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In the past, expenditures on quality have not been explicitly linked to profits because costs and savings were the only variables on which information was available. More recently, evidence about the profit consequences ofservice quality stemming from other sources has been found. This article synthesizes recent evidence and identifies relationships between service quality and profits that have been and need to be examined. The article views the literature in six categories: (1) direct effects ofservice quality on profits; (2) offensive effects; (3) defensive effects; (4) the link between perceived service quality and purchase intentions; (5) customer and segment profitability; and (6) key service drivers of service quality, customer retention, and profitability. In each category, the author identifies what is known and then suggests an agenda of relationships needing validation and questions needing answers. The article is organized around a conceptual framework linking the six topics.
Despite the quality revolution that has preoccupied the thinking of American industry, the first decade of service quality improvements was not explicitly linked to profit implications (Aaker and Jacobson 1994) because the evidence was not readily attainable. Because cost and cost savings due to quality were more accessible, they were the main financial variables considered (see, e.g., Bohan and Homey 1991; Carr 1992; Crosby 1979; Deming 1986). In the past decade, however, researchers and companies have sought and found evidence about the profit consequences of service quality. In fact, the service concern of highest priority to today's companies is the impact of service quality on profit and other financial outcomes of the organization (Greising 1994; Rust, Zahorik, and Keiningham 1995).
The relationship between service and profits took time to verify, part of the delay due to the unfounded expectation that the connection was simple and direct. Investments in service quality, however, do not track directly to profits for a variety of reasons. First, in much the same way as advertising, service quality benefits are rarely experienced in the short term and instead accumulate over time, making them less amenable to detection using traditional research approaches. Second, many variables other than service improvements (such as pricing, distribution, competition, and advertising) influence company profits, leading the individual contribution of service to be difficult to isolate. Third, mere expenditures on service are...