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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
