Introduction To Service Failure Management Essay

This chapter will cover the following 1.) Service Recovery, (2) Equity Theory, (3) Behavioural Outcomes

2.1 Introduction to Service Failure

Recall the synopsis in the introductory chapter pertaining to a company that failed to deliver the product on time and then delivered the wrong product? All the mistakes that the company made are commonly referred to as a service failure. The company’s failure to correct these mistakes when the customer sought redress is referred to as failed service recovery.

A service failure can be defined as service performance or encounter that falls below a customer’s expectations, thus, leading to dissatisfaction (Zeithaml et al., 2009; Andreassen, 2001). Considering the complex nature of services, problems are likely to arise (caused by human or non-human factors) (Kau and Loh, 2006) that warrant the need for service recovery. This involves the necessary steps that the firm must take to correct the service failure (McCollough et al., 2000), whether it’s by proving a refund, an exchange, repair, apology, etc (Blodgett et al., 1997).

Service recovery strategies are important for firms but in order for them to be effective, firms have to take necessary measures to ensure that they meet customers’ expectations during each service encounter. The literature looks at compensation as a service recovery strategy and then delves into service encounters, which are useful in helping firms to determine at which point of the service encounter they failed. We then explore the issue of equity theory, which is an antecedent to customer satisfaction, and then we look at how compensation impacts repurchase intentions, loyalty and word of mouth.

2.1.1 Complainants vs. Non-Complainants

Customers who experience a service failure may cope with the dissatisfaction by engaging in the following behavioural outcomes: do nothing (inertia), complain to a third or spread negative word of mouth or a combination of these. Customers that do voice the dissatisfaction to the service provider will then base their post recovery satisfaction based on the perceived fairness, which should lead to positive (repurchase intent and recommendation) or negative behavioural outcomes (Kim et al., 2010).

Research has shown that a majority of dissatisfied customers are those that do not voice their complaints to the company; only one 1 out 20 complains (Downton, 2002). Customers do not always voice their complaints when they experience a service failure for several reasons: time, unwillingness to complain, or their perception that the firm will not correct the problem; therefore, service providers and retailers have to encourage customers to seek redress because if they don’t, customers are likely to move to the competitor, contact a third party (e.g., newspaper, take legal action, Better Business Bureau) or spread negative word of mouth (Blodgett et al., 1997, Cherbat et al., 2005).

2.2.2 Service Recovery

Firms sometimes do not have control over circumstances that cause service failures, however, they do have control over how they choose to recover; their response is what Maxham (2001) refers to as service recovery. Service recovery efforts are imperative for any organisation and firms have to invest their efforts, time and sometimes money in the appropriate recovery strategies because they detect the outcome of customer satisfaction or defection (McCollough et al., 2000).

The purpose of the service recovery effort is to restore customer satisfaction and retain customers. Previous research has shown that service failure can have a negative impact on loyalty (McCollough et al., 2000; Roos, 1999; Zeithaml, 1996, Andreassen, 2001), market share and word of mouth (Hays and Hill, 1999; Keaveney, 1995). On the other hand, a successful recovery can lead to customer satisfaction (Widmier and Jackson, 2002), which in turn leads to increased loyalty (Miller et al, 2000) and profit (Strauss and Friege, 1999; Hallowell, 1996). Therefore, it is in the company’s best interest to effectively recover from service failure not only because of the benefits mentioned above but also due to the costs associated with acquiring new customers; it is much cheaper for a firm to retain its current customers than it is to acquire new ones (Stauss and Friege, 1999).

Service recovery efforts vary from industry to industry and companies have to implement service recovery policies that are most appropriate for them. The steps involved in recovery are complex because they do not just involve fixing the customer’s problem through exchanges, refunds, etc., they also involve the company’s complaint handling procedure and the employees’ interaction with the customers; all these factors will influence how the customers perceive the recovery effort (Wirtz and Matilla, 2002; Andreassen 2000). Customers evaluations of the service failure and recovery depend on the type and amount of resources lost and gained, and the type and magnitude of the failure; if the failure leads to economic or social loss, customers expect to receive an economic or social resource in the recovery effort (Smith et al. (1999). The following will look at compensation as a recovery strategy.

