69
Journal of Marketing
Vol. 73 (May 2009), 69–85
© 2009, American Marketing Association
ISSN: 0022-2429 (print), 1547-7185 (electronic)
Tillmann Wagner, Thorsten Hennig-Thurau, & Thomas Rudolph
Does Customer Demotion
Jeopardize Loyalty?
Hierarchical loyalty programs award elevated customer status (e.g., “elite membership”) to consumers who meet a
predefined spending level. However, if a customer subsequently falls short of the required spending level, firms
commonly revoke that status. The authors investigate the impact of such customer demotion on loyalty intentions
toward the firm. Building on prospect theory and emotions theory, the authors hypothesize that changes in
customer status have an asymmetric negative effect, such that the negative impact of customer demotion is
stronger than the positive impact of status increases. An experimental scenario study provides evidence that loyalty
intentions are indeed lower for demoted customers than for those who have never been awarded a preferred status,
meaning that hierarchical loyalty programs can drive otherwise loyal customers away from a firm. A field study using
proprietary sales data from a different industry context demonstrates the robustness of the negative impact of
customer demotion. The authors test the extent to which design variables of hierarchical loyalty programs may
attenuate the negative consequences of status demotions with a second experimental scenario study and present
an analytical model that links status demotion to customer equity to aid managerial decision making.
Keywords: loyalty programs, customer demotion, customer loyalty, prospect theory, relationship marketing
Tillmann Wagner is Assistant Professor of Marketing, Rawls College of
Business, Texas Tech University (e-mail: t.wagner@ttu.edu). Thorsten
Hennig-Thurau is Professor of Marketing and Media, Department of Mar-
keting and Media Research, Bauhaus-University of Weimar, and Hon-
orary Visiting Professor of Movie Marketing, Cass Business School, Lon-
don (e-mail: tht@medien.uni-weimar.de). Thomas Rudolph is Professor of
Marketing and International Retail Management, Institute of Marketing
and Retailing, University of St. Gallen (e-mail: thomas.rudolph@unisg.ch).
The authors thank Markus Groth, Roy D. Howell, Michael Paul, Henrik
Sattler, Franziska Völckner, Florian v. Wangenheim, and the three anony-
mous JM reviewers for their helpful und constructive comments.
C
ompanies in the United States spend more than $1.2
billion on customer loyalty programs per year, and
the average household belongs to 12 of such pro-
grams (Ferguson and Hlavinka 2007; Kumar 2008). Hierar-
chical loyalty programs award preferred customer status
(e.g., “elite membership”), providing exclusive benefits to
consumers who have exceeded a certain spending level.
Such programs are common in many service industries,
including airlines (e.g., Continental), banking (e.g., UBS),
department store retailing (e.g., Neiman Marcus), and
hotels (e.g., Marriott).
To maintain preferred customer status, elevated con-
sumers usually must maintain high levels of spending with
the company (Kumar and Shah 2004), but what happens
when a customer falls short of the company’s expectations
and therefore loses his or her preferred status? That is, what
happens when the customer is “demoted” by the company?
Service firms that run hierarchical loyalty programs demote
thousands of customers every day (Reed 2005), but the full
ramifications of such systematic customer status reductions
remain unclear. Whereas disciplines such as sociology
(Garfinkel 1956) and organizational psychology (Gephart
1978) have long recognized status demotion as an important
research issue, no existing marketing research has consid-
ered the effects of status reductions of consumers. This lack
of research has particular importance because arguments
from prospect theory and emotions theory suggest that cus-
tomer demotion has the potential to destroy healthy cus-
tomer relationships. Specifically, we theorize that customer
demotion reduces loyalty intentions toward a firm to a level
that is lower than the level of loyalty intentions the cus-
tomer held before being elevated to preferred status. We
present the psychological mechanisms through which this
destructive effect takes place and test them through an
experimental investigation using the scenario method and
a field study based on proprietary company data from a dif-
ferent industry context. We test whether certain loyalty pro-
gram design variables limit the destructive effect caused by
customer demotion with a second scenario experiment and
analytically link our findings to the strategic variable of
customer equity.
Status Demotion Research
Status, or the position or rank in a certain group awarded to
a person by others (Packard 1959), is a strong motivator of
human behavior (Frank 1985). Elevated levels of status
correspond to a set of exclusive rights and benefits, which
often provoke respect, consideration, or envy from others
(Csikszentmihalyi and Rochberg-Halton 1981). The phe-
nomenon of status demotion initially emerged as a relevant
research topic among sociologists and anthropologists and
was first recognized by Garfinkel (1956), who coined the
term “status degradation ceremony” to refer to the commu-

70 / Journal of Marketing, May 2009
nication of a status reduction to the affected person (Finkel-
stein 1996; Young 1965). Some 20 years later, Gephart
(1978) became the first organizational behavior scholar to
address the topic. Employing an ethnomethodological
approach, he investigated the demotion process in relation
to organizational succession. Since then, other scholars
have studied status reductions in organizations and have
found that demotion constitutes a critical incident, followed
by the experience of negative affect and “withdrawal behav-
iors” (e.g., decreasing loyalty to the organization) by the
demoted consumers (e.g., Pfeffer 1981; Trice and Beyer
1984). Although the impact of preferential customer treat-
ments on loyalty has emerged as an urgent research topic in
the marketing discipline (e.g., Dreze and Nunes 2007;
Wangenheim and Bayon 2007), we are not aware of a single
study that examines the demotion of customers and their
reactions to it.
