In an article published in a 1994 edition of the Harvard Business Review, researchers James Heskett, Earl Sasser, and Leonard Schlesinger proposed what is today popularly known as the Service-Profit Chain Theory.
This is one of the earliest works that linked the profitability of a business directly to employee satisfaction. In simple words, the theory states that business profit is driven primarily by customer loyalty. This loyalty stems from a deep sense of satisfaction among customers.
And what drives customer satisfaction? It’s the genuine value delivered by a business. This is only possible if employees in the organization are satisfied with their jobs and are loyal and productive.
This way, happy employees deliver more value, and this contributes to greater customer loyalty that ultimately contributes to more profitability.
While this theory sounds great in theory, things can get more complicated in the real world. There are many examples of businesses recording millions of dollars in profit; yet accused of poor employee morale and satisfaction. There are also examples of businesses that keep employees happy even as they teeter on the brink of bankruptcy.
Yet, the Service-Profit chain theory is often regarded as one of the pioneering works that sowed the seeds of modern HR business practices that a lot of us today take for granted.
What drives higher employee satisfaction?
Many businesses mistake employee satisfaction (as defined in the service-profit chain theory) for generally happy employees. While it is indeed the job of the employer to build a happy workplace, the service-profit chain theory talks about employee satisfaction solely in terms of driving greater loyalty and productivity among employees.
In other words, only those elements of employee satisfaction that contribute towards loyalty and productivity are considered.
How does this apply to your modern business? Today, a lot of businesses have delivered ‘Return to Office’ mandates for their remote and hybrid employees. This is a move towards greater accountability and hopefully, productivity.
However, businesses could replace an RTO mandate with amenities that make hybrid work more productive. Today, several small businesses have replaced their traditional business phones with virtual phone systems like Unitel Voice that allow customer-facing employees to handle their calls remotely from anywhere in the world. Businesses save office space costs with this move, while employees feel more empowered being able to speak to their clients in a professional setup, while working from home.
So, while you could view this as a cost-saving measure or simply a productivity enhancement activity for your business, it keeps employees satisfied, increases loyalty, and makes them more productive as well.
Translating Employee Satisfaction Into Client Satisfaction
As we saw in the previous section, employee satisfaction with reference to Service-Profit chain theory merely alludes to those elements that contribute to loyalty and productivity. Such satisfied employees are motivated to deliver value in the business.
But what kind of value are we talking about here? As the theory states, these are values that matter to the customer and satisfy their needs.
Even a small percentage point drop in employee engagement at work can cause billions of dollars in lost productivity across the world economy.
Let’s take customer support as an example. A lot of poor customer satisfaction stems from the delays caused by poor customer support. Could an AI agent understand customer intent and help unlock the right resolution for them? Unlike AI chatbots, agents can execute operations on behalf of humans and can thus unlock lightning fast resolutions. This can potentially wow your customers and make them come back.
While a happy and satisfied employee may not be able to match AI in their speed, they can surely outdo them in value creation. Customers value human touchpoints, and being there for the customer when they are making a decision; providing helpful inputs that can steer their decision making, and treating them with empathy and compassion are things that a bot cannot achieve.
You can find similar examples in other areas of business too. A recruitment agency can make use of AI in the hiring process to speed up application review. A happy and satisfied employee would take it a notch further by offering value that their clients love – personally updating candidates after each round of the interview process, providing zestful feedback to the clients at the end of the hiring rounds.
This is a value that customers or clients can only expect from employees that are happy and feel loved in their organization.
How Customer Satisfaction Drives Profitability
At the outset, it is easy to see how higher customer satisfaction drives greater probability. Happy customers come back for more, and this makes the company more money.
What often gets missed is the graph between these two factors is not a straight line up. It’s exponential.
Source: The Daily Scan
This is because of several reasons.
Lower Acquisition Costs: Profit grows not only with higher revenues, but also lower costs. With a loyal customer, the cost of acquisition comes down. This means more profit with the same overheads.
Word of Mouth Referrals: Happy customers tend to refer your business to their friends and family. Customer advocacy is the art of turning happy customers into your unofficial sales reps who do the selling for you. In other words, happy customers tend to bring more customers to your business, which increases revenues and this, in turn, brings down acquisition costs even further. The only real cost of referral software is investing in referral software, like ReferralCandy.
Compounding Brand Equity: Happy customers bring other customers to your business. This improves brand equity of your business, contributing to more inbound business. A positive side effect of this compounding brand equity is that your business becomes less price elastic. That is, your customers become less sensitive to price increases.
As a bigger brand, you can afford to increase your price and profitability without hurting your bottom line.
Charting the Right Path
Keeping your employees happy is not a favor you do to your workers. In the post-pandemic era, this is an expectation. What separates successful organizations from the not-so-successful ones is in the way they view employee satisfaction. Keeping employees satisfied costs money and traditionally this has been viewed as a cost center of the business. However, as the Service-Profit Chain theory has shown, employee satisfaction is a profit center that contributes directly to greater profits for your business.
Identifying the levers that keep employees happy, and makes them contribute better to the organization helps not just your workers, but helps you build a profitable and successful organization.