Marketing Strategies for Service Companies

Marketing for Service BusinessMany services businesses are small (such as shoe repair shops and hair salons) and don’t use formal marketing techniques. There are also plenty of professional service businesses such as accounting and law firms that thought it was unprofessional to use marketing, and some still do, but this is changing.

The classic four Ps marketing approach works well for physical goods, but service companies need to pay attention to additional elements. Marketing gurus Boon and Bitner identify 3 additional Ps for service marketing:

  1. People: If the service you offer is provided by people, then the selection, training, and motivation of your employees has a huge effect on customer satisfaction. Employees should be competent, caring, responsive and have problem solving abilities. See our articles on managing people well for tips in this area.
  2. Physical Evidence: As a service company, you need to demonstrate your service quality through physical evidence and presentation. For example, hotels develop a look a visible style of dealing with customers that projects the desired image and value, such as cleanliness or speed.
  3. Process: You can choose among different ways, or processes, for your service company to deliver your service. For example, restaurants have developed different formats such as cafeteria-style, fast-food, buffet, and candlelight service.

Differentiating Your Service

Service marketers sometimes complain about the difficulty in differentiating their services. For example, a dentist office might wonder how it can differentiate itself from other dentists. It might be tempting to compete on price, but this often ends up hurting business more than helping because competitors will cut prices to match. An alternative to competing on price, is to develop a differentiated offer, delivery, image and/or quality.

  • Offer: The offer can include innovative features. What customers expect is called the primary service package, and to this, you can add a secondary service feature. A coffee shop might offer free internet access and comfortable couches as secondary services.
  • Delivery: A service company can hire and train better people to deliver its service, a more attractive physical environment or design a quicker delivery process.
  • Image: Service companies can also differentiate their image through symbols and branding. If your company is reputable and provides a valued service, use a good logo and symbols to help customers associate high quality to your services.
  • Service Quality: You can win over the competition by delivering consistently higher-quality services and exceeding customer expectations. These expectations are formed by their past experiences, word of mouth, and the messages you deliver through advertising. If you don’t meet or exceed customer expectations, your customers will lose interest in your services.

Increasing Customer Satisfaction & Retention

It’s difficult to over-stress the importance of customer satisfaction. Sustained profitability is only possible through building customer value and satisfaction. Profit comes as a consequence of building customer value.

As Henry Ford said:

“Business must be run at a profit… else it will die. But when anyone tries to run a business solely for profit, then also the business must die, for it no longer has a reason for existence.”

Value Defined

Something that satisfies a consumer’s need or want has value in the eyes of the consumer. Whether or not a consumer will buy a product offering depends on whether what it costs them is greater or less than the product’s perceived value. Furthermore, when choosing between similar offers, a consumer will choose the product that offers the biggest difference between value and cost. Costs to the customer include not only monetary costs, but everything associated to acquiring it, such as time and hassle. For example, having to go and pick up concert tickets you’ve already paid for online adds an additional cost. Therefore, even if your product is more expensive, it will nevertheless be chosen if it carries more value in the eyes of the customer.

The difference between what the consumer perceives as the value of the product offering and its costs, are known by marketers as the delivered value. The goal is to ensure that the delivered value for your product is greater than the delivered value of the customer’s alternatives.

Customer Satisfaction Defined

Customer SatisfactionCustomer satisfaction is closely related to customer expectations. Once acquiring a product, the customer will compare the actual performance of the product with what was expected. The customer will have feelings of pleasure if product performance meets expectations, and feelings of disappointment if it doesn’t. If actual performance exceeds expectations, the customer is highly satisfied or delighted.

Customers form their expectations from a variety of sources such as friends, past experiences, competitors as well as the marketer’s messages and promises. A balancing act must be made here. If you set expectations too high with your messages, your customers are more likely to be disappointed. If you set them too low, fewer will buy. The most successful firms set expectations high and then are able to deliver performance to match – at a profit.

Creating Customer Value

Given the importance of customer value, it’s useful to use what Micheal Porter of Harvard calls the value chain as a tool to find ways to create more customer value. The value chain consists of company activities that create value and add costs in an organization. The primary activities in the value chain are:

  • Bringing materials into the company (inbound logistics)
  • Converting materials into finished products (operations)
  • Shipping out finished products (outbound logistics)
  • Marketing the products (sales and other marketing activities)
  • Servicing the products (customer service)

Primary activities have secondary support activities which include procurement (or purchasing), technology development, human resource management and firm infrastructure. These support activities may be handled by specialized departments or by multiple departments.

