Over the past 20 years, a convergence has occurred regarding the importance of building relationships with valuable customers as the cornerstone of service strategy. Customer satisfaction and delight have been associated with supporting the retention and growth of important relationships. 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 is an MIT Sloan Management Review article. Customers are often involved in the design or delivery of services, and in this respect, they function as co-producers of the service. What happens when customers fail to perform their roles effectively? Customer failure is not uncommon; research indicates that customers cause about one-third of all service problems. To study the issue of customer failure and its prevention, the authors conducted interviews with managers and customers in a variety of industries about experiences of customer failure, developed case studies related to the topic, and conducted secondary research to identify examples of best practices in customer-failure prevention. The authors conclude that recovering from instances of customer failure is difficult and that companies should focus instead on preventing them. An effective three-step approach is: collect diagnostic data about where customer failures occur, analyze the root causes of cases of the failure (e.g., technology, people, process issues), and establish preventive solutions, such as process redesign. The authors cite examples of companies that try to prevent customer failures. For instance, Weight Watchers International Inc. customers may offer each other encouragement at meetings and, thus, help prevent one another from failing in their weight-loss plans.