Service Marketing, Irons (1997) examples are intangible but they do usually add value to or may

be available to tangible products. They do not result in transfer of ownership e.g. hotel services.
According to Gretham & Bitner (1996) Services are deeds, processes and performances, their
broader definition states that services include all economic activities whose output is not a
physical product is generally consumed at a time it is produced and provides added value in form
that are essentially intangible for the purchase.
Kotler (1996) defines it as an activity that are partly offers another that is, essentially intangible
and does not result in the ownership of anything into production may or may not to a physical
product.
Gronroos (1990) identifies it as a series of activities of a more or less intangible nature that
normally but does not necessarily takes place between the customer and service employees and
or physical goods or systems of the service provider which are provided.
CHARACTERISTICS OF SERVICES
1. Intangibility
Most dominant and is defined as the lack of tangible assets which cant be seen, some it
prior to purchase. However services vary in the degree to which they are tangible and
some tangibility spectrum.
2. Variability
Random variable levels or unwanted service quality customers receive when they support
an organization. The primary reason is the human element present in the service process
because humans normally perform services the chance of to service performance being
the same is highly unlikely therefore different service employees who perform the same
service differently and the same service employee will provide a varying service under
different circumstances. Service markets find it difficult to control the quality of the
service performance because it is dependent on fallible employees thus the reliance of
peoples.
3. Inseparability
Simultaneous production and consumption are done. It is often difficult to separate the
service provider from the service consumer e.g. haircut. The Customers are normally
present and during a service production and play an active role in the service production
process. Inseparability of production and consumption means very few services can be
mass produced but almost every service can be consumed to service demands.
4. Perishability

It cannot store the service. Is the major concern to service markets because it leads to
supply and demand problems? The capacity lost can be never be regained and to equalize
supply and demand is difficult.
5. Ownership
Customers receive only the right to use/receive the service after you purchase it. It is
assumed that payment for services buys only the right of access and not the physical
ownership. Since services are produced and consumed simultaneously. The inability to
own a service also has direct implications on the distribution of services and service
customers usually only have use or access to a facility where a service is performed.
SERVICE MARKETING TRIANGLE (SMT)
Service markets face challenges which revolve around issues such as:
i.
ii.
iii.

Understanding customers needs and expectations of services.

Making services tangible to the customer.
Keeping and dealing with promises.

The 3 points of the SMT represents the organization, customers and employees.

Management

Internal marketing

External marketing

Employees

Customers
Interactive marketing

Between each of the 3 points of the channel; there are different marketing processes such as
external marketing (management and customers), interactive marketing (employees and
customers), and internal marketing (management and employees). Between management and
employees exists the enabling promises.

EXTERNAL MARKETING
It is the link between an organization and its external marketing process. External marketing
represents the promises which organizations make to their customers which reference to products
or services they offer. The external communication activities of the service provider play a key
role in the formation of customers expectation because their expectations are affected by the
service providers direct and indirect marketing service. In goods as well as service, the
traditional marketing activities facilitate external marketing. Promises made in adverts and
through promotion are used by customers to form service expectation of the desired level of
service expectations compared to adequate level of service.
Customers can use price as an indication of quality of an offering while the promise of
availability and accessibility of an offering has an impact on the customer expectations e.g.
motor servicing at Croco motors and AMC. For service organizations; factors such as service
employees, organization image and visible structuring and the actual service process itself form
the basis of the customers expectation of the offering and the delivery thereof. The
organisations projected values and integrity must be the priorities that govern promises made to
the customers during the external marketing process. Customers expect realistic and consistent
promises that will be at all times honored by an organization. Creating unrealistic promises
creates dissatisfaction and misleading customers or over promising to them can negatively
influence the relationship between the organization and the customer.
INTERNAL MARKETING
Internal marketing process about keeping promises made by the organization to the customers
along with delivery a quality service to the customer. Internal marketing is the actual contract
between the service employees and the customers and it is normally known as the moment of
truth. It is the decisive moments; everything about service process can succeed or fail. The
success or failure can be temporarily complete or find but the interaction can never be restaged
or controlled. It is the marketing process that enables service markets to deliver promises to
customers. Through internal marketing the organization reveals that consists of individuals and
departments who are considered to be each others customers.
Promises are easy to make, unless the organization have internal systems in place to ensure the
service delivery, service process cannot succeed. Internal marketing hinges on the assumption
that the employee satisfaction and customer satisfaction are intended thus internal marketing
must precede external marketing. Marketing should start within and then outside. Organisations
whose objective is to deliver constant high quality have to enable employees practice customer
orientation and marketing. Service provides need to recruit, train and provide tools to employees
and perform supervisor services e.g. fringe benefits, bonus recognition when they have done
good. Employees will understand their functions with the organization are more likely to create a
harmonious work environment that will pave way for less role ambiguity, less conflict and more
3

satisfied employees in the workforce. There is a direct link between marketing and the actual
delivery of the service because the customers believe that what you are said to be is what
matters, not what you say.

Management
Technology

T
Employees

Customers

TECHNOLOGY
This pyramid suggests that interactive marketing can be the result of interactive relationships
between employees, customers, technology to produce the desired services. So changes in
information technology offer opportunity to organizations to perform services in such ways that
the customers physical presence is not always compulsory e.g. E-learning account can always
access their results without waiting for a longtime or have to there, DSTV can now be subscribed
online. Can customers interact only with technology they will need skills, abilities and
motivation to receive the services in this manner. Technology driven services may hinge upon
introducing more than in service delivery processes that can either extend the service process or
shorten the actual delivery process.
SERVICE MARKETING MIX
The traditional marketing mix is the most basic concept in marketing and is defined as elements
which organisations control and use to satisfy or communicate with customers. Conversely the
traditional marketing mix components have been found to be limited in their application on
services, the intangibility of services offering is not taken into consideration because the focus is
on the tangibility of the products.
1. Product
A product is anything that an organization offers to customers that might satisfy a need
whether it is intangible or tangible. In contrast the decision that face service marketers
concerning service offering are very different from those related to goods. So service
offerings can be divided into 2 distinctive offerings, the core services representing the
intangible service and the secondary being represented by the tangible or augmented
elements of the service components. In hotels accommodation is intangible.
2. Price
In the determination of price, service marketers deal very much with the same price issue
as goods marketers. Subsequently the different presences themselves when the intangible
characteristics of service specifies that the price barriers and quality indicator e.g. in
4

hotels, a suite is more expensive than an ordinary room, luxury couches, banking sector,
schools heritage 100% synthetic. The art of successful pricing is to establish a price level
that is low enough for the exchange to represent good value to customers but high enough
to allow service providers to achieve their financial objectives. The perishable nature of
services makes it important to control the demand and supply of the service offering. The
price component is the easiest to change and normally provide the quickest result so
manipulating of the price can influence and control quality demanded e.g. during the
festive season Victoria Falls cruise, the hotel will be expensive as compared to when
there is less activity during the year it will be less expensive.
3. Distribution Place
The distribution refers to the availability of service offering to the customers. Availability
from customers point of view signifies that services are on hand when they want them
while accessibility is the relative ease with which customers contact service providers.
For pure services the distribution decision is of little relevance though most services
involve a tangible component as a result of the distribution decision involves physical
locations and decisions which intermediaries use to provide the service.
4. Promotion
The promotion mix for the traditional marketing mix is usually broken down into 4
components namely: (i) Advertising (ii) Value promotion (iii) Public relations (iv)
Personal selling.
When it comes to the promotion of services there is need for the service marketer to
emphasise the tangibility elements such as packaging, brand name, corporate image,
service delivery and service employees. The tangibility characteristics of services result
in customers perceiving them of high risk purchase which has a need for tangible
components as evidence of the services. The inseparability characteristics of the service
emphasizes that the promotion of service offerings cannot be isolated from the service
providers therefore the visible production process especially the part played by service
employees during
Typical Service Promotional Objectives

To develop an awareness of interest in the organisations service.

