the customer compares this quality perception perceived long-term
sacrifice (relationship sacrifice), the value of the relationship at a given point in time is perceived (relation-
ship value). This affects long-term satisfaction with the service provider (relationship satisfaction), which
in turn feeds into the image on the one hand and into future behaviour (loyalty and commitment)
on the other hand.28
From a management point of view this model of relationship quality offers a good description of
the mechanisms of relationship quality. It demonstrates how customers proceed through the service
process over time and perceive their relationship with a service provider. The model includes several
concepts, such as bonds, value and sacrifice, and connections between concepts which help managers
understand the process and determine where action should be taken. Some of these concepts will
be discussed further in Chapter 6. The major strength of this model is its multi-faceted nature. It
demonstrates to managers how perceived quality is formed and accumulates over time as the rela-
tionship evolves, and describes which factors need to be taken into account when managing quality
in an ongoing relationship context. It should guide managers towards a comprehensive approach to
understanding relationship quality and quality management to make customer-oriented decisions.29
However, it is not a measurement model.
TA B L E 4.2
The Liljander–Strandvik model of relationship quality.
Type of bond Examples
Legal bond A contract between the customer and service provider (e.g.
telephone company, cable TV, electricity, bank services).
Economic bond Lack of resources may force the customer to buy a service that fits
the customer’s budget; price reductions based on relationship.
Technological bond The purchase of a specific product that requires the use of a
specified deal for repairs/maintenance and/or original spare parts
from manufacturer or retailer.
Geographical bond Limited possibilities to buy the service from other than one or
a few service providers because of distance and/or lack of
transportation.
Time-related bond A service provider may be used because of suitable business hours or
because of a flexible appointment system. Customers are limited
by business hours set by service providers (e.g. child care from
8 am to 4 pm) or employers (office hours and limited lunch hour).
Knowledge-related The customer may have an established relationship with a doctor
bond who knows the customer’s medical history. A customer’s relation
to a bank teller may be strong because of the teller’s knowledge
about the customer’s business which facilitates the transactions. It
also works the other way, so that the customer gains knowledge
about the service provider (e.g. the scripts of how to behave are
known to the customer, which reduces uncertainty).
Social bond Social bonds exist when the customer and the service personnel
know each other well. Contact is easy, there is mutual trust
(services can be handled by phoning the bank, the customer does
not have to go there personally).
Cultural bond Customers may identify themselves with a subculture (e.g.
language, country) and therefore relate more strongly to certain
companies or products made by certain countries.
Ideological bond Customers may be inclined to prefer some service providers because
of certain personal values (e.g. environmentally friendly products,
avoiding companies that exploit nature, support local or national
products over imported products).
Psychological bond The customer is convinced of the superiority of a certain service
provider (brand image).
Source: Adapted from Liljander, V. & Strandvik, T., The nature of relationships in services. In Advances in Services Marketing
and Management, Vol. 4. Greenwich, CT: The JAI Press, copyright c 1995, p. 153 with permission from Elsevier.
T H E D Y N A M I C S O F E X P E C TAT I O N S
The Liljander–Strandvik model of relationship quality implies that a range of comparison standards can
be used by customers to compare their experiences of quality attributes. As has been noted earlier, it
may often be best to use no comparison standard at all, but simply to measure customers’ experiences of
various quality attributes. However, customers’ expectations do theoretically form an important factor
influencing perceived service quality both on an episode (service encounter) level and on a relationship
level. Regardless of whether expectations are measured or not, in order to understand how quality is
perceived in an ongoing relationship, one has to understand how expectations develop throughout the
relationship. This is important for several reasons. First, customers’ expectations should be managed,
so that they do not expect the impossible. Second, it is critical to understand that customers may not
expect the same aspects of quality at a later stage in the relationship as they do in the beginning, and
why this change has taken place. Third, one has to know the inherent mechanisms of the dynamics
of expectations to be able to manage expectations.
Jukka Ojasalo30 studied the way the quality of professional service develops in a customer relation-
ship over time. Although this study was carried out in the professional service area, the dynamics of
expectations revealed in the study seem to be valid for any types of service in customer relationships.
Figure 4.8 illustrates the expectations model.
In the long term, three different types of expectations can be identified: fuzzy, explicit and implicit
expectations. These can be characterized in the following way:31
● Fuzzy expectations exist when customers expect a service provider to solve a problem but do not
have a clear understanding of what should be done.
● Explicit expectations are clear in customers’ minds in advance of the service processes. They can be
divided into realistic and unrealistic expectations.
● Implicit expectations refer to elements of a service that are so obvious to customers that they do not
consciously think about them but take them for granted.
Fuzzy Implicit
expectations Explicit expectations expectations
Unrealistic Realistic
Focusing, revealing and calibrating expectations

increase long-term quality
Intentional dynamics = expectations management

Unintentional dynamics
F I G U R E 4.8
A dynamic model of expectations.
Source: Ojasalo, J., Quality Dynamics in Professional Services. Helsinki: Hanken
Swedish School of Economics, Finland/CERS, 1999, p. 97. Reproduced by permission.
THE DYNAMICS OF EXPECTATIONS 117
F U Z Z Y E X P E C TAT I O N S
It is essential for a service provider to understand which fuzzy expectations customers may have, because
even though customers cannot consciously formulate such expectations, they still have an impact
on satisfaction with quality. Customers may feel that there is a need for service or for a change
of their current state in general, but they do not have a clear understanding of what would fulfil
this need or change the current situation. Such fuzzy expectations are very real, because customers
expect something to be done. If the service rendered by the service provider does not fulfil such
fuzzy expectations, customers are disappointed. They feel that something is missing, and they do not
understand why they are not satisfied. Fuzzy expectations remain fuzzy.
The service provider should be aware of the existence of such expectations and try to make them
surface in the form of explicit expectations. Only then can it be sure that a satisfactory service is
provided. Otherwise the service organization may be faced with unhappy and frustrated customers.
The existence of such fuzzy expectations has been recognized for a long time in professional service.32
Similar situations also occur in other types of service to organizations and individuals alike.
A manufacturing firm that looks for security service does not necessarily understand what needs
to be done to provide full security, for example, for its plants. A provider of security service makes
an offering that seems appropriate but the manufacturer may still feel that more could be done. The
customer may not know what could or should be done and cannot make his expectations explicit, but
he still expects something more, and customer remains unsatisfied. For example, restaurant customers
often have unclear fuzzy expectations about what they want from an evening at a restaurant. They
know that they want to have a good time, but not what will make them feel that they are having one.
If the evening does not offer experiences that fulfil this unspecified wish for a good time, they will
leave the restaurant disappointed. In all these examples, fuzzy expectations exist. If the service provider
can make these explicit for the customer and for itself, there is a greater opportunity to satisfy the customer.
E X P L I C I T E X P E C TAT I O N S
Customers actively and consciously assume that explicit expectations will be met. However, some of
these expectations may be unrealistic. For example, a customer who believes that a financial advisor
will always be able to manage his funds so that their value grows may one day be very disappointed.
It is important for service providers to help customers adjust unrealistic expectations into more realistic
ones. If this is done, the likelihood that a service is provided which will meet customers’ expectations
will be much higher. In the beginning of a relationship, but of course also as it continues, the service
provider should be very careful in what promises it makes. The more vague promises are, the bigger
the risk is that customers will form unrealistic explicit expectations. Such ‘implied-in-fact’ promises33
are extremely dangerous, because the customer is led to believe that the service offered will include
features that in fact are not included. Unclear and deliberately vague sales messages easily lead to such
‘implied-in-fact’ promises, and to possibly unrealistic explicit expectations.
I M P L I C I T E X P E C TAT I O N S
Customers may take for granted that a service provider will fulfil their implicit expectations, because
these are so obvious that they are never clearly expressed. Because of this, the service provider may
neglect them and not include elements that are required to fulfil such expectations in the service
offering. Often customers do not even consciously think about implicit expectations, as long as they
are fulfilled. However, the existence of such expectations becomes obvious when they are not met by
the service provided, and in that situation dissatisfaction occurs. It is important that service providers
make sure that no implicit expectations remain undetected, so that the service offering can be designed
to meet all expectations, not only the explicit ones.
Referring back to Figure 4.8, the thick arrows demonstrate intentional dynamics; that is, how the
service provider can and should actively manage expectations. Fuzzy and implicit expectations should
be detected and made explicit. Fuzzy expectations become less fuzzy if they are focused on by the
service provider. As the relationship continues, the service organization knows what to do and the cus-
tomer learns what to expect. Implicit expectations become explicit if they are not fulfilled. Unrealistic
expectations should be detected and customers should be made aware of what is realistic to expect.
The dotted lines in the figure indicate what could be called unintentional dynamics; that is, shifts in
the nature and range of expectations that take place over time without interference from the service
provider as the relationship proceeds.
Customers calibrate fuzzy expectations into explicit ones and unrealistic expectations into realistic
ones as time goes by, and they learn what they explicitly need and want as well as accept what it is
unrealistic to expect. Of course, the effect of these unintentional dynamics processes is not always
positive in the sense that customers accept that unrealistic expectations really are unrealistic. They
may shift to another firm, which may have the capability to fulfil expectations that were considered
unrealistic by the previous service provider.
The dotted arrow in the figure (from explicit expectations towards implicit expectations) demon-
strates another type of learning process that creates unintentional expectations dynamics. As customers
get used to a certain level of quality in a relationship, some expectations that were originally explicitly
expressed become implicit. Customers do not think of them any more and, as long as everything
continues as before, no problems occur. However, if the service provider changes something in the
service offering – for example, a new service employee takes over a task in the relationship and
starts to carry it out in a different way to what the customer is used to – the customer may become
disappointed. The implicit expectation becomes explicit once again.
A F R A M E W O R K F O R M A N A G I N G C U S T O M E R E X P E C TAT I O N S
Jukka Ojasalo offers a framework for managing expectations, which is illustrated in Figure 4.9.34
The goal is to find ways of avoiding pitfalls created by incorrect or inaccurate expectations. If the
EXPECTATIONS
MANAGEMENT
Fuzzy expectations Focusing Precise expectations
Implicit expectations Revealing Explicit expectations
Unrealistic expectations Calibrating Realistic expectations
F I G U R E 4.9
A framework for managing customer expectations.
Source: Ojasalo, J., Managing expectations in professions services. Managing
Service Quality, 11(3); 2001: 206. Reproduced by permission of Emerald Group
Publishing Ltd.
QUESTIONS FOR DISCUSSION 119
customers’ expectations are fuzzy, the marketer should help them focus their expectations and make
them as precise as possible. On the other hand, if expectations are implicit, and there is a risk that
they will have a negative effect on customers’ perceptions at a later stage, marketers need to make
customers reveal such expectations and make them explicit. Finally, unrealistic expectations held by
customers should be calibrated by marketers, such that they become realistic.
S U M M A RY
In this chapter we first discussed the nature of perceived service quality and presented the perceived ser-
vice quality model as a basic model of service quality. The technical quality (what) and functional quality (how)
dimensions of the model, as well as image as a quality filter, were discussed. Extensions of this model
(a possible servicescape-related where) as well as determinants of service quality were then discussed. Mea-
surement approaches, such as the attribute-based SERVQUAL instrument and the critical incident model,
were presented. In the latter part of the chapter, models of relationship quality and a dynamic approach to
managing expectations in service contexts were discussed.

1. Why is quality of service understood as perceived quality?
2. Which dimensions of perceived service quality have to be recognized, according to the
perceived service quality model? Why? Which additional dimensions could be included?
3. Discuss various determinants and criteria of perceived service quality.
4. What are the strengths and weaknesses of the SERVQUAL instrument as a measurement
model? What are those of the critical incident approach?
5. What are the different layers in which quality is formed and perceived in an ongoing rela-
tionship context? How does quality develop?
6. Discuss the dynamics of the Liljander–Strandvik model of relationship quality. Which are
its strengths and weaknesses for practical use?
7. Discuss how various kinds of expectations influence the perception of quality in a relation-
ship context. What are the risks of not clarifying a customer’s expectations?
8. Discuss how the quality of one or several services offered by your firm, or the quality of
any given service, is perceived by a specified group of customers. What problems exist?
What needs to be improved?
NOTES
1. Grönroos, C., Strategic Management and Marketing in the Service Sector. Helsinki/Helsingfors:
Swedish School of Economics, Finland, 1982 (published in the USA in 1983 by Marketing Sci-
ence Institute and in the UK in 1984 by Chartwell-Bratt). See also Grönroos, C., A service
quality model and its marketing implications. European Journal of Marketing, 18(4), 1984, 36–44.
Evert Gummesson was probably the first service marketing researcher to express the quality of
services as perceived quality: in the context of professional services he concludes that ‘(quality)
becomes a matter of subjectively perceived quality’ (emphasis as in the original publication). See
Gummesson, E., Models of Professional Service Marketing. Stockholm, Sweden: Liber/Marketing
Technique Centre, 1979, p. 9.
2. There is, however, some criticism of the use of customers’ expectations as the only comparison
standard in models and measurements of perceived service quality. See Liljander, V., Comparison
Standards in Perceived Service Quality, diss. Helsinki/Helsingfors, Finland: Hanken Swedish School
of Economics, Finland/CERS, 1995.
3. The importance of the process-related functional quality alongside the outcome-related technical
quality was first observed in a service context in Grönroos, C., A service quality model and its
marketing implications. European Journal of Marketing, 18(4), 1984, 36–44. The impact of these
two quality dimensions have been studied in various contexts, recently as explanations of cus-
tomer happiness. Both dimensions are found to have an impact on happiness. See De Keyser,
A. & Lariviere, B., How technical and functional quality drive consumer happiness: moderating
influences of channel usage. Journal of Service Management, 25(1), 2014, 30–48.
4. Rust, R.T. & Oliver, R.L., Service quality: insights and managerial implications from the frontier.
In Rust, R.T. & Oliver, R.L. (eds), Service Quality: New Directions in Theory and Practice. Thousand
Oaks, CA: Sage Publications, 1994.
5. See Brady & Cronin Jr., Some thoughts on conceptualizing perceived service quality: A hierar-
chical approach. Journal of Marketing, 65(Jul), 2001, 34–49.
6. Bitner, M.J., Servicescapes: the impact of physical surroundings on customers and employees.
Journal of Marketing, 56(Apr), 1992, 57–71. The servicescape consists of the physical resources,
technology and other physical elements surrounding the service process. It helps to create the
ambience of the service process. Thus, it is expected to have an impact on the way service
employees and customers behave and interact in service encounters.
7. Holmlund, M., Perceived Quality in Business Relationships, diss. Helsinki/Helsingfors, Finland:
Hanken Swedish School of Economics, Finland/CERS, 1997.
8. Normann, R., Service Management, 2nd edn. New York: John Wiley & Sons, 1992.
NOTES 121
9. Liljander, V. & Strandvik, T., Emotions in service satisfaction. International Journal of Service
Industry Management, 8(2), 1997, 148–169. See also Jang, S. & Namkung, Y., Perceived quality,
emotions, and behavioral intentions: application of an extended Mehrabian–Russell model to
restaurants. Journal of Business Research, 62, 2009, 451–460, and Hume, M. & Sullivan Mort, G.
The consequence of appraisal emotion, service quality, perceived value and customer satisfaction
on repurchase intent in the performing arts. Journal of Services Marketing, 24(2), 2010, 170,182.
10. White, C.J., Towards an understanding of the relationship between mood, emotions, service
quality and customer loyalty intentions. Service Industries Journal, 26(9), 2006, 837–847. See Also
Gardner, M.P., Mood states and consumer behavior: a critical review. Journal of Consumer Research,
12(Dec), 1985, 281–300.
11. Knowles, P.A., Grove, S.J. & Pickett, G.M., Mood versus service quality effects on customers’
responses to service organizations and service encounters. Journal of Service Research, 2(2), 1999,
189–199.
12. The conceptual and empirical results of their studies of service quality have been reported in a
large number of articles. Key aspects are presented in Berry, L.L. & Parasuraman, A., Marketing
Services. Competing Through Quality. New York: The Free Press, 1992 and in Zeithaml, V.A. &
Bitner, M.J., Services Marketing, 2nd edn. New York: McGraw-Hill, 2000.
13. Parasuraman, A., Zeithaml, V.A. & Berry, L.L., SERVQUAL: a multiple-item scale for measur-
ing consumer perceptions of service quality. Journal of Retailing, 64(Spring), 1988, 12–40.
14. A detailed description of the SERVQUAL instrument as well as the attributes used to measure the
five determinants can be found in Parasuraman, A., Berry, L.L. & Zeithaml, V.A., Refinement
and reassessment of the SERVQUAL scale. Journal of Retailing, 67(4), 1991, 420–450.
15. Murphy, P., Service performance measurement using simple techniques really works. Journal of
Marketing Practice: Applied Marketing Science, 5(2), 1999, 56–73.
16. Grönroos, C., Toward a third phase in service quality research: challenges and future directions.
In Swartz, T.A., Bowen, D.E. & Brown, S.W. (eds), Advances in Services Marketing and Manage-
ment, Vol. 2. Greenwich, CT: JAI Press, 1993, p. 56.
17. Liljander, op. cit.
18. Cronin Jr., J.J. & Taylor, S.A., Measuring service quality: a re-examination and extension. Journal
of Marketing, 56(Jul), 1992, 55–68. See also Cronin Jr., J.J. & Taylor, S.A., SERVPERF versus
SERVQUAL: reconciling performance-based and perceptions-minus-expectations measurement
of service quality. Journal of Marketing, 58, 1994, 125–131.
19. Roos, I., Methods of investigating critical incidents: a comparative review. Journal of Service
Research, 4(3), 2002, 193–204. See also, for example, Bitner, M.J., Booms, B.H. & Tetrault, M.S.,
The service encounter: diagnosing favorable and unfavorable incidents. Journal of Marketing,
54(Jan), 1990, 71–84 and Edvardsson, B., Service breakdowns: a study of critical incidents in an
airline. International Journal of Service Industry Management, 3(4), 1992, 17–29.
20. Reimer, A. & Kuehn, R., The impact of servicescape on quality perception. European Journal of
Marketing, 39(7–8), 2005, 785–808. See also Bitner, op. cit. and Rust & Oliver, op. cit.
22. Athanasopoulou, P., Relationship quality: a critical literature review and research agenda.
European Journal of Marketing, 43(5–6), 2009, 583–561. Evert Gummesson introduced the relation-
ship quality concept in 1987 as part of a study of quality in an Ericsson quality programme. With
this concept he drew attention to the fact that relationships are part of customer perceived quality.
See Gummesson, E., Quality – The Ericsson Approach. Stockholm, Sweden: Ericsson, 1987.
23. Relationship quality has been studied to a very limited extent. Therefore, general attributes or
antecedents of relationship quality cannot be presented. There are some studies that give valu-
able indications. From a consumer brand perspective, see Gifford Jr., D., Moving beyond loy-
alty. Harvard Business Review, 75(Mar–Apr), 1997, 9–10 and Fournier, S., Consumers and their
brands: developing relationship theory in consumer research. Journal of Consumer Research, 24(4),
1998, 343–373 and from a business relationship perspective, see Leuthesser, L., Supplier relational
behavior: an empirical assessment. Industrial Marketing Management, 26(3), 1997, 245–254. For
a recent study see Roos, I., Gustafsson, A. & Edvardsson, B., Defining relationship quality for
customer-driven business development. International Journal of Service Industry Management, 17(2),
2006, 207–223.
24. This observation has always been evident in Nordic School research into service marketing, and
it has become more and more evident as the relationship aspect of buyer–seller interactions in
services and in any types of business is studied. See Gummesson, E., Total relationship marketing:
experimenting with a synthesis of research frontiers. Australasian Marketing Journal, 7(1), 1999,
72–85 and Grönroos, C., A service-orientated approach to the marketing of services. European
Journal of Marketing, 12(8), 1978, 588–601.
25. Holmlund, 1997, op. cit. Although this framework was originally developed in a business-to-
business context, it is equally suited for understanding and analysing relationships in consumer
markets.
26. In the context of services the interaction process has been studied in terms of acts, episodes and
relationships. According to Liljander and Strandvik an episode is, for example, a visit to a bank
office to discuss a loan, whereas an act is the meeting with the loan officer during the visit.
Several interactions related to, for example, withdrawal of money, payment of bills, etc. form
a relationship. See Liljander, V., Introducing deserved service and equity into service quality
FURTHER READING 123
models. In Kleinaltenkamp, M. (ed.), Dienstleistungsmarketing – Konzeptionen und Anwendungen.

Berlin, Germany: Gabler Edition Wissenschaft, 1994, pp. 1–30. In German. See also Liljander, V.
& Strandvik, T., The nature of customer relationships in services. In Swartz, T.A., Bowen, D.E.
& Brown, S.W. (eds), Advances in Services Marketing and Management, Vol. 4. Greenwich, CT: JAI
Press, 1995, pp. 141–167. Holmlund has added a sequence level and has, based on these concepts,
offered a relationship framework. See Holmlund, 1997, op. cit.
27. Liljander & Strandvik, op. cit.
28. Compare also Andreassen, T.W. & Lindestad, B., The effect of corporate image in the formation
of customer loyalty. Journal of Service Research, 1(1), 1998, 82–92.
29. In ongoing relationships a two-party situation is formed. When developing instruments for the
measurement of relationship quality, especially in business-to-business markets, this fact should be
taken into account: the quality perception of both parties in the relationship should be measured.
An interesting conceptual foundation for such an instrument is developed in Holmlund, M.
& Strandvik, T., Perception configuration in business relationships. Management Decision, 37(9),
2000, 686–696.
30. Ojasalo, J., Quality Dynamics in Professional Services. Helsinki/Helsingfors: Swedish School of Eco-
nomics Finland/CERS, 1999. This analysis of the nature and management of expectation has
been further developed in Ojasalo, J., Managing customer expectations in professional services.
Managing Service Quality, 11(3), 2001, 200–212.
31. Ojasalo, op. cit.
32. See, for example, Wittreich, W.J., How to buy/sell professional services. Harvard Business Review,
Mar–Apr, 1966, 127–138, where the author discusses confusion relating to clients who wish to
purchase marketing communication and management consultancy services.
33. The term ‘implied-in-fact’ promises is used by Henrik Calonius to indicate unclear promises
by marketers that create unrealistic expectations. See Calonius, H., The promise concept. In
Blomqvist, H.C., Grönroos, C. & Lindqvist, L.-J. (eds), Economics and Marketing. Essays in
Honour of Gösta Mickwitz. Helsinki/Helsingfors: Swedish School of Economics, Finland, 1992,
pp. 37–56.
34. Ojasalo, op. cit., 2001, 206.
Andreassen, T.W. & Lindestad, B. (1998) The effect of corporate image in the formation of customer
loyalty. Journal of Service Research, 1(1), 82–92.
Athanasopoulou, P. (2009) Relationship quality: a critical literature review and research agenda.
European Journal of Marketing, 43(5–6), 583–561.
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CHAPTER 5
QUALITY MANAGEMENT
IN SERVICE
“ ” It is important for a firm to manage service quality well, but it is critical for it to manage service failures
even better.
INTRODUCTION
After discussing the nature of service and relationship quality in Chapter 4, We now turn to various
models for the management of quality in service contexts. In this chapter the gap analysis framework
and other holistic models for service quality management are discussed. The tolerance zone concept
and the shape of the quality function are also described. Then quality management is considered at
some length, in situations where a service failure or another problem has occurred. Service recovery,
as opposed to traditional complaints handling, as well as elements of a service recovery process, are
discussed. In addition, the timing of service recovery and various timing strategies are put forward.
After having read the chapter the reader should understand how quality can be managed in service;
for example, by using the gap analysis approach and following a quality development structure, and
he should know how service recovery should be taken care of in situations where a service failure
has occurred.
W H Y M A N A G E R S H E S I TAT E T O I N V E S T I N
S E RV I C E S A N D S E RV I C E Q U A L I T Y
Managers often believe that developing and offering services with 100% quality is impossible. Con-
sequently, the organization accepts that mistakes happen, and failures are allowed. Psychologically,
the battle for excellent performance is over before it has even begun.
Tom Gillett, when Director of Services of the telecommunications firm GTT, used to tell his
employees the following anecdote when they argued that in the complex telecommunications busi-
ness top quality could not be achieved and thus could not be offered to their customers: ‘Imagine a
large international airport with hundreds of take-offs and landings each day. If they accepted a quality
128 QUALITY MANAGEMENT IN SERVICE
level of 99%, they would have a number of accidents every day. That just cannot be allowed to hap-
pen. And can you imagine a more difficult and technically complicated service and service production
system than that of an airport?’ The conclusion is, of course, that if an airport can offer and maintain
a 100% quality level, you can do it as well, whatever your business is.
Saying and perhaps even believing that a particular firm’s service is so complex and difficult that to
produce that top quality cannot be achieved is just an excuse for not trying hard enough. True, hard
work and long-term effort may be required, but it is never impossible.
SOME REASONS WHY QUALITY IMPROVEMENT

P R O C E S S E S FA I L
In spite of the obvious benefits of improving quality, many firms that have implemented quality
programmes feel that it did not pay off. Normally, the problem is in a firm’s approach to quality
improvement. If it is only considered as a project, if a limited time frame is given to the effort, and it is
perceived by everybody in the organization, top management and all other employees alike, as simply
a tactical issue, the risk of failure is high. For some managers, quality improvement is a matter of time-
and-motion studies or investment in machinery or equipment that allows the firm to reduce its labour
force. For others, it means a training programme, or introducing a new monetary reward system.
While all these elements can be part of a quality improvement process, as isolated activities they are
bound to fail in the long run. The main problem is in the approach. Quality development must not be
considered as a project, or even worse as a campaign, but has to be an ongoing process. A continuous
appreciation of the importance of quality and an understanding of how to influence good service
quality is required of every individual in the organization, and this has to be constantly reinforced by
management. Quality, and hence quality improvement and quality management processes, are strategic
issues, which require continuous attention by top management.
HOW GOOD SHOULD QUALITY BE?

A question that is often asked is how good should the optimal quality of a given service be? First of
all, the answer depends on the strategy of the firm and the expectations of the customers for whom its
service is intended. And these two factors are dependent on each other. A service provider, where the
strategy is to be the best on the market and cater to customers demanding excellent service, should
first create such expectations among its potential customers, and second provide a service quality that
is perceived as excellent. The strategy of another firm may be to provide a less demanding target group
of customers with service of a lower quality, at a lower price. In this case, the level of service quality
can be lower, but the expectations that the customers are given should not deviate from the real level
of quality. If, in this situation, expectations and experiences meet, the perceived quality is still good.
There is an often-mentioned ground rule that customers should be surprised by getting a little bit
more than they expect. Acceptable quality (confirmed quality where expectations are met but no
more) satisfies a customer but does not necessarily make him feel that this is a relationship with a
service provider that must not be broken. It does not make the customer talk about his experiences
to friends, neighbours and business associates, and write positive comments in social media. Perceived
quality which exceeds expectations to some extent, which is sometimes also called customer delight,
may make customers more interested in continuing the relationship with the service provider, and
this also creates good word-of-mouth benefits. The positively surprised customer remembers the
experience and often likes to talk about it.1
MANAGING SERVICE QUALITY: THE GAP ANALYSIS APPROACH 129
Critics of this ground rule argue that customers learn from their experiences and the next time
their expectations are higher. This will lead to an upward spiral where the firm in the end cannot,
profitably at least, produce a quality level that meets the increased level of expectations. However,
surprising customers does not necessarily mean providing them with something that raises expecta-
tions. Normally the surprise effect can be achieved by a small gesture that does not cost anything and
leads to a similar positive feeling on the part of the customer every time. It is also important to note
that customers’ expectations can be exceeded and customers can be surprised regardless of the level
of the quality of a given service. The same positive effects on loyalty and on word of mouth can be
achieved by small surprises in situations where the level of service quality is low. It does not matter
whether the level of expectations is high or low or in between.
Service providers should not, however, provide customers with a surprising effect once, and then
revert to a previous quality level. Rust and Oliver call this ‘hit-and-run delight’.2 According to them,
a firm which does this will be worse off than if it had not, because a one-time rise in quality experience
will increase expectations, and the next time customers will be dissatisfied. Dissatisfaction causes more
negative effects than the positive effects created by one-time surprise. However, when a higher level
of experiences is constantly offered, customers may forget the surprise element from one occasion to
another. The surprise-creating element may be remembered, but the feeling of surprise it causes is
not. Then the same feeling of surprise can be repeated again, and the same positive quality effect be
achieved every time.3
CASE STUDY
G O T H E E X T R A M I L E T O M A K E T H E C U S T O M E R ’ S D AY
The Shangri-La Hotel in Bangkok is one of the region’s luxury hotels. In spite of the fact
that the number of employees attending to guests during breakfast and happy hour
in the Horizon Club (the hotel’s executive floor) seems to be much smaller than it was
10 years ago and that the employees seem to be constantly overworked, Ms Tippawan, one
of the employees, found the time to show special concern for a guest whom she found out
was temporarily ill with a nasty cold and high fever. She insisted that she fetched hot soup
from the kitchen for the guest and served it in his room. Said Ms Tippawan, ‘Hot soup in
the morning is good for this illness.’ Every morning she brought a different kind of soup,
until the guest was up on his feet again after a few days. By showing this extraordinary
care and concern, she made the guest’s day, and he was positively surprised every time.
M A N A G I N G S E RV I C E Q U A L I T Y: T H E G A P
A N A LY S I S A P P R O A C H
Berry, Parasuraman and Zeithaml have developed what they call a gap analysis model, which is intended
to be used for analysing sources of quality problems and for helping managers understand how service
quality can be improved.4 The model is illustrated in Figure 5.1.
CONSUMER
Word of mouth
Personal needs Past experience
communications
Expected service
GAP 5
Perceived service
MARKETER
Service delivery GAP 4 External
(including pre- communications
and post-contacts) to consumers
GAP 3
GAP 1 Translation of
perceptions into
service quality specs.
GAP 2
Management
perceptions of
consumer expectations
F I G U R E 5.1
The gap analysis model of service quality.
Source: Parasuraman, A., Zeithaml, V.A. & Berry, L.L., SERVQUAL: a multi-item scale
for measuring consumer perceptions of service quality. Journal of Retailing, 64(1);
1988: p. 36. Reproduced by permission of the New York University.
First of all, the model demonstrates how service quality emerges. The upper part of the model
includes phenomena related to the customer, while the lower part shows phenomena related to the
service provider. The expected service is a function of the customer’s past experience and personal needs
and of word of mouth communication from various channels. It is also influenced by the firm’s market
communication.
The service experienced, which in this model is called the perceived service, on the other hand, is the
outcome of a series of internal decisions and activities. Management perceptions of customer expectations
guide decisions about service quality specifications to be followed by the organization, when service delivery
(the execution of the service process) takes place. The customer, of course, experiences the service
delivery and production process as a process-related quality component (creating a functional quality
impact), and the technical solution received by the process as an outcome-related quality component
(creating a technical quality impact). As is illustrated, marketing communication can be expected to
influence the perceived service as well as the expected service.
MANAGING THE QUALITY GAPS 131
This basic structure demonstrates the steps that have to be considered when analysing and planning
service quality. Possible sources of quality problems can then be detected. In Figure 5.1 five discrep-
ancies between the various elements of the basic structure, so-called quality gaps, are illustrated. These
quality gaps are the result of inconsistencies in the quality management process. The ultimate gap –
that is, the gap between expected and experienced (labelled ‘perceived’ in the model) service (Gap
5) – is, of course, a function of the other gaps that may have occurred in the process. The five gaps,
their consequences and implications for management, and the reasons why they occur are discussed
in the next section.
MANAGING THE QUALITY GAPS

THE MANAGEMENT PERCEPTION GAP (GAP 1)
This gap means that management perceives the quality expectations inaccurately. This gap is due to:
● Inaccurate information from market research and demand analyses.

● Inaccurately interpreted information about expectations.
● Non-existent demand analysis.
● Bad or non-existent upward information from the firm’s interface with its customers to management.
● Too many organizational layers, which stop or change the pieces of information that may flow
upwards from those involved in customer contacts.
There may be various cures. If problems are due to bad management, obviously either a change of
management or an improvement in the knowledge of the characteristics of service competition on
the part of management is required. Probably the latter action is more appropriate, because normally
the problems have not occurred because of a genuine lack of competence but rather because of a
lack of knowledge or appreciation of the nature and demands of service competition and service
management among managers.
Part of any cure is always better research, so that the customers’ processes and their needs and wishes
are better observed and appreciated. The information obtained through market research and from
internal flows of information from the customer interface is perhaps not good enough or only partly
appropriate. New methods to gain deeper insight about the customers and their lives and businesses
may be needed, and better ways of using customer feedback from service encounters or customer
complaints systems may be required.
T H E Q U A L I T Y S P E C I F I C AT I O N G A P ( G A P 2 )
This gap means that service quality specifications are not consistent with management perceptions of quality
expectations. This gap is a result of:
● Planning mistakes or insufficient planning procedures.

● Bad management of planning.
● Lack of clear goal-setting in the organization.
● Insufficient support for planning for service quality from top management.
Depending on the size of the first gap, the potential planning-related problems vary. However, even
in a situation where there is enough and sufficiently accurate information on customer processes and
expectations, planning of quality specifications may fail. A fairly normal reason for this is a lack of real
commitment to service quality among top management, because quality is not considered an issue of
highest strategic priority. An obvious cure in such a situation is to change a firm’s priorities. Quality
as perceived by customers is such a vital success factor today, certainly in service competition, that it
is imperative that commitment to quality ranks high on management’s priority list.
Of course, the problem may be in the planning process itself. Those providing service also have to
feel a commitment to the quality specifications. This has to be taken into account in goal-setting and
planning routines. Planning from the top without the collaboration of those who actually produce
the service should be avoided. Ideally, goals and specifications should be agreed upon by the service
providers as well as by the planners and management. Also, it is good to remember that too-rigid
specifications damage flexibility and decrease the willingness of employees to take flexible actions
involving risks. And again, this usually damages service quality.
In summary, commitment to service quality among management as well as service providers is far
more important in closing the quality specification gap than any too-rigid goal-setting and planning
procedure.
T H E S E RV I C E D E L I V E RY G A P ( G A P 3 )
This gap means that quality specifications are not met by performance in the service production and delivery
process. This gap is due to:
● Specifications that are too complicated and/or too rigid.

● Employees not agreeing with the specifications and therefore not fulfilling them.
● Specifications not being in line with the existing corporate culture
● Bad management of service operations.
● Lacking or insufficient internal marketing.
● Technology and systems not facilitating performance according to specifications.
The possible problems here are many and varied, and normally the reasons for the existence of a
service delivery gap are complicated. There is seldom only one reason, and the cure is, therefore,
usually complicated. The reasons for this gap can be divided into three categories: management and
supervision, employee perception of specifications and rules/customer needs and wishes, and lack of
technological/operational support.
Management- and supervision-related problems may also be varied. For example, supervisors may
not be encouraging and supportive of quality performance, or the supervisory control systems may be
in conflict with good service or even with quality specifications. In any organization where control
and reward systems are decided upon separately from the planning of quality specifications, which is
the case far too often, there is an inherent risk of a service delivery gap occurring. And this risk is
not small. Too often non-essential or unimportant activities are controlled, perhaps even rewarded;
and activities that contradict quality specifications are encouraged by the control system. They too
may even be rewarded. Of course, this puts employees in an extremely awkward position. Control
and reward systems partly determine the corporate culture, and goals and specifications that do not
fit the existing culture tend not to be well executed. The cure here involves changes in the way
MANAGING THE QUALITY GAPS 133
managers and supervisors treat their employees, and in the way supervisory systems control and reward
performance. Larger issues related to the culture of the firm and internal marketing may also have to
be attended to. We will return to the issues of internal marketing and service culture in Chapters 14
and 15.
From what has been discussed above it follows, among other things, that employees may feel that
their role as service providers is ambiguous. We have already mentioned the way in which perfor-
mance requirements of the specifications, on the one hand, and existing control and reward systems,
on the other hand, are in conflict with each other. An awkward situation could also occur for person-
nel when a customer contact person realizes that a customer requires different behaviour on the part
of the service provider than what the company’s existing specifications allow. The customer contact
employee knows that the customer is not getting what he expects and may feel that the demands and
wishes of the customer are justified and perhaps could be fulfilled, but he is not allowed to perform
accordingly. This slowly but surely kills any motivation for quality-supporting performance among
the service employees.
The cure in situations like these is to remove all reasons for ambiguity on the part of the personnel.
This may, on the one hand, require changes in the supervisory systems so that they are in line with
the quality specifications. It may, on the other hand, also require better employee training, so that
they are aware of the limitations for performance due, for example, to strategic considerations or
profitability reasons. Here again the issue of internal marketing is critical.
Further, the skills and attitudes of personnel may cause problems. It may be that the wrong people
have been recruited in the first place. The firm may have people who cannot adjust to the speci-
fications and systems that guide operations, however justifiable they are. The cure in this situation
is, of course, to improve recruitment processes so that poor decisions can be avoided. Furthermore,
the workload perceived by employees may be a problem. There may, for example, be too much
paperwork or too many other administrative tasks involved, so that quality specifications cannot be
fulfilled. Because of this, the service provider does not have time to attend to customers as expected.
The cure is to clarify the tasks of all personnel and find a solution where necessary tasks are dealt
with without interfering with quality performance. Finally, problems may be caused because the
technology or the systems of operating, including decision-making and other routines, cannot be
successfully used by the employees. The problem may be the employees, of course, but it is more
probable that technology and operational and administrative systems have been introduced in the
wrong way. Perhaps technology and the company’s systems do not support quality behaviour, or
they have not been properly introduced to the employees who are expected to live with them. The
remedy is either to make proper changes to technology and systems so that they are supportive of the
execution of the quality specifications or, again, to improve training and internal marketing.
T H E M A R K E T C O M M U N I C AT I O N G A P ( G A P 4 )
This gap means that promises made by marketing communication are not consistent with the service delivered.
This gap is due to:
● Marketing communication planning not being integrated with service operations.

● Lacking or insufficient co-ordination between traditional external marketing and operations.
● The organization failing to perform according to specifications, whereas marketing communication
campaigns follow these specifications.
● An inherent propensity to exaggerate and, thus, promise too much.
The reasons for the occurrence of a market communication gap can be divided into two categories,
namely, the planning and executing of external marketing communication and of operations, and a
company’s propensity to overpromise in sales and marketing communication.
In the first case, the cure is to create a system that coordinates planning and execution of external
marketing communication with service operations. For example, every major campaign should be
planned in collaboration with those involved in executing the service process. Two goals can be
achieved by this. First, promises in marketing communication become more accurate and realistic.
Second, a greater commitment to what is promised in external campaigns can be achieved, which
also has the effect that more can be promised than would otherwise be the case.
The second category of problems, overpromising because of the very nature of marketing com-
munication and sales where superlatives are far too easily used, can only be dealt with by improving
planning of marketing and sales tasks. The cure may be better planning procedures, but closer man-
agement supervision also helps.
THE PERCEIVED SERVICE QUALITY GAP (GAP 5)

This gap means that the perceived or experienced service is not consistent with the expected service. This gap
results in:
● Negatively confirmed quality (bad quality) and a quality problem.
● Bad word of mouth and negative comments in social media.
● A negative impact on corporate or local image.
● Lost business.
The fifth gap may, of course, also be positive, which leads either to a positively confirmed quality
or overquality. If a perceived service quality gap occurs, the reason for this could be any of those
discussed in this section, or any combination of these. Of course, there may also be other reasons in
addition to those mentioned here.
The gap analysis model should guide management in finding out where the reason or reasons
for the quality problem lie and in discovering appropriate ways to close this gap. Gap analysis is
a straightforward and appropriate way of identifying inconsistencies in the market research, service
process planning and execution, and external communication about the service. Addressing these gaps
is a logical basis for developing service processes in which expectations and experiences consistently
meet. In this way the likelihood of good perceived service quality will be increased.
MANAGING TOLERANCE ZONES

According to the perceived service quality model’s disconfirmation concept – customers’ experiences
are compared with their expectations – customers’ expectations of the level of a given service attribute
are thought of and measured as one singular level of expectation. No variation in expectations is
included. The zone of tolerance concept has been suggested by Berry and his colleagues,5 because they
considered the underlying assumption of this concept too simplistic.
The zone of tolerance concept assumes that customers do not have expectations of a service
attribute on one given level. Rather, they can tolerate a variation in the real experiences and still
consider them acceptable according to their expectations. This concept implies that customers’ expec-
tations exist on two levels, a desired level and an adequate level. The desired level reflects on what level
THE SHAPE OF THE QUALITY FUNCTION 135
the service should be, whereas the adequate level is what customers believe it could be. The latter
level is the least acceptable level of the service experience. These two levels of expectations form
the borders of customers’ zones of tolerance. If the real experiences of a customer fall in between these
borders, they are tolerated by him and the perceived quality is considered good.
The zone of tolerance can of course vary from customer to customer, and from service attribute
to service attribute. It may also, for a given customer, vary from time to time. It is suggested that, in
general, it is narrower for outcome-related service features and broader for process-related features.
This means that customers generally tolerate more variation in the process (expectations related to the
functional quality dimension) than in the outcome of the process (expectations related to the technical
quality dimension). In addition, if there is a service failure which has to be corrected, the zone of
tolerance diminishes, regarding both outcome-related and process-related service features.
Measuring the zones of tolerance of expectations and comparing them with the experiences of
customers may give management useful information about where service quality problems exist, and
where there is no need for immediate action. For those attributes where the experience measurement
falls in between the desired and adequate levels of expectations, the level of perceived service quality
is at least tolerable. Again, for those attributes where the experience measurement is lower than the
adequate level, immediate corrections may be required, so that the overall level of perceived service
quality does not decrease. It is of course more urgent to take action if such an attribute is considered
central to customers’ quality perception, than if its impact is only marginal.
THE SHAPE OF THE QUALITY FUNCTION

In the service quality models it is normally assumed that the quality function is linear; that is, as the
performance of a service provider improves, the perceived quality increases at the same pace, and vice
versa. In Figure 5.2 this assumption is illustrated at the left of the figure. In reality, this relationship
varies between customers and between quality attributes, and probably also between one customer’s
perception of different service encounters. However, the quality function is probably not linear at all.6
LINEAR QUALITY FUNCTION ASYMMETRIC QUALITY FUNCTION

+ +
Perceived Perceived
service service
quality quality
N N
+ +
Service performance Service performance
F I G U R E 5.2
Linear and asymmetric quality functions.
Source: Expanded from Strandvik, T., Tolerance Zones in Perceived Service Quality.
Helsinki: Hanken Swedish School of Economics, Finland, 1994, p. 154. Reproduced by
permission of Tore Strandvik, Hanken Swedish School of Economics.
At the right of Figure 5.2 a typical quality function is illustrated. When the service firm performs
better than normal (denoted by the letter N in the figure), perceived service quality increases at a
lower pace than it decreases when the firm performs below its normal level. This asymmetric shape
of the quality function7 means, among other things, that it is easier to make a bad impression when quality
deteriorates than it is to please a customer with quality above the normal expected level. Another conclusion
is that it is dangerous for a service provider to let its overall performance, or performance on some
critical attributes, drop below normal expectations, because the quality perception then decreases
quickly. On the other hand, it is difficult to increase the quality perception above normal, because
the service performance has to be improved (relatively speaking) much more to lead to significant
results. As the figure demonstrates, a given increase in service performance has a much smaller effect
on the perceived service quality than does a similar decrease.
For example, if an Internet shop responds to a customer’s inquiry or order more slowly than this
customer considers normal, speeding up the response time can be expected to have a rapid impact
on the perceived quality. However, improving perceived quality by answering even faster than this
normal level will have a much smaller impact on the customer’s quality perception.
Another assumption that is often made in the literature is that all quality attributes are equally
important. However, there may be a clear distinction between the effects on perceived quality of
different attributes. Again, there is probably a difference between customers and between various
types of services, but generally it seems as if different attributes have a different impact on the quality
perception. The main thing is that some attributes may be necessary for a good perception of service
quality, but if they are improved then this does not have a significant positive effect on perceived
quality. Reliability, functionality and competence could be examples of such hygiene factors. A hygiene
factor must be on a given level, otherwise quality is perceived as low, but increasing the level of a
hygiene factor does not improve the quality perception.
Other quality attributes may be quality-enhancing factors, where a higher level of performance has
a positive effect on the quality perception, whereas there is no significant additional negative effect
once it has reached a certain low level. Friendliness, attentiveness, cleanliness and availability could
be examples of such attributes. Improving such quality-enhancing factors above a minimum level
improves the perception of service quality. There may also be quality attributes that influence per-
ceived quality both ways. Comfort, communication and courtesy could be examples of such attributes.8
For example, the reliability of an airline assuring a passenger that he will arrive at the destination on
time is an essential hygiene factor. Delays have major negative effects on quality perception. Arriving
ahead of time probably has limited positive effect. On the other hand, the friendliness and attentiveness
of the in-flight personnel and the cleanliness of restrooms are quality-enhancing factors that linearly
increase the quality perception. However, when they have reached a certain low point, passengers
will have become so frustrated or annoyed that an even worse performance will not further decrease
their quality perception.
Another related way of studying quality attributes is to divide them into satisfiers and dissatisfiers.9
According to a major study in the banking industry in the UK,10 attentiveness, care and friendliness are
examples of predominantly satisfying determinants. Good performance on such determinants causes
an increase in perceived service quality, whereas poor performance below a certain expectations
level does not necessarily have a further damaging effect on quality. Integrity, reliability, availability and
functionality are examples of dissatisfiers. Good performance above a certain expectation level on such
attributes does not increase the perceived service quality, whereas poorer performance has a negative
effect on quality.
In this study responsiveness was found to be both a satisfier and dissatisfier. This is a crucial observa-
tion, because this quality attribute is often considered to have a decisive impact on satisfaction with
LESSONS OF SERVICE QUALITY AND QUALITY MANAGEMENT RESEARCH 137
SATISFIERS DISSATISFIERS
+ +
Perceived Perceived
service service
quality quality
N
N
+ +
Performance Performance
F I G U R E 5.3
Service quality attributes: the effects of satisfiers versus dissatisfiers.
quality. The different ways satisfiers and dissatisfiers work are illustrated in Figure 5.3. On the left
one can see how changes in the performance level of satisfiers impact perceived quality, whereas the
reverse effects of dissatisfiers are shown. The normal expected level of quality attributes is denoted by
the letter N.
The research results reported in this section are somewhat contradictory, which may be a result
of cultural or industry differences or different ways of measuring quality. However, it is important
for managers responsible for service quality to bear in mind that various quality attributes or factors
may function in different ways. The examples mentioned are relevant for some service and some
customers, and function in this way in some cultures, but in other cases other attributes may function
as hygiene, quality-enhancing or two-way factors, and as satisfiers or dissatisfiers. Investing in further
improvement of hygiene factors and neglecting investments in quality-enhancing or two-way factors,
or investing in dissatisfiers above the acceptable expectations level, are clearly ineffective strategies and
a waste of money. Such investments are, however, easily made, if one does not have a clear picture
of the quality-influencing nature of various quality attributes.
L E S S O N S O F S E RV I C E Q U A L I T Y A N D Q U A L I T Y
MANAGEMENT RESEARCH
The models and frameworks of customer perceived service quality and how to manage service quality
presented in this chapter demonstrate a number of important lessons learned from research into service
quality. Some of these issues have also been focused on in studies of good quality management. The
lessons are as follows.
1. Quality is what customers perceive. Quality cannot be determined by management alone; it has to be
based on customer needs, wishes and expectations. Moreover, quality is not what is planned in
objective measures; instead it is how customers subjectively perceive what is delivered.
2. Quality cannot be separated from the service process (the service production process). The outcome of the
service production process is only part of customer perceived service quality (the technical quality
dimension). The service process itself is perceived by customers who also actively participate in
this process. Therefore, the perception of the process and of the buyer–seller interactions or service
encounters of this process becomes another part of total quality (the functional quality dimension).
From a competitive point of view, functional quality is frequently equally important as, or even
more important than, technical quality of the outcome.
3. Quality is produced locally in a series of moments of truth of service encounters or buyer–seller interactions.
Because of the existence of the important functional quality dimension of total service quality,
the service encounters, including a number of moments of truth (or moments of opportunity)
become a pivotal factor in quality perception. Since service encounters take place locally, where
the customer meets the service provider, and not in centrally located quality design and planning
departments, perceived quality is also produced locally. Therefore, the planning and design of
quality has to move out to the local level. Technical quality aspects and the overall design of how
to create quality can, of course, be planned centrally, but the interface between the organization
and its customers has to be involved in quality management and design as well. Otherwise, well-
designed quality may remain a desk product that does not materialize in good customer perceived
quality.
4. Everyone contributes to customer perceived quality. As quality is created and produced in buyer–seller
interactions of service encounters, a large number of employees become involved in the produc-
tion of quality. Since these customer contact employees who handle customer contacts in order
to serve their customers well are dependent on the support of people beyond them in the service
process, these ‘support’ people also become responsible for the ultimate customer perceived quality.
Hence, most employees contribute to quality. If someone in the customer services department or
beyond the direct customer interface fails, quality suffers.
5. As co-producers in service processes customers have to be managed as a quality-producing resource. A central
characteristic of services is the fact that customers participate as co-producers in the service pro-
duction process. In that capacity they can influence both the process and its outcome, and hence,
their own as well as fellow consumers’ perception of quality. Therefore, the firm should guide the
customer through the production process so that he does not, by mistake or because of a lack of
knowledge or motivation, behave in a way that has a negative impact on quality. Customers may
have to be informed about what is required of them and motivated to act in a certain manner.
Sometimes customers may even have to be trained to make a positive contribution to quality.
6. Quality has to be monitored throughout the organization by the whole organization. As quality is produced
by a large number of people and departments throughout the organization, quality performance
has to be monitored and assured at the point where a quality contribution is produced. A centrally
located quality control and management staff cannot normally do this. The task is overwhelming;
and having a separate department for this has a negative effect psychologically on the people in the
organization. The mere fact that such a department exists can easily draw the attention of those
producing quality away from quality assurance. It is easy for other employees to stop worrying
about the tricky issue of constantly producing, maintaining and monitoring quality when there
is a group of specialists to turn to, and to blame when problems occur. In the final analysis, the
organization itself has to do the job of assuring quality.
7. External marketing has to be integrated into quality management. Customer-perceived quality is a func-
tion of expectations as well as of real experiences. Therefore, improvement of quality experiences
A SERVICE QUALITY MANAGEMENT PROGRAMME 139
may be counteracted by, say, a marketing campaign that gives customers reason to believe that
improvements will be greater than they really are. Customer expectations which are not met by
reality will be created. The perceived quality will be bad, although quality improvements, objec-
tively measured, may have taken place. Such negative external marketing effects may have far-
reaching consequences, for example, because this creates negative publicity and the image of the
firm may be damaged. If marketing campaigns are planned in collaboration with those responsible
for the quality improvement process, these mistakes can be avoided. Hence, external marketing,
marketing communication and sales have to be integrated with quality management.
A S E RV I C E Q U A L I T Y M A N A G E M E N T
PROGRAMME
In this chapter we have discussed concepts and models of perceived service quality, in order to develop
an understanding of how service quality is formed and perceived by customers, as well as an under-
standing of how important aspects of service quality can be managed. In the present section we will
sum up these concepts and models in the form of a management-oriented service quality management
programme. This programme is intended to help management implement a service strategy to respond
to the challenges of the constantly increasing service competition. If the organization has decided to
pursue a service strategy, the service quality management programme should, for managerial purposes,
give adequate guidance in what to do. Such a programme must, of course, be grounded in sufficient
insight about target customers’ everyday processes and goals, and about their needs and expectations.
The service quality management programme consists of seven subprogrammes. These are:
1. Service concept development.

2. Customer expectations management programme.
3. Service outcome management programme.
4. Internal marketing programme.
5. Physical environment (servicescape) and physical resources management programme.
6. Information technology management programme.
7. Customer participation management programme.
These will now be described separately in more detail.
1. Service concept development. The establishment of customer-oriented service concepts which guide
the management of resources and activities to be used in the service process is, of course, the
first task in the service quality development process. The service concept must clearly indicate the
intended customer benefits.
2. Customer expectations management programme. Traditional external marketing and sales activities
should never be planned and implemented in isolation. They should always be related to the
experiences the service provider is willing and able to provide to its customers. Otherwise, there
will always be a quality problem, irrespective of the other quality development subprogrammes.
Therefore, managing customer expectations must always be an integral part of any quality programme.
This makes, for example, managing external marketing communication and sales part of quality
management.
3. Service outcome management programme. The outcome of the service process (i.e. what customers
get as a technical quality of the service) is part of the total service experience. The outcome of the
service production process has to be developed and managed according to the service concepts
agreed upon, and the specific needs of the target customers.
4. Internal marketing programme. As we have demonstrated, the functional quality of the process (i.e.
how the service process is perceived by customers) is the key in most cases to an excellent service
quality and to achieving a winning competitive edge. Most frequently this quality dimension is
predominantly due to the courtesy, flexibility and general service-mindedness of the customer
contact employees, and to their ability and willingness to perform in a customer-focused fashion.
Hence, the employees, customer contact employees, managers and other employee categories,
have to be considered a first, internal market of the service provider. A continuous and strategically
backed up internal marketing process is, therefore, a vital part of any quality development and
management program. (Internal marketing will be discussed in detail in Chapter 14.)
5. Physical environment (servicescape) and physical resources management programme. The physical resources,
technology and computing systems of service organizations are too frequently developed accord-
ing to internal efficiency standards. The external effects of, for example, a computer system failure
are seldom taken into account to a proper degree. Consequently, these resources, which constitute
a technology base for service production as well as the physical environment for service con-
sumption, may have a negative impact on customers’ perception of the service process. Hence, a
physical environment and physical resources management programme should be part of an overall
quality programme, to support the functional quality perception.
6. Information technology management programme. Customers make increasing use of information
technology-based systems; for example, using a website on the Internet to get access to infor-
mation, feedback or support from a service firm, to making purchases on the Internet or to use
Internet and mobile applications as part of a service process. Therefore, the service provider must
invest in appropriate information technology and must upgrade software and hardware as tech-
nology and applications advance. Hence, an information technology management programme is
required. This is needed to secure both a good technical quality and functional quality impact.
7. Customer participation management programme. Customers should be advised how to act in the service
process, so that they have a favourable impact on the process themselves. Especially functional quality,
but sometimes also technical quality, can be destroyed by customers who either do not know what
to do or do not want to perform according to the service provider’s intentions. Negative effects
of fellow customers, causing queues, for example, must also be avoided, if possible. Eliminating
unfavourable effects on the service process of a misfit between customer segments and individual
customers is also part of a customer participation management programme.
S E RV I C E R E C O V E RY: M A N A G I N G Q U A L I T Y W H E N
S E RV I C E FA I L U R E S O C C U R
The real test of the customer orientation of a service provider takes place when a service failure
has occurred. Ideally, quality should be high all the time and failures should not occur. However,
employees make mistakes, systems break down, customers in the service process may cause problems
for other customers, or a customer may not know how to participate in the process or may change
his mind regarding some aspect of the service during the process. As a consequence, the planned
SERVICE RECOVERY VERSUS COMPLAINTS HANDLING 141
service process will not lead to a good result for the customer. The intended level of quality is not
achieved. It is important to realize that such a failure does not always result from mistakes made by the
service provider; the customer or fellow customers can also cause service failures. However, regardless
of whether the firm, the customer, or something else is to blame, every problematic situation for a
customer is an opportunity for the service provider to demonstrate its commitment to service.
Hence, regardless of the reason for a failure, the service provider has to take care of the situation
and is responsible for solving the problem in a way that satisfies the customer. Unless this is done, the
customer will feel that he received poor quality, and the risk of losing that customer grows. Or, if com-
plaining customers feel that their complaint is not handled quickly enough and with enough attention
and empathy, the quality of the whole relationship will deteriorate. If there is a quality problem in
the service process, the recovery of the problem has to be performed very carefully and accurately.11
Research shows that service providers are often offered a second chance to create a positive quality
perception by customers even though a service process has broken down.12 The way a firm manages
service recovery forms a platform for strengthened or weakened customer relationships. A well-
managed recovery has a positive impact on the development of a trusting relationship between a firm
and its customer and it also may deepen the customer’s commitment towards the service provider.13
As discussed in the previous chapter, service recovery is a factor influencing perceived service
quality. It is a process-related service criterion that can have a positive effect on functional quality.
After a good recovery, satisfaction with services can be increased.14 It has even been claimed that
good service recovery can make angry and frustrated customers more satisfied with service quality
than they would have been if no problem had occurred in the first place.15
S E RV I C E R E C O V E RY V E R S U S C O M P L A I N T S
HANDLING
Service recovery is a concept that was introduced in the service management literature to help firms
manage service failures and complaints in a service-oriented way.16 The traditional way of handling
service- or goods-related failures is complaints handling, where customers who have experienced
problems are requested to make formal complaints. Such complaints are analysed and handled by
the firm usually following legal and administrative procedures. Frequently it seems as if the objective
of complaints handling is to make sure that, regardless of who caused the failure, the firm does not
have to compensate the customer unless absolutely necessary. Complaints handling has a significant
effect on customers’ perception of the service orientation of a service firm or a manufacturer, and the
complaints-handling approach is inherently non-service-oriented. Service recovery is a service-oriented
approach to managing the same situations that, in an administrative way, are managed by complaints-handling
routines.
For traditional complaints handling internal efficiency, keeping costs as low as possible and not com-
pensating a customer unless this cannot be avoided for legal reasons, seems to be the standard. The
result is unsatisfied customers and lost business. For service recovery external effectiveness, good per-
ceived quality, is the main guideline. The objective of service recovery is to satisfy customers in spite of a
service failure as well as to maintain and possibly improve long-term relationship quality, to retain customers and
long-term profitable business rather than short-term cost savings.
Tax and Brown17 define service recovery in the following way:
Service recovery is a process that identifies service failures, effectively resolves customer problems, classifies their
root cause(s), and yields data that can be integrated with other measures of performance to assess and improve the
service system.
Customer problems caused by a service failure or some other problem are usually twofold; factual
problems and emotional18 problems. Both have to be attended to by the firm.
In a problematic situation when service recovery is called upon, customers are often frustrated
and also tend to have a narrower zone of tolerance than normal.19 Service recovery may therefore be
risky.20 It has to be managed well. It seems that the more committed the employees of a firm feel to
the firm’s visions, strategies and service concepts, the better their service recovery performance will
be. Moreover, employees who are empowered to make independent decisions can be expected to do better
in recovery situations; they are inclined to deal quickly and effectively with service failures.21 It is
important that customers who have suffered from a service failure or some other mistake in the service
process feel that they are treated fairly by the firm. The service recovery process should therefore be
developed and exercised to maximize fairness as perceived by the customer.22
S E RV I C E R E C O V E RY A N D P E R C E I V E D FA I R N E S S
Since the late 1990s, following the initial work by Stephen Tax, there has been a stream of studies on
how customers perceive service recovery in terms of perceived fairness or justice.23 In most of the
studies the term ‘justice’ is used. However, as this term has a legal meaning, the term fairness is more
appropriate in a service management context and is used here as a synonym.
According to this model customers’ perception of a service recovery process is divided into three
parts, which describe three different aspects of how fair or unfair the process is considered:
1. Distributive fairness: the degree to which the outcome of the service recovery process equals what
the customer thinks he deserved or needed, including the level of compensation and apology.
2. Procedural fairness: the degree to which customers feel that they could influence the recovery pro-
cess, and the convenience and timeliness of the process.
3. Interactional fairness: the degree to which customers consider interpersonal interactions during the
process to be fair, honest and empathetic, including fair communication and behaviour.
The three types of perceived fairness represent different aspects of the service recovery process and
its outcome. It is important to realize that customers assess the fairness of the recovery process in
more than one dimension. If the process itself and the interactions and communications taking place
during the process are perceived as unfair, it is not enough to provide customers with a fair outcome
in terms of compensation that recovers a factual loss and apology that reduces the emotional stress
felt by the customer. As a well-managed and favourably perceived recovery is a way of turning a
quality disaster into a positive overall experience of the service provider’s way of operating and thus
into a positive quality experience, it is important for firms to develop service recovery procedures
that make customers feel that they are treated well on all fairness dimensions and thus perceive total
fairness.24
G U I D E L I N E S F O R S E RV I C E R E C O V E RY
Service recovery is a strategy for managing mistakes, failures and problems in customer relationships.
It can be applied by all types of organizations, regardless of the firm’s core business. A manufacturer
or an organization in the public sector can benefit from this approach in the same way as a service
GUIDELINES FOR SERVICE RECOVERY 143
firm, and the customers of any firm will certainly benefit from an organization that takes a service
recovery approach instead of a traditional complaints-handling approach to managing mistakes and
quality problems. Unlike traditional complaints handling, service recovery offers a service-oriented
approach to managing problems. Below is a list of guidelines for the development of an effective
service recovery process.
● It is the organization’s responsibility to spot service failures and other types of mistakes or quality
problems. Customers should only have to notify the firm about the situation or make a complaint
if the firm has been unable to do so.
● If formal complaints are required, it should be made as easy as possible for the customer to complain.
The complaints procedure should be made as unproblematic and free from bureaucracy as possible.
Written complaints should be used only when absolutely necessary, for example for legal reasons or
when large amounts of money are involved. Remember that most customers who are dissatisfied
do not bother to complain; they just take their business away without saying what went wrong.
● The organization should take the initiative to inform the customer about the failure or mistake
and, in cases where immediate corrections cannot be made, keep the customer up-to-date about
the progress of rectifying the mistake.
● The organization should actively take measures to correct failures and mistakes, and not wait until
the customer demands action. Corrections should be made as quickly as possible. Every mistake
or failure should be rectified immediately it occurs, if possible.
● The customer should be compensated immediately and, in cases where immediate compensation
cannot be given, no unnecessary delays should be allowed. A lost customer, if profitable, has a
greater negative effect on long-term profits than an overcompensated, satisfied customer who
continues his relationship with the firm and probably also contributes to favourable word-of-mouth
communication.
● If for some reason, legal or otherwise, a customer cannot be compensated for the problem that has
occurred, a swift and service-oriented recovery process may still make the customer feel satisfied
with the relationship, because a positive functional quality impact has been created in this situation.
However, this requires that customers perceive the procedures and interactions as having been fair.
For long-term profitability it may be wise to compensate customers even when they are wrong or
have caused the failure themselves. Taking short-term losses for the sake of long-term revenues in
strengthened customer relationships often makes sense.
● Emotional reactions, such as anxiety and frustration, which customers often feel because of a service
failure or some other mistake, must also be managed, in addition to recovering the problem itself.
Such emotions should be attended to first.
● Apologizing is important, but is not enough in most situations. Customers must also be compen-
sated for losses they feel they have suffered and the failure must be dealt with.
● To make full use of the potential of successful recovery, a systematic service recovery system
should be developed. In such a system empowered employees such as customer contact employees,
customer-oriented supervisors and managers as well as support persons, are in a central position.
● Complaints departments and managers of complaints-handling departments often only impede
customer-oriented service recovery. However, a service recovery manager may be needed to
develop and support the recovery system.
CASE STUDY
T H E R I T Z - C A R LT O N H O T E L : S E R V I C E R E C O V E R Y
A group of four executive MBA students from Europe had attended a service marketing
seminar at the Ritz-Carlton Hotel in Phoenix, Arizona. Before leaving for the airport in
the evening, they wanted to spend a few hours of leisure time in the ‘Valley of the Sun’
at the swimming pool of the hotel. However, when coming down to the pool in the mid-
afternoon, they were politely told that the pool area was closing, because the area was
about to be prepared for an evening reception and dinner. Upon the students’ explanation
that during their stay at the hotel this was their only time to spend by the pool before
returning to the freezing temperature of their home country and that they had very much
looked forward to this opportunity, the waiter asked them to wait while he sorted out
the situation. After a short while a supervisor arrived and informed the group that the
hotel unfortunately did have to close the whole pool area right away to get ready for
the evening event in time. However, he added, a limousine waited for them outside the
main entrance to take them and their luggage to the Biltmore Hotel, where the pool area
would be at their disposal. The limousine was at the Ritz-Carlton’s expense, of course.
The group was delighted by this solution, and their already favourable perception of
the hotel was improved even more. They have also engaged in a considerable amount of
positive word-of-mouth communication.
S E RV I C E R E C O V E RY P R O C E S S E S
Customer contact employees may spot problems and service failures and take action but, as stated in
the previous section, to make full use of the potential of successful service recovery the firm should
develop a recovery system. The following guidelines may be helpful in developing such a system.25
1. Calculate costs of failures and mistakes. Customers who defect because they are dissatisfied have to
be replaced by new customers, and in addition they often engage in negative word of mouth.
Acquiring new customers is always several times more expensive than keeping existing customers.
Negative word of mouth also has a damaging effect on image. This makes the acquisition of
new customers more difficult and expensive. Correcting mistakes and recovering problematic
situations adds costs that could have been avoided had the service functioned well in the first place.
However, management too seldom realizes the financial effects of bad service. Therefore, careful
measurements of the costs involved may warn management of the negative financial effects of
badly managed service processes. In view of the high cost of losing customers, the need for a service
recovery system is easily appreciated and the cost of compensating, and even overcompensating,
customers for their losses becomes marginal.
2. Solicit complaints. Most customers never tell a firm about problems with services or goods that they
have faced. They just disappear to a competitor. It is important to get information about failures
that occur, mistakes that are made, systems that do not function in a service-oriented way, and
SERVICE RECOVERY PROCESSES 145
other reasons for poor perceived quality and dissatisfaction. Employees, especially those in contact
with customers, should be able to monitor the service processes for mistakes and service failures,
so that the firm realizes there is a problem, if possible even before the customer does. However,
many problems are first and perhaps only perceived by the customer. Because dissatisfied customers
form a firsthand source of information regarding what needs to be improved, it must be made
as easy as possible for customers to complain about quality problems and failures in the service
system. Some firms use information technology to help customers inform the firm about a mis-
take that has occurred.26 When customers complain, they must be shown respect and attention
by the employee to whom they make the complaint.27
3. Identify recovery needs. Mistakes can happen and failures can occur almost anywhere. However,
by carefully analysing the service process, human resources, systems used in the process and cus-
tomers’ need for information and guidance, it is possible to spot areas with high risk of failure.
Situations where one error can lead to a chain reaction (for example, a delayed incoming flight)
are particularly problematic. Complicated IT systems are another risky area. The introduction of
new systems is always critical. By being aware of such areas where the risk of mistakes is especially
high, management can prepare the organization for taking care of possible failures.
4. Recover quickly. An old rule of thumb says that disappointed customers tell 12 others about their
negative experiences, whereas satisfied customers tell much fewer about their positive experiences.
With the introduction of social media, these effects can be much more dramatic today. The more
slowly a problem is attended to and corrected, the more negative word of mouth is created. In
addition, the impact of a slow recovery process on a damaged quality perception is much greater
than if there is a quick recovery. We shall turn to this aspect of service recovery in the next section.
5. Train employees. Customer contact employees must understand why service failures need to be
attended to and recovered quickly, and they need to understand and appreciate why they, in the
front line, have a responsibility, first of all, for spotting problems, mistakes and customers who seem
to become disappointed with the service process or who do not understand how to participate
effectively in the process. Second, they need to understand and accept their responsibilities for
taking action to manage a disappointed customer’s frustration and make efforts to quickly correct
mistakes and compensate the customer for his losses. Training is required so that employees have
the service-oriented perspective needed to take care of problematic situations and also the skills
required in these situations. Without this perspective the employees may have a different view of
recovery needs to the customers.28 This is part of internal marketing, which will be discussed at
length in Chapter 14.
6. Empower and enable customer contact employees. Training gives employees a better understanding of
the situation and their central role in service recovery, and also the knowledge and skills for doing
the job. However, to handle dissatisfied and frustrated customers, employees need authority to
make decisions about what to do and how much to compensate. They also need to know how
far their authority goes and when the recovery of a failure has to be handed over to someone else
in the organization, or when a formal written complaint needs to be made. Employees have to
be empowered with authority and enabled with access to information, databases and compensation
systems, such as vouchers, free tickets or money. In Chapter 15, empowerment and enabling are
discussed at length.
7. Keep the customer informed. The customer should always be told that the failure or mistake has been
acknowledged and that the recovery process is underway. If a recovery cannot be made on the
spot and if the process takes time, customers must be kept informed about its progress. Finally,
when a problem has been corrected, the customer should be notified about the result but also
about what the firm has learnt from the failure and which corrective actions they have taken to
improve the service process.
8. Learn from mistakes. The firm must have a system for using service recovery experiences in a pro-
ductive way. Service failures, quality problems and other mistakes can often be traced back to
either a structural problem in some process in the organization or to employee or management
attitude. It is important that the firm analyses the root cause of a problem and corrects the underly-
ing processes or attitudes. Situations that have led to problematic situations must be handled better
the next time they occur.29
In summary, a system for effective service recovery includes three areas of focus:30 constantly monitor
service processes to identify problems, solve problems effectively and learn from problems and the
recovery process. Table 5.1 shows the necessary recovery steps expected by customers.31
T I M I N G O F R E C O V E RY P R O C E S S E S
In addition to correcting the mistake, quick response and adequate compensation are usually consid-
ered crucial elements of service recovery.32 This final section of Chapter 5 will discuss some effects on
perceived service quality resulting from various timing strategies.33 The relationship framework, includ-
ing episodes (or service encounters) consisting of singular acts, sequences of interrelated episodes
and the overall relationship itself, is used to illustrate various timing strategies. The three strategies
TA B L E 5.1
Customer expectations when service failures or problems occur.
Action expected How action should be handled
Apology Delivered in person, even if the firm did not cause the problem
(however, apology is often not enough).
Fair compensation Reasonable compensation on the spot from customer contact
employee.
Caring treatment By showing empathy and treating each customer as an individual;
attending to emotional problems.
Value-added Customer gets something as a symbol of appreciation of value as
atonement customer (sometimes a fair compensation may serve as such a
symbol).
Kept promises Contact employee describes what will happen and when, with
about recovery confidence that it actually will happen that way (negative
information is better than no information or wrong information; it
is better to hear once that a flight is 60 minutes delayed than to hear
four times that there is a 15-minute delay).
Source: Amended from Zemke, R. (1992) Supporting service recovery: attributes for excelling at solving customers’ prob-
lems. In Sheuing, E.E., Gummesson, E. & Little, C.H. (eds), Selected Papers from the Second Quality in Services (QUIS 2)
Conference. New York: St. John’s University and ISQA, International Service Quality Association, p. 46.
TIMING OF RECOVERY PROCESSES 147
are labelled administrative (a passive approach), defensive (an active approach) and offensive (a proactive
approach), respectively. A lost-luggage situation is used as an example. A family of three is arriving by
air at a distant beach resort for four days of vacation. Upon arrival they realize that all their checked-in
luggage has been lost. This means that the family does not have more than their travelling clothes at
their disposal. The need for service recovery is evident.
An administrative service recovery (passive approach to service failures) is shown in the top part of
Figure 5.4. The airline agent does the required paperwork and gives the family a standard voucher
for a nominal amount of money. The family realizes immediately that this sum will not cover more
than a fraction of the purchases necessary to save their vacation. They are informed that if that is the
case they will have to make a formal complaint to the airline after their vacation. The recovery of
the service failure will thus be taken care of afterwards when this complaint has been duly processed.
The recovery is managed as a separate service sequence following the main service sequence (the vacation
consisting of, for example, three episodes: flight to the vacation resort, stay at the resort, and flight
back). This configuration of the relationship is illustrated in the upper part of Figure 5.4. This way
of handling service failure can be labelled administrative recovery, because the service failure is not fully
recovered at all. Instead the responsibility to seek redress is left to the customer as a separate process
(sequence). This type of recovery is similar to traditional complaints handling.
Furthermore, the emotional effects of the failure are not addressed, which will probably negatively
influence the customer’s perception of service quality. Also, the damage to the perceived service
quality caused by the failure is not likely to be diminished, even if the customer is fully compensated
after the complaints-handling process.
A defensive service recovery (active approach to service failures) is illustrated in the middle part of the
figure. Following this timing strategy the airline company suggests to the family that they buy what
they need at their own expense and then get their purchases reimbursed at the airline’s office after the
return trip. In this way the recovery of the failure is managed as a separate recovery episode, but as
part of the main service sequence (as part of the vacation). This approach to managing service failures
can be called defensive recovery, because there is a clear attempt to recover the situation without any
formal complaints procedure. In this sense it is an active approach. However, it is defensive, because
it leaves the customer to sort out the problem for himself first. The formal recovery is taken care of
later, however, as part of the main service sequence.
The emotional problems following the service failure are probably not managed very well in this
way either, although they will have less influence on the perceived service quality than the adminis-
trative service recovery. As the customer knows from the beginning that he will be able to make the
purchases required without economic consequences for himself, the intended service quality percep-
tion can probably be restored.
An offensive service recovery (proactive approach to service failures) is shown at the bottom of the
figure. The airline company could also make the recovery of the service failure immediately as part of
the episode where the failure occurred. The agent could, for example, offer the family the opportunity
to make all the purchases they need at the airline’s expense in a number of listed shops at the resort.
The firm takes a proactive approach to managing the problems caused by the failure, by removing all
additional annoyance and problems. The recovery act becomes part of the episode where the failure
took place, although some of the recovery-related activities (buying clothes, for example) are part of
a later episode.
In this way the emotional problems caused by the service failure are much more likely to be
diminished. The customer is likely to be surprised by the positive way the negative situation is handled
by the service provider, and there is even a possibility that the originally intended level of perceived
service quality will be exceeded.
ADMINISTRATIVE RECOVERY (PASSIVE APPROACH)
Relationship
Complaints
Main service process
handling
sequence
sequence
Episode Episode Episode Episode
Act Act Act Act Act Act Act Act Act Act Act Act
Time
Problem act Recovery (complaints handling) sequence
DEFENSIVE RECOVERY (ACTIVE APPROACH)
Relationship
Service process
sequence
Episode Episode Episode Recovery

episode
Act Act Act Act Act Act Act Act Act Act
Time
Problem act Recovery episode
OFFENSIVE RECOVERY (PROACTIVE APPROACH)
Relationship
Service process
sequence
Episode Episode Episode
Act Act Act Act Act Act Act Act Act Act
Time
Problem act Recovery act
F I G U R E 5.4
Timing of service recovery in a relationship framework.
Source: Grönroos, C., The role of service recovery: administrative,
defensive and offensive management of service failures. In Fisk, R. &
Glynn, L. (eds), Jazzing Into the New Millennium. 1999 SERVSIG
Services Research Conference, Chicago, IL: American Marketing
Association; 1999: pp. 40–42. Reproduced by permission of the
American Marketing Association.
MANAGING SERVICE FAILURES AND QUALITY PROBLEMS: A SUMMARY 149
M A N A G I N G S E RV I C E FA I L U R E S A N D Q U A L I T Y
P R O B L E M S : A S U M M A RY
Some quality problems and failures cannot be corrected immediately. However, the customer’s emo-
tional concerns, anxiety and frustration should always be attended to right away. Most failures can
be taken care of and recovered on the spot, if there is a functioning recovery system in the firm and if
the customer contact employees are empowered with authority, knowledge and skills, and enabled to
perform with easily retrievable information, an appropriate compensation system and, when needed,
supportive superiors.
Timing is essential. As a ground rule, the quicker recovery can be made, the better. A quick
recovery will make the customer more satisfied with service quality than otherwise. In addition, a prompt
recovery will cost the firm less than a slow recovery or a traditional complaints-handling process. First,
the costs of handling recovery, including compensation paid, will probably amount to a smaller sum,
and second, quick recovery will increase the likelihood of positive word of mouth and also of customer
retention. If customers stay in the relationship, the much higher costs of getting new customers
to replace lost ones can be avoided. Patrick Mene, Director of Quality at the Ritz-Carlton Hotel
Company, an early Malcolm Baldrige Quality Award-winning service firm, coined the ‘1–10–100
rule of service recovery’.34 What costs the firm one pound, euro or dollar to fix immediately will
cost 10 tomorrow and 100 later on. This is the financial logic of service recovery in a nutshell.35
S U M M A RY
In this chapter the reasons why firms hesitate to invest in improved service quality were described. Then,
quality management models for service organizations were discussed: these include the gap analysis model
to close gaps in the quality generation processes of the firm, and programmes for holistic management of
service quality. In the latter part of the chapter service recovery, as an alternative to traditional complaints
handling, was described and service recovery processes were explained.

1. Why are managers often hesitant to invest in quality improvements in services?
2. How can reasons for quality problems be traced using the gap analysis framework?
3. Why is the management of quality a holistic issue in service contexts?
4. What are the benefits (for the customer and the firm) of a service recovery approach to
handling mistakes or quality problems compared with a traditional complaints-handling
system?
5. How can effects of service recovery be understood as customer perceived fairness?
6. How could a proactive service recovery system be installed in your organization, or in any
given organization?
NOTES
1. See Yang, C-C., Identification of customer delight for quality attributes and its applications.
Total Quality Management and Business Excellence, 22(1), 2011, 83–98, where a customer delight
barometer is developed. However, see also Correira Loureiro, S.M., Miranda, F.J. & Breazeale,
M., Who needs delight? The greater impact of value, trust and satisfaction in utilitarian, frequent-
use retail. Journal of Service Management, 25(1), 2014, 101–124, where the authors claim that in a
retailing context at least delight may be less important for customers than perceived value, trust
and satisfaction.
2. Rust, R.T. & Oliver, R.L., Should we delight the customer? Journal of the Academy of Marketing
Science, 28(1), 2000, 86–94.
3. Rust & Oliver, op. cit.
4. The gap analysis model as well as reasons for gaps and ways of managing gaps are discussed in
Parasuraman, A., Zeithaml, V.A. & Berry, L.L., A conceptual model of service quality and its
implications for future research. Journal of Marketing, 61, 1985 and Zeithaml, V.A., Berry, L.L. &
Parasuraman, A., Communication and control processes in the delivery of service quality. Journal
of Marketing, 64(Apr), 1988, 35–48.
5. See Berry, L.L. & Parasuraman, A., Marketing Services. Competing Through Quality. New York:
The Free Press, 1991. See also Yap, K.B. & Sweeney, J.C., Zone-of-tolerance moderates the
service quality-outcome relationship. Journal of Services Marketing, 21(2), 2007, 137–148, and Wu,
L-W. & Wang, C-Y., Satisfaction and zone of tolerance: the moderating roles of elaboration and
loyalty programs. Managing Service Quality, 22(1), 2012, 38–57.
6. In a large study of the restaurant industry Tore Strandvik demonstrated that in general customers
seem to show a loss aversion. See Strandvik, T., Tolerance Zones in Perceived Service Quality. Helsingfors/
Helsinki: Swedish School of Economics, Finland, 1994.
7. See Strandvik, op. cit.
8. This classification of quality attributes and the examples of various types of attributes were sug-
gested by Silvestro and Johnston. See Silvestro, R. & Johnston, R., The determinants of service
quality: hygiene and enhancing factors. In Sheuing, E.E., Gummesson, E. & Little, C.H. (eds),
Selected Papers from the Second Quality in Services (QUIS 2) Conference. New York: St. John’s
University and ISQA, International Service Quality Association, 1992, pp. 193–210.
9. Johnston, R., The determinants of service quality: satisfiers and dissatisfiers. International Journal
of Service Industry Management, 6(5), 1995, 53–71.
10. Johnston, op. cit.
NOTES 151
11. Berry & Parasuraman, op. cit.

12. Boshoff, C. & Leong, J., Empowerment, attribution and apologising as dimensions of service
quality. International Journal of Service Industry Management, 9(1), 1998, 24–47 and Andreassen,
T.W., Dissatisfaction with Services. The Impact of Satisfaction with Service Recovery on Corporate Image
and Future Repurchase Intentions. Stockholm, Sweden: Stockholm University, 1997.
13. Tax, S.S., Brown, S.W. & Chandrashekaran, M., Customer evaluation of service complaint
experiences: implications for relationship marketing. Journal of Marketing, 62(Apr), 1998, 60–76.
14. Spreng, R.A., Harrell, R.A. & Mackoy, G.D., Service recovery: impact on satisfaction and inten-
tions. Journal of Services Marketing, 9(1), 1995, 15–23.
15. Kelley, S.W. & Davis, M.A., Antecedents to customer expectations for service recovery. Journal
of the Academy of Marketing Science, 22(1), 1994, 52–61.
16. An early publication where service recovery was suggested as a way of managing service failures
is Hart, C.W.L., Heskett, J.L. & Sasser Jr., W.E., The profitable art of service recovery. Harvard
Business Review, Jul/Aug, 1990, 148–156.
17. Tax, S.S. & Brown, S.W., Service recovery: research insights and practices. In Swartz, T.A. &
Iacobucci, D. (eds), Handbook in Services Marketing & Management. Thousand Oaks, CA: Sage
Publications, 2000, p. 272. See also Lovelock, C.H., Product Plus. New York: McGraw-Hill,
1994.
18. The emotional aspects of service failures and how they can be handled by service recovery pro-
cedures do not seem to be discussed very much in the literature. The emotional effects of how
failures are recovered have been studied in Shoefer, K. & Ennew, C., The impact of perceived
justice on consumers’ responses to service complaint experiences. Journal of Services Marketing,
19(5), 2005, 261–270. See also Chebat, J.-C. & Slusarczyk, W., How emotions mediate the
effects of perceived justice on loyalty in service recovery situations: an empirical study. Journal of
Business Research, 58(5), 2005, 664–674, and DeWitt, T., Nguyen, D.T. & Marshall, R., Explor-
ing customer loyalty following service recovery: the mediating effects of trust and emotions.
Journal of Service Research, 10(3), 2008, 269–281.
19. Tax, Brown & Chandrashekaran, 1998, op. cit. See also Zeithaml, V.A., Berry, L.L. & Parasuraman,
A., The nature and determinants of customer expectations of services. Journal of the Academy of
Marketing Science, 21(1), 1993, 1–12.
20. Smith, A.K. & Bolton, R.N., An experimental investigation of customer reactions to service
failure and recovery encounters. Journal of Service Research, 1(1), 1998, 65–81.
21. Boshoff, C. & Allen, J., The influence of selected antecedents on frontline staff’s perception of
service recovery performance. International Journal of Service Industry Management, 11(1), 2000, 63–90.
The authors of this article suggest that managers must be prepared for their staff to make mistakes
and that ‘they must adopt an “it’s better to try and fail than not to try at all” attitude’ (p. 82).
22. de Ruyter, K. & Wetzels, M., Customer equity considerations in service recovery: a cross-
industry perspective. International Journal of Service Industry Management, 11(1), 2000, 91–108.
23. See Tax, S.S., Brown, S.W. & Chandrashekaran, M., op. cit. Studies following the justice
approach are, for example, Yim, C.K., Gu, F.F. & Tse, D.K., Justice-based service recovery
expectations: measurements and antecedents. Journal of Satisfaction, Dissatisfaction and Complaining
Behavior, 16, 2003, 36–47; Mattila, A.S. & Cranage, D., The impact of choice on fairness in the
context of service recovery. Journal of Services Marketing, 19(5), 2005, 271–279; Shoefer, K. &
Ennew, C., op. cit.; and and Liao, H., Do it right this time: the role of employee service recovery
performance in customer-perceived justice and customer loyalty after service failures. Journal of
Applied Psychology, 92(2), 2007, 475–489.
24. See Tax, S.S., Brown, S.W. & Chandrashekaran, M., op. cit., p. 72. See also del Rio-Lanza, A.B.,
Vasquez-Casielles, R. & Diaz-Martin, A.M., Satisfaction with service recovery: perceived justice
and emotional responses. Journal of Business Research, 62(8), 2009, 775–781.
25. See Hart, Heskett & Sasser, op. cit., Berry & Parasuraman, op. cit. and Tax, S.S. & Brown, S.W.,
Recovering and learning from service failure. Sloan Management Review, 40(1), 1998, 75–88.
In these publications service recovery systems are discussed at length. See also Wang, K-Y.,
Hsu, L-C. & Chih, W-H., Retaining customers after service failure recoveries: a contingency
model. Managing Service Quality, 24(4), 2014, 318–338, where the authors study ways of keeping
customers after service recovery situations.
26. Tax & Brown, op. cit.
27. In a study of the food retailing industry Inger Roos observed that a lack of respect for customers’
complaints had a decisive effect on customers’ decisions to switch from one shop to another.
See Roos, I., Switching Paths in Customer Relationships. Helsinki/Helsingfors: Swedish School of
Economics, Finland, 1999.
28. In a study of the airline industry Edvardsson found a considerable difference between how
employees and customers perceived critical incidents in the service process. See Edvardsson, B.,
Service breakdowns: a study of critical incidents in an airline. International Journal of Service Industry
Management, 3(4), 1992, 17–29.
29. Bill Marriott, Managing Director of Marriott Corp., says that he demands that his firm not only
do whatever is necessary to take care of guests in normal situations, but that employees also track,
measure and follow up on how to handle things better in the future. See Bowen, D.E. & Lawler
III, E.E., Empowering service employees. Sloan Management Review, 36(Summer), 1995, 73–84.
FURTHER READING 153
30. Compare Berry & Parasuraman, op. cit.

31. Zemke, R., Supporting service recovery: attributes for excelling at solving customers’ problems.
In Sheuing, E., Gummesson, E. & Little, C.H. (eds), Selected Papers from the Second Quality in
Services (QUIS 2) Conference. New York: St. John’s University and ISQA, International Service
Quality Association, 1992, pp. 41–46.
32. See, for example, Johnston, R. & Fern, A., Service recovery strategies for single and double
deviation scenarios. The Service Industry Journal, 19(2), 1999, 69–82.
33. Grönroos, C., The role of service recovery: administrative, defensive and offensive management
of service failures. In Fisk, R. & Glynn, L. (eds), Jazzing Into the New Millennium. 1999 Servsig
Services Research Conference. Chicago, IL: American Marketing Association, 1999, pp. 39–43.
34. Patlow, C.G., How Ritz-Carlton applies ‘TQM’. The Cornell H.R.A. Quarterly, August, 1993,
16–24.
35. See Stauss, B. & Seidel, W., Complaint Management. The Heart of CRM. Mason, OH: Thomson,
2004, where the authors demonstrate how well-handled customer complaints, following a service
recovery system, help the firm save money and achieve sustainable revenues.
Andreassen, T.W. (1997) Dissatisfaction with Services. The Impact of Satisfaction with Service Recovery on
Corporate Image and Future Repurchase Intentions. Stockholm, Sweden: Stockholm University.
Berry, L.L. & Parasuraman, A. (1991) Marketing Services. Competing Through Quality. New York: The
Free Press.
Boshoff, C. & Leong, J. (1998) Empowerment, attribution and apologising as dimensions of service
quality. International Journal of Service Industry Management, 9(1), 24–47.
Boshoff, C. & Allen, J. (2000) The influence of selected antecedents on frontline staff’s perception of
service recovery performance. International Journal of Service Industry Management, 11(1), 63–90.
Bowen, D.E. & Lawler III, E.E. (1995) Empowering service employees. Sloan Management Review,
36(Summer), 73–84.
Chebat, J.-C. & Slusarczyk, W. (2005) How emotions mediate the effects of perceived justice on
loyalty in service recovery situations: an empirical study. Journal of Business Research, 58(5), 664–674.
Correira Loureiro, S.M., Miranda, F.J. & Breazeale, M. (2014) Who needs delight? The greater
impact of value, trust and satisfaction in utilitarian, frequent-use retail. Journal of Service Management,
25(1), 101–124.
de Ruyter, K. & Wetzels, M. (2000) Customer equity considerations in service recovery: a cross-
industry perspective. International Journal of Service Industry Management, 11(1), 91–108.
del Rio-Lanza, A.B., Vasquez-Casielles, R. & Diaz-Martin, A.M. (2009) Satisfaction with service
recovery: Perceived justice and emotional responses. Journal of Business Research, 62(8), 775–781.
DeWitt, T., Nguyen, D.T. & Marshall, R. (2008) Exploring customer loyalty following service
recovery: the mediating effects of trust and emotions. Journal of Service Research, 10(3), 269–281.
Edvardsson, B. (1992) Service breakdowns: a study of critical incidents in an airline. International
Grönroos, C. (1999) The role of service recovery: administrative, defensive and offensive manage-
ment of service failures. In Fisk, R. & Glynn, L. (eds), Jazzing Into the New Millennium. 1999 Servsig
Services Research Conference. Chicago, IL: American Marketing Association, pp. 39–43.
Hart, C.W.L., Heskett, J.L. & Sasser Jr., W.E. (1990) The profitable art of service recovery. Harvard
Business Review, Jul/Aug, 148–156.
Johnston, R. (1995) The determinants of service quality: satisfiers and dissatisfiers. International Journal
of Service Industry Management, 6(5), 53–71.
Johnston, R. & Fern, A. (1999) Service recovery strategies for single and double deviation scenarios.
The Service Industry Journal, 19(2), 69–82.
Kelley, S.W. & Davis, M.A. (1994) Antecedents to customer expectations for service recovery. Journal
of the Academy of Marketing Science, 22(1), 52–61.
Liao, H. (2007) Do it right this time: the role of employee service recovery performance in customer-
perceived justice and customer loyalty after service failures. Journal of Applied Psychology, 92(2),
475–489.
Lovelock, C.H. (1994) Product Plus: How Product Service Affects Competitive Advantage. New York:
McGraw-Hill.
Mattila, A.S. & Cranage, D. (2005) The impact of choice on fairness in the context of service recovery.
Journal of Services Marketing, 19(5), 271–279.
Parasuraman, A., Zeithaml, V.A. and Berry, L.L. (1988) SERVQUAL: a multiple-item scale for
measuring consumer perceptions of service quality. Journal of Retailing, 64(1), 12–40.
Patlow, C.G. (1993) How Ritz-Carlton applies ‘TQM’. The Cornell H.R.A. Quarterly, August,
16–24.
Roos, I. (1999) Switching Paths in Customer Relationships. Helsinki/Helsingfors: Swedish School of
Economics, Finland/CERS Centre for Relationship Marketing and Service Management.
FURTHER READING 155
Rust, R.T. & Oliver, R.L. (2000) Should we delight the customer? Journal of the Academy of Marketing
Science, 28(1), 86–94.
Shoefer, K. & Ennew, C. (2005) The impact of perceived justice on consumers’ responses to service
complaint experiences. Journal of Services Marketing, 19(5), 261–270.
Silvestro, R. & Johnston, R. (1992) The determinants of service quality: hygiene and enhancing
factors. In Sheuing, E.E., Gummesson, E. & Little, C.H. (eds), Selected Papers from the Second Quality
in Services (QUIS 2) Conference. New York: St John’s University and ISQA, International Service
Quality Association, pp. 193–210.
Smith, A.K. & Bolton, R.N. (1998) An experimental investigation of customer reactions to service
failure and recovery encounters. Journal of Service Research, 1(1), 65–81.
Spreng, R.A., Harrell, R.A. & Mackoy, G.D. (1995) Service recovery: impact on satisfaction and
intentions. Journal of Services Marketing, 9(1), 15–23.
Stauss, B. & Seidel, W. (2004) Complaint Management. The Heart of CRM. Mason, OH: Thomson.
Strandvik, T. (1994) Tolerance Zones in Perceived Service Quality. Helsingfors/Helsinki: Swedish School
of Economics Finland.
Tax, S.S. & Brown, S.W. (1998) Recovering and learning from service failure. Sloan Management
Review, 40(1), 75–88.
Tax, S.S., Brown, S.W. & Chandrashekaran, M. (1998) Customer evaluation of service complaint
experiences: implications for relationship marketing. Journal of Marketing, 62(Apr), 60–76.
Tax, S.S. & Brown, S.W. (2000) Service recovery: research insights and practices. In Swartz, T.A. &
Iacobucci, D. (eds), Handbook in Services Marketing & Management. Thousand Oaks, CA: Sage Publi-
cations, pp. 271–285.
Wang, K-Y., Hsu, L-C. & Chih, W-H. (2014) Retaining customers after service failure recoveries:
a contingency model. Managing Service Quality, 24(4), 318–338.
Wu, L-W. & Wang, C-Y. (2012) Satisfaction and zone of tolerance: the moderating roles of elabo-
ration and loyalty programs. Managing Service Quality, 22(1), 38–57.
Yang, C-C. (2011) Identification of customer delight for quality attributes and its applications. Total
Quality Management and Business Excellence, 22(1), 83–98.
Yap, K.B. & Sweeney, J.C. (2007) Zone-of-tolerance moderates the service quality-outcome rela-
tionship. Journal of Services Marketing, 21(2), 137–148.
Yim, C.K., Gu, F.F. & Tse, D.K. (2003) Justice-based service recovery expectations: measurements
and antecedents. Journal of Satisfaction, Dissatisfaction and Complaining Behavior, 16, 36–47.
Zeithaml, V.A., Berry, L.L. & Parasuraman, A. (1988) Communication and control processes in the
delivery of service quality. Journal of Marketing, 64(Apr), 35–49.
Zeithaml, V.A., Berry, L.L. & Parasuraman, A. (1993) The nature and determinants of customer
expectations of services. Journal of the Academy of Marketing Science, 21(1), 1–12.
Zemke, R. (1992) Supporting service recovery: attributes for excelling at solving customers’ prob-
lems. In Sheuing, E.E., Gummesson, E. & Little, C.H. (eds), Selected Papers from the Second Quality
in Services (QUIS 2) Conference. New York: St. John’s University and ISQA, International Service
Quality Association, pp. 41–46.
CHAPTER 6
RETURN ON SERVICE AND
RELATIONSHIPS
“ Customers look for value. However, more value does not necessarily require new services but
better service, meaning that all existing customer contacts are managed as value-supporting service
”
for customers.
INTRODUCTION
Building on the discussions of perceived service quality and relationship quality in Chapter 4 and qual-
ity management in service in Chapter 5, this chapter now turns to the question of whether investing
in service can be expected to pay off. The issues of relationship costs and long-term customer sacrifice
are discussed, and various approaches to understanding customer perceived value are described. Then
a model of reciprocal return on relationship (ROR) and metrics for calculating this ROR are presented.
Finally, a model of customer relationship profitability is presented. After having read the chapter,
the reader should understand how to justify investments in service quality and in service in customer
relationships, and how to quantify the total benefits of a service offering as well as how reciprocal
ROR and the profitability of customer relationships are calculated.
W H Y C U S T O M E R S A R E N O T P R E PA R E D T O PAY
F O R I M P R O V E D S E RV I C E Q U A L I T Y
Service competition is a fact for a growing number of firms and industries. Service firms have always
faced service competition, whereas this situation is less familiar for most manufacturing businesses.
In spite of this new competitive situation, one often meets the sceptical suspicion that, in the final
analysis, developing service and capabilities to cope with service competition will not pay off after all.
‘Customers are prepared to pay only for the core solution, a physical product or a service’ and ‘For
our customers price is the only important factor, so it is no use to invest in services’ are arguments
which are frequently heard. In some situations, and for some customers, they may of course be true.
However, in general they are certainly not valid. Improved service and the development of sustainable
158 RETURN ON SERVICE AND RELATIONSHIPS
customer relationships usually pays off. The problem for most firms is that many customers, individual
consumers as well as organizational, do not see how improved service means more value for them.
The service provider has to make customers realize the value-enhancing potential of better service.
If customers do not appreciate the value to them of good service and are not willing to pay for
service, there can be at least four reasons for this:
1. The service provider has not been able to demonstrate to its customers how they can benefit from
the service offered in terms of added comfort, support, security, wealth and/or lowered costs.
2. The service provider has not managed to show the customers that long-term cost effects of a
service offering are a more important decision-making criterion than price.
3. The service offering is not as customer-centric as it should be and does not offer the favourable
benefits that customers are looking for.
4. A particular customer is not interested in value-enhancing additional services but is only looking
for the core solution at as low a price as possible.
In this chapter we discuss how to cope with the first two reasons given above. The third reason is
discussed in other chapters throughout the book. The fourth reason is not discussed in this context:
a firm that has done its market research carefully enough should realize that such customers are in a
transactional mode (see Chapter 2) and they should not be offered a total service offering at all but
merely the core solution they want.
T H E C O S T O F I M P R O V I N G S E RV I C E Q U A L I T Y
Managers often feel uncomfortable at customer demands for better quality. They feel that improved
service quality does not pay off. Two reasons why the firm cannot improve its quality are normally
offered: improving quality costs more than can be achieved in additional revenues and new business,
and improving quality means that productivity will suffer, which the organization cannot afford.
Managers tend to believe that quality improvements come at the expense of productivity, and vice
versa. Caught in this apparent dilemma, they often choose to concentrate on one of these issues.1
Far too often attention to productivity is given priority, and how to improve quality remains an
unsolved problem. In Chapter 9 the issue of productivity in service is discussed in some detail, and
it is shown that, although it may be true for some firms, as a general rule productivity and quality do
not counteract each other.
Both of these reasons for why quality cannot be improved are cost-related. To improve service
and increase their quality requires too many resources and additional costs, and supposedly lowers
productivity, which leads to higher costs per unit produced. Both reasons are invalid, and are based
on an insufficient understanding of the relationships between quality and productivity on the one
hand and the use of resources and the sources of costs and revenues on the other. Efforts to raise
quality almost always result in better productivity and efforts to raise productivity can very well
pay off through better quality. However, in order to achieve positive results, managers will have to
rethink the relationship between costs and revenues, productivity and quality (see Chapters 1 and 8).
If managers are able to define these relationships, they are probably able to exploit their strengths as
far as production effectiveness, employee satisfaction and profitability are concerned.
BETTER QUALITY, HIGHER CUSTOMER RETENTION RATES, MORE PROFITS 159
Q U A L I T Y D O E S N O T C O S T: A L A C K O F
QUALITY DOES
The belief that high quality implies higher costs is not based on fact. Normally, it is the other way
around. Frequently the more important issue is that a lack of quality costs money. Philip Crosby
coined the phrase ‘quality is free’.2 He based his statement on the notion that firms spend more
than 20% of their sales revenue doing things wrong and then having to correct these mistakes.
These are facts from manufacturing. However, service organizations are probably no better. On the
contrary, it has been suggested that up to 35% of their operating costs may be due to a lack of quality,
having to repeat tasks and correct errors. This, of course, follows from the fact that service quality is
a complicated phenomenon and that it is more difficult to monitor and assure quality in service than
in manufacturing. Furthermore, manufacturing has a long history of quality control research and a
whole collection of quality monitoring techniques, quality assurance and total quality management
at its service.
Hence, improving quality by creating customer-oriented and foolproof systems and by training
employees well is a way not to increase costs, but to get rid of unnecessary costs. If we assume that
35% of operating costs are unnecessary, because they are due to bad quality, quality improvement
by removing these quality problems would save 35% of these costs. All of this would be visible on
the bottom line. However, such an improvement would not go unnoticed by the market, and new
business and additional revenues could be expected to be achieved. This would add even more to
the bottom line, thus profits would be boosted by more than 35% of the original operating costs.
Furthermore, if the firm spends this 35% on further improving quality, operating costs would remain
on the same level as they were originally. This quality improvement process could be expected to
bring in more business and perhaps, even probably, enable the firm to get a better price for its service.
The effects on the bottom line are obvious.
B E T T E R Q U A L I T Y, H I G H E R C U S T O M E R
R E T E N T I O N R AT E S , M O R E P R O F I T S
Service is inherently relational. This does not mean that some service providers could not develop
their marketing strategy in a transaction-oriented fashion. However, there is always the possibility
for the development of customer relationships in service. Relationships between service providers
and consumers and users of services normally continue over time. Hence, we start our analysis of
return on service and relationships by discussing the effects of good service on customer retention
and loyalty,3 and the economic consequences of longer customer relationships.
What ‘good service’ means is a strategic issue. In many cases it means that the service is excellent
in comparison with competing offerings and meets customers’ expectations and other comparison
standards. If this is the case, good service means that the service is genuinely good. However, in other
cases it may mean a lower level of service, because the target group of customers may be looking for a
lower quality level, for example because the correspondingly lower price better fits their budget. Then
the lower level is ‘good service’ for those customers. For example, a couple spending the evening at a
gourmet restaurant consider the quality of the restaurant service good if it meets their expectations of
good food, attentive waiting staff, and so on. However, if the performance of a fast-food restaurant
meets the different expectations they have when visiting such a restaurant, in a relative sense they
will consider the quality of the service equally good.
T H E R E L AT I O N S H I P B E T W E E N C U S T O M E R
S AT I S FA C T I O N A N D R E P U R C H A S E S A N D
L O YA LT Y
Even though a positive relationship between satisfaction with service and goods quality, on the one
hand, and customers’ willingness to continue the relationship or make repurchases, on the other,
seems to exist, it is important to realize that this function is normally far from linear. Experiences
from Xerox reported by Hart and Johnson4 (see Figure 6.1) clearly indicate that there is a substantial
zone of indifference including customers who claim that they are everything from ‘so-so satisfied’ to
‘satisfied’. Only the ‘very satisfied’ customers show a high repurchasing rate and a high propensity
for positive word of mouth. As the figure shows, the retention curve rises steeply at this point of the
satisfaction scale. Evidence from other types of both goods and services supports these observations.
Two obvious conclusions can be drawn from this:
● It is not enough to offer the quality of service that keeps customers in this zone of indifference as far as
repurchasing behaviour is concerned; customers have to be offered a service offering which makes
them very satisfied before they will repurchase. Therefore it is important to surprise customers in
such a way that their quality perception is satisfactory enough to reinforce loyalty and make them
repurchase.
● When reporting results from customer satisfaction and service quality studies, it is extremely impor-
tant to keep those respondents who report that they are very satisfied apart from those who say
that they are simply satisfied. The repurchasing and word-of-mouth behaviour, and therefore also
100 Unpaid salespeople

Repurchase intent and willingness
80
to recommend (%)
60
40
Zone of indifference
20
0
1 2 3 4 5
Terrorists Customer satisfaction
F I G U R E 6.1
The satisfaction/repurchase function.
Source: Hart, C.W. & Johnson, M.D., Growing the trust
relationship. Marketing Management, American Marketing
Association, Spring; 1999: p. 9. Reproduced by permission of
the American Marketing Association.
THE RELATIONSHIP BETWEEN CUSTOMER LOYALTY AND PROFITABILITY 161
the actions required to ensure enduring customer relationships, are totally different for these two
groups of customers (normally, the responses of these two categories of customers are reported
jointly in the ‘satisfied or very satisfied’ category. By so doing, the firm loses vital information
needed to create profitable customer relationships.)
Hart and Johnson5 draw the conclusion that a firm has to go beyond what normally can be described
as good service to create loyalty. The firm must serve customers in such a way that they realize that
the firm can be trusted in every respect at all times. This means that the firms should deliver consistently
good service.
Another interesting conclusion that can be drawn from Figure 6.1 is the effect of customer satisfac-
tion on word-of-mouth communication. Only very satisfied customers will engage in any substantial
positive word-of-mouth endorsements and thus become ‘unpaid’ marketing and sales persons for the
firm. On the other hand, very unsatisfied customers can be expected to create substantial negative
word of mouth, and thus become ‘terrorists’ reinforcing negative but not totally unsatisfactory expe-
riences by other customers and scaring away potential new customers. The development of social
media makes such effects much more far-reaching than ever before.
Furthermore, there are indications that firms gain a larger share of customers’ spending in their
category if the customers are very satisfied with the service they have experienced than if the customers
are less satisfied.6
In conclusion, there are a number of reasons why a firm should strive to provide consistently
impeccable service.
T H E R E L AT I O N S H I P B E T W E E N C U S T O M E R
L O YA LT Y A N D P R O F I TA B I L I T Y
The largest published study of higher customer retention levels following better service quality and
how this affects profit is one by Bain & Company. Although it is not new it is still very relevant. In this
US study several service industries were studied. The effects on profits through improved customer
retention and hence longer relationships with customers are astonishing. It was found, among other
things, that the average profit per customer grew constantly over the first five years.
The reasons why the profit per customer increases over time are illustrated schematically in
Figure 6.2. The economic effect of customer loyalty can be attributed to the following factors: acqui-
sition costs, revenue growth, cost savings, referrals and price premiums.7
The vertical axis in the figure does not have a scale, because the effects on profits of the various
factors differ from industry to industry, firm to firm, and even customer to customer. However, the
height of the sections gives some general indications of the relative importance of these factors. Every
firm should, however, take the time and trouble to study its accounting and reporting system in order
to make the necessary calculations of the influence on total profits per customer of these and possibly
other profit drivers. Because in most firms the figures needed are not readily available, this can be a
time-consuming task. Revenues and costs are usually registered on a per product basis, not on a per
customer basis. These factors are discussed below.
Acquisition costs. The active acquisition of new customers using sales and external marketing efforts
is required in most businesses. As a rule of thumb, getting a new customer costs five to six times
more than it costs on top of normal service operations (sales calls, providing information about new
goods or services, etc.) to keep an existing satisfied customer. In other words, to keep an existing
customer it costs only 15 to 20% of what has to be invested in getting a new customer. The economics
Price premium
Referrals
Annual customer profit

Cost savings
Revenue growth
Base profit
0
Acquisition cost
0 1 2 3 4 5 6 7
Year
F I G U R E 6.2
The profitability effect of loyal customers.
Source: Reichheld, F.F., The Loyalty Effect. The Hidden Forces
Behind Growth, Profits, and Lasting Value. Boston, MA: Harvard
Business School Press, 1996. Reproduced by permission of
Harvard Business Review.
of customer loyalty are very apparent. These figures of course vary from industry to industry, and
situation to situation, but are nevertheless remarkable. In Figure 6.2 the acquisition cost per customer
appears as a negative profit effect in the year before the customer relationship starts.
Base profit. In many service industries the price paid by customers during the first year or even first
few years does not cover the costs of producing the service. In other cases the price covers costs and
produces a profit per customer from the first year. This is the base profit in the figure. After some
years, depending on the industry and other factors, the accumulated base profits have covered the
initial marketing costs of getting the customer.
Revenue growth. In most situations a long-standing customer will bring more business to the same
service provider. This means that, on average, customers can be expected to contribute more to a
firm’s profits as the relationship grows. The annual revenue per customer increases over the years,
thus contributing to growing profits.
Cost savings. As the service provider and the customer learn about each other, about what to expect
and how to perform, service processes will be smoother and take less time, and fewer mistakes that
have to be corrected will be made. Thus, the average operating costs per customer will decrease,
which in turn has a positive impact on profits.
Referrals. Long-standing and satisfied customers will create positive word-of-mouth communica-
tion and recommend the supplier or service provider to friends, neighbours, business associates and
others. The customer takes over the role as marketer without any additional costs to the firm. A
large number of businesses, especially smaller ones, thrive on good referrals by satisfied customers. In
CUSTOMER SACRIFICE: THE COST OF BEING A CUSTOMER 163
this way new customers are brought in with lower than normal acquisition costs, which has an extra
favourable effect on profits.
Premium price. In many business, old customers pay a higher price than newcomers. Discounts that
were initially given to new customers do not exist for older customers. In many cases introductory
offers decrease prices for new customers. However, the main reason for the premium price effect can
be attributed to the fact that long-standing customers realize the value provided by the firm and make
cost savings by using the service of a service provider they know well. We shall return to this later in
the context of relationship costs. In summary, this value offsets the negative effect of higher prices.
Of course, it is not always the case that old customers pay a premium price. Sometimes long-lasting
relationships have given the customer a bargaining position based on power or social relationships
which keeps prices down. If this happens, a negative, profit-eroding effect occurs.
In the study by Bain & Company the economic effects of higher retention rates were calculated in
the service industries studied. These results were also quite astonishing. In general, it was found that
as the customer defection rate falls (i.e. as customer retention grows), profits increase. The variation
between the industries in the study was remarkable. In retail banking at the time of the study oper-
ations profits improved by 85% as the customer defection rate decreased by five percentage points.
Over the service industries in the study the impact on the economic result of a decrease of the defec-
tion rate of this magnitude varied between 25% and 85%.8
Again, the economics of customer loyalty are quite obvious. However, almost always separate stud-
ies of the revenue and cost flows are required, because accounting systems seldom produce the infor-
mation needed for such calculations. The growth in customer retention rates and customer loyalty is
probably not just caused by improved service. However, it is apparent that customer satisfaction with
service quality is a central factor here. On the other hand, it is also clear that satisfaction as such does
not necessarily create loyal customers. The sacrifice made by customers, in terms of price, comfort,
timeliness and relationship costs, which may follow from these and other factors, as well as the value
customers feel they get, are critical variables affecting loyalty and the length of customer relationships.
In the next sections we shall first discuss how to analyse customer sacrifice and then the customer-
perceived value of service in a relationship.
CUSTOMER SACRIFICE: THE COST OF BEING

A CUSTOMER
The view that improved service does not pay off for the service provider or for the customer is
expressed quite regularly, as we have seen above. Nevertheless, as a general rule this is not true.
Except for special cases, for example with highly transaction-oriented customers, there is always
an opportunity to increase customer value and strengthen relationships with customers, if the service
provider understands the nature of service competition and the cost consequences for customers of good and bad
service. One has to realize that bad service creates costs for customers, and good service makes such
costs decrease or eliminates them.
The usual problem is that marketers, salespeople and buyers think in terms of short-term exchanges
or transactions, and they are therefore preoccupied with short-term sacrifice, or the price to be paid.
Because the accounting systems of both the seller and the buyer are normally geared towards regis-
tering transactions and not towards following up on costs and revenues caused by suppliers, service
providers and customers, neither party realizes the long-term cost effects of bad service; nor do they
see the long-term gains of good service. Unnecessary costs caused by bad service and the cost gains
of good service occur for the customer as well as for the service provider. In this section we shall
concentrate on the effects on customers. Later on, effects on the supplier or service provider will be
discussed.
Price is only a part of the total long-term cost of being a customer of a given service provider. Price,
including discounts and terms of payment, is a cost component which occurs in the short run, whereas other
cost components occur in the long run as the relationship unfolds. Thus, the total long-term customer sacrifice
consists of price and additional costs occurring in the relationship. These additional costs are called
relationship costs.9 Hence, it is important to make a distinction between short-term and long-term
sacrifice:
● Short-term customer sacrifice: price.

● Total long-term customer sacrifice: price, relationship costs.
Relationship costs are the additional costs on top of price that occur for a customer due to the fact that
he has purchased something from a given supplier or service firm and entered into a relationship with
this organization. The relationship costs are of three different types:10
1. Direct relationship costs.

