Grandfather Clause and Customer Loyalty : Evidence from a Quasi-Experiment

In customer relationship management (CRM), the grandfather clause is a common practice that differentiates between existing and new customers and exempts existing customers from a price hike to maintain their loyalty. Since the existing customers do not experience any price change, however, the effect of the grandfather clause on their loyalty is not theoretically straightforward. We explore this research question with a quasi-experiment involving a subscription-based video-streaming firm. The results suggest that the grandfather clause positively impacts subscribers’ behavioral loyalty: the grandfathered subscribers who were notified of this policy (hereafter, “addressed subscribers”) kept their subscription for 22.71 days more than the grandfathered subscribers who weren’t notified (hereafter, “unaddressed subscribers”). Further analyses of video consumption and content contribution behavior revealed that both economic considerations and attitudinal changes contributed to the increase in subscription duration. Addressed subscribers extended their subscription because they wanted to avoid the future cost of churning and re-subscribing for a higher price. Since the grandfather clause was a preferential treatment for the grandfathered subscribers, it also led to positive attitudinal changes, which manifested as an increase in subscription duration and content contribution behavior. The attitudinal changes were stronger for communal-oriented subscribers than exchange-oriented subscribers, consistent with the relationship norm theory. This paper contributes to the CRM literature by establishing the grandfather clause as an effective CRM strategy upon a price increase. It also contributes to the behavior-based pricing literature by providing empirical evidence for the validity of forward-looking behavior and the role of the fairness concern in the model