To formulate the benefit of purchasing of service.
To build a positive image of the organization.
To the differentiation of the organization from its competitors and remind customers of
the existence of the service.
The service promotional mix uses of a combination of channels to convey messages of
the target market and these messages are received from services which in the organization

and external resources which include press, word to mouth, while internal originate for
traditional marketing mix from the front line employees.
PEOPLE
People include all the human activities i.e. firms employees internal customers and buyers
external customers and other customers who play part in service delivery and accordingly
influence the perception the choice in the service environment. Since service employees interact
for the customers during service delivery it can be said that service employees competence,
attitude and appearance influence customers perception to the service e. g Moonlight. Customers
often experience Service employees synonymous with the service and no matter how small or
large a part key plays in a actual delivery of the service for customers, so it is crucial that the
service organization stipulates very specifically to their employees, what is expected from them
during interactions with customers. Within successful service organizations the HR and
Marketing departments work together to establish living criteria, training needs and promotional
activities to attract all retain employees who deliver quality service expected.
Every employee in an organization must serve other employees some way of responsibility
therefore just external customers are needed which are quality employees; with service
marketing to enroll all employees in the marketing process within the organization. A high level
of employee involvement and activation is directly linked to an improvement sales and customer
loyalty.
PROCESS
These are some actual, mechanisms and flow of activities by which services are delivered.
Customers judge services operational flow or the actual delivery. Standardized service with flow
on a production line approach while customized services command a greater degree of
empowerment none keyless the moment of truth where customers experience the evidence in not
a one off event but ongoing process. *Difference between service process and manufacturing
process:

Customers are participants in the service process and the process is difficult to structure.
The outcome of service is dependent on internal and external factors.
The output of service process leaves only promises and memories.
Service process plays an integral part in customer specialization.

PHYSICAL EVIDENCE
This is the environment in which the service provider delivers the service and where the
customers and the service organization of interact; this can be by tangible component that
facilitates performance or the communication of the service e. g parking space, uniforms, and
corporate colors on buildings. All tangible representation of services such as business cards,
6

letter heads, signage, equipments physical facilitates where service are revealed, represent the
physical evidence of the service. The more tangible the service the more it relies on physical and
evidence to convey messages to customers.
CUSTOMER PERCEPTION OF SERVICES
Services are exercised by the interaction between service providers and customers therefore the
quality and capability of service providers have a direct and significant effect on the delivery
process and customers satisfaction. Customers perceive services in terms of quality, customer
satisfaction and value.
COMPONENTS OF SERVICE QUALITY
Gronroos (1984) identified technical quality, functional quality and corporate image as
significant components of service quality.
1. Technical quality or what is delivered to the customer?
It refers to the relative, qualificible aspect of services. It is on essential basis for it judging
quality both the customer and the service provider can determine whether or not the
service was performed correctly and as promised.
2. Functional quality or is how a service is performed?
It provides a clear indication of customers thoughts and feelings concerning the service
performance.
3. Corporate image
It is based on both the technical quality and functional quality of services. It focuses on
the actual service performance, the surroundings in which the service was provided of the
image conveyed by service providers. The focal point of the service oragnisations is to
influence customers to remember the corporate image as organizations intend them to
remember it.
DIMENSIONS OF SERVICE QUALITY
Rater Model of service marketing
Research has indicated that customers consider reliability, responsiveness, assurance, empathy
and tangibles as the five quality dimensions that apply specifically to service organizations. It
refers to the ability to perform the promised service dependently and accurately.

a. Reliability
It refers to the ability to perform the promised service dependently and accurately e.g.
b. Responsiveness
It signifies the willingness of the service providers to help customers and provide them
with prompt service e.g. medical aid services or towing services. The dimension of
responsiveness requires organizations to handle complaints and problems that result from
a lack of enforcement of this dimension. Standards for responsiveness need to be set
according to customers requirements because their notion of what constitutes and
promptness might be different from the organizations. Structuring of service employees,
jobs, clear job descriptions and training form a basis for responsiveness success.
c. Assurance
It is experienced in employees knowledge, courtesy and ability to inspire trust and
confidence in customers. This dimension of quality is critical to customers especially if
the service presents them with a high degree of risk. Service employees who perform the
actual services are responsible in instilling trust and loyalty in the customers through
quality of interaction e.g. a banker addresses you by name, doctor and patient
relationship, hairdresser and hairdressee e.t.c. Recruiting and employing personnel with a
positive attitude towards output is of utmost important to service organizations. Their
degree of friendliness, credibility, trustworthiness and competence will be reflected in
customers perception of service quality. Most service organizations will combine the
intangible dimension with one or more of the other quality dimension to create a service
strategy; therefore it can be argued that organizations which do not incorporate the
tangible dimension in their quality strategy can fail to develop a good strategy.
d. Empathy
Caring individualized attention given to customers e.g. new start center, Barclays,
doctors. The essence of empathy is conveying through personalized or customerised
services that customers are unique and special e.g. going to a doctor. Customers want to
feel understood by and important organizations. Small organizations gain a competitive
advantage over larger organizations through their ease in connecting information about
their customers personal issues, needs and desires. Subsequently this will provide them
with the opportunity to develop personalized and customerised services for individual
customers.
e. Tangibles
These are appearance or physical facilities, equipment, employees and written materials.
Customers especially new customers, use these elements to evaluate the quality services.
How do we evaluate Crown Plaza hotel using the tangibles? Service organizations
which customers call on for a service should emphasise the tangible elements. Tangibles
are used to enhance the image of the organizations, provide continuity and signal quality
to customers. * Most organizations that combine the tangible dimension with one or more
of the other quality dimensions to create a service strategy. Therefore it can be argued that

organizations which do not incorporate the tangible dimension in the quality strategy can
fail to develop a good strategy.
CUSTOMER SATISFACTION
It is seen as a combination of service quality, product quality and price. In addition to the
influences of situational and personal factors while the perception of service quality can be
evaluated in the absence of the actual experience. Customer satisfaction can only be assessed
after an experience with the service provider; because customers are more knowledgeable these
days, they consistently find and seek out new services that will provide them with more
satisfaction. As a result, service providers are expected to increase the value of their service
offerings to customers to stop them m from defecting to other organizations.
PERCEIVED VALUE
Grethan & Bitner (1996) defined value as the customer overall assessment of the utility of the
product based on perception of what is received and what is given. Value is therefore very
closely tied to customers perception of price. Although customers may perceive the quality of
service as good and may be generally satisfied with the sensitive delivery. The value to the
service in terms of time and effort may not be of benefit to them. The influence of highly skilled
and well trained service employees who perform services efficiently and accurately can
positively influence the customers perceived value for service offerings.
SERVICE EMPLOYEES
Ogylvy once claimed that an organisations most valuable assets go down on the rift each time,
however in the service environment; service employees are inevitably regarded by customers as:
(i) Service organization (ii) The marketers of the service. If employees are removed from the
service picture, service organizations are left with very little means of gaining competitive
advantage.
Ceithan & Bitner (1997) indicates that it has been shown that happy employees are made for
satisfied customers. Accordingly satisfied customers reinforce employees job satisfaction.
Service organizations depend on the employees who deliver the service for the success of the
service processes.
1. In order to build a customer oriented service minded workforce who will ensure quality
service delivery organizations need to recruit the right employees.
2. Train and develop employees to deliver service quality through seminars, customer
satisfaction index them e.g. will rate the employee against this index, conduct tests and
clientele rate courses, e.t.c.
3. Provide an index support to employees and retain employees who deliver satisfying
service customers.
9

RECRUITING THE RIGHT EMPLOYEES

Recruitment is the way organizations secure their HR therefore the focal point of recruitment
should be to attract and retain right employee for the right job within the organization.
Traditionally recruitment has been the function of personnel specialists in the HR department,
nevertheless these days the focus is an integrated recruitment where the HR department and the
department in need of an employee liase to procure the best employee for the position.
TRAIN AND DEVELOP
Organisations which wish to retain their employees ought to train and develop their employees to
deliver quality service. Through training, employees acquire specific knowledge and skills to
ensure that they perform their jobs more effectively. Service employees need ongoing training in
technical as well as interacting skills.
i.
ii.

Technical skills refers to familiarization, training employees with equipment and

standards routines e.g. Econet, Zimra.
Interactive skills are more complex and focus on teaching employees problem
solving, communication and interpersonal skills.

PROVIDING SUPPORT
Without customers focus, internal and support systems; it is impossible for service employees to
deliver a quality service. Organisations can encourage supportive internal services by measuring
and rewarding them. Organisations which acknowledge that internal service quality exists will
succeed in developing internal quality culture. Service employees must be provided with the
right equipment in order for them to deliver a quality service. Internal processes should also be
designed with customers satisfaction in mind, thus it can be said that the internal procedures will
support quality service performances.
Organisations realize that in order to be truly responsible to customers needs, they have to
empower employees to accommodate customer requests and rectify errors in the case of service
failures. Gronroos (1990) argues that frontline employees should ideally have the authority to
make prompt decisions. Empowerment gives employees the desire, skills, tools and authority to
serve customers. It leads to quicker responses of employees to meet the needs of customers in
situations where customers are very valuable. It allows employees to customize service delivery.

