Service Marketing Theory

See discussions, stats, and author profiles for this publication at: https://www.researchgate.
net/publication/233048319
Service Marketing Productivity and Firm Proﬁt: Evidence From

U.S. Domestic Airline Companies
Article in Services Marketing Quarterly · July 2011

DOI: 10.1080/15332969.2011.581902
CITATIONS READS
5 5,142
2 authors:
Jin-Woo Kim Edmund Prater

Georgia Southern University University of Texas at Arlington
11 PUBLICATIONS 112 CITATIONS 52 PUBLICATIONS 2,007 CITATIONS
SEE PROFILE SEE PROFILE
All content following this page was uploaded by Jin-Woo Kim on 16 August 2015.
The user has requested enhancement of the downloaded file.

This article was downloaded by: [ ]
On: 27 February 2012, At: 10:40
Publisher: Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered
office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK
Services Marketing Quarterly

Publication details, including instructions for authors and
subscription information:
http://www.tandfonline.com/loi/wsmq20
Service Marketing Productivity and Firm

Profit: Evidence From U.S. Domestic
Airline Companies
a b
Jin-Woo Kim & Edmund Prater
a
Department of Marketing, College of Business, The University of
Texas at Arlington, Arlington, Texas
b
Department of Information Systems and Operations Management,
College of Business, The University of Texas at Arlington, Arlington,
Texas
Available online: 24 Jun 2011
To cite this article: Jin-Woo Kim & Edmund Prater (2011): Service Marketing Productivity and Firm
Profit: Evidence From U.S. Domestic Airline Companies, Services Marketing Quarterly, 32:3, 181-198
To link to this article: http://dx.doi.org/10.1080/15332969.2011.581902
PLEASE SCROLL DOWN FOR ARTICLE
Full terms and conditions of use: http://www.tandfonline.com/page/terms-and-conditions
This article may be used for research, teaching, and private study purposes. Any
substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,
systematic supply, or distribution in any form to anyone is expressly forbidden.
The publisher does not give any warranty express or implied or make any representation
that the contents will be complete or accurate or up to date. The accuracy of any
instructions, formulae, and drug doses should be independently verified with primary
sources. The publisher shall not be liable for any loss, actions, claims, proceedings,
demand, or costs or damages whatsoever or howsoever caused arising directly or
indirectly in connection with or arising out of the use of this material.
Services Marketing Quarterly, 32:181–198, 2011
Copyright # Taylor & Francis Group, LLC
ISSN: 1533-2969 print=1533-2977 online
DOI: 10.1080/15332969.2011.581902
Service Marketing Productivity and Firm

Profit: Evidence From U.S. Domestic Airline
Companies
JIN-WOO KIM
Department of Marketing, College of Business, The University of Texas at Arlington,
Arlington, Texas
EDMUND PRATER
Department of Information Systems and Operations Management, College of Business, The
University of Texas at Arlington, Arlington, Texas
Downloaded by [ ] at 10:40 27 February 2012
The service-profit chain has been used as a powerful tool for eval-
uating the relationship between service effort and profit. However,
this framework cannot account for customer satisfaction, which
may be the ultimate goal of firms. This article attempts to investi-
gate the relationship between service marketing productivity and
profit by using data envelopment analysis and regression to deter-
mine the mediating role of customer satisfaction in the
service-profit chain. The data from 17 U.S. domestic airlines from
2001 to 2005 indicate a significant association between service
marketing productivity and profit and the mediating effect of
customer satisfaction.
KEYWORDS airline service, customer satisfaction, data envelop-

ment analysis, service marketing productivity, service-profit chain
The service-profit chain (SPC) is a framework for explaining the relationship

between a firm’s profitability and service operation, employee assessments,
and customer evaluations. It provides a useful integrated foundation to
account for matters ranging from service improvement efforts to ultimate
management goals. According to the SPC, a service firm’s profit can be
realized as an outcome of service operational input through customer
Address correspondence to Jin-Woo Kim, Department of Marketing, College of Business,

