Unit 3: Services

Meaning of Services:

Services are separately identifiable activities that satisfy customer needs or wants through essentially
intangible benefits, either in their own right or as a significant element of a tangible product.

A service is any act of performance that one party can offer another that is essentially intangible and does
not result in the ownership of anything; its production may or may not be tied to a physical product.

According to the American Marketing Association defines services as - “Activities, benefits and
satisfactions which are offered for sale or are provided in connection with the sale of goods.”

The defining characteristics of a service are:

1. Intangibility: Services are intangible and do not have a physical existence. Hence services
cannot be touched, held, tasted or smelt. This is most defining feature of a service and that which
primarily differentiates it from a product. Also, it poses a unique challenge to those engaged in
marketing a service as they need to attach tangible attributes to an otherwise intangible offering.

2. Heterogeneity/Variability: Given the very nature of services, each service offering is unique and
cannot be exactly repeated even by the same service provider. While products can be mass
produced and be homogenous the same is not true of services. eg: All burgers of a particular
flavor at McDonalds are almost identical. However, the same is not true of the service rendered
by the same counter staff consecutively to two customers.
3. Perishability: Services cannot be stored, saved, returned or resold once they have been used.
Once rendered to a customer the service is completely consumed and cannot be delivered to
another customer. eg: A customer dissatisfied with the services of a barber cannot return the
service of the haircut that was rendered to him. At the most he may decide not to visit that
particular barber in the future.
4. Inseparability/Simultaneity of production and consumption: This refers to the fact that
services are generated and consumed within the same time frame. Eg: a haircut is delivered to and
consumed by a customer simultaneously unlike, say, a takeaway burger which the customer may
consume even after a few hours of purchase. Moreover, it is very difficult to separate a service
from the service provider. Eg: the barber is necessarily a part of the service of a haircut that he is
delivering to his customer.

Goods- Service Continuum:

• The goods and services continuum enables marketers to see the relative goods/services
composition of total products. A product’s position on the continuum, in turn, enables
marketers to spot opportunities.

• At the pure goods end of the continuum, goods that have no related services are positioned.

• At the pure services end are services that are not associated with physical products.

• Products that are a combination of goods and services fall between the two ends. For example,
goods such as air conditioners, which require accompanying services such as delivery and
installation, are situated toward the pure goods end. Products that involve the sale of both goods
 and services, such as auto repair, are near the center. And products that are primarily services but
rely on physical equipment, such as taxis, are located toward the pure services end.

A few observations of the Continuum model can be made:

• – The offerings of a firm range from pure goods to pure services.

– Those that are mostly goods are tangible and are very easy to evaluate by the consumer (like
fabrics, jewellery, a house etc.). A consumer finds it very difficult to evaluate those offers which
are mostly services because of their intangibility (like legal and counselling advice, medical
diagnosis etc).
– The range of offers has different qualities in themselves and the customer looks for or seeks
these qualities:

• Highly tangible services eg: Car rental companies in India are Dial-a-Cab, in Delhi,or UBER.
Other car rental companies are Hertz-Rent-A-Car and Avis in the United States.

• Service linked to tangible goods: Here the service is linked to goods, either independently, or as
part of the marketer’s offer. If it is the latter, the service becomes a part of the total product
concept. This takes place when Videocon, the home appliance company, includes repair as part of
its marketing mix. Even if it is not included, home appliance repair is a service that is forever
linked to goods. If there were no home appliances in the world, such services would be non-
existent. A whole range of services exists in the housing sector – especially post-construction like
repair and maintenance.

Highly intangible services: In this classification under the continuum model, service is highly
intangible. The services cannot be touched, felt or seen, e.g., counselling, consultancy,
psychotherapy, physiotherapy, a guest lecture, etc.

Goods linked to
services

Services linked
to major goods
Classification of services:

1) Classification of service based on tangible action

Wherever people or products are involved directly, the service classification can be done based on
tangibility.

a) Services for people – Like Health care, restaurants and saloons, where the service is delivered by
people to people.

b) Services for goods – Like transportation, repair and maintenance and others. Where services are given
by people for objects or goods.

