Service Marketing and Management: Capacity as a Strategic Marketing Variable

Abstract

We start this chapter with the classical discussion of whether service marketing is different from the marketing of manufactured and extractive (e.g., agriculture, fishing, mining) goods. We conclude that although philosophical debates are inconclusive, certain problems are prevalent for service providers. One of those problems, faced by many but not all service providers, is the problem of coordinating marketing and operations. This problem is often made difficult by the presence of capacity constraints. We devote this chapter to the topic of marketing with capacity constraints.After that general discussion, we argue that both service quality and service strategy are integrally related to capacity decisions. For it is capacity (i.e., available employee hours, available physical facilities, lengths of queues, etc.) that ultimately determines whether the service provider can satisfy and retain buyers. Capacity decisions also impact costs and profitability. There are basic compromises between creating additional capacity to better serve customers and increasing costs.After discussing the relationship between capacity strategy and service strategy, we discuss capacity-constrained strategies in two settings. In the first setting, we examine the case when demand is predictable. This case arises when factors such as predictable seasonality allow us to accurately forecast peak and off-peak demand. Seasonality may be related to the time of day, the day of week, the month of the year or particular holidays.The section on capacity-constrained strategies considers strategies such as demand shifting. Demand shifting occurs when service providers attempt to shift demand from peak to off-peak periods. We discuss both the social welfare as well as the profitability implications associated with these strategies. Beyond demand shifting, we also consider other strategies including non-price rationing, offering different levels of service at times of peak demand and the bundling of services.One interesting part of peak pricing strategies occurs when the opportunity cost of a resource changes over time. For example, consider a restaurant where table space is severely limited but only during peak hours. In this situation, the price of foods (e.g., coffee) that take more time to consume should have much higher prices during peak hours because these foods consume more capacity. Off-peak, however, excess capacity lowers the opportunity cost of consuming capacity to zero.The last section of this chapter, before the conclusions, considers the case of capacityconstrained strategies with unpredictable demand. This case often occurs when exogenous and unpredictable events impact the arrival of buyers. A change in interest rates, a change in weather

Are Reservations Recommended?

“…Xie and Shugan (2001) and Shugan and Xie (2005) develop similar ideas. (For reviews, see Courty 2000, Shugan 2002.) None of this work addresses the restaurant industry.…”

“…Also, they do not publicize compensation schemes for reservation holders denied service. Furthermore, most of these papers focus on monopoly settings (Dana 1998 andShugan andXie 2005 are exceptions) while we extend our analysis to competitive environments. Dana and Petruzzi (2001) study a newsvendor model in which customers incur a cost to shop.…”

Inventory Models with Delivery Upgrade

“…Shugan (2002) first defines peak periods, when the demand far exceeds capacity, and corresponding off-peak periods, when the opposite is true. He then emphasizes the importance of shifting demand from peak to off-peak periods, by either pricing or non-pricing rationing.…”

Inventory control and pricing with alternative lead times

“…However, the implementation may not be straightforward. Shugan [3] notes that such a demand shift does not come naturally because the seller would like to "keep price-insensitive customers buying at the peak period" for a higher margin and "shift only price-sensitive customers to the off-peak period." Hence, "accomplishing this objective requires a specific separating strategy (p.…”