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The Unintended Consequence of Price-Based Service Recovery Incentives

The Unintended Consequence of Price-Based Service Recovery Incentives

Vamsi K. Kanuri and Michelle Andrews

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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

However, 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., nonholiday periods).

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Related Marketing Courses: ​
Principles, Core, and Intro to Marketing Mgmt; Consumer Behavior; Marketing Analytics; Marketing Strategy; Services Marketing;​​​​ ​​​​

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) often issue price-based incentives to recover from service failures. However, because considerable time may pass between when providers issue a recovery incentive and when service contracts are due for renewal, it is unclear whether recovery incentives can improve customer retention in the long run. The authors 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, they find that recovery incentives are associated with lower contract renewal likelihoods. They 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. The authors 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, the authors propose a decision support model to optimize recovery and renewal incentives and demonstrate its utility within this empirical context.

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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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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.