When Does the Value of Compensation Matter in Service Recovery?

Abstract

Service recovery (SR) plays an important role in (re-)establishing customer satisfaction after service failures, represents an opportunity for service providers to develop strong relationships with customers, and refers to corrective actions of service providers such as offering (in)tangible compensation in order to generate positive customer responses (Zemke and Bell 1990). Tangible compensation consists of offering economic benefits to customers (Del Rio-Lanza et al. 2009). Intangible compensation consists of simple and inexpensive social actions that aim to recover service failures (Miller et al. 2000). The purpose of the study presented here is to examine the appropriateness of the four most common types of tangible compensation (gift, discount, credit for future consumption, refund) in combination with four types of intangible compensation (apology, showing empathy, explanation, manager intervention) in an economically developing country (Madagascar) compared to a developed one (Switzerland). Studying consumer reactions to different SR attempts in these countries is interesting because, in both countries, the service sector generates over 50 % of the gross domestic product. The target variable analyzed is customer satisfaction with the service recovery (SSR). We further differentiate for failure severity and responsibility for the failure, and also include several control variables (cultural differences, service involvement, and attitude toward complaining) because these variables can affect customer satisfaction and loyalty (De Matos et al. 2009; Webster and Sundaram 1998). The findings presented here enable managers to develop country-specific SR strategies that are appropriate to address service failures in an efficient and cost-effective manner.