Development of a Conceptual Model on the Impact of Guarantees on Service Firms and Their Customers

ABSTRACT - In a time of increasing competition and more demanding consumers, superior service quality is becoming a key determinant of a firm's success. In turn, service guarantees have been advocated by many experts as an important tool for achieving, maintaining and marketing superior service quality. However, despite such support from the literature and interest from practitioners, to date, no conceptual model has been developed on the impact of service guarantees. This paper draws on the available literature on service guarantees and consumer behaviour to develop a number of propositions which are then integrated into a single conceptual model. The model shows the proposed impact of a well-designed guarantee on operations and service quality, on the behaviour of target segments, and on the firm's business performance.

Citation:

Jochen Wirtz and Prem N. Shamdasani (1994) ,"Development of a Conceptual Model on the Impact of Guarantees on Service Firms and Their Customers", in AP - Asia Pacific Advances in Consumer Research Volume 1, eds. Joseph A. Cote and Siew Meng Leong, Provo, UT : Association for Consumer Research, Pages: 165-170.

Asia Pacific Advances in Consumer Research Volume 1, 1994      Pages 165-170

DEVELOPMENT OF A CONCEPTUAL MODEL ON THE IMPACT OF GUARANTEES ON SERVICE FIRMS AND THEIR CUSTOMERS

Jochen Wirtz, National University of Singapore

Prem N. Shamdasani, National University of Singapore

[The authors like to acknowledge the assistance of Rachel Koo, who assisted with the literature review for this paper.]

ABSTRACT -

In a time of increasing competition and more demanding consumers, superior service quality is becoming a key determinant of a firm's success. In turn, service guarantees have been advocated by many experts as an important tool for achieving, maintaining and marketing superior service quality. However, despite such support from the literature and interest from practitioners, to date, no conceptual model has been developed on the impact of service guarantees. This paper draws on the available literature on service guarantees and consumer behaviour to develop a number of propositions which are then integrated into a single conceptual model. The model shows the proposed impact of a well-designed guarantee on operations and service quality, on the behaviour of target segments, and on the firm's business performance.

INTRODUCTION

In a time of increasing competition and more demanding consumers, superior service quality is becoming a key determinant of a firm's success. Service guarantees have been advocated by many experts as a potentially powerful tool for improving operations and service quality of the firm (e.g., forcing the organization to focus on customer needs, soliciting customer feedback, eliminating potential fail points, and improving performance standards), for managing consumer behaviour (e.g., reducing perceived risk, increasing brand loyalty and encouraging positive word-of-mouth), and for ultimately improving business performance (Hart 1988; Heskett, Sasser and Hart 1990). However, despite such support from the literature and interest from practitioners, to date, no conceptual model has been developed on the impact of service guarantees. This paper draws on the available literature on service guarantees and consumer behaviour to develop a number of propositions which are then integrated into a single conceptual model. The model shows the proposed impact of a well-designed guarantee on operations and service quality, on the behaviour of target segments, and on the firm's business performance.

The first section of the paper introduces the requirements for a well-designed guarantee. This is important as only well-designed guarantees will give the firm the desired impacts. In the second section a number of propositions are developed on the impact of a well-designed guarantee on operations and service quality, on consumer behaviour, and on business performance. Perceived risk and uniqueness of the guarantee are introduced as potential amplifiers of the impact of guarantees on consumer behaviour. A summary of all propositions is presented and discussed in form of a model in section three. Avenues for further research are outlined in the last section.

DESIGN OF SUCCESSFUL SERVICE GUARANTEES

A service guarantee is an explicit statement explaining what the customers can expect (the promise) and what the service firm will do if it fails to deliver (the payout) [Hart, Schlesinger and Maher 1992]. Such a statement can be a powerful tool for achieving and marketing service quality. However, the mere presence of a guarantee does not automatically confer these advantages to the firm. Experts generally agree that seven key characteristics are required for a service guarantee to be successful (Hart 1988; Hart, Schlesinger and Maher 1992; Heskett, Sasser and Hart 1990). In particular, service guarantees should be (1) unconditional, (2) easy to understand and to communicate, (3) meaningful concerning the aspects of the service guaranteed and the financial payout or compensation at service failure, (4) easy to invoke, (5) easy to collect on, (6) credible, and (7) a declaration of trust in customers. A guarantee that satisfies all or most of these criteria is considered well-designed [for a review on the design of service guarantees refer to Hart (1988), or Heskett, Sasser and Hart 1990)]. The literature unanimously contends that only well-designed guarantees will give the firm the desired impacts. All propositions developed in the next section refer to the impact of well-designed guarantees.

