Planning for the Unique Aspects of Service Retailing

We present this appendix because service retailing in the United States and around the world is growing steadily and represents a large portion of overall retailing. U.S consumers spend 60 percent of their after-tax income on such services as travel, recreation, personal care, education, medical care, and housing. Over 84 percent of the labor force works in services. Consumers spend billions of dollars each year to rent such products as power tools and party goods (coffee urns, silverware, wine glasses, etc.). There are 86,000 beauty and barber shops; 480,000 restaurants; and 53,000 commercial child care and 21,000 nonprofit child care facilities.^[1] Although automa­tion has substantially reduced manufacturing labor costs, many services remain labor-intensive due to their personal nature.

Here, we look at the abilities required to be a successful service retailer, how to improve the performance of service retailers, and the strategy of a Baldrige Award winner.

1. Abilities Required to Be a Successful Service Retailer

The personal abilities required to succeed in service retailing are usually quite distinct from those in goods retailing, as shown here:

• With service retailing, the major value provided to the customer is some type of retailer ser­vice, not the ownership of a physical product produced by a manufacturer.
• Specific skills are often required, and these skills may not be transferable from one type of service to another. Television repair technicians, beauticians, and accountants cannot easily change businesses or transfer skills. The owners of appliance stores, cosmetics stores, and toy stores (all goods retailers) would have an easier time than service retailers in changing and transferring their skills to another area.
• More service operators must possess licenses or certification to run their businesses. Barbers, real-estate brokers, dentists, attorneys, plumbers, and others must pass exams in their fields.
• Owners of service businesses must enjoy their jobs and have the aptitude for them. Because of the close personal contact with customers, these elements are essential and hard to fake.

Many service retailers can operate on lower overall investments and succeed on less yearly revenues than goods retailers. A firm with four outdoor tennis courts can operate with one worker who functions as clerk/cashier and maintenance person. A tax-preparation firm can succeed with one accountant. A watch repair business needs one repairperson. In each case, the owner may be the only skilled worker. Operating costs can be held down accordingly. On the other hand, a goods retailer needs a solid product assortment and inventory on hand, which may be costly and require storage facilities.

The time commitment of a service retailer differs by type of business opportunity. Some busi­nesses, such as a self-service laundromat or a movie theater, require a low time commitment. Other businesses, such as house painting or a travel agency, require a large time commitment because personal service is the key to profitability. More service firms are in the high rather than the low time-investment category.

2. Improving the Performance of Service Retailers

Service tangibility can be increased by stressing service provider reliability, promoting a con­tinuous theme (the Hertz #1 Club Gold), describing specific results (a car tune-up improving gas consumption by 1 mile per gallon), and offering warranties (hotels giving automatic refunds to unhappy guests). Airlines have Web sites where customers can select flights and make their reservations interactively. These sites are a tangible representation of the airlines and their logos.

Demand and supply can be better matched by offering similar services to market segments with different demand patterns (e.g., tourists versus residents). This can be done by offering new services with demand patterns that are countercyclical from existing services (cross-country skiing during the winter at Denver golf resorts); new services that complement existing ones (beauty salons adding tanning booths); special deals during nonpeak times (midweek movie the­ater prices); and new services not subject to existing capacity constraints (a 10-table restaurant starting a home catering service).

Standardizing services reduces their variability, makes it easier to set prices, and improves efficiency. Services can be standardized by clearly defining each task, determining the minimum and maximum times needed to complete each task, selecting the best order for tasks to be done, and noting the optimum time and quality of the entire service. Standardization has been success­fully applied to such firms as quick-auto-service providers (oil change and tune-up firms), legal services (for house closings and similar proceedings), and emergency medical care centers. If services are standardized, there is often a trade-off (e.g., more consistent quality and convenience in exchange for less of a personal touch).

Besides standardizing services, retailers may be able to make services more efficient by automating them and substituting machinery for labor. Thus, real-estate attorneys often use word­processing templates for common paragraphs in house closings. This means more consistency in the way documents look, time savings, and neater documents with fewer errors. Among the service firms that automate at least part of their operations are banks, car washes, bowling alleys, airlines, phone services, real-estate brokers, and hotels.

