Unit 2: Understanding Consumer Behavior and Service Design

Services vis-à-vis Goods

This topic explains how services differ from physical goods. Services and goods are both marketed, but they differ in nature, delivery, and customer involvement.

Difference Between Goods and Services

Basis	Goods	Services
Nature	Tangible (can be touched/seen)	Intangible (only experienced)
Production & Consumption	Separate	Simultaneous
Storage	Can be stored	Cannot be stored (perishable)
Ownership	Ownership transferred	No ownership
Quality	Standardized	Varies (heterogeneous)
Customer Role	Passive	Active participation
Return	Can be returned/exchanged	Cannot be returned
Evaluation Before Purchase	Possible	Difficult

Key Implications for Marketers

• Must focus more on experience, not just features.
• Need to reduce variability through training and process design.
• Build trust because customers cannot judge service before buying.

Consumer Behavior in Services

Consumer behavior in services is more complex than goods because customers participate in the service process and judge various “moments of truth.”

A. Factors Influencing Consumer Behavior in Services

1. Personal Factors

• Motivation, personality, lifestyle, age, income. Example: fitness-conscious people choose gyms.

2. Psychological Factors

• Perception, learning, attitudes, beliefs.

3. Social Factors

• Family, friends, social groups, word-of-mouth.

4. Cultural Factors

• Customs, traditions, cultural values.

5. Situational Factors

• Time limitations, physical surroundings, urgency. Example: people choose telemedicine in emergencies.

B. Stages of Consumer Decision-Making in Services

1. Problem Recognition - Realizing a need (e.g., needing a loan, needing a hotel room).
2. Information Search - More reliance on reviews, ratings, personal recommendations.
3. Evaluation of Alternatives - Customers compare service providers based on quality, price, trust, brand.
4. Purchase Decision - Decision influenced by perceived risk and confidence in provider.
5. Service Consumption - Customer participates in service delivery.
6. Post-purchase Evaluation - Based on satisfaction, service quality, emotions, and experience.

Customer Expectations and Perceptions of Services

A. Customer Expectations

These are the standards customers believe a service should meet.

Types of Expectations

1. Desired Service – What the customer wants ideally.
2. Adequate Service – Minimum acceptable service.
3. Predicted Service – What customers think they will receive.
4. Zone of Tolerance – Gap between desired and adequate service.

Factors Influencing Expectations

• Past experiences
• Word-of-mouth
• Advertising
• Personal needs
• Service promises made by the company

B. Customer Perceptions

Perceptions are how customers actually feel after experiencing the service.

Perceptions depend on:

• Service quality
• Interaction with employees
• Physical environment
• Technology and convenience

Evaluation of Services

Customers evaluate services by comparing expectations vs. perceptions.
This is the basis of the SERVQUAL Model.

SERVQUAL Dimensions (5 Dimensions)

1. Tangibles – Physical facilities, equipment, staff appearance
2. Reliability – Ability to deliver promised service accurately
3. Responsiveness – Willingness to help customers quickly
4. Assurance – Knowledge & courtesy of employees; trust & confidence
5. Empathy – Caring, individualized attention

If Perception > Expectation → Customer Satisfaction
If Perception < Expectation → Customer Dissatisfaction

Service Development, Design & Standards

Service design is the process of planning how the service will be delivered, who will deliver it, and what standards will be followed.

New Service Development (NSD) Process

Steps include:

1. Idea Generation

• Customer feedback, competitors, employees, technology trends.

2. Idea Screening

• Selecting the most feasible and profitable ideas.

3. Concept Development & Testing

• Creating a detailed concept and testing it with potential customers.

4. Business Analysis

• Estimating cost, revenue, demand, break-even point.

5. Service Design

• Designing the service blueprint, roles, processes, and environment.

6. Testing / Pilot Run

• Testing service in a small market or branch.

7. Commercialization

• Full-scale launch of new service.

Service Design Components

A well-designed service includes:

1. Service Blueprint

A visual map showing:

• Customer actions
• Front-stage activities (visible to customers)
• Back-stage activities (behind-the-scenes)
• Support systems
• Physical evidence at each step

2. Process Design

• How the service flows from start to finish
• Must be simple, smooth, and customer-friendly

3. Physical Evidence Design

• Interiors, signage, equipment, layout, uniform, atmosphere

4. People Design

• Employee recruitment, training, behavior scripts, service culture

Service Standards

Service standards set clear expectations for performance.

Types of Service Standards

1. Hard Standards - 

Measurable, objective standards Example: ATM uptime must be 98%, Call answer time < 20 seconds.

2. Soft Standards - Opinion-based, subjective Example: staff must greet customers politely; maintain friendly attitude.

Importance of Service Design and Standards

• Maintain consistency
• Reduce variability
• Improve customer satisfaction
• Increase efficiency
• Create a competitive advantage

Conclusion

Services differ significantly from goods; therefore, understanding customer behavior, managing expectations and perceptions, and designing proper service systems are essential. Effective service design and standards help companies deliver consistent, high-quality services.

