Marketing of Financial Services

Marketing of Financial Services

(Note: The reading material is collected from internet. Please don’t mind! If any error found corrected by yourselves)

Introduction to Marketing

Marketing – is defined as a human activity directed at satisfying human needs and wants through an exchange process. (Kotler -1994)

Human activity – this shows that there is a need for marketing activities to be coordinated and planned through a management process.

Exchange Process – in marketing the thing exchanged is a service or a product. Many exchange process involve paying out in order to receive a desired order or service.

Satisfying needs and wants – banks and financial institutions must identify customer needs and wants and then deliver a want/need satisfying product. In fact the essence of marketing is to deliver a need satisfying product. – Kotler

Marketing (CIM) is the management process responsible for identifying, anticipating and satisfying customer requirements. This definition Kotler’s definition on human activity to a more precise indication of the responsibility for management – “the management process.” In any organisation it is the responsibility of management to implement and develop and sustain the marketing process.

Anticipation – customers do not necessarily know the product they want. The CIM definition also brings in the essential requirement that marketing must be profitable.

An organisation will only survive if it continues to make profits. Thus marketing has a prime of ensuring that products or services sold are such that profits can be sustained and increased over time. The management process involves coming up with systems that ensures that: –

  1. the right product/services is provided to the market
  2. the right product/services is conveniently provided
  3. the right product/services is correctly priced
  4. the markets are properly segmented/divided.
  5. the right product/services are properly positioned in the market.

The marketing function should coordinate all activities with those of other operational areas e.g. training, production ** so as to ensure that an effective and profitable business is built.

Orientations of Marketing

The term marketing can be defined from a business level point of view and also from the philosophy point of view.

Business level – equating marketing with Accounting, Production, HR, R&D

Concept view – becoming an attitude towards business

Marketing as Business Function

Marketing is concerned with the effective management of all areas encompassed by marketing e.g production management, pricing, strategies, promotion distribution and sales management.

Marketing as Business Function

Marketing should permeate all aspects of the business / all function of a business. Basically when a business takes marketing on board as a philosophy it effectively makes customer the king and by making the customer king the business needs to create a customer focus.

Peter Drucker argues that marketing is so important that it is not just enough to have a strong sales force and entrust marketing activities to it. Marketing is so much broader than selling and it is not a specialized activity. It encompasses the entire business – it is the whole scene from the point view of final results – that is from the customers’ point of view. Concern and responsibility for marketing must therefore permeate all areas of the enterprise. Marketing must be appreciated by every single employee. Training and orientation will enable staff to carry out the philosophy more successfully. This applies in the financial services sector in as much the same way as any other kind of business.

The Marketing Concept

it recognises that the objectives of a financial institution are

  • customer satisfaction
  • at a profitable volume
  • in an integrated efficient framework
  • should be carried out in a socially responsible manner.

Customer Satisfaction

A financial institution must see itself not simply as a current or savings account provider but as a business that provides financial services to include businesses and the entire society. If a bank fails to see itself as a provider of a full set of financial package other financial institutions will step in to fill the gap and a truly marketing oriented bank recognises that satisfaction and the achievement of financial and non-financial goals are inter-twined. The bank’s goal cannot be achieved without identifying customer needs and wants and serving those needs and wants effectively.

Profitable Volume

Companies operate in order to provide a commensurate return to their shareholders. If shareholders are not delighted with the level of return, they are likely to pull out their support. An increase in sales does not necessarily mean profitability increases.

Integration of Effort

the marketing concept must become a philosophy of the whole organisation not just the marketing department. The attitude of every teller, enquiry clerk and any other front line staff gives the customer an image of the whole bank. Thus good attitude equal good marketing practice. Every single staff member must be aware that they are vital to the scheme /operation and that they rely on each other. The marketing concept is central to the organisation and links together the customer and the organisation as shown in the following diagram.

Central Role of Marketing Concept

  1. d) Socially Responsible – Corporate Citizen

The bank wish to foster a feeling that it cares for the community. This may be achieved by sponsoring events on a local or national level. However, having a strong Public Relations may solve part of the image problems. Consumer pressure groups may raise a variety of issues that they feel may not be important to the bank while it is important to them.

Marketing Planning

Mission statement – your strategic intent based on clients, values, employees & shareholders.

Planning is that part of management that attempts to control the organisation’s future conditions. It includes all activities that lead to the definition of goals and the determination of appropriate means.

Why Marketing Planning Is Important For Financial Institution

  • it assist banks to realise their strategic goals
  • planning through situation enables the bank to see its opportunities and threats
  • planning identifies customer needs and wants thus enabling the bank to build strategies for any profitable segments identified.

Strategic Planning

the managerial process of developing and maintain a viable fit between the  organisation’s objectives and resources so that it clearly position itself in the changing marketing environment. The organisation should come up with plan that is flexible enough to the ever changing environment.

Mission Statement

This defines a statement of intent, giving an indication of what the org. is trying to achieve. It may reflect the culture of the organisation or the value attached to customers or shareholders or employees. The mission statement can also emphasise the philosophy of the bank/org.

Environmental Analysis / Audit

This entails presenting a comprehensive review of the macro environment, the task/operating environment and the internal environment.

Macro environment

  1. Economic Factors – these factors include business cycles, gross national trends, investment, interest rates, money supply, inflation, unemployment, disposable income, energy availability & transport services,
  2. Political Factors – taxation policy, foreign trade regulations, e.g. exchange controls, forex rationing, employment laws, stability in the labour market, monopoly legislation.

This process can generate enormous information and the marketers need to select the information that specifically enables it to compete effectively.

Technology Factors – there is a need to access new discoveries and development in the technological field and speed of technological transfers and rates of technological obslences. Government and industry focus on technological efforts e.g. in 1999 Government efforts on Y2K, E-commerce

Steps for Marketing Planning


Social and Cultural Factors

there is a need to analyse population demographics, income distribution, lifestyle changes, attitude to work and leisure, consumerism and level of education.

Task/ Operating and or Market Environment

the task or operating environment assess the elements of the industry structure which is composed of buyers, suppliers, competitors

Buyers – the bargaining leverage of buyers- their ability to influence pricing, buyers’ volume, buyers’ concentration, and buyers’ switching costs.

Suppliers – threats of backward or backward integration their ability to influence pricing, suppliers’ concentration, suppliers’ reliability

Rivalry / Competition – diversity of competitors, exit or entry barriers, brand identity, product differences , ability of competitors to reduce costs, the economies of scale.

Self Analysis Environment

-the major tool in analysing the internal environment is thru assessing the company’s strength and weakness and there is a need to carry out a thorough investigation on the company’s internal environment. Areas to assess are as follows:- a) Core competence areas

  1. b) Adequacy of financial resources
  2. c) human resources – training
  3. d) Pro\duct range/ quality
  4. e) Technology

Models For Analysing The Environment

  1. SWOT Analysis
Strength Weaknesses
Opportunities Threat

The Market Audit

It’s meant to review and analyse all the business conditions affecting the bank and its operations.

