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Service Profit Chain

Service Profit Chain

Service Profit Chain

Use this framework to drive profits through employee engagement

The service profit chain concept was first proposed in an article in Harvard Business Review in 1994 by James Heskett, Thomas Jones, Gary Loveman, Earl Sasser, and Leonard Schlesinger entitled Putting The Service Profit Chain To Work. The same authors published a book on the subject in 1997 with the title The Service Profit Chain – How Leading Companies Link Profit And Growth To Loyalty, Satisfaction And Value.


The service profit chain model argues that happy employees will not just do a job, they will do a great job, and this will be evident to customers. As a result, customers will be happy and happy customers become loyal, generating a high lifetime value and high profits. The chain begins with employees and feeds through to increased profits. Loyal employees reduce the cost to the company as there is less hiring, less training and higher productivity.

 

The service profit chain is a model that can be applied to any size of company – large or small. It is a model particularly suited to businesses where employees have a good deal of access to customers. Airlines, retail and leisure companies are obvious examples. However, the model has an application for all types of businesses.

The culture of a company plays a large part in determining whether it is a good place to work. Company culture is set by the CEO and the leadership team. The success of Southwest Airlines is often attributed to Herb Kelleher, the co-founder and CEO of Southwest Airlines. His reputation is as an empathetic and charismatic leader, whose core values were having fun, focusing on the customer, hiring the right people, and doing good for others. He was a cheerleader for the company’s 50,000 employees. As a result of his leadership, Southwest Airlines stands alone in aviation history as never making a loss in its 50 years.


Employees who are happy in their work are more likely to go the extra mile to satisfy customers. Loyal employees reduce the cost to the company as there is less hiring, less training and higher productivity. The link between happy employees and happy customers is especially evident in retail outlets. Nordstrom in the US and John Lewis in the UK are famous examples of companies that have highly motivated staff feeding through to strong profits. Taco Bell examined its employee turnover records across its many stores. It discovered that the 20% of stores with the lowest employee turnover had double the sales and 55% higher profits than the 20% of stores with the greatest employee turnover.

 

It is worth looking at the case study of Nordstrom to understand the power of the service profit chain. Nordstrom was founded in 1901 By John Nordstrom. Through to the present day the company has had a family feel to it with a great emphasis placed on looking after employees as well as looking after customers.


There are many customer service stories told about Nordstrom that emphasise the empowerment of its employees. One is about a man who went into a Nordstrom store in Anchorage returning a set of tyres – a product which the company has never sold. It materialised that the customer had bought them from an outlet that previously occupied the site on which Nordstrom was based. The store manager decided to allow the customer to return the tyres even though they were never purchased from the company. It became one of many legendary stories that are used to encourage employees to keep customers happy and forge relationships with new ones.


The employee culture began with John Nordstrom.  He set up the store in partnership with Carl Wallin. John was left to manage his new shop on the first day of opening while his partner was out to lunch and no business had been done that morning. When the first customer, a woman, walked into the shop and confronted Nordstrom, he was keen to do business. She had seen a pair of shoes in the window and asked to try them on. Nordstrom looked high and low in his stock for a pair in the size and colour of those in the window. In desperation he asked her to try on the shoes that were in the window and they fitted perfectly.  The customer bought them for $12.50 – the only sale of the day. In this single event John Nordstrom set the foundations of The Nordstrom Way: "Do whatever it takes to take care of the customer, and do whatever it takes to make sure the customer doesn't leave the store without buying something."


More than 100 years later Nordstrom abides by the same principle which is executed in a very customer friendly way. Staff are instructed to greet every customer but never apply undue sales pressure and to always make a decision that favours the customer before the company. The company promotes from within whenever possible and more than half of the Executive Committee are people who started on the shop floor.


Typical of this simple employee/customer engagement principle was the famous Nordstrom's employee handbook, a single 5 inch by 8 inch index card which contained 75 words.


"Welcome to Nordstrom. We're glad to have you with our company. Our number one goal is to provide outstanding customer service. Set both your personal and professional goals high. We have great confidence in your ability to achieve them.

Nordstrom rules

Rule #1: use your good judgement in all situations.

There will be no additional rules.

Please feel free to ask your department manager, store manager or divisional general manager any question at any time."


The happy and empowered employees at Nordstrom have delivered strong profits throughout the years. The company has outperformed almost every other retail company in the US and it continues to promise high returns as it adjusts to future challenges such as online sales.


That said, Nordstrom, like other large retailers have faced several challenges recently. Shoppers are increasingly spending online and Nordstrom is having to adjust to this. It has struggled to manage its inventory levels and Covid 19 caused disruptions to its supply chain. Despite this, the company has the potential to save itself, especially because it has a devoted workforce. The two components of Nordstrom’s success have been hiring nice, capable people, targeting high-level customers and offering the very best customer service. These are the key ingredients for the service profit chain.


Some things to think about:


  • Jim Collins, in his book Good To Great, argued that the starting point of any company is good staff. He said that if you get the right people on the bus, the wrong people off the bus, and the right people in the right seats, you can take the bus almost anywhere. This is also the thesis of the service profit chain. Good employees who are motivated will deliver good profits. Ask yourself the question, “Have I got the right people on the bus?”, “Have I got them in the right seats?”.


  • Carry out a revenue at risk analysis to see which customers are most vulnerable. Then examine those customers to work out why. Could the risk be minimised by better employee engagement and better customer engagement?


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