2.2.3 Compensation

Compensation is a common recovery strategy following a service failure and it has been viewed as a strategy for restoring equity; it includes discounts, coupons, free merchandise, refunds, store credits, etc. (Smith et al., 1999; Kelly et al., 1993)).

Several studies have been conducted to investigate the effectiveness of compensation as a service recovery strategy. Some have looked at its effect on repurchase intentions (Grewal et al., 2008; Hoffman et al., 2003) and satisfaction (Hoffman et al., 2003; Wirtx and Matilla, 2004). Others have looked at the significance of levels of compensation (McColl-Kennedy et al., 2003; Conlon and Murray) on satisfaction, while others have studied its effectiveness in the context of a service failure with high or low magnitude (Smith et al., 1999; Matilla, 2001; Smith and Bolton, 2002).

However, the effectiveness of compensation can be enhanced and attributed to other factors such as providing an explanation (Bitner, 1990; Conlon and Murray, 1996), speed of recovery, apology (Wirtz and Matilla, 2004), customers’ perceptions of fairness, employees’ interaction with the customers (Maxham, 2001; Andreasen, 2000) and many more. Together, these factors can influence customers’ perceptions of the service recovery and their intentions to do business with the firm in the future.

Is compensation always necessary as a recovery strategy? The equity theory (which the author will expand in further detail later) proposes that over-rewarded customers may be less satisfied than those who receive equitable rewards because they feel guilty about the inequity of the exchange (Grewal et al., 2008). In this instance, compensation is not necessary and may be superfluous. On the other hand, research by Kelley et al., (2003) found that additional compensation beyond the initial provision was rated highly by customers, with 90% of them stating that they would continue to do business with the firm. The authors note however, that the effectiveness of this strategy may be dependent upon the magnitude of the failure. Research by Kwon and Jang (2012) also support the notion that when additional compensation is provided, perceived equity increases.

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A study conducted by Grewal et al., (2008) investigated when the use of compensation would enhance repurchase intentions after a service failure by testing it in various “stability (is the cause likely to reoccur?) and locus of responsibility (who is responsible?) conditions (p.424). Results show that compensation is necessary and affects repurchase intentions only when the firm is responsible for the failure or if it is something that occurs frequently. Therefore, companies have to be aware of when to compensate customers for the failure, what type of failure warrants compensation or when an apology is sufficient.

2.2.3 Service Encounters

Service encounters are the starting point for understanding how consumers will respond to service failure and recovery. Every time a customer interacts with a company by phone, email, in person, etc, a service encounter occurs and it’s each of these encounters that constitutes a service and establishes relationships; therefore, customer satisfaction is dependent upon the management and monitoring of these encounters (Bitner, 1990). For each of these encounters, customers have expectations about the service and the extent to which these expectations are met will determine their level of satisfaction. These expectations can be influenced by factors such as customers’ prior experience with the service, advertising, word of mouth, and personal needs (Michel, 2001).

In order to understand how consumers will respond to compensation and their intentions to repatronise the firm, it is vital to first understand consumers’ expectations leading up to the service failure and their preconceived notions about what constitutes an effective recovery strategy. Ultimately, consumers should be satisfied with the outcome of a service recovery if the firm does it right, as research has shown that the main cause of dissatisfaction is not the failure in itself but failure to respond effectively (Bitner et al., 1990). The marketing literature recognizes that process and interpersonal communication are also an important part of the recovery process (Blodgette et al., 1993). Furthermore, research has shown that customers evaluate the effectiveness of a service recovery based on the three dimensions of perceived justice, which is derived from the equity theory.

2.2.4 Equity Theory

Equity or fairness theory has its roots in the social exchange theory (Adam, 1965) and it helps to explain the concept of perceived justice and how customers evaluate recovery strategies. It is the dominant theoretical framework that researchers use in service recovery (Tax and Brown, 2000). When a service failure occurs, the theory states that customers will compare the inputs (e.g. time, money) invested with the gains received (e.g. refund, apology, repair, etc) (Olsen and Johnson, 2003; Hoffman and Kelley, 2003), therefore, ‘equity theory provides a meaningful framework for shaping consumer perceptions of satisfaction, purchase intent, and WOM” (Maxham, 1999, p.12).

The social exchange theory recognises three dimensions of justice used by customers to evaluate service recovery strategies: distributive, procedural, and interactional justice.

