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Literature review

This literature review is written by Bernd-Niklas Bierbaum as part of his NHTV Master in Tourism Destination Management.

In their paper, Hesket et al. (1994) introduce the concept of the service profit chain.  “The S-PC postulates that operations contribute to the profits of a service firm via the following chain of logical deduction (Yee et al. 2009, p.617):”

  1. Profitability and growth are primarily stimulated by customer loyalty.
  2. Loyalty is influenced by customer satisfaction.
  3. Satisfaction is influenced by the service values provided.
  4. Value is created by loyal productive and satisfied employees.
  5. Employee satisfaction results from support services and policies that enable employees to deliver high quality services. (Heskett et al. 1994)

This paper will focus on the question whether it is enough for a company to simply „satisfy“ their customers in order to achieve loyalty and finally profitability. In the following, the question will be raised and discussed whether there might be more to the concept of profitability than simply being able to satisfy a customer. Therefore, customer satisfaction, customer loyalty, the relationship between loyalty and profitability and finally the importance of the “moment of truth” and the service encounter will be evaluated and highlighted from different standpoints.

Customer Satisfaction

Customer satisfaction and service quality seem to go hand in hand. In fact, both terms are often used interchangeably, causing confusion (O’Neill in Kandampully et al. 2001, Knutson in Kandampully et al. 2001, Cronin & Taylor 1992). Therefore, a distinction is necessary. To differentiate satisfaction from service quality, Cronin & Taylor 81992), Bitner (1990) and Parasuraman, Zeithaml& Berry (1988) describe perceived quality as a form of attitude where the customer forms a long-run evaluation whereas satisfaction is described as a reaction to a specific transaction. Supporting the theory by Cronin & Taylor et al., Rust & Oliver (1994) describe satisfaction as a result of a service quality encounter.

Bolton & Drew (1991, p.2) state: “A customer’ satisfaction/ dissatisfaction with a service […] depends on his or her current perception of performance, prior expectations about performance and perceptions of the discrepancy between these two constructs.”

Several studies have proven that customer satisfaction together with quality is one of the key drivers of service performance for a company (Anderson et al. 1994; Fornell 1992). Hence, companies should offer services that are able to satisfy not only the consumers’ expectations but also their perceptions of service quality. As they may however differ from customer to customer, companies should evaluate the perceptions and expectations of customers on a regular basis. On this ground, it is eminent to constantly assure service performance in order to increase or at least preserve customer satisfaction. The degree of satisfaction is furthermore believed to increase the probability of repurchase through a customer, hence eminent for a successful company.

O’Neil (in Kandampully et al. 2001) conclusively states that if the customer experiences better service than expected a high level or positive disconfirmation and therefore satisfaction will result (also discussed in Rust & Oliver 1994; Erevelles& Leavitt 1992).

It was Hesket et al. (1994) who, with their implementation of the service profit chain model, defined customer satisfaction as a prerequisite to customer loyalty. This customer loyalty then again would result in profitability.

Customer Loyalty

For an organization’s success, consumer loyalty plays a critical role (Li & Green 2011). This is underlined by the definition of Van Looy et al. (2003) defining loyalty as:

“Customer behavior characterized by a positive buying pattern during an extended period (measured by means of repeat purchases, frequency of purchase, wallet share or other indicators) and driven by a positive attitude towards the company and its products or services (p.59).”

Aside from a financial aspect, Oliver (1997) defines customer loyalty as “a deeply held commitment to rebuy or re-patronize a preferred product or service consistently in the future […] (p.392).” In view of Li & Green (2010) loyal costumers’ then provide a constant stream of revenue as well as ensuring cost reductions due to less promotional expenses for the acquisition of new customers; hence, increasing profitability.

As outlined in Li & Green (2010), Oliver (1997) proposes four stages loyal customers go through:

  1. Cognitive stage: the customer must confirm that his expectations of the service are met on a constant basis.
  2. Affective sense: customers are repeatedly satisfied with purchasing decisions.
  3. Conative stage: consumers have a deep commitment to buy.
    1. Customers overcome obstacles like price sensitivity (price increase, attractive offers from competitors)

In order to create a long lasting relationship between the customer and the company, the customer needs to run through the above-mentioned stages. On the other hand, the degree on how satisfied the customer is will then determine the level of loyalty. In this context, Van Looy et al. (2003) point out that opposed to the belief that loyalty results automatically from satisfaction; research found out that there is actually a rather weak link between plain satisfaction scores and loyalty. In their paper, Heskett et al. (2008) identify that relationships between the scores and actual loyalty strongly depend on whether customers were “very satisfied” or simply “satisfied” with the product or service. Customers being “very satisfied” were 5 times more likely to repurchase. According to these findings, Van Looy et al. (2003) specify several reasons to explain the weak correlation between “satisfied” customers and loyalty.