DEVELOPMENT OF PROPOSITIONS ON THE IMPACT OF GUARANTEES

A review of the literature on guarantees focuses on a few key benefits of guarantees. These benefits can be grouped into two main categories: (1) impact on service operations and quality, and (2) impact on consumer behaviour. Both categories are discussed in the next two subsections. Subsection three discusses perceived risk and uniqueness of the guarantee as amplifiers of the impact on consumer behaviour. The last subsection presents the implications of guarantees on costs, sales and market share, and finally on overall business performance.

Impact on Operations & Service Quality

Hart (1988) suggested that developing a well-designed service guarantee requires that the firm has to identify the importance and performance expectations of its customers regarding all parts of the service offering. In other words, the formation of a service guarantee forces the firm to orientate on customers' definition of good service (Hart 1988; Marvin 1992). Furthermore, an unconditional guarantee forces a constant focus on customer needs and expectations (Rose 1990). A service performance that did not keep up with changing customer needs over time would lead to dissatisfaction and increased guarantee payouts. A focus on customer needs becomes a driving force that naturally keeps performance at the standards expected by consumers (Marvin 1992).

P₁: A well-designed guarantee causes the firm to focus on customer needs.

An unambiguous, easy-to-understand guarantee sets clear standards of performance for customers to expect and employees to adhere to (Hart 1988; Rose 1990). Such a guarantee tells employees what the company stands for and "forces the company to define each employee's role and responsibilities in delivering the service" (Hart 1988). Furthermore, management is encouraged to set internal standards for all parts of the operation to ensure that the level of guaranteed service quality is met (Marvin 1992). Constant employee performances at/above or below these standards become internally highly visible due to no or high payout costs, respectively.

The setting of standards and the substantial compensation promised to customers during service failures communicates to employees strong management commitment to customer satisfaction. Clear standards, high visibility of employee performance and management commitment to customer satisfaction motivate employees to deliver according to guaranteed service levels.

P₂: A well-designed guarantee sets clear performance standards for employees and motivates them to perform according to guaranteed service standards.

A service guarantee promises the customer some standard of performance. If these standards are not met, financial payouts have to be made. Service performances frequently below guaranteed standards result in a large number of payouts and therefore resulty in high operating costs. This means that the firm is forced to ensure that the basic service delivery system, and support functions and procedures, such as training and performance appraisal, are geared towards meeting guaranteed standards (Marvin 1992). It is suggested that this encourages the firm to thoroughly examine its entire service delivery system for potential fail points and try to eliminate them. Furthermore, every time a guarantee is invoked, it provides an opportunity for the firm to learn about the fail points in its operations. An implemented guarantee encourages the firm to solicit feedback from dissatisfied customers (Marvin 1992).

P₃: A well-designed guarantee forces management to identify, understand, and eliminate and/or reduce potential fail points in the service operation.

P₄: A well-designed guarantee encourages the firm to actively seek customer feedback in order to identify failpoints and/or improve service performance.