2. Indirect relationship costs.
3. Psychological costs.
In the following sections these types of relationship costs will be discussed in more detail. Such costs
occur in relationships with individual consumers and households as well as in business-to-business
relationships. It may be easier to calculate them in the latter type of relationship, but they exist for
individual consumers too.
D I R E C T R E L AT I O N S H I P C O S T S
Direct relationship costs are costs that depend on the processes that the customer has to maintain because
of the solution offered by the supplier. Such costs consist, for example, of investments in office space,
additional equipment, personnel and software and depreciation costs over time. Direct relationship
costs can be calculated either as gross or net costs. Gross direct costs are the total costs if the customer
decides to purchase the solution offered. Net direct costs are any additional costs which are less than
optimal from the customer’s point of view. Both ways of calculating this cost component give the
same result. A net calculation may be more useful when comparing two or more competing offerings,
whereas a gross calculation gives more appropriate information when following up on the total long-
term sacrifice in a given relationship with a supplier or service provider.
For example, Xerox once dominated the market in photocopying machines, and offered a service
system that was efficient from Xerox’s perspective. However, as the Japanese started to introduce
photocopying machines that required little servicing, a new standard for optimal service costs was
established. Any supplier who provided a solution that required higher service costs caused unneces-
sary direct relationship costs for the customer. Now, with digitized and computerized office systems
there is a move back to favouring Xerox. A classic example of how to manage direct relationship
costs is just-in-time logistics. By offering a delivery system that enables a customer to keep a min-
imum number of items in stock, a supplier can minimize the customer’s need to keep capital tied
up in inventories and also make it possible for the customer to invest in smaller and probably less
expensive facilities. All this decreases the direct relationship costs of being a customer of this particular
PSYCHOLOGICAL COSTS 165
supplier, and that way the total long-term customer sacrifice also decreases. To take another example,
in a relationship where an advertising agency requires the customer to add an additional person to its
marketing staff, the extra cost for this person is a direct relationship cost.
A competitor who can offer a just-in-time delivery system that enables the customer to keep an
even smaller inventory buffer, or can offer the same advertising services but without requiring the
customer to tie up one person in the relationship, helps customers to decrease their long-term direct
costs. If everything else is equal, these competing offerings mean more value for customers, because
they involve less long-term sacrifice.
I N D I R E C T R E L AT I O N S H I P C O S T S
Indirect relationship costs caused by a relationship with a given supplier or service firm are due to the
amount of time and resources that a customer has to devote to maintaining the relationship in case
it does not function as it should. Hence, they are unexpected and unwanted costs. Standstill costs or
other quality costs that follow from delays or low-quality repair, maintenance and delivery services
or from goods and service that do not function as they are supposed to also cause indirect relationship
costs. Complaints always cause such costs. On the other hand, a quick and well-managed service
recovery is considered value-supporting by customers, because it keeps down indirect relationship
costs caused by a service failure, mistake or other quality problem.
The less a supplier can be trusted to keep delivery times, or the more problems there are with
maintenance service, invoices and other documents, the more resources the customers have to devote
to the relationship. Documents have to be checked, re-checked, phone calls have to be made, e-mails
have to be sent, complaints have to be filed and followed up, more checking is required and more
phone calls and e-mails are needed, and so on. These costs are indirect relationship costs, because they
are not directly due to the flow of the relationship, but to unnecessary and unwanted deviations from
the intended processes.
The additional costs caused by this are often significant. Sometimes one or more employees have
to spend a considerable amount of time taking care of problems like these, which are all caused by
an unreliable supplier or service provider. Temporary personnel may have to be hired or additional
personnel added. However, far too often the reasons for these costs go unnoticed by management.
The internal report systems seldom show that such additional costs are caused by the poor service
of a given supplier; hence, management is not alerted. Another type of indirect relationship cost is
standstill costs, and the costs of lost business due to the poor service of a supplier; for example, late
deliveries. Such costs can grow very high.
A competitor who provides higher quality service to the buyer creates less pressure, fewer problems
and also minimizes standstill costs and other quality costs. Thus, the indirect relationship costs are
lower. A company that can demonstrate to the customer that it can provide a service offering at such
a quality level that indirect relationship costs are kept to a minimum will be able to show the buyer
that in the long run it can support more value for the customer.
PSYCHOLOGICAL COSTS
Psychological costs are caused when the staff of a firm feel that they cannot trust a supplier or service
provider. They worry about the relationship and feel that they have to take action to ensure accept-
able service. They feel insecure and lack control. Their mental capacity to perform other tasks is
constrained to some extent. They feel that they have to use some of their time to check that every-
thing is in order with the supplier, that deliveries will not be delayed, that maintenance will take place
as scheduled, and that complaints will be attended to in a timely and appropriate way. As a result,
decisions are perhaps not taken as promptly as they should be or implemented as swiftly as intended,
some tasks may be postponed or even forgotten, etc. This may again lead to indirect relationship costs
in the form of increasing overtime, the need for part-time manpower, lost business opportunities, etc.
Psychological relationship costs for a customer are not always measurable, but they are always felt by
those who suffer from having to cope with suppliers or service providers who provide bad service,
and they often create unnecessary additional measurable indirect relationship costs.
As general guidelines of how to handle the various kinds of relationship costs, the following advice
can be used:
● Direct relationship costs: minimize investments and out-of-pockets costs required by the
relationship.
● Indirect relationship costs: eliminate unexpected and unwanted costs occurring due to mistakes and
quality problems, lack of information and service failures.
● Psychological costs: avoid causing a feeling of lack of control and other reasons for being worried.
P R I C E , R E L AT I O N S H I P C O S T S A N D T O TA L
LONG-TERM COSTS AND SACRIFICE
Relationship costs – direct, indirect and psychological – are equally as important as the price paid for
the buyer. Frequently, firms do not realize this and focus on the singular transactions and the cost of
singular exchanges. The price becomes the only cost component they consider. However, price is
only the short-term sacrifice for the customer, whereas what is interesting for a customer from a business
point of view should be the long-term sacrifice:
Short-term sacrifice = Price paid (including discounts and terms)
Long-term sacrifice = Price paid + Relationship costs
Because of relationship costs, direct as well as indirect costs, the long-term sacrifice easily grows
even far above the short-term sacrifice. To see this one has to take a long-term view of total costs. In
Figure 6.3 the formation of total costs in a relationship is illustrated schematically.
The total cost or sacrifice over time may be much higher than price, as is indicated in the figure.
Regardless of how high a proportion of total long-term cost is relationship cost, using price as the
main or sole criterion for purchasing decisions is always misleading. When a buyer is evaluating the
value of competing offerings, in addition to price the net present value of relationship costs that can be
expected to occur over time should be calculated. As is illustrated in Figure 6.4, from a long-term
perspective a lower price offering may well lead to higher total long-term costs than a higher-priced
product. This should not come as a surprise, because a lower level of service is probably the reason
why one competitor is able to offer a lower price. In the end this lower service level will, however,
cause added relationship costs. Moreover, additional service that the customer may need over time is
normally not included in the price. Hence, the customer will have to pay extra for such service.
The seller should always calculate what level of relationship cost, both direct and indirect and also
psychological, can be expected to occur for a potential customer, to put price in a long-term cost
perspective. This is a way of not only helping buyers to make better decisions, but also of justifying
a higher price for better service. By carrying out such long-term cost calculations the seller can put a
value on the service he provides, which the buyer can understand and appreciate.
PRICE, RELATIONSHIP COSTS AND TOTAL LONG-TERM COSTS AND SACRIFICE 167
Relationship costs for the customer:

– direct costs
– indirect costs
– psychological costs
Total cost
Net price
F I G U R E 6.3
Relationship costs for the customer and their effect on total costs.
Source: Grönroos, C., Facing the challenge of service competition: the
economies of service. In Kunst, P. & Lemmink, J. (eds), Quality
Management in Services. Maastricht, the Netherlands: Van Gorcum,
1992, p. 133.
Price Total cost

tc2
Long-term
cost
advantage
tc1
Price p1
advantage p2
Time
p1 and p2 denote short-term prices of two competing offerings.

tc1 and tc2 denote total long-term costs of these offerings.
(tc2-p2) and (tc1-p1) denote the total relationship costs over time
of the two offerings.
F I G U R E 6.4
Price, relationship costs and total long-term costs of two offerings.
Going beyond costs and also taking into account the effect of an offering on a customer’s revenue-
generation capabilities we come to what is really interesting from a business point of view for both
the seller and the buyer, namely value for customers. In a later section of this chapter customer value
will be discussed in some detail.
T H E C O S T O F B A D S E RV I C E : L O S T P R E M I U M
P R I C I N G O P P O RT U N I T I E S
If a firm offers low-quality service, or makes an offering where a physical product constitutes the core
with additional low-quality service such as late deliveries, slow recovery of problems and unreliable
maintenance processes, unnecessary relationship costs will be incurred by the customer. However, as
is illustrated in Figure 6.5, if a firm’s service is high quality, relationship costs for the customer will
correspondingly be low.
The less a potential customer thinks in terms of relationship costs and long-term sacrifice, the more
important price will be as a decision-making criterion. However, there are firms who claim that they
are able to price up to 10% and even 20% above market price. The reason for this is that these firms
understand their customers and have been able to deliver an offering which keeps relationship costs
at a minimum. Their service lowers any extra long-term costs of being a customer of this particular
supplier or service provider. This provides the seller with a well-founded argument for selling his
service at a higher price. The argument for a premium price is based on hard facts, i.e. cost savings.
The trick is to learn how to calculate these costs and to teach customers to look for the impact of
relationship costs on total long-term costs. The lower the relationship costs a firm can guarantee for
a buyer, compared with competitors, the more opportunities exist for premium pricing.
If the additional long-term costs of bad service are not perceived by customers in a concrete way
(based on facts, references and calculations) it will be difficult to make them pay for better service. In
such cases, a lot of opportunities to earn money both for the buyer and for the seller are lost.
Relationship costs Service quality

HIGH HIGH
LOW LOW
F I G U R E 6.5
The relationship between service quality and relationship costs.
RELATIONSHIP COSTS FOR THE SUPPLIER 169
R E L AT I O N S H I P C O S T S F O R T H E S U P P L I E R
It is not only for the customer that poor service leads to unnecessary extra costs over time. As illus-
trated in Figure 6.6, the supplier receives a net price, after taking into account any discounts and terms
of payment. According to the accounting systems of most firms, the margin between this net price
and the cost of producing the solution for the customer is the direct economic result of the relation-
ship. However, this is how it looks from a short-term, product-focused and transaction-oriented
perspective.
From a customer relationship economics perspective the production costs, schematically illustrated
in the lower part of Figure 6.6, are imaginary. The real cost of servicing a customer is much higher.
To obtain the real cost of maintaining the relationship with a given customer, all other costs caused
by the way the customer is served have to be added. Relationship costs occur for the supplier or
service provider as well, and these costs decrease the gross margin between net price and production
cost. If they add too much to production costs, what should be a good profit unexpectedly turns into
a negative net profit. Because of the accounting systems used in many firms, management may not
understand what causes this decrease in profit level.
Relationship costs for the supplier can be divided into the same types of costs as relationship costs
for the customer. There are the direct relationship costs of maintaining a customer relationship caused,
for example, by delivery systems, invoicing, complaints handling, technical service, customer training,
etc., which the supplier uses. The more complicated, outdated and inefficient systems are and the
more inappropriate the tools and equipment used, the higher the level of direct relationship costs
will be for the supplier. Interestingly, the more inefficient, inappropriate and bureaucratic systems the
supplier uses, the lower the level of service quality will be. Of course, the reverse also holds true.
Net margin
Gross
Relationship costs for the supplier:
margin
– direct costs
– indirect costs
– psychological costs
Net price
Production costs
F I G U R E 6.6
Relationship costs for the supplier and their profit-destroying effects.
Source: Grönroos, C. (1992) Facing the challenge of service competition: the
economies of service. In Kunst, P. & Lemmink, J. (eds), Quality Management in
Services. Maastricht, the Netherlands: Van Gorcum, 1992, p. 133.
There are also indirect relationship costs for the supplier in a relationship. Mistakes have to be cor-
rected, complaints have to be attended to, inaccurate invoices have to be altered, problems have to
be looked into, phone calls and e-mails have to be responded to, and so on. This leads to additional
workload, the need for temporary employees, and possibly the need to employ more personnel, etc.
All these costs are unnecessary and result from less than good service. These costs are also not easily
detected and can be attributed to the fact that the firm does not take good care of its customers. How-
ever, firms should always have an account for the costs of bad service rendered, preferably specified per customer
or at least customer group. If this account grows, management should perceive this as a warning signal.
Finally, there are, of course, also psychological costs involved.
E X C E L L E N T S E RV I C E PAY S O F F T W I C E : F O R
B O T H PA RT I E S
The analysis of relationship costs for customers, suppliers and service providers clearly reveals that
bad service causes problems and unnecessary costs for both parties. Moreover, it shows that by and
large it is the same inefficient and untrustworthy service systems that lead to complicated procedures,
service failures, quality problems and complaints, thus causing these extra and unnecessary costs.
Improving service quality is, therefore, a win–win strategy in a customer relationship. Both parties will
gain something to improve their profit margin. Good service pays off twice: for the supplier as well as the
customer. This is illustrated in Table 6.1.
The supplier or service provider has an opportunity to raise prices above market price, and at the
same time has considerable cost-saving opportunities, because improved service decreases additional
relationship costs for the supplier. On the other hand, the customer can avoid substantial relationship
costs if the service rendered is good. Moreover, if customers are satisfied with a given supplier or
service provider and feel that they can trust the firm, and perceive that they get good value in the
relationship, there is no need to look for alternative suppliers. Thus, the considerable search costs
involved in changing supplier and start-up costs resulting from a new business relationship can be
avoided. This does not, of course, mean that customers sometimes do not want to check alternative
TA B L E 6.1
Excellent service pays off twice: for both parties.
Benefits resulting from good service
For the supplier/service provider For the customer
1. Opportunities to raise prices above the 1. Decreasing costs of maintaining the

market price. relationship with the supplier.
2. Decreasing production costs. 2. No search or start-up costs of finding new
supplier/service provider.
Source: Grönroos, C., Facing the challenge of service competition: the economies of service. In Kunst, P. & Lemmink, J. (eds),
Quality Management in Services. Maastricht, the Netherlands: Van Gorcum Assen, 1992, p. 139. Reproduced by permission
of Van Gorcum, the Netherlands.
CUSTOMER PERCEIVED VALUE IN RELATIONSHIPS 171
sources of goods and services, for example just out of interest or to check that their service supplier
is keeping up-to-date with new technology. However, in a well-functioning relationship a trusted
supplier or service provider frequently has the opportunity to upgrade its solutions to meet or exceed
the standard that competitors are offering.
C U S T O M E R P E R C E I V E D VA L U E I N
Previous chapters discussed the perceived service quality concept and in this chapter customer per-
ceived sacrifices have been analysed in terms of short-term sacrifice (price) and long-term sacrifice
(relationship cost). In this and the next section we shall take the discussion one step further and anal-
yse how customers perceive value in a relationship. As service is inherently relational, the value of a
service offering will be discussed from a relationship perspective.11 Such service offerings may include
a service or a physical product as its core.
The starting point for understanding value is the observation that value is created and perceived
by customers in their everyday activities and processes and in interactions with suppliers or service
providers when consuming or making use of services, goods, information, personal contacts, recovery
and other elements of ongoing relationships. Value emerges in the customer’s processes. Unlike nor-
mal management jargon and the traditional view in the management and marketing literature, value
is not produced in a factory or in the back office of a service firm.12 According to the conventional,
production-oriented view, value for customers is embedded in the goods or services delivered to
customers, and it materializes as value-in-exchange at the time of purchase. However, in reality there
is no real value before the customer can make use of a product or a service. Only then value emerges
as value-in-use for the customer in the customer’s processes.13 The role of the firm is to support a
customer’s value creation.14 The firm provides the customer with resources and service processes,
where interactions between the firm and the customer occur. In this way, on top of the customer’s
creation of value, during direct interactions the firm also co-creates value with its customer.15 All this
makes value a complicated concept to understand and manage. However, it is a concept that cannot
be ignored.16 Here approaches to understanding customer perceived value in relationships will be
discussed. Based on these approaches, value-destroying elements in a relationship can be detected
and eliminated, value-enhancing elements can be spotted and reinforced, and ways of calculating
perceived value can be developed.
First we present a ground model of customer perceived value:
What (Technical quality; process) + How (Functional quality; outcome)
(0) CPV0 =
Price + Relationships costs (Direct + Indirect + Psychological)
The technical quality outcome (what) provided by a firm combined with the functional quality
(how), i.e. how the service and relationship process contributes to the support to the customer’s
processes, are related to the price paid and the additional relationship costs accruing over a given
period of time. Sometimes all or parts of the customer perceived value can be calculated in monetary
terms, sometimes it is only perceived in some way. In business-to-business relationships monetary
value can always, in principle, be calculated, whereas it is mostly, but not always only, perceived by
individual consumers and households.
In addition, customer perceived value (CPV) can be described by the following five equations:17
Episode benefits + Relationship benefits

(1) CPV1 =
Episode sacrifice + Relationship sacrifice
(2) CPV2 = Transaction value + or − Relationship value
Core solution + Additional services
(3) CPV3 =
Price + Relationship costs
(4) CPV4 = Core value + or − Additional value
Long-term revenue-generation support
(5) CPV5 =
Price + Relationship costs
The five equations above describe the same value concept as the general model CPV0 from varying
angles. By taking them all into account, one finds a deeper perception of how customers perceive
value, which factors contribute to this value, and how value can be managed.
The first equation (CPV1) demonstrates that value is created by elements in singular episodes or
service encounters as well as by perceptions of the relationship itself. This means that inherently value-
creating elements exist in a relationship. Such relationship benefits may be a feeling of trust in a supplier
or service provider, or social and technological bonds that have been established between the parties.
The level of such benefits can, of course, be high or low, or somewhere in between, and may vary
over time. The point is that such relationship benefits are perceived as true value-creating benefits and
not as feelings. In a similar way, relationship sacrifice exists in an ongoing relationship. The customer
realizes that some sacrifices are related to a given relationship. For example, being the customer of a
certain bank may yield a lower rate of interest on deposits, but the customer may accept this because
he trusts the bank and likes the personal attention paid to him (relationship benefits).
Every episode, service encounter or purchase of a physical product produces a benefit (episode
benefit), and requires a sacrifice (episode sacrifice), normally in the form of a price to pay. However, the
important thing here is that the value of one service encounter cannot be judged solely on the benefit
and sacrifice related to that episode. The benefits and sacrifice involved in the whole relationship also
contribute to the total perceived customer value.
The second equation (CPV2) illustrates the same thing as the previous one. The episode benefits
and sacrifices constitute a value emerging from the transaction of the core solution – a physical product
or a core service – whereas the relationship benefits and sacrifices constitute the value that emerges
from the existence of the relationship itself. Hence, the total perceived value has a transaction value
component and a relationship value component.
The third equation (CPV3) takes a different approach. Benefits for a customer are divided into two
parts, the benefit of a core solution and of additional services. The core solution (a financial transaction,
a production machine, or transportation from one place to another) is perceived on a per episode
level. In quality terms, the core solution creates the perception of the outcome-related technical quality
or what dimension. Additional services may be related to the episode, such as personal attention,
deliveries or meals served during transportation. They may also be part of the continued relationship,
such as information support, social calls, or recovery of quality problems or other types of mistakes.
In quality terms, such additional services are perceived as the process-related functional quality or how
dimension.
The denominator is divided into a price component, which is perceived in the short term, and a
relationship cost component, which emerges over time as the relationship develops. The sum of price,
VALUE AND THE MANAGEMENT OF VALUE DESTROYERS 173
including discounts and terms of payment, and relationship costs constitutes the total long-term costs
or sacrifice in the relationship, and thus equals the sum of episode and relationship sacrifice (see
CPV1).
Customer-perceived value can, of course, be improved by adding benefits; that is, by increasing
the nominator of the equation. By providing a better core solution or new additional service, such as
consulting services, a firm can improve its value perception in an ongoing customer relationship.18
However, it is equally important, and sometimes more important, to look at the denominator of
the equation (CPV3). By decreasing the sacrifice perceived by a customer, the perceived value also
improves.19 The interesting aspect of decreasing sacrifice is not related to the price component, which
should not be lowered, but to the relationship cost component of the equation. By making it easier
and more cost-effective for a customer to be involved with a supplier or service provider, it can
also create a positive effect on customer perceived value. This kind of effect is often perceived in a
favourable way by customers. In the next section we discuss this issue further in the context of the
fourth customer-perceived value equation (CPV4).
The fifth equation (CPV5) is actually the same as the third one (CPV3). It indicates the economic
effect of the total offering (core solution plus additional services), which should be calculated as the
net present value of the total revenue-generating support over time attributable to a solution divided by
the long-term sacrifice to get this revenue-generation support. From a business point of view this is
the most important calculation of value for the customer. However, this requires that the level of
revenues can be assessed or at least estimated over a relevant period of time, and that both direct and
indirect relationship costs over the same period of time can be calculated at least in an approximate
manner.
VA L U E A N D T H E M A N A G E M E N T O F VA L U E
DESTROYERS
The fourth equation (CPV4) describing customer perceived value takes yet another approach to the
phenomenon. Here value is divided into a core value part and an additional value part. The core value
means the benefits of a core solution compared with the price paid for that solution. Additional value
is created by additional service in the relationship compared with the relationship costs that occur
over time.
The interesting thing to observe is the fact that the additional value component can be both positive
and negative. (Compare the relationship value component in CPV2.) If it is positive, for example
because of quick delivery, attentive and supportive service employees or smoothly handled service
recovery, it contributes favourably to total perceived value. However, if additional service causes
unnecessary or unexpected relationship costs, the effect of the added value component is negative.
Thus it is not an added value, but a negative value-eroding component.
Negative additional value is created by complicated systems, non-user-friendly technology,
unfriendly or unskilful employees, late deliveries, incorrect invoices, badly handled complaints,
delayed maintenance of equipment, complicated equipment documentation, long queues to be
served, etc. If such contacts and processes in the customer relationships are not managed as service but
as administrative routines, or are focused on as internal efficiency only, their effect on customer-
perceived value is normally destructive. Even an excellent core value is quickly destroyed by late
deliveries, lack of proper support and delayed maintenance, or unfriendly and untrustworthy person-
nel and a lack of interest in service recovery. Elements in customer relationships – additional services
in CPV3 – which are not managed as services for the customers, but as administrative routines or in
some other customer-aversive fashion, may easily become value destroyers. Because they create prob-
lems, a bad impression and unnecessary extra costs for customers, they decrease the value of the core
solution (core value).
‘Adding value’ has been a buzzword in management for a long time. However, firms seem to
have problems in realizing which services are really valuable for customers and add to their perceived
value, i.e. create additional value. ‘Added value’ is almost always treated as something extra or new
that is created for customers.20 However, adding new services to a relationship which already includes
value destroyers does not make much sense, because these value destroyers spoil the core value of
the solution. A much more effective way of adding value for customers is to improve what is already done for
them, instead of creating something new. By turning customer contacts and processes which are treated as
administrative routines, and therefore perhaps create unnecessary and unexpected relationship costs,
into services for customers, by activating hidden services, relationship costs for the customers are elimi-
nated or at least minimized. At the same time the quality of these customer contacts increases. The
additional value component in CPV4 becomes positive and starts to contribute favourably to total
customer perceived value.
Detecting processes and customer contacts in relationships which make the value of the core solu-
tion (core value) deteriorate and taking corrective action are essential management tasks. In this way
customer-perceived value is improved and the customer relationship will be strengthened. When
value destroyers have been removed, if necessary, new value-adding goods or services can be included.
However, at that point such extras will probably not be needed any more. Hence, the trick is not to do
new things for customers, primarily, but to improve what already exists in the customer relationship.
Managers should define value-creating elements in their customer relationships and, based on the
customer perceived value equations discussed in this section, develop models that in monetary terms
represent the worth of the supplier’s or service provider’s offerings to the customers.21 Without such
models it may be difficult, or even impossible, to demonstrate to customers the value of a total service
offering and how it develops over time.
Q U A N T I F Y I N G T H E VA L U E O F A T O TA L S E RV I C E
OFFERING
In order to quantify the value of a total service offering, the various features that distinguish a given
offering from an existing one or from competing alternatives have to be explicitly demonstrated. Such
offering features can be related to goods components, service components, or other components in the
customer relationship, such as hidden services like complaints handling and invoicing. As is illustrated
in Figure 6.7, both revenue and cost benefits as well as customer investments of each feature must be
calculated for a relevant number of time periods (years, months or whatever is most appropriate).
Revenue benefits are sales increases that can be expected to be achieved if a customer chooses the
offering. Cost benefits are cost savings that follow from the choice of the given offering. Both savings
of direct and indirect relationship costs ought to be included and calculated. Customer investments are
additional costs that customers have to accept in order to be able to use the offering. Such investments
are normally direct relationship costs. Cost benefits are direct relationship costs that can be saved
continuously over the whole relationship, whereas customer investments are extra direct costs that
normally occur only at the start of the relationship. As the figure demonstrates, revenue benefits, cost
benefits and customer investments have to be calculated for each offering feature for each time period.
These figures can be calculated based on historical data, sales and revenue forecasts, and calculated
anticipated cost effects of the features included. The total offering benefits for each period can be
QUANTIFYING THE VALUE OF A TOTAL SERVICE OFFERING 175
OFFERING FEATURES YEAR

1 2 3 4 ... n
Feature 1: Revenue benefit
Cost benefit
Investment
Cost benefit
Investment
Cost benefit
Investment
Cost benefit
Investment
Total offering benefits
F I G U R E 6.7
Value quantification of benefits of a total service offering.
derived, and the net present value (NPV) of these total benefits over the whole time span can be
calculated using an appropriate interest rate. The total offering benefits and their NPV offer a strong
argument in planned marketing communication, development of offers and sales negotiations.
Figure 6.8 shows an example of the quantification of the value of a component in ‘Salute’s Salva-
tion’, a manufacturing process over a six-year time period, following the technological upgrading of
a previous component (‘Salute’s Traditional’) where a competitor is offering a similar solution at a
considerably lower price. The values in the figure represent changes from using the old technology.
Three major offering features of ‘Salute’s Salvation’ representing value-creating improvements are
included. Two features are related to the manufacturing process of the customer – Goods feature 1:
Multi-use process component and Service feature 1: Improved maintenance reliability.
One feature of the offering is related to changes in invoicing routines made by the supplier to make
the previously highly internally-focused invoicing procedure a customer-centric service – Service
feature 2: Monthly invoices specified by customer requirements.
The upgraded technology used in ‘Salute’s Salvation’ (Goods feature 1) makes it possible for the
customer to manufacture several grades of its product without changing the component (the multi-
use feature). This means that downtime decreases substantially, which can be forecasted to result in
additional annual sales and revenues of 30 (annual revenue benefit in a currency and magnitude of the
reader’s choice) over the six-year period (or any other relevant time span and scale). The upgraded
technology also decreases costs for changing the component whenever a new product grade is man-
ufactured in the process (thus diminishing direct relationship costs). The estimated annual cost savings,
based on previous records, are 20 (annual cost benefit). The new technology requires substantial new
YEAR
OFFERING FEATURES
1 2 3 4 5 6
Goods features Revenue benefit 30 30 30 30 30 30
1. Multi-use Cost benefit 20 20 20 20 20 20
process
component Investment −40 −10 0 0 0 0
Service Revenue benefit 20 20 20 20 20 20
features
1. Improved Cost benefit 15 15 15 15 15 15
maintenance
reliability Investment −25 −10 0 0 0 0
2. Monthly Revenue benefit 0 0 0 0 0 0
customer-
specified Cost benefit 5 5 5 5 5 5
invoices
Investment 0 0 0 0 0 0
Total offering benefits 25 70 90 90 90 90
F I G U R E 6.8
Calculation of relationship benefits of a total service offering including goods, services
and other components.
skills among the employees involved in the process (additional direct relationship costs). Therefore, ini-
tial training costs have to be taken into account: 40 during year 1, 10 during year 2 and 0 during the
following four years (annual customer investments).
The new technology also adds improved maintenance reliability to ‘Salute’s Salvation’ (Service feature 1).
The component requires substantially less maintenance, and the customer can take over follow-up
maintenance. First of all, this means that even less downtime will occur, which will lead to additional
annual sales and revenues of 20 (annual revenue benefit). Furthermore, improved maintenance reliability
means lower maintenance costs (diminishing relationship costs including both a direct and an indirect
portion), calculated to an annual amount of 15 (annual cost benefit). However, the customer will have
to invest initially in employee training so that they learn how to handle maintenance-related tasks.
These sums are calculated as 25 during year 1, 10 during year 2 and 0 thereafter, because newly hired
employees are expected to be trained on the job by more experienced colleagues.
Because the relationship with this customer and others includes the regular shipment of materials
in order to strengthen the relationship with its customers, the supplier has at the same time developed
a new invoicing system, where the invoices are specified according to customer requirements. In
addition, instead of sending an invoice for every shipment, which for larger customers may have
meant several invoices per month, customers are now invoiced monthly only (Service feature 2:
Monthly invoices specified by customer requirements). This is calculated to decrease the customers’
cost of handling documents (annual direct relationship cost) by 5 every year.
When the revenue and cost benefits are added up and the customer investments subtracted, the
total offering benefits for each year can be assessed. In this example they are 25, 70, 90, 90, 90 and
90 for the six years studied. Using the customer’s normally applied interest rate, the NPV of the total
benefits of the three new and distinguishing offering benefits can be calculated.
CUSTOMER RELATIONSHIP PROFITABILITY 177
When this NPV is compared with a traditional solution and with the price savings offered by a
competitor, the value of improved goods and service features can be put into perspective. A com-
peting offering that does not offer these benefits will have to be priced considerably lower. Another
consequence of a value quantification of a total service offering like the one illustrated here is that
one can put a price on services. If the total benefits for the customer can be calculated in this way, it
is possible to argue for the costs of the improved service that enables the customer to enjoy these
benefits. Then a price increase which splits the total savings potential between the supplier and the
customer may make sense.
C U S T O M E R R E L AT I O N S H I P P R O F I TA B I L I T Y
Offering good customer perceived value (as value-in-use) is critical, because good value will have a
positive impact on customer loyalty, which in turn – through lower relationship costs and premium
pricing opportunities – improves a customer’s contribution to the firm’s profit. However, value is,
of course, not the only factor influencing profit. In the following sections a model of customer
relationship profitability will be discussed, in order to help managers understand the mechanisms that
make a customer profitable for a firm.
Analysing the profitability and profit contribution of customers and customer relationships is a
problematic task in most firms, for individuals as well as for customer groups. Accounting systems
are normally based on products, not customers. For a manufacturer of physical goods, it is possible to
calculate revenues, costs, profits and even profitability per product and product group. In a service
firm it is much more difficult to do the same, because of the difficulty of measuring and quantifying
one unit of service. For both manufacturers and service firms it is almost impossible to find out
information about revenues, costs, profits and profitability of customers or customer bases. Separate
analysis almost always has to be done, and even then the information registered by the accounting
system may not be enough.22 The tradition of registering cash flow, revenue and cost per product
comes from the industrial era, when production was the major bottleneck. In the post-industrial era
where customers, and employees, are the bottleneck, customer profitability and registration of cash
flows, revenues and costs per customer is more important for strategic as well as tactical management.
Figure 6.9 illustrates a customer relationship profitability model.23 This model helps managers to see the
mechanisms that make customers more or less profitable. A quick glance at the model demonstrates
that the road from customer perceived value to customer profitability includes a considerable number of
factors, which are areas that have to be planned, managed and monitored if a positive contribution to
profit is to be expected. The model is conceptual, and should help managers realize the complicated
mechanisms that influence customer profitability. Some of the factors, such as perceived sacrifice,
some customer–firm bonds, patronage concentration, relationship length, relationship revenue and
relationship cost can be measured in an objective manner using metric scales. Other factors, such as
perceived quality and value, satisfaction, commitment, some customer–firm bonds and relationship
strength can only be measured using attitudinal scales and/or qualitative data. The objective here is
not, however, to develop a calculation model, but to show the reader what to take into consideration
and how to think.
The customer relationship profitability model includes four links as well as factors that influence these
links. The four links are:
1. From customer perceived value to customer satisfaction.

2. From customer satisfaction to relationship strength.
Customer
Customer Perceived Share of Relationship
perceived
commitment alternatives customer revenue
quality
Customer
Perceived Customer Relationship Relationship
relationship
value satisfaction strength length
profitability
Perceived Critical Episode Relationship

Bonds
sacrifice episodes configuration costs
F I G U R E 6.9
The customer relationship profitability model: the mechanisms
behind profitable customers.
Source: Storbacka, K., Strandvik, T. & Grönroos, C., Managing customer relationship for
profit: the dynamics of relationship quality. International Journal of Service Industry
Management, 5(5); 1994: p. 23. Reproduced by permission of Emerald Insight.
3. From relationship strength to relationship length.

4. From relationship length to customer relationship profitability.
From value to satisfaction. As discussed earlier in this chapter, the total service offering includes core
solutions and additional services. How the quality of this offering is perceived compared with the
perceived sacrifice of customers, determines customers’ perceptions of the value of this offering and, in
ongoing relationships, the value of the relationship. Customers are satisfied with perceived quality
provided that the sacrifice involved – price and relationship costs – is not too high. Hence, perceived
value determines customer satisfaction.
Customer satisfaction has an effect on two factors that have an impact on the next link in the
model. Satisfied customers may become committed to the supplier or service provider, because they
trust the other party or are pleased with the level of sacrifice involved in the relationship. Customer
satisfaction also contributes to the formation of bonds between the two parties. Bonds (which can
be social, cultural, ideological, psychological, knowledge-based, technological, geographical, time-
related, legal or economic) (see the discussion of bonds in Chapter 4) tie customers to the supplier or
service provider, because they make it easier, more comfortable or more economical for the customer
to continue to patronize the same firm.
From satisfaction to relationship strength. The next link shows how satisfaction has a favourable effect
on the strength of a relationship. Strong relationships can make customers loyal. Customer satisfaction
has a direct impact on relationship strength. However, the effect also applies to customer commitments and
bonds between the two parties. The more committed a customer is to a firm and the more bonds that
exist between them, the stronger the relationship will be. The model does not say anything about
what degree of satisfaction and commitment is required to create relationships of a certain strength,
since this varies from case to case. It is important to bear in mind that the degree of satisfaction and
CUSTOMER RELATIONSHIP PROFITABILITY 179
commitment and perceived bonds often may have to be quite high to have a definite impact on
relationship strength. For example, it seems that customers who claim that they are satisfied with a
solution are not always loyal. The percentage of customers who make repeat purchases can be as low
as 30% or even lower. However, customers who claim that they are very satisfied with a solution seem
to have a much stronger relationship with the seller. The repurchase percentage may increase to 80%
or above.
Strong relationships influence the number of alternative solutions that a customer considers. A high
relationship strength can be expected to make the customer think less of alternatives to the existing
relationship, and vice versa. In addition, a strong relationship will probably include fewer critical service
encounters or episodes (unfavourable incidents). First, customers are satisfied with and feel committed
to the relationship, because no or only a few unfavourable incidents have occurred. Second, a strong
relationship can be expected to make critical episodes look less unfavourable, provided that such
incidents do not occur too often.
From relationship strength to relationship length. In the third link, relationship strength has direct and
indirect effects on the length of a relationship. The stronger the relationship, the longer it will last.
Customers do not see incentives to stop doing business with the same supplier or service provider.
At the same time, a strong relationship makes customers perceive that fewer alternatives exist, and this
lack of alternatives has a positive effect on the length of a relationship. Also, a lack of perceived critical
episodes has a similar influence.
Longer relationships can be expected to have a favourable effect on two factors, which are critical
for customers’ contribution to profit. In continuing relationships, where customers are satisfied and
feel strong ties to the other party, they can be expected to purchase more from this firm. A patronage
concentration effect thus occurs. The supplier or service provider gets a ‘larger share of the customer’s
wallet’. In ongoing relationships both parties also learn how to adjust to each other and how to
collaborate so that the customer uses the offering in a more effective and personalized way. Fewer
mistakes are made, so less recovery is needed. A more cost-efficient episode configuration should develop.
Moreover, when there is a trusting enduring relationship, the firm can more easily suggest new ways
of producing and using a service, moving to, for example, less expensive Internet-based contacts for
information and payments. Hence, the service can be produced in a way that ties up less expensive
resources without a perceived negative effect on quality and value.
From relationship length to relationship profitability. The final link shows how the length of a relationship
influences the profitability of customer relationships. The length of a relationship by itself has a positive
effect on profit, because costs of customer acquisition can be minimized and in many cases opportunities
exist for premium pricing. A higher patronage concentration has a positive effect on the revenue streams
in the relationship with any given customer. In addition, a more cost-efficient episode configuration,
where unnecessary elements in relationships, such as answering customer questions and recovering
service failures, can be avoided, and less expensive ways of performing a service can be introduced
and accepted by customers, has a positive effect on relationship costs.
Hence, a stronger relationship can be expected to directly influence customer relationship prof-
itability, and does this indirectly through improved revenue streams, higher relationship revenue, and
more cost-efficient service processes and lower relationship costs.
If all favourable effects implied by the model occur, higher perceived service quality compared
with customer sacrifice should lead to improved profitability in customer relationships. However,
the links are not totally clear-cut; factors external to the model may influence some of the links or
factors in an unexpected manner. A competitor who introduces a solution, for example, based on
new technology, or who aggressively promotes a low price may change the links between the factors
in the model. For example, a new much lower price option may make customers perceive episodes
in existing relationships in a negative sense, because price may suddenly have become an issue. Or
new technology offered by a competitor may untie a technology-based bond. In both cases, a new
alternative may suddenly be considered realistic.
Managers must always follow up customer relationships, on individual relationship levels where
possible, to monitor how the mechanisms in the model function. What can be measured using hard
data should be measured. This requires that accounting systems are adjusted so that data on costs and
revenues are available at a customer- or customer-base level. Factors that can be measured only by
attitudinal measurement instruments or in other qualitative ways should also be monitored.
R E C I P R O C A L R E T U R N O N R E L AT I O N S H I P
Relationship marketing is based on the idea that two (or several) actors, in the simplest case a supplier
or service provider and its customer, are involved in a business engagement, where both parties should
benefit from the relationship. A win–win situation should develop. It is, however, difficult to calculate
the value of such a win–win situation. To understand this value the return on relationship (ROR)
concept has been introduced. Relationships are reciprocal business engagements, and therefore, ROR
should also be defined as a reciprocal concept. Grönroos and Helle define reciprocal ROR as follows:24
Reciprocal return on relationship (RORR ) is the long-term net financial outcome emerging for all parties resulting
from the establishment and mutual maintenance of a relational business engagement.
Reciprocal return on relationship is an outcome of a mutual reciprocal process, and it can be cal-
culated as a joint return on the relationship level as well as separately for the relationship parties. In
Figure 6.10 the underpinning model for mutual value creation is illustrated.25 Mutual value creation
includes activities by the supplier and customer respectively with the common goal of creating value
for themselves out of their business engagement. Some of these activities are performed by the parties
without direct interactions with each other (activities in the provider and customer spheres; see Chapter 1
and Figure 1.5 about value spheres). Some activities are co-created in direct interactions between the
supplier and customer (activities in the joint sphere; see Chapter 1 and Figure 1.5).
The model and corresponding calculations are easier to comprehend in a business-to-business con-
text, but in principle the situation is the same in business-to-consumer relationships. As demonstrated
by the figure, value emerges for both parties (and in a network, for several parties) based on the
business configuration the parties agree upon and implement.
In the centre of the figure the provider’s and the customer’s everyday processes required to run
their businesses are schematically illustrated. Which processes are central to a customer’s business and
commercial process is, of course dependent on the context. As an example, in Figure 6.10 the fol-
lowing customer processes are considered central: order-making, warehousing, production (as an example
of any type of core customer process to be supported), maintenance, information need, problem solving,
and cost control. Because these processes are central to the customer’s business and commercial out-
come, the supplier’s corresponding provider processes, needed to support these customer’s processes
successfully, are order-taking, deliveries, product (as the core of the offering), maintenance, call centre, service
recovery, and invoicing system.
After having assessed which the central processes on both sides are, the supplier and customer
should engage in a process of innovating and aligning their processes, resources and competencies relating to
these processes in order to find an optimal match between them. Because the provider and customer
strive to match how they practise their processes, this is called practice matching.26 As a result of the
practice matching process the two parties adopt their processes to fit the other party’s corresponding
RECIPROCAL RETURN ON RELATIONSHIP 181
BUSINESS EFFECTIVENESS:
Financial value measured in monetary
terms (profit, revenue increase, cost savings, etc.
PRACTICE EFFICIENCY:
Technical value measured in operational
terms (volume, quality, etc.)
CUSTOMER PROCESSES
Order- Information Problem- Cost

Warehousing Production Maintenance control
making need solving
PRACTICE MATCHING:
Innovating and aligning customer and supplier
processes, resources and competencies
Service Invoicing
Order-taking Deliveries Product Maintenance Call centre
recovery system
SUPPLIER PROCESSES
PRACTICE EFFICIENCY:
Technical value measured in operational
terms (volume, quality, etc.)
BUSINESS EFFECTIVENESS:
Financial value measured in monetary
terms (profit, revenue increase, cost savings, etc.)
F I G U R E 6.10
The mutual value creation model.
Source: Adapted from Grönroos, C. & Helle, P., Return on relationships: conceptual understanding and
measurement of mutual gains from relational business engagements. Journal of Business & Industrial
Marketing, 27(5); 2012: 348. Reproduced by permission of Emerald Insight.
processes. Who adopts its processes more depends on a number of factors: e.g. the power-dependence
situation between the provider and customer, the strategies of the respective parties, and the perceived
need to adopt. In the ideal case, both the provider and the customer adopt to reach an optimal match,
which has the best possible effect on future revenues and costs for both.
In the next phase, the implications of the matched processes for the customer’s and firm’s processes
are assessed and calculated. The improved practice efficiency following the use of the renewed processes
is calculated as a technical value effect. The technical value improvement can normally be measured in
volumes (e.g. production volume per time unit; amount of scrap), quality (e.g. the technical quality
of a production output), time (the standstill time caused by maintenance need or problem recovery),
or other units.
Finally, the business effectiveness of the new way of maintaining the relationship should be calculated
in monetary terms, which gives decision-makers a financial value effect of the new way of operating in the
relationship measured. This means that the changes in the technical value due to the practice matching
process are transformed into monetary revenue effects and cost effects. Revenue effects following
from, for example, growth or premium pricing opportunities can only be projected, whereas real cost
effects, for example cost savings or required additional costs in the various processes, can be calculated
using real data, for example by applying activity-based costing (ABC).
In addition to the monetary value effects, there are also value perceptions which should often be
considered. The parties may feel more comfortable with doing business with each other, find it easier
to collaborate, and a growing level of trust and commitment may develop.
It is not self-evident that such practice matching processes and corresponding efficiency and effec-
tiveness calculations can be undertaken. It requires a certain amount of trust between the parties to
reveal their processes and, to make the monetary calculations, to open their books and show their
cost and revenue drivers, and business models. However, when firms enter into such a process, they
normally find it worthwhile.
Next, the way of calculating reciprocal return on relationship (RORR ) is described.27 The process is
illustrated in Figure 6.11, and the corresponding calculations are shown in the case study at the end
of this section.
The whole process includes six steps:
1. Adopting a service perspective.

2. Practice matching.
3. Joint productivity gain calculation.
Practice Joint Incremental

Service Reciprocal
matching productivity value Value sharing
perspective ROR
requirement gain calculation assessment
Allowing mutual To align relevant To establish To assess To share the Return-on-

support of each processes, combined cost (both incremental incremental Relationship
other’s practices resources and parties) and revenue value gain to value through a for Supplier/
competencies (customer) effects be shared price mechanism Customer
F I G U R E 6.11
The reciprocal return-on-relationship assessment process.
Source: Adapted from Grönroos, C. & Helle, P., Return on relationships: conceptual understanding and
measurement of mutual gains from relational business engagements. Journal of Business & Industrial
Marketing, 27(5); 2012: 350. Reproduced by permission of Emerald Insight.
4. Incremental value assessment.

5. Value sharing.
6. Calculating the reciprocal and separate return on relationship (RORR , RORP , RORC ).
The first step for the supplier, or any service provider, is to strategically adopt a service perspective
(service logic) in the management of the relationship, and set out to develop an offering which aims
to support the customer’s processes (practice efficiency) and, in the end, the customer’s commercial
and business goals (business effectiveness) in a value creating way. Without this service intention to
support the other party’s processes it will be difficult to get the process going.
The second step is to fulfil the practice matching requirement where the two parties go through the
practice matching process and create appropriate process, resource and competence adjustment. Then
cost effects for both the customer and the provider and projected revenue effects for the customer,
following the new way of operating the relationship based on the practice matching, are calculated.
The revenue effect for the provider is taken into account later, through a pricing mechanism, in the
value sharing phase (the fifth phase).
The third step is to calculate the joint productivity gain of the renewal of the processes on both sides
and the related new way of managing and operating the relationship. Firms in a relational business
engagement which set out to develop the relationship together can often be expected to gain more than
if the parties act independently.28 ‘Joint productivity’ as an idea and concept was introduced and
defined by Pekka Helle.29 This concept is based on the service productivity concept (see Chapter 7),
and means that instead of calculating productivity and productivity changes for providers and cus-
tomers separately, the effects on revenues and costs which constitute productivity are pooled and
calculated jointly. It turns out that this triggers new ways of operating for the two parties in a business
relationship and enables new pricing models. As a consequence, the return on the relationship for
both parties can improve even dramatically, as shown later in this chapter in the case study involving
reciprocal return on relationship calculations.
The fourth step in the model is to assess the incremental value emerging from the joint productivity
gain calculation. This means that one monetary value of the new proposed way of doing business
is calculated by pooling the cost and revenue effects for the parties calculated in the previous phase
(cost effects for both parties; revenue effect for the customer). This is the increase of the value of
the relationship as such, without splitting it between the parties involved. It reflects the total value
increase following the new way of managing and operating the relationship. In practice, this and the
previous phase are intertwined.
The fifth step is the value sharing phase, where the incremental value calculated in the previous
step is shared. In practice this involves price negotiations between the parties, where it is decided how
the incremental value is shared between the provider and the customer. For example, a higher price
means that the provider gets a larger share of the incremental value gain.
In the sixth and final step the return on relationship is calculated as a RORC for the customer and
a RORP for the provider, and as a reciprocal RORR for the relationship as such:
Incremental value gain

RORRelationship =
Provider’s + Customer’s investments in the relationship
Provider’s part of the incremental value gain
RORProvider =
Provider’s investment in the relationship
Customer’s part of the incremental value gain
RORCustomer =
Customer’s investment in the relationship
In the case illustration which concludes this section, the six-step procedure and corresponding calcu-
lations will be illustrated.
Bigger firms engaged in close and ongoing relationships can probably benefit more than others from
joint business development as suggested here. Moreover, firms which become intertwined with their
customers in terms of roles, activities and perceived risks probably also benefit more. Also, firms that
are innovative in their customer relationships and strive to determine their own markets may also find
this approach beneficial. Industry innovators that do not restrict their business performance to existing
offering constellations and market definitions will probably also find this kind of reciprocal relationship
approach useful. Dynamic and uncertain business environments may also be supportive. On the other
hand, if firms perceive a risk of opportunistic behaviour by the other party in a relationship, the
willingness to engage in this type of business may decrease.
CASE STUDY
T H E I N D U S T R I A L D YA D C A S E : R E C I P R O C A L R E T U R N O N
R E L AT I O N S H I P C A L C U L AT I O N
A provider of technology-based equipment to an environmental control customer, with
which it had been doing business together for some time already, had suggested a joint
development of the business performance with an aim of supporting the customer’s
business more effectively (Step 1 in Figure 6.11: a service approach). This proposal was
accepted, and the provider and customer set out to develop a new, more collaborative
business process.
Step 2 (practice matching). The provider and the customer defined the customer’s key
everyday processes and the provider’s corresponding processes, and looked at the firms’
respective business models and cost drivers. After a practice matching analysis, changes
in the way some of the key processes were conducted were agreed upon. Then cost sav-
ings or increases for the respective parties and potential revenue gains for the customer
were calculated. For calculations, a three-year time frame was considered appropriate,
and the corresponding net present values (NPV) of the cost and revenue effects were
calculated:
Customer effects
The net effects of the customer’s changes of processes were calculated as follows:
in some processes an investment of 120 000 the first year was required, whereas the
changed support by the provider combined with other actions lead to a total cost saving
of 2 700 000 (NPV; three-year time frame), which amounts to a total of 2 580 000 in net
costs savings (out of which the cost increase item of 120 000 is an additional investment
in the relationship):
ΔCustomer’s Costs = +120 000 − 2 700 000 = −2 580 000 (net cost savings)
The net present value of projected additional revenues was calculated to 975 000 (NPV
over three years):
ΔCustomer’s Revenues = +975 000 (revenue increase)
Provider effects
The net effects of required R&D efforts and development of some processes were calcu-
lated to an increase of 585 000 (NPV over three years):
ΔProvider’s Costs = +585 000 (cost increase)
Steps 3 and 4 (Joint Productivity Gain Calculation and Incremental Value Assessment):
the next two phases are normally intertwined, although theoretically they are separate
processes. The changes in costs for the customer and provider and revenues for the cus-
tomer (the provider’s revenue change is taken into account through price negotiations in
Step 5) are put together, such that the jointly achievable productivity gain and incremen-
tal value gain to share are calculated as:
Incremental Value Gain (to be shared in Step 5)

= ΔCustomer’s Revenues − ΔCustomer’s Costs − ΔProvider’s Costs
= +975 000 − (−2 580 000) − (+585 000) = 2 970 000
Hence, the practice matching analysis and corresponding adjustments of the provider’s
and customer’s processes are expected to generate a joint productivity gain which corre-
sponds to a joint value increase (incremental value gain) of 2 970 000 calculated as NPV
over a three-year time frame. The question that now arises is how this gain should be
shared between the relationship parties.
Step 5 (Value Sharing): the jointly created incremental value is shared through a price
mechanism. The provider and customer have to negotiate how large a part of this value
gain the provider can keep in the form of price premium. In this case the parties decided
that the incremental value be shared in a 30/70 proportion, such that the provider gets
30% of the incremental value gained through the joint productivity efforts following the
practice matching process. The remaining part, 70%, benefits the customer:
Customer Value Creation = 0.70 × Incremental Value Gain = 0.70 × 2 970 000 = 2 079 000
Provider Value Capture = 0.30 × Incremental Value Gain = 0.30 × 2 970 000 = 891 000
Step 6 (Calculation of Reciprocal and Seperate Returns on Relationship): The devel-

opment starting with the practice matching can be seen as a joint investment in this
relational business engagement. The additional costs paid by the parties (120 000 by the
customer and 585 000 by the provider, respectively) represent the monetary value of the
investment. The value created for the customer and captured by the provider, following
the value sharing negotiation, represent the outcomes of the investment in the relation-
ships. Consequently, the reciprocal return on this relationship investment (RORR ) can be
calculated in the following way:
Reciprocal Return on Relationship RORR

Customer Value Creation + Provider Value Capture (= Incremental Value Gain)
= × 100
Costs paid by Customer and Provider
2 079 000 + 891 000 2 970 000
= × 100 = × 100 = 421%
120 000 + 585 000 705 000
Return on Relationship for the Customer RORC

Customer Value Creation (= 0.70 × Incremental Value Gain)
= × 100
Costs paid by Customer
0.70 × 2 970 000 2 079 000
= × 100 = × 100 = 1730%
120 000 120 000
Return on Relationship for the Provider RORP

Provider Value Capture (= 0.30 × Incremental Value Gain)
= × 100
Costs paid by Provider
0.30 × 2 970 000 891 000
= × 100 = × 100 = 152%
585 000 585 000
The return of the joint investment in the business relationship RORR is expected to be
421%, and when the business partners take their respective additional costs paid into
account, the return of their investments are expected to amount to 1 730% for the cus-
tomer and 152% for the provider. Without taking the service perspective approach and
engaging in joint practice matching with the customer, the provider could hardly have
been expected to help the customer to such a business outcome. And the provider could
not have expected such a good value capture opportunity.
Source: Helle, P, Re-conceptualizing value creation: from industrial business logic to ser-
vice business logic. Working Paper 554. Hanken School of Economics, Finland, Helsinki,
2011, and Grönroos, C. & Helle, P., Return on relationships: conceptual understanding and
measurement of mutual gains from relational business engagements. Journal of Business
& Industrial Marketing, 27(5); 2012: 344–359, where formulas and complete calculations
can be found.
CUSTOMER EQUITY MANAGEMENT

Rust et al.30 have introduced a model for the management of customer profitability, which can be
labelled a customer equity management model. They define customer equity as ‘the total of the discounted
lifetime values over all the firm’s customers’.31 This more or less equals the profitability of a firm’s
THE VALUE OF CUSTOMERS 187
customer base. The model has three components. Depending on the effect on customers’ purchasing
and consumption behaviour of each of these components, the customers decide to give more or less
of their business to the firm, and thus form a more or less profitable customer base for the firm. The
three components are:32
1. Value equity. The end customer’s perception of value from the product.
2. Brand equity. The end customer’s emotional and subjective assessment about the value of the brand.
3. Retention equity. The end customer’s repeat purchase intention and loyalty towards the supplier.
According to this model, value for customers is derived from two sources – the product (a good
or a service) itself and the perception of the brand. If the product functions well for the customer,
he can capture a basic value from the use of the product (value equity). If he considers the prod-
uct to own additional emotionally and subjectively felt qualities caused by the brand image of this
product, this provides additional value support (brand equity). Both these components make the cus-
tomer buy from the supplier of this product and thus generate cash flow for the firm. In addition,
if the customer has a willingness to stay loyal to the firm and continue buying this product from it,
the firm gets additional cash flow over time (retention equity).33 Rust and his colleagues provide
metrics to use for calculation of customer equity, using this three-component model, but when plan-
ning how to create a profitable customer base the model also functions as a conceptual support for
marketers.
T H E VA L U E O F C U S T O M E R S
Finally, firms should know the long-term value of their individual customers. The lifetime value of
customers should be calculated. When managers have such information they realize that long-term
customer relationships are valuable assets. It also helps marketers to realize the importance of keeping
existing customers.
The calculation of customers’ value should be based on information on customers’ current contribution
to net profit, not sales figures.34 For each customer, or for customer groups, the direct costs of producing
an offering, including relationship costs occurring for the seller, are deducted from revenues from this
customer. What remains after this deduction, the net profit from a customer, should cover the firm’s
fixed costs.
A customer’s contribution to net profit may vary substantially over the life of the relationship.
New customers may be unprofitable or their profit contribution may be low, whereas long-standing
customers frequently become more profitable as the relationship continues. Such considerations have
to be taken into account when calculating the long-term profit contribution of customers. Therefore,
it is essential that managers gain as much insight as possible into typical customer life cycles.35
The lifetime value of a customer relationship or, when individual figures cannot be obtained, the
lifetime value of a relationship with a given customer group can be calculated as the net present value of
the net profits that can be expected over the years. This lifetime value shows how important each customer
is to a supplier or service provider. If such figures are not calculated, the value of existing customers
will not be fully appreciated, and the loss of value that follows from departing customers will not be
understood. By calculating the lifetime value of customers, managers obtain information on which
customer relationships are critical to the firm, which are contributing less to total profitability, and
which are not profitable. However, one should always remember that customers who are not prof-
itable at a given time may become profitable in the future, for example as a result of a different episode
configuration, increasing disposable income or changing needs.
CASE STUDY
A N A LY S I N G C U S T O M E R P R O F I TA B I L I T Y
Customer-base analyses, in which companies specifically focus on determining profitability
distributions, show that certain parallels can be drawn between companies regardless of
industry.
Most companies that have conducted customer profitability analyses have been sur-
prised to discover how large a share of their customer base really is unprofitable. It seems
to be the rule, rather than the exception, that more than 30% of customers are unprof-
itable. This uneven distribution of profits and losses between customers of course leads
to a number of strategic and operational problems. A central strategic problem is that
customers subsidize each other, i.e. cross-subsidization occurs in the customer base. Cross-
subsidization makes a company vulnerable to onslaughts by competitors. Competitors
usually try to attract the most profitable customer groups, and if only 30% of a company’s
customers are profitable, for example, the risk exposure is of course enormous.
Management literature often cites the Pareto rule, which claims that 20% of customers
account for 80% of profits. This is, however, incorrect: 20% of customers may indeed
account for 80% of volume but, with regard to profit, the distribution can be very dif-
ferent. This is because earnings can be negative of course and this leads to a distribution
which is often very dramatic.
Source: This illustration was developed by Kaj Storbacka, Vectia Ltd.
CASE STUDY
T H E P R O F I TA B I L I T Y P R O B L E M O F M A J O R O F F I C E M A C H I N E
( M O M ) LT D
Tom ‘Jungle’ Peterson had been with Major Office Machine Ltd (MOM) for four years
when he was appointed Executive Vice President of the business unit selling office equip-
ment and other technical equipment to retailers. In addition to the thrill of promotion,
Tom was faced with a serious problem as the business unit had been incurring losses of
half a million euros annually for several years. His job was to ensure that the unit at least
broke even. His predecessors had tried many different restructuring methods but they had
all failed. Tom chose to use an alternative method to solve the problem. He decided to
start at the customer end and analyse the reasons behind the unprofitable situation.
Tom assembled a team to analyse the situation. The team consisted of an experi-
enced consultant and his assistant, a controller at MOM, and ad hoc members from
various departments at MOM who were involved in producing different types of customer
encounters.
The development process consisted of three phases:
● The customer profitability analysis phase. The aim of this phase was to calculate cus-
tomer profitability and analyse reasons for the losses.
● The relationship strategy phase. The aim of this phase was to differentiate the offerings
and customer relationship processes on the basis of the data obtained from the analysis
in order to ensure a satisfactory profit level.
● The implementation phase. MOM was an established company and had been operating
for about 20 years. Tom was well aware that implementing the changes he envisioned
would demand a considerable amount of work both within the company and with the
customers.
1. The Analysis Phase

The business unit had 1201 retailers as customers; some belonged to chains, others were
large companies, but a large share of the customer base consisted of relatively small retail-
ers. In total the business unit was making an annual loss of about €0.6 million.
The analysis team carried out a customer profitability analysis in which all revenue and
the total cost mass of the business unit were distributed among customers. The distribu-
tion of customer profitability in the business unit’s customer base is depicted in Figure 6.12
(a so-called Stobachoff curve).36
The curve is based on the calculation of the profit for each individual customer. The
customers are arranged in order of profitability, so that customer 1 is the most profitable
and customer 1201 the least profitable. The profits from each customer are then added
together. The curve shows how profit accumulates throughout the customer base.
On the basis of the curve, it was possible for Tom to draw several interesting (and dra-
matic) conclusions about his customer base:
● As long as the curve rises, profitable customers are added. This makes it possible to
determine the number of profitable customers. To Tom’s surprise only about 250 out
of 1201 (i.e. 20%) were profitable. They accounted for approximately €1.5 million of
revenue. These were later called the Protect group.
● Out of the unprofitable customers, two groups emerged. The first group consisted of
the next 800 customers, who all seemed to be equally unprofitable since an almost
straight line emerged between customers numbered 250 to 1050. Together, these cus-
tomers created a loss of about €0.75 million. Tom found out in the analysis that these
were small sales volume customers. These were later called the Develop group.
● The final 151 customers, who were the most unprofitable, created a loss of over
€1 million. These customers were, to Tom’s great surprise, very large and highly valued at
MOM. He noticed the ‘customer profitability paradox’: only really large customers can
be very profitable or very unprofitable! This group was later called the Change group.
Unprofitable
Profitable large
customers customers
“Protect” Unprofitable small customers “Develop” “Change”
1 500 000
1 200 000
Cumulative profits (euros)
900 000
600 000
300 000
–300 000
–600 000
1 101 201 301 401 501 601 701 801 901 1001 1101 1201
Customers in profitability order
F I G U R E 6.12
Case study of MOM: profitability of the customer base (1201 customers).
Source: Storbacka, J.: CRM Customer Relationship Management, Ltd.
Tom concluded that his customer base was especially sensitive to attacks from competitors.
The company’s existence depended on about 250 profitable customers! Also, there had
to be serious problems with the strategy of the business unit since it allowed about 100
customers to be extremely unprofitable.
Finding The Profitability Potentials

It is tempting, based on the Stobachoff curve, to draw straightforward, simple conclusions.
It might seem attractive to ‘cut’ the curve at around customer number 1000. Thus, it would
seem to be possible to eliminate the most unprofitable customers. Even if the idea of
terminating relationships is part of the relationship marketer’s arsenal, a more developed
analysis rapidly shows that this is not a simple solution to the profitability problems of
a customer base. The termination of customer relationships should never be the main
solution to improving customer profitability. The reason for this is obvious. Most costs in
most businesses these days are fixed costs. When analysing customer profitability, fixed
costs are divided among customers. Even if the most unprofitable customer relationships
were terminated, the fixed costs remain, and these, in turn, have to be redistributed to
the rest of the customers, leading to the emergence of an identical curve. Terminating
customer relationships is thus not an optimal solution.
To work with customer profitability as a calculation exercise is in itself uninteresting.
What is interesting is using customer profitability knowledge to identify profitability
potentials within the customer base and implement changes which make it possible to
benefit from this potential.
The information gathered can be used to conduct simulations of consequences of vari-
ous changes in the relationships (‘what-if’ analyses). You can simulate a situation where,
for example, you terminate certain relationships and redistribute all costs, raise prices (and
assume that some customers will decrease their purchases), invest in marketing and simu-
late by how much sales have to increase for profitability to reach an acceptable level, etc.
These analyses usually show dramatic results. Even small changes in customer purchasing
behaviour can have very significant effects if you are able to change the behaviour of a
large share of the customer base.
To identify profitability potential, you have to analyse the causes of unprofitability.
Companies need to ask themselves what aspect of their operations encourages unprof-
itable behaviour. In principle there seem to be three causes of unprofitability.
1. Work. Most unprofitable customers are unprofitable because the service provider is
investing too much in the relationship in proportion to the revenue derived from it.
‘Work’ includes all activities carried out within the relationship, both for the customer
and with the customer. To benefit from the profitability potential, the provider should
reduce activities for which it is not compensated. Typical activities that create large
costs are all those performed in connection with the logistics process: order lines, deliv-
eries, after-sales service. Customer service work in terms of sales, technical service, help
desk and call centre activities also results in costs.
2. Price. Pricing is a complex issue, which is partly determined by the competitive situ-
ation, but which in surprisingly many cases includes a large component of creativity.
Profitability analyses often indicate that really unprofitable customers are unprof-
itable because of pricing problems. A reason for this may be the fact that relation-
ships with large customers are less symmetrical, i.e. large customers can negotiate
prices that are favourable to them. But even in asymmetric relationships, where the
provider’s power is greater, the pricing system can lead to unprofitability. In such a
case it is often a question of discount systems based on sales volumes. In certain cases
the price is so low that the customer is no longer profitable. In other cases corrective
actions can include other pricing issues such as the pricing of deliveries, after-sales ser-
vice, interest on delayed payments and additional fees for small deliveries. In general,
of all the measures a provider can take to influence customer purchasing behaviour,
price is the most powerful. It is therefore important to ensure that pricing leads to
the customer behaviour that is desired by the provider. A quick analysis often proves
that companies lack pricing policies with general principles about how price should
influence customer behaviour. If a daily newspaper, for example, wants its customers
to commit for longer periods, it has to ensure that this is advantageous to the cus-
tomer from a pricing point of view. In most cases in the newspaper industry, however,
it would seem that it is cheapest for the customer to subscribe periodically, taking
advantage of the special rates that newspapers offer.
3. Volume. Even if volume in itself is not a good indicator of relationship value, it is clear
that customers with greater volume are more interesting from the profitability point
of view. In most customer bases, all small-volume customers are unprofitable because
their volume is not sufficient to cover fixed costs. As a result, many providers have
chosen to set volume limits which customers have to reach in order to enter into a
relationship with the provider. Alternatively, transaction fees can be imposed in the
form of an additional fee, for example, for small deliveries, which ensures that even
minor orders can be sufficiently profitable. Choosing one’s customers can thus also be
a sound strategy.
Profitability potential can be identified on the basis of the analysis carried out in the Sto-
bachoff curve. The grouping of customers has a direct effect on the profitability potential.
Profitability potential includes:
● Protecting profitable customers. By protecting these customers a company can ensure

that relationships become long-term and that it can maintain the positive cash flow
from profitable customers. This creates security and a starting point for further business
development.
● Developing small customers. This development can often involve both an increase in
relationship revenue and a decrease in relationship costs. Revenue can be increased by
changing the pricing policy or by setting a minimum volume limit for customers. Chang-
ing relationship strategies so that the amount of work invested in each relationship
decreases can also cut costs.
● Changing the behaviour of the most unprofitable customers. These customers, taken
individually, are the most interesting since they hold the potential to become very prof-
itable. Individual analyses of the causes behind customer unprofitability can be carried
out and individual solutions created for each customer with the aim of changing pric-
ing (to increase relationship revenue) or changing relationship processes to reduce the
work done for the customer (and thus cut costs).
All customers have profitability potential and are therefore of interest. Profitable cus-
tomers are interesting because they constitute the backbone of the provider’s cash flow
and enable future development of the business. The most unprofitable customers taken
individually are interesting since it is possible to rapidly transform them into profitable
customers. Customers seldom wish to be unprofitable since they know that this will have
adverse effects on the service they receive from the provider. Individual negotiations can
therefore lead to dramatic results.
Even small customers are interesting, although perhaps they are more interesting as a
group. This is because there are usually many of them and relationships with them are
asymmetric. Asymmetry in this context refers to their ability and desire to oppose changes
initiated by the provider. Implementing changes in pricing is often easier with small cus-
tomers. In many of the cases we have observed, the largest profitability potential was
found among the small customers.
2. The Relationship Strategy Phase

Existing MOM customer relationships were analysed with regard to their processes and
the activities which MOM performed in these processes.
The analysis showed that MOM was serving its small customers ‘too well’, i.e. both large
and small customers received the same level of service. It was also concluded that cus-
tomers with the same purchasing volume could differ quite significantly in profitability –
and this seemed to be true in most volume classes. To find out why customers with the
same volume could vary so much regarding profitability, Tom compared the purchasing
behaviour of some customers with the help of customer profiles, describing the behaviour
behind the profitability figures. Tom focused on issues such as product mix, number of
sales calls, number of calls to the call centre, number of orders, number of order lines,
number of invoices, credit limit, number of returned products, number of service visits,
number of deliveries and after-sales service.
First, Tom discovered that there were differences in the profitability of the different
products, i.e. customers who bought products with a better sales margin were naturally
more profitable than others. He also noted that some customers enthusiastically used
MOM’s free services. Service Support, Helpdesk and Customer Service were functions that
demanded a lot of time and work and which cost a great deal. Personal contacts also
affected profitability. Tom was forced to admit that his games of golf with the CEO of
one of their biggest customers, fun as they were, had a negative impact on company
profitability.
Tom also realized that certain customers bought products often but in small quantities.
They seemed to be waiting for discounts and buying products sold at reduced prices. They
often received cash discounts and goods in after-deliveries (additional product deliveries
when not all products ordered were shipped at the same time). These customers also
returned products more often than others did.
On the basis of this analysis, three alternative relationship strategies emerged: (1) part-
nerships, (2) contract-dealers and (3) regular customers. The relationship strategies were
described in great detail in terms of offerings for respective customers, the processes nec-
essary to produce the offering, and also how work would be organized with different
customer types. A script was also created for each relationship strategy.
Service content
Partner
Contract
Flexibility
Regular
F I G U R E 6.13
Relationship strategy dimensions.
The relationship strategies differ in two ways (see Figure 6.13):
● Service content, i.e. the degree of service content. That is, all the support that MOM can
give to retailers in terms of training, marketing support, alternative invoicing methods,
strategic planning, etc. The service content is greatest for partners and smallest for
regular customers, with contract-dealers in between.
● Flexibility, i.e. the willingness of MOM to find customer-specific solutions and adapt to
retailer processes. The logic here is the same as with the service content. In other words,
MOM is willing to make changes to their own processes for partners, whereas they
are not interested in creating diverging solutions for regular customers. The regular
customers are offered a standardized solution, while partners are offered company-
specific solutions. Contract-dealers are offered some level of customization of the
service offering.
Involving Employees in Changing Strategies

Change is always difficult to implement, and changes that aim to improve customer prof-
itability are among the most difficult. This is because change often involves negative
aspects from the customer’s point of view: prices are raised, delivery terms worsen, less per-
sonal service is offered, more self-service is required, etc. For customer contact employees
this usually means more complaints from customers and unpleasant customer encounters.
As a result, there will be resistance to change from both employees and customers.
It is therefore crucial that the change process is as smooth as possible and that key
customer contact people are involved. Employees need to be aware of the profitability
data and draw their own conclusions. They have to personally understand the strategic
solutions the provider has chosen in order to be able to deal with the complex customer
encounters that change often entails.
3. The Implementation Phase

The previous section discussed changing strategies, and ways to make the implementation
of change as smooth as possible, for both staff and customers.
Tom decided to involve a large number of the business unit’s personnel in the relation-
ship strategy phase. By involving his personnel he hoped that the implementation phase
would be made significantly easier.
What was the end result of the work carried out? Tom Peterson is pleased. The com-
pany was able to attain several goals at once with the systematic process they created.
The business unit no longer incurred losses and personnel had embraced a new way of
thinking. There was a much greater awareness of what drives profitability in a company
like MOM. Most importantly, MOM had also succeeded in improving customer service as
they improved customer profitability.
Unprofitable Customers
It is essential to maintain a positive attitude towards unprofitable customers. Unprofitable
customers are not bad customers. Customers are unprofitable because the company’s
strategies make unprofitable customer behaviour possible. There are no bad customers,
only bad strategies. Customer profitability is always a function of customer purchasing
behaviour, and behaviour can be influenced in many ways. By changing strategies you
can encourage customer behaviour, which in turn can have a positive impact on customer
profitability.
Many companies dealing with customer profitability issues have drawn too simplistic
conclusions from the results of the analyses. As a result, personnel often end up think-
ing that unprofitable customers are bad customers. This has direct consequences on how
customers are handled, which further aggravates profitability problems. It is therefore
important for companies to view unprofitable customers in a positive light. Unprofitable
customers often represent the greatest profitability potential of a company.
MOM: Strategic development based on customer base analysis.37
Source: Kaj Storbacka, The University of Auckland Business School.

S U M M A RY
In this chapter the issue of return on service and relationships between service providers and customers was
discussed. Sellers have to be able to calculate the long-term value of their service offerings to make buyers
appreciate the value of services. If such calculations are not made, buyers will frequently consider service
elements in customer relationships to be of limited or no value for them. The concept of relationship
costs occurring for customers, suppliers and service providers was discussed, and it was observed that
unnecessary costs are created for both customers and suppliers due to the same reasons; for example,
late deliveries, slow service, failures or quality problems. The profitability of customer relationships was
then discussed, and a model of customer relationship profitability was described. Metrics for calculating
reciprocal return on relationships RORR and corresponding case illustration were presented. Finally, a
way of illustrating and calculating customers’ contribution to profitability was presented.

1. Why are long-term costs more important to consider than price when making purchasing
decisions?
2. What are relationship costs? Why do relationship costs occur? How can such costs be
avoided?
3. What is meant by ‘It is a lack of quality, rather than increasing the quality level, that becomes
expensive for a firm’?
4. What is customer perceived value? How can it be calculated?
5. What is reciprocal return on relationship (RORR )? How can it be calculated?
6. What is meant by joint productivity and joint productivity gains? What are the benefits of
joint productivity gains over separately calculated productivity?
7. Develop a customer value model for your business, or for any given business.
8. How can the value of an improved total service offering be quantified?
9. Which factors influence the formation of customer relationship profitability?
10. What is customer lifetime value? Why is it important to calculate this?
NOTES
1. Pickworth, J.R., Minding the Ps and Qs: linking quality and productivity. The Cornell Hotel and
Restaurant Administration Quarterly, May, 1987.
2. Crosby, P.B., Quality is Free. New York: McGraw-Hill, 1979.
NOTES 197
3. Customer satisfaction studies frequently demonstrate a clear relationship between customer satis-
faction and retention. See, for example, Rust, R.T., Zahorik, A.J. & Keiningham, T.L., Return on
Quality: Measuring the Financial Impact of Your Company’s Quest for Quality. Chicago, IL: Richard
D. Irwin, 1994 and Anderson, E.W. & Sullivan, M.W., The antecedents and consequences of
customer satisfaction for firms. Marketing Science, 12(Spring), 1993, 125–143. One should, how-
ever, remember that there are clear indications that this relationship is often only positive if
customers are very satisfied and not merely satisfied. In a business-to-business context, Venetis
and Ghauri demonstrate that service quality has a positive impact on customer retention. See
Venetis, K.A. & Ghauri, P.N., Service quality and customer retention: building long-term rela-
tionships. European Journal of Marketing, 38(11–12), 2004, 1577–1588. See also Bell, S.J., Auh,
S. & Smalley, K., Customer relationship dynamics: service quality and customer loyalty in the
context of varying levels of customer expertise and switching costs. Journal of the Academy of Mar-
keting Science, 33(2), 2005, 169–183 and Keiningham, T.L., Cooil, B., Aksol, L., Andreassen,
T.W. & Weiner, J., The value of different customer satisfaction and loyalty metrics in predicting
customer retention, recommendation, and share-of-wallet. Managing Service Quality, 17(4), 2007,
361–384.
4. Hart, C.W. & Johnson, M.D., Growing the trust relationship. Marketing Management, Spring,
1999, 9–19.
5. Hart & Johnson, op. cit.
6. See Keiningham, T.L., Aksoy, L., Malthouse, E.C., Lariviere, B. & Buoye, A., The cumulative
effect of discrete transactions on share of wallet. Journal of Service Management, 25(3), 2014, 310–
333.
7. See Reichheld, F.F., The Loyalty Effect. The Hidden Force Behind Growth, Profits and Lasting Value.
Boston, MA: Harvard Business School Press, 1996.
8. Reichheld, F.F. & Sasser Jr., W.E., Zero defections: quality comes to services. Harvard Business
Review, Sept–Oct, 1990, 105–111. Similar results from another study are reported in Heskett,
J.L., Sasser Jr., W.E. & Schlesinger, L.A., The Service Profit Chain: How Leading Companies Link
Profit and Growth to Loyalty, Satisfaction, and Value. New York: The Free Press, 1997.
9. Grönroos, C., Service Management and Marketing. Managing the Moments of Truth in Service Compe-
tition. Lexington, MA: Lexington, Books, 1990.
10. Grönroos, C., Facing the challenge of service competition: the economies of service. In Kunst, P.
& Lemmink, J. (eds), Quality Management in Services. Maastricht, the Netherlands: Van Gorcum,
1992, pp. 129–140.
11. Value perception and value formation in relationships have not yet been studied to any consid-
erable extent. See, for example, Ravald, A. & Grönroos, C., The value concept and relationship
marketing. European Journal of Marketing, 30(2), 1996, 19–30 and Lapierre, J., What does value
mean in business-to-business professional services? International Journal of Service Industry Manage-
ment, 8(5), 1997, 377–397. For excellent overviews, see Payne, A. & Holt, S., Review of the
‘value’ literature and implications for relationship marketing. Australasian Marketing Journal, 7(1),
1999, 41–51 and Tzokas, N. & Saren, M., Value transformation in relationship marketing. Aus-
tralasian Marketing Journal, 7(1), 1999, 52–62. See also Hennig-Thurau, T., Gwinner, K.P. &
Gremler, D.D., Understanding relationship marketing outcomes. An integration of relationship
benefits and relationship quality. Journal of Service Research, 4(3), 2002, 230–247.
12. Normann, R., Reframing Business. When the Map Changes the Landscape. Chichester, UK: John
Wiley & Sons, 2001 and Storbacka, K. & Lehtinen, J.R., Customer Relationship Management.
Singapore: McGraw-Hill, 2001. See also Normann, R. & Ramı́rez, R., From value chain to
value constellation: designing interactive strategy. Harvard Business Review, July–Aug, 1993, 65–
77 and Wikström, S., Value creation by company–consumer interaction. Journal of Marketing
Management, 12, 1996, 359–374. This is, of course, not an entirely new observation. Theodore
Levitt expressed this point of view in the 1980s by noticing that value can only reside in the
benefits of customer needs or expectations and that, therefore, only the customer can assign value
to a physical product or a service. See Levitt, T., The Marketing Imagination. New York: The
Free Press, 1986. By and large, Levitt’s observation went unnoticed, or received only marginal
interest, by practitioners as well as academics.
13. Vargo, S.L. & Lusch, R.F., Evolving to a new dominant logic for marketing. Journal of Marketing,
68(Jan), 2004, 1–17. See also Woodruff, R.B. & Gardial, S., Know Your Customers – new approaches
to understanding customer value and satisfaction. Oxford: Blackwell Publishers, 1996.
14. Grönroos, C. & Voima, P., Critical service logic: making sense of value creation and co-creation.
Journal of the Academy of Marketing Science, 41(2), 2013, 133–150. See also Grönroos, C., What can
a service logic offer marketing theory? In Lusch, R.F. & Vargo, S.L. (eds), A Service-Dominant
Logic in Marketing. Dialog. Armonk, NY: M.E. Sharpe, 2006, pp. 354–364.
15. Grönroos & Voima, op. cit. See also Prahalad, C.K. & Ramaswamy, V., The Future of Competition:
Co-Creating Unique Value with Customers. Boston, MA: Harvard Business School Press, 2004, who
discuss the idea of value co-creation, and Wikström, op. cit.
16. Wilson, D.T. & Jantrania, S., Understanding the value of a relationship. Asia-Australia Marketing
Journal, 2(1), 1994, 55–66 and Tzokas & Sarin, op. cit. Wilson and Jantrania offer a comprehensive
discussion of the value concept.
17. Ravald & Grönroos, op. cit. and Grönroos, C., Value-driven relational marketing: from products
to resources and competencies. Journal of Marketing Management, 13(5), 1997, 407–419.
NOTES 199
18. In a recent study, Dimitriadis, S. & Koritos, C., Core service versus relational benefits: what
matters most? The Service Industries Journal, 34(13–14), 2014, 1092–1112, the authors found that
additional relational benefits are appreciated by customers, but they also found that the role of
the core service may dominate over additional benefits in the customers’ value perception. The
relationship between the importance of the core service and benefits provided by additional
services is to some extent controversial.
19. As Christopher Lovelock observes, ‘creating value requires rigorous analysis of all possibilities on
both the cost and benefit sides of the equation’ (p. 61). See Lovelock, C.H., Product Plus: How
Product + Service = Competitive Advantage. New York: McGraw-Hill, 1994.
20. As Anderson and Narus observe, ‘instead of tailoring their packages of services to customers’
individual needs . . . many suppliers simply add layer upon layer of services to their offerings’
(p. 75). By doing so they do not necessarily create more real value for their customers. See
Anderson, J.C. & Narus, J.A., Capturing the value of supplementary services. Harvard Business
Review, 73(Jan–Feb), 1995, 75–83.
21. See Anderson, J.C. & Narus, J.A., Business marketing: understand what customers value. Harvard
Business Review, 76(Nov–Dec), 1998, 53–61. They call such models customer value models.
22. Storbacka, K., The Nature of Customer Relationship Profitability. Helsinki/Helsingfors: Swedish
School of Economics, Finland/CERS, 1994.
23. Storbacka, K., Strandvik, T. & Grönroos, C., Managing customer relationships for profit: the
dynamics of relationship quality. International Journal of Service Industry Management, 5(5), 1994,
21–38.
24. The definition is based on Grönroos, C. & Helle, P., Return on relationships: conceptual under-
standing and measurement of mutual gains from relational business engagements. Journal of Busi-
ness & Industrial Marketing, 27(5), 2012, 344–359. The first scholar to present a definition of ROR
was Evert Gummesson, whose definition, however, only implicitly includes the reciprocity aspect
of relationships. See Gummesson, E., Total Relationship Marketing. Marketing Management, Rela-
tionship Strategy, CRM, and a New Dominant Logic for the Value-creating Network Economy. Oxford:
Butterworth Heinemann, 2008, p. 257.
25. The mutual value creation model is introduced in Grönroos & Helle, 2012, op. cit. Figure 6.10
and the explanation of the model are adapted from Grönroos & Helle, 2012, op. cit., and Helle,
P., Re-conceptualizing value creation: from industrial business logic to service business logic.
Working Paper 554. Helsinki: Hanken School of Economics, Finland, 2011.
26. Grönroos, C. & Helle, P., Adopting a service logic in manufacturing: conceptual foundation and
metrics for mutual value creation. Journal of Service Management, (21)5, 2010, 564–590. See also
Russo-Spena, T. & Mele, C., ‘Five co-s’ in innovating: a practice-based view. Journal of Service
Management, 23(4), 2012, 527–553.
27. The reciprocal return on relationship process and Figure 6.11 are adapted from Grönroos &
Helle, 2012, op. cit.
28. Compare also Jap, S., Pie-expansion efforts: collaboration processes in buyer-seller relationships.
Journal of Market Research, (36)4, 1999, 461–475.
29. Helle, P., Towards understanding value creation from the point of view of service provision. Conference
report. EIASM Service Marketing Forum, Capri, 2009. See also Helle, op. cit. and Grönroos &
Helle, op. cit.
30. Rust, R.T., Zeithaml, V.A. & Lemon, K.N., Customer Equity Management. Englewood Cliffs,
NJ: Prentice Hall, 2004.
31. Rust, Zeithaml & Lemon, op. cit., p. 4.
32. In the original version of the model ‘relationship equity’ was used instead of ‘retention equity’.
See Rust, R.T., Zeithaml, V.A. & Lemon, K.N., Driving Customer Equity: How Customer Lifetime
Value is Reshaping Corporate Strategy. New York: The Free Press, 2000.
33. It is interesting to notice the resemblance between this three-component customer equity man-
agement model and the logic underpinning the second customer perceived quality equation
(CPV2) discussed earlier in this chapter. Value equity equals the transaction value component in
CPV2, whereas the relationship value component in CPV2 is divided into two components –
brand equity and retention equity.
34. Rust, R.T., Zahorik, A.J. & Keiningham, T.L., Return on Quality (ROQ): making service
quality financially accountable. Journal of Marketing, 59(Apr), 1995, 58–70.
35. Stauss, B. & Friege, C., Regaining service customers: costs and benefits of regain management.
Journal of Service Research, 1(4), 1999, 347–361.
36. See Storbacka, 1994, op. cit. and Storbacka, K., Customer profitability: analysis and design issues.
In Sheth, J.N. & Parvatiyar, A. (eds), Handbook of Relationship Marketing. Thousand Oaks, CA:
Sage Publications, 2000, pp. 565–586.
37. This case was developed by Dr Kaj Storbacka, professor at The University of Auckland Business
School and former research director of CERS (Centre for Relationship Marketing and Service
Management) at Hanken Swedish School of Economics, Finland, based on his research on cus-
tomer relationship profitability and his consultancy experience.
FURTHER READING 201
Anderson, J.C. & Narus, J.A. (1995) Capturing the value of supplementary services. Harvard Business
Review, 73( Jan/Feb), 75–83.
Anderson, J.C. & Narus, J.A. (1998) Business marketing: understand what customers value. Harvard
Business Review, 76(Nov/Dec), 53–61.
Anderson, E.W. & Sullivan, M.W. (1993) The antecedents and consequences of customer satisfaction
for firms. Marketing Science, 12(Spring), 125–143.
Bell, S.J., Auh, S. & Smalley, K. (2005) Customer relationship dynamics: service quality and customer
loyalty in the context of varying levels of customer expertise and switching costs. Journal of the Academy
of Marketing Science, 33(2), 169–183.
Crosby, P.B. (1979) Quality is Free. New York: McGraw-Hill.
Dimitriadis, S. & Koritos, C. (2014) Core service versus relational benefits: what matters most? The
Service Industries Journal, 34(13–14), 1092–1112.
Grönroos, C. (1992) Facing the challenge of service competition: the economies of service. In Kunst,
P. & Lemmink, J. (eds), Quality Management in Services. Maastricht, the Netherlands: Van Gorcum
Assen, pp. 129–140.
Grönroos, C. (1997) Value-driven relational marketing: from products to resources and competencies.
Journal of Marketing Management, 13(5), 407–419.
Grönroos, C. (2006) What can a service logic offer marketing theory? In Lusch, R.F. & Vargo, S.L.
(eds), A Service-Dominant Logic in Marketing. Dialog, Armonk, NY: M.E. Sharpe, pp. 354–364.
Grönroos, C. & Helle, P. (2010) Adopting a service logic in manufacturing: conceptual foundation
and metrics for mutual value creation. Journal of Service Management, 21(5), 564–590.
Grönroos, C. & Helle, P. (2012) Return on relationships: conceptual understanding and measurement
of mutual gains from relational business engagements. Journal of Business & Industrial Marketing, 27(5),
344–359.
Gummesson, E. (2008) Total Relationship Marketing. Marketing Management, Relationship Strategy,
CRM, and a New Dominant Logic for the Value-creating Network Economy. Oxford: Butterworth
Heinemann.
Hart, C.W. & Johnson, M.D. (1999) Growing the trust relationship. Marketing Management, Spring,
9–19.
Helle, P. (2009) Towards understanding value creation from the point of view of service provision. Conference
report. EIASM Service Marketing Forum, Capri.
Helle, P. (2011) Re-conceptualizing value creation: from industrial business logic to service business
logic. Working Paper 554. Helsinki: Hanken School of Economics, Finland, Helsinki.
Hennig-Thurau, T., Gwinner, K.P. & Gremler, D.D. (2002) Understanding relationship marketing
outcomes. An integration of relationship benefits and relationship quality. Journal of Service Research,
4(3), 230–247.
Heskett, J.L., Sasser Jr., W.E. & Schlesinger, L.A. (1997) The Service Profit Chain: How Leading Com-
panies Link Profit and Growth to Loyalty, Satisfaction and Value. New York: The Free Press.
Keiningham, T.L., Aksoy, L., Malthouse, E.C., Lariviere, B. & Buoye, A. (2014) The cumulative
effect of discrete transactions on share of wallet. Journal of Service Management, 25(3), 310–333.
Keiningham, T.L., Cooil, B., Aksol, L., Andreassen, T.W. & Weiner, J. (2007) The value of different
customer satisfaction and loyalty metrics in predicting customer retention, recommendation, and
share-of-wallet. Managing Service Quality, 17(4), 361–384.
Lapierre, J. (1997) What does value mean in business-to-business professional services? International
Levitt, T. (1986) The Marketing Imagination. New York: The Free Press.
Lovelock, C.H. (1994) Product Plus: How Product + Service = Competitive Advantage. New York:
McGraw-Hill.
Normann, R. (2001) Reframing Business. When the Map Changes the Landscape. Chichester, UK: John
Wiley & Sons.
Normann, R. & Ramirez, R. (1993) From value chain to value constellation: designing interactive
strategy. Harvard Business Review, Jul–Aug, 65–77.
Payne, A. & Holt, S. (1999) Review of the ‘value’ literature and implications for relationship mar-
keting. Australasian Marketing Journal, 7(1), 41–51.
Pickworth, J.R. (1987) Minding the Ps and Qs: linking quality and productivity. The Cornell Hotel
and Restaurant Administration Quarterly, May.
FURTHER READING 203
Ravald, A. & Grönroos, C. (1996) The value concept and relationship marketing. European Journal of
Marketing, 30(2), 19–30.
Reichheld, F.F. (1996) The Loyalty Effect. The Hidden Force Behind Growth, Profits and Lasting Value.
Boston, MA: Harvard Business School Press.
Reichheld, F.F. & Sasser Jr., W.E. (1990) Zero defections: quality comes to services. Harvard Business
Review, Sept–Oct, 105–111.
Russo-Spena, T. & Mele, C. (2012), ‘Five co-s’ in innovating: a practice-based view. Journal of Service
Management, 23(4), 527–553.
Rust, R.T., Zahorik, A.J. & Keiningham, T.L. (1995) Return on Quality (ROQ): making service
quality financially accountable. Journal of Marketing, 59(Apr), 58–70.
Rust, R.T., Zeithaml, V.A. & Lemon, K.N. (2000) Driving Customer Equity: How Customer Lifetime
Value is Reshaping Corporate Strategy. New York: The Free Press.
Rust, R.T., Zeithaml, V.A. & Lemon, K.N. (2004) Customer Equity Management. Englewood Cliffs,
NJ: Prentice Hall.
Stauss, B. & Friege, C. (1999) Regaining service customers. Costs and benefits of regain management.
Journal of Service Research, 1(4), 347–361.
Storbacka, K. (1994) The Nature of Customer Relationship Profitability. Helsinki/Helsingfors: Hanken
Management.
Storbacka, K. (1997) Segmentation based on customer profitability – retrospective analysis of retail
bank customer bases. Journal of Marketing Management, 13(5), 479–492.
Storbacka, K. (2000) Customer profitability: analysis and design issues. In Sheth, J.N. & Parvatiyar,
A. (eds), Handbook of Relationship Marketing. Thousand Oaks, CA: Sage Publications, pp. 565–586.
Storbacka, K. and Lehtinen, J.R. (2001) Customer Relationship Management. Singapore: McGraw-Hill.
Storbacka, K., Strandvik, T. & Grönroos, C. (1994) Managing customer relationships for profit: the
dynamics of relationship quality. International Journal of Service Industry Management, 5(5), 21–38.
Tzokas, N. & Saren, M. (1999) Value transformation in relationship marketing. Australasian Marketing
Journal, 7(1), 52–62.
Vargo, S.L. and Lusch, R.F. (2004) Evolving to a new dominant logic for marketing. Journal of
Marketing, 68( Jan), 1–17.
Venetis, K.A. & Ghauri, P.N. (2004) Service quality and customer retention: building long-term
relationships. European Journal of Marketing, 38(11–12), 1577–1588.
Wikström, S. (1996) Value creation by company–consumer interaction. Journal of Marketing Manage-

ment, 12, 359–374.
Wilson, D.T. & Jantrania, S. (1994) Understanding the value of a relationship. Asia-Australia Marketing
Journal, 2(1), 55–66.
Woodruff, R.B. & Gardial, S. (1996) Know Your Customers – New Approaches to Understanding Customer
Value and Satisfaction. Oxford: Blackwell Publishers.
CHAPTER 7
MANAGING
THE AUGMENTED
SERVICE OFFERING
“ ” Customers deserve more than just a good service package. It has to be made into a functioning service
process too.
INTRODUCTION
Based on discussions of service quality in previous chapters, this chapter presents a conceptual model
of how to develop service offerings that are geared to customers’ perception of the quality of services.
The conceptual model is called the augmented service offering model. It takes into account the impact
of the outcome of the service processes (the technical quality of the service) and the impact of how
customers perceive the processes (the functional quality of the process). The effects of brand image
and marketing communication on the service offering are also discussed. Then, service design and a
model of designing for service are presented, and finally a model of service offering development in the
marketspace called the NetOffer model is discussed. After having read this chapter the reader should
understand the complexity and scope of service as an offering and know how to develop a service
offering. The reader should also understand what such an offering includes in a marketspace context.
Finally, the reader should understand what designing for service means and what such a process includes.
T H E M I S S I N G S E RV I C E P R O D U C T: S E RV I C E S
AS A BUNDLE OF OUTCOME- AND
P R O C E S S - R E L AT E D F E AT U R E S
One of the essential cornerstones in developing service management models is a thorough understand-
ing of the phenomenon to be studied. In other words, what is needed is a good model of services as
offerings to be produced, marketed and consumed. Physical products are a bundle of features embed-
ded in the ready-made product. However, as discussed in Chapter 2, services are different. Services
are processes, where no pre-produced product to be marketed and consumed exists.
206 MANAGING THE AUGMENTED SERVICE OFFERING
To understand service management and how to market services it is important to remember that
all models and concepts are based on the fact that the service emerges in a process, in which the
customer participates as a co-producer, and that the production of a service is not separated from the
consumption of this service. Moreover, this process forms an essential part of the service. From the
service provider’s point of view, some of the service is produced in a back office, but from a quality
perception perspective the most critical part of the service is produced at the time when the customer
participates, perceives and evaluates the service process.
As discussed in previous chapters, instead of product features embedded in a pre-produced physical
product, services consist of a bundle of features which are related to the service process and the outcome
of that process. Neither of these exists before the customer initiates the service production process.
These characteristics of services have to be taken into account when developing models describing
services. We name the bundle of process- and outcome-related features a service offering, and the
comprehensive model of a service offering described in this chapter is called the augmented service
offering model.1
This chapter will not discuss a new service development process from idea generation to launch.2
Instead, it will concentrate on the core of such a process, that is, how to understand and manage
the object of development itself, the service offering. Without a thorough understanding of this core
concept, every attempt to design and develop service will fail or at least be less effective.
Any attempt to conceptualize the service offering has to be based on a customer perspective. Far
too often internal aspects, too little market research information, or too limited understanding of the
customers’ point of view guide the process of conceptualizing services to be offered to the market.
However, well planned does not automatically mean well executed. The following sections are going
to address, in detail, how to develop the service offering so that all aspects are thoroughly covered.
This requires, among other things, that service production and delivery issues (that is, the service
process) be incorporated as inseparable parts of the process of planning a service offering. Otherwise,
well-planned service offerings may remain theoretical, unless the execution of plans is made an integral
part of the undertaking to create a service offering.
T H E S E RV I C E PA C K A G E
According to the service package model, which is often used in the literature, the service is described as
a package or bundle of different services, tangibles and intangibles, which together form the service.3
The package is divided into two main categories: the main service or core service and auxiliary services
or extras, which are sometimes referred to as peripherals or peripheral services, sometimes also as
facilitator services. A hotel service may include the accommodation element as the main or core
service, and reception service, valet service, room service, restaurant services and the concierge as
auxiliary services or peripherals in the package. Such extras are often considered to be the elements
of the service package that define it and make it competitive.4
Lovelock developed a model of the service offering which includes supplementary services in addition
to a core service. Supplementary services resemble the idea of auxiliary services and extras.5 This is a
simple and realistic way of illustrating at least part of the nature of any service. However, it has a few
weaknesses if it is to be used for managerial purposes. First, a service is more complicated than this
model would suggest. From a managerial perspective auxiliary or supplementary services may be used
for totally different reasons. This has to be recognized. Second, the main service/auxiliary service
(core service/peripherals, supplementary) dichotomy is not clearly geared to the customer perception
of a service and total service quality. Only what is supposed to be done for customers is recognized.
How the service process and the process-related features are to be handled (i.e. the functional quality
aspects of a service) is not included.
THE BASIC SERVICE PACKAGE 207
A model of the service offering has to be customer-centric. It has to recognize all the aspects of
a service that are perceived by customers. How customers perceive the interactions with the service
provider (the functional quality of the service process) as well as what the customers receive (the
technical quality of the outcome) has to be taken into account. In addition to this, the image impact
on service quality perception also has to be recognized. What has to be planned and marketed and
offered to customers is a comprehensive service offering.
M A N A G I N G T H E S E RV I C E O F F E R I N G
Based on a thorough understanding of the customers’ everyday activities and processes a well-defined
customer benefit concept, which states the benefits or bundle of benefits customers appreciate, can be
derived. Having gained this knowledge about target customers the firm can develop and manage
service offerings. Managing a service offering requires four steps:
1. Developing the service concept.

2. Developing a basic service package.
3. Developing an augmented service offering.
4. Managing image and communication.
The service concept or concepts determine the intentions of the organization. The package can be
developed based on this concept.
The basic service package describes the bundle of services that are needed to fulfil the needs of cus-
tomers in target markets. This package, then, determines what customers receive from the organiza-
tion. A well-developed basic package guarantees that necessary outcome-related features are included,
and that the technical quality of the outcome will be good. However, even an excellent service pack-
age can be destroyed by the way in which the service process functions. Therefore, a good service
package does not necessarily mean that the perceived service is good, or even acceptable. According
to the quality models of services, the service production and delivery process, especially the customer
perception of the buyer–seller interactions or the service encounter, is an integral part of the ser-
vice. This is the reason why the basic service package has to be expanded into an augmented service
offering before we have a description of the service as an offering.
In the augmented service offering model the service process and the interactions between the orga-
nization and its customers as well as customers’ co-production efforts are included. In this way the
model of the service offering is geared to the total customer perceived quality of services.
Finally, image has a filtering effect on the quality perception. Therefore, the firm has to manage
its corporate and/or local image and its marketing communication so that they enhance the perception of
the augmented service offering.
T H E B A S I C S E RV I C E PA C K A G E
As noted previously, in the literature a distinction is often made between core services and sup-
plementary/auxiliary/peripheral services. However, for managerial reasons, it is useful to distinguish
between three groups of services:6
1. Core service.
2. Enabling services (and goods).
3. Enhancing services (and goods).
The core service is the reason for a company being on the market. For a hotel it is lodging and for an
airline it is transportation. A firm may also have many core services. For example, an airline may offer
shuttle services as well as long-distance transportation. A mobile phone operator may, for example,
offer phone calls as well as an e-mail facility as its core services.
In order to make it possible for customers to use the core service some additional services are
often required. Reception services are needed in a hotel, and check-in services are required for air
transportation. Such additional services are called enabling or facilitating services, because they enable
the use of the core service.7 If enabling services are lacking, the core service cannot be consumed.
Sometimes enabling goods are also required. For example, in order to be able to operate an automatic
teller machine, a customer needs a bank card. However, it is often difficult to say whether the physical
things involved in the service offering are goods given to the customer as part of the service production
process or are physical production resources. For instance, the bank card can be considered a physical
thing (an enabling physical good), but it can equally be considered a production resource. The ATM
equipment, on the other hand, is definitely a physical production resource and not an enabling good.
The third type of service is enhancing or supporting services. These, like enabling services, are also
auxiliary services, but they fulfil another function. Enhancing services do not facilitate the consump-
tion or use of the core service, but are used to increase the value of the service and/or to differentiate
the service from that of competitors. Hotel restaurants and airport lounges and a range of in-flight
services related to air transportation are examples of enhancing services. Games and wake-up calls are
examples of enhancing services offered by a mobile phone operator. In some cases physical things that
can be considered enhancing goods are used to enhance the service offering. Shampoo and shoeshine
in hotel rooms are such goods.
The distinction between enabling services and enhancing services is not always clear. A service that
in one situation is enabling the core service – for example, an in-flight meal on a long-distance route –
may become an enhancing service in another context, i.e. on a short flight.
From a managerial point of view it is important to make a distinction between enabling and enhanc-
ing services. Enabling services are mandatory. If they are left out, the service package collapses. This does
not mean that such services could not be designed in such a way that they differ from the enabling
services of the competitors. On the contrary, whenever possible enabling services should be designed
so that they also become means of competition and thus help to differentiate the service. Enhancing
services, however, are used as a means of competition only. If they are lacking, the core service can
still be used. However, the total service package may be less attractive and perhaps less competitive
without them.
The basic service package is, however, not equivalent to the service offering customers perceive.
This package corresponds mainly to the technical outcome dimension of the total perceived quality.
The elements of this package determine what customers receive. They do not say anything about
how the process is perceived, which in the final analysis is an integral part of the total service offering
customers experience and evaluate. In other words, no process-related features of the service have
yet been taken into account.
As the perception of the service process cannot be separated from the perception of the elements
of the basic service package, the process has to be integrated into the service offering. Therefore, the
basic service package has to be expanded into a more comprehensive model, called the augmented
service offering model.
THE AUGMENTED SERVICE OFFERING 209
T H E A U G M E N T E D S E RV I C E O F F E R I N G
The service process, the buyer–seller interactions or service encounters, are perceived in a number of
ways, which differ from situation to situation. Due to the characteristics of most services, there are,
however, three basic elements, which from a managerial point of view constitute the process:8
1. Accessibility of the service.

2. Interaction with the service organization.
3. Customer participation.
These elements are combined with the concepts of the basic package, thus forming an augmented
service offering (see Figure 7.1). It is, of course, essential that these three elements of the service offering
are geared to the customer benefits that were initially identified to be sought by customers in the selected
target segments, and the service concept based on these benefits.
The service concept
The core service
Accessibility
Interactions
of the service
Enabling Enhancing
services services
(and goods) (and goods)
Customer
participation
F I G U R E 7.1
The augmented service offering.
Source: Developed from Grönroos, C., Developing the service offering – a source
of competitive advantage. In Surprenant, C. (ed.), Add Value to Your Service.
Chicago, IL: American Marketing Association, 1987, p. 83. Reproduced by
permission of the American Marketing Association.
The accessibility of the service depends, among other things, on:

● The number and skills of the personnel.
● Office hours, timetables and the time used to perform various tasks.
● Location of offices, workshops, service outlets, etc.
● Exterior and interior of offices, workshops and other service outlets.
● Tools, equipment, documents, etc.
● Information technology enabling customers to gain access to the service provider and the service
process, and to use the service.
● The number and knowledge of consumers simultaneously involved in the process.
Depending on these and other factors customers will feel that it is easy, or difficult, to get access to the
services and to purchase and use them. If the telephone receptionist of a repair firm lets the customer
wait before answering the telephone, or if he cannot find a service technician for the customer to talk
to, there is no accessibility to the service. Even an excellent service package can be destroyed in this
way. Even if the service package does not totally deteriorate, the perception of the service may be
seriously damaged. Internet sites, help desks and call and contact centres are increasingly becoming
accessibility issues for service providers.
For example, in a study of a for-profit laboratory in the southwest United States, the accessibility
issue could be broken down into four parts: site accessibility, customer ease of use of the physical
resources of the laboratory, contact personnel’s contribution to accessibility, and ease of customer
participation. The following variables were identified for each of the four aspects of accessibility:
1. Site accessibility
● The convenience and ease of access from a major street.

● The amount of parking available adjacent to the facility.
● The number of medical facilities located nearby.
● The relative ease of locating the laboratory inside the building.
● Office hours.
● The ease of getting an appointment.
● The size of the waiting room.
2. Customer ease of use of the physical resources

● The attractiveness and condition of the exterior and interior of the medical building where the
laboratory is located.
● The exterior of the laboratory facility.
● The waiting room.
● The patient rooms.
● The restrooms.
THE AUGMENTED SERVICE OFFERING 211
3. Service employees’ contribution to accessibility

● The response time to phone calls.
● The number of employees.
● The skills of employees.
● The response time to people walking in the front door.
● The response time to patients in the waiting room.
● The professionalism of the employees.
● The care taken to reduce unpleasantness of drawing blood.
● The billing procedures.
● The types of payment accepted.
● The insurance arrangements available.
4. Ease of customer participation
● The number and difficulty of forms to fill out.
● The instructions given to patients concerning procedures the patient must participate in or do
alone.
● The difficulty of these procedures.
Interaction with the service organization can be divided into the following categories:
● Interactive communication between employees and customers, which in turn depends on the
behaviour of the employees, on what they say and do, and how they say and do it.
● Interactions with various physical and technical resources of the organization, such as vending
machines, computers, documents, waiting room facilities, tools and equipment needed in the ser-
vice production process, etc.
● Interactions with systems, such as waiting systems, seating systems, billing systems, Internet sites and
telecommunication systems, systems for deliveries, maintenance and repair work, making appoint-
ments, handling claims, etc.
● Interactions with other customers simultaneously involved in the process.
Customers have to get in touch with employees, they have to adjust to operative and administrative
systems and routines of the organization, they may have to use websites, and they sometimes have
to use technical resources such as teller machines or vending machines. Moreover, they may get in
contact with other customers. All these interactions with human as well as physical resources and
systems are part of the service perception. Again, if these interactions are considered unnecessarily
complicated or unfriendly, the perceived quality of an excellent basic service package may be low.
In the same study interactions between the organization and its customers were broken down into
the following parts:
● Interactions with medical personnel (their attitudes, attention to the customer, skill in drawing
blood).
● Interactions with customer service department (attitudes, phone answering promptness, prompt
and accurate answers to questions).
● Interactions with waiting room environment (space, cleanliness, crowdedness).
● Interactions with other customers (communication between patients).
● Interactions with payment or billing system (means of payment available to choose from, under-
standability of invoices and receipts).
● Interactions with scheduling systems (waiting time for service).
● Interactions between physicians (referring patients to the laboratory) and customer service depart-
ment (attitudes, phone answering promptness, prompt and accurate answers to questions, calling
results, follow-up).
Customer participation means that the customer has an impact on the service he perceives. Thus, he
becomes a co-producer of the service and therefore also a co-creator of value for himself.9 Often the customer
is expected to fill in documents, give information, use websites, operate vending machines, and so on.
Depending on how well the customer is prepared and willing to do this, he will improve the service
or vice versa. For example, if a patient is unable to give correct information about his problems, the
physician will not be able to make a correct diagnosis. The treatment may, therefore, be inappropriate
or less effective than otherwise. The service rendered by the physician is thus impaired.
In the study the following questions were asked, to identify aspects of customer participation:
● Are patients knowledgeable enough to identify their need or problem?

● Do patients have a reasonable understanding of the time constraints involved?
● Is the patient willing to co-operate in the process?
● Can additional information be obtained quickly from physicians?
In the case of self-service, customers are required to take a more substantial and active co-producer
role, using the systems and resources provided by the service firm.
Thus, in service encounters the core service, enabling services and enhancing services of the basic
service package are perceived in various ways, depending on the accessibility of the services, how
easily and well the interactions are perceived, and how well customers understand their role in the
service production process.
Finally, in Figure 7.1, the service concept is seen as an umbrella concept, to guide development of the
components of the augmented service offering. The service concept should thus state what kind of
core, enabling and enhancing services are to be used, how the basic package could be made accessible,
how interactions are to be developed, and how customers should be prepared to participate in the
process.
The service concept should also be used as a guideline when, in the next phase of the planning
process, adequate production resources are identified. In a going concern there are, of course, a set
of human and physical resources as well as functioning systems already in place. They determine to
some extent which resources are going to be used. However, the development of an augmented
service offering requires a fresh analysis of the types of resources that are needed. Otherwise, existing
resources may unnecessarily restrict the implementation of a new service offering. Existing resources
must never become a hindrance to the successful implementation of new ideas.
THE ROLE OF TECHNOLOGY IN SERVICE OFFERINGS 213
In summary, developing the service offering is a highly integrated process. A new enhancing service
cannot be added without taking into account the accessibility, interaction and customer participation
aspects of that service. On the other hand, the well-planned introduction of an additional enhancing
service, or an improved facilitating service, may become a powerful source of competitive advantage.
M A N A G I N G I M A G E A N D C O M M U N I C AT I O N A N D
T H E S E RV I C E O F F E R I N G
As illustrated by the model of perceived service quality, image has an impact as a filter on the service
experienced. A favourable image enhances the experience; a bad one may destroy it. Therefore,
managing image and communication becomes an integral part of developing the service offering.10
Because of the intangible nature of services, marketing communication activities not only have a
communicative impact on customer expectations, but a direct effect on experiences as well. This
latter effect is sometimes of minor, sometimes of major, importance.
In the long run, marketing communications such as advertising, websites, sales and public relations
enhance and to some extent form images. However, even an advertisement or a brochure (which a
customer notices and perceives at the point and time of consumption, or in advance) may have some
impact on his quality perception of a service. Moreover, word of mouth is essential in this context. Peer
communication between customers at the point and time of purchasing and consumption may have
a substantial immediate effect as well as a long-term impact. In the same way, a negative comment
from a fellow customer may easily change a given person’s perception of the service he receives.
T H E R O L E O F T E C H N O L O G Y I N S E RV I C E
OFFERINGS
The development of information technology and the increase in Internet and mobile technology use
has offered new opportunities for firms to develop their service offerings.11 IT systems and improved
databases from which customer information files are easier to retrieve, and which are less complicated
to update than before, provide customer contact employees with improved support to help them to
be customer-centric in interactions with customers. More accurate, easily retrievable and available
information about customers enables employees to increase the quality of customer interactions. In
addition, this use of technology also has a positive effect on the accessibility of services. The Inter-
net may also improve employees’ ability to handle customer contacts, for example, when routine
interactions can be transferred to an Internet-based help desk.
New technology also gives customers the means to access the services of a manufacturer or service
firm more quickly and easily. For example, using the website of a manufacturer, a customer can easily
request supportive information about how to handle a problem with a production machine or make
arrangements for the maintenance of the machine. The Internet and mobile technologies offer lots
of opportunities to make a service more accessible than before, and it may also improve interactions.
Of course, customers need to be trained and motivated to use a website for such purposes.
However, although some services, such as the purchase of movie theatre tickets, can be completed
on the Internet, in most cases the customer will at some point also interact with employees and more
traditional physical resources and technologies of the service provider. It should be kept in mind
that well-functioning IT and Internet and mobile service interactions have to be supported by the
‘real’, personal interactions that also take place. Quick and easy arrangements to get a maintenance
task done using the Internet have to be followed by prompt, skilful and attentive service, otherwise
the high-quality perception of the service provider’s use of new technology in the mind of a cus-
tomer is destroyed by a low-quality perception created by traditional means of producing the service
offering.
Finally, one should remember that new technologies used in service processes may not be accepted
and appreciated by all customers of a given service provider. Some customers can be motivated to
accept new technologies, for example after having been informed about their benefits or after having
been trained to use them. Others may want to continue to use more traditional means of interacting
with the service provider. In any case, the firm has to introduce new technologies carefully, otherwise
their effect may be negative. Also, it is important to market new technologies internally, so that
employees are motivated to use them. Employees too have to be properly informed and trained.
D E V E L O P I N G T H E S E RV I C E O F F E R I N G :
A DYNAMIC MODEL
The composition of the augmented service offering in Figure 7.1 is static. The model simply lays
out the elements that have to be taken into account and introduces appropriate concepts. In this
section the model of the augmented service offering will be placed in a dynamic framework, which
illustrates more realistically how the service as a product emerges. Because services are processes in
which consumption is inseparable from production and delivery processes, the service offering by
definition is dynamic. The service exists as long as the production process goes on. Hence, any model
of services, such as the augmented service offering, has to include a dynamic aspect.
The framework can be divided into eight steps:
1. Analysing target customers’ everyday activities and processes.

2. Assessing customer benefits required to support these activities and processes.
3. Defining overall features of an augmented service offering.
4. Defining a service concept which guides the development of the service offering.
5. Developing the core service, enabling and enhancing services, and goods of the basic service
package.
6. Planning the accessibility, interaction and customer participation elements of the augmented ser-
vice offering.
7. Planning supportive marketing communication.
8. Preparing the organization for producing the desired customer benefits in the service processes
(internal marketing).
First, one has to analyse the customers’ everyday activities and processes where they may benefit
from a service that the firm can provide them with or develop for them. For example, Apple’s
launch of the iPhone was a result of thorough ethnographic studies of what people in large customer
segments were doing and would like to do, for example with the support of a new kind of mobile
device, combined with the firm’s innovative knowledge of the possibilities of software technology.
Then, an assessment of the customer benefits is needed, so that the development process is geared to
DEVELOPING THE SERVICE OFFERING: A DYNAMIC MODEL 215
customer experiences of total service quality. Next, the desired features of a competitive augmented service
offering have to be defined as the basis of further planning. These features, following the model of
Figure 7.1, should be related to the service concept, and structured according to the elements of the
service package and the augmentation elements, as well as related to corporate and local image and
market communication.
The next step is to plan the basic package, including the core service, enabling services and goods, and
enhancing services and goods, according to the service concept. Then, the augmented service offering –
which materializes through the service process – has to be developed, so that the service is made acces-
sible in a way that reflects the service concept, and interactions and customer participation meeting
the same criterion emerge.
The next step is to plan supportive marketing communication, which not only informs customers about
the service and persuades them to try it but also has a positive impact on the consumption of the
service and enhances a desired image.
If all steps so far are properly carried out, the result should be a concrete offering, which – in the
basic package elements as well as in the accessibility, interaction and customer participation aspects
of service production and delivery – includes the desired features, which then create the benefits
customers seek. This, in turn, should provide the customers with value-creating support to their
activities and processes. However, yet another step is required, and that is preparing the organization for
producing the desired customer benefits through production and delivery of the augmented service
offering.
One of the fatal mistakes that can be made is to believe that the service, once it has been planned, is
automatically produced as planned. The discussion of customer perceived quality, and especially of the
gap analysis model, in Chapter 5 demonstrated the problems and pitfalls present in producing excellent
perceived service quality and showed how complicated a process it is. Hence, the preparation of the
organization has to be made an inseparable part of any development of service offerings, otherwise
even sound and customer-oriented plans can easily fail.
The preparation of organizations for a desired performance involves the creation of sufficient resources
and internal marketing of the new offering to the employees, so that they first understand it, then
accept it and feel committed to producing it. In Chapter 14 the concept and phenomenon of internal
marketing is covered at some length.
To sum up this discussion of the dynamic model of the augmented service offering, the first stage is
always analysis of the customers’ activities and processes and an assessment of what benefits target cus-
tomers are looking for and would appreciate. Proper market research and use of internal information,
for example, from the interface between customers and the organization, should provide management
with the necessary knowledge of what customers expect, so that corresponding features can be built
into the service. However, innovative market research, such as using ethnographic methods, should
be used as well.
The first four steps of the process, analysing the customers’ activities and processes, assessing a
customer benefit concept, determining the desired features of the service offering to be produced and
defining the service concept, are separate processes. However, the next two phases, developing the
basic package and planning the interaction, accessibility and customer participation elements of the
augmented service offering in the service process, as well as the last phase, preparing the organization,
are inseparable processes. They have to go together, otherwise there is a risk that a good plan will result
in a mediocre service. The basic package may include the correct features, but the crucial importance
of the accessibility, interaction and customer participation aspects of service production and delivery
to total customer perceived quality will not be fully understood or appreciated. Moreover, the need
to actively market the new service internally will be neglected, or not taken care of with sufficient
attention to detail.
Next, a case study describing a successful development and launching of a new service will be
described. The case includes most of the features of the models of the augmented service offering
described earlier in this chapter.
CASE STUDY
DEVELOPING AN AUGMENTED SERVICE OFFERING:
T H E I N T E R R E N T C A S E S . 12 T H E C O M PA N Y A N D
ITS SERVICE CONCEPT
Interrent-Europcar operates nationwide in Sweden in the auto rental market. Although
it belongs to an international group, it is managed as an independent Swedish firm. It is
one of the main auto rental companies in Sweden. Interrent has operated for a long time
◦
as a distinctly service-producing firm. Hans Ake Sand, retired CEO, said:
When this industry was starting to grow here, we realized that we should not just provide
our customers with an automobile, if they ask for one, which our competitors were doing,
and still to some extent seem to be doing. Instead we wanted to position our company as
a provider of transportation service. We developed a service concept, according to which
we provide immediately accessible transportation solutions to temporary transportation
problems.
This service concept still holds and guides Interrent’s new service development and mar-
keting strategies.
Although the firm was doing well, the competition had increased substantially, and
continued to do so. Therefore, it was decided that the auto rental service of Interrent
should be developed in a more service-oriented direction. Hans ˚Ake Sand said: ‘The objec-
tive was to create a unique position for Interrent, where the most important keywords
were trustworthiness and reliability.’ According to Sand, Interrent wanted to be able to
offer customer benefits that were more real and tangible than just ‘we do it with a smile’
or ‘we try harder’.
The Elements of the Basic Service Package

The core service was a transportation solution. The basic ingredients of the service pack-
age were broken down into elements that needed to be designed and planned, so that
an ‘immediately accessible solution to temporary transportation problems’ would emerge
as required by the service concept. Both enabling services and enhancing services were
needed, and most of the necessary enabling services were designed so that they simulta-
neously served as enhancing services as well.
The elements considered were as follows (F denotes enabling (facilitating) service, S

denotes enhancing (supportive) service):
● Information about terms (S).

