Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 Do Complaint Management and Country of Origin Have an Impact on Customer Retention? Jangrho Lee1, Youngsam Cho2 and Boyoung Kim3 This study empirically tested a conceptual model to comprehend the relationship between customer complaint behavior (CCB) and a probability of continuing a relationship with the firm by focusing on the automobile industry. Further, we examined the moderating effects of perceived justice on complaint management and country of origin (COO) on the relationship. Survey results from 222 domestic automobile consumers and 232 foreign automobile consumers showed that all the three types of CCB, voice, private, and third party response behaviors, had negative effects on the continuing relationship. Also, the negative relationship between voice response behavior and continuing relationship was weaker when consumers’ perceived justice on firm’s complaint management was higher. In addition, there were significant differences between the two consumer groups driving a domestic or foreign car. The negative relationship between private response and continuing relationship was weaker for the consumers driving a foreign car than the ones driving a domestic car. Based on findings, this study provides important theoretical and practical implications on the service marketing field. Key Words: Customer complaint behavior, Customer retention, Perceived justice, Country of origin 1. Introduction In the fields of service marketing, numerous studies have investigated the impact of meeting the expectation of customers and preventing failure incidents as an important point where firms can build up a long term relationship with customers (Swanson, Frankel, Sagan and Johansen, 2011). The intangible and simultaneous features of service handling increase the difficulty of service firms to deal with errorfree services in customer interactions (Nikolich and Sparks, 1995). Customer complaint behavior arises when an individual makes a cognitive evaluation on a product or service and takes an action to discuss negative emotions (Jacoby and Jaccard, 1981). Thus, the firm should keep in mind how to rectify unpleasant incidents for the next confronts. That is, customer complaints are valuable sources of information which give firm the second chance to diagnose their service transactions (Gruber, Szmigin and Voss, 2009). Davidow (2003) demonstrated the complaint process takes three steps as complaints made by customers at first, secondly an effective organizational response to be followed promptly, and post complaint behavior that is the reaction on responses of the firm in the view of customers. In this regards, the company‟s complaints handling procedures affect the behavioral decision of the customer at the end of the service transactions in terms of perceived justice assessed by customers (Harris, Grewal, Mohr and Bernhardt, 2006). When the customer perceives that the firm is not cautious when handling unpleasant events fairly, it leads to the second disappointing experience, while an excellent one allows the firm to retain customers 1 2 3 Professor, Korea University Business School (jrlee@korea.ac.kr, 82-2-3290-1926) Ph.D. candidate, Korea University Business School (zegal82@korea.ac.kr, 82-10-8580-0322) M.S., Korea University Business School (qhdud880@naver.com) 1 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 in the long run. This positive relationship between perceived fairness of organizational response and repurchase intentions was empirically proved. (Goodwin and Ross, 1992). There have been few studies in investigating a moderating effect of the complaint management, especially, the perceived justice by customers in between the customer complaints behaviors (CCB) and post-purchase behavior (e.g. a probability of continuing the relationship with the firm). Also, prior COO literature indicated that the country of origin of product strongly influences the product evaluation and purchasing behavior (Sharma, 2010). On the other hand, there have been very limited studies investigating the impact of country of origin on the relationship of CCB and post-purchase behavior. Thus, it is needed to examine the effect of COO in service marketing field (Ahmed, Johnson, Ling, Fang and Hui, 2002). The present study intends to make several contributions. First, we ascertain whether the three customer complaint behavior dimensions of Singh (1988) is clearly distinguished for our Korean sample. Second, we investigate a relationship between customer complaint behaviors and a probability of a continuing relationship with the firm, as one of post-purchase behaviors. Third, we examine a moderating effect of perceived justice, as a complaint management, on the relationship that customer complaint behaviors influence the probability of their continuing relationship. Fourth, we find out whether COO has a moderating role between CCB and firm‟s customer retention. Also, further investigation was conducted to elaborate if three dimensions of complaints behavior, perceived justice, and a probability of continuing relationship have a significant difference based on the country of origin of the automobile that the customers patronize. II. Literature Review Retaining a current customer becomes critical as firm‟s offering moves into maturity phase of the product life cycle where the benefit-cost ratio of attracting new customers declines rapidly (Liu and McClare, 2001). Since customers often remain silent when service failures occur (Zeelenberg and Pieters, 2004), the importance of keeping a relationship with the current customer had received general attention over the past decade. Also, customers who patronize a specific firm form