2) Classification of services based on intangibility

There are objects in this world which cannot be tangibly quantified. For example – the number of
algorithms it takes to execute your banking order correctly, or the value of your life which is forecasted
by insurance agents. These services are classified on the basis of intangibility.
a) Services directed at people’s mind – Services sold through influencing the creativity of humans are
classified on the basis of intangibility.

b) Services directed at intangible assets – Banking, legal services, and insurance services are some of
the services most difficult to price and quantify.

The most intangible form of service output is represented by information processing. The customer’s
involvement in this type is service is not required. Generally, customers have a personal desire to meet
face to face but there is no actual need in terms of the operational process. Consultancy services can be an
example of this type of services where the relationship can be built or sustained on trust or telephone
contact. However, it is more indicated to have a face-to-face relationship in order to fully understand
the needs of the customer.

What is Insurance?
In D.S. Hamsell words, insurance is defined “as a social device providing financial compensation
for the effects of misfortune, the payment being made from the accumulated contributions of all parties
participating in the scheme”
 Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer’s
incurring the risk of paying a large sum upon a given contingency. – Justice Tindall
 Insurance may be described as a social device whereby a large group of individuals, through a system
of equitable contributions, may reduce or eliminate certain measurable risks of economic loss
common to all members of the group. – Encyclopedia Britannica

In simple terms “Insurance is a co-operative device to spread the loss caused by a particular risk
over a number of persons, who are exposed to it and who agree to insure themselves against the risk”

Thus, the insurance is

(a) A cooperative device to spread the risk;

(b) the system to spread the risk over a number of persons who are insured against the risk;

(c) the principle to share the loss of the each member of the society on the basis of probability of loss
to their risk; and

(d) the method to provide security against losses to the insured

Insurance may be defined as form of contract between two parties (namely insurer and insured or
assured) whereby one party (insurer) undertakes in exchange for a fixed amount of money (premium) to
pay the other party (Insured), a fixed amount of money on the happening of certain event (death or
attaining a certain age in case of life) or to pay the amount of actual loss when it takes place through the
risk insured (in case of property)

Terminology used in definition of Insurance

- Insurer or insurance company – The agency involved in Insurance business is known as
insurer

- Insured/ Assured – The person who gets his property/life insured is known as insured
 - Policy - The agreement or contract which is put in writing is known as a Policy

- Premium – The consideration in return of which the insurer undertakes to make goods the
loss or give a certain amount in case of life insurance is known as premium

Assurance and Insurance

The two words were used synonymously at one time, but there is fine distinction between the
two. ‘Assurance’ is used in those contracts which guarantee the payment of a certain sum on the
happening of a specified event which is bound to happen sooner or later, for example attaining a certain
age or death. Thus life policies comes under ‘assurance’.

Insurance, on the other hand, contemplates the granting of agreed compensation of the happening of
certain events stipulated in the contract which are not expected but which may happen, for example risk
relating to fire, accident or marine.

Nature of Insurance
Following are the main characteristics of insurance which are applicable to all types of insurance
(life, fire, marine and general insurance).

1. Sharing of Risks - Insurance is a device to share the financial losses which may occur to individual
or his family on the happening of certain events
2. Cooperative Device – Insurance is a co-operative device to spread the loss caused by a particular risk
over a large caused by a particular risk over a large number of persons who are exposed to it and who
agree to insure themselves against the risk.
3. Value of Risk – Risk is evaluated at the time of insurance. There are several methods of valuing the
risk. Higher the risks, higher will be premium
4. Payment on Contingency -If the contingency occurs, payment is made; payment is made only for
insured contingency. If there is no contingency, no payment is made. In life insurance contract,
payment is certain because the death or the expiry of term will certainly occur. In other insurance
contract like fire, marine, the contingency may or may not occur
5. Amount of Payment of Claim - The amount of payment depends upon the value of loss occurred
due to the particular insured risk. The insurance is there upto that amount. In life insurance insurer
pay a fixed sum on the happening of an event or within a specified time period.

Example – In fire insurance, if fire occurs and half the property is destroyed, but the whole
property is insured, then payment of claim will be made only for that half building that is
destroyed not the whole amount of insured.

6. Insurance is different from Charity - In charity, there is no consideration but insurance is not
given without premium
7. Large number of Insured Person - Insurance is spreading of loss over a large number of persons.
Larger the number of persons, lower the cost of insurance and amount of premium and incase lower
the number of persons, higher the cost of insurance and amount of premium.
8. Insurance is different from Gambling - In gambling, there is no guarantee of gain, by bidding the
person expose himself to risk of losing. Whereas in insurance, by getting insured his life and
property, he protect himself against the risk of loss.