RETAIN EMPLOYEES
10

Once an organization has lined the right employees, trained and developed them and provided
the needed support; it is important that they retain them. It is very discouraging to customer
satisfaction, employee morale and service quality if service organizations experience a high staff
turnover. Recruitment and training is directly influenced by the quality of the reward offered.
Tom Peters says that an organization should be a cool place to work for and it doesnt hurt if the
money is good and it doesnt hurt in the list if they have a gym and day care. The purpose of
reward is to provide employee with something they consider of value in return for their
performance.
Reward can be divided into two categories namely: (i) Monetary
(ii) Non-monetary.
(i)

(ii)

Monetary is directly used to improve performances and act as a principal motivator

such as basic hourly wages, fixed salary, annual bonuses and profit sharing. All these
are usually stipulated in the employee contract with the organization.
Non-monetary- are rewards which can be in the form of subsidies, special facility,
and public recognition for work performance.

SERVICE RECOVERY
Nancy Friedmans seven winning steps to service recovery:
1. It is your responsibility, if you have answered the phone on behalf of the company you
have indeed accepted 100% responsibility at least that is what the customer so get off the
its not my fault syndrome and get on the what can I do for you position.
2. I am sorry does not work, every once in a while I hear from a staff member that tells me
they do not feel that should say sorry and it wasnt their fault. As stated above in 1 in the
customers mind that it is your fault. Saying I am sorry doesnt solve a problem but it
help to diffuse and decrease heat immediately.
CASE
A crowded United Airline Flight was cancelled. A single agent was rebooking a long line
of inconvenienced travelers, suddenly any angry passenger pushed his way to the desk,
he slapped his ticket down on the counter and said I have to be on the flight and it has to
be first class. The agent said Im sorry Sir, I will be happy to try to help you but Ive got
to help these folks first and Im sure will be able to work something out. The passenger
was unimpressed so he asked loudly so that the passengers behind him could hear, Do
you have any idea who I am without hesitating the agent smiled and grabbed the public
address microphone and said May I have your attention please, she began her voice
being heard clearly through the terminal. We have a passenger here at the gate 14 who
does not know who he is, if there is anyone who can help identify himself come to gate
14 Which the folks behind him in line laughing and hysterically, the man glared at the
11

agent and gloated his teeth and swore to the United agent without flinching she smiled
and said Im sorry sir that you have to join the queue too for that.
*Look into the case and study it
3. Empathise immediately with someone who is angry or frustrated with the company. The
one thing they need is someone to agree with them or at least feel they are being
understood, be careful though, I know how you feel is not a good thing to say unless
you been through exactly what they experienced. Rather say, Thats got to be so
frustrating or What an unfortunate situation.
4. Immediate action is necessary to make service recovery. Do not make a customer wait for
a good service, get whatever they need immediately.
5. Ask what would make them happy. In a few rare cases the customer can be the more
difficult one. If you have tried what you considered everything, simply ask the customer
what I can do to make you happy. In most cases it may be something you are able to do.
You just may not have that of it as go ahead and ask.
6. Understand the true meaning of service recovery. Is not just fixing the problem, its
making sure it wont happen again. It is listening to the customer. Its going above and
beyond Remember a great working of quality service is satisfying the customers
physical and emotional needs and then having value. Explore ways how you can
appropriately compensate a customer for their trouble. Be empowered to compensate.
7. Follow up. After you feel that the problem has been fixed, follow up. After you have
made the customer happy make an extra phone call daily or later, be sure to ask them,
Have we fixed everything for you, what else can we do for you. Be sure they are
satisfied and when you hear Thanks you have done a great job. I appreciate it then you
know that you have achieved service recovery.
SERVICE RECOVERY STRATEGIES
1.
2.
3.
4.
5.

Act quickly be quick to apologise and say I m sorry

Treat customers fairly compensation should be the same, do not discriminate.
Learn from recovery experiences, doing the right thing.
Learn from lost customers take down their complaints and try doing the right thing.
Failsafe the product/or service, doing the right thing the first time remove the problem
before delivering the service.
6. Welcome and encourage complaints.

SERVICE RECOVERY
Gronroos (1990) defined service recovery process as those activities in which a company
engages to address a customers complaint regarding a perceived service failure.
12

Bell (1994) ~ service recovery encompasses all the actions taken to get a disappointed customer
back to a state of satisfaction. If a service recovery situation is not regarded as important or
handled well, customer satisfaction can be eroded and ultimately a service providers
profitability may diminish. Results for the study conducted by Boshoff (1997) show that poor
service delivery cannot be compensated for by great service recovery. Although service recovery
can help significantly in limiting a poor service, deliverys harmful impact.
COMMON MANAGEMENT STYLE THAT AFFECT SERVICE DELIVERY
Joseph Durain: one of the greatest TQM (Total Quality Management) gurus, states that most
quality problems are due to poor management rather than poor workmanships.
Seven undesirable Habits and How to kick them
1. Continually breaking your word this destroys trust and ultimately affects the quality of
work. It is better to err on the side of promising less than you expect to achieve selling
something you dont have.
2. Publicly chastising employees most managers sometimes do that because they want to
solve the problem quickly or they want to appear in control when they are not. However
it will alienate individuals and breed resentment. Addressing a problem in private though
send a message that you care about the employees feelings and have their long time
success in mind.
3. Getting all up in their business That is invading privacy and crossing personal
boundaries that will make employees feel uncomfortable and unresponsive. Let them
offer information about their private lives that they feel happy to share but dont press
them for details.
SERVICE FAILURE
A Much research has focused on how to improve a service providers service quality and how to
attract. A major factor that affects a customer perception of the service providers quality is the
extent of the problems they encounter and how these problems are handled by the provider. As
services are inherently variable in how they are conducted. It is to be expected that problems will
occur. A term that is used synonymously for a problem that a customer has with a service is
service failure. Customers react in 2 ways when they encounter a service failure e.g. either relies
with the service provider or leave. When customers experience a service failure e.g. can choose
to complain or not. If customers choose not to complain they may remain with the provider or
leave despite their dissatisfaction. Alternatively if they complain they may also choose to stay or
they may exit and normally this is influenced by how the situation is handled by the provider. In
the case where a service provider is notified that a problem has occurred e.g. through customer
complaint, it is necessary that service recovery be conducted. According to Gronroos (1990)
service recovery includes all actions taken by a service provider to resolve the problem; a

13

customer has with the organization. Looking at service failure customer react in 3 different ways
which are:
(i) Loyalty
(ii) Voice
(iii)
Exit

1. Loyalty
Loyalty is developed over a long period of time from a consistent record of meeting and
sometimes exceeding meeting customer satisfaction. Loyal customers are beneficial to
their service provider and they spend more time with the service provider and they
provide a good source of new business. Loyal customers are good because they lead to
lower marketing costs, more efficient operations and higher profits.
Types of loyalty
Pure loyalty, Latent loyalty and spurious loyalty.
a. Pure loyalty Is patrionising the company often as well as thinking highly of it.
b. Latent loyalty Customer has a low repeat patronage but thinks highly of the
organization.
c. Spurious loyalty Occurs when a customer has a high repeat patronage but a
relatively low attitude to the company.
Initially the choice by a spuriously loyal customer to remain with a service provider does
not immediately threaten profits but with continued dissatisfaction they may spread
negative word of mouth or exit. Customers may stay with an organization even if they are
dissatisfied because they perceive they have no choice.
2. Voice
The terms voice and exit were introduced by Hirschmar (1970) when he suggested that
dissatisfaction provoke two active negative responses, that is, voice and exit. Voice can
be complaining to the service provider, to the acquaintances (negative word of mouth) or
complaining to third parties in order to help seek redress of the situation. Any problem a
customer has with their service provider will arouse some emotion whether they
complain about the service provider or not. By complaining the service provider;
customers are giving the service provider a chance to rectify the problem. Service
providers must provide open lines of communication if they want customers to complain
then they can try to solve their problems. If a customer voices by any other means, e.g.
complaining to a business colleague or even decide to exit, service providers find it
difficult to know? These customers are unhappy.
3. Exit
14

At the end of the day a customers final decision after a service failure is to reside or
leave. Exit is the voluntary termination of an exchange relationship. In order to exit in
response to a service failure it requires the customer to have motivation. Customer exit is
important because it can cost the seller a great deal of revenue through decreased income
from the customers future revenue, higher costs in attracting new business/customer, loss
of the advertising costs through word of mouth and decreased employee retention. The
benefits of customer retention have also been emphasized, according to Reichld and
Sasser (1990) found that by retaining 5% more customers a service provider can increase
profitability by equals to 100%. Many factors influence a customers reaction when they
face a problem with their service provider.
SERVICE FAILURE OUTCOMES
A customer may stay after they have experienced a problem because they have complained and
they are satisfied with the service recovery process. This is the ideal situation for service
providers who plan for good service recovery. However many customers stay even though they
are dissatisfied with the service recovery they received and one of these situations stems from
spurious loyalty.
Personal services experience
Customer care
Chicken inn and chicken slicer
Banks
Case study question: Interfin Bank wants to come back, what should it do?

