The ugly side of customer management - Consumer reactions to firm-initiated contract terminations

Many firms apply “customer demarketing” strategies and dismiss unprofitable customers. However, empirical research on the consequences of dismissing customers is scarce. We address this research gap and develop and empirically analyze a theoretical framework of consumer reactions to customer demarketing based on the theory of dual entitlement. We conduct seven experiments in which we identify the main effect of observing customer demarketing and analyze several moderating and mediating factors. In addition, we use a field study to illustrate the consequences of experiencing a contract termination in a real-world setting, in which a firm terminated contracts for > 10.000 customers. The results show that consumers disapprove of customer demarketing, regardless of whether they experience it themselves or only observe it, regardless of the responsibility for the cause of the contract termination, and regardless of the social proximity to the dismissed customers. The effect is, however, somewhat weaker if customer demarketing is perceived to be a common occurrence, if alternative offers are made, and if the financial cause is framed as a loss. Furthermore, firms can dampen the negative effect of customer demarketing by offering substantial monetary compensation to dismissed customers. We identify perceived fairness of the firm's behavior as the underlying process that causes the negative effects of customer demarketing, and this also holds when we control for potential alternative mediators (i.e., warmth and competence perceptions).