How to offer price-based recovery incentives
We all try very hard, yet, at one point or another our companies fail to deliver the services we promise our customers. This happens every day across all businesses - in restaurants, software, car repair shops, telcos, and all others.
When this happens, we try to mitigate the damage. A very popular solution is to provide a price incentive to the customer - a discount for the rest of the subscription or a one-off discount coupon. Such price-based recovery incentives have indeed been found to increase customer satisfaction.
What is less clear is whether they manage to inspire the action we need, i.e. for a customer to renew their contract. A survey published last year in the Journal of Marketing came up with surprising results (https://journals.sagepub.com/doi/abs/10.1177/0022242919859325?journalCod...). Read on.
Offering price incentives to save customers: it is not all flowers
On the surface of it, it makes sense for price incentives to be effective in mitigating the damage from a service failure. But are they really? To shed light on this question, in 2019 Vamsi Kanuri and Michelle Andrews published the results of their analysis of close to 7.000 newspaper contract renewal decisions.
What they found out is goes against what one expects: offering a price incentive is associated with lower renewal rates. In other words, customers who were offered a discount, for example, were less likely to renew at full price compared to others. Why is that?
Price perception is a matter of expectation
The reason price incentives are not as effective as we often think is what behavioral economists call 'reference price points'. These "are internal standards of price consumers believe are fair for a given service." (Kanuri VK, Andrews M. The Unintended Consequence of Price-Based Service Recovery Incentives. Journal of Marketing. 2019;83(5):57-77.)
How does this relate to price incentives? "Reference prices play a critical role in how consumers perceive current prices and, in turn, whether they begin or renew subscriptions. Specifically, to judge the acceptability of a current price, consumers compared the current price with their reference price." (ibid).
What happens when a customer is offered a price incentive after a service failure is that their reference price point changes. In customers' minds, how much they are paying for their contract is no longer the initial price X, but X minus the discount. So now not only have you failed to deliver what you promised - you have also decreased the perceived value of your service, i.e. the reference price point.
The result when the subscription is due for renewal? Well, the reference (fair) price your customer has in their head is now lower than the price you are asking for, which opens the door for subscription cancellation.
What can we do?
Knowing this, what can a company do? Kanuri and Andrews offer three ideas.
One thing you can do is to remind customers of the original price points at certain intervals between the incentive and the renewal. This prevents, to an extend of course, the formation of a new, lower, reference price and weaken the negative impact of price incentive on renewals.
Another possible action is to offer a discount at the time of renewal. This is obviously not an ideal solution as you lower your price, but at least you save the customer.
A third option is to extend the time period between the service recovery incentive and the renewal. This relies on the simple and universal human feat (or bug) called forgetting. Allowing time to do its work weakens the negative impact of the incentive on the reference price, thus increasing the likelihood of renewal.
All in all, offering price-based incentives after a service recovery might work, but they need to be managed well. Reminding customers of the original price, offer a discount at renewal, and extending the time between the incentive and the renewal are all ideas that help you keep customers on board.
My best wishes for a great day ahead!