Porter's Value Chain

Your job as a marketer is to examine the costs and performance of each value-creating activity, and find ways to improve in each area. It’s helpful to compare competitors costs and performance in the value chain as a benchmark. If you can outperform your competitors you can gain a competitive advantage.

It’s important to note that internal departments sometimes act in ways to maximize their interests rather than those of the company or customers. For example, a credit department may take too long ensuring the credit worthiness of a customer to avoid the possibility of a bad debt. During this time, the customer is waits and waits, and the sales person becomes frustrated.

The solution to this problem, is to ensure the core business processes are managed smoothly, by using cross disciplinary teams to manage core processes.

It’s important to look beyond your own operations as well. Finding competitive advantages beyond your own operations will increase your chances of success. For example, Walmart’s suppliers are plugged directly into its inventory system so that they can track sales and replenish items as needed. This reduces the chances of stock outages.

The importance of customer retention

Often, organizations focus a lot or their marketing efforts on attracting new customers and far less attention retaining customers. Satisfied customers are loyal customers. Here are some interesting statistics from the Harvard Business Review (The Loyalty Effect by Frederick F. Reichheld and Thomas Teal):

  • It can cost 5 times more to get a new customer than to satisfy and retain a current customer
  • In a typical company, customers are defecting at the rate of 10-30% per year
  • The profitability of a customer tends to increase the longer the customer is retained
  • A 5% reduction in the customer defection rate can increase profits by 25% – 80%, depending on the industry

Relationship Marketing

Relationship marketing can be defined as a continuous process of creating additional value with individual customers and sharing the benefits over a lifetime of association. It involves the understanding of, and collaboration with, customers on an ongoing basis for the benefit of both parties. A strong relationship with your customer is ideal to retain that customer. Consider the following sales techniques:

Basic selling: The salesperson sells the product, nothing more.
Reactive selling: The salesperson sells the product and welcomes or encourages customer feedback such as complaints, comments and questions.
Accountable selling: The salesperson contacts the customer shortly after the sale to ensure the customer is satisfied with the product.
Proactive marketing: The sales person contacts the customer occasionally with information about improved or new products.
Relationship (partnership) marketing: The company works on an ongoing basis with the customer to find ways to help the customer reduce costs and improve performance.

Relationship marketing is most important when there are few customers in the industry and the profit margin is high. On the other side of the spectrum, basic selling may the only feasible avenue when product profit margins are low and there are numerous customers. Which you should use depends on your business. Let’s use an extreme example. If you’re selling hot dogs on a street corner, you can be friendly, but you can’t afford to develop a relationship with each customer. If you’re selling business jets, you can, and must, develop a relationship with your customers.

Calculating the cost of lost customers

Losing customers is costly and it’s important for companies to try to compute this cost. There are four steps in estimating the cost of losing a customer.

Step 1: Determine your retention rate. For a magazine, the renewal rate is a good measure. For an online retail store, a good measure might be the proportion of the previous year’s customers that shopped at the store during the current year. The point is to find a measure that’s appropriate for your business.

Step 2: Distinguish between the different causes of customer loss (or attrition) and focus on the ones that can be better managed. For example, there’s not much you can do when customers move from your region or go bankrupt. On the other hand, losing a customer because of poor after sales support is something that can be remedied.

Step 3: Estimate how much profit is lost when a customer is lost. We’ll use an example business (XYZ Company) to illustrate.

XYZ Company has 1,000 customers and loses 5% per year due to poor service. Therefore it loses 50 (10,000 x 5%) customer per year.

The average lost customer represents $9000 in lost revenue. This means, the company lost $450,000 in revenue.

The company has a profit margin of 15%. This means the company lost $67,500 ($450,000 x 15%) this year.

Step 4: Calculate how much it would cost to reduce the defection rate. If the cost of the reduction is less than the profit foregone, the measures should be implemented.

It’s vital to listen to your customers. Using the numeric technique outlined above can be handy but simply listening provides for the best insight as to what can be done to increase retention rates. Senior staff should be in tune with what customers are saying. Using basic surveys and simple interviews can go a long way in getting customer feedback.


Essential Marketing Concepts

Marketing is a term we hear all the time, but what is it exactly? This article outlines some core marketing concepts.

Marketing Definition

Essentially, marketing means creating, promoting, and delivering goods and services to consumers and businesses. Marketing activities are not limited to products you buy in a store. The scope of what is marketed is (perhaps surprisingly) vast. Goods, services, organizations, people, places, experiences, events, property, information and even ideas are marketed.

If you’d like a more formal definition, the American Marketing Association defines marketing in this way:
“Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.”

