Developing effective service compensation strategies [PDF]

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1757-5818.htm

JOSM 22,2

Developing effective service compensation strategies Is a price reduction more effective than a free gift?

202 Received January 2010 Revised February 2010 March 2010 Accepted April 2010

Wen-Hsien Huang Department of Marketing, National Chung Hsing University, Taichung, Taiwan, Republic of China, and

Tzu-Da Lin Department of Business Administration, Soochow University, Taipei, Taiwan, Republic of China Abstract Purpose – The purpose of this paper is to gain some insight into the effectiveness of different types of tangible compensation strategies for two different types of services: utilitarian and hedonic. Design/methodology/approach – The hypotheses are investigated using a 2 £ 2 between-subject experimental design and two factors: service type (utilitarian vs hedonic) and compensation type (utilitarian – a price reduction vs hedonic – a free gift). Findings – The results show that customers prefer to receive a form of compensation that matches the type of service involved. For example, customers who receive a utilitarian compensation (e.g. a price reduction) after experiencing a failure in utilitarian service (e.g. at a bank) report higher levels of satisfaction and repurchase intention than they would after experiencing a failure in hedonic services (e.g. at a restaurant), but that the reverse is true for a hedonic-type compensation (e.g. a free gift). Practical implications – The offering of either a price reduction or a free gift cuts into company profits. Organizations should, therefore, tailor their service recovery efforts, focusing on those resources in the bundle that will have the greatest positive impact and create the most favorable customer response. Originality/value – The primary contribution of this paper to the service marketing literature is that it provides empirical results, which shed light on the interplay between the type of compensation and the type of service on the customer’s post-recovery judgment of that service. Keywords Consumer behaviour, Benefits, Service failures, Customer service management, Customer satisfaction Paper type Research paper

Introduction It is widely recognized that no service system is perfect. Even the best service providers sometimes suffer from problems with service delivery. When such errors cause performance to fall below the customer’s expectations, we say that a service failure has occurred (Smith and Bolton, 2002). Study in the area of service failure indicates Journal of Service Management Vol. 22 No. 2, 2011 pp. 202-216 q Emerald Group Publishing Limited 1757-5818 DOI 10.1108/09564231111124226

The authors are particularly grateful for the support of this work by the “Aim for the Top University Plan” of the National Chung Hsing University and the Ministry of Education, Taiwan, ROC.

that an effective service recovery strategy can minimize customer dissatisfaction following the failure and thus retain customer loyalty (Smith et al., 1999; Wirtz and Mattila, 2004). However, one question that arises is “What is the most effective service recovery strategy?” Service recovery strategies can include a variety of options, involving both costly and no-cost actions such as discounts, replacements, refunds, free gifts, coupons, apologies, empathetic listening, remediation, and so on (Blodgett et al., 1997; Goodwin and Ross, 1992; Tax et al., 1998). Smith et al. (1999) and Smith and Bolton (2002) suggest that the most appropriate strategy for addressing service deficiencies is to provide an apology and speedy response in the case of process failures – the inadequate delivery of services (e.g. a hotel desk clerk treats a customer rudely during the check-in process) or to offer tangible compensation in the case of outcome failures – the unavailability of a service (e.g. the unavailability of a reserved hotel room because of overbooking). Nevertheless, the questions, “What kind of tangible compensation most effectively increases client satisfaction and strengthens future re-patronage intentions if an outcome failure does arise?” and “Would it be better to offer customers a price reduction or a free gift?” remain to be answered. The offering of either a price reduction or a free gift can cut into company profits. Organizations should, therefore, tailor their service recovery efforts, focusing on those resources in the bundle that will have the greatest positive impact and create the most favorable customer response. The primary goal of this study is to gain some insight into the effectiveness of different types of tangible compensation strategies for two different types of services: utilitarian and hedonic. It is believed that our findings will not only assist marketers to develop more effective service recovery strategies, but will extend the existing research on the study of service failure and recovery in the marketing literature. Theoretical background and hypotheses Prior evidence from the literature suggests that the relative effectiveness of service recovery is situation specific (Levesque and McDougall, 2000; Ruyter and Wetzels, 2000). In other words, the service type is likely to influence customer expectations for service recovery (Mattila, 2001). For example, customers might be content to receive a free dessert as compensation for a bad dinner experience at a tranquil and romantic French restaurant, but they would be happier to receive a discount as compensation for delayed service at a bank. In other words, the customers’ post-recovery evaluation and future behavioral intentions differ for different types of services. Utilitarian vs hedonic services Studies on consumption experience have established that consumers purchase goods and services for a combination of two types of benefits: utilitarian and hedonic (Hirshman and Holbrook, 1982; Wirtz and Lee, 2003). Utilitarian benefits refer to the functional, instrumental, and practical benefits of consumption offerings, whereas hedonic benefits refer to aesthetic, experiential, and enjoyment-related benefits (Batra and Ahtola, 1990; Chitturi et al., 2007; Dhar and Wertenbroch, 2000). Broadly speaking, services can be categorized as predominantly utilitarian or hedonic. Utilitarian services are related to rational task performance, tangible performance, and functionality, such as banking, health care, and shoe repair. Hedonic services, on the other hand, are related to pleasure and enjoyment, such as vacation resorts, restaurants, and theme parks

