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The Service Profit Chain

By James L. Heskett, W. Earl Sasser, Jr., & Leonard A. Schelsinger

These three Harvard Professors have written one of the most excellent books that links the bottom line to the human side of the business equation. They have done this with hard evidence. In an effort to peak your interest and convince you to read this book, I have taken some of the best charts from their book for this review. The research this book is based on goes back a number of years. The authors have put forth substantial data to support their hypothesis.

The authors have numerous examples from excellent companies to support their hypotheses. Featured in the book are: British Airways, Marriott, Nordstrom, Ritz Carlton, Service Master, Southwest Airlines, Taco Bell and Wal-Mart, to name a few.

The core concept of the book is captured in figure 1, and described briefly below the figure.

  1. Customer loyalty is what leads to high levels of growth and profit.
  2. High levels of customer satisfaction lead to customer loyalty.
  3. Customer satisfaction results from the value of services delivered vs. what customers expected.
  4. Employee loyalty, effectiveness & satisfaction are the keys to service value.

Here are some key thoughts from the book that you will find interesting:

  1. Treat customer problems like opportunities to build customer relationships.
  2. It is key to get your front line workers to understand their impact on the business.
  3. Xerox found that a very satisfied customer is 6 times more willing to buy from you again vs. a satisfied customer.
  4. If front line employees can't manage themselves, there is no way you can have very satisfied customers.

Figure 2 below captures a key relationship between service quality and its impacts on growth and profitability.

Figure 3 supports Figure 2 and Figure 1 by showing that poor service leads to significantly greater customer turnover. The significance of this is that the cost of acquiring new customers is much higher than the added costs associated with retaining existing customers through good service. Hence a great impact on profitability. This relationship is displayed in figure 4 below.

The book spends quite a bit of time describing what a company needs to do to:

    Mobilize people for breakthrough service Use service recovery to build loyalty with customers Understand the lifetime value of customers Develop your staff so it meets the needs of service profit chain equation.

A key concept in the book is the value of lifetime customers. Here are a few tidbits from the book that should be of interest to you as you think about the Service Profit Chain.

  • MBNA America discovered that customers did not begin to become profitable in their business until they were customers for 5 years. Keys to MBNA's success:
    • They increased their customer retention rate from the low 80's to the high 90's over 8 years & increased profitability 16 times.
    • They needed to increase customer service dramatically to retain customers.
    • Get the right customers and keep them - their philosophy.

  • The authors' research showed a strong relationship between customer retention and profitability for 5 companies in the credit business & no relationship between portfolio size and profitability.
  • Sewell Cadillac, the most profitable Cadillac dealer in the world, calculated that customers buy 15-20 cars in a lifetime. Keys to Sewell's success:
  • Building bonds with customers through their service department, they are the ones that see the customer repeatedly
  • Make sure employees know that people satisfied with service will spread positive word of mouth and buy from you again
  • Driving down operating costs because there is less need for advertising and you can succeed with a smaller sales force, due to customer loyalty.
  • In a tough economy in Dallas, Sewell was able to triple in size.

If you want to understand the details regarding how companies applying the lessons of the Service Profit Chain operate, and what impact this thinking has on managing, selecting and training employees, I highly recommend this book.

Copyright © 2008 Richard M. DiGeorgio & Associates. All Rights Reserved.


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