Understanding Consumer

Earl L. Taylor ais a Senior Vice Response to Service Guarantees

President at Research International/
Cambridge, Cambridge, MA. He joined
the company in 1985, and now heads Because service guarantees make utilities’ implicit
the Cambridge office’s Consulting
commitments to their customers explicit, they may be
Services practice. He has particular
expertise in customer loyalty, brand at best redundant and at worst counterproductive—
equity management, and new-product particularly where a competitive market works to ensure
development in the energy,
telecommunications, financial services, responsiveness to customers.
entertainment, and other sectors. Dr.
Taylor holds a B.A. in psychology and
sociology from Rice University, and a
Earl L. Taylor and John M. Cole
Ph.D. in sociology from Harvard

University. He can be contacted by
e-mail at e.taylor@research-int.com
John M. Cole is also a Senior Vice
President at Research International/
Cambridge, Cambridge, MA. He heads
the company’s Energy Practice, and has
years of experience in the
environmental field, offering research
and consulting expertise to clients at
investor-owned utilities, plastics and
financial services firm, and
environmental agencies. Mr. Cole holds
a B.A. from Harvard University in
East Asian studies, and an M.B.A. in
marketing from Boston University. He
can be reached by e-mail at
j.cole@research-int.com.
This article is based in part upon a
presentation made to the Association of
Energy Service Professionals in
Orlando, FL, last December.
A
s energy utilities deregulate
and prepare for competi-
tion, many are beginning to adopt
some version of a service guaran-
tee. Typically these guarantees
take the form of a cash or credit
payment to customers when speci-
fied levels of service are not met by
the company. For example, if ser-
vice is not restored within a certain
time or a scheduled appointment
is not kept, customers get a cash
payment or a credit on their bills.
Whether an energy utility is
seeking to position itself in com-
petitive marketplaces or to earn
performance-based rates as a
monopoly provider of access and
delivery services, there are at least
three reasons to consider service
guarantees:
• As a potential point of differ-
entiation where few others offer
such a guarantee
• As a point of parity where
most others offer such a guarantee
• As part of an effort to recover
from customer-perceived past ser-
vice failures
Some utilities have also adopted
service guarantees in part to
motivate employees to be more
“customer-focused.” Unfortunately,
our experience suggests that many
utilities decide whether or not to
adopt service guarantees using a
model of customer satisfaction or
loyalty that ignores a key aspect of
service delivery and recovery from
service failure.
Customer satisfaction and loy-
alty research typically focuses on

86 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00072-X The Electricity Journal
measuring customers’ expecta-
tions for service and assessing the
extent to which a company’s
responses currently do—or could
be made to—meet these expecta-
tions. In our pursuit of “action-
able” results, we tend to focus on
the most tangible aspects of service
(e.g., time that callers are placed on
hold) in an effort to determine
customer-perceived thresholds for
noticeable improvements. We can
then trade off the cost of achieving
these threshold improvements
against the value of increased cus-
tomer satisfaction and retention.
Within this context, research (if
any) used to develop and imple-
ment a service guarantee is typi-
cally designed to determine (a)
these thresholds (e.g., time win-
dows for scheduling and keeping
appointments) and perhaps (b)
appropriate levels of the “payout”
to be made in the event of a spe-
cific type of service failure.
As important as this type of
information may be, it misses a
fundamental aspect of customers’
expectations about service deliv-
ery. This missing element is exam-
ined in a recent study by Smith,
Bolton, and Wagner.1 According to
the authors, confirmation or dis-
confirmation of expectations is
only part of customers’ evaluation
of service delivery. Of equal or
greater importance—especially in
cases of service failure—is the
notion of perceived justice as con-
ceptualized by social exchange
theory. In their model of customer
service, disconfirmation of a con-
sumer’s experience can trigger dis-
satisfaction and an attempt at
recovery by the service provider.
October 1999
Understanding the dynamics of
the entire process requires a model
that includes not only expectations
and their (dis)confirmation, but
also customer perceptions of dif-
ferent aspects of “justice” involved
in any effort at recovery.
Since a service guarantee can be
thought of as a promissory note
ensuring customers of a specific
action in the event of future service
failure, it is in effect a prospective or
pre-emptive recovery from service
Service guarantees
must be seen as one
way a company can
communicate with
customers about its
relationship with them.
failure. Our research experience
suggests that this perspective
affords important insights into
how customers perceive service
guarantees by utilities—and thus
helps us understand when and
how to design and implement
them most effectively.
