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I will sound 'hey wow', but... this reminds me of the point in Thaler and Sunstein's 'Nudge', suggesting that people feel roughly twice as averse to losing something as they feel attracted to gaining it.

If this is an old research chestnut, forgive my ignorance, I'm a jobbing marketer, not an academic!

Not at all, Ian. That's one of the key elements of Kahneman and Tversky's prospect theory (see the original post) -- losses loom larger than gains.

For a study of the phenomenon that lays out the practical/managerial implications clearly, I can recommend a 1998 Journal of Marketing paper by Mittal, Ross, and Baldasare (if I remember right...and I'd better, since I just reread it while studying for comprehensive exams) on attribute-level performance, overall satisfaction, and repurchase intention.

The authors found that instances of poor performance on a given attribute outweighed instances of good performance. The effects on satisfaction and repurchase intention are distinct.

And never apologize for being a practitioner ;-). I've got 20 years in private industry, although (Lord willin' and the creek don't rise) I'm going academic.

When brought into an elite circle, would not the customer expect the benefits extended to him at all points in time? What was at one point in time a point for customer delight now becomes an expectation. And as always, when the expectations are not met, a customer remains disappointed. Even worse is if we demote the customer saying that he/she is no longer good enough for us. As mentioned, this would naturally trigger a negative response hence resulting in the loss of any future interactions with the customer. What makes matters worse is that the organization is pouring salt on the customer’s wounds. When the customer no longer is able to meet the expectations of the company, so as to be a privileged customer, pulling him out of the elite circle can have serious social and psychological ramifications.

But through all this, we need to remember the basics of any business, which would be to invest only in activates that bring in money. Using this, the logical decision would be to disallow privileges to customers who no longer bring in money. This leaves us in a predicament of choosing between the devil and the deep blue sea. Do we ignore the negative effects on future loyalty of the customer and demote him from the elite club or do we continue to extend benefits and slowly bleed as a company? Benefits if reinstated once removed do not bring about the same loyalty. This is important in building life-long relationships.

By:-
PGPM students (Great Lakes Institute of Management) Students of Group 4
(Aakash Makkar,Ankita Jain,Anuj Arora,Bharat Maheshwari,Hiren Soni,Jatin Gupta,Jaywant Pandit,Karmendra Trivedi,Kaustav Mukherjee,Manjit Sahni,Mayur Mantri,Nikhilesh Murthy,Nipun Vig,Pratyush Harsh,Prem Kumar,Priyanka Sarkar,Rakshit Bhandari,Ramesh Vellingiri)

The article ‘Does Customer Demotion Jeopardize Loyalty?’ captures an interesting study undertaken by the authors Wagner, Thurau & Rudolph. Here the authors have approached the effect of customer demotion on their loyalty towards that brand/product by means of an empirical study. Essentially the study aims to understand the behavior of customers who have been demoted from their privileged status after they failed to meet the minimum spending requirements to stay at that premium level.

The results show that the loyalty levels of a customer who has been demoted are lower than those who are promoted (as expected) and also lower than those who have never been promoted. This is an indication of how cautious the company has to be when dealing with the pride of the customer. Thus it is a costly decision to demote a customer.

I feel that companies have to exercise more caution when choosing their premium customers and not base it solely on a couple of expensive purchases. Similarly when choosing to demote a customer, a well rounded estimation of the customer’s LTV has to be considered rather than the recent decrease in spending. Elaborate CRM procedures help capture this value, however sometimes manual decisions need to be taken in cases where a set of mathematical equations cannot capture the true worth of a customer.

However the results from this study do provide insights into customer responses to demotion and thus act as a guideline for designing future rewards programs. A key insight is to make the customer feel responsible for his demotion, hence minimizing his negative emotions towards the company. This study provides a good framework and foundation for further research in this area.

