KOREASCHOLAR

As its use widens across many different industries such as airlines, retailing, banking, and hotels, the effective management of customer loyalty programs is becoming an important issue. Previous studies have shown that loyalty programs have a positive impact on customer retention, customer share, market share, and sales (Bolton et al., 2000; Mägi, 2003; Verhoef, 2003; Lacey et al., 2007). A loyalty program is defined as any institutionalized incentive system that attempts to enhance consumers’ consumption behavior over time beyond the direct effects of changes to the price or the core offering (De Wulf et al., 2001; Palmatier et al., 2006; Henderson et al., 2011). The fundamental goal of loyalty programs of firms is to have a long-term relationship with their customers and to increase their customer lifetime value (Reichheld, 1993; Sharp and Sharp, 1997). Most earlier studies that showed positive effects of loyalty programs have been mainly concerned about the changes in customer response resulting from being inducted into the VIP program (Bolton et al., 2000; Mägi, 2003; Verhoef, 2003; Lacey et al., 2007). On the other hand, most loyalty programs are hierarchical, which sets several customer classes and provides preferential benefits to customers based on their status. And customers who are placed at higher VIP level are required to spend larger amounts to maintain that status level. Under these types of loyalty programs, many recent studies have focused on how customers perceive and respond to their status and the accompanying preferential treatments (Mathies and Gudergan, 2012; Mayser and Wangenheim, 2013; Xia and Kukar-Kinney, 2014; Pez et al., 2015). Companies adjust each customer’s VIP status level on a regular(yearly) basis based on his or her actual spending level during the previous period. A customer can be demoted to a lower level if he or she fails to spend the required amount while a customer can be elevated to a higher level if the spending exceeded the required level. Although this is a common practice in the industry, only a few studies to date have looked at customer responses to changes in their status level (Wagner et al., 2009; Berlo et al., 2014; Eggert et al., 2015; Hwang and Kwon, 2015). While most of these studies have relied on measuring attitudes under experimental conditions, the motivation of this research is to examine customers’ actual behavioral response to a status adjustment using real-life data. We particularly focus on the effects of status demotion and how the response is moderated by situational or psychological factors. Specifically, the research questions are presented as follows: 1)If customers are demoted as a result of not fulfilling the firm’s required spending level, how does their purchase behavior change? 2) How does the shortfall amount (the difference between the spending required to maintain the status and the actual spending) impact the demotion effect? 3) What moderators strengthen or weaken the relationship? Using actual VIP customer data from one of the major department stores in Korea, this paper applies the event study methodology to investigate changes in customer purchase behavior resulting from a demotion. Shortfall amount, which can be defined as the degree to which a demoted customer does not meet the firm’s required spending level, is the key variable in analyzing the different purchase response of demoted customers. Propensity for conspicuous consumption and store familiarity of the customers are also proposed as moderators that interact with the shortfall amount. People who experience status demotion in organizations have been found to respond negatively toward the organization by reducing their loyalty, trust, or commitment and increasing switching intentions to other organizations (Pfeffer, 1981; Trice and Beyer, 1984; Wagner et al., 2009; Berlo et al., 2014; Hwang and Kwon, 2015). Status demotion of VIP customers is also expected to negatively influence their purchase behavior. Equity theory (Adams, 1963) provides the conceptual foundation for hypothesizing about the role of shortfall amount in moderating the negative effect of status demotion on customers’ purchase amount. According to equity theory, people in social exchange relationships perceive the fairness of transactions by comparing their inputs (costs) into the exchange to outputs (benefits) from the exchange. People also perceive the fairness by evaluating whether their input/output ratio is consistent with that of their referent groups. Adams (1963) argues that people are motivated to restore equity when they perceive unfairness in a social exchange relationship by increasing or decreasing inputs based on their input/output ratio relative to that of their referents. In our context, the equity theory implies that demoted customers whose shortfall amount is smaller are more likely to perceive the status change to be more unfair than those whose shortfall amount is larger. These customers may feel that the decrease in preferential treatment they receive