Service compensation strategies 203

JOSM 22,2

204

(Batra and Ahtola, 1990; Hirshman and Holbrook, 1982; Jiang and Wang, 2006; Stafford et al., 2002). Holbrook (1994, p. 8) notes that consumer value arises from the experience that results from the consumption of such benefits. There is evidence that the consumption goals consumers expect to be fulfilled by the utilitarian dimension of a product or services are different from those they expect from the hedonic dimension (Chernev, 2004). The distinction between utilitarian and hedonic services helps to predict and explain the different impact of tangible compensation strategies on customer satisfaction and repurchase intention in cases of service failure. Benefit congruency approach Prior research has focused primarily on assessing the relative weight that consumers attach to the utilitarian and hedonic dimensions of various products or services. For example, Edwards (1990) showed that utilitarian information (related to the storage requirements of a beverage) was more persuasive than hedonic information (how it smelled) when the attitude toward the beverage was based on utilitarian benefits (nutrition) than when based on hedonic benefits (taste). Shavitt (1990) found consumer attitudes toward a hedonic product (in this case, coffee) to be influenced more by advertisements emphasizing hedonic rather than utilitarian benefits, but that the reverse was true for a utilitarian product (an air conditioner). Chandon et al. (2000) developed a benefit congruency framework by documenting evidence showing that the effectiveness of a sales promotion depends on utilitarian as well as hedonic benefits, and on the congruence between these benefits and the product being promoted. Similar findings can be found in service industry research. According to Jiang and Wang (2006), pleasure has a stronger influence on perceived service quality and satisfaction in the hedonic service context than in the utilitarian service context. Stafford et al. (2002) found that the effectiveness of the spokesperson (celebrity, service employee, customer, and spokes-character) was dependent on whether a utilitarian (at a bank) or hedonic (at a restaurant) service was being offered. In other words, congruency between spokesperson and service type is needed. There has been work in other domains that also supports this hypothesis. For example, Aaker and Keller (1990) examined consumer reactions to 20 brand extension concepts involving six well-known brand names. They found attitudes toward the extension to be more positive when there was a perception of “fit” between the original and extension product classes. Based on these findings, it is reasonable to expect the effectiveness of compensation in the case of service failure to be determined by the primarily utilitarian or hedonic nature of the benefits delivered and the congruence of these benefits with the type of service. Utilitarian vs hedonic compensations As mentioned previously, most classifications of consumer value and types of consumer benefits start with making a distinction between utilitarian and hedonic benefits (Holbrook, 1994). For example, Babin et al. (1994) showed how this distinction applies to shopping activities, which offer both utilitarian benefits (helping consumers efficiently find and buy the best products) and hedonic benefits (providing entertainment and raising self-esteem). Similarly, the benefits of tangible compensation strategies (price reductions, rebates, coupons, free gifts, and so on) can also be classified as utilitarian or hedonic. In the former case, they help consumers maximize the utility, efficiency, and economy of their consumption (for example, price reductions are perceived as offering greater savings) and in the latter, they provide intrinsic rewards, stimulation, even fun

(for example, free gifts are perceived as offering greater pleasure) after an unsatisfying service experience. Chandon et al. (2000) also uses this type of classification. According to Chandon et al. (2000), price reductions, rebates, coupons, and free gifts can be positioned in a utilitarian £ hedonism benefit matrix, where price reductions, rebates, and coupons are clustered together in the high utilitarian/low hedonism quadrant; free gifts are positioned in the low utilitarian/high hedonism quadrant. Compensation strategies are classified as utilitarian or hedonic based on the predominant nature of the benefits. The “utilitarian compensation” type includes functional, instrumental, and practical compensatory benefits, while the “hedonic compensation” type includes aesthetic, experiential, and enjoyment-related compensatory benefits. On the basis of the preceding discussion, we can conclude that customers will place greater weight on utilitarian benefits than on hedonic benefits when evaluating compensation for a utilitarian service (e.g. a bank). This means that a relatively utilitarian compensation (like a price reduction) will be more effective than a relatively hedonic compensation (such as a free gift). Conversely, when evaluating compensation for a hedonic service (e.g. a restaurant), a hedonic compensation would be more acceptable than a utilitarian compensation. We thus state the following hypotheses: H1. Customers experience higher levels of post-recovery satisfaction and repurchase intention when awarded utilitarian compensation (rather than hedonic compensation) after service failures for utilitarian services than for hedonic services. H2. Customers experience higher levels of post-recovery satisfaction and repurchase intention when awarded hedonic compensation (rather than utilitarian compensation) after service failures for hedonic services than for utilitarian services. Study 1 Research design These hypotheses were investigated using a 2 £ 2 between-subject experimental design with two factors: service type (utilitarian vs hedonic) and compensation type (utilitarian – a $10 price reduction vs hedonic – a $10 gift of chocolate). Participants were asked to read a service encounter scenario describing an initial service problem and the recovery effort made by the service organization. They were asked to imagine themselves in the role of the customer in the encounter. This role-playing approach has been successfully used in a number of service failure and recovery studies (Maxham, 2001; McCollough et al., 2000; Smith et al., 1999). The use of the scenario method is justifiable because it allows for greater control over the many conditions, removes unmanageable variables that can be found in the real world, and saves time by summarizing events that might otherwise unfold over days or weeks (Bitner, 1990). It also reduces bias due to memory lapses, rationalization, and consistency factors, which are common problems encountered in retrospective self-reporting (Smith et al., 1999). Based on prior studies we selected two services as providing a high degree of utilitarian or hedonic benefits (Reimer and Kuehn, 2005; Stafford et al., 2002). Specifically, we selected banking services as representative of utilitarian benefits and restaurant dining for hedonic benefits. In addition, two compensation types were selected: a price reduction for utilitarian compensation and a free gift for hedonic compensation (Chandon et al., 2000).