The tiered loyalty programs are most common in the services industry especially, airlines and banks. The customers are promoted to more privileged status based on their spending. However, firms also frequently demote customers who fail to maintain requisite spending level. The research article ““Does Customer Demotion Jeopardize Loyalty?” Wagner, Thurau & Rudolph) attempts to explore the downsides of these programs with a premise that the negative effects of demotion are more than positive effects of promotion. The potential problems with these types of tiered loyalty program could be that they can destroy Life time value (LTV) of a customer if demotion is done without understanding the circumstances in which customer cut down on his spending.
In my view, such decisions can not be made alone by machines running an algorithm which by a simple mathematics determines who should be promoted and who to be demoted. It requires a holistic approach with an estimation of how much value would be destroyed if a customer decides to make a switch from the firm in case of a demotion. A sporadic decrease in spending does not necessarily mean that customer is no longer profitable in the same way as a one time surge in spending does not guarantee the perpetual profitability. A robust CRM based approach which just does not look at the present and past 2- 3 years numbers but also looks at the entire life time of the customer in making such decisions would add more value to the firm from a relationship as the research article shows that promoting alone does not necessarily translates into increased share of wallet.

This research study is one of its kinds and studies the effect of status reduction of consumers on their loyalty intentions towards the firm.The study concludes that

•Demoted customers significantly lower their spending and transactions after the demotion.
•The negative effects of demotion are higher than the positive effect gained when the customer was promoted.

Firms today engage in a spate of loyalty programs without giving a thought about the negative consequences these programs could have. The above findings imply that, while designing hierarchical loyalty programs, the firms need to come up with new ways of calculating the value of the customer and the impact on customer LTV if the customer is demoted.

Also firms need to be careful before upgrading any customer in the hierarchy; as a wrong decision here could mean losing the customers loyalty in case he/she gets demoted. For e.g. banks should upgrade customers in the hierarchy only when a customer maintains a specific balance for a specific duration of time and not just when he/she reaches a certain balance amount.

It could be even better if customers are not aware of the hierarchical levels and only the company is aware of it. This will help in reducing the negative emotions involved with the demotion.
I think we can’t do away with loyalty programs, but we definitely can take care while designing the loyalty program so that the ill effects of customer demotion are minimized.

Regards,
Siddhesh B Naik
PGPM,Great Lakes Institute of Mangement
Chennai.

Building upon the prospect theory, Wagner T. et al analyzed that the negative effects of demoting a customer is much higher than promoting the customer. The study presented a hypothetical situation where a sample was asked about the effect of demotion of membership for airline services. But in actuality, high net worth customers who enjoy such premier membership are not affected by the number of points they earn by each travel. The high networth individuals do not perceive much gain in becoming part of a premium segment. Services matter more for them rather than status quo. The study was conducted on students for whom monetary gains and status quo can matter much more.
Also, the study cannot be generalized across the globe as human behavior tends to be different across cultures. Status may matter more in a hierarchical society. A collective or individualistic society may also affect the way humans react to loss of status.
The study matters more in businesses which have many human point of contacts. But with arrival of e-commerce , this might not be any more applicable. Services tied with Premium memberships in such selling space may no longer be a status symbol but rather be a means to avail discount or other augmented services.

As CRM is being implemented in almost all the industries, letting out the knowledge to the customers that they are being promoted or demoted is avoidable. Impact of loss of status quo becomes insignificant in such situations. And the company can continue to provide differentiated services with the help of CRM tools and thus cultivate customer loyalty.

- Reema Nagpal (9439)
- Ruchi Golcha (9442)

The research paper, “Does Customer Demotion Jeopardize Loyalty?” by Tillmann Wagner, Thorsten Hennig-Thurau, & Thomas Rudolph empirically tests and strengthens the long held but sparsely tested notion about how demoting customers in loyalty programs can negatively impact their overall loyalty levels towards the brand or the service.

One of the most significant insights that emerge out of the study is that of the asymmetric negative impact of demoting customers from an elevated state. Both, the prospect theory and the emotion theory ratify this hypothesis amply. The most worrying factor for marketers and managers is the fact that loyalty of the demoted customer dwindles below the levels of even those who had not been upgraded in the first place. In the research carried out, this stands true not only for the experimental study but also for the study carried out using real data.

If we look at the second study, there are two interesting phenomena observed. Firstly, the decline in revenues and transactions observed after the demotion is found to be significantly related to the act of demotion itself. Secondly, such customers “perceive significantly fewer benefits from a service provider and report significantly more negative feelings toward the service provider than otherwise identical customers who have never been elevated.”