The University of Texas at Arlington, 701 South West Street, Suite 223, Arlington, TX 76019.
E-mail: jkim@uta.edu
181
182 J.-W. Kim and E. Prater
perception and actual behavior (Heskett, Jones, Loveman, Sasser, Jr., &
Schlesinger, 1994).
Most of the related research performed during the 1990s has focused on
service quality evaluation in perspectives of microeconomics and psy-
chology. In this paradigm, consumers are expected to assess service quality
on the basis of their expected and perceived value for utility maximization.
Therefore, these studies have some limitations when addressing the impact
of post service assessments on customer satisfaction and marketing objec-
tives. In this sense, the SPC is a valuable framework that offers insights that
make it possible observe service related issues from an integrative perspec-
tive (Kamakura, Mittal, de Rosa, & Mazzon, 2002).
However, customer satisfaction has not been fully addressed in terms of
explaining the relationship between service and the profit chain. Most of the
SPC-related studies fail to identify the role of customer satisfaction in transfer-
ring service effort to profit realization. There has been little interest in exam-
ining how customer satisfaction impacts the association between service
efforts and a firm’s profit. This study attempts to clarify the role of customer
satisfaction in service marketing productivity (SMP) and real profit using U.S.
domestic airline data.
First, the research framework is developed from a theoretical back-
ground. Next, the research setting and the data available for analysis are
addressed in the methodology section. This study uses U.S. domestic airlines
data from the Bureau of Transportation Statistics. The data includes SMP, cus-
tomer satisfaction, and real profit. For this analysis, data envelopment analy-
sis (DEA) is utilized to determine SMP by integrating the service input and
service outcomes. Then, regression analysis shows whether there is a
relationship between SMP and real profit. The following section provides
an interpretation of the results and includes a discussion of some of the issues
with theoretical and managerial insights. The final section concludes the arti-
cle and offers some suggestions for further research.
RESEARCH BACKGROUND
Heskett et al. (1994) collected empirical evidence from some 20 large service
organizations and developed the SPC to link service operations, employee
assessments, and customer assessments to profit. However, they failed to
subject any single organization to an analysis of all the links in the chain.
Burleson (1997) attempted to test the entire SPC in a way that the chain
was broken into several piece using large automotive service and repair
chains.
Rucci, Kirn, and Quinn (1998) employed a modified version of the SPC
that they called the ‘‘employee-customer-profit chain.’’ Loveman and Heskett
(1999) updated the SPC model by adopting employee capability and external
Service Marketing Productivity and Firm Profit 183
service quality. Basically, there are four principal components of the SPC:
internal service quality, external service quality and service value, target
market, and financial performance.
Since the 1990s, many researchers have studied service quality and
assessment from a macroeconomic point of view. For example, the relation-
ship between service effort and outcome is one of the most popular research
themes in marketing areas. In particular, DEA has been used as a useful man-
agement science tool; multiple inputs and multiple outputs can be involved
simultaneously in DEA, whereas regression cannot include multiple
responses (Luo, 2004).
Silvestro and Cross (2000) conducted an explanatory study of the SPC in
one of the major supermarket chains in the United Kingdom, but the small
sample size (15 stores) limits the application of their results. Liu (2005)
recommended that researchers should add several other factors to the
SPC, such as market orientation as a mediator and firm size, industry type,
strategy, and ownership as moderators.
Kamakura et al. (2002) provided theoretical and managerial insights by

using the SPC and DEA tools, indicating operational input both indirectly
and directly affects a service firm’s profit. Service input effort follows the
strategic model for customer-level analysis and the operational model for
branch-level efficiency analysis. DEA is one of the most popular manage-
ment science tools used to determine efficiency level using multiple input
and multiple output. Actually, DEA is a tool for evaluating the credibility
of marketing (Luo & Donthu, 2006), retail productivity (Donthu & Yoo,
1998; Thomas, Barr, Cron, and Slocum, Jr., 1998; Kamakura, Lenartowicz,
& Ratchfrord, 1996), salesforce performance (Boles, Donthu, & Lohtia,
1995; Pilling, Donthu, & Henson, 1999), and advertising efficiency (Luo &
Donthu, 2001, 2004; Mahajan, 1991). Moreover, consumer satisfaction, mar-
keting strategy, and banking were the main subjects of DEA. In particular,
DEA has played an important role in evaluating service productivity and
sales force efficiency.
HYPOTHESES DEVELOPMENT
As mentioned earlier, previous studies have tended to concentrate on the ser-

vice quality assessment of individual consumers. In this study, SMP is con-
sidered to be an independent variable and profit is a dependent variable
(See Figure 1). The previous research indicates service improvement efforts
lead to increased customer satisfaction (Kamakura et al., 2002). Even though
customer satisfaction is a cumulative concept during the relatively long term
rather than the short term, service effort can create a positive response in cus-
tomer satisfaction. Accordingly, consumers can perceive service quality
increases, facilitating favorable evaluation and satisfaction.
FIGURE 1 Research hypotheses.
SMP and Customer Satisfaction

In this decision process, utility maximization is regarded as a consumer
decision strategy. Consumers are assumed to be rational and decide their
perception and behavior based on utility. Perception, intention, and real

behavior will occur prior to satisfaction, but basically, these psychological
process can be summarized as satisfaction (Kamakura et al., 2002). Just as
action and reaction are linked, service input stimuli result in negative, neu-
tral, or positive responses.
In this sense, a firm’s service improvement efforts are expected to be
accepted as evidence for positive evaluation. If consumers have a negative
image of a firm, even favorable efforts for service quality enhancement will
be considered negative. For example, when a consumer has a very negative
image of a certain bank, this consumer may interpret bank teller recruiting
intended to decrease waiting time in branches as an increase in part time
job and labor exploits. However, this case is rare under normal circum-
stances. Therefore, SMP will lead to customer satisfaction based on rational
consumer assumption. When a firm employs a service marketing strategy
to improve their service quality, consumers respond favorably and satisfac-
tion levels will increase.
H1: Improved SMP will create more customer satisfaction.
Customer Satisfaction and a Firm’s Profit

As tested in the previous studies, customer satisfaction can be use as an indi-
cator to predict the changes in a firm’s profit. However, time as a factor has
not been considered even though customer satisfaction is a rather long term
concept and profit is the total sum of all of a firm’s efforts. Many empirical
studies have tried to reveal the relationship between customer satisfaction
and real profit (Luo & Homburg, 2007; Mittal, Anderson, Tadikamalla, &
Sayrak, 2005, Cooil, Keininham, Aksoy, & Hsu, 2007).
However, a firm’s profit is a function of cost and other cost-related fac-

tors from a firm’s perspective. In the long term, customer satisfaction is the
ultimate goal of firms, and profit is a kind of satisfaction input. Therefore,
customer satisfaction will have a positive impact on a firm’s profit.
H2: When a firm has more satisfied customers, that firm is expected to
realize more profits.
The Mediating Role of Customer Satisfaction

