The Idea in Brief

What drives growth and profitability in a service business? Highly satisfied customers. And to keep those customers profitable, you need to manage all the aspects of your operation that affect customer satisfaction—what the authors call the service-profit chain.

Here’s how the service-profit chain works: Employee satisfaction soars when you enhance internal service quality (equipping employees with the skills and power to serve customers). Employee satisfaction in turn fuels employee loyalty, which raises employee productivity. Higher productivity means greater external service value for customers—which enhances customer satisfaction and loyalty. A mere 5% jump in customer loyalty can boost profits 25%–85%.

To maximize your profits, strengthen all the links in your service-profit chain. For example, fast-food giant Taco Bell found that its stores with low workforce turnover (a key marker of employee loyalty) enjoyed double the sales and 55% higher profits than stores with high turnover. To boost profitability across stores, it enhanced internal service quality—for instance, by giving employees more latitude for on-the-job decision making.

The Idea in Practice

To optimize your profitability, the authors recommend these practices:

Understand the Links in the Service-Profit Chain

Starting with internal service quality, each link in the service-profit chain can directly strengthen—or weaken—the next:

This link…#…affects this link#ExampleInternal service quality#Employee satisfaction#Financial-services company USAA makes it easier for call-center reps to achieve results for customers by equipping them with state-of-the-art information systems. It also offers more than 200 courses in its employee development program.Employee satisfaction#Employee loyalty#At Southwest Airlines, employee satisfaction levels are so high that at some of its operating locations, turnover rates are lower than 5% per year.Employee loyalty#Employee productivity#An experienced broker who stays with a securities firm for five or more years may account for $2+ million in revenue over several years.Employee productivity#External service value#Thanks to Southwest employees’ unusual productivity (including rapid deplaning and reloading), customer perceptions of service value are very high—even though Southwest doesn’t assign seats or offer meals.External service value#Customer satisfaction#Insurance provider Progressive creates service value for customers by sending teams to the scene of major accidents and providing support services like transportation and housing. By processing and paying claims quickly and reducing policyholder effort, the company enhances customer satisfaction.Customer satisfaction#Customer loyalty#Xerox found that customers who rated their satisfaction level with the company with a “5” (“very satisfied”) on a scale of 1 to 5 were six times as likely to demonstrate loyalty—by repurchasing Xerox equipment—as those who rated their satisfaction level with a “4” (“satisfied”).Customer loyalty#Growth and profitability#By regularly taking steps to improve customer loyalty, Banc One achieved a return on assets more than double that of its competitors.

Measure—and Manage—the Relationships in Your Service-Profit Chain

To enhance profitability, measure the relationships between links in your company’s service-profit chain. Then fashion strategies for strengthening them. Example: 

To assess the relationship between internal service quality and employee satisfaction, Taco Bell: 1) Monitors internal service quality through a network of 800 numbers created to answer employees’ questions, field their complaints, remedy situations, and alert top-level management to potential trouble spots. 2) Conducts periodic employee roundtable meetings, interviews, and companywide surveys to measure employee satisfaction. The results of this work prompted Taco Bell to design an employee satisfaction program that features a new selection process, improved skill building, and automation of unpleasant “back room” labor.

UPDATE: Learn about companies that are applying this timeless advice today.

A version of this article appeared in the July–August 2008 issue of Harvard Business Review.