TY - JOUR
T1 - The Detrimental Effect of Customer Demotion on Customer Profitability in Hierarchical Loyalty Programs*
AU - Chang, Woojung
N1 - Publisher Copyright:
© 2020, Korean Marketing Association. All rights reserved.
PY - 2020
Y1 - 2020
N2 - Firms employing hierarchical loyalty programs (HLPs) periodically demote customers from higher to lower status level to divest from unprofitable customers and boost profitability. However, existing literature lacks objective evidence on how customer demotion affects demoted customers’ future purchase behaviors and ultimately profitability for the firm. Moreover, customers in the HLP’s higher position may respond to customer demotion differently from those in the HLP’s lower position. Drawing upon emotions and equity theories, this study quantifies how the profits that customers contribute to the firm change after customer demotion, and compares demoted customers’ behavioral reactions from top-tier with those from bottom-tier based on customers’ actual behavior data from a major retail bank in South Korea. The findings show that withdrawing customer status actually deteriorates customer profitability, and customers with top-tier status decrease their profitability more dramatically than those with bottom-tier status after demotion. The results contribute to previous literature on customer demotion and relationship marketing, and provide specific guidelines into how firms should design and implement customer demotion in HLPs.
AB - Firms employing hierarchical loyalty programs (HLPs) periodically demote customers from higher to lower status level to divest from unprofitable customers and boost profitability. However, existing literature lacks objective evidence on how customer demotion affects demoted customers’ future purchase behaviors and ultimately profitability for the firm. Moreover, customers in the HLP’s higher position may respond to customer demotion differently from those in the HLP’s lower position. Drawing upon emotions and equity theories, this study quantifies how the profits that customers contribute to the firm change after customer demotion, and compares demoted customers’ behavioral reactions from top-tier with those from bottom-tier based on customers’ actual behavior data from a major retail bank in South Korea. The findings show that withdrawing customer status actually deteriorates customer profitability, and customers with top-tier status decrease their profitability more dramatically than those with bottom-tier status after demotion. The results contribute to previous literature on customer demotion and relationship marketing, and provide specific guidelines into how firms should design and implement customer demotion in HLPs.
KW - customer demotion
KW - customer profitability
KW - difference-in-differences estimator
KW - emotions theory
KW - equity theory
KW - hierarchical loyalty programs
KW - propensity score matching
UR - http://www.scopus.com/inward/record.url?scp=85162211936&partnerID=8YFLogxK
U2 - 10.15830/amj.2020.22.1.1
DO - 10.15830/amj.2020.22.1.1
M3 - Article
AN - SCOPUS:85162211936
SN - 1598-7868
VL - 22
SP - 1
EP - 26
JO - Asia Marketing Journal
JF - Asia Marketing Journal
IS - 1
M1 - 1
ER -