Goods and services are both essential components of our economy, but they differ significantly in their nature and characteristics. Understanding these differences is crucial for businesses to effectively market and deliver their offerings.
Essentially, goods are things you can touch, like a car or a phone, while services are things someone does for you, like a haircut or a taxi ride.
Here are eight key points differentiating goods and services:
1. Tangibility
Explanation: Goods are tangible, meaning they have a physical form and can be touched, seen, and handled. Services, on the other hand, are intangible; they cannot be physically touched or held. For example, a loaf of bread is a good – you can hold it, feel its texture, and see its shape. A haircut, however, is a service – you experience it, but you cannot physically possess it. This fundamental difference in tangibility affects how goods and services are produced, marketed, and consumed. Goods are objects, services are actions.
2. Storability
Explanation: Goods can be stored for future use. For example, you can buy groceries and store them in your pantry or refrigerator. Services, however, cannot be stored. Once a service is performed, it is consumed immediately. A doctor's appointment, once completed, cannot be saved for later use. This difference in storability influences inventory management and production planning. You can keep goods for later, but services are used right away.
3. Standardization
Explanation: Goods can often be standardized, meaning they can be produced consistently with uniform quality. Mass-produced goods, like cars or electronics, are typically identical. Services, however, are often customized and vary depending on the provider and the customer's needs. A massage, for example, can vary significantly depending on the therapist and the customer's preferences. It is easier to make all goods the same, but services are often different each time.
4. Separability
Explanation: Goods can be separated from their production and distribution. For example, a manufacturer can produce a product in one location and ship it to another location for sale. Services, however, are often inseparable from the provider. The service is typically delivered and consumed simultaneously. For example, you cannot receive a haircut without the barber being present. The person making the service, has to be there for you to get the service.
5. Heterogeneity
Explanation: Goods can achieve a high degree of homogeneity, meaning they can be consistently produced with minimal variations. Services, however, are often heterogeneous, meaning they can vary significantly in quality and consistency. This variability is due to the human element involved in service delivery. For example, the quality of a restaurant meal can vary depending on the chef, the ingredients, and the time of day. Goods are more likely to be the same every time, but services can be very different.
6. Ownership Transfer
Explanation: When you purchase a good, you typically gain ownership of it. For example, when you buy a car, you own it and can use it as you please. When you purchase a service, however, you do not gain ownership of anything tangible. You are paying for the experience or the performance of a task. When you pay for a taxi, you don't own the taxi, you just paid for the ride.
7. Evaluation
Explanation: Goods can often be evaluated before purchase. You can inspect a product, read reviews, or compare specifications. Services, however, are often difficult to evaluate before consumption. You may rely on word-of-mouth recommendations or online reviews, but you cannot fully assess the quality of a service until you experience it. It is easier to know what you are getting with a good, but harder to know with a service.
8. Production and Consumption
Explanation: Goods are typically produced, then sold, and then consumed. Services are often produced and consumed simultaneously. For example, a factory produces a television, which is then sold to a customer who consumes it at home. A live concert, however, is produced and consumed at the same time. Goods are made, then used. Services are used as they are being made.
Characteristics Of Services
1. Intangibility
Explanation: Services cannot be seen, tasted, felt, heard, or smelled before purchase. Unlike goods, which have a physical form, services are experiences or performances. For example, you cannot physically hold a haircut, a legal consultation, or a financial advisory session. This intangibility makes it challenging for customers to evaluate services before consumption, leading to a greater reliance on trust and reputation. Because you can't touch it, it is harder to know what you are getting.
2. Inseparability
Explanation: Services are often produced and consumed simultaneously. The service provider and the customer are typically involved in the service delivery process. For example, a doctor's appointment involves the doctor and the patient interacting directly. This inseparability means that the quality of the service can depend on the interaction between the provider and the customer. The service provider has to be there for the service to be given.