Service compensation strategies 205

JOSM 22,2

206

Data collection A convenient sample consisting of 145 undergraduate students from a local university was surveyed. Participants were randomly given one of 4 scenarios. Of the responses, 10 were eliminated from the analysis due to incomplete data and because the participants guessed the purpose of the study. The 135 remaining responses were divided evenly into the four treatment groups, ranging in size from 33 to 35. More than 56 percent of the participants were female. Their ages ranged from 19 to 31 years. The questionnaire began with a screening question. Participants were asked whether they had patronized a bank or restaurant in the last three months. Only those who had patronized either of these two types of services in the last three months were asked to continue and answer the questions based on that particular service consumption experience. Each respondent only selected one service context, i.e. either banking or restaurant dining. Consumption experiences from both utilitarian and hedonic service categories were collected. The same data collection method has been used in several other similar studies (Mano and Oliver, 1993; Smith et al., 1999). At the end of the survey, respondents were asked to complete some demographic information. The demographic variables had no significant effect on the dependent measures, so were excluded from further analysis. Stimuli development Participants were told that the purpose of the survey was to understand how they felt about bank/restaurant services. They were told that “the key to the success of this research depends on whether you are really able to imagine yourself in these situations.” After this introduction, they were asked to read one of four hypothetical scenarios. In the banking (utilitarian service) scenarios, participants were asked to imagine that they had to wait 20 minutes to complete their transactions because of bank equipment problems. The restaurant dining (hedonic service) scenarios involved a 20 minutes wait for the correct meal. Both of these failure incidents could be classified as outcome failures, due to unavailable services (Smith et al., 1999). There were two types of compensation: utilitarian compensation participants were offered a US$10 price reduction; hedonic compensation participants were offered a US$10 gift of chocolate. Manipulation checks A manipulation check was conducted to confirm that the benefits of these two types of services and compensations were perceived to be different. To do this, participants were instructed to indicate answers on a seven point scale, with the endpoints being: (1) “strictly utilitarian” and (7) “strictly hedonic” (Stafford et al., 2002). Definitions of each term were provided: utilitarian benefits refer to the functional, instrumental, and practical benefits, whereas hedonic benefits refer to their aesthetic, experiential, and enjoyment-related benefits (Batra and Ahtola, 1990; Chitturi et al., 2007; Dhar and Wertenbroch, 2000). In the study proper, the degree of utilitarian and hedonic benefits of the two services and two compensations was measured after taking into account the scaling for satisfaction and repurchase intention to avoid potential demand effects. As intended, banking was perceived as being significantly more utilitarian than restaurant dining (1.56 vs 6.38, t ¼ 237.97, p , 0.001); furthermore a price reduction was perceived as being significantly more utilitarian than a gift of chocolate (3.11 vs 5.22, t ¼ 211.01, p , 0.001). A bank and a restaurant were considered as the most appropriate

examples of service types, and a price reduction and a gift of chocolate were considered appropriate compensation types, not only because of differences in their hedonic-utilitarian dimension, but also because they were very familiar to the student participants. Measures All multiple-item scales in this study were measured on a seven-point Likert scale. Post-recovery satisfaction was measured using the following three-item scale (McCollough et al., 2000): “Overall, how satisfied or dissatisfied did this experience make you feel?”, “How well did this service experience meet your needs?” and “Overall, I am very satisfied with this experience.” (Cronbach’s a ¼ 0.94). The repurchase intention measure included the following three items (Blodgett et al., 1997): “Knowing what I do now, if I had to do it all over again, I would visit this bank/restaurant again.” “Because of what happened, I will never go to this bank/restaurant again” and “If this situation had happened to me, I would never go to this bank/restaurant again” (Cronbach’s a ¼ 0.88). Several additional measures were included to ascertain whether the experimental procedures worked as intended, including how realistic the scenarios were, how easy it was for respondents to imagine themselves in the role of customer, and what they thought the purpose of the research study was. Potential confounds caused by demand artifacts that could result from the different scenarios were assessed. The perceived severity of the failure was measured using a three-item scale (Hess et al., 2003): “The failure incident at the bank/restaurant is a severe/minor/significant service problem” (Cronbach’s a ¼ 0.91).