Strategic Objectives

these are usually quantifiable and time specific. The objectives set for any marketing plan must fulfill the following

S – specific

M – measurable

A – achievable

R – realistic

T – time bound

They must also be consistent with the overall corporate vision and must be clearly stated.

Strategy Formulation

The strategic focus emphasizes the relative importance that the bank intends to place on each product. This process will often be conditioned by the corporate strategy and requires some assessment of how the organisation is to develop its business in relation to its particular market.

Market Specific Strategy

This strategy constitutes the set of polices and rules which will guide the marketing effort for a specific group of products. This also involves the bank positioning itself by defining markets where the bank intends to compete and its competitive advantage. A major factor to be considered is whether or not the bank has a sustainable competitive advantage that can lead it to effectively position its products and itself e.g. (at some point ZDB used to be a market leader in a corporate lending/project finance.) the institution will need to consider whether it has a sustainable advantage over its competitor in order to keep the number one position.

Strategic Planning Models

-the strategic planning is a process of developing and maintains a viable fit between the org.’s objectives, skills and resources and its changing marketing opportunities. The aim of strategic planning is to shape the company’s business and products so that it can yield the target profits and growth. Each bank must develop a game plan (strategy) for achieving its long term objectives. Each must determine what makes the most sense in light of its industry position, opportunities, objectives, core competencies and available resources. Each business must define its stakeholders and their needs. Traditionally, most businesses paid attention to their shareholders, however today’s businesses are increasingly recognizing that unless they nourish other stakeholders, (that is customers, suppliers, the community) the business may never earn good profits for its shareholders. For example customer satisfaction leads to repeat business and therefore higher growth and profit both of which deliver higher stockholder satisfaction.

Benefits For the Financial Institution in Developing a Strategic marketing Plan

-it enables the framework to guide all operational forces towards the same purpose and direction.

-it provides a framework for evaluating the effectiveness of the chosen strategy.

-it fosters corporate image.

-it helps to ensure the future success of the organisation by forcing management to think about problems in trying to anticipate the results of any future event.

Strategic marketing Planning is a lengthy & often a difficult process but one which the organisation needs to undertake in order not only to survive but to grow. It reduces uncertainty by enabling the organisation to satisfy the ever changing needs of its customers both present and the future.

Strategic marketing Planning Models no one model can always provide the most appropriate framework. All models have to be regarded as complimentary rather than competitive.

Porter’s Generic Model

This model examines 2 major marketing models Competitive Scope and Competitive advantage.

 Competitive advantage

Cost Leadership

the bank provides at the lowest cost in the industry. the bank can try to achieve this lower cost by means such as encouraging customers to use products in a way that is cheaper to the bank e.g. ATMs, Zimswitch. The bank can then either enjoy superior profits or undercut competition.


Lowest cost leadership stance can be difficult to sustain in the banking sector because many banks’ products are broadly similar and the customers may fail to perceive the bank’s products to be cheaper or comparable or better than that of a competitor. Thus lowest cost leader can be difficult to maintain.


-occurs when a bank seeks too unique in the financial services industry by producing an image or products that are distinctive from its competitors. Differentiation is successful if the customer perceives the different attributes of the product. With differentiation the bank is able to charge a premium price.


Differentiation strategy problems arise from the fact that most bank products are easily copied thus maintaining differentiation leadership for a product is extremely difficult.

Niche focus

while the lowest cost and differentiation strategy aim at a broad target, the niche focus strategy aim at a narrow target. The company aims at satisfying a narrow target normally not served or neglected by players in the industry. e.g. ZBS once targeted the lowest income people who were being neglected by traditional building societies.

Growth Strategies – The Ansoff Model/Matrix









the matrix specifies the product and market mixes that the bank can use to establish its strategy for meeting its goals. Basically the matrix indicate that the bank can grow by selling more of its current products to present customers or by selling new products to present or new customers.

Market penetration

the bank aims at selling more of its current products into current markets by persuading non-users to use the product or current users to use the products more often. As a strategy for growth market penetration will only work when  the market is not saturated.

Market Development

Existing product into new markets.  This requires that the organisation sells its existing products.  It requires effective and imaginative promotion but it can be profitable if markets are challenging rapidly.  The various marketing strategies used by clearing banks to attract a simple exercise in market development.

Product Development

The key features of this strategy are modifying and restyling service products.  The addition of new features and quality enables the products to be preferred by existing market A strategy of this natures relies on god service design, packaging and promotion.  Product development plays on company reputation to attract customers to a new product.


the company seeks to identify new products and new market.  This is suitable when competition is high in the traditional markets while potential is high in the new markets.

The BCG Model

The Boston Consulting Group Model

it is a leaking management consulting firm that developed and popularized the Growth share matrix.

                Relative Market Share






 Question mark?
Cash cow                             Dogs

          10x                                 0               0.1

The circles represent the current sizes and positions of business units in a hypothetical company.  The dollar volume size of each business is proportional to the circle’s area.

 The market growth rate on the vertical axis indicates the annual growth rate of the market in which the business operates.  A growth rate of 20% is considered very high.  The relative market share measures on the horizontal axis refers to the strategic business unit market share relative to that of its competitor. It serves as a measure of the company’s strength in the market. e.g. a relative market share of 0.1x means that the company’s sales volume is 10% of the leader’s sales volume. A growth share is divided into sales with each indicating the prospects of growth in that type of business.

The Star

 a star is a product with very high potential but in a very competitive market. It does not necessarily produce positive cash flows for the company but absorbs large cash resources to keep up the high market growth and fight off competitors’ attack. Companies must be prepared to support this product so as to grow it into a cash cow.

The Question Mark

These are products or business units with a small market share in high growth industry. A small market implies that competitors are in a strong position. A strategic business in this category requires a lot of cash because the company has to spend a lot of cash money, equipment, personnel and product development to keep up with the fast growing market because it wants to overate the leader. The term question mark is appropriate because the company has to think hard about whether to continues injection more in support of the product. However if the company decides to keep it must grow the question mark into a star.

The Dog

this refers to products characterized by a low market share and low growth industries. Dogs lose money but the company may continue to keep them for competitive reasons.

The Cash Cow

a product with a high market operating in a mature market with very low growth. The cash cow makes substantial contribution to overall profitability. the appropriate strategy will vary according to the precise position of the cash cow. If the market position is strong then a holding strategy which seeks to maintain the product.

  Is  the marketing f services different from goods  

The answer is  equivocal . The principles may the same but the translation into practice may be profoundly different. To understand the difference ,there is  need to refer to all products as services or better talk of tangible and intangible.

  1. Tangibles

they can be directly experienced, seen, touched and tested possessed before the actual purchase. Intangible products like transport, banking, insurance investment advice can seldom be experienced or tested in advance. There are exceptions to the distinctions that separates tangible and intangibles. You can not test the intangible in advance. To make buyers more confident and comfortable about intangibles that cannot be pre-tested in advance companies may go beyond literal specifications advertisement, labels to provide reassurance. Services – you will be selling promises so there is need to tangibilise the services.

