Service Profit Chain – Key Concepts

The Service Profit Chain is a theory and business concept evolved by a group of
researchers from Harvard University in the nineties (among others James L. Heskett and
Leonard Schlesinger). The concept was first offered as in an article in the Harvard
Business Review in 1994 by James L. Heskett, Thomas Jones, Gary Loveman, W. Earl
Sasser, and Leonard Schlesinger and 3 years later the subject of a book, The Service
Profit Chain – How Leading Companies Link Profit and Growth To Loyalty, Satisfaction and
Value, published in 1997. In the book, the authors argue why there is this strong and direct
relationship between employee satisfaction to customer loyalty and profitability.The core
idea behind the service profit chain is that a direct relationship exists between profit,
growth, customer loyalty, customer satisfaction, value delivered, employee capability,
satisfaction, loyalty, and productivity.
Contents:

Overview: The crucial steps to success

Loyalty and Satisfaction

Understanding Value

Dream team cycle

References and further reading

Overview: The crucial steps to success

Overview: The crucial steps to success

At a high level, the Service Profit Chain shows a casual relation between the different important
aspects and works unfolding all eight steps of the chain.

Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of very high
customer satisfaction. Satisfaction is largely influenced by the value of services provided to
customers. Value is created by satisfied, loyal and productive employees. Lastly, employee
satisfaction is a result from high-quality support services and policies that empower employees to
serve customers well – also called internal quality. If you wish to influence the upper level (growth
and profit) you need to look at the bottom level first which is internal quality.

• Profit and Growth: The large majority of successful service companies have a purpose other
than making profits. Profits and growth are just tangible outcomes of executing toward that higher
purpose.
• Customer Loyalty: A high degree of customer loyalty has been found to be the number one
factor driving profits and growth in the service business. A solid fan club that loves your services
is a very valuable asset, and if you have a greater number of loyal fans than your competitors do,
you will outperform them.
• Customer Satisfaction: Obviously, there is no loyalty without first having a high level of
satisfaction. Satisfaction is closely linked with expectations. When we get what we expect, we
are basically satisfied. If we get less, we are dissatisfied.
• Value: For a service experience to provide basic satisfaction, it must be valuable to the
consumer. The world is full of examples of companies that got lost along the way and forgot that
it is not about what the company believes it is delivering, but about what the consumer feels he
or she is getting.
• Employee Productivity: The ability to understand and decode what customers are really asking
for and to convert that desire into delivering the appropriate products and services has, more
than ever, become a crucial frontline employee skill.
• Employee Loyalty: Retaining great service people in their positions over time has a direct effect
on our ability to deliver value.
• Employee Satisfaction: The obvious first step to great loyalty is basic employee satisfaction.
Basic satisfaction is closely connected to job context – the environment in which they get to do
the job.
• Internal Quality: To reach a basic level of satisfaction and, hopefully over time, more than that,
we need to at job context and job content. Getting context and content right is driven by the
dream team cycle.

The 3 key elements of the Service Profit Chain

Customer Loyalty and Satisfaction

In practical terms, you could say that enthusiasm and loyalty signify a very high degree of
satisfaction. But we need to distinguish between the two because they are driven by different
factors.

You might think that the relationship between loyalty and satisfaction is linear, so that a little more
satisfaction results in an equivalent increase in loyalty. Unfortunately, this is not the case at all. We
can best illustrate this by looking at a graph of the relationship between loyalty and satisfaction.
As you can see, the curve has a hockey stick shape.

From deeply dissatisfied to relatively happy, nothing much happens. Then, as satisfaction becomes
more than just satisfaction and turns into enthusiasm, loyalty increases sharply. This means that
when we deliver the right service/product at the right price, at the right time, and to the agreed-
upon specifications, we score a 3 or possibly a 3.5 if we are lucky.

According to Fred Reichheld (REF), there is only one question you need to ask and one number
(the answer to the question) that you need to pay attention to. The question is: On a scale of 1 to
10 how likely are you to recommend our “service” to a colleague or friend?
 Answers from 1 through 6 are “detractors”, 7s and 8s are “neutrals”, and 9s and 10s are
“promoters”. Only the enthusiastic are counted as promoters. The satisfied 7s and 8s are lukewarm
and don’t count.

