How much future revenue is lost if a customer complains? How depends this loss on whether the company recovers the problem?

KNOWLEDGE @BI: Complaint Management

Customer complaints occur frequently and may change, or even terminate, the company’s relationship with its customers. However, current practice is that companies do not rely much on customer analytics to deal with complaints and as a result their complaint handling is inconsistent.

Because of increasing pressure to justify marketing based on its return on investment, both researchers and managers have called for complaint management to become more financially accountable.

We followed up on this and developed a model to estimate how much future revenue is lost if a customer complains and how this loss due to foregone future purchases depends on whether the company recovers the problem and on the customer’s history with the company.

We applied the model to actual transaction and complaint records from a major internet and catalog retailer. Our findings imply the following lessons.

1. Better to prevent than recover

Recovery makes it less likely that the customer stops buying from the company, i.e., drops out, after a complaint. However, the effectiveness of recovery is not large enough to offset the initial problem. So, we did not find support for the recovery paradox that the company is better off after a complaint that is recovered well than in the hassle-free case. It is worth devoting resources to prevent failures from occurring.

2. Survive both the complaint incident and the subsequent critical period

The negative impact of past customer complaints on future purchasing fades out quickly. This is good news for retailers and service providers. If the customer did not decide to abandon the company after the complaint and no second failure occurs soon after the first, the relationship quickly returns to business-as-usual; the customer might still hold a grudge, but remains loyal to the company in terms of future purchasing.

3. Recover both new and established customers

New customers are more vulnerable than established customers in terms of drop-out after a complaint, but this does not imply that most monetary value is destroyed. While a new customer is more likely to abandon the company, the value of the foregone purchases is smaller if she would decide to do so. This is an important refinement of the common recommendation that the company should focus recovery resources on new customers whose preferences are affected most.

4. Recover customers with past complaints

Companies should resist the temptation of refusing recovery to customers who have complained in the past, as this negative policy is not optimal. Most customer value is destroyed if recovery is denied to established customers who have complained before.

While these high-value customers seem quite forgiving to company failures, they expect the company to take care of their complaints, in particular if it is not the first problem; they become prone to leaving the company if no recovery is made.

5. Guide new customers well to avoid repeat complaints

While it may be more important for an established customer to recover a second failure than to avoid this repeat complaint, the opposite holds for new customers.

A new customer is still somewhat forgiving toward a first failure (if recovered), but the second failure is likely the end of the relationship, irrespective of whether recovery is provided.

Reference:

Knox, George and Rutger van Oest (2013), Return on Recovery: Customer Complaints and Lifetime Value, working paper.

This article is published in BI Marketing Magazine 2014/2014. BI Marketing Magazine is a Science Communication Magazine published by the Department of Marketing at the BI Norwegian Business School.

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