What Should Managers Do With Profitable Unethical Customers?
Our research shows the answer depends on the manager’s ethical worldview.
Posted October 23, 2017
In a previous blog post, I described some of my recent research, conducted with Zhao Yang and Rene Algesheimer of University of Zurich. In our paper, we found an instance of lawful but unethical behavior of customers that produced beneficial effects for the company as well as its other customers.
Our study was based on customer data from a Swiss online retailer. We found that customers who violated its strict “one account – one customer” policy by opening multiple accounts using someone else’s telephone numbers were also among the company’s most active and engaged customers. Although they comprised just 11.5% of accounts in our dataset, these individuals accounted for 27.6% of the company’s sales. What is more, their presence also increased the engagement and purchase behavior of other ethical customers who maintained single accounts.
Many companies tend to be conservative and risk-averse when it comes to designing and enforcing customer policies. Managers tend to see all unethical behavior, whether it is ethical or unethical, in a negative light. So we wondered how managers would respond when they learnt about our study’s results.
Deontological Versus Teleological Ethics
In the more than three millennia that great minds have thought about ethical issues, two broad perspectives have emerged about how to answer this question.
A deontological perspective, exemplified by the philosopher Immanuel Kant’s writings, focuses solely on the inherent rightness or wrongness of an action. It disregards its consequences entirely. This view emphasizes the individual’s motives for acting, with the ultimate goal of behaving in a certain way for the right reasons. Regardless of how beneficial the customer’s unethical behavior was to the company, a manager adhering to the deontological perspective would seek to distance themselves from the customer and sever ties.
A teleological viewpoint (also known as consequentialism), advocated by British philosophers Jeremy Bentham and David Hume weighs the total positive and negative effects of an action’s consequences. It does not focus on the nature of the behavior itself. Through teleological ethics, a behavior is considered as moral and to be encouraged as long as its total beneficial consequences outweigh its harmful consequences. Managers subscribing to a teleological worldview will be a lot more tolerant of customers who behave unethically but lawfully, when they deliver benefits to the company and to other customers.
How Managers Respond When They Understand Their Unethical Customers Are Beneficial
To find out how managers respond, we conducted a "What would you do?" study of 136 US-based owners or managers of small and medium-sized retail businesses. There were first given a detailed description of the situation faced by the Swiss online retailer. It went like this:
“…Company X prohibits its customers from registering multiple accounts on the site. This prohibition is clearly stated in its terms of agreement with customers. However, a small but significant portion of the customers (around 6%) violates this policy anyway and signs up for multiple accounts on the company’s site. By doing this, the customers get more free cards each day, and have more cards to use and trade with others.
Company X’s research shows that these customers are also its most engaged and profitable customers. They generate more than a quarter of the firm’s revenue and their activity leads to positive effects for the firm and contributes to increased site activity by other customers who have a single account.
The managers of Company X are unsure about what to do with these customers. On the one hand, they are violating the firm’s policy and are engaging in fraudulent behavior. On the other hand, their behaviors benefit both the firm and other customers.”
After reading this, the managers were asked what they would do in this situation. We coded their responses as either “Keep the unethical customers” or “Get rid of the unethical customers.”
Only 19.9% of the managers, or less than a fifth of those asked, said that they would get rid of the unethical customers. The majority, or 80.1%, said that they would keep the unethical customers. It is clear that far more managers embrace a pragmatic consequentialist approach to dealing with their unethical customers who make them money.
With this finding, we developed a model of how managers should respond to unethical behavior that is based on three factors: (1) the type of customer's unethical behavior, whether it is lawful or unlawful; (2) the consequences of the unethical behavior for the company, the customer, and other customers; and (3) the range of responses that the manager can use. The figure below shows the model.
We concluded our paper with these thoughts:
“Our research raises the possibility to consider ethical consumer transgressions in more nuanced and balanced ways, especially when such behaviors arise from violating retailer policies, and to devise solutions that are equally nuanced and lead to the best possible outcomes for the customer base and retailers as a whole, even when customer actions do not fall strictly within the parameters set forth by any one of the influential moral philosophies alone.”