Chapter 3: Service Innovation

Chapter 3 Learning Outcomes

After reading this chapter, you should be able to do the following:

  1. Define “service innovation”.
  2. Explain four evolving trends in service innovation.
  3. Discuss how service attributes, benefits, and values are connected.
  4. List five things businesses can do to increase customer value.
  5. Explain the importance of considering the user, buyer, and payer when innovating.
  6. Discuss the Customer Star Framework for aligning service innovations.

The New Service Landscape

Service innovations take place across all industries and around the world. Of course, this involves service firms, but product-based companies can also develop service innovations.  A service innovation changes the way customers are served to create value for customers and revenue for the company.  Through a new service innovation, a company may increase its revenue due to existing customers spending more, improved positive company image, referrals, etc.

This sector accounts for 75% of Canadian jobs and 78% of the country’s GDP. The sector includes the following sectors; transportation, economic, health care, construction, banking, communication, retail, tourism, and government. As a vital part of the Canadian economy, the most popular sector is retail with some big franchise names including Walmart and Future Shop. In recent years, the financial services, real estate, and communications industries have grown exponentially, especially in the business hubs of Vancouver, Montreal, and Toronto.[1]

A service innovation changes the way customers are served to create value for customers and revenue for the company.

Four Evolving Trends in Service

The nature of services and the pace of change have shifted dramatically in recent years, and mastering the traditional aspects of service delivery will no longer be enough. To seize the opportunities, companies must learn to tap the potential for service innovation made possible by four evolving trends.[2]

  1. Higher customer expectations. More than ever, consumers demand greater involvement, customization, personalization, and mobility from services—with immediate results. When they see cutting-edge service innovations in one industry, they expect to find them in others as well; witness the spread of self-service kiosks from airline check-ins to the retailing and hospitality industries.
  2. The rise of the mobile Internet. Just about everyone has a cell phone today and the number of apps is extensive. The resulting mobile and self-service possibilities are transforming service delivery. Uber’s disruption of the taxi business is just one prominent example. Advances in digital payments are increasingly spurring mobile commerce, with far-reaching implications in financial services and retailing. Remote access and monitoring in healthcare are also potential game-changers made possible by increased connectivity. The proliferation of smart devices unlocks growth opportunities, reduces the cost to develop services, and dramatically lowers barriers to entry.
  3. Big data and advanced analytics. Companies such as Amazon and Harrah’s are known for using customer data to personalize and tailor their services. Continued advances in analytic capabilities allow companies to draw insights from massive, previously untapped sources, leading to new service possibilities.
  4. The Internet of things (IoT). The prevalence of connected devices opens up possibilities for proactive, even “touchless” service, as well as new commercial models quite unlike the traditional fee-for-service one.

Service Innovation Examples

An interesting thing about service innovations is that they are often combined with other types of innovations. For example, if you are a customer of Tim Hortons then you may have used their loyalty program. When you place a product order you gain points and when you get enough points you can use those points to purchase a product.  The app is a service innovation for customers as it improves the customer experience and adds value to their transactions.  The app is also a technological innovation as well as a process innovation for the company.  When customers use the points program it changes the payment process for staff and the technology integrates with the payment system which allows the company to gather data about consumer purchases and preferences.

Airbnb’s business is primarily based on service innovation. The creative entrepreneurial innovation allows people to travel and stay at different hosts connecting them in advance. Airbnb is giving tough competition to the hotels in the hospitality industry, thus disrupting the industry, and forcing the existing way of doing things to evolve and the existing companies to innovate to keep up.

Netflix produced a series of disruptive innovations that revolutionized how people get their daily dose of entertainment at cheap prices.

Need a snack on the go? Forgot your toothbrush or charger? It’s not a problem at Grab, a line of taxis in Singapore that offers in-car convenience stores. The simple solution shows that innovative ideas don’t need to be flashy as long as they meet customers’ needs. Providing items to customers when they need them most solves a major pain point.[3]

Discover What Customers Want

Many companies start their service innovation journey at the wrong end. They look at their existing services and try to find ways to improve them. For a more promising approach through service innovation, they should begin by asking the following questions.

