The magnitude of the penalty also mattered: 74 percent of the respondents said they considered the fee to be too high, particularly when their actions caused no loss of income to the company. As one of those surveyed noted: “I made a mistake and missed paying the full amount of my credit card balance by $1.00 and ended up having to pay interest on the entire $2,317 statement.” When these “near misses” occurred, most respondents expected the company to be more flexible.
The experience of contesting the charge also played a large part in determining customers’ attitudes. In 27 percent of the cases, the company either wiped out or reduced the fee, usually as a one-time courtesy. The refusal by the rest of the companies to make adjustments went over particularly badly with those who had cited family, medical, or other emergencies as the cause of the problem.
“Our research indicates that the design and application of penalties is central to perceptions of fairness and that can dramatically influence the likelihood that customers will continue with the firm and not engage in damaging word of mouth,” the authors write.
To that end, the authors advise companies to adopt the following safeguards to make the penalties less onerous to consumers, and thus less damaging to themselves.
• Help customers avoid incurring a penalty unintentionally. Simple awareness of a potential charge plays a large role in whether customers believe the fee is fair. Reports have indicated that only about 8 percent of financial institutions that charged overdraft fees informed customers that they had insufficient funds to complete a transaction. The lack of notice “may lead to short term revenue gains,” the authors write, but “not being more diligent in keeping customers informed of impending penalties leaves the impression that firms prefer customers [to] fail and wish to capitalize on that happening.
• Manage the magnitude of penalties. The authors cite the Telus Corporation, a Canadian mobile phone carrier, which has tried to enhance its reputation for fairness by making its termination policy and limits on data usage less costly and more transparent to customers.
• Educate customers on the offer and ensure that penalties are clear. American Airlines now offers a “boarding and flexibility” package designed to alleviate any future fees. Explaining to customers how their actions affect the firm’s costs could also be beneficial; those surveyed said they were more likely to accept larger fines if they understood the impact their behavior had on the business.
• Take responsibility for some penalties. Because the analysis showed that customers grew more upset when they believed the cause of the assessed fee was not their fault, it’s important that fines be waived or reduced when the company itself, its partners, or unpredictable circumstances are to blame.
• Consider giving customers a break when they narrowly miss avoiding a penalty. With close calls, firms should consider reversing the charge, especially if it’s the first occurrence. In a slightly different context, the authors note, General Electric has adopted a policy of “unofficially” extending its warranties by a month, because the firm noted that customers were most angry when their product failed shortly after the warranty expired.
• Be flexible: Take into account the customer relationship and empower frontline employees. Flexibility is especially important with regard to high-value or long-standing customers. Research has indicated that the top 20 percent of customers account for as much as 80 percent of a firm’s profit, and companies can curry favor by granting loyal customers some latitude regarding penalties. Frontline staff need to be given the freedom to make quick decisions about reducing or removing fees, assisted by training and access to databases of customers’ shopping history.