When prospective customers cannot taste , feel, smell or watch the product in operation in advance what they are asked to buy are simply promises of satisfaction. Even tangible products have elements of promises.

  1. Inseparability

The production and consumption of services are done concurrently. The consumer is part of the production process while the producer forms an intergral  part of the consumption process. It is possible for tangible products to be consumed at one centre e.g  a teller and customer-, patient and doctor.


Post-ponability  is impossible – no inventory for service-once. Services can’t be post -poned for future consumption. Once a service is not consumed at the appropriate time – it expires. A teller who is idle for a specific period of time can not recover the last when more clients visit the bank.

4.Variability / heterogeneity

Services are people orientated- people are affected by emotions ,habits – standardization is difficult since services are intangible, they have problems in standardizing. Service provision is people intensive this is the level of service that client get is determined to a larger extent by the relationship between the service provider and the consumer. Human nature presents extra difficult in the management f service provision. The quality of service is influenced by the habit, emotions and personal character of the service provider and this makes the standardization of services difficult to handle. Goods Have quality control measures unlike services

5 Lack of ownership  

-Normally  when a physical product is bought customers obtain a product in * for services, consumers are promised satisfaction without any ownership of any physical properties.

Character Of Service Strategies to adopted to minimise impact
a) Intangibility -Tangibilise – provide surrogates e.g current a/c holders are given cheque books, or credit card, or strong use of brands
b) Variability Industrialize the service, monitoring, training of staff, -(induction)
c) Perish ability

(cannot be stored therefore there is a problem with demand fluctuation.)

-Rescheduling of work

– match demand and supply

The concept of market research-service    

Market research refers to the process of gathering and analysing data to provide information for decision making. Marketing research is a means used by those who provide services to keep themselves in touch with the needs and wants of those who buy and use their services, monitor competitor activity.

The Process

The purpose of marketing research for services why do you have to carry a market research

-To reduce uncertainties involved in the decision making process about marketing activities in general and specific aspects of service marketing

-To monitor and help control the performance of marketing activities.

-To provide necessary information and reduce uncertainty especially when a financial institution wants to carry expensive projects for larger investments.

Attitudes in organisation towards marketing research 

Areas of difference between the marketing research for services and for products

Although the use of market research in service organisation has grown there is still resistance to its use to its use in some firms. Some of the reasons for its resistance are :

Ethical reasons  -some service organisations regard marketing research as unethical in the conduct of their business. Ethical objectives strengthen the product orientation of firms which fail to regard what they provide as a service and their client as a market. A good service must be judged by results.

Size-some service organisations are too small in size and too local in character to justify expenditure on marketing research and conduct work at other than the most elementary levels. As a result of this smaller companies rarely obtain anything more than the[ most] basic information about their markets.

Management-Some managers in service industry lack training in marketing of services and therefore fail to appreciate the benefits of marketing research or they lack skills in the interpretation and use of marketing research data.

Customer conduct – some organisation justify their low levels of expenditure on marketing research because they are often indirect conduct with their customers. Such organisations claim that they can get to provide feedback from customers.

Quality of secondary sources of information.

-A particular which research is in the services sector is the lack of secondary sources of published information. The overall problem of the relatively poorer quality and quantity of information about services is aggravated by the problem of a clear definition of what services are.

Patenting difficulties

this reduces incentives for large scale research and development projects. There is a greater tendency towards service improvements than investment in research and development.


If service org. are so close to their customers, why do they need to use marketing research?

The Service Concept

a service is a promise, a cluster of value expectation of which the greater proportion of its parts are intangible. Theodore Levitt (1986)

 A service is entirely non-existent before being bought. It is entirely incapable of prior inspection or preview.

“The most important thing to know about intangible products is that the customer usually does not know what he is getting until he doesn’t. Only when he does not get what he bargained for does he become aware of the value of the bargaining.“ Theodore Levitt (1986) the service concept – it is the definition of the general benefits org. offers based on consumer benefits sought. Groonroos (1978) suggests that the service concept is the zone of the service offering. He argues that at least 2 levels of service concept are possible a) the general service concept. b) the specific service concept.

Promotion of The Product

-it is the communication of value to the consumer. The general purpose in service marketing are the same as in other kinds of marketing

– to build awareness and interest in the service and service organisation.

– to differentiate the service offer and the service organisation from competitors

– to communicate and portray the benefits of the service to the market.

– to build and maintain the overall image and reputation of the service org.

– to attract new customers and to generate customer loyalty.

Clearly these general objectives vary according to the nature of each service industry and service offer.

Differences between the promotion of services and of goods

-most of the differences are a result of the unique characteristics of the service offers.

  1. a) Professional and ethical constraints

– in most service industries there may be ethical and professional constraints placed upon the use of certain marketing and promotional methods.

  1. Traditional and custom may prevent the use of certain forms of promotion. e.g it is easier to advertise in the banking sector than in the insurance sector.
  2. Nature of competition – many service organisations may not need to promote their service extensively because of their inability to cope with present workloads and market conditions. They view promotion as a weaker tool of maintaining customer contact and increasing sales. Most service organisations feel that quality service delivery mechanisms plays an important role in securing and maintaing customer loyalty.
  3. Small scale of service operations –most service business are small and may either not have money to advertise and may not regard themselves as large enough to warrant marketing in general and marketing in particular.

Place  – Distribution

-service providers are concerned with how to make their offering available and accessible to users. an ordinary distribution channel involves a sequence of firms  involved in moving a product from the producer to the consumer. The usual generalization made about service distribution is that direct sales is the most common method and generally distribution channels are shorter in services.

Direct Sales

it may be chosen as a way of distributing services especially because of the inseparability of the service and the provider.

Reasons for choosing direct sales

-the need to maintain a better control over how the service is provided or performed. Loss of control may be a disadvantage if service is provided through an intermediary.

– the need to obtain direct feedback – if service providers are in constant contact with their customer they can identify their existing needs, how these needs are changing and their perception of the competitor’s offering.

-the need to obtain distinguishable product differentiation. org. that operate branch networks may need to standardize their operations and provide uniform service level throughout its outlets. The engagement of intermediaries may lead to variation in service quality and forms.

When direct sale is due to inseparability of service and provider, then the provider of the service may face problems e.g

  • problems of expanding the business. copying with high workloads where the service of one particular individual is on high demand.
  • sometimes direct sales limit geographical market coverage particularly where technology cannot be used.