the corner stone of lofty lifetime value of future cash flow in respect to the firm (Reichheld and Sassar, 1990). Kim and Smith (2007) argued that the trust and the satisfaction with the supplier are strong factors in customer retention. The arguments of these authors in light of our research is that these four stages can stop processing at any stage when either involved party decided to recover their relationship, resulting in prolonging their current relationship. This means how the firm makes an effort in service recovery would help to alleviate the unsatisfactory incident of service failure and to induce the customer to continue to be in a relationship with the firm. Also, many studies examined the COO effect on customers‟ purchase intention (Pharr, 2005; Prendergast, Tsang and Chan 2010). According to Prendergast et al. (2010), especially, the country of brand influences the purchase intention of the customer. Thus, it is meaningful to investigate the relationship between CCB and customer retention and then whether perceived justice in service recovery handling and country of origin affect this relationship. Our conceptual model is depicted in Figure 1. 2 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 <Figure 1> Research Model Customer complaint behavior Perceived justice on complaint management Post-purchase behavior Voice response H1(–) Private response H2(+) H3(+) Probability of continuing relationship Third party response Country of origin 2.1 Customer Complaint Behaviors and Customer Retention The complaint behavior of customers in transaction with a firm has received significant attention in customer related literature for a long time because it shapes the programs of firm reducing potential customer complaints (Bodey and Grace, 2006; Singh, 1988). Singh (1988) defined CCB as „a set of multiple responses (including behavioral and non-behavioral) triggered by perceived dissatisfaction with a purchase incident.‟ He proposed a taxonomy of CCB response construct with three dimensions as follows: (1) Voice response as an action to seek redress from the seller, (2) Private response as a word of mouth communication; (3) Third party response as taking legal action to an organizational entity. Voice response happens when objects are external to consumer‟s social circle and directly involved in dissatisfying transactions. On the other hand, private responses arise when objects are internal to a social circle and not directly involved in dissatisfying transactions. Finally, third party responses occur when objects are external to a social circle and not directly involved in dissatisfying transactions. This study investigates the relationship between customer complaint behaviors and a probability of continuing a relationship, as one of the post-purchase behavior based on the taxonomy of Singh (1988). Service failure incidents are negatively perceived in general (Bougie, Pieters and Zeelenberg, 2003). This negative perception leads to consumers‟ behavioral responses to service failure as they experienced dissatisfaction or negative emotions such as disappointment, regret, anger and sadness (Mattila and Ro, 2008). By having unsatisfied transaction events with the supplier, it is less likely that consumers will be loyal to the firm or at least be reluctant to maintain a strong relationship with the firm, considering another option such as switching to different suppliers or brands. Therefore, the main hypothesis was developed in that each of the three different types of customer complaint behavior, voice, private, and third party responses, will have a negative influence on a probability of maintaining a relationship with the firm. Thus, we propose the following hypotheses: Hypothesis 1a: After service failure, customers who engaged in voice response behaviors will show a negative disposition of continuing a relationship with the firm. 3 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 Hypothesis1b: After service failure, customers who engaged in private response behaviors will show a negative disposition of continuing a relationship with the firm. Hypothesis 1c: After service failure, customers who engaged in third party response behaviors will show a negative disposition of continuing a relationship with the firm. 2.2 Effect of Perceived Justice on the Relationship of CCB and Customer Retention In a recent review integrating thirty years of research in service recovery, the three dimensions of justice is clearly indicated: distributive, procedural, and interactional (Clemmer and Schneider, 1996). Distributive justice is defined as the perceived fairness of a tangible outcome of dispute or negotiation including more than two parties (Blau, 1964). Procedural justice refers to the perceived fairness of the policies, procedures, and criteria that the service provider used in delivering an outcome of dispute in the service handling process (Lind and Tyler, 1988). Lastly, interactional justice is defined as the manner in which customers are treated during the dispute resolution process; courtesy, blameless, and respectful behavior of the service provider are regarded as significant elements (Bies and Shapiro, 1987). In this study, we focus single perceived justice construct as a service recovery handling of consumers (Blodgett, Hill and Tax, 1997). Service recovery is influential in retaining customers since customers are less likely to forget or forgive the treatment perceived as unfair (Seiders and Berry, 1998). An effective service recovery implementation would reduce switching behaviors, helping the firm to increase profit by alleviating the dissatisfaction of service failures (Colgate and Norris, 2001). In Heung and Lam (2003)‟s study investigating