Money for nothing: The impact of compensation on customers’ bad-mouthing in service recovery encounters.

Abstract

As one of the retailer’s most potent recovery tactics to ofset disgruntled customers, frms invest heavily in compensation to increase customer satisfaction and improve loyalty. However, the efectiveness of this tactic remains unclear. This study examines whether frm-ofered compensation afects customers’ emotional responses and bad-mouthing behavior (i.e., telling others about a particular problem). Importantly, the study investigates whether the level of collaboration during the recovery encounter moderates the link between compensation and customers’ emotional responses, and whether collaborative eforts infuence the efectiveness of compensation. The fndings indicate that collaboration during the recovery encounter is necessary if compensation is to mitigate negative emotional responses, with downstream efects on bad-mouthing behavior. In confrming the importance of collaboration during recovery encounters, the fndings have critical managerial and fnancial implications.