Impact on Consumer Behaviour

It is widely accepted that well-designed service guarantees have impact on various aspects of consumer behaviour. Examples are increased likelihood of first time purchase, willingness of paying a price premium and remaining loyal to the brand (Hart 1988). Many of the impacts of a well-designed guarantee on consumer behaviour can be explained by using a perceived risk framework. Consumer decision-making involves risk, because any action a customer takes can have unpleasant consequences that he/she cannot predict with certainty (Bauer 1960). In other words, Bauer contends that the probability of a favourable outcome from purchase usually is less than one. A well-designed guarantee reduces risk in a number of ways. First, an unambiguous guarantee makes the standards of performance the customer can expect very clear and thereby reduces consumer uncertainty. Second, a well-designed guarantee promises high quality performance in the service elements that are perceived as important by the consumer. This implies that important causes of risk in the purchase of that service are reduced by the guarantee. Finally, the promise of a substantial financial payout, if the consumer is dissatisfied with the performance, further reduces risk perception. The consumer is reassured that even if service failure results, he/she can invoke the guarantee and the magnitude of any negative consequences of poor performance is reduced (Hart, Schlesinger and Maher 1992). Therefore, a well-designed service guarantee implies to potential customers that the service quality of the firm in question is of a high standard (Hart 1988). It reduces their perceived risk and increases the strength of the belief that using this firm's service will have a favourable outcome.

P₅: A well-designed guarantee reduces the risk consumers perceive when deciding on the purchase of a service.

Perceived risk is only one aspect of consumer behaviour. Other underlying processes by which a guarantee impacts on consumer behaviour have not been fully explored in the service guarantee literature. Belief and attitude formation are used in the following sections to explain consumer intentions and actions. The guarantee has to impact on consumer beliefs and attitude before it can affect behavioural intention and actual behaviour. A model generally used for explaining and predicting consumer behaviour is Azjen and Fishbein's (1980) theory of reasoned action. According to this theory, the intention to act is the best predictor of actual behaviour itself. A main determinant of behavioural intention is the attitude towards the behaviour, which is driven by two variables. First, beliefs that a behaviour leads to a certain outcome (e.g, undergoing management training will enhance one's job opportunities) and, second, the evaluation of this outcome. The impact of guarantees on attitudes and subsequent behaviour is used for the development of a number of propositions. In the following paragraphs, propositions on the impact of guarantees on the behaviour of prospective and current customers are developed first followed by propositions on the impact on dissatisfied customers.

According to the theory of reasoned action, the increased strength of the belief that buying the service will lead to a favourable outcome (i.e. reduction of perceived risk) induces the customer to form a more favourable attitude towards that particular behaviour. The more favourable attitude towards buying the service in turn leads to a stronger behavioural intention towards buying. This strengthening of behavioural intention has a direct impact on actual purchase behaviour (Sheppard, Hartwick and Warshaw 1988). The result is an increase in new customers (Maher 1992).

P₆: A well-designed service guarantee increases the strength of the belief that purchasing the service will result in a favourable outcome. This leads to the formation of a more favourable attitude, a stronger intention towards purchasing, and to more customers actually buying.

The marketing impact of the well-designed guarantee on consumer beliefs and intentions does not only arise from the guarantee directly. The well-designed guarantee has a favourable impact on operations and service quality as outlined in propositions 1 to 4. These improvements contribute to an increase in satisfaction and brand loyalty of existing customers (Hart 1988; Heskett, Sasser and Hart 1990; Wirtz 1993). One explanation is that consumers try to reduce risk by remaining loyal to a brand that is tried and found satisfactory.

P₇: The improvement in the operations and service quality of the firm contributes to an increase in the brand loyalty of its customers.

The improvements in operations and service quality not only increases brand loyalty, but also generate more positive word-of-mouth (Hart 1988; Marvin 1992; Reichheld and Sasser 1990).

P₈: The improvement in the operations and service quality of the firm increases positive word-of-mouth by its customers.

The improvement in the beliefs, attitudes and behavioural intentions of the potential consumer also plays a part in boosting the marketing muscle of the firm. Firstly, consumers are by nature risk-averse and usually develop decision strategies to reduce risk (Bauer 1960). The improved service quality and the impact of a well-designed guarantee on quality beliefs reduce perceived risk. Since the perceived probability of a favourable outcome is increased and the potential negative consequences reduced, the expected value of a service is enhanced, and therefore, consumers are likely to be willing to pay a price premium for the service (Hart, Schlesinger and Maher 1992).

P₉: The increase in the strength of the belief that purchasing the service will lead to a favourable outcome enables the firm to charge a price premium over its competitors.