Service compensation strategies 207

Validity of the experimental procedures Analysis showed that participants found the scenario to be realistic and the role-playing easy. The mean rating for scenario realism was 5.16 (with seven indicating “extremely realistic”). When asked to rate how easy it was to imagine themselves in the role of customer (with seven indicating “extremely easy” on the seven-point scale), the mean rating was 5.48. There was no significant difference ( p . 0.10) in terms of the realism, ease of role-playing or perceived failure severity among the different treatment groups. Results The descriptive statistics are presented in Table I. Since the two dependent variables, satisfaction, and repurchase intention, are correlated (r ¼ 0.77), it was deemed more appropriate to use multivariate analysis of variance (MANOVA) than separate

Dependent variables Post-recovery satisfaction Repurchase intention

Utilitarian services Hedonic Utilitarian compensation compensation (n ¼ 33) (n ¼ 34)

Hedonic services Hedonic Utilitarian compensation compensation (n ¼ 35) (n ¼ 33)

5.07 (1.23)

4.44 (1.10)

4.08 (0.71)

5.05 (0.95)

5.69 (1.04)

5.01 (0.82)

4.68 (0.76)

5.50 (0.73)

Notes: Cell numbers indicate the means for each condition; the standard deviations are indicated in parentheses

Table I. Descriptive statistics for Study 1

JOSM 22,2

208

univariate analyses of variance (ANOVAs) for each dependent variable (Tabachnick and Fidell, 2006). In this case, the MANOVA controls the experimental error rate. However, separate ANOVAs still had to be used to find which variables cause differences among the scenarios. The 2 £ 2 MANOVA results are given in Table II. They indicate no significant main effects for service type (Wilks’ lambda ¼ 0.97, F ¼ 1.41, p ¼ 0.24) and compensation type (Wilks’ lambda ¼ 0.96, F ¼ 1.58, p ¼ 0.20). The MANOVA test, however, produced a significant interaction between service type and compensation type (Wilks’ lambda ¼ 0.80, F ¼ 11.08, p , 0.001). At the univariate level, this interaction was significant for two dependent variables: post-recovery satisfaction (F ¼ 20.71, p , 0.001) and repurchase intention (F ¼ 26.63, p , 0.001). The means corresponding to the two-way interaction effect are plotted in Figures 1 and 2. As hypothesized, utilitarian service condition customers who received a utilitarian type of compensation reported higher levels of post-recovery satisfaction (M ¼ 5.07 vs 4.44, t ¼ 2.19, p , 0.05; see Figure 1) and repurchase intention (M ¼ 5.69 vs 5.01, t ¼ 2.96, p , 0.01; see Figure 2) than those receiving a hedonic type of compensation. Conversely, hedonic service condition customers who received a hedonic type of compensation gave higher scores for satisfaction (M ¼ 5.05 vs 4.08, t ¼ 2 4.74,

MANOVA Wilks’ lambda

Source Table II. MANOVA and ANOVA results for the dependent variables in Study 1

Service type Compensation type Service type £ Compensation type

0.97 0.96 0.80

F

Univariate F Repurchase df Satisfaction intention

1.41 1 1.58 1 11.08 * * 1

1.21 0.96 20.71 * *

Note: Significance at: *p , 0.05 and * *p , 0.01

7 With a utilitarian compensation

Figure 1. Interactive effects of service type and compensation type on post-recovery satisfaction (Study 1)

Postrecovery satisfaction

With a hedonic compensation 6

5.07

5.05

5 4.44 4.08 4

3

Utilitarian services

Hedonic services

3.12 0.27 26.63 * *

Service compensation strategies

7 With a utilitarian compensation With a hedonic compensation Repurchase intention

6

5.69 5.50

5

209

5.01 4.68

4

3 Utilitarian services

Hedonic services

p , 0.001; see Figure 1) and re-patronage intention (M ¼ 5.50 vs 4.68, t ¼ 2 4.57, p , 0.001; see Figure 2) than those who received a utilitarian type of compensation. This lends support to H1 and H2.

