crosswalk with pedestrians
PHOTO: Ryoji Iwata

The service-profit chain is a widely adopted business theory that states that companies should take care of their employees first, because doing so will result in employees delivering a better customer experience, creating loyal customers who generate greater profits.

The theory was originally put forth in a Harvard Business Review article in 1994, but converting the service-profit chain into a workable model with demonstrable ROI has proved difficult. For years, there were two primary reasons for this difficulty: 1) the need to understand the linkage between customer experience and financial outcomes and 2) the need to understand the linkage between employee experience and customer experience.

In recent years, groundbreaking work has resulted in principles like the “wallet allocation rule.” The wallet allocation rule mapped out concrete solutions to the first challenge, understanding the linkage between customer experience and financial outcomes. The second challenge — linking employee experience and customer experience in a stable way — remains a topic of constant study.

Although complex behavior modeling may eventually help unlock detailed links between employee experience and customer experience, it’s possible for businesses to capture significant market gains right now simply by recognizing that employee experience amplifies customer loyalty. 

Above all, it is important to understand that company culture plays a big role in the employee experience, and that the employees who can have the biggest impact on customer happiness may not be those who first spring to mind.

Related Article: Bad Company Culture? Blame Senior Leadership

Establish the Company Culture

Employee feedback is generally not a top priority for company leaders when revenue growth is slow; in fact, financial concerns and money shortages can often lead to cutting back on benefits. However, while such moves may help the organization achieve short-term financial milestones, intelligent management teams know that prolonged austerity is not a winning strategy.

Even companies with the best cultures have to cut back occasionally. Employers with good corporate cultures do this by engaging with their people and remembering that great employees are the key to pulling out of danger.

If companies simply shift the burden to employees, it signals that they are comfortable asking employees to sacrifice but are not willing to sacrifice in return. That lack of reciprocity and unity is a huge culture-killer and could lead high-performing employees to think that they would be better off elsewhere.

Initiatives undertaken to improve a company’s culture should involve more than offering cool perks; they should include efforts to make employees feel like they contribute in a meaningful way. Companies should reward people with good pay, attractive benefits, fulfilling career paths and other means of demonstrating appreciation for employees’ efforts. A culture that values the employee will drive higher engagement and, by extension, greater customer retention.

Many Different Employees Impact Customers

Organizations generally have three types of employees: first-degree employees, second-degree employees and third-degree employees. Here’s a breakdown of the roles they play:

  1. First-degree employees are service-oriented and directly interact with customers.
  2. Second-degree employees create the company’s products and services.
  3. Third-degree employees handle corporate functions and support first- and second-degree employees.

Although first-degree employees can easily ruin the experience for customers on an individual basis, when second-degree employees fail, the results can be catastrophic to the entire customer base. Leaders who understand these respective impacts can implement sincere rewards and recognition efforts.

When City National Bancshares was acquired by a Spanish bank in 2009, outgoing CEO Leonard Abess Jr. took $60 million in sale proceeds and gave huge bonuses to all of his employees. Many first- and second-degree employees walked away with five- and six-figure bonuses.

Abess explained that his loyal employees constituted the business. If he didn’t show up as CEO for a day or two, the business would probably not be unaffected. But if the front-line employees didn’t show up for a day or two, then there would be no bank.

As companies develop customer experience programs like personas and journeys, they are indirectly highlighting the work of first- and second-degree employees. Products and services are critical touchstones in the customer experience. A company seeking to improve customer retention will reward the impact of employees who deliver experiences.

Related Article: Customer-Centric? Employee-Centric? How About a People-Centric Culture

If You Build Great Products, Loyal Customers Will Come

Although statistical modeling has given businesses a better understanding of how customer experience relates to revenue, company leaders still struggle to tie employee engagement to customer brand loyalty and price inelasticity.

Affective commitment — when customers become emotionally tied to a brand — is what every company wants to achieve. Emotionally committed customers will demonstrate unusual behavior, like spending more for a product than they probably should.

Leaders must determine whether their company actually delivers products or services. Although there is evidence that customer loyalty is stronger for products, attempts to “productize” services businesses often result in cold, dehumanized experiences that may deliver weaker returns and lead to decreases in customer loyalty.

Top-performing products businesses blend product and service experiences. Brands like Subaru, Patagonia and Disney may have great customer service, but the products are largely what drive the passion and make the business durable.

Related Article: The Power of Minimum Viable Products (and the Key to Their Success)

Harness the Power of the Service-Profit Chain

The idea behind the service-profit chain is inherently correct: There is a clear connection between employees and customers. Although the theory is not sufficiently developed to understand employee responsibilities at different layers, there is strong evidence of its effective application. Essentially, it is a good skeleton; it’s just missing some muscle and connective tissue.

Turning employee engagement into customer retention is possible. Building strong company cultures, attracting talented first- and second-degree employees, and focusing on delivering great products and services will enable companies to leverage the power of the service-profit chain.