SMP will lead to increased firm profits. This has been tested empirically by
many studies and by past experience. Although there is some deviation
between the effectiveness of SMP, a firm’s profit will accrue according to ser-
vice improvement efforts. Usually, it will take some time to make a profit, but
profit must be affected by SMP (Rust, Zahorik, & Keiningham, 1995).
As mentioned earlier, increases in service productivity will have positive
effects on a firm’s profit. Consumer perception and evaluation are needed in

order to transfer or convert service effort into profit realization. If there are no
critical problems in a firm’s system or organization, SMP will enhance profit-
ability. For example, when service staff is sensitive and resistant to a new ser-
vice marketing strategy, profit is unlikely to be realized. Conversely, if firm
members are flexible enough to change and accept a new service policy
without resistance, SMP will have much more effect on profit. Therefore,
SMP is associated with a firm’s profit.
Previous studies indicate that customer satisfaction is expected to
mediate the relationship between corporate social responsibility and market
value. This result can be attributed to customer satisfaction, which makes it
possible to convert corporate social responsibility into financial value (Luo
& Bhattacharya, 2006).
Dennett, Ineson, Stone, and Colgate (2004) assessed the impact of the
introduction of an innovative reservation service in the charter airline indus-
try. In order to analyze the impact, their study drew on literature from cus-
tomer satisfaction and value-added services. In particular, the study
analyzed whether customers’ perception of satisfaction and their behavioral
intentions (in terms of repurchase) were significantly higher amongst those
consumers who availed themselves of newly introduced prebookable char-
tered airline services. Their findings indicate that although this innovation
can increase satisfaction and intention to repurchase services, its potential
has not been maximized.
Similarly, service improvement efforts will impact profit after they are
approved by customers. An increase in SMP will not guarantee more profit
if a customer evaluates the firm’s efforts as neutral or negative. If a consumer
does not notice the service effort, changes in profit will be stable or only
marginal. Once customers give their values on increased SMP, the firm can
realize greater profits. In this sense, customer satisfaction will play a mediat-
ing role between service quality efforts and a firm’s profit. Therefore, service
efforts without customer agreement will not be effective. That is, customer
satisfaction it is required for service input to realize additional profit.
H3: Customer satisfaction will mediate the relationship between service

quality improvement efforts and profit.
The Moderating Role of Advertising Expenditures

Advertising has been treated as an input variable of marketing credibility and
advertising efficiency (Luo & Donthu, 2001, 2005, 2006; Mahajan, 1991). As
explained, profit can be realized by achieving service input through cus-
tomer satisfaction. In this process, advertising expenditures will moderate
service efforts and profit. Actually, information on service improvements
can be delivered to customers via advertising and other promotion strategies.
Therefore, advertising amounts are expected to be associated with the

relationship between service effort and profit.
H4: When all other conditions are the same, a firm with more advertising
and promotion expenditure will enjoy more profit.
This hypothesis is based on the effect of advertising over time. Even

though advertising effects will rise to a peak and then decrease over time,
advertising amounts and costs will be affected regardless of the time frame.
Not all advertising has a positive impact on customer satisfaction and profit;
however, normally, advertising will increase customer awareness of service
effort provided by a firm and ultimately result in profit through competition
(Fruchter, 1997).
RESEARCH SETTING
SMP was identified and multiple inputs and outputs selected to represent
SMP. Then, SMP was defined and manipulations made, and DEA was used
to estimate SMP. Next, SMP estimates were used as a regressor, and profit
was found using the regression equation based on the following data.
. Profit ¼bP þ bPs SMP þbPa ADVERT þbPc CS þbPac ADVERT * CS

. Revenue ¼bR þ bRs SMP þbRa ADVERT þbRc CS þbRac ADVERT * CS
DEA Input Variables
Schefczyk (1993) presented a new approach for measuring operational per-
formance, an important facet of performance that was missing in the existing
literature concerned with international airline strategy. For example, the

number of available ton kilometers may reflect aircraft capacity more accu-
rately than flight equipment depreciation. However, different units of
measurement introduce new difficulties. Drawing on data from 15 airlines,
the current study utilizes DEA as a technique to analyze and compare the
operational performance of airlines. The current study concludes with an
analysis of the strategic factors of high profitability and performance in the
airline industry. Schefczyk uses available ton kilometers, operating cost,
and nonflight assets as DEA input, and revenue passenger kilometers, rev-
enue nonpassenger kilometers, other revenue as output in evaluating the air-
line operating efficiency. Efficiency is included as an independent variable
for estimating the various outcomes such as return on equity (ROE), gross
margin, passenger load factor, percentage of passenger revenue, nonflight
assets per available ton km, revenue growth, and percentage international
kilometers (Schefczyk, 1993).
Based on Schefczyk’s studies, the current study uses the DEA method to
evaluate the SMP. In this study, service firm process is considered as service
production procedure where a firm’s capability transforms to service. Thus,
DEA input in this research can be summarized as total assets, total cost,
and total number of employees from the perspective of a resource based
view.
DEA Output Variables

