Developing effective service compensation strategies : Is a price reduction more effective than a free gift?

Purpose – The purpose of this paper is to gain some insight into the effectiveness of different types of tangible compensation strategies for two different types of services: utilitarian and hedonic. Design/methodology/approach – The hypotheses are investigated using a 2×2 between‐subject experimental design and two factors: service type (utilitarian vs hedonic) and compensation type (utilitarian – a price reduction vs hedonic – a free gift). Findings – The results show that customers prefer to receive a form of compensation that matches the type of service involved. For example, customers who receive a utilitarian compensation (e.g. a price reduction) after experiencing a failure in utilitarian service (e.g. at a bank) report higher levels of satisfaction and repurchase intention than they would after experiencing a failure in hedonic services (e.g. at a restaurant), but that the reverse is true for a hedonic‐type compensation (e.g. a free gift). Practical implications – The offering of either a price reduction or a free gift cuts into company profits. Organizations should, therefore, tailor their service recovery efforts, focusing on those resources in the bundle that will have the greatest positive impact and create the most favorable customer response. Originality/value – The primary contribution of this paper to the service marketing literature is that it provides empirical results, which shed light on the interplay between the type of compensation and the type of service on the customer's post‐recovery judgment of that service.