2.2.5 Distributive Justice

Distributive justice refers to the customer’s perceived fairness of the solution offered by the company to resolve customers’ complaints (Blodgette et al., 1993). This element of justice is all about tangible outcomes, evaluating whether the economic or social outcomes are fair. Research has shown that complaints that were resolved by providing compensation were rated more highly by customers (Kelly et al., 1993). In another study by Wirtz and Matilla (2004), they found that the provision of compensation with a poor recovery such as a delayed response or no apology did not increase satisfaction, on the other hand, in a mixed bad recovery (i.e. immediate recovery, no apology, or delayed recovery with apology), compensation had a positive impact on satisfaction.

The evaluation of fairness depends on the type of the failure, specifically, the outcome and process. The outcome involves what is received (utilitarian exchange) and the process (symbolic exchange) involves how the service is received (Smith et al., 1999). Customers also evaluate fairness based on the magnitude of the failure; a failure of higher magnitude results in lower customer satisfaction (Smith et al., 1999). Some failures can be easily resolved with an apology but for the most severe ones, customers are more satisfied when tangible compensation is provided along with an apology (Lewis and McCann, 2004; Seawright et al., 2008). Depending on the severity of the failure, customers may also expect varying levels of compensation.

In a study by Smith et al., (1999), distributive justice accounted for a large percentage of the overall effect of perceived justice on satisfaction and this was affected positively by compensation.

2.2.6. Procedural Justice

Customers also evaluate service recovery based on procedural justice, which involves the ways by which problems are solved. It involves the company’s rules, policies, and procedures for handling and solving complaints (Aurier and Martin, 2007). These should be unbiased, consistent and ethical. Customers also consider the timeliness, responsiveness, flexibility, and convenience for the customer of the complaint handling process (Blodgett et al., 1997).

Perceptions of perceived fairness when it comes to process are also influenced by voice and neutrality; voice is allowing the customer the opportunity to express their feelings about the problem and neutrality is when the company follows a set procedure to fix the problem (Sparks and McColl-Kennedy, 2001). When customers are given the chance to provide input and express their feelings, customer satisfaction is greater especially when they are also compensated (Goodwin and Ross, 1990).

Frequently, when customers experience a service failure, they are aggravated about the situation and making them wait for a response is disconcerting to them as it can be costly. Therefore, companies have to set policies that empower their frontline employees to make decisions on the spot in order to resolve complaints as quickly as possible (Hocutt et al., 2006).

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A study by Karande et al., (2007) on the hotel and airline industries shows that procedural justice has a significant effect on overall post-failure satisfaction; customers that experienced higher procedural justice rated their post failure satisfaction highly.

2.2.6. Interactional Justice

Interactional justice is the third of the three dimensions of justice; it deals with the way information is exchanged and how the customers are treated during the recovery (Smith et al., 1999; Blodgette et al., 1997). Customers expect to be treated with empathy, courtesy and concern so that they feel like their problem matters and the company actually wants to fix it. They also expect the company to be honest, to provide an explanation, to be sensitive and to act like they care (Sparks and McColl-Kennedy, 2001).Therefore, the company’s treatment of the customers will also have an impact on satisfaction and their evaluations of the service recovery.

In a study by Blodgette et al., (1997), they found that customers that were treated with courtesy and respect were willing to repatronise the firm even though partial compensation (e.g. refund, discount) was given. On the hand, customers that are treated rudely are more likely to switch and spread negative word of mouth regardless of the compensation provided. This means that lower levels of distributive justice can be compensated by higher levels of interactional justice. In a similar study, by Hocutt et al., (1997), customers rated highly their satisfaction level when employees showed high levels of concern and responsiveness. In most cases, customers switch service providers when they encounter uncaring, impolite, unresponsive or unknowledgeable emoployees (Keaveney, 1995).

Interactional justice is all about the human interaction and some other important elements of this justice also include acceptance of blame for the failure (Goodwin and Ross, 1989) and the simple act of offering an apology (Goodwin and Ross, 1992) even for factors beyond the firm’s control.

Though the three dimensions of justice may work independent of each other, in most cases, it is a combination of all three that eventually determines customers’ overall perception of the service recovery and how they react thereafter (Blodgette et al, 2007).

