How Much Compensation Should a Firm Offer for a Flawed Service? An Examination of the Nonlinear Effects of Compensation on Satisfaction

Abstract

This research examines the nonlinear effects of compensation on customer satisfaction in order to determine the optimal compensation after a flawed service. As our core contribution, we argue that the nature of this nonlinear effect depends on the way customers handle a flawed service. Building on the Service-Dominant (S-D) logic, this research introduces two specific failure handling tactics-when customers reject versus accept a flawed value proposition-that affect the shape of the nonlinear function of compensation on satisfaction. Our key hypotheses are tested with two experiments that manipulate 11 compensation levels (0-200%) and the two failure handling tactics (rejection vs. acceptance). Consistent with our logic, both studies reveal an S-shaped curve progression for service rejection and a concave shape for service acceptance. For service rejection, the highest incremental effect of compensation on satisfaction lies in between 60% and 120%. For service acceptance, the highest return in satisfaction is obtained with the first dollars invested in partial compensation. As a major managerial takeaway, firms can use these findings to determine the compensation level that provides the best satisfaction return.

The effects of harm directions and service recovery strategies on customer forgiveness and negative word-of-mouth intentions

“…The practical implication for service providers is that a combination of apology and compensation is essential to effectively drive consumer forgiveness and lower NWOM intention. The results corroborate the recent trend in managerial practices to offer combined benefits of apologies and compensation to reduce customers' negative reactions following service failure (Gelbrich et al, 2015;Noone and Lee, 2011).…”

When Do Customers Get What They Expect? Understanding the Ambivalent Effects of Customers’ Service Expectations on Satisfaction

“…Furthermore, within the service failure literature, our study contributes to research on appropriate service recovery strategies (Gelbrich, Gäthke, and Grégoire 2015). An important determining factor of customers' satisfaction with service recovery is the confirmation of customers' expectations of this recovery (McCollough, Berry, and Yadav 2000).…”

Low‐price guarantees as advertisement strategy and compensation policy: The more, the better?

“…This is regretful because the perceived fairness of a low‐price guarantee might have an influence on customers' repurchase intentions. In this light, recent overcompensation studies have found that fairness perceptions mediate the relationship between overcompensation and customer satisfaction (see Gelbrich et al, ). Therefore, in the present research we also investigated if and how fairness perceptions influence the effectiveness of different low‐price guarantees.…”

“…Recently, scholars have tried to resolve these mixed results by systematically studying the overcompensation range by examining the influence of multiple refund depth levels. Gelbrich, Gäthke, and Grégoire (), for instance, compared five overcompensation levels (i.e., a compensation that covered 120%, 140%, 160%, 180%, and 200% of the loss) that a company could offer for a flawed service. Their results revealed a nonlinear effect of overcompensation on customer satisfaction in the form of a concave curve: Small amounts of overcompensation were more effective than an exact compensation, but after a certain point the curve seemed to flatten.…”