An exploratory investigation of customer penalties: assessment of efficacy, consequences, and fairness perceptions

Abstract

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.

Providing a critical service today for tomorrow's consumers: A relational model of customer evaluations and responses in the child care industry

“…Social status is expected to influence customers' evaluations of an organization in many different ways ranging from information processing and brand preferences to satisfaction judgments and behaviors (Bryant and Cha, 1996;Keaveney and Parthasarathy, 2001). Prior research suggests that income and education are highly correlated and that customers who have achieved a high level of education tend to earn more money than those who have not (McCarthy and Fram, 2000).…”

Examining the Penalty Resolution Process

“…Various factors influence perceptions of fairness (Xia, Monroe, and Cox 2004). First, social norms matter, with less established and less familiar penalties being seen as less fair than long-standing ones (Fram and Callahan 2001; McCarthy and Fram 2000). Second, fairness perceptions depend on consumer attributions.…”

“…Before the Credit CARD Act in 2010, 82% of credit cards allowed unlimited penalty rate increases on top of late fees averaging $39 (The Pew Safe Credit Card Project 2009). While some penalties are effective in enforcing compliance and are necessary to compensate for revenue loss (McCarthy and Fram 2000), consumers feel that service providers abuse their power and employ penalties to enhance profit rather than cover costs (Fram and Callahan 2001). This perception is not ungrounded.…”

“…As a result, many penalties are perceived as unfair, leading consumers to develop negative emotions and vengeful feelings toward the provider. These undesirable perceptions and emotions subsequently lead to behavioral consequences, such as switching service providers and negative word of mouth (Kim and Smith 2005; McCarthy and Fram 2000).…”

Rewarding customers who keep a product: How reinforcement affects customers' product return decision in online retailing

“…However, this negative form of operant conditioning bears an unfavorable side effect: The punished individual perceives the punishing individual or institution negatively and seeks to avoid further contact with it (Jablonsky & DeVries, ; Skinner, ). Although punishment is selectively used in marketing (e.g., cancelation fees as a negative consequence to dissuade customers from canceling flights; McCarthy & Fram, ), previous research argues against the use of punishment in a selling context because of its negative side effect (Nord & Peter, ).…”