Why the service economy is growing

 

When you study services marketing as part of your business degree, you quickly learn that services represent 70 – 80% of gross domestic product in most developed countries.

Over the past 50 years or so, service sectors have grown significantly, relative to manufacturing, to become the dominant aspect of many economies throughout the world.

The size of the service economy, along with the unique aspects involved in marketing service firms, was the main reason for the significant increase in understanding services marketing from the 1980s onwards.

The main reasons that services have grown

  • Hollowing-out effect
  • Deregulation and privatization
  • Social changes
  • Family/household affluence
  • Professional services and promotion
  • The growth in franchises

Hollowing-out effect

The hollowing-out effect refers to the reduction in the size of the manufacturing sector in developed economies. The term, hollowing-out, suggests that this part of the economy has been removed. In reality, much low level and unskilled manufacturing has been outsourced to countries where the wages and conditions are much lower.

For example, many countries in South America, as well as China, India and Indonesia now produce a significant amount of manufacture products. As the hourly rate for a worker is much lower in these economies, the products become much cheaper to manufacture, which can allow the firm to compete on price or to increase its profit margin.

Therefore, the first reason why services have outgrown manufacturing is because manufacturing is not growing in its own right, especially the manufacturing of basic goods.

Deregulation and privatization

Many governments in developed countries have deregulated key markets and industries or privatized government owned institutions. The types of industries that have been deregulated or privatized include banking, telecommunications, energy supply, insurance and airlines. Please note that this may vary by country, but it is a reasonably representative list.

This has the impact of creating competition and more ambitious management. In the past, when these services were government owned or essentially operating in some sort of protected industry, there was little incentive to grow the business and increase profitability.

However, with the advent of deregulation, this allowed new competitors to enter markets, as well as allowing existing players to become more ambitious and growth oriented. Therefore, many of these industries have expanded their product offering and their market reach.

Social changes

Social changes are a significant driver of service economy. The most significant social change in this area is the emergence of the two income family since the 1970s in most developed countries.

This had a significant impact, primarily because reduce the amount of time available to the average household. With women re-entering the workforce after children, for example, families became very time–poor. The solution to being time-poor is to utilize convenience-based services.

Examples of the type of services that provide a time saving solution are: restaurants and fast food outlets, childcare, home delivery services, home cleaners and gardeners, laundry services, and so on.

Family/household affluence

The other significant change as a result of women re-entering the workforce (above) is that families and households had greater income. As a household’s disposable income increases, they have more money available for entertainment, travel and lifestyle products and services.

It is also likely that the expenditure on education and training, given families’ increased career focus will increase.
Therefore, a greater disposable income will lead to increased demand for services.

Professional services and promotion

In quite a number of countries, there has been a relaxation of the restrictions on the promotional activities of professional services. In the past, it was not uncommon for legal and medical services to be restricted from engaging in advertising.

However, that situation is generally changed in many countries, and professional services are very growth oriented and have tapped into an increased demand for this service offering.

The growth in franchises

Many franchises are service based. The various fast food restaurants in particular, have done very well in attracting franchisees to help grow their business.

Franchising is very common in the retail sector – which are all service firms – and have contributed to the growth in the service economy.