The Service Profit Chain (SPC) is a business model that illustrates the relationships between various sectors of business, such as profitability, customer loyalty, employee satisfaction, productivity, and loyalty, which lead to business growth.

The SPC was developed by James L. Heskett, W. Earl Sasser, Jr., and Leonard A. Schlesinger at Harvard Business School in the 1990s. The model is based on the idea that satisfied employees are more likely to provide better service to customers, which in turn leads to increased customer loyalty and profitability.

The SPC can be broken down into five steps:

1.     Internal service quality: This refers to the quality of the work environment and the way employees are treated by their managers. Employees who feel valued and respected are more likely to be satisfied with their jobs.

2.     Employee satisfaction: When employees are satisfied with their jobs, they are more likely to be productive and provide better service to customers.

3.     Customer satisfaction: When customers are satisfied with the service they receive, they are more likely to become loyal customers.

4.     Customer loyalty: Loyal customers are more likely to repurchase from the company, spend more money, and recommend the company to others.

5.     Profitability: Profitability is the ultimate goal of any business. The SPC shows that profitability can be increased by focusing on employee satisfaction and customer loyalty.

The service profit chain highlights how employee engagement drives improvements in company performance. When employees are able to see the impact of their actions, it changes their approach and improves results.

The idea

The service profit chain is based on the premise that market leadership requires an emphasis on managing value drivers – those factors that have the greatest impact on success and provide the most benefit to customers.

This concept is then focused on the value drivers that are the most important determinants of success: employee retention, employee satisfaction and employee productivity – it is these that strongly influence customer loyalty, revenue growth and profitability.

How the service profit chain works?

The SPC has been supported by a number of studies, which have shown that companies with high levels of employee satisfaction and customer loyalty tend to be more profitable.

There are a number of things that companies can do to improve their service profit chain. These include:

·       Creating a positive work environment where employees feel valued and respected.

·       Providing employees with the training and resources they need to do their jobs well.

·       Listening to customer feedback and making changes to improve the customer experience.

·       Rewarding employees for providing excellent service.

The service profit chain is a valuable tool for businesses that want to improve their profitability. By focusing on employee satisfaction and customer loyalty, companies can create a virtuous cycle that leads to long-term success.

In practice: Sears

In the 1990s US-based retailer Sears reversed significant losses by focusing on employee issues in order to turn around the company’s fortunes. They examined:

• how employees felt about working at the company

• how employee behaviour affected customers

• how customers’ experience affected profits.

Sears asked employees to estimate how much profit was made for each dollar sold. The average answer was 46 cents while the real answer was 1 cent – demonstrating that profitability was poorly understood. The company introduced changes in order to engage with employees and to get them to understand what influences profitability – in particular, to make clear the link between employee behaviour, customer satisfaction and company success. By understanding the implications of their actions, it changed their approach, resulting in sustained improvements in profitability.

In practice: B&Q

At UK retailer B&Q, each percentage increase in staff turnover was costing the company £1 million. By reducing staff turnover from 35 to 28% through its Employee Engagement Programme, the company reduced costs and increased turnover per employee by 20%.

Here are some additional tips for improving your company's service profit chain:

·       Measure your progress. The best way to improve the SPC is to track your progress over time. This will help you see what's working and what's not, so you can make adjustments as needed.

·       Get everyone involved. The SPC is not just about the employees who interact with customers. It's important to get everyone in the company involved in creating a positive customer experience.

·       Be patient. It takes time to build a strong service profit chain. Don't expect to see results overnight. Just keep working at it, and you'll eventually see the benefits.

The service profit chain is a powerful tool that can help you improve your company's profitability. By following the tips above, you can create a virtuous cycle that leads to long-term success.

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