People & Full Service Delivery

Types of people involved

  1. Service personnel /Operations

these people may perform a production and operation role but may also have a customer contact role in service org. their role is important in influencing the perceived quality of a service as the behavior of the sales staff

  • a customer sees a company through its employees.
  • the employees represent first line contact with the customer.
  • they must be well informed and be able to provide the kind of service one within the customer’s approval
  • customer contact is important for building relationships
  • service personnel include clerks, receptionists, security guards e.t.c
  1. Customers

a customer’s perception of the quality of a service may be formed and influenced by others as well as by the service. Customer contact varies depending on the nature of service provided. In some services there is a high level of customer contact while in others it is lower. Higher customer contact are where a customer takes a bigger proportion of time being involved in the service provision e.g in project finance while in electronic banking there is lower level customer contact.

Consumer Buying Process

Maintaining, Improving Personnel Quality and Performance

  1. a) Careful Recruitment and Training Service Personnel.

– the clear implications of the importance of personnel contact to many services is that recruitment, selection, training and development programmes have to be tailored to the needs of services being provided.

  1. b) Internal Marketing

– the concept is employed in the organisation with an idea of the marketing with its focus on the role of the consumer and the central objectives for a market oriented organisation. What the internal marketing concept does is reemphasize  the importance of marketing to people who serve external customer from a managerial perspective, the internal function has its objectives to get motivated and customer conscious employees. Internal marketing is of crucial importance since staff may be reluctant to sell products which they do not find acceptable. A service must be fully developed and accepted internally before marketed to external customers. Ensuring consistent appearance bearing in mind the characteristics of the intangibility of many services, the appearances of the establishment and personnel are only tangible aspects of the organisation. Therefore the consumer can be expected to choose a service supplier whose place of business and sales personnel can be controlled by service management. One way in which this may be accomplished is the use of code of conduct. A service org. must strive constantly to create and maintain a clear attractive image.


  • the company must have a clear complaint system and ways of providing feedback to the consumers
  • engage in customer satisfaction surveys
  • suggestion boxes

Achieve Employee Commitment

  • employee commitment is defined as absolute loyalty to the delivery to the satisfaction of customers. Basically 2 approaches are used to achieve employee commitment in full service delivery and both consider empowerment of full service workers. This entails freeing full service workers from rigorous control by instructions, policies, orders – to give them the freedom to take up responsibility for their ideas, decisions and actions.
  1. a) Product Line Approach

– propounded by Theodore Levitt when he argued about the industrialization of services. He asserts that operations can be made more effective by applying manufacturing logic and tactics.

– he recommends simplification of tasks

– substitution of equipment and system for people where possible

– decision making must be participative

– workers must be grouped into teams work done through teamwork

  1. b) Empowerment Approach

– relates to the decentralization of decision making and implementation of full service delivery system with employee involvement.

 Advantages of Empowering Employees

– employees can become more innovative, creative and bring more ideas

– employees feel better when they decide issues pertaining to their areas responsibility.

-quicker, on line responses to customers’ needs and enquiries during service delivery

-quicker, on line responses to dissatisfied customers during service delivery

Costs/Disadvantages of Empowering Employees

  • need to recruit select, train & develop an effective workforce
  • employee training & development assumes the highest cost of bank’s human resource function.
  • slower and inconsistent service delivery

as much as organisations may want to empower employees to achieve world class service delivery their employees may fail to make consistent decisions and may misuse their discretionary power

Quality Traits and the Determinants of Full Service Delivery

defines what qualities clients seek in full service delivery

Access – the approachability and easy of reach. The service must be easily accessible by any form of communication. The waiting time to receive a service must be reasonable. The service must be accessible during convenient hours of operation.

Communication – this involves keeping customers in a language they can understand. Listening to customers is an important component of full service delivery.

  • there is a greater need to explain the benefits of the service to clients. This can be done through circulating pamphlets newsletters, having lunch breaks with customers.
  • explain the cost of the service to customers
  • explain the trade off so that the customer can make an informed decision
  • assure the customer that any resultant problem will be handled carefully.


the institution’s possession of required skills and knowledge to perform the expected service and this involves :-

– the knowledge and skills of the contact personnel.

-the knowledge and skills of the operational support staff.

Courtesy – this calls for politeness, respect, consideration and friendliness of the contact personnel.

-there is need to consider the customer’s personality and property.

-clean and neat appearance of the contact personnel.

Credibility  – you need honesty and trustworthy support staff. Credibility affects the image of the company. Personal characteristics of the contact personnel affects public confidence.

Reliability – consistency of performance and dependability. A full service firm can be called dependable if it provides efficient and effective service to its clients.

  • there is need for a firm to keep correct customer records.
  • performing the full service within the designated time.

Accuracy in Transaction

-a full service firm should retain the confidence of customers thru removing any chance of risk, doubt or the danger on issues affecting customers’ accounts.


  • willingness and readiness of employees to provide the full service. it involves the timeliness of service performance e.g mailing of clients statements and prompt attention to customer queries.

The Service / Product Life Cycle 

bringing a service to the market is fraught with unknowns, uncertainties and risks. While it has been demonstrated time after time that properly customer oriented new product development is one of the primary conditions of sales, profit and growth, what has been demonstrated more conclusively are the ravaging costs and frequent fatalities associated with launching a new product.

give Examples of failed product  in the financial sector in Zimbabwe.

The usual characteristics of  a successful product is a gradual increase in its sales curve during the market development stage. At some point in this rise (growth stage) a marked increase in consumer demand and sales take off.

At this point potential competitors who have been watching developments during the introductory stage enter into the market. Instead of seeking ways to get new customers to try the product, the originator faces the problems of getting them to prefer his own brand.

as the rate of consumer acceptance accelerates, it generally becomes easily to open distribution channels and retail outlets. The result of distribution intensity may trigger response from competitors.

Maturity Stage

this stage is characterized by an increase in positive cash flows. Competition becomes intense. Competitive attempts to achieve and hold brand features would involve making final differentiations in the product in customer services and in the promotional practices. Advertising becomes more persuasive than informative.

Decline Stage

When the market maturity tapers off & comes to an end, the product enters the decline stage. Declining sales are accompanied by reducing profit margins as too many competitors fight for the market. Pricing may be drastically reduced and sales promotion becomes intensive.

Almost without exception basic marketing texts refer to and illustrate the product life cycle using the above structure. Briefly it is suggested that products pass ver a number of stages over time. Hise (1968) suggest that the sales history of many products may not accord with above generalized model.




This illustrates the product/service which establishes itself in the market place from the very beginning and continues sales at much the same level.



This represents a service with advantage over its competitors and continues to pick up new customers. Sales increase indefinitely.



It is a product which starts with advantage over competitors’ offerings but then is then made obsolete when superior products are introduced in the market.



 Its where a product/service actually progresses into a decline stage but is rescued by promotional campaign or product modifications which then leads to a new sales curve.

Relevance and Applicability to Service Industry

the underlying logic and attractiveness of the life cycle concept is undeniable intuitively therefore one can’t but agree with Rathmell (1978) that  services like goods have cycles and he suggests that services in the growth stage of the life cycle include fixed telephone, leasing***. Services which  appear to have totally declined include cinema.

