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As organizations are striving to increase customer loyalty through relationship marketing programs, more firms are implementing customer penalty policies that impose fees or charges (e.g. airline reticketing fees) on customers that fail to comply with purchase agreements. While penalties are intended to increase customer compliance with purchase agreements, they may also reduce customer loyalty and increase negative word‐of‐mouth communications. Owing to a paucity of available research, the authors conducted a national consumer survey to determine, first, if penalties increase customer compliance, reduce customer loyalty, and/or increase negative word‐of‐mouth communications, and second, what factors may influence customer perceptions of penalty fairness. The results indicate that while penalties may increase customer compliance, some customer conflict and other negative consequences are likely to follow the imposition of a penalty. Also, the effects of a number of demographic and situational factors on customer perceptions of penalty fairness are presented and discussed. Considers the implications of the findings for management practice and discusses directions for future research.

Given the growing and widespread use of consumer penalties, there is little doubt business considers them an effective way to get customers to follow through on commitments. Yet no one really knows how people, as individuals, respond when they are penalized by banks, airlines, cell phone companies or other vendors. What types of behavioral reactions do penalties elicit from consumers? What is the impact on the businesses that charged them? The authors turn a spotlight on these previously unexamined issues by analyzing the reactions of 44 randomly selected consumers who faced 66 different consumer penalties. Key findings, from a pilot analysis, include the fact that in 38 of the 66 penalty cases examined, study participants thought that the penalties that they incurred were both unfair charges and the amounts unjustified. Overall, a third of all penalties resulted in customers changing vendors. Additional findings show word‐of‐mouth communication to others was significant, and that over half of penalized consumers challenged their penalties, with 50 percent of them having some success. Study results strongly indicate companies should be taking a closer look at their penalty policies in light of building long‐term customer relationships.

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