RELATIONSHIP MARKETING

“Bucket theory of marketing” by James L. Schorr (V.P. of marketing Holiday Inns)

• Marketing as a Big Bucket.• Sales, Advertising & Promotional campaigns

pour business into the top of the bucket.• More effective are these the business will

survive or bucket remains full.• But there is a hole in bucket.• When operations go weak and customers will

be unsatisfied and start switching towards competitor.

• Therefore the hole should be plugged.

Continued

The bucket theory illustrates why a relationship strategy that focuses on plugging the holes in the bucket makes so much sense. Historically, marketers have been more concerned with acquisition of customers, so a shift to a relationship strategy often represents changes in the mind set, organizational culture, and employee reward systems.

RELATIONSHIP MARKETING

• Building on the assumption and the fact that it is usually much cheaper to keep a current customer than to attract a new one, successful marketers are working on effective strategies for retaining customers.

• According to Berry: Relationship marketing is attracting, maintaining

and enhancing customer relationship.

ATTRACT

RETAIN

DEVELOP

CRM

GOALS OF RELATIONSHIP MARKETINGENHANCING

RETAINING

SATISFYING

ACQUIRING

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Traditional Marketing1. Focus on making sale2. Little customer service emphasis 3. Moderate customer contact 4. Customer satisfactionRelationship Marketing1. Focus on making a customer loyal2. High customer service emphasis3. High customer contact4. Customer retention

Evolution of Customer Relationship

• Customers as strangers• Customers as acquaintances• Customers as friends• Customers as partners

Customers as strangers

• Product offering- Attractive relative to competitors• Source of competitive advantage- Attractiveness• Buying activity- Interest/Exploration/Trial• Selling activity- Awareness of offerings /

Encouraging trial, facilitates initial selling • Relationship time horizon- None• Sustainability of competitive advantage- Low• Primary goal- Acquire customer’s business

Customers as acquaintances

• Product offering- Parity product as a form of industry standard

• Source of competitive advantage- Satisfaction• Buying activity- Satisfaction reinforces buying activity and

reduces need to search for market• Selling activity- Familiarity and general knowledge of

customer, facilitates selling• Relationship time horizon- Short (buyer can often switch

firms without much effort)• Sustainability of competitive advantage- Low• Primary goal- Satisfy customer’s needs and wants

Customers as friends

• Product offering- Unique offering; differential value• Source of competitive advantage- Satisfaction + Trust• Buying activity- Trust in firm is needed to continue the buying

activity without perfect information• Selling activity- Specific knowledge of customer’s need facilitates

an offering that directly addresses the customer’s situation• Relationship time horizon- Medium• Sustainability of competitive advantage- Medium (depends on

competitor’s ability to understand and transform it into meaningful differentiated products)

• Primary goal- Retain customer’s business

Customers as partners

• Product offering- Customized product• Source of competitive advantage- Satisfaction + Trust +

Commitment• Buying activity- Commitment in the form of information sharing

and idiosyncratic investments is needed to achieve customized product

• Selling activity- Specific knowledge of customer’s need and situation and idiosyncratic investments facilitates selling

• Relationship time horizon- Long (bcoz it takes time to build and replace interconnected activities)

• Sustainability of competitive advantage- High• Primary goal- Enhance relationship with customer

Benefits for customers

• Confidence Benefits (feelings of trust in the provider along with a sense of reduced anxiety and comfort in knowing what to expect)

• Social Benefits (social relationship makes it less likely that they will switch, even if they learn about a competitor that might have better quality or a lower price; examples: hair stylist, local retail store, health club or restaurant manager who knows the customers personally)

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• Special Treatment Benefits (it includes getting the benefit of doubt, being given a special deal or price, or getting preferential treatment; examples: my doctor allowed me to use the back door entry, by looking at my past history of timely payments- company waived the service charge of my VISA bills though my payment didn’t arrive on time this time)

• Note: Interestingly these were the less important than other types of benefits received in services.

Benefits for firms

• Economic Benefits (increased purchases over time from the customer, reduced marketing and administrative costs as an experienced customer will have fewer problems and questions, and the firm will incur fewer costs in serving the customer)

• Customer Behavior Benefits (free advertising provided through word-of-mouth communication, customer voluntary performance which supports the firm’s ability to deliver quality service)

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• Human Resource Management Benefits (contribute to the coproduction of the service by assisting in service delivery, social benefit as a result of being in a relationship with the same customers, employee retention as people like to work for companies whose customers are happy and loyal)

Customer Profitability Segments

• Company may want to treat all customers with excellent service, but they generally find that customers differ in their relationship value and that it may be neither practical nor profitable to meet all customers’ expectations.

