Stephen S. Tax, University of Victoria
Young ‘‘Sally’’ Kim, Shenandoah University
Sudhir Nair, University of Victoria

Over the past 20 years, a convergence has occurred regarding the importance of building relationships with valuable customers as the cornerstone of service strategy. More recently, firms have adopted penalties and fees as a central means of growing revenue. This has caused friction with the programs targeted at improving customer relations, and increased defections and spurred government regulation. In this article, we collect and analyze data to identify the aspects of penalties that generate customer dissatisfaction and negative emotional and behavioral responses. We offer guidelines for the implementation of penalties that balance the goals of revenue generation and customer loyalty.  These include: preventing unintentional failures, managing the perceived magnitude of penalties, effectively educating customers on the offer, ensuring that penalties are clear and transparent, linking penalty decisions to responsibility for the transgression, taking into account narrowly missing avoiding a penalty, and consideration of the customer relationship and employee empowerment.


This paper is published in Business Horizons (2013) 56, 377—386