  1. As positive and negative feelings can coexist, customers may like parts of the service while rejecting other parts.
  2. Non-directly related factors may play a role. E.g. an accident happens during the holiday. It is not the tour operator’s fault but the client might not be willing to book another holiday with the same tour operator again.
  3. Satisfaction scores may vary upon the mood and circumstances the customer is in while answering the satisfaction survey.
  4. Customer loyalty may also vary upon the commitment the customer has towards the company.
Figure 1: The relationship between customer satisfaction & customer loyalty (Hesket et al. 2008)

Figure 1: The relationship between customer satisfaction & customer loyalty (Hesket et al. 2008)



The figure above shows the loyalty (retention) of customers based on their satisfaction. It briefly divides the customers into three groups, subdivided into 3 different zones. The “terrorists” are those customers who are “extremely dissatisfied” up to “slightly dissatisfied” with the service of the company. According to Heskett et al. (2008) those customers are not only highly likely of defecting to a competitor but are also likely to spread negative word of mouth to others (see also Stauss& Seidel 2004). “Apostles” on the other hand are those customers who are truly satisfied with the company or the service offered resulting in true loyalty to the company.

Thus, it must be the effort of a service provider trying to achieve zero or a minimum number of customer defections. This will lead to more profitability in the long run.

Relationship between Profitability & Loyalty

Increasing and preferably maximizing growth and profitability are obviously at the end of the service profit chain developed by Heskett et al. (1994) as they constitute the final goal of every organization. In order to achieve profitability, companies need to pass through many different stages including employee satisfaction, retention and productivity to be able to achieve high level of customer satisfaction resulting in high customer loyalty and eventually profitability (for more information see Heskett et al., 1994). The relation between customer retention and customer profitability has been examined by several researchers who mostly agreed on the assumption that “increased customer loyalty has a positive effect on customer profitability” (Helgesen, 2006, p.258).

This positive relationship is mainly based on two factors. On the one hand, companies usually invest a great amount of money into each customer, which is the highest in the initial phase of the company-customer relationship. An organization must spend money on resources to acquire customers – acquisition and marketing costs – and later on to cultivate them – maintenance costs (Anderson & Mittal 2000). These costs constantly decrease each year the customer stays with the company as marketing and sales costs are lowered among other things by the customer’s engagement in positive word of mouth (Reinartz& Kumar, 2002) and due to their familiarity with the firm’s service delivery system (Hallowell 1996). A financial consulting business found out, that costs, a company spends for each customer, drop by two-thirds from the first year of the relationship to the second (Reichheld&Sasser 1990).

This leads to the second factor supporting the thesis that “retained customers are a revenue-producing asset for a firm” (Anderson & Mittal 2000, p.116) as they are interrelated. Simultaneously with the decreasing costs, customers generate increasingly more revenues throughout the relationship with a company. In fact, loyal customers buy more frequently, in higher volumes and are likely to positively respond to cross- or up- selling’s (Reichheld&Sasser 1990). Moreover, they are less price-sensitive and less likely to complain (Hallowell 1996; Reinartz& Kumar 2002). In addition, a defecting customer costs a company way more than serving existing ones; acquisition costs have to be spend once more, new customers buy less frequently and in smaller quantities, require more service, and are less active as word-of-mouth marketers (Anderson & Mittal 2000).

“These cost savings and additional revenues combine to produce a steadily increasing stream of profits over the course of the customer’s relationship with the company” (Reichheld&Sasser 1990, p.107). It is estimated that a low customer defection rate can result in profit increases between 25% and 85% concluding that managers should pay at least as much attention to the quality of market share, measured in terms of customer loyalty, as to the quantity of share (Heskett et al. 1994).

The Service Encounter and „the Moment of Truth“

The following part will emphasize the overall importance of the service encounter and the “moment of truth” for the achievement of customer satisfaction. It will outline that it is a crucial part in the derivation of the satisfaction process.

