Compensation Lifts Repurchase Intentions Only After Recurring Failures the Company Causes

Customer ServiceGrewal, D.; Roggeveen, A.; Tsiros, M. · 2008Journal of Retailing
Topicsservice recovery·compensation·repurchase intentions·attribution·stability·locus of responsibility·equity

Many service businesses offer compensation after any failure, frequent or rare. Repurchase intentions measure how likely customers say they are to buy again. Imagine your airline is setting its recovery budget for repeated crew shortages, occasional cancellations and weather disruptions. When should your team offer compensation?

Compensation raises repurchase intentions after a recurring failure the company causes, but not after a rare one or one it does not cause.

Data chart

Compensation raises intent to buy again after recurring failures the airline caused

Customers' average agreement that they would fly this airline again and recommend it to a friend, on a scale from 1 (strongly disagree) to 5 (strongly agree).

no compensationcompensationRecurring failure the airlinecaused1.85 points2.42 pointsRare failure the airline caused(no reliable difference)2.44 points2.79 points
  • All four averages sit below 3, the scale's midpoint.

After a recurring failure the airline caused, customers who got compensation say they are more likely to buy again. After a rare failure it caused, compensation makes no reliable difference.

Study 1 airline scenario, Table 3 (p. 429) and Figure 1a (p. 430). Exact values, no compensation then compensation: recurring failure 1.85 and 2.42; rare failure 2.79 and 2.44. Both groups received an explanation; the rare-failure comparison shows no reliable difference.

Action guide

  1. Target your recovery budget to recurring failures your company causes.After a rare failure or, in the airline study, one the airline did not cause, compensation does not reliably raise repurchase intentions beyond an explanation alone. In those cases, explain the cause and weigh recovery costs against benefits.
  2. Have your customer experience team track perceived fairness after recurring failures your company causes.Flag any case where compensation does not raise it.

Evidence

  • When an airline caused a recurring failure, repurchase intentions scored 2.42 on a 1 to 5 scale with compensation and 1.85 without it.
  • When an airline caused a rare failure, compensation did not reliably raise repurchase intentions beyond an explanation alone. Scores were 2.44 with compensation and 2.79 without it.
  • When an airline did not cause a failure, recurring or rare, compensation did not reliably raise repurchase intentions. For a recurring failure, scores were 3.12 with compensation and 3.05 without it, on a 1 to 5 scale.
  • When a restaurant caused a recurring failure, repurchase intentions scored 2.75 with compensation and 2.14 without it.
  • Across four studies in airline, restaurant and hotel settings, compensation raised repurchase intentions more after a recurring failure the company caused than after a rare one. Its effect after a recurring failure was about the same size in each.
  • After a recurring failure an airline caused, customers rated the fairness of their treatment 3.67 with compensation and 2.80 without it.

Key takeaway

Customers report stronger repurchase intentions when you compensate them for a recurring failure you cause.

Limitations

The airline and restaurant tests use imagined failures and student samples, and the hotel test is only briefly reported. All measure stated repurchase intentions, not actual repeat purchases, and none compares explaining the cause with giving no explanation.

Source

Grewal, D., Roggeveen, A., & Tsiros, M. (2008). The Effect of Compensation on Repurchase Intentions in Service Recovery. Journal of Retailing, 84(4), 424–434. https://doi.org/10.1016/j.jretai.2008.06.002.

https://doi.org/10.1016/j.jretai.2008.06.002