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Why companies should not give their customers discounts after service failures

July 25, 2019

Researchers from the University of Notre Dame and Emory University published a new paper in the Journal of Marketing that examines whether price-based recovery incentives after service failures retain customers in the long run.

The study, forthcoming in the September issue of the Journal of Marketing and titled "The Unintended Consequence of Price-based Service Recovery Incentives," is authored by Vamsi K. Kanuri and Michelle Andrews.

Subscription-based service providers often provide customers with 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. The authors examined 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.

Results indicate that price-based incentives after service failures 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. Kanuri adds, "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.

"Our findings document how firm recovery attempts can affect subscribers' reference price during the contractual relationship," Andrews explains. While recovery incentives may be necessary to address customer dissatisfaction in the short-term, the 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.
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Full article and author contact information available at: https://doi.org/10.1177/0022242919859325

About the Journal of Marketing

The Journal of Marketing develops and disseminates knowledge about real-world marketing questions useful to scholars, educators, managers, policy makers, consumers, and other societal stakeholders around the world. Published by the American Marketing Association since its founding in 1936, JM has played a significant role in shaping the content and boundaries of the marketing discipline. Christine Moorman (T. Austin Finch, Sr. Professor of Business Administration at the Fuqua School of Business, Duke University) serves as the current Editor in Chief. https://www.ama.org/jm

About the American Marketing Association (AMA)

As the largest chapter-based marketing association in the world, the AMA is trusted by marketing and sales professionals to help them discover what's coming next in the industry. The AMA has a community of local chapters in more than 70 cities and 350 college campuses throughout North America. The AMA is home to award-winning content, PCM® professional certification, premiere academic journals, and industry-leading training events and conferences. https://www.ama.org

American Marketing Association

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