● Reservation (F and S).
● Delivery of auto to customer (F and S).
● Customer use of auto (F and S).
● Return of car (F and S).
● Pricing (S).
● Billing (F and S).
● Payment (F and S).
● Handling complaints (S).
These were the major elements included in the service development process. Three impor-
tant observations can be made at this point. First, it is interesting to note how elements
such as billing and complaints handling, which are normally not considered service, just
administrative routines, can be turned into service in a basic service package. Secondly,
most or all enabling services, even payment and the actual use of the automobile, can also
be thought of as enhancing services. Lastly, some traditional marketing variables, such as
pricing in this case, can be transformed into enhancing service elements.
When all the elements of the basic package are there, the necessary outcome-related
features of the service offering, that is, the technical quality dimension of the total cus-
tomer perceived quality, have been planned. However, the way in which the basic package
functions, that is, how the service process functions and is perceived by the customer, is
yet to be planned.
Augmenting the Offering: Goals to be Achieved

At this point, the elements of the basic service package have been defined. The next step
is to design these elements so that the basic package functions in a service-oriented way,
so that the service concept is transformed into a well-functioning service or a success-
ful augmented service offering. When this has been done, the functional process-related
quality dimension of total perceived quality is also accounted for, not just the techni-
cal outcome-related quality. In the next phase, accessibility issues, interactions between
customers and Interrent, and the customers’ role as co-producer during the service pro-
cess were looked into. Three general goals, expressed as service guarantees, are features
the company decided to build into the new service. To plan the augmentation of the
service package in the form of developing service guarantees is one way to ensure that
a company focuses on the customer and what the customer considers important in the
service offering. Moreover, it helps to set standards for employees. Offering guaran-
tees immediately creates service-related goals to employees, which helps management
to make the organization perform as planned (close the fourth gap in the gap analysis
model; see Chapter 5).13 Of course, offering service guarantees should also have external
effects. Research into service guarantees seems to be limited; however, research suggests
that offering guarantees can reduce the risk customers perceive before purchasing a ser-
vice. The more variety there is in the quality of service in an industry, the more service
guarantees can reduce customers’ perceived pre-purchase risk.14
The service guarantees Interrent chose to offer were:
1. A get to your destination guarantee which addressed the operational security of the
service.
2. A lowest price guarantee which addressed the issue of cost efficiency for the customer.
3. A trouble-free service guarantee which addressed any problems related to the conve-
nience, interactivity and accessibility of the service.
Get to your destination. To achieve this goal the automobiles must, of course, be in as
good a condition as possible; but as there is always a chance of breakdown, a system
for taking the customer to his destination if that were to happen had to be designed.
It was decided that customers had to be on their way to their final destination not later
than 45 minutes after they informed Interrent of the breakdown. Interrent entered into
an agreement with a security firm which had a 24-hour telephone answering service. If
the customer could not continue his trip without assistance, he was advised to call the
security firm’s number. The customer was guaranteed that within 45 minutes he would
be on the road again. If no other solution could be found, a taxi was sent to pick up
and transport the customer to his final destination at Interrent’s expense, even if this cost
could be expected to be high. This, of course, led to substantial internal discussions but
as it turned out, this ‘rescue service’ has not been expensive. It has, however, created a
◦
lot of goodwill and positive word of mouth. Hans Ake Sand said: ‘We wanted to create
reliability in our booking and delivery commitment. Our customers have to be absolutely
sure that there will be a service available; and we wanted to give our booking centre and
locations and our partners a strong signal saying that a customer who has a reservation
number is entitled to the service, either by car or taxi.’
Lowest price. To achieve this goal a well-integrated computer system was required,
so that the lowest possible fee, taking into account the various ways of calculating the
final price, could always be immediately given to the customer. The system also enabled
Interrent to do this when the automobile was returned to a location other than where it
had been picked up. Because of this system, customers did not have to figure out whether
they should rent a car on a daily basis or for a weekend, or whether they should choose
a no-mileage fee or not. Before the customer has used the service he will be quoted the
lowest possible fee.
Trouble-free service. To achieve this goal, it was decided that picking up the car and
returning it must be made as convenient as possible for the customer. First, Interrent
decided that a car could be picked up at any Interrent location, or it could be delivered
to company addresses, railway stations or hotels. Interrent also decided to promise that
the car would be delivered not later than five minutes after the time agreed upon. If a
◦
customer had to wait any longer for a car, he would not be billed by Interrent. Hans Ake
Sand said: ‘The signal to the organization and to the market is clear: it is not acceptable
to deliver a car 10 minutes late and offer explanations about unexpected traffic jams.’
Second, customers are not required to return the car to the same place they got it, but
to any Interrent location. They would be guaranteed the ‘lowest price’ quotation at any
location, and immediately.
Developing the Augmented Service Offering

Once these goals were decided upon, the next phase was to develop the resources nec-
essary for their implementation. Most of the resources existed already, but some had to
be created. For example, the existing computer system could not fulfil the ‘lowest price’
goal, so it had to be developed further. The rescue centre did not exist and had to be
developed. As mentioned earlier, a partner was engaged here.
The accessibility of the service was enhanced by the actions taken to fulfil the ‘Get to
your destination’, ‘Lowest price’ and ‘Trouble-free service’ goals. The customers had to
be informed about how to react in case of a flat tyre, motor breakdown or accident in
order to be able to activate the ‘rescue activities’. The participation of the customers was
ensured by written information on how the three ‘guarantees’ functioned both in the cars
and on the accompanying documents, as well as verbally by the employees. Information
about these guarantees and the benefits they offered was also included in Interrent’s
market communication when the new service was launched. Interrent wanted to prepare
the customers to be co-producers of the service as well as possible.
In order to make sure that the interactions with the systems and physical resources were
favourable, the new auto rental service required some specific resources. As far as technol-
ogy, systems and physical resources were concerned, Interrent already had a nationwide
network, where locations operated in isolation from each other and Interrent’s headquar-
ters and were therefore used to making decisions on their own. Also, Interrent had its own
computer system, but the pricing system had to be developed. Furthermore, the cars used
by Interrent were of good quality and dependable, but they had to be maintained as well
as possible to avoid unnecessary extra costs due to breakdowns. Support by the garage
and the mechanics had to be secured. This was achieved by internal information, oral as
well as written, to the mechanics, during the weeks before the new service was launched.
The ‘security alarm system’, involving the subcontracted 24-hour telephone reception and
rescue system, had to be developed and the staff of Interrent’s partner had to be trained
and motivated to accept the new commitments.
The customer contact people in the reservation centre and at the rental locations also
had to be trained and motivated to fulfil the goals of the new auto rental service, so that
customers experienced favourable and positive interactions with the employees. The ‘five-
minute maximum delay’ commitment and the ‘within 45 minutes on the road again’ com-
mitment caused some internal controversy, but the internal marketing approach, headed
by the managing director, convinced the organization of the rationale behind the new
service. Eventually, as the service turned out to function well and without significant extra
costs, a total commitment seemed to have been achieved. This internal marketing pro-
cess had to be squeezed into a 10-day period before the service was launched, so that no
information would leak outside the organization ahead of time. Meetings, called ‘service
seminars’, were arranged, which included oral and written information, where discussion
◦
and communication was encouraged. Hans Ake Sand himself, as CEO, took an active part
in this process. The new service, the goals and the rationale behind the promises to the
market were explained and discussed. Hans ˚Ake Sand concluded that ‘the people in the
organization perceived the total programme we were to offer our customers as a chal-
lenge, but they also realized that the firm trusted them, and we achieved a commitment
for the new service.’
When launching the new service offering, the external marketing campaign was
directed at travel agencies, but there was also a short advertising campaign involving lead-
ing daily newspapers which focused on the three guarantees. Building upon its previous
good image, Interrent wanted to create a communicated image of trustworthiness and
real value and comfort for its customers.
The Results
Immediately after the service was launched sales increased considerably, improving 15%
in the first month, 9% in the second month and 17% in the third month after launching
the service offering. After a year, sales were 23% higher than during the same period the
year before.
The costs of operating the new service had not gone up to any significant extent. The
fear of enormous extra costs following the three guarantees turned out to be unwar-
ranted. Positive and service-oriented standards have also been set for the organization:
promises must be kept 100%, no unnecessary (more than five-minute) delays will be
accepted, no customer must be left without help if a breakdown occurs (on the road
not later than 45 minutes after a phone call to the alarm centre), and the lowest price
must always immediately be quoted. The effects of these and other standards are even
greater because of the trust that management showed in the organization. Goals cannot
be fulfilled without decentralized decision-making authority. Top management supported
this, and provided the employees with sufficient information, guidance and managerial
backup. The pricing system also produced such support.
◦
As Hans Ake Sand said: ‘We wanted to get rid of general promises to our customers,
such as “We do it with a smile” or “We try our best”, and demonstrate real excellence and
trustworthiness.’
SERVICE DESIGN OR DESIGNING FOR SERVICE 221
S E RV I C E D E S I G N O R D E S I G N I N G F O R S E RV I C E
Service design has become an important management issue.15 However, designing services or service
activities is too limited a view. It is based on the thought that goods and services are different categories
of products, and that service design is developed alongside product design. The service perspective on
business, or service logic, does not make such a distinction. Instead it is based on the foundation that
service is a way of approaching the firm’s customers in a manner that supports the customers’ everyday
processes, in order to facilitate their value creation and contribute to their goal achievement in life or
business. Service to customers can be implemented by a firm through any kind of resources or any
resource constellations, including any combination of goods, service activities, information, etc.
Following the service logic, designing services is a special case of designing any resource or resource
constellation in such a way that they support the customer’s processes. The broader view of design-
ing resources and processes is called design for service.16 Anything, including physical products, can
be designed for service, in other words, to serve customers or any users. The opposite is to design a
resource, for example, for artistic merit or technical smartness only. However, designing for service
does not mean that such goals could not be included in the design process as well.17 Hence, we should
distinguish between:
● Design for service.

● Service design.
The latter means designing service activities, whereas design for service means that anything – goods,
service activities and constellations of these and other resources – are designed to fulfil the purpose
of a service logic:18 to serve the customer or any other user in a value-creating way. Thus, designing
for service may include service design, but also design of product elements and other tangible items
in an offering. For example, a teapot can be designed to look good, but when used it spills tea onto
the table, or it can be designed to function properly without spilling tea outside the cup, and still
look good in an artistic sense. In the former situation, the teapot is design as a product only; in the
latter situation it is design for service, i.e. to service the user’s tea-drinking habit in a value-supporting
manner.
In Figure 7.2 a model of designing for service is schematically illustrated (the designing for service
triangle). The three basic parts of the model are the customer/user, whom the resource or offering is
designed to serve, the concept guiding the design process, and finally the service process.
As the model indicates, a thorough understanding of the customers’ everyday processes and goals forms
the starting point. Such an insight can hardly be gained through traditional market research. Instead
ethnographic and similar methods are normally required. The following questions have to be asked
and thoroughly answered:
● Who is the user?

● What is the user doing?
● Why is the user acting in a certain way?
● What could the user achieve?
Answers to such questions help the designer understand what opportunities exist to serve the cus-
tomer, and to serve better than before and perhaps in a totally new way.
CUSTOMER/USER
• Who is the user?
• What is the user doing?
• Why is the user doing things
in a certain way?
• What could the user achieve?
The
Service
Design
Process
CONCEPT PROCESS
• Whom should be served? • How to support the user’s processes
• What purpose should be facilitated and goals?
by the service? • What resource constellations
• What is the underpinning logic? to use for providing this support?
• How to design the process, and people,
systems and artefacts used?
F I G U R E 7.2
The designing for service triangle.
Then a customer-focused and service-based concept guiding the design process is established. Such
a concept can be formulated by answering three simple questions:
● Whom should be served?

● What purpose should be facilitated by the service?
● What is the underpinning logic?
The two first questions provide basic facts for the design process. However, the third question, ‘What
is the underpinning logic?’, is the most important one at this stage. Discussing this question and finding
a new and unique answer to it, based on the answers to the two customer/user-related questions,
may lead to totally new solutions and even revolutionize an industry. This is what Apple managed to
do with the iPhone, or what the introduction of the microwave oven decades ago did to cooking.
There is an abundance of examples. Not spending time on finding a new logic, when appropriate,
only leads to more of the same, and not to a unique new way of serving customer-held purposes.
Finally, the process of designing for service should be attended to. Here the following questions
should be answered:
● How to support the user’s processes and goals?

● What resource constellations to use for providing this support?
● How to design the process, and people, systems and artefacts functioning in the process?
SERVICE DESIGN OR DESIGNING FOR SERVICE 223
When developing the service process and designing the many kinds of resources involved, it is impor-
tant to take a broad enough look at the process. There are often a whole host of resources and
processes involved in providing service. If a required resource or sub-process is neglected and not
properly designed, the whole service may fall apart, leading to a dissatisfied and, in the worst case
lost, customer. Moreover, when developing and designing resources and processes, their effect on
both the technical quality (the outcome of the service process; what the customer is left with) and the
functional quality (how the process is perceived) have to be taken into account.
All resources and processes must be developed such that they function as service. They have to be
servicized, which means that they are designed and managed in a way that indeed serves the customers.
At a minimum the following kinds of resources and processes normally exist in a service process and
have to be included in the design process:
Service employees: Employees in customer contacts and in support functions serving internal cus-
tomers must be trained to do their job technically, but also motivated to perform in a customer-
focused and service-oriented manner. Through their leadership managers and supervisors must sup-
port such behaviour (internal marketing; see Chapter 14).
Goods and artefacts in the service process: Such resources can be servicized, for example by making
them easy to use, easy to maintain, and easily and nicely incorporated in the service process.
Recognized service activities: Activities in a customer relationship which are recognized as service,
such as repair and maintenance service and call centres, must be developed so that they successfully
support the customer process for which they are designed.
Hidden services: These are service activities that normally are not consider service but administrative,
legal, economic, logistical or operational routines, such as complaints handling, invoicing, order-
taking and deliveries. Well designed and handled hidden services can have a profound impact on
customers’ perception of the service provider and its service. Neglected hidden services, for example
resulting in continuous delays in deliveries and unclear or supplier-focused invoices which create
problems for customers, can destroy customer relationships and cause much negative word of mouth
and discussion in social media.
Servicescapes: The environment where the service process takes place, or the servicescape, includes
artefacts, atmosphere-enhancing elements such as music and colours, as well as people, both employees
and customers. The way the servicescape looks and functions must be carefully designed to enhance
the service experience.
Customers: On the one hand, customers are part of and form the servicescape. On the other hand,
customers participate actively in the service process. When designing for service, both these customer
roles have to be taken into account. For example, fellow customers must not disturb or in the worst
case destroy the service experience of a focal customer, and customers can be given some active roles
in service production, such as in Internet banking or self-service stores, or when operating vending
machines and digital healthcare control devices.
The goal here is to design and develop a service process that indeed serves the customer. Apple’s
iPhone mentioned above is an example of a design and development process where thorough atten-
tion was paid to each part of the designing for service process. Another example is the development
of a unique elevator system by the Finland-based global elevator company, Kone Corporation. This
elevator system serves builders and owners of buildings better than traditional ones. By realizing the
need for architects and builders to use as little space for the elevator system as possible, Kone changed
the underpinning logic of the elevator concept and came up with the machine room-free system,
where the machinery is built into the elevator. This freed space for other use in a building, and in
addition it has positive effects on maintenance as well. From only being an elevator and escalator
manufacturer, Kone is today known as a service business ‘dedicated to people flow’.
D E V E L O P I N G A S E RV I C E O F F E R I N G I N T H E
M A R K E T S PA C E
Today, an ever-increasing number of offerings of goods and services are marketed over the Inter-
net and mobile phones. A large virtual marketspace has developed alongside the traditional physical
marketplace. Regardless of whether they are related to physical goods or services, the purchase and
consumption of Internet offerings can be described as process consumption and can be seen to reflect
the key characteristics of service and service consumption.
The customer has to be able to operate the system in order to be able to get information about
goods or services, to order them, to pay for them or arrange for payment, as well as possibly to make
detailed inquiries and receive responses to those, and to perform a number of other activities related
to the offering that is considered, and in many cases to use the service. In the end this process should
of course lead to an outcome as in the case of any service. The quality of an Internet offering is
dependent on the perceived quality of the process (the functional quality dimension) of using the
Internet as a purchasing and sometimes also consumption instrument as well as on the perceived
quality of the outcome (the technical quality dimension). As can be concluded from the description
above, the offering of any physical good or service over the Internet is a service. Therefore, marketers who
wish to use the Internet to offer their goods or services to customers should take care to design their
offerings as service offerings that customers perceive and evaluate as service.
In the following sections the augmented service offering is developed into a service offering for
the Internet, called the NetOffer model.19
THE NETOFFER MODEL

In this section the full NetOffer Internet offering model is described. The elements of the basic ser-
vice package, i.e. the core service as well as the enabling and enhancing services, are similar to those
in the original model. However, the augmentation elements of the Internet offering are different,
because accessibility and interaction aspects of the process cannot be kept apart. Instead, they merge
into one communication element in the augmentation process. The NetOffer model is illustrated in
Figure 7.3.
The service concept is the foundation for the service package and for the augmentation of the package
into an Internet offering. However, unless there is an easy-to-understand and easy-to-use website,
i.e. a well-functioning interface between the user and the firm, there is no access to the Internet
offering. Therefore, compared with the model for the traditional marketplace, an additional element
termed user interface (UI) is included in the service package. The technical as well as the functional
quality dimensions of the offering are dependent on the design and functionality of this interface. If
the interface between the customer and the computer is not functional, the service that the firm is
trying to supply is unusable and therefore worthless. The user interface consists of every aspect of the
computerized interaction. The site must be easy to navigate and all the links must be clear and logical.
The colours and graphics must be attractive and the text easy to process. Moreover, the speed of the
server must be sufficient and the types of fonts must be appropriate. These are all issues that concern
the quality of this interface.
The UI is part of the service package, because it more or less has to sell the offering itself. It has to
be visually appealing and technically functioning. There are no marketers present who can convince
the potential customer about the superiority of the offering. It is easy for a customer to switch to
THE NETOFFER MODEL 225
SERVICE CONCEPT
User
Inf
Interface
orm
tio
ma
ati
or
on
Inf Core
Service
Enabling Enhancing
Services Services
PARTICIPATION COMMUNICATION
Information
F I G U R E 7.3
The NetOffer model.
Source: Grönroos, C., Heinonen, F., Isoniemi, K. & Lindholm, M., The NetOffer model: a case
example from the virtual marketspace. Management Decision, 38(4); 2000: p. 250.
Reproduced by permission of Emerald Insight.
another website, and therefore a visually uninteresting or difficult-to-grasp interface quickly makes a
potential customer leave the site. In that case a sales opportunity is lost.
In an offering on the Internet, information is a critical element. Therefore, the inner triangle in the
figure illustrating the service package is placed within a circle of information. This circle represents
the information supply that has to be provided when offering goods or services on the Internet.
Information is a vital part of any such offering and it is a part of all the different elements of the model.
Information provided by the firm as well as by the customer is the fuel that makes the core, enabling
and enhancing services function and that drives the UI.
As Figure 7.3 shows, the augmentation of the service package includes two elements instead of the
three in the original augmented service offering model. These elements are:
1. Customer participation.
2. Communication.
Customer participation denotes the skills, knowledge and interest of customers as far as operating the UI
is concerned, i.e. as co-producers of the service, so that they can make a purchase, ask questions and
make complaints, receive responses, or go to links offered on the website. Customer participation can
also relate to discussion group activities involving customers and potential customers and other users of
a given website. Through an easily manageable UI and supportive information about various aspects
of the system and the parts of the service package, the firm can assist customers in participating. Thus,
customer participation becomes partly a co-production activity, partly a co-creation of a solution for
the customer’s value-creating process.
On the Internet, accessibility and interaction involve communicating. Getting access means com-
municating with the website using the navigation system of the UI, and interacting with the web-
site means communicating with the system through e-mail or other parts of the system. Interacting
becomes part of communicating. Hence, interaction and accessibility in the original augmented ser-
vice offering model merge into one element, where the common denominator is communication.
Sometimes communication is two-way, as in the case of inquiries through e-mail. Sometimes it is
one-way, as in the case of making a direct purchase or giving credit card information when paying
for goods or services. The communication element of the Internet offering illustrates the dialogue
that can occur between the service provider and the customer. This dialogue can include all possible
media of communication, for example by e-mail, telephone, letters, message boards, etc.
By facilitating user-oriented communication, the Internet marketer helps the customer to purchase
and consume goods and services offered on the Internet. Through this communication and assum-
ing appropriate customer participation skills, the functional quality of the Internet offering (the how
dimension) is enhanced and the customer is able to perceive the technical quality of what is offered
(the what dimension). Good total perceived quality and value are created.
Finally, when goods and services are bought on the Internet, it is not enough that the Internet
offering functions well and creates an acceptable perceived service quality. The purchases have to
be delivered to the customer as well in a quality-enhancing way. Sometimes the delivery can take
place electronically, as in the case of electronic airline tickets that can be printed by the consumer.
Sometimes the goods are delivered in the physical marketplace.
CASE STUDY
DEVELOPING AN AUGMENTED SERVICE OFFERING ON THE
I N T E R N E T: T H E PA L A C E
The Service Package
The Palace is a firm selling tickets to movies and it is also a group of movie theatres. The
service concept can be formulated as follows: ‘To offer tickets to movies supported by
interesting and value-adding information related to current and future films immediately
and easily accessible for a customer at a place chosen by and at any time convenient to
him or her.’
The core service, i.e. the reason for being on the market, has changed from the tradi-
tional selling of tickets to the firm’s group of cinemas to ‘an Internet-based way of pro-
viding tickets to movies any time of the day’. The added value of introducing an Internet-
based offering lies in the fact that, after having reserved and bought the tickets on the
Internet, when coming to the movie theatre the customer knows for certain that there
is a given seat available for him. Traditionally customers have had two options: either to
THE NETOFFER MODEL 227
call the movie theatre and make a reservation, in which case the ticket has to be picked
up to 30 minutes in advance, or to go to the ticket booth and buy the ticket, if any tickets
are available at that time.
In a traditional service offering the ticket purchase encounter is an example of enabling
services. Also in the virtual surrounding of the Internet-based offering such mandatory
enabling can be found, e.g. information about which movies are playing as well as infor-
mation about dates, times and specific movie theatres where a given film is showing. As
tickets have to be paid for, there are links to three different Internet banks. If a customer
has access to them he can make the purchase. These features of the offering are typical
enabling services, because without them customers cannot use the core service. For exam-
ple, persons who are customers of any other than these three banks or who do not have
access to their Internet payment systems cannot purchase tickets, because for them this
enabling service is missing.
Also, enhancing services exist. In fact, there are few limits to what can be done on
an Internet website. Links, competitions, games, gimmicks, etc. can be introduced. The
Palace has introduced a number of such services that are not enabling the purchase of
tickets but are used to enhance or differentiate the service package. Customers want-
ing information regarding various movies can join a mailing list and receive information
about the movies at their e-mail addresses. At best, a service like this may create an inter-
active relationship based on e-mail communication between the company and its cus-
tomers, which if effectively used can create advantages over the competitors. However,
such interactive relationships are becoming so common in virtual marketspaces that they
themselves do not automatically provide a competitive edge unless they are constantly
updated and developed. The users must perceive that they receive essential information
in a convenient way through the system. Otherwise it becomes an ineffective enhancing
service.
On The Palace site there is news about the movies, the actors/actresses and off-screen
activities that may be interesting to customers. This is an important supporting service,
too, but probably not equally important as interactive relationships. In this case the cus-
tomer has to log on to the website in order to read the news. Trailers and soundtracks
are also examples of supporting services offered by The Palace. Such supporting services
seem appealing, but in practice they are more gimmicks than effective marketing tools. In
addition, the customer can get information about and listen to some of the soundtracks
of the films shown in the movie theatre. The soundtracks belong to the same category as
the trailers, initially attractive but probably of limited importance. In the beginning, when
a trailer or a soundtrack system is new and technically better than what competitors can
offer, the differentiating and value-adding effect of such enhancing services can be con-
sidered better. Over time, when the advantage is lost, such services are likely to become
less interesting to users of the website and thus less effective as enhancing elements in
the service package.
Augmentation of the Service Package

There is only one aspect of the offering that can be categorized clearly as a distinct acces-
sibility issue. That is the fact that a virtual store is open 24 hours a day. This, however, is
not something that distinguishes The Palace from other firms on the Internet. Accessibility
is a common feature of virtual stores, because physically they are always accessible. This
type of accessibility is not an issue in the marketspace; it is always there and can therefore
be neglected as a distinguishing means of competition.
The absence of direct interactions with employees means that the website itself must
perform the functions of employees. The site has to be technically advanced enough and
functionally easy to operate by the customer so that he can get access to the service pack-
age. At the same time as this is a matter of accessibility; it is an interaction issue. The
customer has to be able to understand the complexity of a website and to be able to
communicate either in a one-way mode or in a two-way mode using an e-mail option (or
sometimes the telephone).
In The Palace case, e-mail is the most important means of communicating with the
firm. In this way the customer can also make complaints and get responses to them or to
inquiries that he may have made. However, the e-mail system is also, simultaneously, an
accessibility and interaction element of the service package.
The navigation system in The Palace example has a clear logic and is easy to use. This
makes the service package easily accessible at the same time as it provides for good inter-
actions between the user and the website. No access to employees is offered or even
needed, but in other cases, if the user encounters problems, a contact to a helpdesk could
be provided by the system for example. In such situations person-to-person communica-
tion and not only person-to-system communication occurs. Both accessing a system and
interacting with it means communicating with the system.
Customer participation is also an important element in the augmentation of the service
package on the Internet. In order to be able to operate the website of The Palace, the users
need appropriate knowledge of how to use the navigation system, e-mail and other ele-
ments of the system. An easy-to-understand and easy-to-use navigation system assists the
customer in purchasing tickets and in making use of supporting services available on the
site. The Palace also provides the users of its website with the opportunity to log on to dis-
cussion groups, where they may exchange views on different films, movie stars and other
movie-related topics with friends or strangers interested in the same issues. This is a way of
creating a forum for customer participation through customer-to-customer communica-
tion. At the same time it supports word-of-mouth, or rather word-on-line communication
about the Internet ticket sales service between customers and potential customers, who
also may visit the website and take part in the activities of the discussion group.
Source: Grönroos, C., Heinonen, K., Isoniemi, K. & Lindholm, M. (2000) The NetOffer
model: a case example from the virtual marketspace. Management Decision, 38(4); 2000:
243–252. Reproduced by permission of Emerald Insight.
NOTES 229
S U M M A RY
This chapter discussed the need to develop a service offering in a systematic way. As service is a com-
plicated phenomenon, service offerings are also complicated. The augmented service offering model was
introduced as a conceptual model of the total offering customers perceive when consuming or using a
service. The model includes a basic service package and an augmentation of the package into a holistic
augmented service offering. The need for supportive marketing communication and positive image as
well as for internal marketing to prepare the organization to perform according to the requirements of
the augmented service offering was also explained. The starting point for the process of developing the
offering is a clear understanding of the benefits customers want and the formulation of easily understood
service concepts. As part of the presentation of how to successfully develop an augmented service offering,
the issue of service guarantees was briefly touched upon. Then, how to design for service was explored
and a model for designing for service was presented. Finally, a model for the development of services in
the virtual marketspace was discussed.

1. Why has a service package to be further developed into an augmented service offering in
order to be truly customer-oriented?
2. What are the elements of a basic service package?
3. How is the basic service package developed to be an augmented service offering?
4. What is the role of the service concept in the development of service offerings?
5. How does an augmented service offering for the virtual marketspace differ from an offering
for the traditional marketplace?
6. What can be achieved internally and externally with the introduction of service guarantees?
7. What is the difference between service design and designing for service? When designing
for service what questions should be asked?
8. Analyse the service, in general or a given service, offered by your organization, using the
augmented service offering model, or develop a hypothetical service offering using the
model.
NOTES
1. See Grönroos, C., Service Managing and Marketing. Managing the Moments of Truth in Service Compe-
tition. Lexington, MA: Lexington Books, 1990. In the service management and service marketing
literature, surprisingly little attention has been devoted to the understanding and conceptual-
ization of service or service offerings. An example of one of the few attempts is Storey, C. &
Easingwood, C.J., The augmented service offering: a conceptualization and study of its impact
on new service success. Journal of Product Innovation Management, 15(4), 1998, 335–351.
2. There is a limited but growing number of publications on the design and development of new
services. See, for example, de Brentani, U., New industrial service development: scenarios for
success and failure. Journal of Business Research, 32(2), 1995, 93–103; de Brentani, U. & Ragot, E.,
Developing new business-to-business services: what factors impact performance? Industrial Mar-
keting Management, 25(6), 1996, 517–530; Edvardsson, B., Quality in new service development:
key concepts and a frame of reference. Internal Journal of Production Economics, 52(1–2), 1997, 31–
46; Edvardsson, B. & Olsson, J., Key concepts for new service development. The Service Industries
Journal, 16(2), 1996, 140–164; Martin Jr., C.R. & Home, D.A., Service innovations: successful
versus unsuccessful firms. International Journal of Service Industry Management, 4(1), 1993, 49–65.
See also Kokko, T., Offering Development in the Restaurant Sector – A Comparison between Customer
Perceptions and Management Beliefs. Helsingfors, Finland: Hanken Swedish School of Economics,
Finland, 2005.
3. See, for a few early examples, Normann, R., Service Management, 2nd edn. New York: John
Wiley & Sons, 1991; Langeard, E. & Eiglier, P., Servuction. Les Marketing des Services. Paris: John
Wiley & Sons, 1987; Lehtinen, J.R., Quality-oriented Services Marketing. University of Tampere,
Finland, 1986.
4. This point of view goes back to the argument put forward by Theodore Levitt: ‘Having been
offered these extras, the customer finds them beneficial and therefore prefers doing business with
the company that supplies them.’ See Levitt, T., After the sale is over. Harvard Business Review,
Sept–Oct, 1983, 9–10.
5. Lovelock, C., Competing on service: Technology and teamwork in supplementary services.

Strategy & Leadership, 23(4), 1995, 32–47. Recently this model has been studied and updated
in Frow, P., Payne, A. & Ngo, L., Diagnosing the supplementary services model: empirical
validation, advancement and implementation. Journal of Marketing Management, 30(1–2), 2014,
138–171.
6. Grönroos, 1990, op. cit. and Grönroos, C., Developing the service offering – a source of com-
petitive advantage. In Surprenant, C. (ed.), Add Value to Your Service. Chicago, IL: American
Marketing Association, 1987.
7. I am grateful to Anton Molander and Daniela Voullième, two students in my Service Manage-
ment and Marketing class, who in a project presentation made the point that the terms enabling
NOTES 231
and enhancing services better communicate the meaning of the underlying constructs than the
terms facilitating and supporting services which were used in previous editions of this book.
8. Grönroos, 1990, op. cit. and Grönroos, 1987, op. cit. In the service development literature,
especially customer involvement has been studied. See, for example, Carbonell, P., Rodriges-
Escudero, A.I. & Pujari, D., Customer involvement in new service development: an examination
of antecedents and outcomes. Journal of Product Innovation Management, 6(5), 2009, 536–550.
9. See Prahalad, C.K. & Ramaswamy, V., The Future of Competition: Co-Creating Unique Value with
Customers. Boston, MA: Harvard Business School Press, 2004 and Wikström, S., Value creation
by company–consumer interaction. Journal of Marketing Management, 12, 1996, 359–374.
10. The relationship between image as brand image and firm reputation and service offerings have
been studied in Cretu, A.E. & Brodie, R.J., The image of brand image and company reputation
where manufacturers market to small firms: a customer value perspective. Industrial Marketing
Management, 36(2), 2007, 230–240.
11. Bitner, M.J., Brown, S.W. & Meuter, M.L., Technology infusion in service encounters. Journal
of the Academy of Marketing Science, 28(1), 2000, 138–149. See also Kristensson, P., Matthing, J. &
Johansson, N., Key strategies for successful involvement of customers in new technology-based
services. Journal of Service Industry Management, 19(4), 2008, 474–491.
12. Although this case is not new, it clearly demonstrates the potential of the augmented service
offering model.
13. Ostrom, A.L. & Hart, C., Service guarantees. Research and practice. In Swartz, T.A. & Iacobucci,
D. (eds), Handbook in Services Marketing & Management. Thousand Oaks, CA: Sage Publications,
2000, pp. 299–313 and Hart, C.W.L., The power of unconditional guarantees. Harvard Business
Review, 66( Jul–Aug), 1988, 54–62.
14. Ostrom, A.L. & Iacobucci, D., The effects of guarantees on consumers’ evaluation of services.
Journal of Services Marketing, 12(6), 1998, 362–378. See also Wu, C.H.J., Liao, H-C., Hung, K-P.
& Ho, Y-H., Service guarantees in the hotel industry: their effects on consumer risk and service
quality perceptions. International Journal of Hospitality Management, 31(3), 2012, 757–763, and
McCollough, M.A., Service guarantees: a review and an explanation of their continued rarity.
Academy of Marketing Studies Journal, 14(2), 2010, 27–54.
15. See, for example, Patricio, L., Fisk, R.P., Falcao de Cunha, J. & Constantine, L., Multilevel
service design: from customer value constellation to service experience blueprinting. Journal of
Service Research, 14(2), 2011, 180–200.
16. See Kimbell, L., Designing for service as one way of designing services. International Journal of
Design, 5(2), 2011, 41–52. See also Meroni, A. & Sangiorgi, D., Design for services. Surrey: Gower
Publishing Ltd, 2011.
17. Moreover sometime, for example, designing for artistic goals may be designing for service. For
instance, a painting serves the owner or any viewer by its artistic qualities.
18. Wetter-Edman, K., Sangiorgi, D., Edvardsson, B., Holmlid, S., Grönroos, C. & Mattelmäki, T.,
Design for value co-creation: exploring synergies between Design for Service and Service Logic.
Service Science, 6(2), 2014, 106–121.
19. Grönroos, C., Heinonen, K., Isoniemi, K. & Lindholm, M., The NetOffer model: a case example
from the virtual marketspace. Management Decision, 38(4), 2000, 243–252.
Bitner, M.J., Brown, S.W. & Meuter, M.L. (2000) Technology infusion in service encounters. Journal
of the Academy of Marketing Science, 28(1), 138–149.
Carbonell, P., Rodriges-Escudero, A.I. & Pujari, D. (2009) Customer involvement in new service
development: an examination of antecedents and outcomes. Journal of Product Innovation Management,
6(5), 536–550.
Cretu, A.E. & Brodie, R.J. (2007) The influence of brand image and company reputation where
manufacturers market to small firms: a customer value perspective. Industrial Marketing Management,
36(2), 230–240.
de Brentani, U. (1995) New industrial service development: scenarios for success and failure. Journal
of Business Research, 32(2), 93–103.
de Brentani, U. & Ragot, E. (1996) Developing new business-to-business services: what factors
impact performance? Industrial Marketing Management, 25(6), 517–530.
Edvardsson, B. (1997) Quality in new service development: key concepts and a frame of reference.
Internal Journal of Production Economics, 52(1–2), 31–46.
Edvardsson, B. & Olsson, J. (1996) Key concepts for new service development. The Service Industries
Journal, 16(2), 140–164.
Frow, P., Payne, A. & Ngo, L. (2014) Diagnosing the supplementary services model: empirical vali-
dation, advancement and implementation. Journal of Marketing Management, 30(1–2), 138–171.
Grönroos, C. (1987) Developing the service offering – a source of competitive advantage. In Sur-
prenant, C. (ed.), Add Value to Your Service. Chicago, IL: American Marketing Association.
FURTHER READING 233
Grönroos, C. (1990) Service Managing and Marketing. Managing the Moments of Truth in Service Compe-
tition. Lexington, MA: Lexington Books.
Grönroos, C., Heinonen, K., Isoniemi, K. & Lindholm, M. (2000) The NetOffer model: a case
example from the virtual marketspace. Management Decision, 38(4), 243–252.
Hart, C.W.L. (1988) The power of unconditional guarantees. Harvard Business Review, 66(Jul–Aug),
54–62.
Kimbell, L. (2011) Designing for service as one way of designing services. International Journal of Design,
5(2), 41–52.
Kokko, T. (2005) Offering Development in the Restaurant Sector – A Comparison between Cus-
tomer Perceptions and Management Beliefs. Helsingfors, Finland: Hanken Swedish School of Eco-
nomics, Finland.
Kristensson, P., Matthing, J. & Johansson, N. (2008) Key strategies for successful involvement
of customers in new technology-based services. Journal of Service Industry Management, 19(4),
474–491.
Langeard, E. & Eiglier, P. (1987) Servuction. Les Marketing des Services. Paris: John Wiley & Sons.
Lehtinen, J.R. (1986) Quality-oriented Services Marketing. University of Tampere, Finland.
Levitt, T. (1983) After the sale is over. Harvard Business Review, Sept–Oct.
Lovelock, C. (1995) Competing on service: technology and teamwork in supplementary services.
Strategy & Leadership, 23(4), 32–47.
Martin Jr., C.R. & Horne, D.A. (1993) Service innovations: successful versus unsuccessful firms.
McCollough, M.A. (2010) Service guarantees: a review and an explanation of their continued rarity.
Academy of Marketing Studies Journal, 14(2), 27–54.
Meroni, A. & Sangiorgi, D. (2011) Design for services, Surrey: Gower Publishing Ltd.
Ostrom, A.L. & Hart, C. (2000) Service guarantees. Research and practice. In Swartz, T.A. &
Iacobucci, D. (eds), Handbook in Services Marketing & Management. Thousand Oaks, CA: Sage Publi-
cations, pp. 299–313.
Ostrom, A.L. & Iacobucci, D. (1998) The effects of guarantees on consumers’ evaluation of services.
Patricio, L., Fisk, R.P., Falcao de Cunha, J. & Constantine, L. (2011) Multilevel service design:
from customer value constellation to service experience blueprinting. Journal of Service Research, 14(2),
180–200.
Storey, C. & Easingwood, C.J. (1998) The augmented service offering: a conceptualization and study
of its impact on new service success. Journal of Product Innovation Management, 15(4), 335–351.
Wetter-Edman, K., Sangiorgi, D., Edvardsson, B., Holmlid, S., Grönroos, C. & Mattelmäki, T.
(2014) Design for value co-creation: exploring synergies between Design for Service and Service
Logic. Service Science, 6(2), 106–121.
Wikström, S. (1996) Value creation by company–consumer interaction. Journal of Marketing Manage-
ment, 12, 359–374.
Wu, C.H.J., Liao, H-C., Hung, K-P. & Ho, Y-H. (2012) Service guarantees in the hotel indus-
try: their effects on consumer risk and service quality perceptions. International Journal of Hospitality
Management, 31(3), 757–763.
CHAPTER 8
MANAGING PRODUCTIVITY
IN SERVICE ORGANIZATIONS
“ The productivity of service operations is not an internal affair. In service customers decide what is high
productivity and what is not.
”
INTRODUCTION
The productivity concept as it has been developed for manufacturing firms cannot readily be used
in service contexts. In this chapter the problem is discussed in detail. The shortcomings of a tradi-
tional manufacturing-based productivity concept are analysed, and a service productivity concept is
developed. It is observed that in service organizations decisions based on traditional productivity mea-
surements will almost always lead in the wrong direction. Internal and external consequences have
to be taken into account simultaneously if productivity is to provide management with meaningful
guidance. In the final sections of this chapter the possibility of creating measurement instruments
is explored. No final calculation models can yet be offered. The theoretical understanding of ser-
vice productivity has to be developed further before robust measurement models can be developed.
After reading this chapter the reader should understand the problems of a traditional manufacturing-
oriented productivity concept in service contexts and the pitfalls of using productivity measurements
based on such a concept. The reader should also understand the nature of service productivity and
how service productivity measurements could be made and, finally, know how continuous learning
in a relationship contributes to productivity.
P R O D U C T I V I T Y: M A N A G I N G P R O F I T S ,
NOT COSTS
In many organizations managers seem to misunderstand the meaning of productivity. Frequently, pro-
ductivity is more or less seen as cost efficiency, and productivity management only or predominantly
as the management of internal efficiency. Productivity as a concept comes from product manufac-
turing and from a closed system without external interference. Customers are not influencing the
236 MANAGING PRODUCTIVITY IN SERVICE ORGANIZATIONS
manufacturing processes, and moreover, are not exposed to such processes and influenced by how
they are organized and function.
In conventional productivity models, the objective is to ensure effective management of profits. In
practice, it is assumed that when input resources into the processes are changed, and for example, less
expensive resources or production processes are introduced, the quality of the production output, the
products, can be controlled. Therefore, in situations where more cost-efficient resources or processes
are used, revenues generated by production outputs can be expected to remain unchanged but unit
costs of production go down. Costs are variable, revenues are fixed. In conventional manufacturing
this means that by managing cost efficiency, productivity is managed at the same time. Productivity
management becomes a shortcut to profit management, and internal efficiency of the firm’s processes
becomes a proxy for profit effectiveness.
Problems occur when this shortcut to profit management is used in business environments where
production is not a system closed to customers. What functions well in a closed system does not
function in an open system, as a service organization is. When new input resources and processes are
introduced in service operations, the production outcome, and its technical quality dimension, and
the service process, and its functional quality dimension, do not remain unchanged. When managers
in service operations mistake cost efficiency for productivity, and concentrate on managing internal
efficiency only, disaster is around the corner. In service, it is imperative to realize that productivity
management indeed is profit management, and no shortcuts exist. This creates a need for new knowledge
and new productivity models.
THE PRODUCTIVITY DILEMMA: BALANCING

REVENUES AND COSTS
Although some publications on service productivity have been published during the past decade or
so, productivity as a concept has been largely neglected in service research.1 It is often claimed that
productivity is low in many service organizations and that service is produced using excess resources
and at unnecessarily high cost. With another resource structure the service provider could cut costs
and still produce as much as before. For example, banks are urging their customers to use ATMs,
PCs and the Internet to take care of regular bank affairs instead of visiting a bank and occupying the
bank employees’ time. Insurance companies have established websites on the Internet and call centres
for customer service, so that customers can interact over the Internet or telephone instead of by
visiting customer service employees. Airlines are forcing their customers to turn to self-service check-
in systems. The reason for these changes in resource structures is of course to shift from expensive
resources in the service process to cheaper resources. If customers perceive that they receive the same
quality as before, or perhaps even better quality, these changes have been successful.2 They have been
cost-effective and at the same time maintained or improved the firm’s revenue-generating capability.
However, cost-cutting changes in the resources used may well have the opposite effect. Perceived
quality may deteriorate and customers may become dissatisfied and start to look for other options.
The service provider’s revenue-generating capability thus declines.
The problem with being an effective service organization is that productivity and perceived qual-
ity are inseparable phenomena.3 Therefore, managers in service organizations must never revert to
cost efficiency management only. As Anderson et al.4 observe, improving customer satisfaction and
productivity may turn out to be incompatible goals. Improving productivity may have a neutral or
positive impact on quality, but equally it may damage perceived quality. If the latter happens, sat-
isfaction with quality declines and the risk that the firm will lose customers increases. Revenues go
down, and this may have a negative effect on the firm’s overall financial results, even though costs
SHORTCOMINGS OF MANUFACTURING-BASED PRODUCTIVITY CONCEPTS 237
may also have been reduced. As productivity is a proxy for profitability, or profit, this development
is in reality not a productivity improvement.
This is the dilemma in service processes. Improved internal efficiency following the introduction of
more cost-effective production resources and processes does not necessarily lead to better economic
results. In fact, while using a traditional productivity terminology, what is considered to bring about
an increase in productivity – that is, improved internal efficiency – often has the opposite effect in
service organizations. This leads to decreasing service quality and, as a consequence, to lost revenues.
The obvious conclusion is that in service contexts productivity cannot be understood without simul-
taneously considering the interrelationship between internal efficiency and perceived quality (external
effectiveness).5 Hence, internal efficiency, which equates to cost efficiency, cannot be managed sep-
arately from external effectiveness, that is a firm’s capability of producing a certain level of perceived
service quality with a given resource structure.6 Especially in service processes where the role of the
employees is essential, ‘if a firm improves productivity by “downsizing”, it may achieve an increase
in productivity in the short term, but future profitability may be threatened if customer satisfaction
is highly dependent on the efforts of personnel’.7
Because the quality of the production output in manufacturing is not impacted by cost-saving
changes in the production system, the revenue side can be neglected in the productivity equation.
In service the quality level is impacted by such actions and therefore revenues are influenced as well.
Both costs and revenues are variable. Hence, effects on revenues of cost-saving actions must always
be included in productivity models and measurements.
In conclusion, following a traditional productivity concept firms are used to treating the manage-
ment of productivity as an internal issue where revenue effects can be omitted from the calculations.
They measure the level of productivity from an internal efficiency perspective and, because of a
constant-quality assumption, take for granted that the external effects on quality are under control. The
constant-quality assumption implies that production inputs can be changed without a negative impact
on the quality produced. However, in service the situation is the opposite. Productivity is not eval-
uated internally by managers, but externally by the customers, who make external judgements of the
productivity of a service operation. This, of course, does not exclude the importance of taking into account
the internal efficiency aspects of service productivity as well. However, because the constant-quality
assumption does not apply in service, the customers have the last word.
To clarify the discussion of service productivity, Table 8.1 describes central concepts and terms as
they are used here. Some have been discussed and defined in previous chapters.
S H O RT C O M I N G S O F M A N U FA C T U R I N G - B A S E D
PRODUCTIVITY CONCEPTS AND REQUIREMENTS
O F A S E RV I C E - B A S E D C O N C E P T
The goal of productivity management is to create profit effectiveness – in other words, to manage the eco-
nomic results. Because, by increasing productivity, an unchanged or even improved customer perceived
quality is produced using fewer resources or using resources in a more efficient way, the economic
results are assumed to improve. As long as this is the case, managing productivity makes sense. If
improved productivity does not lead to better economic results, there is no profit effectiveness, and
in that case increasing productivity does not make sense.
Existing productivity models and productivity measurement instruments are based on assumptions
of closed systems, where consumption and production are separate processes and customers do not
TA B L E 8.1
Definition and description of central concepts and terms used.
Concept/term Definition and/or description
Productivity Efficiency and effectiveness in the process of transforming input

resources in a service or manufacturing process into customer
value and hence also into profitable operations. Productivity is
profit management.
Traditional The conversion of production resources into output, or the ratio
productivity between output from the production process and input into that
concept process, given a constant quality level (the constant-quality
assumption).
Internal efficiency How efficiently outputs can be produced using a given amount of
production resources and a given production process.
Cost efficiency Synonym for internal efficiency; capability to manage costs.
External effectiveness How effectively perceived service quality can be produced using a
given amount of production resources.
Revenue effectiveness Synonym for external effectiveness; capability to manage revenues.
Revenue-generating The degree to which the perceived service quality capability enables
capability the service provider to generate sales and revenues.
Capacity efficiency How efficiently the production capacity is used for serving
customers (excess supply lowers capacity efficiency; excess
demand may affect perceived service quality negatively).
Profit effectiveness How efficiently and effectively production resources are used,
blending external effectiveness and internal efficiency, and
capacity utilized, to produce economic results. Profit effectiveness
is the ultimate internal goal for productivity-improving actions
and programmes; value for customers is the ultimate external
goal.
participate in the production process as co-producers. In traditional manufacturing,8 these assumptions

make sense of course. In service contexts, where the service production process is largely an open
system, they create confusion, give rise to misleading measurements and guide decision-making in
the wrong direction. In Table 8.2 assumptions underpinning the traditional manufacturing-oriented
productivity concept and characteristics of service are summarized.9
The characteristics of service and the assumption underlying the traditional productivity concept
make traditional productivity models and measurement instruments less useful as such for service orga-
nizations. For example, how raw materials are used in a restaurant to produce a given number of
meals can be calculated using manufacturing-oriented productivity methods, and this information is
undoubtedly valuable for the restaurant. However, it has nothing to do with the productivity of the
SHORTCOMINGS OF MANUFACTURING-BASED PRODUCTIVITY CONCEPTS 239
TA B L E 8.2
The service productivity dilemma.
Assumptions included in the Characteristics of service affecting

manufacturing-oriented productivity productivity in service contexts
concept
Production and consumption are separate; Production and consumption are

productivity measured in a closed system partly simultaneous processes with
→ perceived quality is dependent on quality-influencing interactions, i.e. an
outcome only (technical quality). open system.
→ perceived quality is dependent on both
outcome and process (technical and
functional quality).
→ difficulties in separating production input
from output.
Customers do not participate in the Customers participate in the service process
production process (closed system) (open system).
→ perceived quality is not influenced by the → uncertainty of customer-induced input in
production process. the service process; their effects vary from
situation to situation.
→ customer-induced input affects the
efficiency of firm-induced input in the
process.
→ perceived quality is also influenced by the
service (production) process (the functional
quality dimension).
Source: Adapted from Ojasalo, K., Conceptualizing Productivity in Services. Helsinki, Helsingfors: Hanken Swedish School
of Economics, Finland/CERS, 1999, p. 59. Reproduced by permission.
total restaurant operation. A totally different approach to productivity has to be taken to measure how
well a service provider uses resources to create output in the form of acceptable perceived quality
and support to customers’ value creation, and hence to create profitable operations and an improved
economic result. In service processes, where a firm provides customers with a highly standardized
infrastructure, such as a telephone receptionist or a fast-food cash register, the service provider comes
close to a closed production system resembling manufacturing. As long as the infrastructure functions
without problems and the customers know how to operate it, traditional assumptions for understand-
ing and measuring productivity apply to a large extent. However, in most service processes, even in
high-tech services, the characteristics of service in Table 8.210 apply. There, traditional productivity
models and measurement instruments are more misleading than valuable.
Because the service production process and consumption are partly simultaneous processes, where
customers actively participate as co-producers, the resources used to produce service cannot be totally
standardized. It is difficult to relate a given number of inputs, in volume or value terms, to a given
number of outputs. Frequently, it is even difficult to define ‘one unit of service’. The traditional
manufacturing-based productivity concept can be described with the following formula:
Output produced ||
Productivity = | Constant quality
Input used |
In traditional manufacturing inputs used can be measured in monetary terms as cost of production,
and because of the constant quality assumption, a decrease of the cost level equals improved produc-
tivity. Because the output quality can be kept constant, revenues will not be affected by changes in
input resources and processes. Therefore, from a commercial point of view, in traditional product
manufacturing, the productivity formula takes the following form:
Fixed revenues
Productivity (manufacturing) =
Variable costs
Only if the quality of the production output is constant can productivity be measured using tra-
ditional methods. This constant-quality assumption is normally taken for granted and, therefore, not
explicitly expressed. As an unfortunate consequence, the critical importance of this assumption is eas-
ily forgotten. However, traditional productivity measurements only make sense in service contexts
when the constant-quality assumption applies. In most service processes it does not apply. Consequently
in service the productivity formula takes the following form:
Output produced ||
Productivity = | variable quality
Input used |
In situations where the constant-quality assumption can be taken for granted in productivity man-
agement, revenue effectiveness is not an issue. A stable quality level is a guarantee of stable revenue
streams. For service providers, however, revenue effectiveness considerations cannot be omitted, and
therefore they become an integral part of productivity management. If they are not taken into account,
productivity as profit effectiveness is not managed, only internal cost efficiency. From a commercial
standpoint, service productivity can be illustrated with the following formula:
Variable revenues
Productivity (service) =
Variable costs
In service, it is not only the input that is difficult to calculate, it is also difficult to measure output.
Output measured as a volume is only useful if customers are willing to buy this output. Unlike in man-
ufacturing, in service we do not know whether customers will purchase the output produced using
a different input structure or not. It depends on the effects on perceived process-related functional
and outcome-related technical quality of the new inputs used. Hence, the interrelationship between
the use of input or production resources and the perceived quality of the output produced with these
resources has to be taken into account in service productivity.11 In other words, the interrelation-
ship between internal efficiency (cost efficiency) and external effectiveness (revenue effectiveness) is
critical for service productivity.
In the limited number of publications on productivity in service that exist, the authors normally
suggest that service productivity is managed as internal efficiency only, and somehow related to the
management of service quality.12 However, this is not according to the fundamental idea of the
THE INTERRELATIONSHIP BETWEEN PRODUCTIVITY, QUALITY, CUSTOMER PARTICIPATION AND DEMAND 241
productivity concept as an instrument for managing profit effectiveness. Moreover, such an approach
does not guarantee that perceived quality effects are properly taken into account. In a recently pub-
lished article, Parasuraman concluded that strategies to improve productivity and service quality, and
also innovation, are likely to be suboptimal, if they are pursued in isolation. Instead integrated strate-
gies should be developed.13 Therefore, we present a service productivity concept which incorporates
both internal efficiency (costs) and external effectiveness (perceived quality, revenues) and strives to
integrate them into one model.
T H E I N T E R R E L AT I O N S H I P B E T W E E N
P R O D U C T I V I T Y, Q U A L I T Y, C U S T O M E R
PA RT I C I PAT I O N A N D D E M A N D
Because customers participate as co-producers in the service process and influence the process and its
outcome, the customer’s role in productivity is also different in service contexts to that in manufac-
turing (see Table 8.2). We can distinguish between:
● Provider-induced contribution to productivity.

● Customer-induced contribution to productivity.
● Interaction-induced contribution to productivity.
The first contribution is provider participation in the service process. For example, for a hair stylist, his
professional and communication skills, time available, the equipment, physical products used in the
process, enhancing services and goods such as coffee, tea and magazines form the provider participa-
tion in the process.
The customer and fellow customers provide customer-induced contributions to productivity, such as
information, self-service activities, inquiries and complaints. In the hair stylist example, the accuracy
of the customer’s requests and her ability to provide correct information to guide the hair stylist in
cutting her hair are customer-induced contributions to the process. The customers’ actions do not
only give the input needed to produce the service, they also influence the way the employees and
technologies in the service process function. Depending on how well the hair stylist and the customer
can relate to and communicate with each other, the interactions that occur will contribute more or
less to the perceived quality of the process, and sometimes also to the internal efficiency. This is an
interaction-induced contribution to productivity.
The provider-induced, customer-induced and interaction-induced contributions do not only influ-
ence service productivity but quality as well.14 Quality and productivity are thus two sides of the same
coin.
In addition, productivity is influenced by demand. If demand is low, the service provider’s resources
will be underutilized, which means that internal cost efficiency decreases, with a negative effect on
productivity. A given cost level produces fewer revenues and the operation turns less profitable. In
manufacturing, inventories can be used to offset this effect. In service, this is not possible. When
there is a demand that meets the provider-induced resources in the service process, internal effi-
ciency improves and a positive effect on productivity is created. When demand starts to exceed what
can be managed with existing resources, external effectiveness decreases, which has a negative effect
Demand-induced quality
Provider-induced Customer-induced
quality quality
Interaction-induced
quality
PROVIDER CUSTOMER
PARTICIPATION PARTICIPATION
IN THE SERVICE INTERACTIONS IN THE SERVICE
PROCESS PROCESS
Interaction-induced
productivity
Provider-induced Customer-induced
productivity productivity
Demand-induced productivity
Interactive participation by service provider and customer
F I G U R E 8.1
Productivity, quality, customer and provider participation and demand
as productivity factors in service contexts.
Source: Gummesson, E., Productivity, quality and relationship marketing in service
operations. International Journal of Contemporary Hospitality Management, 10(1);
1998: p. 9. Reproduced by permission of Emerald Insight.
on perceived service quality and on revenues and profits. Hence, demand is also a critical produc-
tivity factor in service. In Figure 8.115 the interrelated factors in service productivity are illustrated
schematically.
The shaded areas of the provider participation and customer participation boxes depict the parts
of the provider’s resources and the customer’s resources that are used in interaction with each other
(in service encounters). Part of provider participation takes place in a back office, where internal
service is produced. On the other hand, customer participation sometimes also takes place outside
the interactions with the service provider. For example, when making a telephone call the service
is produced by two customers who are interacting with each other. The telephone operator only
indirectly supports the service process by providing the telephone infrastructure. For example, IKEA,
the Swedish furniture chain, provides its customers with packaged furniture in a box which includes
parts, bolts and tools and instructions for assembly. The customer is then expected to continue the
service process which started in the shop by assembling the furniture at home. Here again the service
provider only indirectly supports the service process in the customer’s home by providing tools and
instructions.
From a managerial point of view, the following aspects are important in productivity management
in service organizations:
● When the service provider designs its input into the process, an optimal balance between perceived
service quality and the firm’s revenue-generating capability (external effectiveness) on the one hand
and cost efficiency of resources used (internal efficiency) on the other hand must be maintained.
MANAGING COSTS IN A SERVICE CONTEXT 243
● The service provider’s resources (provider participation) must contribute to interactions with cus-
tomers in the service process in a way that creates an optimal balance between perceived quality
and internal efficiency.
● Customers must be chosen, educated, motivated and informed in such a way that they, through
their participation in the service process, contribute positively to customer-induced quality and
productivity as well as to interaction-induced quality and productivity.
● Demand must be managed so that a balance can be maintained between perceived quality and
internal efficiency and thus also between revenues and costs.
The crucial point here is to pay attention to how changes in internal efficiency affect perceived service
quality (external effectiveness). Longer waiting times and less customer attention from personnel may
be the results of a change which increases cost efficiency in the resource structure. These effects can
easily have a negative impact on the functional quality of the service process and perhaps also on the
technical quality of the outcome. If this is the case, customers may be lost, revenues decline, and in the
end the profit effectiveness of the service provider deteriorates. Then the ultimate goal for productivity
improvements, a better economic result and improved profitability, is not achieved.16
On the other hand, actions that improve cost efficiency may have a neutral or even positive effect
on perceived service quality. New configurations of inputs and a move to a new technology level
may improve cost efficiency and have a positive effect on perceived quality as well. For example, a
restaurant may offer a salad bar instead of serving salad at the table, to decrease its input resources. For
those customers who appreciate this alternative the perceived quality is maintained or perhaps even
improved. For the restaurant this shift has probably led to a more cost-efficient use of resources. In
this case, both internal efficiency and external effectiveness, and hence also profit effectiveness, have
improved, which is the ultimate internal goal for productivity-improving actions.
In conclusion, cost efficiency and managing costs form an important part of the management
of productivity in service, as they do in manufacturing. However, because of the characteristics of
service, cost efficiency is a more complicated issue in service contexts. In the next section we shall
turn to the management of costs in service as one aspect of productivity management.
M A N A G I N G C O S T S I N A S E RV I C E C O N T E X T
In a turnaround process in the 1980s that received a lot of international publicity in service industries
and in service management literature, SAS (Scandinavian Airlines System), using a non-accounting
language, introduced a useful division of costs. The costs of operating and administrating the firm were
divided into good costs and bad costs.17 These cost concepts are not related to conventional terminology,
such as fixed and variable costs, but they are managerially relevant and helpful tools for calculating
cost efficiency and for service productivity management.18
Good costs are productive costs, because they improve an organization’s capability to produce high-
quality service and thus enhance revenue. The costs of maintaining service encounters and back-office
operations are mostly good costs. Also, the costs of training personnel, goods and service development,
are examples of good costs. The connection between such costs and the enhancement of external
effectiveness is obvious. Bad costs are costs that follow from unnecessary bureaucracy, heavy middle and
top management layers, overstaffed departments and unnecessarily complicated and time-consuming
operational and administrative routines. Changes in resource structure that decrease bad costs will
have a positive effect on internal efficiency and at the same time either a neutral or sometimes even
a positive effect on customer perceived quality and external effectiveness.
If management wants to improve productivity, achieve better results, or just cut costs as a means of
enhancing the competitiveness of the firm, what is usually done? Far too often the main actions are to
save costs of service encounter operations or back-office operations. Other staff and the management
layers are left untouched. It is much easier to cut costs in operations than costs in other parts of the
organization. If a firm is facing hard times with poor financial results, personnel training, product
development efforts and external marketing activities are also often affected by cutbacks. What man-
agement does is to cut good costs leaving bad costs untouched. From this it follows that internal efficiency
may or may not improve, but external effectiveness and customer perceived quality may be damaged,
and the net effect is all too often negative. The firm’s situation is not improved, and the competitive
position of the firm is worsened. The firm becomes a victim of the strategic management trap discussed
in Chapter 3.
A clear distinction between good costs, bad costs and mandatory costs has to be made before any
cost-saving actions are considered. Even if the firm is suffering from financial hardship, good costs,
following from efforts such as improving the skills of customer contact employees or investing in new
technology in service encounters, may have to be increased so that its competitiveness is improved
or at least not damaged. Good costs should not be cut. Instead, bad costs should be focused on by
management. Bad costs, not good costs destroy profits. First, bad costs and the sources of such costs have
to be identified. Second, actions to eliminate or decrease bad costs should be taken.
The point is that all costs are not equal wherever they occur. Until a particular cost is identified as
good or bad, action must not be taken to eliminate or decrease it.
P I T FA L L S W H E N U S I N G A P R O D U C T I V I T Y
M O D E L F R O M M A N U FA C T U R I N G
As mentioned, using a productivity model from manufacturing with its constant-quality assumption and
concentrating on the cost side only may cause problems for a service organization and even lead to the
opposite effect to what was intended. In Figure 8.2 the effects of using a manufacturing productivity
model in product manufacturing and in service, respectively, are illustrated.
To the left in Figure 8.2, the manufacturing case is depicted. When increasing productivity is
measured as internal efficiency only, due to the constant-quality assumption the quality of the out-
come, the physical products, can be expected to remain unchanged. Therefore, the level of revenues
is maintained and, because of the internal efficiency gains, costs go down and profit goes up. The
right part of the figure illustrates what typically happens in a service organization. When productiv-
ity gains are sought through internal efficiency increases without paying attention to quality effects,
perceived service quality tends to deteriorate. Because lower quality probably leads to lost revenues,
the expected profit increase due to cost savings is not achieved. Lost revenues offset the cost savings,
and in the end instead of going up, profit goes down.
In reality the development is not always as bad as illustrated above. Especially in situations where
service firms operate in a bureaucratic manner, both the internal efficiency and customer perceived
quality (external effectiveness) may be improved by streamlining the way the firm operates. Then
bad costs are found in the service encounters as well. In a situation like this, using a manufacturing-
based productivity model may very well at the same time benefit the firm as well as its customers, and
hence also lead to improved profits. Also, in situations where new technology to be used in service
processes is available, both internal efficiency gains and improved perceived service quality can be
achieved. Using the Internet and IT technologies and other digital means may be ways of rising to a
PITFALLS WHEN USING A PRODUCTIVITY MODEL FROM MANUFACTURING 245
MANUFACTURING SERVICES
Profit
Profit Manufacturing productivity
Manufacturing productivity (internal efficiency)
(internal efficiency) Service quality
Product quality Profit Manufacturing
productivity
Manufacturing
(internal efficiency only)
productivity
Profit
Product quality
Service quality
Time Time
F I G U R E 8.2
The relationship between manufacturing productivity (internal efficiency only), product
and service quality and profitability.
new and more cost-efficient technology level. As in the case of Internet banking, customers may not
always immediately appreciate the new service processes, but in the end the service quality advantages
of the introduction of new technologies are normally accepted by most, if not always all, customer
segments. However, when the old-fashioned or bureaucratic service processes have been streamlined
and/or the new technology has been adopted, and if the firm continues to cut costs, the problems
with using a manufacturing model to achieve additional productivity gains demonstrated in Figure 8.2
will start to occur.
In Figure 8.3 the challenge for a service firm looking for improved profits through productivity
improvements is illustrated. As long as the service processes are unclear and bureaucratic or a new
technology has not yet been adopted, a manufacturing productivity model may very well be effective.
Internal efficiency is improved and because the streamlined service process or the new technology is
appreciated by the firm’s customers, perceived service quality increases as well. Hence, costs go down
and revenues go up, resulting in improved profit. However, eventually a turning point is reached. This
breaking point, illustrated by the vertical dotted line in the figure, means that the manufacturing-like
situation no longer exists and further developments require new, service-oriented productivity concepts
and models. If the firm attempts to achieve further cost savings through internal efficiency improve-
ment without paying due attention to how the quality of its service develops, the economic result
and profitability easily starts to decrease. The actions that lead to a positive development before the
turning point was reached become counterproductive. As illustrated in the right part of Figure 8.3,
after the turning point perceived quality starts to deteriorate. The service process and the functional
quality perception are probably hurt first, but eventually the outcome and the technical quality per-
ception may also be impacted. When this happens, as was illustrated on the right side of Figure 8.2,
the additional cost savings sought after the turning point are soon offset by the lost revenues that
follow from a deteriorating service quality.
It is important for management in a service organization to realize that even if traditional
manufacturing-oriented productivity models work at first, inevitably at some stage a turning point
is reached. When this occurs, one must turn to new productivity concepts that are based on char-
acteristics of service and service processes. Otherwise, what started as a favourable productivity and
TURNING POINT!
Profit Manufacturing
Manufacturing productivity
productivity (internal efficiency only)
Perceived quality
(of outcome and
process)
Profit
Outcome
Perceived quality
Process
Time
Processes in disorder or Processes in order;
old technology level new technology in place
F I G U R E 8.3
Effects of using a manufacturing productivity model in service organizations.
profit improvement process soon turns into a disaster. A problem exists in that there seem to be
no models indicating when the turning point is reached – and managers are easily blinded by the
initially occurring good results. Only by following how customers perceive the service process and
the technical and functional quality of the service can one find out when the turning point has been
passed and new approaches to productivity management are needed. Moreover, increasing turnover
in the customer base and growing dissatisfaction among customer contact employees may be other
signs indicated that the turning point has been passed.
In the following sections of this chapter a service-oriented approach to understanding productivity
in service organizations will be explored and discussed.
A S E RV I C E P R O D U C T I V I T Y M O D E L
The discussion so far in this chapter has demonstrated that it is meaningless to develop a productiv-
ity concept for service organizations based on the management of internal efficiency (cost efficiency) and
quantity of output only. Because of the characteristics of service and the service process, the manage-
ment of external effectiveness (perceived service quality) of the quality of output has to be an integral part
of a service productivity concept. Managing external effectiveness and perceived service quality is a
matter of revenue effectiveness, because better quality normally means more sales and increased revenues,
and vice versa. A third element of a service productivity model is the management of demand or
A SERVICE PRODUCTIVITY MODEL 247
capacity efficiency. This is because service providers cannot use inventories to cope with excess capacity
or excess demand, as goods manufacturers can.
Hence, a service productivity concept can be described in the following way:
1. Service productivity = f (internal efficiency, external effectiveness, capacity utilization) or

2. Service productivity = f (cost efficiency, revenue effectiveness, capacity efficiency).
As we have seen, because in manufacturing quality is considered to remain constant and therefore
no revenue effects of changes in input will occur in product manufacturing, external or revenue
effectiveness can be eliminated from the productivity function. Because firms can use inventories
as a buffer between excess demand and excess supply, within limits even capacity efficiency can be
eliminated. In service this does not work. The service productivity model is illustrated in Figure 8.4.19
Service provider’s SERVICE PROCESS

input: Output
– Personnel quantity
– Technology Service provider
– Systems producing the service
– Information in isolation from
– Time, etc. customer (back office)
Service provider and Output

customer producing
Im a g e
quality: Customer
Customers’ the service in interaction perceived
– Outcome
input: (service encounter) quality
– Process
– Own participation
– Participation by Customer producing the
fellow customer service in isolation from
the service provider
INPUTS OUTPUTS
Internal efficiency External effectiveness

(cost efficiency) (revenue effectiveness)
SERVICE PRODUCTIVITY
f (internal efficiency, external
effectiveness, capacity efficiency)
Capacity efficiency
(capacity utilization) DEMAND
F I G U R E 8.4
A service productivity model.
Source: Based on Ojasalo, K., Conceptualizing Productivity in Services. Helsinki: Hanken Swedish
School of Economics, Finland/CERS, 1999, p. 71. Reproduced by permission.
From a productivity perspective the service process can be divided into three separate processes:
1. The service provider produces service in isolation from the customer.

2. The service provider and the customer produce service in interactions (service encounters).
3. The customer produces service in isolation from the service provider.
The service provider-induced inputs into the service process (personnel, technology, systems, informa-
tion, use of time, etc.) influence the first two processes directly and, for example by providing the
infrastructure for service consumption as in telephone communication, the third process indirectly
(as illustrated by the black and dotted arrows, respectively). The customer-induced inputs (customer’s
own participation and fellow customers’ participation as co-producers) directly affect the second and
third processes, and indirectly affect the first, for example by providing information to back-office
processes.
The more efficiently the service organization uses its own resources as input into the processes and
the better the organization can educate and guide customers to provide process-supporting input to
produce a given amount of output, the better the internal or cost efficiency of the service process will
be. From the provider’s point of view, how customers produce service in isolation from the service
provider has no direct effect on internal efficiency, but has a decisive impact on service productivity
through customers’ perceptions of service quality and their corresponding willingness to contribute
to the firm’s revenues.
Finally, the service provider and the customer influence the interactive part of the service process,
leading to an interaction-induced contribution to productivity.
The output of the service process is twofold: quantity of output (volume) and quality of output
(outcome and process).
The quantity produced is dependent on demand. If demand meets supply, the utilization of capacity
or capacity efficiency is optimal. If there is excess demand, capacity is utilized to the full extent, but there
may be a negative effect on the quality of the output. If demand is lower than potential output, the
capacity is underutilized and capacity efficiency will be lower than optimal. For example, if the call
centre staff is underutilized, the perceived quality of the service that is produced is good, but internal
efficiency is low. On the other hand, if the call centre is understaffed, internal efficiency may be high
but perceived service quality is probably low, because customers will have to wait for their calls to
be answered and the employees will have a limited time for each call (low functional quality of the
process). In addition, they may not have the time required to solve customers’ problems or give good
advice, resulting in low technical quality as well.
Because of the characteristics of service, the quality of the output is partly manifested in the process
(interaction-induced quality) and partly in the outcome of the process. As shown in Chapter 4,
customers experience quality as the functional quality of the service process and the technical quality of
the outcome, and filter the experiences of these two quality dimensions through the image of the
company, resulting in customer perceived quality. The more effectively perceived quality is produced
using a given amount of input (service provider’s input and customers’ input), the better external
or revenue effectiveness will be, resulting in improved service productivity. On the other hand, if the
perceived service quality goes down, because the available input is functioning in a less service-
oriented way or the resource structure is altered in a way that decreases quality, external effectiveness
is reduced and the firm’s revenue-generating capability is lowered. This has a negative impact on
service productivity.
A SERVICE PRODUCTIVITY MODEL 249
In conclusion, internal efficiency and the cost-efficient use of resources is one side of service pro-
ductivity, and external effectiveness (perceived service quality) and the revenue-generating capability
following the use of resources is another. In addition, the efficient utilization of resources so that
demand and supply meet as much as possible has a positive impact on service productivity. As the
service productivity functions shown at the start of this section illustrate, high service productivity
requires that the three efficiency and effectiveness factors are blended in an optimal way. Increasing
(internal) cost efficiency may have the opposite effect on (external) revenue effectiveness. On the
other hand, improved internal efficiency following new ways of producing a service (for example,
using the scenario at the beginning of this chapter, going from performing everyday bank services in
bank offices to customers using ATMs, home banking, the Internet and mobile devices), may very
well lead to an improved quality perception and thus to improved revenue-generating capability and
external effectiveness at the same time as it lowers costs. In addition, how capacity is utilized (capacity
efficiency) has to be taken into account.
This blending of the three types of efficiency is illustrated in Figure 8.5. The highest possible service
productivity is achieved in the shaded area of the figure. However, achieving this may not always
be possible, because higher external effectiveness and revenue-generating capabilities may require
lower internal efficiency and cost efficiency. The optimal combination is dependent on the blend
of revenue-generating capability and cost efficiency that optimizes the firm’s economic result, also
taking into account the effect of the capacity efficiency that can be achieved.
In conclusion, to manage productivity in service organizations, an integrated service productivity
concept, and realizing that a constant-quality assumption does not apply, is the only meaningful
productivity concept. How to measure productivity based on a service productivity concept is another
issue, which we shall turn to in the last section of this chapter.
(High productivity)
High
Internal (cost) efficiency
Low High
(Low productivity) Capacity efficiency
Low High Low
External (revenue) effectiveness
F I G U R E 8.5
Service productivity as a function of internal efficiency, external
effectiveness and capacity efficiency.
Source: Ojasalo, K., Conceptualizing Productivity in Services. Helsinki: Hanken
Swedish School of Economics, Finland/CERS, 1999, p. 161. Reproduced by permission.
LONG-TERM PRODUCTIVITY COUNTS

In order to produce acceptable quality, the service provider may have to invest in new technology
and in training its personnel to be more customer-oriented. In the short run, say, for the first 12 to
36 months, this may increase costs more than it will generate additional revenue. However, this short-
term perspective must not guide management decisions. In Western companies there is an established
inclination to demand quick results and to reject actions that only pay off in the long term and show
no short-term benefits. This is a devastating approach, the negative effects of which should be avoided
as much as possible.
By such a strategy the long-term profitability of a firm could be sacrificed in the pursuit of quick
revenues, often without management and shareholders even realizing it. However, a short-sighted
outlook can easily lead to deteriorating customer perceived quality, which in turn leads to dissatisfied
customers and lost business. If a firm’s market share is to be maintained, huge increases in its budget for
traditional external marketing are then required, and in the long run even this may not help. A long-
term perspective should, therefore, guide management decisions. If there is ever a conflict between short-
term revenue and quality, quality considerations should come first. Focusing too narrowly on finances makes
managers lose their long-term perspective and quality improvements that may be needed will not be
achieved. By focusing first on quality, better financial results will follow. As Patrick Mene, Corporate
Director of Quality and TQM co-ordinator of the Malcom Baldrige Quality Award-winning Ritz
Carlton Hotel Company, once said: ‘You cannot improve a company’s financial performance merely
by focusing on finances.’20
An investment programme such as the one illustrated in this section will probably pay off in more
internally efficient operations after, say 12 to 36 months. Applying a service productivity concept to
improve productivity requires a long-term approach. Managers who do not realize this easily revert
to a manufacturer-oriented productivity concept, which carries a high risk of making the wrong
decisions for the long-term survival of the firm.
A P P LY I N G T H E S E RV I C E P R O D U C T I V I T Y
C O N C E P T: I M P R O V I N G P R O D U C T I V I T Y
A N D Q U A L I T Y AT T H E S A M E T I M E
As has been shown here, contrary to what is commonly thought, it is a mistake to believe that
improving productivity and increasing service quality cannot be done simultaneously. All steps taken
to improve service productivity should be based on (1) a thorough understanding of what constitutes
good service quality, as perceived by customers, and (2) an equally thorough analysis of the firm’s pro-
cesses and customer interfaces, and of how the firm operates to produce that quality; which resources
(human, physical, technological and customer) are needed and which are unnecessary, and how effec-
tive or ineffective the systems and routines used. Good costs and bad costs have to be identified and
kept separate. When these two pieces of research (external and internal) are compared, a strong basis
will be established for improving productivity and quality simultaneously in a service organization. Next,
ways of simultaneously improving service quality and service productivity will be discussed.
IMPROVING EMPLOYEES’ TECHNICAL SKILLS

High-quality service means, among other things, that employees know how to do things correctly.
If they have inadequate skills, the technical quality of the outcome of the service process will be
APPLYING THE SERVICE PRODUCTIVITY CONCEPT 251
damaged. However, at the same time, customers will probably have to wait longer, and be more
proactive themselves, to receive an acceptable technical quality. Moreover, they will perceive the
lack of skills on the part of the employees. All these aspects of interactions with the firm lower the
perception of the functional quality of the interaction process. At the same time, this lack of skills
and the need for corrective action and the repetition of activities affect productivity. Consequently,
improving the technical skills of a firm’s personnel may be a means of simultaneously improving
quality and productivity.
S E R V I C E O R I E N TAT I O N O F AT T I T U D E S A N D E M P L O Y E E
B E H AV I O U R
Unfriendly and negative attitudes and behaviour by personnel has a significant negative impact on the
functional aspect of perceived service quality. Moreover, this has a backlash effect on productivity.
Angry customers, by their reaction, tend to create problems for employees, which slows down the
service process. Moreover, angry and dissatisfied customers may complain either on the spot or later,
which creates extra work and lowers productivity. Service-oriented employees, on the other hand,
enhance quality perception and thus enhance productivity. Of course, if, for example, employees
spend an unnecessarily long time with each customer, which does not pay off even in the long run,
a productivity problem may occur.
I N T E R N A L VA L U E S S U P P O R T I V E T O G O O D S E R V I C E
PRODUCTIVITY
Internal value systems in organizations that honour conventionality, risk aversion and behaviour inhi-
bition may have an unfavourable impact on service productivity.21 The development of internal
values that support good service, on the one hand, and make employees aware of the need to use
resources intelligently, on the other, is a means of improving service productivity. At the same time,
employees will have to understand the interplay between internal efficiency (costs) and external effec-
tiveness (revenues) of their actions and behaviour in the service processes. Managers and supervisors
have a decisive role in this process of forming internal values and culture (see Chapter 14 on internal
marketing and Chapter 15 on service culture).
MAKING SYSTEMS AND TECHNOLOGY MORE SUPPORTIVE

TO EMPLOYEE AND/OR CUSTOMER CO-PRODUCTION
If the operational systems and routines used are considered complicated, or difficult to handle or to
understand, this may create problems for employees, customers or both. For example, if a customer
service helpdesk receives too many inappropriate phone calls – for example, requests for general
information – productivity and quality problems occur. For employees, this creates barriers to meet-
ing customer service specifications and thus they are unable to care enough for the customers. For
customers, it often means a long waiting time for help. Productivity and service quality are dam-
aged. In this situation, a front-end automated device using modern call-centre technology that directs
phone calls to the correct destination could be an appropriate solution. Thus, both service quality
and productivity could be influenced favourably. Moreover, self-service technologies which cus-
tomers find complicated and/or which do not consistently function properly also damage productivity
(and perceived service quality). Self-service check-in at airports currently seems to be an example
of this.
I N D U S T R I A L I Z I N G T H E S E R V I C E O P E R AT I O N
Applying manufacturing-like methods of operations as a means of improving service had already
been suggested in the 1970s.22 Generally, industrializing a service means to substitute technology
and automation for people. ATMs, insurance vending machines, Internet banking and Internet shops
and automatic check-in machines in airports are examples of such an approach. In some cases indus-
trialization is an appropriate way of improving both service quality and productivity. Today, when
retail banks offer ATMs to customers who want to withdraw cash from their accounts with the
convenience this provides but offer personal service when they want to discuss financial problems
and opportunities, this way of industrializing the service works well. However, problems can arise if
industrialization is offered for all types of service to all segments of customers in all situations, which is
often the case. Productivity measured by internal measurements may increase, but service quality may
decrease, and this may have a negative effect on the firm’s economic result, both in the short term
and the long term. Hence, industrialization as a means of improving productivity and quality always
demands extremely careful internal as well as external quality impact-oriented analyses to avoid errors.
U S I N G T H E I N T E R N E T, D I G I TA L S O L U T I O N S A N D I N F O R M AT I O N
TECHNOLOGY
The Internet and other digital means and information technology offer many opportunities for cre-
ating service processes which demand fewer resources from the service provider and at the same time
are perceived as improved service quality by customers. Electronic commerce, Internet shopping and
banking are examples of service processes with a different input configuration that lower costs and for
many customers provide a high quality service. TV shopping is another example of how an informa-
tion technology-based resource structure can be used to decrease costs and at the same time provide
high-quality service to customers who appreciate this form of shopping. Mobile commerce-based
telecommunication and digital TV have enormous potential to offer similar opportunities.
I N C R E A S I N G C U S T O M E R PA R T I C I PAT I O N I N T H E S E R V I C E
PRODUCTION PROCESS
Another way of improving productivity and quality is to look at customer impact on the service pro-
cess. There are, in principle, two ways of doing this. First, more self-service elements can be introduced.
However, it is extremely important that this is not done simply for internal efficiency reasons. Cus-
tomers have to see that benefits arise from participating in self-service processes. If they do not find
those benefits, perceived quality suffers. Customers have to be rewarded for taking part in self-service
elements, and they have to be motivated to do so. The other aspect of improving productivity and
quality by paying attention to customer participation is to improve the participation skills of customers.
Sometimes customers do not know exactly what they are supposed to do or say, how documents
are to be filled out, and so on. This has a negative impact on the functional quality aspect; it may
also affect the technical quality of the outcome. In addition to this, more of the employee’s time is
required to ensure that customers fulfil their role in the service process. Thus, productivity is affected.
Better-informed customers feel more secure, make fewer mistakes and need less unnecessary attention
from employees. Consequently, they are more satisfied with the service. At the same time, there is
a twofold effect on productivity. The customers speed up the service production process – by their
SERVICE PRODUCTIVITY AS A LEARNING RELATIONSHIP 253
input into the process they improve productivity, and employees can serve more customers, which
also enhances productivity.
R E D U C I N G T H E M I S M AT C H B E T W E E N S U P P LY A N D D E M A N D
Physical goods can be kept in stock, if demand is low; service cannot. If the demand curve has high
peaks and corresponding troughs, service quality will probably be good in the latter situations, but at
peak times too many customers present at the same time will lead to long queues, longer waiting times,
less personal attention, and so on. At the same time, productivity is low, because too often the firm
will have idle resources and low capacity efficiency. Hence, reducing the mismatch between supply
and demand is a way of making quality more consistent and of simultaneously improving productivity.
Using part-time employees may be one way of doing this, but it is not always successful. For example,
when retailers replace professional sales clerks with part-time personnel without sufficient training,
motivation and supervision, service quality suffers permanently, at slow times as well as at peak times.
Another way of matching supply and demand is to attempt to manage the flow of customers. Offering
better prices during slow periods and making customers change their consumption habits by means
of communication are ways of doing this using traditional marketing activities.
In addition to these means of simultaneously improving service quality and productivity, there
are other methods that can sometimes be used. Reducing the service level (quantity or quality),
introducing new services (smartcards instead of credit cards or bus tickets) and substituting goods for
services (new data transfer equipment replacing cable and mail services) are examples.
S E RV I C E P R O D U C T I V I T Y A S A L E A R N I N G
R E L AT I O N S H I P
Individual customers as well as organizations frequently engage in ongoing relationships with service
firms, and manufacturers who face service competition also engage in relationships with customers
where a range of services are included in a total offering to them. Hence, service productivity is
frequently dependent on how the relationship proceeds. Relationships are learning experiences where
both parties get used to each other and learn how to interact with each other so that errors, service
failures, quality problems, information problems, etc. can be minimized. In other words, both
the service provider and the customer gradually learn how to avoid errors and problems that create
unnecessary costs for both parties, and have a negative impact on perceived service quality.23 These
effects of learning relationships on service productivity are illustrated in Figure 8.6.
Figure 8.6 demonstrates how the customer (in the upper part of the figure) gains experience of a
service provider and the service process (or processes) as the relationship continues. It also shows how
this has effects in two directions, on the ability to participate more effectively in the service process,
thus improving internal efficiency (to the left in the figure) and on the perception of service quality,
thus improving external effectiveness (to the right in the figure).
Following the upper part of the figure to the left, one can see an internal efficiency-improving
learning process. More knowledgeable customers have what could be called a narrower competence
gap than customers in earlier stages of the relationship, because their knowledge of how to act and,
for example, what information input to provide, make the service process quicker and smoother.
This enables more intense customer participation and co-production, which in turn results in higher
internal efficiency (cost efficiency) and may also lead to improved external effectiveness (perceived
quality and revenue effectiveness). Following the upper part of the figure to the right, one can see
Customer Better match

More
Narrower familiarizes Customer between
intensive
competence himself learns what expectations
customer
gap with the to expect and
participation
service experiences
Higher Higher
internal external
efficiency Relationship
effectiveness
(and external continuity
(and internal
effectiveness) efficiency)
Provider Provider Provider Provider

allows more becomes familiarizes learns the More
intensive aware of itself customer’s tailored
customer customer’s with the specific services
participation competence customer needs
Better capacity efficiency
Improved service productivity
F I G U R E 8.6
Effects of learning relationships on service productivity.
Source: Based on Ojasalo, K., Conceptualizing Productivity in Services. Helsinki: Hanken Swedish
School of Economics, Finland/CERS, 1999, p. 194. See also Grönroos, C. and Ojasalo, K., Service
productivity as mutual learning. International Journal of Quality and Service Sciences, Vol. 7, 2015
(forthcoming). Reproduced by permission.
external effectiveness-improving effects of the same learning process. Customers become more aware
of exactly what to expect and this creates a better match between expectations and experiences, which
in turn improves external effectiveness (perceived quality and revenue effectiveness). It may also have
a positive effect on internal efficiency (cost efficiency).
In the lower part of Figure 8.6 one can see how the service provider, when it learns more about a
customer, becomes more aware of the customer’s competence and can allow more intensive customer
participation, and learns more about the their specific needs, wishes and expectations, and therefore
can better tailor service for the customer. These processes make it possible for the service provider to
adjust to the customer and take actions that improve both internal efficiency and external effectiveness.
At the same time, due to this learning process, the service provider can try to persuade its customers
to use its service in a way that levels out demand peaks and troughs, and can adjust its resources to
account for customer demand so that capacity better meets demand. In this way the utilization of
capacity (capacity efficiency) improves as well. The end result is improved service productivity.
From a productivity point of view, longer customer relationships are preferable, because they allow
for mutual learning. Due to the learning effect, the more often relationships are broken and lost
customers have to be replaced by new ones, the lower service productivity will be. Hence, customer
retention is important for service productivity, and productivity in service is a learning experience.24
MANAGING SERVICE PRODUCTIVITY 255
M A N A G I N G S E RV I C E P R O D U C T I V I T Y
Service productivity theory has been developed only to a very limited extent. However, some guide-
lines for productivity management in service businesses can be presented. These guidelines are still
quite rudimentary, but nevertheless helpful for management:
1. The first step is to distinguish between quality-enhancing good costs and bureaucracy-maintaining bad costs
in the service processes. This information provides a starting point for making decisions about
how to improve service productivity. Resources and processes which include good costs must be
treated differently to bureaucracy-maintaining resources and processes.
2. Then clarify and systematize processes which include overlapping activities and unclear purposes, such that
these processes are streamlined and double-work is avoided. In this way unnecessary cost-creating
work can be avoided, and at the same time customers probably perceive the change as quality-
enhancing. The customers’ experiences with streamlined service processes especially have a posi-
tive impact on the functional quality perception.
3. If possible, move to a new technology level. Introduction of more advanced technologies in service
processes may have a positive effect on the customers’ perception of service quality (e.g. Internet
banking) and at the same time improves the firm’s internal efficiency and lowers the cost level.
4. Also if possible, move activities which customers consider interesting and are willing to perform to the customers’
sphere. Self-service processes increase customers’ quality perception provided that they do not
create unnecessary perceived sacrifice for them (increase relationship costs). Moving to self-service
enables the firm to be more cost efficient. However, the customers must accept the self-service
requirement and find it quality-enhancing, otherwise it does not work.
All these service productivity-improving actions aim at simultaneously increasing the internal effi-
ciency (cost efficiency) as well as the external effectiveness (perceived service quality) of the service
provider, which is at the heart of service productivity. However, one should remember that espe-
cially those actions which require customers to change their behaviour are not necessarily immedi-
ately accepted. Customers may have to be educated. However, if the customers do not eventually
accept a suggested new role for them in the service process, this new self-service process will not be
productivity-enhancing. It may lower the cost level, but may also hurt the firm’s revenue-generating
capability even more, and may also have a negative impact on the firm’s image.
M E A S U R I N G S E RV I C E P R O D U C T I V I T Y
In the final sections of this chapter, approaches to developing instruments for measuring service
productivity will be discussed. As Parasuraman notes, metrics for measuring service productivity as
an integrated concept are largely lacking.25 No final solutions are provided, because there is not yet
enough research available on how to measure service productivity to make this possible. However,
suggestions for how to think and in which direction to go will be made.26
In traditional manufacturing the constant-quality assumption makes it relatively easy to measure pro-
ductivity. A measure of output is compared with a measure of input. If the ratio grows following
alterations in the resources or resource structure used in production, productivity improves. Parts of
the total service production process can be measured in a similar way. For example, the number of
delivery trucks loaded in a warehouse per day, the number of phone calls that a call centre can handle
in an hour or the percentage of seats in a restaurant occupied at any given point in time are examples
of such partial productivity measures. They give management an idea of how efficiently these processes
function from an internal perspective, which may sometimes be a useful piece of information. How-
ever, such measures must never be used to judge the overall productivity of these processes. Instead,
measures of, for example, the number of calls received must always be accompanied by measures
of the time spent with customers and the quality of the outcome of the call.27 In service, produc-
tivity measurements must always include a measure of how a given input in the form of resources
and resource structures affects perceived service quality and the revenue-generating capability of the
organization. In addition, considerations of how well capacity is utilized must also be taken into
account.
Because service productivity includes both cost efficiency and revenue effectiveness, the develop-
ment of a global or total productivity measure has to incorporate both phenomena. A concept which
includes both revenues and costs is, of course, profit. When capacity efficiency is included we get
close to the profitability of the service operations. Capacity efficiency influences costs but also rev-
enues where excess demand has a negative impact on quality. The interrelationship between quality,
productivity and profit is complicated, but clear. In a previous chapter we discussed the relationship cost
concept, which demonstrates how improved service quality as perceived by customers can decrease
the cost level of the service provider, thus having a positive effect on both revenues and costs. In
Figure 8.7 the complicated interrelationship between quality, profit and productivity is illustrated.
QUALITY UP
Image up Customer Service Inspection Rework Inventory Accounts Processing

retention costs and test and scrap down receivable time
up down costs costs down down
down down
Costs of Capital
Share of
complaints costs
customer
down down
up
Sales
Scale
up
economies
up
Price Production PRODUCTIVITY UP
competition costs
down down
PROFITS UP
F I G U R E 8.7
The interrelationship between quality, productivity and profit.
Source: Gummesson, E., Productivity, quality and relationship marketing in service
operations. International Journal of Contemporary Hospitality Management, 10(1); 1998: p. 6.
HOW TO DEVELOP SERVICE PRODUCTIVITY MEASUREMENT INSTRUMENTS 257
The figure is based on the fact that goods and service activities almost always appear in a symbiotic
relationship. As the figure indicates, improved quality can be expected to have a number of internal
and external effects, all of which have a positive impact on productivity. The same positive effects of
improved quality also lead to a higher profit level. The effects of improved quality on revenues are
shown in the left section of the figure, on cost in the middle section and on capital employed in the
right section. As Evert Gummesson observes, quality, productivity and profitability form ‘triplets’,
the parts of which are all related to the same phenomenon, the welfare of the organization, although
they approach this from different perspectives.28
Figure 8.7 demonstrates how the effects of quality and productivity improvements eventually lead
to improved profit. As was concluded previously, as productivity is a proxy for profit the ultimate
goal of productivity management is to achieve better profit effectiveness and economic results. The-
oretically, the correct way of measuring global productivity is to measure how changes in production inputs impact
on the level of perceived quality and how this, in turn, affects profits. In traditional manufacturing, due
to the constant quality assumption, effects on revenue generation can be excluded from productiv-
ity measurement instruments. Therefore, measurements are reduced to cost-efficiency calculations.
In service, where the constant quality assumption does not apply, effects on revenues have to be
included. Hence, measuring service productivity becomes more complicated.
The next section will discuss various ways to measure service productivity and will suggest ways
to develop service productivity measurement instruments.
H O W T O D E V E L O P S E RV I C E P R O D U C T I V I T Y
MEASUREMENT INSTRUMENTS
Because external effects on perceived quality have to be taken into account in service productiv-
ity, a measurement instrument has to include the customer’s perspective as well. Taking an internal
organizational perspective is not enough. This, of course, makes the development of measurement
models much more complicated in service contexts than in traditional manufacturing, where paying
attention to internal efficiency is sufficient.
As was said before, it can sometimes be useful to measure partial productivity, but only global
or total productivity measurements give real information on how a service provider is performing.
Table 8.3 gives three basic alternatives for productivity measurements.
TA B L E 8.3
Alternative ways of measuring service productivity.
Physical measures Financial measures Combined measures
Partial customers served revenues revenues

e.g. e.g. e.g.
productivity employee-hours labour costs number of employees
(output/one
input)
customers served revenues revenues
Total e.g. e.g. e.g.
total resources cost of resources level of resources
productivity
Source: Ojasalo, K., Conceptualizing Productivity in Services. Helsinki/Helsingfors: Hanken Swedish School of Economics,
Finland/CERS, 1999, p. 133. Reproduced by permission.
Physical measures are the traditional way of measuring productivity in general. The normal way of
measuring service productivity has been to also use physical measures. This is natural, but misleading,
because there was in the past no theory of service productivity and firms therefore had to borrow
the manufacturing productivity concept. In an attempt to cope with the obvious problems of using
physical measures in service operations, combinations of physical and financial measures have also
been used. For example, in a restaurant the revenue per service employee or restaurant seat has been
used to calculate partial productivity of personnel or physical outlets. The ratio between the number
of customers served per period and the costs of operating the restaurant have also been used to find
total productivity.
Using physical measures by themselves is misleading, because neither cost nor revenue effects
are included. Using combination measures is also misleading, because they either omit cost con-
siderations or exclude revenue effects. Other types of combination measures have also been sug-
gested; one proposed measure that comes close to a pure financial measure is calculating ‘pro-
cess value productivity’, which is the market value of what is produced minus the costs of the
resources purchased, divided by the number of employee-hours per period used in the service
process.29
Purely financial measures are not normally used for measuring service productivity. This is probably
because it seems difficult to calculate the value of the output of the service process. First, because of
the heterogeneity of production inputs and customer participation in the service process, it is difficult
to standardize output and assess a market value. Second, price fluctuations make it harder to use
financial measures of output.30 Table 8.4 shows the pros and cons of physical, financial and combined
measures of service productivity.
Regardless of the problems involved, the only theoretically correct and seemingly practically
relevant approach to measuring service productivity is to base productivity calculations on finan-
cial measures. In principle, the correct way of measuring service productivity as a function of
cost efficiency (internal), revenue effectiveness (external) and capacity efficiency is the following
measure:
Revenues from a given service

(1) Service productivity =
Costs of producing this service
As a global or total productivity measure of the operations of a service provider, the following measure
can be used:
Total revenues
(2) Service productivity =
Total costs
Hence, service productivity more or less equals the economic profit and profitability, and when-
ever possible productivity in a service organization is best assessed by measuring profitability or the
economic result of an operation.
The perceived service quality following from a given resource structure as an input in the service
process creates sales at a certain level. If the resource structure is changed, the cost level changes along
with perceived quality and the revenue-generating capability of the service provider. A change in
cost efficiency leads to a change in revenue effectiveness, and the result of this can be measured as the
ratio between revenues and costs. This is a true measurement of productivity in service organizations.
HOW TO DEVELOP SERVICE PRODUCTIVITY MEASUREMENT INSTRUMENTS 259
TA B L E 8.4
Characteristics of alternatives for measuring service productivity.
Physical measures ● Heterogeneity and intangibility aspects of services make physical

measures inappropriate.
● Physical measures ignore variations in quality.
● Total productivity is difficult to measure because it is problematic
to combine quantities of input resources.
● Difficult to get precise information on quantities.
Financial measures ● Financial measures signal heterogeneity and intangibility aspects

of services.
● No price indices are needed because both the numerator and
denominator of the productivity measure are monetary values of
the same period.
Combinations of ● The same problems are experienced as with physical measures.

physical and ● Price indices are needed because neither numerator nor denomi-
financial measures
nator is expressed in monetary values.
Source: Ojasalo, K., Conceptualizing Productivity in Services. Helsinki/Helsingfors: Hanken Swedish School of Economics
If revenues increase more than costs, productivity goes up. On the other hand, if a cost reduction
leads to lost revenues, but the decline in revenues is less than the cost savings that have been achieved,
productivity still improves. However, this may be a dangerous strategy, because in the long term it
may lead to a negative image and unfavourable word of mouth, which in turn can have a further
negative effect on revenues. Finally, cost reductions may lead to a bigger drop in revenues than is
made up for by cost savings. If this is the case, service productivity declines.
Service-oriented productivity measures should be derived from the two formulae above. How-
ever, one should bear in mind that there are problems with financial measures that should be
observed. Revenue is not always a good measure of output, since price does not always reflect per-
ceived service quality. It may also be difficult to assign capital costs correctly to respective revenues.
Table 8.5 summarizes the advantages and limitations of revenue to cost ratios for measuring service
productivity.
In conclusion, service productivity is much more complicated than traditional manufacturing pro-
ductivity, because the constant quality assumption does not apply to service. In service, it is not pos-
sible to make use of the shortcuts for measuring productivity that can typically be used in traditional
manufacturing. Examples of such shortcuts are excluding revenue measures from the productivity
formula and using physical and combined measures. Service organizations have to take the long route
to understanding and measuring productivity.
TA B L E 8.5
Advantages and limitations of using the revenue/cost ratio for measuring service productivity.
Advantages Limitations
1. Easy to compute and understand. 1. Cannot be used in non-profit service

sector.
2. Data from company records are easy to
obtain. 2. Revenues do not always provide a reliable
illustration of output quality (cf. point 4 in
3. Takes into account all quantifiable
left column), since prices do not always
output and input factors, and provides
tend to reflect the perceived quality,
an accurate representation of the real
especially for services which have been
economic picture of a service firm on an
paid for in advance. Also, if the business is
aggregate level.
subsidized by government, if prices are
4. Output quality tends to be better taken regulated, or if competition is
into account than in volume-based monopolistic, revenues may be a poor
measures (cf. point 2 in the right measure of output quality.
column).
3. Does not have the ability to explain
5. Reflects the level of capacity utilization, reasons for changes in productivity or to
since all costs are incorporated in the show bottlenecks in performance.
denominator.
4. Assigning costs of capital correctly to
6. Shows changes in productivity directly; respective revenues may be difficult,
no price indices are needed for particularly at a detailed level.
comparisons.
5. Data for computations are relatively
7. Easy to compare a firm’s productivity at difficult to obtain on service and customer
any given moment with its past levels, unless data collection systems are
performance and objectives; and easy designed for this purpose.
to compare separate units of a firm
with each other.
Source: Ojasalo, K., Conceptualizing Productivity in Services. Helsinki/Helsingfors: Hanken Swedish School of Economics,
S U M M A RY
This chapter concluded that using traditional productivity measurement instruments from manufacturing is
not possible in service organizations. Applying a productivity concept geared to traditional manufacturing
does not provide management with any useful information. Basically, this follows on from the facts that the
constant-quality assumption of the traditional productivity concept does not apply in service contexts, and
the ratio between production inputs and outputs varies from one customer served to another and from one
NOTES 261
‘unit of service’ to another. When input resources in service processes are altered, the perceived quality
of the service changes. Therefore, quality has to be included as an integral part of a service productivity
concept. Based on this, a service productivity concept including internal or cost efficiency, external or
revenue effectiveness, and capacity efficiency was introduced. Then service productivity as a learning
process was discussed. A number of ways of improving productivity in service was presented, and finally,
problems in measuring service productivity were explained.

1. What is meant by the constant-quality assumption in the traditional productivity concept
from manufacturing, and why does this not apply in service contexts?
2. Discuss the differences in measuring productivity in closed and open systems.
3. Why is it more difficult to measure productivity in an open system?
4. What should be taken into account in a service productivity concept?
5. What are the challenges involved in the development of productivity measurement models
in service?
6. Discuss service productivity as a learning process. How does this apply to service offered in
your organization?
7. Discuss the factors that influence the service productivity of service processes in your firm,
or in any given service operation.
NOTES
tition. Lexington, MA: Lexington Books, 1990; Filitrault, P., Harvey J. & Chebat, J.C., Service
quality and service productivity management practice. Industrial Marketing Management, 25(3),
1996, 243–255. Publications from the last 10 to 15 years include Parasuraman, A. Service quality
and productivity: a synergistic perspective. Managing Service Quality, 12(1), 2002, 6–9; Grönroos,
C. & Ojasalo, K., Service productivity: toward a conceptualization of the transformation of
inputs into economic results in services. Journal of Business Research, 57(4), 2004, 414–423; Rust,
R.T. & Huang, M-H., Optimizing service productivity. Journal of Marketing, 76(2), 2012, 47–
66; Calabrese, A., Service productivity and service quality: a necessary trade-off? Internal Journal
of Production Economics, 135, 2012, 800–812; Rust, R.T. & Huang, M-H., Optimizing service
productivity. Journal of Marketing, 76(2), 2012, 47–66; Grönroos, C. Service Productivity. In
Dahlgaard-Park, S.M. (ed.), Encyclopedia of Quality and the Service Economy, New York:
Sage, 2015. See also Carlborg, P., Kindström, D. & Kowalkowski, C., A lean approach for
service productivity investments: synergy or oxymoron. Managing Service Quality, 23(4), 2013,
291–304, where the authors discuss how a lean approach could improve service productivity
without hurting customer value.
2. It is often said that quality and productivity cannot be improved at the same time. This may
sometimes be the case, but as a general rule this is not true. Quite frequently new technology,
a new production system using resources in a new way or an altered customer participation
pattern can contribute to better productivity and improved service quality at the same time. For
one example, see Truitt, L.J. & Haynes, R., Evaluating service quality and productivity in the
regional airline industry. Transportation Journal, 33(4), 1994, 21–32. For a more recent discussion,
see Calabrese, op. cit.
3. Grönroos & Ojasalo, op. cit. See also, for example, Parasuraman, op. cit., and Calabrese, op. cit.
Johnston, R. & Jones, P., Service productivity. Towards understanding the relationship between
operational and customer productivity. International Journal of Productivity and Performance Manage-
ment, 53(3), 2004, 201–213.
4. Anderson, E.W., Fornell, C. & Rust, R.T., Customer satisfaction, productivity, and profitability:
differences between goods and services. Marketing Science, 16(2), 1997, 129–149: ‘if a firm
improves productivity by “downsizing”, it may achieve an increase in productivity in the short-
term, but future profitability may be threatened if customer satisfaction is highly dependent on
the efforts of personnel’ (p. 129).
5. Anderson, Fornell & Rust, op. cit., 129.
6. Grönroos, C., op. cit.
7. Anderson, Fornell & Rust, op. cit., 129.
8. The phrase ‘traditional manufacturing’, is used because in modern manufacturing, through
CAD/CAM techniques and Internet-mediated solutions, the customer is often involved in design
and production. In such cases the manufacturing processes become partly open processes and
start to resemble service processes. However, the existing productivity concept and measurement
instruments are based on a traditional manufacturing context.
9. The table is based on Ojasalo, K., Conceptualizing Productivity in Services. Helsinki/Helsingfors:
Management, 1999; Sumanth, D.J., Total Productivity Management: A Systematic and Quantitative
Approach to Compete in Quality, Price and Time. Boca Raton, FL: St. Lucie Press, 1997; Grönroos,
1990, op. cit.
10. In modern manufacturing processes this does not always hold anymore.
NOTES 263
11. Grönroos, 1990, op. cit. See also Haynes, R.M. & DuVall, P.K., Service quality management: a
process control approach. International Journal of Service Industry Management, 3(1), 1992, 14–24;
Chase, R.B. & Haynes, R.M., Service operations management: a field guide. In Swartz, T.A.
& Iacobucci, D. (eds), Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage
Publications, 2000, pp. 455–471, where the authors demonstrate the interrelationship between
productivity and service quality, although they use a traditional manufacturing-oriented produc-
tivity concept. See also Vuorinen, I., Jarvinen, R. & Lehtinen, U., Content and measurement of
productivity in the service sector. A conceptual analysis with an illustrative case from the insur-
ance business. Internal Journal of Service Industry Management, 9(4), 1998, 377–386; Parasuraman,
A., op. cit.; Rust & Huang, op. cit.; and Calabrese, op.cit., where the author discusses the need to
combine the company-oriented and customer-oriented perspectives on productivity.
12. See, for example, Parasuraman, op. cit.; Calabrese, op. cit.; and Rust & Huang, op. cit.
13. Parasuraman, A., Service productivity, quality and innovation: implications for service-design
practice and research. International Journal of Quality and Service Sciences, 2(3), 2010, 277–286. The
challenge to integrate productivity and quality strategies in service has also been observed within
the area of service science. See Maglio, P.P. & Spohrer, J., Fundamentals of service science.
Journal of the Academy of Marketing Science, 36(1), 2008, 18–20. See also Luria, D., Yagil, G. &
Gal, I., Quality and productivity: role conflict in the service context. The Service Industries Journal,
34(11–12), 2014, 955–973, which discusses employees’ ways of coping with the double messages
that decisions about quality on one hand and productivity on the other hand send.
14. See Gummesson, E., Productivity, quality and relationship marketing in service operations. Inter-
national Journal of Contemporary Hospitality Management, 10(1), 1998, 4–15.
15. Figure 8.1 is influenced by a figure in Gummesson, op. cit., 9.
16. See Kontoghiorges, C., Examining the associations between quality and productivity perfor-
mance in a service organization. The Quality Management Journal, 10(1), 2003, 32–43 and Dobni,
D., A marketing-relevant framework for understanding service worker productivity. Journal of
Services Marketing, 18(4–5), 2004, 303–312, where the authors analyse the relationship beween
quality and productivity in service organizations from different angles.
17. See Grönroos, op. cit.
18. In a study of service productivity Katri Ojasalo added mandatory costs as a third category. Manda-
tory costs are unavoidable, even though they may not have an effect on external effectiveness and
customers’ service experiences. Insurance is an example of such costs. See Ojasalo, 1999, op. cit.
19. This Service Productivity model is slightly modified and further developed from a service pro-
ductivity concept developed in a large study of the productivity in services by Katri Ojasalo. See
Ojasalo, 1999, op. cit. Her study of service productivity is the largest and most innovative and
thoughtful contribution to this field published so far. See also Grönroos, C. & Ojasalo, K., op. cit.
20. Partlow, C.G., How Ritz-Carlton applies ‘TQM’. The Cornell H.R.A.: Quarterly, Aug, 1993, 22.
21. Dobni, D., Ritchie, J.R.B. & Zerbe, W., Organizational values: the inside view of service pro-
ductivity. Journal of Business Research, 47(1), 2000, 91–107.
22. Levitt, T., A production-line approach to service. Harvard Business Review, Sept/Oct, 1972. See
also Bowen, D.E. & Youngdahl, W.E., ‘Lean’ service: in defense of a production-line approach.
International Journal of Service Industry Management, 9(2), 1998, 207–225.
23. Ojasalo, 1999, op. cit. See also Grönroos, C. & Ojasalo, K, Service productivity as mutual learning.
International Journal of Quality and Service Sciences, 7(2-3), 2015.
24. Compare Reichheld, F.F., The Loyalty Effect. The Hidden Force Behind Growth, Profits and Last-
ing Value. Boston, MA: Harvard Business School Press, 1996. More generally the relationship
between learning and productivity in product and service contexts is discussed in Argote, L. &
Miron-Spektor, E., Organizational learning: from experience to knowledge. Organization Science,
22(5), 2011, 1123–1137.
25. Parasuraman, 2010, op. cit.
26. Typically, attempts to study productivity in services take only partial productivity into account,
and usually only measure internal variables. See, for example, Dobni & Zerbe, op. cit., who in a
very interesting study of the productivity impact of employees measure perceived role behaviour,
organizational commitment and employee affect.
27. See Coates, R., Measuring service productivity. Small Business Reports, 16(3), 1991, 22–25, where
the interrelationships of quantity and quality in measuring productivity in services is discussed.
28. Gummesson, 1998, op. cit. This proposition was originally put forward in a seminal paper on
service productivity presented by Evert Gummesson at the 2nd International Research Semi-
nar in Service Management arranged by l’Institut d’Administration des Enterprises d’Université
d’Aix-Marseille in France in June 1992. See Gummesson, E., Service productivity: a blasphe-
mous approach. In Gummesson, E. (ed.), Quality, Productivity & Profitability in Service Operations.
Conference Papers from the QP&P Research Program 1992–1994. Stockholm University/
Marketing Technique Centre, 1995, pp. 8–22.
29. Edvardsson, B., Thomasson, B. & Øvretveit, J., Quality of Service. Cambridge: McGraw-Hill,
1994.
30. For example, in Jones, P., Quality, capacity and productivity in service industries. In Johnston,
R. (ed.), The Management of Service Operations. London: IFS Publications, 1988, pp. 309–321, the
author argues against the use of financial measures.
FURTHER READING 265
Anderson, E.W., Fornell, C. & Rust, R.T. (1997) Customer satisfaction, productivity, and profitabil-
ity: differences between goods and services. Marketing Science, 16(2), 129–149.
Argote, L. & Miron-Spektor, E. (2011) Organizational learning: from experience to knowledge.
Organization Science, 22(5), 1123–1137.
Bowen, D.E. & Youngdahl, W.E. (1998) ‘Lean’ service: in defense of a production-line approach.
Calabrese, A. (2012) Service productivity and service quality: A necessary trade-off? Internal Journal of
Production Economics, 135, 800–812.
Carlborg, P., Kindström, D. & Kowalkowski, C. (2013) A lean approach for service productivity
investments: synergy or oxymoron. Managing Service Quality, 23(4), 291–304.
Chase, R.B. & Haynes, R.M. (2000) Service operations management: a field guide. In Swartz, T.A.
& Iacobucci, D. (eds), Handbook of Services Marketing & Management. Thousand Oaks, CA: Sage Pub-
lications, pp. 455–471.
Coates, R. (1991) Measuring service productivity. Small Business Reports, 16(3), 22–25.
Dobni, D. (2004) A marketing-relevant framework for understanding service worker productivity.
Journal of Services Marketing, 18(4–5), 303–312.
Dobni, D., Ritchie, J.R.B. & Zerbe, W. (2000) Organizational values: the inside view of service
productivity. Journal of Business Research, 47(1), 91–107.
Edvardsson, B., Thomasson, B. & Ovretveit, J. (1994) Quality of Service. Cambridge: McGraw-Hill.
Filitrault, P., Harvey, J. & Chebat, J.C. (1996) Service quality and service productivity management
practice. Industrial Marketing Management, 25(3), 243–255.
Grönroos, C. (2015) Service Productivity. In Park-Dahlgaard, S.M. (ed.), Encyclopedia in Quality and
the Service Economy. New York: Sage.
Grönroos, C. & Ojasalo, K. (2004) Service productivity: toward a conceptualization of the transfor-
mation of inputs into economic results in services. Journal of Business Research, 57(4), 414–423.
Grönroos, C. & Ojasalo, K. (2015) Service productivity as mutual learning. International Journal of
Quality and Service Sciences, 7(2-3).
Gummesson, E. (1995) Service productivity: a blasphemous approach. In Gummesson, E. (ed.),
Quality, Productivity & Profitability in Service Operations. Conference Papers from the QP&P Research
Program 1992–1994. Stockholm University/Marketing Technique Centre, pp. 8–22.
Gummesson, E. (1998) Productivity, quality and relationship marketing in service operations. Inter-
national Journal of Contemporary Hospitality Management, 10(1), 4–15.
Haynes, R.M. & DuVall, P.K. (1992) Service quality management: a process control approach.
Johnston, R. & Jones, P. (2004) Service productivity. Towards understanding the relationship
between operational and customer productivity. International Journal of Productivity and Performance
Management, 53(3), 201–213.
Jones, P. (1988) Quality, capacity and productivity in service industries. In Johnston, R. (ed.), The
Management of Service Operations. London: IFS Publications, pp. 309–321.
Kontoghiorges, C. (2003) Examining the associations between quality and productivity performance
in a service organization. The Quality Management Journal, 10(1), 32–42.
Levitt, T. (1972) A production-line approach to service. Harvard Business Review, Sept–Oct.
Luria, D., Yagil, G. & Gal, I. (2014) Quality and productivity: role conflict in the service context.
The Service Industries Journal, 34(11–12), 955–973.
Maglio, P.P. & Spohrer, J. (2008) Fundamentals of service science. Journal of the Academy of Marketing
Science, 36(1), 18–20.
Ojasalo, K. (1999) Conceptualizing Productivity in Services. Helsinki/Helsingfors: Hanken Swedish
School of Economics, Finland/CERS Centre for Relationship Marketing and Service Management.
Parasuraman, A. (2002) Service quality and productivity: a synergistic perspective. Managing Service
Quality, 12(1), 6–9.
Parasuraman, A. (2010) Service productivity, quality and innovation: implications for service-design
practice and research. International Journal of Quality and Service Sciences, 2(3), 277–286.
Partlow, C.G. (1993) How Ritz-Carlton applies ‘TQM’. The Cornell H.R.A.: Quarterly, August, 16–24.
Reichheld, F.F. (1996) The Loyalty Effect. The Hidden Force Behind Growth, Profits, and Lasting Value.
Boston, MA: Harvard Business School Press.
Rust, R.T. & Huang, M-H. (2012) Optimizing service productivity. Journal of Marketing, 76(2), 47–66.
Sumanth, D.J. (1997) Total Productivity Management: A Systematic and Quantitative Approach to Compete
in Quality, Price and Time. Boca Raton, FL: St. Lucie Press.
Truitt, L.J. & Haynes, R. (1994) Evaluating service quality and productivity in the regional airline
industry. Transportation Journal, 33(4), 21–32.
Vuorinen, I., Jarvinen, R. & Lehtinen, U. (1998) Content and measurement of productivity in the
service sector. A conceptual analysis with an illustrative case from the insurance business. International
CHAPTER 9
MANAGING MARKETING
OR CUSTOMER-FOCUSED
MANAGEMENT
“ Full-time marketing specialists are required to make promises and find customers, but without skilful
”
part-time marketers promises will not be kept, and the total marketing process collapses.
INTRODUCTION
This chapter will discuss the nature and content of the marketing process in a service business. As the
chapter title indicates, the traditional view of marketing management may not apply where services are
concerned. A relationship approach to marketing is suggested, and the scope and content of the total
marketing process is discussed in detail. The concepts of part-time marketers, interactive marketing and
the customer relationship lifecycle are discussed. Furthermore, a relationship marketing model is presented.
Two types of marketing strategies, relationship marketing and transaction marketing, are analysed on
a marketing strategy continuum, and their implications for management and marketing explored. Finally,
it is concluded that for service, marketing is better characterized as market-oriented or customer-
focused management than as marketing management in the traditional functionalistic sense. After
having read the chapter the reader should understand the role and scope of marketing in a service
context, and realize the importance of the interactive marketing process to the total marketing process
of a service organization as well as understand the nature of a relationship marketing approach and
the consequences of adapting a relationship marketing strategy for a firm.
THE ROLE AND SCOPE OF MARKETING

The marketing process includes four main parts:
1. Understanding the market and individual customers by market research and segmentation analysis as
well as by using database information on individual customers.
268 MANAGING MARKETING OR CUSTOMER-FOCUSED MANAGEMENT
2. So that market niches, segments and individual customers can be chosen.

3. For which marketing programmes and activities can be planned, implemented and followed up.
4. Also, to prepare the organization so that marketing programmes and activities are successfully imple-
mented (internal marketing).
This approach is based on the so-called marketing concept, which describes marketing as a philosophy.
This concept holds that the firm should base all its activities on the needs and desires of customers
in selected target markets. At the same time, of course, societal restrictions (laws, norms, industry
agreements, etc.) have to be recognized. This is also known as a market-oriented view, in contrast to
a production-oriented view, where the firm’s activities are geared to existing technology, products or
production processes.
The fourth part of the marketing function is traditionally not included. Normally, it is taken for
granted that once marketing decisions are made they are executed as planned. However, this may be a
dangerous assumption. Especially in service – both service firms and product manufacturers adopting
a service logic – marketing programmes and activities have to be marketed internally to those who are
expected to actively implement them externally.
Traditionally, marketing as a business activity is thought of as a separate function that is taken
care of by specialists organized in a marketing department or marketing and sales departments. By
and large, the rest of the organization, with few exceptions, has no responsibility for the customers
or for marketing. Employees in other departments are not recruited or trained to take a customer
focus and to think about marketing; nor are they supervised in a way that would make them feel any
marketing responsibilities, or responsibility for customers. Such an approach demands that marketing
specialists are the only people who have an impact on the customers’ views of the firm, on their
preferencs and buying behaviour. In many consumer packaged goods contexts, where consumption
can be characterized predominantly as outcome consumption, this has always been the case. If the product
is a pre-produced item with no need for service or other significant contact between a firm and
its customers, only marketing (and sales) specialists are needed. Good market research, packaging,
advertising campaigns and pricing and distribution decisions by marketing specialists lead to good
results.
Figure 9.1 demonstrates the traditional place of marketing according to most marketing textbooks.
The arrow pointing up indicates that the marketing specialists acquire information about the market
(such as demand and buying behaviour analyses) through market research. The downward arrow
illustrates the planning and implementation of marketing activities. However, as soon as we leave the
area of consumer packaged goods, new elements appear in the relationship between buyer and seller.
Many durables need delivery, installation, complaints handling and service. As soon as this happens,
the prerequisites of Figure 9.1 are not valid any more, because more and more process consumption
characteristics can be seen in the consumption process (see Chapter 2 about process and outcome
consumption).
In service, the interface between the firm and the customer grows. This was first pointed out
in 1974 in a service marketing book by John Rathmell.1 Moreover, the customer no longer acts
passively, but takes an active part in the service production process. This is often the case in industrial
or business-to-business marketing as well. The more services that are introduced or the more hidden
services that are actively used as service (e.g. claims handling, billing procedures, etc.) in customer
relationships, the more important it is for companies engaged in business-to-business marketing to
understand service competition and service management and marketing.
WHAT IS MARKETING? 269
Production
Marketing
Consumption
F I G U R E 9.1
The traditional role
of marketing.
W H AT I S M A R K E T I N G ?
Marketing as a phenomenon can be approached in many ways. Far too often marketing is considered
to be only a set of tools and techniques and mostly in a marketing mix context. This is a dangerous
way of introducing marketing into any organization, but especially into a service organization. If
marketing is considered to be a set of tools, marketing remains the sole responsibility of a group
of marketing specialists who are familiar with these tools and know how to handle them. The rest
of the organization (for example, people involved in operations, deliveries, maintenance, the design
and development of technology and systems) are not concerned with marketing, and with the firm’s
customers, which means that, although they may have customer contacts, they are not focused on
their customers, their desires and wishes.
Marketing has been described variously as a philosophy and a craft. Focusing on the tools and tech-
niques of marketing is to concentrate on marketing as a craft. However, we have to view marketing
in a much larger context. A well-designed and executed advertising campaign will not lead to good
results if campaign promises are not fulfilled by operations staff or delivery personnel. If this happens,
the tool (advertising) may have been used successfully, viewed in isolation from other activities of
the organization, but the marketing objective still fails (in the next chapter this particular issue will
be discussed in more detail).
Marketing exists on at least three levels:
● Marketing as a philosophy and an attitude of mind or way of thinking.