  1. How can we relieve customers from activities they do not like to perform?
  2. How can we enable customers to perform activities they cannot do without our service?
  3. How can we make it easier for customers to do what they need or want to do?

In order to create break-thru innovations, a company must do more than just add an element or a single attribute to an existing service or product.  Unfortunately, most of the customer surveys businesses use today are trying to do just that, evaluate customer satisfaction based on current attributes. When you ask a customer what they want from their car mechanic they might say, “to pay less,” “to know my car is repaired and safe to drive, peace of mind,” or “to be quick and save me time by getting me back on the road again.”  In order to successfully innovate, a business must have a very clear and systematic understanding of what they do and how the customer benefits from it.  For example, if the bank offers a drive-through ATM, which is an attribute, the benefit to the customer might be that the bank helps them to save time. If the bank stays open until 10 p.m. they are meeting the customer’s need for convenient hours of service. There is often more than one relationship between the attributes and the benefits. For example, a drive-through ATM may not only offer time savings but also safety, or it increases personal mobility and freedom for handicapped customers who cannot walk to the bank. When you meet with customers to find out what they really want it is helpful to take notes, ask questions, and separate attributes from benefits.[4] If an attribute is not a benefit to customers then you may need to consider removing it.

Linking (also known as laddering) product or service attributes to benefits and benefits to customer values helps companies sell products and services to customers. Customers seek attributes in products and services that bring them the benefits they value, and they will not pay for attributes that do not bring them the benefits they value.  The formula for customer value can be written as: (Total Customer Benefits – Total Customer Costs) = Customer Value, or (B – C = CV).

Tips for Businesses to Increase Customer Value[5]

  1. Evaluate your customer experience. Make it convenient for the customer to buy, and provide options in how the customer wants to buy and pay.
  2. Focus on more than price. Reduce the price, or don’t, but provide something extra over the competition (this could be improved service, better attention, community, improved quality, warranties, and other add-ons to the product or service).
  3. Collect customer data. Consider surveys, focus groups, observation, trends analysis, buying behaviour, needs/wants, and preference history.
  4. Target your most loyal customers. Keep these customers by providing the benefits that bring them value.
  5. Segment your customer base.  Different segments have different needs for different benefits.


Customer Benefits (save time, money, solve an issue, prestige, peace) versus Customer Costs (money, emotional, energy, time)
Customer Benefits versus Customer Costs



Explore the Concept – Attributes, Benefits, Values

If you were to purchase a pair of new running shoes, which attributes would bring you benefits that you consider of value?

Product and service benefits are the features that are most important to the customer. More often than not these are conceptual and change according to the individual shopper or customer segment. Different types of customers will find different attributes valuable.  Some may like the no-tie laces (maybe they have problems with dexterity), while others may be more enticed to buy because of the recycled soles (maybe they have a concern for the environment).  A company will segment its customers and devise promotions to emphasize the benefits that may be of value to specific target groups.  For example, a senior may like the extra cushioning and water-repellent attributes, and they may also hope to find arch support.  A business can create a customer segment for seniors (e.g., over 60) and survey these customers or potential customers to determine which attributes would bring benefits of value to that customer segment, then design products and services to provide those benefits.  Offering products or services customers do not need or want will mean the innovation will probably not be successful.


Attribute Benefits for a running shoe include water repellent, breathable fabric, no-tie shoe laces, hemp canvas, etc.
Running Shoe Attribute Benefits


Now imagine that this same company also offers three services with the purchase of this running shoe: 1) As a customer of the company you can join a loyalty program to collect points and when you have a certain number of points you will receive a discount on your next purchase.  2) This company also offers a running club for customers, in which customers join the group and go running with other avid runners each week. 3) There is a warranty for one year that covers any product defects or issues such as not fitting well or sole wearing out too quickly and they will repair the shoe for free.

Which of the above service attributes would be a benefit to you?  Which brings you added value? Which of these services would you consider of no benefit or value to you?  Why? Can you think of someone else who might enjoy the benefit of these services?

