Aaron R. Brough and Dr. Kristen DeTienne, Organizational Leadership and Strategy

Disappointed customers are less likely to continue doing business with a firm and more likely to drive other customers away. Obviously, such actions can be costly for companies. Service recovery may be defined as any actions a company undertakes in order to mitigate the damaging effects of service failure. Successful service recovery restores, and occasiona lly elevates, prefailure levels of customer satisfaction and loyalty. The following two pages summarize an honors thesis that shows how companies can strategically design a profitable service recovery system. Although service recovery has been shown to increase profits in many instances, other research argues that it may not be worth the investment. This paper proposes two propositions that may help to explain the conflicting results.

First, companies may be better off extending extensive recovery efforts only to select customers, rather than to all customers. Candidates for extensive recovery efforts should be evaluated based on profitability and responsiveness to recovery efforts. Historically, studies have encouraged companies to recover every customer, arguing that long-term relationships with customers will lead to profitability. However, not all service recovery efforts are cost-effective. Companies should not necessarily commit resources to fully recover every customer; the key to costeffective service recovery is focusing recovery efforts on profitable customers. While loyal customers can indeed contribute to a firm’s profitability, companies must consider whether all recovered customers will contribute equally to company profits. If not, recovery efforts should be tailored to individual customers or customer groups. Maximizing service recovery profitability by differentiating recovery candidates is a topic that has not received much attention in existing literature. Perhaps some customers merit more extensive recovery efforts than others. Hence, the first proposition: Companies should not attempt to provide extensive recovery efforts to all customers who experience a service failure.

Second, the type of recovery effort extended to any customer should correspond to the type of failure the customer experienced. A substantial amount of research has been dedicated to discovering the most effective types of recovery efforts in retaining customers. Because customers will not respond in the same manner to different types of recovery efforts, companies seeking to improve service recovery profitability should extend different types of recovery efforts to different customers. Empirical research has indicated that the most effective recovery efforts are those that correspond to the type of service failure the customer experienced. For instance, if a failure damages a customer financially, recovery efforts that reimburse the customer are most effective. These types of recovery efforts, typified by discounts, coupons, and reimbursements, are generally called tangible recovery efforts. However, when the customer is failed emotionally, recovery efforts that restore the customer emotionally are most effective. Emotionally restorative recovery efforts, such as listening, apologizing, and showing individual concern or empathy, are called psychological recovery efforts. Research indicates that psychological and/or tangible recovery efforts increase customer perceptions of service recovery quality. Thus, companies should consider the effectiveness of the recovery effort when deciding which types of recovery efforts to extend to different customer groups. This leads to the second proposition: Not all types of service recovery efforts are equally effective in retaining customers.

Companies that neglect these factors may indeed perform service recovery, but their service recovery efforts may not result in maximum profitability. To successfully evaluate the profitability of service recovery, companies must consider recovery benefits, failure costs, and recovery costs. Recovery benefits are the benefits a company acquires through a successful service recovery effort, such as future purchases stemming from customer retention and positive word-of-mouth. Failure costs are the estimated costs the company will incur, such as lost future revenues and negative word-of- mouth, if no attempt is made to recover a customer. Recovery costs are the actual costs to the company of performing service recovery. This involves both system costs, such as training employees or reprogramming computers, and incident costs, such as reimbursing the customer, repeating the service, or offering future discounts. Recovery profitability is equal to the sum of recovery benefits plus failure costs, less recovery costs. Recovery costs should not exceed the sum of recovery benefits plus failure costs; otherwise the recovery is not profitable.

The paper concludes by presenting a strategic model, based on the propositions and components of service recovery profitability, which will allow companies to profitably perform service recovery. First, companies must determine the general level of expectations among their customers. Next, they must determine the amount of individual customer data that is collected and readily accessible by front-line employees. Then, when a service failure occurs, individual customers should be evaluated as candidates for extensive recovery efforts based on 1) the severity of the service failure they experienced and 2) how profitable they are, if individual customer data is known.

The most extensive recovery efforts should be rendered by companies whose customers generally have high expectations to profitable customers who have experienced a severe service failure. The type of service recovery should be based on the type of service failure. This model explains how executives can successfully prevent resources from being wasted on customers who will respond in an undesirable manner and instead direct those resources to customers that will generate desirable responses. By focusing recovery efforts on these customers, service recovery is more likely to be profitable.

To facilitate additional research in the area of service recovery, I also compiled a database containing over 120 journal articles and books that deal with this topic. The database may be accessed online at http://home.byu.net/~arb42/SR_DAT~1.XLS. Service recovery researchers may sort the literature by author, year of publication, article title, or journal.