Functions of Insurance
Functions of insurance can be divided into parts;

I Primary functions.

II Secondary functions.

I Primary Functions
1. Certainty of compensation of loss: Insurance provides certainty of payment at the uncertainty of
loss. The elements of uncertainty are reduced by better planning and administration. The insurer
charges premium for providing certainty.

2. Insurance provides protection : The main function of insurance is to provide protection against
risk of loss. The insurance policy covers the risk of loss. The insured person is indemnified for
the actual loss suffered by him. Insurance thus provide financial protection to the insured. Life
insurance policies may also be used as collateral security for raising loans.

3. Risk sharing : All business concerns face the problem of risk. Risk and insurance are interlinked
with each other. Insurance, as a device is the outcome of the existence of various risks in our day
to day life. It does not eliminate risks but it reduces the financial loss caused by risks. Insurance
spreads the whole loss over the large number of persons who are exposed by a particular risk.

II Secondary Functions
1. Prevention of losses : The insurance companies help in prevention of losses as they join hands
with those institutions which are engaged in loss prevention measures. The reduction in losses
means that the insurance companies would be required to pay lesser compensations to the
assured and manage to accumulate more savings, which in turn, will assist in reducing the
premiums

2. Providing funds for investment : Insurance provide capital for society. Accumulated funds
through savings in the form of insurance premium are invested in economic development plans or
productivity projects.

3. Insurance increases efficiency : The insurance eliminates the worries and miseries of losses. A
person can devote his time to other important matters for better achievement of goals.
Businessman feel more motivated and encouraged to take risks to enhance their profit earning.
This also helps in improving their efficiencies.

4. Solution to social problems : Insurance take care of many social problems. We have insurance
against industrial injuries, road accident, old age, disability or death etc.

5. Encouragement of savings : Insurance not only provides protection against risks but also a
number of other incentives which encourages people to insure. Since regularity and punctuality pf
 payment of premium is a perquisite for keeping the policy in force, the insured feels compelled to
save money for premium payment.
Importance of Relationship Marketing Insurance:

A relationship develops between a customer and an organization when there are benefits to
both from one or more exchanges. For a profit maximizing firm, the benefits of a relationship
with end users arise if they are retained over time in isolation from competition and so forth.
Thus, a relationship marketing approach is considered essential for this sector as:

 Not only are financial services are inherently intangible and complicated in nature, but the
relationship between the financial institution and the customer may also become very complex.
This is due to the fact that financial service customers seldom buy just one product, but rather
purchase a range of products, often in the form of a ‘package’.
 The customer’s level of comprehension is dependent on the insurance manager’s experience in,
knowledge of, and skill in, managing the complexity and intangibility of the service provided.
Good strategies in relationship management are required to enhance customer comprehensibility
and to lower customer mistrust in an insurance relationship
 The service provider has to establish priorities concerning how much involvement should be
invested in a relationship, taking into consideration both the type of service and the type of
customer concerned.
 The more complex the financial service provided, the higher the long-term commitment, the
larger the resources, and the increased risk required.
 Multi-Level Marketing: The sale of insurance policies has all the characteristics that make it
suitable for relationship marketing. It is well known a joke among insurance sellers, which states
that “nobody goes to a supermarket (or other shops) in order to buy an insurance policy”. In this
context, the insurer agent has to contact the potential customers, to identify their necessities and
to offer them insurance programs that better fit their needs. As relationship marketing technique,
the insurer could consider Multi-Level Marketing (MLM), which is still successfully used by
some insurance brokers.
 Customer Loyalty and the Return on Relationships: Customer loyalty may be considered a key to
profitability, but it is reasonable to state that the creation of this sense of loyalty is not something
that happens overnight. As an example of this, there is research showing that in certain private
insurance business it may take as long as seven years before the individual customer gives the
provider any profit from the relationship. The right customers are mainly those to whom the best
value possible can be delivered by the company over a long-term period. The effects of marketing
alone are not able to create sustainable loyalty; customers stay loyal because of the value they
receive, not because of a marketing program. Hence the role of the marketing department is “to
ensure that the efforts of each department are coordinated into effective delivery of a unique
value proposition, which will provide superior value and thus, earn customer loyalty.

