Is there a limit to exceptional customer service?

A colleague of mine who works in the executive office of a luxury hotel, recently shared an internal customer service debate with me.

Like many B2C companies, this hotel had budgeted for gift certificates that it would use for VIPs, promotions, disgruntled guests, etc with the goal of enhancing the hotel's reputation by making valued customers, partners and prospects happy.

The internal debate was whether or not the hotel should assume any balance on a gift certificate used in its restaurant if the value of the gift certificate didn't cover the full cost of the meal.  In other words, if the gift certificate was worth $100, but the check came to $150, should the hotel assume the $50 balance to further enhance its brand as a five star, customer focused property?

There were some members of the team who felt absorbing the additional cost (within limits) was a small gesture that could have a big impact on the hotel's reputation, while others believed it was unnecessary, as the gift certificate itself was a generous gesture that exemplified the hotel's goodwill and hospitality. 

This debate raised an interesting question:  When does good customer service end, and being taken advantage of by a customer begin?

I remember when I was the marketing director for Clear Channel Radio and one of the radio stations I was responsible for held a contest for a trip to a couples only resort in Jamaica.  What we didn't know at the time was that the resort didn't accept same sex couples, and the winner of the trip was gay.  Needless to say he was not happy that the resort wouldn't allow him to bring his partner, and quite honestly, neither were we.  We offered to send him to another resort, but he insisted on staying at the resort promised in the prize package.  After some negotiating with the resort, they agreed to bend their rules and allow the winner to bring his partner.  However, the problem wasn't resolved yet.  The winner also wanted to travel on a holiday weekend, even though the contest rules and the airline voucher both clearly stated that holiday black out dates applied.  After having already resolved one delicate situation with the winner, we spoke to the airline and they graciously agreed to waive the black out dates.  NOW the problem was solved right?  Wrong!  The winner was upset that he had to pay for his airport transfers.  Therefore we agreed to pick up the cost.  Resolved now?  Not yet.  The winner was still angry and felt that due to the anguish we put him through we should also provide him with a cash stipend for his trip.  In an effort to provide the best possible customer service and finally resolve the matter, we agreed to give him $250 in cash.  But he demanded $500 ($250 for him and $250 for his guest).  At this point, we drew the line.  We felt we had done everything we reasonably could to make him happy, but it just wasn't enough.  We came to the realization that nothing was going to please him, and the more of an effort we made, the more he was going to demand from us.

I actually debated for quite some time about whether to draw the line; though in retrospect, the decision to do so seems clearly justified.  It is one thing to make every effort to please a customer, but another thing to sacrifice the integrity of your product/service for someone who is making unreasonable demands. In this particular case, the winner wasn't even a listener of our radio station. He won the contest by registering for it at a sponsor location.

The question still remains however:  At what point do you draw the line?  Where does a company cross over from providing excellent customer service to being taken advantage of? 

While every company should strive to provide outstanding customer service, as the vast majority of customers will never take advantage of a company's goodwill, is there a point when potentially losing a customer is the lesser of two evils?  Please feel free to share your experiences and where you believe the line should be drawn...if at all.