• Ivaylo Yorgov

CX Science: the zone of tolerence for providing compensation


What:

  • Customers display a zone of tolerance towards service failures: their expectation for a compensation will remain stable for a certain period, giving you an opportunity to fix the failure.

  • First-time customers are more impatient and demand higher compensation sooner. Long-term customers give you a longer zone of tolerance but demand higher compensation after that. Why? Because they feel you betrayed them.


Now what:

  • Investigate how long is the zone of tolerance for compensation after service failure for your business. This will help you maximize the impact of your service recovery spending.



Service failures are a common occurrence in business. Examples abound: outages disrupt internet connections, websites go down, hackers block entire systems and ask for ransom, restaurants mess up orders, banks make mistakes.


To mitigate the damage service failures do on their relationship with customers, companies often offer compensations. These are by and large proven to work in rebuilding trust and keeping customers.


Let me ask you this though: do you know how much compensation should you offer to your customers? Do you know when? Should you offer it to everyone? Is a financial incentive better than a non-financial one?


A survey recently published in the Journal of the Academy of Marketing Science set out to investigate one of these questions: Does expected compensation increase as time passes by? The results can have a major impact on your compensation strategy - read on!



The zone of tolerance


As much as we know that the customer is always right, we often indulge ourselves with stories about choleric customers who went nuclear on your service reps because of a small, easily fixable mistake or mashup. I don't believe this picture of angry customers virtually flocking around your contact center to rip off pieces of revenue and profit does customers justice though.


In fact, the researchers Jens Hogreve, Nicola Bilstein, and Leonhard Mandl found out that there is a time zone of tolerance, in which customers' expectations for a compensation do not increase in the slightest.


This means that no matter if you decide to compensate people affected by a service failure today or in 5 days it wouldn't really make a difference. Hence, to wait before spending money on service recovery compensation is sound advice.


How long is the zone of tolerance? The answer is very context-dependent and every company will have to run its own analytics to figure it out. As an indication, Hogreve, Bilstein, and Mandl tested a compensation period of 1 and 4 weeks and there is a marked difference between the two. Whether the same effect occurs in the third week, though we don't know; it is also unclear how this unfolds in different industries, so it's really a matter of translating the finding to your specific context. What is clear is that there does exist a zone of tolerance and companies will do well to use it to avoid overspending on service recovery.



Stepping outside of the zone


A very interesting effect takes place when service failure continues beyond the zone of tolerance. Remember that for some time the expected compensation does not increase. Once this period is over, customers at first start expecting a much higher compensation. Interestingly, this also fades away - there is a third stage of service recovery during which customers' expectations for financial compensation actually decrease back to the initial levels.


We need to be very clear though that this is not good news. Compensation expectation might decrease but the level of satisfaction plummets as well, and the rate at which customers spread negative word of mouth intensifies. So no, managers cannot just wait for the compensation expectation to decrease, for at this point much deeper and profound changes in the relationship being to take place.



Anger and betrayal


Customers are not all alike. Some have been with you for a long time, with others you are just now developing a relationship. These first-time customers are actually more critical towards you and the zone of tolerance is much shorter than with long-time ones - they expect higher compensation earlier, and it is anger that is driving this behavior.


Long-term customers will be more tolerant towards service failures, but will expect higher compensation afterwards. The emotion driving this: betrayal. Your long-term customers will feel a breach in the trust they've displayed in you and if it comes to that the compensation they'll request would be the least of a company's problems.



I hope this inspires you to dig deeper, much deeper in fact, in the data you possess about your customers. It is a brilliant example of the value of exploring the patterns of customer behavior and looking not just for linear relationships, but for more sophisticated ones. This is completely within the reach of most companies as the amount of data and opportunities to experiment are staggering.

My best wishes for a great day ahead!


CX Inspirations - card 7
.pdf
Download PDF • 31KB