Study 2 There were several similarities between Studies 1 and 2. A scenario-based format was again used in Study 2 and the same scenario development procedures and manipulation checks were followed. However, there were several important differences. First, instead of university students, the participants were non-student service consumers who had recently patronized a hotel. To ensure that participants had prior experience with hotels, they were asked to name a hotel they had visited in the past 3 months. Another difference was that Study 2 included two service types within the same service industry: business hotels for utilitarian services and leisure hotels for hedonic services; whereas the Study 1 service types were included in two different service industries: banking for utilitarian services and restaurant dining for hedonic services. The hotel context was deemed appropriate, since real-life service deficiencies and recovery are common in this industry (Smith and Bolton, 2002). In addition, hotels can be simply classified according to the benefits offered and their principal clientele, specifically, business travelers, tourists, business hotels, and leisure hotels (Garcı´a-Falco´n and Medina-Munˇoz, 1999). The former type includes hotels whose main clientele consists of individuals and groups traveling for business purposes (e.g. meetings, visits to customers or suppliers, attending seminars). Business travelers choose business hotels mainly for utilitarian reasons, such as convenience of transportation, efficiency, business center facilities, and reasonableness of the price. The latter group includes hotels whose clientele consists of individuals and groups traveling for pleasure, such as sun-and-sand tourism, sports tourism, or cultural tourism. Tourists usually choose those leisure hotels which offer mostly hedonic benefits, for the sake of pleasure and enjoyment.

Figure 2. Interactive effects of service type and compensation type on repurchase intention (Study 1)

JOSM 22,2

210

It should be noted that the difference between the two experimental studies provides an opportunity to interpret the subtle effects of the research context on the findings. The second study is intended to assess the external validity of the Study 1 findings by testing the two hypotheses for a new industry and using a non-student sample. Data collection Consumers at a large shopping mall were recruited as volunteers. Advertisements were posted on bulletin boards near each entrance. Volunteers were offered a small gift (worth about US$5) for participating. The surveys were run on a Thursday, a Friday, and a Saturday, so that both weekday and weekend consumers were questioned. Each respondent was given a survey kit consisting of a questionnaire and was randomly assigned one of four scenarios – that is: 2 (service type: utilitarian vs hedonic) £ 2 (compensation type: utilitarian vs hedonic). A total of 160 individuals took part. Of these, 16 were eliminated from the analysis because of incomplete data or because of guessing the purpose of the experiment. The 144 remaining participants were divided evenly into the four groups, ranging in size from 35 to 37 individuals. The average participant age was 42.5 years. About 76 (52.7 percent) of the respondents were male, 68 (47.3 percent) were female; their average working experience was 11 years. Of these participants, 54.4 percent had a college degree or higher. Stimuli development Participants in the business hotel scenarios were asked to imaging that: You are traveling on an important business trip and will stay at a business hotel located in the heart of the city. This hotel has convenient transportation and an efficient business center with modern office facilities. You will stay at this hotel for 5 days and will cost you NT$3,500 (New Taiwan Dollars, about US$100) per night. You arrive at the front desk of the hotel at 5:00 p.m. to check in. The representative at the front desk looks up your prepaid reservation and informs you that your room is ready. However, it is not the type of room (in terms of the number and size of beds, smoking or non-smoking) that you reserved.

In the leisure hotel scenarios, the participants were informed that: You are traveling to a sun-and-sand tourist destination and you plan to stay at a leisure hotel located on the beach with a variety of facilities for relaxation (e.g., spa, pool, and so on). You will stay at [. . .].

Finally, a description of compensation was provided. For utilitarian compensation, the hotel manager apologized for the failure and offered a US$120 price reduction as compensation, whereas for the hedonic compensation, an apology was offered along with a fresh fruit basket worth about US$120. Results The manipulation checks provided strong evidence that the participants did not have any problem identifying with the situations. The business hotel was perceived as significantly more utilitarian than the leisure hotel (1.59 vs 6.37, t ¼ 2 48.05, p , 0.001); furthermore the price reduction was perceived as significantly more utilitarian than the fresh fruit basket (3.18 vs 5.19, t ¼ 2 14.67, p , 0.001). Taken together, these results suggest that the manipulations were perceived as intended.

Cell means are presented in Table III. The MANOVA (Table IV) produced insignificant main effects for service type (Wilks’ lambda ¼ 0.99, F ¼ 1.31, P ¼ 0.27) and compensation type (Wilks’ lambda ¼ 0.98, F ¼ 2.01, P ¼ 0.11). However, the two-way interaction between service type and compensation type (Wilks’ lambda ¼ 0.80, F ¼ 21.45, p , 0.001) was significant. At the univariate level, this interaction was significant for two dependent variables: post-recovery satisfaction (F ¼ 40.96, p , 0.001) and repurchase intention (F ¼ 51.28, p , 0.001). An analysis of the mean ratings indicated that participants in the business hotel (who received a price reduction as redress for the service failure) showed higher levels of post-recovery satisfaction (M ¼ 5.07 vs 4.44, t ¼ 2.93, p , 0.01; Figure 3), and repurchase intention (M ¼ 5.56 vs 5.01, t ¼ 3.50, p , 0.01; Figure 4) than did those who received a fresh fruit basket. Conversely, the leisure hotel participants who received a fresh fruit basket as redress for the service failure reported higher scores for post-recovery satisfaction (M ¼ 5.08 vs 4.10, t ¼ 2 6.91, p , 0.001; see Figure 3) and future purchase intention (M ¼ 5.57 vs 4.70, t ¼ 2 7.24, p , 0.001; Figure 4) than those who received a price reduction. These findings again corroborate the assumption that utilitarian compensations are more effective (compared with hedonic compensations) for utilitarian services than for hedonic services. Conversely, hedonic compensations are relatively more effective (compared with utilitarian compensations) for hedonic services than for utilitarian services. Therefore, H1 and H2 are supported.