One way that services can increase customer loyalty is by better understanding and react­ing to shopper complaints. This strategy enables a service operator to rectify problem areas that would otherwise be unknown. It also makes it possible for the service operator to offer restitution to the consumer so that he/she will remain loyal. Unfortunately, too often, a dissatisfied customer will find it easier to switch to a competitor (or complain to friends and family) as opposed to complaining to the service operator. Retailers can reduce the negative effect of a service-related failure by (1) apologizing, (2) reviewing the complaint, (3) fixing the problem and following up to show concern, (4) documenting the problem so that the poor situation will not recur, and (5) communicating with these customers and treating them in a fair manner. Employee politeness and sincerity are closely related to customer satisfaction following a service failure.²

The location of a service retailer must be carefully considered. Sometimes, as with TV repairs, house painting, and lawn care, the service is “delivered” to the customer. The firm’s location becomes a client’s home, and the actual retail office is rather insignificant. Many clients might never even see a service firm’s office; they make contact by phone or personal visits, and customer convenience is optimized. The firm incurs travel expenses, but it also has low (or no) rent and does not have to maintain store facilities, set up displays, and so on. Other service retailers are visited on “specific-intent” shopping trips. Although a customer may be concerned about the convenience of a service location, he or she usually does not select a skilled practitioner such as a doctor or a lawyer based on the location. It is common for doctors and attorneys to have offices in their homes or near hospitals or court buildings. A small store can often be used because little or no room is needed for displaying merchandise. A travel agency may have six salespeople and book millions of dollars in trips, but fit into a 500-square-foot store.

Satisfaction-based pricing recognizes and reduces customer perceptions of uncertainty that service intangibility magnifies. It involves service guarantees, benefit-driven pricing, and flat- rate pricing.³ Relationship pricing encourages long-term relationships with valuable customers. It entails long-term contracts and price bundling. Efficiency pricing shares cost savings with customers that arise from the firm’s efficiently executing service tasks. It is related to the concept of cost leadership.

Negotiated pricing occurs when a retailer works out pricing arrangements with individual customers because a unique or complex service is involved and a one-time price must be agreed on. Unlike traditional pricing (whereby each consumer pays the same price for a standard service), each consumer may pay a different price under negotiated pricing (depending on the nature of the unique service). A moving company charges different fees, depending on the distance of the move, who packs the breakable furniture, the use of stairs versus an elevator, access to highways, and the weight of furniture.

Contingency pricing is an arrangement whereby the retailer does not get paid until after the service is performed and payment is contingent on the service’s being satisfactory. A real- estate broker earns a fee only when a house purchaser (who is ready, willing, and able to buy) is

presented to the house seller. Several brokers may show a house to prospective buyers, but only the broker who actually sells the house earns a commission. This technique presents risks to a retailer because considerable time and effort may be spent without payment. A broker may show a house 25 times, not sell it, and therefore not be paid.

Dynamic pricing uses data from customers, as well as ongoing analyses of reservations (such as airlines and hotels), to vary prices on a customer-by-customer basis. Prices can differ for the same service, such as airline travel, based on when a customer makes a reservation (early or late), the time of day and day of the week of the flight, and whether the service provider feels it needs to reduce price to fill otherwise empty facilities (seats on a plane or at a show).⁴

One customer type is often beyond the reach of some service firms: the do-it-yourselfer. And the number of do-it-yourselfers in the United States is growing, as service costs increase (and due to the slow-growth economy). The do-it-yourselfer performs repairs on his or her car, paints the house, mows the lawn, and makes all vacation plans. Goods-oriented discount retailers do well by selling supplies to these people, but service retailers suffer because labor is done by the customer.

3. The Strategy of Pal’s Sudden Service: Baldrige Award Winner⁵

The Baldrige Award is given by the president of the United States to businesses—manufacturing and service, small and large—and to education and healthcare organizations that apply and are judged to be outstanding in seven areas: leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource focus; process manage­ment; and results. One of the few retailers to win the award is Pal’s Sudden Service—based in Kingsport, Tennessee—a privately owned, quick-service restaurant chain with 26 locations and about 1,000 employees (as of 2016). The firm distinguishes itself by offering competitively priced food of consistently high quality, delivered quickly, cheerfully, and without error.

At Pal’s, customer waiting time from placing an order to picking it up is four times faster than the second-fastest quick-serve U.S. restaurant; at the drive-up window, where orders are placed, the average turnaround time is 12 seconds. Despite the speedy service, Pal’s makes an error only once in every 3,600 orders. That is 10 times better than the average fast-food restaurant.

Pal’s has a process for every organizational and operational activity. Its Business Excellence Process is the key integrating force and ensures that customer needs are met in each transaction. Carried out under the leadership of Pal’s top executives and its owner-operators, this process spans all facets of operations from strategic planning (done annually) to online quality control.

The company’s success in significantly reducing turnover among frontline production and service personnel, most of whom are between the ages of 16 and 18 and work part-time, is a big advantage. Job candidates must pass a 60-question psychometric test before being considered for training. Owner-operators and assistant managers have primary responsibility for training, based on a four-step model: Show it, do it, evaluate it, and perform it again. New employees get 120 hours of training before working on their own and must be certified for each specific job task. At the assistant manager level, job turnover is 1.4 percent; at the front-line level it is just 32 percent.

Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.