Target Markets and Market Segments

Target Market & SegmentationIn the old days, a market was a place in town where buyers and sellers got together. Today, marketers view “the market” as those who buy, or might potentially buy. The sellers constitute “the industry”.

Consumers have varying tastes, desires and financial means. Not everyone likes the same car, lipstick or sofa. Marketers a long time ago decided to partition buyers into groups based on some general preferences. For example, if you’re selling corporate accounting software, your marketing efforts might target the “business community” as opposed to “preteens”.

Segmenting markets is not an exact science because no two people are exactly alike, and it’s impossible for a marketer to figure out what motivates everyone. But generalizations can be made to help come up with a profile of potential buyers. This relatively homogeneous group of buyers is referred to as a market segment.

Needs, Wants and Demands

Everyone needs certain basic things in order to survive. Food, clothing, shelter and air are examples. Besides the bare essentials, people have strong needs for things like recreation, social interaction and education. When your quest to fulfill a particular need is directed at an object, your need becomes a want. You need food, but you might want a slice of pizza.

If you have the ability and willingness to pay for a want, it becomes a demand. Many people want a summer mansion in the countryside or an 80 foot yacht, but few are able to pay for these products. Marketers are tasked with not only figuring out how many want a product offering, but also how many are willing and able to buy it.

Products and Brands

Products are offerings that people use to satisfy their needs and wants. A brand, is simply an offering from a “known” source. A brand’s image is the associations the offering creates in the mind of the consumer. Disney has a powerful brand image which can be associated to vacations, fun, movies and family. Companies work to build strong brand images.

Value and Satisfaction

A product’s success is tied to how much satisfaction and value it can deliver. There are costs associated to acquiring products. These costs may involve things other than just money, such as time or labor. When choosing between products, consumers will weigh the benefits (functional and emotional) the product provides with what it costs, and try to maximize this ratio. A consumer may choose the more expensive product if the perceived benefits associated with product are greater than the perceived cost increase. The marketer’s goal is to maximize value to the consumer.

Marketing Channels

Marketers use marketing channels to reach target markets. These channels are:

  • Communication channels are used to send messages to, and receive messages from potential buyers. A few of these channels include billboards, newspapers, brochures, toll-free numbers, websites, and even employee facial expressions and clothing.
  • Distribution channels are used to deliver the offering to the consumer. These channels include trucks, warehouses, distributors, wholesalers and retailers.
  • Selling channels are used to facilitate the consumer purchase. This not only includes retailers but banks, credit card companies and insurance companies.

As you might imagine, finding the optimal channel mix is a major challenge for marketers.

Supply Chain

Marketing channels involve connecting the marketer to the buyer. The supply chain on the other hand, is the term used to refer to the channel that begins with the basic raw materials required for a product to the final finished good brought to the final consumer. If we us the example of a car, the supply chain starts with the metal and other raw materials, moves on to the manufacturing of car components and car assembly, to the marketing channels that bring the car to the final consumer.

Marketing Environment

The marketing environment is what surrounds and effects the organization. This environment can be broken up into the “macro-environment” and the “micro-environment”.

  • The micro-environment involves factors that affect the company directly. These include target customers, suppliers, distributors and the company itself.
  • The macro-environment involves broader factors such as demographics, technology, politics and the state of the economy.

To better tailor product offerings, marketers pay close attention to the marketing environment.


A part of the marketing environment which draws a lot of attention from marketers is the competition, so we’ll give it it’s own heading. Competition includes any potential alternatives a buyer might consider. This includes similar products as well as substitutes. For example, as substitute for a car, a consumer might consider buying a motorcycle or a bus pass.

Marketing Mix (4 Ps)

Marketing Mix A discussion of core marketing concepts wouldn’t be complete without an introduction to the marketing mix. Anyone who’s ever taken an introductory marketing course will remember the marketing mix as the “4 P’s of marketing”. Everything else may have been forgotten, but the 4 P’s seem to stick. They are the tools marketers use to bring about the desired responses from their target markets.

These tools can be thought of in terms of four broad groups (classified by marketing professor E. Jerome McCarthy) – product, price, place and promotion. Below are some examples of the marketing variables associated to each “P” in the marketing mix.

Product: Variety, design, quality, features, packaging, sizes.
Price: Listed price, payment terms, discounts
Place: Locations, inventory, transportation, channels
Promotion: Advertising, sales force, public relations

The 4 P’s of marketing are seen from the perspective of the marketer. It’s worthwhile noting that these concepts have their analogies from the perspective of the buyer. More recently, a marketer by the name of Robert Lauterborn has suggested the four P’s are mirrored by the customer’s four C’s.

Product → Customer solution
Price → Customer cost
Place → Convenience
Promotion → Communication