Rebranding
Change name
Corporate colours
Advertising
Cut transaction charges

E-Service and the Consumer Author(s): Roland T. Rust and Katherine N. Lemon Reviewed
work(s):Source: International Journal of Electronic Commerce, Vol. 5, No. 3, Marketing in the
E-Channel (Spring, 2001), pp. 85-101Published by: M.E. Sharpe, Inc.Stable URL:
15

http://www.jstor.org/stable/27750983 .Accessed: 23/07/2012 13:09Your use of the JSTOR

archive indicates your acceptance of the Terms & Conditions of Use, available at
.http://www.jstor.org/page/info/about/policies/terms.jsp .JSTOR is a not-for-profit service that
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support@jstor.org. .M.E. Sharpe, Inc. is collaborating with JSTOR to digitize, preserve and
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16

E-Service and the Consumer Roland T. Rust and Katherine N. Lemon ABSTRACT: Many
Internet applications do not fully utilize the unique nature of the Web, which in its purest form
involves interactive, personalized information service. The true nature of the Web, here termed eservice, will be the key to marketing most effectively to the consumer, for it is the logical
continuation of a 100-year trend toward information service in the economy. This paper
examines the aspects of e-service that are critical in effectively interacting with consumers in
interactive, networked information environments like the Internet. It discusses three central
changes brought about by the advent of the Internet (true interactivity with the consumer,
customer-specific, situational personalization, and the opportunity for real-time adjustments to a
firm's offering to customers), as well as changes in consumer expectations regarding firm service
strategies that flow from these developments. Based upon these changes in technology and
consumer expectations, important elements of the e-service experience are defined. The paper
concludes by showing how e-service strategies will play a significant role in growing the overall
value of the firm. In each of these areas, a set of research questions is proposed that will lead to a
stronger understanding of e-service and consumer behavior. KEY WORDS AND PHRASES: Eservice, personalization, self-service. As consumer behavior continues to expand in cyberspace,
it is important to understand the role of service in this new arena, here termed "e-service/7
Research advances over the past several years have provided a solid understanding of how
services influence consumer behavior in traditional settings such as retailing, financial services,
telecommunications, and post-purchase sales support. Little research, however, has examined the
consumer's response to e-service, and how the exploding world of e-service on the Internet is
affecting consumer behavior. An understanding of the role of e-service is critically important. A
recent study by Data monitor, Inc. suggests that as much as $6.1 billion in potential Web sales
were lost in 1999 due to inadequate e-service [81. More important, as mainstream consumers
begin to explore the world available to them on the Web, they will be less willing to put up with
poor service. Widespread consumer experiences of inadequate e-service may, in fact, stall the
growth of this emerging economy [41. The Service Revolution To fully appreciate the
importance of understanding e-service and the consumer, it is first necessary to understand the
economic changes that have led to the rise of the service aspect in the economy. Advancing
technology has resulted in a shift, in advanced economies, from goods to service. This is a 100year trend. Consider any key growth indicator? New jobs created, new businesses created,
growth in Gross Domestic Product. In every case, service has been the major source of growth
[12, 32]. In addition to the growth of service companies, service is becoming more important to
goods producers International Journal of Electronic Commerce I Spring 2001, Vol. 5, No. 3, pp.
85-101. Copyright? 2001 M.E. Sharpe, Inc. All rights reserved. 1086-4415/2001 $9.50 + 0.00.

17

86 ROLAND T RUST AND KATHERINE N. LEMON [29]. In fact, for many goods producers,
service is becoming a key revenue and profit driver, over and above their traditional "tangible"
product mix [40]. The service revolution has increasingly been an information revolution,
because information service is the highest growth area in service. Information service is that
aspect of service in which information is the primary value ex changed between two parties (e.g.,
buyer and seller). The Internet is built upon this concept of information service. By its very
nature, the Internet is a network that permits the interchange of information (at its very core, in
zeroes and ones). The purest commercial utilization of the special characteristics of this
environment is interactive information service, with consumer wants and needs going in one
direction, and highly customized information going in the other direction. This interactive
information service is the critical backbone of the new e-economy, and is critical to
understanding the role of e-service in this new domain. This is not to say that traditional aspects
of consumer service are not important on the Internet. Rather, what is already known about
consumer behavior and service will provide a solid foundation for developing service strategies
on the Web. Key elements like site effectiveness, trust, response quality and response timing,
fulfillment, and availability will be key elements in defining a basic approach to serving
customers on the Web and developing e-service quality [37]. However, this article focuses on
aspects of the Internet that are markedly different from the traditional service domain. E-Service:
Beyond E-Retail and Fulfillment to date, e-tailers (Amazon, CDNow, Pets.com, and Boo.com)
have been the highest-profile pioneers in Web-space. These businesses, as goods marketers, do
not take advantage of the true strengths and breakthrough innovations of fered by the Internet.
Such businesses are really nothing more than catalog sellers in electronic clothing.
Unfortunately, because goods sellers dominate the Web, people (wrongly) think of e-service as
no more than access to goods and order fulfillment. Although these elements are important for etailers, they do not represent the true nature of e-service, but the current state of e distribution.
Now that more than 400,000 companies have Web sites, experts are recommending that 70-75
percent of Web budgets should be allocated to developing e-service [2, 34, and 38]. Why? Eservice is more than order fulfillment, more than responsiveness to inquiries, e-mail, and status
requests. The true nature of e-service is providing consumers with a superior experience with
respect to the interactive flow of information. As will be discussed below, it is e-service (in
general) and e-service providers (in particular) that represent the future of e-commerce. Internet
Myths For the first several years of e-business, the excitement of a new advertising medium, a
new distribution channel, or a new information source has led

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INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 87 many firms to overlook

the true marketing-innovation opportunities the Internet provide. To understand the importance
of e-service in this unprecedented interactive, networked environment, it is first useful to
examine what the Internet is not. Here are some of the more common Internet myths. "The
Internet Is Just a New Advertising Medium" Traditional advertising is a unidirectional
information flow? Delivering a message to a set of potential customers and then waiting for
sales. Much of Internet advertising (e.g., banner ads, pop-up windows) relies on this traditional
approach to attracting new customers to Web sites. Thinking about the Internet simply as an
advertising medium, however, ignores three crucial aspects of the Web world: (a) two-way
(instantaneous) communication, (b) per sonalization based on two-way communication, and (c)
real-time adjustments to the firm's communications with customers and even to its offerings.
"The Internet Is Just a Big Direct-Mail Catalog" Traditional direct-mail marketing uses market
segmentation (or even segments of one based upon customer purchase histories) to focus oneway appeals to customers and, like traditional advertising, then waits for the sales response.
Although the Web has made it much more convenient for many consumers to engage in directto-firm ordering, thinking about the Internet in this way over looks certain critical elements.
Although two-way communication is possible through direct mail marketing, the two-way
feedback loop is too slow to characterize the Web (entire e-businesses begin, grow, and die in the
amount of time it may take for a direct-mail marketer to determine the complete response to a
promotion). Moreover, although personalization is possible through targeted mailing based upon
profiling, it is limited, expensive, and often out of date. Finally, direct mail marketing does not
allow for real-time adjustments to communications, offerings, or context. On the Internet, the
time lag between communications from the firm and communications from the customer is
compressed, real-time dialog is possible, and the firm's responses to the consumer can be
adjusted much more quickly. "On the Internet, Everything Becomes a Commodity" Will the
Internet become a commodity marketplace? A commodity market place implies perfect
competition, with no differentiation among products. Only a pure goods marketplace is a true
commodity marketplace, because service provides the opportunity for differentiation. The eservice potential of the Web will decrease the extent of commoditization (even for branded
items). Even a book sold over the Web may demand a higher price at one retailer than at another
because of the potential to differentiate on e-service through communication, personalization,
and trust. Two-way communication (and learning over time) enables e-businesses to personalize
offerings to an extent not before scalable, resulting in greater differences between competitors.
This personalization may produce a new form of monopoly. In effect, e-businesses

