Understanding the role of service recovery strategies in reducing customer churn in an emerging market

 by Prof. Sourav Borah

Firms invest a considerable amount of resources in developing customer relationship management (CRM) strategies. According to the CMO report survey 2018, firms invest 9.5% of the total marketing budget in CRM which is considerably higher than other marketing activities such as brand building, new product introduction and new service introduction spending2. One of the central elements of any customer retention strategy is to prevent customer churn. However, despite such a high level of spending, firms across the globe are struggling to manage customer churn. Among multiple reasons for customer churn, service failures are a key concern for managers. While firms across markets are struggling with service failures, firms in emerging markets are facing significant challenges to manage the same. According to a consulting report, 64% of Indian customers churn because of issues associated with service failure3. Due to multiple problems such as unavailability of human capital, infrastructure, lack of customer focus, firms in emerging markets find it hard to control service failures. If a firm cannot prevent service failures from taking place, it is only reasonable to expect that there will be effective strategies to mitigate the ill effects of service failures (commonly referred as service recovery strategies). While articles both from academic as well as practitioners' perspective have been written in this area, there is limited focus on what should firms operating in an emerging market do to mitigate the ill effects of service failures. Along with the co-authors, I have tried to address this issue in our research.

Extant literature in service failure has classified failure as outcome failure and process failure. Outcome failures are failures associated with the final outcome of a service, such as non-availability of services. Contrary to that, process failures are failures associated with service delivery processes, such as delayed service, long queues, rude behaviour, etc. Scholars also point out that outcome failures are associated with utilitarian exchanges, whereas process failures are related to symbolic exchanges. Thus, a tangible recovery option such as compensation is more effective in case of outcome failure whereas a symbolic recovery option such as an apology is more desirable in case of process failure. Matching recovery strategy with service failure is commonly referred to as the 'matching hypothesis'

While there seems to be a consensus around the matching hypothesis, most research has primarily been conducted in developed markets of the United States and Western Europe. However, emerging markets differ from developed markets both structurally as well as culturally. Structurally, extant literature has shown that emerging markets differ from developed markets in four dimensions- chronic shortage of resources, inadequate infrastructure, market heterogeneity and high levels of unbranded competition. Again, cultural embeddedness and hierarchy are the two most salient characteristics which distinguish emerging markets from developed markets. We argue that because of structural and cultural differences, some failures are more painful to consumers than others. As such, we show that process failure will lead to a higher likelihood of churn as compared to an outcome failure. Due to prevailing market conditions such as poor infrastructure, outcome failures are a reality in emerging markets. Irrespective of the service provider, consumers are more likely to face outcome failures. Again, as there are high levels of unbranded competition, the quality of alternatives for the consumers is poor in emerging markets. Therefore, outcome failures are prevalent across the market and consumers are more likely to encounter them. Contrary to that, process failures go against the cultural realities of emerging markets. With the culture of embeddedness (which emphasizes on group norms) and hierarchy (which emphasizes on an unequal distribution of power), process failures are in odds with the culture prevalent in emerging markets. Hence, we argue that the likelihood of customer churn is greater in the case of process failures as compared to outcome failures.

Again, we also show that the matching hypothesis may not hold in emerging markets. Due to scarcity of some resources such as 'economic resources (money, reward etc.)' and an abundance of some otherssuch as 'politeness and courtesy' , consumers may be willing to trade even dissimilar resources. We show that compensation is more important in case of process failures as compared to outcome failures. The losses in case of outcome failures are tangible in nature. Therefore, consumers expect some tangible benefits such as monetary compensation as a part of the recovery strategy. However, for process failures losses are primarily symbolic. Thus, providing a scarce resource such as tangible compensation when consumers are not expecting the same will lead to customer delight, which substantially reduces customer churn. Similarly, we show that an 'apology' is more effective in case of process failure as compared to outcome failure as losses associated with process failure are symbolic. Finally, we also establish that resolving the problem promptly is more effective in case of outcome failure than process failure.

We use three different methods, including interviews of industry experts, field data from a telecom service provider and laboratory experiments, to test our hypothesis. From the managerial perspective, our paper highlights the need for segregating service failures and devising recovery strategies based on the type of failure. We also challenge some of the conventional wisdom prevalent in the service industry. For example, our findings suggest that while an apology can be an effective strategy in case of process failure, it is not as effective in case of an outcome failure. Similarly, compensation is more effective in case of process failure. To sum up, our paper extends the existing scholarship in service recovery by bringing contextual nuances and challenging the conceptual underpinnings.

1 This article is based on a research article "Borah, S. B., Prakhya, S., & Sharma, A. (2019). Leveraging service recovery strategies to reduce customer churn in an emerging market. Journal of the Academy of Marketing Science, 1-21."
2 https://cmosurvey.org/wp-content/uploads/2018/08/The_CMO_Survey-Highlights_and_Insights_Report-Aug-2018.pdf
3 https://www.thehindu.com/news/cities/mumbai/Customers-head-for-the-exit-at-first-sign-of-poor-service/article10026653.ece

About The Author

Prof. Sourav Borah

Prof. Sourav Borah

PhD, IIM Bangalore