New Service Development Process (NSD)

New Service Development involves planning, designing, and launching new or improved services to meet customer needs and remain competitive.

A service evolves through different stages from Basic Service → Expected Service → Enhanced Service → Potential Service.

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A. Levels of Service Offering (Kotler’s Model)

1. Basic Service

• The fundamental service the customer expects. Example: A bank’s basic service = opening and maintaining accounts.

2. Expected Service

• Basic service + minimum supporting services expected by customers. Example: ATM access, mobile banking, customer support.

3. Enhanced Service

• Additional services that exceed customer expectations. Example: Personalized financial advice, reward programs, doorstep banking.

4. Potential Service

• Future or innovative services a company can offer to impress the market. Example: AI-based investment advisors, biometric banking, VR-based showroom tours.

Why important? Companies that innovate at the potential service level gain a strategic competitive advantage.

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B. Stages in the New Service Development Process

1. Idea Generation

• Sources: customer feedback, employees, market research, technology changes.

2. Idea Screening

• Selecting the most feasible and profitable ideas.

3. Concept Development & Testing

• Creating detailed service concepts and testing with customers.

4. Business Analysis

• Calculating cost, revenue, demand, and break-even.

5. Service Design / Service Blueprinting

• Designing the process, roles, scripts, technology, and physical evidence.

6. Pilot Testing

• Testing the service in a small area or small group.

7. Commercialization

• Full-scale launch with marketing and training.

8. Review & Continuous Improvement

• Tracking performance and upgrading the service.

Customer-Defined Service Standards

Customer-defined service standards are performance rules created based on what customers consider important.

These standards help ensure consistent, high-quality service.

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A. What Are Customer-Defined Standards?

Standards that reflect customer expectations, not just management opinions. Example: Customers expect

• Bank call to be answered within 3 rings
• Restaurant food to be served within 15 minutes
• Hotel check-in in under 5 minutes

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B. Types of Customer-Defined Standards

1. Hard Standards

• Measurable, observable, and objective

Example:

• Delivery must be completed within 30 minutes
• ATM uptime must be 98%
• Website loading time < 3 seconds

2. Soft Standards

• Opinion-based, subjective, customer-perception oriented

Example:

• Staff must greet customers with a smile
• Staff should explain details clearly
• Maintain polite and friendly attitude

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C. Steps to Develop Customer-Defined Service Standards

1. Identify Customer Expectations

• Through surveys, complaints, focus groups, social media feedback.

2. Translate Expectations into Measurable Standards

• Example: “Quick service” → “Serve within 10 minutes”.

3. Set Performance Levels

• Example: Minimum service time: 8–10 minutes.

4. Train Employees

• Staff must know exactly what standards to follow.

5. Monitor and Modify Standards

• Regular audits to ensure standards are being maintained.

Demand and Capacity Management in Services

In services, demand & capacity must be managed because services:

• cannot be stored
• are produced and consumed simultaneously
• have fluctuating demand

Why Demand and Capacity Management is Important?

• Prevents overcrowding
• Avoids under-utilization of resources
• Ensures customer satisfaction
• Improves efficiency and profitability

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Demand Management Strategies

1. Differential Pricing

• Charging different prices during peak vs. off-peak times. Example: movie tickets, hotels, flight prices.

2. Promotion & Advertising

• Encouraging demand during off-peak periods. Example: weekday discounts at restaurants.

3. Reservation Systems

• Helps control demand by allocating specific time slots. Example: appointment booking, ticket booking.

4. Developing Complementary Services

• Adding services during low demand. Example: hotels offering conference rooms during weekdays.

5. Changing Service Delivery Channels

• Offering online alternatives to balance physical demand. Example: online banking reduces branch crowding.

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Capacity Management Strategies

1. Increasing Service Capacity

• Hiring temporary staff during peak seasons
• Using part-time employees
• Extending service hours
• Adding more equipment/technology (ATMs, kiosks)

2. Adjusting Resource Allocation

• Move employees from low-demand areas to high-demand areas
• Flexible scheduling

3. Sharing Capacity

• Using shared workspaces, contract staff, outsourcing.

4. Educating Customers

• Encouraging customers to use off-peak times. Example: telecom sends messages for off-peak data usage.

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Matching Demand & Capacity Together

Companies must balance both using:

• Queue management systems
• Self-service technology (SSTs)
• Dynamic pricing
• Yield management
• Prioritization systems (e.g., fast passes, VIP lanes)

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Conclusion

New Service Development helps firms innovate; customer-defined standards ensure service quality; and effective demand-capacity management ensures smooth operations and high customer satisfaction. These concepts are critical for modern service companies to remain competitive.