19

88 ROLAND T. RUST AND KATHERINE N. LEMON providing customized and personalized

e-services may develop monopolies on specific customers. This may lead to increased prices (a
monopolistic price effect) for two reasons. First, captive customers may be willing to pay higher
prices to receive the customized benefits. Second, firms will need to increase prices to cover the
costs of the customization and personalization. These increased costs may actually outweigh the
cost reductions that result from the distribution channel efficiencies the Web provides. "The
Internet Is Just a New Sales Channel" Periodically, significant innovations occur in the
distribution process, as improvements are made in the way goods are moved from individuals or
organizations that want to sell the goods to individuals or organizations willing to pay for them.
But it is not the new sales channel that makes the Internet a revolution. Thinking about the
Internet as a new channel from seller to buyer focuses on an outmoded "push the product to the
consumer" sellers view of the marketplace. What is new is that the Internet is a new access or
"buy" channel, providing consumers with new avenues for initiating contact with the firm.
Moreover, the interactive, instant-feedback nature of the Internet provides firms with exciting
product-development opportunities. In addition to being able to customize its response to the
customer (in terms of communication or product offering), the firm can collaborate with the
customer to develop new products and services. It is now possible, for example, for apparel
retailers to communicate with customers before they make buying decisions for the fashion
season? Pretesting fashions with consumers in real time, or for car manufacturers to involve
consumers directly in the product-development process? getting quick feedback on potential
design changes, "The Internet Is Just a Big Encyclopedia" Many people think that what is new on
the Internet is more information. However, it is not the information that is new. The information
has always been there? Encyclopedias, journals, newspapers, research articles are not new. What
is revolutionary is the ubiquitous access to information, the new flows of information, and the
new markets for information that the Internet makes possible. The Full Potential of E-Service
Much of what has been written to date about e-service focuses on traditional customer servicecall center response, weekly e-mail discount reminders, speed of response, order-status updates,
site effectiveness, and so forth [36,381. Al though it is critical to get the traditional aspects of
customer service right to be a successful e-player, the real action in the e-service opportunity lies
elsewhere. Several service opportunities made possible by the advances of the Internet have
already been mentioned: two-way, interactive communication, personalization, real-time
adjustments to a firm's offerings, new forms of consumer

20

INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 89 access. To fully appreciate

the importance of these e-service opportunities, one must understand their impact on consumer
behavior and consumer expectations of the firm. The New Consumer Values The historic
development in the service economy and the ongoing emergence of the e-economy have been
accompanied by shifts in consumer expectations in three specific areas: the importance of the
buying experience, the importance of control, and the role of personalization. The Buying
Experience Pine and Gilmore suggest that providing a unique buying experience is the key to
winning the hearts and minds of consumers in the new millennium [27]. Their work indicates
that consumers value the experience of a good or service more than its actual tangible value? In
fact, the experience becomes a key element of the overall "product" being purchased and
consumed. Other researchers have begun to examine the consumer's experience via the Web with
the flow construct, suggesting that it is possible to measure the extent and intensity of the
consumer's experience on the Web [24]. The importance of experience to the consumer
underscores the importance of getting e-service right. Customer Control New advances in
technology have made it possible for customers to take greater control of the purchase and
consumption experience than ever before. The customer has always had the power to choose to
purchase or not. Now, however, not only do customers choose whether or not to purchase the
product, they choose the channel through which to acquire the product, the channel through
which the product will be delivered, the extent of personalization of the product, and the extent
to which they would like to be involved in or responsible for the development or delivery of the
product. This shift toward greater consumer control leads to higher consumer expectations of
ease and convenience throughout the entire purchase, consumption, and post-purchase salessupport process [35]. These expectations continue to escalate. Consumers may have forgiven
unresponsiveness to e-mail queries a few years ago, but now it is as critical as responding to an
incoming phone call [28]. In short, given the consumer's new access to being in control,
consumer expectations of perceived control (e.g., [6,15]) have escalated. Personalization finally,
the new technologies that together represent the e-experience for consumers have created
exciting opportunities for the personalization of com

21

90 ROLAND T. RUST AND KATHERINE N. LEMON munications, product offerings, delivery

options, and post-purchase support. Customers' expectations of personalization will escalate with
the continued enhancement of technological capabilities. However, it is not sufficient just to
utilize past purchase patterns to develop customized interfaces for customers. Solutions such as
collaborative filtering will not be sufficient, because they are not personalized enough.
Customers expect to be truly "known" by the firm. Consider the underlying assumptions in
collaborative filtering. Collaborative filtering assumes that the customer's needs are static and
can be matched with an exemplar customer with similar static needs. Why will this not be
sufficient? If a customer has different needs in different situations (which marketers have
demonstrated for many years, e.g., [3D, then the assumptions of collaborative filtering will not
hold. The approach will be ineffective and may even lead to confused, disgruntled consumers.
Consider the consumer who purchases a size 4 blouse (for her daughter) and a size 12 skirt for
herself. This individual should not be "averaged" to predict future purchases of size 8. In
contrast, consider the "Your Personal Model" feature at www.landsend. com. Simply by
providing a few inputs, such as weight, height, body measurements, and coloring (anonymously
if desired), individuals see "models" of themselves and can ask for style advice, virtually try on
outfits, and even get one-on-one personal attention from a "Web rep" [11]. This technology
makes it possible for the consumer mentioned above to create two different models? One for
herself and one for her daughter. Situational personalization? The ability to identify and respond
to different sets of needs and preferences of the same individual? Will be essential to successful
personalization strategies. These three aspects of consumer expectations (the experience factor,
increased customer control, and situation-specific personalization) suggest a unique role for eservice, for only the service aspect of e-business can success fully address these emergent
customer expectations. Recent evidence suggests that it pays to respond to these expectations. To
cite but one example: Merita NordBanken, Finland's largest bank, has made its customer
accounts e-accessible via ATMs, telephone, GSM mobile, PC, Internet TV, and WAP phones.
Customers can conduct all transactions electronically, without any paperwork. Merita has
600,000 Finnish e-banking customers, 500,000 of whom use the service monthly. They are
gaining approximately 5,000 new users per month, and the current monthly logon is about 2
million (4 logons per active customer). A recent study suggests that the e-service strategy will
save the bank money: A transaction over a cell phone costs approximately 8 cents, while the
same transaction via the traditional call-center runs about 60 cents [10]. Research Questions
There is much still to be learned about the consumer in e-space. Future re search in this area
should focus on the following questions: To what extent do customers prefer to be in control
throughout the decision, purchase, consumption, post-purchase support, and disposition
processes? What mechanisms influence customer perceptions of control for each aspect of
consumer behavior?

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INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 91 To what extent do

consumer expectations of personalization escalate with experiences of personalization? Can an
individual customer's behavior be segmented? Do consumers construct multiple personalities,
characters, or Schemas as they interact on the Web? How can firms market to the different
consumers within the consumer? Are the benefits of situation-specific personalization worth the
costs? To what extent do consumers value such investments in shopping efficiency? Customer
important weights and ideal points: rediscovering marketing models and psychometrics. The
many advances in marketing models and psychometrics have provided great insight into how
customers choose. Perceptual space models and choice models have been studied for years, and
the main insights of this extensive stream of research should be utilized. Applying the tools and
knowledge of psychometrics to the problem of understanding e-consumer behavior will be
critical to understanding how best to meet changing consumer expectations. Designing E-Service
The changes in consumer behavior and expectations require firms to respond via specific eservice strategies in three areas: two-way communication, customer collaboration, and real-time
adjustments of the firm's offerings. These elements will now be treated in more depth, discussing
the challenges involved in developing effective e-service strategies for each of them. E-Dialog:
From One-Way to Two-Way the Internet is inherently a bidirectional medium. To take full
advantage, marketers must understand the new opportunities available in this real-time two-way
conduit. What are the possibilities? At a minimum, marketers should use this two-way capability
to elicit information from the consumer and then use it to personalize the product offering. But
the possibilities for dialog go much further. From One-to-Many to One-to-One Since decreasing
communications and processing costs result in smaller segment sizes [36], the traditional role of
mass media (and mass messages) should be replaced by targeted invitations for dialog. The
initial message should be an opportunity rather than an offering, because the offering (or
response) it self should be crafted from the two-way interaction with the customer. Hewlett
Packard (HP), for example, has developed tracking software to better under