due to demotion is unfairly large given the small difference in spending between themselves and those who were able to maintain their status level. They may also feel that their spending (i.e., contribution to the company) is much greater than other customers in the lower demoted status level. To the extent that these customers are likely to feel that the exchange relationship with the firm is unjust, they will respond negatively toward the firm (Campbell, 1999; Xia and Kukar-Kinney, 2014) and it is predicted that they will show a larger decrease in their post demotion spending compared to their counterparts whose shortfall amount is larger. That is, the smaller (greater) the demoted customers’ shortfall, the stronger (weaker) the negative relationship between customer demotion and purchase amount. In this research, consumers’ propensity for conspicuous consumption and store familiarity are presented as variables that moderate the effect of shortfall amount on post demotion spending. Desire for status motivates conspicuous consumption and often leads to purchases of luxurious or altruistic goods (Han et al., 2010). Rucker and Galinsky (2008) argued that consumers are more willing to spend for status-related goods when they feel that they have low power. Based on the literature, it is anticipated that the effect of shortfall will be diluted if a demoted customer has strong propensity for conspicuous consumption as he or she may increase purchases to overcome threats caused by status reduction. In other words, when customers are demoted, the effect of shortfall on purchase amount is weakened as propensity for conspicuous consumption becomes higher. Familiarity is defined as the number of product-related experiences that have been accumulated by a consumer (Alba and Hutchinson, 1987). As the familiarity with a product increases, consumers generally reduce cognitive effort in choosing the product and are more likely to select it habitually or in inertia (Rhee, 2003). Assael (1998) proposed that a process of consumers’ product choice is similar with that of consumers’ store selection. Thus, based on previous studies, it is predicted that the effect of shortfall on post demotion purchase amount is diluted if a demoted customer’s store familiarity is higher because he or she may be less likely to decrease purchases since they face a higher cost of switching to other stores. In other words, when customers are demoted, the effect of shortfall on purchase amount is weakened as store familiarity becomes higher. This research applies the event study method to study the impact of shortfall amount on post demotion change in purchase amount. Specifically, we capture the increase or decrease in post demotion purchase through notion of cumulative abnormal purchase amount. Cumulative abnormal purchase amount is obtained for each demoted customer by calculating the difference between the actual purchase amount after the status change with the expected purchase amount (i.e., baseline) if the customer had not experienced the status demotion. If the actual purchase amount is smaller than the baseline, then the cumulative abnormal purchase amount is negative, which indicates that the customer responded negatively to the demotion. The results revealed that the average cumulative abnormal purchase amount of demoted customers was negative. Also, the shortfall amount had a positive impact on the cumulative abnormal purchase amount, supporting the hypothesis that demoted customers whose shortfall was small were more likely to show a larger decrease in post demotion purchase(i.e., larger negative cumulative abnormal purchase amount). Both of the moderating variables--propensity for conspicuous consumption and store familiarity of demoted customers--weakened the effect of shortfall on the cumulative abnormal purchase amount. This paper contributes to the literature by extending the understanding of consumer behavior in the context of hierarchical loyalty programs and status reduction in a real-world setting. Specifically, this study uses the notion of perceived fairness adopted from equity theory to hypothesize about the moderating role of shortfall amount on the effect of status demotion. This paper also provides several managerial implications to help marketing managers manage their loyalty program more effectively. First, it is important for the managers to recognize possible negative aspects of hierarchical loyalty programs where certain customers are inevitably demoted to lower status levels. Second, since demoted customers who ‘just miss’ the cutoff by only a small amount may perceive injustice, managers may need to look for a method to reduce such customers’ negative response. Third, companies could also seek for ways to weaken the negative effect of customer demotion through the development of marketing plans based on customer characteristics such as propensity for conspicuous consumption and store familiarity.

• Donghoon Kim(Yonsei University, Republic of Korea)
• Luri Lee(Yonsei University, Republic of Korea)