Offering rebates as a form of service recovery can actually backfire

It happened, again. You know the script: the internet is down; you try all the tricks in the book; they don’t work; you call the provider; they tell you that “we are experiencing some technical problems in the area”; they apologise; eventually, they offer you a rebate on your monthly fee which hardly makes up for the time you wasted, let alone the frustration you are experiencing.

Is a rebate the best that subscription-based service providers can do to make up for service failure?

According to the paper “The Unintended Consequence of Price-Based Service Recovery Incentives”, authored by Vamsi K Kanuri and Michelle Andrews, suggests that rebates can actually backfire.

Kanuri and Andrews examined 6,919 contract renewal decisions following various service failure + rebate combos, for a newspaper offering a monthly subscription service. They found that renewal decisions actually decreased after customers received a discount to make up for a service failure! The authors believe that this is because the rebates “may lead subscribers to adjust (downwards) the price they believe is fair for the service” (page 72). We call this new anchor value the “reference price”. Because the reference price is lower than the renewal price, offering rebates as a form of service recovery can actually decrease the likelihood that customers will renew their contracts at full price, especially when the failure (and, thus, the rebate) occurs close to the renewal of the subscription.

To offset this effect, providers of subscription-based services like telecoms, streaming, newspapers or fitness should consider the following:

• Remind customers of the full-price of renewal, to help customers update their reference price.

• Coordinate the rebate being offered for the service failure with renewal discount incentives, in order to reduce the gap between the cost of renewing the subscription and customers’ reference price following the rebate.

• Consider the extent to which other service providers may be offering discounts or other benefits at the time the renewal is due.

• Engage in personalised communications that emphasise the value offered by the service provider which are most relevant for that particular customer (or type of customer). For some, it may be the breadth of services offered, for others it may be one specific service.

• Extend the contract (e.g., instead of discounting 50% of next month’s fee extend the contract for one additional month for free), in order to postpone the date when the customer needs to renew their subscription. This not only gives customers the perception of getting value, but gives providers opportunity to get customers to adjust their reference price through the mechanisms discussed next (and, presumably, to delight customers).

The last one is my favourite. Though, mind you, at the rate at which my internet service provider fails, if they gave me a free, additional month’s subscription every time they let me down, I would be using them for the rest of my life… which is not a reassuring perspective. 😩