the potential motivation that consumers are to engage in complaining behavior, they found that consumers wanted to seek corrective actions by the firm to put things right and to listen to apologies from the service provider. In this study, we assume that perceived justice on complaint management have a positive moderating effect on the relationship between customer complaint behavior and a probability of continuing a relationship. Thus, we propose the following hypotheses: Hypothesis 2a: The negative relationship between customers’ voice response behavior and continuing a relationship with the firm will be weaker, when their perceived justice on firm’s complaint management is higher. Hypothesis 2b: The negative relationship between customers’ private response behavior and continuing a relationship with the firm will be weaker, when their perceived justice on firm’s complaint management is higher. Hypothesis 2c: The negative relationship between customers’ third party response behavior and continuing a relationship with the firm will be weaker, when their perceived justice on firm’s complaint management is higher. 4 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 2.3 Effect of Country of Origin on the Relationship of CCB and Customer Retention Country of origin effect (COO) is defined as a specific marketing phenomenon on which consumers consciously or subconsciously incorporate a stimulus for COO such as „made-in‟ label in their evaluation criterion for a certain product (Blomer, Brijs and Kasper, 2009). Laroche, Papadopoulos, Heslop and Mourali (2005) argued that the country image does directly and positively influence purchase intention of customers. Particularly, country of brand was shown to determine perceived product quality and value when country of consumers differ in their economic level (Han and Won, 2014). Many researchers studied whether COO indeed influences customers‟ purchase intention, directly related to continuing a relationship with the firm. Pharr (2005) found that the country of origin indirectly affects purchase intention passing through perceived product value formation. Especially, COO effect was found to be used more in evaluating the foreign goods and the products which have technically complex features or financially expensive as automobiles (Verlegh and Steenkamp, 1999). In this study, we focused on the relationship between complaining behavior and consumer retention would be moderated by COO effect, especially the country of brand. As mentioned above, when customers purchase the automobile originated from the countries such as Germany and Japan with higher economic level and higher reputation in auto industry compared to Korea, it is expected for them to be more likely to continue the relationship with the company. That is, the customers who drive a foreign car from Germany or Japan, would still keep a relationship with the firm even after making a complaint compared to those who drive domestic one. Thus, we propose the following hypotheses: Hypothesis 3a: The negative relationship between customers’ voice response behavior and a continuing relationship with the firm will be weaker, when their perceived country of origin image on the product is higher. Hypothesis 3b: The negative relationship between customers’ private response behavior and a continuing relationship with the firm will be weaker, when their perceived country of origin image on the product is higher. Hypothesis 3c: The negative relationship between customers’ third party response behavior and a continuing relationship with the firm will be weaker, when their perceived country of origin image on the product is higher. III. Methodology 3.1 Sample and Data Collection This study focused on the automobile industry as a research setting. The automobile brands of Korea (Hyundai, Kia, Renault Samsung), Germany (BMW, Mercedes-Benz, Volkswagen, Audi), and Japan (Toyota, Honda, Nissan) were selected to investigate the effect of the country of origin. The final sample included 5 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 454 completed survey questionnaires: 222 consumers for Korean brand automobiles, 135 consumers for German brand automobiles, and 97 consumers for Japan brand automobiles. 3.2 Measures All scales in the survey questionnaire were translated into Korean using the backtranslation method, and then the items were adjusted to focus on the automobile company. We used a seven-point Likert Scale for all the variables in the research model except COO dummy from „strongly disagree‟ (1) to „strongly agree‟ (7). The dependent variable was measured using Alvarez et al. (2010)‟s five item scale of the probability of continuing a relationship. The items were reverse-coded from the study since the original scale examined the probability of terminating the relationship. A sample item is „If the firm does not offer me a more diversified service, I will end the relationship.‟ The Cronbach‟s alpha was .86. The independent variables were measured by a widely used construct from Singh (1988)‟s eleven items. Those items were used in various CCB studies (Liu and McClure, 2001). According to Singh (1988), CCB consists of three sub-dimensions: voice response (4 items), private response (4 items), and third party response (3items). We examined whether Korean consumers engage in those three distinct complaint behaviors in our sample. The results of explanatory factor analysis (EFA) showed that all items were clearly distinguished into each three sub-dimension and had the factor loadings above .80 by confirming the discriminant validity of Singh (1998)‟s CCB items in Korean context. However, one of voice response items had .47 factor loadings. Thus, we used ten items except for the item in our study. Further, we conducted a confirmatory factor analysis (CFA) to check the validity of the three-factor model. The three-factor model (χ2(df) = 120.45 (32), GFI = .95, CFI = .98, NFI = .97, RMSEA= .08) fitted the data significantly much better than the onefactor model (χ2(df) = 1756.08 (35), GFI = .57, CFI = .57, NFI = .57, RMSEA= .33). Each sample item is „I discussed an automobile defect with a manager or other employees of the firm,‟ „I convinced my friends or relatives not to do business with this automobile firm,‟ and „I wrote a letter to the local newspaper about my bad experience with an automobile defect.