The Service Profit Chain

By Heskett, Sasser and Schlesinger – 1997

Today’s seminars admonish us to:

 Treat customers like royalty
 Exceed customer’s expectations
 Either seek low operating costs or some means to differentiating our
business from competitors
 Assume that customer is always right

The Service Profit Chains thinking maintains that there are direct and
strong relationships between profit, growth, customer loyalty, customer
satisfaction, the value of goods and services delivered to customers; and
employee capability, satisfaction, loyalty and productivity.

Internal External
Operating strategy and Service concept Target Market
Service delivery system
Loyalty
Customers
Satisfaction
Productivity & Service Satisfaction
Output Quality Value

Employees Loyalty Revenue

growth

Capability Profitability
Service Quality
Satisfaction Loyalty
Workplace design Quality &
Job design / decision-making latitude productivity Attractive value: Lifetime value
Selection and development improvements Service designed Retention
Rewards and Recognition yield higher & delivered to Repeat business
Information and Communication service quality meet targeted Referral
Adequate ‘tools’ to serve customers and lower cost customer’s needs

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 Profit and Growth are linked to Customer Loyalty

In the 1970s, a major study of Profit Impact of Market Share (PIMS),

based on the examination of data from hundreds of companies in many
industries, concluded, among other things, that one of the most important
determinants of profitability was Market Share.

 Customer Loyalty is linked to Consumer Satisfaction

Of all the links in the service profit chain, this one has proven the least
reliable. Short-term measures of the relationship have been disrupted by
such thing as competitive price reductions that may entice customers
away from outstanding service providers, regardless of the levels of
satisfaction customers say that they have with a service.

 Customer Satisfaction is linked to Service Value

Customers today are strongly value-oriented. They seek results and

service process quality that far exceeds the price and acquisition costs
they incur for a service.

 Service Value is linked to Employee Productivity

In the Travel Services division of American Express, productivity is

defined in terms valued by customers, the speed and accuracy with which
tickets are prepared. This recognises the fact that quality of service need
not be ‘traded off’ for high productivity.

 Employee Productivity is linked to Employee Loyalty

Traditional measures of the losses incurred by employee turnover

concentrate only on the cost of recruiting, hiring and training
replacements. But in most service jobs, an even greater cost of turnover
is loss of productivity and decreased customer satisfaction.

 Employee Loyalty is linked to Employee Satisfaction

In one study of a property and casualty insurance company’s employees,

it was found that 30 percent of all dissatisfied employees registered an
intention to leave the company, a potential turnover rate three times
higher than that for satisfied employees.

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 Employee Satisfaction is linked to Internal Quality of Work Life

What we call the internal quality of a working environment contributes

most to employee satisfaction. Internal quality is measured by the
feelings that employees have toward their jobs, colleagues and
companies. In general, the frontline service employees value most their
ability and authority to achieve results for customers, something we call
capability.

THE CUSTOMER VALUE EQUATION

VALUE = Results produced for the customer + Process quality

Price to the customer + Costs of acquiring the service

Results produced for customer:

Customers buy results, not products or services

Process quality:

The way in which a service is delivered is often as important as

results delivered to the recipient

According to Parasuraman, Zeithaml and Berry, five universal

dimensions of service process quality can be defined:

 Dependability:
Did the service provider do what was promised?
 Responsiveness:
Was the service provided in a timely manner?
 Authority:
Did the service provider elicit a feeling of confidence?
 Empathy:
Was the provider able to take the customer’s point of view?
 Tangible evidence:
Was evidence left that the service was indeed performed?

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 Price and Acquisition costs

Relationships between price and service acquisition (or access)

costs have important implications for service providers: These
finding ways to lower acquisition costs for customers often can
charge higher prices for their services, particularly if they can
convince customers of the value of such efforts.

Requirements of those who manage by the Customer Value Equation

 Understanding customer needs (marketing research, customer

involvement…)
 Determining ways in which needs influence attitudes toward the
Value Equation
 Establishing a return on value-enhancing investments (how best to
invest in service improvements that enhance the value equation)
 Developing different value packages for various market segments
 Developing a single-minded emphasis on value (Capability for
assessing proposed actions in the context of the customer value
equation)
 Ultimately deciding whether value can be provided at a profit (Little
margin for error = little opportunity for profit?)

STRATEGIC SERVICE VISION

Service
Operating Service Target
delivery
strategy concept market
system

Potential
Cost to Value of
Versus = profit to
service results to
service
provider customer
provider
Actual profit to
Service provider
Value of
Price and
results
access Value to
Versus and =
cost to customer
process
customer
quality to
customer
Employee satisfaction
Profit
Customer
Customer Customer
Capability Loyalty Value
satisfact. loyalty
Equation
Growth
Productivity & Quality

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 SERVICE PROFIT CHAIN
RETHINKING MARKETING

Conventional marketing efforts centered around the four P’s of Product,

Price, Place and Promotional activities have long influenced those
responsible for the sale of consumer and industrial products, with the
primary objective of building market share. Nowadays organisations seek
out ways not only to retain customers but to encourage them to buy
related products or services, essentially resulting in a strategy centered
around the three R’s of Retention, Related sales and Referrals.