● Marketing as a way of organizing the various functions and processes of a firm.
● Marketing as a set of tools, techniques and activities to which customers are exposed.
Marketing as a way of thinking. Marketing is first and foremost a philosophy or a mindset and a way of
thinking in an organization. This philosophy, the marketing concept, has to guide all people, processes,
functions and departments of an organization. It has to be understood and accepted by everyone, from
top management to the most junior staff alike. Hence, marketing should, first of all, be an attitude of
mind. This is the foundation of successful marketing and should be a basis of all decision-making.
However, it should be noted that customer perspective is not the only perspective to take into
account in decision-making. For example, the economic realities and demands of other groups of
stakeholders are aspects that cannot be forgotten. Also, technological development and what is some-
times labelled ‘product or production orientation’ must not be neglected. Normally, product ori-
entation is not good for a firm. However, in some cases this perspective is more important than
the customer perspective, because customers cannot always foresee the likely future developments of
products and services based on technological advances. For example in the mobile phone business
smartphones were not asked for by customers. Market research does not always give enough input
to product development. This is of course most important in situations where rapid or complicated
technological advances are taking place. For example, based on marketing research only, microwave
ovens and text messaging (sms) had not been introduced. No one identified this as a need area.
Instead, the skills and innovation of engineers and other specialists gave us these new means of cook-
ing and communicating. Of course, in the final analysis, the customers decide whether an innovation
is successful or not.
Marketing as a way of organizing. Second, successful marketing requires an appropriate way of orga-
nizing the firm. Various departments involved in making and fulfilling promises have to be able to
compare notes and co-ordinate plans, and they have to be willing to do this. Traditional disputes
and lack of willingness to collaborate between departments are examples of situations in which firms
are not organized for optimal marketing. In firms where such turf fights exist, the marketing attitude
of mind throughout the organization does not exist, and from the customers’ point of view successful
marketing will probably not be implemented.
Parts of customer relationships, normally traditional marketing and sales efforts, will be taken care
of in a customer-oriented way. Other parts of the relationships, normally those related to interactions
with customers, will be less well handled, and hence the total marketing effect, or how well customer
relationships are managed over time, will be worse, often critically worse. For example, in a study
of the relationship between the pulping industry and suppliers of service and components to firms in
that industry, the customers talked about a ‘tail-light or rear light syndrome’. They said that as long
as negotiations on a deal continued, the supplier, and particularly the sales representative, showed an
interest in the customers and their needs and requirements. However, as soon as the deal was closed
the customers felt that they only saw the ‘tail-lights’ or ‘rear lights’ of the salesperson and the supplier
as they left. After that they were dealt with by departments such as deliveries, invoicing and claims
handling who apparently did not have a customer focus and consequently did not seem to consider
the customers very important.
In today’s competitive situation, firms cannot afford to maintain barriers between departments and
organizational silos. The marketing philosophy has to be spread throughout the organization, and
organizational solutions will have to support the acceptance of this philosophy. Marketing is a set of
ideas which must be integrated throughout the entire organization and overseen by top management. This makes
marketing a top management responsibility.2
In many situations a firm may be dependent on a network of partners to solve the problems of its
customers. In such situations the management of this marketing attitude of mind often becomes even
more complicated. With the growth of virtual or network organizations, new challenges to instil this
marketing mindset emerge.
OBJECTIVES OF MARKETING AND LEVELS OF CUSTOMER COMMITMENT 271
Marketing as a set of tools and activities. Finally, marketing is a set of tools, techniques and activities. This is,
of course, an important aspect of marketing, because it is the one to which customers are exposed. But
this is also the reason for much of the misunderstanding in many practical situations, where marketing
as a phenomenon is predominantly or only thought of as these tools, and predominantly as marketing
mix tools planned and implemented by marketing specialists. In reality, the activities performed by many
business functions have marketing effects.
OBJECTIVES OF MARKETING AND LEVELS

OF CUSTOMER COMMITMENT
Traditionally, acquiring customers and achieving sales are considered the main objectives of mar-
keting. This has been labelled transaction marketing. For more than 40 years, research into relationship
marketing has pointed out the importance of retaining customers. As service, with its often continuous
interactions between the service provider and its customers, is inherently relational, in most cases an
approach other than a transactional one should be taken by service organizations. Marketing activities
should aim not only at acquiring customers but also, and in most cases probably more so, at keep-
ing and further developing the customer contacts that have been established. Hence, three levels of
marketing objectives can be identified:
1. Acquire customers.
2. Keep customers.
3. Grow customers into customer relationships.
The objectives of marketing on these three levels and the commitment of customers sought are
summarized in Table 9.1.
TA B L E 9.1
Marketing objectives and levels of customer commitment.
Level Marketing objective Customer commitment
Level 1: Acquire To make customers choose the firm’s Trial purchase.

customers offerings (goods, services) over
those of the competitors.
Level 2: Keep To make customers satisfied with A share of the ‘customer’s wallet’.
customers what they have bought so that
they decide to buy again.
Level 3: Grow Create a trusting relationship and In addition, a share of the
customers an emotional connection with the ‘customer’s heart and mind’.
customers, so that they feel
committed to the firm and
continuously patronize it.
Transactional marketing aims at achieving the first level. Even if customers have bought from the
same provider previously, they are approached by activities aiming at customer acquisition, such as
advertising campaigns, price offers or sales calls. Each new purchase is like a new trial purchase. In
situations where the firm and its customers interact on a regular basis, the firm can attempt to develop
its customer contacts during service processes in a way that impacts the customers favourably and
influences them to continuous purchasing. This requires that a customer focus is extended to all
employees with whom the customers interact. This is called interactive marketing and will be discussed
further in a later section of this chapter. In this way the firm can capture a continuous share of these
customers’ purchases in a certain category (‘a share of the customer’s wallet’).
Here it is important to realize that although these customers seem to be in a relational mode, a real
relationship does not necessarily exist. Due to their continuous purchasing behaviour, these customers
look relational, but in fact they may only be bonded to the firm in a non-committing way (customer
bonds were discussed in Chapter 5).3 The reason for their behaviour may be a lack of alternatives. A
retailer may be the only one that for the time being is conveniently located or a supplier of equipment
may be the only one that for the time being has the required technology to offer. As soon as an
alternative with a better or equal location, or offering a better price or an improved technology enters
the scene, the customer may be gone.
To develop a true relationship with a customer the firm has to strive to reach the third level, where
the customer feels emotionally committed to the firm, which then also has managed to capture ‘a
share of the heart and mind’ of such a customer.4 Here a real customer relationship has emerged, where
a customer feels a trusting relationship and some level of an emotional connectedness with the firm.
This does not mean that this customer could not stop patronizing a given firm at some stage, but
it makes the customer less prone to shop around. To achieve this third level the firm has to take a
relational approach in its marketing. In a subsequent section, the differences between a transactional
and relational approach to marketing is discussed in detail.
T H E C U S T O M E R R E L AT I O N S H I P L I F E C Y C L E
Far too often customers are viewed and treated as an anonymous mass. Customers are seen in terms of
numbers. When someone stops being a customer, there are always new to take their place. From the
customers’ point of view, however, every single customer forms a latent relationship with the seller,
which the firm should develop and maintain. However, customer relationships do not just happen
by magic; they have to be earned. The same goes for relationships with distributors, suppliers and other
partners.
It may be useful to view the development of a customer relationship as a lifecycle.5 The concept of
the customer relationship lifecycle is illustrated in Figure 9.2. The lifecycle consists of three basic phases:
● Initial phase.
● Purchasing phase.
● Consumption (or usage) phase.
A potential customer who is unaware of a firm and its offerings is in the initial stage of the lifecycle.
If this individual, or an industrial customer, has a need which he feels that the firm may be able to
satisfy, the customer may become aware of the firm’s service and move into the second stage of the
lifecycle, the purchasing process.
THE CUSTOMER RELATIONSHIP LIFECYCLE 273
ive
gat
Ne
Perceived
ice service Pos
l serv quality itive
ta ng
To offeri
Re
pe
at
pu
In
itia
rch
ls
ase
tag
e
s
sumption proces
Ne
Customer
Interest
ga
tiv
e
Con
Ac
ep es
s
c
ted roc
pro gp
mise ha sin
Purc
e
ativ
Neg
F I G U R E 9.2
The customer relationship lifecycle.
Source: Grönroos, C., Strategic Management and Marketing in the Service Sector.
Cambridge, MA: Marketing Science Institute, 1983, p. 70. Reproduced by permission of
the Marketing Science Institute.
During the purchasing process the potential customer evaluates the service in relation to what he
is looking for and is prepared to pay for. If the outcome of this process is positive, the customer
decides to try the service, so he makes a first purchase. This takes the customer into the third stage
of the lifecycle, the consumption process (or usage stage, which may be a more appropriate term in a
business-to-business context). During this process the customer may observe the firm’s ability to take
care of his problems and to provide service, which the customer perceives have a level of outcome-
related technical and process-related functional quality. If the customer is satisfied with the perceived
quality and considers the value it enables to be good enough, it is more probable that the customer
relationship will continue, and a new or prolonged consumption or usage process will follow than
would otherwise be the case.
The customer may leave the circle at any stage, or may stay within the circle and progress to the
following stage. After the consumption or usage process the customer may either leave or decide
or to continue using the service provider. Obviously, the marketing efforts of the firm will have an
impact on the decision the customer makes. The objectives of the firm’s marketing programme and
the marketing activities to be used depend on which phase of the customer relationship lifecycle the
customer is in. The firm should therefore recognize (1) where in the customer relationship lifecycle
a given customer is or its various groups of target customers are, and (2) which resources and activ-
ities are effective from a marketing point of view at the different stages of the lifecycle, so that the
relationship with a given customer is managed as effectively as possible.
The position of a customer in the lifecycle has substantial marketing consequences. At each stage
the marketing objective and the nature of marketing – the marketing resources and activities that are
effective – will be different (see Figure 9.3). At the initial stage the marketing objective is to create
interest in the firm and its service. At the second stage, the purchasing process, the general interest
should be turned to sales by making promises which are accepted by the potential customer.
The potential customer (an individual customer or an industrial buyer) should realize that accepting
the promises concerning the future problem-solving offering of the firm is a good option. During
the consumption (usage) process the customer should receive positive experiences of the firm’s ability to
take care of his problems. At this stage the promises that the customer has accepted should be fulfilled.
Thus, resales, cross-sales and enduring customer relationships should be achieved.
M A N A G I N G T H E C U S T O M E R R E L AT I O N S H I P
LIFECYCLE: AN EXAMPLE
As an illustration of long-range management of customer relationships, let us consider the efforts of a
transportation company offering transportation service by sea. The firm operates in a consumer mar-
ket as well as in a business-to-business market, offering both transportation service and conference
arrangements for businesses and other organizations. This example describes how customer relation-
ships are managed for conference service. This is illustrated schematically in Figure 9.3.
Through advertising and various promotional activities and its website, and occasional personal
selling, the company attempts to make potential customers interested in it as a possible conference
operator. In addition, the company relies heavily on word of mouth and social media to influence
potential customers and on references promoting the idea of using its ships as conference sites. In this
initial stage, marketing activities are mostly traditional, supported by indirect promotion drawing on
the firm’s reputation and word-of-mouth communication in various channels.
When a potential customer contacts the transportation company, activities are more specifically
directed towards the unique processes and needs of that customer. The purchasing process starts. At this
stage a conference service that corresponds to the customer’s needs and to the customer’s conference
budget must be designed. Here the output of the process, accepted promises and a first purchase, is to
a great extent the result of personal selling efforts. The salesperson will have clarified the customer’s
conference-related processes and needs to find out what the customer really wants. His ability to
negotiate is considered critical to success at this point. The customer should be offered a conference
design that will satisfy him both during and after the conference, rather than simply a minimum
MANAGING THE CUSTOMER RELATIONSHIP LIFECYCLE: AN EXAMPLE 275
ive
gat
Ne
Perceived
e service
rvic Pos
itiv
ta l se ing quality e
To offer
Re
Other ph sources
technica
and pers
pe
I
Co d pe
at
g n
an
ni
pu
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rc
l re
ysical/
ver
ren nn
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has
pe hop ra
ad
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age
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e
p
fac
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ilit
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l
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ies
s
and tauran ch
sumption proces
per t ba Bro
son r
nel
ail
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cabin stewards
Ne
Customer
Interest
Public re
ga
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office
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e
Con
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al s
n elli
k-i
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ng
ee
ec
ion
Ch
d
e
ad
fic
ecis
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Configuration
ta
et
se d
Of
Booking
tio
ck
fer
n
Ti
cha
Pur
Ac
ce
ss
p e
ted oc
pro g pr
mis e asin
Purch
ive
gat
Ne
F I G U R E 9.3
The customer relationship lifecycle of a transportation company.
Source: Grönroos, C., Strategic Management and Marketing in the Service Sector. Cambridge, MA:
Marketing Science Institute, 1983, p. 75. Reproduced by permission of the Marketing Science Institute.
budget design that may seem to correspond to the customer’s initial needs but which in the long term
will turn out to be a disappointment.
If the purchasing process is successful, the potential customer will accept the promises made by
the transportation firm and buy a conference service. The firm cannot, however, stop considering
the customer as soon as the purchase decision is made. The customer relationship has to be managed
with equal care throughout the consumption or usage process. During the consumption process, when
the conference service is consumed and experienced and at the same time produced, a number of
moments of truth, or moments of opportunity, occur. If the moments of truth go unmanaged, the quality
of the service probably deteriorates and the customer may be lost, as well as opportunities to create
more business.
The company attempts to produce a service that corresponds to the expectations of the customer.
The conference facilities, arrangements for meals and accommodation, and the appearance and per-
formance of the personnel on board are of the utmost importance to the success or failure of the
company as a conference operator in the mind of the customer.
By appropriately designing the conference facilities as well as other aspects of the servicescape6 –
for example, cabin design, access to the Internet, telephones and computer equipment – and by
conducting internal training programmes to improve the customer-oriented performance and service-
mindedness of its employees, the firm tries to guarantee that the customer, the conference participants
and other passengers leave the ship in a state of satisfaction and with a favourable image of the trans-
portation company and its service in mind. This increases the likelihood that the customer and the
conference participants will return. It is also expected that they will have a considerable impact on
potential customers through word of mouth, social media, resulting in increased interest in the firm
and its service.
DEFINING MARKETING: TWO BASIC RULES

Before discussing various approaches to marketing, two basic assumptions about marketing have to be
established. These are basic guidelines for the development of marketing that are almost axiomatic:7
1. Regardless of which organizational process or department they belong to, resources and activities of a firm that
influence a customer’s preferences and behaviours are marketing resources and activities.
2. The customers of a firm, not the firm nor its marketers, decide which of the firm’s resources and activities are
marketing resources and activities.
These assumptions seem self-evident, but nevertheless they are seldom, if ever, explicitly pointed
out in the marketing literature. And in marketing planning they are most often violated. They are
somehow disguised behind the much more abstract marketing concept, according to which the needs
and wants of customers should be the starting point for a firm’s decision-making. The basic idea of
marketing is to relate a firm to its current and potential customers and make it meaningful for its
customers. What pursues these objectives is marketing, regardless of existing planning or organiza-
tional and budgeting structures. In the final analysis, only customers can decide what has an impact on
them and which of a firm’s resources and activities influence their preferences. What has an impact
on customers will vary from industry to industry, firm to firm, situation to situation, customer to
customer, from culture to culture and even from time to time. Therefore, a marketing approach
cannot be based on a set of predetermined decision-making areas. Such a list will not fit all cus-
tomers or customer groups in all situations, and moreover, as the circumstances change it will become
obsolete.
Before we discuss and compare a conventional and a service-oriented marketing approach – the
marketing mix and relationship marketing – in the following sections, generic views of what mar-
keting is and how it can be defined will be presented. They are based on the view of marketing as a
value-supporting process, which in contemporary discussion is considered the reason d’être for marketing.8
DEFINING MARKETING: TWO BASIC RULES 277
As a philosophy marketing can be described as follows:
Marketing is a set of ideas which must be integrated throughout the entire organization and overseen by top
management.
Marketing is an attitude of mind which must be spread throughout an organization, wherever contacts
with external customers or internal customers occur. Because marketing, therefore, exists outside the
group of marketing specialists of the marketing department, only top management can take respon-
sibility for the creation and maintenance of such a customer-focused attitude.
On the most general level:
The ultimate meaning of marketing is to make the firm meaningful for its customers.9
This, of course, goes for all kinds of organizatons and all stakeholder groups. By its actions, the firm
should make its customers realize that it is indeed supporting their everyday processes, and ultimately
their life or business, in a value-creating way. This is achieved by a customer focus throughout the
firm which makes the whole organization function in a customer-centric, service-providing fashion.
In this way the firm becomes meaningful for its customers.
On a somewhat more explicit level, from the meaning of marketing expressed above the following
goal for marketing can be derived:
The goal for marketing is to engage the firm with its customers’ processes with an aim to support value creation
in those processes, and ultimately in the customers’ life processes (business-to-consumer) and business processes
(business-to-business), thus enabling value capture for the firm.10
Engaging with the customers’ processes means that the firm understands these processes well enough
to be able to support them in a way that is meaningful for the customers. How the firm can engage
with its customers to support their value creation is further captured in the following, even more
explicit definition, based on a promise management view of marketing:
Marketing is a customer focus that permeates organizational functions and processes and is geared towards making
promises through value propositions, enabling the fulfilment of individual expectations created by such promises,
and fulfilling such expectations through assistance to customers’ value-creating processes, thereby supporting value
creation in the firm’s as well as its customers’ and other stakeholders’ processes.11
A value proposition is a promise made by a firm, suggesting what benefits or what value a customer
can expect if buying and using this firm’s offering. Basically, value proposition is a synonym of value
promise. The value proposition term was originally introduced by the McKinsey Corporation as a
concept which should guide and support all actions of a firm when communicating and providing
value to customers.12 It is important to realize that a value proposition is just that, a proposition,
not realized value. Lately the value proposition term has been used extensively in the service and
marketing literature.13
For example, the customer relationship lifecycle model demonstrates the importance of keeping
promises made in the initial and purchasing stage – i.e. fulfilling value propositions – through value-
supporting actions in the consumption stage. If promises made are not kept, customers will perceive
a lower level of service quality, become unsatisfied, and perhaps leave. Because the implementation
of marketing depends on the context at hand, the promise management definition does not say
anything about how promises are made, enabled, and kept through the fulfilment of expectations
created by promise making. Decisions on the resources and actions are contextually bound. However,
schematically it works in the following way:
● Making promises: traditional external marketing activities, such as marketing communication and
promotional campaigns, pricing and price offers, product design and packaging, and sales, are the
main tools to make promises.
● Keeping promises through fulfilment of expectations: the way the resources and processes customers
use and interact with, such as products and service processes, as well as hidden services (such as
invoicing, service recovery and complaints handling), service employees, technologies and systems,
function and support the customers’ processes, and how they facilitate value creation in those
processes, and in life and business processes, determine how well promises are kept.
● Enabling promises: promise making and keeping are enabled by preparing appropriate resources for
the value-creating support to the customers’ processes, such as service and product development,
resource and systems development, and internal marketing. Internal marketing aims at ensuring that
employees in customer contacts know how to successfully keep promises, and are motivated and
have the required skills and knowledge to perform in a customer-focused way (internal marketing
is further discussed in Chapter 14).
In Table 9.2, the levels of marketing are summarized.
TA B L E 9.2
A hierarchy of marketing definitions.
Marketing as a philosophy:
Marketing is a set of ideas which must be integrated throughout the entire organization
and overseen by top management.
The meaning of marketing:
The ultimate meaning of marketing is to make the firm (or any organization) relevant for
its customers (and other stakeholders).
The goal for marketing:

The goal for marketing is to engage the firm with its customers’ processes with an aim to
support value creation in those processes, and ultimately in the customers’ life processes
(business-to-consumer) and business processes (business-to-business).
Implementing this goal as promise management:
Marketing is a customer focus that permeates organizational functions and processes and
is geared towards making promises through value propositions, enabling the fulfilment
of individual expectations created by such promises, and fulfilling such expectations
through assistance to customers’ value-creating processes, thereby supporting value
creation in the firm’s as well as its customers’ and other stakeholders’ processes.
DEFINING MARKETING: THE MARKETING MIX APPROACH 279
DEFINING MARKETING: THE MARKETING

MIX APPROACH
In this and subsequent sections we will discuss how marketing in practice can be managed in service
competition. The marketing concept is transformed into marketing in practice in the standard liter-
ature on marketing management, which is essentially geared towards consumer goods contexts. There
are dozens of textbooks covering this topic. In this approach to marketing, the core of marketing
is overwhelmingly the marketing mix. The marketer plans various means of competition and blends
them into a ‘marketing mix’,14 so that a profit function, based on the goods profit logic (see Chapter
3), is optimized. When Neil Borden first introduced the idea of the marketing mix in the 1950s, he
offered a list of 12 variables as a guideline and said that they would probably have to be reconsidered
in any given situation. The marketing mix was soon reformulated as the ‘4Ps’, with four standardized
categories of marketing variables.15
Traditionally, the 4Ps are product, place, price and promotion. In a later definition from 1985 mar-
keting, according to the marketing mix approach, is described as follows: ‘Marketing is the process
of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services
to create exchanges and satisfy individual and organizational objectives [emphasis by this author].’16
During the last two decades, marketing researchers have increasingly found that the list of 4Ps is
too restrictive and more categories of marketing variables have been suggested, most often in the
form of additional ‘Ps’, such as people, processes and physical evidence17 as well as public rela-
tions and politics.18 As a consequence, in the 2000s the American Marketing Association made two
attempts to renew this definition. The importance of value creation and marketing as a process is
recognized, but other than that the resulting definitions are still overshadowed by a marketing mix
toolbox.19
Defining marketing according to the marketing mix approach is like using a list of tools, or cate-
gories of tools, as a definition. Such a way of defining a phenomenon can never be considered the
most valid. A list can never include all relevant items, it will not fit all situations, and it becomes
obsolete. Increasing the number of Ps does not offer a fundamental improvement to the defini-
tion The need to add new categories of marketing variables or Ps is a symptom of the weakness
of the marketing mix approach, and demonstrates that, as a general marketing model, the marketing
mix approach has failed.20 Moreover, the marketing mix approach is an inside-out oriented model,
where managing marketing mix variables easily becomes more important than understanding the
customers’ everyday activities and processes.21 Customers become objects for the marketer to whom
something is done, instead of being subjects, with whom and for whom solutions are developed.22
Still, it may well be helpful in many contexts, such as for consumer packaged goods where the
products are standardized. In the competitive situation after World War II, with increasing demand
and growing markets, the marketing mix and its 4Ps formed an effective marketing approach. In a
relationship-oriented approach to marketing, many elements of the marketing mix toolbox are still
highly necessary, because it includes variables, for example promotion and pricing, that are clearly
important in service competition.23 However, as a general marketing approach, and especially outside
the consumer goods area, the marketing mix method hardly makes a firm meaningful for its customers
anymore, and as all other stakeholders are depending on the firm’s customers, this does not make the
firm relevant for them either.
In a situation where service competition dominates, markets are more and more mature and com-
petition more intense, the shortcomings of marketing mix management and its 4Ps are becoming
evident. As the starting point of this approach, in practice, is marketing as a predetermined set of
decision-making areas; other decision-making areas are outside the scope of marketing. The process
nature of marketing as illustrated, for example, by the customer relationship lifecycle model is largely
neglected. Marketing activities may be seen as processes, for example when executing a promotional
campaign, but the firm’s relationship with its customers is not viewed in that way.
Moreover, although it is not inherent in traditional models, marketing has become a function
that sits alongside other business functions, delegated to a separate group of marketing specialists and
frequently organized in the form of a marketing department. It is symptomatic that in the marketing
literature, ‘marketing’ and ‘marketing department’ are often used interchangeably. Frequently, the
customer relationship is managed with a marketing approach only or mainly to the extent that the
marketing specialists (and salespeople) are involved.24
It is ironic that the people who by definition have a marketing attitude of mind, the full-time
marketing specialists of the marketing departments, are the people who frequently have limited or
no customer contact. Those who interact with customers during the consumption or usage stage of
the customer relationship lifecycle (in service processes, deliveries, repair and maintenance, customer
training, complaints handling, billing, etc.) normally do not have marketing training or a genuine
interest in the customer.
As a consequence of these deficiencies of the marketing mix management approach, the following
conclusions can be drawn:
1. Marketing has become a function for marketing specialists, and therefore a marketing attitude of
mind is not easily instilled throughout the organization.
2. Because of the lack of marketing training throughout large parts of the organization, the customer’s
interests are given high priority only in some parts of the customer relationship lifecycle (mainly the
initial and purchasing phases), whereas during the consumption or usage process the relationship is
managed by staff without a customer focus and without taking customer considerations properly
into account.
3. Furthermore, because of the decision variable orientation of the marketing mix, marketing and
marketing planning have become preoccupied with making and refining decisions which, accord-
ing to the marketing mix, are considered marketing decisions. At the same time the process of
taking customers through the relationship lifecycle and ensuring that customers stay in the life-
cycle, which may require that other decision-making areas are included in marketing planning as
well, is neglected.
4. Finally, as a consequence of the three previous points, both ‘ground rules’ of marketing put forward
above are violated. In service competition, particularly for service firms and in business-to business
markets, the marketing mix approach frequently does not cover all resources and activities of the
stages of the customer relationship lifecycle. As can be seen in Figure 9.3, during the consumption
process especially there is a range of contacts between the service firm and its customer which are
outside the traditional marketing function as defined by the 4Ps of the marketing mix. Managing
and operating these contacts (for example, the conference facilities, the cabins, the restaurants, and
managing the employees on board) are the responsibility of operations and other non-marketing
departments. Nevertheless, these contacts – buyer–seller interactions or service encounters – have
an immense impact on the future buying behaviour of the customers as well as on comments on
social media and word of mouth; that is, they have marketing implications, and should therefore
be considered as marketing resources and activities and managed as such.
DEFINING MARKETING: A RELATIONSHIP APPROACH 281
D E F I N I N G M A R K E T I N G : A R E L AT I O N S H I P
APPROACH
In Chapter 1 we discussed the relationship perspective on marketing and the management of customer
relationships as marketing. It was noted that this marketing perspective fits service competition well.
The marketing concept as the basic philosophy guiding marketing in practice still holds, although the
customer perspective has to be focused on in a much more customer value-oriented way.25 To
make firms relevant for their customers and enable them to engage with their customers’ processes
to support their value creation, marketing should be defined in a service-based, relationship-oriented
way.
A relationship definition of marketing can be formulated as follows:
The purpose of marketing is to identify and establish, maintain and enhance, and when necessary terminate
relationships with customers (and other parties) so that the objectives regarding economic and other variables of all
parties are met. This is achieved through a mutual making and fulfilment of promises.26
Such relationships are usually long term, but they do not necessarily always have to be. In this context
we are mainly discussing customer relationships, but the same approach can also be used when deal-
ing with other parties, such as suppliers, distributors, co-producers of customer solutions, financial
institutions and political decision-makers. It may be necessary for a firm to establish relationships with
such parties to supply its customers with appropriate solutions.27
In the relationship marketing literature there are several definitions similar to the one presented
here.28 Parvatiyar and Sheth29 present an excellent overview of the discussion in the literature of
relationship marketing definitions as well as in the domain of relationship marketing. Evert Gummes-
son has presented a definition which is somewhat different, but nevertheless has the same process
orientation: relationship marketing is marketing seen as relationships, networks and interactions.30
This definition points out the central phenomena in marketing according to the relationship per-
spective (the relationship itself) and the key processes in the relationship (the interactions) as well as
the fact that relationship marketing often takes place in networks of co-operating partners. The view
that exchange is the focal phenomenon in marketing31 is not included in these definitions. Although
exchange still takes place, focusing on exchange makes marketing transaction-oriented and draws the
marketer’s attention away from what is essential, namely the interactions with customers that form
relationships in which exchanges from time to time take place.32
Long-term customer relationships mean that the main objective of marketing is to seek enduring
relationships with customers. Of course, in some situations short-term sales based on transaction market-
ing may be profitable. Generally, however, retaining customers in the long term is vital to profitable
business. In a relationship, transactions concerning goods, services, knowledge, information or any
other asset of value to the customer must take place. Profitability cannot be measured immediately
as a result of the first transaction. Profitability is a long-term measurement, which should develop
from an ongoing and enduring relationship. However, the link between longer customer relation-
ships and profitability is not automatic. In some cases costs of retaining customers may be high and
long-standing customers may over time demand more attention and service followed by increasing
costs of serving such customers.33 Hence, firms must attempt to follow up the profitability of their
customers over time, so that they are not surprised by customer relationships that gradually turn
unprofitable.
Identifying and establishing, maintaining and enhancing customer relationships implies, respectively,
that the process of marketing includes the following:
1. Market research to identify potentially interesting and profitable customers to contact.

2. Establishing the first contact with a customer so that a relationship starts to emerge.
3. Maintaining an existing relationship so that the customer is satisfied with the perceived quality and
the value created and is willing to continue to do business with the other party in the relationship
(getting a ‘share of the customer’s wallet’).
4. Enhancement of an ongoing relationship so that a trusting relationship and an emotional connection
between the customer and the provider is emerging, and the customer decides to expand the
content of the relationship by, for example, purchasing larger quantities or new types of goods and
services from the same seller (getting a ‘share of the customer’s heart and mind’ and expanding the
‘share of the customer’s wallet’).
5. Terminating a relationship; sometimes a firm will have to cope with the situation when a customer
decides to discontinue the relationship or the firm may find it necessary to discontinue a relationship
with a customer. Both these situations should be managed so that the relationship can be re-
established in the future. We will, however, not discuss this fifth situation here.34
These situations are all different from a marketing point of view. In short, establishing the first contact
demands good communication and sales skills. Favourable word of mouth and a well-known image
help. Maintaining and enhancing customer relationships requires other types of tools and activities.
To maintain a relationship the perceived quality of goods, service activities, information, personal
contacts and all other types of service elements present in a given customer relationship have to be
good. In addition, good selling skills may be required to enhance a relationship. Good selling does
not only, or even mainly, mean good sales performance by professional salespeople, but also good
sales and communication skills by customer contact employees interacting with customers as part of
the service process. From the supplier’s or service provider’s point of view:
● Establishing a relationship involves making promises.

● Maintaining a relationship is based on fulfilment of promises, and finally,
● Developing or enhancing a relationship means that a new set of promises is made with the fulfilment of
earlier promises as a prerequisite.
T H E D A R K S I D E O F R E L AT I O N S H I P S
Although long-term relationships can normally be considered favourable for both the supplier or
service provider and the customer, over time negative consequences of stable relationships may occur
for both parties. This may be especially important in business-to-business relationships. The customer
may become lazy and neglect developments in the marketplace. A competing supplier may have
developed a new and better technological solution, but this has gone unnoticed by the customer who
is engaged in a stable relationship with another supplier. On the other hand, the supplier may be
satisfied with having customers buying existing solutions and as a consequence neglect to invest in
developing new and improved technologies and solutions. For both parties this type of neglect can
turn out to be fatal.
PROMISE THEORY 283
The above-mentioned negative consequence of stable relationships is only one of several possible
unfavourable long-term effects that can occur. Possible negative effects include:35
● Either party or both neglect developments in the marketplace.

● The customer’s choices are restricted by a long-term relationship.
● Suppliers may be excluded from serving other customers that compete with the one in the
relationship.
● The customer may become connected to unwanted business partners who belong to the supplier’s
network of relationships.
● The trust in one party in a relationship may be misused by the other party, especially when problems
occur.
These ‘dark sides’ of relationships36 must be observed, otherwise what starts as a win–win situation
may eventually turn into a burden for one of the parties, or sometimes even for both.
CASE STUDY
M A R K E T I N G A S A PA S S I O N O R C O S T
Some firms view marketing just as a cost, and they do not drive their business with passion.
Others see marketing as an opportunity and that makes them passionate about their busi-
ness. I have worked for both types of firms. The first firm was a start-up company, where
no restrictions were set for the marketing budget, neither for external nor interactive
marketing and customer interactions. The costs of everything else were strictly monitored.
The other firm had a totally different mindset. Marketing was considered just a necessary
evil, and marketing focused only on external activities. We employees could feel this in
our skin, and it hurt motivation. Two years after I left, the first firm, which had started
from scratch, had grown to a prospering business which operates in six of the biggest
cities in the world. The other firm still struggles with customers who are reluctant to buy
its products, and it has not grown at all.
Source: This case was written by Mia-Maja Korhonen, based on her work experience.
P R O M I S E T H E O RY
An integral element of the relationship marketing definition is the promise concept based on promise
theory.37 According to this, the responsibilities of marketing do not only include making promises and
thus persuading customers to act in a given way. A firm that is preoccupied with making promises
may attract new customers and build new relationships to begin with. However, if promises are not
fulfilled, the evolving relationship cannot be maintained or enhanced. Keeping promises is equally
important as a means of achieving customer satisfaction, retention of the customer base, and long-term
profitability. It is also important to notice that promises are made, and should be fulfilled, mutually.
Finally, the firm has to take action to make sure that it, either by itself or together with network
partners, has the resources, knowledge, skills and motivation to keep promises. Sufficient efforts to
enable promises have to be made.38 This will be discussed in Chapter 14 in the context of internal
marketing.
MARKETING RESOURCES AND ACTIVITIES

A C C O R D I N G T O T H E R E L AT I O N S H I P D E F I N I T I O N
The relationship definition of marketing does not state that the traditional means of competition of
the marketing mix, such as advertising using new or old media, personal selling, pricing and con-
ceptualizing of the product are any less important than earlier. However, it does demonstrate that
there is much more to marketing. What is important is that it represents a fundamental shift in the way
of looking at marketing as a phenomenon as compared with the marketing mix. The relationship
approach to marketing is based on a service logic and therefore truly process-oriented. It views market-
ing as a process of taking the customer through the customer relationship lifecycle and keeping the
customer there in order to reach the mutual objectives of the firm and the customer. The exchange
of promises indicated in the relationship definition may be of any kind and may concern any type
of activities. The resources to which the customer is exposed and interacts with may also be of any
type, and they may vary from customer to customer depending on whether the relationship is in the
establishment, maintenance or enhancement phase. They cannot be predetermined or categorized,
as marketing resources and decision-making areas are according to the marketing mix.
In practical situations, for teaching in classroom settings as well as for marketing planning in orga-
nizations, the relationship definition is not as easy to use as the marketing mix. This is natural, because
the main virtue of the marketing mix is its simplicity, not its proven capability to capture certain mar-
keting situations. The relationship definition does not provide users with an easy-to-implement list of
categories of marketing variables or means of competition. Instead, it forces users to think for themselves
and to analyse the marketing situation at hand, as well as develop an understanding of the resources and
activities required to establish, maintain or enhance – and of course, when necessary, terminate – a
relationship with a specific customer or group of customers.
To sum up, according to the relationship approach, marketing is a process rather than a function39 and it
is the concern of every function and department in an organization. A marketing mindset is required
by everyone with a direct or indirect impact on how customers perceive the firm, its goods and
services and its way of taking care of its customers, regardless of what responsibilities a person may
have within the organization. The relationship perspective is, of course, not the only market-oriented
way of honouring the marketing concept. It is, though, an approach well suited for understanding,
as well as planning and implementing, marketing in service contexts and in service competition.40
Relationship marketing is a newer paradigm and school of thought in marketing, alongside the
traditionally dominating marketing management school. In his analysis of relationship marketing,
Adel El-Ansary goes as far as to postulate that it will ‘continue to be a dominant school of thought
in marketing, thus replacing the traditional marketing management school of thought’.41
Relationship marketing cannot be implemented by a marketing department alone. An understand-
ing of customer relationships and relationship marketing should permeate the whole organization and
employees from departments other than marketing are responsible for serving customers and thus for
making customers either willing to continue buying from the same supplier or service provider or
not willing to do so. In a subsequent section such employees are termed part-time marketers. If this
MARKETING RESOURCES AND ACTIVITIES ACCORDING TO THE RELATIONSHIP DEFINITION 285
is not the case, marketing will not succeed. Hence, a relationship perspective on a firm’s customer
management includes three levels:
1. Relationship perspective as a culture and an attitude.

2. Relationship perspective as a strategy.
3. Tactical consequences on the operational level of the relationship perspective.
A relationship-based view of how to take care of customers involves the whole company. Therefore,
an attitude among employees on all levels including top management that honours a relationship approach to
customer management is essential to successful planning and implementation. A culture that appreci-
ates relationship marketing is required.42 In Chapter 15 the development of a service culture, based
on a relationship approach to marketing, will be discussed.
Secondly, a relationship approach to customer management has to influence the strategic decision-
making in the firm, and not only on a separate marketing strategy level. Because one way or the
other the whole organization is responsible for the implementation of a relationship approach to
managing customers, the firm’s business strategy has to be relationship-focused. Otherwise problems will
occur on the third and final level. A firm with a non-relational strategy will never be able to practise
a relational approach in its customer management. In essence, its marketing will remain transactional.
The traditional marketing efforts may become more relational, such as an extended use of direct
response activities and loyalty programmes and customer clubs, but other than that customers will
not be treated in a relational manner. Relationship marketing requires that a customer is managed
in a relationship-based fashion throughout the customer relationship lifecycle. It requires a focus on
customers and on service in every corner of the organization.
Finally, tactical consequences on an operational level follow from taking a relationship perspective. All
processes and functions where customer contacts occur, either directly or indirectly, have to be geared
towards the development, maintenance and enhancement of relationships with customers and other
stakeholders such as distributors and retailers. This probably requires changes in operational plans,
policies and procedures in organizations that are used to a situation where customer management is
the responsibility of marketing and sales departments only.
In Figure 9.4 a relationship marketing model is illustrated. The two outer circles represent processes,
which the firm controls, except for word of mouth and social media on the outermost circle. The
circle in the middle represents the customer’s processes and, due to the firm’s actions on the two
outer circles, how value emerges for the customer.
The two outer circles demonstrate the two different processes that build up the relationship. The
communication process includes communication messages which are planned and where separate and
distinct planned communication media are used. Sales and all types of communication media are
effective in this context (for example, TV commercials, newspaper ads, brochures, direct mail, Inter-
net sites and adverts, sales calls, exhibition stands and sales promotions; in Figure 9.4 a limited number
of examples are indicated as illustrations only). In addition, word of mouth and discussions on social
media also influence the customer. Basically, here promises are made about how the customer’s pro-
cesses will be supported and what perceived quality and value this support should lead to.
The interaction process is a real process in the sense that through interactions promises made are kept
and the customers perceive how the firm supports their value creation in reality. The customers’ real
interactions with physical products, service processes, hidden services, customer contact employees,
systems and technology, e-commerce processes, administrative and financial routines, etc. occur in this
process. Of course, an episode in this process includes also an element of communication. And word
of mouth and social media comments are triggered by what customers experience in various episodes.
INTERACTION
PROCESS:
COMMUNICATION Keeping promises
PROCESS:
Making promises
CUSTOMERS’
PROCESS:
VALUE
CREATION
Episodes in the interaction process Direct marketing activities
Sales activities Word of mouth; social media
Mass communication activities
F I G U R E 9.4
A relationship marketing process model.
Source: Grönroos, C., Relationship marketing: the Nordic School perspective.
In Sheth, J.N. & Parvatiyar, A. (eds), Handbook of Relationship Marketing.
Thousand Oaks, CA: SAGE, 2000, p. 107. Reproduced by permission of SAGE
Publications Inc.
Successful relationship marketing requires that both the communication and interaction processes
are properly planned and executed. Only focusing on relationship-oriented communication activities,
such as direct marketing, and customer loyalty programmes creates expectations, but how such expec-
tations are fulfilled remains unplanned. According to promise theory and the promise management
view of marketing, expectations must be fulfilled by keeping promises made. In a straightforward
consumer goods marketing situation, a standardized product will keep promises made and fulfil expec-
tations created by such promises. However, in situations where the customer interface is broader and
may continue over a longer period of time, such as in service and relationship marketing, there is no
one standardized item which takes care of this. All the episodes on the interaction circle and the flow of these
episodes equals the standardized product in the marketing mix of consumer goods.
MARKETING FUNCTIONS AND PROCESSES 287
The double-headed arrows between the two outer circles in Figure 9.4 indicate that to avoid
overpromising and the creation of the wrong expectations, communication activities on the com-
munication circle must be geared to the various episodes on the interaction circle.
MARKETING FUNCTIONS AND PROCESSES

As demonstrated by the customer relationship lifecycle model and also the relationship marketing model,
in a service context marketing is by no means only an intermediate function building a bridge between
production and consumption or usage, as it is supposed to be in conventional marketing. Marketing
is an integral part of producing and delivering service, especially during the consumption (usage) process.
In other words, managing the moments of truth in the service encounters is a marketing task as well as a
responsibility for operations, personnel, human resources management and other departments which
have contact with customers or influence such contacts. The separation of marketing, production,
human resource management and other processes may well be logical in traditional manufacturing,
where customers order and use the products far away from the place of production. It is not appropri-
ate for service systems where the production of service, delivery and consumption is simultaneous.43
There is, however, a distinct difference between handling the interactions of the moments of
truth as a marketing task and executing traditional marketing activities such as advertising, personal
selling and sales promotion. Normally the latter are planned and implemented by marketing and
sales specialists, whereas the former are implemented by specialists in other areas. Moreover, they
are frequently planned and managed by non-marketing managers and supervisors; people who are
neither aware of their marketing responsibilities nor interested in customers or marketing.
The employees involved in marketing, who are not marketing specialists, are part-time marketers as
opposed to full-time marketers, to use a term introduced by Evert Gummesson.44 They are, of course,
specialists in their own areas. At the same time, they must learn to perform their tasks in such a way
that customers will want to return, thus strengthening the customer relationship. Hence, they will
have to learn to act in a customer-focused and marketing-oriented fashion, and their managers and
supervisors will have to learn to think in terms of marketing and customer impact as well.
To sum up, the marketing process can be divided into two separate functions or sub-processes: a
specialist function, taking care of many traditional marketing mix activities and market research; and
a marketing function, related to the buyer–seller interactions of the simultaneous service production
and consumption processes, where marketing tasks are performed by part-time marketers, supported
by, and sometimes (as in telecommunications or Internet banking) replaced by, customer-oriented
physical resources, technology and systems. The two functions or sub-processes of marketing are the
traditional external marketing process and the interactive marketing process.
In Figure 9.5 the two marketing functions of service organizations are schematically illustrated.
The shaded areas represent the marketing functions. The traditional marketing function is separate from
other functions. It involves market research, advertising, Internet and mobile communication, pricing,
sales promotions and other activities traditionally considered to be part of marketing. This traditional
marketing function is also frequently labelled external marketing. For consumer service, the traditional
marketing function is a mass marketing function. However, in business-to-business relationships personal
sales contacts by salespeople are also involved and most often dominate this function.
The interface between production and consumption represents the buyer–seller interactions or
service encounters, where the moments of truth or moments of opportunity occur. Because the mar-
keting impact of these interactions occurs in interactive processes, this part of marketing has been
called the interactive marketing function45 in the service marketing literature since the late 1970s. Inter-
active marketing, or marketing outside the marketing department, occurs at the moment when the
Traditional
marketing
function
Production
Consumption
(usage)
Interactive marketing
function
(buyer–seller interactions)
F I G U R E 9.5
Two marketing processes.
Source: Grönroos, C., Strategic
Management and Marketing in the Service
Sector. Cambridge, MA: Marketing Science
Institute, 1983, p. 62. Reproduced by
permission of the Marketing Science
Institute.
customer and service provider interact. The service is actually delivered and the foundation laid for
resales through activities in the buyer–seller interactions of the service encounters.
The customer’s opinion of a service is influenced both by the means of production (i.e. the pro-
duction facilities, human and other production resources and the servicescape) and by the service
production process (i.e. the behaviour of the employees, the manner in which the production facil-
ities are used, and the way physical resources, technology and systems support the production and
consumption of the service in a customer-oriented fashion). The interactive marketing function rec-
ognizes that every component – human and non-human – in producing a service, every production
resource used, and every stage in the service production and delivery process should be handled as a
marketing issue, and not considered as merely an operations or administrative issue. In addition, cus-
tomers are not only consumers or users of a service but also co-producers of that service. In this respect
customers are also a resource in the interactive marketing process. The marketing consequences of
every resource and activity involved in interactive marketing situations have to be acknowledged
in the planning process, so that the production resources and operations support and enhance the
organization’s attempts to develop and maintain long-term relationships with its customers.
The co-production willingness of customers cannot be taken for granted. When necessary, customers
have to be educated and advised about how to best co-operate in the service process in a way that
supports their perception of service quality. In addition, especially when new technology for customer
self-service is introduced, considerable efforts to not only educate customers, but also to motivate
them to make use of the new technology may be required.46
WHAT IS MORE IMPORTANT – TRADITIONAL EXTERNAL MARKETING OR INTERACTIVE MARKETING? 289
To sum up, the marketing resources used in the interactive marketing process are totally different from those
used in the traditional external marketing function. While the latter are ‘full-time marketing resources’, the
resources of interactive marketing are only ‘part-time marketing resources’. The dual role of the part-
time marketers has already been discussed, but the same applies to other resources as well. Physical
resources, technology and systems used in the service process and to build up the servicescape should
function well to produce the service in a technical sense and should also keep internal efficiency at
an optimal level. However, when planning how such resources should be used, a customer-focused
approach has to be taken simultaneously. Resources in the service process should function in inter-
actions with customers in a way that creates good process-related functional quality, and thereby has
a good interactive marketing effect. When investing in these resources, both internal efficiency (the
cost-effective use of resources) and external effectiveness (impact on perceived service quality) must
be taken into account at the same time by the service provider. Customers have dual roles, too. They
consume the service, but they also contribute to how the service process proceeds.
W H AT I S M O R E I M P O RTA N T – T R A D I T I O N A L
EXTERNAL MARKETING OR INTERACTIVE
MARKETING?
Interactive marketing can be characterized as the heart of marketing in service competition. Regard-
less of how customer-focused and well-planned and implemented traditional marketing activities such
as advertising campaigns are, if interactive marketing fails, marketing fails. Moreover, because it is the way
normal operational and administrative efforts are implemented, interactive marketing always exists.
In the minds of the customers, interactive marketing may be good or bad, but it is always present.
In situations where the service provider has a stable customer base with satisfied customers who
continuously patronize the firm and through positive word-of-mouth referrals bring in new cus-
tomers, in principle nothing else than pricing is needed. Because of a customer-focused service process
and consequently a successful interactive marketing process, the customers patronizing the firm are
satisfied enough to return and to bring in new business. This is typically the case for a small pub or
restaurant or a street corner retailer, but also large service firms can perform successfully without much
traditional external marketing support. For example, in 2004 in Sweden the advertising expenditure
of Handelsbanken, one of the four large nationwide operating banks in the country, was only 7%
of that of the competitor that spent the most, and only slightly more than one-tenth of what the
two other banks in that category spent. Still, this bank managed to outperform the others in terms
of market share growth.47 Ten years later the percentage is still clearly under 10%. On top of this,
customer satisfaction ratings and profitability for this bank have, over the years, constantly been the
highest or among the highest in the industry.
However, in most situations service organizations need both interactive marketing and traditional
external marketing. Especially in situations where a firm launches new service or wants to enter a new
market or customer segment, traditional marketing campaigns are needed. Furthermore, sometimes
a competitor’s campaign has to be matched by traditional marketing efforts. However, the better the
interactive marketing functions, the less need for that. To assess the effectiveness of a service firm’s
total marketing in a stable market situation, the following ground rule can be used as a first indicator
of how customer-focused the firm is: the higher the advertising expenditures, the less service-focused the firm
is likely to be and the less customer-focused its interactive marketing performance probably is. Of course, this
does not have to be the case in all situations, and further analyses should always be done. In a highly
competitive market environment even a very customer-focused service provider with a good inter-
active marketing performance may have to invest more in traditional external marketing campaigns.
However, it is typical that less customer-focused service firms compensate a lack of service orientation
in their operations with higher advertising budgets. To replace the unsatisfied customers who have
left, new customers are lured to take their place. In the long run this is not an effective strategy.
THE INTERNET AND MARKETING

The Internet, and to a growing extent also mobile technologies, have become more frequently used in
marketing. The Internet is, for example, used for selling, communication, market research and making
payments. These are all ways of using it to perform traditional marketing activities. However, the
Internet is also an interactive marketing vehicle, because a variety of service interactions can be initiated and
also performed over the Internet. For example, by providing e-mail connections to helpdesks or other
functions of a firm, the Internet becomes part of the service process. The way it functions influences
the interactive marketing impact of the firm. This of course requires that the firm manages to assume
its role as an interactive partner in the virtual environment. Finally, digital service is developing, for
example in games, where the service is produced digitally as well.
The Internet is a service- and relationship-oriented medium, even though it is often only used as a
communications and sales tool. It is important to keep in mind, though, that normally it is not the firm
that makes the first contact with a customer over the Internet; it is the customer or potential customer
who initiates the contact. If this contact can be developed into a service process with interactions
between the firm and the customer, a relationship may emerge. Because it is so easy to jump from
one website to another, creating a relationship-oriented service interaction with a given customer
may be an effective way of maintaining a given customer’s interest in the firm and creating ongoing
business.
In conclusion, the Internet does not only offer a means of carrying out traditional marketing
activities, it is also an interactive process instrument which has an important role in the interactive
marketing function. Mobile technologies and cellular phones can be used both for communicating
with customers and making offers and as an interactive marketing tool. However, increasingly they
also function as a platform for service consumption, for example for playing games.
CASE STUDY
WWOZ RADIO: THE SOUND OF NEW ORLEANS – THE
INTERNET IN THE SERVICE OF MUSIC BROADCASTING
WWOZ radio (90.7 FM) is based in the New Orleans Jazz National Historical Park in New
Orleans, Louisiana, USA. Playing blues, jazz, calypso, zydeco, gospel, Brazilian, Caribbean,
Irish music and a lot more, WWOZ keeps the music and musical heritage of the Crescent
City alive. A listener-supported, volunteer-operated, non-profit radio station, WWOZ uses
sophisticated technology to deliver its services to a global audience. In addition to broad-
casting live to listeners in the south-eastern Louisiana area, WWOZ broadcasts live on the
Internet (http://www.wwoz.org) and can be heard from anywhere in the world.
THE THREE-STAGE MODEL 291
The New Orleans Jazz & Heritage Foundation, Inc. owns WWOZ and also produces the
New Orleans Jazz & Heritage Festival (JazzFest). WWOZ broadcasts start-to-finish cov-
erage of JazzFest. In 1999, six hours of the 56 hours of WWOZ’s live JazzFest coverage
were uplinked by satellite to a network of public radio stations organized by WWOZ. In
addition, it does numerous live broadcasts from music clubs throughout the year via its
mobile recording studio. WWOZ also offers selected downloadable MP3 music files from
the WWOZ website.
Source: This case example was developed by Raymond P. Fisk, Texas State University.
T H E T H R E E - S TA G E M O D E L
Marketing is a dynamic process, where traditional external marketing activities and interactive mar-
keting resources and activities co-operate so that profitable long-term customer relationships may be
developed and maintained. The customer relationship lifecycle model illustrated how enduring customer
relationships are created through a three-stage process. The three-stage model demonstrates this long-
term marketing approach, as illustrated by Figure 9.6. At each stage the objective of marketing and the
nature of marketing – the marketing function to be used – will be different.
At the initial stage, when potential customers have no clear view, or perhaps old-fashioned or
out-of-date views, of the firm and its service, the objective of marketing is to create interest in the
organization and its offerings. This is best achieved by the traditional marketing function. Advertising,
websites, sales promotions and public relations are appropriate means of competition. Sometimes sales
Stage Objective of marketing Marketing function
Initial stage To create interest in the firm The traditional marketing

and its services function
Purchasing process To turn general interest into The traditional and the
sales∗ (first purchase) interactive marketing
functions
Consumption (usage) To create resales, The interactive marketing
process cross-sales and enduring function
customer relations∗∗
∗ Making promises
∗∗ Fulfilling promises
F I G U R E 9.6
The three-stage model.

Source: Grönroos, C., Strategic Management and Marketing in the Service Sector. Cambridge, MA:
Marketing Science Institute, 1983. Reproduced by permission of the Marketing Science Institute.
is also needed, especially in business-to-business markets. One should also not overlook the potential
power of favourable word-of-mouth communication.
At the second stage, the purchasing process, general interest should be turned into sales. More specifically,
promises about future commitments on the part of the seller are made and should, one hopes, be
accepted. Here again the traditional marketing activities, including sales, can be used. However, interac-
tive marketing activities can also be applied whenever the customer contacts with the firm’s production
resources before he has made a final purchase decision.
During the consumption (usage) process, resales, cross-sales and enduring customer relationships should
be achieved. At this stage, promises have to be kept, so that customers realize that the firm can satisfy
their needs and that it can be trusted. At this final stage in the lifecycle the traditional marketing
activities have only a slight chance, if any, of influencing the preferences of the customers towards
the service. Here the interactive marketing process is responsible for success or failure. The marketing
orientation and service-mindedness of the service process and the resources in the production process
are of vital importance if customers are not to be lost at this stage.
Often the firm may be excellent at making promises, but these promises may be kept in a much
less marketing-oriented way, and low perceived quality follows. Marketing may be managed suc-
cessfully during the first two phases of the customer relationship lifecycle, but in the third phase,
the consumption or usage process, nobody seems to be responsible for marketing and customers any
more.
Marketing has to be planned and implemented throughout the lifecycle as a continuous process,
otherwise too many customer relationships are broken, which leads to bad word of mouth. More-
over, lost customers have to be replaced by new customers, which requires an increased budget for
traditional marketing.
T H E M A R K E T I N G S T R AT E G Y C O N T I N U U M
As we have seen, relationship marketing means that the firm uses a marketing strategy that aims at
maintaining and enhancing ongoing customer relationships. Although getting new customers is still
important, the main strategic interest is to market to existing customers. In a relationship marketing
strategy, interactive marketing becomes essential. If the moments of truth of the buyer–seller interac-
tions are badly taken care of, thus literally wasting moments of opportunity, no traditional marketing
efforts can ensure that the customers will stay with the firm. A relationship marketing approach and
excellent interactive marketing capabilities are essential in service competition. Without these ele-
ments a service strategy often collapses.
Of course, relationship marketing is not the only marketing strategy option in service competi-
tion, although the importance of such a strategy is increasing all the time. It can be useful to think
about possible marketing approaches or strategies along a marketing strategy continuum.48 As a strat-
egy, relationship marketing can be considered one end of such a continuum. At the other end of
the continuum, the strategy would be to concentrate on one transaction at a time with any given
customer, without deliberately trying to develop any enduring relationship with that customer. This
type of marketing strategy is often called transaction marketing. As marketing strategies can be placed on
a continuum, where these two types of strategies are the extremes, there are, clearly, situations where
firms can combine elements of the two strategies. A relationship type of strategy or a transaction
type of strategy may dominate. The marketing strategy continuum and its consequences for a number of
marketing issues are illustrated in Figure 9.7.
Marketers of consumer packaged goods will probably benefit most from a transaction-type strategy,
although this is not necessarily the case. Service firms and product manufacturers adopting a service
THE MARKETING STRATEGY CONTINUUM 293
The strategy continuum Transaction marketing Relationship marketing
Unit of analysis Single exchange Relationship

Time prespective Short-term focus Long-term focus
Dominating marketing Marketing mix Interactive marketing
function (supported by marketing
mix activities)
Price elasticity Customers tend to be more Customers tend to be less
sensitive to price sensitive to price
Dominating quality Quality of output (technical Quality of interactions
dimension quality dimension) is (functional quality
dominating dimensions) grows in
importance and may
become dominating
Measurement of customer Monitoring market share Managing the customer base
satisfaction (indirect approach) (direct approach)
Customer information Ad hoc customer satisfaction Real-time customer feedback
system surveys system
Interdependency between Interface of no or limited Interface of substantial
marketing, operations strategic importance strategic importance
and human resource
management
The role of internal Internal marketing of no or Internal marketing of
marketing limited importance to substantial strategic
success importance to success
F I G U R E 9.7
The marketing strategy continuum.

Source: Adapted from Grönroos, C., From marketing mix to relationship marketing: towards
a paradigm shift in marketing. Management Decision, 32(2); 1994: p. 11. Reproduced by permission
of Emerald Insight.
logic, on the other hand, would normally be better off by applying a relationship-type strategy.
Manufacturers of consumer packaged goods have mass markets but no immediate contact with their
ultimate customers, while service firms almost always have such contacts, sometimes on a regular
basis, sometimes only at discrete points of time. Therefore, the interface between the service firm
and its customers is expanded far outside the departments of marketing and sales specialists. However,
the development of information technology has made it possible for marketers of consumer packaged
goods to create databases which enable them, too, if they find this effective and justified from an
economic standpoint, to treat each and every customer as an individual.
In consumer durables the customer interface is broader than for consumer packaged goods, and
a pure transaction-type strategy is not the only available option. The durables have to be delivered
to customers and often also installed. Industrial goods, ranging from mass-produced components to
complex machines and projects, would probably fit best between consumer durables and services.
However, in many business-to-business marketing situations the customer relationships are similar to
many service contexts, and here no distinctions between business-to-business marketing and service
marketing can be made on the continuum.
CONSEQUENCES FOR MARKETING OF THE

S T R AT E G Y C O N T I N U U M
In this section nine different consequences of a relationship marketing strategy and a transaction
marketing strategy will be discussed (see Figure 9.7):
1. Unit of analysis.
2. Time perspective.
3. Dominating marketing function.
4. Price elasticity.
5. Dominating quality dimension.
6. Measurement of customer satisfaction.
7. Customer information system
8. Interdepartmental collaboration.
9. Role of internal marketing.
The unit of analysis and the time perspective. The time perspective of marketing differs depending on
where on the continuum a firm is. As transaction marketing means that the firm focuses on single
exchanges or transactions at a time, the time perspective is rather short. The unit of analysis is a single
market transaction or exchange. Profits are expected to follow from today’s exchanges. In relationship
marketing the time perspective is much longer. The marketer does not plan primarily for short-term
results. His objective is to create results in the long term through enduring and profitable relationships
with customers. In some cases, single transactions that take place in the relationship may even be
unprofitable as such. Thus, relationships and how they develop through continuous interactions to
facilitate transactions which create satisfaction for both parties are the units of analysis.
Dominating marketing function. Because of the lack of personal contact with their customers and their
focus on mass markets, firms pursuing a transaction-type strategy will probably benefit most from a
traditional marketing mix approach. The 4Ps model will give guidance in most cases; this model was
originally developed for consumer-packaged goods marketing where transaction marketing is most
appropriate.
For a firm applying a relationship strategy the marketing mix is often too restrictive. The most
important customer contacts from a marketing success point of view are those outside the realm of
the marketing mix and the full-time marketers. The performance of the part-time marketers, the cus-
tomer orientation of information technology, operating systems, industrialized service routines, such
as vending machines, ATMs and home banking systems, and the willingness of customers to per-
form as co-producers in the service process, are critical ingredients in a relationship-oriented strategy.
The marketing impact of the customer’s contacts with people, technology and systems and other
non-marketing functions determines whether he (or the organizational buyer) will continue doing
business with a given firm or not. All these customer contacts are interactive to a certain extent. These
resources form the interactive marketing function. This marketing function can also be described as all
the marketing activities outside the marketing mix and outside a marketing (and sales) department.
In relationship marketing interactive marketing becomes the dominating part of the marketing pro-
cess. Of course, variables in the marketing mix, such as traditional external marketing activities, are
CONSEQUENCES FOR MARKETING OF THE STRATEGY CONTINUUM 295
important here as well, but to a much lesser degree and they merely support interactive marketing
activities. In other situations the support of salespeople is needed, for example to close a new deal or
to provide continuous attention during the consumption (usage) phase.
Price elasticity. In transaction marketing there is not much more than the core product (goods or
services) and sometimes the image of the firm or its brands, to keep the customer attached to the seller.
When a competitor introduces a similar product, advertising and image may help to keep customers,
at least for some time, but price usually becomes an issue. A firm that offers a lower price or better
terms is a dangerous competitor, because in transaction marketing the price sensitivity of customers
is often high. A firm pursuing a relationship marketing strategy, on the other hand, may have created
more value for its customers than what is provided by the core solution alone. Such a firm develops
tighter ties over time with its customers. If, say, a financial service arrangement is complicated, an
Internet grocery store provides its customers with easy-to-use ordering systems, consistent quality
of goods, information and deliveries, or a supplier provides its customers with a complex solution,
the buyer and seller grow together due to the various ties that have been established over time.
Such ties or bonds may, for example, be variously technological, knowledge-related or information-
related, geographical or social in nature. If they are well handled they provide customers with value;
something that is not provided by the core solution itself. Of course, price is not unimportant but is
often much less of an issue here. Thus, relationship marketing makes customers less price-sensitive.
Dominating quality dimension. The way quality is perceived by customers will typically differ,
depending on the strategy used by a firm. In transaction marketing the customers’ contact with the
firm is limited to the product and exposure to other traditional marketing mix variables. The benefits
sought by customers are imbedded in the technical solution provided by the product. The customer
will not receive much else that will create value in his processes. Hence, the technical quality of
the product, or what the customer gets as an outcome, is the dominating quality-creating source in
transaction marketing.
The situation is different in relationship marketing. The customer interface is broader, and the firm
has opportunities to provide its customers with value of various types (technological, information,
knowledge, social, etc.). When several firms can provide a similar technical quality, managing the
interactions of the service processes also becomes imperative from a quality perception perspective.
Thus, in relationship marketing the functional quality dimension grows in importance and often dom-
inates. Of course, this does not mean that technical quality can be neglected. It is a prerequisite for
good total quality, but it is no longer the only quality dimension to be considered.
Measurement of customer satisfaction and customer information systems. A normal way of monitoring
customer satisfaction and success is to look at market share and to do ad hoc customer satisfaction surveys.
For a consumer-packaged goods marketing firm, which would typically apply a transaction marketing
strategy, there is no way of continuously measuring market success other than by ad hoc customer
satisfaction studies. A service firm and many business-to-business marketers, on the other hand, who
could more easily pursue a relationship marketing strategy, have at least some kind of interaction
with almost every single customer, even if they serve mass markets. Thus, customer satisfaction can
be directly monitored. A firm that applies a relationship-type strategy can study customer satisfaction
by directly monitoring its customer base.
Managing the customer base means that the firm has at least some kind of direct knowledge of its
customer satisfaction levels. Instead of thinking of numbers, or of market share only, management
thinks in terms of individuals with personal reactions and opinions. Instead of getting information
about marketing success from customer satisfaction studies, the marketer judges success by information
direct from customers. This requires a means of gathering the various types of customer feedback that
are constantly obtained by a large number of employees in large numbers of customer contacts. In
combination with market share statistics, such an intelligence system focusing on customer satisfaction,
needs and desires forms a valuable source of information for decision-making. Of course, traditional
customer satisfaction studies can be made from time to time to complement the data gathered from
daily customer contacts.
Consequently, in a relationship marketing situation the firm can build up an on-line, real-time infor-
mation system. This system will provide management with a continuously updated database of its
customers and information about the degree of satisfaction or dissatisfaction among customers. This
can serve as a powerful management tool. In a transaction marketing situation it is more difficult to
build up such a database, although thanks to available information technology this is not impossible
any more.
The strategic importance of interdepartmental collaboration. The level of interdependency between pro-
cesses and departments in an organization depends on whether the firm has chosen a transaction-type
strategy or a relationship-type strategy. In transaction marketing, most or all of the firm’s customer
contacts are related to the product itself and to traditional marketing mix activities. Marketing and
sales specialists are responsible for total marketing; no part-time marketers are involved. Thus, from
a marketing point of view the internal interface between functions has no, or very limited, strategic
importance to the firm.
In relationship marketing the situation is different. The customer interface is much broader, often
involving a large number of part-time marketers in several different departments. This is the case,
for example, in most services marketing and business-to-business marketing situations. A successfully
implemented interactive marketing performance requires that all parts of the firm involved in taking
care of customers can collaborate, co-operate and support each other in order to provide customers
with good total perceived quality. Thus, for a firm pursuing a relationship marketing strategy the
internal interface between marketing, operations, human resource management and other depart-
ments is of strategic importance to success.
The role of internal marketing. Part-time marketers have to be prepared for their marketing tasks.
Internal marketing is needed to ensure the support of traditional non-marketing staff. They have to
be committed, prepared and informed, and motivated to perform as part-time marketers. This does
not apply only to customer contact employees and back-office employees. It is, of course, equally
important that supervisors, middle-level and top-level managers are equally committed and prepared.
Internal marketing as a process has to be integrated with the total marketing process. The traditional
marketing and interactive marketing performance starts from within the organization. A thorough and
ongoing internal marketing process is required to make relationship marketing successful. If internal
marketing is neglected, interactive marketing in particular will suffer or fail.
MARKETING MANAGEMENT OR
M A R K E T- O R I E N T E D / C U S T O M E R - F O C U S E D
MANAGEMENT?
In conventional marketing literature, which is mainly based on the context of consumer packaged
goods, the concept of marketing management is used to describe the practical applications of the
marketing concept. In a consumer goods context this is perfectly appropriate. However, in situations
where the typical customer relationship is extended far beyond the straightforward and impersonal
relationship between a marketer and a buyer of consumer breakfast cereals, toothpaste or soap, this
straightforward view of how to manage marketing does not hold any more. When marketing is geared
to the management of customer relationships, the situation changes.
MARKETING MANAGEMENT OR MARKET-ORIENTED/CUSTOMER-FOCUSED MANAGEMENT? 297
In business-to-business marketing contexts the marketing management approach becomes awk-

ward. Many customer relationship issues are the concerns of departments other than the marketing
department. The interrelationships between departments make planning, co-ordination and imple-
mentation much more complicated than a traditional marketing and sales department can handle.
In a service context the situation is often even more complex. Marketing activities – traditional
and interactive marketing activities – are spread throughout the organization; therefore, the whole
organizational structure has to be supportive of marketing. Because of the extreme interdependence
between the various departments of a service firm and marketing, a marketing attitude of mind is needed
throughout the organization. Furthermore, as George Day49 observes, the hearts and minds of the
entire organization have to be engaged.
Customers have to be considered in planning and implementing most activities in a firm, regardless
of whether those activities are labelled production and operations, human resource management,
finance or any other traditional function. In other words, marketing considerations are one aspect,
among others, to be observed in decision-making throughout an organization. For the full-time
marketers, marketing is the main or only consideration to bear in mind, but for other functions
and processes marketing is only one of many aspects to take into account. However, in the final
analysis it is a firm’s success in the marketplace which is crucial. Hence, market-oriented management
and customer-focused performance throughout the organization is needed rather than marketing
management being the responsibility of one department only.
Top management alone has the necessary overview of the organization, and the authority to manage
the total marketing process; therefore, ultimate marketing responsibility has to be held sufficiently high
up in the organization. A marketing department can plan and implement some marketing tasks, but
total management of the marketing process has to be an integral part of overall company management.
Hence, even for psychological reasons, market-oriented or customer-focused management is what
it is all about, not marketing in the traditional functionalistic sense. Marketing, therefore, becomes
an integral part of service management. This is also the reason why the title of this book is Service
Management and Marketing. In fact, because in service contexts it is more a question of market-oriented,
customer-focused management than just marketing management, the term ‘service management’ was
originally introduced as a synonym for service marketing.
S U M M A RY
In service competition, marketing is not restricted to marketing specialists. It is spread throughout the
organization, and part-time marketers almost invariably outnumber specialists in, for example, market
research, marketing communication and sales. The traditional models of marketing management, there-
fore, do not fit very well in a service context. The traditional approach to marketing, the so-called mar-
keting mix, is too restrictive and simplistic to be very useful. Moreover, its approach to marketing as a
function, with well-defined areas of marketing decision-making, guides management interest away from
the process nature of customer management. Instead, in this chapter a relationship approach to marketing
was suggested, and a relationship definition of marketing was presented.
The total marketing process is divided into two sub-processes, the traditional external marketing process
and the interactive marketing process. The interactive marketing process is especially important during
the consumption or usage process of the customer relationship lifecycle. Of course, traditional external
marketing efforts are still important, but more in the form of support activities and mainly in the initial
and purchasing phases of the lifecycle. The relationship marketing model illustrates the two processes – a
communication process making promises and an interactions process keeping promises – which have to
be included in relationship marketing planning and implementation. The concept of a marketing strategy
continuum was introduced, and two distinct marketing strategy options, relationship marketing and trans-
action marketing, were analysed in relation to this strategy continuum. In service contexts, the nature of
marketing makes this much more a top management process than it is normally considered to be. Hence,
it is actually more accurate to talk about market-oriented, customer-focused management than marketing
management in the traditional sense of the term. Therefore, marketing becomes an integral part of any
theory of service management.

1. Why does marketing have to be a concern of all the departments of a firm in service
contexts?
2. What is the difference between traditional external marketing and interactive marketing?
Why is interactive marketing considered so critical to the marketing process of service
providers?
3. What is the difference between full-time marketers and part-time marketers? Why are the
latter especially important to marketing success in service competition?
4. Define the various groups of part-time marketers of your firm, or any given firm, and
analyse their importance to the total marketing process. What are the problems with the
contribution of the various part-time marketers to the interactive marketing process?
5. In view of the marketing strategy continuum, how does a relationship marketing strategy
differ from a transaction marketing strategy?
6. Why is ‘market-oriented management/customer-focused management’ a better term than
‘marketing management’ in service contexts?
7. Discuss the role of making, keeping and enabling promises in marketing.
8. Using the relationship marketing model, analyse the way in which customers in your firm,
or any given firm, are taken care of. Is a relationship marketing strategy implemented?
NOTES
1. Rathmell, J.M. (1974) Marketing in the Service Sector. Cambridge, MA: Winthrop.
2. See Strandvik, T., Holmlund, M. & Grönroos, C., The mental footprint of marketing in the
boardroom. Journal of Service Management, 25(2), 2014, 241–252. See also Klaus, P. & Edvardsson,
B., The road back to relevance – how to put marketing back on the CEO’s agenda. Journal of
NOTES 299
Service Management, 25(2), 2014, 166–170, and this whole issue of the Journal of Service Management,
which is devoted to how to put marketing back as the firm’s core strategy. If marketing is not
considered a strategic issue, customer-based metrics about the market performance of the firm
do not reach the boardroom, and remain unused in strategic decision-making. See Ambler, T.,
Marketing and the Bottom Line. The Marketing Metrics to Pump Up Cash Flow. London: Prentice-
Hall, 2003, where this problem is discussed at length.
3. For an extensive study of positive, neutral and negative bonds in commercial relationships see
Arantola, H., Relationship Drivers in Provider–Consumer Relationships. Empirical Studies of Customer
Loyalty Programs. Helsinki: Hanken Swedish School of Economics, Finland, 2002.
4. See Storbacka, K. & Lehtinen, J.R., Customer Relationship Management. Singapore: McGraw-Hill,
2001, where the authors discuss the role of getting a growing share of the customer’s ‘wallet’ as
well as of their ‘heart and mind’ in relationship marketing.
5. The customer relationship lifecycle concept was originally introduced in Grönroos, C., Strategic
Management and Marketing in the Service Sector. Cambridge, MA: Marketing Science Institute, 1983.
Journal of Marketing, 56(Apr), 1992, 57–71.
7. Compare Grönroos, C., What can a service logic offer marketing theory. In Lusch, R.F. &
Vargo, S.L. (eds), The Service-Dominant Logic of Marketing. Dialog, Debate, and Directions. Armonk,
NY: M.E. Sharpe, 2006, pp. 357–358.
8. See Sheth, J.N. & Uslay, C., Implications of the revised definition of marketing: from exchange
to value creation. Journal of Public Policy & Marketing, 26(2), 2007, 302–307, and many earlier
sources, one of the most prominent being Alderson, W., Marketing behavior and executive action.
Homewood, IL: Richard D. Irwin, 1957.
9. Grönroos, C. & Gummerus, J., The service revolution and its marketing implications: service
logic versus service dominant logic. Managing Service Quality, 2014, 24(3), 206–229.
10. Grönroos, C., Promise management: regaining customer management for marketing. Journal of
Business & Industrial Marketing, 13(5–6), 2009, 353. The value capture aspect has been added to
the definition.
11. Adopted from Grönroos, C., On defining marketing: finding a new roadmap for marketing.
Marketing Theory, 6(4), 2006, 407.
12. Lannings, M.J. & Michaels, G., A business as a value delivery system. New York: McKinsey Paper
No. 4, 1988.
13. See, for example, Payne, A. & Frow, P., Developing superior value propositions: a strategic
marketing imperative. Journal of Service Management, 25(2), 2014, 213–227.
14. The view of the marketer as a mixer of ingredients was first expressed by James Culliton in a
study of marketing costs in 1948 and in the 1950s, based on this expression, Neil Borden created
the notion of a marketing mix. See Borden, N.H., The concept of the marketing mix. Journal of
Advertising Research, June, 1964.
15. The 4P model was first introduced in a major marketing textbook by McCarthy in 1960 (see
McCarthy, E.J., Basic Marketing. Homewood, IL: Irwin, 1960). Since then it seems as if marketing
textbooks, especially in North America, have had to be organized around the 4Ps of the marketing
mix.
16. In a definition from 1985 marketing, according to the marketing mix approach, is described as
‘the process of planning and executing the conception, pricing, promotion and distribution of ideas,
goods and services to create exchanges and satisfy individual and organizational goals’, and in a
definition from 2004 the following is offered: ‘Marketing is an organizational function and a set
of processes for creating, communicating and delivering value to customers and for managing
customer relationships in ways that benefit the organization and its stakeholders’ (definition by
the American Marketing Association). For a critical discussion of this updated definition, see
Grönroos, C., On defining marketing: finding a new roadmap for marketing. Marketing Theory,
6(4), 2006, 395–417.
17. These are the three new service-oriented categories in a 7P marketing mix for services suggested
Booms, B.H. & Bitner, M.J., Marketing strategies and organization structures for service firms.
In Donnelly, J.H. & George, W.H. (eds), Marketing of Services. Chicago, IL: American Marketing
Association, 1982.
18. These two additional categories were suggested by Philip Kotler in the context of megamarketing.
See Kotler, P., Megamarketing. Harvard Business Review, Mar–Apr, 1986.
19. The newest marketing definition by the American Marketing Association, approved in 2013,
reads: ‘Marketing is the activity, set of institutions, and processes for creating, communicating, deliv-
ering, and exchanging offerings that have value for customers, clients, partners, and society at large.’
See https://archive.ama.org/Archive/AboutAMA/Pages/DefinitionofMarketing.aspx (6 March
2014). As a contrast the Chartered Institute of Marketing (CIM) in the UK defines marketing
strictly as a process: ‘Marketing is the management process responsible for identifying, anticipating and
satisfying customer requirements profitably.’ See http://www.getin2marketing.com/discover/what-
is-marketing (6 March 2014).
20. See also Constantinides, E., The marketing mix revisited: towards the 21st century marketing.
Journal of Marketing Management, 22(3–4), 2006, 407–438, where the author offers a compre-
hensive critical analysis of the marketing mix approach, and also Möller, K., Comment on the
NOTES 301
marketing mix revisited: towards the 21st century marketing. Journal of Marketing Management,
22(3–4), 2006, 439–450, where the author points out positive aspects of the marketing mix.
21. Because of the inside-oriented nature of the marketing mix approach we have metaphorically
labelled it a ‘production-oriented’ approach to marketing. See Grönroos, C., Defining marketing:
a market-oriented approach. European Journal of Marketing, 23(1), 1989, 54.
22. Dixon, D.F. & Blois, K., Some Limitations of the 4Ps as a Paradigm for Marketing. Marketing Edu-
cation Group Annual Conference. UK: Cranfield Institute of Technology, July, 1983.
23. Gummesson, E., Total Relationship Marketing. Marketing Management, Relationship Strategy, CRM,
and a New Dominant Logic for the Value Creating Network Economy. Oxford: Butterworth
Heinemann, 2008, p. 325.
24. Some authors go so far as to conclude that a traditional marketing perspective, with the manage-
ment of the marketing mix and its 4Ps as the central part, had by the end of the 20th century
deprived the marketing phenomenon of its importance and made decision-makers in business
lose interest in the development of marketing in firms. Only marketers themselves may not have
fully realized the need for a reorientation of their discipline. So, for example, says Ian Gordon:
‘Busy attending to the practice of marketing, marketers may not have noticed that marketing
is, for all its practical purposes, dead . . . Today, marketing attracts neither interest nor patience
from the investor community, except to the extent basic marketing skills must be demonstrated
by the enterprise. Marketing rarely achieves its promise of differentiating and developing endur-
ing, competitively superior value’ (p. 1). He sees a hope for a revitalization of marketing in the
relationship marketing philosophy. See Gordon, I., Relationship Marketing. Toronto: John Wiley
& Sons, 1998.
25. Compare Hoekstra, J.C., Leeflang, P.H. & Wittink, D.R., The customer concept: the basis for
a new marketing paradigm. Journal of Market-Focused Management, 4(1), 1999, 43–76. In this arti-
cle the authors formulate a new marketing concept, which they label the customer concept, and
‘is mainly based on the realization of superior customer values where the individual customer
is the starting point’ (p. 43). For a study of the importance of a customer value-based approach
in interactive service relationships, see Chen, S.-C. & Quester, P.G., Developing a value-based
measure of market orientation in an interactive service relationship. Journal of Marketing Manage-
ment, 21(7–8), 2005, 779–808.
26. This definition is further developed from definitions first presented in Grönroos, C., 1989, op. cit.,
p. 57 and further developed in, for example, Grönroos, C., Value-driven relational marketing:
from products to resources and competencies. Journal of Marketing Management, 13(5), 1997b,
407–420.
27. Evert Gummesson has, in a relationship marketing context, discussed a large number of relation-
ships with various partners. See Gummesson, 2008, op. cit.
28. In 1999 Harker published an analysis of the then existing definitions of relationship marketing and
concluded that the one suggested in the present book seems to be the most commonly accepted.
See Harker, M.J., Relationship marketing defined? An examination of current relationship mar-
keting definitions. Marketing Intelligence & Planning, 17(1), 1999, 13–20. His analysis still seems to
be valid.
29. Parvatiyar, A. & Sheth, J.N., The domain and conceptual foundations of relationship marketing.
In Sheth, J.N. & Parvatiyar, A. (eds), Handbook of Relationship Marketing. Thousand Oaks, CA:
Sage Publications, 2000, pp. 3–38. See also Agariya, A.K. & Singh, D., What really defines rela-
tionship marketing? Review of definitions and general and sector-specific defining constructs.
Journal of Relationship Marketing, 10(4), 2011, 203–237. See also the discussion of relationship
marketing as a school of marketing thought in El-Ansary, A.I., Relationship marketing manage-
ment: a school in the history of marketing thought. Journal of Relationship Marketing, 4(1–2), 2005,
43–56. The author concludes that ‘in a global and macro sense, Relationship Marketing is a cul-
ture. In a micro and managerial sense, it is a managerial practice’ (p. 51). Because of its managerial
aspect he suggests that this marketing school of thought should be labelled ‘relationship market-
ing management’ and proposes that ‘ . . . it will continue to be the dominant school of thought
in marketing, thus replacing the traditional marketing management school of thought’ (p. 53).
In O’Malley, L., Relational marketing: development, debates and directions. Journal of Market-
ing Management, 30(11–12), 2014, 1220–1238, a recent discussion of the relationship marketing
paradigm is provided.
30. Gummesson, op. cit., p. 5.
31. See Bagozzi, R.P., Marketing as exchange. Journal of Marketing, 39(Oct), 1975, 32–39.
32. Grönroos, C., Adopting a service logic for marketing. Marketing Theory, 6(3), 2006, 317–333. See
also Sheth, J.N. & Parvatiyar. A., Relationship marketing in consumer markets: antecedents and
consequences, in Sheth, J.N. & Parvatiyar, A. (eds), Handbook of Relationship Marketing. Thousand
Oaks, CA: Sage Publications, 2000, pp. 171–208, where the authors conclude that exchange
theory perhaps should be given up. Ballantyne and Varey state that ‘interactions over time may
be the enactment of the exchange process’. See Ballantyne, D. & Varey, R.J., Introducing a
dialogical orientation to the service-dominant logic of marketing. In Lusch, R.F. & Vargo, S.L.
(eds), The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions. Armonk, NY: M.E.
Sharpe, 2006, pp. 224–235. Sheth & Uslay, op. cit. suggest that exchange should be replaced by
value creation.
NOTES 303
33. Ryals, L., Making customer relationship management work: the measurement and profitable
management of customer relationships. Journal of Marketing, 69(4), 2005, 252–261. See also
Reinartz, W. & Kumar, V., The mismanagement of customer loyalty. Harvard Business Review,
Jul, 2002, 86–94, who claim that ‘no company should ever take for granted the idea that managing
customers for loyalty is the same as managing them for profits’ (94).
34. Research into the issue of termination on dissolution of relationships is in its infancy. However,
it seems to be a topic which will quickly grow. An early study in a business-to-business context
is reported in Halinen, A. & Tähtinen, J., Towards a Process Theory of Relationship Dissolution.
Finland: Working Paper No. 9, Turku School of Economics and Business Administration, 1999.
35. See, for example, Håkansson, H. & Snehota, I., The burden of relationships or who’s next? In
Naudé, P. & Turnbull, P. (eds), Network Dynamics in International Marketing. Oxford, UK: Elsevier
Science, 1998, pp. 16–25; Vigon, M. & Hertz, S., The burden of key customer relationships.
Journal of Customer Behavior, 2(2), 2003, 269–287; Pressey, A. & Tzokas, N., Lighting up the
‘dark side’ of international export/import relationships: evidence from UK exporters. Management
Decision, 42(5–6), 2004, 694–708; Anderson, E. & Jap, S.D., The dark side of relationships. Sloan
Management Review, 46(Spring), 2005, 75–82; Holmlund-Rytkönen, M. & Strandvik, T., Stress
in business relationships. Journal of Business & Industrial Marketing, 20(1), 2005, 12–22.
36. Anderson & Jap, op. cit. See also Villena, V.H., Revilla, E. & Choi, T.Y., The dark side of
buyer-seller relationships: a social capital perspective. Journal of Operations Management, 29(6),
2011, 561–576, Fang, S-R., Chang, Y-S. & Peng, Y-C., Dark side of relationships: a tension-
based view. Industrial Marketing Management, 40(5), 2011, 774–784, and Frow, P., Payne, A.,
Wilkinson, I.F. & Young L., Customer management and CRM: addressing the dark side. Journal
of Services Marketing, 25(2), 2011, 79–89.
37. Henrik Calonius was probably the first marketing researcher who argued for the explicit inte-
gration of promises in marketing models. See Calonius, H., A market behaviour framework. In
Möller, K. & Paltschik, M. (eds), Contemporary Research in Marketing. Proceedings from the XV
Annual Conference of the European Marketing Academy. Helsinki: Helsinki School of Eco-
nomics and Hanken Swedish School of Economics, Finland, 1986, pp. 515–524; Calonius, H., A
buying process model. In Blois, K. & Parkinson, S. (eds), Innovative Marketing – A European Per-
spective. Proceedings from the XVIIth Annual Conference of the European Marketing Academy.
Bradford, UK: University of Bradford, 1988, pp. 86–103. The promise concept was probably
first used in a relationship marketing definition in Grönroos, 1989, op. cit., 57. Calonius offered
the following general promise-based definition: ‘Marketing is a set of human activities directed
at facilitating and consummating exchanges of promises’ (1986, p. 522). Promise theory has not
been adopted very much in management and marketing yet. However, see Price, R.F. & Schultz,
D.E., Reliability Rules: How Promises Management Can Build Your Company Culture, Build Your
Brand, and Build Your Bottom Line. Chicago, IL: Racom Communication, 2008.
38. The expression ‘enabling promises’ was in this context introduced by Mary Jo Bitner (Building
service relationships: it’s all about promises. Journal of the Academy of Marketing Science, 23(4), 1995,
246–251.
39. As Moorman and Rust conclude in an analysis of the role of marketing: ‘Looking broadly at
the marketing literature and practice, it appears that during the past ten years there has been
a movement toward thinking of marketing less as a function and more as a set of values and
processes that all functions are participating in implementing’ (180). See Moorman, C. & Rust,
R.T., The role of marketing. Journal of Marketing, 63(Special Issue), 1999, 180–197.
40. Service marketing textbooks are typically based on a customer relationship approach. See, for
example, Zeithaml, V.A. & Bitner, M.J., Services Marketing. Integrating Customer Focus Across the
Firm, 2nd edn. New York: McGraw-Hill, 2000. In general, it is interesting to note that full-scale
textbooks on service marketing (not just text and reference volumes) now being published in
English are more and more organized around a genuinely service-oriented perspective. See, for
example, Zeithaml & Bitner, op. cit.; Bateson, J.E.G., Managing Services Marketing. New York:
Dryden Press, 1995; Lovelock, C., Vandermerwe, S. & Lewis, B., Services Marketing: A European
Perspective. London: Prentice-Hall Europe, 1996; Kasper, H., van Helsdingen, P. & de Vries
Jr., W., Services Marketing Management: An International Perspective. New York: John Wiley &
Sons, 1996; McGuire, L., Australian Services Marketing and Management. South Yarra, Australia:
Macmillan Education Australia, 1999. The marketing mix approach no longer dominates the
structures of these textbooks. An early textbook pioneering such an approach in English is Cowell,
D., The Marketing of Services. London: Heinemann, 1985, which was organized around the 7P
framework. In other languages such genuinely service-based textbooks have existed since the
early 1980s.
41. El-Ansary, op. cit., 53.
42. Compare El-Ansary, op. cit.
43. Lovelock, C., Functional integration in services. Understanding the links between marketing,
operations, and human resources. In Swartz, T.A. & Iacobucci, D. (eds), Handbook in Services
Marketing & Management. Thousand Oaks, CA: Sage Publications, 2000, pp. 421–437.
44. Gummesson, E., The new marketing – developing long-term interactive relationships. Long
Range Planning, 20(4), 1987, 10–20 and Marketing-orientation revisited: the crucial role of the
part-time marketer. European Journal of Marketing, 25(2), 1991, 60–67.
45. See, for example, Grönroos, C., Designing a long range marketing strategy for services. Long
Range Planning, April, 1980.
FURTHER READING 305
46. See, for example, Meuter, M.L., Bitner, M.J., Ostrom, A.L. & Brown, S.W., Choosing among
alternative service delivery modes: an investigation of customer trial of self-service technologies.
47. Storbankernas reklamhaveri (The advertising flop of big banks). Resumé, May, 2006, 30–31. In
Swedish.
48. See Grönroos, C., From marketing mix to relationship marketing – towards a paradigm shift
in marketing. Managing Decision, 35(4), 1997, 322–339. An earlier version was introduced in
Grönroos, C., The marketing strategy continuum: a marketing concept for the 1990s. Management
Decision, 29(1), 1991, 7–13.
49. Day, G.S., Managing market relationships. Journal of the Academy of Marketing Science, 28(1), 2000,
24–30.
Agariya, A.K. & Singh, D. (2011) What really defines relationship marketing? Review of definitions
and general and sector-specific defining constructs. Journal of Relationship Marketing, 10(4), 203–237.
Alderson, W. (1957) Marketing behavior and executive action. Homewood, IL: Richard D. Irwin.
Ambler, T. (2003) Marketing and the Bottom Line. The Marketing Metrics to Pump Up Cash Flow. London:
Prentice-Hall.
Anderson, E. & Jap, S.D. (2005) The dark side of relationships. Sloan Management Review, 46(Spring),
75–82.
Arantola, H. (2002) Relationship Drivers in Provider–Consumer Relationships. Empirical Studies of Customer
Loyalty Programs. Helsinki: Hanken Swedish School of Economics, Finland.
Bagozzi, R.P. (1975) Marketing as exchange. Journal of Marketing, 39(Oct), 32–39.
Ballantyne, D. & Varey, R.J. (2006) Introducing a dialogical orientation to the service-dominant
logic of marketing. In Lusch, R.F. and Vargo, S.L. (eds), The Service-Dominant Logic of Marketing:
Dialog, Debate, and Directions. Armonk, NY: M.E. Sharpe, pp. 224–235.
Bateson, J.E.G. (1995) Managing Services Marketing. New York: Dryden Press.
Bitner, M.J. (1992) Servicescapes: the impact of physical surroundings on customers and employees.
Journal of Marketing, 56(Apr), 57–71.
Bitner, M.J. (1995) Building service relationships: it’s all about promises. Journal of the Academy of
Marketing Science, 23(4), 246–251.
Booms, B.H. & Bitner, M.J. (1982) Marketing strategies and organization structures for service firms.
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Borden, N.H. (1964) The concept of the marketing mix. Journal of Advertising Research, June.
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porary Research in Marketing. Proceedings from the XV Annual Conference of the European Market-
ing Academy, Helsinki: Helsinki School of Economics and Hanken Swedish School of Economics,
Finland, pp. 515–524 also published as Calonius, H. (2006) A market behaviour framework. Marketing
Theory, 6(4), 419–428.
Calonius, H. (1988) A buying process model. In Blois, K. & Parkinson, S. (eds), Innovative Marketing –
A European Perspective. Proceedings from the XVIIth Annual Conference of the European Marketing
Academy. Bradford, UK: University of Bradford, pp. 86–103.
Chen, S.-C. & Quester, P.G. (2005) Developing a value-based measure of market orientation in an
interactive service relationship. Journal of Marketing Management, 21(7–8), 779–808.
Constantinides, E. (2006) The marketing mix revisited: towards the 21st century marketing. Journal
of Marketing Management, 22(3–4), 407–438.
Cowell, D. (1985) The Marketing of Services. London: Heinemann.
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24–30.
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Education Group Annual Conference, UK: Cranfield Institute of Technology, July.
El-Ansary, A.I. (2005) Relationship marketing management: a school in the history of marketing
thought. Journal of Relationship Marketing, 4(1–2), 43–56.
Fang, S-R., Chang, Y-S. & Peng, Y-C. (2011) Dark side of relationships: a tension-based view.
Industrial Marketing Management, 40(5), 774–784.
Frow, P., Payne, A., Wilkinson, I.F. & Young L. (2011) Customer management and CRM: address-
ing the dark side. Journal of Services Marketing, 25(2), 79–89.
Gordon, I. (1998) Relationship Marketing. Toronto: John Wiley & Sons.
Grönroos, C. (1980) Designing a long range marketing strategy for services. Long Range Planning,
13(Apr), 36–42.
Grönroos, C. (1989) Defining marketing: a market-oriented approach. European Journal of Marketing,
23(1), 52–60.
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Grönroos, C. (1997a) From marketing mix to relationship marketing – towards a paradigm shift in
marketing. Managing Decision, 35(4), 322–339.
Grönroos, C. (1997b) Value-driven relational marketing: from products to resources and competen-
cies. Journal of Marketing Management, 13(5), 407–420.
Grönroos, C. (1999) Relationship Marketing: the Nordic School Approach. In Sheth, J.N. &
Parvatiyar, A., eds. Handbook of Relationship Marketing. Thousand Oaks, CA: Sage, pp. 95–118.
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S.L. (eds), The Service-Dominant Logic of Marketing. Dialog, Debate, and Directions. Armonk, NY: M.E.
Sharpe, pp. 354–364.
Grönroos, C. (2006b) Adopting a service logic for marketing. Marketing Theory, 6(3), 317–333.
Grönroos, C. (2006c) On defining marketing: finding a new roadmap for marketing. Marketing
Theory, 6(4), 395–417.
Grönroos, C. (2009) Promise management: regaining customer management for marketing. Journal
of Business & Industrial Marketing, 13(5–6), 351–359.
Gummesson, E. (1987) The new marketing – developing long-term interactive relationships. Long
Range Planning, 20(4), 10–21.
Gummesson, E. (1991) Marketing revisited: the crucial role of the part-time marketer. European
Journal of Marketing, 25(2), 60–67.
CRM, and a New Dominant Logic for the Value Creating Network Economy. Oxford: Butterworth
Heinemann.
Håkansson, H. & Snehota, I. (1998) The burden of relationships or who’s next? In Naudé, P.
& Turnbull, P. (eds), Network Dynamics in International Marketing. Oxford, UK: Elsevier Science,
pp. 16–25.
Halinen, A. & Tähtinen, J. (1999) Towards a Process Theory of Relationship Dissolution. Working Paper
No. 9, Turku School of Economics and Business Administration, Finland.
Harker, M.J. (1999) Relationship marketing defined? An examination of current relationship mar-
keting definitions. Marketing Intelligence & Planning, 17(1), 13–20.
Hoekstra, J.C., Leeflang, P.H. & Wittink, D.R. (1999) The customer concept: the basis for a new
marketing paradigm. Journal of Market-Focused Management, 4(1), 43–76.
Holmlund-Rytkönen, M. & Strandvik, T. (2005) Stress in business relationships. Journal of Business

& Industrial Marketing, 20(1), 12–22.
Kasper, H., van Helsdingen, P. & de Vries Jr., W. (1996) Services Marketing Management. An Interna-
tional Perspective. New York: John Wiley & Sons.
Klaus, P. & Edvardsson, B. (2014) The road back to relevance – how to put marketing back on the
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Möller, K. (2006) Comment on the marketing mix revisited: towards the 21st century marketing.
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180–197.
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ships: evidence from UK exporters. Management Decision, 42(5–6), 694–708.
Price, R.F. & Schultz, D.E. (2008) Reliability Rules: How Promises Management Can Build Your Company
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CHAPTER 10
MANAGING INTEGRATED
MARKETING
COMMUNICATION AND
RELATIONSHIP
COMMUNICATION
“ Everything communicates something about a firm and its offerings – regardless of whether the marketer
”
takes this into account and acts upon it or not.
INTRODUCTION
This chapter addresses the issue of marketing communication and demonstrates the need for a total
communication or integrated marketing communications approach where communication messages
from a number of different sources are integrated. The communication circle concept is described, and
the impact of various time horizons on the effects of marketing communication campaigns is analysed.
Some guidelines for managing marketing communications in service are also presented. In the final
sections of the chapter we discuss the relationship dialogue concept and how total integrated market-
ing communication and relationship marketing relate to each other. A relationship communication
model is presented, where communication messages sent by a firm are considered facilitators of the
customers’ creation of meaning out of these messages. After having read the chapter the reader should
understand the importance of taking a holistic approach to marketing communication and know how
to integrate communication activities of different natures; planned, as well as product and service,
and unplanned, messages. The reader should also understand how marketing communication has an
impact on several target groups and on several levels along a time span. Finally, the reader should
realize the importance of the customer as a creator of meaning out of communication messages in his
temporal and situational context.
312 MANAGING INTEGRATED MARKETING COMMUNICATION AND RELATIONSHIP COMMUNICATION
M A R K E T I N G C O M M U N I C AT I O N : A T O TA L
C O M M U N I C AT I O N S I S S U E
Marketing communication is a substantial part of the marketing process. Conventional marketing
includes market communication activities such as sales, advertising, sales promotion and communica-
tion over the Internet. However, communication is also an integral part of the interactive marketing
process and relationship marketing. What employees say, how they say it, how they behave, how
service outlets, machines and other physical resources look, and how they function all communicate
something to the customers. The communication effect may be positive, such as ‘they really care
for me here’, ‘they have modern and efficient equipment’, ‘this website is easy to use and provides
useful interactions with the firm’ or ‘the employees are nicely dressed’. It may also, of course, be less
favourable, such as ‘how rude their people are’, ‘what a sloppy office they have’, ‘how can it always
take so long to get things done here’ or ‘why do they not keep me informed about the developments?’
There is an important difference between the communication of the traditional marketing function
and that involved in the interactive marketing process. The latter type of communication is related to
reality as customers perceive it. They communicate what really is as far as consumers are concerned.
The relationship marketing model in Chapter 9 shows communication effects of activities in the interaction
process. The former type of communication, such as advertising, is always on an abstract level for
customers. It relates to the planned communication process of this relationship marketing model. Planned
communication involves information that may or may not be true; however, as far as the customer or
potential customer is concerned, the validity of this must still be tested. Hence, this communication
is a promise about what hopefully will happen in the future. Testing takes place when the customer
meets reality. There is an obvious connection here with how service quality is perceived. Marketing
communication efforts like advertising and sales predominantly impact the expected service, whereas
the communication effects of the interactive marketing process influence the experienced service.
For example, a retailing chain that advertises a certain product at a special price communicates a
positive promise of good value. If the product is not available in the shop, or if it has already sold out,
a negative communication message is created: ‘They do not advertise honestly’ or ‘They just want
me to come to the shop to buy stuff. They probably only had a limited number of the advertised low-
price products in stock in the first place.’ The negative communication impact of the latter is much
more forceful, because it is caused by the actual performance of the retailer. Moreover, it changes the
favourable effect of the first type of communication into an unfavourable image of the retailing chain.
The size of the gap between expectations and experiences determines the quality perception, as
discussed earlier. Hence, here there is a truly total communication impact;1 almost everything the orga-
nization says about itself and its performance and almost everything the organization does that is
experienced in the service encounters or elsewhere has an impact on the customer. Moreover, the
various means of communication and their effects are interrelated. These communication effects,
together with other factors such as the technical quality of the service, shape the image of the orga-
nization in the minds of customers, and potential customers. We shall return to the issue of image
management and branding in the next chapter.
I N T E G R AT E D M A R K E T I N G C O M M U N I C AT I O N S
The integrated marketing communications notion emerged as an approach to understanding how a holistic
communications message could be developed and managed.2 As the total communication concept, it is
based on the notion that it is not only planned communication efforts using separate and distinct
INTEGRATED MARKETING COMMUNICATIONS 313
communications media, such as TV, print, direct mail, the Internet, or social media, etc., that com-
municate a message about the firm and its offerings to customers and potential customers. Although
these are communication activities that can easily be planned and implemented by the marketer, other
aspects (for example, how the service process functions, what resources are used and what physical
products are used in the process) include an element of communication. The messages that these parts
of the customer relationship send may be more effective than those that the customer receives from
advertisements, brochures and other traditional marketing communications media. However, to an
overwhelming extent the literature on integrated marketing communication only includes commu-
nication media where communication activities can be planned distinctly as communication.
Furthermore, as conventional marketing communication is basically a firm-driven process, what is
communicated is expected to be perceived more or less as intended. Obviously, in reality it may not
be like this. A customer-driven communication approach is presented later in this chapter.
As a true total communications approach, integrated marketing communications, which is still
firm-driven though, can be defined as follows:3
Integrated marketing communications is a strategy that integrates traditional media marketing, direct marketing,
public relations and other distinct marketing communications media as well as communications aspects of the
delivery and consumption of goods and services and of customer service and other customer encounters. Thus,
integrated marketing communications has a long-term perspective.
According to this definition, communication messages can originate from several sources. Duncan and
Moriarty distinguish between four kinds of sources of communication messages:4
1. Planned messages.
2. Product messages.
3. Service messages.
4. Unplanned messages.
Planned messages are the result of a planned marketing communications campaign where separate
communications media, such as TV, print, direct mail, the Internet, social media, etc., are used to
send a message. Sales representatives also communicate planned messages. Generally, these messages
are the least trustworthy, because people know that they are planned by the marketer to persuade
customers and potential customers in a certain direction.
Product messages are messages about the firm and its offerings that follow from the physical products
in an offering: how a physical product is designed, how it functions, how it can be disposed of, etc.
Service messages are messages that result from service processes. The appearance, attitude and
behaviour of service employees, the way systems and technology function, and the servicescape all
send service messages. Interactions between customers and service employees in the service process
include a substantial element of communication. Not only can the customer get valuable information
in these encounters, he may also develop a sense of trust in the firm based on such interactions. On
the other hand, the effects may also be negative. How the systems function and how the servicescape
supports the service process also communicate something and may build up trust in the firm. One
might say that service messages are more trustworthy than planned messages and product messages,
because customers know that it is more difficult to manage the resources that create such messages
than it is with planned messages and product messages.
Least credible Most credible
PLANNED PRODUCT SERVICE UNPLANNED ABSENCE OF

MESSAGES MESSAGES MESSAGES MESSAGES COMMUNICATION
Mass communication Appearance Interactions with Word of mouth No information or
(e.g. advertising) Design service processes referrals feedback to customers,
Brochures Usefulness Deliveries References for example when an
Direct response Raw materials Invoicing News stories unexpected delay or service
Sales Production Claims handling Gossip failure has occurred, or
Web sites processes Information etc. in any situation when the
etc. etc. etc. customer feels he is out of
control of the situation
F I G U R E 10.1
Sources of communication messages.
Source: Developed from Duncan, T. & Moriarty, S., Driving Brand Value.
New York: McGraw-Hill, 1997.
Finally, there are unplanned messages, which are considered to be the most trustworthy. Unplanned
messages about the firm and its offerings are sent by fellow customers who interact with a given
customer during the service process or who make comments in social media and convey good or
bad word-of-mouth communication or, for example, by articles in newspapers, magazines or in TV
programmes.
In Figure 10.1 these four types of sources of communication messages, as well as examples of the
various types of messages, are summarized. To the far right in the figure a fifth source of commu-
nication message has been added. As Henrik Calonius5 suggested, absence of communication in critical
situations, such as when service failures or other unexpected events have occurred, can have a pro-
found influence on the customer’s perception of service quality. If the marketer does not say anything,
for example, about how long a delay can be expected to take or when a delayed shipment can be
expected to arrive, customers are kept out of control of the situation. This almost always has a negative
effect on perceived service quality, adds psychological relationship costs and hurts a relationship.
As is illustrated in Figure 10.2, the sources of these four types of messages, in addition to absence of
communication, can be described as ‘What the firm says’ (in planned communications messages), ‘What
the firm does’ (creating product and service messages) and ‘What others say and do’ (fellow customers in
the service process, word of mouth, social media comments and conservations, and media coverage
in the form of articles and TV programmes).
A major problem in marketing communication is the fact that only the least trustworthy source
of messages about the firm and its offerings – planned messages (‘What the firm says’) using distinct
communications media – is normally planned as part of the marketing communications programme.
Product messages may partly be planned, whereas the more trustworthy sources, service messages and
unplanned messages (‘What the firm does’ and ‘What others say and do’) are largely ignored. The
fact that these types of messages are not part of an organized marketing communications process and
not covered by a budget for marketing communications does not mean that their communications
impact would be low. However, firms tend to neglect them, because they are difficult to plan. It
is much easier to spend even more money on developing planned messages and using advertising,
direct mail, sales promotions and other traditional means of marketing communication as well as the
Internet and other new media. The effect of such a communications strategy is not guaranteed.
THE ABSENCE OF COMMUNICATION 315
The firm says The firm does

(planned messages) (product and service
messages)
• Sales • Deliveries
What the firm What the firm
• Advertising • Usefulness of products
SAYS DOES
• Direct marketing • Service processes
• Sales promotion • Personnel and systems
• Digital channels • Hidden services
What others
SAY and DO
Others say and do

• Public relations
• News stories
• Social media discussions
• Word of mouth
• Customer impact on
service processes
F I G U R E 10.2
The total communication/integrated marketing communication triangle.
Source: Adapted from Grönroos, C. & Lindberg-Repo, K., Integrated marketing
communications. The communication aspect of relationship marketing. Integrated
Marketing Communications Research Journal, 4(1); 1998: 10.
The challenge to a firm is to manage all sources of messages about the firm and its offerings and all
the communication media and their effects in an integrated way. Otherwise, customers will receive
different, possibly contradictory, signals from the various types of communication. A salesperson may
promise one thing while a personalized sales letter may promise something else (both planned com-
munication messages), and a third communication effect may emerge when the customer perceives
reality in the service encounter when consuming the service (effect of service messages). Furthermore,
somewhere along the line there may be an absence of communication, either deliberate or accidental,
which adds to the confusion of the total communication effect.
On the other hand, the organization that masters total communication management can achieve
a powerful market communication impact, which adds substantially to the performance of the
total marketing process. It is a way of boosting image and has a significant effect on word-of-mouth
communication.
T H E A B S E N C E O F C O M M U N I C AT I O N
As mentioned, there is a fifth source of message or type of communication that has to be considered
when planning total communication, and that is the absence of communication.6 This is often mistaken
for lack of communication, where nothing is communicated.
The absence of communication may send messages as effectively as planned communication does.
When a firm decides not to inform its customers about, say, a delay or a quality fault, this is not simply a
lack of communication. Instead, there is a distinct message involved. This is perceived either immediately
or later. It tells the customer that the service provider or supplier does not care about the customer
and that the firm cannot be trusted. Absence of communication is frequently perceived as negative
communication.
When a customer observes that there is a problem – for example, a flight does not leave on time or
delivery of merchandise does not arrive on time – and the firm remains quiet, he loses control of the
situation. Customers consider it important to be in control.7 Being in control of a negative situation
such as a delayed shipment makes a customer more trusting towards the supplier than not knowing
what has happened. Also, keeping the customer informed about problems and deviations from what
was expected is a way of showing respect. Openly recognizing a service failure is also the first step
in a service recovery process and, as we have discussed previously, successful service recovery is a
criterion of good functional quality.
In conclusion, the absence of communication may send a dangerous negative message about the
firm. Normally, even negative information is better than no information.
W O R D O F M O U T H A N D T H E C O M M U N I C AT I O N
CIRCLE
The marketing impact of word-of-mouth communication is usually huge, frequently greater than that
of planned communication. This impact has been growing exponentially due to the Internet and
since the introduction of social media. Word of mouth means messages about the organization, its
credibility and trustworthiness, its ways of operating, its offerings and so on are communicated from
one person to another, or through digital media to groups of other persons. As service is often based on
an ongoing customer relationship, it is useful to understand word of mouth in a relationship context:
Word of mouth communication from a relational perspective is based on consumers’ long-term experiences and
behavioral commitment. Their word of mouth communication reflects the nature and value of their perception of
relationship episodes or service encounters, as well as psychological comfort/discomfort with the relationship. It
varies depending on how strong the relationship is.8
In the eyes of a potential customer, a person who has had personal experience with the service provider
is an objective source of information. Consequently, if there is a conflict between the word-of-mouth message
and, say, an advertising campaign, advertising will lose.
If a strong relationship develops with a given customer, advocacy bonds between the firm and the
customer may also develop. Such customers recommend the firm to their friends, colleagues, etc.,
and on social media even to complete strangers, whereby they thus invite others to share the service
experience with them.9 They become advocates of the service offering. When offering word-of-mouth
referrals customers with only one or a few experiences from a service will probably emphasize the
price of the service, whereas long-standing customers are more likely to talk about the value of the
service.
The amount of word-of-mouth referrals also seem to correlate positively with the relative growth
of a firm in its industry. The more a firm’s customers enthusiastically recommend the firm and its
products to others, the better the growth rate of that firm. As growth can often be expected to be
WORD OF MOUTH AND THE COMMUNICATION CIRCLE 317
Word of mouth
and references/
social media
Expectation/
purchases Experiences
(old/new customers)
Interactions
(moments of truth)
F I G U R E 10.3
The communication circle.
a key driver of profitability, a large number of advocates on the market who refer the firm to other
people also makes sense from a business profitability point of view.10
We will not go into word of mouth in any further detail here. Instead, we will turn to the com-
munication circle, in which word of mouth in all its forms plays a critical role. This circle is illustrated
schematically in Figure 10.3.
The communication circle consists of four parts, expectations/purchases, interactions/service encounters,
experiences and word of mouth and references/social media. A potential customer or existing customer has
developed certain expectations and therefore may decide to make a purchase; new business is created
or an ongoing customer relationship thus continues, respectively. Having done so, he moves into the
consumption stage of the customer relationship lifecycle. At this point, the customer gets involved
in interactions with the organization and perceives the technical and functional quality dimensions of
the service rendered. These interactions usually involve a high number of moments of truth or moments
of opportunity. Here the customer is exposed to the interactive marketing efforts of the firm and receives
service and product messages. The way the employees perform and systems function communicates
a number of messages about the firm, its trustworthiness, its interest in customers, etc.
Now, the experiences that follow from a customer being involved in interactions in the service
encounters and perceiving the quality dimensions multiply several times by means of word of mouth and
comments and conversations on social media. If the message thus communicated is positive, customer
expectations develop favourably. The customer with positive experiences is more inclined to return
or continue to use the service on an ongoing basis. New potential customers become interested in
the organization and its offerings. References (and testimonials) represent an active way for the firm to
use positive word of mouth in its marketing, thus capitalizing more effectively on potential sources
of good word of mouth.
The multiplier effect of word of mouth varies between industries and situations. It is frequently
claimed that negative experiences tend to multiply by word of mouth quicker and more often than do
positive experiences. And through social media these effects grows exponentially. Although there is
no research to show the magnitude of this multiplying effect, the trend is clear and sends the marketer
a blunt message: Do not play with word of mouth. Make it work for you in all situations, and always
try to capitalize on it. From the marketer’s perspective it is difficult, almost impossible, to steer word
of mouth and discussions on social media directly. Attempts to interfere with such discussions almost
invariably backfire. Word of mouth in all its forms can only be managed indirectly, by eliminating mistakes
and negative customer experiences, and when service failures sometimes happen, by recovering the
failure properly in a customer-centric manner.
Thus, word of mouth has a powerful impact on the formation of expectations of existing and potential
customers and is an important determinant of future purchasing behaviour. On the one hand, good word
of mouth has a positive effect on expectations and future purchases. On the other hand, negative
word of mouth has, of course, the opposite effect.
M A R K E T I N G C O M M U N I C AT I O N A N D T H E
C O M M U N I C AT I O N C I R C L E
It is important that the existence of the communication circle be understood and its implications fully
appreciated by the marketer. If customer interactions create too many negative experiences and neg-
ative word of mouth follows, the customer builds up a resistance to active marketing communication. The
more negative word of mouth there is, the less effective advertising campaigns, direct communication
and sales efforts will be, and the less inclined people will be to look at the firm’s website. More has
to be invested in these types of communication if the negative impact of word of mouth is to be
nullified. If too many negative messages are communicated by word of mouth and the image of the
organization suffers severely, no increase in the marketing communication budget will be enough to
save the situation, at least not in the long run.
Positive word of mouth, on the other hand, decreases the need to spend so much on marketing
communication, through, for example, advertising and sales. It also draws customers and potential
customers to Internet sites, either because they are looking for solutions to a problem, or simply
out of curiosity. Good experiences and favourable word of mouth take care of much of the new
business that is needed. In theory, excellent interactions, including good customer perceived quality
and interactive communication, make mass communication less necessary and allow more freedom in pricing.
Only when totally new services are launched may mass communication such as advertising campaigns
be needed. There are numerous examples of small local firms that operate successfully in this way,
and larger firms operating in larger areas can do the same. One of the leading banks in Scandinavia,
Svenska Handelsbanken, has pursued such a communication strategy for over 40 years, and it has
worked well; the profitability of the bank as well as customer satisfaction have constantly been well
above average.
Whatever communication strategy the organization adopts, the key to successfully executed mar-
keting communication is how the interactions between the organization and its customers have been
geared to the needs and wishes of customers and to producing excellent perceived quality and build-
ing up supportive word of mouth. If the communication aspects of interactions are neglected, the
interactive communication impact will not be as good, and could even be negative. As a consequence,
more money will be needed for other types of communication, and even this may not be enough.
If marketing communication efforts sending planned messages through, for example, personal sell-
ing, mass communication and direct mail are developed without being geared to the communication
PLANNED AND UNPLANNED COMMUNICATION 319
effects of the service encounter (service messages) and word of mouth, the risk of overpromising and,
consequently, of building up quality gaps grows substantially. Customers will then meet a reality that
does not correspond to their expectations. This, in turn, destroys the communication circle, and three
types of negative consequences may follow:
1. Word of mouth and references will become negative; negative discussions on social media are
triggered.
2. The trustworthiness of the organization’s communication messages suffer.
3. The firm’s image is damaged.
On the other hand, if all elements of the communication process and customer perceptions of the
service encounters are good, the corresponding effect is, of course, the opposite. Good word of mouth
is built up, the credibility of the marketing communication efforts increases, and image improves.
To sum up, only a total communication management approach, where the effects of various sources
of communication messages are integrated as well as possible, will be effective and justified from
a management point of view. The effects of all types of communication, including the absence of
communication, have to be taken into consideration. Integrating the different types of marketing
communication and sources of messages is not an easy task. This is, however, not a valid excuse for
not trying to integrate as much as possible. However, there is sometimes a structural obstacle in firms.
Marketing communication is normally managed on a low level in the organizational hierarchy, where,
for example, a marketing communication manager or even a marketing manager cannot integrate
more than the planned communication messages.
P L A N N E D A N D U N P L A N N E D C O M M U N I C AT I O N
Unplanned messages were discussed in a previous section. These are messages from sources that cannot
be planned or are difficult to plan. There is also another aspect of the planned/unplanned issue. Even
planned messages may go partly unplanned. Hence, we can talk about unplanned communication as well
as planned, depending on how well the marketer manages to plan all aspects of a planned message,
or of a product or service message.
Unplanned communication, as opposed to planned communication, has a distinct effect just like the
absence of communication.11 There are often a number of situations where communication effects
occur, although these situations have not been planned from a communication point of view. Such
unplanned communication effects may be caused by planned messages in sales negotiations, advertising
or some other distinct communications media, or they may be related to product or service messages.
Unplanned communications can easily have a negative impact on customer perceptions. There-
fore, it is important to analyse all sources of communication and their possible effects, planned as
well as unplanned. In Table 10.1 examples taken from various situations illustrate how unplanned
communication effects may occur.
In practical situations it is, of course, seldom possible to exclude all sources of unplanned commu-
nication. However, successful total communications management requires that as many as possible of
the potential communication situations be planned and the risk of unfavourable unplanned commu-
nication at least minimized.
TA B L E 10.1
Planned and unplanned communication.
Type of communication Planned Unplanned
Personal selling Good travel plans Sloppy dress

Good advice Uninterested in our values
Mass communication Target-group directed Communicates values that

advertising offend the customer
Informative menus
Direct communication Correct address Wrong first name

(direct mail) Personalized content Irrelevant information
Websites Easy to find interesting links & No or delayed answers to

e-mail contact opportunities e-mails
Communication in service Good manners Snooty

encounters (service Pleasant servicescape Badly maintained premises
messages) Effective systems Complicated technology
Communication by physical High-class amenities in a hotel Plastic chairs in an outdoor

products in service room café
processes (product
messages)
Absence of communication ‘We don’t give any Neglecting to inform

information unless it is customers about delays
correct’
‘We’ll inform you as soon as
we know more, and let you
know the situation every
10 minutes anyway’
T H E S H O RT- , M E D I U M - A N D L O N G - T E R M
E F F E C T S O F M A R K E T I N G C O M M U N I C AT I O N
Frequently, marketing communication is only used to achieve short-term goals. Sometimes efforts
are made to create more enduring effects, for example, corporate advertising campaigns or image
communication programmes. Too often, however, such long-term efforts are planned separately from
other campaigns. Every communication activity, whether short-term or long-term, has effects on
customers, as well as on potential customers and employees in a number of different time perspectives.
THE SHORT-, MEDIUM- AND LONG-TERM EFFECTS OF MARKETING COMMUNICATION 321
We are here going to distinguish between three time perspectives and their impacts on how an
organization is perceived in the marketplace:
1. A marketing communication impact in the short term.

