Services Marketing:

People, Technology, Strategy

CHAPTER 9
Balancing Demand And Capacity

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 Learning Objectives
1. Know different demand-supply situations
that fixed-capacity firms may face.
2. Describe building blocks of dealing with
problem of fluctuating demand.
3. Understand what is meant by productive
capacity in a service context.
4. Be familiar with basic ways of managing
capacity.

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 Learning Objectives
5. Recognize that demand patterns vary by segment, so
that segment-specific variations in demand can be
predicted.
6. Be familiar with five basic ways of managing demand.
7. Understand how to use marketing mix elements of
price, product, place, and promotion to smoothen out
fluctuations in demand.
8. Know how to use waiting lines and queuing systems to
inventory demand.
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 Learning Objectives
9. Understand how customers perceive waits and
how to make waiting less burdensome for
them.
10.Know how to use reservations systems to
inventory demand.
11.Be familiar with strategic approaches to utilize
residual surplus capacity even after all other
options of matching demand and capacity
have been exhausted.
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Section 1
DEMAND-SUPPLY SITUATIONS

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 Fluctuations In Demand Threaten
Profitability
• Services with limited capacity face wide swings in
demand
• Service capacity cannot be kept aside for sale at a
later date (perishability)
• Effective use of expensive productive capacity is a
secret of success in service businesses
• Service marketers should develop strategies to bring
demand and capacity balance to create benefits for
customers & improve business profitability

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 Four Demand-supply Situations
• Excess demand — Level of demand exceeds
maximum available capacity.
• Demand exceeds optimum capacity — Conditions
are crowded and customers are likely to perceive a
deterioration in service quality.
• Demand and supply are well-balanced at the level of
optimum capacity — Staff and facilities are busy
without being overworked.
• Excess capacity — Demand is below optimum
capacity and productive resources are underutilized.
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Implications Of Variations In
Demand Relative To Supply

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 Building Blocks In Managing
Capacity And Demand

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Section 2
DEFINE PRODUCTIVE CAPACITY

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 Forms of Productive Capacity
• critical to capacity management
FACILITIES • relates to those that are designed to “hold”
customers and those that “hold” goods

• used to process people, possessions, or information,

EQUIPMENT may encompass a large range of items
• can be very situation-specific.

• a key element of productive capacity in all high-

LABOR contact services and many low-contact ones

• organizations are dependent on access to sufficient

INFRASTRUCTURE capacity in the public, or private infrastructure, to be
able to deliver quality service to their own customers.
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Section 3
MANAGE CAPACITY

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 Managing Capacity
• Capacity can be stretched or shrunk
• Stretched Capacity Levels —
– The same capacity is stretched to absorb extra
demand. Ex: public transportation
– Utilizing the facilities for longer periods. Ex:
stretched working hours in banks

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 Managing Capacity
• Adjusting Capacity to Match Demand —
– Schedule downtime during periods of low demand
– Cross-train employees
– Use part-time employees
– Invite customers to perform self-service
– Ask customers to share
– Create flexible capacity
– Rent or share extra facilities and equipment

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Section 4
UNDERSTANDING DEMAND
PATTERNS

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 Questions about demand patterns and their
underlying causes (Table 9.1)
1. Do demand levels follow a predictable
cycle?
If so, is the duration of the demand cycle:
• One day (varies by hour)
• One week (varies by day)
• One month (varies by day or by week)
• One year (varies by month or by season
or reflects annual public holidays)
• Another period
3. Do demand levels seem to change
randomly?
If so, could the underlying causes be:
• Day-to-day changes in the weather
• Health events whose occurrence cannot
be pinpointed exactly
• Accidents, fires, and certain criminal
activities
• Natural disasters (e.g., earthquakes,
storms, mudslides, and volcanic eruptions)
2. What are the underlying causes of these
cyclical variations?
• Employment schedules
• Billing and tax payment/refund cycles
• Wage and salary payment dates
• School hours and vacation
• Seasonal changes in climate
• Occurrence of public or religious holidays
• Natural cycles, such as coastal tides
4. Can demand for a particular service over
time be disaggregated by market segment
to reflect such
components as follows?
• Use patterns by a particular type of
customer or for a particular purpose
• Variations in the net profitability of each
completed transaction
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Section 5
MANAGING DEMAND

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 Managing Demand
• Five approaches to managing demand:
– Take no action and leave demand to find its own
levels
– Reduce demand during peak periods
– Increase demand during low periods
– Inventory demand using a queuing system
– Inventory demand using a reservations system

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Alternate Demand Management Strategies
for Different Capacity Situations

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 Take No Action
• Insufficient Capacity (Excess Demand)
– Results in unorganized queuing (may irritate
customers and discourage future use)
• Insufficient Demand (Excess Capacity)
– Capacity is wasted (customers may have a
disappointing experience for services such as
theater)

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Use Marketing Mix Elements To Shape
Demand Patterns
• Use price and non-monetary costs to manage demand
– Lower prices may encourage some people to change timing of
purchase.
• Change product elements
– A new service product targeted at different segments is created to
encourage demand.
• Modify place and time of delivery
– Varying timings when service is available, offering service to customers
at new locations.
• Promotion and education
– If other variables of the marketing mix remain unchanged,
communication efforts alone may be able to help facilitate smooth
demand.
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 Inventory Demand Through
Waiting Lines And Queuing Systems
• Demand can be inventoried in two ways:
1. By asking customers to wait in line, usually on a
“first-come first-serve” basis
2. By offering customers the opportunity of
reserving or booking a service capacity in
advance

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 1. Managing Waiting Lines
• Rethinking design of queuing system
 queue configuration and virtual waits.