W hether the goal is customer
loyalty to a competitive
energy service provider or cus-
tomer satisfaction with monopoly
distribution services, service guar-
antees must be seen as one way a
company can communicate with its
customers about the relationship it
has (or wants) with them. In short,
service guarantees must be evalu-
© 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00072-X
ated as part of a company’s overall
brand management strategy.
T o do this, we need a concep-
tual framework within which
to develop and link models of ser-
vice delivery and brand manage-
ment. This means seeing both as
examples of inference management.
In what follows, we first interpret
findings from our research on util-
ity service guarantees in light of
the model of service delivery pro-
posed by Smith, Bolton, and Wag-
ner. We then situate this model
within our own model of utility
brand management. The resulting
approach can be used by a utility
to evaluate whether and how to
adopt service guarantees as part of
its overall branding strategy.
I. Customer Reactions to
Service Guarantees
Results from several qualita-
tive and quantitative research
projects we have conducted for
our utility clients show a wide
range of reactions to the idea of
service guarantees. The following
statements are typical:
It shows they have faith in their
own product and their service,
because otherwise they wouldn’t
be doing it.
I think that it’s the only way that a
huge company like this can at
least show the peons that they are
supporting them a little bit—giv-
ing them something back.
You would know then that they
were trying and then you think also
that they would show up [on time]
nine times out of 10, because they’re
not trying to give this money away.
So you can rely on them more.
They are trying. They’re willing
to make an effort and keep
their word.
87
 You have to admire anyone that’s
willing to make a commitment,
depending on how well they
stand behind that commitment.
Equally typical, however, are the
following reactions—some of
them from the same customers
quoted above!
If the service is there, you don’t
need the guarantee.
You shouldn’t have to put an ad to
do your job.
I keep having a problem with the
word “guarantee.” . . . Let your
word be your bond.
What’s guarantee if it’s not over-
seen, if somebody doesn’t see that
it works? Who’s going to be the
watchdog that’s going to make
sure they are doing this? And who
would have to prove if they broke
their guarantee? Do you have to
prove it to them?
I think it’s a good idea if they do
that. But on the other hand, what
hassle am I going to have to go
through to get my $25? What’s the
small print?
I feel basically like $25 sounds
good, great—but who’s going to
pay the extra? . . . In the long run,
the $25 is going to cost you $50
when it’s all over.
This representative range of
reactions suggests at least the
following about customers’
perceptions of utility service
guarantees:
• They can be taken as evidence
of a utility’s commitment to cus-
tomer service.
• They may be seen as “giving
something back” to customers.
• The prospect of losing money
may motivate the utility to per-
form better.
• Any commitment made still
depends on how well a utility
“stands behind” it.
88 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00072-X
• A service guarantee may seem
redundant with the original prom-
ise of service.
• In practice, a service guarantee
may still need a “watchdog.”
• A service guarantee may seem
to put the burden of proof on the
customer.
• Customers may end up paying
for the service guarantee, thus
negating any apparent benefits.
How can we reconcile this diver-
sity of reactions without merely
It appears customers
are most comfortable
guaranteeing aspects
of service that
are routine and
objective.
saying that customers are “ambiv-
alent” about service guarantees? Is
there an underlying logic that uni-
fies and can help us understand
this range of possible reactions to
service guarantees?
O
ne way to begin to answer this
is to note how customer reac-
tions vary across different aspects of
service that might be subject to a
guarantee. In several studies we
have done, customers seem most
comfortable with the idea of service
guarantees for accurate metering
and billing, and keeping scheduled
appointments. Customers are typi-
cally least comfortable with a utility’s
service guarantees to restore ser-
vice within a specified time period
or to maintain “professionalism” in
its dealings with customers.
L ooking at these first examples, it
appears that customers are
most comfortable guaranteeing
aspects of service that are routine and
objective: meters can be read more or
less accurately; appointments can
be kept more or less closely. That
there is an objective right or wrong
of the matter does not mean, how-
ever, that this will be easy to resolve
in actual practice. As one customer
put it: “I don’t understand how you
could prove them wrong.” And as
others above note, doing so might
prove to be a “hassle.”
While accuracy of meter reading
and timeliness of keeping sched-
uled appointments are both routine
and objectively measurable, there is
at least one important difference
between them. Service failure in the
case of meter reading and billing
can usually be seen (at least in the
first instance) as a mistake:
If it was truly a mistake and they
corrected the bill, I don’t feel I
need [money in return], but I’d
like to have $25. But, fair is fair.
The customer also needs to be fair
to the service provider. And if it
was just a mistake, and they cor-
rect the mistake and everything
gets adjusted, I don’t think you
need to pay a penalty on it.
