ServiceFriday: Invest in Divestment – How to Avoid Customer Revenge

It’s cheaper to keep a customer then to attain a new one is how the old saying goes, but what happens when the time comes for service providers to divest from customer service contracts? Divestment occurs by contract demotion (cutting back services) or termination and “is not based on mutual agreement but solely on the provider’s relationship valuation.” Initial research has shown that divested customers retaliate by engaging in revenge behaviors such as negative word-of-mouth, marketplace aggression and vindictive complaining. Does the type of divestment used affect customer revenge and if so, what mediates the relationship and how can service providers alleviate the negative outcome?

A recent research paper, published in the Journal of Service Research, featured four studies that offered empirical evidence on the impact of the two divestment tactics on customer revenge. Study 1 and 2 asked participants to imagine a scenario where they had a roadside assistance membership and experienced one of the three divestment conditions (termination, demotion, and no divestment). Study 2, however, also examined if offering financial compensation mitigates the situation. Study 3 replicates the procedures and methods of Study 2 but the focus is on the impact of an apology rather than financial compensation. Study 4’s purpose was to extend the validity and generalization of the findings from the previous studies.

Researchers discovered that the pre-divestment satisfaction of customers greatly influenced their revenge behaviors. For customers with high pre-divestment satisfaction, service termination caused a higher desire for revenge than service demotion did. If pre-divestment satisfaction was low, customers had a greater desire for revenge due to service demotion versus service termination. The results indicated that anger was the mediating factor between divestment and revenge behaviors.

Study 2 followed the prior study’s methods but examined whether offering financial compensation helps to reduce the negative effects of mismatching the divestment tactic with pre-divestment satisfaction. “Notably, compensation not only mitigates the effect of a mismatch between divestment approach and pre-divestment satisfaction on customer revenge, it completely reverses it.” the researchers discovered. For customers with high pre-divestment satisfaction, combining financial compensation with service termination led to less customer revenge but offering it with service demotion led to more customer revenge. The opposite was true for customers with low pre-divestment satisfaction.

The methods of Study 2 were replicated in Study 3 with two exceptions: participants were asked to imagine a scenario involving a fictitious bank, and participants were offered an apology instead of financial compensation. After analyzing 381 responses, the researchers discovered the same effect from Study 2. “Study 3 supports Hypothesis 3b by showing that the interaction effect between divestment approach and pre-divestment satisfaction on customer revenge is also reversed by offering an apology.”

Managerial implications

Managers are right to be concerned about customers getting revenge after a service contract divestment. These studies indicate that there could be serious financial losses but they also offer suggestions. “We recommend that managers concentrate on service demotion to divest from previously satisfied customers to curtail revenge.” The opposite is true for customers who were not previously satisfied. Researchers call for “customer-centric decision processes” when service providers’ goal is to loosen or end relationships.

The researchers also suggest that service providers collect, analyze and leverage customer relationship data. In doing so, they can identify opportunities to recover customer relationships and avoid divestment altogether. “Service firms could further use social media monitoring in order to track customer satisfaction.” 

Lastly, the results show that offering financial compensation or an apology after termination can help mitigate the undesirable effects of divestment if the customer was previously satisfied. If the customer was previously dissatisfied then offering financial compensation or an apology would work best after a demotion.

To read the full article, go to the Journal of Service Research. (A fee may apply.)