Reports

Why Customer Service Frustrates Consumers: Using a Tiered Organizational Structure to Exploit Hassle Costs

Anthony Dukes and Yi Zhu, 2018, 18-126-09

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For many customers, dealing with a customer service organization (CSO) is time consuming and frustrating. Many CSOs are organized in tiered structures where an unsatisfied customer must speak to an agent who does not have the authority to offer the redress that the customer feels is due. Thus, to claim redress, the customers must incur additional hassle costs in time and effort.

Why do firms organize their CSOs in a way that consistently leads to customer frustration?

Anthony Dukes and Yi Zhu suggest that customer frustration may be embedded in the design of customer service organizations, where the tiered structure of the CSO systematically exploits consumer hassle costs.

To study the basic features of a tiered CSO, the authors develop a game theoretical model of the complaint process in which customer claims are heard and evaluated by the CSO. With this model, they study the micro-economic incentives of a dissatisfied customer seeking compensatory redress from a firm’s CSO.

The crucial design feature in their model is the authorization limit any CSO agent can pay out. The equilibrium outcome demonstrates that these payout limits can be specified in a way that forces a dissatisfied customer through a sequential claims process, akin to “jumping through hoops,” in order to obtain compensation.

The firm’s choice of these limits implies a tiered, or multi-level, structure that requires any unsatisfied customer to initially voice a complaint with a first-level CSO agent who is limited in authority to offer redress. Only if the customer feels that offer is too low, will he or she incur the hassle cost of escalating the claim to a higher level representative (e.g., a manager) who is authorized to provide a higher amount redress. They show that a tiered structure reduces the firm’s redress costs by screening out claims that are less severe and illegitimate.

The authors further explore the relationship between a tiered CSO and the firm’s pricing and quality decisions. If the firm’s target market is more sensitive to hassle costs, then its customers are less likely to escalate claims when dissatisfied. It is then optimal for the firm to reduce the CSO’s first-level authorization limit, raise prices, and lower product quality. This result is moderated by the firm’s concern for its reputation but not necessarily by competition.

Put into Practice

This research suggests that some organizations may be tempted to utilize a tiered CSO to improve their bottom line. But the authors stress that managers should also understand there can be negative consequences from exploiting consumer hassles to save money. For instance, if a brand relies heavily on a reputation of good customer service, then a CSO that leads to customer frustration may damage reputation and ultimately, profitability. 

Anthony Dukes is Professor of Marketing, Marshall School of Business, University of Southern California. Yi Zhu is Assistant Professor of Marketing, Carlson School of Management, University of Minnesota.

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