The costs and benefits of addressing customer complaints

Researchers from Michigan State University, University of South Florida, St. John's University, and American Customer Satisfaction Index (ACSI) published a new paper that analyzes relationships between customer complaints, complaint handling by companies, and customer loyalty to understand how customer complaint management affects companies' performance and to inform companies how to manage customer complaints much better and more consistently.

The study, forthcoming in the Journal of Marketing, is titled "Turning Complaining Customers into Loyal Customers: Moderators of the Complaint Handling—Customer Loyalty Relationship" and is authored by Forrest Morgeson, Tomas Hult, Sunil Mithas, Tim Keiningham, and Claes Fornell.

The angry restaurant patron. The irritated airline passenger. The retail customer screaming about a return or refund. Every company worries about complaining customers. They can be loud, disruptive, and damage a company's brand reputation, sales, employee morale, and market value. But are customer complaints as damaging as they seem?

As it turns out, customers who lodge complaints are not a lost cause. They can still be satisfied and remain loyal if their complaints are handled well. Regrettably, companies rarely handle complaints consistently, partly because they don't know how.

The research team carried out the largest study ever on customer complaints to inform companies how to manage customer complaints much better and more consistently. We studied data from the world-renowned American Customer Satisfaction Index (ACSI) regarding behaviors of 35,597 complaining customers over a 10-year period across 41 industries.

The study finds that the relationship between a company's complaint recovery and customer loyalty is stronger during periods of faster economic growth, in more competitive industries, for customers of luxury products, and for customers with higher overall satisfaction and higher expectations of customization. On the other hand, the recovery-loyalty relationship is weaker when customers' expectations of product/service reliability are higher, for manufactured goods, and for males compared to females.

Hult explains that "We draw two key conclusions from the results. First, companies need to recognize not only that industries vary widely in the percentage of customers who complain (on average, about 11.1 percent), but also that economic, industry, customer-firm, product/service, and customer segment factors dictate the importance of complaint recovery to customers and their future loyalty. Companies should develop complaint management strategies accordingly."

He continues, "Secondly, the financial benefits of complaint management efforts differ significantly across companies. Since complaint management's effect on customer loyalty varies across industries and companies offering different kinds of goods, the economic benefit from seeking to reaffirm customer loyalty via complaint recovery varies as well. Through this study, these performance factors can be identified and considered when designing a company's complaint management system."

Without context, these conclusions suggest that a profit-maximizing strategy simply requires that managers understand the impact of complaint recovery on customer loyalty in their industry. Added to this complexity, however, is the reality that profitability is not evenly distributed throughout the customer base. Fornell says that "Companies need to implement complaint management systems that make it easier for front-line employees to respond to complaining customers in ways that optimize customer satisfaction, customer loyalty, and the economic contribution of customers."

Without a deeper understanding of the boundaries of the complaint handling-customer loyalty relationship and the effects of economic, industry, customer-firm, product/service, and customer segment factors, companies will likely allocate cost estimates to complaint management that are too low for the required recovery actions or customer loyalty estimates that are too high, or both, instead of achieving an optimal point of recovery-loyalty yield.

Fornell advises that "Achieving an optimal recovery-loyalty yield is more advantageous than adopting the mantra that the customer is always right. It is a folly to believe that the customer is always right. Economically speaking, the customer is only "right" if there is an economic gain for the company to keep that customer. In reality, some complaining customers are very costly and not worth keeping."