‟ Each Cronbach‟s alpha was .84, .92, and .97. In this study, the perceived justice on complaint management and country of origin as two moderators were used between CCB and the probability of continuing a relationship with the firm. The perceived justice on complaint management was measured using Davidow (2003)‟ original nine item scale and the two additional items by authors in order to complement the original items. According to Davidow (2003), perceived justice consists of three sub-dimensions: distributive justice, procedural justice, and interactional justice. Our study focused on one construct formulating the overall perceptions of justice by combining three dimensions (Blodgett et al., 1997). A sample item is „I think what the company gave me was appropriate for automobile service failure.‟ The Cronbach‟s alpha was .92. To measure the country of origin as another moderator, we used the COO dummy variable (the consumers who drive a domestic automobile = 0, foreign automobile from either Germany or Japan= 1) to investigate the interaction effects of CCB on the probability of continuing a relationship with the firm. We controlled for several demographic variables that may have an influence on the probability of continuing a relationship with the firm: gender, age, occupation, educational level, marital status, annual income. These variables have been generally used in CCB studies (Heung and Lam, 6 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 2003). Gender was measured as a dummy variable (male = 1, female = 2). Age was categorized into four groups from 1 (below 29 years) to 4 (over 50 years). Occupation was divided into five categorical groups. Education level was divided into four groups from high school or less to doctoral degree. Marital status was measured as a dummy variable (single = 1, married = 2). Annual income was divided into six groups from 1 (under 30 million won) to 6 (over 100 million won). IV. Results 4.1 Correlation Analysis Table 1 shows the descriptive statistics and correlations among the variables in our research model for the whole sample. All the three types of customer complaint behaviors were negatively related to the probability of continuing a relationship with the firm. In particular, the private response behavior among the three CCB variables had the strongest negative relationship with the continuing relationship variable. The consumer‟s perceived justice on complaint management from the automobile company was positively related to the continuing relationship variable. Also, COO dummy was positively related to the continuing relationship variable. In other words, the consumers who drive a foreign car have a higher probability of continuing a relationship with the company compared to the ones who drive a domestic car. <Table 1> Descriptive statistics and correlation matrix (N = 454) 1. Voice response 2. Private response 3. Third party response 4. Perceived justice on complaint management Mean 4.08 3.66 2.36 SD 1.55 1.55 1.52 1 (.84) .56** 2 3 .33** .51** (.97) 4.33 1.24 .15** -.14** .02 4 5 6 (.92) (.92) .51 .50 5. COO dummy .10** -.05 -.09** .10** 6. Continuing relationship 4.11 1.22 -.32** -.50** -.36** .23** Notes: *p< .05, **p< .01, The figure in parenthesis indicates Cronbach‟s alpha. .14** (.86) 4.2 Hypothesis Tests To verify the hypotheses, we conducted hierarchical linear regression analysis. First, we ran a regression analysis (see Table 2). In model 1, we tested the effects of control variables. There were no significant effects. To examine the main effects, we added three types of consumer complaint behavior variables and two moderators in model 2. All the voice, private, and third party response behaviors were negatively related to the probability of continuing a relationship (𝛽 = -.14, p < .005; 𝛽 = -.32, p < .001, 𝛽 = -.14, p < .005), supporting Hypotheses 1a, 1b, and 1c. Among the three CCB variables, the private response was the most influential on continuing a relationship. 7 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 <Table 2> The Result of Regression Analysis (N = 454) Variables Control Gender Age Occupation Education level Marital status Annual income Main effects Voice response Private response Third party response Perceived justice on complaint management Country of origin dummy Moderating effects Voice response x Perceived justice Private response x Perceived justice Third party response x Perceived justice Voice response x COO dummy Private response x COO dummy Third party response x COO dummy Adj. Probability of continuing relationship Model 1 Model 2 Model 3 -.03 .05 .03 -.04 -.08 .05 .01 .01*** -.01 .01 -.00 .00 -.06 .00 -.01 .02 -.01 .01 -.07 .02 -.14** -.32*** -.14** .19*** .09† -.14** -.30*** -.13** .19*** .07 .31*** .30*** .16** -.03 -.11* -.02 .12* -.08† .34*** .32*** Notes: †p< .10, *p < .05, **p < .01, *** p < .001, COO dummy (domestic = 0, foreign = 1) To test the moderating effects for Hypotheses 2 and 3, we added the interaction terms in model 3. The six interaction terms account for 3 percent additional variance in