One firm’s loss is another’s gain: capitalizing on other firms’ service failures

Whereas past research has focused on negative outcomes that can transfer from one firm to another, this paper examines conditions under which a service failure by one firm creates an opportunity to enhance customer evaluations of a different firm in a contiguous service experience. Thus, a new external service recovery phenomenon is demonstrated in which consumers have more favorable perceptions of a firm when there was a previous failure with a different firm compared with no previous service failure. Study 1 tests hypotheses related to consumers’ perceptions of a hotel’s external service recovery after an airline’s service failure. Study 2 examines an external recovery effort in the hotel industry that follows a service failure from an unrelated hotel, an affiliated hotel, and the same hotel. Study 3 utilizes a laboratory experiment to assess the effects of external recovery in a restaurant setting. Results from all three studies suggest external recovery leads to appreciable gains for the recovering firm but only when it is not affiliated with the failing firm. Implications for service managers suggest several simple and relatively low cost tactics can be implemented to capitalize on other firms’ failures. In particular, this research highlights strategies that encourage frontline employees to listen to customers and, if a prior failure is detected, make simple gestures of goodwill.