The airline industry will be going through dramatic changes in the years to
come. This is chiefly due to altering customer demands and expectations,
but it can also be attributed to the deregulation of the airline business. Many
airline companies have lost track of the true needs of their passengers and are
trapped in outdated views of what airline services are all about. Gustafsson,
Edvardsson, and Edvardsson (1999) illustrated how Scandinavian Airlines
System (SAS) has carried out thorough investigations of the concerns of their
FIGURE 2 Airline service flow.

customers throughout the entire travel experience using the airline service
flowchart seen in Figure 2.
This service flowchart provides many implications for selecting airline
service output from inputs such as total assets, total cost, and total number
of employees. Obviously, customer satisfaction institutions, including Skytrax
and J. D. Power, apply their criteria for evaluating airline customer satisfac-
tion, which are shown in Table 1. Although there is difference in the level
of detail between the two agencies, their standards include ground service,
on-board service and catering, staff service, and other factors.
Similarly, each airline company has established a customer service com-
mitment, which can be seen in Table 2. According to Table 2, scheduled ser-
vice and baggage delivery are the most important service items for airline
companies. Given the service performance of customer satisfaction agencies
and airline service commitments, this study has selected several items as DEA
outputs. The DEA outputs included in this study are the number of
TABLE 1 Service Performance Item by Customer Satisfaction Agent
SKYTRAX JD Power
p
Ground=Airport service Web site: Ease of use p p
Online check-in p
Airport check-in p p
Transfer p
Arrival p
Ground service handling p
Lounge facility p
Lounge staff p p
On-board features Cabin safety p
Entertainment p
Amenities p
Magazine p
Seat comfort p
Catering diversity p
Catering quality p
Catering price p
Catering service p p
Cabin=Staff service Efficiency of staff service p
Staff attitude and friendliness p
Response to passenger requests p
Cabin presence through flights p
Assisting parents with children p
Service consistency amongst staff p
Staff language skill p
Additional Seat allocation=boarding system p
Cabin cleanliness p
Aircraft interior p
Excess baggage policy p
Hand luggage policy p
Handling of delay=cancellation p
Customer service backup
TABLE 2 Customer Service Commitment by Airline Companies

Hawaiian US
Southwest Northwest air Delta Continental ATA AA Airways Alaska
p p p p p p p p p
Airport operation and
scheduled service p p p p p p p
Reservation and prior
notice of delay or
cancellation p p p p p p p p
Low fares and
ticketing p p p p
Overbooking p p p p p p p p
Tickets and refunds p p p p p p p
Responsive service p p
Airplanes p p p p p p p p p
Baggage delivery p p p p p p p
Baggage limits p p p p p p p p
Special services for
children and the
disabled p p p p p p p p
Reward and advantage
program p p p p
Respond to customer
complaints p p p p
Comfort and safety
mishandled bags, on-time performance, and the number of passengers

denied the ability to board. In terms of scheduled operation, on-time per-
formance would be a good indicator. The number of mishandled bags is
used to evaluate the service performance after flying, and the number of
those denied the ability to board is used to evaluate service in the airport.
As stated in the hypotheses, SMP will increase financial performance in
categories such as revenue and profit. For this reason, this study considers
net income and operating revenue. Then, using the SMP according to
DEA, the study estimates revenue and profit based on regression results.
Data Sources and Measures

This study obtained the total assets, total number of employees, total costs,
number of complaints, number of mishandled bags, advertising and pro-
motion expenditures, profit, and revenue for 17 U.S. domestic airlines. Data
on AirTran, Alaska, America West, American, American Eagle, ATA, Atlantic
Southeast, Continental, Delta, Express Jet, Frontier, JetBlue, Northwest,
Southwest, United, and US Airways were gathered from multiple archived
sources. Specifically, this study collected secondary data from three sources:
the Bureau of Transportation Statistics (BTS), the Federal Aviation Adminis-
tration (FAA) and the annual reports of the airline companies being exam-
ined. The data sample was obtained from various secondary sources, and
the multiple inputs and outputs that were chosen in this study are shown
in Table 3.
TABLE 3 Measure and Operationalization
Variable Measure Operationalization
DEA efficiency SMP SMP, service input vs. service efficiency

DEA inputs ASSET Annual total assets ($10,000)
COST Annual total cost ($10,000)
EMPLOYEE Total number of employees (persons)
DEA outputs On-time On-time performance (on time
flights=scheduled flights)
BAGG The reciprocal of number of
mishandled bags
OVERSOLD The reciprocal of number of those
denied the ability to board
Moderator ADVERT Advertising and promotion
expenditure ($10,000)
Mediator CS The reciprocal of number of
customer complaints
DEA outcome PROFIT Annual profit ($10,000)
REVENUE Annual operating revenue ($10,000)
Because there are no annual customer satisfaction data available, the

number of customer complaints was converted as an appropriate form to
measure the annual satisfaction value. The annual customer satisfaction mea-
sure is a reciprocal of the number of customer complaints collected by BTS.
Similarly, in order to compute SMP by using the efficiency score, BAGG and
OVERSOLD are measured by the reciprocal of the original performance
values, respectively. On-time performance is obtained from the number of
on-time flights divided by the number of total scheduled flights. Other values
such as total assets, profits, or revenue were used ‘‘as-is,’’ that is, without
transformation. In addition, due to some missing data, several pieces of data
had to be eliminated. After data handling, data from 2001 to 2005 were
merged to form the final dataset.
RESULTS AND DISCUSSION
The analysis in this application consists of three steps that were mentioned
earlier. First, to obtain the customer service efficiency scores of the 17 U.S.
domestic airlines from 2001 to 2005, a DEA run was executed using DEA
Excel Solver. DEA analysis provided the SMP for all companies on the basis
of their individual combination of inputs and outputs compared to those of
others in the sample.
Second, to get the overall SMP of each company, 5 years of data were
combined as one dataset. Given this condition, the same company from
2001 to 2005 was regarded as a different decision making unit (DMU) for
each year. Finally, regression and ANOVA were used in order to test the
mediation effect of customer satisfaction between SMP and profit and the
moderation effect of advertising expense between customer satisfaction and

