Services now form the backbone of the global economy. Statistics show that services contribute nearly 70 % of global GDP – and their share is rising.
Even traditional industrial companies, such as car and machine manufacturers, are looking into services to differentiate, add value, and lock in customers. They do this, for example, by adding value-enhancing services to manufactured goods, which has the effect of blurring the line between services and manufacturing.
B2B companies, too, are increasingly moving into services. The growth of the service sector is, in fact, driven largely by the rise of business services, such as legal services, market research, IT, and payroll operations.
Customer service and service management are often not seen as strategic enough.”
From senior management, this requires a whole new attitude towards service marketing and management, says Professor Jochen Wirtz.
"Customer service and service management are often not seen as strategic enough, but if you look at creating and capturing value in the service economy, one of the critical aspects of differentiation these days is the value you deliver to your customers through integrated solutions which typically include products and bundles of services. A lot of this has to do with service management."
Key to winning: customer perspective
According to Prof. Wirtz, who serves as Professor of Marketing at the National University of Singapore, the key to winning in the current economy – rather than becoming commoditized – is to look at everything from a customer perspective, whether it's management, people, operations, or the whole process design.
"It all comes together in the customer interface. In traditional marketing, you talk about the 4 P's. In service marketing, we add 3 more: people, process, and physical environment."
Managing people for service advantage covers everything from being the preferred employer for your key target employees and having the right tools to identify them to training, motivating, and organizing your employees into teams. Creating a distinctive culture of service leadership also plays an important role.
Physical environment refers to the service space. If you have to wait in a bank, where and how you wait and what it feels like and the quality cues the bank sends – all this is critical to the customer experience.
Poor process results in poor service
Another key aspect of creating a good customer experience are processes that run smoothly. Under processes, Prof. Wirtz also lumps IT – "having the necessary information at the fingertips at the frontline is important," he says – as well as supply and demand and capacity management.
"If you make people wait too long, it's a very poor process. The process is the backbone of the service. Without a great process, you are never going to have a good service," he says.
Keeping up with customer expectations is an ongoing battle.”
The need for well-designed processes makes services a lot tougher to manage than product-based businesses, because service processes are often distributed and happen in real-time.
"If I'm Apple, I can churn out a hundred million phones out of a central factory where they are quality controlled and then distributed globally, but if I'm Starbucks, every restaurant is a mini-factory with its own machines, processes, and touchpoints. That's why quality control, capacity management, and cost control are all a lot more challenging," Prof. Wirtz explains.
The upside is that this is exactly why delivering quality service is a key differentiator in many businesses. Keeping up with customer expectations is an ongoing battle.
Neglecting service recovery is a risky business
One of Prof. Wirtz's favorite themes is strategic complaint handling and service recovery, something that is often overlooked despite its importance for both B2C and B2B businesses.
"It's such an unsexy topic. None of the senior people want to get their hands dirty with it. Yet we know that some 40 % of people switch service providers because of poor or non-existent complaint handling and poor service recovery. That's why we need to look at this from a customer retention perspective. Poor complaint handling is a key leakage point in a company's customer base. You have to look at it carefully and decide how to plug it – or risk losing customers."
While losing customers is a problem for all companies, for B2B companies it may be disastrous as they often have fewer customers than their B2C counterparts. For a B2B business, losing one customer may result in a significant loss of income.
On the other hand, when service recovery is handled skillfully, it can even bring in new business.
Specialization explodes traditional value chains
Another way to drive growth and innovation in the service economy is specialization and outsourcing non-core activities. Even SMEs can now outsource many of their business processes to external providers. Outsourcing helps unlock management capacity to concentrate on developing new products, Prof. Wirtz says.
To create value is the easy part, but how to capture value and have pricing power, that's the question.”
"It's part of the power of Silicon Valley. If you come up with a brilliant idea, you don't need many assets or skills because everything you need is readily available at a pretty good price."
Prof. Wirtz sites Tesla as a fantastic example. "Its revenues are less than what the big car manufacturers spend in R&D, yet it out-innovates the competition. They pick where they want to innovate and buy everything else in from outside."
According to Prof. Wirtz, specialization explodes traditional value chains. Capturing value becomes difficult. "To create value is the easy part, but how to capture value and have pricing power, that's the question. You have to be able to own something others can't readily copy or buy from someone else."
Owning the customer relationship gives bargaining power
One way to capture value is – still – branding. Another is owning the customer relationship and the point of sale.
"If I own the point of sale, it's me who decides whether to offer you Nike or Adidas. Whoever serves the customer, owns the relationship, and is present at the transaction has a lot of power in the value chain and can extract value from that," Prof. Wirtz says.
He points to the big hotel chains. The most valuable assets they have are loyalty programs with all the customer data and the online distribution network.
"When they sign up a new hotel, what do they sell? Occupancy. They have a huge database that can help fill up to 80 % of the new hotel's capacity. It gives them a lot of bargaining power," Prof. Wirtz says.
Other aspects to add value include, among other things, the network effect, webs of processes, and critical mass and liquidity. Why is London such an attractive financial center, for example? Because it has liquidity, says Prof. Wirtz.
"I can execute huge purchase and sales orders in London without moving the market, whereas if I do that in Frankfurt and want to buy a lot, I drive up the price, and if I want to sell a lot, I drive down the price. Each time I lose."
"If you want to capture value you have to have things that are of value to the customer and that cannot be copied, whether because it's too difficult, illegal, or too time-consuming," Prof. Wirtz concludes.