That something can be “truly a
mistake” implies the opposite—
that inaccurate meter reading can
be seen as a systematic practice of
the utility or at least reflect an atti-
tude of not caring about cus-
tomers. It is only when perceived
inaccuracy in metering or billing is
taken as a cue for such inferences
that it ceases to be a mistake and
The Electricity Journal
becomes something requiring
redress. In short, it is the inferred
attitude rather than the action per
se that determines what type of
“service failure” has occurred, and
thus what, if any, attempt at
“recovery” is appropriate.
Unlike making a mistake in
meter reading, missing a sched-
uled appoint without notification
is, in effect, a breach of an implicit
contract. If such an action is seen
as voluntary—that is, not con-
strained by events beyond the
company’s or employee’s con-
trol—then the customer is almost
compelled to make negative infer-
ences about their attitudes toward
him. In this case, we have a faux
pas that may require an apology.
As we shall see, it is less clear that
financial restitution is in order, and
this may even be inappropriate.
Once again, it seems that the atti-
tude inferred behind the action
rather than the action itself is the
critical issue.
Thus far we have seen that ser-
vice guarantees may be problem-
atic even where customers find
them most intuitive, that is, when
applied to objectively measurable
aspects of routine services such as
meter reading or keeping appoint-
ments. Customers feel least com-
fortable with service guarantees
for things such as deadlines for
service restoration or maintaining
“professionalism.” These aspects
of service share the qualities of
being nonroutine and subjective.
Estimated times for service resto-
ration may change, depending on
acts of nature or God beyond the
utility’s or employee’s control.
“Professionalism” is (at least some-
October 1999 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00072-X
what) in the eye of the beholder. In
the words of one customer, “Your
idea of a professional and my idea
of a professional may be two dif-
ferent things—it’s very hard to tell.”
As in the case of a missed
appointment, the issue turns on
customers’ perceptions of whether
or not a given action is voluntary.
Most customers assume that a util-
ity will work to restore service as
quickly as possible “under the cir-
cumstances.” What is implicitly
Although guarantees
may be seen as
“giving back,”
customers may
suspect they will
pay “in the end.”
guaranteed is an attitude and
motivation, not a specific outcome.
By contrast, an explicit service
guarantee commits a utility to a
specific outcome—e.g., restoration
within two hours. If this commit-
ment is made without explicit
exceptions being noted, it may not
be credible to customers who
know and expect that exceptions
always apply. On the other hand,
any attempt to explicitly enumer-
ate exceptions in the “fine print” of
the service guarantee can prompt
more questions than it answers.
Either way, an explicit service
guarantee risks diverting custom-
ers’ attention to the promised spe-
cific outcome and away from the
company’s commitment to serve
them. In some cases, it may be best
to let sleeping expectations lie!
Similar considerations apply to
guaranteed “professionalism.” It is
not just that evaluation of this mat-
ter is subjective. Rather, strictly
speaking, a service guarantee of
professionalism is redundant—
and may even be counterproduc-
tive. Just as virtue is its own
reward, so too should profession-
alism be its own incentive. That is,
customers can see employees’
actions either as motivated intrin-
sically by professionalism and a
commitment to serve them or as
motivated extrinsically by the
desire to avoid paying penalties.
By making the implicit commit-
ment to service explicit, and by
externalizing motivations, the
redundant service guarantee short-
circuits the inferential process
whereby customers perceive the
company as acting voluntarily in
their best interests.
T his last point brings us back to
two additional features of
how customers think about service
guarantees from an energy utility.
On the one hand, service guaran-
tees may be seen as “giving back”
something to customers. On the
other hand, customers may sus-
pect that they will pay the costs of
such guarantees “in the end.”
These seemingly contradictory
perceptions are in fact two sides of
the same basic problem utilities
face in trying to meet their cus-
tomers’ expectations for service.
Briefly, our research has consis-
tently shown that consumers do
not think of buying energy from a
89
monopoly utility as a truly free
economic exchange. Historically,
they have had no choice but to
make this essential purchase with
no choice of supplier. Conse-
quently, when consumers pay for a
given amount of energy, they feel
that the utility still owes them
something above and beyond this
transaction.
One critical way utilities can
meet this expectation of a “give-
back” is through economic and
environmental stewardship of the
communities they serve. If a utility
merely complies with tax and
environmental laws, customers
may conclude only that it has a
good legal department. If, how-
ever, a utility’s economic or envi-
ronmental actions are seen to be
voluntary and proactive, then cus-
tomers may be led to infer positive
motivations that account for these
actions. Our research consistently
shows that this is a major way in
which utilities can demonstrate
shared values and earn customers’
trust and loyalty.
