Loyalty Program Termination Recovery - A quantitative study on the efficacy of compensation and explanation recovery efforts in mitigating negative reactions following a loyalty program termination

Abstract: Loyalty program (LP) practitioners increasingly face the necessity to terminate their LP considering the disadvantages to LP management, the fact that LPs continually fail to be of value to many members and the growing shift towards subscription-based loyalty models. Aware that terminations lead to negative customer reactions, managers will inevitably wonder how to mitigate such reactions so as to retain customers and diminish negative backlash. To support managers in this, the current study views an LP termination as a service failure and examines the recovery efforts of compensation and explanations and their respective impacts on recovery outcomes of company loyalty, cumulative satisfaction and negative online word-of-mouth intentions. Causal relationships are hypothesized and explained via perceived equity mediation, drawing on equity and attribution theory. Adopting a between-subject experimental design, the quantitative data yielded a number of findings. Both recovery efforts significantly mitigated negative loyalty, satisfaction and online word-of-mouth intentions, via simple mediation by perceived equity. More specifically, providing low controllability explanations and/or high monetary compensation appears to mitigate these reactions best. In relation to previous LP termination literature, this study contributes in that it quantitatively investigates how to successfully terminate an LP. In relation to previous service failure recovery literature, this study contributes by extending the knowledge of the efficacy of compensation and explanation recovery efforts by applying them in a new context.