The amount of businesses in the service sector that rely their future profits on low‐skilled and directionless employees is mind‐boggling. This article describes the structural changes and reasons behind the service economy, how it has matured over time in terms of customers’ service expectations, and finally the general problems in service designs are briefly discussed and an alternative provided.

1. The service paradox: Retailing
in the service economy
By Jens Gregersen: I develop long‐term competitive advantages based on consumer oriented strategies – an
approach which I have implemented in diverse cultural markets across Europe, the Middle East and Asia.
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The amount of businesses in the service sector that rely their
future profits on low‐skilled and directionless employ‐
ees is mind‐boggling. This article describes the struc‐
tural changes and reasons behind the service econ‐
omy, how it has matured over time in terms of
customers’ service expectations, and finally the
general problems in service designs are briefly
discussed and an alternative provided.
First a question for businesses owners;
how many of your customers left your
shop or store feeling valued today? Well,
chances are that 60% of your customers
had a bad service experience. Of the re‐
maining 40%, how many had an experi‐
ence good enough to recommend your
business? Strangely enough most business
owners are incapable of providing even a
slightly qualified answer to these two es‐
sential questions.
The most famous definition of service is provided by
The Economist; Service is everything that can’t fall on
your feet. This definition is as correct as it is simple. Simple
because service is a complex set of economic activities ranging from labour intensive low‐skill areas such as re‐
tail to advanced knowledge intensive sectors like software development. The focal point of this article in term
of service is retail trade though its findings and conclusions can with advantage be used across other service
sectors.
The service economy
In just about all developed economies around the world the service sector is the principal part of the economy.
For example, in the EU‐15 countries the service sector constituted an astonishing 73.2% of GDP in 2010 – signifi‐
cantly larger than that of the two other basic GDP sectors; industry (25%) and agriculture (1.8%).
According to the World Bank an increased service sector is a natural process as an economy develops – that
being as capita income rises people will demand more industrial products over agriculture, once this material
demand is satisfied people will begin demanding more services. The interesting question in this context is what
consequences this shift will have on customer preference as the service sector matures over time.
Theoretical insight: The rise of the service economy
Since 1935 academics have researched the reasons why a society’s basic economic sectors change over time;
the reasons can roughly be categorised into three categories: (1) Demand, (2) supply, and a (3) division of la‐
bour.
Demand side: While industry and agriculture were still the leading sectors of the economies Fisher (1935) was
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2. ‐ continued: The rise of the service economy
among the first to discuss the service sector as a function of income. In other words, as people have more
disposable income and their materialistic needs (for agricultural and industrial products) are satisfied they will
demand more services. Though supported by many such as the World Bank this demand side view has been
challenged as research has not been able to show a positive correlation between the level of income and the
proportion of the service sector e.g. by Schettkat and Yocarini (2005).
Supply side: The demand side explanation has foremost been challenged by a supply side interpretation pri‐
marily represented by Baumol (1967, 1992 and 2001) who explains the continuous increase in the service sec‐
tor as a result of lower productivity in this sector relative to agriculture and industry, and not because of a
changing demand. In other words, as productivity in the two other basic economic sectors (agriculture and
industry) increases the share of employment in the service sector will increase proportionally more – that be‐
ing, the cost of labour increases at the same rate in all three basic sectors regardless of the productivity. The
validity of this perspective has been verified by Fuchs (1980) an others.
Changes in inter‐industry division of labour: The final and third perspective is based on an inter‐industry divi‐
sion of labour. As companies split their different divisions, that could for example be a car producer creating a
separate company to handle marketing or finance, or the car company outsource these functions altogether,
the number of people employed in the industry sector goes down as the former industry employees are now
counted in the service sector. This perspective has been supported empirically by e.g. Schettkat (2003).
Service economy and productivity
Academics continues to research the reasons for the structural changes in the basic sectors of the economy but
one thing is clear, societies are becoming increasingly more dependent on the service sector. The following
paragraphs will investigate the challenges faced by service dependent economies and how these challenges
might have changed over time.
The in 1968 publication of The Service Economy by Fuch describes how the USA was the world’s first country to
become a service economy, meaning that by 1967 “more than half of the employed population is not involved in
the production of food, clothing, housing, automobiles, or other tangible goods.”
Fuch did another two findings; his research concluded that the service sector had primarily grown faster than
those of agriculture and industry because of a lack in productivity in the service sector (supply side perspective).
He explained this lag of output with a “[m]uch more rapid increase in the quality of labour in the industry than in
service.” Fuch concluded further that “The upgrading of labour quality in industry is also revealed by the faster
growth of professional and managerial occupation in that sector.” (ibid). In other words, the agricultural and
industrial sectors have been subject to a higher degree of training and professionalism than in the service sec‐
tor.