The Customer: The User, The Buyer, The Payer

First, you need to understand the customer roles – user, buyer, and payer. The user, buyer, and payer may not always be the same customer.  When you go to the store and buy groceries, you are the user, the buyer, and the payer because you will use the groceries, you selected the store to shop at, and used your credit card to pay.  Now imagine that you are buying groceries for your grandmother who asked you to purchase a few items on a list at a grocery store, and she gave you her credit card to pay for the items.  In this scenario, she is the user and the payer, and you are the buyer as you selected the grocery store to shop at. If she had sent you to a specific grocery store then she would also be the buyer and you are just the lovable delivery person.

If you attend a marketing convention out of town as approved by your manager, the payer of the hotel room is your employer, the user of the hotel room is you, and the buyer of the hotel room is the marketing association since it determined where the conference would be and which hotels would hold rooms for convention attendees.

Another example; if you work in the procurement department at a hospital, your job would be to buy the materials needed by surgeons to conduct surgeries. The surgeons are the users, and the payer is the hospital department that Accounting charges when the invoice is paid.

A deep understanding of the three roles is crucial for innovation success. The user, needs the right materials, in the right place,  at the right time.  They need the materials to do the job they are supposed to do.  The buyer requires a catalogue of all the materials the supplier provides, the prices, and the uses of each product or service. They need to know about warranties, inventory in and out, repair or replacement options, time for delivery, etc.  They must also understand the needs of the users and communicate with them. The payer needs to know what was ordered and if the full order was delivered and which department is paying for the order. They also need to know the budget maximum and communicate this information to the buyer.

When a business tries to understand the customer’s needs they must be specific–they must understand the user’s needs, the buyer’s needs, and the payer’s needs since they might be quite different.  When a company defines a new service innovation the best innovations are those that simultaneously improve the job to be done for the user, the buyer, and the payer.

Aligning Service Innovations

Organizations must align service innovations with the company mission, vision, values and goals as well as with customer expectations. The Customer Star framework (below) helps executives and entrepreneurs align their decisions and actions around what customers really want.

Align with Company Brand

Companies need to align service innovations with the company’s mission, vision, values, and goals to retain existing customers and obtain new customers.  Sharing with customers the company mission, vision, values, and goals will help set customer expectations around product and service offerings and attract customers that want the company offerings.  There is not much sense in offering a sauna at a fitness center if the customers would not use it or if the mission of the fitness center is to offer a quick workout at a low price.  Adding a sauna might be expensive and there would be considerations around safety and hygiene, so not a cheap innovation to implement.  Adding a sauna would probably not bring the benefits the fitness center customers would want; therefore, they would not pay extra to use it, so the company may lose money on this innovation.  If the fitness center is a place that promotes luxury and various spa treatments as service offerings after a workout, then a sauna may be right in line with the company’s mission and vision, and it would bring added value to the customer segment that frequents the fitness center.

To confirm this assumption, the fitness center would need to conduct research through customer surveys or focus groups, for example, in order to gather customer feedback. Psychographics are all about understanding customers’ lifestyles, values, beliefs, and optimizing marketing to demonstrate to customers how the company can fulfill these psychographic variables by providing the benefits sought thus providing customers value.

The fitness center would also conduct a competitive analysis to see if saunas are offered at competitor locations in the area. The company would examine costs and expected returns on investment as well as internal and external strengths and weaknesses, opportunities, and threats (SWOT).  The company might conduct a PEST analysis as well to determine if this innovative idea for a new service offering will be successful. After the research is complete and the results analyzed the company management team would decide if this new service innovation is feasible.

