Shannon Roddel | July 3, 2019
Subscription-based service providers including newspapers, cable and internet providers and utility companies often issue price-based incentives including discounts in response to complaints about service failures. It’s been shown to satisfy angry customers — at least momentarily.
But new research from the University of Notre Dame demonstrates the tactic may not be successful in retaining customers in the long term.
“The Unintended Consequence of Price-Based Service Recovery Incentives,” forthcoming in the Journal of Marketing from lead author Vamsi Kanuri, assistant professor of marketing in Notre Dame’s Mendoza College of Business, and Michelle Andrews from Emory University, shows that in subscription-based service settings, discounts to make up for service failures could backfire by reducing the likelihood of subscription renewals.
“The economic theory of reference prices (amount a purchaser thinks is appropriate to pay for a good or service) leads us to believe that discounts to make up for service failures will provide a new price point for customers to anchor on,” Kanuri said. “In turn, this will lead them to compare the price of the service renewal with their reduced service price following the service failure. A higher discount results in consumers forming a lower reference price, which in turn increases the difference between the full renewal price and the reference price. This difference then translates into a perceived loss, which ultimately results in lower renewal probabilities.”
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