Spring 2020

I want my money back!


Yi Zhu was on his way to Key West, Florida, when he learned that his connecting flight had been canceled. The airline had rebooked him on another flight, but the new schedule meant he would miss a night he’d already paid for at a local hotel. 

Hoping to get some sort of compensation, he called the airline—which only made him more frustrated. “You have to really jump through hoops to get a refund or any sort of compensation,” says the associate professor of marketing at the U’s Carlson School of Management. “Nobody’s going to call you to say, ‘Hey, what’s going on? How can I help?’”

Zhu’s experience made him wonder why dealing with customer service—specifically, obtaining a refund—is often such a hassle. Why would a company set up a system that irritates and frustrates customers? Partnering with a colleague from the University of Southern California, Zhu decided to find out.

Describe the typical customer service experience.

After going through a list of phone options, you’re lucky if you can connect with a person quickly. If you do manage to reach someone, that representative normally cannot make big decisions. They can use some nice words to comfort you or provide some form of assistance, but they’re often not authorized to help you if you’re asking for a full refund. If you’re persistent, you’ll probably get transferred to a manager or supervisor—which means more waiting—and then you have to explain the situation all over.

Why do companies make the process complicated?

Our study found that often there’s a profitable advantage to induce customer hassles. If you think about it, refunds chip into a company’s profit. So if you can minimize refunds, you can preserve the overall profit. It turns out the optimal design for maximizing profit, which we can show mathematically, is a tiered structure where the lower-tier agent has limited authority. You have to talk to a manager on the second tier to actually get a refund.

Who uses tiered structures?

They’re most commonly used by industries with just a few big players—finance, internet services, and airlines. The tiered structure works if the company has certain monopoly power. Take airlines, for example: If your flight is canceled, you’ll probably be offered some miles or another flight. And you’ll probably accept it, because what else can you do? The company doesn’t want you to explode, so they’ll offer you something, but not a full refund. If you’re not happy with what they offer during the first call or first contact, you have to spend extra time and energy to try to get more of a refund.

Wouldn’t it be cheaper just to offer refunds in some instances?

Possibly. Building and managing tiers can be costly. We found that companies usually have two to three tiers at most. And there’s downside, for sure. You get resentment from consumers, so there’s a social cost that may impact your company’s reputation. 

You also found that the structure can be discriminatory. 

Customers have to have time to deal with the tiered system, so if you need to get to your second job or have kids to watch, you may not have time to stay on hold or argue your point. You have to have language skills—especially when you’re interacting with chat bots and other artificial intelligence. Those automated systems use key words to trigger a connection to the second tier. People who aren’t familiar with technology or people with less education may not be in a good bargaining position. Other studies have found that women, African Americans, and Latinos may experience more hassles while navigating the system. 

How can we get better customer service?

Some companies provide excellent customer service. But the trade-off is they may charge a higher price. For example, you can become a diamond member with Delta Airlines, which gives you a special number to talk to customer service. But you can only achieve diamond status if you pay a lot of money. Basically, the company transfers some of the cost of providing refunds to you, but with a very high price tag.

If you don’t want to pay for it, your best bet is to rely on third parties—like the government or Better Business Bureau—that can force companies to deal more equitably with customers. 

How has donor support allowed you to advance your research?

Financial support from being the Mary and Jim Lawrence Fellow has helped me reduce my teaching load so that I have time to work with my collaborators at other institutions. It has also allowed me to travel internationally to present my research, collect new data, and work with coauthors. One of my recent studies, which was supported by the fellowship, was published in Marketing Science, one of the top business journals in the world.

Joel Hoekstra is a Minneapolis writer and editor.