Managing Complaints to Improve Customer Profitability☆
Graphical abstract
Introduction
“Unless decision makers fully understand customer complaint behavior and can quantify the return on investment (ROI) of complaint handling, they won’t see the link between complaint handling and loyalty and profits, and it's unlikely they will ever allocate adequate resources for change” (John Goodman, Vice-Chairman of TARP 2006, p. 28).
Academics and practitioners continuously warn about the damaging consequences of service failures for the development of successful and profitable customer relationships (Keaveney, 1995, Surachartkumtonkun et al., 2013). However, despite recognizing the benefits of limiting the number of unsatisfactory situations, customer complaints as a result of service failures continue to be the norm, rather than the exception, in most businesses (Mittal et al., 2008, Zhu et al., 2013). For example, in the European financial services industry, a recent report shows that, in 2012, complaints increased by 5%, with 828,040 new reported financial service failures (Data Monitor 2012). In other industries, the pattern is similar, with the European Consumer Centres Network (ECC-Net) reporting a total of 32,197 complaints in electronic commerce in 2012 and an increase of 20% in the number of complaints in the airlines industry for the same year.
In response to a complaint, firms frequently implement complaint-resolution mechanisms (Brady et al., 2008, Hess et al., 2003, Huang and Lin, 2011). These strategies imply investing significant financial resources. For instance, at an average cost of handling a customer complaint of $5 (Goodman 2006), the increase in complaints reported previously in the financial services would lead to a total cost of complaint handling of more than 4 million dollars. However, these investments provide an uncertain return. This is because, as suggested by prior empirical and anecdotal evidence, customers’ post-recovery reactions differ significantly (Beverland et al., 2010, Boshoff, 1997, Homburg and Fürst, 2005, Kaltcheva et al., 2013, Ringberg et al., 2007), ranging from a magnification of the initial negative response to the service failure (DeWitt et al., 2008, Grégoire et al., 2009) to improvements in attitudes and perceptions after the failure (Homburg and Fürst, 2005, Smith and Bolton, 1998). Even the same strategy implemented to compensate customers for a similar failure can be effective for some customers but ineffective for others (Grégoire, Tripp, and Legoux 2009). Thus, as marketing strives for greater accountability, an important – yet unresolved – challenge for managers is to understand how to allocate resources to the alternative complaint-handling initiatives so that, for each individual customer, the impact on performance outcomes is maximized. Several academic and managerially relevant questions remain to be answered. How do alternative complaint-handling initiatives affect financial performance? Are they equally effective for all complaining customers? If not, under what circumstances does each complaint-resolution mechanism become more effective?
In this study, we attempt to answer these questions and provide managers with new insights to make customer-specific complaint-handling decisions on the basis of an assessment of their potential contribution to customer profitability. To do so, we build on the congruence approach and develop a contingency framework in which the effectiveness of three key organizational responses to customer complaints (timeliness, compensation and communications) in improving profitability is contingent on two critical variables: relationship strength and failure type. Specifically, we propose that achieving a high level of congruence between the benefits offered by firms through complaint handling (economic vs. social benefits) and the benefits sought by customers (economic vs. social benefits) based on the joint consideration of the two contingency variables enhances performance outcome levels. Using data from a financial services company and applying latent class modeling techniques, our proposed framework receives significant support.
This study contributes to existing marketing research in three critical ways. First, prior studies have provided valuable insights into the consequences of complaint handling on customer perceptions and attitudes (Beverland et al., 2010, Kaltcheva et al., 2013, Valenzuela and Cooskey, 2012). We extend this knowledge by providing an understanding of the financial consequences of complaint handling. To do so, we build a link between complaint handling and profitability that can help practitioners to make more adequate resource allocation decisions on the basis of a financial assessment of alternative complaint-handling initiatives. Second, prior studies have offered preliminary evidence about the heterogeneous nature of customer responses to alternative complaint-resolution mechanisms (Hess et al., 2003, Homburg et al., 2010, Roschk and Gelbrich, 2014). In this study, we not only consider customer heterogeneity explicitly by developing a latent class modeling approach but also offer a theoretical understanding of why different complaint-handling initiatives are differently effective at improving profitability. We conceptually propose and empirically show that the nature of the relationship (i.e., relationship strength) and the failure context (i.e., type of failure), by dictating the types of losses experienced by customers, jointly explain their heterogeneous responses to complaint handling. Third, we provide new insights into the circumstances under which recovery efforts are most effective at improving profitability. Building upon the congruence approach (Chandon et al., 2000, Mahajan and Churchill, 1988), we demonstrate that when the types of benefits offered through complaint handling (economic vs. social) match the types of benefits sought by customers to recover from the loss (economic vs. social), customer profitability is enhanced. Based on these contributions, our study provides a practical basis to help marketers manage complaints to improve customer profitability.