3. Heterogeneity (Variability)
Explanation: Services are highly variable and can differ significantly in quality and consistency. This is because services are performed by people, and human performance can vary depending on factors such as the provider's skill, mood, and the customer's specific needs. For example, the quality of a restaurant meal can vary depending on the chef, the ingredients, and the time of day. This means that even the same service, provided by the same person, can be different each time.
4. Perishability
Explanation: Services cannot be stored or inventoried for future use. Once a service is not used, the opportunity to provide it is lost. For example, an empty seat on an airplane or an unused appointment slot at a salon represents lost revenue. This perishability requires service providers to carefully manage capacity and demand. If the service is not used, it is gone forever.
5. Lack of Ownership
Explanation: When you purchase a service, you do not gain ownership of a tangible asset. You are paying for an experience, a performance, or access to a resource. For example, when you pay for a movie ticket, you are paying for the experience of watching the movie, not for ownership of the film itself. You are paying for the use of something, not for the thing itself.
6. Customer Participation
Explanation: Customers are often actively involved in the service delivery process. Their participation can influence the quality and outcome of the service. For example, in a personal training session, the customer's effort and engagement directly impact the results. This required participation, means the customer is a part of the service.
Classifying services
1. By Nature of the Service Act
People Processing:
These services involve direct action on people's bodies. Examples include healthcare, hairdressing, and personal training.
The customer must typically be physically present.
Possession Processing:
These services involve actions on customers' physical possessions. Examples include car repairs, dry cleaning, and freight transportation.
The customer's presence may not be required, but their possessions are.
Mental Stimulus Processing:
These services involve actions directed at people's minds. Examples include education, entertainment, and advertising.
The customer's mental presence is essential.
Information Processing:
These services involve actions directed at intangible assets, such as information. Examples include banking, insurance, and consulting.
The customer's physical presence may not be required.
2. By Degree of Customer Contact
High-Contact Services:
These services require a high level of interaction between the service provider and the customer. Examples include consulting, medical services, and personal training.
Low-Contact Services:
These services require minimal interaction between the service provider and the customer. Examples include online banking, automated car washes, and mail delivery.
3. By Service Provider's Skill Level
Professional Services:
These services require a high level of specialized knowledge and skill. Examples include legal services, accounting, and medical services.
Non-Professional Services:
These services require less specialized skill. Examples include house cleaning, lawn care, and basic retail services.
4. By Market Served
Consumer Services:
These services are provided to individual consumers for personal use. Examples include restaurants, salons, and entertainment.
Business Services:
These services are provided to businesses to support their operations. Examples include IT support, marketing services, and logistics.
5. By Degree of Tangibility
Tangible Services:
These services are those that are accompanied by a tangible good. Example: restaurants, where food is the tangible good.
Intangible Services:
These services are those that are purely an experience. Example: education, or consulting.
Difficulties/Challenges in Services Procurement
Services procurement involves acquiring services from external providers, which can be significantly different from purchasing tangible goods. Unlike goods, services are often intangible, variable, and involve a high degree of interaction between the provider and the customer. This unique nature of services presents several challenges for procurement professionals.
Essentially, it's about the problems companies face when they need to hire someone to do something for them, instead of buying something they can hold. It's harder to define and control services than it is to define and control products.
Here are some key difficulties and challenges:
1. Defining and Specifying Service Requirements
Explanation: Unlike goods, which can be defined by specific physical attributes, services are often intangible and subjective. It can be challenging to clearly define the desired outcomes and performance metrics for a service. For example, how do you specify the "quality" of a consulting service or a creative design project? This difficulty in defining requirements can lead to misunderstandings, scope creep, and disputes with service providers. It is often very difficult to put into words, exactly what you need.
Addition: This is made more difficult, by the fact that the service provider also has to understand those specifications, and be able to deliver them.
