A couple of months ago,the Harvard Business Review carried a great article “Companies and the Customers Who Hate Them” by Gail McGovern and Youngme Moon. In this article, the authors describe several situations where companies generate a significant portion of their profit by penalizing customers for bad behavior. Examples cited by the authors include:

• Video rental stores that generate a significant portion of their profits from late fees
• Credit card companies that approve rather than decline over limit transactions and then charge the customer fees
• Banks that present checks in reverseorder of magnitude to increase the likelihood that more checks will be drawn against insufficient funds
• Cellular providers that lock customers into lengthy contracts rather than creating loyalty through good service.

In addition to the examples cited in that article, there are no shortage of others including:

• Car dealers that raise the price of popular models above list if there is a shortage.
• Stores that raise the price of umbrellas when it’s raining or snow shovels when it’s snowing.

While leveraging antagonistic customer practices can generate higher profits in the short term, it also creates a competitive risk as customers can quickly migrate to more customer-friendly offerings from competitors as they arrive on the scene.

Potentially more important is a growing body of research that indicates customers will actively find ways to penalize companies they believe have treated them unfairly. These penalties include defection and negative word of mouth (often using electronic means that now reach hundreds if not many thousands of other potential customers).

Customers intuitively and automatically sense when they are engaging in relationships that aren’t fair at some basic level. The evolutionary path of the human brain has reinforced the development of instinctual, subconscious mechanisms for recognizing fairness in individual or group exchanges. This capability dramatically improved the success of our hunter-gather ancestors who relied on cooperative group behavior for survival. Every one of us has had emotional experiences of situations being “just not fair,” even if we have a hard time putting our finger on why we feel that way. Usually our automatic emotional experience and resulting feeling of injustice happens before we can consciously label that feeling with some rational explanation or principal that tells us why it’s not fair.

One of the simplest ways to observe our instinctual fairness response is the Ultimatum Game. This is a one-round bargaining game played by two people. The first person, called the Proposer, is given a sum of money, say 100 dollars. The Proposer then makes an offer to split some of the money with the second person, calledthe Responder. The Responder can either accept the offer, in which case the two players each get their share, or reject the offer, in which case both players get nothing. Since this is a one-round game, the only rational choice for the Responder is accept any non-zero offer.

However, the actual results of playing the game are very different. In most cases, Responders reject non-zero offers that are perceived as “unfair” splits. This experiment has been done across very different cultures and the results are essentially the same. Non-zero offers are rejected at a rate that increases as the offer size decreases. The overwhelming insight is the people feel an automatic, instinctual need to penalize unfairness even if that behavior involves a personal cost to them.

The Ultimatum Game is just the start. There are a wide range of situations that reinforce the automatic drive that people have to penalize unfairness. In essence, people are willing to spend their own capital (money, time, energy, etc…) to penalize others that treat them in ways that they perceive as unfair. In his book “PassionsWithin Reason,” Robert H. Frank emphasizes that people “often do not behave as predicted by the self-interest model.”

The emerging field of neuroeconomicslooks at the neuropsychological basis for decision making that does not follow rational economic theory. It appears that our subconscious, automatic reactions toviolations in social exchanges is handled by a particular area of the brain - the anterior insula. Brain imaging of players in theUltimatum Game demonstrate stronger activations in the anterior insula as theResponder is presented with increasingly unfair splits. The anterior insula is also activated when people are shown objects and situations that they find disgusting. This is one of the reasons why many people experience being treated unfairly as similar to feelings of disgust.

Across the research that’s been done in this area, three types of “justice” are important to consider in the customer experience:

• Distributive justice. Does the customer perceive the outcome they received to be fair given either their perceived investment or what they believe has been received by other customers?
• Procedural justice. Was the process that was used to arrive at the outcomes fair? Didthe customer see that their time was treated as highly valuable or did they believe they had to wait too long? Were others who arrived after me served first?
• Interactional justice. Wasthe customertreated fairly and with respect by the individuals thatthey encountered?

How different customers perceive, interpret, and evaluate violations in justice are personae dependent. The basic components involved in understanding these different customer personae is covered in the post “Cognitive Ergonomics: Designing Experiences that Fit the Customers’ Mental Model.” For example, a customers’ temperamental orientation towards Harm Avoidance acts as an amplifier in automatic reactions to perceived violations of justice. In addition, more Reward Dependent customer personae tend to react more strongly to perceived violations in Interactional Justice.In general, the way youdesign interactions with customers have to be sensitive tothe personae of the target customers.

Today customers 1)have an increasing ability to communicate their dissatisfaction with other customers and 2) base more of their purchase decision on word of mouth. Regardless of the company’s policy or the fine print on the back of the service agreement, if any company doesn’t design what they do to be highly sensitive to creating an experience that customers’ perceive as fair is just… ”roadkill waiting to happen.”