2. A marketing impact in the medium term.
3. An image impact in the long term.
Every communication effort, such as an advertising campaign, an Internet site, the behaviour of service
employees, or the ease with which an ATM is operated, has an instant, short-term communication impact as
a communication activity. This may be very effective as a means of communication; for example, a well-
planned and executed advertising campaign that makes potential customers believe in the promises
made. However, over a longer period the effects may be less clear, even negative. Another thing that
is important to bear in mind is that mass communication has an impact on several target groups, even
though it may be planned for and directed at only, say, potential customers. Existing customers and
the firm’s employees are also exposed to such communication. For example, potential customers to
whom the firm may promise discounts or special benefits if they make a purchase may be impressed,
whereas the firm’s existing customers may be annoyed. Such problems should be recognized by the
marketer in advance and avoided from the beginning in the planning process.
In Table 10.2 the possible effects of such an effective advertising campaign (or any type of commu-
nication effort) involving overpromising are illustrated: ‘+’ denotes a favourable effect, ‘–’ a negative
TA B L E 10.2
Effects of an effectively executed communication campaign involving overpromising in three
time periods at three levels.
Effect/period of Target groups

time level
Existing customers Potential customers Employees
Short term: effect + or 0 + 0

of campaign as ‘Maybe they really ‘This sounds good!’ ‘I doubt it!’
communication mean it!’
Medium term: – 0 or – –
effect of ‘I should have known ‘Wasn’t it more than ‘It’s as I thought and
campaign as part better! Cheated this?’ or ‘This is I have had to
of marketing again!’ not what I explain why we
expected!’ cannot fulfil our
promises!’
Long term: effect –– –– ––
of campaign on ‘They never do what ‘They just talk and ‘I’m looking for
image formation they say they are promise.’ another
going to do!’ employer.’
TA B L E 10.3
Effects of realistic market communication in three time periods at three levels.
Effect/period of Target groups

time level
Existing customers Potential customers Employees
Short term: effect + + +

of campaign as ‘They have something ‘It sounds ‘We are prepared!’
communication new to offer.’ interesting.’
Medium term: ++ + +
effect of ‘What a good service!’ ‘They really fulfilled ‘It works out well.’
campaign as part their promises.’
of marketing
Long term: effect ++ ++ ++
of campaign on ‘That’s my service ‘You can really trust ‘This is the best
image formation provider!’ them.’ employer I’ve ever
worked for.’
effect and ‘0’ a neutral effect or no effect. Three target groups for this campaign, customers, potential
customers and employees, are identified and the impact on these groups indicated. In reality there
may be more target groups. In Table 10.2 and then in Table 10.3 traditional planned communication
is used to exemplify the various effects of marketing communication. Similar analyses can, and should,
be conducted for product and service messages, and also for unplanned messages and even for absence
of communication.
As can be seen from Table 10.2, this hypothetical advertising campaign obviously includes promises
that cannot be fulfilled. For potential customers and even for existing customers, the effects of this campaign
may be positive in the short term seen as a communications effect only, if it is well executed. However,
employees, who know they cannot possibly fulfil such promises, react differently. If this is the first
time such overpromising takes place, they will probably react in a neutral way and the campaign will
have no effect. However, if such overpromises have been made in the past, their reactions will be
negative.
Over a longer period of time, as customers and potential customers get involved in interactions
with the organization, the perception of this advertising campaign changes. They realize that reality
has not met their expectations and the promises made by the campaign. The combined impact of
the advertising campaign as a traditional marketing effort and the interactive marketing effect of the
buyer–seller interactions in the service encounters, which are inconsistent with the campaign, thus
changes the positive effect of the campaign. This combined effect is the impact of the total marketing
process, including traditional as well as interactive activities, and it is probably negative. The customers
feel cheated, and justifiably so. Hence, in the medium term, the marketing effect of a campaign,
which judged in isolation may seem good and effective, can be poor or directly negative.
As far as the employees are concerned, the medium-term effect is definitely negative, because
they will have to cope with customers who have unrealistic expectations and may get angry and
GUIDELINES FOR MANAGING MARKET COMMUNICATION 323
sometimes even nasty towards them. Personnel are put in an awkward position, which damages
employee motivation and good interactive marketing performance.
Finally, we can stretch the time perspective even more, and observe the possible long-term effects of
this advertising campaign. If the campaign runs for a longer period of time, or is followed by other
campaigns which also overpromise, customers and potential customers will learn that the organization is
not trustworthy. Over the long term, single communication campaigns that, again judged in isolation,
look like good communication may have a very negative impact on the image of the organization.
Of course, employees react as strongly as customers. Dissatisfied customers can normally leave a
company with little or no notice, whereas it may be less easy for many employees to find a new
employer. In the long run employee motivation suffers badly.
The effects of a trustworthy communication campaign that does not involve overpromising are,
of course, totally different. Table 10.3 illustrates the effects that can be expected to occur when, for
example, an advertising campaign is run which makes realistic promises. Customers exposed to the
messages of this campaign experience a reality that corresponds to the promises, if they decide to buy
and consume service provided by the organization.
The effects demonstrated in Table 10.3 are totally different from those in Table 10.2. In the short
term, existing and potential customers and employees can be expected to react positively. This initial
favourable effect is enhanced by the fact that the service production process is perceived to be in line
with the campaign. Interactive marketing in the service encounters and the market communication
campaign support each other. In the long term, image is improved by the fact that the organization
consistently gives a good impression, by marketing communication as well as by reality and interactive
marketing performance. In terms of the relationship marketing model in Chapter 9, activities in
the planned communication process (planned messages) and in the interaction process (product and service
messages) support each other. As a consequence, this will trigger positive unplanned communication
(word of mouth, comments on social media, news stories). The employees also react favourably. In
the long term, they will probably consider their employer the best possible, if other internal activities
or policies do not destroy this impression.
As these examples demonstrate, it is imperative that every communication effort is judged not only
on its virtues as a communication effort, but in a much larger perspective, otherwise unwanted effects
may occur.
GUIDELINES FOR MANAGING MARKET

C O M M U N I C AT I O N
Some general guidelines for managing market communication can be identified.12 Here 12 guidelines
are discussed:
1. Direct communication efforts to employees.

2. Capitalize on word of mouth.
3. Provide tangible clues.
4. Communicate intangibility.
5. Make the service understood.
6. Provide communication continuity.
7. Promise what is possible.

8. Observe the long-term effects of communication.
9. Be aware of the communication effects of the absence of communication.
10. Integrate marketing communication efforts and messages.
11. Customers integrate communication messages with their previous experiences as well as with
their life experiences and expectations.
12. In the end, it is the customers who create messages for themselves out of a firm’s communication
efforts.
Direct communication efforts to employees. All advertising campaigns and most other mass communica-
tion efforts that are planned for various segments of existing and potential customers are also visible to
employees. Employees are therefore an important ‘second audience’ for these campaigns. Promoting
the position of employees in external communication campaigns is a way of internally enhancing the
employees’ roles and adding to their motivation.
Capitalize on word of mouth. As demonstrated by the discussion of the communication circle and the
vital role of word of mouth and customer references, good word of mouth makes customers more
receptive to external marketing communication efforts, and vice versa. Moreover, good word of
mouth can be considered the most effective communication vehicle. Therefore, if a firm has created
good word of mouth, which is a message from an objective source (satisfied customers), it is a good
idea to use the objective nature of word of mouth in marketing communication. Testimonials are
examples of this.
Provide tangible clues. As services are intangible, communicating information about a service, espe-
cially to an audience of potential customers, can be very difficult. The intangible service can easily
become even more abstract. Therefore, it is a good idea to try to make the service more concrete.
For example, a firm may illustrate or demonstrate tangible items that are either involved in the service
production process or relate to the service. This is a way of demonstrating the quality of the service.
Showing the physical comfort of first class travel on an airline in an advertisement may be a more
effective way of giving potential customers something tangible to relate to and remember than an
abstract visualization of luxury.
Communicate intangibility. Although it is often possible to offer tangible clues to a service, one should
bear in mind that service is intangibly perceived. Emphasizing a tangible component in the service
process, such as silverware and flatware for a first class or business class airline service, may not always
differentiate a service in a meaningful way. Instead, the challenge is sometimes to be able to cope with
the intangibility of the service, because the differentiating appeal may be found in some aspect of the
intangibility of the service. Showing parts of the service process, for instance, a customer enjoying
his leisure time at a beach while being on an inclusive vacation or presenting testimonials of satisfied
customers, are examples of how to communicate intangibility of services.13
Make the service understood. Because of the intangible nature of service, special attention has to be
paid to making the benefits of a particular service clearly understood. Using abstract expressions and
superlatives may not lead to a good communication effect. The service and what it can do for the
customer remains unclear. Therefore, it is important to find good metaphors that clearly communicate
the service.
Provide communication continuity. Once more, because service is intangible, and because mass com-
munication about service is difficult for the audience to grasp, there has to be continuity in commu-
nication efforts over time. A common tune in a TV or radio commercial or a common layout, picture
GUIDELINES FOR MANAGING MARKET COMMUNICATION 325
or phrase in a newspaper advert, which continues from one campaign to the next, may be a way
of making the audience realize more quickly what is advertised and what the message is. Typically,
marketers feel that a communication theme is out of date and ready to change, just when the target
audience has started to realize what the message is all about. In service, the marketer needs more
patience than in the communication of physical products.
Promise what is possible. If promises given by external market communication are not fulfilled, the gap
between expectation and experience is widened, and customer perceived quality decreases. It is often
said that keeping promises is the most important single aspect of good service quality. Clearly, avoiding
overpromising is essential in managing marketing communication. This has a clear connection with
the next guideline.
Observe the long-term effects of marketing communication. As the discussion in the previous section
demonstrated, a communication campaign that seems to be effective may have unexpected, negative
effects when viewed over the long term. If promises that cannot be fulfilled are made, the short-term
effects on sales may be good, but customers will become dissatisfied as they perceive reality. They will
not return but will create bad word of mouth. Over the longer term, the image of the organization is
damaged. The effects on employees are similar. Hence, a long-term perspective must always be taken
when external marketing communication is planned and executed.
Be aware of the effects of the absence of communication. If there is no information available in a stress-
ful situation, customers often perceive this as negative information because they lose control of the
situation. It is usually better to share bad news with customers than to say nothing.14
Integrate marketing communication efforts and messages. As a previous discussion in this chapter demon-
strated, customers are exposed to a number of different communication messages. These messages
may be conflicting, thus creating a confusing impact. If communication messages through, for exam-
ple, advertising, direct mail and the messages the service process are sending are contradictory, the
effect is not trustworthy and the image of the firm may be damaged. Hence, it is important for the
marketer to try to integrate all types of communication messages – planned, product, service and
unplanned – so that customers know what the firm stands for and can develop a trusting relationship
with it.
Customers integrate messages with their previous experiences and life expectations. No communication
message exists in a vacuum. A customer has experiences of the firm or its services or goods from before
and he may even feel that there is at least some kind of relationship with the firm. The perception
of the communication message from, for example, an advertisement or service interaction is merged
with these previous experiences and the image of the firm and its solutions that have developed in
the customer’s mind. The message that is formed in this way is probably at least somewhat different
from what the firm intended it to be and it may even be vastly different.15 Likewise, the customer’s
life situations, history and expectations will probably have an impact on the message he perceives.
This impact may even be profound. This means that different customers will interpret the same
communications effort, for example an advertisement, in very different ways.16
In the end it is the customers who create the message out of a firm’s communication efforts. Most marketing
communications models state that, except for the distorting effect of some noise in the communication
flow, the message sent by the marketer equals the message received by the customer. Marketers often
tend to act as if the message sent is also the message understood by customers. In reality it is the customer
who constructs the message for himself. Every message is personal. It is highly questionable whether one can
even say that marketers send messages. What marketers perhaps do is create inputs of various sorts for
each and every customer’s personal message creation mechanism. This mechanism is in the mind of
the customer, and the creation process depends on the relationship history and future expectations of a
given customer as well as his life history and expectations. Furthermore, it depends on environmental
effects, for example what a competitor does at a given moment or changes in the customer’s life
situation.17 For example, in the case of service interactions the service contact employees can attempt
to take a customer’s personal situation, his relationship history and expectations, and possibly even his
life situation, into account as much as possible. In this way the communication effect of the interaction
will probably improve. In direct communication, for example using direct mail, this is also possible to
some extent. In mass communication, to improve the effect of communication efforts, the marketer
will have to make use of information about customer segments.
D E V E L O P I N G A R E L AT I O N S H I P D I A L O G U E
In an ongoing relationship context it is not only the firm that is supposed to talk to the customer, and
the customer who is supposed to listen. It is a two-way street, where both parties should communicate
with each other. In the best case a dialogue develops.18 A dialogue can be seen as an interactive
process of reasoning together.19 In the words of Ballantyne and Varey, ‘marketing’s unused potential is
in the dialogical mode’.20
The purpose of a dialogue is for two parties to develop a better mutual understanding of a problem
and eventually to solve this problem. Hence, two business parties should reason together in order to
understand a problem, and if possible find a solution to it. The process of reasoning together includes
the willingness of both parties to listen and an ability to discuss and communicate for the sake of achieving
a common goal. As Ballantyne and Varey conclude, ‘in a dialogue participants speak and act between
each other, not to each other’.21
A connection between the firm and the customer has to be made, so that they find they can trust
each other in this dialogue or reasoning process. The intent of this process is to build shared meanings,
and develop insights into what the two parties can do together and for each other through access to
a common meaning or shared field of knowledge.22
A dialogue requires participation of the parties involved.23 Participation takes place not only in inter-
actions between the firm and its customers, but also through one-way communication efforts, such
as advertisements, brochures and direct mail as well as one-way Internet communication. Messages
through these traditional communication media using old and new technologies should, however,
contribute to the development of shared meanings and common fields of knowledge. When such
messages through impersonal media and interactions between the customer and the firm support each
other, the two parties are reasoning together.
There is a difference between one-way and two-way communication through impersonal media as
part of a dialogue. One-way communication has a sender and a receiver of messages sent. A dialogue
requires the participation of the parties involved, and hence, in a dialogue there are no senders or
receivers, only participants in the dialogue process. Therefore, a dialogue resembles a discussion more
than communication in a traditional sense.
Sometimes marketers send out a direct marketing letter where they invite a response from the
receiver. If the receiver reacts by responding, this is taken as the beginning of a dialogue or even
as the manifestation of a dialogue. However, creating a dialogue between a firm and a customer
takes much more effort than this. A dialogue is an ongoing process, where information should be
exchanged between the two parties in a way that makes both the firm and the customer ready to start
or continue doing business with each other. Both parties have to be motivated to develop and maintain a
dialogue, otherwise no real dialogue will develop.24 Instead of a dialogue, two parallel monologues or
perhaps only one monologue without a listener will take place. This, of course, goes for individual
consumers as well as for firms.
DEVELOPING A RELATIONSHIP DIALOGUE 327
To maintain a dialogue not all communication contacts between the parties have to include an
invitation to respond. An informative brochure or even a plain TV commercial may be part of an
ongoing dialogue, provided that the customer perceives that it gives information which is valuable
for him to proceed in the relationship: for example, it tells the customer what piece of advice to ask
for or gives him information needed to make the next purchase. It is also important to remember
that it is not only planned communication through planned communication media (TV commercials,
newspaper ads, brochures, direct mail, Internet communication, sales representatives, etc.) that main-
tains a dialogue. In a relationship the other sources of communication which were discussed earlier in
this chapter (product and service messages, unplanned messages such as word-of-mouth referrals and
public relations and the absence of communication) also send messages which influence the dialogue.
Goods, service processes and interactions with fellow customers during the various service encounters
contribute to the firm’s total communication message, and thus are all forms of input into an ongoing
relationship dialogue.
In the relationship marketing model in Chapter 9 (see Figure 9.4) two parallel processes – a
communication process and an interaction process – constitute the relationship process. Using this model,
a relationship dialogue can be illustrated, and the quality of such a dialogue can also be analysed. For
example, a customer calls a helpdesk because he has been advised to do so in a newspaper ad or in
a brochure, and he receives attentive service and the required information. This is a good two-step
sequence of distinct communication (advert or brochure) and service messages (helpdesk support),
which favourably supports the development of a relationship dialogue. A customer may also have
answered a direct mailing and in return received a brochure describing quick and attentive service.
Following this sequence of dialogue-oriented distinct communication messages with the customer’s
response in between the two messages, the customer decides to purchase the service and enters into
interactions with employees and systems in a service process. There he realizes that the service does
not fulfil the promise of quick and attentive service. There are, for example, too few customer contact
employees and they do not have the time or desire to show a genuine interest in the customer’s
problem. What started out as a positively developing dialogue is damaged by the negative message
following the customer’s bad experiences with the service encounter. Messages from the commu-
nication process and the interaction process have not supported each other and, consequently, no
favourable relationship dialogue developed in the long run.
A successful development of a relationship requires that the two (or more) parties continuously learn
from each other. The supplier or service provider acquires a constantly growing understanding of the
customer’s needs, values and consumption or usage habits. The customer learns how to participate in
the interaction processes in order to get quick and accurate information, support, personal attention,
well-functioning service, etc. This process can be characterized as a learning relationship.25
An ongoing dialogue supports the development of a learning relationship. However, if the col-
laboration between a supplier and a customer does not include elements of learning, a relationship
dialogue will not develop. In fact, no real relationship will develop where the parties involved do
not feel that a mutual way of thinking exists. The customer may still continue to buy from the same
supplier or service firm, at least for some time, perhaps because the seller offers a low price, has a
technological advantage over competing firms, or is conveniently located. However, this relationship
is much more vulnerable to changes in the marketplace, to new competitors and to new alternative
solutions that may become available.
I N T E G R AT E D M A R K E T I N G C O M M U N I C AT I O N
A N D R E L AT I O N S H I P M A R K E T I N G
Simply planning and managing marketing communication through distinct communications media,
even as a two-way process, is not relationship marketing and probably does not create a dialogue,
although communication efforts may look relational, such as personally addressed letters inviting a
customer response. The marketer and the customer are not reasoning together to build up a common
meaning. Only the planned integration of distinct planned communication and interaction processes into one
systematically implemented strategy creates relationship marketing. A true integration of the various market-
ing communication messages with each other and with the outcomes of the interaction process is
required for the successful implementation of relationship marketing. Only in this way can an ongo-
ing relationship between the firm and its customer dialogue, which is a key element of relationship
marketing, be maintained.
As the relationship proceeds, the different types of messages develop in a continuous process and
their effects accumulate in the minds of customers. If the distinct communication process with its
planned marketing communication is supported by the product and service messages created in the
interaction process, favourable unplanned communication resulting in positive word-of-mouth communi-
cation will occur.26
Both the firm and the customer should be motivated to communicate with each other. The cus-
tomer should feel that the firm which sends a message is interested in him and argues convincingly for
their service. In such a situation the planned communication efforts and the communication aspects
of the interaction process merge into one single two-way communication process, which consti-
tutes a relationship dialogue with the customer and the supplier or service provider as participants.
The nature and content of word-of-mouth referrals will probably differ depending on how long the
customer has been involved in the interaction process. It can be assumed that referrals by a long-
standing customer will include more holistic expressions (such as ‘It’s a great company’) than detailed
experiences, and more value-oriented than price-related expressions.27
R E L AT I O N S H I P C O M M U N I C AT I O N
In order to develop a relationship with its customers the firm has to turn to a long-term dialogical
communication approach. When the firm and its customer ‘reason together’ about how the cus-
tomer’s everyday activities and processes can best be supported and a mutual knowledge about how
this can be done is emerging, the likelihood increases that a mutual understanding and commitment
develops between the customer and the supplier or service provider. The possibility of reaching the
marketing objective of getting not only a ‘share of the customer’s wallet’ but also a ‘share of his
heart and mind’ grows. In Figure 10.4 a trimodal conceptualization of relationship communication
is illustrated.28 The model includes three levels: planned communication, contact and connectedness.
The relationship communication process proceeds from a low level of interaction between the seller
and buyer towards higher levels of interaction. In the first phase, communication activities are mostly
planned communication using distinct communication media, for example, advertisements, brochures
and direct mail as well as sales negotiations. As the process moves on the customer becomes involved
in interactions with the firm, for example interacting with service employees and various systems
representing the firm or interacting with physical goods. If these interactions successfully support
the customer’s everyday processes, a contact beyond the mere planned communication messages is
established. Product and service messages are intertwined with planned communication messages, and
if the outcome is a successfully integrated message, the first steps towards dialogical communication
RELATIONSHIP COMMUNICATION 329
PLANNED
COMMUNICATION CONTACT CONNECTEDNESS
Low Moderate High

level of interaction
Relationship processes evolving over time
F I G U R E 10.4
A trimodal relationship communication model.
Source: Reprinted from Lindberg-Repo, K. & Grönroos, C., Conceptualising
communications strategy from a relational perspective. Industrial Marketing
Management, 33; 2004: p. 233 with permission from Elsevier.
have been taken. As the process moves on over time and two-way communication efforts increase,
the communication that takes place can be characterized as dialogical and relational. As a result, a state
of connectedness between the two parties is emerging. At this stage of the relationship communication
process the customer’s heart and mind may have been won and a true relationship established. As
long as the activities taken by the other party are considered fair and supportive, the likelihood that
the relationship continues is high.
A relationship dialogue is aimed at as outlined above and shown in Figure 10.4. However, whether
a communication effort is perceived as relationship communication is determined by the customer, not by the
marketer. The customer assesses what meaning for him there is in a message (conveyed, for example,
through an advertisement, brochure or direct contact in a service encounter). What the marketer
thinks is relationship-oriented communication may be something else from the customer’s point of
view. Finne and Grönroos suggest the following definition of relationship communication:29
Relationship communication is any type of marketing communication that influences the receiver’s long-term
commitment to the sender by facilitating meaning creation through integration with the receiver’s time and situa-
tional context. The time context refers to the receiver’s perception of the history and envisioned future of his/her
relationship with the sender. The situational context refers to other elements internal or external to the receiver.
From a relationship perspective, a communication message should have a positive impact on the
customer’s commitment to the firm. However, whether this happens or not depends on the nature
and content of the message and the customer’s temporal and contextual reality, or rather perception of
reality. This is illustrated by the relationship communication model in Figure 10.5.
Conventional marketing communication models, also in the context of integrated marketing com-
munication, assume that it is the marketer who determines what meaning a message conveys. The
customer as a receiver is expected to accept this meaning, only somewhat distorted by some noise in
the communication process. The relationship communication model, on the contrary, assumes that
Situational context
External
factors
CUSTOMER’S
Historical Future
MEANING
factors factors
CREATION
Internal
factors
Time frame
F I G U R E 10.5
Meaning creation in a relationship communication model.
◦
Source: Finne, A . & Grönroos, C., Rethinking marketing communication: from
Integrated marketing communication to relationship communication. Journal
of Marketing Communications, 15(2–3), 2009, 179–195. Reproduced by
permission of Taylor & Francis.
it is the customer who creates meaning out of communication messages. According to the model,
this meaning is dependent on two factors: a temporal factor and a situational factor.30
The temporal factors relate to the customer’s relationship with the firm. What are his experiences
with the firm in the past, and what future expectations does he have about this relationship? The
situational factors are either internal to the customer or external to him. Internal factors relate to an
individual’s personality, education and level of knowledge, and the individual’s ‘life expectations’,
etc. External factors can be culturally-situated factors or the personal context of the individual, such as
family situation, economic situation and social situation, or trends, traditions, alternative choices, and
also communication messages from competing firms, discussions on social media and word of mouth.
The customer relates any given communication message – an advertisement, sales call or interaction
with a service employee – to the four temporal and situational factors of the model. Depending on
how this assessment of the message turns out, this communication either has a positive or negative
relationship-oriented meaning, or is not considered a relationship message at all. This assessment is, of
course, often unconscious, but sometimes it may be very consciously conducted. From the marketer’s
perspective, this means that a thorough analysis of its customers’ temporal and situational contexts
should be done, before any communication plans are developed. Otherwise much of marketing
communication may be unproductive, or even counterproductive, and relationship communication
with the customers may not occur.
NOTES 331
S U M M A RY
In this chapter we dwelt upon marketing communications issues, and argued for a holistic integrated mar-
keting communication approach. There are a number of types of sources of communication, but a need
exists for a total communication approach where a sufficiently long-term perspective is taken. If this is not
done, what is good marketing communication in the short term may, in the long term, have a negative
marketing impact on customers, because their real experiences with physical products and services are in
conflict with the promises made by, for example, an advertising campaign. Furthermore, the effect on
company image the longer this continues may be even more negative. A number of guidelines for market-
ing communication in service were presented. Then, how total or integrated marketing communication
and relationship marketing are related to each other was discussed and the development of a relationship
dialogue process was explored. Finally, relationship communication was explained.

1. What is meant by an integrated marketing communication approach? Why is such an
approach to marketing communications effective?
2. How can a marketing communication campaign (e.g. an advertisement campaign), which
effectively creates awareness and generates sales, lead to a negative marketing effect and
ultimately damage a firm’s image?
3. Discuss how well the planned marketing communication messages given by your firm, or
any given firm, are integrated with the product, service and unplanned messages about the
offerings to which customers are exposed.
4. What is a dialogue? What is a relationship dialogue?
5. How can a relationship dialogue be created and maintained?
6. How can a relationship communication process be understood? How can it be used in a
firm’s marketing communication?
NOTES
1. This total communication concept was introduced in the 1980s. See Grönroos, C. & Rubinstein, D.,
Totalkommunikation (Total communication). Stockholm, Sweden: Liber/Marketing Technique
Centre, 1986. In Swedish. In the early 1990s the same notion reappeared in the form of integrated
marketing communications.
2. See Schultz, D.E., Tannenbaum, S.I. & Lauterborn, R.F., Integrated Marketing Communications.
Lincolnwood, IL: NTC Publishing Group, 1992. For a more recent discussion of integrated
marketing communication, see Kerr, G.F., Schultz, D., Patti, C. & Ilchul, K., An inside-out
approach to integrated marketing communication: an international analysis. International Journal
of Advertising, 27(4), 2008, 511–548, and Mulhern, F., Integrated marketing communication:
from media channels to digital connectivity. Journal of Marketing Communications, 15(2–3), 2009,
85–101.
3. Grönroos, C. & Lindberg-Repo, K., Integrated marketing communications: the communications

aspect of relationship marketing. Integrated Marketing Communications Research Journal, 4(1), 1998,
10. In a definition by the American Association of Advertising Agencies, as in almost every other
definition, only traditional means of marketing communication, such as advertising, direct mail,
sales promotion and public relations, are included.
4. Duncan, T. & Moriarty, S., Driving Brand Value. New York: McGraw-Hill, 1997.
5. Calonius, H., Market communication in service marketing. In Avlonitis, G.J., Papavasiliou, N.K.
& Kouremeos, A.G. (eds), Marketing Thought and Practice in the 1990s. Proceedings from the
XVIIIth Annual Conference of the European Marketing Academy, Athens, Greece, 1989.
6. Calonius, op. cit.
7. Hui, M.K. & Bateson, J.E.G., Perceived control and the effects of crowding and consumer
choice on the service experience. Journal of Consumer Research, 18(Sept), 1991, 174–184. See also
Bateson, J.E.G., Perceived control and the service encounter. In Czepiel, J.A., Solomon, M.R.
& Surprenant C.E. (eds), The Service Encounter: Managing Employee/Service Interactions in Service
Businesses. Lexington, MA: Lexington Books, 1985, pp. 67–82.
8. Lindberg-Repo, K. & Grönroos, C., Word-of-mouth referrals in the domain of relationship

marketing. The Australasian Marketing Journal, 7(1), 1999, 115. See also Lindberg-Repo, K., Word-
of-Mouth Communication in the Hospitality Industry. Helsinki/Helsingfors: Hanken Swedish School
of Economics, Finland/CERS, 1999. For a classical publication on word of mouth, see Arndt,
J., Word of Mouth Advertising. New York: Advertising Research Foundation, 1969.
9. Lindberg-Repo & Grönroos, op. cit. For marketing in social media, see Evans, D., Social Media
Marketing. An Hour a Day. Indianapolis, IN: John Wiley & Sons, 2012.
10. Reichheld, F.F., The one number you need to grow. Harvard Business Review, 81(12), 2003,
46–55. See also Keller, E., Unleashing the power of word of mouth: Creating brand advocacy
to drive growth. Journal of Advertising Research, December, 2007.
11. See Calonius, op. cit.

NOTES 333
12. Many of these guidelines are from George, W.R. & Berry, L.L., Guidelines for the advertising
of services. Business Horizons, July–Aug, 1981, which still today is the best discussion of how to
advertise service. Even though the authors focus on the advertising of service, their guidelines
are useful in a larger marketing communications context as well.
13. The need to develop advertising and other ways of communicating, based on the intangibility of
service, has been proposed by Benwari Mittal, who argues that intangibility may often offer better
opportunities for differentiating a service in advertising than concentrating on tangible evidence.
He discusses various strategies for communicating intangibility in advertising. See Mittal, B., The
advertising of services. Meeting the challenge of intangibility. Journal of Service Research, 2(1),
1999, 98–116.
tition. Lexington, MA: Lexington Books, 1990.
◦
15. Finne, A. & Grönroos, C., Rethinking marketing communication: from integrated marketing
communication to relationship communication. Journal of Marketing Management, 15(2–3), 2009,
179–195.
16. See Mick, D.G. & Buhl, C., A meaning-based model of advertising experiences. Journal of Con-
sumer Research, 19(Dec), 1991, 317–338.
17. Finne & Grönroos, op. cit.
18. See, for example, Fischer, A., Sieg, J.H., Wallin, M.W. & von Krogh, G., What motivates
professional service firm employees to nurture client dialogues? The Service Industries Journal,
34(5–6), 2014, 399–421, where the relationship dialogue notion is discussed and ways of enhanc-
ing a dialogue in a professional service context are explored.
19. Ballantyne, D., Dialogue and its role in the development of relationship specific knowledge.
Journal of Business and Industrial Marketing, 19(2), 2004, 114–123.
20. Ballantyne, D. & Varey, R.J., Introducing a dialogical orientation to the service-dominant logic
of marketing. In Lusch, R.F. & Vargo, S.L. (eds), The Service-Dominant Logic of Marketing. Dialog,
Debate, and Directions. Armonk, NY: M.E. Sharpe, 2006, pp. 224–235, p. 228.
21. Ballantyne & Varey, op. cit., p. 227.
22. Schein, E.H., The process of dialog: creating effective communication. The Systems Thinker, 5(5),
1994, 1–4 and Bohm, D., On Dialogue. London: Routledge, 1996.
23. Bohm, op. cit.
24. Dichter, E., How word of mouth advertising works. Harvard Business Review, 44(Nov–Dec),
1966, 147–166.
25. Peppers, D., Rogers, M. & Dorf, B., Is your company ready for one-to-one marketing? Harvard
Business Review, 77(Jan–Feb), 1999, 151–160.
26. These word-of-mouth effects on ongoing relationships are discussed in Lindberg-Repo &
Grönroos, op. cit.
27. Lindberg-Repo & Grönroos, op. cit. See also Lindberg-Repo, op. cit.
28. Lindberg-Repo, K., Customer Relationship Communication – Analysing Communication from a Value
Generating Perspective. Helsinki, Finland: Hanken Swedish School of Economics, Finland, 2001.
See also Lindberg-Repo, K. & Grönroos, C., Conceptualising communications strategy from a
relational perspective. Industrial Marketing Management, 33, 2004, 229–239.
◦
29. Finne, A. & Grönroos, C., op.cit., 180–181.
30. The temporal and situational factors influencing customers’ meaning creation are derived, respec-
tively, from Mick & Buehl, op.cit. (meaning making is a function of internal and external factors
influencing an individual’s perception of a communication message) and from Edvardsson, B. &
Strandvik, T., Is a critical incident critical for a customer relationship? Managing Service Quality,
10(2), 2000, 82–91.
Arndt, J. (1969) Word of Mouth Advertising. New York: Advertising Research Foundation.
Ballantyne, D. (2004) Dialogue and its role in the development of relationship specific knowledge.
Journal of Business and Industrial Marketing, 19(2), 114–123.
Ballantyne, D. & Varey, R.J. (2006) Introducing a dialogical orientation to the service-dominant
logic of marketing. In Lusch, R.F. & Vargo, S.L. (eds), The Service-Dominant Logic of Marketing. Dialog,
Debate, and Directions. Armonk, NY: M.E. Sharpe, pp. 224–235.
Bateson, J.E.G. (1985) Perceived control and the service encounter. In Czepiel, J.A., Solomon, M.R.
& Surprenant, C.E. (eds), The Service Encounter: Managing Employee/Service Interactions in Service Busi-
nesses. Lexington, MA: Lexington Books, pp. 67–82.
Bohm, D. (1996) On Dialogue. London: Routledge.
Calonius, H. (1989) Market communication in service marketing. In Avlonitis, G.J., Papavasiliou,
N.K. & Kouremeos, A.G. (eds), Marketing Thought and Practice in the 1990s. Proceedings from the
XVIIIth Annual Conference of the European Marketing Academy, Athens, Greece.
Dichter, E. (1966) How word of mouth advertising works. Harvard Business Review, 44(Nov/Dec),
147–166.
FURTHER READING 335
Duncan, T. & Moriarty, S. (1997) Driving Brand Value. New York: McGraw-Hill.
Edvardsson, B. and Strandvik, T. (2000), Is a critical incident critical for a customer relationship?
Managing Service Quality, 10(2), 82–91.
Evans, D. (2012) Social Media Marketing. An hour a Day. Indianapolis, IN: John Wiley & Sons.
◦
Finne, A. & Grönroos, C. (2009) Rethinking marketing communication: from integrated marketing
communication to relationship communication. Journal of Marketing Management, 15(2–3), 179–195.
Fischer, A., Sieg, J.H., Wallin, M.W. & von Krogh, G. (2014) What motivates professional service
firm employees to nurture client dialogues? The Service Industries Journal, 34(5–6), 399–421.
Grönroos, C. & Lindberg-Repo, K. (1998) Integrated marketing communications: the communi-
cations aspect of relationship marketing. Integrated Marketing Communications Research Journal, 4(1),
3–11.
Grönroos, C. & Rubinstein, D. (1986) Totalkommunikation (Total communication). Stockholm,
Sweden: Liber/Marketing Technique Centre. In Swedish.
Hui, M.K. & Bateson, J.E.G. (1991) Perceived control and the effects of crowding and consumer
choice on the service experience. Journal of Consumer Research, 18(Sept), 174–184.
Keller, E. (2007) Unleashing the power of word of mouth: creating brand advocacy to drive growth.
Journal of Advertising Research, December.
Kerr, G.F., Schultz, D., Patti, C. & Ilchul, K. (2008) An inside-out approach to integrated marketing
communication: an international analysis. International Journal of Advertising, 27(4), 511–548.
Lindberg-Repo, K. (1999) Word-of-Mouth Communication in the Hospitality Industry. Helsinki/
Helsingfors: Hanken Swedish School of Economics, Finland/CERS Centre for Relationship
Marketing and Service Management.
Lindberg-Repo, K. (2001) Customer Relationship Communication – Analysing communication from a value
generating perspective. Helsinki, Finland: Hanken Swedish School of Economics, Finland.
Lindberg-Repo, K. & Grönroos, C. (1999) Word-of-mouth referrals in the domain of relationship
marketing. The Australasian Marketing Journal, 7(1), 109–117.
Lindberg-Repo, K. & Grönroos, C. (2004) Conceptualising communications strategy from a rela-
tional perspective. Industrial Marketing Management, 33, 229–239.
Mick, D.G. & Buhl, C. (1991) A meaning-based model of advertising experiences. Journal of Consumer
Research, 19(Dec), 317–338.
Mittal, B. (1999) The advertising of services. Meeting the challenge of intangibility. Journal of Service
Research, 2(1), 98–116.
Mulhern, F. (2009) Integrated marketing communication: from media channels to digital connectiv-
ity. Journal of Marketing Communications, 15(2–3), 85–101.
Peppers, D., Rogers, M. & Dorf, B. (1999) Is your company ready for one-to-one marketing? Harvard
Business Review, 77(Jan–Feb), 151–160.
Reichheld, F.F. (2003) The one number you need to grow. Harvard Business Review, 81(12), 46–55.
Schein, E.H. (1994) The process of dialogue: creating effective communication. The Systems Thinker,
5(5), 1–4.
Schultz, D.E., Tannenbaum, S.I. & Lauterborn, R.F. (1992) Integrated Marketing Communications.
Lincolnwood, IL: NTC Publishing Group.
CHAPTER 11
MANAGING BRAND
RELATIONSHIPS AND IMAGE
“ If anyone can build a brand, it is the customer. Marketers cannot do that. They can only create favourable
conditions for a brand image to develop in customers’ minds.
”
INTRODUCTION
This chapter discusses two important concepts in marketing, brand and image. First, the nature of a
branding process and a definition of a brand is analysed. Taking a relationship approach, brands are
seen as brand relationships, which are affected by a number of brand contacts that occur during an
ongoing relationship between a customer and a supplier or service provider. In the latter sections
of the chapter the image concept is explored. The functions of image on a company are discussed,
along with possible reasons for a bad image, and actions that should be taken to improve image are
presented. After having read the chapter the reader should understand the importance of branding
for service providers and the characteristics of creating service brands and brand relationships, as well
as the role of image and how image can be improved in various situations.
W H AT I S A B R A N D ? A T R A D I T I O N A L V I E W
The brand concept is well established in marketing. The first brands in a modern marketing sense
were developed a century ago. However, during the second half of the 20th century brands and
branding became central issues in marketing. Most discussions of brands are related to physical prod-
ucts, especially consumer packaged goods. Only during the last 30 years or so has an awareness of the
importance of creating service brands emerged. Now it is widely recognized that branding is a vital
issue for service organizations as well.1
The American Marketing Association offers the following definition of a brand: ‘A name, term,
sign, symbol or any other feature that identifies one seller’s product or service as distinct from those of other sellers.’2
From a service perspective at least, two objections can be made: this definition misses the key
characteristic of service as a process, and it excludes the customer.
338 MANAGING BRAND RELATIONSHIPS AND IMAGE
First, it explicitly points out issues such as name, term, sign, symbol and feature, but does not
address the fundamental characteristic of service, which is that service is a process and the consumption
of service can be characterized as process consumption. Because service is perceived in processes in which
the customer normally also participates, this service process undoubtedly creates a distinction between
the service of one provider and that of another. Of course, names, terms, signs and so on may also
contribute to the brand, but the service process (or service production process) has to be at the heart
of service brands, because it is there that the most profound impression on the customer’s view of the
service is created.
Second, this definition excludes the customer. Brands are viewed from the marketer’s point of view as
something that the firm creates. Much brand development, or brand building as it is often incorrectly
labelled, has been based on such a perspective in practice. The marketer uses a number of planned
marketing communication efforts to develop a distinct brand, and the customer is expected to form
an image of the brand that corresponds to the intended brand.
In reality this is of course not the case, but this view of a brand and branding is due to the normally
used branding processes for physical goods, where planned marketing communication is the main
instrument employed.3 In a consumer goods context this has been a successful way of creating brands,
because the good is pre-produced and already exists when the branding process starts. In reality,
developing and designing the products is the first phase of a branding process, but it is seldom explicitly
considered as that. The goods and their features are taken as given, and branding is thought to start
from there. The goods always include the same features, and if proper market research has been
done, customers like or accept these features and they correspond to the benefits the customers are
looking for. A bottle or can of soft drink or a breakfast cereal cannot be developed into a successful
brand if the customers do not like the taste of the soft drink or the breakfast cereal. Because in the
case of goods the base for a successful brand already exists in the form of the goods themselves,
the central part of the branding process automatically becomes a planned marketing communication
issue using distinct communication media, such as television, newspapers, direct marketing and the
Internet.
The development of social media has added a new dimension of customer influence on brands and
branding. Conversations between customers and potential customers, for example on Facebook, and
postings on YouTube, may have a decisive impact on customers’ perceptions of brands. The tune
‘United Breaks Guitars’ posted on YouTube by a musician mistreated by this airline is a dramatic
example of this. The Internet and mobile technologies have enabled customers to engage with, for
example, hotels’, restaurants’ and tour operators’ brands through favourable or unfavourable remarks
on their websites or on those of other organizations, such as Trip Advisor. On the other hand, firms
also have the potential to influence the branding process by actively using social media, and the
Internet and mobile technologies.4 This has, however, also lead to a considerable amount of fraud.
Firms may make fake postings on websites, but customers also engage in fraud, for example in online
auctions. The role of social media will be discussed in detail in Chapter 12.
Because a service as a process is a much less standardized base for branding, the situation changes
and the importance and involvement of the customer increases dramatically. The first and often
critical mistake in service branding is to consider the service process (and its functional quality) and
its outcome (and the technical quality) as a given, and outside the branding process.
Finally, when working with brands and brand management one must not become too focused on
branding in itself. After all, branding is only a means of doing better in a competitive situation. As
Rust et al. point out, ‘brands exist to serve (the firm’s) customers’.5 If a firm becomes too preoccupied with
branding as such, this may detract from the basic issue of developing a customer base and maintaining
relationships with existing customers.6
BRAND RELATIONSHIPS AND BRAND CONTACTS 339
BRAND IMAGE AND IDENTITY

One of the problems with the discussion of brands and branding seems to be the distinction between
brand and brand image that is often made. Brand image is the image of the goods or service that is
formed in the customer’s mind. The term brand identity can be used as a description of the image of
the brand that the marketer wants to create.7 Keeping apart the concepts of a brand and brand image
somehow gives the impression that a brand can be created and can exist without the presence of the
customer.8 According to this view, the customers form an image of a readily created brand. Following
this line of thought, the misleading expression ‘brand building’ has emerged. In reality, customers
continuously receive inputs about the brand that is being created, and they relate to these brand
messages on a continuous basis, to the extent that they observe them and react to them consciously
and unconsciously, thus forming the brand image in their minds (compare the customers’ creation
of meaning in the relationship communication model presented in Chapter 10). This is the case with
service as well as with physical goods. This can be put another way: a brand is not first built and then
perceived by the customers. Instead, every step in the branding process, every brand message, is separately
perceived by customers and together add up to a brand image, or brand for short, which is formed in
their minds. As Anne Rindell points out, based on previous experiences with a firm or an offering,
customers always carry with them an ‘inherited’ image. In brand management firms should keep this
image heritage in mind.9
When including the customer in the branding process, there is no need to make a distinction
between a brand and a brand image. For the customer brand is always brand image. Therefore, the
brand as a concept is always an image. Hence, in this book when we talk about a brand, we always refer
to it as an image in the minds of customers. In this way brand and brand image are synonymous.
In conclusion, the term brand identity can be used as a concept that describes the image of the brand
that the marketer wants to create in the minds of customers. It is the goal to be achieved. A brand is
the image that is actually formed in their minds. Branding is the process of creating this image.
As we have already noted in this chapter, ‘brand building’ is often used to mean branding. However,
this is incorrect and even misleading and dangerous, because it gives the impression that the marketer
can create a brand by himself. From this follows that after the brand has been ‘built’ it can be offered
to customers. In reality, as we shall see in the following sections, the customers’ role is much more
active in the branding process. Whatever the marketer does, it is the customer who decides whether
an intended brand is developing or not. If anybody builds a brand, it is the customer. As LEGO is reported
to state: ‘[W]e own the brand name, our customers own the brand.’10 The role of the marketer is to create
frames for the development of a brand in the minds of customers, by providing an appropriate physical
product, service process and supportive communication using various means of planned marketing
communication. If the marketer has been successful in creating this branding ‘frame’, a brand image
that corresponds to the intended brand identity is developing, otherwise it is not.
B R A N D R E L AT I O N S H I P S A N D B R A N D C O N TA C T S
When observing the customer’s active role in branding, our understanding of the brand changes. It is
no longer something that exists in a vacuum, something that can be transferred to customers. Rather,
it is something that continuously develops and changes when the customer relates to the flow of
brand messages, originating for example from employees, systems and physical product elements in
the service process, from planned marketing communication, Internet websites, word of mouth and
discussions in social media. In this way a relationship between the customer and the brand emerges and
develops. This brand relationship gives goods, services or the combination of the elements of a solution meaning
in the minds of the customers.11 Therefore, the brand, as brand image, is the consequence of how a given
customer perceives his relationship with a brand over time.
Schultz and Barnes12 state that a brand relationship develops in a series of brand contacts experienced
by customers, where they either experience a brand message to which they are exposed or are involved
as co-producers. They define a brand contact as an image and information-bearing experience
had by a customer or a potential customer, regardless of where this experience takes place or what
kind of experience it is. In Figure 11.1 examples of such brand contacts are illustrated.
Planned
Unplanned communication
communication messages
messages
Sales
TV news negotiations
program Advertising
Brand contact
Bra
Internet
t
Direct
tac
chat group
nd
mail
con
ct
Br
con
a
nt
an
nd
co
d
tact
Bra
Word of mouth
co
d
an
nt
Bra
communication Br Events
ac
nd tact
con con
t
tac d
t Bran
Accuracy and
ease of processing Brand contact Customer Brand cont
act
invoices Sales
act promotion
d cont Br
an
Service Bran ct d co
n ta nta
Br
recovery
t
co c
tac
Brand co
t
an
process d Appearance
an
con
dc
Br of physical
on
Personal attention
nd
ta
goods
Bra
ntact
ct
shown by service
employees Disposal of
Access to Ease of use package material
information of goods
Service
messages
Product
messages
F I G U R E 11.1
Brand contacts forming a brand relationship.
BRAND RELATIONSHIPS AND BRAND CONTACTS 341
In the figure a number of brand contacts are depicted to illustrate the concept. Depending on
the situation, the types of brand contacts experienced by a customer will differ. For a soft drink,
product messages and planned communication messages dominate, although service messages and
unplanned communication messages may occur in the brand relationship. The marketer may, for
example, develop a waste management system to collect empty cans. This system sends a service
message to consumers. For some people this message adds favourably to the brand in their minds, for
others it does not. For bank service, service messages and planned communication messages dominate,
but product messages, and also unplanned communication messages through word-of-mouth and
conversations on social media, may occur in the brand relationship. For example, gold and platinum
credit cards signal prestige, which for some consumers creates a positive extra to the bank brand in
their minds. For others, such cards do not have that branding effect. In an ongoing relationship the
customer experiences various kinds of brand contacts on a continuous basis.
In Figure 11.1 the time perspective is missing. In Chapters 9 and 10 we discussed the communication
process (consisting of planned communication messages) and the interaction process (communicating
product and service messages) and how, following a successful integration of the elements of these
two processes, a relationship dialogue can be developed and maintained.
In Figure 11.2 sources of brand contacts of a retail bank is illustrated. Customers’ brand relationship
is based on a variety of brand contacts, indicated in the figure. Managing some well and neglecting
others, thereby perhaps letting them communicate negative brand messages, creates confusion and an
unfavourable brand relationship where the brand value declines. As the figure clearly demonstrates,
a service brand is a function of how customers perceive a large number of communication messages
originating from a variety of brand contacts, and of how they create meaning out of them.
Bank office
Parking space Location
Premium
Employees customer
Retail Bank programme
Personal
experiences Internet bank
Word of mouth/
Advertising
Social media
F I G U R E 11.2
Retail banking: an example of brand contacts.
B R A N D VA L U E , B R A N D E Q U I T Y A N D
A R E L AT I O N S H I P - O R I E N T E D D E F I N I T I O N
OF A BRAND
In this context the term brand value is used as the customer’s perception of how valuable a given
good, service or solution is to him in comparison with other alternatives.13 If the brand value declines
over time, the customer will be more open to other solutions and more interested in communication
messages from other firms. On the other hand, if the brand value increases, the likelihood that the
customer will stay loyal can be expected to increase. In the same way it can be seen that brand value
is important to suppliers, distributors and other network partners.
Because the brand value to customers is the basis for achieving sales and thus for creating value
to the firm out of a brand, the value of brands to customers is important. However, a brand also
provides value to the firm. The more customers consider a brand valuable, the more sales can be
expected to be achieved. The term brand equity is used to describe the value of a brand to the firm. It
can be defined as follows:
The differential effect that brand knowledge has on the customer response to the marketing of that brand. Equity
occurs when the customer is familiar with the brand and holds some favorable, strong and unique brand associations
in memory.14
This differential effect evolves over time and can be either positive or negative. The term brand equity
means the value of service or a good to the firm. The higher the brand equity, the more valuable the
product is to the firm.
Finally, a brand can be defined as a brand image based on the customer’s perception of his brand
relationship:
A brand image (often plainly called a brand) is created in continuously developing brand relationships where
the customer forms a differentiating image of a physical good, a service or a solution including goods, services,
information and other elements, based on all kinds of brand contacts that the customer is exposed to and engaged
with.
This definition corresponds well with Ambler’s short and simple definition of brand equity, according
to which brand equity is ‘what we carry around in our heads about the brand’.15 According to this defini-
tion of brand equity and the brand relationship definition above, it is meaningless to try to develop a
brand without taking into account the relevant customers’ and potential customers’ ways of relating
to and engaging with branding activities. Also, in a relationship context, the expression ‘to build a
brand’ is inaccurate, because it implies that the marketer can initiate and implement activities that
create the brand. This of course is not true. The brand is created in the mind of a customer following
a flow of brand contacts – interactions between customer and supplier or service provider, including
physical products, service processes, information, etc., and planned marketing communication ele-
ments, Internet websites and social media discussions – in the ongoing relationship between the two
parties. Creating brand relationships is an accurate and descriptive term for the process of developing and
maintaining a brand in the minds of customers, potential customers and other stakeholders over time.
For a true brand relationship to exist, the ‘heart and mind’ of a customer must have been captured by
the service (or good or solution) and the firm providing that service, so that an emotional attraction
and a state of connectedness have been reached. Unless this level of attraction has been created, the
brand relationship is actually only a latent relationship.
HOW TO CREATE SERVICE BRAND RELATIONSHIPS 343
If a brand relationship has been created and nurtured so that a customer feels attached to a given
service and believes that this service, or any other type of offering, is different from competing service,
active and favourable word of mouth can be expected to follow. The customer will feel motivated to
talk about this service and make remarks on social media, and will do so. The marketer has achieved
brand involvement from the customer.16 Strong brand involvement means that a customer feels pos-
itively involved with the service and the service process of a given supplier or service provider.
This often makes the customer himself an effective marketer of the service. A high degree of brand
involvement means that a true brand relationship exists. Brand involvement can be enhanced through
well-managed interactions with customers and also, for example, through brand communities on the
Internet.17
H O W T O C R E AT E S E RV I C E B R A N D
When branding service, two circumstances have to be kept in mind:
● There is no ready-made, standardized product to be taken as a starting point for the creation of
brand relationships. Instead the service (production) processes themselves are at the heart of the
branding process.
● The basis for the branding process is often the company itself and its service processes, not separate
services (although firms may sometimes create service that is separable from the company itself).
In the context of physical goods the key issue in the branding process is usually planned market-
ing communication efforts using distinct marketing communication media (planned communication
messages) implemented by the marketer, whereas the product itself is a supporting element. It should
include features and benefits that the customers are interested in and relate to. Designing the product
is, of course, a part of the branding process here, too, but in practice, it is often taken for granted that
the product is readily designed to support the intended brand identity, and therefore it is not thought
of as a part of the branding process. Marketing communication (planned communication messages)
is then the most important aspect that a brand manager spends time and money on.
In the context of service, planning and managing the service process is at the heart of the branding process.
Planned marketing communication is only a supporting element in the branding process. If the service
process leads to negative brand value, planned communication efforts can seldom compensate for that.
A service marketer who concentrates on planned communications as key branding activities is always
at risk of failure. He may have created brand awareness, a knowledge of the existence of a service and
perhaps also of the brand identity the firm wants to create, but this is only a promise made about the
brand. This brand promise may not be fulfilled by the service process. If this brand fulfilment is missing
in the mind of a customer, a brand image which corresponds to the wanted brand identity is not
developing and the branding process has failed.
If the service process is not managed as part of the branding process, it may easily provide negative
brand contacts which effectively counteract the planned communication efforts. As will be discussed
in Chapter 15, a customer-oriented service process that consistently includes favourable brand contacts
is largely dependent on the existence of a supportive service culture in the organization. If such a
culture exists, the service process will effectively contribute to a planned brand identity. Thus, an
intended brand emerges when the values of the customers and the values of the organization and its
employees do not conflict with each other, but complement each other. In brand management the
term internal branding is often used to describe this need to internally match the internally existing and
externally wanted values of a firm as a basis for creating a favourable brand image.18 For brand images
to develop the brand identity must be marketed internally as well.19 For many firms the internal
branding issue is even more challenging than external branding.
Assuring that a firm’s employees accept and embrace the firm’s brand promise to its customers is
also labelled employee branding.20 Often this term is used interchangeably with internal branding, and
also with internal marketing. Sometimes the term employer branding is used. One of the most important
means of employee branding is a good example demonstrated by managers and supervisors. If they by
their behaviour support the brand promise, customer contact employees will most likely adjust their
behaviour accordingly.
The firm’s intended brand, the brand identity, and the relationship of the employees to the orga-
nization is sometimes called employee brand identification. If a firm’s employees feel alienated from the
organization and its management, low brand identification by the employees is probably developing.21
In a situation like this the employees will probably not support the promised brand through their
performance as well as they would in situations where the employee brand identification is high.
Employee branding and internal branding will be discussed in Chapter 14 under the rubric internal
marketing.
In Figure 11.3 the service branding process is illustrated.22 The starting point should be an analysis
of the brand image that the firm wants its customers and other stakeholders, such as shareholders,
financing institutions, network partners and employees, to have. This is the wanted brand identity.
Through planned marketing communication, a brand awareness is then created. The purpose for doing
this is twofold. First of all customers (and other stakeholders) are made aware of the existence of a given
service. Secondly, provided that the planned communication efforts support and do not counteract
the customers’ experiences of the service firm and the service process and its outcome (the functional
Brand Awareness
(brand promise)
Marketing communication
Perceived BRAND IMAGE

Wanted BRAND IDENTITY
Customer experience with

the firm and the service
process
Brand Fulfilment
F I G U R E 11.3
The service branding process.
HOW TO CREATE SERVICE BRAND RELATIONSHIPS 345
and technical quality of the service), these experiences are supported by the brand promise of marketing
communication efforts. In the service branding process the experiences customers have with the firm and
the service process form the brand fulfilment. Primarily, this brand fulfilment leads to a perceived brand
image that the customers (and other stakeholders) develop in their minds, whereas in this process the
planned communication efforts are only supportive. In the figure this is indicated by the dotted line
from the brand awareness box to perceived brand image.
Although the branding process illustrated in Figure 11.3 looks structured, it is only the branding
process – making brand promises and creating brand-fulfilling experiences – that is manageable, the
formation of the brand image is not. The brand emerges for the customer in his mind through a
continuous brand formation process, whereas the marketer should create the right circumstances for a
desired brand image to develop. Hence, if one wants to use the widely misused expression ‘brand
building’, it is the customers who build the brand. The marketer can under no circumstances do that.
We can summarize the branding of service in the following way:
● The main task in the branding process is to manage the service (production) processes so that they
provide the customers with positive brand contacts and corresponding brand message, which create
brand fulfilment, and ultimately favourable brand relationships.
● The planned marketing communication efforts are only supportive activities in the creation of
brand relationships.
● In addition, brand enabling through internal efforts (internal branding) is required to prepare and
motivate employees in the organization and, for example, in distributor and other network partner
organizations to actively contribute to successful brand fulfilment.
Furthermore:
● Even a good service brand concept can and will be destroyed by a malfunctioning service process.
● The service process will not contribute to the emergence of an intended brand, if the brand identity
that the firm is aiming at is in conflict with the corporate culture.
● If the service process does not create a positive brand image in the minds of customers, normally
this cannot be compensated for by planned marketing communication supporting a brand identity
that is not manifested in the service process and in the organizational culture.
Based on the service triangle presented in Chapter 2, Brodie and his colleagues have developed a
service–brand–relationship triangle to help researchers and practitioners alike to understand the multi-
faceted aspects of branding.23 The model is illustrated in Figure 11.4.
Leonard Berry presented a systematic view of how to ‘cultivate service brands’ in order to develop
brand equity.24 His suggestions, which are based on an in-depth study of a number of firms providing
excellent service, include four strategic viewpoints that should be taken into account in order for the
firm to cultivate brand equity and to create brand relationships that pay off:25
1. Be different.
2. Determine your own fame.
3. Make an emotional connection.
4. Internalize the brand.
FIRM
INTERNAL
“enabling fulfilment of EXTERNAL
expectations created by “making brand promises”
brand promises” BRAND
(internal branding) RELATIONSHIP
EMPLOYEES INTERACTIONS CUSTOMERS AND

“so-creating meaning and
STAKEHOLDERS
experiences in the
service process”
(brand fulfilment)
F I G U R E 11.4
The service–brand–relationship triangle.
Source: Adapted from Brodie, R.J., Glynn, M.S. & Little, V., The service brand
and the service-dominant logic: missing fundamental premises or the need for
a stronger theory? Marketing Theory, 3(3); 2006: 372. Copyright Sage
Publications Ltd. Reprinted by permission.
Be different. Firms with good and recognized brands never offer their service as a commodity. It is
differentiated in a way that makes it distinguishable in a way that creates an interest among current
and potential customers. Such firms innovate rather than imitate existing offerings, and their service is
presented in a different way compared to the competition. In this way brand relationships which differ
from those of the competitors are created. In the minds of the customers of these firms, the brand
is distinct and different. It creates a brand image which distinguishes the offering from competing
offerings in a favourable way.
Determine your own fate. Firms with good and appreciated brands develop something that is impor-
tant and valuable to their customers. Differentiating the service from that of the competitors is a nec-
essary starting point, but it is not enough. The service must be considered valuable to the customers.
If the customers do not find an offering supportive to their everyday practices, less or no value-in-use
emerges for them, and no brand relationships develop. Branding is a way for firms to demonstrate
their mission and organizational values to customers. Therefore, firms that determine their own fate
will perform their service better than their competitors. As a consequence, good word-of-mouth is
also created, and customer-to-customer discussions on social media enhance the brand.
Make an emotional connection. Good customer relationships often include an emotional bond between
the firm and its customers. The customers feel an emotional connection to the firm. Service always
has an emotional string attached, and therefore, firms with good brands attempt to reach beyond
the mere logical and economical aspects of an offering. They develop feelings of trust, attraction,
affection and closeness among their customers. Brands should reflect the customers’ own core values,
which often may go beyond what is purely logical from a physical or economic point of view.
Of course, this does not come by itself, it has to be earned by the firm. Firms which manage to
make themselves meaningful to their customers (the ultimate goal for marketing) can also make this
emotional connection with them.
MANAGING COMPANY IMAGE 347
Internalize the brand. The brand image can be promoted by communicational efforts, such as adver-
tising campaigns, but ultimately the brand and a brand relationship are to a large degree created in
service encounters. Any kind of service encounter can either make or break the relationship. Often,
but of course not always, service employees have a central role. In the service encounters employ-
ees either support or destroy the branding process. Firms with good brands invest in internalizing
the brand relationship inside the organization. Therefore, firms with good brands consider internal
marketing important.
In conclusion, the key to successful branding can be summarized in the following five points:
1. A brand is always an image in the minds of customers (and other stakeholders).

2. Brands cannot be built. The firm can only create favourable circumstances that facilitate the evolve-
ment of a brand as an image in the minds of customers. (‘If anyone builds the brand, it is the
customer’).
3. Customers’ experiences with brand contacts are the key to how a brand image evolves, and man-
aging brand contacts is at the heart of branding.
4. Marketing communication and the creation of brand awareness are only supporting activities in
branding.
5. Internal branding is instrumental for successful brand management.
So far in this chapter we have discussed brand relationships and brands as brand images. In the rest
of the chapter we will turn to another aspect of image, the image of a company as an organization.
However, it should be remembered that company image and brands as images are closely related.
M A N A G I N G C O M PA N Y I M A G E
The image of a company or any other organization, international, nationwide or local, represents the
values customers, potential customers, lost customers and other groups of people connect with the
organization. The image may vary depending on which group is being considered, and may even
vary between individuals. However, there is some common perception of the organization, which
may be very clear and well known to some groups and unfamiliar to other groups.
Image exists on several levels. A large network organization, such as a restaurant chain, has an
overall company image. In addition to this, a local organization, such as a local restaurant, has a local
company image. If many outlets or offices belong to a local organization (for example, a range of car
rental locations belong to the same local franchise-holder which, in turn, is part of a nationwide car
rental organization), each individual outlet may very well have an image of its own, in addition to an
overall local image.
Company images on different levels are interrelated. The overall image influences the perception
of the local organization (i.e. the local image) and the image of an individual office or outlet to some
extent depends on the local image. Moreover, the various images can affect each other in different
ways. Very large customers, such as financial organizations, are more inclined to be influenced by
company image. Smaller and local customers are more interested in local image. For a local firm,
overall company image and local image may be virtually the same thing.
It is important from a management point of view to note that a local unit is inevitably affected
by the company image of the bigger organization of which it is a part. On the other hand, service
operations in many respects are local, which presents a good opportunity for a local organization to
develop an image of its own among its local customers. For example, if a hotel has a bad reputation
on the corporate level, a specific hotel in that chain may nevertheless develop a strong and favourable
local image, which helps to attract customers.
From the company’s point of view, a distinct local image may be tolerated within limits, whereas
too-different local images may be harmful as far as the pursuit of a corporate strategy is concerned.
If the images of local hotels are too diverse, it may be difficult to maintain a clear company image.
This, of course, is a very context-specific issue.
However, again, service is local, and most customer relationships are local. Therefore, corporate-
level management should not automatically try to streamline the images of all hotels. Local business
environments and societies are different, and a too-streamlined local image may damage business.
The issue of streamlining or differentiating local images in relation to a desired corporate image is
a management concern, where the strengths of disparate local images should be compared with the
need for a clear corporate image. Sometimes there is a conflict involved, sometimes not.
T H E I M P O RTA N C E O F I M A G E
A favourable and well-known image, overall company image and/or local image, is an asset to any
firm, because image has an impact on customer perceptions of the communication and operations of
the firm in many respects. The role of image is at least fourfold. For the sake of simplification, no
distinction between overall organizational image and local image is made here:
1. Image communicates expectations.

2. Image is a filter moderating experiences.
3. Image is a function of expectations as well as of experiences.
4. Image has an internal impact on employees as well as an external impact on customers.
First, image communicates expectations, together with external marketing campaigns such as advertising,
direct mail and personal selling, and word-of-mouth communication. Here we will only consider
customer relationships, but image works in a similar manner in relation to other stakeholders as
well. Furthermore, image has an impact on expectations, and it also helps people to screen informa-
tion, marketing communication as well as comments in social media and word of mouth. A positive
image makes it easier for a firm to communicate effectively, and it makes people more perceptive to
favourable word of mouth. Of course, a negative image has a similar effect, but in the opposite
direction. A neutral or unfamiliar image may not cause any damage, but it does not increase the
effectiveness of communication and word of mouth either.
Second, image is a filter that moderates experiences and influences the perception of the performance
of the firm. Technical quality and functional quality are both seen through this filter. If the image is
good, it becomes a shelter. Minor problems, even occasional more serious problems of a technical or
functional quality nature, can be overlooked due to this sheltering effect. However, this only works
for a short period. If such problems continuously occur, the effect of this shelter diminishes, and the
company image will change. This filter has the opposite effect as well. An unfavourable image makes
customers feel more dissatisfied and angrier with bad service than they would otherwise be. A neutral
or unfamiliar image does not cause any harm in this respect, but it does not provide a shelter either.
DEVELOPING IMAGE 349
Third, the image is a function of the experiences as well as of the expectations of customers. When customers
develop expectations and experience reality in the form of the technical and functional quality of
the service, the resulting perceived service quality changes the image. If the perceived service quality
meets the image or exceeds it, image is reinforced or even improved. If the firm performs below
image, the effect will be the opposite. Also, if the image is not clear or well known to customers, it
is developed and given distinct positive or negative features by customer experience.
There is a fourth effect of image that is important to management. Image has an internal impact
on employees as well as the external effect on customers. The less clear and distinct the image is,
the more this may affect employee attitudes towards the organization as an employer. This, in turn,
may have a negative influence on the employees’ performance and thus on customer relationships
and perceived quality. On the other hand, a positive image of, say, a firm with excellent service,
communicates clear values internally and may thus strengthen positive attitudes towards the business
among its employees. Such a firm easily attracts good employees, too.
DEVELOPING IMAGE
Frequently we hear managers say that the image of their firm is poor or unclear or old-fashioned. Far
too often they try to solve this problem without analysing it and the reasons behind the unfavourable
image. This, in turn, leads to poor decisions and actions. For example, cosmetic actions, such as
corporate image advertising campaigns or actions involving other means of mass communication, are
often turned to in situations where they will not solve the actual problem. Such actions have a limited
positive effect, or in the worst case a negative effect.
There is a well-known saying that image is reality.26 Therefore, image development or image
improvement programmes have to be based on reality. If the company image is unknown, but the
firm performs well, there is a need for planned marketing communication. But if its image is bad and
the firm does not perform well, the basic problem is different. The organization faces a real problem,
not only a communication problem.
First, one has to analyse why there is an image problem. Basically, there are two possible reasons:
the organization is known but has a bad image; or the organization is not well known and, therefore,
has an unclear image or an out-of-date image based on old customer experiences.
If the image is negative in one way or the other, the experiences of the customers are probably bad.
There may be problems with technical and/or functional quality. In such a situation, if management
calls upon an advertising agency to plan an advertising campaign offering the message that the firm
is service-oriented, customer-conscious, modern or whatever the message may be, the result may be
fatal. At best, the campaign will be a waste of money; however, there are cases where such actions
have had much more serious consequences. A national retail chain in a European country suffered
from a poorly service-oriented image. It invested extensively in a corporate advertising campaign
which communicated good service, customer-conscious employees, a pleasant shopping atmosphere
in its retail outlets, and so forth. In the short term, sales improved, but in the long term, sales decreased
again to where they had been and even fell below this level. The organization’s already bad image
was further damaged.
The lesson is that because image is reality, if market communication does not fit reality, reality
normally wins. An advertising campaign that is not based on reality only creates expectations that
will not be fulfilled. If expectations are higher than they used to be, but reality has not changed, the
perceived service quality is affected in a negative way, and the company image will be damaged.
If the image problem is a real problem, only real action will help. Real problems with the performance of
the firm, its technical and/or functional quality, cause an image problem. If the poor image is to be
improved, internal actions to improve the performance of the firm are needed.
If the company’s image is unknown, there is a communication problem. The firm may be entering a new
market, where it is unknown, or the nature of its business may lead only to sporadic customer contacts,
which means that customers never develop an in-depth image of the firm based on experience. Also,
the firm’s reality may have changed so that it is, say, more customer-conscious and service-oriented
than before, but this has not yet been fully appreciated by its customers. Therefore, the image is not
yet as good as it should and realistically could be. The image will improve eventually, when enough
customers become sufficiently experienced with the new reality. However, if the firm communicates
this change to the market, this process will probably take less time. In these situations an image prob-
lem is really a communication problem, and improved marketing communication offers a solution.
Furthermore, it is always possible to support a company’s image using various means of planned
communication. The layout of websites, advertisements, brochures, packages and letterheads and
the design of offices and delivery trucks may support a given image if they are in line with it. On
the other hand, modern office design and advertisement layouts do not improve a firm’s image if the
performance of the firm is perceived as being old-fashioned and bureaucratic.
In summary, it is important to realize that image portrays what exists in reality; image is not what
is communicated through planned marketing communication if the communicated image does not
correspond with reality. When there is an inconsistency between real performance and communi-
cated image, reality wins. The planned communication of the firm is perceived as untrustworthy,
which damages image even more. If there is an image problem, management should analyse the
nature of the problem thoroughly before taking action. A communication problem can and should
be solved by improved communication. However, if there is a real problem, if the negative or other-
wise unfavourable image is due to bad performance, the image can be improved only by internal
action, the objective of which is to improve performance. Only in a second phase can planned com-
munication be used, when the real performance-related reason for the poor image has been removed.
S U M M A RY
In this chapter the issues of branding and image in service contexts were discussed. A brand develops as a
brand image in the minds of customers as a result of accumulated experiences of various brand contacts.
In service, the service processes, and various brand contacts, are at the heart of branding. Unlike physical
products, planned marketing communication does not form a central instrument in the development
of brands. Such communication can be seen as supportive activities in a branding process. If service
processes do not function in a way that customers want to relate to, planned marketing communication
cannot compensate for this. It was noted that customers can be understood to have brand relationships
with ongoing service processes or relationships with a supplier or service provider, including ongoing
interactions related to physical products, service processes, information, etc.
In the second part of the chapter the concept of image was explained. It was noted that image exists
on an overall organizational level as well as on a local and branch office level. When managing an image,
it is important to realize that planned communication efforts cannot improve the situation if a poor image
is caused by problems in the service processes. Only actions that improve the quality of the service can
improve the image.
NOTES 351

1. What is a brand? What is the difference between brand, brand image and brand identity?
2. Which are the most critical aspects in the development of service brands?
3. What characterizes the branding processes of excellent service providers?
4. Identify brand contacts, analyse the brand in the minds of customers, and discuss the brand
value and brand equity of a given service offering provided by your organization, or any
organization.
5. How do conversations on social media and website postings impact the branding process?
6. What is the relationship between a brand and a company image?
7. What could be the reasons for a poor image? How should a poor image be improved?
8. What are the functions of a company image and a local image?
NOTES
1. Berry, L.L., Cultivating service brand equity. Journal of the Academy of Marketing Science, 28(1),
2000, 128–137 and Brodie, R.J., Whittome, J.R.M. & Brush, G.J., Investigating the service
brand: a customer value perspective. Journal of Business Research, 62(3), 2009, 345–355.
2. Bennet, P.D., Dictionary of Marketing Terms, 2nd edn. Chicago, IL: American Marketing Associ-
ation, 1995.
3. See, for example, Rindell, A. & Strandvik, T., Brand evolution – brands evolving in consumers’
everyday life. European Business Research, 22(3), 2010, 276–286 and Rindell, A. & Iglesias, O.,
Context and time in brand image constructions. Journal of Organizational Change Management,
27(3), 2014, 756–768.
4. The role of social media, the Internet and mobile technologies in branding and various possibilities
for their use in general and in service branding are discussed in de Chernatory, L., McDonald,
M. & Wallace, E., Creating Powerful Brands, 4th edn. Oxford: Butterworth Heinemann, 2011.
5. Rust, R.T., Zeithaml, V.A. & Lemon, K.N., Customer-centered brand management. Harvard
Business Review, 82(Sept), 2004, 110.
6. Rust, Zeithaml & Lemon, op. cit.
7. Aaker, D.A. & Joachimsthaler, E., Brand Leadership. New York: The Free Press, 2000.
8. Rindell & Strandvik, op. cit.
9. Rindell, A., Image Heritage. The Temporal Dimension in Consumers’ Corporate Image Constructions.
Helsinki/Helsingfors: Hanken School of Economics, Finland, 2007. See also Rindell & Iglesias,
op. cit.
10. See Gyrd-Jones, R.I. & Kornum, N., Managing the co-created brand: value and cultural comple-
mentarity in online and offline multi-stakeholder ecosystems. Journal of Business Research, 66(9),
2013, 1484–1483, where the branding process in Lego is studied.
11. See Schultz, D.E., Barnes, B.E., Schultz, H.F. & Azzaro, M., Building Customer-Brand Relation-
ships. Armonk, NJ: M.E. Sharpe, 2009.
12. Schultz & Barnes, op. cit., p. 46.
13. In the literature brand value is often referred to as the value of a brand to a firm. See, for example,
Melo, T & Galan, J.I., Effects of corporate social responsibility on brand value. Journal of Brand
Management, 18(6), 2011, 423–437.
14. Keller, K.L., Conceptualizing, measuring and managing customer-based brand equity. Journal of
Marketing, 57(Jan), 1993, 1–22. See also Keller, K.L., Strategic Brand Management: Building, Mea-
suring and Managing Brand Equity, 2nd edn. Englewood Cliffs, NJ: Prentice-Hall, 2003. However,
sometimes brand equity is also related to the value for customers of a brand. See, for example,
Aaker, D.A., Managing Brand Equity: Capitalizing on the Value of a Brand Name. New York: The
Free Press, 1991, where brand equity is defined as ‘the set of assets (and liabilities) linked to a
brand’s name and symbol that adds (or subtracts from) the value provided by a product or service
to a firm and/or that firm’s customers’ (p. 16; emphasis added).
15. Ambler, T., Marketing and the Bottom Line: The New Metrics of Corporate Wealth. London: Financial
Times/Prentice-Hall, 2000, p. 14.
16. See Lindberg-Repo, K. & Grönroos, C., Word-of-mouth referrals in the domain of relationship
marketing. Australasian Marketing Journal, 7(1), 1999, 109–117. See also Andersen, P.H., Rela-
tionship marketing and brand involvement through web-enhanced brand communities: the case
of Coloplast. Industrial Marketing Management, 34(1), 2005, 39–51, where the author discusses the
evolvement of brand involvement on the Internet.
17. See Andersen, op. cit.
18. See Schultz, M. & de Chernatony, L., The challenges of corporate branding. Corporate Reputation
Review, 5(2–3), 2002, 105–112.
19. Mitchell, C., Selling the brand inside. Harvard Business Review, 80(Jan), 2002, 99–106.
20. King, C. & Grace, D., Examining the antecedents of positive employee brand-related attitudes
and behaviours. European Journal of Marketing, 46(3–4), 2012, 469–488. See also Miles, S.J. &
FURTHER READING 353
Mangold, W.G., Positioning Southwest Airlines through employee branding. Business Horizons,
46(6), 2005, 535–545, and, for example, Kimpakorn, N. & Tocquer, G., Service brand equity and
employee brand commitment. Journal of Services Marketing, 24(5), 2010, 378–388, and Schlager, T,
Bodderas, M, Maas, P. & Cachelin, J.L., The influence of employer brand on employee attitudes
relevant for service branding: an empirical investigation. Journal of Services Marketing, 25(7), 2011,
497–508.
21. See Hurrell, S.A. & Scholarios, D., ‘The people make the brand’: reducing social skills gaps
through person-brand fit and human resource management practices. Journal of Service Research,
17(1), 2014, 54–67, and Löhndorf, B. & Diamantopoulos, A., Internal branding: social identity
and social exchange perspectives on turning employees into brand champions. Journal of Service
Research, 17(3), 2014, 310–325.
22. See Berry, L.L., Discovering the Soul of Service. New York: The Free Press, 1999, p. 200, where a
service brand meaning model illustrating a similar process is presented.
23. Brodie, R.J., Glynn, M.S. & Little, V., Brands and relationships and the service dominant logic.
Marketing Theory, 3(3), 2006, 363–379.
24. Berry, op. cit.
25. Berry, 1999, op. cit. See also Berry, 2000, op. cit.
26. See Bernstein, D., Company Image & Reality. Eastbourne: Holt, Rinehart and Winston, 1985.
Aaker, D.A. (1991) Managing Brand Equity: Capitalizing on the Value of a Brand Name. New York:
The Free Press.
Aaker, D.A. (1996) Building Strong Brands. New York: The Free Press.
Aaker, D.A. & Joachimsthaler, E. (2000) Brand Leadership. New York: The Free Press.
Ambler, T. (2000) Marketing and the Bottom Line: The New Metrics of Corporate Wealth. London:
Financial Times/Prentice-Hall.
Andersen, P.H. (2005) Relationship marketing and brand involvement through web-enhanced brand
communities: the case of Coloplast. Industrial Marketing Management, 34(1), 39–51.
Bennet, P.D. (1995) Dictionary of Marketing Terms, 2nd edn. Chicago, IL: American Marketing
Association.
Bernstein, D. (1985) Company Image & Reality. Eastbourne: Holt, Rinehart and Winston.
Berry, L.L. (1999) Discovering the Soul of Service. New York: The Free Press.
Berry, L.L. (2000) Cultivating service brand equity. Journal of the Academy of Marketing Science, 28(1),
128–137.
Brodie, R.J., Glynn, M.S. & Little, V. (2006) The service brand and the service-dominant logic:
missing fundamental premises or the need for a stronger theory? Marketing Theory, 6(3), 363–379.
Brodie, R.J., Whittome, J.R.M. & Brush, G.J. (2009) Investigating the service brand: a customer
value perspective. Journal of Business Research, 62(3), 345–355.
Calonius, H. (1986) A market behaviour framework. In Möller, K. & Paltschik, M. (eds), Contempo-
rary Research in Marketing. Proceedings from the XV Annual Conference of the European Marketing Academy.
Helsinki: Helsinki School of Economics and Hanken Swedish School of Economics, Finland,
pp. 515–524.
de Chernatory, L., McDonald, M. & Wallace, E. (2011) Creating Powerful Brands, 4th edn. Oxford:
Butterworth Heinemann.
Duncan, T. & Moriarty, S. (1997) Driving Brand Value. New York: McGraw-Hill.
Gyrd-Jones, R.I. & Kornum, N. (2013) Managing the co-created brand: value and cultural com-
plementarity in online and offline multi-stakeholder ecosystems. Journal of Business Research, 66(9),
1484–1483.
Hurrell, S.A. & Scholarios, D. (2014) ‘The people make the brand’: reducing social skills gaps
through person-brand fit and human resource management practices. Journal of Service Research, 17(1),
54–67.
Keller, K.L. (1993) Conceptualizing, measuring and managing customer-based brand equity. Journal
of Marketing, 57(Jan), 1–22.
Keller, K.L. (2003) Strategic Brand Management: Building, Measuring and Managing Brand Equity, 2nd
edn. Englewood Cliffs, NJ: Prentice-Hall.
Kimpakorn, N. & Tocquer, G. (2010) Service brand equity and employee brand commitment.
King, C. & Grace, D. (2012) Examining the antecedents of positive employee brand-related attitudes
and behaviours. European Journal of Marketing, 46(3–4), 469–488.
Lindberg-Repo, K. & Grönroos, C. (1999) Word-of-mouth referrals in the domain of relationship
marketing. Australasian Marketing Journal, 7(1), 109–117.
Löhndorf, B. & Diamantopoulos, A. (2014) Internal branding: social identity and social exchange
perspectives on turning employees into brand champions. Journal of Service Research, 17(3),
310–325.
FURTHER READING 355
Melo, T & Galan, J.I. (2011) Effects of corporate social responsibility on brand value. Journal of Brand
Management, 18(6), 423–437.
Miles, S.J. & Mangold, W.G. (2005) Positioning Southwest Airlines through employee branding.
Business Horizons, 46(6), 535–545.
Mitchell, C. (2002) Selling the brand inside. Harvard Business Review, 80(Jan), 99–106.
Rindell, A. (2007) Image Heritage. the Temporal Dimension in Consumers’ Corporate Image Constructions.
Helsinki/Helsingfors: Hanken School of Economics, Finland, 2007.
Rindell, A. & Iglesias, O. (2014) Context and time in brand image constructions. Journal of Organi-
zational Change Management, 27(3), 756–768.
Rindell, A. & Strandvik, T. (2010) Brand evolution – brands evolving in consumers’ everyday life.
European Business Research, 22(3), 276–286.
Rust, R.T., Zeithaml, V.A. & Lemon, K.N. (2004) Customer-centered brand management. Harvard
Business Review, 82(Sept), 110–118.
Schlager, T, Bodderas, M, Maas, P. & Cachelin, J.L. (2011) The influence of employer brand
on employee attitudes relevant for service branding: an empirical investigation. Journal of Services
Marketing, 25(7), 497–508.
Schultz, D.E., Barnes, B.E., Schultz, H.F. & Azzaro, M. 2009, Building Customer-Brand Relationships.
Armonk, NJ: M.E. Sharpe.
Schultz, M. & de Chernatony, L. (2002) The challenges of corporate branding. Corporate Reputation
Review, 5(2–3), 105–112.
CHAPTER 12
SOCIAL MEDIA IN SERVICE
MANAGEMENT AND
MARKETING
Written by Johanna Gummerus
“ ” In social media, a firm is just as good as its customers think it is – the truth leaks out one way or
another.
INTRODUCTION
This chapter looks at the role of social media in service management and marketing. Also, different
types of social media are discussed. Then, the chapter presents the social media communication circle,
after which the influence of social media on service marketing and management will be explained.
After reading the chapter the reader should know what kinds of social media there are, how they
function, and how firms can adapt their marketing to various social media.
BACKGROUND TO SOCIAL MEDIA

Social media refer to all those new online media that allow actors to generate and share content with
others on a large scale. The content can be text, pictures, video, or audio. The social media platforms
enable and encourage sharing, meaning that the content spreads fast to a wide online audience, causing
an enormous ripple effect. In essence, then, social media constitute a new way with which people
connect to each other.
From a marketing perspective, the most important aspect of social media is their pervasiveness and
influence in people’s lives. Most people are today connected to some social media, be it social networking
sites1 such as LinkedIn and Facebook, microblogging services such as Twitter, communication apps
such as WhatsApp and Kik, content sharing communities such as YouTube, SlideShare, Instagram and
Pinterest, crowd sourcing or crowd funding platforms,2 different online forums or blogs, or virtual
worlds such as Second Life or Habbo Hotel. As consumers are continuously connected to different
social media, they share with others their everyday life, including their interactions and experiences
with firms. Because of the mass sharing of information, consumers are also better informed and
358 SOCIAL MEDIA IN SERVICE MANAGEMENT AND MARKETING
thereby they become more empowered3 – they can more readily find and evaluate service providers,
brands, or products. Also, because consumers are increasingly able to learn from each other, they may
question expert opinions based on the information they have accessed online. The pervasiveness and
continuous mass sharing of experiences in social media further leads to transparency of firm actions,
as both positive and negative firm activities spread out far quicker and to a wider audience than
before, and many firms perceive an increasing lack of control of what is being said about them. Quite
frequently, customer stories spread from social media to traditional media e.g. through journalists
who skim through social media content to find appealing stories.
Another important aspect relates to the content that is created and shared by people in social
media, the user generated content (UGC), which refers to the content that is created voluntarily by
ordinary users and not by professionals. This content can vary from a simple grade given for a product,
brand or firm on a review site to complex information or creative efforts such as music, videos or
virtual items. A single consumer can, in social media, get his voice heard by millions of listeners.
Customers often create content that in one way or another relates to companies. It may be positive,
for example praise for a company or a brand, or negative, such as sharing a bad experience. The social
media review sites such as YELP! (www.yelp.com) collect and aggregate consumer opinions and
experiences, and as they offer a continuously updated pool of information, these assessments influence
customer decision-making and behaviour. Review sites may also act as middlemen as TripAdvisor
does (www.tripadvisor.com), or concentrate on assessing firms from an employee’s viewpoint, as
done at Glassdoor (www.glassdoor.com). Importantly, customers find the content generated by other
users more trustworthy and interesting than the content firms put online.4 In particular more creative
content, such as music, spreads quickly in social media. The Disney film Frozen, for example, has
inspired video bloggers to create videos on how to get the perfect look of the main characters in the
film, and these can be found on, for example, YouTube, where other users can grade and comment
on them. The viewer numbers and grades then influence how high up the content appears on the site,
emphasizing popular content. Another well-known example is that of the Canadian country singer
Dave Carroll, whose guitar was damaged when he flew with United Airlines. After almost a year-
long battle to get the damages covered, the airline turned down Carroll’s request for compensation.
The upset musician then wrote a song about his experiences and put it on YouTube, from where it
spread virally to millions of viewers and was caught up by journalists and taken up in other media.5
The video resonated with customers who had been maltreated by United and other big airlines,
and led to United Airlines share prices plunging.6 . Because of the video, Carroll became a popular
breakfast show guest and has toured talking about airline quality, written a book about his experiences
entitled United Breaks Guitars, and finished a trilogy of songs about his United Airlines experience.
The side effect of UGC is that because of the astounding amount of content that competes with
firm-generated content, gaining visibility in social media may be challenging.
A third important aspect of social media is that customers tend to opt-in in these media, that is, they
choose and become engaged in sub-groups within different social media that by default involve a par-
ticular interest. Such sub-groups may, for example, be brand sites on Facebook, groups in LinkedIn,
blogs specializing in different topics, YouTube channels, pinned interests, or online discussion fora.
Furthermore, the users who have opted-in tend to be experts or highly involved in the topic. This
means that many social media platforms enable firms to reach particular niche segments of customers
who have signalled that they are interested and willing to learn more about a particular topic.
Fourthly, social media offer a platform where firms and customers may interact. Consequently, manufac-
turers and suppliers who have not necessarily traditionally had any direct contact with end customers
are able to listen to and engage in dialogues with the end customers in social media. One such case is
the Finnish dairy company Valio, that has used social media to develop new protein-rich and low-fat
DIFFERENT TYPES OF SOCIAL MEDIA 359
quark products together with the weightlifting community.7 Similarly, social media make consumer
opinions more visible for companies, as they are able to monitor what is said about them and respond
directly to customers.
Fifthly, social media may have a direct influence on the service experience during consumption. Tweeting
with others while watching a TV show or being engaged in any service process has the potential
to change both the collective service experience and the experience of the individual consumer.
Sharing impressions and thoughts about the service between like-minded persons changes the service
experience. For example, the experience of a TV show may, through this use, change considerably
from what was intended by the producer. In this way social media lifts the service experience to a new
level, and offers risks and opportunities for the service provider. Kai Huotari, who has studied the
impact of social media on service experiences, calls this phenomenon experientializing.8 An interesting
and challenging aspect of experientializing is the fact that it takes place outside the direct reach of the
service provider.
Finally, social media space is fast-moving and therefore requires a totally new type of communica-
tion from companies. Consequently, in many cases the most efficient service and relationship-building
activities require the ability to quickly react to unplanned activities taking place. One such instance
happened during the 2013 Super Bowl power blackout, when Oreo biscuits were quick to tweet
‘You can still dunk in the dark’, referring to dunking the biscuit to liquid in order to enjoy it. This
quick, snappy remark raised a wave of positive reactions among the public, journalists and marketing
professionals.9 The main winning factor was not the ingeniousness of the message, but rather the
quick reaction to the disruption. Thus, the companies that are agile in the social media environment
are the ones most likely to benefit from them.
Next, we will discuss the different social media types.
DIFFERENT TYPES OF SOCIAL MEDIA

Social media can be understood by looking at the different characteristics they have. The early ver-
sions of social media, virtual communities, referred to groups of people who interacted with each
other because they were either enthusiastic or knowledgeable about something. Consequently, vir-
tual communities were divided based on whether the users focused on information exchange or on
social interaction, and whether the interactions were freely accessible by everybody or took place
within a closed circle of people.10 Of late, differentiations between information exchange and social
interaction are difficult to make, because the information exchange itself has become a social activity.
More recently, another way to understand how the social media platforms differ has been intro-
duced, based on media content, and the role of the participant. Media content concerns the social
presence/media richness. Social presence/media richness reflects the medium’s ability to provide
information to decrease uncertainty and replicate real-life sensory cues.11 The second aspect that takes
up the role of the participant refers to the degree of self-presentation/self-disclosure to which the
participants engage in divulging personal information.12 Virtual worlds such as Second Life or Habbo
Hotel are examples of social media with high self-presentation/self-disclosure, because people are able
to create avatars that impersonate them. The virtual world participants are able to interact with others
with the help of the avatars, expressing their personality with clothing, use of words, and different
symbols that represent their interests. Virtual worlds are also high in social presence/media richness
because the verbal and visual cues ameliorate ambiguity. If self-disclosure is high, the interactions
within the media are more personal and consumers may find it easier to connect with each other,
and with the firm.
Another way of understanding social media is through the half-life and the depth of information. The
half-life of information refers to how long the information is available13 on the screen, and social media
differ in this aspect. On Kik for example, the messages come up and disappear. Facebook postings are
more long-lived as they can be found on the news feed or the person’s or firm’s site that posted them.
The depth of information in turn means how rich, numerous, and diverse the viewpoints presented
on a topic are. It can vary between shallow information depth in, for example, blogs that, although
they may be rich, represent mainly one person’s (the blogger’s) perspective and are thus classified as
shallow, to the deep information presented in specialized communities that aggregate several people’s
views.
A challenge in many social media applications is that information emerges and then disappears in the
flow of new posts. Therefore, customers may be exposed to firm postings to different degrees, some
noticing all of them, some only few and some none. Consequently, firms need to understand social
media in terms of media richness, participant self-presentation/self-disclosure, information depth and
information longevity.
C O M PA N Y PA RT I C I PAT I O N I N S O C I A L M E D I A
In order to interact with potential, current and past customers, companies can either establish their
own social media platforms, such as corporate blogs or company-sponsored communities, or employ
external social media platforms.14 Company-owned virtual communities are valuable because the
company is able to set the rules for the community, direct activities and gather data from the users.
However, setting up own communities may be costly, and what is even more crucial, it may be
difficult to gain visibility and attract participants to them.
Companies may also choose to tap into the extant social media platforms that already have a wide
audience. Most social media platforms offer firms the opportunity to establish company sites, or
include their own content on the platform. If companies establish presence in external social media
sites, they have to follow the rules and regulations of the platform owner. Planning activities may
however be challenging because the social media platform owners may change the rules after innova-
tive marketing campaigns. For example, the Swedish furniture company IKEA launched a Facebook
campaign to promote their new store in Malmo. During the campaign, the store manager posted,
within a two-week period, twelve pictures of IKEA catalogue-type photos on Facebook. On the
photos, the customers could tag15 pieces of furniture. Whoever tagged the furniture first would win
it. The marketing campaign received a huge amount of ‘likes’ and spread among people who recom-
mended the campaign to their peers. However, Facebook soon banned these types of campaigns.
To illustrate the contingency of company participation in social media, Figure 12.1 depicts how
company–customer interaction takes place in social media.
Figure 12.1 shows how customer activities, company activities, and social media platforms together
create the sphere where customer–company interactions take place in social media. The three areas
are interdependent. Both firm and customer activities are dependent on the social media platform.
For example, Twitter allows only 160 characters in the messages sent, which forces users to compress
messages and use hashtags (# and the connecting word) to link their message to other messages where
the word that has been tagged is used. The customer activities of creating, sharing and consuming
also influence what firms are able to do. For example, customers’ tendency to share company-related
content defines how easy and costly it is to spread messages in social media. Customers may also have
differing expectations about how firms are allowed to act in different social media. In general, social
media that are not owned by the company are mainly meant for customer-to-customer interaction,16
SOCIAL MEDIA COMMUNICATION CIRCLE 361
CUSTOMER
Creating
Sharing Customer-company
Consuming interaction in social
media
COMPANY
SOCIAL MEDIA
Inbound and
Platform
outbound
Rules, regulations
activities
F I G U R E 12.1
Customer–company interaction in social media.
and consumers may not be positively attuned to company participation. Customers generally tend to
think that firms should openly admit if they are behind marketing messages. Unfortunately, not all
companies do this. Companies may seed content and comments to enhance information spreading
among customers, evoke interest among them, or encourage discussions without telling that they are
behind this.
Because of the special media characteristics and the interdependence between company and cus-
tomer activities, social media impact the traditional communication circle. This will be discussed next
with the help of the social media communication circle.
S O C I A L M E D I A C O M M U N I C AT I O N C I R C L E
Social media challenge the traditional communication circle, for several reasons: the communication
speeds up, the customers may already during the service encounter share their experiences with
others and the firm, and the customers may seek social support during the encounter. For example,
a customer may, while waiting to be seated in a restaurant or during a meal, comment on the service
or take photos of the food and the interior, and share them in social media. Figure 12.2 depicts the
social media communication circle that is modified from the traditional communication circle.
The basic elements of the social media communication circle are the same as in the traditional
communication circle: customer expectations, interactions, experiences, and word of mouth (WOM).
In the traditional communication circle, expectations, interactions, experiences, and WOM follow
each other, and the circle closes as the WOM influences expectations. However, in social media,
as the customer is constantly connected to social media, the interactions and WOM may take place
simultaneously. Because of this, as the concept of experientializing mentioned earlier demonstrates,
WOM may even become a part of the interaction and the final service experience. For example, a
WOM/references
Expectations/
Experiences
purchases
Interactions
F I G U R E 12.2
Social media communication circle.
customer may go to a shop to buy a new outfit for a family occasion and, while in the shop, take a
photo of the dress and send it to her WhatsApp list to receive feedback from family members, and
depending on the response, ending up buying the dress or not. The response may also shape how the
customer experiences the whole shopping spree as either immensely humiliating (‘How could you
even consider that horrible rag?’) or as delightful (‘Where on earth did you find that lovely outfit!’).
Consequently, the WOM and the service interaction become intertwined and interdependent when
social media communication is involved.
THE INFLUENCE OF SOCIAL MEDIA

O N S E RV I C E M A R K E T I N G
A number of aspects in service management and relationships become highlighted due to social media.
First of all, as both positive and negative experiences of customers will spread, the importance of
making, enabling and keeping promises is accentuated. Firms must make sure that the promises they
make are really kept and fulfilled, because any problems in service quality will be communicated
quickly in the social media space. This means that it is crucial to prevent the negative word of mouth
from emerging by removing the causes for dissatisfaction. Essentially, firms need to acknowledge
even more than before that customer-to-customer communications are beyond their control. In fact,
many brands have hate websites that collect negative customer experiences.17 The existence of such
communities and of any type of word of mouth can also be seen as a positive sign – the brand evokes
feelings and is not within customers’ sphere of indifference, which may be far more dangerous. The
role of part-time marketers18 in particular becomes pivotal, as they influence customer satisfaction
directly and will be referred to in online reviews. Consequently, social media also influence how
firms should organize their activities internally. The personnel need to have a clear understanding of
THE INFLUENCE OF SOCIAL MEDIA ON SERVICE MARKETING 363
what is expected of them, that is, role divisions, such as who is responsible; how quickly and often
to respond; and how to deal with different types of issues that arise online. It is important that the
personnel are allowed to show their personality in their communications with customers. All in all,
the firm will have to rely on more direct communication, showing authenticity and identity. Thus,
firms should encourage the employees to use their own genuine, personal interaction style.
Secondly, the agility of the social media landscape has consequences for firms. Since consumers
are connected to social media, firms are able to instantaneously serve their customers. This is partic-
ularly useful in cases where unexpected situations arise, or when companies need to access customers
quickly. In emergencies, when company web pages or contact centres would not manage the large
number of customer contacts, different social media can be utilized to communicate with customers,
as they can be updated quickly and are technically fit for mass communication. Also, through social
media, marketers may find possibilities for reacting quickly to other more mundane real-life events
and engage the audience in a dialogue, for example take part in conversations taking place in the
general press. The instantaneous visibility of the customers’ service experiences also means that firms
can monitor their service performance online in real time. With the help of online monitoring tools
and feedback systems, firms can reach and respond instantly to negative customer feedback, and iden-
tify and correct flaws in service processes. For example, the Finnish airline company Finnair screens
customers’ Twitter postings to recognize glitches in customer flight experiences, after which they
analyse the underlying causes of these service failures and, when applicable, correct internal service
processes. Firms may also find it easier to manage the perishability of face-to-face services by pro-
moting the service in social media at times when the service would otherwise go unsold, for example
during off-season or if demand otherwise fluctuates.
Thirdly, the new types of communications in social media including audio, video, and pictures
have several implications for the communication between customers and between customers and the
firm. Customers are able to provide evidence in the form of pictures and video to back up any claims
they make about the firm. The social media interactions that are supported by visual evidence are
more tangible than traditional word of mouth that consists mostly of verbally communicated stories.
Consequently, experience services that the customer is only able to evaluate after consumption19
may become higher in search qualities (aspects that can be evaluated before consumption). Also,
this content is stored and stays online, to be found even years after the initial incident. On the one
hand, firms are challenged by heightened requirements for quality management since deviations from
acceptable levels of quality have even more powerful consequences due to widely spreading electronic
word of mouth. On the other hand, the firms excelling in customer service will reap benefits from
positive reviews and customer experiences.
Fourthly, social media also make it possible for customers to show their engagement to the firm
or brand in multifaceted ways that entail both purchase and non-purchase behaviour.20 Customer
engagement captures customers’ positive firm-related behaviours. It includes both consumer-to-firm
interactions and consumer-to-consumer communications about the firm or the brand. Engagement
behaviours may include discussing, commenting, information searching and taking part in opinion
polls, as well as communicating through brand communities, blogging and other social media. When
customers engage in different activities, they also derive different benefits. The benefits that firms try
to create with customers may be economic (for example through lotteries, discounts), entertainment-
related (for example games and videos), and social benefits (for example recognition, discussions with
peers).21 In many cases, customers engage in multiple behaviours. Customer community engagement
behaviours such as content liking, reading and commenting on messages influence the benefits that
customers receive from their engagement with the community. Companies should, however, be
careful if they focus on economic benefits such as bonuses or lotteries, because they may not influence
customer satisfaction or loyalty in a positive way. Rather, they may attract bargain-hunters who
seek out cheap offers but have no intention of purchasing for full price. Also, people may become
accustomed to low prices, waiting for the next offer and only buying then.
Fifthly, firms need to reconsider the division of work and whether to employ the ‘wisdom of the
crowds’,22 particularly when it comes to service innovation. In innovation work, companies may
employ customers in several areas – externalizing activities may pay off in idea generation, developing
the ideas further, or commercializing them.23 These types of activities, where the company views
innovation work more broadly in a network setting, are labelled ‘open innovation’. Open innova-
tion includes both importing innovative ideas into the company and exporting intellectual capital.24
Crowdsourcing can extend from innovation work to any redivision of labour, so that a company
can renegotiate the roles taken by its customers and other interest groups. Although customers often
happily engage in service development work, the company needs to make sure that the innovation
process is perceived as being fair and transparent, and that the customers are satisfied with the inno-
vation outcome.25 In some cases, the customer involvement may be rather straightforward, such as
inviting customers to test a new concept or become brand ambassadors by displaying them while
using the brand. For example, the Finnish online yoga service provider Yoogaia (www.yoogaia.com)
has been using Facebook for developing and launching its service.
Sixthly, as in other media, companies need to connect with customers and support them in their
daily activities, but the particularity of social media is that companies need to consider why customers
would engage in word of mouth or act as advocates online. For example, companies who wish to
encourage private bloggers to spread word of mouth about the company need to consider why such
individuals blog in the first place. Some reasons include blogging because the activity itself is reward-
ing, because bloggers feel that the content they produce is valuable, and because of social connectivity
to the readers of the blog.26 Consequently, if the company is able to help the blogger to reach such
benefits, for example by helping them to get exclusive content, improve their blogging skills, or help
them in communicating with the readers, the blogger is more likely to accept collaboration. In the
same manner, end customers value company social media activities that help them to achieve their
own goals, such as to receive recognition, to be entertained, or to acquire economic benefits.27 In
some cases, such as when involving the firm’s fans, the task may be quite straightforward – fans are
likely to accept and share content further in their network. For example, many sports fan clubs share
information about coming events, players or league news, allow fans to post content, promote events,
and arrange contests for fans.
Finally, it is noteworthy that companies have different degrees of closeness to the customers. For
example, companies that typically use third-party suppliers, such as manufacturers of consumer goods,
have in social media a direct channel through which they can communicate with the end customers.
However, their challenge, as they do not own the customer data, is to figure out whether social
media marketing campaigns in fact have an effect on customer behaviour or not. The providers of
experiential services that are not typically able to be evaluated beforehand, such as travel, music, or
theatre, can encourage customers to spread word of mouth and thus make the service more appealing
for potential clients. Similarly, services that require physical contact such as car repair, health care or
hairdressers, can encourage the customers to share their experiences to reduce potential customers’
risk perceptions. Manufacturers of products that require long production processes, particularly if they
have highly-involved customers, may again interact with customers and make the product distin-
guishable for them by opening up the firm-internal production processes. Such an approach would
mean that the provider invites the customers to get acquainted with the firm’s daily activities.
FIRM ACTIVITIES IN SOCIAL MEDIA 365
Social Media Customer Presence Customer

Channels Segments
Strategic Goals
Boundaries of
Targeting
Activities
Firm Activities
F I G U R E 12.3
Company social media strategy triangle.
FIRM ACTIVITIES IN SOCIAL MEDIA

Figure 12.3 demonstrates how firms should plan their social media activities.
The model consists of four parts: strategic goals that define what should be achieved, the choice of
the social media channels, the customer segments that one wishes to reach, and the firm activities that
are undertaken to reach the strategic goals. These four parts are all interdependent and interlinked
with the environment. For example, the choice of appropriate strategy is dependent on the customer
market that is targeted, and therefore different markets may have different strategic goals. For example,
a firm that has only just entered a new market will likely aim for becoming more well known, whereas
an established player on the market will more likely be interested in serving current customers or
learning from them. The same logic applies for different sub-markets. For example, a company may
have as a strategic goal branding their hotel chain as the most appealing option for business travellers.
Firms should, if they decide to participate in social media, start by setting their strategic goals.
Setting measureable goals is important, because this allows the follow-up of how well different actions
lead to desired results. Also, well-defined goals allow the selection of customer segments that will be
targeted, the choice of appropriate tactics, and the measurement of success/failure.
General strategic goals for social media comprise increasing brand awareness, serving customers,
generating traffic or profits, and collecting customer inputs. Brand awareness is important, because
it means that the company is within the customer’s consideration set, and it is particularly relevant
to reach in new markets where the company is poorly known. Brand awareness can be evaluated
with relatively simple measures such as the number of content viewers, and how these evolve over
time. Serving customers in social media offers an important opportunity to engage in dialogue with
customers and support them before, after, and during service use. Increasing traffic to the company
website is perhaps the most straightforward goal, because it can be defined and measured effectively.
Collecting customer inputs or ‘listening in’ to understand customers better is an important goal.
However, this goal is difficult to measure, as it not only refers to noticing customer inputs but also
learning from and acting upon them.
The social media channel choice is closely interlinked with the type of users that they have and
the type of company activities that they enable. Social media vary in terms of who the consumers are
that use them; how widely they are used; what type of content is published and shared; the consumer
activities that the media enable; and the degree of involvement from companies. The company has to
consider where it can reach its customers the best. In many cases, media agencies are used to choose
appropriate media, but the company must understand how the different media work.
Company activities in social media are contingent upon the channel used and the customers the
company wants to reach. The way companies are able to interact with their customers in social media
depends on several aspects. First of all, the customers engage in different activities in social media, and
may be willing to different degrees to interact with companies. Notably, only a minority of people
create content, but their contribution is central for the vitality of social media, and it can become a
form of viral marketing when customers promote the company and/or its offerings. For this reason,
it is important to encourage and acknowledge customer content creation. It should be kept in mind
that for each person that contributes, there are typically ten people who lurk, that is, follow the social
media content. These lurkers may be just as loyal towards the brand as the active participants.28 Thus,
it is dangerous to assume that it is only worth maintaining relationships with the active participants.
From a firm perspective, social media platforms are often tricky because they are typically owned
by a third party that sets rules and regulates what is possible. The third parties also charge for the use
of the social media space, making this medium costly. The companies often differentiate between
earned media, which is essentially non-paid visibility, and paid media, which refers to paid visibility.
In social media, although most word of mouth is organic (that is, stems from the participant interest
and spreads around on its own), firms may need to seed content and pay for initial visibility.
One of the greatest challenges in social media is the measurement of outcomes. One central ques-
tion is to what degree firms can differentiate between traditional marketing, communication, and
customer service, and often the difficulty is that in social media, all these three areas come together.29
CASE STUDY
FINNAIR IN SOCIAL MEDIA
The Finnish airline company, Finnair, uses social media to support marketing, communi-
cation, and customer service activities. Finnair has been actively using social media for its
strategic goals of increasing brand awareness, listening to customers, serving customers,
and supporting sales. One challenge at Finnair has been that the roles of marketing,
communications and customer service become blurred. Traditionally, marketing has been
more campaign-driven and interested in measurable short-term results, whereas the com-
munications department has aimed at increasing earned media, in other words creating
positive word of mouth. Nevertheless, in social media the different departments need
to be aligned. For example, the communications department will need the marketing
department’s support in spreading the content that they create.
At Finnair, the role of employees has been emphasized as content creators in social
media. The Finnair policy is that all employees are allowed to produce content in social
media, and the personnel are increasingly seen as brand ambassadors. For example,
Finnair has launched an internal campaign of becoming ‘the most tweeting airline com-
pany in the world’, where Finnair employees are encouraged to tweet about their daily
work.
QUESTIONS FOR DISCUSSION 367
A long-term example of Finnair’s social media activities is the Quality Hunters pro-
gramme, which started as a public relations campaign but has evolved into a service devel-
opment programme. The idea with Quality Hunters originally, in 2010, was that four peo-
ple at Finnair were selected to travel across the world and blog about what constitutes
quality in the travel industry and how it could be improved. The Finnair customers could
then vote for their favourite improvement ideas and at the end, the most successful idea
was selected based on customer ratings. Subsequently, the campaign has developed into
a community-based service development project where customers are able to participate
in service development through, for example, workshops.
In social media, the company is able to create mechanisms that enable customers to talk
about and to the company. However, even social media success relies on the core business
performance: as Aku (Anna-Kaisa) Varamäki, Finnair’s Social Media Manager states: ‘Good
customer service is the best marketing there is.’
S U M M A RY
In this chapter, we first discussed what characterizes social media. Then, the social media communication
circle was described, showing how customer–company interactions and word of mouth become entangled
and take place simultaneously, influencing each other. Finally, a company social media strategy triangle
was presented, depicting how strategy, social media channel choice, customer segments and firm activities
are interrelated.

1. What characterizes social media in comparison to other service channels?
2. How does customer–firm interaction change if the customer uses social media during the
service encounter?
3. Which aspects should a manager consider while choosing social media channels?
4. Should firms always engage in social media, regardless of their offering, size, customers, or
market contingencies?
5. Discuss the fit of different social media channels to reach different strategic goals.
6. Discuss the pros and cons of social media for different types of companies.
NOTES
1. According to Boyd and Ellison (2007), social networking sites are sites that ‘allow individuals to
(1) construct a public or semi-public profile within a bounded system, (2) articulate a list of other
users with whom they share a connection, and (3) view and traverse their list of connections
and those made by others within the system’. Boyd, D.M., & Ellison, N.B. (2007) Social net-
work sites: definition, history, and scholarship. Journal of Computer-Mediated Communication, 13.
Retrieved from http://jcmc.indiana.edu/vol13/issue1/boyd.ellison.html
2. Crowdsourcing entails the engagement of large numbers of individuals to conduct tasks (Howe,
2008), whereas crowd funding refers to the collective actions of people within a network to
gather money for a purpose that other people or organizations have defined (Ordanini, 2009).
Howe, J. (2008). Crowdsourcing: Why the Power of the Crowd is Driving the Future of Business, New
York: Random House. Ordanini, A. (2009). Crowd funding: customers as investors. The Wall
Street Journal, 23 March, 3.
3. Kucuk, U.S., & Krishnamurthy, S. (2007) An analysis of consumer power on the Internet.
Technovation, 27, 47–56.
4. Lawrence, B., Fournier, S. and Brunel, F. (2013) When companies don’t make the ad: a multi-
method inquiry into the differential effectiveness of consumer-generated advertising, Journal of
Advertising, 42, 292–307.
5. http://www.theguardian.com/world/2009/jul/23/united-airlines-guitar-dave-carroll
6. http://www.dailymail.co.uk/news/article-1201671/Singer-Dave-Carroll-pens-YouTube-hit-
United-Airlines-breaks-guitar–shares-plunge-10.html
7. http://www.slideshare.net/rouenbs/netnography-by-joonas-rokka
8. See Huotari, K. (2014) Experientalizing – How C2C communication becomes part of the service experi-
ence. The case of live-tweeting and TV viewing. Helsinki: Hanken School of Economics, Finland.
9. http://www.360i.com/work/oreo-super-bowl/
10. Kozinets, R. (1999) E-tribalized marketing? The strategic implications of virtual communities of
consumption. European Management Journal, 17, 252–264.
11. Kaplan and Haenlein applied the social presence theory of Short, Williams, & Christie and the
media richness theory of Daft & Lengel to classify social media, varying from low media such as
blogs, medium level media richness of social networking sites, and high level media richness of
virtual social worlds, such as Second Life or the Finnish teenager virtual world Habbo.
Kaplan, A.M. and Haenlein, M. (2010) Users of the world, unite! The challenges and opportu-
nities of social media. Business Horizons, 53, 59–68.
NOTES 369
12. Kaplan and Haenlein (2010).