Align with Evolving Customer Expectations

Key areas of customer service have evolved, including the emergence of analytics, personalization, and employee engagement. Companies that thrive in an era of rapidly evolving customer expectations need to align their initiatives accordingly. It’s about going beyond short-term goals to building a self-sustaining customer-centric organization. The companies below are not only part of the service industry — they are also shaping its future. By extension, these and other companies like them are changing the way we live our lives.[6]

  1. Facebook, Twitter, Yelp, et al.  Social media sites should be recognized for their role in changing the service industry. Customers are increasingly turning to online outlets to share reviews, ask questions, and solicit feedback from brands that play a role in their lives. These interactions provide companies with an opportunity to learn more about their customers so they can better tailor their services to consumers’ needs.
  2. Motif Investing. The personal finance industry doesn’t exactly have a reputation for innovation. Motif Investing is the exception that proves the rule. The company is making investments accessible to a broad segment of the population by creating an investment structure that is affordable and easy to understand.
  3. Noma. The restaurant has both driven innovations in the food industry and capitalized on them. Led by world-renowned chef René Redzepi, noma embodies the farm-to-table movement by utilizing local and wildly sourced ingredients, avoiding GMOs, and emphasizing quality at all costs. In the process, it’s put Nordic cuisine on the international map.
  4. City CoPilot. More and more individuals and companies are enlisting personalized service from concierge companies—and not just when they’re staying in a hotel. City CoPilot and other innovative concierge companies have moved these services beyond the hotel lobby. Whether clients need assistance with luggage storage and delivery, package acceptance, airport transportation, finding discounted tickets to tours and attractions, or something else entirely, this new brand of concierge is here to make people’s lives easier at all times.
  5. UberEATS. Uber has already transformed the service industry with its innovative approach to transportation, but the company isn’t stopping there. It’s now attempting to disrupt the food delivery market with UberEATS. The company has more opportunities for distribution than any other business in the market, and thanks to their pre-existing name recognition, they have had an easy time identifying partners in the restaurant industry. It’s a winning combination that’s threatening even the companies that have long sat at the top of the food delivery chain. 

The service industry entails a vast variety of services ranging from food delivery to digital investing tools. Still, these companies all share something in common. They’re innovating existing services and transforming the country’s economy in the process.

Alignment Tool: The Customer Star Framework

The Customer Star framework created by Stefan Michel helps executives and entrepreneurs align their decisions and actions around what customers really want. In order to successfully implement any service innovation, a firm must make choices in regard to each point of the customer star. Those choices must then align and support each other.  When you apply the Customer Star Framework you can begin with any of its points. Service innovations may fail when the eight dimensions of the customer star are not in alignment. [7]


Customer Star Framework by Stefan Michel shows a star with 8 points as described in chapter
Customer Star Framework by Stefan Michel

When using the Customer Star Framework to check service innovation alignment, a company must ask the following questions about the eight dimensions.

  1. Customer Segments. Which current and future segments can we identify in our market?  Which of these segments are we interested in? How do we serve different segments differently?
  2. Positioning. What does our brand stand for?
  3. People. What are the employee skills required? What is the leadership style and how does it shape the culture in the organization?
  4. Information/IT. How do we use the Internet and other IT systems for gathering, storing, and disseminating data? Which analytics do we use to convert data to insights?
  5. Products. How do we innovate, manufacture, and distribute our products? How do we customize our products to each customer’s needs? How do we bundle our products with services?
  6. Operations. How do we design and manage our processes in all phases of the customer relationship? How do we link customer-facing processes with back-office work? How do we handle variability in terms of customer needs and demand/supply cycles?
  7. Partners. In addition to suppliers and distributors, which partners are essential to serve your customers?  What is our organization’s role in providing customer value in the partnership?
  8. Profit Model. What are our major revenue drivers, and what are our major cost drivers? How sensitive is the profit model in respect to fluctuating demand and costs?

For example, if you operate a 4-star resort then you need to be sure that your products are of high quality, your employees understand how to provide excellent customer service, and the services you offer at the resort are what your target customers want, thus, will pay for.  If you put a fast-food restaurant in a prestigious, high-class resort, the customers may frown upon it, as they want fine dining and they have expensive tastes.  You may need to go back and determine your resort’s positioning dimension.  If you position the company as prestigious then you need the other dimensions to align with that in order to obtain and retain the customers in the segment you are seeking.  Some brands that are thought of as prestige or luxury brands include Apple, BMW, Gucci, Ritz-Carlton, Tiffany, Rolex, and Cartier. If your resort is to be considered a luxury or prestige resort then you would want to align the eight dimensions accordingly, otherwise, your service innovation may fail to meet customer needs and expectations.  On the other hand, if you operate a resort that is considered a fair price, economy class resort, then you would position your resort that way in your marketing efforts and you would serve the needs of the customer segment who would be spending their money in this type of resort.