Section snippets
Conceptual Framework and Hypotheses Development
In this section, we present a model and a set of testable research hypotheses that describe the effects of organizational responses to customer complaints on customer profitability. The model provides a contingency framework for understanding how relevant contingency variables related to the customer–firm relationship (i.e., relationship strength) and the failure context (i.e., failure type) influence customer responses to complaint-handling activities after a service failure. Drawing upon the
Research Methodology
In this section, we develop an econometric model to empirically test the proposed conceptual framework and its associated hypotheses. To choose the appropriate model for estimating the relationships, we must first deal with the following three modeling challenges. First, we want to investigate the effect of the categories of variables discussed above on customer profitability in the context of a service failure. To ensure that the analysis provides reliable information about the true impact of
Study Context
We test our conceptual framework in the financial services industry. Mistakes and failures in the delivery of banking services are frequent occurrences (Lewis and Spyrakopoulos 2001). The European Consumer Centres Network, 2012a, European Consumer Centres Network, 2012b finds that the number of complaints in banking is growing. The same conclusion is reached by EPSI Rating (2012), a project developed by several European business schools which highlights that, in addition to an increasing number
Estimation Results
In this section, we present the estimation results and test the proposed hypotheses. As noted previously, we estimate a latent class model to control for unobserved customer heterogeneity because it allows the model parameters to vary across a priori unknown customer segments (Dias and Vermunt, 2007, Wieringa and Verhoef, 2007). To identify the number of segments in our empirical application we use information criteria. In Table 4, we report the Bayesian Information Criterion (BIC) and the
Theoretical Implications
In this research, we have tried to provide a conceptual framework for managing complaints to increase profitability. In the proposed framework, we describe and analyze whether, to what extent, and under what circumstances, organizational responses to customer complaints improve customer profitability. We empirically test the framework in the financial services industry and the study findings enable us to contribute to existing marketing literature in several critical ways.
Whether. In this
Managerial Implications
As more and more customers become more demanding and the number of complaints increases, firms should devise new ways to manage them more effectively to obtain a positive return on their investments and enhance financial performance. In this study, we have conceptually proposed and empirically validated a framework that can be used by companies as a useful instrument to allocate their resources more adequately across alternative complaint-handling initiatives to increase profitability.
A major
Limitations and Future Research
This study presents a number of limitations which can be addressed by future research. First, we focus on financial services and consider a specific bank. Despite the significant and robust results that we obtain, given the particular characteristics of this market (high involvement, contractual relationship) and due to the use of a single company, the generalization of the study findings to other services industries and other companies must be carried out with care. Further research should
References (59)
- et al.
Retention of Latent Segments in Regression-Based Marketing Models
International Journal of Research in Marketing
(2003) - et al.
Strategies to Offset Performance Failures: The Role of Brand Equity
Journal of Retailing
(2008) - et al.
Latent Class Modelling of Website Users’ Search Patterns: Implications for Online Market Segmentation
Journal of Retailing and Consumer Services
(2007) Sources, Characteristics, and Dynamics of Post-Purchase Price Complaints
Journal of Business Research
(2003)- et al.
Consumer Responses to Service Failures: Influence of Procedural and Interactional Fairness Perceptions
Journal of Business Research
(1992) - et al.
The Effect of Compensation on Repurchase Intentions in Service Recovery
Journal of Retailing
(2008) - et al.
When do Customers Offer Firms a “Second Chance” Following a Double Deviation? The Impact of Inferred Firm Motives on Customer Revenge and Reconciliation
Journal of Retailing
(2013) - et al.
Do Customer Relationships Mitigate or Amplify Failure Responses?
Journal of Business Research
(2013) - et al.