Service compensation strategies 211

General discussion The goal of this study is to examine the effectiveness of service compensation strategies for utilitarian and hedonic services after a service failure experience. There are several

Dependent variables Post-recovery satisfaction Repurchase intention

Utilitarian services Hedonic Utilitarian compensation compensation (n ¼ 36) (n ¼ 37)

Hedonic services Hedonic Utilitarian compensation compensation (n ¼ 35) (n ¼ 36)

5.02 (1.23)

4.44 (1.09)

4.10 (0.69)

5.08 (0.91)

5.56 (0.98)

5.01 (0.81)

4.70 (0.71)

5.57 (0.66)

Notes: Cell numbers indicate the means for each condition; the standard deviations are indicated in parentheses

MANOVA Source Service type Compensation type Service type £ Compensation type

Wilks’ lambda 0.99 0.98 0.80

Note: Significance at: *p , 0.05 and * * p , 0.01

F

Table III. Descriptive statistics for Study 2

Univariate F Repurchase df Satisfaction Intention

1.31 1 2.01 1 21.45 * * 1

1.40 2.73 40.96 * *

2.25 2.62 51.28 * *

Table IV. MANOVA and ANOVA results for the dependent variables in Study 2

JOSM 22,2

7 With a utilitarian compensation

212

Figure 3. Interactive effects of service type and compensation type on post-recovery satisfaction (Study 2)

Postrecovery satisfaction

With a hedonic compensation 6

5

5.08

5.02 4.44 4.10

4

3 Utilitarian services

Hedonic services

7 With a utilitarian compensation With a hedonic compensation Repurchase intention

6

Figure 4. Interactive effects of service type and compensation type on repurchase intention (Study 2)

5.57

5.56

5

5.01 4.70

4

3 Utilitarian services

Hedonic services

important findings and contributions related to marketing theory and real-world practices can be drawn. First, owing to the context specific nature of service recovery, most previous studies have focused on a single service type (e.g. restaurant) or a specific service industry (e.g. hospitality industry). With a view to justifying our argument that the relative effectiveness of service recovery is situation specific, we conducted two experimental studies that included two different service types in different service industries (Study 1: banking as representative of utilitarian services and a restaurant as representative of hedonic services) and two different service types within the same service industry (Study 2:

business hotels for utilitarian services and leisure hotels for hedonic services). Responses from 135 undergraduate students in Study 1 and 144 real consumers in Study 2 provided strong evidence that the effectiveness of a service compensation strategy is based on whether the service is utilitarian or hedonic. More specifically, when customers receive utilitarian compensation (in this case a price reduction) after a service failure, they tend to experience higher levels of post-recovery satisfaction and repurchase intention for utilitarian services (e.g. at a bank or a business hotel) than for hedonic services (e.g. at a restaurants or a leisure hotel). Conversely, customers who receive hedonic compensation (such as a free gift) after a service failure express higher levels of post-recovery satisfaction and repurchase intention for hedonic services than for utilitarian services. These findings have not been found previously, because in much past work, the focus for service recovery has been on the relative importance of the three justice dimensions (distributive, procedural, and interactional) and their influence on customer service evaluations (Blodgett et al., 1997; Goodwin and Ross, 1992; Ruyter and Wetzels, 2000; Wirtz and Mattila, 2004), as well as how different levels of compensation (i.e. with vs without, or high vs medium vs low) impact customer satisfaction and behavior outcomes (Boshoff, 1997; Mattila, 2001; McCollough et al., 2000; Tax et al., 1998). The primary contribution of this study to the service marketing literature is that it provides empirical results which shed light on the interplay between the type of compensation and the type of service on the customer’s post-recovery judgment of the service. In addition, it is worth noting that our results do not disagree with those of Smith et al. (1999) who found that customers prefer to receive recovery resources that match the type of failure they have experienced – that is, an apology and speedy response in the case of process failures and tangible compensation in the case of outcome failures. What we have done here is to further clarify which type of tangible compensation is better in case of an outcome failure. To the best of our knowledge, this is the first time this specific issue has been dealt with. Third, a large number of existing studies have shown that tangible compensation (such as discounts, coupons, free gifts, and so on) have a positive effect on customer satisfaction (Smith et al., 1999; Tax et al., 1998) but a negative effect on defection rates (percentage of people indicating that they would no longer patronize that restaurant) (Hoffman et al., 1995). However, little is known about whether it would be better to offer customers a discount, a coupon, or a free gift in the case of service failures. To explore the important, but as yet under-researched issue of what kind of tangible compensation would be more effective at restoring customer satisfaction and repurchase intentions, we classified tangible compensation strategies as either utilitarian or hedonic, based on the predominant nature of their benefits. Hence, compensations that primarily include functional, instrumental, and practical benefits are categorized as “utilitarian”, while aesthetic, experiential and enjoyment-related benefits are categorized as “hedonic”. Our results confirm that there is a need for congruency between compensation type and service type. The value of developing a compensation classification scheme lies in the ability to facilitate and develop meaningful strategies and action plans for service recovery programs. Given that organizational compensation strategies ultimately cut into company profits and give rise to service recovery performance (Smith et al., 1999), understanding the nature of specific compensation contexts and the tactical and strategic implications of these contexts is important. Moreover, compensation types may create a foundation for developing theories within a specific compensation classification.