In 2000 OECD published a report concluding that there is a need for highly skilled‐white collar workers in the
service sector throughout the member states and that growth and development depends profoundly on human
capital; “A lack of skilled workers, as well as a lack of flexibility, frequently acts as a severe constraint for devel‐
opment.” The report also researched the issue of productivity and concluded that “[...] labour productivity show
that services make a contribution to overall productivity growth that is relatively limited compared with the size
of the sector.” Though, it should be mentioned that OECD generally finds it difficult measuring productivity in
the service sector in the same way as done in the agricultural and industrial sectors. But in certain service sec‐
tors the increased productivity is evident for example telecommunications, transport, and finance industry has
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3. experienced significant productivity improvements.
The OECD report was followed by a McKinsey Global Institute publishing in 2010; ‘Beyond austerity: A path to
economic growth and renewal in Europe’, which demonstrates how improving productivity in the European
service sector to best practice could increase the region’s overall productivity by 20%.
Hence, the demand for highly skilled professionals in the service sector apparently still exists some 43 years
after this sector became the leading basic sector in the USA (and a few years later in the EU). Though one signifi‐
cant difference between 1968 and 2010 is the mere size of the service sector, thus a small change in productiv‐
ity will have an immense influence on the overall GDP as demonstrated by McKinsey Global Institute. Another
difference between the service sector anno 1968 and today is that the service sector has become far more spe‐
cialized and services and products/goods exist symbiotically – an example of this is computers and software –
making it more complex to separate one basic sector from another.
As the service sector matures
Thus far it is clear that the service sector continues struggling with the same underlying challenges of filling key
managerial positions with skilled workers in 2010 as the sector did in 1967 when it first became the largest of
the three basic sectors in the USA. Besides from a structural understanding of the service sector it is important
to learn how the sector has changed over time in term of operations – in other words, what customers expect in
terms of service. But what constitute service? Walker (Lock 1998) defines service as being a personal experience
[...] Mood, culture and timing, as well as the customer’s previous experience all affect the way service is per‐
ceived”. According to the writers such vague definition and concept is a challenge to business operations.
Exactly this could explain why it seemingly is so difficult for businesses to provide good service. For one, service
is performed and evaluated by individuals – individuals often with different opinions of what constitute good
service. Inspired by Walker’s service definition it can be argued that service provided is subject to the mood,
training and interpretation of the individual performing the service as well. This observation is supported by the
fact that service is created and consumed simultaneously and cannot be stored.
30 years after the publishing of The Service Economy Pine and Gilmore introduced the theory of the experience
economy in 1998, which describes a change in society where customers take products and service for granted
and demand experiences which appeals to their senses and involvement. Thus, providing experiences is not a
matter of just adding experiences to traditional offerings – the experience must be real and engage the custom‐
ers. Customer engagement is a personal matter thus Pine and Gilmore conclude that “[...] no two people can
have the same experience.” (ibid). The writers see products and services as integrated stepping stones in provid‐
ing experiences – hence, products, services and experiences interact symbiotically. It is interesting to learn that
Pine and Gilmore’s conclusion of experiences being subject to individual interpretation and evaluation corre‐
sponds with Walker’s (1998) understanding of service.
21 years have passed since the experience economy was first articulated and it is clear that an increasing num‐
ber of companies have embraced the idea of competing on experiences. Today a wide range of products have
storytelling associated, most retail businesses put significant resources into the shopping environment – or
stage – but service seems to be taken for granted, at least by businesses. With more than half of customers feel‐
ing that they had a poor service experience, the most likely experience businesses provide is through mediocre
service – not exactly the experience hoped for by the customers and not exactly the experience outlined by Pine
and Gilmore. As the writers notice; “No company sells experiences as its economic offering unless it actually
charges guests (customers) for the events that they stage. ... An event created just to increase customer prefer‐
ence for the commoditized goods or services that a company actually sells is not an economic offering.”
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4.
As mentioned, many companies are trying to stage experiences in terms of shop designs (stage themes), they
upgrade the packaging, they apply storytelling to their products etc. – in other words, companies tries to obtain
customer satisfaction and perhaps even loyalty by creating the framework for experiences, the only problem is
that these attempts are based on traditional marketing initiatives, are half hearted and do not work if the ser‐
vice provided fails.