There are a number of feedback loops or secondary impacts of the proposed effects on consumer behaviour discussed so far. For example, the increase in word-of-mouth has a number of further marketing implications. Positive word-of-mouth markets the service quality to potential customers and reduces perceived risk, which again can increase the number of new customers trying the service. To keep the proposed model simple, potential feed back links between the various aspects of consumer behaviour are not included in Figure 1.

So far only the impacts on potential, new customers or satisfied existing customers have been discussed. In the following paragraphs, propositions of the impact of guarantees on consumer reactions to service failures are discussed.

The guarantee provides customers with clear standards against which to assess a service performance of the firm. For example, without the guarantee, a restaurant patron might feel that his lunch took a long time to be served, but he may not be confident about his assessment and therefore reluctant to complain. But when the lunch is served 15 minutes after an explicitly guaranteed time, then the same customer might feel perfectly in the right to complain. The guarantee also promises the customer a meaningful compensation (e.g., a free meal), if guaranteed standards are not met (lunch was served 15 minutes later than the guaranteed time). Providing customers with a clear basis for performance assessment and promising compensation if standards are not met, increases the strength of the customer's belief that complaining if dissatisfied due to sub-standard performances leads to a favourable outcome (i.e., no need for a confrontation with front line staff or management concerning performance standards and the level of appropriate compensation). This in turn leads to a more favourable attitude towards complaining. The improvement of the customer's attitude towards complaining leads to a stronger intention towards complaining, which has a direct impact on actual complaining behaviour. This generation of feedback is valuable to the firm as it pinpoints weaknesses in the service delivery process or perhaps where competitors are doing better.

P₁₀: A well-designed service guarantee increases the strength of the belief that complaining if dissatisfied, will result in a favourable outcome. This leads to the formation of a more favourable attitude, a stronger intention towards complaining, and to an increase of the proportion of customers complaining when dissatisfied. The outcome for the firm is an increase in useful customer feedback.

Past research has shown that consumers who complain to the firm are less dissatisfied, less likely to engage in negative word-of-mouth, and more likely to buy again, even when the complaint is not resolved (Sellers 1988). Furthermore, the firm has an opportunity to recover the service and/or pay out the guaranteed compensation when dissatisfied customers complain. Satisfaction and customer retention are further increased when the complaints are resolved through service recovery (Sellers 1988) or guarantee payouts (Hart 1988).

P₁₁: The increased proportion of customers complaining when dissatisfied leads to a decrease in dissatisfaction, less negative word-of-mouth and increase in customer retention. These positive effects are further enhanced when the service can be recovered and/or guarantee payouts are made.

Potential Amplifiers of the Impact of a Well-designed Guarantee

So far, propositions on the impact of guarantees on operations and consumer behaviour have been advanced. In this section, the guarantee literature is reviewed for factors that mediate the potential impact of a guarantee.

Hart (1988) suggests that the guarantee's impact on consumer behaviour is increased when one or more of the following conditions exist: when the price of a service is high, when a service is ego-involving, when a customer knows little about a service, when the negative consequences of service failure are high, when the industry has a high service failure rate and when word-of-mouth is important for consumer decision making. As all of these conditions are related to perceived risk, it is suggested that the impact of a well-designed guarantee increases with the level of risk perceived by consumers when making purchasing decisions.

P₁₂: The potential impact of the guarantee increases with the level of perceived risk related to the service offering.

Rose (1990), and Hart Schlesinger and Maher (1992) suggest that the unconditional service guarantee could be the ultimate point of differentiation in the service industry. But such differentiation can obviously only be obtained if either the main competitors do not offer a guarantee or their guarantees are not as good. When most firms in the industry offer a service guarantee with similar terms, then the guarantee offered by any one firm is no longer a differentiating factor. In fact, if all firms offer it, then it becomes a minimum choice criterion which customers expect when buying this type of service. In conclusion, it is necessary for the guarantee to be unique for having a strong positive impact on consumer behaviour. This uniqueness can either mean that the guarantee is a unique feature in the industry or that the features of the guarantee are unique, i.e. better than the guarantees of competitors.