Problems with the PLC

general criticism of the PLC is its relevance is its relevance to the marketing of services. Cartman & Langeard (1986) argue that   using the PLC to build a product portfolio in services context is not very useful.

Definitional Problems

many people are not clear on ways in which the PLC concept is used with services this may also be referred to as the product life cycle of the firm itself. It may also be necessary to distinguish between the ways in which the PLC concept is used. It may also be used to refer to the service firm or the service class.

Lack of Empirical Evidence on its validity

this criticsm was levied by Doyle (1989)

“There has been no comprehensive empirical research on the PLC’s validity. While there is evidence that most products follow a broad life cycle pattern, the pattern seem not to be regular to allow the use of the model as a forecasting tool. While it may  useful for a company to balance its tangible products by stage of the PLC, as part of its product planning process, some service organisations have only a small number of core services and do not have the flexibility for combining different services belonging to the same category.”

Physical Evidence

essential evidence and peripheral evidence, personnel, promotion and process are some of the chief ways thru which a services organisation can formally create and maintain its image. Service marketing organisations also try to use the tangible clues to strengthen the menaing of their intangible products. the however tend to do so instinctively. The management of tangible evidence is not articulated in marketing as a primary priority for services marketing. The has been little in depth research on the ability of the tangible evidence to enhance the quality and create value for the service consumer.

Physical Evidence and Services

physical evidence can assist in creating the environment and atmosphere a service is bought and help shape customer perception of a service.

Peripheral evidence

this is part of the evidence which is actually  possessed as part of the purchase of a service. it however has little or independent value. A bank cheque is of no value unless backed by funds transfer or a credit balance in the account otherwise it doesn’t have value on its own. Such representation of service must be designed and developed with customer needs in mind. They often provide an important set of complementary item to the essential core service sought by customers.

Essential Evidence

unlike peripheral evidence it cannot be possessed by the customer. Nevertheless essential evidence may be so important in its influence on service purchase. It may be considered as an element in its own right. Ultimately peripheral evidence and essential evidence form the image elements of service delivery.

Making the Service More Tangible

one suggestion is to develop tangible representation of the service, the bank credit card is an example of the tangible representation of the service. The use of the card means that;-

  • the service can be separated from the sellers
  • intermediaries can be used in distribution thereby expanding the geographical area in which the service market can operate.
  • the card acts as a symbol of status as well as providing access to credit.

Making the service easier to grasp mentally

  • associate the service with a tangible object which is more easily perceived by the customer
  • use tangible object that are considered important by the customer and which are sought as part of the service. Using objects that customers do not value may be counterproductive.
  • ensure that the promise implied by these tangible objects in fact is delivered when the service is used that is the quality of the goods must live up to the reputation implied by the promise.

The decision of the service environment

the design and creation of an environment should be a deliberate act for most service organisations. Exceptions might be those service organisations that provide the service at the customer’s premises. The environment refers to the context (physical and non-physical) where a service is performed an where the service organisation and the customer interact. It refers to the buildings, land, the equipment, level of technology and furniture – the design task – layout is concerned with the totality of impressions conveyed by the part and whole. Creating an idle physical environment and atmosphere is clearly a difficult task to undertake. Particular problems service organisations face in attempting to create an ideal environment :-

  • our knowledge of the impact of the environment and particular knowledge within it is imperfect. i.e service providers are not aware of how important space, colour, shape, structure of materials are
  • diversity in humanity – individuals respond to the environment in various personal ways. service org. environment which serve a wide variety of people must provide the environment suitable for a greater proportion of its customers. However if the differences can be identified, suitable marketing mixes can be formulated.

Physical attributes – internal and external

-physcial size of buildings, shape, frontage, logos,

Internal  – the layout, colour, skills lighting, equipment, air conditions

  1. Physical evidence and atmosphere are important elements in helping to create the image of a service and in saying something about its service.
  2. Service org. need to manage the evidence they use in a planned and systematic way to help overcome the problems paused by the intangible nature of services.
  3. Creating an ideal environment is difficult. There are a lot of factors which influence the impact the environment has.

Conclusion on attributes influencing a retail outlet.

–     the above factors influence image. However, their presence or absence also influences the perception of other individual factors. Internally the layout of the service org. the arrangement of equipment fittings & fixtures signs & logos – the quality of visual evidence like pictures, photographs – all these factors combine to create an impression and image. the combination of these elements into a distinctive overall personality – [e.g the imposing atmosphere at the RBZ] for a service org. is a skilled and creative task.

–     the atmosphere of a service facility has been coined to define the conscious design of space and materials to influence buyers.

Many service organisations are increasingly becoming aware of the importance

of atmosphere e.g Chicken Inn. Restraunts are known for their atmosphere and

their foods. Commercial banks with large space or waiting rooms and seating

space clients waiting space also provide a relaxing atmosphere. Kotler suggests

that atmosphere can be particularly a competitive tool when there is large

number of growing competitors.

Products or price differential are small.

Products are aimed at distinct social class or group e.g Chicken Inn aimng at

young people would place entertainment machine while a similar company aiming

to serve business people may have computers.

creating an atmosphere may therefore be a deliberate act for many service org.

This means when designing a service facility for the first time org. face 4 major

design questions

  • What should the building look like from outside?
  • What should the organisation look like from inside?
  • What should be the functions and floor characteristics of the building?
  • What materials would best support the desired feelings of the building?

Potential Exam Questions

  1. What kinds of physical evidence can a service marketer use to help market his service products? (10)
  2. Discuss problems which arise in managing service environment.
  3. What problems do service have to overcome in managing service environment?
  4. Image are so impersonal that they can’t be managed. Discuss (20)

PROCESS – Operations Management

Process and Service Marketing

  • in service org. cooperation between marketing and operations is vital. The linkage between the 2 operations requires more than a cursory treatment usually given in most discussions. Cooperation between the 2 operations is too vital and important to operate in a fragment system. This is because a significant component of any service product from the customer’s point of view is how the service is performed. Service systems which operate sufficiently and effectively can give marketing managers considerable marketing leverage and promotional advantage. The operational management literature has rather neglected services system until recently and concentrated instead on manufacturing operations thus traditional emphasis is now changing and specialists in perations are giving more attention to how their skills and experience can be transferred to service systems. The term operations is defined as the means by which inputs are combined, transformed and operated to create useful outputs.

In managing this process some traditional areas of operations management include:-

  1. Process Planning – this is the selection and specifications of operations to achieve service outputs in terms of quality, quantity, delivery and cost to meet customer requirements.
  2. Facilities Design – this considers the layout material handling and maintenance – the design and the maintenance of any equipment involved to achieve a smooth flow of materials and people through the operating system.
  3. Quality Control – appropriate checking and control techniques used at relevant points within a system to ensure that the prescribed quality levels are attained must be detailed.
  4. Forecasting and long-term planning – anticipating demands placed on the services system and forecasting the capabilities that need to be included in the systems’ capacity.

