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Containing the Anger over Customer Fees

When assessing penalty charges, companies must be fair, flexible, and transparent.

Title: Getting the Right Payoff from Customer Penalty Fees (fee or subscription required)

Authors: Stephen S. Tax (Peter B. Gustavson School of Business), Young “Sally” Kim (Shenandoah University), and Sudhir Nair (Peter B. Gustavson School of Business) 

Publisher: Business Horizons, vol. 56, no. 3

Date Published: May–June 2013

How can companies use penalty fees to stay in the black without causing their customers to see red?

That’s what many firms are asking themselves as they impose more and more charges, and confront more and more irate consumers, over missed payments, late cancellations, no-shows, tardy returns, and overdrawn bank accounts. The short answer is that so long as companies see fees as a revenue generator, they will always lose some angry customers. But, according to this paper, firms can limit the damage if they build into their penalty program a dollop of forgiveness, a lot of transparency, and a host of other features that foster flexibility and fairness. With such safeguards in place, the authors of this paper say, penalties can continue to be a powerful source of revenue without driving too many customers away.

Corporate America’s love affair with penalties and fees has been out in the open for some time, and the charges are now an important contributor to the bottom line at many firms. For example, penalties for late payments and overage fees in the credit card industry almost tripled from 1997 to 2007, amounting to about 10 percent of profits during that time. In 2009 alone, airlines in the U.S. reaped about US$2.4 billion (or roughly 3 percent of their overall revenue) from fees assessed for changing or canceling flights. Golf courses, hospitals, hotels, and restaurants now routinely impose no-show fees, and some retailers charge customers a restocking penalty when they return merchandise.

But seeking such revenue breeds resentment and risks fraying or even cutting the bonds with longtime customers. Given that the penalty fees aren’t going away, how can companies reduce those risks? The authors looked to customers for an answer. They first identified which aspects of the penalty process result in consumers’ dissatisfaction and then drew up guidelines for companies to balance the goals of revenue creation and customer loyalty.

The authors surveyed more than 200 consumers who had been charged a penalty in the previous six months. The penalties were imposed in a wide range of industries, most levied by bank and credit card companies, airlines and hotels, telephone companies, retailers, and healthcare providers. Participants were randomly selected from a huge online consumer database, Zoomerang, to ensure a representative sample of age and gender. The participants answered open-ended questions, including whether they found the charge to be fair and how the experience affected their feelings for the company and their subsequent shopping behavior.

The reaction of the surveyed consumers, 84 percent of whom said they had a positive outlook toward the company before being assessed, was strong. Nearly three-fourths reported being angry or upset at receiving the penalty; 22 percent said they had stopped doing business with the company and 18 percent had “bad-mouthed” the firm.

The negative reaction largely stemmed from a sense of unfairness: 64 percent of participants said they thought the charge was not warranted. Almost half of these customers said they were unaware that they would be charged a penalty - in some cases, because the firm’s policy had changed or was buried in fine print. Those who felt they had little control over the process were noticeably angrier, especially if they incurred the charge because of a personal hardship (such as a family emergency that necessitated a last-minute cancellation).

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