23

92 ROLAND T RUST AND KATHERINE N. LEMON stand corporate customers who call or email with service concerns. When the customer contacts HP a second or third time, the contact
can be immediately routed to the appropriate service specialist who can address their specific
concern. HP estimates that the program has generated (thus far) an additional $180 million in
incremental business [34]. From Firm-to-Customer to Customer to-Firm Traditional marketing
communications strategies assume, as a starting point, that the firm initiates contact with the
potential customer. In the e-world, this assumption is no longer valid. In many instances, the
customer will initiate the dialog. It will be imperative to have systems in place to take advantage
of customer-initiated contacts with the firm, as these prospects may be more valuable than those
who merely respond to the firm's initial contact. Consider the innovative ways that traditional
service firms such as Geico (direct-to consumer insurance) and Fidelity Investments (mutual
funds) are capitalizing on customer-initiated dialog. Both firms are utilizing "click-to-talk"
applications on their Web sites that allow customers to click a button that prompts service
representatives to call them back immediately. Geico has found that the technology provides
customers with the customized two-way inter action that is critical for complicated products like
insurance. Fidelity is utilizing the feature only with its very high-end customers, providing it as a
critical competitive advantage to retain these valuable customers [38]. The key here is customer
accessibility? letting the customer choose a preferred communication channel to the firm and
developing dialog through the customer's preferred channel [13]. Customer-to-Customer Dialog
finally, the Internet increases the likelihood of customer word-of-mouth communication. On-line
communities and the ubiquity of e-mail create numerous possibilities (and potential headaches)
for marketers [19]. Firms must understand the role of electronic communities and word-of-mouth
communications in their marketing strategies. They must find ways to encourage not only dialog,
but "multi-log" with their customers? Actively managing the overall net work of communications
made possible on the Net. E-Self-Service: New Forms of Customer Collaboration and Control
Given the consumer's need for increased control in service transactions, e technologies enable the
consumer to take care of a new set of functions that previously could only be handled by the firm
[20]. This focus on e-self-service provides opportunities for the firm to increase the stickiness of
the relationship while reducing the internal costs of serving the customer [23]. Recognizing the
importance of shifting the locus of control from the firm to the customer, FleetBoston Financial
has created a set of services that enables the customer to

24

INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 93 get answers to questions

quickly, consistently, and without having to rely on human response. These solutions have
created an unexpected advantage: The firm's employees also have access to the on-line help
function, and as a result are now able to provide higher-quality information to customers who
call in via traditional means [25]. Specialized Bicycle has created Web self-service access that it
credits as a key element in its brand-building and relationship building strategies [17]. The
system allows Specialized to continuously up date and refine the content of its Web site and
frequently asked questions (FAQs), putting the issues most frequently searched for up front. This
simple approach has decreased overall call volume and improved visitors' perceptions of the site
and Specialized. Simple though they may be, all of the preceding examples are solutions that
create opportunities for increased customer control. Real-Time Marketing New technologies
make real-time marketing possible. The decreasing cost of computer storage, increased concerns
about privacy, the potential for more speedy personalization, and the shift from centralized data
warehouses to a distributed data approach in which consumers carry their data around with them
(think cookies or smart cards) will result in customer information increasingly being stored at the
customer's location. Real-time marketing means that the potential capability of the service
offering is present in many forms (perhaps an infinite number) at the customer's location, and
that the product offering changes in real time, based on the choices and actions of the customer
[26]. Consider the following examples. E-Nutrition already provides at least 30 different ways
for customers to buy its products on-line. By analyzing the customer's behavior (where and when
on the site the customer purchases, other products looked at, etc.), customized access approaches
can be developed for that customer [18]. The software solutions described above for Lands' End's
"Your Personal Model" allow Lands' End Web reps to actually take control of the customer's
browser (with permission, of course) and make specific, customized-product suggestions. In
addition, new technologies not only route the customer's record to the appropriate representative
when an incoming call is received from the customer, but also suggest appropriate responses to
the representative, based upon the customers purchase or service history [10]. Research
Questions Many of the concepts presented here represent relatively uncharted territory for both
marketing researchers and marketing practitioners. Future research in this area should focus on
the following questions: How does the potential of engaging in active dialog over time, and in
real time affect the customer-firm relationship? What forms of dialog are most effective for
building sustainable, profitable relationships? How does a firm's e-mail or Web response
influence customer perceptions of the firm?

25

94 ROLAND T. RUST AND KATHERINE N. LEMON How does marketing change when
consumers initiate the relationship? Are these customers more likely to be retained by the firm?
Do they purchase more quickly? Buy more? How does marketing change when consumers sell to
other consum ers? How does the (unmanaged) dialog among a firm's customers influence
customer relationships with the firm? How can the firm best manage these word-of-mouth
communications? How does consumer self-service affect overall perceptions of the firm,
customer satisfaction, perceived service quality, customer retention, and customer equity? Does
consumer self-service truly reduce a firm's cost-to-serve? Increase profitability? How do
customers want to use self-service? Is integrating all information on the customer so that the firm
can present a "single face" to him or her really worth the effort? What benefits accrue from
effective data integration? How does effective data integration influence customer satisfaction,
perceived quality, customer cost-to-serve, customer retention, customer lifetime value, and
overall profitability? What is the value of real-time marketing? To what extent do consumers
expect or value personalization and customization? What are the consumer ideal points on these
dimensions? What attributes are needed by effective Web-reps? How does our understanding of
marketing change when consumers rather than the firm choose the "P's" (i.e., product price,
promotion, and place)? When the Customer Isn't Human Thus far the challenges of e-service
have been examined in the traditional contexts where the customer is an individual human
consumer. However, as the Internet continues to bombard the customer with information, the
overall amount of data will eventually become too much for the customer to handle. In The
Doors of Perception, Aldous Huxley argues that the brain is primarily a "reducing valve," whose
function is to reduce the amount of input information to a manageable amount. On the Internet,
the search engine is the initial (and currently the most popular) reducing valve. Search engines
make decisions for consumers that reduce the size of their choice? Or search? Problem. Agents
and Bots Beyond search engines, many different kinds of agents and bots have been devised to
save the consumer time and effort. To name but a few, there are shopping bots (that shorten the
consumer's search time), chatter bots (that

26

INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 95 engage in dialog), gossip

bots (that negotiate, share information, and make deals with other agents), and datasheet bots
(that locate product datasheets from manufacturers) [40]. Bots can be found in almost any
language. The role of many bots is to act as reducing valves, or intelligent decision aids, for the
consumer. Essentially consumer behavior on the Web is becoming, in essence, a human-machine
hybrid. To understand consumer behavior on the Web, one will have to understand not only how
consumers choose, but also how consumers choose agents (or bots) to make decisions on their
behalf, how consumers interact with their chosen agents, the situations under which consumers
will "trust" agents to make decisions on their behalf, and how the agents themselves make
decisions [1, 14, 21, 22]. In addition to understanding the decision processes involved between
consumers and agents, it will also be important to understand how to market to agents. The role
of agents and bots in consumer decisions is growing steadily. Currently these decision-aids are
utilized to construct consideration sets (handling the "wiruriowing-down" process), but in the
future they may handle the purchasing decisions as well. Therefore, it will be critical to
understand the decision rules embedded in agents so as to develop e-service strategies consistent
with the "needs" of agents and bots, and their "client" consumers. Therefore, in addition to
understanding consumer behavior in the e-space, it will also be necessary to understand
computer behavior [29]. Consider the Gossip both mentioned above (www.tryllian.com). Each of
the consumer's agents (a consumer can have up to five) actually goes out and interacts with other
agents to negotiate deals on the consumer's behalf. Right now, the Gossip both can only gather
information. But soon, Tryllian promises, Gossip agents will also be able to make purchases on
behalf of consumers. This means that marketers are going to have to understand the decision
processes not only of consumers but of their designated agents. Research Questions
Understanding consumer behavior in the Internet domain represents a significant challenge to
researchers and practitioners. The challenge of understanding the computer behavior of the
nonhuman decision-makers on the Web may be even more daunting but is no less important.
Future research in this area should focus on such questions as: How do intelligent decision aids
and consumer information "reducing mechanisms" influence consumer behavior? What is the
process by which consumers choose agents? Under what conditions and for what specific tasks
do consumers find agents helpful? Will consumers choose to employ multiple agents? What
decision models will best characterize consumer choice of multiple agents? What factors drive
agent consumption decisions? What are the most appropriate decision rules for developing
effective agents?

