The Service-Profit Chain

Customer ServiceHogreve, J.; Iseke, A.; Derfuss, K.; Eller, T. · 2017Journal of Marketing
Topicsservice-profit chain·customer satisfaction·employee satisfaction·service quality·customer loyalty·meta-analysis·services

Imagine your team proposes raising internal service quality, the support and policies that help employees serve customers, and external service quality, the service customers experience. The case assumes the service-profit chain runs straight to loyalty and profitability. Do you approve it?

The service-profit chain has offsetting routes to loyalty and profitability.

Data chart

External service quality's two routes to profitability nearly cancel out

Change in profitability, in standard deviations (the typical spread around the average), for a one-standard-deviation rise in external service quality, meaning how customers rate the service.

+.187Through customer satisfaction andloyalty-.007 (n.s.)Total, all routes
  • The gain through loyalty and the direct loss nearly cancel.

External service quality relates positively to profitability through customer satisfaction and loyalty, but its direct relationship with profitability is about as large and negative, so in total it is near zero.

Associations, not proven causes, from a model fitted to pooled correlations from an overall evidence base of 518 service-profit-chain studies published 1994 to 2015. Evidence varies by link. Customer loyalty with profitability rests on six correlations and customer loyalty with revenue on twelve. Both links vary substantially across studies; their 95% credibility intervals span zero. Exact values +.187 through customer satisfaction and loyalty and -.007 in total (not significant).

Data chart

More internal service quality goes with better-rated service and higher profitability

Change in each outcome, in standard deviations (the typical spread around the average), for a one-standard-deviation rise in internal service quality, all routes combined.

+.287How customers rate the service (externalservice quality)+.158Profitability
  • Internal service quality goes with better customer ratings and higher profitability.

Across all routes, a rise in internal service quality goes with a rise in how customers rate the service and in profitability.

Associations, not proven causes, from the same model, counting the direct route and the routes through the rest of the chain. The 518 studies are the overall evidence base; evidence varies by link. Customer loyalty with profitability rests on six correlations and customer loyalty with revenue on twelve. Both links vary substantially across studies; their 95% credibility intervals span zero. Exact values +.287 and +.158.

Action guide

  1. Require every service proposal to show all its routes to profitability.Some routes offset others.
  2. Target external service quality at your customer segments that repay it with loyalty.Its profitability gains come through loyalty.
  3. Add linked outcomes to marketing and HR scorecards.Review employee satisfaction alongside productivity and customer loyalty, and external service quality alongside profitability.
  4. Build loyalty through external service quality and employee productivity, not customer satisfaction alone.Both relate to loyalty directly.
  5. Justify internal service quality on more than employee satisfaction.Include employee productivity, external service quality and profitability.

Evidence

  • Across 518 studies, every core link in the chain is positive, but the strict sequence leaves out direct and offsetting relationships.
  • Employee satisfaction has a negative direct relationship with customer loyalty and a positive indirect one. Across all routes, it goes with slightly lower profitability.
  • External service quality has a negative direct relationship with profitability, about as large as its positive indirect one, so the two nearly cancel.
  • External service quality and employee productivity relate to customer loyalty directly, not only through customer satisfaction. For external service quality, 61% of that relationship is direct.
  • Internal service quality relates directly to employee productivity, external service quality and profitability. Its link to employee retention runs entirely through employee satisfaction, but only 29% of its link to productivity does.

Key takeaway

The service-profit chain has several routes to profitability, and some offset others.

Limitations

The evidence covers B2C and B2B service firms from 1994-2015, not product businesses. Loyalty's links to revenue and profitability have limited, widely varying evidence.

Source

Hogreve, J., Iseke, A., Derfuss, K., & Eller, T. (2017). The Service-Profit Chain: A Meta-Analytic Test of a Comprehensive Theoretical Framework. Journal of Marketing, 81, 41–61. https://doi.org/10.1509/jm.15.0395. Exact chart values: for a one-standard-deviation rise in external service quality, profitability changes by +.187 standard deviations through customer satisfaction and loyalty and -.007 in total (not significant); for a one-standard-deviation rise in internal service quality, external service quality rises by +.287 and profitability by +.158 standard deviations, all routes combined.

https://doi.org/10.1509/jm.15.0395