Research

Keeping the customer dissatisfied? How businesses can recover from service failure

Strategies for recovering from service failures can have a dramatic impact on profitability, according to research conducted at the W. P. Carey School of Business. That's because most business profit comes from keeping current customers satisfied, not from developing new accounts. So, it's crucial that managers and executives know how to handle service failures. But in reality, many business leaders are clueless about what to do when their best efforts come up short.

2006-09-27

Business decision-makers know how important it is to curry customer loyalty, says Stephen W. Brown, a W. P. Carey School of Business professor of marketing and executive director of the Center for Services Leadership.

That's because most business profit comes from keeping current customers satisfied, he points out — not from developing new accounts. So, it's crucial that managers and executives know how to handle service failures. But in reality, many business leaders are clueless about what to do when their best efforts come up short.

"There's a lot more of a thrill with going after and getting a new customer than keeping the ones you have," Brown says. But "recovering from service failures needs to become a priority for most firms and their executives and managers."

Closely related: recovery and profitability

Recovery strategies have a dramatic impact on profitability, according to "Recovering and Learning from Service Failure," an article researched and written by Brown and colleague Stephen S. Tax of the University of Victoria, British Columbia. Their research showed that:

• Only 5 to 10 percent of unhappy customers complain after a service failure.
• Most customers are dissatisfied with the way companies resolve their complaints.
• Most companies fail to learn from their mistakes.

But customer rights and company obligations can be made clear from the get-go. "One way to overcome the problem of unclear expectations is to implement service standards, which are often communicated through service guarantees," Brown and Tax wrote. Then, frontline employees can be empowered to come up with solutions; sometimes it happens without a complaint having to be lodged.

Citing "The Ritz-Carlton Basics," Brown and Tax say that when a complaint is made, it is a good idea for an employee who receives a complaint to "own" it and promptly see it through to its resolution. Preferably, the first employee to learn of a problem will solve it.

"Once customers have voiced complaints, they expect action. More specifically, they want justice or fairness," they wrote. "Customers form perceptions of fairness by assessing three aspects of service recovery: outcomes, procedural features and interactional treatment."

Practices that lead to successful recovery

When customers are unhappy with service recovery, it often is because the company failed to understand the customers' cost and inconvenience. Along with refunds, credits, repairs and replacements, customers are looking for humility. "We found that apologies also contribute to customers' compensation for being inconvenienced or treated rudely," Brown and Tax wrote.

Although it is a good sign when well-trained employees handle problems at the front line and few complaints rise to higher organizational levels, employees should share their knowledge with their supervisors and contribute to institutional awareness. "Recovery data can be classified and integrated with other firm data to identify profitable service-improvement investments," the "Recovering and Learning" study states.

"Ford electronically distributes complaint information gathered at its service center directly to the dealerships responsible for settling the dispute. The same information is also sent to the marketing research and engineering departments, which integrate the complaint data with additional research information."

Unfortunately, the study showed, "Most firms fail to document and categorize complaints adequately, making learning more difficult." Instead, complaints are treated as isolated incidents, and "many employees and managers devoted their energies to avoiding responsibility for the problem, instead blaming the customer for the failure."

Brown and Tax observed four practices that dramatically bring about a tight service-recovery ship: "hiring, training and empowerment; establishing service-recovery guidelines and standards; providing easy access and effective responses through call centers; and maintaining customer and product databases."

Customer satisfaction and loyalty — and profitability — follow. "Studies show that some customers are actually more satisfied with a firm that follows a service failure with a remarkable recovery than they would have been had the failure not occurred in the first place," the study states. "Compelling evidence that customer loyalty drives profitability has led to recommendations that firms shift more of their attention toward 'defensive' strategies aimed at satisfying and keeping current customers."

Room for improvement

Since more businesses have been paying more attention to learning from and recovering from service failures, are there signs that service is getting any better as a result? "Not really," Brown says, "for several reasons: Just a few years ago, we were experiencing a real employee downsizing, in many cases reducing people who were responsible for helping customers.

Customers are forced to wait more, or they have no option but to go to the Internet. Even though the economy has come back, you're not hearing lots of corporations say they are adding folks to customer service or customer relations; it's for sales, engineering and other areas." Also, Brown notes, customer satisfaction with service is not getting better, because "customers have higher expectations."

He says service providers and those who study service have their work cut out for them. "There's still a huge need for us," he says. "There are so many interactions with service providers. There is lots of variance depending on who you interact with. Sometimes you're treated wonderfully, and sometimes it's abysmal." Still, the seeds of progress have been sown.

"For consumers, it means that there are more vehicles to express their concerns about failures and that the likelihood of getting a reaction from businesses has improved," Brown says. Do most businesspeople realize it is more important, economical and profitable to hold on to current customers than it is to seek new ones?

"I think they do, most of the executives and businesspeople I talk to, but most companies still put a huge emphasis on new customers," Brown says. He said existing customers hate to be taken for granted. Has the increasing dominance of the electronic marketplace, automated voice-mail systems, etc. depersonalized service to the point where there is less room for improvement? "Yes. The electronic marketplace has depersonalized service for some," Brown says.

"There are younger consumers, however, who would prefer to do everything without talking to someone. And, they can do it anytime." Brown says middle-aged customers would say technology has interfered with personal service. There still is room within the electronic marketplace to improve service, and there is an imperative to do so. "The stakes are much, much higher if you fail the customers of today, because of the electronic marketplace," Brown says.

Whereas angry ex-customers used to tell people through word of mouth about their bad experiences with a certain company, technology now amplifies their discontent. Citing e-mail and hate Web sites, Brown says, "Now those word-of-mouth messages can get on the Internet and tell thousands of people."

Are different types of business — say, commodities vs. franchises — more dependent on service quality? If so, why?"The level of intensity of competition is a key factor in service quality and service recovery," Brown says. "In the commodity businesses, that's the only difference you have: service." Because so many products are becoming commodities, fending off competitive threats is heavily reliant on service, he says, pointing to the struggle between Blockbuster and Netflix for movie-viewers' business.

"That's true", Brown says, even for utilities and their monopoly power. "Even with monopolies, when there is bad service, citizens will complain to regulators, so the next rate increase might be denied," Brown says. "I think all companies have to be concerned about service."

Bottom line:

• Written service guarantees can help make lines of responsibility clear and can prevent problems.
• Legitimately angry customers should be met with honest, polite concern and an immediate taking of responsibility by the company.
• Correction and compensation should be prompt — and be accompanied by an apology.
• There should be a formal process to incorporate frontline lessons learned from service failures into institutional memory so problems can be headed off or fixed more quickly.

Marketing Faculty