2.2.7 Satisfaction

Satisfaction is the ultimate goal of any recovery effort because satisfied customers will recommend the firm to other people and they are also likely to become loyal customers. Hallowell (1996) defines customer satisfaction as ‘the result of a customer’s perception of the value received in a transaction or relationship-where value equals perceived service quality relative to price customer acquisition and relative to the value expected from transactions with competing vendor’ (p.28).

There are several theories that aim to understand customer satisfaction. Some researchers have tried to predict customer post recovery satisfaction by looking at satisfaction from two different perspectives: transaction specific and cumulative evaluations. Transaction specific refers to the customer’s experience with the service encounter or product at any given point; whereas cumulative evaluations refers to the sum of a customer’s experiences with the firm to date, and it is better predictor of repurchase intentions (Oliver, 1997; Olsen and Johnson, 2003).

Past research has shown that customers’ perceptions of equity affect loyalty through satisfaction; however, Olsen and Johnson (2003) show that customers perceive equity and satisfaction through cumulative evaluations, meaning their overall experience with the service firm will determine their satisfaction, not just one isolated incident. On the other hand, many other researchers have used the disconfirmation paradigm model to understand customer satisfaction/dissatisfaction and how they will react to the recovery. This model states that customers compare service/product performance to expectations and performance that exceeds expectations is positive disconfirmed, whereas, the one that falls below expectations is negatively disconfirmed (Bitner, 1990; McCollough et al., 2000).

Furthermore, other researchers have argued that some failures are specific to certain industries and processes within the industry (Michel, 2001), therefore, post recovery satisfaction should depend on the type and magnitude of the failure (Smith et al., 1999). In certain situations, there are failures that are deemed acceptable by the customer, especially those that are beyond the firm’s control such a delayed flight due the storm, however, in cases where this acceptability is low, satisfaction will also be low (Hoffman et al., 1995).

Studies have shown that when customers perceive that the firm has control over the failure, they are more dissatisfied than when they perceive the failure to be beyond the firm’s control or if it’s a rare occurrence (Bitner, 1990).

2.2.8 Service Recovery Paradox

Studies have shown that customer satisfaction is usually lower after service failure and recovery, despite high recovery performance when compared to error free service (McCollough et al., 2000). Researchers have been puzzled by other studies that have shown that customer satisfaction and repurchase rates of recovered customers exceeded those of customers that had not experienced a service failure (Goodwin and Ross, 1992; Bitner et al., 1990; Kelly et al., 1993). This puzzle is termed the ‘service recovery paradox’ and the idea was initially developed by Etzel and Silverman (1981).

Researchers such as Bitner (1990), Tax et al., (1998), Andreassesn (2001), Michel (2001), and support this theory. Studies conducted by these researchers claimed that in most cases, satisfaction levels after the recovery exceeded satisfaction levels before the service failure and also increased repurchase and word of mouth. Furthermore, other research suggests that a good recovery can turn frustrated customers into loyal customers and create more goodwill than if the failure had not occurred (Hart et al., 1990).

Findings by Michel and Meuter (2008) show that error free initial transactions that are ‘very satisfying’ are much better at driving customer satisfaction than service recovery that is better than expected. However, they also found evidence of the service recovery paradox in initial service that was just ‘satisfying’ where customers rated highly on satisfaction after a recovery that was better than expected.

Other researchers such as Smith and Bolton (1999), McCollough (2000), Hocutt et al., (2006), Magnini et al., (2007) and many others have refuted the theory of the service recovery paradox. These studies show that satisfaction and repurchase intentions were much higher for customers that did not experience a service failure than for those that did. These studies prove that the service recovery paradox exists in some situations but does not in others. There’s no agreement on what factors or failure types it exists in.

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Behavioural Outcomes

2.2.9 Repatronage intentions

Every firm’s desire is to have repeat customers due to the cost associated with acquiring new ones; therefore, companies should strive for excellence and to keep their customers satisfied. Customer satisfaction has a direct impact on repurchase intentions (Maxham, 2001) and Cronin and Taylor (1994) suggest that satisfaction has more impact on future intentions to buy than service quality. In situations where a stable failure occurs and the company is not responsible for it, compensation leads to higher repurchase intentions (Grewal et al., 2008).