Degree Of Contact

an alternative classification is based on the extent of customer contact in the creation of the service. Managing service operations with high level of customer contact present difficult challenges compared with those systems where there is a low level of customer contact.

The Effects of the Degree Contact

-high contact system are those where a customer spend a lot of time in service delivery. These are more difficult to control since the customer can make an input to the process or even disrupt the process. Workers in high contact system can have a greater influence upon the customer’s view of the service provided. In high contact system the customer can affect the timing f of demand and it is more difficult to balance the capacity of the system to meet demand placed upon it. Some of key questions service managers need to consider in developing policy for service org. emerge from this type/kind of analysis:-

  1. a) What steps are involved in the process?
  2. b) Are they logically arranged?
  3. c) Can some steps be eliminated or combined?
  4. d) Are the capabilities of each steps balanced?
  5. e) Where are customers involved in this process?
  6. f) Can technology be used to speed up the process?

Operations Management Difficulties in Services

Establishing objectives in service systems – the difficulties come as a result of a) quantity of service is difficult to measure

  1. capacity utilization – the element of perishability
  2. Intangibility of services means that there are limitations on stock or inventory building. Generally in services what is unused or idle is wasted and cannot be used to fill an overload in the future.
  3. A fundamental decision in managing services operations is what level of capacity will be provided. Too much will make the operation in economic while too little may cause bottlenecks in service delivery and may lead to customer resentment because of inefficiency and loss of business.

People involved in the service process

its important to realise that customers often judge the quality of a service and obtain satisfaction with a service through the quality of the relationship they enjoy with service employees. Clearly the manner in which service employees contact themselves and their knowledge of the services available are important influences upon those satisfaction.

Note – employees can do all they can to assist customers but they cannot compensate entirely for a bad and entirely inefficient system.

Action To Balance Supply and Demand of a Service System 

Supply      Demand
-schedule workers according to demand introduce shift work, part-time workers, or use of contract workers -have customers wait in favorable environment

– schedule customers’ appointments

– increase customer participation in the production process e.g use of self-service banking like the provision of ATMs
Share facilities with other service organisations and invest in technology e.g promote use of ZimSwitch

Implementation of Operations Management Change and Quality Control

  1. Develop customer trust – the willing ness of customers to accept change may be a function of the org.’s perceived trustworthiness.
  2. Understanding customer habits – this will assist successful presentation of the rationale for any changes
  3. Pretest the new product and equipment and procedures –get an assessment of the customer understanding and their reactions thru field tests.
  4. Understanding the determinants of consumer behavior – understand why customers behave the way they do
  5. Teach customers how to use new innovations – customers may be resistant to change particularly with regard to new technology. There is need to promote the benefits to be derived from consuming the product.
  6. Monitor and Evaluate performance

Quality Control

quality is intangible but can be experienced. Quality control involves everyone in a service operation  – invisible & non-visible tasks. System need to be used to identify quality failures, reward successes and help with improvements.  Quality control may be assisted by replacing people with machines particularly with routine tasks.

Possible Exam Questions

Why should marketing managers be involved in operational aspects of service system performance.

What difficulties do operations managers face in managing service system.

 New Service Development Procedures

Define – a new product can be defined as a genuine innovation

– a modified product – improving on efficiency & effectiveness or adding new features

– new to the market or the company but existing in other companies or market.

The Process Of Developing a new product

  1. Justification for the product/ concept -tell us why we need a new product. Possible reasons could be competitive pressure, or current product are declining or they are no longer profitable or are now expensive to maintain.
  2. Idea generation — brainstorming meeting/seminar (internal),  external e.g customers telling you how they want to be served , – engage consultants

ideas  can arise inside or outside the org. They can result from formal search procedures e.g market research or informally they may involve their org. in creating the means of delivery the new service product they may involve the org in obtaining rights to the service products like a franchise.

  1. Screening of Ideas

it is mainly concerned with checking out which ideas will justify the time, expense & managerial commitment of further research & study.   -organisation should do cost benefit analysis – chose the highest benefit with the lowest cost.

– feasibility studies – ideas with possibility of performance  with the resources available i.e the Human resources, finance , IT, – set your choice criteria

Concept Development and testing

ideas surviving the screening process then have to be translated into product concepts. In the service product this means concept development & testing.

Concept Development – it is concerned with translating the service product idea where the possible service product is defined in functional and objective terms into a service product concept, the specific subjective consumer meaning the org. tries to build into the product idea.

Concept testing – its applicable in services context as well as in goods context. Concept testing of taking the concepts developed after the stages ideas generation & idea screening and getting reactions to the groups of target customers.

  • an associated stage of the development oof the service product is that of product positioning. Service product positioning is a concept increasing widely referred to though it remains imprecisely defined loosely used& difficult to measure. essentially positioning is the visual presentation of the image of an org.’s service product in relation either to competitive service products or to other service in its own mix. The principle underlying this method of presentation is that it enables product attributes to be compared with competitive offering and with the customers’ perception of products relative to his/her needs. Such a comparison and perceptions give useful insights for developing a programme. Some products are best positioned directly against competition others by not confronting competition.

Business Analysis

  • this stage is concerned with translating the proposed idea into a firm business proposal. it involves undertaking a detailed analysis of the idea in business terms and its likely chances of success or failure. A detailed analysis of aspects like manpower required to implemented the new service product idea, the additional physical resources the likely estimates of sales, costs & profits over time, the contribution of new service to the range offer like customer reaction to the innovation & the likely response of competitors.
  1. Identify the alternative choice
  2. Product development –there is need for coordination and organisation

it requires the translation of the idea into an actual service product for the market. Typically this means that there will be an increase in investment in the project.

Staff may have to be recruited or trained facilities, may have to be constructed, communication systems may need to be established. the tangible elements of the service product will be designed and tested. Unlike goods the development  involve attention to both the tangible elements the service product and service product delivery system.

  1. Testing

testing of new service product may not always be possible. A bank may make a new service available initially on a regional basis e.g ATMs. Product launch – launch on piecemeal basis then commercialisation N.B some new products do not have such an opportunity. There is a need to be very tactical.

  1. Commercialization

this stage represents the org.’s commitment to a full scale launch of the new service product. In undertaking the launch Kotler suggest 4 basic decision apply:-

  • when to introduce the new service product
  • where to launch the new service product whether local, regional, national etc
  • to whom to launch the new service product
  • how to launch the new service product.


  • reposition or rejuvenating on existing product.
  • its likely to result in companies producing products that fulfill the current need in the market.
  • it minimise the chances of product failure.
  • it enables companies to identify key selling points – what enables you outcompete others
  • it removes unnecessary duplication.