13. Weinberg, B.D. and Pehlivan, E. (2011). Social spending: managing the social media mix,
Business Horizons, 54, 275–282.
14. Porter suggests that communities can be divided into organization and customer communities.
Organization-sponsored communities can be divided into commercial, non-profit, and govern-
mental communities. Porter, C.E. (2004) A typology of virtual communities: a multi-disciplinary
foundation for future research. Journal of Computer-Mediated Communication [online], 10.
15. Tagging refers to the act of putting labels on items in social media, for example people in pho-
tographs can be tagged to connect their figure with their Facebook profile.
16. Fournier, S. and Avery, J. (2011) The uninvited brand. Business Horizons, 54, 193–207.
17. See e.g. http://www.ihateryanair.org/; http://www.ihatesbux.com/forum/
18. Gummesson, E. (1991) Marketing orientation revisited: the crucial role of the part time marketer.
European Journal of Marketing, 25(2), 60–75.
19. Nelson, P. (1970) Information and consumer behavior. Journal of Political Economy, 78, 311–329.
20. van Doorn, J., Lemon, K.N., Mittal, V., Nass, S., Doreén, P., Pirner, P. and Verhoef, P.C.
(2010). Customer engagement behavior: theoretical foundations and research directions. Journal
of Service Research, 13(3), 253–266.
21. Gummerus, J., Liljander, V., Weman, E. and Pihlström, M. (2012). Customer engagement in a
Facebook brand community. Management Research Review, 35(9), 857–877.
22. Kozinets, R.V., Hemetsberger, A., Jensen Schau, H. (2008). The wisdom of consumer crowds:
collective Innovation in the age of networked marketing. Journal of Macromarketing, 28(4),
339–354.
23. Muller, A., Hutchins, N. and Pinto, M.C. (2012). Applying open innovation where your com-
pany needs it the most. Strategy & Leadership, 40(2), 35–42.
24. Chesbrough, H.W. (2003). A better way to innovate. Harvard Business Review, 81(7), 12–13.
25. Gebauer, J., Füller, J. and Pezzei, R. (2013). The dark and the bright side of co-creation: trig-
gers of member behavior in online innovation communities. Journal of Business Research, 66(9),
1516–1527.
26. Sepp, M., Liljander, V. and Gummerus, J. (2011) Bloggers motivations to produce content –
a uses and gratifications theory perspective. Journal of Marketing Management, 27(13–14),
1479–1503.
27. Gwinner, K.P., Gremler, D.D. and Bitner, M.J. (1998) Relational benefits in service industries:
the customer’s perspective. Journal of the Academy of Marketing Science, 26(2), 101–114.
28. Shang, R.-A., Chen, Y.-C. and Liao, H.-J. (2006) The value of participation in virtual consumer
communities on brand loyalty. Internet Research, 16(4), 398–418.
29. Gummerus et al. 2012.
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Chesbrough, H.W. A better way to innovate. Harvard Business Review, 81(7), 2003, 12–13.
Fournier, S. and Avery, J. The uninvited brand. Business Horizons, 54, 2011, 193–207.
Gebauer, J., Füller, J. and Pezzei, R. The dark and the bright side of co-creation: triggers of member
behavior in online innovation communities. Journal of Business Research, 66(9), 2013, 1516–1527.
Gummerus, J., Liljander, V., Weman, E. and Pihlström, M. Customer engagement in a Facebook
brand community. Management Research Review, 35(9), 2012, 857–877.
Gummesson, E. Marketing orientation revisited: the crucial role of the part time marketer. European
Journal of Marketing, 25(2), 1991, 60–75.
Gwinner, K. P., Gremler, D. D. and Bitner, M. J. Relational benefits in service industries: the cus-
tomer’s perspective. Journal of the Academy of Marketing Science, 26(2), 1998, 101–114.
Howe, J. Crowdsourcing: Why the Power of the Crowd is Driving the Future of Business. New York:
Random House, 2008.
http://www.dailymail.co.uk/news/article-1201671/Singer-Dave-Carroll-pens-YouTube-hit-
United-Airlines-breaks-guitar–shares-plunge-10.html
http://www.ihateryanair.org/; http://www.ihatesbux.com/forum/
http://www.slideshare.net/rouenbs/netnography-by-joonas-rokka
http://www.theguardian.com/world/2009/jul/23/united-airlines-guitar-dave-carroll
http://www.360i.com/work/oreo-super-bowl/
Huotari, K. Experientalizing – How C2C Communication Becomes Part of the Service Experience. The Case
of Live-Tweeting and TV Viewing. Helsinki: Hanken School of Economics, Finland, 2014.
Kaplan, A.M. and Haenlein, M. Users of the world, unite! The challenges and opportunities of social
media. Business Horizons, 53, 2010, 59–68.
Kozinets, R. E-tribalized marketing? The strategic implications of virtual communities of consuption.
European Management Journal. 17, 1999, 252–264.
FURTHER READING 371
Kozinets, R.V., Hemetsberger, A., Jensen Schau, H. The wisdom of consumer crowds: collective
innovation in the age of networked marketing. Journal of Macromarketing, 28(4), 2008, 339–354.
Kucuk, U.S. and Krishnamurthy, S. An analysis of consumer power on the Internet. Technovation,
27, 2007, 47–56.
Lawrence, B., Fournier, S. and Brunel, F. When companies don’t make the ad: a multimethod inquiry
into the differential effectiveness of consumer-generated advertising. Journal of Advertising, 42, 2013,
292–307.
Muller, A., Hutchins, N. and Pinto, M.C. Applying open innovation where your company needs it
the most. Strategy & Leadership, 40(2), 2012, 35–42.
Nelson, P. Information and consumer behavior. Journal of Political Economy, 78, 1970, 311–329.
Ordanini, A. (2009) Crowd-funding: customers as investors. The Wall Street Journal, 23 March, 3.
Porter, C.E. A typology of virtual communities: a multi-disciplinary foundation for future research.
Journal of Computer-Mediated Communication, 10, 2004.
Sepp, M., Liljander, V. and Gummerus, J. Bloggers motivations to produce content – a uses and
gratifications theory perspective. Journal of Marketing Management, 27(13–14), 2011, 1479–1503.
Shang, R.-A., Chen, Y.-C. and Liao, H.-J. The value of participation in virtual consumer commu-
nities on brand loyalty. Internet Research, 16(4), 2006, 398–418.
van Doorn, J., Lemon, K.N., Mittal, V., Nass, S., Doreén, P., Pirner, P. and Verhoef, P.C. Customer
engagement behavior: theoretical foundations and research directions. Journal of Service Research, 13(3),
2010, 253–266.
Weinberg, B.D. and Pehlivan, E. Social spending: managing the social media mix. Business Horizons,
54, 2011, 275–282.
Culnan, M.J., McHugh, P. & Zubillaga, J.I. (2010) How large U.S. companies can use Twitter and
other social media to gain business value. MIS Quarterly Executive, 9(4), 243–259.
Grace-Farfaglia, P., Dekkers, A., Sundararajan, B., Peters, L., & Park, S. (2006) Multinational web
uses and gratifications: Measuring the social impact of online community participation across national
boundaries. Electronic Commerce Research, 6, 75–101.
Gummerus, J., Liljander V. & von Koskull C. (2014) The Role of E-Health Information in the
Empowerment of Customers. In Kandampully, J. (ed.) Service Management in Health & Wellness Services.
Dubuque, IA, US: Kendall Hunt Publishing Company.
Heinonen K. (2011) Consumer activity in social media: managerial approaches to consumers’ social
media behavior. Journal of Consumer Behaviour, 10(6), 356–364.
Heller Baird, C. & Parasnis, G. (2011) From social media to social customer relationship management.
Strategy & Leadership, 39(5), 30–37.
Hennig-Thurau,T., Malthouse, E.C. Friege, C., Gensler, S., Lobschat, L., Rangaswamy, A. & Skiera,
B. (2010) The impact of new media on customer relationships. Journal of Service Research, 13(3),
311–330.
Hoffman D.L. & Fodor, M. (2010) Can you measure the ROI of your social media marketing? Sloan
Management Review, 52(1), 41–49.
Hoffman, D.L. & Novak T.P. (2012) Toward a deeper understanding of social media. Journal of
Interactive Marketing, 26, 69–70.
Hollebeek, L.D., Glynn, M.S. & Brodie R.J. (2014) Consumer brand engagement in social media:
conceptualization, scale development and validation. Journal of Interactive Marketing, 28(2), 149–165.
Jahn, B. & Kunz, W. (2012) How to transform consumers into fans of your brand. Journal of Service
Management, 23(3), 344–361.
Kietzmann J.H., Hermkens K., McCarthy I.P. & Silvestre B.S. (2010) Social media? Get serious!
Understanding the functional building blocks of social media. Business Horizons, 54(3), 241–251.
Lipsman, A., Mudd, G., Rich, M. & Bruch, S. (2012) The power of ‘Like’: how brands reach (and
influence) fans through social-media marketing. Journal of Advertising Research, 52, 40–52.
McQuarrie, E.F., Miller, J. & Phillips, B.J. (2013) The megaphone effect: taste and audience in fashion
blogging. Journal of Consumer Research, 40(1), 136–158.
Michaelidou, N., Siamagka N.T. & Christodoulides G. (2011) Usage, barriers and measurement of
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Sashi, C.M. (2012) Customer engagement, buyer-seller relationships, and social media. Management
Decision, 50(2), 253–272.
Weinberg, B.D. & Pehlivan, E. (2011) Social spending: managing the social media mix, Business
Horizons, 54, 275–282.
CHAPTER 13
CUSTOMER-FOCUSED
ORGANIZATION:
STRUCTURE, RESOURCES
AND SERVICE PROCESSES
“ The firm should turn the organizational pyramid upside down – mentally and structurally. Its customers
have done so long ago.
”
INTRODUCTION
This chapter discusses how to structure a service organization and manage service processes such
that the service provider becomes customer-focused. The first half of the chapter concentrates on
structural issues, such as the use of marketing departments or other organizational solutions, so that
a total marketing process can best be facilitated. The rest of the chapter discusses how to plan and
manage the service (production) process so that the interactive marketing process of a service provider
is successful. A service system model and an extended servicescape model are presented. After having read the
chapter the reader should understand the problems involved with organizing marketing in a traditional
way in service contexts and how to find new service-oriented solutions, and know how to develop
the service process so that a good marketing impact is achieved.
THE MARKETING PROCESS AND THE

M A R K E T I N G D E PA RT M E N T
In conventional marketing thinking, which is based mainly on experience from consumer packaged
goods, a marketing department is the organizational unit responsible for planning and implementing
marketing activities. The logic behind this solution is, of course, that marketing can best be planned
374 CUSTOMER-FOCUSED ORGANIZATION: STRUCTURE, RESOURCES AND SERVICE PROCESSES
and implemented if all marketing activities are concentrated on and taken care of by a group of spe-
cialists. If marketing is seen as a function, as usually has been the case in the past, this also makes sense.
However, such logic requires that marketing as a process be separated from the other business
processes and activities of the firm in a logical and manageable way. In mainstream marketing this
way of organizing for marketing is considered appropriate. At the same time, however, an increasing
amount of criticism of this has emerged over the last 40 years.1 According to this criticism, in the
emerging business environment marketing cannot remain a specialist function or be delegated to one
department where the specialists plan and implement all marketing activities of the firm. This need
for marketing to break free from the marketing department was recognized very early in service
marketing research, especially in the Nordic School of service marketing thought.2 The traditional
highly-structured military model with its hierarchical charts-and-box structure is seen as old-fashioned
in today’s business environment. Process organizations and project organizations have been used as a
way of overcoming the problems in these functionalistic organizational solutions.
The development of virtual or network organizations also shows how traditional rigid solutions are
becoming less effective. Such an organization3 includes a nucleus which puts together and manages
a network of other organizations and actors, and its assets, processes and people critical to the success
of the business exist and function both inside and outside the conventional borderlines of the organi-
zation. In such organizational solutions, relationships and the process nature of marketing are natural
ingredients.4
Nevertheless, a brief look at standard marketing textbooks and journals reveals that the traditional
marketing department is still most often offered as the standard solution. The same is true for the
practice of marketing. However, when moving the focus from the established areas of marketing, such
as consumer goods marketing, to newer areas, such as business-to-business relationship marketing and
service marketing, one can see another picture, where marketing departments are less dominating
or there are no formal marketing departments at all. The long-term marketing perspective and the
recognition of the characteristics of long-term customer relationships of service firms and business-to-
business marketing demonstrate that marketing is not solely the responsibility of marketing specialists,
but that marketing activities are carried out throughout the entire organization.5 We thus have an organizational
dilemma created by the fact that those who produce and deliver service carry out marketing activities
for that service as part-time marketers,6 whether they know it or not and whether they accept it or not.
Figure 13.1 illustrates the position of marketing in a professional service firm, as in any service orga-
nization. The dotted areas indicate the marketing responsibilities of various functions. For example,
the president, divisional and regional directors, consultants and assistants as well as all other employees
have marketing responsibilities as part-time marketers, because what they say and do and how they
do it may have an important impact on the future buying and consumption behaviour of customers.
Simultaneously, they have responsibility for operations as well. In addition, people outside the formal
organization may also make a marketing impact on behalf of the service provider. In the figure, clients
and former employees are examples of such people. To take a bank as an example, the managing
director, regional directors, loans director and tellers are employees who have similar marketing duties
as part-time marketers.
The status of most employees in service operations is complicated. They have dual responsibilities
because clearly a cashier, bank teller, waiter, hotel receptionist or maintenance technician must first
be able to take care of his technical duties. However, at the same time most employees have to realize
that the way in which they do their duties is a marketing task. Marketing activities are carried out
by every employee who influences the customers of the organization directly or indirectly. In every
service organization there are a large number of part-time marketers who have dual responsibilities: to
perform their tasks well in a technical sense and at the same time in such a way that they create a good
THE MARKETING PROCESS AND THE MARKETING DEPARTMENT 375
Firm Environment
President
Marketing Advertising agency

and sales and other support
Other executives
Customers
Consultants
Former
employees
Assistants
Suppliers, investors,
media, etc.
Other employees
Marketing activity
F I G U R E 13.1
The simultaneous responsibility for marketing and operations among
the personnel of a service provider.
Source: Adapted from Gummesson, E., The marketing of professional services –
an organizational dilemma. European Journal of Marketing, 13(5); 1979: p. 311.
marketing impact. In many service organizations these part-time marketers outnumber marketing
specialists in the marketing department many times over. In the words of Evert Gummesson, this is
because ‘marketing and sales departments (full-time marketers) are not able to handle more than a
limited portion of the marketing as their staff cannot be at the right place at the right time with the right
customer contacts’ (emphasis added).7
The main problem in most situations is the fact that the marketing department is mistaken for the
much larger concept of a marketing process. The marketing process includes all resources and activities that have
a direct or indirect impact on customer preferences and the establishment, maintenance and strengthening of customer
relationships, irrespective of where they are in the organization. The marketing department, on the other
hand, is an organizational solution which aims at concentrating some parts of the marketing process
into one organizational unit. There is always a marketing process – that is, the use of resources which
the customers are exposed to and influenced by – but a marketing department does not necessarily
exist in a firm. Lately there has been a discussion of the role and importance of marketing departments
in the literature.8 Introducing and using a marketing department as an organizational solution to
handling marketing may at some stage be an acceptable step. By doing so, management may be able to
create an interest in and at least a theoretical understanding of the importance of marketing to service
providers. The introduction of a marketing department may, however, also have a negative effect,
because it may become an excuse for the employees to forget about the customer and concentrate
on their ‘real’ job. In the long term a marketing department, especially a dominating one, can easily become
a trap, which in practice makes it difficult for the whole organization to think and perform in a true
customer-focused manner.9
T H E M A R K E T I N G D E PA RT M E N T A S A N
O R G A N I Z AT I O N A L T R A P
In a consumer goods context, mixing the two concepts of the marketing process and the marketing
department is not a serious mistake, because most of the contacts between the firm and its customers
can be taken care of by the marketing department. The pre-produced product, sales, advertising
and other planned marketing communication efforts, price and distribution channels, is what the
customers see and are influenced by. A very limited number of customer-influencing activities take
place outside the marketing department.
Figure 13.2 shows the differences between the coverage of a marketing department in a consumer
goods context and in a service context. The circles in the figure denote the total marketing process,
and the shaded areas illustrate the proportion of total marketing that can be handled by a marketing
department. As can be seen, the difference between consumer goods and services is remarkable.
In most service contexts the situation is the opposite of that characterizing consumer goods. Nor-
mally only traditional marketing tasks such as advertising, pricing and sales promotion can be handled
Consumer goods Services
Marketing Marketing
department department
F I G U R E 13.2
The marketing department versus the total marketing process.
THE MARKETING DEPARTMENT AS AN ORGANIZATIONAL TRAP 377
by a typical marketing department, whereas other marketing activities carried out as part of operations
and other functions are outside the realm of this department. A large part of the marketing process
is carried out by part-time marketers outside the marketing department. Nevertheless, growing ser-
vice firms have, in the best consumer goods tradition, often been inclined to establish a marketing
department, in order to maintain or even strengthen the market orientation of the firm. However,
the long-term effect of this may easily be the opposite of that intended.
A traditional marketing department cannot usually be responsible for the total marketing process
of a service provider. The introduction of such departments, on the contrary, easily influences the
organization in an unfavourable direction. People working in other departments, performing, for
example, operational or administrative tasks, stop worrying about their customer-related responsibili-
ties and concentrate on handling what they see as their ‘real’ job. The reason for this is clear. The firm
now has marketing specialists in the marketing department; why should people in other departments
bother any longer to do the marketers’ job? There is someone else to blame if things go wrong. The
result is an increasing inward orientation and a less customer-focused performance. The marketing
department solution becomes an organizational trap.10
The above problem is very real. As one executive of a large insurance company recognized:
Our corporate marketing department has become an organizational trap. Employees working in various operational
departments and account servicing and administration concentrate on handling operations rather than focusing on
their customer influencing activities. These customer influencing activities are thought of as being the responsibility
of the corporate marketing department. Although these employees realize that they do have responsibility for
maintaining customer satisfaction, they tend to focus on the technical aspects of their job. Performance is measured
quantitatively and quality is enforced by penalties for mistakes.
If the negative effects of a marketing department are further reinforced by performance measurement
systems and reward systems that focus on aspects of jobs other than customer relationship-building
and maintenance, the problems increase. In such situations these negative effects are not only psycho-
logical, but actual. Concentrating solely on the technical aspects of a job instead of paying attention to
customer relationship aspects gives more credit to the employee; the reverse discredits the employee in
the eyes of his superiors. Internal efficiency is seen as being more important than external effectiveness
and the delivery of good service quality to customers.
In summary, in service organizations it is often counterproductive to introduce marketing depart-
ments as the ultimate solution to problems where a market orientation is lacking or insufficient.11
Sometimes they can, however, be used as an intermediate solution. However, there are good examples
of firms that have either closed down or drastically reduced the size of their marketing departments
and become successful in the marketplace. In a later section of this chapter a case study illustrating
such a development is described.
Marketing departments may be helpful for planning, market research and executing corporate-wide
campaigns. Customer-influencing activities should, however, be actively planned and implemented
as part of the total marketing process in the line organization, where the immediate responsibility lies for
rendering service. A marketing department should always be introduced very carefully, so that no
one in the organization misunderstands its role. Furthermore, it should never be given a dominant
position. If and when such departments are introduced, careful attention should always be paid to
the measurement and reward systems used for the part-time marketers outside the marketing depart-
ment. A marketing department is not an excuse for the rest of the organization to stop being responsible for
customers.
O R G A N I Z I N G F O R M A R K E T O R I E N TAT I O N :
I N V E RT I N G T H E P Y R A M I D
A service organization should not be unnecessarily bureaucratic or have a large number of hierar-
chical levels. Customer orientation requires thoroughly understood and accepted responsibility for
customers and the authority to take action to serve them. Large staff with substantial planning and
decision-making authority may not have sufficient knowledge and/or the ability to make decisions
quickly enough to serve customers well. The organizational hierarchy or pyramid should therefore
have as few layers as possible between the customers and top management.
The customer contact personnel create value for customers. The rest of the organization, the
back-office functions, management and staff, form a support for buyer–seller interactions in service
encounters. This support creates the necessary back-up for the service encounters, i.e. for the suc-
cessful handling of the numerous moments of truth, such that they become well-utilized moments of
opportunity which reinforce the customer relationships.
Management should not be directly involved in operational decision-making on an everyday level,
but it should give the strategic support and resources necessary to pursue a service strategy. In a
traditional military structure, top management is often far removed from reality. In addition, top
management is often surrounded by a staff organization which seals it off from the rest of the orga-
nization, including the service encounters and the customers. This, of course, may have a harmful
effect on strategic decision-making. Among other things it tends to draw attention away from external
effectiveness aspects and make top management overemphasize internal efficiency instead.
The old traditional view of the organization and the modern service-oriented organizational frame-
work are schematically illustrated as pyramids in Figure 13.3. The transition in organizational thinking,
which is the result of a change in strategic thinking according to the principles of service manage-
ment, means three things. First of all, priorities are changed. This is demonstrated by the fact that
the organizational pyramid is turned upside down.12 Top management is not the apex of the pyramid
and thus the part of the organizational structure that immediately determines whether the strategy of
Old New
Customers
Service encounters
Top
management
Support functions
Middle management, Top

staff and support functions management
Service production and delivery

(Service encounters)
F I G U R E 13.3
Service-oriented organizational structure.
THE RELATIVE SIZE OF ORGANIZATIONS 379
the firm will be a success or failure. Instead, interactions with customers during service encounters,
including personnel, physical resources, information technology and operational systems, are at the
top of the organizational hierarchy. The organization’s performance in service encounters determines
whether it will be successful and profitable or not. Staff, other support functions and management are
a prerequisite for success.
Second, the responsibility for customers and for operational decisions is moved from management
to staff involved in the service encounters and thus those immediately responsible for the moments
of truth. Third, the new thinking means that the organizational pyramid has to be flattened. This
follows from the transition of responsibilities and authority to service encounters. Fewer intermediate
levels are needed.
T H E R E L AT I V E S I Z E O F O R G A N I Z AT I O N S
Flattening the organizational pyramid and the decentralization of decision-making authority are
necessities if service organizations are to become truly customer-focused. Strategic decisions should
be taken by top management at the bottom of the pyramid. Another rule is that decision-making
should not be transferred from the service encounters in the pyramid. Some operational decisions
have to be taken by middle management, but as much as possible decisions should be taken where
the reason for a decision occurs.
It could be argued that a small service firm is frequently more customer-oriented than a big firm.
In a smaller organization operational decisions are made more quickly and closer to the customers. It
is easier to develop good interactive marketing performance and to provide better functional quality
in such situations. Internal marketing is less time-consuming and troublesome. On the other hand,
there is more potential strength in large firms. In a bigger firm more resources can be used in order
to develop technical quality.
Invisible systems and support functions, to which local branches can easily gain access, can often
be developed centrally. This may give economies of scale as well as improve the efficiency of the
total service system. It is also sometimes easier to attract better trained people to leading positions
in a larger organization, although this is not always the case. Economies of scale can be achieved in
production, administration, finance departments and so on, which are invisible to the market.
In summary, one may argue that a growing service firm, in order to remain customer-oriented and be
successful, will have to combine the strengths of being a small firm with the strengths of belonging to a large
organization. However, there is much evidence that demonstrates that this may be difficult to do. As
an organization grows and tries to achieve the advantages of being a large company, far too often it
destroys the potential strength of being a small company.
CASE STUDY
S U C C E S S F U L O R G A N I Z AT I O N A L D E V E L O P M E N T: S C B B A N K
The SCB Bank is a major bank operating nationwide in Scandinavia. In the past it suffered
from low profitability and production-oriented attitudes among its personnel, includ-
ing branch managers and other middle management. Marketing was handled by a large
marketing department at head office. In order to turn the bank into a customer-oriented
and profitable firm, it was decided that it should concentrate on profitable services and
market segments. An organizational development process was also initiated. This process
included several stages, where each stage followed on from customer orientation prob-
lems perceived at the previous stage.
At the first stage, the central marketing department was closed down and a customer
contact development office established. This office was only staffed by a few people, and
reported directly to the managing director. The bank was divided into regional banks,
and responsibility for marketing, including selling to individual households and organiza-
tional, was delegated to local branch managers. Marketing consultants were located at
the regional level, to give marketing assistance to local managers. At the same time the
bank stopped all national advertising, because management felt that purchase decisions
are made locally and should be influenced by the performance of the local branch offices.
However, the local branch offices remained production-oriented, and did not actively
take over marketing tasks. When the branch manager felt he should do some market-
ing, he called upon the regional marketing consultant. When the regional marketing
consultants left the local office, interest in customer-oriented activities decreased again.
Nevertheless, the situation had improved because the customer contact development
office created guidelines for local planned marketing communication and sales cam-
paigns and developed training programmes for employees. These training programmes
were intended to help employees handle customer contacts and communication with
customers.
In order to further improve customer orientation on the local level, the regional mar-
keting consultants were removed, and the total responsibility for marketing was given to
local branch managers. The local offices operated as profit centres. When the regionally
located marketers were gone, and there was no central marketing department to turn
to, the interest in marketing and customer consciousness among the branch managers
increased; they had no choice but to start focusing on their customers. The profit centre
responsibility, accompanied by a higher decision-making authority, obviously supported
this change of attitude.
The customer contact development office supported the branch office managers in
training their personnel and in developing planned marketing communication and local
sales efforts. Slowly, customer-orientation improved. The bank also became one of the
most profitable in Scandinavia and has remained so.
I N T E R N A L S E RV I C E P R O V I D E R S A N D I N T E R N A L
CUSTOMERS
Traditionally, customers are thought of as people or organizations external to a company. Such external
customers have to be served in such a fashion that their needs are fulfilled and they are satisfied with the
firm’s performance. However, there are user-service provider relationships inside an organization as
INTERNAL SERVICE PROVIDERS AND INTERNAL CUSTOMERS 381
well and also between network partners. The customer contact employees and departments in a firm
have to be supported by other people and departments in the firm, if they are to give good service to
customers. For example, goods cannot be delivered in a service-oriented way if the warehouse does
not supply the truck driver with the correct items, in good condition, and on time.
Every service operation is full of such internal service functions which support one another and the
customer contact employees and departments interacting with external customers. Frequently, there
may be many more internal service functions than external customer service functions.
To sum up, if internal service is poor, the externally rendered service will be damaged. However,
it is often difficult for people involved in internal service functions supporting other departments
to realize the importance of their performance to the final service quality. They rarely see ‘real’
customers, and they can easily feel that those whom they serve internally are somehow just fellow
employees and that the service they get does not affect external performance in any way.
A way of tackling the attitudinal problem of those who should serve ‘somebody else’ (other than the
ultimate customers) is to introduce the concept of internal customers.13 This concept brings customer–
service provider relationships inside the organization, as illustrated by Figure 13.4. There may be one
or a whole range of internal service functions, each illustrated by a box within the larger box in the
figure. These functions are internal customers to other internal service providers; they are also service
providers to other internal customers. Finally, in the service process, the ultimate output is the external
service received and perceived by the ultimate external customer. In a network context or in a virtual
organizational constellation, the difference between what is internal and what is external becomes
blurred. However, the same type of service provider–internal customer chains exist and have to be
managed in the same customer-oriented manner, so that the final, ultimate external customer receives
good service.
When the existence and importance of internal customer relationships are realized by personnel,
it is much easier to change attitudes among employees. The concept of internal customers gives a
totally new dimension to the tasks performed inside an organization. It is more easily realized that ‘a
satisfied customer’ should not only refer to individuals or organizations external to the firm.
Sometimes the internal customer–service provider relationships may be straightforward. However,
frequently they can be complicated, with relationships in which both parties serve each other, or
when the outcome of one department depends on the internal service provided by two or more other
Internal External
Output Input Output Input Output External service
Service Customer Service Customer Service External

provider provider provider customer
Feedback Feedback Feedback
Service process
F I G U R E 13.4
Internal service functions and internal customers.
departments. It is mandatory that such internal customers are served as well as external customers are expected
to be served. This means that generating quality into service is not the exclusive duty of departments
visible to external customers. For example, the perceived quality of delivery service depends just as
much on the performance of the warehouse as it does on the performance of the delivery function.
Therefore, the responsibility for producing good service quality is spread throughout the organization as well as
in a network of co-operating organizations throughout the network.
In many cases two or more departments may be directly involved with customers. Then it is of
vital importance that these parallel processes are co-ordinated and perceived by customers as one
single service process, otherwise service quality will deteriorate. If there is no one responsible for the
customer in such situations, the customer may be sent from one person to another in a disorganized
way. The organization does not take responsibility for the service, and the customer is forced to take
over the responsibility for getting service. This is bad quality.
The service production process is built up by interrelationships and interdependencies between a
number of sub-processes. The external customer only gets in touch with part of a company’s sub-
systems. There is a line of visibility14 dividing those parts of the process that customers immediately
see and perceive from those parts that only indirectly influence the service quality perception. Psy-
chologically, this sometimes causes internal problems. Because in many cases these interdependencies
between internal service providers and internal customers are not discussed and stressed enough by
management, this is often understandable. However, almost all employees have customers to serve, although
many customers may be internal ones.
When developing a service production system, various strategies can again be used. The part of
the total system that is on the visible side of the line can be limited to, say, only one or two persons.
Customers only contact them, and most of the service production process is taken care of internally.
For example, an insurance company that directs all of its contacts through one single agent uses such a
strategy. Such a strategy is applied, of course, to make it as easy as possible for customers to deal with
the firm. In other situations the visible side of the line consists of a system or physical resource only,
as in Internet shopping where the customer interacts with a website. Another strategy is to expose
customers to many sub-processes. A restaurant, for instance, is normally forced to apply such a strategic
approach. In this case the customer relationship is broader and more vulnerable. Mistakes that may
occur do so under the eyes of the customer. Fewer problems can be taken care of as internal affairs.
Of course, there are an unlimited number of options between these two examples. The main thing is
that the service production process is designed so that perceived service quality can be monitored and
kept at an intended level. The daily activities and processes, the needs and wishes of target customers
should guide strategic decisions concerning where the line of visibility is drawn.
W H E R E I S M A R K E T I N G I N T H E O R G A N I Z AT I O N ?
To conclude the discussion about organizational structures, it is appropriate to ask: ‘Where is mar-
keting in the organization?’ As marketing is what a firm does to get customers and to keep and grow
customers on a profitable basis, i.e. marketing is what relates a firm to its customers and what makes it possible
for the firm to engage with its customers’ processes, there is only one logical answer to this question:
Marketing is definitely not only carried out in a marketing department of full-time marketing specialists. Marketing
is everywhere in the organization, wherever brand contacts occur and wherever the customers’ quality perception
is formed as a basis for their willingness to continue their relationship with the service provider. Marketing is also
wherever internal customers are served in internal back-office operations.
WHERE IS MARKETING IN THE ORGANIZATION? 383
Because marketing is everywhere and is the responsibility of no one single department, there is an
obvious risk that in the end marketing is nowhere and nobody takes responsibility for it, and conse-
quently that no one takes responsibility for customer focus in the organization either. Indeed, service
providers in practice often establish separate functionalistic marketing departments to take care of the
marketing process, so that they can see where marketing is concentrated. Soon enough they realize
that this does not work. Marketing is everywhere in the sense that there has to be a marketing aspect in all
roles, tasks and departments of a service organization; a customer focus throughout the organization. In other
words there has to be an appreciation of the customer in all tasks that are performed in the organi-
zation. Part-time marketers can be found in operations, finance, administration, logistics, research and
development, human resource management, and all other departments. Furthermore, technology and
systems that have an interactive marketing impact are also all around the organization and should be
treated as part-time marketing resources, for example, when investment decisions are made.
Of course, service providers also need someone who takes responsibility for market research,
planned marketing communication (to the extent this is needed), pricing issues and other traditional
marketing activities. Therefore, most service organizations need some full-time marketers to take care
of the traditional external marketing processes. Full-time marketers should also be instrumental in inter-
nal marketing processes, normally working closely with human resource management. However, to
organize them into a ‘marketing department’ may be detrimental and ineffective. Such a department
can make promises, and can do so effectively, but it cannot contribute to the fulfilment of promises.
Finally, the better the organization takes care of its customers and provides them with good service
quality and value support, the less work there is for full-time marketers.
The only person who can be responsible for the total marketing process is the CEO or managing
director, or locally the regional director, and more locally the outlet/branch manager. A marketing
manager who is responsible for a department of full-time marketers can only be responsible for this
department. However, a marketing manager is a customer specialist and should have an active role
in the total marketing process as an internal consultant to top management.
Another conclusion to be drawn is that marketing cannot be totally organized in a service firm. Marketing
can only be instilled in the organization. However, it has to be systematized in some way. Here are a few
guidelines:
1. Instilling a marketing attitude of mind in people in all departments and enabling customer-focused
performance as well as supervisory and reward systems that reinforce such performance is one
aspect of how to organize marketing in a service firm.
2. Clarifying the responsibility for the customer of top management and all line managers is another
aspect of marketing.
3. The service provider may of course also need to use traditional external marketing efforts to some
extent, and to do market research. Therefore, resources for doing this internally and/or externally
should be secured. Many traditional marketing activities can be taken care of by the local line
organization, but a central marketing group or staff with full-time marketers may be required as
well.
4. It is important to make sure that this central group does not become a dominant marketing
department that psychologically has a negative effect on the customer focus of employees in other
departments and functions.
5. Full-time marketers have an important role in the marketing process, but it is the part-time
marketers and the interactive marketing process that are at the heart of marketing in service
organizations.
In conclusion, when organizing marketing in a service firm the following should be kept in mind:
● Successful marketing requires a marketing attitude of mind throughout the organization, because
the central part of marketing takes place in the service encounters, and in back-office support to
service encounters, through customer-oriented part-time marketers and service-oriented systems and
technologies (the interactive marketing process).
● Responsibility for marketing lies within the line organization, and the managing director has to
accept the ultimate responsibility for marketing.
● Many of the traditional external marketing activities that may be needed can be handled locally
in the line organization, but a central marketing staff of full-time marketers may sometimes also be
required to take responsibility for centrally implemented marketing activities as well as to act as
internal consultants to top management in customer-related issues and in internal marketing.
The aim of installing marketing as such a holistic concept in an organization is, of course, to make
a firm customer-centric, where the management mindset as well as the planning and execution of
service processes are customer-focused. The ultimate goal is to gear the firm’s management approach
from inside-out management to outside-in management (see Chapter 1).15
The following sections of this chapter look more closely at what one needs to know about cus-
tomers, and at the service process, and discusses how the latter can be developed so that a good
interactive marketing effect can be achieved.
W H AT D O W E N E E D T O K N O W A B O U T
OUR CUSTOMERS?
What makes a given customer want a certain type of service? What makes the customer purchase it
from a certain service provider? The reactions of customers are based on their expectations, but these
are a function of a whole range of internal and external factors.
First of all, the service provided by goods or service activities purchased has to fit the customer’s
value-creating processes, so that it supports value creation in his everyday activities and processes (or
those in the organization he represents). For example, a firm that looks for a sales supporting database
system wants a solution that makes it possible to easily find out, save, change and retrieve information
about customers in order for the sales representatives to develop an understanding of the needs, values
and internal processes of customers and offer them service that suit their needs. Any solution that does
not fit this process will not interest the firm, because it will not create the value they want. Customers’
everyday activities and their value-creating processes are the most important thing for a firm to know about its
customers, if possible on an individual basis, otherwise on a segment-by-segment basis.
It is, however, essential to realize that the value-creation processes alone do not determine what
kind of service a person looks for. Many service providers can usually produce an acceptable solution
that could offer adequate support to a customer’s value generation. In addition, customers also have
certain wishes in relation to how they want the service provider to treat them. This normally narrows
the scope of options available. For example, almost any retailing bank can provide an individual
with banking service, but not every bank manages to treat customers in a way they are pleased
with (compare the technical and functional dimensions of customer perceived service quality). This
is also related to the customer’s value system, which determines what kinds of solutions to a problem
are considered acceptable and what is considered out of the question. Environmental concerns are
WHAT DO WE NEED TO KNOW ABOUT OUR CUSTOMERS? 385
examples of aspects in the value system that exclude some otherwise possible need-satisfying solutions.
Some consumers do not want to use cosmetics that have been developed using animal testing, and
they will not buy such products. In conclusion, a customer’s everyday processes, in combination with his
value system, determine what kind of solutions are of interest to him.
The needs of a customer follow from his value-creation process and how he wants his values to be
supported. They direct expectations towards a certain type of solution. An organization may form
its needs in a more complicated way than a single customer or a household. In principle, however,
an organization’s or a person’s need is some sort of a problem that requires a solution. This solution
may be solved in a number of ways. For example, house cleaning can be managed by buying proper
equipment and by a do-it-yourself approach, or one can take care of it by purchasing a service. In
both cases there are a number of options available in relation to what to buy, and where to buy the
necessary equipment or service. A customer’s needs, combined with his value system, determine what kind
of solutions or offerings are acceptable to him. Finally, a customer’s everyday processes and his perceptions of his
needs determine what kind of solutions he is looking for. This could be labelled the customer’s game plan.
To sum up, in order to thoroughly understand customers and potential customers the marketer
needs to acquire information about the following (see Figure 13.5):
● The customers’ everyday processes and value-creating processes.

● The customers’ value systems.
● The customers’ needs that follow from their value-creating processes and value systems.
Traditionally, customer needs are the main focus of market research. Such studies are still impor-
tant, but today it is even more crucial to develop a thorough understanding of customers’ everyday
processes which influence their value creation. It is also more or less impossible to market anything
to customers that violates their value system. However, the most important task for market research
today is to study the customers’ everyday processes and what kind of solutions would support them
in a value-creating way. Today, firms normally know the least about such everyday processes, what
customers are doing in their everyday lives, and why, and what they are trying to achieve, or what
THE CUSTOMER’S
EVERYDAY PROCESSES
What kind of solutions

The What is interesting?
are looked for?
Customer’s
value-creating
process
NEEDS VALUE SYSTEM

What is accepted?
F I G U R E 13.5
The customer’s gameplan: what do we need to know about
the customer?
they would like to achieve. Much more research about these issues is needed. Here, traditional
methods are of limited value. Instead various ethnographic methods should be used, where the researcher
in various ways gets close to the customers (‘lives with the customers’) and tries to understand what
they are doing, why and for what purpose.
Customers’ needs, wishes, value systems and value-creating processes are of vital importance for
the development of customer expectations. However, expectations are also formed by external factors
(this was discussed in more detail in previous chapters). For example, what family acquaintances
and business associates say about a given service provider (word-of-mouth communication) has an
impact on the formation of the expectations as well as what newspapers and trade magazines write
about the service firm and its service and what is discussed in social media. This is often of great
importance. Moreover, planned marketing communication activities, such as personal selling and
advertising campaigns, influence expectations. Finally, the overall company image and local image
also influence expectations.
CASE STUDY
S E L L I N G 1/4 - T U R N F A S T E N E R S , B U T N O T A N Y 1/4 - T U R N
FASTENERS
Dennis Holmlund, sales representative of Unilink Co., marketing Fairchild Fastener prod-
ucts and specialty fastening systems to industrial markets, had negotiated for some time
with a major customer in the industrial freezer market about fastening solutions for the
customer’s freezers for supermarkets. The machinery of the freezers is accessible through
a small door which should be easily opened and closed. He had offered 1/4-turn fasteners
that were very easy to operate. The buyer was not convinced that this was a good solu-
tion, which puzzled Mr Holmlund, because he knew that an easier-to-use fastener did not
exist on the market, and that price should not be a problem. The fastener he suggested
clearly fulfilled the needs of the customer.
Then he accidentally overheard a discussion between the buyer and another executive
of the freezer manufacturer when they were talking about the safety of toddlers and
small children. It turned out that the customer did not feel that they could offer freezers to
supermarkets where the freezer door could be opened by mistake, which could therefore
be hazardous to small children who opened the door out of curiosity. An easy-to-operate
fastener was an excellent solution but nevertheless did not fit the value-creating process
of the customers. The values of the freezer manufacturer focused on concern for the safety
of the small children accompanying their parents in the stores, and they did not accept
the fastener, regardless of how well it fulfilled the basic need.
When these values and value-creating processes of the customer were revealed, Mr
Holmlund asked Fairchild Fastener to make a change to the basic fastener, so that it was
still an easy-to-operate 1/4-turn fastener, but was impossible to open by mistake. Hence,
the values of the customer, i.e. not to offer solutions that could be hazardous to toddlers
and small children in supermarkets and grocery stores, were met.
RELATING THE SERVICE PACKAGE TO THE CONSUMPTION PROCESS 387
C U S T O M E R S E G M E N T S A N D TA R G E T G R O U P S
Customers have differing needs and/or wishes about how they want to be treated. An organization
can, therefore, very seldom satisfy the needs of every potential customer in a similar manner. It should
not even try to solve everyone’s problems or support everyone’s value-creating processes. Customers
have to be divided into homogeneous segments, which are sufficiently different from each other. One
or a few such segments are then chosen as target groups of customers. In service contexts it is often
difficult to satisfy target groups of customers with too widely varying needs and wishes. Because
customers frequently meet and interact with each other, they influence fellow customers’ perception
of the service. For example, a family having a picnic on a Saturday afternoon in the park does not
mix well with a bunch of beer drinkers. If the firm goes for segments that are very different from
each other, it is usually a good idea to keep them apart. Finally, it should be observed that a service
production system cannot usually take care of satisfying too diverse needs and wishes. This follows
from the fact that service is a complicated phenomenon and service production is a complicated task.
It is also important to remember that customers in a relationship with a service provider often
want to be recognized and treated as individuals, even though they are part of a larger segment.
Therefore, the firm should not be blinded by the fact that it may have mass markets and may use
the segment concept for analytical purposes. Customers often want to be treated as segments of one.16
Direct customer contacts occur naturally in most service contexts and they give a good starting point
for the individual treatment of customers. In addition, the information technology available to firms
today also supports individualistic treatment of customers.
R E L AT I N G T H E S E RV I C E PA C K A G E T O T H E
CONSUMPTION PROCESS
We now turn to the issue of how the customer and the consumption process can be incorporated
into the service process. Doing this is of utmost importance because of the nature of service and the
inseparability of large and critical parts of production and consumption. The service consumption
process can be divided into three phases:17
1. Joining phase.
2. Main consumption phase.
3. Detachment phase.
The joining phase is the first stage of the consumption process, where the customer gets in touch with
the service provider in order to buy and consume a core service, for example, elevator maintenance.
In this phase facilitating services are mainly required, for example, telephone contact with the elevator
maintenance firm in order to get hold of a service technician. Some enhancing services may be used,
for example a toll-free number or an easy-to-use website, which makes it easy for the customer to get
in touch with the maintenance firm. A customer’s perception of service quality and his value creation
start already during this phase.
The main consumption phase is the main stage of the total service consumption process. In this phase
the needs of the customer have to be satisfied, and his value-creating process has to be supported.
Hence, the core service is consumed at this stage. For example, the elevator is serviced. Further-
more, there may be some enabling services (for example, a shelter surrounding the work space) and
F = enabling services
S = enhancing services
F1 F2 S1 F3 F4 S2 F5 F6 S3
Core service
Time
Joining phase Main consumption phase Detachment phase
F I G U R E 13.6
The service package and the service consumption process.
Source: Lehtinen, J., Quality Oriented Services Marketing. University of Tampere,
Finland, 1986, p. 38. Reproduced by permission of Tampere University Press.
enhancing services (for example, instructions to people normally using the elevator directing them
to the stairs and telling them when the job is expected to be finished). In the detachment phase the
customer leaves the service process. This often requires some enabling services (for example, the ser-
vice technician fills in a report and hands it over to the caretaker or another representative of the
customer). Enhancing services may be used here, too. It is important to realize that this phase also
contributes to the customers’ perception of service quality and supports their value creation. Because
the detachment phase includes the customers’ final experiences with the service, what happens during
this phase may be especially important for them and their quality perception.
In Figure 13.6 the service consumption process and the types of services related to the three phases
of the process are illustrated schematically. If, for example, we look at a full-service restaurant, the
joining phase may include table reservations (F1) and cloakroom services (F2) as enabling services, and
valet parking (S1) as an enhancing service. During the main consumption phase the core service, which
may be a three-course dinner, is consumed. The table setting (F3) and the performance of the waiting
staff (F4) are enabling services, and live music (S2) may be an enhancing service. In the detachment phase,
when the customer leaves the restaurant, some enabling services are needed, for example, paying the
bill (F5) and again the cloakroom services (F6). Valet parking (S3) may be used as an enhancing service
again at this stage. Depending on how the enabling services function, they may operate in a service
enhancing manner as well.
It should be observed, however, that this model only takes into account the components of the
basic service package (core service as well as enabling and enhancing services and goods). The next
step is to take the components of the augmented service offering (see Chapter 7); that is, accessibility,
interactions and customer participation, into account so that the functional quality dimension of the process
is also covered.
T H E S E RV I C E S Y S T E M M O D E L
The service system model illustrated in Figure 13.7 can be used for analysing and planning the service
process.18 In this figure the various quality-generating resources are combined in a systematic way.
The large central square illustrates the service-producing organization from the customer’s perspective.
Support part Interactive part
Technology and Systems and

systems know-how operational
resources • Personal needs and values
Systems support
• Previous experiences
Managers and supervisors • Company/local image
Contact persons
Management support • Marketing communication
Customers
Line of visibility
Expectations
• Word of mouth
Totally invisible part
Service concepts
Customers’ value
Business mission
Support functions and
creating processes
Physical resources • Absence of communication

support persons and equipment
Physical support
Corporate culture
F I G U R E 13.7
The service system model.
From the producer’s point of view there may be several functions or departments involved, but
the customer sees it as one integrated process or system. The customer is located inside the square
because he is a resource participating in the service process and therefore an integral part of the service
system model. Yet, in most service processes, customers are treated as an outside factor only. This,
of course, is due to a manufacturing-oriented view of the role of the customer. However, they are
inside the organization and interact with parts of the organization in the service process and are a
service production resource.
The line of visibility divides the part of the organization that is visible to customers from the part
that is invisible. To the right, outside the main square, the means of influencing the expectations of
customers are illustrated, such as their needs and wishes, their previous experiences, overall company
and local image, word of mouth and social media, external planned marketing communication and
absence of communication.
To the left of the square are the business mission and the corresponding service concepts which, like
umbrellas, should guide planning and managing the service system. At the bottom of the main square
is the corporate culture; that is, the shared values that determine what people in the organization think
and appreciate. This culture is always present. Sometimes it has a substantial impact on the employ-
ees, sometimes it is more vague. If the culture is not service-oriented, it creates problems for an
organization providing service. This issue will be returned to later in Chapter 15.
T H E I N T E R A C T I V E PA RT
The visible or interactive part of the service system model (see Figure 13.7) corresponds to the service
encounter where the customer meets the service organization. It consists of customers and the rest of
the quality-supporting resources that the customers interact with directly. Here the moments of truth
take place. The quality-supporting resources in the interactive part are as follows:
● Customers involved in the process.

● Customer contact employees.
● Systems and operational routines.
● Physical resources and equipment.
Customers are directly involved in the service system as co-producers. Because of the nature of ser-
vice production and consumption, customers are not simply passive consumers. At the same time
they consume the service, they also take part in production of that service in an active way; some-
times more (as when at the hairdresser’s or having a three-course dinner at a gourmet restaurant),
sometimes less (as when using a freight forwarder’s service). In some cases customers interact with
a large service system when staying at a hotel, but in other situations they are in touch with only a
limited sub-system, as when operating an automatic teller machine. Sometimes several customers are
present simultaneously in the process interacting with each other. In other situations, as in the case
of telephone communication, the service concept is to provide technology and a system that makes
it possible for customers to contact each other. Irrespective of the nature of the situation, customers,
however, actively take part in the process and in service production. It is important to analyse how
customers influence the service process, and to avoid situations where they have a negative impact on
the process, and on the behaviour of service employees and the effectiveness of systems used in the
process. One must be aware of the fact that sometimes a firm has misbehaving customers, and that
THE INTERACTIVE PART 391
there is a readiness in the firm to handle such customers. Furthermore, service processes are sometimes
designed in a way which triggers customer misbehaviour.19
Customer contact persons are employees directly interacting with the customers. Sometimes they are
also called ‘service employees’ or ‘frontline employees’. Anyone can be a contact person, irrespective
of which position or job he may have in the hierarchy. Interactions that take place may be face-to-face
contacts or interactions over the telephone or even by e-mail, fax or letter. A manager or supervisor
may also be a contact person if direct customer contacts, on a regular or irregular basis, are part of
his job. Frequently, contact personnel are the most crucial resource for a service provider. Systems,
technology and physical resources are a valuable support, but most service organizations depend more
on their contact staff than on other resources. Contact persons are in a position to recognize the wishes
and demands of customers in the moments of truth by watching, asking questions and responding to
the customers’ wishes, worries and behaviour. Furthermore, they are able to instantly follow up on
the quality of the service rendered and undertake corrective action as soon as a problem is observed.
However, more and more service processes are designed so that no contact persons are present, at
least not on a regular basis. This makes the process more vulnerable when service failures occur.
Systems and routines consist of all operational and administrative systems as well as work routines
of the organization. Queuing systems, call centre systems, how to cash a cheque in a bank, how to
operate a vending machine or how to make purchases on a website are examples of such systems.
There are a vast number of systems and routines that influence the way of consuming the service and
performing various tasks. The systems can be more or less service-focused. A complicated document
that customers are supposed to fill in forms a system that is not service-focused. This normally means
that the perceived service quality is poorer than it otherwise would be. A manufacturer of goods has
a range of such systems, which may be performed as administrative tasks without taking the customer
into account or turned into service-focused processes. Such systems include research and development, the
installation of machines and equipment, deliveries, customer training, quality control at the customer’s
premises, claims handling, billing or the service of a telephone receptionist.
These systems and routines have a double impact on service quality. First, they directly influence the
quality perception of customers, because customers have to interact with systems. If they feel comfortable
with a certain system, it is probably service-oriented. If they feel that they are forced to adjust to a
system, however, there is room for improvement. Quality is destroyed or damaged by the system.
Second, the systems and routines have an internal impact on employees. If a certain system is considered
old-fashioned, complicated or not service-focused, employees who have to live with the system will
get frustrated. This, of course, influences motivation in a negative way.
Physical resources and equipment include all kinds of resources used in the service system. Computers,
documents and tools belong to this category. Some of these physical resources are a prerequisite for
the good technical quality of the output. However, they also influence functional quality because
customers may find it more or less easy to use them in self-service tasks and they make a favourable or
less favourable impression on customers. Other physical resources only have an impact on functional
quality. The interior of waiting rooms is an example of such physical resources. Physical resources
and equipment used in the service process have an internal effect on employees similar to that of
the systems. Physical resources and equipment form the servicescape20 of the service process, where
customers, contact persons and systems and resources work together. The servicescape can also include
objects, music and even aromas that support a positive perception of the ambience and physical
elements of the service encounter. All these elements form the visible part of the service process.
Every single part, including the customers, has to match the total system if good quality is to be
perceived.
T H E I M PA C T O F T H E S U P P O RT PA RT
Behind the interactive part, where the customer directly encounters the service organization, there is
the line of visibility (see Figure 13.7). Customers seldom see what is going on behind this line, and they
often do not realize the importance of the service production that takes place there. This causes at least
two types of problems for the service provider. First, what takes place behind the line is not always
appreciated as much as it should be by customers. Because of this, customers do not realize how much
the service production there contributes to service quality and value support. Irrespective of whether
good quality, especially good technical quality, is produced here, customers probably perceive a bad
service quality if the interactive part adds mediocre or worse quality. What often happens is that good
technical quality produced behind the line of visibility is damaged by bad functional quality produced
in the service system in front of this line. On the other hand, good service intentions by contact
persons can also be hindered by low-quality support from back offices.
Second, customers may not understand why a given service has a certain price, because they do
not realize how much is done behind the line of visibility. It may be difficult to explain why the price
is so high, when the visible service production process may seem uncomplicated and therefore in the
minds of customers should not justify the high price level.
The service provider, on the other hand, may interpret the importance of the supporting back
office in another way that is equally wrong. Because the service provider knows how much of the total
value support is produced in the back office invisible to customers, he can assume that customers also
know and appreciate this, and consequently enough attention is not paid to the customer orientation
of the visible and interactive part of the service process. This may turn out to be a serious mistake.
C O M P O N E N T S O F T H E S E RV I C E S Y S T E M B E H I N D
THE LINE OF VISIBILITY
What happens in the supporting and invisible part of the organization has an impact on what can be
accomplished by the interactive part. This support is sometimes a major prerequisite for good service.
There are three kinds of support to the interactive service production (see Figure 13.7):
1. Management support.
2. Physical support.
3. Systems support.
The most important type of support is management support, which every manager and supervisor should
provide to their staff. Managers and supervisors maintain corporate culture, and if the firm wishes to
be characterized by a service culture, they will have to support the values of such a culture. They are
responsible for shared values and ways of thinking and performing in their work groups, teams and
departments. If employees are to be expected to maintain service-focused attitudes and behaviours,
managers are the key to success. The manager is the leader of the troop. If the boss does not provide
his team with a good example, and if he by his leadership is not capable of encouraging them to
be service-minded and customer-conscious, the organization’s interest in its customers and in giving
good service will decrease. From this follows deteriorating functional quality of the service production
process and perhaps even difficulties in maintaining the technical quality of the outcome of the process.
Contact personnel often have to rely on physical support provided by functions and departments
invisible to the customers. These support employees have to consider customer contact personnel as
THE BLUEPRINTING MODEL 393
their internal customers. In the supporting part there may be a range of support functions, for example,
behind each other as discussed previously in this chapter. Support staff have to be treated as internal
customers by support functions further behind in the service system. Internal service has to be as good as
the service to ultimate customers, otherwise the perceived service quality will be damaged. Calculating
background data for offering an insurance policy and loading trucks in warehouses are examples of
physical support.
The third type of support is systems support. This is of a somewhat different nature. Investments
in technology, for example, computer systems, information technology, buildings, offices, vehicles,
tools, equipment and documents, form the systems support from behind the line of visibility. If the
organization invests in an unreliable, slow computer system that does not permit prompt answers
to customers’ questions or rapid decision-making or that regularly crashes, or a database that does
not provide contact personnel with easily and quickly retrievable information about customers, the
service system lacks good systems support. If a contact person cannot provide good service because
of existing management regulations, there may be another type of inadequate system support – rules
and regulations that are too rigid.
There is also another kind of systems support. The knowledge employees have of operating various
systems is systems know-how. The organization must invest in employees who know how to operate
and make best use of the company’s systems and technology, and should provide training.
Behind the support part is the totally invisible part of the organization. This part is in a way outside
the service system. It consists of functions that do not influence the service offering or service quality,
either directly or indirectly. Internal bookkeeping is an example. Frequently, analysing an organization
shows that there are surprisingly few parts that are totally invisible.
THE BLUEPRINTING MODEL

Service blueprinting is a well-known model of planning the service process as a system. The model was
originally introduced by Lynn Shostack.21 During the past few years this planning model has been
used extensively.22 In the blueprinting model sub-processes and activities in a service process are
depicted and the relationship between them is established and related to the customer’s contact points
with the various processes. In this way the interrelationships between activities in the interactive part
of the service process in front of a line of visibility and activities in a supportive back office behind this
line are established, and a blueprint of the whole process is developed. In this way it is possible to
analyse how a service process can best be designed to support good customer perceived service quality.
CASE STUDY
T H E S E R V I C E S Y S T E M M O D E L : E L E VAT O R R E PA I R
AND MAINTENANCE
We now consider the development of the service system in a major elevator repair and
maintenance operation. This service is provided by one of the major manufacturers – the
service, maintenance and modernization operations of which count for more than half
of their total invoicing. The first part of this case was presented in Chapter 2 to illustrate
customers’ perception of service quality. In that context it was observed that customers,
although they were satisfied with the technical quality of the outcome of the firm’s service
processes, did not appreciate the functional quality of the process, and therefore consid-
ered the total quality of the service to be low. Customers did not like the fact that almost
every time the elevator needed maintenance or there was a need for repair, a new service
technician arrived to take care of the job. The successive technicians did not develop a
hands-on knowledge of the elevators and did not get to know the customers. The cus-
tomers, in turn, did not get to know the service technicians, which made communication
difficult. Moreover, the customers did not understand why the service technician often
left an unfinished job, especially as no information on the reasons for this nor when the
technician could be expected to return was given. Moreover, problems were experienced
with the punctuality of the service and the flexibility of the firm.
The technology already existed to create a good outcome of the repair and mainte-
nance processes. However, the systems (as well as the attitudes and skills of the employees)
necessary for implementing the process were lacking. Hence, a new service system was
developed and implemented. The subsequent changes in the interactive and support parts
of the service system and their impact on the service process are presented and discussed
in this part of the case study.
Systems and operational resources. Previously, the supervisor of a regional or local ser-
vice group (covering a smaller city or part of a bigger city) allocated each day’s repair and
maintenance jobs to the service technicians available that morning, without considering
the previous history of the various customers or whether a given service technician had
any previous experience of the customers and elevators that were assigned to him. In
this way no relationship between a given customer and a given service technician could
develop. Moreover, service technicians did not develop a knowledge of, or responsibil-
ity for, any of the customers. This was now changed, so that every service technician was
given long-term responsibility for the same set of customers. A back-up system to be used
in case the regular technician was sick was also developed.
In order for the company to change its operational system, specific systems knowledge
had to be developed. This was not an easy process because of the history of organizing
workflow in the company. However, by developing a new understanding of how oper-
ational systems should function, a systems support was created that enabled the service
technicians to get a far better knowledge of the history of the elevators they were respon-
sible for as well as to feel more responsible for the customers to which they had been
assigned.
Physical resources and equipment. Previously, the service technicians had a limited stock
of spare parts and a limited assortment of tools in their vans. If they needed a tool they
did not carry, they had to leave the job and get the missing spare part or tool from a
central depot. This was one of the reasons why customers were left wondering where the
service technician had gone and why he had left the job unfinished. Now the decision to
invest in new and bigger vans and to keep more spare parts and tools in stock was taken
THE BLUEPRINTING MODEL 395
(a decision to renew the car-park had already been taken, but instead of purchasing
the vans that had been planned originally, the company bought bigger vans). This made
it possible for service technicians to finish almost all jobs without interruption. Hence,
this decision not only increased the usefulness of the physical resources used in the ser-
vice process, it also had a favourable impact on the operational systems used in the
process.
By changing the technology used, the company created an additional systems support
that made it possible for the service technicians to perform in a more customer-oriented
fashion.
Contact personnel. It was obvious that service technicians concentrated on the outcome
of the repair and maintenance tasks, and were much less concerned with the way they did
their jobs and with their interactions with the customers. Operational systems and man-
agement support from supervisors had been outcome-focused and had not encouraged
an interest in the process itself. An internal marketing process was initiated, where the
objective was to focus the interest of service technicians as well as their supervisors and
managers on the quality perceptions of the customers, especially on the importance of
the functional quality perception of the process. The reasons for these changes in systems
and equipment were explained. By this internal marketing process, management wanted
to achieve a change in all employees’ attitudes towards the customers and towards their
jobs, so that a more customer-focused performance would be achieved.
Traditionally, supervisors and managers had focused on the outcome of the service pro-
cess, while the understanding of how to support and manage the process of repair and
maintenance from a quality perspective had been neglected. Elevator repair and main-
tenance had been thought of as solely outcome consumption. However, in reality the
customers perceived it as process consumption. Now a process perspective was taken, sup-
ported by the internal marketing process. Hence, management support by supervisors and
managers was created.
A support function responsible for information about customers already existed.
Through more customer-oriented market research, more accurate support in the form of
better customer information was achieved.
Customers. The new service system was intended to make it easier for the customers to
interact with the service technicians. Customers would realize that their viewpoints were
recognized and that they more easily got answers to their questions. Their time could
be expected to be used more effectively, because unnecessary breaks in the repair and
maintenance jobs could be avoided in future.
The starting point for the change process was a strategy decision, according to which
the service concept was redirected towards supporting people’s movement within build-
ings, during and outside elevator maintenance and repair activities.
The results of the development of the service system were positive. Fewer customers
left the company, while the company managed to maintain its premium price level. The
business became profitable.
T H E S E RV I C E P R O C E S S L A N D S C A P E :
T H E S E RV I C E S C A P E A N D T H E E X T E N D E D
S E RV I C E S C A P E M O D E L
The service process and the service encounter take place in an environment that is partly planned
and controlled by the service provider. External environmental conditions, such as the weather and
competitors’ actions, are not under the firm’s control and in some situations the service is provided
in the customer’s premises. However, in most cases the immediate environment in which the service
process takes place can be, and should be, carefully designed and developed by the firm. Otherwise,
the number of uncontrolled factors grows. In order to help service organizations manage the physical
setting of the environment for the service process, Bitner introduced the servicescape model.23 When
presenting the model she also makes the point that ‘interestingly, in service organizations the same
physical setting that communicates with and influences customers may affect employees of the firm’.24
THE SERVICESCAPE FRAMEWORK

The servicescape framework is based on the idea of a landscape for the service process. In this land-
scape the service encounters take place and the service contact personnel and the customers interact
during the service process. However, according to the framework, customers and employees are not
part of the service landscape, but their behaviour is influenced by it. The model has been criticized
on this very point, that it does not – as integral parts – include the people acting in the physical
setting. According to this criticism the physical setting is formed by the people who are in this set-
ting and act and interact in it.25 Moreover, the servicescape framework has been criticized on the
grounds that it fulfils an instrumental role only,26 and it excludes people’s cultural perception and their
experiences,27 behavioural intentions when entering the physical setting for the service encounter28
and social interactions.29
In spite of this criticism, the servicescape model provides a basic model for understanding the
physical setting of a service and its influence on employees and customers. The model is illustrated in
Figure 13.8.
The servicescape framework in Figure 13.8 is fairly self-explanatory. Hence, it will be commented
upon only briefly here. The elements or typology of the framework are three environmental dimensions –
that is, ambient conditions (temperature, air quality, music, noise, odour, etc.), space and function
(layout, equipment, furnishings, etc.) and signs, symbols and artefacts (signage, style of décor, etc.) – the
perceived servicescape as a holistic environment, moderators that affect employee and customer responses,
respectively, three internal response factors (cognitive, emotional and physiological – see the figure
for details that impact employee and customer responses, respectively), and behaviour. A behavioural
element is, of course, the social interaction among employees and customers. However, because it has an
instrumental influence on these social interactions, a main effect of the servicescape framework is
the way people react to the physical setting. The framework includes two opposite ways of reacting:
approach (affiliation, exploration, stay longer, commitment, carry out plan) and avoid (defined as the
opposite of approach).
The servicescape model is certainly helpful for designing the physical setting of a service process and
service encounters, and it indicates what factors could be observed when assessing the effectiveness of
such a physical setting. However, as the criticism of the framework pointed out previously indicates,
to explain the interactions between the customer and employees and other resources in the setting,
it may be too structured and the social and behavioural context is lacking.
THE SERVICE PROCESS LANDSCAPE: THE SERVICESCAPE AND THE EXTENDED SERVICESCAPE MODEL 397
ENVIRONMENTAL HOLISTIC
DIMENSIONS ENVIRONMENT MODERATORS INTERNAL RESPONSES BEHAVIOUR
Cognitive Emotional Physiological

• pain Approach
• beliefs • mood
• categor- • attitude • comfort • affiliation
ization • movement • exploration
• symbolic • physical fit • stay longer
meaning • commitment
Ambient Conditions • carry out plan
• temperature Avoid
• air quality (opposites of
• noise approach)
• music Employee Employee
• odor Response Responses
• etc. Moderators
Space/Function Social Interactions

• layout Perceived Between and
• equipment Servicescape Among Customers
• furnishings and Employees.
• etc.
Customer
Signs, Symbols Response Customer
& Artefacts Moderators Responses
• signage Approach
• personal artefacts • attraction
• style of decor • stay/explore
• etc. • spend money
Cognitive Emotional Physiological • return
• pain • carry out plan
• beliefs • mood
• categor- • attitude • comfort Avoid
ization • movement (opposites of
• symbolic • physical fit approach)
meaning
F I G U R E 13.8
The servicescape model.
Source: Bitner, M.J., Servicescapes: the impact of physical surroundings on customers
and employees. Journal of Marketing, 56(Apr); 1992: p. 60. Reproduced by permission
of the American Marketing Association.
CASE STUDY
A SERVICESCAPE EXAMPLE: NIKE TOWN CHICAGO
Nike Town Chicago (NTC) is a three-storey showcase displaying the total range of Nike
products. The objective of the concept is to support the Nike brand, rather than achieve
immediate sales. Customers entering NTC are invariably struck by the huge assortment
of products. The ground floor simulates a small-town shopping district with cobblestone
streets. When entering the store the customers or curious visitors encounter statues and
framed photos of well-known people wearing Nike products as well as large fish tanks and
display cases containing Nike products and memorabilia. When moving further into the
showcase they are greeted by framed pictures of sports celebrities such as Michael Jordan
and Charles Barkley, who endorse Nike products. A banner saying ‘There Is No Finish Line’
is clearly visible. On the second floor there is a half-court basketball unit, where the sounds
of the Chicago Bulls’ team introduction music can be heard in the background. On the
third floor cased exhibits show the history of the Nike brand. The whole NTC is designed as
a servicescape embodying the Nike brand identity. Through experiencing this servicescape
the customer creates his own perception of the Nike brand.
Source: This Nike Town Chicago example of a thoroughly designed servicescape is

described in greater detail in Zeithaml, V.A. & Bitner, M.J., Services Marketing. Integrating
Customer Focus Across the Firm, 2nd edn. Boston, MA: Irwin McGraw-Hill, 2000, p. 264.
See also Sherry Jr., J.F., The soul of the company store: Nike Town Chicago and the
emplaced brandscape. In Sherry Jr., J.F. (ed.), Servicescapes: The Concept of Place in Con-
temporary Markets. Chicago, IL: NTC/Contemporary Publishing Company, 1998, pp. 109–146.
THE EXTENDED SERVICESCAPE MODEL

In Figure 13.9 an extended servicescape model is illustrated. This extended model attempts to include
aspects of the physical setting as a social meeting place that are lacking in the original framework.30 For
the sake of readability, the detailed factors that are similar to the ones in the original servicescape
framework are not explicitly listed in the figure. The reader may want to consult Figure 13.8 (the
original framework).
BEHAVIOUR/
PERSONAL
CUSTOMER
EXPERIENCES
- previous experiences
- approach
- image of the firm
- avoid
- behavioural intentions
CUSTOMER
PHYSICAL DIMENSIONS INTERNAL RESPONSE

OF THE ENVIRONMENT INTERACTION PERCEIVED
CUSTOMER/EMPLOYEE PERCEIVED
- ambient conditions - cognitive - SOCIAL SERVICE
SERVICESCAPE
- space/function - emotional - PHYSICAL QUALITY
- signs, symbols and - physiological
artefacts
EMPLOYEE
BEHAVIOUR/
EMPLOYEE
SPATIAL CONTEXT
- approach
- personal feelings
- avoid
- social density
F I G U R E 13.9
The extended servicescape model.
Source: Sandbacka, L., Tjänstelandskap. Teoretisk bakgrund och praktisk tillämpning i tjänste Företag,
(Servicescape. Theoretical background and implementation in practice.) Helsinki: Hanken Swedish
School of Economics, Finland, 2006. Reproduced by permission.
FITTING RESOURCES IN THE SERVICE SYSTEM TO THE SERVICE CONSUMPTION PROCESS 399
Customers and service employees are both part of the extended servicescape framework; by their
presence and behaviour at the same time as they are affected by the physical setting of the service,
they also form it. Perceived service quality is included as the final outcome of the model. The physical
setting and the interactions taking place in it should be designed so that, in the final analysis, cus-
tomers perceive favourable service quality that makes them want to continue using the same service
provider’s offerings. Moreover, not only social interactions between people in the servicescape but
also interactions with the elements of the physical setting itself are included in the framework (physical
interactions). Customers, and employees, do not only interact with each other but also with physical
resources, systems and other tangible elements in the physical setting. Hence, in addition to the social
interactions these physical interactions influence the customers’ perception of service quality. At the same
time, the customer contact employees also perceive such physical interactions and, in addition to the
social interactions with customers, these interactions affect them as well. Both the social and physical
interactions affect their feeling of well-being as well as their motivation to be customer focused, and
their proneness to provide customers with good service and in the end good service quality.
To the physical dimensions of the service environment, such as ambient condition, space, signs, symbols
and artefacts (see Figure 13.8 for details), two factors influencing the servicescape have been added –
personal experiences and spatial context. The customers as well as the employees bring their previous
experiences from the physical setting at hand and other servicescapes, their image of the service provider
and their behavioural intentions to the service process. All this affects the perceived servicescape and
therefore also their behaviour in it. In addition, the spatial context of the physical setting has to be
taken into account. The number of people, fellow customers and also employees in the environment,
i.e. the social density, and the personal feelings towards the type of spatial context they become involved
in also influence the customers’, and employees’, perception of the servicescape.
As in the original model the internal responses of customers and employees are cognitive, emotional
and physiological (see Figure 13.8 for details). From these responses the perceived servicescape emerges.
Customers and employees interact socially and with the physical elements of the servicescape and their
behaviour in the servicescape can be characterized either as approach or avoid behaviour (see Figure 13.8
for details). Finally, a customers’ perception of service quality is formed.
In conclusion, the extended servicescape model brings the social context including personal experi-
ences and the spatial context as well as both customers’ and employees’ interactions with the physical
setting into the framework. Moreover, it explicitly points out that the ultimate goal for the customers’
and employees’ either approach or avoid behaviour in the physical setting, and the social and physical
interactions taking place in it, is to create favourable perceived service quality for the service provider’s
customers. Alone and especially together with the service system model in Figure 13.7, the extended
servicescape model provides a useful framework for planning service processes. Together with the service
style/consumption style model presented in the next section (see Figure 13.10), they form a comprehen-
sive framework for planning service encounters and buyer–seller interactions, and therefore also for
planning the service organization’s interactive marketing process.
F I T T I N G R E S O U R C E S I N T H E S E RV I C E S Y S T E M
T O T H E S E RV I C E C O N S U M P T I O N P R O C E S S
The quality-supporting resources – personnel, systems, goods, technologies and physical resources,
and customers – have to be carefully planned so that a competitive functional quality is produced
in the service process. If good quality is produced, an excellent interactive marketing impact is also
created. In Figure 13.10 the nature of this issue is illustrated schematically.
Service
A
Customer A:
style of consuming A
Systems and Contact personnel:

physical resources style of performance
Customer B:
style of consuming B
Service
B
F I G U R E 13.10
The service style/consumption style model.
Source: Lehtinen, J., Asiakasohjautuva palveluyritys (Customer-oriented service firm).
Espoo, Finland: Weilin+Göös, 1983, p. 81.
The model demonstrates the need for achieving a balance between the resources involved. In the
service encounter and its moments of truth, contact personnel emerge as one critical resource. Every
contact person has a specific way of performing, which can be called their service style or style of
performance.31 For example, a dental receptionist and a dentist have their own way of doing and saying
things and of performing their tasks. This style is, of course, partly due to their professional skills, but
partly also due to their attitude towards patients.
This style of performance has to be geared to the corresponding style of consuming of the customers,
here the dentist’s patients. If there is a misfit between these two styles, perceived service quality
will probably be damaged. Since many different customers are frequently present at the same time,
their styles of consuming must also fit. For example, a nervous patient in the waiting room may
scare other people waiting to see the dentist. In a restaurant, a group of people drinking beer and a
family having lunch may not get along well in the same servicescape. The perceived service quality
deteriorates.
The systems and physical resources used in the service production process will also have to fit the style
of performance of contact staff as well as customers’ style of consuming. Inappropriate systems make
this unnecessarily complicated and even frustrating for contact persons to do their job. Also, if there
is a misfit between the systems and the customers’ style of consuming, they will not want to adjust to
the systems and they will find it awkward to take part in the process. The perceived service quality is
again damaged. For example, the treatment procedures and the equipment of the dentist, as well as
registration and recall systems and waiting room facilities, have to fit the dentist and the other contact
persons as well as the patient. The circles ‘Service A’ and ‘Service B’ in Figure 13.10 indicate that
Customers A and B may perceive slightly different service, irrespective of whether or not the basic
service package is the same. In conclusion, the availability of quality-generating resources as such does
THE SERVICE SYSTEM IN A NETWORK OF SYSTEMS 401
not automatically lead to good customer perceived service quality. Sufficient and properly designed
resources are a prerequisite, whereas the fit between them determines success.
Figure 13.10 illustrates a case involving external customers. The same applies for internal customers
too. The style of performance of supporting staff will have to match the style of consuming of contact
staff as internal customers. If there is a misfit, the internal climate will suffer and contact personnel
will feel that they get bad support – that is, insufficient internal service – from the support function.
Moreover, the systems and physical resources of the support function will have to fit into the service
process in a similar manner.
T H E S E RV I C E S Y S T E M I N A N E T W O R K
OF SYSTEMS
In previous sections the service system model has been viewed as a single organizational unit. This
is, of course, not always the case. Frequently a total system is built up through a network of separate
service systems. This, in the minds of customers, is normally perceived as one service system.32
For example, a hotel chain may have a hotel reservation system, which is geographically located
away from the hotels. Customers who make their reservations themselves through this system on
one date and stay at a hotel at a later date judge the two service processes (the reservation system
and the hotel’s service production system) separately, but they also view the reservation system as a
part of the hotel’s system. If the reservation system fails, the customer will not make a reservation at
the hotel, and consequently, the total service process system (reservation and hotel together) fails. In
principle, the same holds true if the customer makes his reservation through a travel agent not affiliated
with the hotel chain. From a management point of view, it will probably be more complicated
to manage the total service system, since the other system of this network, reservation through an
independent travel agent, is an independently managed organization.
Sometimes the situation becomes even more complicated because the relationships between the
parties in a network are often mutual. In the previous case, the hotel’s service system depends on that
of the travel agent. But the service system of the latter also depends on that of the hotel. If the travel
agent directs a customer to a hotel that turns out to be unsatisfactory, the customer will blame not only
the hotel but also the travel agent. In this situation the travel agent can be considered a subcontractor
of the hotel. However, they are both part of a network that consists of the service systems of both
parties, and the customer will judge not only the systems of the two parties separately, but the total
service system of the network.
In manufacturing, firms often outsource various service activities to sub-contractors. For example,
independent delivery firms transport goods to customers, and independent firms are used to handle
installation, technical service and repair and customer training. In these situations, similar networks
to those above emerge, where the manufacturer is often judged by the performance of the service
system of its subcontractor.
From a management point of view, it is essential to observe the existence of these networks of
independent or affiliated service systems, and to realize the impact of one system on another and on
the success of the total system. For example, bad performance by one party, say an insurance broker,
in the network may damage, or even destroy, the other party, in this case the insurance company.
On the other hand, excellent service provided by a partner in the network, say, by a delivery and
transportation firm, may substantially enhance the image of the manufacturer in the minds of its
customers.
S U M M A RY
This chapter discussed how to organize marketing in a service organization. It was observed that in a
service firm marketing cannot really be organized. Marketing has to be instilled by creating a customer-focused
mindset in everyone throughout the organization at every hierarchical level. Most of the marketing process takes
place outside the responsibility and reach of a traditional marketing department and is implemented by
part-time marketers who belong to other departments and functions. The role of marketing specialists or
full-time marketers is more of a supportive nature. In the latter part of the chapter a service system model
and an extended servicescape model were presented and discussed. Depending on how well such a system
is designed, interactive marketing will be more or less successful.

1. What does ‘marketing cannot be organized in a service firm, but instead has to be instilled
in the organization’ mean?
2. Why does a service organization have to be able to combine the strengths of a large and
small company? What results can be achieved by doing so effectively?
3. Why is there a difference between the marketing process and the marketing department?
4. How can a service package be related to the consumption process?
5. How should a service system be designed so that a good interactive marketing impact is
created?
6. How does the extended servicescape model differ from the original servicescape model?
7. Analyse, using the service system model, a service of your organization, or a service of any
organization, in order to detect the strengths and weaknesses of the system. What are the
marketing effects of such strengths and weaknesses? How should the system be developed
in order to create a better marketing effect?
8. Discuss how the service system, the extended servicescape and the service style/consump-
tion style models can be used as a comprehensive framework to plan the service process
and the service encounters of your or any organization with a goal of creating effective
interactive marketing performance.
NOTES
1. In the 1980s, Haller and Piercy predicted that marketing as a separate function and marketing
departments as organizational solutions would disappear. See Haller, T., Strategic planning: key
to corporate power for marketers. Marketing Times, No. 2, 1980 and Piercy, N.F., Marketing
NOTES 403
Organization. An Analysis of Information Processing, Power and Politics. London: George Allen &
Unwin, 1985.
2. See, for example, Gummesson, E., The marketing of professional services – an organizational
dilemma. European Journal of Marketing, 13(5), 1979; Grönroos, C., An applied service marketing
theory. European Journal of Marketing, 16(7), 1982, 30–41; Grönroos, C., Strategic Management
and Marketing in the Service Sector. Cambridge, MA: Marketing Science Institute, 1983. See also
Grönroos, C., On defining marketing: finding a new roadmap for marketing. Marketing Theory,
6(4), 2006, 395–417.
3. See Hedberg, B., Dahlgren, G., Hansson, J. & Olve, N.-G., Virtual Organizations and Beyond:
Discovering Imaginary Systems. London: John Wiley & Sons, 1997. Also, see Piercy, N.F. &
Cravens, D., The network paradigm and the marketing organization. European Journal of Market-
ing, 29(3), 1995, 7–34.
4. See, for example, Achrol, R.S. & Kotler, P., Marketing in the network economy. Journal of
Marketing, 63, Special Issue, 1999, 146–163. The authors distinguish between internal, vertical,
intermarket and opportunity networks.
5. The first researcher to point this out in the context of service marketing was Evert Gummesson.
See Gummesson, 1979, op. cit.
6. Gummesson, E., Marketing revisited: the crucial role of the part-time marketer. European Journal
of Marketing, 25(2), 1991, 60–67.
7. Gummesson, 1991, op. cit. p. 72.
8. See, for example, Rust, R.T., Moorman, C. & Bhalla, G., Rethinking marketing. Harvard Busi-
ness Review, 88, Jan–Feb, 2010, 94–101, where the authors advocate for ‘customer departments’
replacing ‘marketing departments’. See also Leeflang, P., Paving the way for ‘distinguished mar-
keting’. International Journal of Research in Marketing, 28(2), 2011, 76–88, where the author discusses
a new role of marketing in the organization.
10. The notion of marketing departments as organizational traps for service providers was first intro-
duced in Grönroos, 1983, op. cit., based on a large study in the service sector in Scandinavia.
11. Grönroos, 1983, op. cit. See also Simon, H., Hidden Champions. Boston, MA: Harvard Business
School Press, 1996; Piercy, N.F., Market-Led Strategic Change. Oxford: Butterworth-Heinemann,
1992.
12. Jan Carlzon, former managing director and president of SAS (Scandinavian Airlines System), who
in the 1980s successfully turned around this airline to a highly service-oriented and profitable firm,
used the notion of inverting the organizational pyramid. See Carlzon, J., Moments of Truth.
Cambridge, Ma: Ballinger, 1987. Translated into English, the title of the Swedish original was
‘Tear down the Pyramids’. Recently, the idea of turning the organizational pyramid upside down
has been reinvented. See Jacobson, M.D., Turning the Pyramid Upside Down. a New Leadership
Model. New York: Diversion Books, 2013.
13. The concept of internal customer was introduced to the service and relationship marketing context
by Gummesson. See Gummesson, E., Total Relationship Marketing. Rethinking Marketing Manage-
ment. Oxford: Butterworth-Heinemann, 2008.
14. The line of visibility concept was introduced in the service marketing literature by Lynn Shostack
as part of her service blueprinting model. See Shostack, G.L., Designing services that deliver.
Harvard Business Review, Jan–Feb, 1984.
15. There is a discussion of customer centricity and customer-centric organizations in the literature.
See, for example, Harris, J.E., Customer centricity: what it is, what it isn’t, and why it matters.
Journal of Consumer Marketing, 29(5), 2012, 392–393, and Shah, D., Rust, R.T., Parasuraman, A.,
Staelin, R. & Day, G.S., The path to customer centricity. Journal of Service Research, 9(2), 2006,
113–124. See also Galbraih, J.R., Designing the Customer-centric Organization: A Guide to Strategy,
Structure, and Process. Hoboken, NJ: John Wiley & Sons, 2011.
16. See Peppers, D. & Rogers, M., Enterprise One-to-One. London: Currency/Doubleday, 1997, who
discuss the issues of identified individual one-person segments by creating interactive interfaces
with customers and by mass customizing solutions to them.
17. See Lehtinen, J., Quality-oriented Services Marketing. The University of Tampere, Finland, 1986,
which introduced this three-stage approach.
tition. Lexington, MA: Lexington Books, 1990.
◦
19. See Fellesson, M., Salomonson, N. & Aberg, A., Troublesome travelers – the service system as
a trigger of customer misbehavior. International Journal of Quality and Service Sciences, 5(3), 2013,
256–274, and also Daunt, K.L. & Harris, L.C., Linking employee and customer misbehavior: the
moderating role of past misdemeanours. Journal of Marketing Management, 30(3-4), 2014, 221–224,
where the authors expand the topic to include misbehaving employees.
21. See Shostack, op. cit.
22. See, for example, Bitner, M.J., Ostrom, A.L. & Morgan, F.N., Service blueprinting: a prac-
tical technique for service innovation. California Management Review, 50(3), 2008, 66–94, and
NOTES 405
Kostopoulos, G., Gounaris, S. & Boukis, A., Service blueprinting effectiveness: drivers of success.
Managing Service Quality, 22(6), 2012, 580–591.
23. Bitner, op. cit. See also Brüggen, E.C., Foubert, B. & Gremler, D.D., Extreme makeover: short-
and long-term effects of a remodeled servicescape. Journal of Marketing, 75(5), 2011, 71–87,
and Rosenbaum, M.S. & Massiah, C., An expanded servicescape perspective. Journal of Service
Management, 22(4), 2011, 471–490.
24. Bitner, op. cit., p. 57. See also Baker, J., Berry, L.L. & Parasuraman, A., The marketing impact
of branch facility design. Journal of Retailing, 10(2), 1988, 33–42.
25. Clarke, I. & Schmidt, R.A., Beyond the servicescape. The experience of place. Journal of Retailing
and Consumer Services, 2(3), 1995, 149–162; Rowley, J. & Slack, F., The retail experience in air-
port departure lounges: reaching for timelessness and placelessness. International Marketing Review,
16(4–5), 1999, 363–375.
26. Aubert-Games, V., Twisting servicescapes: diversion of the physical environment in a re-
appropriation process. International Service Industry Management, 8(1), 1996, 26–41.
27. Arnould, E.J., Price, L.L. & Tierney, P., Communicative staging of the wilderness servicescape.
Service Industries Journal, 18(3), 1998, 90–115.
28. Hightower, R., Brady, M.K. & Baker, T.L., Investigating the role of the physical environment
study of sporting events. Journal of Business Research, 55, 2002, 697–707.
29. Tombs, A. & McColl-Kennedy, J.R., Social-servicescape conceptual model. Marketing Theory,
3(4), 2003, 447–475.
30. The extended servicescape model was developed at Hanken Swedish School of Economics Fin-
land by Lotta Sandbacka. See Sandbacka, L., Tjänstelandskap. Teoretiska bakgrund och praktisk
tillämpning i tjänsteföretag (Servicescape. Theoretical background and implementation in practice).
Unpublished master’s thesis. Helsinki: Hanken Swedish School of Economics, Finland, 2006. In
Swedish.
31. This approach to understanding the balance between resources in the service process was devel-
oped by Jarmo Lehtinen. See Lehtinen, op. cit. See also Gwinner, K.P., Bitner, M.J., Brown,
S.W. & Kumar, A., Service customization through employee adaptiveness. Journal of Service
Research, 8(2), 2005, 131–148, where the authors found that the employees’ amount of customer
knowledge and some personality dispositions and the intrinsic motivation of the employees influ-
ence their propensity to adapt their service style and even the service offering to better suit the
customers.
32. See Gummesson, E., Quality, service-dominant logic, and many-to-many marketing. The TQM
Journal, 20(2), 2008, 143–153.
Achrol, R.S. & Kotler, P. (1999) Marketing in the network economy. Journal of Marketing, 63, Special
Issue, 146–163.
Arnould, E.J., Price, L.L. & Tierney, P. (1998) Communicative staging of the wilderness servicescape.
Service Industries Journal, 18(3), 90–115.
Aubert-Games, V. (1996) Twisting servicescapes: diversion of the physical environment in a re-
appropriation process. International Service Industry Management, 8(1), 26–41.
Baker, J., Berry, L.L. & Parasuraman, A. (1988) The marketing impact of branch facility design.
Journal of Retailing, 10(2), 33–42.
Bitner, M.J. (1992) Servicescapes: the impact of physical surroundings on customers and employees.
Journal of Marketing, 56(Apr), 57–71.
Bitner, M.J., Ostrom, A.L. & Morgan, F.N. (2008) Service blueprinting: a practical technique for
service innovation. California Management Review, 50(3), 66–94.
Brüggen, E.C., Foubert, B. & Gremler, D.D. (2011) Extreme makeover: short- and long-term effects
of a remodeled servicescape. Journal of Marketing, 75(5), 71–87.
Carlzon, J. (1987) Moments of Truth. Cambridge, MA: Ballinger.
Clarke, I. & Schmidt, R.A. (1995) Beyond the servicescape. The experience of place. Journal of
Retailing and Consumer Services, 2(3), 149–162.
Daunt, K.L. & Harris, L.C. (2014) Linking employee and customer misbehaviour: the moderating
role of past misdemeanours. Journal of Marketing Management, 30(3–4), 221–224.
◦
Fellesson, M., Salomonson, N. & Aberg, A. (2013) Troublesome travelers – the service system as a
trigger of customer misbehaviour. International Journal of Quality and Service Sciences, 5(3), 256–274.
Galbraith, J.R. (2011) Designing the customer-centric organization: a guide to strategy, structure, and process.
Hoboken, NJ: John Wiley & Sons.
Grönroos, C. (1982) An applied service marketing theory. European Journal of Marketing, 16(7), 30–41.
Grönroos, C. (1983) Strategic Management and Marketing in the Service Sector. Cambridge, MA:
Marketing Science Institute.
Grönroos, C. (2006) On defining marketing: finding a new roadmap for marketing. Marketing Theory,
6(4), 395–417.
FURTHER READING 407
Gummesson, E. (1979) The marketing of professional services – an organizational dilemma. European

Gummesson, E. (1991) Marketing-orientation revisited: the crucial role of the part-time marketer.
Gummesson, E. (2008) Quality, service-dominant logic, and many-to-many marketing. The TQM
Journal, 20(2), 143–153.
CRM, and a New Dominant Logic for the Value-creating Network Economy. Oxford: Butterworth-
Heinemann.
Gwinner, K.P., Bitner, M.J., Brown, S.W. & Kumar, A. (2005) Service customization through
employee adaptiveness. Journal of Service Research, 8(2), 131–148.
Haller, T. (1980) Strategic planning: key to corporate power for marketers. Marketing Times, 2.
Harris, J.E. (2012) Customer centricity: what it is, what it isn’t, and why it matters. Journal of Consumer
Marketing, 29(5), 392–393.
Hedberg, B., Dahlgren, G., Hansson, J. & Olve, N.-G. (1997) Virtual Organizations and Beyond:
Discovering Imaginary Systems. Chichester: John Wiley & Sons.
Hightower, R., Brady, M.K. & Baker, T.L. (2002) Investigating the role of the physical environment
study of sporting events. Journal of Business Research, 55, 697–707.
Jacobson, M.D. (2013) Turning the Pyramid Upside Down. A New Leadership Model. New York:
Diversion Books.
Kostopoulos, G., Gounaris, S. & Boukis, A. (2012). Service blueprinting effectiveness: drivers of
success. Managing Service Quality, 22(6), 580–591.
Leeflang, P. (2011) Paving the way for ‘distinguished marketing’. International Journal of Research in
Marketing, 28(2), 76–88.
Lehtinen, J. (1983) Asiakasohjautuva palveluyritys (Customer-oriented service firm). Espoo, Finland:
Weilin & Göös. In Finnish.
Lehtinen, J. (1986) Quality Oriented Services Marketing. The University of Tampere, Finland.
Peppers, D. & Rogers, M. (1997) Enterprise One-to-One. London: Currency/Doubleday.
Piercy, N.F. (1985) Marketing Organization. An Analysis of Information Processing, Power and Politics.
London: George Allen & Unwin.
Piercy, N.F. (1992) Market-Led Strategic Change. Oxford: Butterworth-Heinemann.
Piercy, N.F. & Cravens, D. (1995) The network paradigm and the marketing organization. European
Rosenbaum, M.S. & Massiah, C. (2011) An expanded servicescape perspective. Journal of Service
Management, 22(4), 471–490.
Rowley, J. & Slack, F. (1999) The retail experience in airport departure lounges: reaching for time-
lessness and placelessness. International Marketing Review, 16(4–5), 363–375.
Rust, R.T., Moorman, C. & Bhalla, G. (2011) Rethinking marketing. Harvard Business Review,
88(Jan–Feb), 94–101.
Sandbacka, L. (2006) Tjänstelandskap. Teoretiska bakgrund och praktisk tillämpning i tjänsteföretag
(Servicescape. Theoretical background and implementation in practice). Unpublished master’s thesis.
Helsinki: Hanken Swedish School of Economics, Finland. In Swedish.
Shah, D., Rust, R.T., Parasuraman, A., Staelin, R. & Day, G.S. (2006) The path to customer cen-
tricity. Journal of Service Research, 9(2), 113–124.
Shostack, G.L. (1984) Designing services that deliver. Harvard Business Review, Jan–Feb.
Simon, H. (1996) Hidden Champions. Boston, MA: Harvard Business School Press.
Tombs, A. & McColl-Kennedy, J.R. (2003) Social-servicescape conceptual model. Marketing Theory,
3(4), 447–475.
edn. Boston, MA: Irwin McGraw-Hill.
CHAPTER 14
PEOPLE MANAGEMENT:
INTERNAL MARKETING
AS A PREREQUISITE FOR
SUCCESSFUL CUSTOMER
MANAGEMENT
“ Without good and well-functioning internal relationships, external customer relationships will not
develop successfully. Engaging and motivating employees – on all levels – is a true test of managing an
”
organization.
INTRODUCTION
In service businesses in particular the role of employees is paramount for success. In spite of the
growing importance of technology, customer-centric and service-minded employees are needed for
high-quality service experiences. Therefore, successful people management is a prerequisite for suc-
cessful customer management. This chapter will discuss a phenomenon that was originally highlighted
by the research into service marketing; that is, internal marketing.1 Throughout this book, the issue of
internal marketing has emerged in several contexts. The term was coined as an umbrella concept for
a variety of internal activities and processes that are not new but, focused upon as here, offer a new
approach to developing a service orientation and an interest in customers and marketing among an
organization’s personnel. Internal marketing starts from the concept that employees are a first, internal
market for the organization. If a service perspective, goods, services, planned marketing communi-
cation, new technologies and operational systems cannot be marketed to this internal target group,
marketing to ultimate, external customers cannot be expected to be successful either. Internal mar-
keting is a prerequisite for successful external and interactive marketing. The latter part of the chapter
will focus upon two concepts that are closely related to internal marketing, empowering and enabling
410 PEOPLE MANAGEMENT
employees. After reading this chapter the reader should understand the role of internal marketing in
service management and know how to develop an internal marketing process, as well as understand
the opportunities for empowerment and the risks related to half-hearted empowerment processes.
I N T E R N A L M A R K E T I N G : A S U M M A RY
Internal marketing is not a new phenomenon, and it was not new when the term was first used in
the service marketing literature in the 1970s.2 Firms have always used morale-boosting activities and
campaigns, and employees’ attitudes and motivation have long been a concern of management and
human resources staff. However, the notion of internal marketing has brought three new aspects to
human resources management in a firm:
1. The employees are a first, internal market for the firm’s offerings to external customers as well as
for its external marketing programmes.
2. An active, co-ordinated and goal-oriented approach to all employee-oriented efforts, which com-
bines these internal efforts and processes with an external orientation of the firm (that is, with
creating a preparedness and motivation for good interactive marketing behaviour and provision
of good perceived service quality).
3. An emphasis on the need to view people, functions and departments internal to the firm as internal
customers, to whom internal service has to be provided in the same customer-focused manner as
to external customers.
The first observation is important, because it points out the fact that everything the service provider
does for its external customers (planned marketing communication, service offerings, etc.) is first
perceived and evaluated by its own personnel. If employees do not believe in the promises made by
external marketing activities and campaigns, do not know how to implement a service offering or
how to make use of technology or systems in the service process – if they do not accept them, or feel
that they do not have the skills to perform according to what is required of them, they will not ‘buy
the offering’. In that case they will not be able or willing to perform as effective part-time marketers and
contribute to a good interactive marketing impact and successful brand fulfilment. The employees form an
internal market that should be attended to first.
The second notion is equally important, because it emphasizes the fact that all internal efforts, pro-
grammes and processes have to be geared towards maintaining or improving external effectiveness and the firm’s
external performance. Human resource management is not only an internal matter, but is also a matter
of making sure that employees contribute to the service provider’s external performance. Such efforts
and processes have to be planned and implemented with a similar approach as external marketing,
that is, in a co-ordinated, active and goal-oriented way.
The third observation – that internal customers exist and that they have to be treated in the same
way as external customers – has an important impact on the internal relationships of an organization.3
Fellow employees must not be provided with slow, inattentive and careless service and support,
because if this is the case their ability to provide the firm’s ‘real’ customers with good service and to
create high perceived service quality is seriously jeopardized.
Internal marketing studies4 have emphasized a need to view people in an organization not only
as individuals but as relationship partners, and moreover pointed out that people management has to
reach out to people in relationships with other organizations in the network as well.5
INTERNAL MARKETING: A STRATEGIC ISSUE 411
TA B L E 14.1
What is required of the employees in a customer-focused and service-oriented organization.
General requirements:
● Understand the full relationship the firm has with its customers (or other stakeholders).
● Understand and accept their role and obligations in maintaining these relationships.
● Be customer-focused in their work environment.
Specific requirements:
● Have the skills to interact and communicate with customers (or other stakeholders).
● Be motivated to interact and communicate.
● Feel rewarded for interacting and communicating in ways that support customer-focused
behaviour and thus successful interactive marketing performance.
The first observation emphasizes the need to view employees not as subordinates but from a win–
win partnering perspective, where people feel that they are working for an organization that provides
them with something in return, such as opportunities to develop, an encouraging environment, access
to skills, information and support from a knowledge-generating team, and of course an acceptable
salary.6
The second observation demonstrates that the borderline between what is inside an organization
and what is outside it becomes blurred. The distinction between relationships with employees internal
to a firm or to a network and relationships with customers and other stakeholders becomes blurred
as well. Suppliers, service providers and their customers become one interactive organization, where
value for customers is created jointly in interactive relationships.
Recent research into internal marketing has pointed out that the notion of motivating employees
and creating motivated employees, which has been suggested as a key goal of internal marketing,
easily becomes an obstacle for lifting people management onto a strategic level in an organization.7
Neither top management nor marketing specialists tend to consider motivating employees part of
their responsibilities, or even an issue they should be concerned about. As a consequence motivating
employees remains a tactical issue in the firm. This observation is important, because the internal
marketing approach to people management considers motivating employees for customer-focused
and service-minded behaviour of such importance to success that it should be given strategic attention.
In Table 14.1 what is required of employees for a service firm to be customer-focused and service-
oriented is illustrated. These requirements can be divided into general requirements and specific
requirements. In subsequent sections, means of achieving the goals set by these requirements will be
discussed at length.
I N T E R N A L M A R K E T I N G : A S T R AT E G I C I S S U E
The term internal marketing was originally derived from the notion of the internal market of employees,
and from this point of view internal marketing is a logical term. However, it can be argued that this
term is not very appropriate. Often employees who have no marketing training and who do not
consider themselves part of marketing, and normally have not been appointed to be concerned with
customers as part-time marketers, have a negative view of marketing and do not want to be involved
in anything labelled marketing. Why should they want to be involved in something called ‘internal
marketing’? If the term becomes a problem internally, one can always choose another name for this
phenomenon for internal use. Many firms have done so, and any term or slogan that functions well
will do. However, the term internal marketing is used to describe this approach to people management
in principle, what it includes and how it can be implemented. Therefore, the term internal marketing
is used in this book as well.
Human resources form a strategic resource for any firm. With employees who are inadequately
trained, have poor attitudes towards their job and towards internal and external customers, and who
get inadequate support from systems, technologies, internal service providers and their managers and
supervisors, the firm will not be successful. Therefore, internal marketing is a management strategy.8 It is
a strategic issue, in spite of the development of information technology and the growth of high-tech
service. If top management does not understand the strategic role of people and consequently also of internal
marketing, money invested in internal marketing efforts and processes will not pay off. In that case money
invested in information technology and systems often does not pay off very well either. The active
and continuous support of top management, not merely lip service to the importance of employees,
is a necessity for successful internal marketing.
In internal marketing the focus is on good internal relationships between people at all levels in
the organization, such that a service-oriented and customer-focused mindset is created among cus-
tomer contact employees, support employees in internal service processes, team leaders, supervisors
and managers. However, such a mindset is not enough. Adequate skills (for example, for how to
interact and communicate with customers) and supportive systems and leadership are also required.
If employees do not have the knowledge and skills needed to provide good service and create a
favourable marketing impact, they will not be motivated to perform in that way.
Top management, human resource management and marketing all contribute to the implementa-
tion of internal marketing processes. They do so in close collaboration with service operations and
other departments, where part-time marketers work.9 As will be seen later in this chapter, on a tactical
level many of the activities of internal marketing already exist in firms. It is only a matter of refocus-
ing, co-ordination, and active and goal-oriented implementation. However, on a strategic level the
role and importance of internal marketing is often not yet properly recognized.
Internal marketing thus operates as a holistic management process to integrate multiple functions of
the firm in two ways. First, it ensures that employees at all levels in the firm (including management)
understand the importance of a customer focus in the business and its various processes, activities and
campaigns. Second, it ensures that all employees have adequate knowledge and skills for complete
customer support and are prepared and motivated to act in a service-oriented manner.
THE INTERNAL MARKETING CONCEPT

The emerging importance of service to almost every business has enhanced the notion that a well-
trained and service-focused employee, rather than raw materials, production technology or the prod-
ucts themselves, is the most critical resource. These employees will be even more critical in the future
in an increasing number of industries. The more information technology, automated and self-service
systems are introduced in service processes, the more important will be the service orientation and
customer-consciousness of the employees who remain. The customer contacts that occur from time
to time will have to be consistently perceived favourably by the customers. In such service processes,
TWO ASPECTS OF INTERNAL MARKETING: CHANGING ATTITUDES AND COMMUNICATING CHANGES 413
the high-tech processes are largely taken for granted, whereas contacts with service employees, when
they occur, either make or break the customer relationship.
Marketing specialists in the marketing department are not the only human resource in marketing;
often they are not even the most important resource. In customer contacts, these full-time mar-
keting specialists are almost always outnumbered by employees whose main duties are production
and operations, deliveries, repair and maintenance services, claims handling or other tasks tradition-
ally considered non-marketing. However, the skills, customer focus and service-mindedness of these
individuals are all critical to customers’ perception of the firm and to their future patronage. Hence,
customer focus and a willingness to serve customers in a marketing-oriented fashion and to provide
customer satisfaction have to be spread throughout the organization, to every department and work
group.10
The internal marketing concept states that:
The internal market of employees is best motivated for service-mindedness and prepared for customer-focused
performance by an active, goal-oriented approach, where a variety of activities and processes, on a strategic as well
as operational level, is used internally in an active, marketing-like and co-ordinated manner. In this way, internal
relationships between people in various departments and processes (customer contact employees, internal support
employees, team leaders, supervisors and managers) can best be enhanced and geared towards service-oriented
management and implementation of external relationships with customers and other parties.
Internal marketing is the management philosophy of treating employees as customers.11 They should
feel satisfied with their job environment and relationships with their fellow employees on all hierar-
chical levels, as well as with their relationship with their employer as an organization. Human resource
management (HRM) and internal marketing are not the same thing,12 although they have a lot in
common. HRM offers tools that can be used in internal marketing, such as training, rewarding, hir-
ing and career planning, and adds more tools. Internal marketing offers guidance on how these and
other tools should be used, that is, to improve interactive marketing performance through customer-
focused and skilful employees. Successfully implemented internal marketing requires that marketing
and HRM work together.13
What is new with the internal marketing concept as described in this chapter is the introduction
of a unifying concept for more effectively managing a variety of interfunctional and well-established
activities as part of an overall process aimed at a common objective. The importance of internal marketing
is the fact that it allows management to approach all of these activities in a more systematic and strategic manner
and gear them towards the external performance of the firm. Internal marketing is not legitimated by its
methods – any activity could be part of internal marketing – but by its purpose of gearing internal
personnel-oriented processes towards their external customer-focused effects (or internal customer-
oriented effects).14
TWO ASPECTS OF INTERNAL MARKETING:

C H A N G I N G AT T I T U D E S A N D C O M M U N I C AT I N G
CHANGES
Internal marketing means two types of management processes, changing attitudes (attitude management)
and communicating changes (communications management). First of all, the attitudes of employees and
their motivation for customer-focus and service-mindedness have to be managed. This is often the
predominant part of internal marketing.
Second, managers, supervisors, contact people and support staff need information to be able to
perform their tasks as leaders and managers and as service providers to internal and external customers.
They need information about job routines, goods and service features, promises given to customers by,
for example, advertising campaigns and salespersons, and so on. They also need to communicate with
management about their needs and requirements, their views on how to improve performance, and
their findings of what customers want. This is the communications requirement of internal marketing.
Both attitude management and communications management are necessary if good results are to be
expected. Too often only the communications issues are recognized, and perhaps only as a one-way
information task. In such cases, internal marketing typically takes the form of campaigns and activi-
ties. Internal brochures and booklets are distributed to personnel, and staff meetings are held where
written and oral information is given to the participants and very little communication occurs.15 Also,
managers and supervisors typically take limited interest in their staff and do not recognize their need
for feedback information, two-way communication, recognition and encouragement. The employ-
ees receive an abundance of information but very little encouragement. As a result, there is not much
mutual understanding
This, of course, means that much of the information they receive has no major impact on the staff.
The necessary change of attitudes and enhancement of motivation for good service and customer
consciousness is lacking, and employees are, therefore, not receptive to the information.
If the need for and the nature of the attitude management aspect of internal marketing is recognized
and taken into account, internal marketing becomes an ongoing process instead of a campaign or series of
campaigns, and the role of managers and supervisors, on every level, is much more active. Also, much
better results are achieved.
Changing attitudes always includes an element of reinforcing newly instilled attitudes, and is, there-
fore, a continuous process, whereas communications management may be more of a discrete process
including activities at appropriate points in time. However, these two aspects of internal marketing are
also intertwined. Naturally, much or most of the information shared with employees has an effect on
attitudes. For example, customer contact personnel who are informed in advance about an external
advertising campaign develop more positive attitudes towards fulfilling the promises of that campaign.
The tasks of managers, supervisors and team leaders include, as integral and often inseparable parts,
both communications management aspects and attitude management aspects.
CASE STUDY
C H A N G I N G AT T I T U D E S I N A N O R G A N I Z AT I O N
IN THE PUBLIC SECTOR
A consultancy firm focusing on change processes shared the following experiences about
the process of changing attitudes in a Scandinavian public sector organization with several
thousand employees. First, the general manager requested that the consultants, together
with middle-level management, should implement and inform employees throughout the
organization about substantial changes underway in the manner the organization would
work. However, the consultant quickly realized that if this change was going to be suc-
cessfully implemented, top management had to act as a role model and supporter of the
PURPOSE AND OVERALL OBJECTIVES OF INTERNAL MARKETING 415
process. Top management had to meet the employees. In the end, the organizational
change was introduced through a big ‘tour’, containing two big buses, cameramen, sup-
porters, and of course top management. The goal was to visit hundreds of employees
at their different workplaces and tell them about the changes and ask for their opinion.
Meanwhile, the entire tour was broadcast live online, such that every employee could be
informed about the changes and the discussions with top management that were taking
place. In this way the attitude and communication management aspects were integrated,
and the change process was lifted onto a strategic level.
The tour was a great success. The response the consultants received afterwards from
employees was remarkable: ‘I have a feeling that I have been heard’, ‘I feel much more
informed regarding what we are supposed to do’, and ‘I got the feeling that the managers
at the top listen to us and take us seriously.’ After six months the organizational change
had been implemented successfully. Top management realized that they had to have more
direct and in-depth contact with their employees to be able to secure their support for
effective implementation of any decisions and changes that influenced employees. They
also realized that attitude change and communication go hand in hand.
PURPOSE AND OVERALL OBJECTIVES

OF INTERNAL MARKETING
Internal marketing has almost always been described as a means of motivating employees to be
customer-focused and service-minded in their customer contacts. This makes sense, but given that
internal marketing should be on top management’s agenda as a strategic issue, and that top manage-
ment does not usually take an explicit interest in motivating employees, defining internal marketing
in this way does not seem appropriate. Instead, as Laura Cacciatore16 suggests in her study of the
subject the lack of adequate knowledge and skills, which is a major reason for lack of motivation
for customer-focused and service-minded behaviour among employees, could be the key focus of
internal marketing. The competence level and the development of appropriate knowledge, skills and
abilities among the employees are issues which have the potential to draw top management’s attention
and turn internal marketing into a strategic issue.
A main reason why employees are not motivated to perform in a certain manner – customer-
focused, service-minded, or any other way – is a lack of knowledge and skills that would be required
for them to feel comfortable with a given behaviour. Provided that a wanted behaviour is consid-
ered generally acceptable by the employees, closing this competence gap can be expected to create
motivation and a willingness to perform. However, as will be discussed in subsequent sections of this
chapter, closing such a competence gap is a continuous process, where a number of strategic and
tactical issues have to be considered. On a general level the purpose of internal marketing can be
defined as follows:17
The purpose of internal marketing is to close the gap between the skills, knowledge and competencies that employees
need to successfully provide customers with good service, and the current competence level (e.g. knowledge and
skills) and support provided (e.g. management, information and physical support) in the organization.
Closing the competence gap can be expected to contribute to the desired motivation for a wanted
behaviour. There are of course also other reasons for a lack of motivation. However, as will be
shown in subsequent sections, creating, reinforcing and maintaining adequate knowledge and skills
demand a set of actions which address other motivators as well, such as management and supervi-
sory behaviour, communicating with employees and ways of disseminating information, and ways of
including employees in planning processes.
Based on the purpose of internal marketing formulated above, from a relationship perspective, the
objective of internal marketing is:
. . . to create, maintain and enhance internal relationships between people in the organization, regardless of their
position as customer contact personnel, support personnel, team leaders, supervisors or managers, so that they have
the skills and knowledge required as well as the support needed from managers and supervisors, internal service
providers, systems and technology to be able to provide service to internal customers as well as to external customers
in a customer-focused and service-minded way, and feel motivated to perform in such a manner.18
Such internal relationships can only be achieved if employees are comfortable with what is required
of them and feel that they can trust each other, and above all trust the firm and its management
to continuously provide the physical and emotional support required to perform in a customer-
focused and service-minded way.19
From the relationship-oriented objective of internal marketing, four more specific overall objec-
tives can be derived:
1. To ensure that employees are motivated for customer-focused and service-minded performance
and thus successfully fulfil their duties as part-time marketers in the interactive marketing process.
2. To attract and retain good employees.
3. To ensure that internal service is provided in a customer-oriented manner in the organization or
between partners in a network.
4. To provide people who render service internally or externally with adequate managerial and tech-
nological support, which enables them to fulfil their responsibilities as part-time marketers.
The main objective is, of course, to create an internal environment and implement internal actions,
processes and programmes so that employees feel motivated to carry out part-time marketing
behaviour. However, the second objective follows on from the first one: the better its internal mar-
keting works, the more attractive the firm is considered as an employer. The third objective is, of
course, only an extension of the first one, and the fourth objective is a requirement for maintaining
a motivation for customer orientation as well as for making it possible to perform well in a practical
situation as a part-time marketer. These overall objectives can be developed into more specific goals
depending on the situation at hand. This will be discussed in the following sections.
THE THREE LEVELS OF INTERNAL MARKETING

In principle, three different types of situation can be identified where internal marketing is called for:
1. When creating a service culture in the firm and a service orientation among personnel as the funda-
mental requirement for the existence of customer-focused and service minded behaviour among
employees on all levels.
THE THREE LEVELS OF INTERNAL MARKETING 417
2. When maintaining a service orientation among personnel.

3. When introducing a service perspective, new goods and services or external marketing campaigns and activities
or new technologies, systems or service process routines to employees.
These situations represent three levels of internal marketing. Each of the situations will be discussed
below.
C R E AT I N G A S E R V I C E C U LT U R E
As will be discussed in more detail in Chapter 15, a service culture exists when a service orientation and
an interest in customers are the most important norms in the organization.
In many firms a service culture is lacking or weak. Internal marketing is a powerful means of
developing a service culture in connection with other activities. In Chapter 16 service culture and
how to create such a culture is discussed. In general, internal marketing goals in this situation are:
1. To enable employees – managers, supervisors, customer contact employees and support

employees – to understand and accept the service perspective and business mission, strategies and
tactics as well as the goods, services, external marketing campaigns and processes of the firm.
2. To create positive relationships between people in the organization.
3. To develop a service-oriented management and leadership style among managers and supervisors.
4. To teach all employees service-oriented communications and interaction skills.
It is essential to achieve the first goal, because one cannot expect employees to understand why ser-
vice, service orientation and customer consciousness are important and why they have responsibilities
as part-time marketers, unless they are aware of what the firm wants to achieve, and accept this.
The second goal is important, because good external relationships with customers and other parties
are dependent on the internal climate in the organization. The third and fourth goals are impor-
tant because service-oriented management methods and communication and interaction skills are
fundamental requirements of a service culture.
M A I N TA I N I N G A S E R V I C E C U LT U R E
The second situation where internal marketing can be useful is when a service culture should be
maintained. Once such a culture has been created it has to be maintained in an active manner,
otherwise employees’ attitudes will easily revert to a culture where non-service norms and a lack of
customer focus dominate. Internal marketing goals for helping to maintain a service culture include
the following:
1. To ensure that management methods are encouraging and enhance the service-mindedness and
customer focus of employees.
2. To ensure that good internal relationships are maintained.
3. To ensure that an internal dialogue is maintained and employees receive continuous information
and feedback.
4. To continuously market new goods and services as well as marketing campaigns and processes to
the employees before they are launched externally.
The most important internal marketing issue here is the management support of every single manager and
supervisor. Management style and methods are of extreme importance at this point. Employees seem
to be more satisfied with their jobs when supervisors concentrate on supporting how problems for
customers are solved rather than enforcing existing rules and regulations.
Because management does not have the ability to directly control service processes and the
moments of truth of the service encounters, it has to develop and maintain indirect control. Such indi-
rect control can be established by maintaining a culture that makes employees feel that service should
guide their thinking and behaviour.20 In this continuous process, every single manager and supervisor
is involved. If they are able to encourage their staff, if they can open up communication channels –
both formal and informal – an established service culture can be expected to continue. Managers and
supervisors are instrumental in maintaining good internal relationships.
INTRODUCING NEW GOODS, SERVICES, EXTERNAL MARKETING

A C T I V I T I E S , C A M PA I G N S A N D P R O C E S S E S
Internal marketing initially emerged as a systematic way of handling problems when firms planned and
launched new goods, services or marketing campaigns without properly preparing their employees.
Contact employees especially could not perform well as part-time marketers when they did not know
what was going on, did not fully accept new goods, services or marketing activities, or learned about
new services and advertising campaigns from newspaper adverts or TV commercials or, even worse,
from their customers.
It should be noted that this third level of internal marketing is interrelated with, and reinforces,
the other two. These introductions, however, form an internal marketing task in their own right.
At the same time, they enhance the maintenance of an established service culture or support the
establishment of such a culture. The internal marketing goals for helping with these introductions of
new goods, services and external marketing campaigns and processes include the following:
1. To make employees aware of and accept new goods and services being developed and offered to
the market.
2. To make employees aware of and ensure their acceptance of new external marketing campaigns
and activities.
3. To make employees aware of and accepting of new ways – utilizing new or renewed technologies,
systems, routines, etc. – in which various tasks influencing internal and external relationships and
interactive marketing performance are to be handled.
PREREQUISITES FOR SUCCESSFUL INTERNAL

MARKETING
If internal marketing activities are implemented purely as isolated programmes or campaigns, or, even
worse, as separate activities without connections to other management factors, the risk that nothing
enduring will be achieved is overwhelming. The organizational structure and the strategy of the firm
have to support the establishment of a service culture. Moreover, management methods and the
management and leadership style of managers and supervisors have to be supportive if they are to be
expected to fulfil their tasks in internal marketing.
STRATEGIC AND TACTICAL INTERNAL MARKETING 419
The three prerequisites for successful internal marketing are:
1. Internal marketing has to be considered an integral part of strategic management.

2. The internal marketing process must not be counteracted by the organizational structure of a firm or
by lack of management support, or systems and physical support.
3. Top management must constantly demonstrate leadership and active support for the internal mar-
keting process.
In order to be successful, internal marketing starts with top management. Next, middle management and
supervisors have to accept and live up to their role in a marketing process. Only then can internal
marketing efforts directed towards contact employees and support employees be successful. Employees’
ability to function as service-minded part-time marketers depends to a large extent on the support and
encouragement they get from supervisors. Genuine customer-focused leadership at all levels in the
organization is a necessity if customer contact and support employees are expected to be committed
to good service.
In conclusion, all other categories of employees have to be involved as well. The contact personnel
form a natural target market for internal marketing. They have the immediate customer contacts and
are instrumental in the interactive marketing process. However, they often depend on support from
other employees and departments in the firm. The ability of contact employees to perform their
interactive marketing tasks depends to a large extent on the service-mindedness of employees who do
not come into contact with customers themselves. Such groups of employees, the support personnel,
should perform in a customer-focused manner when they serve their internal customers (for example,
contact employees). They are part-time marketers as well, although their customers are internal and not
external. In summary, the four main target groups for internal marketing are:
1. Top management.
2. Middle management and supervisors.
3. Customer contact personnel.
4. Support personnel.
It should be noted that the same person may occupy several positions. A support person may some-
times be a contact person. A supervisor who, for example, is supposed to support and encourage
contact people may be a contact person serving customers, or a support person serving internal cus-
tomers, regularly or occasionally. Middle or top management may also have customer contacts. When
they have such contacts they, too, are part-time marketers in the firm’s marketing process.
S T R AT E G I C A N D TA C T I C A L I N T E R N A L
MARKETING
As internal marketing is part of strategic management, and therefore should be a management philos-
ophy, implementing internal marketing includes strategic aspects as well as tactical ones. On a strategic
level internal marketing requires that management creates a job environment which is encouraging
and motivating for customer-focused and service-minded behaviour.21 On a tactical level, internal
marketing activities which aim at implementing a customer-focused, service-minded behaviour are

planned and executed.
S T R AT E G I C I N T E R N A L M A R K E T I N G
In order for management to create a motivating and encouraging environment for service-oriented
and customer-focused behaviour, four management areas are important. These are:
1. Motivating leadership and management support.

2. Motivating human resource policy.
3. Motivating training policy.
4. Motivating planning systems.
In the following sections we shall discuss these in some detail.
M O T I VAT I N G L E A D E R S H I P A N D M A N A G E M E N T S U P P O R T
Training is an important internal marketing activity. However, no training programme alone is
enough in an internal marketing process. In order to achieve continuity in such a process, the role of
top management, middle management and supervisors is paramount. Managers, supervisors and team
leaders have to show leadership, not only administrative ‘managing and controlling’.
Management support can be of various types, for example:
● Continuity of formal training programmes by everyday management actions.

● Demonstrating an active interest in customers and in providing good service.
● Actively encouraging employees as part of everyday management tasks.
● Empowering employees by giving them decision-making authority, and thereby showing trust in them.
● Involving employees in planning and decision-making.
● Feedback to employees and flow of information and two-way communication in formal and informal
interactions.
● Establishing an open and encouraging internal climate.
● Creating trusting relationships among employees.
Frequently, employees returning from a course or a training session have no follow-up on the course
message. Their supervisor is not interested in what they have learned or how to make use of new ideas
and knowledge. Employees are usually left alone to implement what they have learnt. Sometimes
employees get the impression that the fact they have been away for training has only created problems,
for example with undercapacity. Nobody seems to care about any positive and potentially useful
learnings. In such situations, employees are alienated, any new idea and favourable attitude effects are
rapidly destroyed.
Instead, the manager or supervisor should encourage employees to implement new ideas and help
them to realize how they could be applied in their specific environment. Recognition is a critical
STRATEGIC INTERNAL MARKETING 421
Demonstrate an active Involve employees in

interest in customers planning processes and
and good service establish goals together
Support learnings Enable employees to

from training provide good service
programmes Motivating leadership
and
management support
Empower employees Establish and reinforce
and decentralize an open and
decision making encouraging climate
Provide feedback Support trusting relationships

and encouragement between employees
F I G U R E 14.1
Strategic internal marketing: Motivating leadership and management support.
part of management support. The management style demonstrated daily by managers and supervisors
has an immediate impact on the job environment and internal climate, thus management style is an
internal marketing issue.
Joint planning and decision-making with the employees involved is a means of achieving com-
mitment in advance to further actions that emerge from the planning process. Customer contact
employees have valuable information and knowledge of the needs and desires of customers, so the
involvement of these employees in the planning process leads to improved decision-making.
The need for information and feedback has been discussed already in this book. Here, managers,
especially supervisors, have a key role. Moreover, they are responsible for creating an open cli-
mate where service-related and customer-related issues can be raised and discussed in a relationship-
enhancing internal dialogue.
Management support and internal dialogue are the predominant tools of the attitude management
aspect of internal marketing, but they are also key ingredients of communications management.
Key aspects of motivating leadership and management support as part of strategic internal marketing are
summarized in Figure 14.1.
CASE STUDY
EXPERIENCES OF A SERVICE EMPLOYEE
From my job experience, it really makes a difference if the employee feels that he is an
important part of the business, and really believes in what the firm is doing. I have worked
for firms where I have felt important and felt that the managers believed in what I was
doing, and in other firms where I have felt absolutely unimportant. If you understand
what the firm is doing and your role there, and if managers give you decision-making
authority, it really influences the way you work. You feel that you are trusted, and you
feel committed to the employer. On the other hand, when your supervisor just gives you
orders, and you’ll have to make customers believe in one thing, and you realize that the
firm in reality does not live up to this, you don’t feel committed.
The most powerful bosses I have had during my life have been those who have gained
power by giving it away, by empowering their employees and only been support persons
to them. On the other hand, I have had bosses who have tried to control as much of my
work as possible. These bosses have gained little real power in the minds of the employees,
whose work efforts have decreased during the time they worked for them.
In my experience, so many managers don’t understand the role of service employees
for the firm’s marketing impact. Because they don’t see this, they seem not to care about
their team members who are in daily contact with customers. And if they do understand
the role of marketing in their field, they tend to believe that they know what customers
need and want, and don’t listen to the contact employees who get firsthand feedback
from the customers.
The problem here is that these managers seem to think that their team members are
not to be trusted or capable of taking responsibility. I have seen so many big deals lost,
because the employees working directly with customers did not have proper information
and authority to respond quickly to customers’ inquiries and demands.
Source: This case was written by Tyrsky Ylppö from Finland, based on her work experience.
M O T I VAT I N G H U M A N R E S O U R C E P O L I C Y
The human resource management approach must motivate the employees to take a customer-focused
and service-oriented approach when pursuing their tasks. This includes:
● Hiring policies which encourage service-oriented persons to apply.