P₁₃: The potential impact of a guarantee increases with its uniqueness. A guarantee is unique, if it is either the only guarantee in the industry or its features are better than guarantees offered by competitors.

Perceived risk and uniqueness of the guarantee are proposed to only mediate the impact on consumer behaviour. It is suggested that the benefits of a well-designed guarantee on operations and service quality can be obtained independent of these factors. In the extreme case of a service sector where consumer perceive no risk and well-designed guarantees are provided by most firms, a well designed service guarantee still has a positive impact on operations and service quality. For example, it still causes the firm to focus on customer needs (proposition 1), and sets clear performance standards for employees (proposition 2).

P₁₄: A well-designed service guarantee has positive impact on operations and service quality independent of the level of risk perceived by its consumers and the uniqueness of its guarantee.

Impact on Business Performance

The impact of a well-designed guarantee on consumer behaviour implies that there is an impact on sales and market share. For example, the attraction of new customers, higher customer retention rates, increased brand loyalty, and the ability to charge premium prices translates into higher sales (Hart 1988, Heskett Sasser and Hart 1990). Furthermore, it was proposed that the guarantee increased the level of service quality delivered and reduces risk perceived by consumers (e.g. reducing consequences at service failure). This will translate into higher market shares if the price is kept constant, or the reduction in utility of a price premium is more than offset by increases in utility through better quality and lower risk.

P₁₅: The attraction of new customers, the increase in customer retention rates and brand loyalty, and the ability to charge a price premium translate to an increase in sales.

P₁₆: Increased service quality and reduced perceived risk will translate into higher market shares if the price is kept constant, or if the reduction in utility caused by a price premium is more than offset by increased utility through better quality and lower risk.

Setting up and implementing a guarantee not only has benefits, but also incurs costs (Hart 1988). Costs are directly incurred as a result of the design and implementation of a guarantee, and payout costs to dissatisfied customers. The design of a guarantee takes time and effort and therefore directly incurs costs. For example, a well-designed guarantee contains promises that are meaningful to the consumer (Hart 1988). Research needs to be conducted to understand what service elements are important to the consumer and should be covered by a guarantee, and what type and/or amount of payout would be meaningful to customers. Features of the guarantee have to be determined, its presentation to consumers has to be designed, and legal aspects might have to be considered. All these activities incur costs.

Furthermore, services are real-time performances and cannot be executed a hundred per cent failure free all of the time, and occasional service failures are unavoidable. Given the more positive attitude of dissatisfied consumers towards complaining and invoking the guarantee, payout costs will be incurred (Maher 1991).

Finally, a guarantee program and related improvements in operations incur cost increases (Heskett, Sasser and Hart 1990). Efforts to eliminate fail points, improve operations and service quality typically incur costs. The size of the cost burden depends on how poor the original standards of service are, the nature of the firm's relations with employees and customers, and the nature of the business (Heskett, Sasser and Hart 1990). Furthermore, a guarantee program is suggested to increase costs beyond the startup phase, because money is constantly spent on keeping and continuously improving levels of service quality (Heskett, Sasser and Hart 1990).

P₁₇: The design and development of a guarantee, efforts made by the firm to improve operations and service quality, and payments to customers who invoked the guarantee, incur cost increases.

Both, increases in sales and costs, have been proposed as a result of the introduction of a well-designed guarantee. It is generally assumed that the benefits of the guarantee far outweigh the costs in the long run (Hart 1988; Heskett, Sasser and Hart 1990). Maher (1991) further suggested that although costs are increased, some of the increase is offset by increased efficiency. Therefore, profits are expected to rise.

P₁₈: The increase in sales outweighs the increase in costs and contributes to an increase in profits.

It is proposed that the positive impact of the well-designed guarantee on profits and market share provides positive feedback to management and further reinforces their commitment to the service guarantee. This increased commitment is proposed to lead to a careful monitoring and improving of the features of the guarantee.

P₁₉: An increase in profits reinforces management's commitment to the service guarantee, and monitoring and improving its design and administration.