Due to Hesket et al. (1994) in the new economics of service, frontline workers and customers need to be the center of management concern. Investment in people, technology that supports frontline workers, revamped recruiting and training practices are the factors that drive profitability in the new service paradigm. These frontline workers act as ambassadors for their companies during service encounters, playing a crucial role in influencing customers’ perceptions of quality (Lee-Ross 2001). Lovelock (2007) describes a service encounter as every time a customer interacts with an employee. In line with this, many researchers define the service encounter as a dyadic interaction between customer and service provider, each influencing the other’s activity and experience (Solomon et al. 1985; Bitner et al. 1990; Ma &Dubé 2011). Presbury et al. (2005) confirm that every encounter between an employee and a customer is an opportunity for the customer to evaluate the service provided. Therefore, every service encounter is a “moment of truth”. Swedish consultant Richard Normann (as quoted in Lovelock 2007) borrowed the metaphor of “the moment of truth” from bullfighting saying:

“We could say that the perceived quality is realized at the moment of truth, when the service provider and the service customer confront each other in the arena. At that moment they are very much on their own… It is the skill, the motivation, and the tools employed by the firm’s representative and the expectations and behavior of the client which together will create the service delivery process (p.55).”

Instead of a live or death decision, Normann points out the relationship between service provider and customer, being at stake every time during an encounter (Lovelock 2007). In the post purchase phase of an encounter, a customer then evaluates if prior expectations have been met during the encounter and therefore determines if he is satisfied (Lovelock 2007).

As the service encounter (as discussed above) is an eminent or crucial factor for the overall satisfaction of a customer, researches have proposed ideas on how to improve service encounters from a companies and customers’ point of view. Pugh (2001) in his study “service with a smile” examines on how employees feel and act towards customers and in which sense displaying emotions influences customer affect and judgment of service quality. In his conclusion, Pugh (2001) points out that it is a valid tool for employees to display emotions (see also Morris &Feldmann 1996) as they can influence the customers’ attitude towards an organization through altering moods. It is not necessary though to display real emotions but to “learn norms about which emotions are appropriate to express when interacting with customers (p.1019). Pugh (2001) states that “a professional acts as they must, not as they feel (p.1018).” Hence, service encounters can to some extent be scripted or blueprinted (Lee-Ross 2001). Bitner et al. (1990) as well as Ma &Dubé (2011) suggest in their findings of improvements to service encounters for a more satisfied customer, that employee responses to customer query should be coordinated in order to create a positive synergy. In their work, Chase &Dasu (2001) add that it is possible and effective to engineer service encounters in order to enhance the customers’ experience during, and the recollection of the encounter afterwards. Using behavioral science they found out that several principles apply for a successful encounter with a customer. As people tend to especially remember the last days/ things/ sentences etc. it is important to always finish strong, get bad experiences out of the way early, combine those bad experiences rather than splitting them and give people the possibility to choose (Chase &Dasu 2001). Especially the last three findings can be very important when it comes to customer complaints as customers’ should be able to savor rather positive than negative events at the end of sequences.

All in all, the service encounter and the moment of truth are crucial parts of the overall service experience. Ultimately in the end, all that counts for a service provider during a service encounter is what the customer perceives occurred (Chase &Dasu 2001).


This paper has analyzed and discussed the steps from customer satisfaction to company profitability as outlined in Hesket et al. (1994). Throughout the research, the author has emerged the fact, that there is a correlation between customer satisfaction, loyalty and company profitability. Nevertheless, it has become clear that simply satisfying a customer will not make him or her loyal to a given company. The literature review does not support the viewpoint of researchers like Thurau-Klee (1997) and Khumar Shah (2004) who neglect the importance of customer satisfaction and customer loyalty for the profitability of a company. It has been pointed out though, that the customer has to be more then satisfied with a given service in order to becoming loyal as there are crucial differences in the degree of satisfaction levels. Customer loyalty is then considered to be an important milestone for a company on the way to becoming profitable. As previously discussed, processes during service encounters have to be optimized in order to achieve the goal of a more than satisfied customer.

As a result, customer satisfaction can be seen as a crucial element for profitability. The satisfaction of the customer goes hand in hand with every service encounter (“moment of truth”) a customer faces, each defining the grade of satisfaction and therefore the degree of loyalty towards the company in the future. It is only then, that the company can be profitable.


Reference List

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