A Typology of Retail Failures and Recoveries
Journal of Retailing
(1993) - et al.
Customer Complaining: The Role of Tie Strength and Information Control
Journal of Retailing
(2008)
Effect of Manufacturer Reputation, Retailer Reputation, and Product Warranty on Consumer Judgments of Product Quality: A Cue Diagnosticity Framework
Journal of Consumer Psychology
Comparison of Bayesian and Regression Approaches to the Study of Information Processing in Judgment
Organizational Behavior and Human Performance
Customer Rage Back-Story: Linking Needs-Based Cognitive Appraisal to Service Failure
Journal of Retailing
Beyond Valence in Customer Dissatisfaction: A Review and New Findings on Behavioural Responses to Regret and Disappointment in Failed Services
Journal of Business Research
Does Delaying Service-Failure Resolution Ever Make Sense?
Journal of Business Research
Fix It or Leave It? Customer Recovery from Self-Service Technology Failures
Journal of Retailing
Closeness, Strength, and Satisfaction: Examining the Nature of Relationships Between Providers of Financial Services and their Retail Customers
Psychology & Marketing
Relationship Marketing of Services-Growing Interest, Emerging Perspectives
Journal of the Academy of Marketing Science
Exploring Consumer Conflict Management in Service Encounters
Journal of the Academy of Marketing Science
The Theoretical Underpinnings of Customer Asset Management: A Framework and Propositions for Future Research
Journal of the Academy of Marketing Science
An Experimental Study of Service Recovery Options
International Journal of Service Industry Management
A Benefit Congruency Framework of Sales Promotion Effectiveness
Journal of Marketing
Organizational Responses to Customer Complaints: What Works and What Doesn’t
Journal of Service Research
Exploring Customer Loyalty Following Service Recovery. The Mediating Effects of Trust and Emotions
Journal of Service Research
Competitive and Procedural Determinants of Delight and Disappointment in Consumer Complaint Outcomes
Journal of Service Research
Cited by (59)
The role of human interaction in complaint handling
2021, Journal of Retailing and Consumer ServicesStandardized vs. customized firm-initiated interactions: Their effect on customer gratitude and performance in a B2B context
2021, Journal of Business ResearchWhen customers like preferential recovery (and when not)?
2021, Annals of Tourism ResearchCitation Excerpt :Importantly, service recovery can be preferential, with some customers receiving “additional or enhanced products and services above and beyond standard firm value propositions and customer service practices (Lacey et al., 2007, 242)” or it can be non-preferential—the same across all customers and service failures. Preferential treatment literature has attested that these preferential efforts lead to higher firm profits and a higher return on sales (Cambra-Fierro et al., 2015; Homburg et al., 2008). Drawing upon prior research, it seems reasonable to infer that preferential (vs. non-preferential) recovery will lead to higher levels of satisfaction and patronage intention (Ding & Keh, 2016; Lacey et al., 2007; Roschk & Gelbrich, 2017; Varela-Neira et al., 2010).
Profiling (un-)committed online complainants: Their characteristics and post-webcare reactions
2020, Journal of Business ResearchCitation Excerpt :We assume that besides the desire for revenge, prior brand-commitment is a key element driving post-webcare consumer reactions within these two groups. Scholarly literature has long recognized the benefits of classifying complainants for improving recovery effectiveness (e.g., Cambra-Fierro, Melero, & Sese, 2015; Richins, 1983). For instance, Beverland, Kates, Lindgreen, and Chung (2010) demonstrate that grouping consumers in accordance to how they frame the conflict after a failure is critical to their incidence and recovery reactions.
- ☆
The authors are members of the research group “Generes” (http://generes.unizar.es/en/), and they appreciate the financial support received from the projects ECO2011-23027 (MICINN, FEDER), and S09-PM062 (Spanish Regional Government of Aragón), as well as from the program “Ayudas a la Investigación en Ciencias Sociales, Fundación Ramón Areces”. Iguacel Melero gratefully acknowledges the financial aid from the Spanish government (Ministry of Education) through the FPU scholarship program (AP2010-4448). The authors’ names appear in alphabetical order.
- 1
Tel.: +34 954977924.
- 2
Tel.: +34 976761000; fax: +34 976761767.