2. Measuring and Evaluating Service Quality
Explanation: Because services are often intangible and variable, measuring and evaluating their quality can be difficult. Unlike goods, which can be inspected for defects, services are often evaluated based on subjective criteria, such as customer satisfaction and perceived value. This makes it challenging to establish objective performance metrics and hold service providers accountable. How do you measure how good a training session was, or how effective a marketing campaign is? This difficulty in measuring service quality can lead to inconsistencies and dissatisfaction.
Addition: Often, the quality of a service is only able to be judged, after the service has been completed, which makes it hard to change anything.
3. Managing Service Provider Relationships
Explanation: Services often involve a high degree of interaction and collaboration between the buyer and the service provider. This requires effective communication, trust, and relationship management. Unlike goods, which can be purchased and delivered with minimal interaction, services often require ongoing communication and coordination. Managing service provider relationships can be challenging, especially when dealing with complex or long-term service contracts. It is not just about buying something, it is about working together.
Addition: This can be especially difficult when dealing with service providers from different cultures, or with very different business practices.
4. Controlling Costs and Managing Budgets
Explanation: Service costs can be difficult to control, especially when dealing with complex or customized services. Unlike goods, which have fixed prices, service costs can vary depending on factors such as labor rates, project scope, and unforeseen circumstances. This makes it challenging to accurately estimate service costs and manage budgets. It is harder to know how much something will cost, before it is done.
Addition: When dealing with services that are billed by the hour, it can be very difficult to know how many hours will be required.
5. Ensuring Service Provider Compliance
Explanation: Service providers may be subject to various regulations and compliance requirements, such as data privacy, security, and labor laws. Ensuring service provider compliance can be challenging, especially when dealing with global service providers or complex regulatory environments. This requires careful due diligence and ongoing monitoring. It is very important to make sure that the people you hire, are following all the rules.
Addition: This can also be difficult to monitor, especially when the service is being provided off site.
6. Managing Intellectual Property and Confidentiality
Explanation: Services often involve the exchange of sensitive information and intellectual property. Managing intellectual property and confidentiality can be challenging, especially when dealing with external service providers. This requires robust contracts and security measures to protect confidential information and prevent unauthorized disclosure. It is vital to make sure that any company secrets, remain secret.
Addition: This is made more difficult, when multiple people, or companies, are involved in the provision of the service.
The steps involved in services procurement
1. Identify the Need and Define Requirements
Explanation: The process begins with recognizing a need for a specific service. This involves clearly defining the objectives, scope, and desired outcomes of the service. It's crucial to specify the required skills, experience, and qualifications of the service provider. This step also includes documenting detailed specifications, performance metrics, and any relevant service level agreements (SLAs). Essentially, figure out why you need the service, and what you want to get out of it.
2. Develop a Procurement Strategy
Explanation: Based on the defined requirements, a procurement strategy is developed. This strategy outlines the sourcing approach, evaluation criteria, and selection process. It may involve deciding whether to use a competitive bidding process, a negotiated contract, or a sole-source provider. The strategy also addresses risk management, contract terms, and budget considerations. This is about deciding how you're going to get the service.
3. Source Potential Service Providers
Explanation: This step involves identifying and researching potential service providers who can meet the defined requirements. This can be done through various means, such as online directories, industry networks, referrals, and requests for information (RFIs). The goal is to create a shortlist of qualified providers for further evaluation. This is where you find out who can provide the service.
4. Issue Request for Proposals (RFPs) or Quotations
Explanation: Once a shortlist of potential providers is created, a formal RFP or quotation is issued. This document outlines the service requirements, evaluation criteria, and submission guidelines. It allows providers to submit detailed proposals or quotations that demonstrate their capabilities and pricing. This is where you ask the providers to tell you how they would perform the service, and how much it would cost.
5. Evaluate Proposals and Select a Provider
Explanation: The submitted proposals or quotations are evaluated based on the pre-defined criteria. This may involve assessing factors such as technical expertise, experience, pricing, references, and compliance with requirements. The evaluation process should be objective and transparent, leading to the selection of the most suitable provider. This is where you decide which provider is the best.
