Monday, March 25, 2013

Services versus Goods – Which brings your company more money?

A fundamental shift from good-demand logic to service-demand logic is occurring within the service management field. Service-demand logic looks at the economic value of the services associated with the product versus the actual cost of the product itself. Changing this scope of understanding helps decision-makers to view the value of the product as one of many types of possible revenue generating sources. These others sources may include servicing, insurance, technical support, upgrades, etc…

One of the reasons why a company would desire to move from a good-demand mentality to a service-demand mentality is because the latter affords many more opportunities to gain wealth. A secondary reason is because in today’s world of low price Asian manufacturers it is hard for American companies to compete on product price alone. Selling a total package raises the overall value of the product to the consumer.

It is important to understand the differences between products and services to understand how the mental shift impacts business operations. According to Vargo and Lusch (2004) there are four fundamental differences:

1.)    Intangibility: Services are intangible and products are tangible.
2.)    Heterogeneity: Goods are standardized while services are not.
3.)    Inseparability: The services are inseparable from the customer while goods are produced separate from the customer.
4.)    Perishability: Services are perishable while most good are not.

Through these four concepts it is possible to understand that services are connected deeply to the needs of the customer. They create a relationship and expectation on the customer through which long-term relationships and additional purchases can be sought. Thinking of a product with services raises the overall market value of the entire package allowing for higher levels of customer satisfaction and sales.

Service-demand logic is based on the culmination of many different marketing , organizational, and service theories. Lusch and Vargo (2006) reviewed 50 top marketing scholars from around the world and found much support and some criticism of service-demand logic. Eventually the field was integrated by Gummesson (2008) with marketing and customer relationship management to create multi-party networks through mass marketing.

Even though this is an emerging concept it stands to logic and reason that the service economy requires a new way of thinking about products. The product is sold into a relationship with the customer. It is this relationship that can either foster over many years or be a simple one-time sale. Through the proper management and development of appropriate service offerings organizations can create higher revenue streams that further their sustainability interests.

Gummesson, E. (2008), Total Relationship Marketing, revised 3rd ed., Butterworth-Heinemann, Oxford.

Vargo, S. and Lusch, R. (2004b), The four service marketing myths: remnants of a goods-based, manufacturing model. Journal of Service Research, 6 (4).

Vargo, S.. and Lusch, R. (2006), Service-dominant logic: what it is, what it is not, what it might be, in Lusch, R.F. and Vargo, S.L. (Eds), The Service-dominant Logic of Marketing: Dialog, Debate, and Directions, M.E. Sharpe, Armonk, NY, pp. 43-56.

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