RETENTION:

Retention is the continuing, active relationship with a customer that

yields a stream of revenue from the sale of the initial product or service.
This stream of revenue becomes more and more profitable as existing
customers become easier to serve with less need to spend ‘get acquainted’
marketing effort on them. Costs of serving existing customers decline as
expectations are established and customers learn the service delivery
process.

RELATED SALES OF NEW PRODUCTS AND SERVICES:

It costs much less to sell new products and services to existing customers
than new customers. Sales to those you know and who know you require
little marketing introduction, no new credit checks, and much less time.

REFERRALS:

By far the greatest profit impact of efforts to retain customers and

develop their satisfaction comes through the positive referrals they
provide to potential customers. Data developed several years ago in a
study for the U.S. Office of Consumer Affairs suggest that satisfied
customer for consumer services in their survey were likely to tell five
other people. On the other hand, dissatisfied customers were likely to tell
eleven other people.

MEASURING CUSTOMER SATISFACTION AND LOYALTY

Customer satisfaction and loyalty can be tracked by means of ‘listening

post’ such as customer surveys, feedback volunteered by customers,
formal marketing research, reports filed by frontline service personnel,

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and actual customer involvement in certain affairs or organisations
serving them.
Customers usually tell others about extraordinary experiences, good and
bad. We know that in most services, less than a third of dissatisfied
customers ever complain to the service provider. The complaints of some
are ‘lost’ in the channels of communication.

Those who tell others about positive experiences are what we call
‘apostles’. Dissatisfied customers who don’t quietly take their business
elsewhere, but take others with them through their criticism, are
‘terrorists’.

The best returns on investment are at the extremes of customer

satisfaction:
 Neutralising the ‘Terrorists’
 Preserving and creating ‘Apostles’
 Investing to achieve Total Customer Satisfaction
 Minimising investments in Low-Satisfaction
Customers
 Investing in Existing versus New Customers
 Creating Terrorists as a By-product of Focus

THE SERVICE ENCOUNTER: THE SATISFACTION MIRROR

Customer and employee satisfaction measures in multiunit service

operations typically track closely with one another. Some management of
international companies clearly believe that the goal of complete
customer satisfaction is achieved through satisfied employees. That’s
why it not only pays its customer contact personnel well in manner that
rewards long-term sales success achieved through customer satisfaction,
but also provides an attractive selling environment, often including a
pianist playing soft music, plush carpet, and well appointed and well-
located stores. In a study reported in 1985, B. Schneider and D. Bowen
established a close links between customer and employee satisfaction
levels. They concluded that ‘the degree to which employees believe their
work is facilitated yields the most consistent information about customer
satisfaction. The ‘mirror’ probably occurs in its simplest form in the
restaurant where the waitpersons enthusiastic about their jobs not only
communicate their enthusiasm to customers but also go out of their way
to make customer’s dining experiences pleasant. Customer satisfaction is
expressed through both comments and often a larger-than-normal tip,

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reinforcing the relationship and increasing the waitperson’s enthusiasm
for the next customer encounter.

FROM SERVICE ENCOUNTER TO RELATIONSHIP

Successful service encounters occur for a variety of reasons. But unless

they can be replicated consistently, they do not lead to the kind of
relationship that induces customers to fell like ‘owners’ of the service.
Face to face (the human touch) is one factor creating the successful
service encounter. A series of service encounters between a provider and
customer will lead to a productive and profitable relationship only if the
provider is able to achieve consistently high quality in the encounter. This
is one of the most important factors in McDonald’s success, for example.

FACTORS AFFECTING THE STRENGTH OF RELATIONSHIP IN THE SERVICE RELATIONSHIP

TRIANGLE

Service
organisation
Brand strength Reputation of Firm
Transaction supporting systems Proprietary technology, services
Working environment Accessibility
Organisation policies Reliability of billing
Compensation Overall value received
Front-line Customer
service
provider
Need for high levels of trust
High perception of risk by customer
Need for judgement and flexibility in the delivery
A strong ‘satisfaction mirror’ effect

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 THE CYCLE OF CAPABILITY

Careful
employee and
customer
selection
Employee
referrals of High quality
potential training
candidates
Well designed
Satisfied
support
employees
systems
Greater
Appropriate
latitude to
rewards and
meet
frequent
customer’s
recognition
needs
Clear limits on,
and
expectations
of, employees

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