Branch Location and Distribution

-branches are a channel of distribution. Channels of distribution for services should be thought of as a means to increase the availability and/or convenience of services that help satisfy the needs of existing the need of existing users.

in order to envisage a criteria for effective channel choice, the financial services markets must facilitate the right product, for the right people, at the right place and the right price. There are 2 barriers to the provision of delivery systems in financial services – what hinders a bank from having an efficient branch network.

a) Business Barriers b) Technological Barriers
–   cost

–   staff skills

–   management skills

–   customer acceptance

–   availability of software & hardware

–   reliability of technology used

–   security


Distribution Channels for Banks and Building Societies

  • banking is now becoming highly automated – in fact in some countries like Japan there are some fully automated branches that are controlled 2 -4 people to monitor the machines. The most important distribution channel for banks and building societies is the branch. The decision to build a branch in a certain area/location can be very costly if it turns out to be a very wrong place. According to Carrol P many incorrect decisions have been made concerning bank branch location. He believes that the banking system has grown into a structure that is overrepresented in inherently weak markets and underrepresented in inherently strong markets. In order to be successful, the financial services branch must be designed and located correctly. The number of staff in a branch should never  be greater than 40 according to Median (1996)  as a large outlet is difficult to manage by a single branch manager.

The Outlet Location Decision

The Steps That Need To Be Considered

  1. Evaluate the territory in terms oof the customer characteristics – corporate or retail and competitor bank strategies.
  2. Decide what type of delivery system is the most appropriate for the geographical area.
  3. Select the type of location that is most appropriate for an isolated unit, unplanned direct or planned shopping centre complex.
  4. Analyse & decide between alternative sites of the appropriate location type
  • the area of which a banking outlet operates can be divided into 3 parts namely primary, secondary & fringe. Primary embraces 50-75% of branch customers secondary has 15-25%

The size and shape of the branch operating area can be determined relatively and accurately from a study of branch records. The value of specific areas for individual service volumes can also be calculated based on patterns such as Reilly’s Law or refinements proposed by Huff & Gautschi as follows:-

Expected Annual Service Use = no of customers by segment in the area X  percentage of customers in area using your outlet X Annual expected service per customer


thus the nature of the customer base & the type of services used by different socio-demographic groups can be expected to assess branch or outlet potential.

Types Of Branches

A Full Service Branch

A branch that provides a full set of services it has been convectional service delivery system within the financial service industry. For many financial institutions nearly all branches provide a full range of services and products offered by the institution to both retail and corporate customers. The rational for continuing full service branch is increasingly difficult to justify. The traditional reasons for establishing branches were to collect deposits, arrange loans and convenience in conducting transactions. However technological developments mean that there is less need for customers to go to branches for their banking business.

Specialty Branch

focuses on either retail or corporate business only e.g in the building societies a specialty branch deals with residential or industrial mortgage.

Corporate Branches

-aim at the middle market corporate a/c and do not handle retail financial services. services common with corporate branches are online foreign exchange, letters of credit, asset based financial specialization e.g securitization.

High networthy branches

these branches are located in an appropriate socio-demographic areas and they distribute a range of financial services for up market customers. These services are often based on minimum balance criteria and emphasis is laid on personal financial counselor rather than conventional bank teller.

Branch Location in Shopping Centres

branch location tend to be concentrated in larger shopping centers because financial institutions seek to attract personal savings and past experience indicate that these are the most advantageous locations for most banks or building societies.


  • easy market entry since many shoppers and potential customers frequent the high street shopping centres.
  • most shopping centres have built in deposit potential –security.
  • transport facilities are available


  • poor parking space, too much competition, high rentals
  • in some centres, there are restrictive opening & closing business hours

Automated Teller Machines

  • ATMs in the UK were introduced in 1968 and in Zimbabwe in 1982. The main objectives of this innovation in distribution facilities were to save costs, staff, time & to provide greater convenience that is service outside normal banking hours. However this technology driven facility have paused the following main problems:-
    • reliability mostly as a result of machine failure
    • security from fraud –chances of losing card, money etc
    • volume generation at a particular location – congestion
    • relatively high cost per machine networks the decision whether or not to install a machine depends on a number of factors as follows :-

-assess its impact branch staffing levels, branch net business and branch costs

-the cost of investing in a large network of ATMs including service support and reciprocal arrangements with other financial institutions

-the impact of ATM installation on the financial institution’s image and its ability to differentiate its service products.

The distribution of financial services has been further affected by the development of Electronic Funds Transfer Systems at Points of Sale (EFTOPs). The implementation of EFTOPs systems requires not just a large injection of capital and the determination to be competitive there are also a number of implications. The financial institution must establish its distinctive image and identity. An attempt to increase cross selling thru electronic funds transfer or other channels must be closely monitored.


in this approach no customer visits the bank. Business is solicited by long distance tele-marketing or direct mail. These systems can be much cheaper than full branch operations are especially useful to institutions that do not have a large network of branches. Computerised facilities have made it easier to conduct business. Supermarkets are increasingly being brought in. While trends show that EFTOPs will become an important payment it is not expected wholly to replace cheques although successful implementation of the program is likely too reduce cheque payments and in particular stimulate the use of debt rather than credit cards.

Branch Location Decisions

Location decisions are extremely important as they involve the expenditure oof considerable resources over a long period. 3 possible classes of objectives for having a branch are as follows:-

Academic –academic arguments will be served by building model that improve our conceptualization or generation that is explain there is partial distribution of banking outlets entails that confirmed theories of economics or social science.

Commercial argument –this argument this is important decision. it must  be determined by business performance and prospects of business development. Costs and other factors must be considered but the benefits of an accurate performance prediction are clear.

Social arguments – for social reasons and corporate citizenship.

Economic factors to be considered

  • commercial structure – industry base, firms in the particular location & working population
  • characteristics of the population –income increases projections, employment characteristics of the resident population
  • financial institutions structure – consider the existing banks in place
  • geographical factors – accessibility, visibility
  • location of competition
  • proximity to public transport.

Pricing Of Banking Services

Pricing Mechanisms

-a distinction in the pricing of banks is between Explicit and Implicit and charging pricing. As banks hold customers’ accounts on which they may or may not pay interest, they have an option of  making implicit charges for services through not paying interest or paying very low interest on deposits e.g Building Societies do not pay interest on account. As this is not an option for other types of business, banks have a wide range of pricing options and present a unique case in the analysis of pricing. Implicit pricing include requirements on customers to maintain minimum balances and the non-payment or low payment of interest on credit balances banks earn interest using interest free deposits to acquire interest earning assets. Where interest rates are high banks earn “endowment profits” –such interest free accounts represent a cost to the consumer. They represent an implicit payment for the services provided by the bank to the customer.

Banks have a wide range of pricing and charging options in that they have a choice with respect to :-

  • the form of pricing
  • the strategy –single transactions and 2 part tariff
  • tariff or fee levels.

When considering the pricing of current account and the payment of services, the major variables at the disposal of the bank include :-

  1. Explicit transaction charges – an outright charge
  2. quarterly or annually fee e.g safe custody
  3. The non-payment of interest on deposits
  4. The payment of interest below market levels on deposits
  5. The requirements for customers to maintain minimum average balances in order to qualify for non-explicit charging. Notional charges calculated on the average size of the balances maintained in the transaction period.

