Service providers usually have fixed capacity. For instance, there are only so many people that can safely travel on a given flight; so many haircuts that can be done in a day; or so many meals that can be served at a time.
On the other hand, interest in that service (i.e., the demand) tends to vary. For instance, travel to seaside destinations may vary across the year; demand for haircuts is likely to vary during the week; and restaurants are likely to be busier at some times of the day than others.
If demand for the product exceeds the service provider’s capacity, the service provider loses out on revenues from those customers that the airline / hairdresser / restaurant turns away – not just the immediate sales lots, but possibly, even, future revenues. In addition, service quality for those that remain may suffer: if a venue is full, mistakes or accidents are more likely to happen; and the service experience may deteriorate (e.g., too noisy).
However, if demand falls below the service provider’s capacity, resources are under-utilised, which will impact negatively on profit. After all, salaries still need to be paid, rents are still due, and the lights still need to be on. Depending on the service, the customer experience may also suffer – for instance, going to a restaurant can be as much about the good as it is about the ambiance. Moreover, firms may miss out on additional sales, when potential customers take the sight of an empty hair saloon / restaurant as a sign of poor quality.
Thus, service managers will go to great extents to manage demand levels (i.e., try to flatten demand) to approximate its optimal capacity levels – for instance, offering discounts during off-peak times. And, when they can’t shift demand, then service managers need to try their best to manage the customer experience to try and avoid the downsides of excess supply or demand.
Brian Bartolo, Director of Sales and Marketing at the Grand Hotel Excelsior, in Malta joined my Services Marketing class, earlier this year, to discuss how his hotel deal with the challenges presented by fluctuating demand vs fixed capacity. He also discussed how the hotel adapted to the challenge of all challenges: Covid-19!
He has graciously agreed to have his talk recorded, and shared here on the blog. Here is the video – enjoy!
If you work in services or digital marketing, and would be happy to share 20-30 minutes of your time with students, I would love to hear from you.