The relationship manager in an insurance firm must be equipped with enough experience and
knowledge to be able to manage the complexity and intangibility of the insurance services provided,
so that there is no doubt of the customer’s level of comprehension. All in all it is a matter of the
insurance agent’s ability to inform the customer of the elements of the particular insurance. There are
no shortcuts in making the insurance service more tangible to the customer, and this concerns all
kinds of insurance (See Figure 4). Not everyone understands guarantee insurance on a new pair of
glasses at first sight, the message has to be transferred in a competent manner. The figure below is
 intended to convey the theory outlined above, showing the perceived difference between a bank loan
and an insurance contract, and the importance of a high level of customer-perceived comprehension
of the service product provided. The intention is not to make a product with low complexity more
complex, but rather to show that even an uncomplicated product may be difficult to comprehend. The
more complex the product, the higher the need for a marketing strategy capable of increasing
customer comprehensibility. Comprehension LOW HIGH Complexity HIGH LOW Insurance Bank
loan Marketing Strategy Figure 4.

The competition in the insurance markets will most certainly continue to intensify: banks, insurance
companies, and other financial institutions will keep on merging, cross-selling services and erasing the
borders between the respective fields of financial services. The financial markets of the 21st century
may be markets where there are no longer anything called “insurance companies” or “banks,” but
only more widely termed as financial services organisations. This development gives cause for
launching every action possible to retain and deepen profitable customer relationships in order to survive
the battle for market share. “The customer is king” is a well-known phrase in marketing. However,
following this reasoning relationship management is the indispensable queen, which requires the deepest
respect and a strong and well-elaborated sense of strategy.

The Concept of Commoditization in the Insurance Industry:

Commoditization is the tendency for certain types of products and services to become a commodity over
time. It actually means the tendency of customers to view various products of a particular category as
more or less the same and thus prefer to purchase the one that is available at the lowest price. The path to
commoditization often starts with products and services offering differentiating features that allow for
premium pricing. With truly commoditized products, consumers can shop based on price comparisons
only, with the assurance that the product with the lowest cost is the equivalent of higher-priced versions.

For example, when Apple Inc. introduced the iPhone in 2007, the differentiating features included a
touch-screen interface and multi-tasking features that allow owners to surf the web while on a phone call.
While all of these features were later commoditized, the iPhone clearly differentiated itself from every
other mobile phone on the market at the time, and sold at premium prices. Commoditized products benefit
consumers with increased access and lower prices. Examples of these offers include holiday-themed
sales, promotions, free shipping, flexible payment options, and the extension of standard warranties.
If companies know that their products are unique in any manner, they need to communicate this fact to
the customers and hence charge it at a higher price.
Thus, companies may also be able to delay commoditization by marketing products with varying levels of
after-purchase services, specifically to price-insensitive market segments. For example, several airlines,
including Delta Air Lines and American Airlines, target business travelers for premium memberships to
access their airport lounges. Available services include snacks, personal travel assistance, etc.

Extra features can also be leveraged in a slightly different way. Rental car companies offer a prime
example here. After selecting a rental car company on a price-comparison site, the consumer is directed to
that company’s own website, where he is offered several higher price-margin extras (such as insurance,
car seats, pre-pay for fuel and GPS).

Commoditization in the Insurance sector

Over the last decade, the landscape of the insurance market has gone through an upheaval. Where
many companies could rely on strong producers dominating local markets and bringing in lots of
renewals, there is now massive competition. The auto insurance market is a prime example of this.
Except for luxury policies, most coverage offers are really the same. For a short time, the level of
service provided by each company was beginning to differentiate, but even that is disappearing as the
major companies move to technology efficient systems involving centralized claims systems leading
to efficiency and competitiveness. For better or worse, they changed the marketplace and most
consumers now cite price as the determining factor when choosing their auto insurance provider.

Strategies for De-commoditization of the Insurance sector:

Bundling — It means combining a product or service along with a particular purchase of a product. For
insurance, selling an insurance product at the time a related purchase is made — is a strategy that can
yield results for carriers. For example, insurance coverage for a pricey piece of jewelry can be offered at
the same time the jewelry is purchased. In some countries, auto insurance is sold along with the purchase
of a new car. By bundling a policy with a purchased item, the carrier has removed the hassle of trying to
find insurance for the item on his own. It also means that the customer does not do as much price
comparison across multiple options for that insurance.

