In the service-profit chain, customer satisfaction leads to customer loyalty, and results in

What is a Service-Profit Chain?

The service profit chain is a representation of the internal service quality in a firm and how it links with other internal service elements to affect revenue growth and profitability. 

The service profit chain helps managers identify the factors important to improve the profitability as well as the revenue growth.

What are the Elements of the Service-Profit Chain? 

Internal Service Quality - The first link is the internal service quality which includes the internal factors of an organization such as the workplace, employee selection, various tools used for serving customers, and the various employee development programs. 

Employee Satisfaction - The service quality factors lead to greater employee satisfaction. 

Employee Productivity - If employees are satisfied in your organization, it leads to increased employee productivity and thus they will be able to provide much better service to the customers. 

Employee Retention - A satisfied employee is an asset to a company and this satisfaction also prevents the employee from defecting i.e. leads to employee retention.

External Service Value - If the above links are nurtured well, they enhance the external service value provided to the customer but if the previous links are not nurtured well it may even weaken the next link. External service value is what a customer feels he is getting for what he is paying, if the gap between customer's expectations and the company's offerings is minimum then the customers feel that they are getting a high service value. 

Customer Satisfaction - Greater service value leads to greater customer satisfaction. Customer satisfaction is increased by the frequency of good service and also it has to be maintained in order to keep the customers happy and thus the internal employees play a big role in increasing customer satisfaction.

Customer Loyalty - If a customer is satisfied with the service provided, it means that if given a chance he will choose the same service again the next time. Customer Loyalty depends on customer satisfaction, research has shown that people who were satisfied and very satisfied showed a significant difference in customer loyalty. The results showed that a very satisfied customer can be as 6 times as loyal as a satisfied customer. 

Revenue Growth and Increased Profitability - More loyal customers directly lead to faster revenue growth and increased profitability. Good quality of sales leads to more profitability than a high number of low-quality sales.

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2. Definitive Guide: What Is a Service-Profit Chain?

By Indeed Editorial Team

Published November 30, 2021

Companies often use business models or theories to help gain more customers or profits. The service-profit chain is a theory that describes the relationships between satisfied employees and customers with profitability and revenue growth. If you're a part of a customer service, sales or leadership team in a company, then it might benefit you to learn about this business theory. In this article, we discuss what the service-profit chain is by explaining its key elements and its effects on employee engagement and customer relationships, along with providing tips for improving your employer's service-profit chain.

What is the service-profit chain?

The service-profit chain is a theory that researchers at Harvard developed. It explains how employees' satisfaction affects customers' satisfaction. If a company's employees are happy, then their customers may also be happy. When employees feel satisfied at work, they may produce higher-quality goods or services. Once the customers receive quality goods and services, they may be more likely to be repeat customers. This creates more revenue for the company, which allows employees to have better worker conditions. The cycle continues because the employees' happiness then increases. Companies can use this model to increase employee and customer satisfaction, plus profits.

Key elements of the service-profit chain

Here are the key elements of the service-profit chain:

Employee links

The employees start the service-profit chain because their work usually affects the customers' happiness. The first link is internal service quality, which refers to the employees' working conditions. If they have a positive work experience, then the employees may be satisfied with their jobs. This leads to the next steps, which are employee retention and employee productivity. When employees are happy, they may stay at their company longer and they may be more productive. Employee satisfaction is important to the service-profit chain because it moves the process along. The following links occur once the employees feel satisfaction.

Related: What Is Supply Chain Management and Why Is It Important?

Customer links

The second half of the chain represents the customers and their interactions with the company. Customers may be more likely to use the company if they receive high-quality goods and services, which creates more profits for the organization. The first link is external value services. This is the quality of goods and services the customers receive, which results in customer satisfaction. The last link is customer loyalty, which could mean customer retention, repeated business or referrals. Customer satisfaction is a goal for most companies, which they get through employee satisfaction. Each link relates and ultimately leads to increased profits.