profit.
Results of SMP
Table 4 reports the input-oriented yearly SMP for each company. There is a
trend in the SMP of each company, but it is not meaningful. In 2001 and 2002,
each company’s SMP is the almost same, and the SMP for 2003 and 2004 are
almost identical. However, in 2005, there is a general decrease in the SMP of
each company after Expressjet is included in the sample. The inclusion of
Expressjet in 2005 creates a different context for SMP and causes a decrease
from the 2004 SMP levels.
After annual SMP has been computed, the input and output dataset for
each year was integrated for hypothesis testing. Obviously, the economic
environment affecting airline company operations varies according to time,
but for the simplicity and convenience of the analysis, this study assumes that
there were no significant fluctuations in the economy and the market and
that all conditions were the same for each year. Table 5 reports the descrip-
tive statistics and the SMP range for the 17 U.S. domestic airlines.
According to Table 6, the mean of the SMP is 0.35. The least efficient
company is 2005 United Airlines with a 0.06044 SMP score. Four of the 63
DMUs were identified as efficient with a 1 SMP score based on the
input-oriented CRS DEA method. They are 2003 Airtran Airway, 2003 Atlantic
Southeast, 2003 JetBlue, and 05 ATA.
To capture the relationship between airline type and SMP, the mean
SMP of network carriers, low cost carriers, and regional carriers were com-
pared with each other. Network carriers are relatively large domestic airlines
TABLE 4 Input-Oriented Annual SMP from 2001 to 2005
2001 2002 2003 2004 2005
Airtran Airway 1.00000 1.00000 0.54997

Alaska 1.00000 1.00000 0.47544 0.55879 0.39986
America West 1.00000 1.00000 0.47078 0.45381 0.35729
American 0.11373 0.09568 0.05857 0.06990 0.05331
American Eagle 1.00000 1.00000 0.80159 0.65408 0.48711
ATA 0.94671 1.00000 1.00000
Atlantic Southeast 1.00000 1.00000 0.65114
Continental 0.30044 0.26318 0.13366 0.15257 0.11329
Delta 0.14044 0.12896 0.08846 0.09551 0.07311
Expressjet 1.00000
JetBlue 1.00000 1.00000 0.50155
Northwest 0.20419 0.18474 0.10749 0.14711 0.09181
Southwest 0.35786 0.29795 0.18052 0.21259 0.18215
United 0.10843 0.10577 0.07500 0.09367 0.06967
US Airway 0.26145 0.28564 0.18991 0.22538 0.17700
M 0.44865 0.43619 0.46630 0.47596 0.38048
TABLE 5 Descriptive Statistics for Variables
M SD SMP CS ADVERT Profit Revenue
SMP 0.3459 0.3139 1.0000

CS 0.0069 0.0079 0.7675 1.0000
ADVERT 663,473 613,527 0.7727 0.6485 1.0000
Profit 1,121,747 3,778,828 0.2640 0.2208 0.4017 1.0000
Revenue 7,029,226 5,852,350 0.7968 0.6490 0.9510 0.4504 1.0000
such as Northwest, United, US Airways, Continental, American, and Delta.

Low cost carriers and regional carriers are relatively small carriers including
Southwest, JetBlue, American Eagle, and others. Table 7 shows that the mean
SMP for network carriers is 0.14926 and the mean SMP for low cost carriers
TABLE 6 Input-Oriented SMP from Combined Data

Input-oriented Input-oriented
DMU Name CRS efficiency DMU Name CRS efficiency
2001 Alaska 0.51687 2003 US Airway 0.18991

2001 America West 0.46620 2003 ATA 0.94671
2001 American 0.05952 2004 Airtran Airway 0.77645
2001 American Eagle 0.88730 2004 Alaska 0.37526
2001 Continental 0.13640 2004 America West 0.33409
2001 Delta 0.07898 2004 American 0.04754
2001 Northwest 0.09228 2004 American Eagle 0.43547
2001 Southwest 0.18820 2004 Atlantic Southeast 0.68564
2001 United 0.05477 2004 Continental 0.10551
2001 US Airway 0.13985 2004 Delta 0.06563
2002 Alaska 0.56996 2004 JetBlue 0.68755
2002 American 0.06054 2004 Northwest 0.09636
2002 American Eagle 0.95275 2004 Southwest 0.13973
2002 America West 0.51725 2004 United 0.06356
2002 Continental 0.16850 2004 US Airway 0.15209
2002 Delta 0.09056 2004 ATA 0.68782
2002 Northwest 0.10548 2005 Airtran Airway 0.48842
2002 Southwest 0.18865 2005 Alaska 0.33738
2002 United 0.07209 2005 America West 0.31202
2002 US Airway 0.19994 2005 American 0.04563
2003 Airtran Airway 1.00000 2005 American Eagle 0.37184
2003 Alaska 0.47544 2005 Atlantic Southeast 0.58379
2003 America West 0.47078 2005 Continental 0.09361
2003 American 0.05857 2005 Delta 0.06406
2003 American Eagle 0.80159 2005 JetBlue 0.42702
2003 Atlantic Southeast 1.00000 2005 Northwest 0.08686
2003 Continental 0.13366 2005 Southwest 0.12662
2003 Delta 0.08846 2005 United 0.06044
2003 JetBlue 1.00000 2005 US Airway 0.15664
2003 Northwest 0.10663 2005 ATA 1.00000
2003 Southwest 0.18052 2005 Expressjet 0.91331
2003 United 0.07500
TABLE 7 Input-Oriented SMP From Combined Year
Carrier type Network carrier Low cost carrier Regional carrier
Carrier Northwest Southwest Atlantic Southeast

