Why hierarchical loyalty programs do not pay off

Hierarchical loyalty programs are designed to elevate consumers that meet certain spending criteria. It has been shown that such programs can stimulate purchase intention and firm satisfaction. However, Wagner et al show that it is difficult to justify hierarchical loyalty programs from an ROI-perspective.

The problem demonstrated by the authors is that the negative effect of consumer demotions actually exceeds the positive effect of elevating them. Consumers that previously benefitted from services associated with their membership status experience a profound negative dissonance when informed that they no longer receive special treatment.

Good news is there are at least two ways to limit the negative effects of demoting consumers who fail to meet the required levels of spending:

1. Inform the consumers about their decline in spending and provide the terms of elevated-status membership
2. On demotion, provide the consumers with a personal apology

In contrast, the authors found no impact of the demoting firm offering (1) monetary compensation or (2) an explanation about competitive pressure, on consumer affect or loyalty intentions.

Source: Wagner T, et al. 2009. Does Customer Demotion Jeopardize Loyalty? JoM, Vol 73.