Relationship between Service Quality and Profitability

Beyond a General Relationship between Service Quality and Profitability

Prior to the 1990s, the general link between service quality and profitability was still being questioned, but since the early 1990s, it has been persuasively established.(n2) The evidence to support the linkage came from a variety of sources and is now convincing enough to lead executives to believe that a positive relationship does exist. The link was first established through industry-wide, cross-industry, or cross-facility studies such as the PIMS (Profit Impact of Market Strategy) project, which demonstrated a correlation between quality and profits across both manufacturing companies and service companies.(n3) In more recent studies, quality improvement and customer satisfaction have been linked to stock price shifts, the market value of the firm, and overall corporate performance.(n4) 

Because firms are managed at the individual level and not the industry level, executives still clamored for evidence that improved service quality resulted in increased firm profitability. A growing number of studies bear this out, showing that:

• service improvement efforts produce increased levels of customer satisfaction at the process or attribute level,(n5)

• increased customer satisfaction at the process or attribute level leads to increased overall customer satisfaction,(n6)

• higher overall service quality or customer satisfaction leads to increased behavioral intentions, such as greater repurchase intention,(n7)

• increased behavioral intentions lead to behavioral impact, including repurchase or customer retention, positive word-of-mouth and increased usage,(n8) and

• behavioral impact then leads to improved profitability and other financial outcomes.(n9)

What is still missing in this research evidence is the recognition that the link between service quality and profitability can be stronger if it is recognized that some customers are more profitable than others. Service investments across all customer groups will not yield similar returns and are not equally advantageous to the firm. Different profitability segments are likely to be sensitive to different service emphases and are likely to deserve different levels of resources. As a small number of progressive companies have discovered, they can become more profitable by acknowledging the difference in profit potential among customer segments, then developing tailored approaches to serving them.