A utility’s monopoly status also
works against it in another
closely related way: many cus-
tomers view interactions with their
utility as a “zero-sum game”: the
utility’s gain is their loss (and vice
versa). For example, customers
asked to participate in demand-
side management programs are
often initially skeptical that their
utility would want them to buy
less of its energy. They assume that
whatever they “save” in reduced
usage will be recouped by the util-
ity in higher rates—and this, in
fact, has happened. Similarly, in
the wake of oil embargoes and fuel
90 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00072-X
adjustment charges, many cus-
tomers have come to feel that
monopoly utilities will always “pass
through” costs to the consumer.
In short, feeling that they are
entitled to some form of “give-
back” and suspecting that the util-
ity will always “pass through” the
cost of its activities, many custom-
ers approach the notion of a ser-
vice guarantee from their monop-
oly utility with understandable
skepticism. While this dynamic
may change over time with indus-
try restructuring and increased
competition, it is the current con-
text within which we need to eval-
uate the role of service guarantees
for energy utilities.
II. Understanding Service
Guarantees as Brand
(Inference) Management
Reviewing the range of utility
customers’ reactions, we discover
a paradox inherent in the idea of a
service guarantee: making implicit
commitments explicit may be at
best redundant and at worst coun-
terproductive. By enumerating the
conditions under which it does or
does not apply, a service guarantee
may simply restate what cus-
tomers assume is already in
effect—and is thus redundant.
Alternatively, if it seems to limit
the implicit commitment to only
what is explicitly stated, or if it lists
only specific exceptions that apply,
a service guarantee risks raising
more concerns than it allays.
In short, by its very nature, a ser-
vice guarantee shifts customers’
attention from the implicit com-
mitment to serve them to an
explicit guarantee of specified out-
comes. As we have seen, however,
in determining whether or not a
service failure has occurred and
what, if any, recovery is appropri-
ate, it is not the actions themselves
but rather customers’ inferences
about the company’s attitudes and
motivations that are critical.
Understanding how customers
make these inferences should clar-
ify the possible role of a service
guarantee as pre-emptive recov-
ery from service failure.
The recent work by Smith, Bol-
ton, and Wagner on recovery from
service failures is a rich source of
insights of relevance to service
guarantees. In what follows, we
will touch on only a few of these.
Perhaps the authors’ most criti-
cal insight is that a customer’s sat-
isfaction with the entire service
delivery experience, including
recovery from service failure,
depends as much or even more on
the perceived justice of the recovery
effort as it does on the confirma-
tion or disconfirmation of specific
expectations for the service. Fol-
The Electricity Journal
lowing social exchange theory, the
authors define three types of justice:2
• Distributive justice “involves
resource allocation and the per-
ceived outcome of exchange,”
such as compensation for a ser-
vice failure.
• Procedural justice “involves the
means by which decisions are
made and conflicts are resolved,”
such as the speed with which
recovery is undertaken.
• Interactional justice “involves
the manner in which information
is exchanged and outcomes are
communicated,” such as whether
an apology is offered and whether
this is initiated by the company or
requested by the customer.
Research reported by the authors
supports the conclusion that cus-
tomers are more likely to be dis-
satisfied with process failures that
involve these types of justice (e.g.,
encountering a rude waiter) than
with outcome failures (e.g., an “out
of stock” condition such as a spe-
cific menu item or product not
being available when desired).
Most importantly for our pur-
poses, the authors’ research also
supports the notion that attempts
at recovery must “match” the spe-
cific type of service failure encoun-
tered. For example, in response to
an “out of stock” outcome failure,
a “rain check” or discount coupon
with which to obtain the item in
the future may be an appropriate
form of service recovery. However,
offering such compensation to cus-
tomers who feel they have been
insulted by service staff would not
be appropriate—and might in fact
further insult them. Interestingly,
the authors also find that many
October 1999
customers are dissatisfied when
compensation exceeds their per-
ception of the harm done (appar-
ently by making them feel guilty
about the disproportion).
W ith an all-too-brief look at
this fascinating study, we
are now in a better position to
understand the dynamics of cus-
tomers’ reactions to the idea of ser-
vice guarantees. We noted at the
outset that research done to design
and implement a service guarantee
typically focuses on defining spe-
cific thresholds for performance,
such as time windows for schedul-
ing and keeping appointments.
That these thresholds may be hard
to determine, may vary by customer
segments, and may change over
time are not the only difficulties.
Rather, the fundamental problem is
that even with the right threshold
for the right segment, offering cus-
tomers cash payments when we fail
to meet this threshold in effect con-
verts the service into a commodity.
