Service Economy: Evolution and Customer Experience
The Transition to a Service Economy
Services are economic activities where customers obtain value from access to labor, professional skills, facilities, etc. Service is the co-creation of value between the service provider and consumer to benefit both.
Clark-Fisher Hypothesis: The Shift from Manufacturing
According to the Clark-Fisher hypothesis, as productivity increases in one sector, the labor force moves into another. We see an increase in employment in services in the last decade, shifting from manufacturing. This graph also clearly shows the time frames of the different economic societies in the U.S.
- Pre-industrial Era: Agriculture. Value is derived from harvesting nature, with low productivity and minimal technology, operating at a subsistence level before mechanization.
- Industrial Era: Value comes from manufacturing products, supporting large populations with mass production of goods using technology. The division of labor is the operational law.
- Post-industrial Era: Value is derived from enhancing capabilities and interactions among people. The economy relies on the offering of services and is concerned with the quality of life, measured by health, education, and recreation. This era is the stage of a society’s development when the service sector generates more wealth than the manufacturing sector of the economy.
First, services that support industrial development emerged: transport, utilities, sales, marketing, maintenance, and repairs. Growth in population and mass consumption required more services: wholesaling, retailing, banking, insurance, and real estate. As income increases, people have more money to spend on things other than necessities: higher education, investment, and entertainment.
Characteristics of Services
From a marketing perspective, services, unlike goods, do not involve the transfer of ownership.
- Goods Rental: Obtaining temporary right to exclusive use (vehicles, tools, furniture, equipment).
- Place and Space Rental: Obtaining exclusive use of a defined portion of a larger space (hotel room, seat on a plane, storage unit).
- Labor and Expertise: Hiring other people to do a job (car repair, surgery, management consulting).
- Physical Facility Usage: Gaining admission to a facility for a period of time (theme park, campground, physical fitness gym).
- Network Usage: Gaining access to participate (electric utility, cellphone, internet).
Services have distinct characteristics:
- Intangible: They cannot be felt, seen, or tested.
- Created and Consumed Simultaneously: They are open systems; the issue is consumers waiting and queuing.
- Customer Participation: Consumers participate in the service process.
- Perishable: They cannot be inventoried.
The Service Package
Services are characterized by customer participation, simultaneity, perishability, intangibility, and heterogeneity. The service package includes:
- Explicit Services: Observable benefits sensed directly (fresh ingredients, clean bathrooms, doctors, teachers, car modifications, a clean place after cleaning).
- Implicit Services: Psychological benefits or extrinsic features which the consumer may only sense vaguely (atmosphere, attitude of service personnel, convenience, happiness in a theme park, worry-free feeling after seeing a doctor, prestige after university).
- Supporting Facility: Physical resources that must be in place before a service is offered (hospital, airplane, equipment).
- Facilitating Goods: Materials purchased or consumed by the buyer, or items provided by the customer (legal documents, medical supplies, golf clubs, skis).
- Information: Data available from the customer or provider to enable efficient and customized service (patient records, seat and room availability).
The Four Realms of Service Experience
One way to think about experiences is across two dimensions. The first corresponds to customer participation. The second dimension of experience describes the connection, or environmental relationship, that unites customers with the event or performance.
- Absorption: As the name suggests, you absorb the service. This can be active or passive in terms of customer participation. While watching a movie, the customer is passive and does not interact with the service provider. In class, a student is listening to the instructor but also has the opportunity to participate. This is active.
- Immersion: In immersion, you are surrounded by the service, not just “watching” it. Again, the customer can be passive or active. A tourist is immersed in the culture, but they are not a part of it. This is passive. When scuba diving, the customer is immersed in the activity and is also the person performing it.
Using the Four Realms for Service Advantage
How can a service provider use this information about the four realms of service to their advantage? Depending on whether the customers are active or not will tell you whether you need to train your customers. An example of this is Starbucks; as the service you are receiving is highly customized, you need customers to know the names of different sizes. They have their own language. When it comes to the level of interaction with the environment, this gives you information about how you need to manage things. For example, in escape rooms, usually at the end of the session, you will find the room dismantled; you, as the service provider, need to prepare it for the next one. When you are designing or managing a service, you can use the four realms to identify maintenance needs.
The Service Process Matrix
The service process management allows different service organizations to learn from each other by categorizing. Roger Schmenner, an Operations Management Professor at the Kelley School of Business at Purdue University, Indianapolis, proposed the service process matrix to classify services according to the service delivery process in two dimensions: the degree of labor intensity and the degree of interaction and customization.
The degree of labor intensity on the vertical axis is measured as the ratio of labor cost to capital cost. The degree of interaction and customization on the horizontal axis is a marketing variable that describes the ability of the customer to affect personally the nature of the service being delivered.
The four quadrants of the service process matrix have been given names:
- Service Factory: Services with low labor intensity and low customer interaction. These services provide a similar service to all customers, and customers do not have a direct way of changing this service other than through demand.
- Mass Service: When labor intensity is high and the degree of interaction is low. The service provided is labor-intensive; however, it is the same for every customer.
- Service Shop: When the degree of customer interaction is high, but labor intensity is low. In service shops, most of the cost is from capital, but the service provided needs to be specialized to the customer. Some examples of these are hospitals and mechanics, where the service is customized according to the needs of the customer.
- Professional Service: When both the degree of interaction and labor intensity are high. These types of services require the use of highly-skilled workers, and the service provided is based on a specific customer’s needs/wants.