As customers use bank services and accounts in different ways, different customers have a preference for different combinations of pricing instruments. They key variable of relevance to the customer are –

  • the size of average balance always in the account
  • the volume of transactions
  • the type of transactions

Customers that maintain high average balances but making a small number of transactions would normally prefer transaction charges rather than non payment of interest on credit balances. Conversely customers maintaining low averages balances but making relatively large number o f transactions would tend to prefer a charges system based on the implicit or fixed charge.

Implicit vs Explicit Charge

-the essence of implicit charging on current a/c payment services is that banks receive interests on assets  acquired through zero or low interests deposits. This endowment revenue can finance the provision of current a/c services. Implicit charges represent the equivalent interest rate cost  (the interest forgone on deposits of the provision of current a/c services). The cost of the current a/c to the customer and the implicit revenue to the bank are determined by the level of interest rates which both fall as interest rates decline and as interest rates rise all proportion of the cost of the payment system is conveyed by endowment receipts. In general the higher  are the minimum balances on which no interest is paid, the greater is the benefit the bank receives in period of higher interest rates. Similarly the effective cost to the consumer rises with the level of interest rates. This is one of the hazards of implicit charging. Effective cost to the consumer and revenue to the bank vary with the level of interest rates. whereas the effective cost of supplying current a/c services are independent of interest rate levels if to any extent banks seek to smooth the cyclical profile of profits then other elements of charging need to be adjusted in line with the level of interest rates.

Arguments For Implicit Charging

  • simplicity for both the customer & the bank
  • taxation – tax is levied on interest received on deposit but is levied on the implicit interest received thru the provision of provision of free banking services – the overall value of implicit charging is therefore determined in part by tax rates.
  • consumers have a degree of certainty with respect to charges in the absence of certainty about the future volume of transactions. Explicit charges for transactions create uncertainty for the consumer with respect to the cost of the account.
  • implicit charging is a low cost for the bank –admin costs are low compared with explicit charging where charges are levied on each transaction and a monitoring procedure is needed for calculating transaction costs for each consumer. While this is a comparatively easy for low volume transaction customers it is likely to lead to more enquiries from customers about how charges have been generated which is expensive in terms of managerial time.

Disadvantages of Implicit charges

  • The cost to the customer and revenue to the bank are interest rate sensitive while the cost of providing a service is independent of interest rates.
  • a particular problem emerges at low levels of interest rate – the cost of supplying interest rates services cannot be  met from the interest received on the basis of balances on which the bank does not pay interest. It is inevitable that at some low level of interest rates the break even implicit charge implies a negative deposit rate of interest.
  • there is no desire to save on the part of consumer
  • implicit pricing lacks transparency lacks transparency – the consumer is unaware of the benefits received and the cost that the different behavior patterns imposed on banks.

Other Forms of Charging

– the analysis of explicit prices for the current a/c transactions & services must be looked at in view of alternative pricing strategies

1) Single transaction charges which cover fixed and variable costs

2) Disney World Pricing – (Thin Part)

3) Two part tariff

a key issue in pricing with all forms concerns the relationship between fixed and variable costs – for many banking services fixed costs are high relative to the marginal costs i.e the cost of providing the infrastructure for the the administration of the payment system are high while the cost of processing individual transaction are low. In this respect, the structure of costs is to some extent similar to that of public services. The most important question is the distributional effect that is how fixed costs are covered or recovered. If marginal costs are below average cost and  only costs are charged then fixed costs are not covered and the industry becomes potentially unstable. The way fixed costs are incorporated in pricing also has implications for different customers e.g single fixed charge with no transaction charge benefit high users of current a/c while when fixed and variable costs are covered by single transactions low current a/c benefit as high users carry a large share of fixed costs. All pricing policies have distributional implications between different categories of customers.

Single Transaction Charge

an alternative strategy and the most common is to levy single charges on each transaction or each purchase. 2 alternatives present themselves

  1. a) the price to reflect only marginal cost of production or
  2. b) the price to reflect booth variable and fixed costs of production

-the second alternative is a disadvantage for above average users of current a/c services as they pay a disproportionate share of fixed costs.

Disney World Pricing

-this is commonly associated with thin park or ski lifts in holiday resorts where a single price grants access to services. the parallel with banks is where a quarterly charge is levied on current a/c holders without additional transaction charges. The fixed charge is calculated to cover total costs (fixed & variable) based on the assumptions of average use of facilities. This is a prima face on in irrational system of pricing as it does not contain incentives for consumers to economise on use. There is a built-in incentive to over consume a service for which no usage charge is made.

Conditions For Disney World Pricing

  • where marginal costs are low relative to fixed costs
  • Where the supply of the service or commodity is fixed – where consumer behavior can determine the costs.
  • where enforcements costs of transactions are high. This is because a system of collecting charge has to be established and the behavior of consumer has to be monitored.
  • Where it is inconvenient for the consumer to pay on each occasion.
  • Where the consumer put a high value of knowing in advance precisely what level of expense is likely to be.

Advantages of Disney World Pricing

  • it is comparatively cheaper to administer.
  • it is easier for consumer to understand.
  • it creates certainty for consumers as to total expenditure
  • a single charge without transactions charges is one of the options available to banks in the pricing of services. The charge can either be implicit or explicit. It can take the form of the required minimum balance without interest being received by the depositor.

However there is no incentive for the consumer to economies on the use of the current a/c or to use a low cost medium.

Although in principle this problem could be solved by the bank setting limits on the volume of free transactions and those that attract a charge. A modification to the Disney world charge system is for the charge to include a limited number of free transaction which exceed the set limit.

3) The 2 Part Tarrif

-the third generic method of pricing is to combine elements of the first 2 above into a 2 part  tariff structure. A 2 part tariff involves a fixed charge independent of a consumers’ consumption together with a level of service consumed. A 2 part tariff is a method of covering fixed costs specifically while at the same time charging the consumer the marginal cost of producing the good or the service.

It avoids some of the distributional problems in the above 2 problems. it is based on the general principle that fixed costs should be recovered somewhere within the pricing system and that all costs created by the consumer’s behavior should be reflected in prices. Fixed costs need to be covered irrespective of how the consumer behaves. Fixed resources give the consumer access too facilities and if these costs are not covered the consumer will not be able to secure access. In effect the fixed charge is an entry fee to the service being provided while the variable costs in effect reflect transaction costs.

a 2 part is designed in part to circumvent some of the problems implicit in marginal cost  pricing. If the prices are set equal to marginal costs and marginal costs is equal to or greater than average costs a part tariff is unnecessary as prices covers all costs.

the rational and superiority of a 2 part charging of services may be summarised as follows:-

  1. there is no rational for consumers not paying services used. However because of nature of the cost structure of the bank a pure marginal cost pricing policy of a bank is unlikely to recover full costs.
  2. because transactions are explicitly charged and charges are levied can be related to a particular payment media used a part tariff create incentives for consumer to minimum on transaction usage.

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