How Customer Demotion Affects
Loyalty Intentions
In hierarchical loyalty programs, introducing preferential
customer treatment provides additional benefits to cus-
tomers, which should increase their loyalty intentions
toward the firm (Lacey, Suh, and Morgan 2007). Intuitively,
withdrawing preferred customer status and the benefits
associated with it then should cause the customer to return
to his or her original level of loyalty intentions. However,
arguments from both prospect and emotions theory suggest
that such withdrawal can cause negative effects, which in
turn can drive an otherwise loyal customer away from the
firm.
A Prospect Theoretical Perspective on Customer
Demotion
Prospect theory helps explain asymmetries in people’s
evaluations and behaviors relative to their perceived losses
or gains in conditions of perceived uncertainty (Kahneman
and Tversky 1979). It builds on the principle that human
perception tends to be related to changes in or differences
among certain conditions instead of their absolute magni-
tude; it also assumes that people regard given outcomes
either as losses or as gains relative to a certain reference
point (Qualls and Puto 1989). A key element of prospect
theory entails the loss aversion bias, which states that
people tend to be more sensitive to changes they perceive as
losses than to equally strong changes they interpret as gains
(Ho, Lim, and Camerer 2006; Thaler 1980). According to a
prospect theoretical perspective, an increase in customer
status constitutes a gain for the awarded customer because
the customer receives certain benefits to which he or she
had no access before the status elevation. Such benefits
include convenience (e.g., personal assistance by courteous
service personnel instead of automated service kiosks or
telephone help lines) and recognition (e.g., giving cus-
tomers “the ability to feel special”; Shugan 2005, p. 190).
However, the withdrawal of a customer’s preferred status
because of a reduced spending level represents a loss for the
customer relative to his or her reference point, that is, the
previously held status (Knetsch 1989). After such a demo-
tion, the customer can no longer access the additional bene-
fits that correspond to elevated status. Prospect theory’s loss
aversion bias suggests that status demotion (i.e., the loss of
customer status and its exclusive benefits) should be more
influential for human judgments and future behavior—
namely, customer loyalty intentions—than equally strong
gains (i.e., the initial increase in customer status and the
associated benefits) (Ho, Lim, and Camerer 2006). Accord-
ingly, we expect that status demotion exerts an asymmetric
negative effect on customer loyalty intentions, such that the
negative effect of status decreases on loyalty intentions
demonstrates a stronger magnitude than the positive effect
of status increases. In other words, members of loyalty pro-
grams who lose their previously elevated customer status
and return to the customer status they had before their ele-
vation will demonstrate lower loyalty intentions than not
only members who maintain their elevated customer status
(i.e., experienced a gain but no loss) but also members
whose status never increased in the first place (i.e., experi-
enced neither a gain nor a loss).
An Emotion Theoretical Perspective on Customer
Demotion
As a cognitive theory originating in behavioral economics,
prospect theory elides the potential effect of emotional reac-
tions to status changes. However, a status demotion also
conveys to the customer that he or she has not performed to
meet the company’s expectations and is no longer part of
the company’s “inner circle” (Trice and Beyer 1984). Such
an unpleasant experience is likely to elicit the experience of
negative emotional states, such as anger and disappointment
(Fournier, Dobscha, and Mick 1998; Lazarus 1991). This
argument is in line with demotion research in organizational
psychology and sociology, which indicates that status
reductions commonly cause negative emotions within the
person who loses status (e.g., Smith 2002). Building on
extensive research that demonstrates the destructive effects
of negative emotions on customer attitudes and behaviors
(e.g., Bougie, Pieters, and Zeelenberg 2003), we propose
that the negative emotions triggered by demotion will trans-
late into reduced customer loyalty intentions, strengthening
the negative effect caused by the withdrawal of benefits
captured by the loss aversion bias.
In summary, arguments from prospect and emotions
theory lead to us expect that customer demotion will have
an asymmetric negative impact on customer loyalty inten-
tions. Furthermore, we argue that customers’ greater sensi-
tivity to a loss of benefits than to a gain of the same bene-
fits, combined with the negative affect caused by the
demotion act, represents the psychological mechanism
through which demotion reduces loyalty intentions. We
illustrate this rationale in Figure 1 and summarize it in our
first two hypotheses:
H
1
: Customer demotion exerts a negative asymmetric effect
on customer loyalty intentions; decreases in loyalty inten-
tions caused by status reductions have a greater magnitude
than increases caused by status elevations.
H
2
: Customer demotion decreases customer loyalty intentions
through (a) decreased perceptions of experienced benefits
and (b) increased levels of negative affect.