The value profit chain

The Value Profit Chain

Internal service quality

Revenue growth

Profit-ability

Employee

Customer loyalty

Satisfaction

Loyalty

CapabilityProductivity

External service quality

ValueCustomer

satis-faction

Customer LoyaltyConventional Wisdom – Relative Profitability?

$5.7

$4.1

$2.2

$1.7

$1.5

• Midwest

• Chesapeake

• Gorham

• Great Lakes

• Liberty

Customer LoyaltyNo Relationship: Size and Profit

0 2 4 6 8

5%

4

3

2

1

0

$5.7Midwest

$4.1

Chesapeake

$2.2 Gotham

$1.7

Great Lakes

Liberty

$1.5

Profit

Size

Customer LoyaltyStrong Relationship: Retention Rates and Profit

70% 80% 90% 100%

4%

3

2

1

0

$5.7Midwest

$4.1

Chesapeake

$1.7

Great Lakes

Liberty

$1.5

Profit

Retention rate

$2.2

Gotham

Customer LoyaltyRetention Economics – Insurance Example

%

Prudential

Liberty Mutual

AetnaFarmers

Nationwide Mutual

Allstate

State Farm

USAA

AmicaProfitability (combined ratio)

Customer retention rate (percent)Sources: A.M. Best Insurance Reports; Consumer Reports

P and C profit drivers (1988)80

100

12078 80 82 84 86 88 90 92 94

%

Customer LoyaltyWhy Annual Profits Increase Throughout Customer Life

Profit

Profit from referrals

Base profit

0 1 2 3 4 5 6Year of customer life

Acquisition

Profit from increased purchases

Profit from price premium

Profit from reduced operating costs

The Three R’s of Profitability

Retention

Related Sales

Referrals

Gross profit per purchase(= revenue less variable costs)

XNumber of purchases per year

XYears in lifetime of an average customer

=Lifetime value of an incremental customer

Customer SatisfactionSatisfaction vs. Retention

1 2 3 4 5

20%

40%

60%

80%

100%

Loyalty(retention)

Satisfactionmeasure

Extremelydissatisfied

Somewhatdissatisfied

Slightlydissatisfied

Satisfied Very satisfied

Customer SatisfactionSatisfaction vs. Retention

SatisfactionMeasure

Loyalty(Retention)

1ExtremelyDissatisfied

2SomewhatDissatisfied

3Slightly

Dissatisfied

4Satisfied

5Very

Satisfied

Terrorist

100%

80%

60%

40%

20%

Zone of Defection

Zone of Indifference

Zone of AffectionApostle

Employee Cycle of Success

Revenue growth

Profit-ability

Employee Cycle of Success

Customer loyalty

Satisfaction

Loyalty

CapabilityProductivity

External service quality

ValueCustomer

satis-faction

Employee Satisfaction (Cont.)

High

Low

Low High

Region

Customersatisfaction

Service capability

Employee Satisfaction (Cont.)

Region

Customersatisfaction

Job satisfaction

Customersatisfaction

TurnoverLow High LowHigh

Why Long-Term Employees Create Value

Employee referral

Customer referral

Customer retention

Customer selection

Efficiency

Training

Selection

Year 0 1 2 3 4 5 6 7THE LOYALTY EFFECT, Frederick F. Reichheld, Bain & Company, Inc. (Harvard School Press)

The Value Profit Chain

Internal service quality

Revenue growth

Profit-ability

Employee

Customer loyalty

Satisfaction

Loyalty

CapabilityProductivity

External service quality

ValueCustomer

satis-faction

“The hard stuff--financial results and anything that’s easy to quantify--usually crowds out the soft stuff. Despite this, it’s the soft stuff that really counts if you want to be more than a me-too player.”

“Your job is to identify the right soft stuff, put in context for the company, and figure out how to make it hard so that it gets the attention it deserves.”

CEO of a Fortune 500 Service Firm