In situations where customers
themselves perceive that there is a
clear and measurable economic
loss associated with the service
failure, such compensation may in
fact be seen as appropriate. (Who
decides this, and calibrating the
exact value of the compensation
due, will still be difficult.) For
many aspects of service covered by
a typical service guarantee, how-
ever, a cash payment for a service
failure is like offering the insulted
diner a coupon to dine again (and
be insulted again?). If we modify
the service guarantee to offer com-
pensation or apologies only where
warranted by the specific circum-
stances, it is hard to see how this
© 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00072-X
differs from simply providing good
(implicitly guaranteed) service.
III. Conclusion: The Role of
Service Guarantees in Brand
Management
Our understanding of how
utilities create customer loyalty
through brand equity manage-
ment has been discussed at length
elsewhere.3 We will conclude by
suggesting that service guarantees
can—and must—be understood in
terms of brand management as
inference management. In our
view, creating and managing
brand equity is the key to success
for both regulated monopoly
access providers (Wirecos) and
competitive service providers
(ESCOs). Wirecos will use brand
equity as leverage to shape and
cost-effectively meet customers’
changing expectations for service,
thereby maintaining satisfaction
and achieving performance-based
rates of return. ESCOs will use
brand equity to differentiate their
offerings and earn customer loy-
alty in competitive markets.
R esearch we have conducted
over two decades for monop-
oly energy utilities and for compa-
nies in a wide range of competitive
industries confirms the following
model of customer satisfaction,
favorability, and loyalty (see
Figure 1). While satisfaction may
be largely a function of meeting
customers’ expectations, more is
required to create favorability (and
thus leverage) with customers of a
monopoly or to earn customers’
loyalty in competitive markets. In
the latter instances, it is the infer-
91
Figure 1: Building Customer Loyalty
ences that customers make about
the company’s actions that matter
most. The sum of these inferences
is a company’s brand equity with
its customers. Most critical to cre-
ating favorability and loyalty are
brand equity inferences about the
company’s attitudes toward its
customers. This is why actions that
are seen to be voluntary—whether
environmental stewardship or ser-
vice delivery—are so important:
they are “triggers” for inferences
about brand attitudes that elicit
reciprocal customer attitudes of
favorability and loyalty.
F rom this perspective, service
guarantees should be evalu-
ated more in terms of their contri-
bution to closing the communica-
tions gap than merely as efforts to
close the performance gaps. A ser-
vice guarantee that appears to pro-
vide extrinsic motivations for
employees’ actions—e.g., avoid-
ing penalties rather than a “profes-
sional” commitment to serving
customers—in effect short-circuits
the inferential process. More gen-
erally, by equating recovery with
cash payments, a service guarantee
92 © 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00072-X
risks conflating different types of
expectations for perceived justice
in service delivery. To compensate
a process failure with an outcome
remedy may compound the origi-
nal problem. Ironically, by guaran-
teeing specific outcomes, we may
deflect customers’ attention from
the critical issue—the attitude
toward customer service that the
guarantee was meant to convey.
To summarize our argument:
• In most cases, there may be no
market-defined need for service
guarantees as such. There is a
market-defined need for superior
service, and there is a strategic need
to communicate service excellence,
but these needs must not be con-
fused with (reduced to) what ser-
vice guarantees typically offer.
• Service guarantees are difficult
and potentially expensive to imple-
ment. If improperly designed or
implemented, service guarantees
may not fit with—and may actively
undermine—the brand manage-
ment strategy of a utility.
• Service excellence is a means
to an end—customer satisfaction
or loyalty—not an end itself. By
putting an explicit price on
implicit expectations, service guar-
antees risk converting a service
into a commodity.
• Service guarantees may be
redundant for traditional aspects of
service such as accurate metering
and billing that are considered as
“givens” (and thus free entitle-
ments) by most customers. When
we move to “value added” ser-
vices such as power conditioning
that go beyond traditional utility
entitlements, there may appear to
be a role for service guarantees in
some stages of some markets. Iron-
ically, however, when and where a
competitive market itself works
to ensure responsiveness to cus-
tomers, service guarantees may
once again become redundant.
Endnotes:
1. Amy K. Smith, Ruth N. Bolton, and
Janet Wagner, A Model of Customer Satis-
faction with Service Encounters Involving
Failure and Recovery, Working Paper
Report 98-100, Marketing Science Insti-
tute (Cambridge, MA), Feb. 1998.
2. Id., at 6.
3. Gene Pokorny, Building Brand Equity
and Customer Loyalty, Elec. Perspectives,
May/June 1995.
The Electricity Journal