The Idea in Brief
Outlandish as it may sound, it’s possible to spend too much time setting profit goals and focusing on market share. To excel in a service economy, you must devote most of your time and attention to your customers and the front-line workers who interact with them. Why? Because the lifetime value of a customer can be astronomical, especially when referrals and repeat purchases of related products are added into the economics of customer retention. For example, the lifetime revenue stream from a loyal corporate purchaser of commercial aircraft can be billions of dollars.
Once you’ve quantified the impact of employee satisfaction, loyalty, and productivity on the value of products and services delivered, you can build customer satisfaction and loyalty. From there you can assess the impact on profitability and growth. Linking all these measures gives you a picture of the service-profit chain. And understanding the relationships among the links can help you craft comprehensive strategies for lasting competitive advantage.
The Idea in Practice
Seven fundamental propositions form the links of the service-profit chain:
1. Customer loyalty drives profitability and growth. A 5% increase in customer loyalty can boost profits by 25% to 85%.
2. Customer satisfaction drives customer loyalty. Xerox found that its very satisfied customers were six times more likely to repurchase company equipment than were customers who were merely satisfied.
3. Value drives customer satisfaction. An insurer’s efforts to deliver maximum value include funding a team that provides special services at the sites of major catastrophes. The company has one of the highest margins in its industry.
4. Employee productivity drives value. Southwest Airlines deplanes and reloads two-thirds of its flights in 15 minutes or less; pilots fly an average 20 hours more per month than competitors. Fares stay low while service remains high.
5. Employee loyalty drives productivity. One auto dealer’s annual cost of replacing a sales rep who had eight years of experience with one who had less than a year was $432,000 in lost sales.
6. Employee satisfaction drives loyalty. In one company study, 30% of all dissatisfied employees expressed an intention to leave, compared to only 10% of all satisfied employees. Moreover, low employee turnover was found to be closely linked to high customer satisfaction.
7. Internal quality drives employee satisfaction. Service workers are happiest when they are empowered to make things right for customers and when they have responsibilities that add depth to their work.
How can you achieve the greatest benefit from the service-profit chain? Relate the links to each other in meaningful ways.
A service-profit chain audit can help you get started. Do measurements of customer profitability include profits from referrals? How are customers’ perceptions of value shared with those responsible for designing a product or service? What proportion of business development expenditures and incentives are directed to the retention of existing customers? Answers to such questions can help you uncover the links in the service-profit chain that are most important for your company.
Top-level executives of outstanding service organizations spend little time setting profit goals or focusing on market share, the management mantra of the 1970s and 1980s. Instead, they understand that in the new economics of service, frontline workers and customers need to be the center of management concern. Successful service managers pay attention to the factors that drive profitability in this new service paradigm: investment in people, technology that supports frontline workers, revamped recruiting and training practices, and compensation linked to performance for employees at every level. And they express a vision of leadership in terms rarely heard in corporate America: an organization’s “patina of spirituality,” the “importance of the mundane.”
