The Unintended Consequence of Price-Based Service Recovery Incentives

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.