6. Negotiate and Finalize the Contract
Explanation: Once a provider is selected, contract negotiations begin. This involves discussing and finalizing the terms and conditions of the service agreement, including pricing, payment schedules, performance metrics, and dispute resolution mechanisms. A well-defined contract is essential for ensuring clear expectations and protecting the interests of both parties. This is where you agree on all the details of the service.
7. Manage the Service Delivery
Explanation: After the contract is signed, the service delivery process begins. This involves ongoing communication, coordination, and monitoring of the provider's performance. Regular reviews and feedback sessions are conducted to ensure that the service meets the agreed-upon standards. This is where you make sure the service is being provided as agreed.
8. Evaluate Performance and Close the Contract
Explanation: Upon completion of the service or at the end of the contract term, a final evaluation is conducted. This assesses the provider's performance against the agreed-upon metrics and documents any lessons learned. The contract is then formally closed. This is where you check to see how well the service was provided, and then end the agreement.
Methods of Compensating Service Providers
Compensating service providers involves determining how they will be paid for the services they deliver. This is a crucial aspect of service procurement, as it directly impacts the provider's motivation, performance, and the overall cost of the service. The method chosen should align with the nature of the service, the desired outcomes, and the level of risk involved.
Essentially, it's about figuring out how to pay someone for doing a job for you, when that job isn't making a physical product. There are many ways to pay for services, and the right way depends on the type of service.
Here are some common methods of compensating service providers:
1. Fixed Price (Lump Sum)
Explanation: In this method, the service provider agrees to deliver the service for a predetermined, fixed price, regardless of the actual time or resources required. This method is suitable for well-defined services with clearly specified deliverables and a low degree of uncertainty. For example, a company might hire a web designer to create a website for a fixed price. This method provides cost certainty for the buyer and shifts the risk of cost overruns to the provider. The provider knows how much they will get, and the buyer knows how much they will pay.
Addition: This method is best when the scope of work is very clearly defined.
2. Time and Materials (T&M)
Explanation: This method involves paying the service provider for the actual time spent and materials used in delivering the service. The provider typically charges an hourly rate for labor and adds a markup to the cost of materials. This method is suitable for services with uncertain scopes or complex projects where the exact time and resources required are difficult to estimate upfront. For example, a company might hire an IT consultant to troubleshoot a complex technical issue on a time and materials basis. The buyer pays for the actual time and materials used.
Addition: This method is best when the scope of work is hard to define, or is likely to change.
3. Cost Plus Fee
Explanation: This method involves reimbursing the service provider for their actual costs plus a predetermined fee, which can be a fixed amount or a percentage of the costs. This method is often used for complex projects or research and development services where the exact costs are difficult to predict. For example, a government agency might hire a research firm to conduct a study on a cost-plus-fee basis. The fee is intended to cover the provider's profit and overhead. The buyer pays for the costs, plus a little extra.
Addition: This method is often used when the buyer needs to have a great deal of oversight into the costs of the project.
4. Performance-Based Compensation
Explanation: This method ties the service provider's compensation to the achievement of specific performance targets or outcomes. The provider is paid based on the results they deliver, rather than the time or resources they expend. This method is suitable for services where the outcomes are measurable and directly linked to the provider's performance. For example, a marketing agency might be paid based on the number of leads generated or the increase in sales revenue. The better they do, the more they get paid.
Addition: This method is best when the desired outcome can be clearly measured.
5. Retainer Fee
Explanation: This method involves paying the service provider a fixed fee on a regular basis (e.g., monthly or annually) for ongoing access to their services. This method is often used for legal, consulting, or creative services where the buyer requires continuous access to the provider's expertise. For example, a company might pay a law firm a monthly retainer fee for ongoing legal advice. The buyer pays a fixed amount, to have access to the service provider.
Addition: This method is best when the buyer needs regular access to the service provider.