A study by Kim (2009) shows that distributive justice has the greatest impact on recovery satisfaction, which in turn leads to high revisit intentions. This is supported by a previous study done by Smith and Bolton (1998) in which customers were asked to evaluate a scenario (failure and recovery strategy) in either the hotel or restaurant sector. Results show that compensation has a considerable impact on customer’s satisfaction and their intentions to repatronise the firm.

Other studies by and Goodwin and Ross (1992), and Kelley et al., (1993) suggest that repurchase intentions will be constant or possibly increase as a result of an effective service recovery. Therefore, companies can restore low purchase intentions through effective service recoveries that resolve perceived inequities (Maxham III, 1999). In cases where customers are satisfied with the recovery effort, they are more likely to patronise the firm and recommend it to others (Maxham and Netemeyer, 2002).

2.2.10 Loyalty

Loyalty can be defined as “a deeply held commitment to re-buy or re-patronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behavior” (Oliver, 1997, p.392). Hallowell (1996) argues that loyalty behaviors include a continued and increased scope of the relationship between the firm and the customer and it also encompasses customers’ recommendation of the firm due to the belief that it’s better than the competitor

In the absence of service failure, there are other factors that influence customer loyalty such as familiarity, switching costs associated with changing services, lack of alternative, time or money constraints (Bitner, 1990). Oliver (1999) identifies four levels of loyalty: cognitive, affective, conative and action. Most firms should strive to achieve action loyalty as this is the process when loyal customers actually show their loyalty by purchasing a certain brand or using a firm’s service.


Current research shows that loyalty is a function of customers’ perception of trust; therefore, customer loyalty can be enhanced by understanding the mediating roles of trust and emotion when delivering an effective service recovery (Dewitt et al., 2008). Furthermore, in a study conducted by Dewitt et al., (2008), results show that when customers are satisfied with the recovery, they perceive a high level of justice, in conjunction with positive emotions. This leads to customers exhibiting a positive attitude toward the firm (attitudinal loyalty) and increased likelihood of repatronage.

Previous studies have also shown that when customers are dissatisfied with the service recovery, their loyalty tends to decrease (Tax et al., 1998), whereas, if they experience high levels of distributive and interactional justice, they are more likely to become loyal customers and spread positive word of mouth (Blodgette et al., 1997). Therefore, one can conclude that satisfaction is precursor to customer loyalty.

2.2.11 Word of Mouth (WOM)

Word of mouth is vital for both the firm and the customers. Positive word of mouth can help customers with their purchasing decisions and this in turn can help the firm gain new customers (Maxham, 1999). On the other hand, when a service failure occurs, negative word of mouth can hurt the firm and lead to customer defections and loss of new customers (McCollough et al., 2000).

When customers experience a service failure and become dissatisfied, research has shown that they tell nine or ten people about it, whereas if they are satisfied, they tell four or five people about their experience (Collier (1995), On the other hand, if they are angry, at least one in five customers will tell 20 people (Hocutt et al., 2006). This shows that a bad service recovery has the potential to hurt the firm’s image which in turn hurts potential customers. On the hand, a recovery strategy that is properly executed can restore levels of satisfaction and also promote referrals for future purchases Goodwin and Ross (1992). This is because when the firm rectifies an inequitable failure, it can restore customers’ propensity to recommend the firm to others (Goodwin and Ross, 1992), whereas, if the firm is unsuccessful in restoring customer satisfaction, customers will have the tendency to spread negative word of mouth (Blodgett et al., 1997).

Research has shown that satisfaction with the service recovery efforts after a service failure can enhance customer relationships and have a positive effect on WOM (Blodgette at al., 1997; Maxham, 2001; Kim; 2009). This is further supported by Maxham (1999) whose findings show that moderate and high service recovery can significantly increase positive WOM and repurchase intentions.

There have been some conflicting findings on the customers’ word of mouth following a service failure. For example, Michel and Meuter (2008) found that were no significant difference in word of mouth intentions before and after the service recovery. The authors argue that this can be a result of either a strong initial or a strong recovery generating the same level of positive word of mouth. On the other hand, they also found that WOM intentions were higher when customers experienced a service recovery that was better than expected compared to their initial satisfying encounter before the failure.

Other researchers have found that there’s no significant difference in negative WOM between customers that experience a good recovery and those who did not (Hocutt et al., 2006). This finding can be attributed to the fact that only a small number of people will spread positive WOM when they experience a satisfying recovery, most of them keep quiet about it.

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