Issues Outside The Company

Business challenges and customer dissatisfaction are often due to problems, for which the company is NOT responsible, and to solve them, managers will need to think beyond the firm. Organizations may need to partner with external firms to solve problems stemming from the external environment, they may need to adapt processes to meet new government regulations, or they may need to change their business model in order to remain relevant with changing social trends and customer buying behaviours.

For example, many international students who wish to attend college or university in Canada are told by recruiters from their home country that they can come to Canada and work at the same time they attend school.  When the students arrive they find that it is very difficult to be successful in their studies when they are working 30, 40, 60 hours per week.  Many need the income to pay the bills, they may not have a place to stay, or even understand how much living in Canada costs. Students end up failing many courses due to a lack of time to commit to schoolwork, becoming depressed, and some end up spending far more money than they budgeted for on college course fees when they have to retake courses they failed. While this may not be an issue directly related to the specific Canadian college they attend, it is probably an issue the Canadian colleges and universities need to address with the recruiting agencies in foreign countries.  What might the colleges do to improve this situation? The colleges might implement an orientation course that all international students must take before they arrive in Canada or before they enroll and pay fees at a Canadian institution.  This would set the expectations for students before they spend their money as well as acclimatize students to Canadian culture and Canadian college expectations. Can you think of other possible solutions?

Another example might be a retailer who is always out of stock with specific items.  Customers may become upset or dissatisfied with the retailer when the items are not in stock.  This problem may be an internal issue pertaining to incorrect ordering, but what if the issue is with the supplier?  The retailer will have to decide if they need to switch suppliers, but what if they are locked into a contract, what then?  During COVID many products were in short supply, including bicycles, toilet paper, hand sanitizer, refrigerators, and kayaks.  Production shutdowns sent the price of lumber sky-high. Months spent quarantining led homeowners to spend more time outdoors, some taking on more do-it-yourself (DIY) renovation projects. And the fear of the unknown led to hoarding and stockpiling.[8]

Nearly two years after the pandemic began, the global supply chain mostly stabilized, but there was still one industry where shortages continue to abound: semiconductor chip manufacturing in the auto industry was one of the hardest hit. A semiconductor chip, also called a microchip, serves as the “brain” of modern electronics. With every new model, cars and trucks feature bigger infotainment systems and a host of other high-tech car safety features. Each of these technology-packed features relies on semiconductor chips. Building semiconductor chips is an extremely complex, expensive, and time-consuming process. For that reason, there are only a handful of chip manufacturers in the world, and all of those manufacturers were currently operating at full capacity.[9]

You may have found it hard to visit your favourite retailer, see a doctor, or get into a restaurant during COVID.  This was not the organization’s fault or problem, but a larger national and global problem.  The retailers, restaurants, and other service companies must abide by government health regulations and they took the health safety actions they were told to take.  Some retailers and restaurants began offering services such as pickup, delivery, and online ordering with pickup in the parking lot.  You could order groceries and pull up to the grocer’s location and the staff would load your groceries into the trunk of your vehicle.  Some companies already had those services in place which made it easier and quicker for them to adapt to COVID health regulations. These were some of the service solutions retailers came up with while they were NOT allowed to serve customers in-store or in-person or were restricted on the number of patrons they could have in the physical store at one time.