United JetBlue American Eagle
US Airways ATA ExpressJet
Continental Frontier
American AirTran
Delta America
Alaska West
M 0.14926 0.59178
and regional carriers is 0.59178. The difference between the two categories is
statistically significant (F ¼ 60.69, p < .000).
Airline size was also found to be an important factor for determining
SMP. This study examined the association between airline size and SMP
based on total assets. The difference between the two categories is statisti-
cally significant (F ¼ 57.83, p < .000). Namely, low cost carriers and regional
carriers performed better than large or network carrier in terms of SMP, indi-
cating that airline size or type has a negative relationship with SMP.
Hypotheses Testing Results

As stated in H1, improved SMP will have a positive impact on customer sat-
isfaction. Regression using SMP as an independent variable and customer sat-
isfaction as a dependent variable provides the main effect of SMP on
customer satisfaction (ß ¼ 0.019204, t ¼ 9.3509, p < .000), suggesting that
H1 is supported. Figure 5 summarizes the regression results for H1, H2,
and H3.
H2 addresses the relationship between customer satisfaction and profit.
If the firms maintain a high level of customer satisfaction, they are expected
to realize more profits. However, this customer satisfaction is not significant
(ß ¼ 0.019204, t ¼ 1.7679, p ¼ .082) at a ¼ 0.05, but it is significant at a ¼ 0.1.
Based on this result, H2 is partially supported. On the other hand, there is
a negative correlation between profit and revenue.
Similarly, H3 deals with the association between SMP and profit. If a
firm’s SMP is relatively high, the firm enjoys more profit. Figure 5c demon-
strates that the impact of SMP on profit is significant (t ¼ 2.1378, p ¼ .0366)
at a ¼ 0.05, indicating that H3 is supported.
To evaluate the existence of the mediation effect of customer satisfac-
tion between SMP and profit, four conditions should be held valid (Luo &
Bhattacharya, 2006).
. The predictor variable, SMP, should significantly influence the mediator

variable, customer satisfaction.
TABLE 8 Mediating Effect Testing (Response ¼ Profit)
b t Value p Value
SMP ! CS 0.0192 9.3509 0.00000

SMP ! Profit 3178493.213 2.1378 0.03655
CS ! Profit 1.06E þ 08 1.7679 0.08208
SMP, CS ! Profit
SMP ! Profit 2770424 1.1851 0.05481
CS ! Profit 21249038 0.2274 0.8209

p < .01. p < .05. p < .1.
. The mediator variable should significantly influence the dependent vari-

able, the profit.
. The predictor variable should significantly influence the dependent vari-
able.
. After controlling for the mediator variable (CS), the impact of the predictor
variable (SMP) on the dependent variable (profit) should no longer be sig-
nificant or should be reduced in strength.
After the aforementioned conditions are fulfilled, customer satisfaction

can be considered as a mediator between service input and financial output.
The direct impact of SMP on profit is possible, but most profits will be rea-
lized by the mediation of customer satisfaction. Table 8 shows that customer
satisfaction does not fully mediate the relationship between SMP and profit.
The evidence for the partial mediation of customer satisfaction is that the
impact of SMP on profit was reduced from 0.03655 to 0.05481 after control-
ling customer satisfaction. Thus, H3 is partially supported. However, when
the response is not profit but revenue, the mediation effect of customer sat-
isfaction is not significant.
Finally, H4 posits that advertising and promotion expenditure moderates
relationship between customer satisfaction and profit. However, the moder-
ation effect of advertising and promotion expenditure was not proven accord-
ing to the regression result. The interaction term between customer satisfaction
and advertising expense is not significant (t ¼ 0.3909, p ¼ .6973). Meanwhile,
ANOVA using a dummy variable for customer satisfaction and advertising
expense presented somewhat interesting results. The result shows that interac-
tion is present, but not significant (F ¼ 1.2, p ¼ .277).
CONCLUSION
Theoretical Implications
A firm’s service improvement efforts are expected to be evidence for the
positive evaluation of customers. SMP will create more customer satisfaction;
if a firm employs a service marketing strategy to improve the service quality,

consumer responses will be favorable to that firm and the customer satisfac-
tion level will increase. The increased customer satisfaction will subsequently
generate more profit, which is one of the goals of firms.
According to the results, SMP can only result in profit through customer
approval, which is the mediator. This information is important in that SMP
will transform into real profit through customer satisfaction. Without cus-
tomer approval or agreement, firms cannot realize greater profits from
increased SMP. Therefore, future research should address how to facilitate
customer involvement with regard to SMP.
In that sense, the study extended the existing literature that suggests that
customer satisfaction is the mediator between service productivity and profit.
Given this, the current study asserts that the SPC should take customer satis-
faction into account. Customers can be a bridge that links SMP to profit.
Because the moderating effect of advertising expense on the relationship
between customer satisfaction and profit is not supported, other possible
moderators should be identified, because this new moderator will boost

