Customer Complaints and Recovery Effectiveness: A Customer Base Approach

Abstract

Although customer complaints are a well-studied aspect of business, no study has measured the impact of actual complaints and recoveries on subsequent customer purchasing. The authors develop a customer base model to investigate the effectiveness of recovery in preventing customer churn. They calibrate it on panel data that track actual purchases, complaints, and recoveries for 20,000 new customers of an Internet and catalog retailer over 2.5 years. Complaints are associated with a substantial increase in the probability that the customer stops buying, but the size of the increase depends on prior customer experiences: prior purchases mitigate the effect, and their impact is long-lasting, whereas prior complaints exacerbate the effect, but their impact is short-lived. Thus, unless the customer leaves the company after a complaint, or a second failure occurs shortly after the first, the relationship quickly returns to normal. Recovery counters the effect of the complaint but, in almost all cases, does not entirely offset it. The authors use simulation to translate the results to financial impact and discuss implications for researchers and managers.