27

96 ROLAND T. RUST AND KATHERINE N. LEMON what are the appropriate models for
consumer-to-agent interaction and for agent-to-agent interaction? Do traditional marketing
approaches apply when marketing to computer agents rather than human consumers? Is there
room for differentiation? What marketing approaches are most effective? E-service and
Customer Equity Throughout this article it has been argued that e-service, and not just ecommerce, is the "killer app" on the Internet. This leads to the question: What is the value of a
firm's e-strategy? Recent research suggests that the foundation of a firm's value arises from its
discounted future profit streams [7, 9, 33]. From a marketing perspective, this may be thought of
as the firm's Customer Equity, or the total of the discounted lifetime values of the firm's current
and future customers [5, 31]. The three drivers of Customer Equity, as defined by Rust et al., are
Value Equity (arising from the consumers objective perceptions of the firm's offerings), Brand
Equity (arising from the consumer's subjective perceptions of the Brand, over and above value
Equity), and Relationship Equity (the customer's likelihood to stick with the brand, over and
above the effects of value and brand) [30]. Each equity has a set of actionable sub drivers?
Drivers that build (or detract from) the firm's overall Customer Equity. Building Value Equity the
role of e-service in building Customer Equity will now be explored. Within Value Equity, eservice capabilities can influence the quality sub driver (through specific elements of quality,
such as response time to e-mail inquiries, real time chat, customization of products, etc.). In
addition, e-service capabilities have a strong influence on the convenience sub driver of Value
Equity. Finally, recent evidence suggests that the application of e-self-service strategies may
provide significant cost reductions in the customer service area. For example, recent research
regarding the difference in cost to the firm of a phone contact with a customer and a Web contact
suggests significant savings (per call) ranging from tenfold to twenty fold [4, 34]. Verizon
expects to cut the number of rudimentary calls from customers in half with its self-service estrategies, realizing tremendous cost savings [38]. If these savings materialize, e-self service
strategies may influence the price sub driver of Value Equity as well. Building Brand Equity
within Brand Equity, e-service strategies will be important in influencing the customer's overall
attitude toward the brand, particularly the extent to which the consumer trusts the e-provider
(e.g., through secure ordering channels). Second, e-service strategies and policies will be an
important influence on the corporate ethics sub driver of Brand Equity, and in particular, the
firm's privacy policies and choices of advertising partners. Finally, successful e-service

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INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 97 strategies have the

potential to create significant word-of-mouth for a firm's Web site, as customers tell other
customers their success stories of interacting with the firm in real time, with real-time
responsiveness and situation-specific customization. Building Relationship Equity within
Relationship Equity, e-service strategies will be most critical. Firms can utilize e-service
capabilities to develop learning relationships with customers, providing customized
communication options for individual customers or customer segments, and thereby increasing
their likelihood of continuing the relationship with the firm. Specialized Bicycle, noted above,
has realized that learning about individual customers over time is critical. "No one 'needs' a
$3,000 bike," says Mike Regan, senior global e-marketing manager [17]. The key is developing a
strong bond with the customer, based upon knowledge from the customer. Second, the firm can
customize e-service strategies by the value of the customer (or potential value), providing
distinctive reward programs and special-treatment options for each customer (consider the
example of Fidelity Investments' click-to-chat technology for high-value investors, discussed
above). Finally, firms can build Relationship Equity by designing and managing on-line
customer communities to strengthen their relationships with their customers. Strategic Choices
each of the strategies noted above can be utilized to engage the consumer in distinct forms of
interaction and dialog with the firm. Objective value is created for the consumer through Value
Equity, the customer's subjective value of the firm's offerings is enhanced through Brand Equity,
and the customer's bond with the firm is strengthened through Relationship Equity. The
cumulative effect grows the firm's overall Customer Equity. Supporting the links between eservice and customer equity, there is growing evidence that e-service strategies have a significant
impact on the bottom line. In addition to the examples already described (incremental sales for
HP, cost effectiveness for Merita NordBanken, decreasing incoming calls by 50 percent at
Verizon), ReetBoston Financial expects significant support-cost reductions from its investment in
e-service. A key aspect of this savings will be in the creation of greater institutional knowledge
that will decrease the training time for new support analysts at Fleet. In a recent survey, more
than 17 percent of CFO's reported reduced operating costs due to e-service as the most important
benefit of their e-strategies [35]. The preceding discussion and these preliminary results suggest
that e-service strategies will be fundamental as firms seek to utilize the Internet to enhance their
value. Research Questions It is not enough to understand consumer behavior on the Web or the
role of e service in influencing consumer behavior. An understanding of how success

29

98 ROLAND T. RUST AND KATHERINE N. LEMON full e-service strategies can lead to
enhanced firm value is crucial. Although there has been much useful study of the links between
e-service and firm value, much more remains to be done. Future research should focus on the
following questions: What is the role of e-service in building Brand Equity? Relationship
Equity? Value Equity? What are the opportunities for business models built upon e service? What
new business models become possible and viable with the advent of expanded e-services? How
can the value of e-service strategies be measured? What are the appropriate metrics for
evaluating the success or failure of such strategies? Conclusion Getting e-service right (or
wrong) will make (or break) a firm's e-strategy. This article argues that a firm's e-strategy needs
to be centered on e-service: the interactive flow of information between customer and firm. Any
other focus will not be sustainable. The essential innovation available to markers as a result of
the Internet is the instantaneous, two-way communication link with customers. Several
opportunities arise from this innovation: 1. situation-specific, personalized communication 2.
Real-time adjustment of the firm's offering based upon customer input 3. Collaborative product
development 4. new opportunities for access by the customer? New "buy" channels 5. An
unprecedented opportunity to develop the firm's key assets? Its customers. However, in most
cases, these opportunities represent relatively uncharted territory in which there is little
documented evidence of successful strategies or conclusive research findings. There is still much
to learn about customers in e-service environments, and an ambitious research agenda has been
out lined here. It includes key questions that must be answered in order to ensure successful eservice strategies, and key questions that must be addressed to fully understand and take
advantage of the opportunities afforded by the new technologies. Significant research is needed
in three areas: (1) the effects of the e-service revolution on consumer behavior, (2) the influence
of agents on the marketing process, and (3) new strategic models and metrics. The goal of this
article has been to examine the emerging yet critical role of e-service as an element of customer
strategy. An improved understanding of e-service and the consumer will be critical to the
continued development of

30

INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 99 the Internet as a powerful,

credible business environment. As firms (and consumers) begin to harness the power of
instantaneous, multiparty, multidirectional flows of information, the possibilities will be
astounding. This is e-service: the future of e-business. REFERENCES 1. Alba, J.; Lynch, J.;
Weitz, B.; Janiszewski, C; Lutz, R.; Sawyer, A.; and Wood, S. Interactive home shopping:
Consumer, retailer and manufacturer incentives to participate in electronic marketplaces. Journal
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(November 9, 2000), 243 244. 3. Belk, R.W. Situational variables and consumer behavior.
Journal of Consumer Research, 2 (December 1975), 157-164. 4. Bettua, M. Rethinking ecommerce service. Call Center Solutions, 18 (July 1999), 148-150. 5. Blattberg, R.C., and
Deighton, J. Manage marketing by the customer equity test. Harvard Business Review, 74
(July/August 1996), 136-144. 6. Bolton, R.N., and Lemon, K.N. A dynamic model of customers'
usage of services: Usage as an antecedent and consequence of satisfaction. Journal of Marketing
Research, 36 (May 1999), 171-186. 7. Copeland, T; Koller, T; and Murrin, J. Valuation:
Measuring and Managing the Value of Companies. New York: John Wiley, 2000. 8. Data
monitor. The U.S. market for Internet-based customer service. Product code: DMTC0681. New
York: Data monitor, April 2000. 9. Ehrbar, A. EVA: The Real Key to Creating Wealth. New York:
John Wiley, 1998. 10. Engen, J.R. Banking on the nm. Banking Strategies, 76 (July/August
2000) , 16-25. 11. Fister, S. E-commerce meets e-service. Training, 37 (June 2000), 42-46. 12.
Godbout, T. Employment change and sectoral distribution in 10 countries, 1970-1990. Monthly
Labor Review, 116 (October 1993), 8. 13. Hashemian, R.V. Where did the service in e-service
go? Call Center Solutions, 18 (February 2000), 56-58. 14. Hauble, G., and Trifts, V. Consumer
decision making in online shopping environments: The effects of interactive decision aids.
Marketing Science, 19 (winter 2000), 4-21. 15. Hui, M.K., and Bateson, J.E.G. Perceived control
and the effects of crowding and consumer choice on the service experience. Journal of Consumer
Research, 18 (September 1991), 174-184. 16. Huxley, A. The Doors of Perception and Heaven
and Hell. New York: Harper & Row, 1956. Reprinted: HarperCollins, 1990. 17. Liebmann, L. Eservice at hub of online push. Information week, September 27,1999, 373-374. 18. Maselli, J. Eservice tailors marketing programs. Information week, May 29, 2000, 38.