the association between customer satisfaction and financial performance.
Managerial Implications
This article highlights the importance of customer satisfaction in terms of ser-
vice production and monetary performance. Customer satisfaction is not just
a conceptual indicator, but one of the main factors that increases profit.
Thus, management should recognize the importance of customer oriented
marketing.
The negative correlation between oil prices and profit provides some
managerial implications, especially in terms of price strategy. In this paper,
the results show that more revenue means more negative profit. If there is
an economy of scale in a specific industry, market followers can enter the
market with their high efficiency. Because efficiency is directly associated
with profit, small sized companies with brand equity or a good reputation
may penetrate a market niche and enjoy a relatively large profit. Therefore,
management should realize that efficient resource utilization is critical to cus-
tomer satisfaction and profit.
Accordingly, relatively large companies need to explore new market
positions and develop specific competitive advantages for neglected seg-
ments over long periods. On the other hand, small sized companies should
focus on efficient production rather than serving untouched market areas. In
order to improve DEA efficiency, input and output slack must be identified
and eliminated.
Using the example of airlines, price advantage is the best way to realize
greater customer satisfaction and profit. In this sense, investors should pay
attention to companies with high efficiency and high customer satisfaction.
FIGURE 3 Moderation effect of advertising and promotion expenses.
Figure 3 demonstrates that 23 companies have high efficiency and high cus-
tomer satisfaction in the airline company sample.
Contributions and Future Research

This article attempted to examine the mediating effect of customer satisfac-
tion between SMP and profit based on the SPC by using airline data. SMP
has a positive impact on customer satisfaction and profit, as customer satis-
faction has a positive effect on profit.

Theoretically, the results of this study direct the marketing scholars to
focus on customer satisfaction, which is links SMP to profit. Practically, man-
agement should recognize the importance of customer satisfaction, which is
related to profit. Therefore, this study indicates that having a large sales vol-
ume may not guarantee high profit, but efficient service production and cus-
tomer satisfaction will boost financial outcomes.
However, the generalizability of this research is limited because the
sample is somewhat small. This paper uses 63 DMUs to evaluate SMP, but
there are some areas where the data can be improved. To alleviate this prob-
lem, longitudinal analysis is necessary in conjunction with more extensive
data.
REFERENCES
Boles, J. S., Donthu, N., & Lohtia, R. (1995). Salesperson evaluation using relative
performance efficiency: The application of data envelopment analysis. Journal
of Personal Selling & Sales Management, 15(3), 31–49.
Burleson, A. L. (1997). The service profit chain: An investigation of the linkages
between employees, customers, and organization profitability. Unpublished
manuscript, Department of Psychology, DePaul University, Chicago, IL.
Cooil, B., Keininham, T. L., Aksoy, L., & Hsu, M. (2007). A longitudinal analysis of
customer satisfaction and share of wallet: Investigating the moderating effect
of customer characteristics. Journal of Marketing, 71(1), 67–83.
Dennett, C., Ineson, E. M., Stone, G. J., & Colgate, M. (2000). Pre-bookable services
in the chartered airline industry: Increasing satisfaction through differentiation.
Service Industries Journal, 20(2), 82–94.
Donthu, N., & Yoo, B. (1998). Retail productivity assessment using data envelopment
analysis. Journal of Retailing, 74(1), 89–105.
Fruchter, G. E. (1997). The many-player advertising game. Management Science, 45,
1609–1611.
Gustafsson, A., Edvardsson, F., & Edvardsson, B. (1999). Customer focused
service development in practice: A case study at Scandinavian Airlines
System (SAS). International Journal of Service Industry Management, 10,
344–359.
Heskett, J. L., Jones, T. O., Loveman, G. W., Sasser, W. E., Jr., & Schlesinger, L. A.
(1994). Putting the service-profit chain to work. Harvard Business Review,
72(2), 164–174.
Kamakura, W. A., Lenartowicz, T., & Ratchfrord, B. T. (1996). Productivity assess-
ment of multiple retail outlets. Journal of Retailing, 72, 333–356.
Kamakura, W. A., Mittal, V., de Rosa, F., & Mazzon, J. A. (2002). Assessing the
service-profit chain. Marketing Science, 21, 294–317.
Liu, X. (2005). Study on service profit chain: Review and prospect. Services Systems
and Services Management, 1(1), 429–434.
Loveman, G. W., & Heskett, J. L. (1999). Service-profit chain research. In T. K.

