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Executive Summary
Hierarchical loyalty programs award elevated customer status (e.g., “elite membership”), including exclusive benefits, to high-spending customers and have been broadly implemented in various service industries for many years. Initial research findings suggest that elevated-status customers indeed tend to demonstrate certain characteristics that firms desire, such as more pronounced future purchase intentions, compared with people who receive standard customer treatment. However, because most customers will lose their preferred status at some point in time and be demoted to “regular” customer status, the overall effect of hierarchical loyalty programs on customers must account for customers’ reaction to such demotion. This is the first research to address the effects of both the upgrading and the demotion of customer status on customers’ attitudes and behaviors.

On the basis of two experimental investigations and a field study of proprietary company data, the authors assess customers’ psychological and behavioral reactions to status demotions as part of hierarchical loyalty programs. The authors also test the effectiveness of selected marketing instruments that firms may deploy to reduce such negative consequences. Using analyses of variance and partial least squares structural equation modeling, this study finds that status demotions exert an overall asymmetric negative effect on customer loyalty intentions, such that the negative impact of status decreases on loyalty is stronger than the positive influence of status increases, such that customer demotion reduces loyalty intentions to a level that is lower than the level of loyalty intentions the customer held before being elevated to preferred status. Based on the findings regarding the effectiveness of certain marketing instruments, the results also detail how firms may limit negative reactions to status demotions to some extent by affecting customers’ perceived causal attributions and providing certain forms of compensation.

In terms of managerial implications, the authors conclude that given the substantial negative impact of status demotions and the difficulty to assess individual customers’ contribution toward firms’ profits based on brief periods, it may be beneficial for firms to implement extended periods of status elevations to avoid jeopardizing the loyalty of too many potentially valuable customers. Firms that demote should attempt to maximize the salience of customers’ perceived internal locus of control by reminding customers proactively of both their spending decline and the formal requirements to maintain an elevated status. Offering demoted customers an apology, such as through a personal letter, is not only a cheaper but also a much more efficient marketing tool than providing respective monetary compensations. Finally, the authors present an integrative analytical model of the effects of upgrading and demoting on customer equity, in which they outline the conditions under which differentiations of customer status are economically reasonable.

Biography
Tillmann Wagner is Assistant Professor of Marketing in the Rawls College of Business at Texas Tech University, where he recently received the New Faculty Award. Professor Wagner was previously a visiting scholar at the University of Florida. He holds a doctoral degree in Marketing from the University of St. Gallen in Switzerland and also graduated from the University of Applied Sciences in Lüneburg (Germany), the University of Portsmouth (England), and the University of Texas–Pan American. His research interests are related to services and retail marketing, customer relationships, and consumer reactions to corporate social responsibility.

Thorsten Hennig-Thurau is Professor of Marketing and Media in the Department of Marketing and Media Research at Bauhaus-University of Weimar, and Honorary Visiting Professor of Movie Marketing in the Cass Business School, London. Dr. Hennig-Thurau has published articles in Journal of Marketing, Journal of the Academy of Marketing Science, Marketing Letters, Journal of Service Research, International Journal of Electronic Commerce, Journal of Interactive Marketing, Psychology & Marketing, and Journal of Consumer Affairs, among others. Dr. Hennig-Thurau has authored two books and is coeditor of the monograph Relationship Marketing, which has been translated into Chinese. He also is a member of the editorial board of Journal of Service Research and International Journal of Electronic Commerce. Dr. Hennig-Thurau has won ten best-article and best-paper awards, including the Overall Best Paper Award of the 2005 AMA Summer Educators’ Conference and the 2002 Journal of Service Research Excellence in Service Research Award. His research interests are in services marketing, customer relationships, and media management.

Thomas Rudolph is Professor for Marketing and International Retail Management and holds the Gottlieb Duttweiler Chair of International Retail Management at the University of St. Gallen. He is also director of the university’s Institute for Marketing and Retailing. Professor Rudolph is coeditor of the marketing magazine Marketing Review, and he has published several books and scholarly articles on contemporary topics in retailing. He is well known in practice through his work on retail differentiation and strategic retail management. He is a member of the editorial review board of Journal of Marketing Channels and is on the board of directors of several major corporations. Finally, Professor Rudolph has been teaching retail management at the Massey University in Auckland, New Zealand.

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