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.