probability of continuing a relationship ( = .34). As shown in model 3, the negative relationship between voice response and continuing a relationship was weaker when consumers‟ perceived justice on firm‟s complaint management was higher (𝛽 = .16, p < .005), supporting Hypothesis 2a. However, Hypotheses 2b and 2c was not supported. In terms of the moderating effect of the country of origin, the negative relationship between private response and continuing a relationship was weaker for the consumers driving a foreign car compared to the ones driving a domestic car (𝛽 = .12, p < .05), supporting Hypothesis 3b. However, Hypotheses 3a and 3c was not supported. The moderating effects of perceived justice and COO between third party response and a continuing relationship were significantly negative, contrary to our expectation. That is, they worsened the negative relationship. Liu and McClure (2001) argued that the scale of third party response is not favorable to measure complaining behavior. Also, It is not common for Asian consumers to report their inconvenient events on public newspaper or take legal procedures towards the company. To further understand the meaning of the significant interaction terms, we plotted the interaction effects using Aiken and West‟s (1991) procedures (see Figure 2). 8 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 5 5 4.5 4.5 4 3.5 3 2.5 2 Low Justice High Justice 1.5 1 Contunuing relationship Contunuing relationship <Figure 2> Interaction effects of voice and private responses by level of perceived justice and COO of automobile on a probability of continuing a relationship with a firm (N = 454) 4 3.5 3 2.5 2 Domestic Car Foreign Car 1.5 1 Low Voice High Voice Low Private High Private V. Discussion Although many researchers have studied the relationships between consumer complaint behavior and its consequences in the field of service marketing, there have been few studies in investigating the moderating effects of complaint management and the country of origin. This study examined CCB main effects and two moderating effects on a probability of continuing relationship with the firm by focusing on the automobile industry in Korean context. It is meaningful to integrate three streams of marketing literature for CCB, service recovery, and country of origin in a study. Our findings confirmed that all the three types of CCB had negative effects on the continuing relationship. Also, the negative relationship between voice response behavior and continuing a relationship was weaker when consumers‟ perceived justice on firm‟s complaint management was higher. The negative relationship between private response and continuing a relationship was weaker for the consumers driving a foreign car than the ones driving a domestic car. The finding of this study provide several important theoretical and practical implications. First, we confirmed that Singh (1988)‟s three dimensions of CCB developed from Western context was clearly distinguished for Korean consumers by using both EFA and CFA. Further, all the three dimensions had negative effects on customer‟s willingness to remain in the relationship with the firm. It is consistent with prior CCB studies (Bodey and Grace, 2006; Bougie et al., 2003). Thus, companies should be concerned about consumers‟ complaint behaviors for a long-term relationship. Among the three variables, private response behavior was the most influential on continuing a relationship. Liu and McClure (2001) argued that Korean consumers are more likely to involve in private response rather than voice or third party behavior. Second, we examined a moderating effect of consumers‟ perceived justice from firm‟s complaint management through its repair shops on continuing a relationship. The result showed that the negative relationship between voice response and continuing a relationship with the firm was weaker when consumers‟ perceived the justice from firm‟s complaint management higher. Highly satisfying complaint 9 Proceedings of Eurasia Business Research Conference 16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2 handling by service provider increases customers‟ overall satisfaction (Chelminski and Coulter, 2011). Companies need service provider training and development of a standard procedure in service recovery for more effective complaint management. Third, we investigated another moderating effect of the country of origin for automobiles on a continuing relationship. The result indicated that the negative relationship between private response and a continuing relationship was weaker for the consumers driving a foreign car from either Germany or Japan compared to the ones driving a domestic car. As mentioned earlier, automobile customers in an emerging country such as Korea tend to consider the automobile company in a more developed country as the one with relatively high reputation and quality (Anholt, 2010). Drawing upon the previous studies and our results, there are two contradictory implications for domestic and foreign automobile companies. The domestic companies recognize high loyalty of consumers driving a foreign car for its own brand company, and then should exert all the endeavors in improving product quality and brand image for overcoming COO effect of the foreign brand company. The foreign companies with high reputation should reflect these advantages on their global marketing strategy into less developed countries. The foreign companies should make a continuous effort to advertise their brand and let consumers remember their country of brand as an important informational cue. References Ahmed, Z. U., Johnson, J. P., Ling, C. P., Fang, T. W. and Hui, A. 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