The Unintended Consequence of Price-Based Service Recovery Incentives

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Recovery incentives are negatively associated with contract renewal likelihoods. Consistent with the economic theory of reference prices, the deeper the recovery incentive, the less likely newspaper subscribers were willing to renew their contracts at full price

But, this negative effect of recovery discounts on contract renewals was reduced when: 1) subscribers were reminded of the full service price several times before the renewal, 2) subscribers were offered a discount at the time of the renewal, 3) subscribers had more time left in their service contracts after the recovery incentive was administered, 4) subscribers were originally acquired through personalized campaigns that emphasized the value of the service as opposed to the price of the service, or 5) subscribers were offered the recovery discount when the promotional intensity in the external environment was low (e.g., non-holiday periods).

The Unintended Consequence of Price-Based Service Recovery Incentives from American Marketing Association | Journals

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Full Citation:
Kanuri, Vamsi K., and Michelle Andrews (2019), “The Unintended Consequence of Price-Based Service Recovery Incentives,” Journal of Marketing, 83 (5), 57-77.

Article Abstract:
Subscription-based service providers (e.g., newspapers, internet services, utility companies) often issue price-based incentives to recover from service failures. However, whether recovery incentives improve customer retention in the long-term remains unknown. We investigate this question by examining 6,919 contract renewal decisions of newspaper subscribers who received varying levels of recovery incentives after newspaper delivery failures. In contrast to conventional wisdom, we find that recovery incentives are associated with lower renewal likelihoods at the end of the contract period. We rationalize this finding using the economic theory of reference prices and further demonstrate that firms could mitigate the unintended consequence of recovery incentives by reminding subscribers of the original price at touch points following the recovery, discounting the renewal price, and prolonging the duration between the recovery and renewal. We also show that the intensity of promotions in the external environment at the time of administering recovery incentives, and that acquiring subscribers by communicating the value of the subscription service, can influence the long-term effectiveness of recovery incentives. For subscription-based service providers, we propose a decision support model to optimize recovery and renewal incentives, and demonstrate its utility within our empirical context.

Special thanks to Kelley Gullo and Holly Howe, Ph.D. candidates at Duke University, for their support in working with authors on submissions to this program.

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