● Job descriptions which encourage a service orientation and customer focus.
● Career plans that encourage a service orientation and customer focus.
● Reward systems that appreciate service-orientation and customer-focused behaviour.
These aspects of human resource management aim at supporting a service culture and an interest
in internal and external customers. If they are mismanaged, the culture will not enable a service
orientation and an interest in customers, which are prerequisites for successful interactive marketing
and customer-focused part-time marketer behaviour.
It is essential to hire and keep the right kind of employees in a firm. Successful internal marketing
starts with recruitment and hiring. This, in turn, requires proper job descriptions where the part-
time marketer tasks of contact and support employees are recognized. Job descriptions, recruitment
Career planning which

Hiring policies which encourages service
encourage service-minded orientation and
individuals to apply customer focus
Reward systems which

Motivating human appreciate and support
resource policy service orientation and
customer-focused behaviour
Job descriptions which Motivating training systems

encourage service orientation and programmes (discussed
and customer focus separately
F I G U R E 14.2
Strategic internal marketing: motivating human resource policy.
procedures, career planning, salary, bonus systems and incentive programmes, as well as other HRM
tools, should be used by the organization to pursue internal marketing goals.
None of the HRM-related tasks is new. However, they are often used passively, more like admin-
istrative procedures than as active marketing tools to achieve internal objectives. The external market-
ing implications of these tasks are also all too often neglected. Because of the traditional management
approach, most employees are considered costs only, and not revenue-generating resources, and the
human resource policy is developed accordingly.
Rewarding employees for good service is also an important internal marketing instrument.22 People
should know that good service is appreciated by the firm and this should be recognized in the reward
system. Far too often cost-efficiency achievements and other internal efficiency factors are the basis for
reward systems. If a high number of phone calls dealt with is considered good and rewarded in spite
of the fact that customers may be dissatisfied because they feel that they received too little attention,
good service is not encouraged.
In many service businesses, the important customer contact jobs are placed in the hands of the
newest, least-trained employees, who are often hired on a part-time basis only. Quite often they are
unskilled and paid little. Their job can be monotonous. No positive relationships with the employer
can develop under such circumstances, although such employees can have a major influence on
customer experiences of service quality. Their impact on profits can be equally important.23
Key aspects of motivating human resource policy as part of strategic internal marketing are summarized
in Figure 14.2.
M O T I VAT I N G T R A I N I N G P O L I C Y
Educating employees and training programmes are part of human resource management. However,
because of the central importance of training for successful internal marketing, training policies and
programmes are discussed in a separate section. Training is the most frequently used internal market-
ing activity, and it is almost always required. However, the training policy is of strategic importance.
Strategically, it has to be geared towards the creation and maintenance of a service culture, which
enables and reinforces service-mindedness and a customer focus within the organization. A lack of
understanding of the firm’s strategies and of the importance of part-time marketers’ responsibilities
is almost always present. ‘Service knowledge’ and adequate skills are lacking. This is partly due to
insufficient or non-existent knowledge of the meaning of a service strategy, of the nature and scope
of marketing in a service and relationship context, and of the employees’ role with dual respon-
sibilities in the firm. This often goes for managers on all levels as well as for contact and support
employees.
Partly, this is an attitude problem. Indifferent or negative attitudes have to be changed. On the
other hand, attitude problems normally follow on from a lack of understanding of facts and a lack of
adequate skills. Therefore, the tasks of improving employees’ knowledge and changing attitudes are
intertwined.
Training, either internal or external, is most frequently needed as a basic component of an internal
marketing process. Three types of training tasks can be included:
1. Developing a holistic view of a service strategy and of the total customer management or marketing
process, as well as of the role of each individual in relation to other individuals and processes in
the firm, and in relation to customers.
2. Developing adequate technical knowledge and skills about how to provide good service and how
to handle customer contact situations.
3. Developing and enhancing favourable attitudes towards a service strategy, a customer focus and
part-time marketer performance.
4. Developing and enhancing communications, sales and service skills among employees.
Training, together with internal communication support, are the predominant tools of the commu-
nications management aspect of internal marketing. However, at the same time they are also part
of the attitude management process. If the first type of training goal is overlooked, it will be very
difficult or impossible to create conditions for favourable attitudes towards service and part-time mar-
keting responsibilities, or to make employees interested in acquiring the skills required to perform as
good part-time marketers. An individual who does not recognize and appreciate the whole picture
will not understand why he should change his behaviour towards fellow employees and customers
and bother to acquire new skills unrelated to his traditional tasks. Because employees need to feel
that there is a trusting relationship between fellow employees and management as well as customers,
training programmes must also include elements focusing on the fair treatment of both employees
and customers.24
Key aspects of motivating training policy as part of strategic internal marketing are summarized in
Figure 14.3.
M O T I VAT I N G P L A N N I N G S Y S T E M S
Often employees feel frustrated because they cannot influence how work routines and processes are
developed. They know from experience and firsthand customer feedback what could be improved.
Therefore, employees on many levels in an organization should be actively involved in the planning
of their work environment and job routines. The employees have knowledge and insights which
are often valuable for planning their jobs. Of course, suggestions based on such knowledge must be
evaluated in accordance with the firm’s strategy. In a later section, a relationship-mediated model of
internal marketing relying on a motivating planning system will be described.
Firms seldom make use of the firsthand knowledge of customer processes, needs and expectations
held by customer contact employees. As a consequence, actions needed to correct or improve service
processes and employee skills are not taken, or processes and skills are developed in a less than optimal
Develop adequate technical

skills for the provision of good
Training is a continuous process
service and handling of customer
contact situations
Develop and reinforce a holistic Teach how to service external

view of the service strategy and Motivating
and internal customers and how
the total customer management training policy
to communicate with them
process
Demonstrate the role of each Develop and enhance favourable

employee in relation to others in attitudes towards implementing a
the customer management service strategy, customer focus
process (‘the big picture’) and part-time marketer behaviour
F I G U R E 14.3
Strategic internal marketing: motivating training policy.
way, sometimes in a counterproductive direction. This is also true in the case of internal processes,
where the insights of support employees go unnoticed.
Including employees in planning processes has at least the following benefits:
● Knowledge of how service processes function and problems with practical implementation, and
about opportunities to improve them, is used.
● Knowledge about internal and external customers’ views of existing processes and how such pro-
cesses could be improved is used.
● Tacit knowledge as well as explicit knowledge is recognized and can be used.
● Employees who have been actively involved in planning and development processes easily feel
more committed to executing new plans than other employees.
From an internal marketing perspective, the main reason to include employees in planning processes is
to create and reinforce customer-centric and service-oriented attitudes in the organization. However,
at the same time, better insights into how existing processes work (and why they sometimes do not
work well) and knowledge about the firm’s customers are obtained to improve existing processes.
These insights exist in the form of tacit knowledge, which is made explicit only by deliberate actions.
Furthermore, employees who have been engaged with planning processes which they are part of
can be expected to commit themselves to implementing these processes more wholeheartedly than
otherwise.
Engaging employees with planning processes can of course be done in many ways, both through
formal routines and in informal ways. Whenever possible formal planning routines can be used, but
informal contacts between a manager or supervisor and contact employees may often both enhance
motivation for good service and reveal useful insights about customers and how service processes
function and could be improved.
Key aspects of motivating planning processes as part of strategic internal marketing are summarized in
Figure 14.4.
Engaging employees reinforce Better decisions regarding

favourable attitudes and service processes and routines
motivation for service provision are made
First-hand insights about Competence gaps and lacking

Motivating
customers and how existing skills can be revealed and
planning systems
processes function is obtained acted upon
In addition to explicit Employees engage better with

knowledge, tacit knowledge service processes and strategies
is also recognized and are more committed to
implementation
F I G U R E 14.4
Strategic internal marketing: motivating planning systems.
INTERNAL MARKETING ACTIVITIES ON THE

TA C T I C A L L E V E L
There is no exclusive list of activities that should belong to an internal marketing process. Almost
any activity that has an impact on internal relationships and on the service-mindedness and customer
focus of employees can be included.
Typical internal marketing activities can be identified, however. The following list is not intended
to be inclusive, nor does it distinguish between activities to be used in developing or maintaining a
service culture or in introducing new goods, services and marketing campaigns internally. Many of
the activities are common to two or three of these situations.
TRAINING
As mentioned above, training is the most frequently used tactical internal marketing activity, and
is almost always needed. However, it is important to remember that training is seldom enough to
achieve lasting, or even short-term, results. Training must always be supported by other actions, out
of which leadership and management support are most important. Training was discussed extensively
in the context of strategic internal marketing, and will therefore not be discussed here any further.
I N T E R N A L M A S S C O M M U N I C AT I O N A N D I N F O R M AT I O N S U P P O R T
Most managers and supervisors realize that there is a need for them to inform employees about new
service-oriented strategies and new ways of performing in internal and external service encounters,
and to make them understand and accept new strategies, tasks and ways of thinking. However, many
people do not know how to do this. Therefore, it is important to develop various kinds of support
materials. Computer software, PowerPoint presentations and other audio-visual and written material
explaining new strategies and ways of performing can easily be used by managers during staff meetings.
INTERNAL MARKETING ACTIVITIES ON THE TACTICAL LEVEL 427
Brochures, internal memos and magazines, as well as other means of mass-distributed communi-
cations material, can of course also be used in internal marketing.
HUMAN RESOURCE MANAGEMENT

HRM activities are also part of an internal marketing process. However, such tasks were discussed in
the section on a motivating human resource policy and will therefore not be discussed any further
here.
E X T E R N A L M A S S C O M M U N I C AT I O N
The internal effects of any external mass communication are seldom fully recognized. However,
employees almost always form an interested and responsive target audience for advertising and other
marketing communication campaigns. Such activities and campaigns, and the customer promise
inherent in them, should be presented to employees before they are launched externally. This may
create commitment and decrease confusion. One step further would be to develop such campaigns
in co-operation with the employee groups affected by the external communication effort. This can
be expected to commit employees to the fulfilment of promises made in planned external marketing
communication.
DEVELOPING SYSTEMS AND TECHNOLOGY SUPPORT

The development of customer information databases, systems for effective internal service support,
and other types of systems and technologies that make it possible for the contact employees to pro-
vide good service are important parts of internal marketing. If such support is lacking, even the most
customer-focused and service-minded employees will eventually start to feel frustrated and lose inter-
est in being good part-time marketers.
Information technology and the development of intranets have had a tremendous impact on inter-
nal processes and provided an effective support system in internal marketing. Through easy access to
databases, websites and e-mail, and also social media, people and internal processes can reliably and
quickly connect to each other. The feeling of being connected to the same body of information as
everyone else may create a commitment to a mutual cause among employees, which has a positive
influence on internal relationships.25 However, there is also a risk that the use of e-mail and intranets
may alienate employees from each other and from the work community. It is too easy to be antisocial
and only communicate using information technology. Such negative aspects of this technology are
also enhanced by a surplus of information, much of which may be totally irrelevant.26
I N T E R N A L S E RV I C E R E C O V E RY
From time to time customer contact employees and support employees face service encounters where
a service failure has occurred, or have to interact with customers who are having a bad day. The
situation may be frustrating and sometimes also humiliating for the contact person. Furthermore,
the less empowered they are, the more they may experience feelings of low perceived control of the
tricky situation and helplessness in dealing with the service failure. The customers may have been
emotionally upset, frustrated or angry. Internal customers may react in similar ways. Contact persons
who have had to cope with situations like these may need help to recover from the mental stress
they suffer following such encounters and from the pressure that they have been under. The firm
must actively address these issues to help employees to recover. Bowen and Johnston call this internal
service recovery.27 Managers and supervisors have a decisive role in handling such internal recovery
situations. Support from the whole work group can be valuable for fellow employees in such stressful
circumstances. Management may need to a create a system which guarantees that a support network
exists and functions.
M A R K E T R E S E A R C H A N D M A R K E T S E G M E N TAT I O N
Both internally and externally, market research can be used to find out, for example, attitudes towards
part-time marketing tasks and service-oriented performance. Market segmentation can be applied in
order to find the right kind of people to recruit for various positions in the organization.
In Table 14.2 internal marketing activities are summarized.
TA B L E 14.2
Internal marketing activities.
Training
● Target groups: employees on all levels from top management to middle management, super-
visors and support and contact personnel.
● Understanding of the employees’ role in the total relationship with a customer and of each
and everyone’s role and tasks in maintaining and enhancing this relationship.
● Interaction and communication skills.
Leadership and management/supervisory support

● Leadership and management/supervisory support is a continuation of training sessions, which
either brings the messages of such sessions alive or kills them.
● Top management must personally demonstrate customer-focused and service-oriented atti-
tudes and behave accordingly.
● Every manager/supervisor must live up to customer- and service-focused standards.
● They must support and not counteract the motivation of and possibilities for their people to
perform in a customer-oriented and service-focused manner.
Internal communication and dialogue

● No memos must be used.
● As little one-way information as possible.
● As much personal contact as possible.
● As much dialogue as possible.
● Use intranets for key information.
● E-mail can be used, but avoid overload and if appropriate enable e-mail response.
INTERNAL MARKETING ACTIVITIES ON THE TACTICAL LEVEL 429
Make use of internal effects of external communication
● The employees are always an eager audience for external communication.

● Emphasize the role of your employees in advertising and in other external campaigns.
Involve your employees in planning
● Your employees are a source of tacit knowledge about customer preferences and customers’
everyday activities, expectations and requirements.
● Involvement has a motivating effect.
● The marketing communication effort that is developed can be better than it would have
been otherwise.
Reward your employees for successful performance
● Encourage employees, show respect for them and acknowledge good performance.
● Correct mistakes and give advice for the future in a positive and encouraging manner.
● Although encouragement and job satisfaction are good motivators, bonuses and rewards
are also supportive.
Develop supportive technologies and systems
● Make sure that support systems, databases and physical instruments required in the service
process are supportive to service-focused and customer-oriented behaviour and performance
and do not become a hindrance to such behaviour.
Use human resource management instruments
● Use HRM activities in an active way that not only helps create job satisfaction and a satisfying
work environment, but at the same time directs the interests of employees towards customers
and customer-focused behaviour so that they become good part-time marketers.
Do internal market research and segmentation
● Job satisfaction usually correlates with customer satisfaction.

● Study the employees’ attitudes and preferences towards the work environment, their tasks
and the challenge of customer-focused and service-oriented behaviour.
● Use qualitative as well as quantitative methods; make use of information and feedback from
encounters that managers and supervisors have with their team members.
● Remember that employees also form a heterogeneous group and therefore may have to be
segmented into subgroups that in some respects are approached in different ways.
CASE STUDY
H G H A R D WA R E
In the Scandinavian market, computer hardware competition has been fierce, and many
firms have suffered. Forced to stay out of his office because of a broken leg, Mr Sam
Hardman, marketing director of HG Hardware, a regional chain with 15 stores, a central
warehouse and some 120 employees, took the time to develop an internal marketing con-
cept to increase employee commitment to the employer and to good service. According
to this concept, the attention of everyone in the firm – for example, managers, office per-
sonnel, sales clerks, drivers of delivery trucks, warehouse workers and cleaners – should
be drawn to the economic performance of the firm, and everyone should be rewarded if
its financial result exceeded a set level.
An easy-to-understand chart showing how costs and revenues lead to a Return of
Investment (ROI) measure was developed, and an equally easy-to-read booklet about how
everyone’s performance contributed to costs and revenues was distributed to employ-
ees. In this booklet it was demonstrated how the level of service to customers over the
counter contributed to revenues, how the work of office employees in the warehouse
and stores and in deliveries affected costs, on the one hand, and the opportunity to serve
customers well created revenues, on the other hand. The expected impact on costs and
revenues of employees paying increased attention to their tasks and to serving internal
and external customers was explained in detail and in an understandable way. Each and
every employee, regardless of his position in the firm and area of responsibility, could see
how the way he did his job influenced costs and revenues, and eventually had an effect
on ROI. They could also see how changes in the way they did their job had an impact on
ROI, either positively or negatively.
The firm invested in an extensive training programme, the objective of which was to
teach employees to understand the economic consequences of the way they did their jobs
and to help them realize how they all contributed to ROI, regardless of their tasks.
HG Hardware’s management set a modest ROI target of 15% for the first year, and
informed the employees that, provided this target was achieved, the owner would take
7.5% to cover their ROI objectives and for future investment in the business, and the
rest of the achieved ROI would be split equally between the owners and the employees.
On the 15th of every month the ROI figure for the end of the previous month was dis-
played in all luncheon and coffee rooms and other social areas, so that everyone could
follow how their performance had paid off. This created interest in the firm’s financial
results. After the first year the target had been exceeded. Mr Hardman said, ‘It worked.
People became interested in the economic consequences of how they took care of their
tasks, and we got a commitment to good service. Our customers seemed to have noticed
it, too.’
A RELATIONSHIP-MEDIATED APPROACH TO INTERNAL MARKETING 431
A R E L AT I O N S H I P - M E D I AT E D A P P R O A C H
TO INTERNAL MARKETING
In his research David Ballantyne has taken a relationship approach to internal marketing, where he
views it as knowledge renewal.28 Groups of customer contact employees have accumulated knowl-
edge about customers’ behaviour and preferences as well as about how, and with what means, to best
serve customers and create a good service quality perception. However, this knowledge has the form
of tacit knowledge, which is not documented in formal procedures or even known to management.
And it is probably not known to everyone who serves customers and perhaps not widely used in
the organization. This knowledge may be actively used or, if restricted by company policies, reward
systems or supervisory control, not used other than marginally or not at all. If that is the case, it
probably frustrates the employees and has a negative impact on their service orientation and customer
consciousness. According to Ballantyne, this tacit knowledge has to be interpreted and codified, and if
found useful as explicit knowledge circulated in the organization for use by everyone serving internal
or external customers. If based on strategy and cost–benefit considerations found appropriate, this tacit
knowledge made explicit could change company policies. In the best case scenario the new explicit
and authorized knowledge about how to serve customers becomes part of the corporate culture and
as tacit knowledge steers the employees’ attitudes and behaviours.
According to Ballantyne, this process of knowledge renewal has four stages.
1. Energizing: revealing common knowledge by exploring tacit knowledge.

2. Code breaking: discovering new knowledge by turning tacit knowledge into explicit knowledge.
3. Authorizing: making cost–benefit and policy considerations and transforming tacit-made-explicit
knowledge into explicit knowledge that from a strategic and commercial perspective can be put
to use.
4. Diffusing: integrating the new explicit knowledge with corporate culture and behaviour by dis-
seminating the new explicit knowledge in the organization.
In the first phase of the process, the energizing phase, groups of employees are gathered to discuss
customer service and various means of servicing customers as well as obstacles and challenges related
to this. Such obstacles can be related to anything, for example, existing skills, IT and physical support,
atmosphere, company policies, reward systems and supervisory control. The groups are given the
opportunity to meet regularly and discuss freely. This first energizing phase should not necessarily
lead to any conclusions or suggestions yet. At the same time as tacit knowledge held by the participants is
explored it is a socialization process where the participants should create a willingness to pass on to other group
members the knowledge and experiences they have gathered in their job. A mutual trust among the participants
should develop, otherwise discussions and knowledge transfers will be constrained.
In this and the next phase of the process discussions, role play and group-based dialogue could
be used. Of course, any other way of comparing experiences and making knowledge and thoughts
explicit could also be used.
After the initial phase the code breaking phase follows. There, when the group members have already
familiarized themselves with other participants and developed a trust in each other, the main task is
to discover knowledge that, based on their experience, the members have gained and perhaps made use of. Old
codes should be broken and new opportunities explored. In this way the tacit knowledge held by the
group members is turned into explicit knowledge. As the participants know that their task is to develop new
ways of serving customers (or of performing any task), a mutual obligation to drive the task through
should keep the process going.
In the authorization phase the developments and suggestions created in a group are analysed from a company
policy and cost–benefit point of view. This analytical task can to some degree be done in the group, but
other than in special cases, the final analysis and decisions have to be made on a management level.
This is, of course, due to the fact that company strategies, budget restrictions and other management
considerations have to be taken into account. This is a process where tacit-made-explicit knowledge
about service procedures and cost–benefit and policy considerations are brought together. Through
this process, explicit knowledge created by the groups is further developed into new procedures and routines to be
used in the organization. It is probable that some developments and suggestions by the group cannot be
transformed into new procedures. This can be due to, for example, cost–benefit considerations and
company strategies or policies that would be violated, and according to management should not be
changed.
In the final stage of the process, the diffusing phase, the new authorized knowledge is integrated with cor-
porate culture through, for example, new designs, support systems and procedures as well as training programmes
and new supervisory methods and leadership. The goal is not only to make the new knowledge and the
changes in the organization known to everyone concerned, but also to achieve personal commitment
by the employees. In this way the new explicit knowledge is transformed back into tacit knowledge that con-
sciously and unconsciously steers the behaviours of the employees in the organization. It is integrated
with and reinforces the company culture and in some cases even alters it.
Input to this internal marketing process is the personal knowledge of employees, possibly supported
by market intelligence. The output can be expected to be a higher level of customer consciousness in the
organization and, as a consequence, improved customer-perceived service and relationship quality as well
as enhanced market performance of the firm.29
EMPOWERING AND ENABLING EMPLOYEES

Two concepts that are closely related to internal marketing are empowering and enabling. An under-
standing of both concepts and their meaning is important for the effective implementation of internal
marketing.
Empowering employees means to give people in an organization, some of whom are customer contact
employees, the authority to make decisions and take action in a large number of potentially problem-
atic situations.30 The main reason for empowerment is the employee motivation effect that can be
achieved.31 There will probably be limits on how far this authority can go, and these limits must be
carefully determined. For example, decisions where legal matters have to be considered and/or large
sums of money are at stake probably need to be taken to a higher management level. Management
must set clear and acceptable boundaries for frontline employees’ service recovery latitude.32 The
main thing is that the contact (or support) employee knows his responsibilities and is encouraged to
perform more effectively and in a more customer-focused fashion. The ultimate goal is, of course, to
improve the part-time marketing performance of the customer contact and support employees.
Correctly implemented empowerment as part of an internal marketing process can have a decisive
impact on the job satisfaction of employees, which in turn may improve the part-time marketing
impact of employees in customer contacts. Through improved customer retention and more cross-
sales this can be expected to have a positive effect on profit.33
The empowerment concept has, however, also been criticized. It has been claimed that little real
empowerment take place,34 and that change programmes which aim at empowering employees are
EMPOWERING AND ENABLING EMPLOYEES 433
full of inner contradictions that have a negative impact on motivation. Managers consciously and
unconsciously by their actions and attitudes counteract efforts to empower personnel. In practice they
rely more on standardized processes that steer the performance of the employees in a predetermined
direction. This does not create an environment for self-governance or for motivated employees to
take responsibility for their actions, especially for actions that deviate from the normal route.
However, if empowerment is successfully introduced, the results can be good. Empowerment
demands a continuous nurturing of trusting relationships between management and employees.35
Managers must show that they respect employees’ authority to analyse situations and make decisions.
In this way a mutual trust between management and employees can be instilled. It is also important to
realize that empowerment cannot happen overnight. Rather, management must create and maintain
the conditions needed so that an employee can feel that he has power and can use his power in
customer interactions.36 The enabling concept is part of the process of creating the conditions required
for empowerment.
Bowen and Lawler37 put empowerment in a larger context. They claim that empowering
employees means (1) providing them with information about the performance of the organization,
(2) rewarding them based on the organization’s performance, (3) creating a knowledge base that
makes it possible for employees to understand and contribute to the performance of the organization,
and (4) giving employees the power to make decisions that influence organizational directions and
performance.
Empowerment cannot function without simultaneously enabling employees so that they are pre-
pared to take the responsibility that goes with the new authority. Much of the concern about empow-
erment in the literature seems to be due to lack of enabling. The employees must understand what
goals they should be aiming at by making empowered decisions, and feel that they have the capacity
and knowledge required for such behaviour. Enabling means that employees need support to be able
to make the independent decisions effectively in the service process. Without such support, proper
conditions for empowered employees do not exist. Enabling includes:
1. Management support, so that supervisors and managers give information and also take over decision-
making when needed but do not interfere unnecessarily with the decision-making authority given
to employees.
2. Knowledge support, so that employees have the skills and knowledge to analyse situations and make
proper decisions.
3. Technical support, from back-office support staff, systems, technology and databases that provide
contact employees with information and other services and tools required for handling a wide
variety situations.
It is important to realize that empowerment without enabling creates more confusion and frustration than job
satisfaction and motivation among employees. People who are required to take responsibility for customers
but who are not enabled to do so will feel confusion, frustration and anger, and they will proba-
bly make bad decisions. The connections between empowerment and internal marketing can easily
be seen. Among the objectives of internal marketing is the development of management support,
knowledge support and technical support so that empowered employees have the tools and assistance
they require and will feel motivated to perform effectively as part-time marketers.
The benefits of empowerment of service employees are as follows:38
1. Quicker and more direct response to customer needs in the service process, because customers will not have
to wait for a decision until a supervisor can be found in unusual situations. At the same time,
customers will experience a feeling of spontaneity and willingness to help which has a positive
effect on perceived service quality.
2. Quicker and more direct response to dissatisfied customers in service recovery situations, again because cus-
tomers will not have to wait for a decision until a superior can be found, or will not have to file
a formal complaint in situations that do not warrant such a complicated procedure.
3. Employees are more satisfied with their job and feel better about themselves, because they take ownership
of their job and know that they are trusted employees. This may also decrease absenteeism and
employee turnover.
4. Employees will treat customers more enthusiastically, because they are more motivated to do their
job. This of course requires that they have been made aware of their part-time marketing
responsibilities.
5. Empowered employees can be a valuable source of new ideas, because they have direct customer con-
tacts, see the problems and opportunities experienced in service encounters, and the customers’
behaviours, needs, wishes, expectations and values. As empowered employees they are more
inclined to notice these problems and opportunities and to share the findings and ideas they get
from them with supervisors and managers.
6. Empowered employees are instrumental in creating good word-of-mouth referrals and positive comments in
social media, and increasing customer retention, because they can be expected to serve customers in
a quick, skilful and service-oriented manner, thus surprising customers and making them more
inclined to spread the word and stay with the same service provider.
Empowerment does not mean that managers and supervisors should have less managerial
responsibility.39 The nature of this responsibility will change, however: there will be more leadership
orientation instead of mere managing, more independent judgement instead of managing by the book,
and a clear understanding when decisive action on the part of the manager or supervisor is required.
Sometimes empowering employees may incur some extra costs. Additional employee training may
be required and it may be necessary to pay empowered employees better. There is also, of course,
the risk that empowered customer contact employees will make bad decisions that may cost the firm
money and perhaps also have a negative effect on customers. This can, however, be avoided by
recruiting and enabling personnel carefully. It should also be remembered that not all employees can
be empowered, because not everyone will want to have the responsibility that goes with it. Some
seemingly unnecessary costs that make customers happy, for example, in service recovery situations,
will probably pay off in the long run.
CASE STUDY
E M P O W E R M E N T AT N O R D S T R O M
Nordstrom, the upscale North American department store chain whose headquarters
are in Seattle, Washington State, has a long-established reputation for empowering its
sales associates. In turn, the chain also has a phenomenal reputation for fervently loyal
customers.
AN APPROACH TO MOTIVATING EMPLOYEES 435
Nordstrom’s sales associates have an ‘empowered state of mind’, and they feel more
control over how to perform the job, more awareness of the business context in which the
job is performed and more accountability for performance outcomes. Nordstrom accom-
plishes this through management practices that confer significant amounts of power,
information, knowledge and rewards upon them. As to power, the associates have the
discretion to do whatever it takes to please the customer. The Nordstrom policy manual
essentially consists of two sentences: ‘Use your good judgement in all situations. There
will be no additional rules.’ Information on products and sales performance is widely
shared. Knowledge refers to training, and Nordstrom relies on extensive on-the-job train-
ing, rather than formal classroom training. Finally, as to rewards, sales associates can earn
well above the industry average through commissions on sales. There are also numerous
status rewards such as being elected as Employee of the Month or being nominated to the
V.I.P. Club. It is this empowerment that industry analysts claim accounts for the high level
of employee sales, customer satisfaction and profits that make Nordstrom a benchmark
in retailing.
A N A P P R O A C H T O M O T I VAT I N G E M P L O Y E E S
Berry and Parasuraman40 offer a number of guidelines for firms that want to practice internal mar-
keting effectively:
1. Compete for talented employees.

2. Offer a vision that brings purpose and meaning to jobs.
3. Make sure that employees have the skills and knowledge needed to do their job excellently.
4. Create teams of people who can support each other.
5. Leverage the freedom factor.
6. Encourage achievements through measurement and rewards.
7. Base job design decisions on research.
These seven guidelines make good sense; however, it is not always easy to implement them.41
Employees need to be empowered to perform, but they also need the support of good management,
support systems, technology and information. They also need training so that they have the skills
needed to perform effectively. Most people feel motivated to perform better if they have the freedom
to think, analyse, make decisions and act. To be able to do that they need knowledge and skills, so that
they feel secure in an empowered position. It all starts with recruitment procedures. The better people
the firm can hire from the outset, the more effectively they will perform as part-time marketers and
in their other duties. In spite of all its technology, a firm is only as good as its people. However, how
often do firms violate some or all of these guidelines when hiring and managing customer contact
employees or support employees and their supervisors and managers?
HOW TO IMPLEMENT AN INTERNAL

MARKETING PROCESS
When starting to plan and implement an internal marketing process, a few guidelines should be
observed. First of all, the internal focus of internal marketing has to be recognized and fully accepted by
management. Employees sense that management considers them important when they are allowed to
participate in the process, both in an internal research process and in planning their work environment,
the goals and scope of their tasks, information and feedback routines and external campaigns. When
employees realize that they are able to involve themselves in improving something that is important
to them, they will be more inclined to commit themselves to the business and the goals of the internal
marketing strategy.
However, the external focus of an internal marketing strategy process should never be forgotten.
Improving the work environment and tasks for the employees is, of course, an important objective in
its own right. It is, nevertheless, the external marketing impact of every employee that is the ultimate
focus of internal marketing. The ultimate objective is to improve customer consciousness and service
mindedness and thus, in the final analysis, the interactive marketing abilities and the part-time marketing
performance of the employees. Consequently, the internal and the external focus of internal marketing go
hand in hand.
Furthermore, it should always be remembered that if the internal marketing process is viewed as being
simply tactical and initiated only at the customer contact level involving only contact employees, it will
fail. This level alone cannot breed a service culture for the organization, nor reach the many support
employees who also have to function as part-time marketers internally. Only in a situation where a
solid service culture has been established can the internal marketing of, for example, an advertising
campaign or a new service be directed towards a specific target group of, say, contact employees
in a certain department. In all other situations, internal marketing has to involve everyone in the
organization, and start with top management and include middle management and supervisors. As
has been said, continuous management support, not only by paying lip service to internal marketing,
but by active involvement in the process, is an absolute necessity.
Finally, internal marketing is a continuous process. The organization needs constant attention from
management. Changes in strategy, in technologies used in service processes and in external marketing
must always be carefully introduced to the organization. Changing a corporate culture in a service-
oriented direction takes time, and management must understand that it has to be given the time it
takes. After that the service culture has to be continuously nurtured.
S U M M A RY
Internal marketing is an umbrella concept for a range of internal activities and processes, the objective of
which is to develop a service orientation, service-minded attitudes and an interest in part-time marketer
behaviour among the personnel. It is, therefore, first a management philosophy and second a set of tools.
As a management philosophy it emphasizes the pivotal role of the employees as a first internal market. In
this chapter the importance of internal relations was emphasized. Three levels of internal marketing were
discussed: (1) developing a service culture; (2) maintaining a service orientation among the personnel;
and (3) introducing new goods, services, marketing campaigns and activities, systems and technologies
in service processes to the personnel. Then, marketing on strategic and tactical levels were explained.
NOTES 437
A number of typical activities that can be part of an internal marketing process were also described. In
the final part of the chapter, the concepts of empowerment and enabling employees were presented and
discussed at some length.

1. Why has a need for internal marketing emerged in service firms?
2. What does it mean to take a relationship approach to internal marketing?
3. Which are the levels of internal marketing? Which processes and activities can be expected
to function well as part of internal marketing at each of these levels?
4. What is empowerment? What is the role of empowerment in internal marketing?
5. Why is it dangerous to empower employees without simultaneously considering the need
for enabling employees?
6. Discuss the relationship-mediated approach to internal marketing. How could it be imple-
mented in your firm?
7. Analyse the level of service orientation in your firm, or in any given firm, and determine the
need for internal marketing. Also, discuss which internal marketing processes and activities
might function well for your firm.
NOTES
1. The ultimate idea of internal marketing, to make sure that employees make a good impres-
sion on a firm’s customers and support customers’ perception of quality, is growing in impor-
tance. Internal marketing has been the subject of continuous academic research. For some recent
publications where internal marketing is studied in various contexts, see for example Peltier,
J.W, Schibrowski, J.A. & Nill, A., A hierarchical model of the internal relationship marketing
approach to nurse satisfaction and loyalty. European Journal of Marketing, 47(5-6), 2013, 899–916;
Ting, S-C., The effect of internal marketing on organizational commitment: job involvement
and job satisfaction as mediators. Educational Administration Quarterly, 47(2), 2011, 353–382; and
Papasolomou, I., Kountouros H. & Kitchen, P.J., Developing a framework for successful sym-
biosis of corporate social responsibility, internal marketing and labour law in a European context.
The Marketing Review, 12(2), 2012, 109–123.
2. The observation of the existence of an internal market and of the need for service firms to
market their campaigns and offerings internally was probably first made by Eiglier and Langeard
in France in a working paper published in 1976 (Eiglier, P. & Langeard, E., Principes politique
marketing pour les enterprises des services. Working Paper, Institute d’Administration des Enterprises,
Université d’Aix-Marseille, December, 1976), although they did not explicitly use the phrase
‘internal marketing’. In the same year Sasser and Arbeit addressed the issue of ‘selling jobs to the
employees’ and discuss recruitment, training, motivation, internal communication and retention
of service-minded personnel as aspects of this internal task (Sasser, W.E. & Stephen P., Selling jobs
in the service sector. Business Horizons, 19(3), 1976, 61–65). In the 1970s, Christian Grönroos
also pointed out the need for internal marketing (Grönroos, C., A service-orientated approach
to the marketing of services. European Journal of Marketing, 12(8), 1978, 588–601). Leonard Berry
was another early proponent of internal marketing (Berry, L.L., The employee as customer. Retail
Banking, March, 1981).
3. In some publications on internal marketing the relationship between internal suppliers and inter-
nal customers (that is, the marketing of goods and services internally in the organization) is con-
sidered the main or only domain of internal marketing. See, for example, Ling, I.N. & Brooks,
R.F., Implementing and measuring the effectiveness of internal marketing. Journal of Marketing
Management, 14, 1998, 325–351 and Reynoso, J.F. & Moores, B., Internal relationships. In But-
tle, F. (ed.), Relationship Marketing: Theory and Practice. London: Paul Chapman Publishing, 1996,
pp. 55–73. In this book, the authors have a much broader perspective.
4. See, for example, Voima, P., Negative Internal Critical Incident Processes. Windows on Relationship
Change. Helsinki: Hanken Swedish School of Economics, Finland, 2001 and Ballantyne, D., A
relationship-mediated theory of internal marketing. European Journal of Marketing, 37(9), 2003,
1242–1260.
5. Varey, R.J., Internal marketing: a review of some inter-disciplinary research challenges. Inter-
national Journal of Service Industry Management, 6(1), 1995, 40–63; Voima, P. & Grönroos, C.,
Internal marketing – a relationship perspective. In Baker, M.J. (ed.), The IEBM Encyclopedia of
Marketing. London: International Thomson Business Press, 1999, pp. 747–751; Gummesson, E.,
Internal marketing in the light of relationship marketing and virtual organizations. In Lewis, B. &
Varey, R.J. (eds), Internal Marketing. London: Routledge, 2000; Voima, P., Internal relationship
management – broadening the scope of internal marketing. In Lewis, B. & Varey, R.J. (eds),
Internal Marketing. London: Routledge, 2000.
6. Gummesson, op. cit. See also Ballantyne, D., Internal marketing for internal networks. Journal of
Marketing Management, 13(5), 1997, 343–366.
7. Cacciatore, L., När företagets och servicepersonalens uppfattning om det riktiga i företagets strategi kolliderar.
En studie i användningen av intern marknadsföring för att motivera kontaktpersonalen i en bank i Finland.
Helsinki: Hanken School of Economics, Finland, 2014.
NOTES 439
8. Grönroos, C., Service Management and Marketing. Managing the Moments of Truth in Service Com-
petition. Lexington, MA: Lexington Books, 1990 and Piercy, N.F. & Morgan, R.A., Internal
marketing – the missing half of the marketing program. Long Range Planning, 24(2), 1991, 82–93,
and more recently, for example, Awwad, M.S. & Agti, D.A.M., The impact of internal market-
ing on commercial banks’ market orientation. International Journal of Bank Marketing, 29(4), 2011,
308–332.
9. Bowen, D.A., Schneider, B. & Kim, S.S., Shaping service cultures through strategic human
resource management. In Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Marketing &
Management. Thousand Oaks, CA: Sage Publications, 2000, pp. 439–454. Also, from an HRM
perspective, the internal marketing requirement of close collaboration with other business func-
tions is an opportunity which, according to Schneider and Bowen, helps HRM to ‘avoid the
HRM trap’. See Schneider, B. & Bowen, D.A., Winning the Service Game. Boston, MA: Harvard
Business School Press, 1995.
10. Compare Gilmore, A. & Carson, D., Managing and marketing to internal customers. In Glynn,
W.J. & Barnes, J.G. (eds), Understanding Service Management. Chichester: John Wiley & Sons,
1995, pp. 295–321, where internal marketing is defined as the task of spreading the responsibility
for marketing across all departments in a firm.
11. Berry, L.L. & Parasuraman, A., Marketing Services: Competing Through Quality. New York: The
Free Press, 1991, p. 151.
12. Rafiq, M. & Ahmed, P.K., The scope of internal marketing: defining the boundary between
marketing and human resource management. Journal of Marketing Management, 9, 1993, 219–232.
Pitt and Foreman claim that the question of whether internal marketing is synonymous with
good human resource management has not been studied thoroughly enough. See Pitt, L.F. &
Foreman, S.K., Internal marketing’s role in organizations: a transaction cost perspective. Journal
of Business Research, 44(1), 1999, 25–36. Varey and Lewis suggest that internal marketing should
incorporate organizational development (see Varey, R.J. & Lewis, B.R., Beyond the popular
conception of internal marketing. In Fisk, R. & Glynn, L. (eds), Jazzing into the New Millennium:
1999 SERVSIG Services Research Conference. Chicago, IL: American Marketing Association, 1999,
pp. 44–51).
13. Compare Bowen, Schneider & Kim, op. cit.
14. Ballantyne, D., The strengths and weaknesses of internal marketing. In Varey, R.J. & Lewis,
B.R. (eds), Internal Marketing. London: Routledge, 2000.
15. This can typically be the case in situations where internal communication is handled by human
resource management alone. See Mitchell, C., Selling the brand inside. Harvard Business Review,
90(Jan), 2002, 99–106.
16. Cacciatore, op. cit.

17. Cacciatore, op. cit.
18. This relationship-oriented definition of internal marketing is adapted from Voima & Grönroos,
op. cit., p. 748. In the latter part of the 1990s, following intense interest in relationship marketing,
there was a revival in research into internal marketing, but from a relationship perspective.
19. A lack of trust internally has been shown to have a negative effect on internal relationships. See
Herriot, P., Manning, W.E.G. & Kidd, J.M., The content of the psychological contract. British
Journal of Management, 8(2), 1997, 151–162. See also Bowen, D.E., Gilliland, S.W. & Folger, R.,
HRM and service fairness: how being fair with employees spills over to customers. Organizational
Dynamics, 27(3), 1999, 7–23.
20. See Bowen, D.E. & Schneider, B., Service marketing and management: implications for organi-
zations. Research in Organizational Behavior, 10, 1988.
21. Over the years the relationship between internal marketing and job satisfaction has been demon-
strated in several studies. For a recent study in the educational sector, see Ting, S-C., The effect
of internal marketing on organizational commitment: job involvement and job satisfaction as
mediators. Educational Administration Quarterly, 47(2), 2011, 353–382.
22. See Lovelock, C., Functional integration in services. Understanding the links between marketing,
operations, and human resources. In Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Mar-
keting & Management. Thousand Oaks, CA: Sage Publications, 2000, pp. 421–437. As Lovelock
observes, ‘reward systems send powerful messages to all employees as to what kind of organization
management seeks to create and maintain, especially as to desired attitude and behavior’ (p. 426).
23. Katzenbach, J.R. & Santamaria, J.A., Firing up the front line. Harvard Business Review, May/June,
1999.
24. Bowen, Gilliland & Folger, op. cit.
25. Smith, S., Internal affairs. Marketing, 7 August, 1997, 24–25.
26. As Gummesson points out, technology is only supportive when put to constructive use. See
Gummesson, op. cit. See also Hallowell, E.M., The human moment at work. Harvard Business
Review, Jan–Feb, 1999.
27. Bowen, D.E. & Johnston, R., Internal service recovery: developing a new construct. International
28. Ballantyne, 2003, op. cit.
29. Ballantyne, 2003, op. cit., p. 1251.
30. The psychological antecedents and meaning of empowering have largely been discussed. See, for
example, Wang, G. & Lee, P.D., Psychological empowerment and job satisfaction. An analysis
FURTHER READING 441
of interactive effects. Group & Organization Management, 34(3), 2009, 271–296, and Maynard,
M.T., Gilson, L.L. & Mathieu, J.E., Empowerment – fad or fab? A multilevel review of the past
two decades of research. Journal of Management, 38(4), 2012, 1231–1281.
31. See Conger, J.A. & Kanungo, R.N., The empowerment process: integrating theory and practice.
Academy of Management Review, 13(3), 1988, 471–482.
32. Bowen, D.E. & Lawler III, E.E., Empowering service employees. Sloan Management Review,
36(4), 1995, 73–84.
33. Oakland, J.S. & Oakland, S., The links between people management, customer satisfaction and
business results. Total Quality Management, 9(4–5), 1998, 185–190.
34. Argyris, C., Empowerment: the emperor’s new clothes. Harvard Business Review, 76(May–Jun),
1998, 98–105.
35. Khan, S., The key to being a leader company: empowerment. Journal of Quality and Participation,
20(1), 1997, 44–50.
36. Harari, O., Stop empowering your people. Management Review, 86(2), 1997, 48–51. The author
expresses concerns about empowering when used without proper care. See also Edvardsson, B.,
Larsson, G. & Setterlind, S., Internal service quality and the psychosocial work environment:
an empirical analysis of conceptual interrelatedness. The Service Industries Journal, 17(2), 1997,
252–263, where the authors show that the psychosocial work environment has an impact on the
service orientation of employees.
37. Bowen, D.E. & Lawler III, E.E., The empowerment of service workers: what, why, how, and
when. Sloan Management Review, Spring, 1992, 31–39.
38. Bowen & Lawler, op. cit.
39. Eccles, T., The deceptive allure of empowerment. Long Range Planning, 26(6), 1993, 13–21.
40. Berry & Parasuraman, op. cit.
41. Cahill, D.J., Internal Marketing. Your Company’s Next Stage of Growth. New York: The Haworth
Press, 1996.
Argyris, C. (1998) Empowerment: the emperor’s new clothes. Harvard Business Review, 76(May–Jun),
98–105.
Awwad, M.S. & Agti, D.A.M. (2011) The impact of internal marketing on commercial banks’ market
orientation. International Journal of Bank Marketing, 29(4), 308–332.
Ballantyne, D. (1997) Internal marketing for internal networks. Journal of Marketing Management, 13(5),
343–366.
Ballantyne, D. (2000) The strengths and weaknesses of internal marketing. In Varey, R.J. & Lewis,
B.R. (eds), Internal Marketing. London: Routledge.
Ballantyne, D. (2003) A relationship-mediated theory of internal marketing. European Journal of
Marketing, 37(9), 1242–1260.
Berry, L.L. (1981) The employee as customer. Retail Banking, March.
Berry, L.L. & Parasuraman, A. (1991) Marketing Services: Competing Through Quality. New York: The
Free Press.
Bowen, D.E. & Johnston, R. (1999) Internal service recovery: developing a new construct.
Bowen, D.E. & Lawler III, E.E. (1992) The empowerment of service workers: what, why, how, and
when. Sloan Management Review, Spring, 31–39.
Bowen, D.E. & Lawler III, E.E. (1995) Empowering service employees. Sloan Management Review,
36(4), 73–84.
Bowen, D.E. & Schneider, B. (1988) Service marketing and management: implications for organi-
zations. Research in Organizational Behavior, 10.
Bowen, D.E., Gilliland, S.W. & Folger, R. (1999) HRM and service fairness: how being fair with
employees spills over to customers. Organizational Dynamics, 27(3), 7–23.
Bowen, D.A., Schneider, B. & Kim, S.S. (2000) Shaping service cultures through strategic human
resource management. In Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Marketing
Cacciatore, L. (2014) När företagets och servicepersonalens uppfattningom det riktiga i företagets strategi kollid-
erar. En studie i användningen av intern marknadsföring för att motivera kontaktpersonalen i en bank i Finland.
Helsinki: Hanken School of Economics, Finland.
Cahill, D.J. (1996) Internal Marketing. Your Company’s Next Stage of Growth. New York: The Haworth
Press.
Conger, J.A. & Kanungo, R.N. (1988) The empowerment process: integrating theory and practice.
Academy of Management Review, 13(3), 471–482.
Eccles, T. (1993) The deceptive allure of empowerment. Long Range Planning, 26(6), 13–21.
Edvardsson, B., Larsson, G. & Setterlind, S. (1997) Internal service quality and the psychosocial work
environment: an empirical analysis of conceptual interrelatedness. The Service Industries Journal, 17(2),
252–263.
FURTHER READING 443
Eiglier, P. & Langeard, E. (1976) Principes politique marketing pour les enterprises des services. Working
Paper, Institute d’Administration des Enterprises, Université d’Aix-Marseille, December.
Gilmore, A. & Carson, D. (1995) Managing and marketing to internal customers. In Glynn, W.J. &
Barnes, J.G. (eds), Understanding Service Management. Chichester: John Wiley & Sons, pp. 295–321.
Grönroos, C. (1978) A service-orientated approach to the marketing of services. European Journal of
Marketing, 12(8), 588–601.
Gummesson, E. (2000) Internal marketing in the light of relationship marketing and virtual organi-
zations. In Lewis, B. & Varey, R.J. (eds), Internal Marketing. London: Routledge.
Hallowell, E.M. (1999) The human moment at work. Harvard Business Review, Jan–Feb.
Harari, O. (1997) Stop empowering your people. Management Review, 86(2), 48–51.
Herriot, P., Manning, W.E.G. & Kidd, J.M. (1997) The content of the psychological contract. British
Journal of Management, 8(2), 151–162.
Katzenbach, J.R. & Santamaria, J.A. (1999) Firing up the front line. Harvard Business Review, May–
Jun.
Khan, S. (1997) The key to being a leader company: empowerment. Journal of Quality and Participation,
20(1), 44–50.
Lovelock, C. (2000) Functional integration in services. Understanding the links between marketing,
operations, and human resources. In Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Marketing
Maynard, M.T., Gilson, L.L. & Mathieu, J.E. (2012) Empowerment – fad or fab? A multilevel review
of the past two decades of research. Journal of Management, 38(4), 1231–1281.
Mitchell, C. (2002) Selling the brand inside. Harvard Business Review, 90(Jan), 99–106.
Oakland, J.S. & Oakland, S. (1998) The links between people management, customer satisfaction
and business results. Total Quality Management, 9(4–5), 185–190.
Papasolomou, I., Kountouros H. & Kitchen, P.J. (2012) Developing a framework for successful sym-
biosis of corporate social responsibility, internal marketing and labour law in a European context. The
Marketing Review, 12(2), 109–123.
Peltier, J.W, Schibrowski, J.A. & Nill, A. (2003) A hierarchical model of the internal relationship
marketing approach to nurse satisfaction and loyalty. European Journal of Marketing, 47(5–6), 899–916.
Piercy, N.F. & Morgan, R.A. (1991) Internal marketing – the missing half of the marketing program.
Long Range Planning, 24(2), 82–93.
Pitt, L.F. & Foreman, S.K. (1999) Internal marketing’s role in organizations: a transaction cost per-
spective. Journal of Business Research, 44(1), 25–36.
Rafiq, M. & Ahmed, P.K. (1993) The scope of internal marketing: defining the boundaries between
marketing and human resource management. Journal of Marketing Management, 9, 219–232.
Reynoso, J.F. & Moores, B. (1996) Internal relationships. In Buttle, F. (ed.), Relationship Marketing:
Theory and Practice. London: Paul Chapman Publishing, pp. 55–73.
Sasser, W.E. & Stephen, P. (1976) Selling jobs in the service sector. Business Horizons, 19(3), 61–65.
Schneider, B. & Bowen, D.A. (1995) Winning the Service Game. Boston, MA: Harvard Business School
Press.
Smith, S. (1997) Internal affairs. Marketing, 7 August, 24–25.
Ting, S-C. (2011) The effect of internal marketing on organizational commitment: job involvement
and job satisfaction as mediators. Educational Administration Quarterly, 47(2), 353–382.
Varey, R.J. (1995) Internal marketing: a review of some interdisciplinary research challenges.
Varey, R.J. & Lewis, B.R. (1999) Beyond the popular conception of internal marketing. In Fisk,
R. & Glynn, L. (eds), Jazzing into the New Millennium: 1999 SERVSIG Services Research Conference.
Chicago, IL: American Marketing Association, pp. 44–51.
Voima, P. (2000) Internal relationship management – broadening the scope of internal marketing. In
Lewis, B. & Varey, R.J. (eds), Internal Marketing. London: Routledge.
Voima, P. (2001) Negative Internal Critical Incident Processes. Windows on Relationship Change. Helsinki:
Hanken Swedish School of Economics, Finland.
Voima, P. & Grönroos, C. (1999) Internal marketing – a relationship perspective. In Baker, M.J. (ed.),
The IEBM Encyclopedia of Marketing. London: International Thomson Business Press, pp. 747–751.
Wang, G. & Lee, P.D. (2009) Psychological empowerment and job satisfaction. An analysis of inter-
active effects. Group & Organization Management, 34(3), 271–296.
Wasmer, D.J. & Bruner II, G.C. (1991) Using organizational culture to design internal marketing
strategies. Journal of Services Marketing, 5(1), 35–46.
CHAPTER 15
MANAGING SERVICE
CULTURE: THE INTERNAL
SERVICE IMPERATIVE
“ A functioning service culture requires that providing good service is second nature to everyone within the
organization.
”
INTRODUCTION
In this chapter the concept of service culture will be discussed. First, two broader concepts are pre-
sented, corporate culture and climate, and their importance to the attitudes and behaviour of people
in an organization. Next, the issue of a service culture and the need for such a culture is covered.
Prerequisites for a service culture are analysed and ways of creating such a culture are described.
Finally, barriers to and opportunities for developing such a culture are discussed. After reading this
chapter the reader should understand the importance of a service culture for service providers, know
the prerequisites for a service culture and know how such a culture can be created.
T H E I M P O RTA N C E O F C O R P O R AT E C U LT U R E
The concept of corporate culture is used to describe a set of common norms and values shared by
people in an organization. Hence, culture is an overall concept that explains why people do certain
things, think in common ways, and appreciate similar goals, routines, even jokes, just because they
are members of the same organization. Corporate culture can be defined as the pattern of shared values
and beliefs that give the members of an organization meaning, and provide them with the rules for behaviour
in the organization.1 Culture represents values that can be thought of as residing deep within the
organization. It is not easy to see it, but it is always present.2 The existing culture in a firm is a result
of its organizational past, and it provides stability, meaning and predictability in the organization.3
Corporate culture can be related to an internal climate in the organization. As discussed in the
previous chapter, the organizational climate is partly dependent on how internal relationships function
446 MANAGING SERVICE CULTURE: THE INTERNAL SERVICE IMPERATIVE
between people in the organization. The climate is the employees’ accumulated sense of what is
important in an organization.4 Schneider, White and Paul describe service climate as a description
of what happens in people’s work units with regards to the service-focused policies, practices, and
procedures they experience, and to what they see is expected, supported and rewarded.5 The climate
is a result of what goals employees are given to pursue in their jobs and how daily routines are
handled in the organization.6 The climate has a direct external effect on customer experiences and
on perceived service quality, and may also influence customer loyalty.7
Service providers have to manage their internal climate so that employees who serve internal or
external customers develop positive attitudes towards providing service. Such attitudes and a service-
oriented climate can be expected to exist if the employees feel that organizational routines, directions
for action given by policies and management and reward systems indicate that focusing on giving
good service is important.8 Because of this, the culture and climate of a firm have a vital impact on
how service-oriented its employees are.9 The terms culture and climate are often used interchangeably
to mean more or less the same thing, because they are so closely related to each other.10
Culture is an important phenomenon to study and understand, because it is considered a potential
basis for competitive advantage.11 For service firms and manufacturers facing service competition,
the development and management of a service culture is a critical task.
Internal activities or projects, such as training programmes, do not lead to expected results if they
do not fit the existing culture in the firm. For example, a service-oriented training programme alone
would probably have no significant impact on the thinking and behaviour of employees of a manufac-
turer where goods-oriented industrial norms are highly regarded, or the employees of a service firm
where sales and cost-efficient operations are the only visible management priorities.12 A much more
strategically-oriented and comprehensive process would be needed if any results are to be achieved
(see Chapter 14).
A weak corporate culture, where there are few or no clear common shared values, creates an
insecure feeling concerning how to respond to various clues and how to react in different situations.
For example, when a company has a strong culture, what to do when a customer has unexpected
requests may be self-evident. On the other hand, if there is a weak culture, such a situation frequently
results in inflexible behaviour by contact employees, long waiting times and a feeling of insecurity on
the part of the customer. This, of course, hurts customer perceived service quality. In such a culture,
employees do not have any clear norms to which to relate, for example, sales training or service skills
courses, and hence they do not know how to respond to such activities.
A strong culture, however, enables people to act in a certain manner and to respond to various
actions in a consistent way.13 Clear cultural values seem particularly important for guiding employee
behaviour, especially in service organizations.14 In many cases new employees are easily assimilated
into the prevailing culture.15 A customer-focused and service-minded person with a favourable part-
time marketing attitude who is recruited for a service job may quickly be brought down to earth by
his new colleagues who share strong values which do not honour interest in customers or in providing
good service. On the other hand, a strong service-oriented culture easily snowballs. Service-oriented
employees are attracted by such an employer, and most new employees are influenced in a favourable
way by the existing service culture.
When employees identify with the values of an organization, they are less inclined to quit, and
customers seem to be more satisfied with the service provided. In addition to this, when there is a
minimal employee turnover, service-oriented values and a positive attitude towards service are more
easily transmitted to newcomers in the organization.16
The modern views of quality and productivity are related to corporate culture. Improving produc-
tivity and quality requires a new way of thinking in the culture of the organization.
MANAGING RELATIONSHIPS REQUIRES A SERVICE CULTURE 447
A strong culture is not, however, always good. In situations where the surrounding world has
changed and new ways of thinking are called for, a dominating culture may become a serious hin-
drance to change. It may be difficult to respond to new challenges. In such a situation, a strong culture
does not only affect the responsiveness of employees in a negative fashion, but may also paralyse man-
agement. For example, a strong manufacturing-oriented or sales-focused culture may develop into
a serious obstacle for a firm that should obviously respond to service-related changes in the market,
or to a situation where keeping existing customers has become the most important way of doing
profitable business. A service strategy is perhaps the obvious solution, but the management team may
be too restricted by their inherited way of viewing the business. If only marginal internal activi-
ties to introduce a service strategy are implemented, old-fashioned ways of thinking among middle
management and the rest of the personnel do not permit any major attitude change.
T H E I M P O RTA N C E O F C L I M AT E A N D C U LT U R E
I N S E RV I C E O R G A N I Z AT I O N S
In a service context a strong and well-established culture, which enhances an appreciation for good
service and customer orientation, is extremely important. This follows from the nature of service pro-
duction and consumption. Normally, service production cannot be standardized as completely as an
assembly line, because of the human impact in the buyer–seller interactions of the service encounters.
Customers and their behaviour cannot be totally standardized and predetermined. Situations vary,
and therefore a distinct service-oriented culture is needed which tells employees how to respond to
new, unforeseen and even awkward situations.17 Hence, the culture makes a service-oriented strat-
egy come alive for the employees and directs their behaviour.18 In conclusion, it will be difficult to
implement a service strategy without the existence of a service-focused culture in the organization.
It has been argued that a strong culture is of vital important in service organizations, because the
attitude and performance of the employees is so visible to customers. If employees experience a
service-oriented climate, the customers’ experience of service quality will probably be better than
otherwise expected. There seems to be a clear interrelationship between employee experiences and
customer experiences.19
Since service quality is a function of the co-operation of so many resources – human as well as
technological – a strong culture that enhances quality is a must for successful management of quality
in a service context. Moreover, since it is more difficult to control quality in a service context than
in manufacturing, service-oriented and quality-conscious values are necessary in the organization. In
this way management can execute indirect control by culture.20
M A N A G I N G R E L AT I O N S H I P S R E Q U I R E S
A S E RV I C E C U LT U R E
Managing customer relationships demands that the firm adopt a service perspective, and customer
relationships (as well as relationships with suppliers, distributors and other types of network partners)
include a large number of service activities. Some of them, such as over-the-counter personal service,
goods deliveries, maintenance and consulting services, can easily be seen by management as what
they are in the minds of customers, that is, as value-creating services. Other types of services, such
as invoicing, complaints handling, answering phone calls or e-mails, and a host of similar activities,
which were earlier labelled hidden, unbillable services in relationships, are not as easily recognized as
value-supporting services.
If the culture in a firm which has decided to give priority to the management of customer relation-
ships (and relationships with other parties) does not honour service and a constant attention to provid-
ing good service to the other party, it will be difficult to implement the relationship-oriented strategy.
The non-service culture will keep people (managers, supervisors and customer contact employees
alike) from realizing the importance of all the ‘hidden services’, and even the more visible service
elements may not be given enough attention. The values that dominate in the firm will direct peo-
ple’s attention elsewhere. Therefore, managing customer relationships, and relationships with other
parties, requires a service-oriented culture.
P R O F I TA B I L I T Y T H R O U G H A S E RV I C E S T R AT E G Y
R E Q U I R E S A S E RV I C E C U LT U R E
Adopting a service logic and a service perspective and implementing a service strategy requires the sup-
port of all employees in the organization. Top management, middle management, customer contact
employees and support employees will all have to get involved and perform according to such a
strategy. An interest in service and an appreciation of good service among managers and all other
employees is an essential requirement. What is needed is a corporate culture that can be labelled a
service culture. Such a culture can be described as:
. . . a culture where an appreciation for good service exists, and where giving good service to internal as well
as ultimate, external customers is considered by everyone a natural way of life and one of the most important
values.21
Hence, service has to be the raison d’être for all organizational activities.22 This, of course, does not
exclude other values from being important, too. For example, attention to internal efficiency and
cost control is still important, as well as an appreciation of sales and getting new customers. However,
the service-oriented values should have a dominating position in the organization with a top-priority
concern in strategic as well as operational thinking and performance, and not remain a marginal or
lower-priority concern.
In a service culture all employees should be service-focused. Service orientation can be described
as shared values and attitudes that influence people in an organization so that interactions between
them internally and interactions with customers and other external actors are perceived in a favourable
manner. Internally, a service focus can be expected to enhance the internal climate and improve
the quality of internal service and support. Externally, a service focus should create good perceived
quality for customers and others as well as lead to strengthened relationships with customers and other
parties.
Clearly, a service orientation enhances the functional quality dimension of customer perceived
service quality, and probably also supports good technical quality. As Figure 15.1 illustrates, service
orientation among personnel normally fuels an important positive process within an organization. A
service orientation that is a characteristic of a service culture improves service quality as perceived by
customers.
Service-focused employees who take an interest in their customers do more for the customers, are
more courteous and flexible, try to find appropriate solutions to customers’ wishes, and go out of their
way to recover a situation where something has gone wrong or an unexpected scenario has occurred.
SHARED VALUES 449
Service orientation
Profitability Service quality
F I G U R E 15.1
Effects of a service orientation.
Furthermore, we know that customer perceived quality is a key determinant of profitability, although
it is not the only one. Hence, service orientation improves service quality which, in turn, positively
affects profitability. This favourable process continues as an upward spiral, because better profitability
provides means to maintain and further improve service-oriented attitudes among personnel. The
process fuels itself.23
A word of warning is important here, however. Although good perceived quality can be expected
to improve profitability, this requires that the service offerings provided to customers are put together
in such a way that customers are prepared to pay a price which matches the cost of producing the
service. There are situations where customers may be very satisfied with the perceived service quality,
but they are still not profitable over time.24 Furthermore, the positive connection between culture
and profitability is often claimed to exist, and a clear service-oriented culture probably has a favourable
impact on the financial performance of the firm. In Chapter 6, and especially in Figure 6.9, factors
that influence the link from perceived quality to profitable customers were discussed. It is difficult
to show how a service culture and service orientation leads to profitable customer relationships,
because there are always so many external factors involved that it is difficult to isolate the effects of
culture.25
S H A R E D VA L U E S
The values shared by people in an organization and the prevailing norms are the foundation of the
culture. The shared values constitute guidelines for employees in performing their everyday tasks. In
an organization with strong shared values three common characteristics are often present:26
1. The shared values are a clear guideline for task performance.

2. Managers devote much of their time to developing and reinforcing the shared values.
3. The shared values are deeply anchored among the employees.
Performance is improved by strong shared values in an organization. Managers and employees

devote themselves more to issues and ways of performing that are emphasized by the shared values.
Performance is better, because people are more motivated. Strong shared values may, however,
become a problem, too; for the following reasons:
● The shared values may have become obsolete and are therefore not consistent with current strategies
and service concepts.
● Strong shared values may lead to resistance to change, which makes it difficult for the organization
to respond to external challenges.
● New employees are formed by existing strong shared values, and in situations when the culture
needs to be changed, differently thinking newcomers are easily swallowed by the existing culture.
In many firms these are highly relevant problems. Even though there may be no service culture, there
may still be a strong corporate culture. The existing culture may emphasize manufacturing ideals or
bureaucratic routines, or press short-term sales instead of the importance of concentrating on keeping
and growing customers. In many manufacturing firms and institutions within the public sector, a
strong culture that does not appreciate service is a major hindrance to change. Challenges from the
market and from society may go unnoticed, or the organization may not be capable of adjusting to
the need for change. The results are sometimes fatal. The effects of a single internal activity, for
example a training programme that does not have a strategic foundation, will probably be counteracted
by a hostile culture. Internal marketing efforts may easily fail if they are not in line with the prevailing
culture, or if the objectives of the internal marketing efforts are contradictory to it. On the other
hand, a long-term internal marketing process is one ingredient in a process that aims at changing an
existing culture. A strategic approach to internal change is needed.
R E Q U I R E M E N T S F O R A S E RV I C E C U LT U R E
Introducing and implementing a service strategy requires a service culture. In many firms and in many
organizations within the public sector, a cultural change is called for. Such a change is a long-range
process, which demands extensive and long-range activity programmes. In the previous chapter we
discussed one major ingredient in such a process, internal marketing. This chapter will look at general
prerequisites for achieving a service culture.
The requirements for good service27 are strategic requirements, organizational requirements, manage-
ment requirements, and knowledge and attitude requirements.
If all four kinds of requirements are not all recognized, the internal change process will suffer and the
result will be mediocre at best. The four different requirements above are intertwined. For example,
a complicated organizational structure may make it impossible to implement a good service concept;
or a service-minded, customer-focused and motivated contact employee becomes frustrated and loses
interest in providing good service because he gets no support or appreciation from his boss, or finds
it impossible to be service-minded because the service orientation is not derived from a strategic
foundation, and therefore sufficient resources are not granted and continuous and consistent top
management support is lacking. The following sections will discuss the four requirements above in
some detail.
D E V E L O P I N G A S E R V I C E S T R AT E G Y
The strategic requirements for good service are fulfilled by developing a service-focused strategy. This means
that top management wants to create a service-focused organisation; the management team is not just
REQUIREMENTS FOR A SERVICE CULTURE 451
paying lip service to service orientation. Here, top management may be the CEO or the managing
director and his management team, but it may also be the head of a regional or local organization or
a profit centre, which can operate sufficiently well independently.
The business mission is the foundation of strategy formulation. Strategies are developed based on the
scope and direction of the business indicated by the mission. A service strategy means that the mission
includes a service vision. It demands that a service orientation, which of course means different things
in different industries and even firms, is to be achieved. This will not be discussed here. In Chapter
3 guidelines for formulating a service-based and customer-focused business mission were presented.
In short, in a generic way the business mission of a service-focused firm that has adopted a service
perspective for its business can be described in the following way:
The business mission is to provide the customers’ activities and processes with support that makes value for the
customers emerge when they do those activities and run those processes.
This support could, of course, be of any kind, including goods, services, hidden services, or informa-
tion, as long as when the customers make use of it, value emerges for them. For business customers
this value support should ultimately have a favourable effect on the customers’ business process and
even on the customers’ customers’ processes. Although similar effects on individual customers are less
obvious and more difficult to measure, in principle the support of a service provider should lead to
similar effects.
However, a service strategy requires that service concepts related to the business mission and the
strategy be defined. If service concepts are not clearly defined, the firm lacks a stable foundation
for discussion of goals, resources to be used, and performance standards. As previously stated, the
service concept states what should be done, to whom, how and with which resources, and what benefits
customers should be offered. If these issues are not clarified, personnel will not understand what they
are supposed to do. Moreover, goals and routines do not form a clear and understandable pattern,
because there is no clear and well-known service concept to relate them to. If the service concepts
are not clearly understood at the middle management level, it will be difficult to perform supervisory
duties consistently.
Human resource management is an important part of strategic requirements. Recruitment procedures,
career planning, reward systems and so on are vital parts of a service culture. Good service performance
has to guide HRM. The more aspects other than skills and service-orientation dominate, for example
recruitment procedures and reward systems, the less inclined towards service-mindedness employees
will be, and a service culture will be difficult to achieve.
Good service has to be rewarded and accomplishments have to be measured in such a way that
employees realise the importance of service. However, able employees are sometimes forced to do
dumb things, because measurement and reward systems are wrong. Quite often only internal effi-
ciency issues, such as the number of meals served in a restaurant or the number of phone calls dealt
with, are measured and reward systems developed accordingly. If this is the case, and employees feel
they are rewarded for accomplishments other than excellent service quality, any attempt to develop
a service culture is bound to fail.
D E V E L O P I N G T H E O R G A N I Z AT I O N A L S T R U C T U R E
Development of the organizational structure creates the organizational prerequisite for good service. All
aspects of organization design have to be geared to the service process, if high service quality is to
be achieved and consistently maintained. The more complicated the formal structure is, the more
problems related to giving good service will occur. The organization of a firm can be a serious
obstacle to a service culture. Good service means, among other things, easy access to service and quick
and flexible decision-making. It requires co-operation between various departments in designing,
developing and executing service. If the organizational structure does not allow employees to perform
in this way, values characterizing a service culture cannot be developed. Good intentions, even when
they are based on strategy, cannot be implemented without the structure being in place. This makes
people frustrated and may have a counter-effect. Employees may feel that management demands the
impossible, and this only achieves negative effects as far as service-oriented attitudes are concerned.
There is also an informal organizational structure. People create a value structure and personal
contacts, which make the formal structure either less or more complicated. In the former case, positive
attitudes among the employees involved may make it possible to solve the problems created by a
complicated structure. In the latter case, on the other hand, even a service-oriented structure may
be an obstacle to good service. If people do not want to collaborate, a service culture is harder to
accomplish.
Normally, a service-oriented firm requires a relatively flat organizational structure with few hier-
archical levels. Decisions have to be made by employees who are close to the customers. The roles
of managers change. The customer contact and support employees have more responsibility and they
are expected to perform more independently. However, this does not mean that the supervisory
level loses power, only that the role of supervisors changes. They are not just technical managers
and decision-makers any more; instead, they are supposed to be coaches and demonstrate leadership.
They will have to assist and encourage their staff and create an open climate where good service is a
leading shared value.
The role of supervisors in support functions must also be clarified. Often employees who do not
have immediate customer contacts regard themselves as carrying out passive functions with some
administrative duties. In fact, their role in most support functions is much more active. As we have
noted in previous contexts, they should see people in customer contact functions as their internal
customers, whom they will have to serve as well as they, in turn, serve the ultimate (external) customers.
In many firms, the customer contact functions are understaffed, whereas back office and staff func-
tions departments are overstaffed. The obvious conclusion is to strengthen the customer contact pro-
cesses and streamline and redesign other departments so that they support the buyer–seller interactions
in a more effective and service-focused way.
Another aspect of organizational development is the creation and improvement of operational
systems, routines and work flows. Good service normally requires simplified ways of doing things,
so that unnecessary delays and information breakdown are avoided. The effects of this are twofold.
First of all, customers perceive such a development as better functional quality of the service. Second,
employees feel that their job has become more meaningful and motivating when routines and work
flows have been simplified, and unnecessary or time-consuming elements of the operational systems
have been eliminated.
Information technology also provides opportunities to make changes in internal information sys-
tems and operational systems. The introduction of intranets can create a feeling of belonging and
strengthen corporate identity among personnel. An intranet makes everyone a member of the same
information system and makes it possible, for example, for every customer contact and support
employee to share the same, relevant information about a given customer at the same time. If the
information is easily retrievable, constantly updated and relevant, such a system supports good and
timely interactions with customers and helps employees to give good service. This can contribute to
a positive service culture. On the other hand, when using intranets in this way there is a danger of
information overload, which must be monitored. Such overload easily counteracts the maintenance
of a service culture.
REQUIREMENTS FOR A SERVICE CULTURE 453
DEVELOPING LEADERSHIP
The management prerequisite for good service is promoted by establishing a service-oriented leadership.28
This includes managers’ and supervisors’ attitudes towards their role, their teams and how they act as
managers. Management must be supportive, inspirational and attuned to the individuals they manage.
Without active and continuous support from all managers and supervisors, the values that characterize
a true service culture cannot be spread throughout the organization and maintained once they have
been established. Such a managerial impact is of vital importance if service-oriented values are to
be communicated to the employees, strengthened and made an integral part of the everyday life of
the organization.
Managers are leaders in an organization, and by leading they also contribute to the culture. In this
way managers, and supervisors, have a key role in the development of a service culture. On the other
hand, a manager who is not aware of this will be led by the culture.29 This can be a problem in a
situation when the culture needs to be changed. Hence, it is very important for every manager and
supervisor in the organization to be aware of the corporate culture.
Simply being a technical manager without taking on the role of coach and leader does not do much
for the pursuit of a service culture. A more whole-hearted devotion to the service concepts and the
employees is called for. Service is still to a large extent a human business and the result of interactions
between people internally as well as externally. Management styles that do not take this into account
do not fit in here.
Communication is a critical ingredient of leadership. The manager and supervisor will have to
be willing, and know how to communicate with their staff. Communication is a two-way street,
where the ability to listen to others is an important component. A leader should be able to create
a dialogue with his team, and also be able to give clear direction and guidance, and make decisions
when he is expected to take a firm stand.
One of the biggest risks involved in a process towards a service orientation is the risk of ambiguity.
If the manager talks about the need for service-mindedness and customer-consciousness, but in reality
does not pursue a service strategy, he and the service culture lose credibility. A sense of uncertainty
among personnel is easily created, and the idea of service orientation and a service culture will not
be taken seriously any more. Performance that is in line with good quality and the nature of a ser-
vice culture as expressed by management has to be measured and rewarded. Internal efficiency and
manufacturing-oriented productivity measures must not be given priority. Hence, management has
to talk about the importance of good service and of pursuing a service culture, and demonstrate by their
actions their belief in this idea. Otherwise, serious damage may easily be done to a service-orientation
process that may have been initiated in good faith.
The top person in the organization, which may be a firm, a local unit, a profit centre, a strategic
business unit or another well-defined organizational unit, will constantly have to give the service
strategy top priority, and continuously and actively give it his strong support. Furthermore, every
manager and supervisor will have to accept the role of a coach. They have to be able to encourage
employees and strengthen their motivation for service-oriented performance.
Monitoring performance and results is, of course, still an integral part of management. But the tra-
ditional role of management is shifting from controlling towards guiding employees. Many managers
feel that their authority is eroding as a consequence of such a change, and they cannot effectively
‘manage’ their people any more. However, this is not the case. The leadership-oriented management
philosophy does not mean that management abdicates, but instead that it sets up goals and guide-
lines and delegates operational responsibility in a clear manner. Hence, the traditional role as mere
technical manager is changed to a new role characterized by leadership and coaching. Another aspect
of a service-oriented management style is the development of an open internal communication climate.
On the one hand, employees need information from management to be able to implement a service
strategy; on the other hand, they have valuable information for management about customers’ needs
and wishes, about problems and opportunities, and so on. Feedback is required so that they see the
results of their job and their actions, otherwise employees easily lose interest in what they are doing.
It is a good idea to get contact employees involved in the planning process and in decision-making
concerning, say, what new services to offer and how they should be produced. Overall objectives for
a group or a department can be broken down into sub-goals for that unit in co-operation with the
employees who are supposed to accomplish those goals. This process is, first, a way of communicating
the strategy and objectives of the firm to the employees, and second, a way of achieving employee
commitment to the service strategy and to the firm’s goals.
Finally, as noted in the previous chapter, management methods and the attitudes of managers and
supervisors towards their employees are of pivotal importance to the long-term success of an internal
marketing process.
Schneider and White summarize the impact of leadership in the following way.30 The role of the
leader is to:
● Espouse service-focus values among the employees.

● Develop policies, practices and routines that are consistent with these values.
● Ensure that those who most fully implement these procedures, to achieve a service-focused climate,
are recognized for this and rewarded.
SERVICE TRAINING PROGRAMMES

By training employees, the knowledge and attitude requirements for good service can be achieved. However,
to be effective training must be supported by the three other prerequisites for a service culture.
Training employees is also an integral part of internal marketing. In organizations where existing
values are not service-oriented, an attitude of resistance to change can be expected. A large portion
of this resistance can be removed by creating the previously discussed strategic, organizational and
management prerequisites for good service. However, this resistance is also a question of attitude and
a lack of knowledge and skills. If the three requirements discussed above are not attended to, negative
attitudes easily prevail or develop among the personnel. If the firm has always operated in, say, a
manufacturer-oriented or bureaucratic way, it is not easy to make people think in new directions.
This goes for management as well as for other employees.
If top management, middle management, and support and customer contact employees are
expected to be motivated for service-oriented thinking and behaviour, they will need to know how a
service organization operates, what makes up customer relationships, what their role in the operation
and in customer relationships is, and what is expected of the individual. A person who does not under-
stand what is going on and why cannot be expected to be motivated to do a good job as a contact
person or an internal service provider in support functions behind the line of customer visibility.31
Moreover, every person should be aware of the firm’s business mission, strategies and overall objec-
tives as well as the goals of his own department and function, and his own personal goals. Otherwise,
it would be unrealistic to think that an employee understands why he is told that it is important
to perform in a certain way. This is even more crucial for employees in support functions than for
contact employees.
In training programmes, knowledge-oriented training and attitude training are intertwined. The
more knowledgeable a person is, the easier it is for that person to have positive attitudes towards a
specific subject. It is essential to realise that attitudes can seldom be changed without knowledge. Pep
DEVELOPING A SERVICE CULTURE: BARRIERS AND OPPORTUNITIES 455
talks may help on some occasions, but if people do not have the facts they will never create enduring
service-focused attitudes. Employees need to know why the firm is a service business, or why as a
manufacturer it adopts a service strategy; which requirements for performance follow from this; what
their role is in relation to other functions and people, and in relation to customers; what is demanded
of them as an individual, and why. And if a person feels that he does not have the required skills, he
will also be reluctant to change.
Service training can be divided into three categories:
1. Developing a holistic view of the firm and its sub-functions as a service organization and how it
operates in a market-oriented manner.
2. Developing skills concerning how various tasks are to be performed.
3. Developing specific communication and service skills.
All three types of training are needed. The first type gives a general foundation for understanding a
service strategy and how to implement it. It puts every function, department and task into perspective,
and demonstrates how the processes in the organization and the people performing these processes
are related to each other and to a common goal of servicing customers well and creating support
for their value-creating processes. The second type, vocational training, provides the skills required
so that employees can perform their tasks, which may have been changed after the introduction
of a service strategy, in an efficient way. The third type of training provides employees, especially
customer contact employees but also support employees, with specific skills as far as communication
and interaction tasks are concerned. Courses that address service-mindedness belong to this group,
too. A serious mistake, which is all too common, is to believe that only the third type of training is
needed to change employee attitudes. Such an approach is hardly ever successful.
D E V E L O P I N G A S E RV I C E C U LT U R E : B A R R I E R S
A N D O P P O RT U N I T I E S
Clearly, the task of changing the corporate culture and creating a service culture is a huge one. And
it will take a substantial amount of time until any results will be observable. Getting started is often a
substantial problem. There is an initial barrier to starting the process, and there is a threshold to cross
on the way. Before this happens, no major changes can be seen in the internal value systems. However,
once the process develops far enough it usually gains pace, provided it is constantly supported and
enhanced, especially by top management. A service culture has to be maintained once it has been
achieved, otherwise there is always the risk that the interest in service and in servicing internal as well
as external customers will start to deteriorate.
In some situations it is easier to get started than in others. Favourable conditions for a change
process are:
● Environmental pressure, such as increased competition, changes in customer needs and expectations,
the introduction of new technologies, or deregulation or regulation of the industry.
● New organizational strategies, which differ from the previous ones.
● New structural arrangements, such as new management or a major change in the organizational
structure.
All or some of these things could, of course, occur simultaneously, which would probably help the
process. When times are good, and problems seem to be too far into the future or are invisible to most
people in the organization, it is much more difficult to start to change the existing corporate culture.
However, when altering an organization’s culture, it is critical to preserve some of what has gone
before and build on it to make the change. Honouring and learning from the past is important and
does not have to mean that it slows down the process or counteracts it.32 It is probably a good idea
to move slowly, to set intermediate goals and to make changes gradually. Sometimes, however, there
is no time for that. In most cases there is though, and trying to implement change too rapidly may
lead to bad results. A cultural change means that the mindset of people has to change. The process
has to be planned and executed in the same way as any important organizational task.
S U M M A RY
Corporate culture and service culture is extremely complicated, and a holistic phenomenon. Developing a
specific culture, therefore, requires that a whole range of internal issues be addressed. Culture cannot exist
in isolation from or side by side with, for instance, the organizational structure, management approaches
and methods, or the business mission and strategies of the organization. It is the result of these and other
aspects of organizational life.
Hence, culture becomes a strategic matter. It does so in two ways, which are related to each other. First
of all, creating a service culture requires a holistic view of the company by the decision-makers and those
responsible for developing the culture; only top management holds that position. Therefore, it becomes
a strategic issue that internal requirements for the creation of a service culture be developed. Second,
implementing a service strategy requires, among other things, the kind of people who believe in service
and who consider that it is essential in business to provide internal as well as external customers with good
service. Therefore, if an organization intends to implement a service strategy, it is of vital importance that
it aims for the achievement of a service culture.

1. Why is culture of strategic importance for the performance of an organization?
2. What is the difference between organizational climate and culture?
3. Which are the strategic requirements for a service culture?
4. Discuss the possible relationship between a service culture, service quality and profitability
in a service organization.
5. Analyse how well the strategic requirements for a service culture are fulfilled in your firm,
or in any given organization. What should be done to improve or strengthen the culture?
6. What are the problems related to starting to change the corporate culture?
NOTES 457
NOTES
1. Davis, S.M., Managing Corporate Culture. Cambridge, MA: Ballinger, 1985. This somewhat dated
definition by Davis still very accurately describes the concept of corporate culture. See also, for
example, Iglesias, O., Montana, J. & Sauguet, A., The role of corporate culture in relationship
marketing. European Journal of Marketing, 45(4), 2011, 631–650.
2. Bowen, D.A., Schneider, B. & Kim, S.S., Shaping service cultures through strategic human
resource management. In Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Marketing
& Management. Thousand Oaks, CA: Sage Publications, 2000, pp. 439–454. See also Shein,
E.H., Corporate Culture. In Vogelsang, J. et al. (eds.), Handbook for Strategic HR. Chicago, IL:
AMACOM, 2013, pp. 252–258.
3. Schein, E.H., Organizational Culture and Leadership, 2nd edn. San Francisco, CA: Jossey-Bass,
1992.
4. Schneider, B. & Bowen, D.E., Winning the Service Game. Boston, MA: Harvard Business School
Press, 1995.
5. Schneider, B., White, S.S. & Paul, M.C., Linking service climate and customers perception of
service quality. Journal of Applied Psychology, 83(2), 1998, 150–163.
6. Schneider, B., Brief, A.B. & Guzzo, R.A., Creating a climate and culture for sustainable organi-
zational change. Organizational Dynamics, 24(4), 1996, 7–19.
7. Bowen, D.E. & Schneider, B., A service climate synthesis and future research agenda. Journal of
Service Research, 17(1), 2014, 6, 10–11.
8. Schneider, B., The climate for service: an application of the climate construct. In Schneider, B.
(ed.), Organizational Climate and Culture. San Francisco, CA: Jossey-Bass, 1990, pp. 383–412.
9. See also Edvardson, B. & Enquist, B., Quality improvement in governmental services: the role
of change pressure by the ‘market’. The TQM Magazine, 18(1), 2006, 7–21, where the authors
study the situation in a public sector context.
10. See Bowen, D.E. & Schneider, B., op. cit., where a distinction between service climate and other
concepts such as service orientation is made.
11. Barney, J., Organizational culture. Can it be a source of sustained competitive advantage. Academy
of Management Review, 11(3), 1986, 656–666. See also Flamholtz, E.G. & Randle, Y., Corporate
culture, business models, competitive advantage, strategic assets and the bottom line: theoretical
and measurement issues. Journal of Human Resource Costing & Accounting, 16(2), 2012, 76–94,
where the relationship between corporate culture and the competitive advantage of a firm is
discussed, and Guiso, L., Sapienza, P. & Zingales, L., The value of corporate culture, Journal
of Financial Economics, [online, 24 May 2014] where it is shown that the relationship between
corporate culture and firm performance may not be straightforward.
12. See Skålen, P. & Strandvik, T., From prescription to description: a critique and reorientation
of service culture. Managing Service Quality, 15(3), 2005, 230–244, where the authors study the
effects of a service management programme in a public sector situation. Because the goals of the
programme and the existing culture were far apart, the programme created more confusion in
the organization than helped, changing the culture into a service-oriented direction.
13. Brown, S.W., The employee experience. Marketing Management, 12(2), 2003, 12–16.
14. Schneider, B., Notes on climate and culture. In Venkatesan, M., Schmalensee, D.M. & Marshall,
C. (eds), Creativity in Services Marketing. What’s New, What Works, What’s Developing. Chicago,
IL: American Marketing Association, 1986.
15. Schein, op. cit.
16. Bowen, D.E. & Schneider, B., Service marketing and management: implications for organiza-
tional behavior. Research in Organizational Behavior, 10, 1988.
17. Schneider, op. cit.
18. See Schneider, B., Hayes, S.C., Lim, B.-C. & Raver, J.L., The human side of strategy: employee
experiences of strategic alignment in a service organization. Organizational Dynamics, 32(2), 2003,
122–138.
19. Schneider, B., White, S. & Paul, M.C., op. cit.
20. Brown, 2003, op. cit. And for example, in a study of the airline industry it became clear that the
service culture had a direct effect on service behaviour. See Zerbe, W.J., Dobni, D. & Harel,
G.H., Promoting employee service behaviour: the role of perceptions of human resource man-
agement practices and service culture. Revue Canadienne des Sciences de l’Administration, 15(2),
1998, 165–179.
21. Grönroos, C., Service Management and Marketing. Managing the Moments of Truth in Service Com-
petition. Lexington, MA: Lexington Books, 1990, p. 244. See also, for example, Beitelspacher,
L.S., Richey, R.G. & Reynolds, K.E., Exploring a new perspective on service efficiency: service
culture in retail organizations. Journal of Services Marketing, 25(3), 2011, 215–228.
22. To use the words of Schneider and Rentsch, service has to become ‘the raison d’être for all
organizational activities’ and an ‘organizational imperative’. See Schneider, B. & Rentsch, J., The
management of climate and culture. In Hage, J. (ed.), Futures of Organizations. Lexington, MA:
Lexington Books, 1987.
NOTES 459
23. See Gebauer, H., Edvardsson, B. & Bjurko, M., The impact of service orientation in corporate
culture on business performance in manufacturing companies. Journal of Service Management, 21(2),
2010, 237–259, where this relationship is discussed in a manufacturing context.
24. In a large study of the profitability of customer bases in retail banks in Scandinavia, Kaj Storbacka
showed that a large number of satisfied customers had a substantial negative effect on the over-
all profitability of the bank. See Storbacka, K., The Nature of Customer Relationship Profitability.
Helsingfors, Finland: Swedish School of Economics, Finland/CERS, 1994.
25. Bowen, Schneider & Kim, op. cit. See also Siehl, C. & Martin, J., Organization culture: a key to
financial performance? In Schneider, B. (ed.), Organizational Climate and Culture. San Francisco,
CA: Jossey-Bass, 1990, pp. 241–281. See also Edvardsson, B. & Enqvist, B., The IKEA saga: how
service culture drives service strategy. The Service Industries Journal, 22(4), 2002, 153–166.
26. Deal, T.F. & Kennedy, A.A., Corporate Cultures: The Rites and Rituals of Corporate Life. Reading,
MA: Addison-Wesley, 1982.
27. Grönroos, C., 1990, op. cit.
28. See Schneider, B. & White, S.S., Service Quality. Research Perspectives. Thousand Oaks, CA: Sage,
2004.
29. Schein, op. cit.
30. Schneider & White, op. cit., p. 118.
31. Jan Carlzon, the former managing director and president of SAS, illustrates in his book about the
turnaround process of SAS in the 1980s (Moments of Truth. Cambridge, MA: Ballinger, 1987) the
impact of a holistic understanding of the tasks people are involved in by the following anecdote:
There is no better way to sum up my experience than with the story about the two stone cutters who were
chipping square blocks out of granite. A visitor to the quarry asked what they were doing. The first stone
cutter, looking rather sour, grumbled, ‘I’m cutting this damned stone into a block.’ The second, who looked
pleased with his work, replied proudly, ‘I’m on this team that’s building a cathedral.’
This anecdote is still often told in similar contexts. It is interesting to note that, in slightly different
words, Mikhael Gorbachev, former leader of the Soviet Union, told it as an illustration of the
perestroika process. See Gorbachev, M., Perestroika – New Thinking for Our Country and the World.
New York: Harper & Row, 1987.
32. Zemke, R., Creating service culture. The Service Edge, 8, 1988.
Barney, J. (1986) Organizational culture: can it be a source of sustained competitive advantage?
Academy of Management Review, 11(3), 656–666.
Beitelspacher, L.S., Richey, R.G. & Reynolds, K.E. (2011) Exploring a new perspective on service
efficiency: service culture in retail organizations. Journal of Services Marketing, 25(3), 215–228.
Bowen, D.E. & Schneider, B. (1988) Service marketing and management: implications for organi-
zational behavior. Research in Organizational Behavior, 10.
Bowen, D.E. & Schneider, B. (2014) A service climate synthesis and future research agenda. Journal
of Service Research, 17(1), 5–22.
Bowen, D.A., Schneider, B. & Kim, S.S. (2000) Shaping service cultures through strategic human
resource management. In Swartz, T.A. & Iacobucci, D. (eds), Handbook of Services Marketing &
Management. Thousand Oaks, CA: Sage Publications, pp. 439–454.
Brown, S.W. (2003) The employee experience. Marketing Management, 12(2), 12–16.
Carlzon, J. (1987) Moments of Truth. Cambridge, MA: Ballinger.
Davis, S.M. (1985) Managing Corporate Culture. Cambridge, MA: Ballinger.
Deal, T.F. & Kennedy, A.A. (1982) Corporate Cultures: The Rites and Rituals of Corporate Life. Reading,
MA: Addison-Wesley.
Edvardsson, B. & Enqvist, B. (2002) The IKEA saga: how service culture drives service strategy. The
Service Industries Journal, 22(4), 153–166.
Edvardson, B. & Enquist, B. (2006) Quality improvement in governmental services: the role of change
pressure by the ‘market’. The TQM Magazine, 18(1), 7–21.
Flamholtz, E.G. & Randle, Y. (2012) Corporate culture, business models, competitive advantage,
strategic assets and the bottom line: theoretical and measurement issues. Journal of Human Resource
Costing & Accounting, 16(2), 76–94.
Gebauer, H., Edvardsson, B & Bjurko, M. (2010) The impact of service orientation in corporate
culture on business performance in manufacturing companies. Journal of Service Management, 21(2),
237–259.
Gorbachev, M. (1987) Perestroika – New Thinking for Our Country and the World. New York: Harper
& Row.
FURTHER READING 461
Guiso, L., Sapienza, P. & Zingales, L. (online 2014) The value of corporate culture. Journal of Financial
Economics.
Iglesias, O., Montana, J. & Sauguet, A. (2011) The role of corporate culture in relationship marketing.
Schein, E.H. (1992) Organizational Culture and Leadership, 2nd edn. San Francisco, CA: Jossey-Bass.
Schein, E.H. (2013) Corporate Culture. In Vogelsang, J. et al. (eds.), Handbook for Strategic HR. NY:
AMACOM, pp. 252–258.
Schneider, B. (1986) Notes on climate and culture. In Venkatesan, M., Schmalensee, D.M. &
Marshall, C. (eds), Creativity in Services Marketing. What’s New, What Works, What’s Developing.
Chicago, IL: American Marketing Association.
Schneider, B. (1990) The climate for service: an application of the climate construct. In Schneider,
B. (ed.), Organizational Climate and Culture. San Francisco, CA: Jossey-Bass, pp. 383–412.
Schneider, B. & Bowen, D.E. (1995) Winning the Service Game. Boston, MA: Harvard Business School
Press.
Schneider, B. & Rentsch, J. (1987) The management of climate and culture. In Hage, J. (ed.), Futures
of Organizations, Lexington, MA: Lexington Books.
Schneider, B., Brief, A.B. & Guzzo, R.A. (1996) Creating a climate and culture for sustainable orga-
nizational change. Organizational Dynamics, 24(4), 7–19.
Schneider, B., White, S. & Paul, M.C. (1998) Linking service climate and customer perception of
service quality: test of a causal model. Journal of Applied Psychology, 83(2), 150–163.
Schneider, B., Hayes, S.C., Lim, B.-C. & Raver, J.L. (2003) The human side of strategy: employee
experiences of strategic alignment in a service organization. Organizational Dynamics, 32(2), 122–138.
Schneider, B. & White, S.S. (2004) Service Quality. Research Perspectives. Thousand Oaks, CA: Sage.
Siehl, C. & Martin, J. (1990) Organization culture: a key to financial performance? In Schneider, B.
(ed.), Organizational Climate and Culture. San Francisco, CA: Jossey-Bass, pp. 241–281.
Skålen, P. & Strandvik, T. (2005) From prescription to description: a critique and reorientation of
service culture. Managing Service Quality, 15(3), 230–244.
Storbacka, K. (1994) The Nature of Customer Relationship Profitability. Helsingfors, Swedish School of
Economics, Finland/CERS Centre for Relationship and Service Management.
Zemke, R. (1988) Creating service culture. The Service Edge, 8.
Zerbe, W.J., Dobni, D. & Harel, G.H. (1998) Promoting employee service behaviour: the role
of perceptions of human resource management practices and service culture. Revue Canadienne des
Sciences de l’Administration, 15(2), 165–179.
CHAPTER 16
TRANSFORMING A
MANUFACTURING FIRM
INTO A SERVICE BUSINESS
“ In growing numbers customers consider manufacturers of physical products service providers, albeit often
mediocre service providers. In order to maintain their competitive advantage it is time for manufacturers
”
to start transforming themselves into service businesses.
INTRODUCTION
In previous chapters we have discussed what it means to be a service organization, and to manage it
and its customers with a customer focus in order to support the customers’ activities and processes in
a value-supporting way. Here the need for traditional manufacturers, such as firms in metal, forest,
electronic, chemical, IT and other industries, to find new sources of competitive advantage is dis-
cussed. Transforming into a service business is one logical way of getting closer to the customers and
finding new opportunities to support customers’ processes in a more valuable manner than before.
After reading the chapter the reader should understand the reason for manufacturers to transform into
service businesses, and why this requires a strategic turnaround of the whole firm to be fully successful.
The reader should also know what changes are needed to become a service business, how the prod-
uct should be understood and what steps should be taken, according to the CSS (Conceptualizing,
Systematizing, Servicizing) model, to make a transition.
T H E C H A L L E N G E F O R M A N U FA C T U R E R S
It is generally agreed that markets have moved into a service economy, where the firm which can
provide its customers with not only the best core solution, such as a physical product (or a core
service), but also better overall value-supporting service than the competitors will survive. Prod-
uct manufacturers increasingly voice a need to move into a service business mode. The traditional
supplier–customer dyad has long been challenged by forces in the marketplace. To be able to support
464 TRANSFORMING A MANUFACTURING FIRM INTO A SERVICE BUSINESS
their customers, suppliers have had to move into networks with other suppliers and the customer’s
customer becomes a part in the chain that has to be considered. Changes in the business environment
relating to business-to-business markets can have dramatic consequences for firms. A competitive
advantage cannot be achieved and maintained by traditional means. A supplier who, in a competitive
market, only offers the core solution to its customers in the form of a physical product, from small-
scale products to large investments such as a paper machine, will, among other things, soon find that
the pressure on price gradually grows from what it used to be. The reason for this is quite obvious. As
customers do not perceive any other support to their processes by a supplier than what the product
offers, and as there is an abundance of competing offerings on the market, it is only natural for a
buyer to look at price as a major and often even the major purchasing criterion. What the supplier
traditionally does is offer its customer a technical solution to a customer process, for example a produc-
tion, administrative, financial, marketing or HRM process, but not explicitly a value-creating support
to this process that has a favourable effect on the customer’s business and commercial processes. The
competitive advantage once created by a technological solution is in most industries long gone. And
when new technological solutions are introduced, the advantage lasts less time than ever.
Furthermore, offering service, such as maintenance and upgrading, to an installed base provided
by the manufacturer may provide a steady stream of revenues on top of those from delivering the
product. Although the unit revenue of a single product transaction is often higher, the service-based
revenue provides a continuous cash flow.
A value-creating support to a process provided by service requires, first of all, that the customer
can perceive and preferably also calculate the effects on the outcome of the process that is supported.
Second, a calculable longer-term effect on the customer’s business process, that is, on the customer’s
revenue-generating capability or on its cost level, or on both, and ultimately on its profits, should
at least approximately be visible for the customer. Or if for some reason it cannot be calculated, the
existence of such a positive effect must at least be recognized and accepted. Otherwise the value of
service remains abstract and incomprehensible, and difficult to evaluate by the buyer. If this is the
case, price becomes the dominating decision-making criterion.
In order to provide more support over a longer time period than the physical product provides,
suppliers often turn to various types of services, traditionally called after-sales services, or industrial
services. For example, a physical product can be offered together with a service contract. This may
be an improvement, but it turns out that it is often difficult to persuade customers to pay for these
services. Moreover, the product as the core is often still managed and delivered with more of a
product-focused than a customer-focused strategy. Hence, new visions and new actions are needed.
S E RV I T I Z AT I O N : I N F U S I N G S E RV I C E S
INTO A PRODUCT OFFERING
In the management and also marketing literature the need for product manufacturers to turn to
service has been recognised.1 Oliva and Kallenberg offer a four-phase process: (1) consolidating mostly
existing product-related services, (2) entering a market of servicing an installed base, and (3) expanding
to services based on customer relationships and developed from existing processes. The fourth phase
would cover situations where the firm takes over an end-user’s operation, and for example manages
a production plant.2
Almost invariably, the literature on how to transform product manufacturers into service busi-
nesses suggests that this transformation takes place through a gradually increasing infusion of services
ADOPTING A SERVICE PERSPECTIVE: A SERVICE STRATEGY APPROACH 465
into a product-based offering (service infusion).3 A more commonly used term for this process is serviti-
zation. Andy Neely summarizes the discussion of what is meant by servitization with the following
explanation:
In essence servitization is a transformation journey – it involves firms (often manufacturing firms) developing the
capabilities they need to provide services and solutions that supplement their traditional product offerings.4
Hence, according to the servitization and service infusion approach, product manufacturers can move
towards a service business mode, and eventually become a service firm, basically by gradually adding
more service activities to their core offerings, which remain physical product-based. We do not believe
that this would work. For this approach to be successful, a growing number of services should auto-
matically change the overall strategy of the firm. However, if the core of the offering remains a
resource, such as a physical product, there is a substantial risk that the firm’s strategy will remain
product-based, and the accompanying services will be treated as add-ons and the dominating culture
in the firm will continue to be product-centric.
In our view, servitization and service infusion is, at best, a transition stage. For a final transformation
to take place, the manufacturing firm’s overall strategy has to be service-based, and the core of the
offering has to be value-creating support to customers, not a physical product or any other type of resource.
In the offering, products and service activities have to merge into an integrated process, which aims at
supporting the customers’ processes and ultimately their business processes. Offering value-laden resources
must be replaced by providing value-creating support. This means that unlike product-based offerings which
tend to be transaction based, service offerings are based on relationships. Consequently, firms which
are in a true service business mode have to change their business model from a transaction-based model
to a relationship-based model.5
In a study of the effects of servitization on firm value, it was observed that adding services to a
core product may add to the manufacturer’s value, but this requires a substantial level of service sales.
It was also noted that if services offered are closely related to the core product, this effect grows.6
However, in the recent literature the weaknesses and insufficiencies of a servitization approach are
clearly recognized. In a recently reported study about European manufacturing firms it was observed
that in reality product offerings are supplemented only with a limited number of services.7 It has also
been claimed that transforming into a service business mode is an evolutionary process rather than a
transition from one phase to another8 and requires strategic rather than incremental change.9
This chapter will discuss how to transform from a product manufacturing firm into a service business
by taking a service perspective and adopting a service strategy, rather than by following a servitization
process.
A D O P T I N G A S E RV I C E P E R S P E C T I V E : A S E RV I C E
S T R AT E G Y A P P R O A C H
The question is: What is meant by providing better service in a manufacturing industry? We do not believe
that it is enough to add better industrial services or after-sales services to the core product. In this
book we have defined service as supporting the customer’s everyday activities and processes in a value-creating
manner.10 Hence, taking a service perspective, or adopting a service logic in a manufacturing firm
would mean that the supplier alone, or together with network partners, develops and implements
holistic offerings that successfully support its customers’ processes, for example, a production process,
so that this process functions better than without the support of this offering or with the support
of some other offering. Moreover, this offering should have a favourable and preferably quantifiable
effect on the customers’ business processes, in terms of growth and renevue-generating opportunities
and/or cost savings.11
The next important question is: What does this value-supporting offering include? Does it only include
industrial services such as maintenance, repair or training? The answer is definitely no. Following a
service perspective, an offering with which a supplier provides service in a value-supporting manner
over time cannot include only after-sales and other service elements, it has to include the total sup-
port, thus encompassing the support provided by the physical product as the core solution as well as
by service processes, such as deliveries, installation, repair, maintenance and customer training, and
hidden services, such as invoicing, complaints handling, extranets, product documentation and ad hoc
interactions between people. In this way a true service offering is provided, and not a product offering
accompanied by services. In Chapter 1, hidden services were defined as activities that customers are
influenced by which by the firm are considered administrative, financial, legal or technical routines,
without any impact on the customers’ preferences. They are, therefore, treated and implemented as
non-service. Badly managed and handled hidden services, such as complaints handling and invoicing,
easily create emotional stress for customers and, in addition, unnecessary and unwanted sacrifice in
the form of time spent, for example, on solving a service failure, checking the specification and cor-
rectness of an invoice or figuring out the meaning of product documentation, and costs created by
this. In Chapter 6 such costs were discussed and termed indirect and psychological relationship costs.
Adding more services one by one to a product-based core offering may be counterproductive.12 To
have a major effect on a firm’s competitiveness, servitization must lead to a strategic development of the
entire manufacturing business into a service business, including its traditional product manufacturing
part. Then a service perspective and service logic drives the whole business, both strategically and
tactically.13
T H E T H I R D - PA RT Y T H R E AT
In addition to the price pressure from customers, and the fact that in most industries the technical
solutions embedded in a physical product have become more or less similar, there is another threat
that suppliers in manufacturing industries have to be aware of and handle. This can be called the
third-party threat. This is illustrated in Figure 16.1.
In the upper part of the figure a traditional supplier–customer–customer’s customer chain is illustrated. In
this situation, by providing the customer with a core solution, for example, a production machine or
computer hardware, more effectively than competitors also offering core solutions only, the supplier
can successfully develop a working relationship with its customer. As customers have traditionally
considered the technical specifications of the product the essence of a successful solution, by offering a
competitive technical solution the supplier has been able to claim and keep ownership of the customer.
However, this situation is changing. In the lower part of the figure a quickly emerging situation
is illustrated. Customers’ preferences are changing from considering the technical specifications as
the essence of a successful solution to looking at how efficiently and effectively a process, such as
a production or an administrative process, runs using a given technical solution and other support,
such as serviceability of the technical solution, repair, maintenance, training and call centre or website
advice. Customers are even looking for support in operating a production line or a whole plant.
Moreover, customers start to look at the effect on their business process of how well a given process
functions, and at possibilities to serve their customers successfully. At this point, from having been
tactical suppliers, service companies and consultants offering services that help the customer run a
HOW TO MAINTAIN A SUSTAINABLE COMPETITIVE ADVANTAGE: ADOPT A SERVICE LOGIC 467
SUPPLIER
CUSTOMER
CUSTOMER’S
CUSTOMER
SUPPLIER
CUSTOMER
CUSTOMER’S
CUSTOMER
Key question:
Who owns the customer?
SERVICE
COMPANY,
CONSULTANT,
ETC.
F I G U R E 16.1
Who owns the customer: the third-party threat.
process successfully gradually gain a strategic position in the customer’s business. When a customer
decides to outsource, for example, the operation of a production line or a plant to a third party, such
as a service company, the position of the supplier becomes shaky.
What has happened to the supplier–customer–customer’s customer chain? The more the third-party
actor gains a strategic position, the more the position of the supplier, who traditionally had this position
in relation to the customer, declines and eventually becomes merely tactical. The supplier does not own
the customer any more, the third-party actor does. This means that decisions regarding the supplier’s
involvement with the customer are no longer primarily taken between the supplier and the customer,
but between the customer and the third-party actor. The supplier may not even be asked. Hence,
ownership of the customer has slipped away from the supplier to the service firm or consultant, or
whichever type of firm has taken this position. The risk grows that the supplier becomes a subcontractor
to the third-party actor.
H O W T O M A I N TA I N A S U S TA I N A B L E
C O M P E T I T I V E A D VA N TA G E : A D O P T
A S E RV I C E L O G I C
What can a manufacturing firm that is in the supplier’s position in Figure 16.1 do? One option is
to continue to compete with price. In some markets and in some customer segments it works, but
a price strategy is sustainable only if the firm has a lasting cost advantage. In the long run it seldom
works. Moreover, a lowest price strategy also makes it difficult for a firm to invest enough in research
and development, in technology and service development.
There is also another quite obvious option. The manufacturer can transform itself into a service company.
Instead of remaining in a manufacturing business mode it can move into a service business mode.
On top of its technological and product knowledge it can strive to create the same capabilities as a service
company and consultant as third-party actors have, and thus create an even stronger strategic position
in relation to the customer than the third-party actor can ever develop. Of course this does not
mean that the manufacturer has to do everything. It can very well outsource some processes, such as
deliveries or maintenance, but in this case it is the supplier which is the outsourcer, not the customer
who uses a third party’s services. Consequently, the risk that a third-party threat develops is minimized.
Today it is seldom possible for a traditional manufacturer to create a sustainable advantage with
a price strategy or based on technological development with a product strategy. The only option
left is to adopt a service perspective and strategically and tactically develop into a service business.14
This, however, is easy to say, but turns out to be very difficult to do. It normally demands changes
in attitudes, business mission and strategies, organizational and operational structures and leadership
approaches. It takes a service-focused mission, service business-based strategies and a service culture. (These
issues have been discussed at length in previous chapters.) In many cases, attitudes seem to be the
most problematic issue. Without a change in attitudes throughout the entire organization, none of
the other required changes will take place. However, it should be noted that unless top management
truly embraces a service culture first, an organization-wide cultural change will not take place.
However, what part of the business should adopt a service logic? Is it enough that a separate service
operation, industrial services, is transformed into a true service business? The answer is no. This is
servitization and service infusion into manufacturing without reaching the ultimate goal, a true service
business. To achieve a sustainable competitive advantage the entire firm, including its manufacturing
part and service part, has to adopt a service logic and become a service business where the manufacturing
and service operations are integrating into one business. There are three reasons for this:15
1. If the industrial services part – for example, engineering, consultancy, software supply, repair and
maintenance, customer training, product upgrading – is developed according to a service logic,
but the manufacturing business is not, the former becomes closer to understanding its customers’
value creation and geared towards supporting it (outside-in management), whereas the latter part
of the business inevitably remains focused on manufacturing and the customers’ technical pro-
cesses (inside-out management). However, the customers are the same both for the manufactured
product and for industrial services, and therefore customers easily get confused and upset by the
inconsistency in approach.
2. It is difficult for two different logics and cultures to exist and thrive in an organization. Normally,
the manufacturing logic which exists in a much larger part of the organization and which has much
older and deeper roots in the firm and its culture will become a hindrance to the development of
a much younger and stranger service culture. In the end, the service culture will fade away and
the whole business will slip back to the dominating manufacturing culture. If top management is
in a manufacturing mode, the risk that this will happen is overwhelming.
3. If an industrial service business has been successfully established, it easily undermines the image of
the product business in the minds of the firm’s customers. The service business represents solutions
that are more attractive to customers than stand-alone products. The product business is perceived,
relatively speaking at least, as more product-oriented and less customer-focused. Eventually cus-
tomers consider stand-alone products more as commodities, which leads to an increasing price
pressure.16
TRANSFORMING INTO A SERVICE BUSINESS – THE GAME PLAN 469
T R A N S F O R M I N G I N T O A S E RV I C E
BUSINESS–THE GAME PLAN
Being a service business means that a firm does not only provide its customers’ resources, such as
physical products alone or together with stand-alone services, for their use. Instead the firm offers
customers value-supporting processes, integrating a set of resources – physical products, services (including hidden
services), people, systems, information – which in interactions with the customers and the customers’ resources,
facilitate a customer process, such as a production line or sales automation. If this functions well, value is
created in this customer process and, furthermore, in the customer’s business process as well in the form
of a better revenue-generating capacity over time, lower costs of being a customer over time (lower
relationship costs), or both, and eventually improved profits.
In business-to-business markets, supporting, for example, a customer’s production process in a way
that has a positive effect both on the revenue side and the cost side, means that in addition to the core
process, a multitude of other customer processes have to be supported in a successful way as well.
Examples of such processes are the customer’s warehousing, repair and maintenance, need for basic
product knowledge and ad hoc information, payment and cost control, problem solving and failure
management. Only by supporting all these and other processes, in addition to the production process,
is the customer’s business and commercial process backed up in a successful way. If the supplier
manages to do so with adequate, customer-focused resources, a trusting relationship can be expected
to emerge and the ‘customer’s heart and mind’ can be won.17
As MacMillan and McGrath18 point out in a discussion of finding ways of differentiating businesses,
a supplier cannot concentrate on providing the customer with a good product only, it has to take
a comprehensive look at the customer’s processes. According to them, the supplier should ask the
following questions:19
● How do customers become aware of their need for your product or service?
● How do customers find your offering?
● How do customers make their final selections?
● How do customers order and purchase your product or service?
● How is your product or service delivered?
● What happens when your product and service is delivered?
● How is your product installed?
● How is your product or service paid for?
● How is your product stored?
● How is your product moved around?
● What is the customer really using your product for?
● What do customers need help with when they use your product?
● How is your product repaired and serviced?
● What happens when your product is disposed of or no longer used?
Going through these and possibly other questions, the customer’s experience is analysed. A manufac-
turer as a service business has to support all of the customer’s processes, which are important to the
customer’s commercial outcome, in a satisfactory way. Some of these processes are more critical to
the customer and its business process than others, and those processes have to be supported especially
carefully. However, it must be realized that, in the end, all processes are important to the customer.
Some activities can be outsourced, but in order for the supplier to maintain its strategic position in
relation to its customers, the supplier has to stay in control of the network used and of outsourced
processes.
In Figure 16.2 a typical chain of processes of a customer and a corresponding chain of processes
of a supplier are illustrated. In the figure they follow each other in a chain-like order. However, in
reality the order may be different, and some processes may be simultaneous or iterative. For the sake
of simplicity they are depicted as a chain.
The customer chain includes awareness of needs, perception of a solution, purchasing and order-
ing, warehousing and installing, payment and cost control, usage, information needs, problems and
complaints, upgrading and modernization and, finally, word-of-mouth referrals.
The supplier chain includes market research, sales and traditional marketing, order processing,
logistics and deliveries and installation, invoicing, repair and maintenance and process operation, call
centre and Internet advice and documentation, complaints handling and recovery, engineering and
technology development, and public relations and marketing.
These lists are, of course, only examples. The important thing is, however, that the customer’s
process and the supplier’s process are linked to each other and interact with each other, that is, that
the supplier’s activities are truly geared towards the requirements of the corresponding process on the
customer side. For example, the supplier’s logistical process should meet the customer’s warehousing
process with a delivery system that supports value creation in the customer’s goods-handling processes.
As another example, the supplier’s invoicing system should meet the requirements of the customer’s
payment and book-keeping and cost control system. Developing this system includes issues such as
specification of the invoice, number of invoices sent during a given period and the receiver to whom
invoices are sent, and so on.
Moreover, supplier processes that, when supporting a customer’s processes, need to function
together or at least be informed about each other’s contacts with the customer must work closely
together, share information and perhaps do joint planning. Such processes are, for example, product
development, repair and maintenance and modernization. Far too often people in these processes
never see each other or even talk to each other, either when planning or executing.
In the supplier firm the following questions should be asked:
● Do we know which customer processes are influenced by our activities and processes?
● Do we know how these customer processes function and who is involved in them?
● Do we know how these customer processes influence the customer’s business process, either
through a revenue-supporting or a cost-creating effect?
● Do we know which of the customer’s processes are critical to the customer’s business process and
commercial outcome?
● Do we know how the way we handle our activities and processes influences the customer’s pro-
cesses today?
● Do we know how the customer’s processes could function more efficiently and effectively than
today and support the business process better?
Awareness
of
need
Perception
of
solution
Usage
analysis
Purchasing/ Warehousing/ Paying/ Information Problems/ Upgrading/ Word-of-mouth

Usage
Ordering Installing Cost control need Complaints Modernization referrals
Sales/ Logistics/ Repair/ Call centre/ Complaints Engineering/ Marketing/

Marketing/ Deliveries/ Invoicing Maintenance/ Internet/ handling/ Technology Public
Order Installing Operation Documentation recovery development relations
R&D/ processing
Product
development
Sales/
Marketing
Market
research
F I G U R E 16.2
The customer lifecycle and supplier support chains.
● Do we know how we could support the customer’s processes more efficiently and effectively with
a higher value-creating effect than today?
● Do we know the customer’s customers’ processes well enough so that we can advise the customer
about how to serve their customers better than today?
Only after having asked these questions and found satisfactory answers to them is a firm prepared
to develop a comprehensive offering to support the customer in a value-supporting manner. Before
finding satisfactory answers the manufacturing firm does not know the game plan for operating as a
service business and probably cannot successfully service its customers in a competitive way.
W H Y I S A S E RV I C E B U S I N E S S A P P R O A C H
NEEDED?
The core competence of a traditional manufacturing firm is mainly related to how to manage man-
ufacturing processes and an understanding of the customers’ processes in a technical sense. Therefore, such a
firm offers its customers a technical solution for a technical process, for example for a production process,
administrative process or sales process. This technical solution should make the customer’s technical
process function more efficiently. The effects on the customer’s value creation and business process,
not to say the processes of the customer’s customers, are normally not considered in an explicit way.
A manufacturer that wants to ensure it can stay in a strategic position in relation to its customers
has to be able to support the customers’ various processes in a way that helps them create value in
these processes (value-in-use) such that the customer’s business process is also supported in a value-
creating way. As the previous section demonstrated, the core solution, the physical product as a
technical solution, is not enough to achieve this. Traditionally, in a manufacturing firm the main
knowledge base is geared towards knowledge about technologies, products and manufacturing processes. This
knowledge base is still of paramount importance for being a successful service business. However, to
compete successfully in the new situation, in relative terms, the required main knowledge base is not
in manufacturing processes, technologies and products. Today, the traditional knowledge base can be
characterized as a prerequisite for success, but the main knowledge base required is elsewhere.
To compete successfully for customers today, the main knowledge base has to be:
● Knowledge about customers’ processes and about how customers create value for themselves in
these processes.
● Knowledge about how to support the customers’ everyday processes, so that value (value-in-use)
emerges in them.
● Knowledge about how supporting customers’ everyday processes successfully contributes to com-
mercial value for the customer, for example by providing growth and revenue-generation oppor-
tunities and/or cost savings.
This knowledge is what a service business is built upon. Service is support and the logic of a service orga-
nization is to know how to support its customers’ everyday activities and processes.
This refocusing of the required knowledge base does not mean that the traditional knowledge of
a manufacturer is less important, probably in most situations it is the contrary. In Figure 16.3 the
change in focus of how to improve the operations of a firm is illustrated schematically.
WHY IS A SERVICE BUSINESS APPROACH NEEDED? 473
More
Technology
TECHNOLOGY/ development only Customer knowledge
MANUFACTURING development supported
KNOWLEDGE by technology knowledge
Customer knowledge
development with a loss
of technology knowledge
More
KNOWLEDGE ABOUT
CUSTOMER PROCESSES AND
HOW TO SUPPORT THEM
F I G U R E 16.3
Moving towards a service business knowledge base in manufacturing.
In the figure a thin line shows the traditional way of creating a competitive advantage based on
a knowledge base geared towards technology and manufacturing processes. The technology knowl-
edge deepens and the level of technology goes up, but the knowledge geared towards understanding
customers’ everyday processes and business process, and towards how to support them, other than
with a technical solution for a technical process, remains on the same level as before. In value terms,
this development is based on the idea that value for customers is embedded in the products developed
and offered for the customers’ use (value-in-exchange).
The dotted line illustrates the worst development that can happen. The manufacturer devotes time
to create an understanding of the customers’ processes, but does not maintain or when needed improve
the technological knowledge. In that case the firm loses its capability to offer technical support in
the form of products to its customers. The customers may like the supplier’s way of interacting with
them, but not the way they help them keep their processes going, for example a production or
administrative process. The prerequisite for being a customer-focused service business has been lost.
Such a supplier will not survive long on the market.
The thick line in Figure 16.3 indicates the way to become a service business. The manufacturer
must obtain an in-depth knowledge about all its customers’ processes (compare the game plan in
Figure 16.2) as well as how they, and through them the business process, can be supported so that
value is created in all processes. The customers are the key to value creation. They create value for
themselves supported by the supplier,20 and this value is created in the customers’ processes where
the support of the supplier is used (value-in use).
T H E C U S T O M E R ’ S VA L U E F O R M AT I O N P R O C E S S
The core competence of a service business is related to an understanding of the customer’s value creation
and business process and how to manage a system for supporting customer’s value creation. Based on its main
knowledge base of understanding the customers’ activities and processes and their value creation, and
understanding how to support this value creation, a manufacturer taking a service business approach
would strive to provide support to its customers’ value-creating processes and business processes, and
thus to total value creation. When doing so, it would probably also provide support for its customers’
capabilities to serve their customers and support the customers’ commercial outcome. This is achieved
by offering customers, first of all, technical solutions to technical processes, but in addition, by managing all of
its activities and processes, including hidden services, that have an impact on the customers’ total value creation, and
hence also on their preferences towards the supplier, in a customer-focused and value-supporting manner
throughout the customer relationship lifecycle.
In Figure 16.4 a hypothetical example of how a customer’s value creation is supported through
a four-stage process is schematically illustrated (compare Figure 6.10 in Chapter 6). The following
steps should be taken:
1. Identify customer processes which are critical to the customer’s commercial result, that is, to the
customer’s business effectiveness.
2. Match the customer’s key processes and the supplier’s corresponding processes (practice match-
ing), such that the customer’s processes are successfully supported (creates process effectiveness),
The supplier’s The customer’s Process Business

processes processes effectiveness effectiveness
Production
Product
process
Monetary
value dimension
- Growth effects
Technical value dimension
Order-taking Order-making - Revenue effects

Practice matching
- Cost effect
Repair and Secured

maintenance/ production/
logistics no stand-still
Experience-
related value
dimension
Invoicing Cost control
- Commitment
- Trust
- Comfort
Service Failure - Etc.
recovery control
F I G U R E 16.4
Supporting customers’ value creation – an example.
THE BENEFIT FOR A MANUFACTURING FIRM OF TAKING A SERVICE BUSINESS APPROACH 475
and facilitate the customer’s commercial result in a value-creating way (creates business
effectiveness).
3. Manage the supplier processes such that the customer’s identified key processes are effectively
supported in a technical sense (technical value dimension).
4. Make sure that the technical support to the customer’s processes is transformed into success-
ful business effectiveness (monetary value dimension), and creates a favourable experience as well
(experience-related value dimension).
In Figure 16.4 the core of the offering is exemplified with a physical product of some kind. The
customer processes which are considered critical to the customer’s commercial result are the following
(the supplier’s corresponding processes are in brackets): the production process (product), order-
making (order-taking), secured production minimising stand-still time (repair and maintenance and
logistics), cost control (invoicing), and failure control and correction (service recovery).
The supplier must first identify these pairs of critical processes, and thereafter initiate a practice
matching process, where the way these processes are practised is analysed. The aim is to align the
supplier’s and customer’s activities, competencies and processes, such that the customer’s different processes
are successfully supported. Who adapts to whom is a matter of, among other things, the two parties’
strategies, power position, and also understanding of the potential of the service perspective.
Then the supplier should integrate support to each of the customer’s key processes into one offering,
and then manage its processes in a way which creates a technical value21 in each of the customer’s
processes, and consequently create process effectiveness. This value dimension can be measured, for
example, in technical, temporal, or sometimes even monetary terms, such as quality of production
output, amount of scrap, time from order to delivery, or lost sales due to stand-still or delayed problem
recovery. Sales often aim at supporting process effectiveness, and often the effectiveness of a core cus-
tomer process only. As a consequence, technical specification and price become key sales arguments
on one hand, and dominating purchasing criteria on the other hand. By taking the process one step
further, sales can move the purchasing agent’s interest into value for the customer on the commercial
level, which leads to value-based sales. Sales and selling is, however, not part of the scope of this book.
The final step is to demonstrate for the customer how the combined process effectiveness in the
customer’s key processes leads to a monetary commercial value or business effectiveness: which are the
effects on the revenue side through possible growth or premium pricing opportunities, and which
cost savings effects can be expected to occur. In Chapter 6 on return on service and relationships we
showed how these monetary effects can be calculated.
Furthermore, positive effects on business effectiveness and on the monetary value dimension can
be expected to have a favourable impact on experience-related value dimensions, such as commitment
to the supplier, and trust and comfort in doing business with this supplier.
T H E B E N E F I T F O R A M A N U FA C T U R I N G F I R M
O F TA K I N G A S E RV I C E B U S I N E S S A P P R O A C H
From transforming its approach towards customers into a service business approach at least the fol-
lowing benefits can be expected for a manufacturer:
● The firm becomes truly customer-focused and learns to understand not only its customers’ technical
processes, but how value is created in those processes and in the customers’ business processes as
well.
● By doing so, the firm can develop more valuable technical solutions than before as well as truly
customer-focused and service-based ways of supporting all critical customer processes (warehous-
ing, installation, maintenance, invoice processing, problem solving, etc. – compare Figures 16.2
and 16.4).
● The firm becomes more relevant for the customers’ business processes than any third-party actor
and can maintain a strategic position in relation to its customers.
● The firm has the potential to help their customers serve their customers in a more efficient and
effective, and therefore probably also more profitable, manner.
● By developing its solutions and ways of managing its customers as a service business, the firm
differentiates its offering in a way that for competitors is substantially more difficult, sometimes almost
impossible, to copy.
● In the final analysis, a service business approach enables the firm to strengthen its customer contacts
and develop them into trustworthy and sustainable relationships that are less vulnerable to com-
petitor actions and third-party threats, and hence a source of better and more profitable business.
Of course, not all customers are interested in getting into such close contact with a supplier and
are not ready to open up for a supplier. For some customers the technical solution is the only part
of an offering to consider, and the price remains the most important purchasing criterion. For such
customers, or sometimes even for markets dominated by such customers, a service business approach
may not be effective. For all other customers and markets such an approach may even be inevitable
in the future for maintaining competitive advantage or even just for staying on the market.
A service business approach can be important for any type of firm in business-to-business markets,
not only for those offering tailor-made solutions in markets where there is a need for after-sales ser-
vice. Standardised products are myths and commodities only exist in the minds of managers who have
not had the imagination to differentiate them by developing other interfaces with the customers that
inevitably always exist.22 Offerings to customers and customer contacts with even simple products
can be developed in this way. By taking a service perspective and adopting a service logic, undiffer-
entiated, commodity-type products can be differentiated. The supplier needs to find out what would
make a customer perceive the product and the supplier differently from the industry standard. There
is always something in the customer relationship which a customer appreciates when it is offered and
handled in a new and different way. It can relate to deliveries or delivery times, warehousing, prod-
uct documentation, the invoicing system and the structure of the invoice, access to people, systems
and information, or just anything that a customer may perceive as different and valuable compared
to standard behaviour. By finding out what it is and offering it, the firm adds a customer-focused
value-enhancing support to the core product. The supplier moves from a product manufacturing and
delivery mode to a service business mode, and becomes a service firm.
T R A N S F O R M I N G I N T O A S E RV I C E B U S I N E S S
In order for product manufacturers to become service businesses, two fundamental requirements have
to be taken into account:
1. Becoming a service business is a strategic choice. There must be a strategic decision to be and per-
form as a service business. Such a strategic decision demonstrates top management’s wish and
TRANSFORMING INTO A SERVICE BUSINESS 477
determination to transform the firm from a resource-delivering product business into a value-
supporting service provider.
2. Performing as a service business and providing value-supporting service to customers (and other
stakeholders) requires a dominating service culture throughout the firm. Unless such a culture can
be created, the implementation of a service perspective and a service strategy will not be suc-
cessful. In addition to employee training, internal communication and other efforts that may be
necessary, creating and maintaining a service culture requires the continuous support through top
management’s leadership (see Chapters 14 and 15 about internal marketing and service culture).
The case study on the Normet Group at the end of the chapter clearly illustrates these requirements.
Compared with a manufacturing approach, taking a service business approach requires at least three
fundamental changes in the business logic. These changes are:
1. Redefining the business mission and strategies from a service perspective.

