ServiceFriday: Will You Stay if We Pay? Benefits of Financial Compensation After a Service Failure

Financial compensation as a means to recover from service failures can serve as powerful tool. However, it is important that practitioners learn the ways in which to do this properly in order to receive the most desired outcomes for service recovery. Research from the Journal of Service Research examines the ways in which financial compensation should be applied to service recovery efforts, as well as the types of compensation that should be used according to the situation. 

Practitioners need to keep in mind that high touch offerings such as personal notes from service employees, along with cash or a gift card instead of a credit entry or reimbursement, go a long way to increase recovery outcomes. “a particularistic compensation, coming from the individual service employee, is perceived as fairer, rendering customers more satisfied compared to presenting the same monetary amount in an impersonal way, as coming from ‘the firm.'” 

The researchers also uncovered an interesting side effect when financial compensation is applied in a highly personal way. They found that customers will often be compelled to pay it forward in the form of tipping more, or even buying an additional service or product following the right compensation effort. “Specifically, a particularistic (i.e., personal) or concrete (i.e., tangible) compensation fosters obligations to reciprocate, which in turn increases tipping and cross-buying. The reciprocation effect is particularly pronounced for the link between particularism and tipping. Tipping is a major source of income for many service employees, especially for the two million waiters and waitresses in the United States (U.S. Bureau of Labor Statistics 2014). Although the effect is likely to be context specific, particularism produces an approximate 28% increase in the amount of the tip when compensation is delivered in a personal (vs. impersonal) way.”

The advice for practitioners is to be wary of compensating for a service failure in any way that could be perceived as disingenuous or manipulative. “…service employees should not give customers the impression that they are obliged to repay the compensation. Indeed, firms should not even insinuate that customers can spend this money on a tip or on the firm’s offerings, for example, by offering additional services while handing over the money. Customers could perceive this action as an undue manipulation, leading to reactance.”

To access the full article in the Journal of Service Research, visit Sage Journals at this link: (A fee may apply.)

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