McGraw and J. L. Cruikshank (Eds.), The intellectual venture capitalist: John
H. McArthur and the Work of the Harvard Business School 1980–1995
(pp. 197–220). Boston, MA: Harvard Business Press.
Luo, X. (2004). Date envelopment analysis: A management science tool
for scientific marketing research. Journal of Marketing Research, 42,
113–116.
Luo, X., & Bhattacharya, C. B. (2006). Corporate social responsibility, customer
satisfaction, and market value. Journal of Marketing, 70(4), 1–18.
Luo, X., & Donthu, N. (2001). Benchmarking advertising efficiency. Journal of
Advertising Research, 41(6), 7–18.
Luo, X., & Donthu, N. (2005). Assessing advertising media spending inefficiencies in
generating sales. Journal of Business Research, 58(1), 28–36.
Luo, X., & Donthu, N. (2006). Marketing’s credibility: A longitudinal investigation of
marketing communication productivity and shareholder value. Journal of
Marketing, 70(4), 70–91.
Luo, X., & Homburg, C. (2007). Neglected outcomes of customer satisfaction.
Journal of Marketing, 71(2), 133–149.
Mahajan, J. (1991). A data envelopment analytic model for assessing the relative
efficiency of the selling function. European Journal of Operational Research,
53, 189–205.
Mittal, V., Anderson, E. W., Tadikamalla, P., & Sayrak, A. (2005). Dual emphasis and
the long-term financial impact of customer satisfaction. Marketing Science, 24,
544–555.
Pilling, B. K., Donthu, N., & Henson, S. (1999). Accounting for the impact of territory
characteristics on sales performance: Relative efficiency as a measure of sales-
person performance. Journal of Personal Selling and Sales Management,
19(2), 35–45.
Rucci, A. J., Kirn, S. P., & Quinn, R. T. (1998). The employ-customer-profit chain at
Sears. Harvard Business Review, 76(1), 82–97.
Rust, R. T., Zahorik, A. J., & Keiningham, T. L. (1995). Return on quality (ROQ):
Making service quality financially accountable. Journal of Marketing, 59(2),
58–70.
Schefczyk, M. (1993). Operational performance of airlines: An extension of
traditional measurement paradigm. Strategic Management Journal, 14,
301–317.
Silvestro, R., & Cross, S. (2000). Applying the service profit chain in a retail environ-
ment: Challenging the ‘‘satisfaction mirror.’’ International Journal of Service
Industry Management, 11(3), 244–268.
Thomas, R. R., Barr, R. S., Cron, W. L., & Slocum, J. W., Jr. (1998). A process for eval-
uating retail store efficiency: A restricted DEA approach. International Journal
of Research in Marketing, 15(5), 487–503.
View publication stats

Service Marketing Theory

Uploaded by

Copyright:

Available Formats

Service Marketing Theory

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Service Marketing Theory

Uploaded by

Copyright:

Available Formats

See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Service Marketing Productivity and Firm Proﬁt: Evidence From

Article in Services Marketing Quarterly · July 2011

Jin-Woo Kim Edmund Prater

SEE PROFILE SEE PROFILE

The user has requested enhancement of the downloaded file.

Services Marketing Quarterly

Service Marketing Productivity and Firm

Available online: 24 Jun 2011

To link to this article: http://dx.doi.org/10.1080/15332969.2011.581902

PLEASE SCROLL DOWN FOR ARTICLE

Full terms and conditions of use: http://www.tandfonline.com/page/terms-and-conditions

Service Marketing Productivity and Firm

KEYWORDS airline service, customer satisfaction, data envelop-

The service-profit chain (SPC) is a framework for explaining the relationship

Address correspondence to Jin-Woo Kim, Department of Marketing, College of Business,

Kamakura et al. (2002) provided theoretical and managerial insights by

As mentioned earlier, previous studies have tended to concentrate on the ser-

FIGURE 1 Research hypotheses.

SMP and Customer Satisfaction

perception and behavior based on utility. Perception, intention, and real

H1: Improved SMP will create more customer satisfaction.

Customer Satisfaction and a Firm’s Profit

However, a firm’s profit is a function of cost and other cost-related fac-

The Mediating Role of Customer Satisfaction

effects on a firm’s profit. Consumer perception and evaluation are needed in

H3: Customer satisfaction will mediate the relationship between service

The Moderating Role of Advertising Expenditures

Therefore, advertising amounts are expected to be associated with the

This hypothesis is based on the effect of advertising over time. Even

. Profit ¼bP þ bPs SMP þbPa ADVERT þbPc CS þbPac ADVERT * CS

literature concerned with international airline strategy. For example, the

DEA Output Variables

FIGURE 2 Airline service flow.

TABLE 1 Service Performance Item by Customer Satisfaction Agent

TABLE 2 Customer Service Commitment by Airline Companies

mishandled bags, on-time performance, and the number of passengers

Data Sources and Measures

TABLE 3 Measure and Operationalization

Variable Measure Operationalization

DEA efficiency SMP SMP, service input vs. service efficiency

Because there are no annual customer satisfaction data available, the

RESULTS AND DISCUSSION

moderation effect of advertising expense between customer satisfaction and

TABLE 4 Input-Oriented Annual SMP from 2001 to 2005

2001 2002 2003 2004 2005

Airtran Airway 1.00000 1.00000 0.54997

TABLE 5 Descriptive Statistics for Variables

M SD SMP CS ADVERT Profit Revenue

SMP 0.3459 0.3139 1.0000

such as Northwest, United, US Airways, Continental, American, and Delta.

TABLE 6 Input-Oriented SMP from Combined Data

2001 Alaska 0.51687 2003 US Airway 0.18991

TABLE 7 Input-Oriented SMP From Combined Year

Carrier type Network carrier Low cost carrier Regional carrier

Carrier Northwest Southwest Atlantic Southeast

Hypotheses Testing Results

. The predictor variable, SMP, should significantly influence the mediator

TABLE 8 Mediating Effect Testing (Response ¼ Profit)