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Before You Offer an Angry Customer a Discount, Read This

Vamsi K. Kanuri and Michelle Andrews

Newspaper late today? Here’s a discount. Subscription-based service providers often offer customers price-based incentives to recover from service failures. For instance, after receiving complaints of a verified service failure, contractual service providers such as newspaper firms and internet companies generally reduce the price of the service for consumers who contact them. This recovery tactic has been shown to satisfy angry customers in the short-term and may even be necessary to alleviate the stress customers experience following a service failure. However, whether recovery incentives actually retain customers in the long-term, such as after contracts end, remains unknown.

A new study in the Journal of Marketing explores whether it is in service providers’ best interests to offer these recovery incentives. Using the economic theory of reference pricing, we hypothesized that recovery incentives provide a new price point for customers to anchor onto, which in turn lead them to compare the price of the service renewal with the reduced service price following the service failure. This price comparison will then guide their decision on whether to renew their service contract.

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We tested this hypothesis by examining 6,919 contract renewal decisions from a large U.S. newspaper firm involving subscribers who experienced service delivery interruptions, were then offered varying levels of discounts, and then made renewal decisions at the end of the contract period.

Our results show that price-based recovery incentives are negatively associated with the likelihood that subscribers renew their service contracts at the end of the contract period. Thus, a solution that can address service failures in the short-term may backfire by hurting contract renewals in the long-term. We find that this effect of recovery incentives on renewal likelihoods may vary. Specifically, reminding subscribers of the original price of the service through the touchpoints the firm has after the recovery can reduce the negative effect of recovery incentives. Discounting the price of the subscription renewal and increasing the amount of time between when the firm issued the service recovery and when subscribers have to make renewal decisions can each also reduce the negative effect of price-based service recoveries on renewal likelihoods.

Contextual factors, such as promotional intensity in the external environment at the time of recovery and how subscribers who experienced the service failure were originally acquired, can also affect the long-term effectiveness of recovery incentives.

Our findings document how firm recovery attempts can impact subscribers’ reference price over the course of the contractual relationship. They also demonstrate the importance of managing subscriber reactions to recovery incentives in the post-recovery period. Recovery incentives may be necessary to address dissatisfaction in the short-term and hence may be unavoidable for subscription-based service providers. For such cases, our study proposes several ways subscription-based service providers can reduce the negative effect of recovery incentives on customers’ desire to renew relationships after contracts end.

Read the full article.

From: Vamsi K. Kanuri and Michelle Andrews, “The Unintended Consequence of Price-based Service Recovery Incentives,” Journal of Marketing, 83 (September).

Go to the Journal of Marketing

Vamsi K. Kanuri is Assistant Professor of Marketing, University of Notre Dame, Mendoza College of Business.

Michelle Andrews is Assistant Professor of Marketing, Emory University, USA.