The Service Profit Chain as a Blueprint for Businesses

Before talking about the operationalization of the service profit chain or any of the variables within it, let’s preface this article by saying that the individual links or relationships between variables in this model are meaningless. Single connections are valid and proven, but not impactful unless used as part of a grander scheme. The service profit chain should be seen as exactly that - a chain. If the individual relationships within this chain are not connected and managed in congruence with each other, the efficacy of the model in stimulating profit and growth will not be realized.

Let's start with what we want.

Customer Loyalty — Profitability & Growth

Research shows that as little as a 5% increase in customer loyalty can increase profit by 25-95%. The focus here should be on creating quality relationships. For too long, companies have focused on acquiring as many customers as possible and saturating their market. For too long, they’ve been wrong.

What’s more important is the depth of your relationships and profitability of your relationships, rather than the number of relationships you have with customers. Depth here can be perceived as two things: the number of your products that customers use and your share of their wallet (the more, the deeper). On the other hand, it can be seen as how frequently and willingly they partake in brand evangelist behaviors such as positive reviews, positive WOM, and social engagement and referrals.

Depth of relationship is the new customer lifetime value. Focus on creating more meaningful connections with your customers to benefit from the full potential of your customer base.

Customer Satisfaction — Customer Loyalty

It comes as no surprise that customer loyalty is a direct product of customer satisfaction. The focus of many companies is to have as many positive reviews as possible - and that makes perfect sense. However, positive or “good” reviews aren’t worth as much as you’d think - at least in comparison to top reviews.

Customers that give 5/5 on their satisfaction score are 6 times as likely to be loyal as customers that give a 4/5. The assignment should be clear: focus on getting those 5 stars.

External Service Value — Customer Satisfaction

Naturally, a customer that perceives a higher value will be more satisfied. For customers, value is typically the results achieved in comparison to the total price paid. The point here is not that you can charge very little but have average performance, as value is a function of price.

However, it’s not quite that. Apple not only has the highest customer satisfaction score, but they also (just so happens to) invest in research & development, customer experience, and employee training more than any other competitor.

The important thing to understand about external service quality in particular, but also the other variables, is that it is a product. External service quality is a product or function of every variable on the left side of the model. If you don’t invest time and effort into the areas of internal service quality, employee satisfaction, retention, and productivity, you cannot expect to be able to turn things on once it’s time for some external service.

This stresses how vital it is to view this as a holistic model rather than approaching it on a variable-by-variable basis, but more on that later.

Employee Productivity — External Service Value

This almost goes without saying. Employee productivity has a positive relationship with external service value, meaning that more productivity creates value for customers. Think about - if you have two employees, one able to make 15 coffees in an hour and another that can make 30 in an hour.

Assuming the coffees taste the same and are of the same quality, who are customers going to think provides more value? It’s not the employee with half the productivity.

Aside from this, the most productive employees are generally those that are best trained. Not only is training essential for service quality, but training can ensure your employees effectively market and advocate for your product and initiatives when facing customers. This works a charm for incorporating things such as loyalty programs, member initiatives, or subscription models. Employees can wear uniforms with QR codes for joining programs, promote subscriptions or membership when interacting with customers, or encourage customers to purchase a gift card for the perfect present.

Employee Loyalty — Employee Productivity

Again, this is a no-brainer. However, what’s interesting about this variable is that it also has an effect on external service quality via employee productivity. 

Employees that have been retained in your company for a number of years are going to be far more productive than new hires. Better still, they likely have a relationship with customers in a customer-facing industry.

While every company should strive for employee loyalty, this is more of a warning than a recommendation. Letting employees go is costly regardless of your industry, and many pieces of research focus on hiring and training costs. Sure, they’re high, but they pay off if you do it right.

What doesn’t pay off is the revenue you lose as a result of customers leaving as they received worse service than they used to. In the securities industry, losing an employee with strong client relationships has been proven to cost as much as a cumulative $2.5 million over 5 years.

Employee Satisfaction — Employee Loyalty

Satisfying employees now goes far beyond a decent salary and a few holidays. Employees want a positive and welcoming workplace culture, along with flexibility and trust. Plus, when you see that happiness among employees can increase productivity by as much as 12%, it makes total sense that employee satisfaction has an effect on employee productivity through employee loyalty.

In today’s climate, it won’t take much for your employees to leave. As a result of the current war for talent, employees now expect more freedom, benefits, and recognition than ever before. Recent research shows that 43% of employees that do not receive enough recognition will move elsewhere.

When you consider how much damage losing one important employee can make, it makes sense to up your game on the recognition and rewards front. Setting up a formal rewards or recognition program for your employees can come at quite a low cost, but can benefit motivation, productivity, morale and even culture exponentially.

Internal Service Quality — Employee Satisfaction

Internal service quality is a bit of an abstract term, so let’s clarify it. Internal service quality is essentially how employees serve each other and are equipped within the organization. In fact, it’s a combination of a number of things that make up the overall working experience and environment.

This is impacted by how employees are trained and developed, how they are recognized and rewarded, how much trust and responsibility they are given, along with how well they (can) progress within the organization.

Achieving loyalty in a holistic sense is something that many businesses have lost sight of in recent years. A full-circle approach is theoretically superior, yet very few businesses implement such a strategy. In spite of this, those that have prioritized the training, treatment, and facilitation of their staff have profited significantly from doing so.

Is loyalty the next move for your business? Our intuitive loyalty software allows you to create a dedicated loyalty app - no coding necessary. Take care of your employees on one side, while you reward and drive repeat customers on the other. Start with a free account now to get started with your loyalty journey.