Service failure and recovery encounters as critical moments of truth. Klaus Schoefer

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1 Service failure and recovery encounters as critical moments of truth Klaus Schoefer

2 Road Map Why is service recovery management important? How do customers respond to service failures? Why do(n t) all dissatisfied customers complain? How do customers evaluate a service recovery experience? How should a service provider design its service recovery? How can firms learn from service recovery encounters? What does an effective service recovery management system look like?

3 Clarification of terminology A service failure is a dissatisfactory service experience Service recovery is the process of putting things right (i.e. restoration of customer satisfaction) A necessary condition for service recovery is identifying when failures occur. Complaints make the service provider aware of a service failure. Service recovery management relates to the organizational efforts to manage and learn from customer complaints

4 Why is service recovery management important?

5 Importance of Service Recovery Management Service delivery is inherently failure prone Service failure is a pushing determinate that drives customers switching behaviour Customer retention is critical to profitability A service provider can boost profits by almost 100% by increasing customer retention by just 5% (Reichheld and Sasser, 1990) Successful recovery can mean the difference between customer retention and defection

6 Importance of Service Recovery Management Effective service recovery management may separate the more successful service providers from the rest

7 How do customers respond to service failures?

8 Customer Responses to Service Failures Switch Service Provider Service Failure Negative Wordof-Mouth Third-Party Complaint Complaint

9 Important observations Only 5 10% of dissatisfied customers choose to complain following a service failure (Tax and Brown, 1998) About half of the customers who do complain are reported to be dissatisfied (Grainer, 2003)

10 Why do(n t) all dissatisfied customers complain?

11 Understanding Customer Responses to Service Failure Why do customers complain? - Obtain restitution or compensation - Vent their anger - Help to improve the service - Altruistic reasons Why don t all dissatisfied customers complain? - Don t want to take the time - Feel that complaining is unpleasant - Perception of low power

12 How do customers evaluate a service recovery (complaint handling) experience?

13 What do they take into account? Apology Empathy Acknowledgement Explanation Compensation Correction Replacement Fast response Information

14 Customer Evaluations of Service Recovery (Complaint Handling) Experiences Justice (fairness) theory suggests that recovery evaluations are based on a customer s perception of (a) (b) (c) the manner in which s/he was treated during the recovery process (i.e. interactional justice) the means by which decisions are made and conflicts are resolved (i.e. procedural justice) the perceived outcome of the complaint (i.e. distributive justice)

15 Justice (Fairness) Themes in Service Recovery Fair Unfair Distributive Fairness Procedural Fairness The waitress agreed that there was a problem. She took the sandwiches back to the kitchen and had them replaced. We were also given a free drink. The representative was pleasant and quick to resolve the problem. The sales manager called me back one week after my complaint to check if the problem was taken care of to my satisfaction. Their refusal to refund our money for the cold food was inexcusable. The situation was never remedied. Once they had my money, they disappeared when I had problems. They should have assisted me with the problem instead of giving me a phone number to call. No one returned my calls, and I never had a chance to speak to a real person. I had to tell my problem to too many people. I had to become irate in order to talk with the manager, who was apparently the only one who could provide a solution. Interactional Fairness The manager had a good attitude. She wanted to make sure I left satisfied. The loan officer was very courteous, knowledgeable and considerate he kept me informed about the progress of the complaint. The person who handled my complaint about... wasn t going to do anything about it and didn t seem to care. They lied to me about the free Pepsi and they wouldn t give me an explanation why they pizza was so late to begin with.

16 How should a service provider design its service recovery?

17 Justice Theory-informed Service Recovery Design Process guidelines Behavioural guidelines Outcome guidelines Homburg and Fuerst (2005) showed that a mechanistic service recovery design (i.e. providing justice theory-informed process, behavioural, and outcome guidelines) is positively linked to customer evaluations of service recovery encounters.

18 Justice Theory-informed Service Recovery Design Process guidelines - Formal organizational procedures for registering and processing complaints - Examples: Time standards to ensure a fast complaint handling process, Specify staff requirements to inform customers about status of the complaint within reasonable time period, Include instructions to record/forward complaint in a quick, complete and structured way Behavioural guidelines Outcome guidelines

19 Justice Theory-informed Service Recovery Design Process guidelines Behavioural guidelines - Explicit organizational policy for employees behaviour towards complainants - Examples: Instructions for employees to be polite, helpful, and understanding while interacting with complainants Show concern and take responsibility for customer problems Outcome guidelines

20 Justice Theory-informed Service Recovery Design Process guidelines Behavioural guidelines Outcome guidelines - Formal organizational policy for providing compensation - Examples: Address the question of whether employees who are responsible for complaint handling have decision authority that is necessary to provide a satisfactory outcome (refund, compensation, discount, etc.) Instructions that form outcome should match complainant s needs

21 What are the outcomes of (very) good/bad/ugly service recovery?

22 Outcomes of Service Recovery Good: Restoration of customer satisfaction/loyalty Very Good: achieve higher customer satisfaction ratings from customers then if the failure had never happened (i.e. service recovery paradox) Customer Satisfaction

23 Outcomes of Service Recovery Good: Restoration of customer satisfaction/loyalty Very Good: achieve higher customer satisfaction ratings from customers then if the failure had never happened (i.e. service recovery paradox) Bad: no restoration of customer satisfaction (i.e. double deviation) Ugly: producing customer rage, grudgeholding and retaliation/ revenge (

24 How can firms learn from service recovery encounters?

25 Learning from Service Recovery Encounters Customer complaints contain valuable information about service delivery performance Many firms do not use the information inherent in complaints to initiate systematic improvements Only 5% of complaints reach corporate headquarters Organizational barriers: see no evil, hear no evil, speak no evil This contributes to perpetuation of service failure and defection in the marketplace

26 Learning from Service Recovery Encounters Solution - Sensitize managers for the negative effect of not learning from complaints - Don t treat complaints as negative information, rather see them as an opportunity to improve service delivery - Encourage non-fraudulent complaints Learning from Service Failure/Recovery Encounter - Document and categorize service failure - Maintain a database - Conduct root-cause analysis - Disseminate data to relevant decision-makers - Improve service delivery system

27 What does an effective service recovery management system look like?

28 Effective Service Recovery Management Do it right the first time + = Effective service recovery Increased customer satisfaction Identify service failures Encourage Complaints Resolve customer complaints effectively Develop Effective Service Recovery System and Training in Complaints Handling Learn from the recovery experience Develop complaints as opportunity culture

29 Thank you very much for your attention!

30 Literature Grainer, M. (2003), Customer care the multibillion dollar sinkhole: A case of customer rage unassuaged, Alexandria: Customer Care Alliance. Homburg, C., Fürst, A. (2007), See No Evil, Hear No Evil, Speak No Evil: A Study of Defensive Organizational Behavior towards Customer Complaints, Journal of the Academy of Marketing Science, 35, 4, Homburg, C. and Fuerst, A. (2005), How Organizational Complaint Handling Drives Customer Loyalty: An Analysis of the Mechanistic and the Organic Approach, Journal of Marketing, 69(July), Reichheld, F. F. and Sasser, Jr., W. E. (1990), Zero defects, quality comes to services, Harvard Business Review, 68(September-October), Tax, S. S. and Brown, S. W. (1998), Recovering and learning from service failure, Sloan Management Review, 40(1),

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