Reductions in Customer Commitment: An Empirical Study on Pure Downgrade versus Hybrid Downgrade

Abstract

While service providers strive to maintain customer relationships, a nontrivial number of customers downgrade their services, something that has been particularly true during the post-pandemic period or economic recession. Studying downgrade behavior is vital because it damages the bottom-line performance of service providers and reflects a reduced customer commitment. Unlike previous studies, we further divide downgrade behavior based on whether there is a change in the product category, that is, a downgrade to a lower-priced service option within the same product category (“pure downgrade”) versus a downgrade to a lower-priced service option in a different product category (“hybrid downgrade”). An analysis of customer data collected from a major telecommunications company shows fundamental differences in the determinants and consequences of these two downgrades. Transaction-related variables, such as service usage, have a significantly stronger positive effect on the likelihood of hybrid downgrade than on that of pure downgrade. Conversely, relationship-related variables like relationship length have an inverted U-shaped effect on pure downgrade but barely affect the likelihood of hybrid downgrade. Interestingly, customers who engage in pure downgrade are more likely to churn than those who engage in hybrid downgrade. The empirical findings offer valuable insights on customer relationships and churn management.