Service compensation strategies 213

JOSM 22,2

214

Future research and study limitations There are numerous opportunities for future research in this area, some of which are made evident by the limitations of this study. For example, to maximize internal validity, we utilized hypothetical scenarios rather than an actual consumption experience as stimuli. The setting involved only one type of failure (outcome failure). Future studies could include different types of failures or levels of severity and a more natural setting. Second, other classification systems for services should be examined. For example, hard services (involving little customer/staff contact) might require a different type of compensation than soft services (involving much customer/staff contact). Third, only one type of utilitarian and one type of hedonic compensation were used. In future, we could include several exemplars in each compensation category. Moreover, it is possible that customer preference for specific compensation type may depend on income. Individuals with lower incomes might be more apt to prefer utilitarian compensation as opposed to hedonic. This can be included in future analysis. In addition, although we make the argument that utilitarian types of compensation are better for utilitarian services and vice versa, this may depend on how large the clients’ business volume is. With banks for instance, clients with very large personal banking accounts are already likely to be getting the best deal possible, so they might interested in mostly hedonic compensations as rewards for their patronage. Researchers could investigate this possibility in future. Finally, in their study, Ringberg et al. (2007) found three cultural models – relational, oppositional, and utilitarian – that influenced people’s recovery preferences and reactions to goods or service failures. It would be beneficial to integrate the cultural model approach into our framework. It is expected that such an investigation would enable utilitarian and hedonic service providers to develop adaptive service recovery strategies that more closely resonate with consumers’ different recovery preferences and thereby improve consumer recovery satisfaction.

References Aaker, D.A. and Keller, K.L. (1990), “Consumer evaluations of brand extensions”, Journal of Marketing, Vol. 54 No. 1, pp. 27-41. Babin, B.J., Darden, W.R. and Griffin, M. (1994), “Work and/or fun: measuring hedonic and utilitarian shopping value”, Journal of Consumer Research, Vol. 20 No. 4, pp. 644-56. Batra, R. and Athola, O.T. (1990), “Measuring the hedonic and utilitarian sources of consumer attitudes”, Marketing Letters, Vol. 2 No. 2, pp. 159-70. Bitner, M.J. (1990), “Evaluating service encounters: the effects of physical surroundings and employee responses”, Journal of Marketing, Vol. 54 No. 2, pp. 69-82. Blodgett, J.G., Hill, D.J. and Tax, S.S. (1997), “The effects of distributive, procedural and interactional justice on post-complaint behavior”, Journal of Retailing, Vol. 73 No. 2, pp. 185-210. Boshoff, C. (1997), “An experimental study of service recovery options”, International Journal of Service Industry Management, Vol. 8 No. 2, pp. 110-30. Chandon, P., Wansink, B. and Laurent, G. (2000), “A benefit congruency framework of sales promotion effectiveness”, Journal of Marketing, Vol. 64 No. 4, pp. 65-81. Chernev, A. (2004), “Goal-attribute compatibility in consumer choice”, Journal of Consumer Psychology, Vol. 14 Nos 1/2, pp. 141-50.