• Tailoring queuing system to different market segments

 by urgency, price or importance of customer

• Managing customers’ behavior and their perceptions of wait

 use the psychology of waiting to make waits less unpleasant

• Installing a reservations system

 use reservations, booking, or appointments to distribute demand

• Redesigning processes to shorten the time taken in each transaction

 by installing self-service machines

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 Different Queue Configurations

• Single line sequential stages

– Bottlenecks may occur where process takes
longer to execute
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 Different Queue Configurations

• Parallel lines to multiple servers

– Offer more than 1 serving station, customers can
choose
– However, not all lines move at equal speed
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 Different Queue Configurations

• Single line to multiple servers

– Commonly known as a “snake”, used at post offices
and airport check-ins
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 Different Queue Configurations

• Designated lines
– E.g. Express lines at supermarkets or different
check-ins for first class, business class etc.
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 Different Queue Configurations

• Taking a number
– Saves customers from standing in line
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 Different Queue Configurations
• Wait lists
– Commonly used in
restaurants
– E.g. Party-size seating,
VIP seating, call-ahead
seating or large party
reservations

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 Different Queue Configurations
• Virtual Waits
– Customers register their place
in line on a terminal
– Terminal estimates the time
customer will reach front of
virtual line for them to return
and claim their place
– E.g. Sushi Tei Restaurant has a
self-service touch screen for
diners to register; they will
receive a call 5 minutes before
their table is available.

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 Queuing Systems Tailored To
Market Segments
• Not all queuing systems are organized on a “first
come, first served” basis. Rather, good systems
often segment waiting customers by:
– Urgency of the job (e.g., hospital emergency units).
– Duration of the service transaction (e.g., express lanes).
– Premium service based on a premium price (e.g., first-
class check-in counters).
– Importance of the customer (e.g., frequent travelers get
priority wait listing).
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Section 5
CUSTOMER PERCEPTIONS OF
WAITING TIME

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 Customer Perceptions Of Waiting Time
• Customers don’t like wasting their time waiting.
• Research shows people often think they waited
longer for a service than they actually did.
• Firms need to understand the psychology of
waiting and take active steps to make waiting
less frustrating.

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 Suggestions To Make Waits Less Stressful
And Unpleasant
1. Unoccupied time feels longer than occupied time
– Engage customer during longer waiting times
2. Solo waits feel longer than group waits
– Make group waits more enjoyable
3. Physically uncomfortable waits feel longer than comfortable
waits
– Provide customers with comfortable waiting facilities
4. Pre- and post-process waits feel longer than in-process waits
– engaging customers during pre- and post-process waits
5. Unfair waits are longer than equitable waits
– Do not honor people who jump lines
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 Suggestions To Make Waits Less Stressful
And Unpleasant
6. Unfamiliar waits seem longer than familiar ones
– Create customer awareness about usual waiting time
7. Uncertain waits are longer than known, finite waits
– Be certain about wait times for different situations
8. Unexplained waits are longer than explained waits
– Apologize for unexplained waits
9. Anxiety makes waits seem longer
– Introduce special efforts to reduce anxiety
10. The more valuable or important the service, the
longer people will wait
– Project the value of the service
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Section 6
RESERVATIONS SYSTEMS

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 Inventory Demand Through Reservations
Systems
• Benefits of a reservations system:
– Customer dissatisfaction due to excessive waits can
be avoided.
– Allows demand to be controlled and smoothed out
in a more manageable way.
– Enables implementation of revenue management
and serves to pre-sell service to different customer
segments.
– Helps organizations prepare operational and
financial projections for future.
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 Creating Alternative Use For Otherwise
Wasted Capacity
• Use capacity for service differentiation. When capacity
utilization is low, service employees can go all the way to truly
“wow” their customers.
• Reward your best customers and build loyalty (e.g., through
special promotions as part of a loyalty program).
• Customer and channel development (e.g., provide free or
heavily discounted trials).
• Reward employees (e.g., excess capacity in restaurants, beach
resorts, or cruise lines can used to reward loyal employees
and their families).
• Barter free capacity (e.g., service firms can consider bartering
excess capacity for advertising space, airline seats, and hotel
rooms).
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THANK YOU FOR LISTENING!

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