2. Redefining the offering as a process.
3. Servicising critical elements in the customer relationships.
R E D E F I N I N G T H E B U S I N E S S M I S S I O N A N D S T R AT E G I E S
FROM A SERVICE PERSPECTIVE
Being a service business means that the firm does not view its manufacturing part as one business and
industrial services as another business with different strategies and planning processes. The manufac-
turing part must be integrated with all other activities – service processes as well as hidden services –
into one total continuous support to the customers’ processes over the customer lifecycle. The business
mission is not to provide customers with excellent or high-technology resources only for their use,
such as physical products as a technical solution, but to provide customers with excellent support to their
processes so that value is created in them and in the customers’ business and commercial processes. Strategies have
to be formulated accordingly.
This support is formed by a continuous flow of technical solutions, products, deliveries, customer
training, invoicing, service recovery when needed and handling of complaints and problems, advice,
repair and maintenance service, joint product and service development, and research and develop-
ment, upgrading and modernization of installed equipment, etc. (see Figures 16.2 and 16.4). This
flow of activities takes place in a continuous process of supporting the customers’ processes in a value-
creating manner. In this way the customer is truly served with physical products and technical solutions,
service processes (deliveries, training, maintenance, etc.), administrative and legal routines (hidden
services such as invoicing and complaints handling), infrastructures (logistical systems, extranets, etc.),
information (product documentation, advice, etc.) and people.
REDEFINING THE OFFERING AS A PROCESS

As the previous discussions of a service business-focused mission and of how customers’ business
effectiveness is supported demonstrated, it is not enough to just provide customers with a technical
solution for a technical process. This is only one element of a process of providing customers with
all the support needed for them to be able to create adequate value in their processes and for their
business. Hence, the offering of a manufacturing firm, which used to be a physical product, is dead
in its traditional form. The physical products still exist, of course, but from having been the output of
the manufacturer’s production process they become one input among others into the customer’s value-creating
process. The physical product becomes a resource alongside a host of other resources needed in the
constant flow of supporting the customer’s processes. This flow of resources and activities takes place
in a continuous process. Hence, a service business’s offering is the process. This process takes the place
of the traditional product.23
S E R V I C I Z I N G C R I T I C A L E L E M E N T S I N C U S T O M E R R E L AT I O N S H I P S
As was shown in the previous section, a firm’s productive (e.g. products), administrative (e.g. web-
sites), financial (e.g. invoicing), legal (e.g. complaints handling) and other processes should be consid-
ered inputs into customers’ processes, where the goal is to support value creation in those processes, and
ultimately the customers’ business processes. They have to be turned into true service for customers,
or servicized. So, servicizing can be defined as turning all elements in a customer relationship, regardless of
their type and nature, into value-supporting inputs into the customers’ processes, i.e. turning them into service
for customers. Servicizing the supplier’s resources and activities makes a firm a true service business.
Servicizing is not the same as servitization. The latter means that a growing number of services are
added to a core product. Servicizing relates to the actions taken by a firm to transform resources
and processes into a holistic offering, including products and recognized and hidden services into
value-supporting processes that serve the customers’ processes and business.
Servicizing requires that:
● All customer contacts and all resources and activities in those contacts, and all interactions with
the customer, are analysed and the effects they have on the customer process they influence are
assessed.
● If this effect is neutral or even negative, that is, no value support to a customer process is achieved,
or the customer’s process is affected unfavourably (unnecessary and unwanted costs are created for
the customer, the customer’s revenue-generating capability is hurt, or both; the value of the core
solution is hurt by value destroyers), an assessment is made of how critical this activity is for the
customer’s value creation and commercial outcome (either perceptually or in financial terms, or
both).
● Resources and activities with a neutral or negative effect are developed so that, in the future, they
function as value-supporting service and not as value destroyers in the customer relationships.
In principle, anything can be servicized. It is just a matter of management attitude and the adoption of
a service logic and customer focus. What in any given case should be servicized depends on what
is critical for the customer, the competitive situation at hand and a long-term cost–benefit analysis.
However, changing the focus and servicizing elements of the customer relationship will probably not
create substantial extra costs, if any. Moreover, doing so can easily lead to cost savings for the suppliers.
When the firm performs in a more service-focused manner, mistakes are avoided and unnecessary
queries and complaints do not have to be attended to. Therefore, less resources, time and money are
required for the unproductive processes of sorting out problems, correcting mistakes and discussing,
negotiating and sometimes even quarrelling with customers. All badly-handled activities that lead to
unnecessary costs for customers (rising relationship costs) normally at the same time also lead to similar
unnecessary relationship costs for the supplier (see Chapter 6).
In Table 16.1, examples of how various systems, resources and activities in customer relationships
can be servicized are described.
TA B L E 16.1
Examples of how systems, resources and activities in customer relationships can be servicized.
Products Products are traditionally seen as outputs of production processes.

Servicizing products requires that they are considered inputs into the
customers’ processes. Tailor-making products, using CAD/CAM and
other techniques and bringing customers into design and production
processes, and mass customization are examples of this. Other examples
are making products easier to maintain, easier to make operational,
and easier to handle. However, depending on the situation and the
requirements of the customers, servicizing may also mean that products
are standardized. It all depends on what is the most effective way of
supporting value generation for customers.
Logistics Just-in-time logistics is a well-known means of servicizing order-making,
deliveries and warehousing. By this strategy a supplier aligns its
logistical processes to the customer’s processes in order to minimize the
customer’s costs of keeping products in stock.
Deliveries Deliveries as a separate part of logistics can be servicized, for example, by
customizing timetables and by keeping customers informed about the
progress of a delivery.
Information Documentation about how to use machines, software and other solutions
can be servicized by turning it into real knowledge for customers.
Knowledge requires that the information is easily retrievable and
understandable and can be used immediately.
Extranets and Servicizing extranets and websites requires that they are designed so that
websites users can easily navigate them and find the information they are
looking for in such a format that it can easily be transformed into usable
knowledge.
Managing quality If there is a problem with goods quality or a mistake or service failure has
problems and occurred, servicizing requires that such incidents are managed according
service failures to the principles of service recovery. The customers have to perceive that
the supplier or service provider cares for their situation, quickly finds a
solution, and compensates for losses that they may have suffered.
Invoicing By developing an invoicing and payment system and by designing invoices
so that they are easy to understand, check and process by customers,
this element of customer relationships is turned into a cost-saving
service for customers. Making sure that mistakes are avoided is, of
course, also part of servicizing invoicing.
TA B L E 16.1
(continued )
Product and Bringing customers into the processes of developing and designing new
service resources and processes, such as products and services, potentially makes
development it possible for a supplier or service provider to develop solutions that
better fit customers’ processes and, therefore, also more effectively
support their value-creating processes. This may improve the
revenue-generating capacity of customers, and reduce their costs, and is
therefore an example of how to servicize the customer relationship.
R&D Bringing customers into the processes of basic research and development
may have similar effects to the ones discussed above.
Etc. There are many more elements of the customer relationship where
servicizing is possible.
As can be seen from the examples in the previous section, there are several ways of servicizing
customer relationships already at least partly in use (for example, involve customers in the design and
development of products and other resources and processes, just-in-time logistics and joint R&D).
However, the challenge is to not just take some elements of a relationship in isolation and treat them
from a value-supporting perspective. As long as other elements of a relationship are not designed in
a similar manner, the customer’s process may still be hurt and value destroyed.
DEVELOPING THE OFFERING AS SERVICE: THE CSS

( C O N C E P T U A L I Z I N G , S Y S T E M AT I Z I N G , S E R V I C I Z I N G ) M O D E L
A manufacturer that has adopted a service business logic has to develop its processes so that they
support the corresponding customer processes (compare Figure 16.2). Formulated in a generic way, a
business mission based on a service logic could read as follows (in Chapter 3 guidelines for developing
a service-oriented business mission were discussed; see Figure 3.5):
The firm’s mission is to support the customer’s production process (or whichever process is concerned) and related
processes (logistics, installation, maintenance, payment and book-keeping, information need, etc. depending on
what is included in the customer relationship) in a way that creates value-in-use24 for the customer, and moreover
supports the customer’s business process and commercial outcomes.
Hence, the business mission should not be to supply customers with, for example, the best product, but
instead to support the customer’s activities and processes in a value-creating manner. The difference
between the two formulations is huge. The first one is based on a manufacturer’s traditional main
knowledge base and core competence, whereas the latter is based on a service logic and the main
knowledge base and core competence of a service business.
However, once the business mission is formulated in a service-oriented manner and the manufac-
turing firm starts operating as a service business, the firm’s offering has to be organized and developed
as one continuous flow of support to the customer’s various processes over the customer lifecycle. It is impor-
tant to realize that service is a process, and however much this process is planned and organized, it will
never become anything like a standardized product. Therefore, an idea of a ‘product’ must never be
the ideal goal of the development of an offering. Here a three-stage approach called the CSS model
is helpful. CSS stands for:
1. Conceptualizing.
2. Systematizing.
3. Servicizing.
Conceptualizing means that the firm decides what kind of support it should provide a customer
with, how value should be created in the customer’s processes, and how customer touchpoints should
be handled and interactions with the customer’s various processes should function and what they
should lead to in terms of support to the customer’s everyday activities and processes, and how this
should affect the customer’s business process commercially. Conceptualizing includes decisions about
what core solutions (for example, a product, services, information, combinations of such and other
resources) should be offered and how, for example, logistical, repair and maintenance, educational,
advisory, invoicing, problem-solving and other activities should function in order to support value-
in-use for the customer over the customer lifecycle.
In short, conceptualizing is to determine what to do for the firm’s customers and how to do it.
Systematizing means that the firm should decide what kind of resources are needed in order to
implement the conceptualized offering and create a structural way of putting in place the various
processes of the offering. This is done so that resources are used in a rational way. Cost–benefit con-
siderations should be taken into account in the systematizing phase. An objective with systematizing
is to make sure the unnecessary or unnecessarily expensive resources are not used, or that resources
are not used and processes developed in an unorganized and unco-ordinated way. The goal of orga-
nizing resources and processes used is to achieve a maximal effect in terms of supporting the customers’
everyday activities and processes without creating unnecessary costs. The goal of co-ordinating resources
and processes is to make sure that they are not functioning in ways that create information problems
and confusion in the customer contacts and in the customer’s processes.
In the systematizing phase it is important to realize that standardized packages must not be created.
The customer contacts over time are not standardized. Instead, it is a question of developing organized
guidelines for performance where flexibility is allowed and encouraged. However, at the same time
systematizing also includes setting the limits for flexibility.25 These limits are, of course, based on a cost–
benefit analysis, however a long-term analysis of what it costs and what can be gained is required.
Standardized modules that can be combined in different ways to achieve flexibility can, of course, be
used, but this must not lead to stereotyped behaviour.
In short, systematizing is:
● To determine what resources and processes are needed for the firm to support customers’ activities and
processes in a value-creating way.
● To organize resources and processes that constitute the offering.
● To co-ordinate the way various resources and processes function.
● To determine the limits for flexibility in the way resources and processes function based on a long-term
cost–benefit analysis.
Servicizing is the final phase of the CSS model. Once the resources and processes and the organized
and co-ordinated ways of using them have been determined and the limits for flexibility set, one has
to make sure that the various processes and customer contacts indeed function in a value-supporting
manner. The attitudes, knowledge and skills of people, the capabilities of physical resources, systems
and infrastructures to function in a customer-focused way, and the customer-focused quality of the
leadership provided by managers and supervisors have to be ensured. Sometimes customers have to be
educated about how to participate in the processes. The goal is to develop all resources and processes
supporting the customers’ everyday activities and processes, regardless of what these activities and
processes are, in a way the guarantees that value-in-use is created in those processes. Value-in-use
means that the customer perceives and wherever possible can calculate that its processes function more
efficiently and effectively with the support of the supplier’s activities than without them or with the
support of a competitor. In the previous section, servicizing was discussed in detail and the question
of what can be servicized was addressed with examples (see Table 16.1).
In short, servicizing is to make sure that the planned offering including a set of resources, processes, and
interactions functions in a value-supporting way, that is, functions as service for the firm’s customers, or to
put it in another way, truly serves the customers.
The CSS model can often be used in two stages. First, a general conceptualizing, systematizing
and servicizing of the offering to customers can be undertaken. The result is an offering that can be
used as a general guideline for the business. In the next phase, if and when appropriate, applications
geared towards specific customers can be created as guidelines for how a specific customer should be
served.
OUTSOURCING AND BUILDING NETWORKS

Outsourcing has been mentioned a number of times throughout this book. Outsourcing (some-
times also called ‘offshoring’) means that a firm lets an external organization perform an activity. For
example, call centres answering customers’ queries about a product or a service, deliveries of goods,
maintenance of products and equipment delivered, and also sometimes product development and
the development of software are frequently outsourced. Sometimes outsourcing takes the form of
formal networks, but the difference between building networks and outsourcing is not always very
distinct. For example, in the construction industry it is normal that firms build stable or loosely-
coupled networks of subcontractors that take care of parts of the construction process. Firms in the
clothing industry form networks with designers, manufacturers and distributors to develop a successful
business.
When, for example, product development or design of clothing are outsourced, the outsourc-
ing firm’s customers do not experience the performance and behaviour of network partners or the
outsourced activities other than indirectly in the form of the final product or clothing. However,
in service the situation is typically different. The way a call centre answers a call by a given firm’s
customer and how well it manages to solve the customer’s problem have a direct impact on this cus-
tomer’s perception of the outsourcer’s service and its quality. If the firm that handles an outsourced
activity misbehaves and provides bad service, it is the outsourcing firm that suffers. This means that
outsourcing must be managed carefully, and activities outsourced for the right reasons.
Today service activities are far too often outsourced for the wrong reasons. In Chapter 1 the dif-
ference between outside-in management and inside-out management was discussed (see also Figures 1.1
and 1.2). The former approach means that managers’ first focus on understanding the customers’
processes and the firm’s revenue-generating capability, and only then on the firm’s own processes
WHAT DOES TRANSFORMATION INTO A SERVICE BUSINESS COST? 483
and technologies and costs. The latter approach means that focus on costs and the firm’s processes
dominate managerial decision-making, and revenue-generating implications and the customers’ pro-
cesses are given less or even marginal attention, if any. Cleary, for outsourcing to be successful, the
outsourced service activity should support the service quality goals. This means that the dominating
reason for outsourcing, for example, call centre services or maintenance services, should be a stren-
uous effort to maintain the overall perceived quality of the firm’s offering, and thereby strengthen
or at least maintain the firm’s revenue-generating capability. Of course, cost considerations should
also be made, but not dominate. Outsourcing decisions should be guided by outside-in management
considerations.
In reality, outsourcing decisions are often made from an inside-out management perspective. Cost
considerations determine what is outsourced and how. The result is often low perceived quality, and
unsatisfied customers. As a consequence, limited or no positive effect on the firm’s performance is
achieved through outsourcing.26
In conclusion, outsourcing and forming networks to serve customers may be useful. However, for
service businesses one must always remember that the outsourced service activity always has a direct impact
on the customers’ perceptions of the outsourcing firm’s service quality, and on the firm’s brand fulfilment and image.
Hence, outsourcing decisions must not be made based primarily on cost considerations. Instead, an outside-in
management approach needs to be taken. Questions about how outsourcing a service activity to an
outside firm or network partner will support the customers’ processes and strengthen the outsourcing
firm’s revenue-generation capabilities must be asked and properly answered. Cost considerations are
of course also important, but they must not dominate decision-making. An outsourcing decision
which saves costs but hurts the firm’s capability to generate revenues is clearly not wise, and should
not be accepted from a commercial point of view.
W H AT D O E S T R A N S F O R M AT I O N I N T O A S E RV I C E
BUSINESS COST?
‘What does it cost to transform a manufacturing firm into a service business?’ and ‘Does it cost
considerably more to operate as a service business?’ are frequently asked questions. The transforma-
tion process may require some investments in internal marketing and employee education and in
development of some organizational structures, but most of all it requires intellectual effort. What is
required in the transformation process is the development of a business mission geared towards a service
logic, renewed strategies and service-focused operational routines, where the resources and operational pro-
cesses throughout the organization are used in a new way that supports the customers’ everyday processes
and activities throughout their organizations. Moreover, organizational structures, leadership models, and
planning and budgeting routines may have to be changed. Finally and above all, for a service culture
to emerge attitudes have to be changed among everyone from top management throughout the orga-
nization. Provided that the business mission and strategies are renewed, the rest does not have to
cost too much. However, if old manufacturing-oriented attitudes, missions and strategies remain,
transformation attempts will start to become expensive and will probably not lead to any lasting
changes.
When the transformation has taken place, operating as a service business does not imply a higher cost level.
Normally the resources needed already existed before the transformation, and processes to take care of
all necessary activities were in place. The investments that may be required are in transformation, not
in operating as a service business. On the contrary, relationship costs for the supplier may decrease,
and probably will do so.
CASE STUDY
NORMET GROUP: FROM PRODUCT MANUFACTURER
I N T H E M E TA L I N D U S T R Y T O A G L O B A L LY O P E R AT I N G
SERVICE BUSINESS
Normet Group is a globally operating firm based in Finland with its main production facil-
ities in the city of Iisalmi in the northern part of the country. Ten years ago Normet was
a typical product manufacturer in the metal industry, operating in three fairly different
business areas. One of the businesses was subcontracting heavy equipment for the mining
business to the Sweden-based global firm Sandvik. Normet’s strategy at the time was for-
mulated as ‘manufacturer of rubber tired heavy duty machines’. This strategy had worked
very well for years. However, in 2004 Sandvik terminated the sub-contracting agreement.
In another business line Normet’s own products had been delivered internationally in the
thousands, but Normet had no clear idea of where they were used and how they were
maintained. As Aaro Cantell, Normet Group’s CEO and chair, says, ‘The new situation was a
major challenge for us, but also a most important opportunity to seize’. At the same time,
this was also an opportunity for Normet to internationalize and grow. Today, Normet is
market leader globally in its niche business areas.
During a seven-year process Normet moved from a manufacturer of products and equip-
ment for the mining industry only to service provider, the business of which is based
on understanding and supporting its customers’ mining and tunnel construction opera-
tions, and its strategic goal is to facilitate value creation in the customers’ processes, with
over 40 offices on six continents. In that time period the turnover has grown from under
€50 million per year to approx. €250 millon, and the number of employees has grown
almost fivefold. Normet’s new vision is that through its service approach, by using its
knowledge and expertise, it will be able to boost its customers’ processes and support their
competitive position, and through the knowledge and level of expertise it holds, it will
be able to earn the position as preferred business partner. Formally, the vision has been
formulated as follows: ‘To be a fast growing and innovative technology company with
a passion to offer continuous improvement to our underground mining and tunnelling
partners’ processes for increased safety, productivity and sustainability.’
The service provided to customers typically aims at helping customers to shorten their
production cycles and decrease their operating costs as well as improve environmental
friendliness and work safety. Consequently, the offering has changed from mining prod-
ucts and equipment to consultancy, application know-how , operation support, service
and maintenance, training and other customer-supporting service. Simultaneously the
product elements have been enlarged to include, for example, new construction chemical
products required for the customers’ mining and tunnelling processes.
The main reason for Normet’s growth followed from the transformation into a service
provider. Aaro Cantell states: ‘We realized that our holistic solution approach to support
WHAT DOES TRANSFORMATION INTO A SERVICE BUSINESS COST? 485
and develop the concrete spraying process in tunnel construction could also be applied
to other tunnel construction processes like explosive charging and later also to injection
and bolting. This helped us find new growth areas.’
Underground mining is growing, which has provided more business in Normet’s
traditional customer segment. In addition, tunnel construction is rising, particularly in
developing countries where infrastructure (road and railroad tunnels, hydro power, etc.)
is increasingly needed, and also in big cities (due to urbanisation), where lack of space
forces more and more activities to be built underground (traffic, car parks, metro, water
pipes, sewage, shopping centres, etc.). Furthermore, modern mechanized technologies
are used more and more in underground mining and tunnelling, and therefore, the need
for knowledge and consultancy supporting faster and safer operations as well as better
cost efficiency and process productivity is growing. All this provides opportunities for a
service provider that a pure product manufacturer finds difficult to seize.
How did all this happen? The first step was to realize the business opportunities of
providing service to customers, instead of only delivering products. The second step was
the strategic decision by Normet’s management to become a service business and a solu-
tion provider, although in the beginning of this transformation process the products and
equipment still formed the core of the offering. Without these two initial steps nothing
new and, above all, nothing enduring, would have developed.
First, turning this service-based business idea into practice did not succeed well. Services
were added on top of the products as after-product sales, but the distributors abroad and
the customers were not impressed. As neither the distributors nor the customers saw the
value of this approach, whereby Normet tried to apply servitization or service infusion
through reseller channels, this attempt did not work. As Aaro Cantell afterwards con-
cluded, ‘As we had no direct contacts with our real customers, the end users, we could
not provide service to them, really. We understood that we had to move close to the end
users.’ Consequently, Normet invested in a global network of fully-owned sales and ser-
vice offices. In this way a direct link between Normet and the end users was established.
This was a bold endeavour, but this network was created quickly, and it functioned well
from the beginning. A major reason for the successful launch of well-performing local
offices across the globe was the fact Normet managed to recruit an experienced manager,
Tom Melbye, who was internationally well known and respected in the industry, to take
charge of the internationalization process. Secondly, with Melbye in charge of the pro-
cess, Normet managed to find skilful local individuals with good experience of the local
markets to take charge of Normet’s local business. Currently, Tom Melbye is the President
of Normet Group.
Another reason for the successful launch of the new fully-owned sales and service net-
work can be found in how the business mission and the corresponding strategic approach
had been reformulated. Service infusion into a basically product-dominated offering had
failed. Now service, instead of the products, was defined as the core of the business
and the offering. The strategy of understanding and supporting its customers’ mining
operations in order to facilitate value creation in the customers’ processes was crystallized.
The business mission was formulated as follows: ‘To improve underground mining and
tunnelling processes with knowledge and technology to benefit our clients and society.’
Instead of adding services to the product offering, services and products were integrated
into a service offering, which was driven by the service perspective defined by this ser-
vice strategy. Hence, a service logic was adopted, whereby Normet aimed at supporting
customers’ value creation to be able to capture value from its customer relationships in
return.
An important organizational change was made in order to enable the implementation
of the service strategy through the new sales and service network. Normet was divided
into two separate firms, Supply Line and Front Line. However, the organization was not
split in the way this often happens, that is, in a services selling and providing part and
a product manufacturing, selling, and delivering part. Instead, Normet was divided into
a Supply Line firm responsible for efficient and effective development and production
of the products and equipment needed to provide service to customers (essentially the
old Normet), and a frontline firm responsible for setting up and managing Normet’s
own sales and service network and for selling and providing service, where product ele-
ments alongside consultancy, application know-how, logistics, maintenance, training and
other services are integrated into a service offering. If a customer at some point needs
only a product, this is also fine. However, the product is not sold and delivered as such,
but as support to the customer’s business, and at the same time enhancing process effi-
ciency and work safety, thereby facilitating the customer’s value creation, as required by
Normet’s mission and strategy. In other words, even products are sold and provided as
service.
A third reason for the successful implementation of the service strategy, and for the
comparatively fast international growth, can be found in the enthusiasm and optimism
demonstrated by management. Says Aaro Cantell: ‘The international economic problems,
following the financial crisis of 2008, hurt us and our business as well, but we considered
the drop in investments being temporary and our markets as future growth markets, and
felt that the biggest limitation in our growth were our own skills and human resources.
During 2009 to 2010, when other firms laid off personnel, we hired 100 new employ-
ees, in spite of the fact that our turnover dropped by 16% during the same period.’ This
future orientation and belief in the business and its employees kept the company spirit
high, spread the enthusiasm throughout the organization and motivated people to work
hard.
Eventually, the ultimate reason why Normet changed so successfully into a service busi-
ness was the vision of Normet Group’s CEO and chair Aaro Cantell, and his enthusiasm and
determination to see through the change process. ‘For me this period has been an excit-
ing adventure and a fantastic experience. But Normet’s inspired professionals throughout
the globe were the ones that really made it happen,’ he concludes.
NOTES 487
S U M M A RY
In order to stay competitive or to create a sustainable competitive advantage manufacturers in a growing
number of business-to-business markets have to redefine their business as a service business and adopt a
service logic for their customer management – not only their after-sales or industrial services but their
total business. Their product business and industrial service business have to be integrated into one ser-
vice logic-based business. Operating with two different business logics creates confusion both for the
manufacturer itself and for its customers. A service business approach requires that the business mission is
redefined and, moreover, managerial, structural, operational and above all attitudinal changes have to take
place. The manufacturer’s processes have to be aligned with the corresponding processes of its customers.
Requirements for transforming into a service business were discussed. The CSS (Conceptualizing, System-
atizing, Servicizing) model was presented as a systematic means of developing the offering and the way of
operating. The transformation into a service business mode may demand some extra costs and additional
investments, but operating as a service business will not cost more than operating in a product business
mode. On the contrary, it may lead to cost savings.

1. What are the reasons for manufacturing firms to transform into service businesses?
2. What does the third-party threat mean? How can a supplier–customer relationship be
affected by such a threat?
3. How should a manufacturing firm manage its customers as a service business?
4. What changes in the business logic are required to transform into a service business?
5. What does it mean to provide value-supporting processes instead of only technical solutions
to a technical process?
6. What is meant by servicizing? What can be servicized? How is a customer relationship
servicized?
7. Discuss how transforming a given or hypothetical manufacturer into a service business
would affect the business mission, strategies and performance of this firm.
8. Discuss how the CSS (Conceptualizing, Systematizing, Servicising) model can be used in
a given or hypothetical firm.
NOTES
1. See Bowen, D.E. & Siehl, C., A framework for analyzing customer service orientation in man-
ufacturing. Academy of Management Review, 14(1), 1989, 75–95. For an overview of the early
literature on this need, see Oliva, R. & Kallenberg, R., Managing the transition from products
to services. International Journal of Service Industry Management, 14(2), 2003, 160–172.
2. Oliva & Kallenberg, op. cit., 165ff.
3. A notable exception is Grönroos, C. & Helle, P., Adopting a service logic in manufacturing:
conceptual foundation and metrics for mutual value creation. Journal of Service Management, 21(5),
2010, 564–590. Typologies of service infusion strategies have been suggested in Raddats, C. &
Kowalkowski, C., Reconceptualization of manufacturers’ service strategies. Journal of Business-to-
Business Marketing, 21(1), 2014, 19–34. In Kowalkowski, C, Kindström, D, Brashear Alejandro,
T., Brege, S. & Biggemann, S., Service infusion as agile incrementalism in action. Journal of
Business Research, 65(6), 2012, 765–772, the authors discuss service infusion and demonstrate
problems with applying this concept.
4. See http://andyneely.blogspot.fi/2013/11/what-is-servitization.html. (18 March 2014).
5. See Grönroos & Helle, op. cit., and also Oliva & Kallenberg, op. cit., who make this observation
in their four-phase model.
6. Fang, E., Palmatier, R.W. & Steenkamp, J-B.E.M., Effect of service transition on strategies and
firm value. Journal of Marketing, 72(5), 2008, 1–14. See also Visnjı́c Kastelli, I. & Van Looy, B.,
Servitization: disentangling the impact of service business model innovation on manufacturing
firm performance. Journal of Operations Management, 31(4), 2013, 169–180.
7. Dachs, B., Biege, S., Borowiecki, M, Lay, G., Jäger, A. & Schartinger, D., Servitisation of
European manufacturing: evidence from a large scale database. The Service Industries Journal,
34(1), 2014, 5–23. This study also indicates that small and large firms may benefit more from
servitization.
8. See Smith, L., Maull, R. & Ng, I.C.L., Servitization and operations management: a service-
dominant logic approach. International Journal of Operations & Production Management, 34(2), 2014,
242–269, who conclude from their research that becoming a service business is not based on a
transition from one stage to another, but an evolutionary process towards a service-based mode
of operations.
9. See Barnett, N.J., Parry, G. Saad, M., Newnes, L.B. & Gah, Y.M., Servitization: is a paradigm
shift in the business model and service enterprise required? Strategic Change, 22(3-4), 2013, 145–
156.
10. See Grönroos, C., Adopting a service logic for marketing. Marketing Theory, 6(3), 2006, 317–333.
11. See Grönroos & Helle, op. cit.
12. See Brax, S., A manufacturer becoming service provider – challenges and a paradox. Managing
Service Quality, 15(2), 2005, 142–155.
NOTES 489
13. Grönroos & Helle, op. cit. Bowen and Siehl were one of the first, if not the first, to discuss the
need for manufacturers to transform their whole business into a service business. See Bowen &
Siehl, op. cit.
14. From a customer point of view, every business is a service business and every firm a service firm.
See Webster Jr., F.E., Executing the new marketing concept. Marketing Management, 3(1), 1994,
9–18 and Vargo, S.L. & Lusch, R.F., Evolving to a new dominant logic for marketing. Journal
of Marketing, 68(Jan), 2004, 1–17. See also Grönroos & Helle, op. cit., and Eggert, A., Hogreve,
J., Ulaga, W. & Muenkhoff, E., Revenue and profit implications of industrial service strategies.
Journal of Service Research, 17(1), 2013, 23–39, where the authors demonstrate empirically that a
service-led strategy in manufacturing firms may have a positive effect on revenues and profits.
15. For an interesting discussion about the conflicts between product and service businesses in a
manufacturing context see Auguste, B.G., Harmon, E.P. & Pandit, V., The right service strategies
for product companies. The McKinsey Quarterly, 1, 2006, 41–51.
16. See Auguste, Harmon & Pandit, op. cit.
17. This metaphor was used in Storbacka, K. & Lehtinen, J.R., Customer Relationship Management.
Singapore: McGraw-Hill, 2001.
18. MacMillan, I.C. & McGrath, R.G., Discovering new points of differentiation. Harvard Business
Review, Jul–Aug, 1997, 133–145.
19. MacMillan & McGrath, op. cit., 134–137, 143.
20. See, for example, Grönroos, C. & Ravald, A., Service business logic: implications for value
creation and marketing. Journal of Service Management, 22(1), 2011, 5–22. See also Prahalad, C.K.
& Ramaswamy, V., The Future of Competition: Co-Creating Unique Value with Customers. Boston,
MA: Harvard Business School Press, 2004.
21. The technical value dimension has also been labelled ‘functional value dimension’. See Gupta, S.
& Lehman, D.R., Managing Customers as Investments. Wharton School, Upper Saddle River, NJ,
2005. However, in order to avoid confusion with the functional quality concept of the perceived
service quality model, the expression ‘functional value’ is not used here.
22. See MacMillan & McGrath, op. cit., 144–145, who use gasoline sales as an example.
23. Compare Storbacka & Lehtinen, op. cit.
24. Value-in-use means that the customer perceives and wherever possible can calculate how its pro-
cesses function more efficiently and effectively with the support of the supplier’s activities.
25. Here we can see the difference between systematizing and productizing, a commonly used con-
cept in service businesses. Productizing views standardized products as the ideal and service as
problems. It is a matter of creating packages and eliminating flexibility as much as possible. The
goal is to create standardized products out of service processes. However, the processes do not
disappear anywhere. Customer-oriented flexibility is the strength of service and it is important
not to eliminate that. Therefore, productizing as a concept and a term idealizing the manufactured
product concept is dangerous in a service business. It is dangerous for two reasons: it is based on
an impossible thought that service processes through productizing would disappear and could be
reduced to a standardized thing, a package equalling a manufactured product; and psychologically
it makes managers and customer contact employees alike turn their backs on the customers and
focus on stereotyped behaviour instead of listening to the customers. Productizing kills a ser-
vice. However, productizing aims at an important issue, the need to create organized guidelines
for how service should support customers’ activities and processes. The CSS (Conceptualizing,
Systematizing, Servicizing) model is offered as a service-oriented alternative for achieving that
goal.
26. See Gilley, K.M. & Rasheed, A., Making more by doing less: an analysis of outsourcing and its
effects on firm performance. Journal of Management, 26(4), 2000, 763–790, where the authors did
not find significant effects of outsourcing on firm performance. If there is an effect, it depends
on the firm’s strategy and also on the environment.
REFERENCES
Auguste, B.G., Harmon, E.P. & Pandit, V. (2006) The right service strategies for product companies.
The McKinsey Quarterly, 1, 41–51.
Barnett, N.J., Parry, G. Saad, M., Newnes, L.B. & Gah, Y.M. (2013) Servitization: is a paradigm
shift in the business model and service enterprise required? Strategic Change, 22(3-4), 145–156.
Bowen, D.E. & Siehl, C., (1989) A framework for analyzing customer service orientation in manu-
facturing. Academy of Management Review, 14(1), 75–95.
Brax, S. (2005) A manufacturer becoming service provider – challenges and a paradox. Managing
Service Quality, 15(2), 142–155.
Dachs, B., Biege, S., Borowiecki, M, Lay, G., Jäger, A. & Schartinger, D. (2014) Servitisation of
European manufacturing: evidence from a large scale database. The Service Industries Journal, 34(1),
5–23.
Eggert, A., Hogreve, J., Ulaga, W. & Muenkhoff, E. (2013) Revenue and profit implications of
industrial service strategies. Journal of Service Research, 17(1), 23–39.
Fang, E., Palmatier, R.W. & Steenkamp, J-B.E.M. (2008) Effect of service transition on strategies
and firm value. Journal of Marketing, 72(5), 1–14.
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effects on firm performance. Journal of Management, 26(4), 763–790.
Grönroos, C. & Helle, P. (2010) Adopting a service logic in manufacturing: conceptual foundation
and metrics for mutual value creation. Journal of Service Management, 21(5), 564–590.
Grönroos, C. & Ravald, A. (2011) Service business logic: implications for value creation and mar-
keting. Journal of Service Management, 22(1), 5–22.
Gupta, S. & Lehman, D.R. (2005) Managing Customers as Investments. Upper Saddle River, NJ:
Wharton School.
http://andyneely.blogspot.fi/2013/11/what-is-servitization.html.
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infusion as agile incrementalism in action. Journal of Business Research, 65(6), 765–772.
MacMillan, I.C. & McGrath, R.G. (1997) Discovering new points of differentiation. Harvard Business
Review, Jul–Aug, 133–145.
Oliva, R. & Kallenberg, R. (2003) Managing the transition from products to services. International
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dominant logic approach. International Journal of Operations & Production Management, 34(2), 242–269.
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keting, 68(Jan), 1–17.
Visnjı́c Kastelli, I. & Van Looy, B. (2013) Servitization: disentangling the impact of service business
model innovation on manufacturing firm performance. Journal of Operations Management, 31(4), 169–
180.
Webster Jr., F.E. (1994) Executing the new marketing concept. Marketing Management, 3(1), 9–18.
CHAPTER 17
CONCLUSIONS:
MANAGING SERVICE
AND RELATIONSHIPS
“ Good intellectual analysis and thorough planning of a service-oriented business is valueless unless
management has the determination, courage and strength needed to implement their visions
”
and plans.
INTRODUCTION
This final chapter will summarize the essence of service management and service strategy. First, impli-
cations for management of the Service Profit Logic are presented. Then, the scope of service management
and marketing is summarized. Thereafter, consequences for marketing of the service and relationship
approach are discussed, followed by seven ‘rules’ of service. Finally, barriers to achieving results in an
organization are presented.
A S U M M A RY O F M A N A G E M E N T I M P L I C AT I O N S
O F T H E S E RV I C E P R O F I T L O G I C
From a commercial point of view, adopting a service logic and applying service management prin-
ciples in business requires a clear understanding of the Service Profit Logic and its implications for
management. As we have demonstrated throughout this book, in a service organization the economic
result is generated in a dramatically different way as compared to conventional product manufac-
turing. Therefore, the Service Profit Logic requires equally dramatic rethinking about several manage-
ment issues. This rethinking, pointed out and discussed in the previous chapters, is summarized in
Table 17.1.
494 CONCLUSIONS: MANAGING SERVICE AND RELATIONSHIPS
TA B L E 17.1
Managerial implications of the Service Profit Logic.
Marketing management Holistic customer management through Promise

Management instead of functionalistic marketing
management.
Human resource management Externally-oriented Internal Marketing instead of
internally-oriented HRM only.
Quality management Management of Customer Perceived Quality instead of
internally-oriented quality assurance and management
only.
Productivity management Holistic externally-oriented management of profit
effectiveness instead of internally-oriented cost efficiency
management only.
Operations management Customer-focused management of operations;

management of service production processes as well as
of systems and resources used, including customers.
A N O V E RV I E W O F A C U S T O M E R – F O C U S E D
S E RV I C E S T R AT E G Y
In Figure 17.1 the essence of service management and marketing is summarized. The core of the process is
the series of moments of truth of service encounters, where the employee and the customer, supported
by systems and technology and physical resources, meet and interact. Employee–customer interactions
are not always the normal form of interaction. In many cases the customer interacts with IT and other
systems, infrastructures or fellow customers and only on certain occasions, such as when a failure has
occurred or the customer needs advice, interactions with contact employees take place. These service
encounters influence customers’ value-creation. If they are not well taken care of, the perceived service
quality (service quality as perceived by the customer) is damaged, and the service provider may lose
business. The main focus in service competition is the continuous management of the series of moments of truth
in service processes, as well as adequate support from managers and supporting functions and from investments in
technology, operations and administrative systems. If the ongoing moments of truth are well taken care of,
the service encounters will turn out well, and the relationship will probably develop satisfactorily and
lead to continuous business and loyal customers.
Value for customers is not, of course, entirely dependent on what takes place in service encounters.
Much value support may have been pre-produced by the supporting part of the organization. The
final value for the customers emerges in the consumption or usage of the service. From the customer’s
point of view, however, what happens in the service encounter is always decisive. If the customer is not satisfied
with what he experiences, then the pre-production efforts in back offices, or by manufacturers in
factories, have been in vain.
AN OVERVIEW OF A CUSTOMER–FOCUSED SERVICE STRATEGY 495
Corporate strategy Service concepts
EXTERNAL
INTERNAL
(traditional)
MARKETING
MARKETING
(= creating the prerequisite (= creating expectations

for making promises to by making promises)
customers)
Responsibility of every Responsibility of
manager and supervisor marketing (and sales)
(mainly) specialists (mainly)
The moments of truth

(service Personal needs
Life path encounters) and values
EMPLOYEES CUSTOMERS
Personal needs Word of mouth
Image INTERACTIVE Image

MARKETING
(= keeping promises)
Role conflict Previous
and ambiguity • Contact personnel experience
• Systems and physical
resources
• The customer and fellow
customers
• Management support
• Physical support and
support personnel
• Technology and systems
support
• Price
• Corporate/local image
Responsibility of people
throughout the organization
(mainly as part-time marketers)
F I G U R E 17.1
An overview of a customer-focused strategy.
MAKING PROMISES: TRADITIONAL EXTERNAL

MARKETING
Customers’ experiences of service encounters do not take place in a vacuum. They go into them with
certain expectations, which are partly created by the service provider itself. By its external marketing
process, involving traditional marketing efforts, such as market research, personal selling, advertising,
Internet communication, direct mail, sales promotion and pricing, the organization makes promises
that should correspond to the customers’ everyday activities and processes and their personal needs,
values and wishes. The full-time marketers inside the organization or outside of it (for example, in
advertising agencies and market research firms) are usually responsible for this type of traditional
external marketing.
These promises are enhanced or counteracted in the minds of the customers by their previous
experiences, if they have had any, by word-of-mouth communication, and by postings on various websites
and discussion in various social media, and by customers’ conceptions of the image of the service
provider.
ENABLING PROMISES: INTERNAL MARKETING

Employees’ abilities, skills and motivation to meet the expectations of customers are backed up by internal
marketing efforts. By creating and maintaining a service culture, as well as by actively marketing the
service perspective as well as new goods and services, systems and processes to the employees, and by
making use of all available means of motivating the employees and enhancing their skills for service-
oriented and customer-focused performance, the organization can prepare its employees for part-time
marketing responsibilities. Thus, internal marketing is a must for creating the prerequisite conditions for
keeping promises.
Internal marketing is a top management responsibility, but it is also the responsibility of every manager
and supervisor. Of course, the personal needs of the employees and their perceived job satisfaction
and supervisors’ encouragement, as well as their life path and their image of the employer, also have an
impact on the employees’ performance as part-time marketers. Moreover, employees are influenced
by role ambiguity, related to, for example, what they perceive customers and the organization expect
them to do. Employees are also influenced by role conflicts, for example, when what management
says the employees should consider important in their jobs conflicts with the opportunities to live
up to these intentions that management provides in terms of skills, support and incentives, and with
their personal beliefs and values. Grocery retailers sometimes make promises in their advertising about
products and additional service, for example cooking advice, that customers can get in the store. If
there are not products left on the shelves or if employees, a large proportion of whom may be working
on a low-pay, part-time basis, do not have the cooking knowledge or interest needed to give such
advice to customers, who may often be better cooks than they are, they will be put in an awkward
situation which they cannot handle. If they get information from customers about what they are
supposed to do, which is not uncommon, the situation is even more frustrating for the employees.
Bad internal relationships and bad external relationships with customers follow from this.
Another aspect of how well promises are enabled is the support of systems and technology – information
technology and other – on which the employees depend. If customer information is difficult to
retrieve from databases, or if files are not properly updated, contact employees have difficulty in
providing customers with attentive, prompt and accurate service. Moreover, a lack of systems support
also has a counterproductive impact on internal marketing processes in the organization.
KEEPING PROMISES: INTERACTIVE MARKETING 497
Empowering employees is another key aspect of enabling promises. Employees who have the author-
ity to handle customer contact situations themselves, and who have the technical skills and the moti-
vation to take this responsibility, will keep promises effectively and in a customer-oriented manner.
Here again, a lack of systems support can seriously diminish the potential positive effects of empow-
erment. However, it must always be remembered that empowerment without enabling does not work
and may even be counterproductive and discourage employees. Enabling means that empowered
employees are supported by necessary supervisory and physical support, and have been provided a
required level of knowledge and skills to handle customer contact situations.
KEEPING PROMISES: INTERACTIVE MARKETING

What actually happens in the moments of truth of the service encounters, where customers and
employees meet and interact, determines whether customers’ experience meets their expectations. If
experiences are equal to or higher than expectations, the perceived service quality is probably good;
otherwise, there may be a quality problem. Good quality is a strong basis for a long-term customer
relationship, including resales and cross-sales, as well as for favourable word of mouth and image.
Thus, keeping promises is one major aspect of the interactive marketing process. The customer contact
employees are most often the key to success. However, information systems, operational systems and
physical resources, and the customers, all influence interactive marketing performance. Although the
role of the employees is most often paramount, other resources must not be neglected. First of all,
there is a range of situations in which customers interact only with systems and physical resources.
Using an ATM, making a local telephone call, sending a text message (SMS) from a mobile phone,
playing digital games or making a purchase on the Internet are examples of such situations. Second,
employees need a service-oriented operational system and proper computer technology, customer
databases and other physical resources to be able to create positive moments of truth. However, one
should never forget that if the technology or automatic service production system does not work,
breaks down or cannot be operated, the key to recovering the situation is a service-minded and
customer-focused employee. As has been discussed in previous chapters, if there is a problem of
any sort, the service provider most often gets a second chance. However, in such service recovery
situations the contact employees’ role and responsibility for success is paramount.
The physical support of support personnel and functions, as well as management support and leadership,
are critical to the service orientation of the customer contact employees and systems of the visible
part of the service process. Furthermore, customers’ experiences in service encounters are influenced
by the corporate and/or local image of the service provider. Finally, the price level and possible price
offerings have an impact on the level of customer satisfaction. This is not always altogether true,
however. For example, if a manufacturer needs service and spare parts in order to keep its machines
running, and if every hour of delay means thousands of euros, pounds or dollars of lost production
and sales, he will probably be willing to pay almost anything to get the service.
Interactive marketing and keeping promises is almost entirely the responsibility of operations and other
traditionally non-marketing functions. Therefore, employees involved in such functions are called part-
time marketers, with dual responsibilities – for operations, or whatever their tasks concern, and for
the marketing impact of their performance as well. To some extent, full-time marketers are also
involved, but their role is marginal. Of course, in most business-to-business relationships the sales
representatives have continuous responsibility for their customers. They cannot, however, do much
to rescue a customer relationship if the organization has made a customer sufficiently dissatisfied with
the service quality. In the short term the organization may be able to hold on to the customer’s
business; in the long term it loses customers.
Keeping promises is also dependent on how productivity management is understood. If productivity

is predominantly considered a cost efficiency management issue and not a profit management issue,
where external effectiveness and internal efficiency considerations are integrated in decision-making,
service quality is easily hurt and the interactive marketing performance deteriorates.
F R O M T R A N S A C T I O N S T O R E L AT I O N S H I P S
IN MARKETING
Service processes are inherently relational. Normally, interactions between the customer and the
service provider occur and continue for some time. In many cases, service is consumed or used
on a continuous basis. The same customer meets the same service provider over and over again.
Service marketing has often been difficult and considered less effective because service firms have not
recognized that service is inherently relational and have instead taken a transactional approach in their
marketing strategies.
There are certainly situations where a transaction marketing approach leads to good results, and
there are customers who do not appreciate relationships in commercial contexts, but as a principle,
a relationship approach can be expected to lead to better results in service competition. Because
markets are maturing and new customers are difficult to acquire, other than by poaching them from
competitors, long-lasting relationships with existing customers become exceedingly important. It is
much more difficult to compete with a core solution, whether it is a physical product or a service
process, than before. Firms have to develop total service offerings to support competitive value for
their customers. This means that more and more businesses have become service businesses and that
service competition has taken over. Sometimes a transaction approach can work, but generally speaking
these developments require a relationship approach to managing customers (and other stakeholders,
such as wholesalers, retailers and other distributors).
CONSEQUENCES FOR MARKETING

I N S E RV I C E C O M P E T I T I O N
Because of the transaction marketing traditions, the marketing mindset and mainstream marketing
concepts and models do not fit service competition very well. In this section consequences for mar-
keting in service competition of its transaction-oriented traditions and the requirements of a service
and relationship-focused perspective,1 respectively, are discussed. In Table 17.2 summarizes these
consequences and requirements.
Diffusion of customer-focused activities (that is, the existence of marketing-like behaviour). Due to the
transaction-oriented traditions of marketing, a customer focus normally exists only among full-time
marketers and salespeople, who have been trained and appointed for marketing and sales tasks. When
performing their jobs people outside these groups are generally not focused on customers. However, a
service perspective demands that a customer focus is present throughout the firm. Wherever customer interfaces
occur and customer contacts take place, a customer focus and marketing-like behaviour should exist.
People who are engaged in such activities are part-time marketers. This goes for internal customers
as much as for ultimate, external customers. All customer contacts have to be taken care of in a
customer-focused or marketing-like manner, otherwise the total marketing process fails.
Dedication to customer management and a customer focus (that is, the existence of marketing attitudes in
the firm). Normally, only a limited part of the organization, outside the group of full-time marketers
and salespeople, takes a genuine interest in the firm’s customers. A firm that faces service competition
CONSEQUENCES FOR MARKETING IN SERVICE COMPETITION 499
TA B L E 17.2
Consequences for marketing in service competition of its transaction-related traditions and of
a service and relationship-focused perspective, respectively.
Aspect of marketing Consequences of Requirements of service and

transaction-related relationship-focused
traditions perspective
Diffusion of A customer focus normally A customer focus has to be

customer-focused exists only in some of the present throughout the
activities (marketing) places where customers organization, wherever
interact with the firm. external or internal
customers are present.
Dedication to customer Only a limited part of the In addition to full-time
management organization is engaged marketers and
(marketing) in customer-focused salespeople, a major
behaviours and has a part of the organization
customer-focused attitude. must be committed to
customer-focused attitudes
and behaviours.
Organising for customer Marketing is normally a All marketing cannot be
mangement hostage of marketing organized in a traditional
(marketing) and sales departments. sense. Only full-time
Marketing is normally marketing can be organized
organized in marketing in a specialized department.
departments consisting of In part-time marketers a
full-time marketers only. customer-focused
(marketing) attitude can
only be instilled.
Planning and preparing Plans and budgets for Planning and preparing
budgets for customer customer management budgets for customer
management (sales and marketing) are management must be part
(marketing) normally plans of sales and of all planning in a firm and
marketing departments co-ordinated in the business
only. plan.
Commitment to internal All marketing and sales people Part-time marketers
marketing are considered marketing outnumber full-time
professionals. Hence, no marketers several times.
internal marketing is Hence, internal marketing is
needed. of strategic importance.
TA B L E 17.2
(continued )
Aspect of marketing Consequences of Requirements of service and

transaction-related relationship-focused
traditions perspective
The term used For a century marketing has Marketing as a term may
for customer been used as the term for relate too much to customer
management customer management. acquisition only. Moreover,
(marketing) part-time marketers often
do not accept being
involved in something called
marketing. Hence, this term
may be outdated and
psychologically wrong and
therefore not useful as an
overall label for the process
of acquiring, keeping
and growing customers
(customer management).
and adopts a service perspective has to be customer-focused throughout the organization. Every-
one who interacts with external or internal customers, including support persons whom customer contact persons
are relying upon, have to be dedicated to a customer focus and have a marketing mindset. If they are not, the
customer contacts will be taken care of in an inconsistent manner and customer perceived service
quality will suffer, and in the end marketing will fail.
Organising for customer management and customer-focused performance (that is, organizing marketing in
a service business). In most firms marketing is the hostage of marketing departments. Firms have
marketing departments staffed with full-time marketers who are highly visible in the organization
and often run large external marketing campaigns. People outside the marketing department easily
believe that the firm’s total impact on the customers, that is, total customer management, is taken care
of by that department, and by sales departments. However, a service perspective requires that almost
everyone as part-time marketers take responsibility for customers. Of course, not everyone can be
placed in the marketing department and report to its director. It is impossible to organize marketing
in a similar manner to its traditional arrangement in consumer goods marketing firms. Only the full-
time marketers, the specialists on customers, can be organized in one department totally dedicated
to marketing and customer-focused behaviour. Everyone else, the customer contact employees and
support employees as part-time marketers, whose main job after all is to produce a service or take
care of some administrative tasks, albeit in a marketing-like fashion, belongs to their own department
or processes. However, in spite of this, they have dual responsibilities. A marketing attitude of mind
has to be instilled in them so that when doing their main jobs, they have the skills and motivation
needed to perform them in a customer-focused manner. Hence, marketing can only partly be organized.
Mostly it is instilled in the organization as an attitude of mind.
CONSEQUENCES FOR MARKETING IN SERVICE COMPETITION 501
Planning and preparing budgets for customer management and customer-focused performance (that is, preparing
marketing plans and budgets). Normally, what are called marketing plans and marketing budgets are
prepared within the marketing department and mostly only cover activities planned and implemented
by that department. Then the marketing plan becomes a plan for traditional external marketing only
and the budget prepared for marketing becomes a budget for external marketing. In the plans govern-
ing other customer-contact activities performed in other departments and processes, that is, in plans
governing the remaining parts of customer management, a customer focus is normally marginal or
even lacking. Everyone knows that activities that have an impact on the firm’s customers are planned
in the marketing department and budgets for such activities are prepared there. Therefore, market-
ing plans and budgets truly become hostages of the marketing department. In a firm that adopts a service
perspective, a customer focus has to be present in all plans developed in the organization and in all budgets.
Hence, the plan and budget prepared by the marketing department is only a minor part of the total
customer management (that is, total marketing) planning and budgeting in the firm. Ultimately, all
these sub-plans have to be co-ordinated, and probably this can best be done in the firm’s business plan.
Commitment to internal marketing. By definition, full-time marketers and salespeople are, or should
be, customer-focused. They are also trained and motivated for marketing-like performance. Tradi-
tionally, no additional marketing-focused training for other people in the firm is considered necessary.
However, when adopting a service perspective the firm has part-time marketers throughout the orga-
nization in a number of different organizational units and processes, who from the outset are not
appointed for customer-focused behaviour and whose basic training is not related to handling cus-
tomer contacts in a marketing-like fashion. Neither can they be expected to have a customer-focused
attitude. However, they have customer contacts on a regular basis and they outnumber the full-time
marketers several times. Hence, internal marketing is not only a tactical issue, it is of strategic importance
to the firm. If internal marketing is lacking or less effectively managed and implemented, customer
contacts will be handled badly, perceived service quality will suffer and the total marketing process
fails.
The use of the term ‘marketing’ for customer management. Customer management, that is, being focused
on customers and taking care of customers, is as old as the history of trade and commerce. The
term marketing has been used for this process for roughly 100 years. Hence, it is a very new term.
On no tablets of stone is it written that marketing, under all circumstances, is the best label to use.
Indeed, marketing may turn out to be a problematic term in firms adopting a service and relationship
approach, where the commitment to customers is required of a host of part-time marketers in almost
every corner of an organization. First of all, this label has developed as a term describing the act of
acquiring customers, persuading customers to buy and creating sales. It is an inside-out label. The very
word ‘marketing’ refers to a movement, moving out onto the market. Today in service competition,
when forming and maintaining longer-term relationships are a major part of customer management,
customer acquisition and persuading customers to buy are still important tasks, of course, but so much
else related to keeping and growing customers and creating a sense of connectedness with customers
(and other stakeholders) is also important, and perhaps an even more important part of the customer
management process. Hence, the term marketing refers only to a part of what ‘marketing’ is today, and perhaps
often to the less important part.
Secondly, in the minds of people with part-time marketing responsibilities, marketing as a term is
frequently loaded with negative associations. According to them, marketing is far too often equal to
persuasion, pushing and making people buy things they do not need. And who would like to be part
of that? So, for potential part-time marketers the very term ‘marketing’ easily creates resistance to adopting a
customer focus. They simply do not listen to internal efforts aimed at explaining why they, as part-time
marketers, are part of the firm’s total marketing process. Therefore, for a firm in service competition to
become truly customer-focused it may even be necessary to abolish the label ‘marketing’ for customer
management. Psychologically this label is wrong and may become a hindrance for change processes,
and it does not refer to the whole customer management process of acquiring, keeping and growing
customers, where the latter two aspects are frequently more important than the first one (to which
the term marketing originally referred).2
Throughout this book the term ‘marketing’ has been used for customer management. As a more
appropriate term that would be even to some limited extent agreed upon or understood in a more
or less similar way does not seem to exist, for the time being we have chosen to label the customer
management process ‘marketing’.3 However, we suggest that firms seriously consider taking another,
more appropriate and psychologically less problematic label for the customer management process in
use.4 Of course, this also goes for the label ‘internal marketing’.
G U I D E L I N E S F O R M A N A G I N G S E RV I C E
COMPETITION
In this last section of this concluding chapter a set of guidelines for service management are presented.
The situation differs, of course, between firms and industries. However, some general guidelines for
implementing a service strategy can be put forward. These guidelines start from the idea that people
are still the critical resource and the bottleneck in most service businesses. However, information
technology, the Internet, operational systems and physical resources are increasingly important. So
technology and an understanding of how to use it may also be the bottleneck in a service process. As
business is a social phenomenon it is, of course, incorrect to talk about any rules of service in a strict
sense. Nevertheless, in order to emphasize the common characteristics of the customer relationships
in most organizations in service competition, these concluding guidelines have been labelled the seven
rules of service. The reader is asked to bear in mind that these rules are general and overemphasize the
role of the employees for some situations. The fifth and sixth rules, however, focus on other aspects
of service management.
The seven rules of service are as follows:
First rule: The general approach.

Second rule: Demand analysis.
Third rule: Quality control.
Fourth rule: Marketing.
Fifth rule: Technology.
Sixth rule: Organisational support.
Seventh rule: Management support.
FIRST RULE: THE GENERAL APPROACH

The importance of service elements in customer relationships grows over time and customers – busi-
ness customers as well as individuals – increasingly demand individual and flexible responses from
the service provider. Success in the market requires that the firm can offer advice and guidance; for
example, technical advice needed to start operating a printer or a production machine, as well as small
GUIDELINES FOR MANAGING SERVICE COMPETITION 503
details, for example, a quick response on the telephone about airplane departure times. If employees
are authorized to make their own judgements and have the knowledge needed to do that, and in
addition have a service-focused approach to their job and to their customers, and if the firm is com-
petitive in other respects, this will give good results in the marketplace. In spite of automated service
systems, the increased use of information technology and the Internet, the creativity, motivation and
skills of people are still the drivers behind successful development of new service, the implementation
of service concepts and recovery of service failures that occur from time to time. Hence, the first rule
of service can be expressed as follows:5
People develop and maintain good and enduring customer contacts. Employees ought to act as consultants, who
are prepared to do their duty when the customer needs them and in a way the customer wants. The firm which
manages best to do this strengthens its customer relationships and achieves the best profitability.
S E C O N D R U L E : D E M A N D A N A LY S I S
Service is either rendered directly to people or organizations, or services are made on equipment
owned by people (or organizations). In all cases the customer is present, extensively or occasionally,
in the service process. Direct interactions between customer contact employees and customers occur,
and in such situations immediate actions may have to be decided upon and taken by the contact
person, or they may have to provide some information or change their way of doing the job according
to the needs of the customer. Such a reaction may be, for example, changing the level of a customer
training seminar to better meet the requirements or level of knowledge of the attendees, or a quick
decision by a telephone receptionist about whom to put on the phone when the person a customer is
asking for is absent. If corrective actions are to be taken immediately, nobody other than the person
who produces the service can recognize the perhaps unexpected shift in the needs or wishes of the
customer. As has been discussed in previous chapters, in such situations prompt action is called for.
Market demand can, of course, be measured in advance using standard market research. How-
ever, the changing needs and wishes of customers at the point and time of service production and
consumption cannot be measured in advance. Nor can this be reacted to later on, when somebody
else has detected the need for changes in the service process. If the need for a reaction is detected
afterwards, the customer relationship was affected long ago. Only customer contact personnel can
manage such a situation in a satisfactory manner. Hence, the second rule of service can be expressed as
follows:
The customer contact persons producing the service in contact with customers will have to analyse the customers’
activities and processes and their needs, values, expectations and wishes at the point and time of service production
and consumption.
THIRD RULE: QUALITY CONTROL

According to traditional manufacturing quality control models, the quality of a product is controlled
by a separate unit, which checks the pre-produced goods. This view is no longer valid in modern
quality management. Everyone, in manufacturing as well as in service production, has a responsibility
for quality, and producing good quality is based on the notion that things will have to be done
correctly the first time. Because of the characteristics of service and the nature of service production
and consumption, post-production control cannot prevent failure; it can only be observed that bad
service quality has been produced and experienced by the customer. Moreover, if things are not
done correctly the first time, the cost of correcting quality problems, which have occurred either
in the back office or in the service encounter, is frequently high, especially if problems and failures
are not rectified immediately. In this scenario the quality goal is often less than 100% and mistakes
are therefore tolerated, and these costs easily become ‘hidden costs’, which are taken for granted and
considered a necessary evil. It is not possible to have a separate quality control unit following every
production step; instead, everyone has to control the result of his job.
In service operations this is very true. In manufacturing, one has to do things right the first time
according to static specifications. In service production, as was demonstrated by the discussion of the
second rule, the specifications may change during the service process. The customer may change his mind.
Technology may break down, or almost anything may happen to change the situation and demand
new or unforeseen actions.
The customer contact employee will have to check the quality of the service at the time it is
produced and delivered. For example, when goods are delivered to a customer, an elevator is repaired,
or a customer in a restaurant is being served, the quality of that service operation cannot be controlled
and managed by anyone other than the person who has contact with the customer. Normally, there
are no supervisors physically present in employee–customer interactions who can monitor quality on
a continuous basis. Afterwards the quality can, of course, be checked, for example by market research,
but then the mistake has already been made and the customer relationship may have been damaged.
On the other hand, the contact person must not be left totally alone. ‘Common sense’ may not be
sufficient guidance. Management must provide employees with the knowledge, skills and directions
needed to manage quality on their own with their customer contacts (internal or external). Moreover,
management has to enhance the attitudes and mental capabilities of the employees to manage quality.
Hence, the third rule of service can be expressed as follows:
The customer contact person producing the service in contact with customers will have to control the quality of the
service at the same time he produces the service.
FOURTH RULE: MARKETING

In service competition the nature of marketing changes as well. Although traditional external market-
ing activities, such as market research, advertising campaigns, pricing, personal selling by a professional
salesforce and sales promotion, are as important as ever, they are not the only activities to be per-
formed as marketing activities. The marketing process is much broader and is spread throughout the
organization. When ongoing relationships are to be maintained and strengthened, traditional market-
ing efforts are of less importance. In order to develop existing customer relationships, the exchange
of goods, services and information, as well as financial and social exchange, is of critical importance.
Personal selling, advertising and sales promotion activities are, of course, used in such situations, too,
but their impact is often minor. Price is important at all stages of the customer relationships lifecycle.
In service competition every contact between a contact person and a representative of a cus-
tomer includes an element of marketing. These contacts are the moments of truth or the moments
of opportunity where the success of the service provider is determined, and resales and cross-sales
opportunities can be utilized. If these moments of truth give the customer a favourable impression
of the contact person, of the systems and resources used, and thus of the total organization, the cus-
tomer relationship is strengthened. The probability that it will last longer and lead to further business
increases. However, the opposite is also true. Badly-handled service encounters – that is, negatively
experienced moments of truth – damage customer relationships and lead to lost business. They are
truly missed moments of opportunity.
Any service organization has a large number of part-time marketers. However, marketing is only
their second responsibility, beside the tasks they are set to perform. If the marketing aspect of their job
is neglected, customers will perceive the quality of the service more negatively. Furthermore, in almost
every service organization the part-time marketers outnumber the full-time marketers and salespeople
several times over.6 Consequently, the marketing impact of what they do and how they perform
their tasks has to be recognized by management, because their role in the total marketing process
is critical. If the interactive marketing performance of the part-time marketers fails, the marketing
process fails, irrespective of whether the efforts of the salesforce or the advertising campaigns or
other traditional external marketing efforts have been successful or not. This is the essence of service
marketing. Marketing the service as a part-time marketer in the interactive marketing sense does not
necessarily mean that the contact person would have to actively sell or offer the service, although this
may also occur. Normally good part-time marketing behaviour means that the job is done skilfully, in
a flexible manner, without unnecessary delays, and with a service-focused attitude. Hence, the fourth
rule of service can be expressed as follows:
The customer contact person has simultaneously to be a marketer of the service he produces.
FIFTH RULE: TECHNOLOGY

Information technology is becoming exceedingly important for more and more service processes. If
a website is designed so that users find it complicated or uninteresting, or if people using a website do
not get a quick response to their inquiries, they quickly lose interest in the firm and its offerings; it is
so easy to jump to the next website. Information technology should also enable contact employees to
get easily retrievable and reliable information about the customers they are serving. If that is not the
case, interactions between contact employees and customers are affected and bad perceived quality
created.
All kinds of technology and physical resources used in service processes must be customer-friendly
and reliable. A technological solution, or a physical resource that is geared to the needs and wishes of
the user and that fits the situation in which it is to be used, may well enhance the quality of the service.
It can improve the efficiency of operations and profitability as well. Even more frequently, techno-
logical support enables personnel to produce a better service. Appropriate technology and physical
resources, such as computer systems, documents, tools and equipment, may at the same time improve
working conditions and enhance the motivation of the employees to give good service. On the other
hand, technology that employees do not understand or are not willing to use has a negative effect
both on internal relationships in the organization and on external customer relationships. Employees
need adequate technological support.
Hence, the fifth rule of service can be expressed as follows:
The impact on customers’ ability and willingness to use technology, systems and physical resources (of any kind),
as well as the impact of such resources on the employees in interactive and supporting parts of the organization,
and on their ability and willingness to serve customers, have to be taken into account when investments in such
resources are made, so that the service orientation of employees and the service quality perceived by customers are
not affected in a negative way.
S I X T H R U L E : O R G A N I Z AT I O N A L S T R U C T U R E S U P P O R T
In many firms the organizational structure does not support customer-focused and high-quality service
operations. Contact employees and departments that have to interact with each other in order to
produce a service may be geographically or physically far apart in the organization. Often decisions
concerning even minor details are made too far away from the service encounter which, of course,
can have a negative impact on the perceived service. Internal regulations may restrict the flexibility
of the contact staff. For example, hotels frequently have their employees say, ‘No, sir, we cannot do
that – management regulations, sir’ to customers who ask for a service outside the normal procedures.
Trousers cannot be ironed on a Sunday, or pyjamas cannot be supplied for a guest whose luggage
has been left behind by an airline, or because designated exit gates are elsewhere an entry gate to
an attraction cannot be opened to let an exhausted visitor out quickly. Management does not trust
employees to think for themselves and make sensible decisions.
In many manufacturing firms, service elements are considered to be low priority. This means that
services are not, like goods, an integral part of the total offering to the market. They receive fewer
resources and less of management’s time.
The employees and their managers alike often feel that service is not important. A company’s
organizational structure may not be geared to the demands of the new service competition. The result
is inevitable, of course. Employees involved in the firm’s variety of service operations feel no pride
in their job, nor do they feel motivated to provide good service to customers. In order to develop
their service into powerful means of competition, firms will have to adjust their structure so that the
organization supports employees in their efforts to provide good service. An organizational structure
support is needed.
Hence, the sixth rule of service can be expressed as follows:
The organizational structure must enable internal collaboration between employees and departments and motivate
customer contact personnel and support personnel alike, such that good service can be provided to internal and
external customers.
SEVENTH RULE: MANAGEMENT SUPPORT

It is well known that managers and supervisors get the staff they deserve. They have an important
effect on the values that guide the overall way of thinking and behaving in the organization. In service
competition this is as true as it ever was, and even more important to realize than before, because of
the immediate impact that contact persons have on demand analysis, quality control and marketing.
Managers and supervisors have to be true leaders, not simply technical managers. There are too
many rules and restrictions that managers and supervisors use as managing devices. If employees are
well informed and have required skills, they are normally able to think for themselves, act sponta-
neously and in a flexible manner, and still make good judgements. Such service-oriented attitudes are
effectively damaged by too much rules-and-regulation management and too little leadership.
Managers have to be able to motivate their people to be service-oriented and customer-focused,
by, for example, their leadership style, their way of sharing information and giving feedback to people
in their organizational unit, and their way of encouraging, supporting and guiding employees. They
will have to demonstrate, by the way they do their job, that they, too, consider good service and
satisfied customers important. It goes without saying that this attitude is required of every manager in
the firm, irrespective of their hierarchical position and their own involvement in service operations.
Unclear visions and/or badly defined or undefined service concepts (one or several) make it difficult for
managers, supervisors and support and customer contact employees to decide in which direction they
should go, what leads to fulfilling goals, and what is contradictory to the objectives of the organization.
If service concepts are not well stated, no clear goals can be set. In such situations there will be disarray
both in planning and in the everyday implementation of plans. To sum up, the employees need the
management support of their managers and supervisors. Moreover, clearly defined service concepts
are a necessity if the organization is to avoid a chaotic situation where nobody knows what to do
in certain situations or how to react to changes in the environment and to unexpected customer
behaviour. Hence, the seventh rule of service can be expressed as follows:
Every manager and supervisor, and explicitly defined service concepts, have to provide the guidance, support and
encouragement needed to enable and motivate customer contact persons and support persons alike to provide good
service.
CASE STUDY
C R E AT I O N O F N E W A N D I N N O VAT I V E S E R V I C E
S Y S T E M S T H R O U G H E M P L O Y E E I N I T I AT I V E :
T H E H O S P I TA L M AT E R N I T Y W A R D
There are significant opportunities for service and relationship marketing in the UK
healthcare sector. However, realizing measurable success here is fraught with difficulties,
some due to its corporate culture. However, a recent tragic event has had the effect of
inspiring a radical turnaround in one maternity ward in a major regional hospital. This
event was the theft of a baby from another hospital maternity ward. The subsequent
public outcry made finding a solution to security issues of the utmost importance. What
catalyzed service improvements in this particular organization was a series of employee-
driven changes that had the effect of significantly changing both procedures and the way
in which patients were treated. What was the most significant change, however, was who
actually made it happen.
In almost all UK hospitals, it is the responsibility of the Estates department to take care
of such matters as gardens, car parking, building maintenance, cleaning and security. Since
baby theft was clearly a security matter, the Estates department acted promptly in imple-
menting new procedures and systems. CCTV, security passes, visitor screening and so on
all had the effect of making the obstetrics ward appear to be under siege. One of the
new work practices was to cease rotating the cleaning staff, whose additional tasks were
to help with security maintenance. As people became used to new working practices, cer-
tain problems arose. Nursing staff felt pressurized under the greater administrative load
caused by the heightened security procedures. Because they were no longer regularly
reassigned to different groups, cleaning staff had by then acquired, for the first time, a
team ethos. This moved them to suggest ways in which they might help. Cleaners began
undertaking non-medical tasks, such as serving meals to patients, managing visitor traf-
fic and helping with admission of patients. The ‘siege mentality’ induced by the security
regime engendered a supportive enclave of teams who expressed this support by regularly
meeting to discuss ways in which their service might improve. The Estates managers were
keen to give them autonomy since they were also learning and, significantly, they wanted
to avoid another public relations disaster. Two small but significant changes occurred –
patients were now called mothers, and the cleaners now called themselves the domestic
staff. The first change was in response to the way in which the domestic staff viewed their
clientele. They reasoned that unlike other hospital patients there was nothing ‘wrong’
with their patients, they were not ill; they freely entered into pregnancy, but did need
medical support service. Mothers did not need ‘fixing’; instead of commiseration there
should be celebration, and so the mindset of service providers was positive. Mothers, in
turn, did not see such caring and supportive service providers as simply cleaners, and the
term ‘domestics’ was felt more appropriate to the mindset of the customer.
Domestic staff made significant strides in freeing the medical staff from the pressure of
the security environment. Nursing staff, in turn, were highly supportive of their internal
suppliers, expressing confidence by giving the domestics more freedom in assisting them.
Domestic staff for the most part were mature women, with much experience. First-time
mothers and difficult-birth mothers were routinely isolated, which may have made med-
ical sense but made little human sense. Domestics organized their work around ensuring
that no such mother was ever isolated, each spending as much time with the mothers
as needed to support them psychologically, advising, alleviating fears and simply listen-
ing. Thus, the level of service, both in terms of efficiency and effectiveness, had the result
of achieving a virtuous circle of self-sustaining benefits available to each member of the
obstetrics department. More effective planning could be observed, administrative effi-
ciency was optimized, staff morale was high, management input was minimal and moth-
ers expressed far more satisfaction than at any time previously. At the heart of these
beneficial effects was the emergence of a relatively autonomous empowered workforce,
none of whom were very well qualified, and certainly not sophisticated intellectuals. The
lucky induction of a simple Hawthorne effect impelled a highly complex series of events,
the momentum of which created the conditions for a continuous quality improvement
strategy.
Source: This case study was developed by Peter Murphy, University of Dundee.7
F I V E B A R R I E R S T O A C H I E V I N G R E S U LT S
The last three rules can be made more explicit by adding five additional statements that follow directly
from the discussion about these rules. These statements all concern major barriers to successfully imple-
mented service management. Most of these are due to an outdated management philosophy and old
organizational structures, which hamper the development of sound and effective management of firms
in the post-industrial society of the 21st century.8 They are:
1. Organizational barrier.
2. Systems and regulations-related barrier.
3. Management-related barrier.
4. Strategy-related barrier.
5. Decision-making barrier.
SUMMARY 509
Barrier 1 (organizational barrier). Good service, and sound change processes towards a service culture, are
effectively destroyed by an old-fashioned and obsolete organizational structure. If an inappropriate organiza-
tional structure is left outside a change programme, much of the effort to achieve better service may
be in vain. The organization simply is not suitable for service and, thus, becomes a barrier to change.
Barrier 2 (systems and regulations-related barrier). Employees would normally like to treat their customers
well and provide good service, but internal rules and regulations, the systems of operating, and the technology used
may make this an impossible task. It is only natural that most people would prefer to treat their customers
well and provide good service, but if management regulations, operational or administrative systems,
or the technology used counteract good service, they cannot do this. The internal infrastructure
becomes a barrier to change. This typically happens when training efforts are used in isolation as the
major or only means of developing a service culture in an organization, and no attention is given in
the change process to this infrastructure provided by regulation, systems and technology.
Barrier 3 (management-related barrier). How managers treat their staff is the way the customers of the
organization will be treated. If a change process focuses predominantly or only on contact and support
personnel and top and middle management are left outside, there is a risk that the superiors of those
involved in customer contacts will not be fully aware of what should be emphasized in these contacts
and how the moments of truth should be handled and managed. Supervisors can easily encourage the
wrong aspects of a task, and a role conflict emerges for the employees. They would like to implement
new ideas, but their bosses have become a barrier to doing this.
Barrier 4 (strategy-related barrier). If well-defined and easily understood service concepts are lacking, chaos
will reign in the organization, and managers and customer contact and support persons alike will be uncertain
about how to act in specific situations, in planning as well as in implementing plans. If the organization throws
itself into a change process without first clearly analysing the benefits sought by the customers in the
organization’s target segments, and decides what it should do, and how corresponding goals should
be accomplished, there is no solid foundation for a consistently pursued change process. A number
of projects are initiated and programmes started without anyone really knowing why this is being
done and what the ultimate objectives are. In short, there is no strategic approach, and this becomes
a barrier to change.
All of the four barriers above, as well as the six rules, are easy to accept, and generally it is not
difficult for managers to admit that these rules have been broken and/or several barriers to change are
present in their organizations. However, there is a big step from understanding a phenomenon and
accepting that a problem may exist to doing something about it. Therefore, a fifth barrier is finally
offered as the key to success.
Barrier 5 (decision-making barrier). Good intellectual analysis and thorough planning is of no value unless
there is the determination, courage and strength needed in the organization to implement new visions and intel-
lectually sound plans. To put this another way, weak management is always a barrier to implementing
change processes.
S U M M A RY
This chapter has illustrated the essence of management and marketing in service competition. The first
sections summed up management implications of the Service Profit Logic and the customer-focused
service management framework, and in the following sections consequences for marketing of a service
and relationship approach and general guidelines for service management, the seven rules of service, were
described.
The conclusions in this chapter hold true not only for so-called service firms such as hotels and restau-
rants, banks and financial institutions, insurance companies, transportation firms and a variety of public
service. They are equally valid for any type of organization. This follows from the fact that in most industries
the importance of service has grown dramatically. Everybody is now part of the service economy. Every
firm faces service competition to some extent. Services can be found in any industry, and they should be an
integral part of any firm’s offering, irrespective of whether goods or services are the core of the business.
The traditional ways of handling demand analysis, quality control and marketing are not sufficient.
The new service competition requires a new way of thinking, adopting a service logic.9 If management cannot
adjust its ways of thinking and its actions according to the new situation, the risk that the firm will
suffer and lose market share will grow. Service logic is a strategic issue, and not only an operational one. The
ways in which demand analysis, quality control and marketing have been carried out in the past are not
necessarily totally outdated today. Traditional activities may still be efficient and effective, and they should
be applied whenever appropriate. The main thing is that they are not sufficient any more. They have to
be accompanied by new efforts, and they should be viewed from a new, more holistic perspective.
In service competition, if the firm fails to understand the characteristics of service and the critical impor-
tance of successful customer management, the firm’s operations will deteriorate and be less successful.
A number of moments of truth will become wasted moments of opportunity. On the operational level,
every employee has to meet the demands that competition makes on them all the time. Although mistakes
are bound to happen, the objective must be to achieve 100% excellence. Otherwise, the battle is lost before
it has even begun; customers will receive inconsistent service, bad word of mouth is created, negative
comments on social media occur, and the organization’s image is damaged.
Inconsistency of service is perhaps the most serious problem facing service operations today. Most parts
of a service process may function well, but if one or two interactions with a customer are handled badly,
all the good that has been developed may be destroyed by these elements of bad service. Or the customer
may be pleased with the service he receives in the service encounters he is regularly involved in, but if he
has an unexpected request or a service failure has occurred, no service can be obtained. This means that
his opinion of the firm’s service will be revised. Whether the customer experiences bad service or a lack of
willingness to give good service, the total perceived service quality will collapse in the mind of the customer
on that occasion. The inconsistency of the service process caused by one or more badly handled moments
of truth has an immense negative impact on the customer relationship. Successful service management
requires an appreciation for the customers’ perspective throughout the organization and consistency in
the way that every customer contact is handled.

1. Discuss the implications for marketing of a service and relationship approach.
2. Discuss the importance of the seven rules of service.
3. In your organization, or in any organization, which of the barriers to achieving results
are present? What are the reasons for the existence of these barriers? How can they be
removed?
FURTHER READING 511
NOTES
1. See Grönroos, C., Relationship marketing: challenges for the organization, Journal of Business
Research, 46(3), 1999, 327–335.
2. Grönroos, op. cit. One of the major Scandinavian banks referred to in previous chapters of this
book has long ago abolished the use of the term ‘marketing’ for the customer management
process. In that bank the term ‘active customer contact behaviour’ was introduced instead. This
change of terminology turned out to be successful. There are also other examples.
3. However, as the author believes that it is only fair to say that the term ‘marketing’ is outdated and
does not fit an era of service competition and a service and relationship perspective in customer
management, he would have liked to use another term which more appropriately would fit
today’s situation in the marketplace.
4. See Strandvik, T., Holmlund, M. & Grönroos, C., The mental footprint of marketing in the
boardroom. Journal of Service Management, 25(2), 2014, 241–252, where problems with the term
‘marketing’ are discussed.
5. The logic underpinning this general rule of service was discussed by Gösta Mickwitz in an essay
on the role of service in business. See Mickwitz, G., Arbetstid och service (Working hours and
service). Ekonomiska Samfundets Tidskrift (The Journal of the Economic Society of Finland), 38(4),
1985, 163. In Swedish. Gösta Mickwitz is a former Professor of Marketing and Economics at
Hanken School of Economics and Helsinki University in Finland and my mentor, who taught
me to think laterally and seek solutions outside the limits set by the prevailing opinion.
6. Gummesson, E., Marketing revisited: the crucial role of the part-time marketer. European Journal
of Marketing, 25(2), 1991, 60–67.
7. Murphy, P., Front stage transactions lead to backstage relationships: a study of role repertoires in
hospital service provision. Unpublished research paper. Dundee University, Scotland, UK, 2000.
8. Grönroos, C., Företagsledningens tvångströja (The management straitjacket). Ekonomiska Sam-
fundets Tidskrift (The Journal of the Economic Society of Finland), 52(3), 1999, 115–116. In Swedish.
9. See, for example, Grönroos, C., Adopting a service logic for marketing. Marketing Theory, 6(3),
2006, 317–333, and Grönroos, C. & Voima, P., Critical service logic: making sense of value
creation and co-creation. Journal of the Academy of Marketing Science, 41(2), 2013, 133–150.
Grönroos, C. (1999a) Relationship marketing: challenges for the organization. Journal of Business
Research, 46(3), 327–335.
Grönroos, C. (1999b) Företagsledningens tvångströja (The management straitjacket). Ekonomiska

Samfundets Tidskrift (The Journal of the Economic Society of Finland), 52(3), 115–116. In Swedish.
Gummesson, E. (1991) Marketing revisited: the crucial role of the part-time marketer. European
Mickwitz, G. (1985) Arbetstid och service (Working hours and service). Ekonomiska Samfundets Tid-
skrift (The Journal of the Economic Society of Finland), 38(4), 163.
Murphy, P. (2000) Front Stage Transactions Lead to Back Stage Relationships: A Study of Role Repertoires
in Hospital Service Provision. Unpublished research paper. University of Dundee, Scotland, UK.
Strandvik, T., Holmlund, M. & Grönroos, C. (2014) The mental footprint of marketing in the
boardroom. Journal of Service Management, 25(2), 241–252.
INDEX
4Ps (product, place, price and promotion) model 279, 280 brand equity 187, 342–3, 345
brand formation process 345
absence of communication 314, 314, 315–16 brand fulfilment 343, 345
acceptable quality 128 brand identity 339
accessibility 210–11, 388 brand image 339, 342, 345
accountability 435 brand involvement 343
acquisition costs 161–2 brand knowledge 342
active relational mode 27–8, 28 brand messages 339
acts 108 brand promise 343
adaptability 56 brand–relationship–value triangle 345, 346
additional value 173–4 brand relationships 339–41, 340, 342
administrative recovery 147 brand value 342–3
administrative service recovery 147 branding 312, 339
administrative strategy 147 budgets for customer management and customer-focused
advocacy bonds 316 performance 501
after-sales services 464 business effectiveness 475
Amazon.com 27 business logic 87, 477
Apple 214, 222, 223 business mission 80–1, 81, 390, 451, 477
asymmetric quality function 135, 136 buyer–seller interactions 95, 138
attitude management 413–15
attraction 29, 30–1 capacity efficiency 247, 248, 249, 249, 254, 256
attribute-based measurement instruments 101, 102–4, 103 classification of services 51–2
augmented service offering 205, 206, 207, 209–13, 209, climate, internal 445–6, 447
215, 388 closed process 57
case study 216–20 closed systems 237–8
on Internet 226–8 coaching 453
auxiliary services 206 cognitive dissonance 29
commercial analysis 4–5, 5
bad costs 243, 244, 255 commitment 29, 30, 31
barriers to implemented service management 508–9 communication 26, 60–1, 359, 426–7
base profit 162 absence of 314, 314, 315–16
basic package 215 communication circle 311, 317, 317–18, 324, 361–2, 362
basic service package 207–8, 224 marketing communication and 318–19
blogs 364, 367 communications management 213, 413–14
blueprinting model 393–5 company image 96
BMW 54 comparison standard 111
bonds 26, 111–14, 115, 178, 272, 295 competition-driven perspective 24
brand awareness 343, 345 competitive advantage 55–6, 97–8, 467–8
brand contacts 339–41, 340, 341 conceptualizing, systematizing, servicizing (CSS) model
brand definition 337–8, 342–3 480–2
514 INDEX
confidence type of relational benefit 28, 29 customer benefit concept 207, 209, 214–15
confirmed quality 128 of service strategy 80
connectedness customer commitments 178
brands and 342 customer contact, direct 3, 11
relationship communication and 328, 329 customer contact development office 380
constant-quality assumption 237, 240, 244, 255 customer contact employees 390, 391
consumption of services 52–4, 54 empowerment of 145
consumption style model 400, 400–1 enabling 145
consumption (usage) process 273–4, 275, 287, 292 customer database 3, 11–12
consumption phase 387–8, 388 customer delight 128
detachment phase 387, 388, 388 customer-driven perspective 23–4
joining phase 387, 388, 388 customer equity, definition 186
service package and 387–8, 388 customer equity management 186–7
contact, relationship communication and 328 customer expectations 384, 386, 390, 496
contact personnel 400, 419 managing 99–100
continuously rendered services 51, 52 customer experiences 496
contracts, trust and 30 customer focus 498–500
co-production of customers 138, 288 customer-focused activities, diffusion of 498
core product perspective 19–20, 22 customer-focused management 31
core service 206, 208 customer-focused strategy 494, 495
core solution 172, 173 customer-induced contribution 241, 242
core value 173, 174 customer information files 3, 11
corporate culture 390, 445–7 customer investment 174, 176
cost benefits 174, 175 customer lifecycle 471
cost-effective changes 236 customer loyalty 23
cost efficiency see internal efficiency customer satisfaction and 160–1, 160
cost-generating functions 72, 73 profitability and 161–3, 162
cost savings 162 customer management 500–1
costs marketing and 501–2
acquisition 161–2 customer needs 98, 385
bad 243, 244, 255 customer-oriented service system, creating 3, 12
direct relationship 164–5, 166, 169, 174, 175, 176 customer-oriented services 12
of failures and mistakes 144 customer participation 211, 225–6, 388
good 243, 244, 255 customer past experience 98, 130
gross direct 164 customer perceived quality 248
indirect relationship 164, 165, 166, 170, 174, 176 customer perceived service quality 72, 76, 78
management of 243–4 customer perceived value (CPV) 171–3, 177
net direct 164 customer profitability, analysing 188
production 169 customer profitability analysis phase 189–93, 190
profitability and 4 customer relationship lifecycle 267, 272–4, 273
psychological 164, 165–6, 170 managing 274–6, 275
relationship 164, 166, 167, 168, 168, 171, 172–3, 179, customer relationship lifecycle model 280, 287, 291
256, 478 customer relationship perspective 23
of service recovery 149 customer relationship profitability 177–80, 178
critical episodes 179 customer relationships 2–3
critical incident method 93, 105–6 service impact in 82–4
critical service encounters 179 customer sacrifice 111, 163–4, 166
crowdsourcing 364 customer satisfaction 111
cultural bonds 111, 115 customer loyalty and 160–1, 160
culture, importance in service organizations 447 vs perceived service quality 106
customer base, management of 295–6 customer satisfaction measurement models 94
INDEX 515
customer segments 387 management support 433

customer-to-customer communication 60–1 technical support 433
customers enabling goods 208
as co-producers 49, 138 enabling services 208
definition 27 engagement behaviours, social media 363–4
game plan 385, 385 episode benefit 172
informing 145–6 episode configuration 179
knowledge about 384–6, 385 episode-level quality 111
value-creating processes 2, 3, 384, 385 episode performance 111
value-formation process 474–5, 474 episode sacrifice 172
episodes 108–9
decision-making authority 86, 87–8 exchange perspective 23
defensive recovery 147 existing customers, communication and 321–2, 322,
defensive service recovery 147 323
defensive strategy 147 expected quality 98
depth of social media information 360 expected service 130
design for service 221–3, 222 experience-related value 475
dialogical mode 326 experienced quality 98
dialogue, definition 326 experientializing 60–1, 359, 361
direct relationship costs 164–5, 166, 169, 174, 175, explicit expectations 116, 117, 118
176 explicit knowledge 425, 431–2
disconfirmation construct 94 extended servicescape 398–9, 398
discretely rendered services 51, 52 external customers 380
dissatisfiers 136–7, 137 external effectiveness 71, 72, 76
distinct communication process 327, 328, 341 external efficiency see perceived service quality
distributive fairness 142 external marketing 268, 287, 417, 418, 496
dynamics of expectations 116–19, 116, 118
Facebook 360, 364
economic bonds 111, 115 facilitating goods 208
economic quality 97 facilitating services 208, 225
emotions, customer 101 Fairchild Fasteners 386
employee brand identification 344 fairness, perceived 142
employee branding 344 Finnair 363, 366–7
employee role ambiguity 496 firm
employee role conflicts 496 as a service business 3
employees 12 as value-generating operation 10
communication and 321–2, 322, 323 flexibility 55–6
empowerment of 87, 149, 409, 432–5, 497 full-time marketers 382, 383, 384, 496
enabling 87, 149, 409, 432–4 function dimension of quality 95, 98
knowledge 59 functional quality 96, 97, 135, 138, 171, 172, 205, 223,
requirements of 411, 411 248
support 392–3, 419 functional value 182
training 145, 423–4, 425, 426 functionalistic management perspective 10
see also customer contact employees fuzzy expectations 116, 117, 118
empowerment
of consumers 358 gap analysis approach 127, 129–31, 130
of customer contact employees 145 generalized trust 30
of employees 87, 149, 409, 432–5, 497 geographical bonds 111, 115
enabling employees 87, 149, 409, 432–4 good costs 243, 244, 255
of customer contacts 145 good perceived service quality 93
knowledge support 433 ‘good service’, definition 159
516 INDEX
goods logic 24, 25 intentional dynamics 118

goods marketing triangle 56–8, 57 interaction 26, 49, 388
Goods Profit Logic 70, 70, 71, 73 interaction-induced contribution 241, 242
governing system 59 interaction process 327, 328, 341
gross direct costs 164 interactional fairness 142
gross margin 169 interactive marketing 52, 59, 267, 272, 292, 294–5, 317,
410, 436, 497–8
half-life of social media information 360 vs traditional external marketing 289–90
Handelsbanken 289 interactive marketing function 287–8
HG Hardware 430 interactive marketing model 17
hidden services 21, 48, 71, 82–3, 174, 223, 448, 466 interactive marketing process 287, 383, 384
high-tech services 51–2 internal branding 344, 345
high-touch services 51–2 internal customers 381–2, 381, 393, 419, 452
hit-and-run delight 129 internal dialogue 417, 421, 428
human resource management (HRM) 413, 422–3, 423, internal effect 77, 78
427, 429, 451 internal efficiency 70–2, 75, 76, 77–8, 141, 240–1, 242,
hygiene factors 136 244, 245, 245, 246, 247, 248, 249, 249, 253, 255
internal marketing 12, 60, 215, 268, 296, 450, 454
ideological bonds 111, 115 activities 428–9
IKEA 242, 360 commitment to 501
image 98–9, 114, 337 concept 412–13
communicated expectations 348 continuous process 436
developing 349–50 definition 409
as filter 348–9 enabling promises 496–6
as function of expectations and experience 348, 349 external focus 436
importance of 348–9 goals 417
internal and external impact 348, 349 implementation 436
as reality 349–50 internal focus 436
service provider 496 as knowledge renewal 431
image factor 98 objectives 415–16
image impact 321 relationship-mediated approach 431–2
image management 207, 213, 312, 347–8 strategic 419, 420–5, 421, 423, 425, 426
image perspective 19, 20, 23 as strategic issue 411–12
implementation phase 189, 195 summary 410–11, 411
implicit expectations 116, 117–18 tactical 419–20, 426–9
implied-in-fact promises 117 three levels of 416–18
incremental value assessment 183, 185 internal marketing relationship-mediated approach 431–2
independent value creation 14–15 internal service 393
indirect control by culture 447 internal service functions 381–2, 381
indirect relationship costs 164, 165, 166, 170, 174, 176 internal service recovery 428–9
industrial services 464, 466 Internet 24, 213–14, 224, 225, 226–8, 252
information exchange through social media 359 marketing and 290–1
information support 426–7 Interrent-Europcar 216–20
information technology, role in service offerings 213–14 intranets 452
innovation 364
inseparability characteristic 50
inside-out label 501 JIT logistics 24
inside-out management approach 6, 7, 7, 20, 482–3 job satisfaction 432, 433
intangibility 50–1 joint productivity gain calculation 183, 185
integrated marketing communication 312–15, 314, 315 justice 142
relationship marketing and 328 just-in-time approach 24, 164–5
INDEX 517
knowledge, employee 59 marketing communication 98, 130, 134–5, 138–9, 207,

knowledge-related bonds 111, 115 213, 311–12
Kone Corporation 48, 223 communication circle and 318–19
guidelines 323–6
leadership 420–2, 421, 428, 453–4 capitalize on word of mouth 323, 324
learning relationships 253–4, 254, 327 communicate intangibility 323, 324
legal bonds 111, 115 communication continuity 323, 324–5
Levi Strauss 54 communication effects of absence of communication
lifecycle approach 50 324, 325
lifetime value of customer relationship 187 customers create messages for themselves 324,
Liljander–Strandvik model of relationship quality 111–14, 325–6
112–14, 115 customers integrate communication messages with
line of visibility 382, 390, 392–3 experience 324, 325
linear quality function 135, 135 direct communication efforts to employees 323, 324
local image 96 integrate marketing communication efforts and
long-range process 450 messages 324, 325
long-term productivity 250 long-term effects of communication 324, 325
long-term relationships 85 make the service understood 323, 324
long-term sacrifice 166 promise what is possible 324, 325
lurkers on social media 366 provide tangible clues 323, 324
integrated 312–15, 314, 315
main service 206
marketing communication impact
main service sequence 147
Major Office Machine Ltd (MOM) 188–95, 190, 194 long-term 321–2, 323
management perception gap 131 medium-term 321–2, 322–3
management support 392, 420–2, 421, 428, 497, 506–7 short-term 321, 321–2
mandatory costs 244 marketing concept 268, 270, 281
manufacturers, challenge for 463–4 marketing definition 269–71, 278
manufacturing, strategy lessons 69–71, 70, 73 basic rules 276–8, 278
manufacturing-oriented productivity concept marketing mix approach 279–80
pitfalls using model 244–6, 245, 246 relationship approach 281–2
shortcomings 237–41, 238, 239 marketing department 373–6, 375
market communication gap 133–4 as organizational trap 376–7, 376
market orientation, organizing for 378–9, 378 marketing functions and processes 287–9, 288
market-oriented management 84, 296–7 marketing impact 321
market-oriented view 268 marketing management 296–7
market performance 432 marketing mix approach 279–80, 294
market research 428, 429 marketing objectives 271–2, 271
market segmentation 428, 429 marketing process, marketing department and 373–6, 375
market share 295–6 marketing strategy continuum 267, 292–3, 293
marketing 24 consequences 294–6
as passion or cost 283 customer information system 295–6
as philosophy 269, 270, 277 dominating marketing focus 294–5
place in the organization 382–4 dominating quality dimension 295
relationship definition of 284–7, 286 interdepartmental collaboration 296
role and scope of 267–8, 269 measurement of customer satisfaction 295–6
as set of tools, techniques and activities 269, 270 price elasticity 295
social media 362–4 role of internal marketing 296
three-stage model 291–2, 291 time perspective 294
viral 366 unit of analysis 294
as way of organizing 269, 270 mass communication 426–7, 428, 429
marketing attitude of mind 270, 297, 383, 384 mass customization 54
518 INDEX
mass marketing function 287 part-time marketing resources 289, 383

Mattel 54 partial productivity 256
McDonald’s 341, 341 participation, dialogue and 326
measurement focus 86, 88 participation skills 252
middle management 419 partnerships 3, 10–11
missing product 60, 61–2 passive relational mode 27–8, 28
missing service product 205–6 patronage concentration 179
mistakes, learning from 146 perceived fairness 142
moments of opportunity 100, 276, 317 perceived quality 253–4
moments of truth 100–1, 138, 276, 287, 317, 390, 494 in relationship framework 109–11, 110
monetary value 475 perceived sacrifice 178
mood, customer 101 perceived service 130
motivation of employees 435 perceived service quality 72, 93, 94, 98–9, 99, 242, 245,
multi-use feature 175 246, 249, 249, 255, 399, 494
mutual value creation 180, 181 vs customer satisfaction 106
determinants of 102, 103, 104
narrower competence gap 253 good, criteria 106–7, 107
net direct costs 164 problems with measurements and comparisons 104–5
net present value (NPV) 166, 175, 176–7, 184–5, 187 perceived service quality gap 134
net price 169 personal knowledge of employees 432
net profit 169 personality-based trust 30
NetOffer model 224–6, 225 personality factors, trust and 30
network organizations 374 physical interactions 399
networks 3, 10–11, 401, 482–3 physical resources in service production process 400–1
new services 82 physical support 392–3, 497
Nike Town Chicago (NTC) 397–8 planned communication 318–19, 320, 328–9
Nordic School 31, 57, 374 planned messages 313, 314, 314, 315
Nordstrom 55, 434–5 planning systems, motivating 424–5, 426, 429
Normet Group 484–6 potential customers, communication and 321–2, 322, 323
practice efficiency 182
offence strategy 147 practice matching 180–2, 183, 184–5, 186, 474, 475
offensive service recovery 147 premium price 163
offering as a process 477–8 price
offering features 174–7, 175, 176 elasticity 295
open innovation 364 net 169
open process 53 perspective 19, 20, 22
open systems 238 premium 163
Oreo 359 service quality and 107
organization size 379 procedural fairness 142
organizational pyramids 378–9, 378 process-based trust 30
organizational structure 86, 88 process consumption 52–4, 54, 75, 77, 268, 338
organizational structure support 505–6 process effectiveness 474, 475
outcome consumption 52–4, 54, 70, 268 process management perspective 3, 9–10, 10
outcome dimension of quality 95 process-oriented marketing 284
outside-in management approach 5–8, 6, 7, 20, 482–3 process quality 96
outsourcing 482–3 process-related dimension of quality 95
ownership 51 process value productivity 258
process variable 4, 5
Palace, The 226–8 ‘product’ as a process 477–8
part-time marketers 59, 267, 284, 287, 362, 374–5, 383, product-based value 85
384, 419, 436, 496, 497, 498 product business focus 6–7
INDEX 519
product-focused management, commercial analysis 4–5 relationship definition of marketing 281–2

product marketing triangle 57, 57–8 relationship dialogue 311, 326–7
product messages 313, 314, 314, 328 relationship framework 108–9, 109, 146–7, 148
production costs 169 perceived quality in 109–11, 110
production-oriented view 268 relationship marketing 23, 27, 28, 30, 271
productivity integrated marketing communication and 328
balancing revenues and costs 236–7 relationship-oriented service processes 498
managing profits, not costs 235–6 relationship performance 114
productivity management 498 relationship perspectives 26–7
profit effectiveness 243 relationship quality 108, 114
profit logic 71, 73, 77 relationship framework for 108–9, 109
see also Goods Profit Logic; Service Profit Logic relationship sacrifice 114, 172
profit variable 4, 5 relationship satisfaction 114
promise concept 283–4, 362, 496–8 relationship strategy
provider-induced contribution 241, 242 strategic requirements 3, 8–11
provider participation 241, 242, 242, 243 tactical elements 3, 11–12
psychological bonds 111, 115 relationship strategy phase 189, 193–5, 194
psychological costs 164, 165–6, 170 relationship strength 178–9
purchasing behaviour 318 relationship value 114
purchasing process 272–3, 274–5, 292 relationships 108, 109
definition 24–7
qualitative measurement instruments 101, 102 negative consequences 282–3
quality resistance to change 450
customer perception of 94–5 resource development 60
optimal 128–9 resource variable 4, 5
quality dimensions 95–7, 96 retention equity 187
quality-enhancing factors 136 return on relationship (ROR) 180
quality function, shape of 135–7, 135, 137 reciprocal (RORR ) 180–6, 181, 182
quality gaps 131–4 revenue benefits 174, 175, 176
quality improvement, failure in 128 revenue effectiveness 240, 241–2, 246, 247, 254
quality monitoring 138 revenue-generating capability 4, 236
quality specification gap 131–2 revenue-generating function 72, 78
revenue growth 162
reciprocal return on relationship (RORR ) 180–6, 181, revenue streams 179
182 reward systems 86, 88, 423, 429
recognized services 21, 71 Ritz Carlton Hotel, Phoenix, Arizona 144
recovery, speed of 145
recovery needs, identification 145 Sabel Wilderness hotel 100
recovery system 144, 149 sacrifice, customer 111, 163–4, 166
referrals 162–3 SAS (Scandinavian Airlines System) 27, 243
regulations, trust and 30 satisfiers 136–7, 137
relational benefits 28–9 scale economies 70
relational customers 27, 28 SCB Bank 379–80
relational intent 27 self-service elements 252, 255
relational marketing process model 285–7, 286 sequences 108, 109
relational mode 27–8 service blueprinting 393–5
relationship benefits 172 service brand relationships, creating 343–7, 344, 346–7
relationship communication 328–30, 329, 330 service branding process 344–5, 344
relationship costs 80, 164, 166, 167, 168, 168, 171, service business 6, 55
172–3, 179, 256, 478 defining the firm as a 8–9, 9
for the supplier 169–70, 169 transforming into 468, 469–72, 471, 476–82, 479–80
520 INDEX
service business approach, need for 472–3, 473 dynamic model 214–20
benefit for manufacturing firm 475–6 managing 207
cost of transformation into service business 483 service orientation 449
service business focus 6 service-oriented leadership 453
service business knowledge base 472–3, 473 service-oriented organizational structure 378
service business logic 7 service-oriented strategy 78–80, 79
service competition 9, 20, 23–4, 498–502, 499–500 service package 206–7, 226–8
management guidelines 502–8 service perspective 2–3, 22, 447
seven rules of service 502–7 adoption of 183, 184, 186, 465–6
demand analysis 503 definition 19, 20
general approach 502–3 service process 215, 245–6, 248
management support 506–7 service productivity 258
marketing 504–5 as a learning relationship 253–4, 254
organizational support 505–6 managing 255
quality control 503–4 measuring 255–7, 256
technology 505 revenue/cost ratio for measuring 258–9, 260
service competition logic 23–4 service productivity concept, applying 250–3
service concepts 80–2, 207, 209, 212, 215, 224, 390, 451, attitudes and employee behaviour 251
506 employee/customer co-production 251–2
service consumption process 399–401, 400 improving employees’ technical skills 250–1
service culture 392, 445 increasing customer cooperation 252–3
barriers and opportunities 455–6 industrializing the service operation 252
definition 448 internal values supportive to good service productivity
developing 416, 417 251
maintaining 417–18 using Internet, digital solutions and IT 252
managing relationships and 447–8 reducing mismatch between supply and demand 253
prerequisites for successful 418–19 service productivity dilemma 239
service culture, requirements for 450–5 service productivity measurement instruments 257–9, 257,
developing leadership 453–4 259, 260
developing organizational structure 451–2 service productivity model 246–9, 247, 249
developing service strategy 450–1 Service Profit Logic 71–4, 72, 73, 86, 87, 493, 494
service training programmes 454–5 service quality 88
service delivery gap 132–3 cost of improving 158
service design 221 customer willingness to pay for 157–8
service-dominant logic 14, 24, 43–5 investment in 127–8
service elements 82, 83–4 lack of, cost of 159
service encounters 95, 138, 287 lessons 137–9
service failure 140–2 measuring 101–2
service features, quality of 94 research 93–4
service-focused management, commercial analysis 4–5 social media 363
service infusion 464–5, 468 service quality management programme 139–40
service knowledge 424 customer expectations management programme 139
service logic 14, 15, 24, 25, 43–7 customer participation management programme
service management 9, 12, 13, 20, 50, 84–5 140
outside-in approach 5–8, 6 information technology management programme
principles of 86–8, 86 140
shifts in focus 85–8 internal marketing programme 140
service marketing triangle 58–60, 58 physical environment and physical resources
service messages 313, 314, 314, 315, 328 management programme 140
service offering 206 service concept development 139
developing in marketspace 224 service outcome management programme 140
INDEX 521
service recovery 141 social value co-creation 15

vs complaints handling 141–2 solicitation of complaints 144–5
definition 141 special treatmentsas customer benefit 29
guidelines 142–4 special treatments as relational benefit 28
perceived fairness and 142 Stobachoff curve 189, 190, 190, 192
processes 144–6, 146 strategic internal marketing 419, 420–5, 421, 423, 425,
timing of recovery processes 146–7, 148 426
service sequence 147 strategic management trap 71, 74–6, 74, 77, 244
service strategy, service culture and 448–9, 449 strategic requirements of relationship strategy 3, 8–11
service strategy approach 465–6 style of consuming 400
service style 400 style of performance 400
service style/consumption style model 400, 400–1 supervisors 419
service system in a network of systems 401 supervisory control 86, 88
service system model 373, 388–90, 389, 393–5, 401 supplementary services 206
interactive part 390–1 supplier–customer–customer’s customer 466–7, 467
customers 390–1 supplier support chains 471
physical resources and equipment 390, 391 support of systems and technology, promises and 496
systems and routines 390, 391 support personnel 392–3, 419
support part 392 supporting goods 208
service vision 451 supporting services 208, 225
services supportive marketing communication 215
common characteristics 49–51 Svenska Handelsbanken 87–8, 318
definition 47–9 system trust 30
good, benefits 170–1, 170 systematization 55
good, requirements for 450 systems knowledge 394
low-quality, cost of 168, 168 systems support 392, 393, 427, 429, 496
as processes 50
servicescape 97, 140, 223, 276, 391, 396–8, 397 tacit knowledge 425, 431–2
servicizing 223, 478–80, 479–80 tactical elements of relationship strategy 3, 11–12
servitization 464–5, 466, 468 tactical internal marketing 419–20, 426–9
SERVPERF 105 target groups 387
SERVQUAL 93, 102–4 technical dimension of quality 95
servuction model 17 technical quality 95, 96, 97–8, 100, 135, 138, 171, 172,
Shangri-La Hotel, Bangkok 129 205, 223, 248
shared values 449–50 technical solution to customer process 464
short-term sacrifice 166 technical value 182, 475
social benefits of customer–provider relationship 28, 29 technological bonds 111, 115
social bonds 111, 115 technologies 59
social interactions 399 technology-driven perspective 24
social media 98, 357 technology support 427, 429
background 357–9 third-party threat 466–7, 467
branding 338 three-stage model of marketing 291–2, 291
communication circle 361–2, 362 time 12
community participation 360–1, 361 customer’s 59
customer-to-customer communication 60–1 time-related bonds 111, 115
Finnair case study 366–7 timing of service recovery 148, 149
firm activities 365, 365–6 top management 419
marketing of services 362–4 total communication concept 312
strategy 365, 365 total communication impact 312
types 359–60 total communication management 319
social norms, trust and 30 total customer perceived quality 85
522 INDEX
total long-term costs 166, 167 value-creating support 464, 465–6

total perceived quality 97, 98, 99 value creation 12–19, 14, 16, 18, 180, 181
total perceived service quality model 94 value destroyers 173–4
total revenue-generating support 173 value equity 187
total service offering 12, 174–7, 175, 176 value formation process 384, 385, 474–5, 474
total value 85 value-generating process 13–16, 14, 384
totally invisible part of organization 393 value-in-exchange 13, 85, 171, 473
traditional external marketing process 287, 289–90, 383 value-in-use 13, 15, 85, 171, 472, 473, 482
traditional marketing function 287, 291–2, 496 value quantification 174–7, 175, 176
training, employees 145, 423–4, 425, 426, 428 value sharing 183
transaction marketing 23, 27, 271, 272, 281, 292 value system, customer 384–5
transactional mode 27, 28 vicious circle 71, 76–7
trust 29–31, 161, 326 viral marketing 366
turning point 245–6 virtual communities 359, 360
Twitter 60–1, 359, 360, 363, 366 virtual marketspace 224
virtual organizations 374
Unilink Co. 386 virtual worlds 359
unintentional dynamics 118
United Airlines 358 win–win situation 26–7, 180
unplanned communication 319, 320 win–win strategy 170
unplanned messages 314, 314 word-of-mouth communication 98, 213, 315, 316–18,
usage process see consumption (usage) process 328, 361–2, 364, 366, 386, 496
user generated content (UGC) 358 WWOZ ratio 290–1
user interface (UI) 224–5, 226
Xerox 160, 164
Valio 358–9
value 2, 3, 111
for customers 12–13, 16–17, 16, 168 Yoogaia 364
of customers 187–95 YouTube 358
for service providers 17–19, 18
value constellation model 13 zone of indifference 160, 160
value-creating processes 13, 384, 385 zone of tolerance 111, 134–5, 142
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Fourth Edition

Copyright 2015 Christian Grönroos

Cover image: @CharlesKnox. Used under licence from iStock.com.

Library of Congress Cataloging-in-Publication Data

Typeset in 10/11pt Bembo by Aptara Inc., New Delhi, India.

1 The Service and Relationship Imperative: Managing in Service Competition 1

2 The Nature of Service and Service Consumption, and its Customer

3 The Service Profit Logic and Service Management Principles 69

4 Service and Relationship Quality 93

5 Quality Management in Service 127

6 Return on Service and Relationships 157

7 Managing the Augmented Service Offering 205

8 Managing Productivity in Service Organizations 235

9 Managing Marketing or Customer-Focused Management 267

10 Managing Integrated Marketing Communication and Relationship

11 Managing Brand Relationships and Image 337

12 Social Media in Service Management and Marketing

13 Customer-Focused Organization: Structure, Resources and Service

14 People Management: Internal Marketing as a Prerequisite for Successful

15 Managing Service Culture: The Internal Service Imperative 445

16 Transforming a Manufacturing Firm into a Service Business 463

17 Conclusions: Managing Service and Relationships 493

● how many members there were in the household;

Then he offered every customer:

● free home delivery; and

● Dominating focus on revenues and revenue generation, or dominating focus on costs.

Focus on revenues Focus on revenues

Customers’ Ming Hua’s

Focus on costs Focus on costs

Focus on revenues Focus on revenues

Focus on costs Focus on costs

Outside-in management Inside-out management

Core competence Understanding customers’ everyday Understanding technology,

Factory/Back office Services Customers

A PROCESS MANAGEMENT PERSPECTIVE

always co-creators of value.22 However, as service-dominant logic is more of a systemic approach

Provider sphere Joint sphere Customer sphere Value-in-use

Resource compilation Co-creation Customer alone Customer’s

Strategic Characteristic of a corresponding strategic approach

Service is a holistic process aiming at Goods are resources delivered to

WHEN IS THE CUSTOMER A CUSTOMER?

ARE ALL CUSTOMERS INTERESTED

Customer mode Customers’ expectations

Transactional Transactional customers are looking for solutions to their needs at an

● Increased wealth and/or revenue-generating capability.

THE OBJECTIVE AND APPROACH OF THIS BOOK

QUESTIONS FOR DISCUSSION

40. Grönroos, C. & Gummerus, 2014, op. cit.

Level of perspective Managerial; defined concepts. Systemic; abstract; metaphorical.

Value in use: The qualifying dimension of a Sometimes replaced by the

1. Service as a perspective on business and marketing (service logic).

1. Service is a process consisting of a series of activities.

Physical goods: Outcome consumption

Services: Process consumption

Service (production) process

1. Flexibility when designing service processes.

CUSTOMER MANAGEMENT IN A PHYSICAL

Enabling promises Making promises

Enabling promises Making promises

QUESTIONS FOR DISCUSSION