The effect of on‐the‐spot versus delayed compensation: the moderating role of failure severity

Purpose – The present study compares two types of compensation – i.e. on‐the‐spot and delayed – and tries to reveal how and when firms can utilize delayed compensation effectively. For this, failure severity is considered how these two types of compensation affect satisfaction and repurchase intentions. Design/methodology/approach – A scenario‐based experiment in the hotel and restaurant industries was used with a sample of 292 students. Findings – The results show that failure severity acts as a moderating variable in a recovery process of compensation‐satisfaction‐repurchase intention. The more severe consumers perceive the failure is, the more they depend on satisfaction to decide repurchase intentions. The two types of compensation are also moderated by failure severity on their effects on satisfaction and repurchase intentions. On‐the‐spot compensation leads to more satisfaction and repatronage intentions when failures are severe, but the results are not as straightforward when failures are insignificant. Under such a condition, while delayed compensation does not engender customer satisfaction with recovery as much as on‐the‐spot compensation, repatronage intentions for both types of compensation were similar in the hotel industry and even higher in restaurant services. Research limitations/implications – Industry differences such as ease of visit, frequency of visit, competition factors, and primary value (e.g. hedonic versus utilitarian) are expected to influence the effects of on‐the‐spot versus delayed compensation. Practical implications – The study provides practitioners with the implication that the timing of compensation should be approached strategically according to the severity of failure and recovery outcomes they expect to achieve. Originality/value – The present study tries to focus on compensation, one of the most commonly used recovery strategies, and tries to find the effects of different timings of it.