Key Takeaways

  1. A service innovation changes the way customers are served to create value for customers and revenue for the company.

  2. Companies must learn to tap the potential for service innovation made possible by four evolving trends: Higher customer expectations, the rise of the mobile Internet, Big data and advanced analytics, the Internet of Things (IoT).
  3. For a more promising approach through service innovation, companies should begin by asking the following questions.
    • How can we relieve customers from activities they do not like to perform?
    • How can we enable customers to perform activities they cannot do without our service?
    • How can we make it easier for customers to do what they need or want to do?
  4. Customers will often not pay more for attributes that do not bring them benefits, as from the customers’ perspective this would not be of value.  The formula for customer value can be written as: (Total Customer Benefits – Total Customer Costs) = Customer Value, or (B – C = CV)
  5. Tips for Businesses to Increase Customer Value: Evaluate your customer experience, Focus on more than price, Collect customer data, Target your most loyal customers, Segment your customer base.
  6. When a company defines a new service innovation the best innovations are those that simultaneously improve the job to be done for the user, the buyer, and the payer because each may have different needs.
  7. Psychographics are all about understanding customers’ lifestyles, values, beliefs, and optimizing marketing to demonstrate to customers how the company can fulfill these psychographic variables by providing the benefits sought thus providing customers value.
  8. Companies that thrive in an era of rapidly evolving customer expectations need to align their initiatives accordingly. The Customer Star framework created by Stefan Michel helps executives and entrepreneurs align their decisions and actions around what customers really want.
  9. Business challenges and customer dissatisfaction are often due to problems, for which your company is NOT responsible, and to solve them, you will need to think beyond your firm.

End-of-Chapter Exercises


  1. Changes Impacting the Service Sector. Research one of these companies and explain how this company is addressing the changes impacting the service sector: Bank of Nova Scotia, Canadian Tire, PepsiCo, McDonald’s, or IKEA. Does the research relate to this chapter’s content?  If so, what does it say?
  2. Walmart Service Innovation. Conceptualize five ways in which Walmart could innovate its customer service offerings.  Share your thoughts with the class and/or professor.  Do your ideas align with Walmart’s mission, vision, values, and goals?  Do your ideas align with the customer segment that shops at Walmart?  Do you think your ideas will be successful? Why or why not?
  3. Nordstrom Customer Insights. Nordstrom is known for customer support excellence. Search the Internet to find information about how the business is using AI-powered analytics and customer insights to transform its digital approach.  Discuss your findings with the class and/or professor.
  4. McDonalds Customer Star Framework.  Try applying the Customer Star Framework for McDonalds and start with Products=Fast Food and Profit Model=Franchised and Labour Costs=Low.  Fill in the other points on the Customer Star Framework as you can and determine with a partner, your class and/or professor if the Customer Star dimensions are aligned. You may wish to watch the LinkedIn Learning module, Service Innovation by Stefan Michel who created the Customer Star Framework (you may require a subscription).
  5. User, Buyer, Payer Scenarios. Come up with three (3) different scenarios, one where you are the user,  buyer, and payer. A second scenario in which you are only the payer and someone else is the user and buyer. A third scenario in which you are the user and someone else is the buyer and payer. Share with a partner, the class and/or the professor and see if they agree with your positions in these scenarios.
  6. Services Customers Value. Assume you own a Hair Salon, besides cutting hair, what other services could you offer customers that would be a benefit they would value?  Consider the value for different customer segments.  Discuss with the class and/or professor.
Hair Salon image of employee blow drying woman's hair
Hair Salon

Self-Check Exercise – Dialog Cards – Service Innovation


(Note: This list of sources used is NOT in APA citation style instead the auto-footnote and media citation features of Pressbooks were  utilized to cite references throughout the chapter and generate a list at the end of the chapter.)

Media Attributions

  1. Canadian Visa. (n.d.). Service industry.
  2. McKinsey Quarterly. (2015, February 1). Service innovation in a digital world.
  3. Morgan, B. (2019, October 21 ). 20 fresh examples of customer experience innovation.
  4. Michel, S. (2020, June 4). Service innovation. [Video]. LinkedIn Learning.
  5. Fontanella, C. (n.d.). What is customer value?
  6. Scalco, D. (2017, February 19). 5 companies innovating the service industry.
  7. Michel, S. (2020, June 4). Service innovation.
  8. Metz, J. (2021, October 22). Car chip shortage 2021: What's going on?
  9. Metz, J. (2021, October 22). Car chip shortage 2021: What's going on?


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