Loyalty programs present yet another differentiation strategy. Airlines have the corner on this one,
giving customers an incentive to buy tickets consistently from a favored airline, even if a bit more
expensive, in order to accumulate frequent flier miles and perks for achieving status levels. Insurance
companies have long offered similar loyalty incentives, such as longevity discounts (lower prices for
customers who renew over multiple years). There have been experiments with new types of incentives in
recent years, such as declining deductibles and airline-like loyalty programs. These incentives are all
designed to make policyholders less inclined to shop for an alternative policy, since it would mean giving
up the benefits that they have “earned” from their longevity with their current insurer.

Personalised Schemes for clients The automotive manufacturing industry provides a good example of
the use of flexible core manufacturing systems to economically deliver variations on a product that make
it suitable for different niches. Long gone are the days when these companies could produce 50,000 of
one kind of car and then shut down to retool their facility to make 50,000 of the next kind. Now, their
core production systems must be able to accommodate a huge number of variations like different colors,
interiors and engine sizes, and all kinds of option kits. Similarly, carriers looking to follow any
differentiation strategies must retool their core systems for flexibility — flexibility in offering different
products, under different brands, with bundling and so on. By having a flexible core system in place,
carriers can avoid the commoditization problem by offering many different target products in an
inexpensive way.

Trends in The Insurance Sector that can lead to De-commoditization in the

insurance industry
Service quality has been recognized as having the potential to deliver strategic benefits, such as improved
customer retention rates, whilst also enhancing operational efficiency and profitability. It had been found
in a number of researches that the provision of products and services of high quality enhances reputation,
improves customer retention, attracts new customers through word of mouth and increases financial
performance and profitability and thus, companies that have been able to incorporate these trends
have been able to create clients for themselves and been able to charge a premium price for their
products.

Timely and Efficient management of claims is crucial for performance in the industry. Delay in claim
settlement generally results in higher claims cost. The incurred claims ratio, which measures the claims
incurred to the premiums earned in the same period, stood at 97% for public insurers and 87% for private
insurers in FY11 for the non-life insurance business.

Product innovation With customers asking for increased levels of customization, product innovation is
one of the best strategies for companies to increase their market share. Tis also creates increased
efficiency as companies can maintain reduced unit costs, offer improved services, can increasem
commissions and generate higher sales. commissions and generate higher sales. Regulatory changes,
especially those with respect to health insurance portability and micro insurance, offer considerable
potential for insurance companies to be more innovative, while others such as product design guidelines is
likely to stifle innovation, if not conceived and implemented in an appropriate manner. Micro insurance is
important not only from social and economic perspective but also from insurers’ perspective for new
avenues of sustainable profitable growth in future

Customer servicing Customer service assumes primary importance in any industry, and insurance is not
different. The regulator believes that in order that there is perceptible improvement in customer service,
and therefore customer satisfaction. Insurers should identify areas, which are most vulnerable to frequent
critical comments, analyze the reasons for such underperformance, and take steps to augment the
resources sufficiently so that trends of insufficient service delivery are arrested. If the Indian insurance
industry is to make rapid stride of progress, efficient service delivery to the policyholder in its truest sense
is the need of the hour.

Company Services and Infrastructure: Infrastructure of the insurance companies, Use of modern
equipments, Fast and efficient counter services, Speed and efficiency of transactions, Wide range of
products and services Company opening / operating hours

Convenience: Interest rates, Lower service charge, New scheme information, Ease of opening the
account, Connectivity with bank etc have led to an easy way of handling and managing the insurers
claims and their investments,
Security The whole process should keep in mind the security of the information provided by the investors
and insurers, also the internet banking process has been made secure enough to gain trust among the
insurers.

Reputation: Regular insurance account statement and information about the account, Influential
marketing campaign, free gifts for customers, Peer group impression, etc. should be used in order to
enhance the company’s reputation.

Computerization of online transaction (technology), with utmost care being taken that the process is
easy and not complex for the non-tech savvy insurers, lets them pay their premium online, get e-
statements, etc.

Responsiveness: Professionalism and credibility of the staff, Immediate complaint handling, mobile
banking, 24*7 availability through net banking and payment of premiums have made the insurance sector
more responsive and easy accessible to the ultimate customers.