This dissertation focuses on two under-researched areas in services: customer mistakes and customer penalties. The mistakes that customers make often lead to penalties imposed by the service provider. Examples of penalties are airline change fees, late payment fees, retail restocking fees, and no-show charges. The current trend among service firms is to add or increase penalties and fines (Lovelock and Wirtz 2007) as a means of not only changing customer behavior, but also as a source of revenue for the firm. Customers are frequently error-prone (Chase and Stewart 1994) and cause one-third of all service problems (Tax, Colgate, and Bowen 2006). As common as customer mistakes are, no research exists that explores these mistakes. In addition, no research examines the penalties assessed by service firms after a mistake, or the effect of these penalties on the customer-firm relationship. Many questions exist about customer mistakes and the resulting penalties. The major research questions of this dissertation are the following: (1) What are the underlying causes of customer mistakes in services? (2) What are customers' emotional reactions to penalties, penalty waivers, and waiver refusals? (3) What are the consequences of these emotional reactions on the service relationship? (4) What is the role of attribution of firm responsibility and the disconfirmation of expectations in explaining customers' perceptions of fairness?