Abstract
Service failure is endemic and even service organizations with the most customer-oriented service quality programs are unlikely to eliminate all service failures. How the service provider handles service recovery (SR) is vital for retaining customers, thus the topic has received abundant research attention. Apart from the extant literature that has focused on perceived justice, this article applies signaling theory and examines the role of SR proactivity and compensation in enhancing customers’ expectations of future service improvement and achieving desirable customer outcomes. In particular, this research proposes a model analyzing the direct effects of compensation and SR proactivity on customer outcomes, along with their indirect effects, via future improvement expectations (FIE). Additionally, this research predicts that SR proactivity weakens the effects of compensation on future improvement expectations. Findings from two studies using scenarios support predictions pertaining to the effects of SR proactivity on FIE and customer outcomes. Although compensation is found to signal future improvement, high compensation does not result in higher FIE when the service provider is proactive in SR interaction. The results further demonstrate that FIE mediates the effects of the interaction on customer intention to repurchase and to spread negative word-of-mouth. This study contributes to the literatures by empirically confirming proactivity as an effective signal to establish positive expectations about future service improvement and to reduce the need for providing compensation in service recovery. The findings also suggest that the application of multiple signals simultaneously does not necessarily lead to more positive outcomes than the use of a single signal in service recovery.