Chitturi, R., Raghunathan, R. and Mahajan, V. (2007), “Form versus function: how the intensities of specific emotions evoked in functional versus hedonic trade-offs mediate product preferences”, Journal of Marketing Research, Vol. 44 No. 4, pp. 702-14. Dhar, R. and Wertenbroch, K. (2000), “Consumer choice between hedonic and utilitarian goods”, Journal of Marketing Research, Vol. 37 No. 1, pp. 60-71. Edwards, K. (1990), “The interplay of affect and cognition in attitude formation and change”, Journal of Personality and Social Psychology, Vol. 59 No. 2, pp. 202-16. ´ Garcıa-Falco´n, J.M. and Medina-Munˇoz, D. (1999), “The relationship between hotel companies and travel agencies: an empirical assessment of the United States market”, The Service Industries Journal, Vol. 19 No. 4, pp. 102-22. Goodwin, C. and Ross, I. (1992), “Consumer responses to service failures: influence of procedural and interactional fairness perception”, Journal of Business Research, Vol. 25 No. 2, pp. 149-63. Hess, R.L. Jr, Ganesan, S. and Klein, N.M. (2003), “Service failure and recovery: the impact of relationship factors on customer satisfaction”, Journal of the Academy of Marketing Science, Vol. 31 No. 2, pp. 127-45. Hirschman, E.C. and Holbrook, M.E. (1982), “Hedonic consumption: emerging concepts, methods and proposition”, Journal of Marketing, Vol. 46 No. 3, pp. 92-101. Hoffman, K.D., Kelley, S.C. and Rotalsky, H.M. (1995), “Tracking service failures and employee recovery efforts”, Journal of Services Marketing, Vol. 9 No. 2, pp. 49-61. Holbrook, M.B. (1994), “The nature of customer value”, in Rust, R.T. and Oliver, R.L. (Eds), Service Quality: New Directions in Theory and Practice, Sage, Thousand Oaks, CA, pp. 21-71. Jiang, Y. and Wang, C.L. (2006), “The impact of affect on service quality and satisfaction: the moderation of service contexts”, Journal of Service Marketing, Vol. 20 No. 4, pp. 211-8. Levesque, T. and McDougall, G. (2000), “Service problems and recovery strategies: an experiment”, Canadian Journal of Administrative Science, Vol. 17 No. 1, pp. 20-37. McCollough, M.A., Berry, L.L. and Yadav, M.S. (2000), “An empirical investigation of customer satisfaction after service failure and recovery”, Journal of Service Research, Vol. 3 No. 2, pp. 121-37. Mano, H. and Oliver, R.L. (1993), “Assessing the dimensionality and structure of the consumption experience: evaluation, feeling, and satisfaction”, Journal of Consumer Research, Vol. 20 No. 3, pp. 451-66. Mattila, A.S. (2001), “The effectiveness of service recovery in a multi-industry setting”, Journal of Services Marketing, Vol. 15 No. 7, pp. 422-8. Maxham, J.G. III (2001), “Service recovery’s influence on consumer satisfaction, positive word-of-mouth, and purchase intentions”, Journal of Business Research, Vol. 54 No. 1, pp. 11-24. Reimer, A. and Kuehn, R. (2005), “The impact of servicescape on quality perception”, European Journal of Marketing, Vol. 39 Nos 7/8, pp. 785-808. Ringberg, T., Odekerken-Schro¨der, G. and Christensen, G.L. (2007), “A cultural models approach to service recovery”, Journal of Marketing, Vol. 71 No. 3, pp. 194-214. Ruyter, K. and Wetzels, M. (2000), “Customer equity considerations in service recovery: a cross-industry perspective”, International Journal of Service Industry Management, Vol. 11 No. 1, pp. 91-108. Shavitt, S. (1990), “The role of attitude objects in attitude functions”, Journal of Experimental Social Psychology, Vol. 26 No. 2, pp. 124-48.

Service compensation strategies 215

JOSM 22,2

216

Smith, A.K. and Bolton, R.N. (2002), “The effect of customers’ emotional responses to service failures on their recovery effort evaluations and satisfaction judgments”, Journal of the Academy of Marketing Science, Vol. 30 No. 1, pp. 5-23. Smith, A.K., Bolton, R.N. and Wager, J. (1999), “A model of customer satisfaction with service encounters involving failure and recovery”, Journal of Marketing Research, Vol. 36 No. 3, pp. 356-72. Stafford, M.R., Stafford, T.F. and Day, E. (2002), “A contingency approach: the effects of spokesperson type and service type on service advertising perceptions”, Journal of Advertising, Vol. 31 No. 2, pp. 17-34. Tabachnick, B.G. and Fidell, L.S. (2006), Using Multivariate Statistics, Allyn and Bacon, Boston, MA. Tax, S.S., Brown, S.W. and Chandrashekaran, M. (1998), “Customer evaluation of service complaint experiences: implications for relationship marketing”, Journal of Marketing, Vol. 62 No. 2, pp. 60-77. Wirtz, J. and Lee, M.C. (2003), “An examination of the quality and context-specific applicability of commonly used customer satisfaction measures”, Journal of Service Research, Vol. 5 No. 4, pp. 345-55. Wirtz, J. and Mattila, A.S. (2004), “Consumer responses to compensation, speed of recovery and apology after a service failure”, International Journal of Service Industry Management, Vol. 15 No. 2, pp. 150-66. Corresponding author Wen-Hsien Huang can be contacted at: [email protected]

To purchase reprints of this article please e-mail: [email protected] Or visit our web site for further details: www.emeraldinsight.com/reprints