The service-profit chain establishes relationships between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity. The links in the chain (which should be regarded as propositions) are as follows: Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers. The service-profit chain is also defined by a special kind of leadership that emphasizes the importance of each employee and customer.
Harvard University Research
The Service-Profit Chain is a theory and business model evolved by a group of researchers (James L. Heskett, Thomas Jones, Gary Loveman, W. Earl Sasser, and Leonard Schlesinger) from Harvard University in the nineties. In their subsequent book The Service Profit Chain – How Leading Companies Link Profit and Growth To Loyalty, Satisfaction and Value they prove there is a direct link between superior service experiences, customer loyalty, and financial performance (profit and growth). The work of Heskett et al. was criticized by a study of Rosa Chun. In an article in the Strategic Management Journal she argues that they haven't found any hard data supporting the concept.
The framework of the service-profit chain consists of the following elements:
- Profitability and Revenue Growth – Most companies strive towards profit and growth
- Customer loyalty – Companies with profit and growth are characterized by a large number of loyal customers and that execute well against the 3 Rs: retention, repeat business, and referrals
- Customer satisfaction – Loyal customers result from satisfied customers by having service designed and delivered to meet targeted customer needs
- External Service Value – Satisfaction depends on the company’s ability to create value for the customer through a well defined service concept
- Employee retention – Value is created by loyal employees
- Employee productivity – Satisfied and loyal employees are far more productive
- Employee satisfaction – Employee loyalty is driven by employee satisfaction
- Internal service quality – To engage employees and ensure employee satisfaction the company has to build up the best possible internal quality through effective workplace design, job design, employee selection and development, employee rewards and recognition, and tools for serving customers.
Linking the Service-Profit Chain
Customer loyalty drives Profit and Growth
The service-profit chain research suggests that customer loyalty is the key determinant of profitability (Frederich Reichheld and W. Earl Sasser, Jr. "Zero Defections: Quality Comes to Services." HBR September–October 1990). This same research suggested that a 5% improvement in customer loyalty results in a 25-85% improvement in profits.
Customer satisfaction drives Customer Loyalty
There are two things about loyalty which are important to notice. A satisfied customer is not automatically a loyal customer. It’s only the super satisfied customers who become loyal. That is why ‘satisfied’ is not enough in a world of abundance which is the situation for many companies today. Add to that the tough reality that what we considered fantastic last year is what we expect this year. The expectations of the customer change all the time. If a company wants to maintain the loyalty it has to get better and better.
Xerox found that customers that rated them 5 (on a 1-5 customer satisfaction ranking) were six times more likely to repurchase Xerox equipment versus those at the 4 rating level. Xerox coined the term "apostles" to characterize the customers that rated them a 5. Just as important is to avoid creating terrorists: customers that become so upset they make it a point to speak out about the poor service they received at every opportunity.
Loyal customers are more likely to tell others about their loyalty than just satisfied customers. Excited customers tell other people about their experiences and create ambassadors for the company. They become loyal customers and they keep returning.
Value drives Customer Satisfaction
The primary determinant of customer satisfaction is perceived value – that the customer has gained more from the product than he or she thinks it is worth. Value often has an emotional aspect that makes an experience particularly memorable for the customer. The key to create value is the ability to bond emotionally with the customers and create emotional wow experiences. Underlying this is being very clear about the targeted service concept for the targeted customers.
Employee Productivity drives Value
Value is a direct result from having engaged productive employees. In this case value has to do with the employee’s ability to act on the wishes and needs of the customers and find solutions that work within the framework of the company. Productive employees also have a high degree of product knowledge and customer knowledge. This is why employees who have served quite a few years in the company usually are much more productive than new employees.
Employee Loyalty drives Productivity
Employee loyalty is driven by enthusiasm and satisfaction. To be able to create excited customers and contribute to memorable experiences you need to be excited as an employee as well. This implies that the employees must be happy with their jobs to have what it takes to effectively engage the customer in this way. In this case loyal refers to considerate employees who have longer tenure with the company and have great knowledge of both customers, processes and the culture within the company. It is also important to understand the negative: the real cost of employee turnover, and not managing retention, is the loss of productivity and decreased customer satisfaction.
Employee Satisfaction drives Loyalty
The research behind the service-profit chain shows that low employee turnover can be linked to high customer satisfaction. In recent times, this hypothesis has been questioned through new research in emerging markets 
Internal Quality drives Employee Satisfaction
Employee satisfaction is rather easy to achieve. To achieve real excitement is far more difficult and much more complex. In the service-profit chain employee satisfaction is a result of ‘internal quality’ which is measured by the feelings that employees have toward their jobs, colleagues, and companies. This is related to a number of elements that have to be present to ensure employee satisfaction such as workplace design, job design, employee selection, training and development, rewards and recognition, and tools for serving customers.
Internal quality ensures the employee’s motivation. It’s important to underline that motivation has to do with both job context and job content. The job context is the external conditions such as fringe benefits and wages. However, this is not the most important aspect of motivation. The context merely prevents demotivation. The determining factor for motivation and employee satisfaction is the job content. The moment we contribute with something meaningful it gives us a high degree of motivation.
Leadership Underlies the Chain's Success
A service-profit chain leader develops and maintains a culture that is focused on service to customers and fellow employees. They are also effective listeners with both the ability and willingness to listen. These are high engagement leaders that spend time with their employees and customers, test their service delivery processes, and actively seek employee suggestions for improvement. In addition, they demonstrate real care and concern for employees as demonstrated by how they select them, tracking and guide their development, and proactively recognize them.
Empirical Research on the Service Profit Chain
In the last decade—since 2000—several scholars have examined the service profit chain in various contexts including banking, B2B markets, and a variety of other industries. The vast majority of these studies have validated the different links in the service profit chain showing that attribute performance improves overall quality/ overall satisfaction, which in turn improves customer loyalty, and finally financial outcomes such as sales and revenues. However, there is some research showing that while revenues increase with increased satisfaction, profits (which also entail attribute improvement costs) may not improve unconditionally. Thus, managers implementing the satisfaction profit chain should be careful to optimize the chain, rather than simply maximize satisfaction or loyalty.
- Heskett, James L., Jones, Thomas O., Loveman, Gary W., Sasser, W. Earl, and Schelsinger, Leonard A. "Putting the Service Profit Chain to Work", Harvard Business Review, (March–April 1994) 164-174
- Heskett, James L., Sasser, W. Earl Jr., and Schlesinger, Leonard A. The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value. The Free Press, New York, 1997.
- Chun, Rosa, Davies, Gary, and Kamins, Michael A. Reputation gaps and the performance of service organizations. Strategic Management Journal, 2009.
- Reichheld, Fredrick and Sasser, W. Earl Jr. "Zero Defections: Quality Comes to Services." HBR September–October 1990
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- Pallas, Florian and Mittal, Vikas and Groening, Christopher, Allocation of Resources to Customer Satisfaction and Delight Based on Utilitarian and Hedonic Benefits (2014). Journal of Research in Marketing, Vol. 2 (1), 106-112 . Available at SSRN: http://ssrn.com/abstract=2404450
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