Profitability and revenue

Profitability and revenue are the end results of the service-profit chain. Once the employees are satisfied, they create better goods and services, which leads to happier customers. The company earns these customers' loyalty. This results in company profitability and revenue growth. Profitability is the ability to earn money, while revenue growth is the amount of money the company earns compared to a previous period. Revenue growth leads to overall company growth, which funnels to the start of the chain. Additional revenue allows the company to provide more for its employees.

Read more: 17 Strategies for Increasing the Profitability of a Business

Effects on employee engagement

When companies follow the service-profit chain, they typically engage more with their employees. This can lead to happier employees who feel motivated to work harder. Engagement means that the employer listens to the employees and meets all of their needs. If employees require more resources to complete their jobs, then the company might provide them with those tools. Usually, engaged employees are more productive, which helps them create better goods and services. Engagement, such as incentives, can also inspire employees. They may feel more connected to their job, which promotes high-quality work. Employee engagement leads directly to profitability.

Effects on customer relationships

Positive experiences with the company create meaningful and lasting relationships with customers. When satisfied employees create quality products, the customers are more likely to be happy with their experience or purchase. This results in customer loyalty, such as making additional purchases or recommending the company to others. Relationships are important for companies because they rely on customers' support for profits, which the service-profit chain shows.

Relationships can also refer to the interactions between the customers and the employees. Customers often remember positive experiences they have with supportive employees. For example, an employee might have helped a customer find the correct product. The customer could remember this experience the next time they go shopping and choose your company. As the company gains more money, it can devote more resources to its employees.

Related: 15 Examples of Business Functions with Definitions

Tips for improving service-profit chain

Follow these tips for improving your service-profit chain:

Identify the weakest link

Try to identify the weakest link of the service-profit chain for your employer. Review each stage and compare it to your company. This may require you to assess the company's performance in each link. For example, you might evaluate the employees' resources, job design and incentive programs to determine how well the internal service quality link is performing. You could also ask employees to rate the company's work conditions in an anonymous review. Once you identify the area that needs the most improvement, you can implement strategies to develop it. This allows you to strengthen the company's service-profit chain.

Related: Value Chain Analysis: What It Is and How To Use It

Listen to employee feedback

Consider listening to employee feedback and making appropriate changes. Employee satisfaction propels the service-profit chain, which is why it's helpful to listen to staff members. If the employees have a complaint or ask for additional resources, try to accept their requests within reason. This gives them what they need to work and shows them that management cares about them, which can increase employee satisfaction. When the employees are happy, they typically produce high-quality goods and services. Try giving your employees a few ways to provide you with feedback, such as surveys or reviews.

Use customer feedback

Customer feedback is also valuable for improving the company's service-profit chain. If you have comments from your customers, you know how to improve the company to their preferences. For example, they may have constructive feedback about a product or customer service. If you know what the comment is, you can reallocate resources to resolve it. Try to promote customer feedback so you receive their evaluation of the company. Consider creating a survey for customers to complete after they make a purchase. You might offer them some incentive for assessing the company, such as giving a discount for submitting a review.

Create an employee activation program

An employee activation program is when employees willingly share authentic content that relates to their job. You can distribute this program to the employees so they can read it. If successful, it generates enthusiasm to work for the company. Typically, these posts are positive and share meaningful posts about the company or a role. Writing these programs might empower the employees and help them feel united with the company. This is another way you can increase employee satisfaction with the company, which improves the service-profit chain.

Encourage communication

Try to encourage communication between the company and both its employees and customers. Effective communication allows the employees and customers to learn new information regarding the business. This also means they can communicate with the company. It's important that staff members and customers can ask questions or talk about their concerns with management. Foster communication by giving each group different ways to speak with management. You might create a weekly meeting for employees or a call service for customers. Communicating with these groups may increase their satisfaction, which improves the service-profit chain.

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