The rest (1 through 6) are in reality answers that correspond to customers who will likely make a
negative comment if asked to recommend the service provider. Now, of all clients surveyed, if we
disregard the neutrals and subtract the detractors from the promoters, we arrive at the net-
promoter score as a percentage of all customers surveyed. So if I survey 1,000 customers, and
500 of them are promoters, 100 detractors and the rest are neutrals or did not respond, I can
calculate my NPS as:

NPS = ((500-100) / 1000 ) x 100 = 40%

Brands such as Apple, Harley Davidson, and Amazon.com have high net promoter scores of 66%,
81%, and 73%, respectively.

So the only number you need to watch like a hawk is your net promoter score, how high it is, and –
more importantly – whether it is increasing. If it increases, you are doing something right. If it
decreases, you are doing something wrong. End of story.

Understanding Value from the customer perspective

Value in service companies can be illustrated by the value equation:
Result

What is the primary need of the customer? If I want to go to Paris, it’s just travel from A to B.
Nothing more – nothing less. If I order a party for my family, what is then the primary result? It has
to be a memorable experience, and what is a memorable experience? It can vary a great deal
depending on who the customer is. The obvious consequence of not understanding the needs of
the customer is that they might never return.

Process

We can achieve the primary result – getting from A to B – in many ways. The difference is the way
we do it. In the Value Equation, we call this the Process. We have to analyze our processes in
terms of what creates value for the customer because it almost always increases the expenses.
The Ryanair concept aims at minimizing the processes of getting from A to B, leaving the customer
with almost nothing but the primary result.

Price

Price is, of course, what the customer has to pay for the service.

Effort

Effort is to which degree the customer makes an effort, him or herself, in the service delivery. If you
do your shopping in IKEA, you make a great effort yourself – when you pick up your furniture in the
stock or remove your service from the table after your meal. The effort reduces the price. If you
order room service, you make a tiny effort but have to pay some more for that luxury.

Variables

In this way there are always four variables we can influence in the service concept. Result,
Process, Price and Effort. These four variables together constitute the Value Equation, and all
service products are a unique combination of these particular four elements. IKEA, Ryanair, 7-
Eleven, and Hotel D’Angleterre each work with their own particular combination. The most clever
service companies have several value equations operating at the same time – one for each group
of customers and situation.
Dream Team Cycle

The Right Team

Careful selection of new recruits. Hire for attitude. Train for skills. Coach for performance and that
includes dealing with the bad apples.

Continuous Improvement

Best in class training and development at all levels in the organization. Continuous improvement is
considered one of the great benefits of the job. “In this job, I grow”…

Great Support Systems

Service is not just something the frontline does for our customers. Service is our culture.
Employees and managers who do not have customer contact service the employees that do. (Our
IT department is not the IT-Police – it is an internal service department that supports the frontline in
getting the job done.)
Empowerment

The best service employees take pride in solving the problem on the spot. So the freedom to act is
hugely motivating. Southwest Airlines famously tells its employees, “You may do anything you are
not uncomfortable doing to solve a passengers problem.”

Clear Expectations

In the same way that anyone who has made it to a great sports team knows what is expected of
them, employees in the best service organizations also know what is expected of them. It is part of
their motivation to be part of a team that is not afraid to set the bar high.

Appropriate Rewards and Recognition

Focusing on what works, celebrating success, and acknowledging each other’s contributions
makes work meaningful.

High Levels of Satisfaction and Engagement

As a result of Steps 1-6, we generate not just higher levels of satisfaction, but also real
engagement – Service work becomes fun and meaningful.

Employees Recommend New Employees

When we need to recruit new team members, our best employees recommend friends and
previous colleagues from other organizations because these are the people they would like to work
with. Gradually we become the preferred employer in our region – which means we get the pick of
the crop.
——————————————————————————–

Reference and further reading

Anderson,Eugene W. Mittal,Vikas (2000). “Strengthening the Satisfaction-Profit Chain”, Journal of
Service Research, 3(2), November, 107-120.

Bowman, Douglas, Narayandas, Das . “Linking customer management effort to customer

profitability in business markets.” Journal of Marketing Research 41.4 (2004): 433-447.

Heskett,James et al. “Putting the Service Profit Chain to Work”, Harvard Business Review, (March–
April 1994) 164-174

Heskett,James L. et al. The Service Profit Chain: How Leading Companies Link Profit and Growth
to Loyalty, Satisfaction, and Value. New York: The Free Press, 1997.

Hohnen, Michael. (2013). Best! – No Need To Be Cheap If You Are…. Lulu.com

Kamakura,Wagner et al. (2002). “Assessing the Service-Profit Chain”. Marketing Science, 21(3),
Summer, 294-317.

Pallas, Florian Mittal, Vikas 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.