It refers to whole environment in which the service is presented and sold to the consumers. It includes all the tangibles that create perceptions about the service and the firm offering it. As an example, consider a salon service where the physical evidence includes the interiors of the place, the dress up of the personnel, the recognition certificates hung on wall, the magazines and brochures lying on table.
All these work either positively or negatively to affect the consumer experience about the service he will be offered and the company offering it.