SUMMARY DESCRIPTION OF THE MODEL

The propositions developed in this paper are summarized into a conceptual model presented in Figure 1. The model starts with the implementation of a guarantee that fulfils the key requirements for being considered well designed (e.g., Heskett, Sasser and Hart 1990). The formulation and implementation of such a guarantee directly improves operations and service quality. The process of designing a guarantee causes the firm to focus on customer needs (P₁), and sets clear performance standards for employees and motivates them to perform according to guaranteed service standards (P₂). Furthermore, management is forced to identify, understand and reduce potential fail points in the operation (P₃), which also encourages active seeking of customer feedback (P₄).

A well-designed guarantee affects consumer behaviour in a number of ways. It reduces risk perceived by consumers because negative consequences of service failure are reduced through the guaranteed payout (P₅). The reduction in perceived risk increases the strength of the belief that purchasing a service will result in a favourable outcome. This results in the formation of a more favourable attitude, a stronger intention towards purchasing, and to more customers actually buying (P₆).

The improvement in operations and service quality contributes to an increase in brand loyalty (P₇) and more positive word-of-mouth (P₈). The improved quality and reduction in perceived risk allows the firm to charge a price premium (P₉).

A well-designed guarantee not only impacts potential new customers and satisfied customers, but also dissatisfied customers. A guarantee provides customers with a clear basis for performance assessment and promises a compensation if standards are not met. This increases the strength of the belief that complaining, if dissatisfied with a sub-standard performance, results in a favourable outcome. As a consequence, an increased proportion of dissatisfied customers complain and provide useful feedback for the firm (P₁₀). Past research showed that consumers who complain are less dissatisfied, less likely to engage in negative word-of-mouth, and more likely to buy again, even when the complaint is not resolved. Customer dissatisfaction and customer defection rates are further decreased when the complaints are resolved through service recovery or guarantee payouts (P₁₁).

FIGURE 1

A MODEL OF THE IMPACT OF SERVICE GUARANTEES ONFIRMS AND THEIR CUSTOMERS

Two mediating variable on the impact on consumer behaviour are proposed. First, the impact of a well-designed guarantee increases with increasing risk perceived by consumers (P₁₂). Second, the potential impact of a guarantee increases when it is either the only guarantee in the industry or its features are better than guarantees offered by competitors (P₁₃). Perceived risk and uniqueness are proposed to only mediate the impact on consumer behaviour. It is suggested that the benefits of a well-designed guarantee on operations and service quality can be obtained independent of these factors (P₁₄).

The effects of a guarantee on consumer behaviour and operations are finally reflected in business performance. First, the impact on consumer behaviour such as the attraction of new customers, higher customer retention rates, increased brand loyalty, and the ability to charge premium prices, translates into higher sales and market shares (P_15&16). Second, the design and implementation of the guarantee, payout costs at service failures, and necessary improvements in operations and service quality incur cost increases (P₁₇). Finally, it is generally assumed that the benefits of the guarantee far outweigh the costs in the long run contribute to an increase in profits (P₁₈). This positive development in profits and market share provides positive feedback to management and further reinforces their commitment to the service guarantee (P₁₉).

SUMMARY AND FURTHER RESEARCH

This is the first time a comprehensive model on the impact of a service guarantee has been developed. The literature on service guarantees was reviewed, and the impacts and relationships between various variables in the literature were transformed into explicit propositions which were then integrated into a single model (see Figure 1). The model depicts the expected implications of a well-designed guarantee on consumer behaviour, operations and service quality, and on business performance.

A number of avenues for further research can be pursued. For example, a few in-depth case studies with service firms could be conducted to initially test the propositions and refine them where necessary. A follow-up study on a larger sample of firms could then be conducted. Furthermore, the various propositions on the impact on consumer behaviour could be examined with both field and laboratory experiments. Finally, so far it has been assumed that all seven criteria for well-designed guarantees have to be fulfilled to have a positive impact on consumer behaviour. However, this has not been tested yet, and it remains unclear what constitutes a well-designed guarantee.

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