Services are arrangements between things and agreements between people for a job to be done. Services have the potential to get a job done when for various reasons customers are unable or unwilling to do it themselves. In other words, when it is more attractive an option than DIY. 1 How strong customers feel the need for a service, and are therefore willing to make use of it and pay, depends on the boldness of the offering, and the resulting costs and benefits. Propensity and audacity store the potential for demand and supply. Having either means being in the market for it, either as a customer or a service provider.
Propensity, prospect and potential
As we know, assets have abilities, but they also have shortcomings and shortfalls, or simply constraints. How well the asset actually performs depends on its constraints in the context of its use or the job to be done. It could be incredibly useful in one context and immediately useless in another, at the same time. Therefore the potential of an asset may be viewed as the ratio of ability to constraint.
Potential = Ability / Constraint
Consider for example, an electric car with a range of 250 miles on a fully charged battery. In the simplest sense, the car’s potential as an asset is measured by whether or not it can make a particular journey possible, within a certain timeframe, for a certain number of people. Owners and users of the car define the prospects. How many of them need to drive how far, when and for what purpose? Is it quick trip to the local bakery to pick up a birthday cake, the daily work commute during rush hour, or a leisurely road trip through scenic Belgium? That determines what kind of roads they have to take, under what kind of traffic conditions, and the tolerance for delays. That in turn determines what shortcomings and shortfalls the car will face, and therefore what services it will need.
In general, people are motivated by the prospect of avoiding losses and making gains. They are more sensitive to the prospect of a loss, than of an equivalent gain. That’s the essence of prospect theory 2. In the framework of a service, where there are opportunities for an asset to be more useful and valuable, there are prospects of losses or gains; losses if the asset falls short of its potential, and gains if it does better than usual.
Propensity is the inclination and tendency of customers to make use of, and pay for a service. The propensity could be part of a habit or routine. Or, it could be the most likely choice a customer makes in given situation. If the propensity for a service is high, they are more likely than not to opt for a service. Propensity could be a predisposition, or hardly a matter of choice, for example, when someone who does not own a private jet decides to travel from New York to London and needs to get there in less than a day’s time. It can be a forgone conclusion they will purchase an airline ticket.
Propensity = Prospect/Potential
Propensity is the product of prospect and potential. The propensity to make use of a service increases, with an increase in the prospects of a gain or a loss. Picking up that cake is very important, otherwise 4-year old Natalie and her friends would be so disappointed. Some days you simply don’t feel like driving to work so you may work from home or take the bus, but that weekend driving across Belgium is very important. Propensity also increase with a drop in potential, in relation to that prospect. The battery could run out of charge. You need to find a charging station soon. Or the registration of the vehicle could expire. Conversely, propensity for a service is low when the prospects are low and the potential is high.
Audacity, prospect, and potential
Audacity is the boldness of a service provider has in offering a service at a price lower than or equal to what customers are willing to pay. 3 At the very least, audacity is measure of confidence in getting a job done better than customers can do it themselves. It is also an indicator of a competitiveness in a market. Audacity is apparent in through value propositions, promises, and claims service providers make about the performances and affordances their services can supply, and the outcomes and experiences that will materialize.
Audacity = Prospect x Potential
Like propensity, audacity is also a product of prospect and potential. The difference is, audacity increases with an increase in the potential. The greater the potential, the bolder a service provider can be with their promises and claims. The increase is potential in the form of additional capacity a service provider deploys, or superior capabilities and resources 4. The potential is limited by capacity constraints such as commitments providers have already made to other customers, or operational failures. Service providers invest in new technologies partly to overcome such constraints 5.
Propensity emboldens service providers to invest in capacity in advance. How many police cars to deploy? Which movie titles to license from studio? Which airports to fly between, and with what type of aircraft? How many more chartered accountants to hire with knowledge of the automobile industry? It’s a design problem that depends to a large part on the nature of the demand and the level of risk. A higher quality of demand, attributes of which include customers’ willingness to pay for the service, preferably in advance, reduces the risk of underutilized capacity 6.
The prospects for service assets are therefore linked to the likelihood customer assets will fall short of their potential, and feel the need-to-have and the need-to-be. That makes sense because, in a market for services, a decrease in the potential of customer assets is an opportunity for a service provider’s capabilities and resources to be more useful and valuable. 7
“It is not the tram that makes transportation a successful experience. It is the schedule.” Lucius Burckhardt
Audacity in turn stimulates propensity, and encourages customer needs to be even more expansive and more habitual. Shortcomings and shortfalls become part of the routine. The more proven a service is in fulfilling needs, the more customers come to depend on it, and less on their own ways and means getting things. Google is perceived to be so reliable in finding answers, people are getting bolder in asking questions, not even caring about getting the spelling right. The better the battery life and greater the expanse of the network of supercharging stations, the more people will opt for the electric car.
Propensity and audacity are both functions of prospect and potential, and they are opposites that attract. The strength of the attraction define the market for a service. Propensity is an indicator of desirability from the perspective of customer needs, and audacity of the feasibility of fulfilling those needs. Desirability and feasibility reinforce each other in a feedback loop till each crosses a threshold beyond which a service offering becomes viable, which is to say customers and service providers can depend on each other for supply and demand.
- Consider a simple case of car owners paying a mechanic to fix their car. They possibly could fix their own car, if with the right tools, equipment but they may lack the knowledge, and skills. They may have know-how in their hands, but they may lack the time and energy. They may be lacking in ability but not in constraints. That creates the potential for somebody else to get the job done. Viewing that as an opportunity, auto mechanics keep stock of that ability, and adequate capacity in terms of time, space, and energy to not be constrained. This dynamic relationship between potential on two sides is what creates the market for services. Most car owners let auto mechanics maintain capabilities and resources, and pay for their use as part of the maintenance and repair services. Similarly, airlines, trucking and shipping companies, may choose to have their own maintenance, repair and overhaul (MRO) operation for their fleets, or choose to pay for MRO services others provide. In other words, some services similarly exist. ↩
- This is the essence of prospect theory for which Daniel Kahneman and Amos Tversky won their Nobel Prize in Economics. ↩
- Amazon AWS is a great example of the audacity of a service provider. By making huge investments in IT infrastructure, Amazon almost dared companies to give up on managing and operating their own infrastructure, and use instead AWS, that offers high availability, scale, and flexible pricing. ↩
- For example, a hospital can invest in new systems and technology or instruments, or simply add more units. An airline can upgrade its fleet with new models of aircraft that have greater efficiency, reliability and range, or add new routes for an existing fleet. ↩
- Netflix started with mailing movies in the DVD format, to a purely digital format that makes it possible to serve up millions of instances of the same title, all at once, across the 160 countries. ↩
- That’s the underlying reason why service providers entice customers into long-term contractual commitments, through discounts and rewards, including frequent flyer programs and loyalty cards. ↩
- Indeed, capacity allocation and dynamic pricing are often in anticipation or response to routine or special events in which customers finding themselves in the need. ↩