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brands through online communities. Sloan Management Review, 41, 3 (2000), 43-54. 20.
Meuter, M.L.; Ostrom, A.L.; Roundtree, R.I.; and Bitner, M. J. Self-service technologies:
Understanding customer satisfaction with technology-based service encounters. Journal of
Marketing, 64 (July 2000), 50-64. 21. Moon, Y. Intimate exchanges: Using computers to elicit
self-disclosure from consumers. Journal of Consumer Research, 26 (March 2000), 323-339. 22.
Moon, Y. When the computer is the sales agent: Consumer responses to computer personalities in
interactive marketing situations. Working Paper 99-041. Boston: Harvard Business School, 1999.
23. Moon, Y, and Frei, F.X. Exploding the self-service myth. Harvard Business Review, 78
(May/June 2000), 26-27. 24. Novak, T.P.; Hoffman, D.L.; and Yung, Y-F. Measuring the
customer experience in online environments: A structural modeling approach. Marketing
Science, 19 (winter 2000), 22-42. 25. O'Brien, J. FleetBoston financial shifts help desk from
"nogginware" to "knowledgeware." Bank Systems & Technology, 37 (May 2000), 60. 26. Oliver,
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Press, 1999. 28. Roth, T.S. Christmas is coming. Are you prepared? Call Center Solutions, 19
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will find their customer isn't human. Marketing Management, 6 (fall 1997), 31-34. 30. Rust, R.T;
Zahorik, A.; and Keiningham, T. Service Marketing. New York: HarperCollins College
Publishers, 1996. 31. Rust, R.T; Zeithami, V.A.; and Lemon, K.N. Driving Customer Equity:
How Customer Lifetime Value Is Reshaping Corporate Strategy. New York: Free Press, 2000. 32.
Shugan, S.M. Explanations for the growth of services. In R.T. Rust and R.L. Oliver (eds.),
Service Quality: New Direction in Theory and Practice. Newbury Park, CA: Sage, 1993. 33.
Srivastava, R.K.; Servani, T.A.; and Fahey, L. Market-based assets and shareholder value: A
framework for analysis. Journal of Marketing, 62 (January), 2-18. 34. Stepanek, M. You'll want
to hold their hands. Business Week, March 22, 2000, EB30. 35. Sweeney, T. E-commerce
enhances e-service. Credit Union Management, 23 (March 2000), 6. 36. Varki, S., and Rust, R.T.
Technology and optimal segment size. Marketing Letters, 9, 2 (1998), 147-167. 37. Voss, C.
Developing an eService strategy. Business Strategy Review, 11,1 (2000), 21-33. 38. Waltner, C.
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INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 101 40. www.botspot.com.
Some
good
and
unusual
new
bots.
Retrieved
from
www.botspot.com/dailybot/newbots061400.html. 41. Zeithami, V.A., and Bitner, M. J. Service
Marketing: Integrating Customer Focus Across the Firm, 2d ed. New York: Irwin McGraw-Hill,
2000. ROLAND T. RUST (rrust@rhsmith.umd.edu) holds the David Bruce Smith Chair in
Marketing at the Robert H. Smith School of Business of the University of Maryland, where he
directs the Center for E-Service. His research focuses on service marketing and advertising
media. He has won best-article awards for articles in Marketing Science, Journal of Marketing,
Journal of Advertising, and Journal of Retailing, and his six books include Driving Customer
Equity, Service Marketing, and Advertising Media Models. Professor Rust is one of only two
media researchers to be awarded the Outstanding Contribution to Advertising Research award by
the American Academy of Advertising, and the only media researcher ever to be named a Fellow
of the American Statistical Association. He has also received the American Marketing
Association's Gil Churchill Award for career contributions to marketing research, and the Henry
32

Latane Distinguished Doctoral Alumnus Award from the University of North Carolina at Chapel
Hill. He is the founder and chair of the AMA Frontiers in Services Conference, and founding
editor of the Journal of Service Research. He also serves on the editorial review boards of the
Journal of Marketing Research, Journal of Marketing, and Marketing Science. He has taught at
Vanderbilt University and the University of Texas at Austin, holds a B.A. in mathematics from
DePauw University, and an M.BA. and Ph.D. in marketing from the University of North
Carolina at Chapel Hill, and is a member of several corporate and nonprofit boards.
KATHERINE N. LEMON (lemonka@bc.edu) is an assistant professor of marketing at the
Wallace E. Carroll School of Management, Boston College, and previously was the M.BA. Class
of 1962 Visiting Assistant Professor at the Harvard Business School, and on the marketing
faculty of Duke University's Fuqua School of Business. Her research focuses on dynamic
customer-relationship management, customer equity, and wireless CRM. She has conducted
research in a myriad global industries, including emerging e-businesses, financial services,
retailing, telecommunications, interactive television, computing, high-technology electronics,
and consumer products. She is a co-author of Driving Customer Equity: How Customer Lifetime
Value Is Reshaping Corporate Strategy, currently being translated into several languages, and the
forthcoming Wireless Rules: New Marketing Strategies for Customer Relationship Management
Anytime, Anywhere. Her research has appeared in the Journal of Marketing Research, Marketing
Science, and the Journal of Product Innovation Management, and she serves on the editorial
board of the Journal of Service Research and Journal of Interactive Marketing. She consults with
and teaches senior executives at leading companyes worldwide.

33

SELF ENTERED NOTES

The world economy nowadays is increasingly characterized as a service economy. This is primarily due to the increasing importance and
share of the service sector in the economies of most developed and developing countries. In fact, the growth of the service sector has
long been considered as indicative of a countrys economic progress.
Economic history tells us that all developing nations have invariably experienced a shift from agriculture to industry and then to the
service sector as the main stay of the economy.

This shift has also brought about a change in the definition of goods and services themselves. No longer are goods considered separate
from services. Rather, services now increasingly represent an integral part of the product and this interconnectedness of goods and
services is represented on a goods-services continuum.

Definition and characteristics of Services

The American Marketing Association defines services as - Activities, benefits and satisfactions which are offered for
sale or are provided in connection with the sale of goods.
The defining characteristics of a service are:
Intangibility: Services are intangible and do not have a physical existence. Hence services cannot be touched, held,
tasted or smelt. This is most defining feature of a service and that which primarily differentiates it from a product.
Also, it poses a unique challenge to those engaged in marketing a service as they need to attach tangible attributes
to an otherwise intangible offering.
1.

Heterogeneity/Variability: Given the very nature of services, each service offering is unique and cannot be
exactly repeated even by the same service provider. While products can be mass produced and be
homogenous the same is not true of services. eg: All burgers of a particular flavor at McDonalds are almost
identical. However, the same is not true of the service rendered by the same counter staff consecutively to
two customers.

2.

Perishability: Services cannot be stored, saved, returned or resold once they have been used. Once
rendered to a customer the service is completely consumed and cannot be delivered to another customer.
eg: A customer dissatisfied with the services of a barber cannot return the service of the haircut that was
rendered to him. At the most he may decide not to visit that particular barber in the future.

3.

Inseparability/Simultaneity of production and consumption: This refers to the fact that services are
generated and consumed within the same time frame. Eg: a haircut is delivered to and consumed by a
customer simultaneously unlike, say, a takeaway burger which the customer may consume even after a few
hours of purchase. Moreover, it is very difficult to separate a service from the service provider. Eg: the
barber is necessarily a part of the service of a haircut that he is delivering to his customer.

Types of Services
1.

Core Services: A service that is the primary purpose of the transaction. Eg: a haircut or the services of
lawyer or teacher.

2.

Supplementary Services: Services that are rendered as a corollary to the sale of a tangible product. Eg:
Home delivery options offered by restaurants above a minimum bill value.

Difference between Goods and Services

Given below are the fundamental differences between physical goods and services:
Goods

Services

34

A physical commodity

A process or activity

Tangible

Intangible

Homogenous

Heterogeneous

Production and distribution are separation from their

consumption

Production, distribution and consumption are simultaneous processes

Can be stored

Cannot be stored

Transfer of ownership is possible

Transfer of ownership is not possible

35