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Korean Marketing Association (한국마케팅학회)
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The Detrimental Effect of Customer Demotion on Customer Profitability in Hierarchical Loyalty Programs

  • Received : 2020.01.05
  • Accepted : 2020.04.13
  • Published : 2020.04.30
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Abstract

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.

Keywords

Acknowledgement

This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2017S1A5A8021030).

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