Stick It Out or Walk Out: Customers as Captive Sardines
Marketing Science, 2009
High demand for a service means more revenue and more profits for the service provider. However, when peak demand is unpredictable and it occurs in a confined space (e.g., restaurants, resorts, trains, and airplanes), the service quality tends to decline. Customers are likely to have a bad experience because of longer wait times, overcrowded spaces and inattentive employees. That result: lost revenue because of customer dissatisfaction and defection. Whether the customer chooses to stick it out or walk out, future profits are in jeopardy.
In their recent article, “Should Captive Sardines Be Compensated? Serving Customers in a Confined Zone,” published in the May-June 2009 issue of Marketing Science, Assistant Professor Rachel Chen and her co-authors, Assistant Professor Catherine Yang and Professor Emeritus Eitan Gerstner, who is now a professor of business at Loughborough University, argue that one way to remedy this potential profit loss is to compensate the inconvenienced customers with free drinks, desserts or services. However, according to the authors, there is no evidence that consumers are better off under this compensation strategy.
In their paper, the researchers explore optimal compensation and pricing policies by developing an analytical model that measures the benefit or loss garnered through a customer compensation strategy. Chen et al. identify two major sources of customer dissatisfaction during unexpected time of high demand: the first is the “sardine effect” that causes discomfort when too many customers compete for space and services at the same time. The second is the “captivity effect” that results in discomfort when exiting a situation becomes costly for the customer.
The authors conclude that compensating “captive sardines” does improve profit margins in the short run because the compensation encourages those who might choose to flee to stick-it-out and in the long run because it builds customer loyalty. Chen et al. add that a key feature to increasing profit margins through compensation is contingency pricing. According to the authors, a business can set lower prices if the service is less pleasant and higher prices in the absence of the sardine effect.
They also point out that compensation is not advisable when marginal cost is high, or when it is difficult for a customer to escape a service. Ultimately, according to their model, the way to always improve profit is to avoid the sardine effect by changing the ambiance of the restaurant to make it appear and feel more spacious, readjust the staff to relieve congestion more efficiently, and, if possible, add more physical space.