Among all these factors, I feel that the ‘negative feelings’ aspect is major cause for concern. An important aspect that the study does not touch upon is the notion of the ‘empowered customer’ that appears to strengthen by the moment. In a digital world, information flows at the speed of thought. Consequently, the decision to downgrade has never been more complex. By deciding to take away certain privileges from a customer, marketers not only need to consider the perils of losing the loyalty of a downgraded customer but also the need to grapple with the huge risks that crop up should the disgruntled customer decide to use one or more of the several digital media – such as Twitter, Facebook, Wikis, blogs etc. to unleash his/her discontent. Such instances have occurred in the recent past. And companies have had to invest significant time and effort to avoid downward spirals that have sometimes threatened to turn into a complete domino effect. I would like to put the enormous power that the customer wields today into perspective through an example. Even though it is slightly unrelated, but the recent case where an unhappy customer of Domino’s pizza decided to post his comments on the web about his experience sums it all up. The whole episode turned into a wildfire overnight and dampened, albeit temporarily, the pizza brand. In fact, it took the intervention of the top management of the company to mitigate the potential disaster – a cost much higher than that of the transaction itself, perhaps.

That brings me to my final point. Even though this research study asserts that things like compensations, consolations or apology notes are able to reduce the negate impact of demotion to a certain extent in the present scenario, the notion of the empowered customer has huge implications for managers. The key word here is ‘present scenario’. It is naive to assume that the future customer is going to be simply content with superficial consolations, to say the least. Today’s customer is extremely demanding and with the falling of global domestic and international trade barriers, switching costs have been declining continuously for most goods and services. Even though I concede that companies cannot indefinitely keep on doling out preferential benefits to customers who are no longer as valuable as they were in the past, they will need to be extremely careful about how and when they do it.

Optimal timing of severing the relationship is only one part of the story, indeed.

By,

Rohit Das, Roll Number: 9338
Great Lakes Institute of Management

The journal talks about the bad aspects of demoting the customer in the loyalty programs and other negative connotations associated with it. It also says that demotion has a negative asymmetric effect on the customer’s loyalty intention, which is greater than the increase in loyalty caused by elevating the customers. On one hand it definitely looks improper as any sort of demotion is bad for the person and the Organization. Both are interdependent and they have to sail in a proper fashion which will perpetually help the Organization to grow. However certain points definitely should be taken care of.

In today’s market we say the customers are the money machine and demoting a customer just doesn’t make sense. However some customers are drains on company’s profit and morale. It’s always good to throw some bad apples to prevent others from getting rotten. Demoting a few customers can be a launch pad thing for the company. The decision as to whom to demote and why is also not a nail biting task and can be achieved once the organization sets up the criteria and method to let them go. There are few who will never pay their bills on time and will have their invoices piled up on their desk. Even frequent reminder calls and mailing requests will go in vein, in such cases you know you really don’t have a choice other than demoting them.

There are others who have the habit of cribbing all the times. You send them the best technician to help and solve any technical glitches in the product, empathize with them, assure them of the best possible fix that can be put in place; they seem to be not getting pacified at all. It’s so hard to pacify their needs that they end up being a fomenter for that organization. Some of them also have the audacity to threaten you of replacement with other service provider, in such cases it’s always good to demote them or even get rid of them. So it’s definitely not always true that demoting has got negative fall outs and it’s worse than positive impact of elevating customers.

Review/Evaluation:
The experimental methods used by the authors are appropriate and well calibrated, but there are a few conditions which they have missed while testing their hypothesis.
1. They have not considered the economic conditions of people who have been demoted (hence could have reduced the usage of the airlines or purchase from the particular store, as mentioned in the article); this could be easily misconstrued to be a reduction in loyalty, though it isn’t.
2. The emotional metrics used can differ from one place to another or from one culture to another; hence the experiment performed with the set of people may not work in all conditions.
3. As mentioned in the article itself, real life situations would give more accurate values rather than an imitation of the scenario.

Conclusion:
The article very clearly (with factual data) lists out the negative impact of customer demotion and is quite right in doing so, but an inclusion of the above factors could lend more authenticity/acceptance to the findings.