This chapter presents a model of service recovery designed to improve profitability by differentiating the recovery efforts offered to different customer segments. To predict customer responsiveness to recovery efforts, the model advocates the use of both (1) company knowledge and databases to classify customers by past profitability and (2) the severity of the service failure they have experienced. The chapter makes recommendations related to the level of recovery quality and the type of recovery effort that should be extended to customers in each segment of the classification scheme. Using this strategic model of service recovery, executives can avoid wasting costly resources on unprofitable recovery efforts and instead direct those resources to the customers most likely to respond favorably to recovery efforts. By focusing recovery efforts on these customers, the probability of generating a profit through recovery efforts is increased.
TopIntroduction
Disappointed customers are less likely to continue doing business with a firm and are more likely to drive other customers away. Obviously, such actions can be costly for companies. Service recovery may be defined as the actions a company undertakes in order to mitigate the damaging effects of service failure. Indeed, strategic recovery of customers is an integral component of relationship marketing (Bruhn, 2003). Successful service recovery restores, and occasionally elevates, pre-failure levels of customer satisfaction and loyalty. Research by Johnson & Michel (2008) shows that service recovery has a positive impact on employees and process improvements as well as on customer recovery.
Regardless of a company’s experience and effort, some service failures are inevitable. However, research shows that in many cases it is considerably more profitable for a company to work to keep customers who have been disappointed than to try to find new customers. For example, one empirical study found that firm profits doubled after increasing customer retention by only five percent. Additional evidence from these same authors suggests that by cutting customer defections in half, a firm can double its growth rate (Reichheld & Sasser, 1990). Thus, retaining customers can significantly contribute to a company’s profitability.
When customers experience a service failure, customer retention is affected by the service recovery effort companies make. Studies in several industries show that return on investment for service recovery can reach 150 percent (Tax & Brown, 1998). Thus, effective service recovery can have a beneficial effect on profitability.
Service Recovery Impacts Profits
Competitive pricing alone does not create customer loyalty; companies must nurture customer relationships and mend broken ones (Scott, 2001). Inevitable accidental service failures necessarily represent visible opportunities to pursue or ignore such nurturing; therefore, the quality of service recovery efforts that companies offer to customers is critical when the relationship has been damaged or endangered by a service failure. High-quality service delivery, and recovery when needed, strengthens customer satisfaction and loyalty and thereby increases profits (Zeithaml, Berry, & Parasuraman, 1996). When customers perceive high-quality service, customer satisfaction is increased (Mohr & Bitner, 1995). Increased customer satisfaction significantly impacts profits; when the management of a credit card company focused on increasing customer satisfaction, profits increased sixteen-fold over a period of eight years (Reichheld & Sasser, 1990). In addition to directly contributing to profits, a high level of customer satisfaction generally promotes customer loyalty; which also leads to increased profits (Jones & Sasser, 1995). By raising levels of customer satisfaction and loyalty, high-quality service recovery reduces costs and improves revenues (Howell, 1996).