Where service recovery meets its paradox: implications for avoiding overcompensation

Abstract

PurposeThe service recovery paradox (SRP) is the phenomenon that happens when customer satisfaction level post-service failure and recovery surpasses the customer satisfaction level achieved at error-free service. The aim of this study was to identify how large the size of compensation has to be at recovery for customer satisfaction to surpass that of error-free service (i.e. to identify a threshold value for SRP). The purpose of this is to inform managers how to restore customer satisfaction yet avoid overcompensation.Design/methodology/approachThe paper covers two studies. Study 1 used the novel approach of asking participants who had experienced a service failure in the hotel industry what amount of money (recovery) would make them more satisfied than in the case of error-free service. Study 2 then tested the compensation levels expressed by Study 1 participants to be sufficient for the service recovery paradox to occur.FindingsStudy 1 indicated that the threshold for the SRP was (on average) around 1,204 SEK, or just over 80% of the original room reservation price of 1,500 SEK (approx. $180). Study 2 found that (on average) the customer satisfaction of participants who received 1,204 SEK in compensation for service failure marked the point where it surpassed that of error-free service. Participants who received 633 SEK were less satisfied; participants who received 1,774 SEK were more satisfied.Research limitations/implicationsThe findings are context-specific. Future research should test the findings' generalizability.Practical implicationsThe approach used in this paper could provide managers with a tool to guide their service recovery efforts. The findings could help hotel managers to make strategic decisions to restore customer satisfaction yet avoid overcompensation, given a legitimate service failure in which the organization is at fault.Originality/valueNumerous previous studies have investigated the occurrence or absence of the SRP at predetermined compensation levels. This paper used a novel approach to find a quantitative threshold at which the magnitude of the recovery effort makes customer satisfaction surpass that of error-free service.

The demand-what-you-want strategy to service recovery: achieving high customer satisfaction with low service failure compensation using anchoring and precision effects

“…Service-oriented companies must consider the decremental effect of offering larger compensations in their service recovery strategies to avoid overcompensation—that is, setting compensation sizes that waste unreasonably large resources in relation to the gains obtained in customer satisfaction (Hazarika et al ., 2019). An important factor to avoid such overcompensation is the threshold of the SRP (Edström et al ., 2022)—namely, the point at which compensation is large enough for customer satisfaction and the feeling of fair procedures to surpass that of error-free service. Compensations larger than this can be considered unnecessary and a waste of resources from the company's viewpoint.…”

“…Quasi-monetary compensations like cryptocurrencies (Nazifi et al ., 2021b) have similarly been found to have positive effects. Past research also indicates that the compensation must be quite substantial for the service recovery paradox (Figure 1) to emerge (Edström et al ., 2022; Garg, 2013; Ok et al ., 2007).…”

“…Finally, our study contributes to, and nuances the question of the optimal level of compensation in recovery (Gelbrich et al ., 2015; Khamitov et al ., 2020). In a recent study, Edström et al . (2022) tried to identify a fixed threshold for recovery efforts to trigger SRP.…”

“…In the case above, the hotel could offer complimentary drinks or food, provide sincere apologies and explanations, offer monetary compensation or use other means to amplify their service recovery to improve customer satisfaction and loyalty (Krishna et al, 2011). Recovery efforts can improve the level of customer satisfaction and under certain circumstances even surpass the level of error-free service (Edstr€ om et al, 2022;Krishna et al, 2014). This phenomenon is known as the service recovery paradox (SRP; McCollough et al, 2000), see Figure 1.…”

Participative leadership and service recovery performance: a moderated mediation model

“…While “errors occur ubiquitously in every industry” (Yao et al ., 2019, p. 78), service organizations are potentially more vulnerable to errors that constitute service failure, mainly due to the inherently heterogeneous, uncertain and consistently evolving service delivery process and the involvement of multiple actors in service delivery (Ali et al ., 2020a; Chen, 2016; Dang-Van et al ., 2022; Edström et al ., 2022; Jerger and Wirtz, 2017; Peng et al ., 2022). Therefore, service recovery performance – “the effectiveness of employees dealing with customer complaints” (Boshoff and Allen, 2000, p. 73) – achieves a greater level of prominence within service organizations (Jerger and Wirtz, 2017; Xu et al ., 2014).…”