One could think that companies are attempting to buy their way to customer satisfaction via traditional and
functional methods but it might just be that the concept and the task of providing service is a too complex and
indefinable concept as articulated by e.g. Walker (1998). The reason could also be due to a lack of high‐skilled
and qualified employees in the sector as observed by OECD (2000) and confirmed by the McKinsey Global Insti‐
tute in 2010. In terms of retail this sector is to a very high degree crowded with by low‐skilled employees who
might lack the necessary mood, training and interpretation of the company’s service definition and require‐
ments – or the company’s service design is perceived untrustworthy and feigned by the service employees.
Regardless of the reason, in a world where mass production and globalisation have erased product functional‐
ities and prices differences companies are investing heavily into marketing, the best possible locations and fan‐
tastic interior design from which they offer their products. The problem is that the majority of customers get a
disappointing experience when actually interacting with the businesses operation.
The service paradox
In 1985 CEO of SAS Jan Carlson phrased the term The Moment of Truth, which refers to the moment when the
customer interacts with an employee of the company – this is the moment when all the hard work and re‐
sources put into the products, marketing, location, decoration etc. is being evaluated by the customer. Failure
by any employee to meet the expectation of the customers will re‐
duce these resources to a sunk cost. The moment of truth!
It is actually a paradox that companies base their investment into products, marketing, location etc. on low‐
skilled and poorly trained employees – employees who will make or break the relationship between companies
and their customers; “[...] on average 40% of customers who suffer through bad experiences stop doing business
with the offending company.” according to Dougherty et al. 2009. One can only wonder how many of the re‐
maining 60% will accept a second or third mediocre service experience before taking their business elsewhere.
As mass production and globalisation has erased product and price differences it has also given customers an
unlimited amount of similar businesses to choose from.
Some might think that good service is reserved expensive and high end businesses, but that is not the case as
demonstrated by Bregman (2009). One could also think that bad service mostly occurs in large organisation, but
this is not the case either. Two out of three private sector jobs in the EU are provided by small and medium‐
sized enterprises (SME) such as bars, bakeries, clothing stores, restaurants etc.; chances are that you have been
interacting with a SME more than a couple of times the past few days as these constitute 99% of all European
businesses. Then try asking yourself the following; how many times the past week did you have a great or just
good service experience with one of these SME’s?
As described earlier in this article, service is subject to individual evaluation so try asking the following instead;
how many of these places gave a good enough overall experience for you to recommend this or these places to
your friends and family? The idea of a small business owner being close to and paying special attention to his
customers is in most cases nothing more than an illusion – thus, size seems not to matter.
The two most likely reasons for poor service is the vagueness of the concept, which consequently makes it un‐
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5. Emotional bonds between
companies and customers
are difficult for competitors
to break.
Carbone et al. (2002)
manageable. In an attempt to overcome this and simplify the service concept do businesses implement measur‐
able initiatives but many of these are too functional and reveal little of the impact on a business’s bottom line
such as the number of phone calls answered within a given time etc. In other words, anything service related
becomes, perhaps unintentionally, discursively constructed as cost centres.
To many businesses it can make good sense to simply the concept of service, and to measure and analyse it
continuously, but instead of measuring and basing quality service on functional initiatives companies could de‐
fine and measure service on the extend of customer loyalty as defined by e.g. the Net Promoter Score (NPS),
Reichheld (2003). The NPS takes two factors into account; buyer economics (the value of the customer), and
referral economies (their potential value through referral). The first factor measures a customer’s own choices,
and the latter how those choices influence on others – the difference (the net) is the result companies should
pay close attention to. Customers are asked a very simple but highly profit influential question; to what extent
they would recommend Company X to friends and family – 10 being extremely likely.
The increased popularity of the Net Promoter Score program is likely because of its simplicity compared to
many other customer loyalty programs but this simplicity is also its limitation. As the NPS asks a general ques‐
tion it also generates a general answer. Though simple and revealing the success of the NPS depends to a high
degree on how it is implemented and how companies choose to interpret and especially react on the result gen‐
erated.
Often companies will realize two things, first, that their existing service design is focused on measuring factors
that matter little to customers in an attempt to build loyalty, as most service designs are very functional and
rigid. As described earlier, service is performed and evaluated by people and different people have different
criteria. Thus, a rigid service design applied persistently and without considering the real needs of the individual
customers is a likely way to give a poor service experience. The second reason why service tends to fail is due to
lack of training and motivation with the service employees – this is very often rooted in the culture of the com‐
pany and management inconsistency.
Describing a service design as part of the corporate culture is neither within the scope nor focal point of this
article but it should be mentioned that for an organisation to become truly customer centric service must be
basis for all decisions, be flexible and supported and awarded by management – one way of doing this is by
building experience in to the service.
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