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What is the service profit chain?

October 11th 2018 - employee motivation, employee engagement, engagement

Businesses are constantly trying to figure out the connection between their satisfaction and loyalty, efforts and profit.

The service profit chain is a theory and business model evolved by a group of researchers from Harvard University. The main conclusion drawn is that loyal customers are the result of loyal, engaged employees. Furthermore, leading service organisations are using the model to quantify the impact that loyal, engaged employees have on their bottom line.

A number of studies have shown different styles of relationships when it comes to what creates revenue, research has shown very strong relationships between various satisfaction scores, loyalty and revenue.

Life time value of a loyal customer can be astronomical, especially when referrals are added to the economics of customer retention and repeat purchase of related products.

The service-profit chain establishes these relationships between profitability, customer loyalty, and employee satisfaction, loyalty and productivity. The links in this chain 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 the customers. Value is created by satisfied, loyal, and productive employees. Employees satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers.

A closer look at each link reveals how the service-profit chain function as a whole;
  1. Great Leadership Underlies the Chain’s Success; Leaders who understand the service-profit chain will develop and maintain a culture that is centred around service and quality delivered to its customers and fellow employees. This culture that is developed will underlie the chains success, drive satisfaction, productivity, value, loyalty and ultimately profit and growth.

  2. Great Leadership Leads to Internal Service Quality; including employee support and enabling policies. At the top of the chain are services, reward and recognition, personal development, policies and tools for completing the job ect. These benefit the employee and lead to a stronger workplace.

  3. Internal Service Quality Drives Employee Satisfaction; this directly relates to the employee support, reward and recognition offered by the company.

  4. Employee Satisfaction Drives Productivity and Retention; the next step down the chain is improved productivity and employee retention. The higher the employee satisfaction and loyalty is, the more likely the employees are going to deliver results that go above and beyond and improve staff retention. This lower staff turnover is also closely linked to higher customers satisfaction.

  5. Employee Productivity Drives Value; happy employees will deliver products and services that will bring value to the customers. In other words, whether it is the quality of the product or the friendliness of the service, satisfied employees will be more valuable to the customer.

  6. Value Drives Customer Satisfaction; obviously there is no loyalty without first having a high level of satisfaction. Because the company is offering value, the customers are far more satisfied with the company, leading to high customer satisfaction scores. A satisfied customer will be a loyal.

  7. Customer Satisfaction Drives Customer Loyalty; The ultimate measure of the service profit chain is customer loyalty. Organisations should focus on creating satisfied customers by providing great value. Satisfied customers are going to be those that keep coming back, because they grow loyal to the company, its products, and its employees.

    high degree of customer loyalty has been found to be the number one factor driving profit and growth in the service business. A solid fan club that loves your service is a very valuable asset, and if you have a greater number of loyal fans that your competitors do, you will outperform them.

    A recent study by Reichheld and Sasser estimated that a 5% increase in customer loyalty can produce a profit increase between 25-85% and that the most loyal customers (top 20%) not only provide all the profit to companies but also cover losses incurred in dealing with less loyal customers

  8. Customer Loyalty Drives Profitability & Revenue Growth; The final step in the chain is that loyal and satisfied customers will ultimately lead to increased company profits. Recently measures have suggested that customer loyalty is the most important determinant of profit and growth. The study by Reichheld and Sasser concluded that quality of market share, measured in terms of customer loyalty, deserves as much attention as quality of that share.

The service profit chain shows a clear correlation between profit & growth and customer loyalty, this loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. This 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.

How we can help at incentivesmart

At incentivesmart we assist in unlocking the potential of your employees, customers & channel partners by creating genuine loyalty, advocacy and brand evangelism that will generate substantial profits.

We assist with improving the communication of your company mission, purpose & values driving the engagement, empowerment & productivity of your workforce which will drive advocacy and education of your sales team and customer engagement, evangelism & loyalty ultimately result in increased profits and commercial success.

We believe that employee commitment, channel engagement and customer loyalty are strongly linked and, to remain sustainable, should be based on building emotional connections earned over time. This loyalty, that we can assist in driving, will ultimately lead increased profits, revenue and growth.

Working closely with SMEs, agencies and multinational organisations, incentivesmart design and create reward & recognition solutions that excite, educate and engage people who can make a difference! Our focused team of problem solvers at incentivesmart are re-imagining how loyalty strategies work and are challenging the norm.

Get in touch today to find out how we can assist you in driving loyalty, increasing sales performance, brand engagement and offer a ROI unrivalled with other forms of marketing.