Avoiding punishment

Customer loyalty depends on rules. Those who fail to comply face penalties—late fees, penalty interest, and contractual fines. The underlying assumption is that penalties deter undesirable behavior. However, they sometimes produce the opposite effect. The key question is: Under what conditions do penalties reduce undesirable behavior, and when do they paradoxically encourage it—and what does the evidence tell us?

Studies

The Daycare Center Experiment

Uri Gneezy and Aldo Rustichini conducted one of the most famous experiments in behavioral economics in 2000. They observed 10 Israeli daycare centers over 20 weeks and initially documented 8 late pickups per week. Then they introduced a fine of 10 shekels (approximately 3 dollars) per late pickup. The result was astonishing: late pickups doubled to 16 per week. Parents reinterpreted the fine as a price for a service. The social obligation "I should be on time" transformed into the transactional decision "I'm paying for 30 minutes of extra work time."

From Social Norm to Market Transaction

Before the fine, parents viewed lateness as a moral failing—they felt ashamed to keep the caregivers waiting. The 10-shekel fine completely reframed this dynamic: lateness became a legitimate option with a transparent price. Parents suddenly began calculating rationally: "Is the extra time worth $3 to me?" The answer was usually yes. Notably, once money entered the equation, people shifted from social to market thinking—even with symbolic amounts. The social obligation had been replaced by a business transaction.

The Lasting Damage

After 16 weeks, Gneezy and Rustichini eliminated the fine. The logical expectation would have been a return to the original 8 late pickups per week. In reality, something alarming happened: late pickups remained at 15 per week—nearly double the pre-experiment level. The social norm had been irreversibly destroyed. Once framed as a market transaction, arriving late remained an acceptable option—even without a price. Money can destroy a social norm, but removing the money cannot repair it. The damage was permanent.

Principle

Which principle for Customer Experience Design can be derived from this? When a moral or social norm is in place, introducing a small fine can undermine it by shifting the relationship between company and customers from a social framework to a transactional one. Once customers view a behavior as something they can simply pay for, it loses its moral weight and becomes a rational cost-benefit calculation. This is especially problematic when the fine is set too low, as it signals that the undesired behavior isn't particularly serious. This principle operates primarily in domains where strong social norms already exist—such as environmental protection, fairness, or community responsibility. The following guidelines demonstrate how to apply this principle in practice.

Guidelines

Do not introduce small penalty fees

Before introducing a penalty fee, ask yourself: Is a social norm already effective? Small fees often undermine the sense of social responsibility without actually changing behavior. Instead, use social framing (such as "Other customers are waiting") or set fees high enough to genuinely deter the unwanted behavior. The following examples illustrate this guideline:

• Bibliotheken: Many libraries have eliminated late fees. Return rates either stayed the same or improved—the social norm of "books should be returned" proved more effective without the market-based logic of financial penalties.
• Netflix: Netflix eliminated late fees that were common at video rental stores. This signaled: 'We're not a transactional relationship, but a service.' Customer satisfaction increased.