6. Milestone Payments
Explanation: In this method, payments are made to the service provider upon the completion of specific milestones or deliverables. This method is suitable for projects with clearly defined phases or stages. For example, a software development project might have milestone payments tied to the completion of key functionalities. The buyer pays when certain parts of the project are completed.
Addition: This method is best when the project can be broken down into clear, defined phases.
In-House vs. Outsourcing of Services: Advantages and Disadvantages
When a company needs a service, it faces a fundamental decision: perform the service in-house or outsource it to an external provider. This decision has significant implications for cost, quality, control, and strategic focus.
Essentially, it's about deciding whether to do something yourself, or to hire someone else to do it.
Here's a breakdown of the advantages and disadvantages of each approach:
In-House Services:
Advantages:
Greater Control:
The company has direct control over the service delivery process, ensuring alignment with its specific requirements and standards. This allows for quick adjustments and responses to changing needs. You get to control how everything is done.
Enhanced Communication and Collaboration:
In-house teams facilitate seamless communication and collaboration, leading to better coordination and faster problem-solving. This is especially important for services that require close integration with other departments. It is easier to talk to people who work in the same building.
Protection of Confidential Information:
Keeping services in-house reduces the risk of sensitive information being exposed to external parties. This is crucial for businesses that handle confidential data or intellectual property. Company secrets are more likely to stay secret.
Development of Internal Expertise:
Performing services in-house allows the company to develop and retain valuable expertise, which can provide a competitive advantage. This can lead to long-term cost savings and improved service quality. You get to keep the skills within your company.
Increased Employee Morale:
Providing a wider variety of job functions for employees can increase employee satisfaction.
Disadvantages:
Higher Costs:
Maintaining an in-house team can be more expensive than outsourcing, especially for specialized services or infrequent needs. This includes costs related to salaries, benefits, training, and equipment. It can cost more to hire people full time.
Limited Expertise:
In-house teams may lack the specialized expertise or resources required for certain services. This can lead to lower quality or inefficient service delivery. It is hard to be an expert at everything.
Resource Constraints:
Performing services in-house can strain internal resources, diverting attention from core business activities. This can impact productivity and overall business performance. It can take time and resources away from other important tasks.
Lack of Flexibility:
It can be difficult to scale in house services up or down, based on changing demand.
Outsourcing Services:
Advantages:
Cost Savings:
Outsourcing can reduce costs by leveraging economies of scale and accessing lower labor rates in other regions. It can also eliminate the need for significant upfront investments in equipment and infrastructure. It is often cheaper to hire someone else.
Access to Specialized Expertise:
Outsourcing allows companies to access specialized expertise and resources that may not be available in-house. This can lead to higher quality service delivery and improved efficiency. Experts are hired to do the job.
Increased Focus on Core Business Activities:
Outsourcing non-core services allows companies to focus on their core competencies and strategic objectives. This can lead to improved productivity and competitive advantage. The company can focus on what it does best.
Greater Flexibility:
Outsourcing allows a company to more easily scale the amount of service that is being provided, based on changing demand.
Disadvantages:
Loss of Control:
Outsourcing can lead to a loss of control over the service delivery process, potentially impacting quality and responsiveness. You have less control over how things are done.
Communication and Coordination Challenges:
Outsourcing can create communication and coordination challenges, especially when dealing with remote service providers or different time zones. It can be harder to communicate with people who are not in the same building.
Security and Confidentiality Risks:
Outsourcing can increase the risk of sensitive information being exposed to external parties. This requires robust contracts and security measures to protect confidential data. There is a greater risk of company secrets leaking out.
Dependence on External Providers:
Outsourcing can create a dependence on external providers, potentially impacting business continuity if the provider fails to deliver. If the outsourcing company fails, then your company is also effected.
Potential for hidden costs:
Contract negotiation and service level agreements must be carefully crafted to avoid unexpected charges.