• Federal Express Corporation, for example, has categorized its customers internally as the good, the bad, and the ugly-based on their profitability. Rather than treating all its customers the same, the company pays particular attention to enhancing their relationships with goods, tries to move the bad to the good, and discourages the ugly.

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• Virtually all firms are aware at some level that their customers differ in profitability, in particular, that a minority of their customers accounts for the highest proportion of sales or profit. The finding has often been called the “80/20 rule”-20% of customers produce 80% of sales or profit. Hence all the firms offer services to the identified segments after identifying profitability bands.

PLATINUM

GOLD

IRON

LEAD

Least profitable customers

Most profitable customers

Profitability Tiers-The Customer Pyramid

• Platinum tier (company’s most profitable customers, typically those who are heavy users of the product, are not overly price sensitive, are willing to invest in and try new offerings, and are committed customers of the firm)

• Gold tier (want price discounts or are not as loyal, may be heavy users who minimize risk by working with multiple vendors rather than just the focal company)

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• Iron tier (essential customers; but their spending levels, loyalty, and profitability are not substantial enough for special treatment)

• Lead tier (demand more attention than they are due given their spending and profitability and are sometimes problem customers)

Customer’s View of Profitability Tiers

• Whereas profitability tiers make sense from the company’s point of view, customers are not always understanding, nor do they appreciate being categorized into a less desirable segment.

• For example, at some companies the top clients have their own individual account representative whom they can contact personally. The next tier of clients may be handled by representatives who each have 100 clients. Meanwhile, most clients are served by a number, an automated voice response system, or referral to a website. Customers are aware of this unequal treatment, and many resist and resent it.

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• Hence, it is increasingly important that firms communicate with customers so they understand the level of service they can expect and what they would need to do or pay to receive faster or more personalized service. Because many customers refuse to pay for quality service, they react negatively if they believe it has been taken away from them unfairly.

RELATIONSHIP DEVELOPMENT STRATEGIES (Factors affecting)

Strong Customer Relationship

(Loyalty)

Core Service Provision

Switching Barriers

Relationship Bonds

Core Service Provision

• A firm needs to begin the relationship development process by providing a good core service delivery that, at a minimum meets customer expectations; it does no good to design relationship strategies for inferior services.

• The firm does not necessarily have to be the very best among its competitors or world-class in terms of quality and customer satisfaction.

• It must be competitive, however, and frequently better than that.

Switching Barriers

• Customer inertia (Inertia may even explain why some dissatisfied customers stay with a provider. Sometimes consumers simplistically state that “it’s just not worth it” to switch providers.)

• Example: Automobile repair facilities might keep a complete and detailed maintenance history of a customer’s vehicle. These records remove from the customer the burden of having to remember all the services performed on the vehicle and would force the customer to expend considerable effort in providing a complete maintenance history if the vehicle is taken to a new mechanic.

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• Switching costs (These costs, both real and perceived, monetary and nonmonetary, are termed switching costs. Switching costs include investments of time, money, or effort-such as setup costs, search costs, learning costs, and contractual costs-that make it challenging for the customers to move to another provider.)

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1. Setup costs- paying for a complete physical when changing doctors(X-rays, reports etc.)

2. Search costs- to obtain suitable information about alternative services

3. Learning costs- costs associated with learning of how to use a product or service

4. Contractual costs- arise when the customer is required to pay a penalty to switch providers

Note: In order to retain customers, firms might consider increasing their switching costs in order to make it difficult for customers to exit the relationship(or at least create the perception of difficulty).

RELATIONSHIP BONDS

• Switching barriers tend to serve as constraints that keep customers in relationships with firms because the “have to”. However, firms can engage in activities that encourage customers to remain in the relationship because they “want to”.

Note: However, the most successful retention strategies will be built on foundations of core service excellence.

Excellent service and

value

Financial Bonds

• Volume and frequency rewards (airlines, hotels, and car rental companies do the same; telephone companies provide discounts for volume and long distances )

• Stable pricing (for their most loyal customers)

• Bundling and cross selling (many airlines link their reward programs with hotel chains, auto rental and credit card usage)

Social Bonds

Social bonds are common among professional service providers(lawyers, accountants, teachers), personal care providers(hairdressers, counselors, healthcare providers) and their clients.

• Continuous relationships (duration of transactions)

• Personal relationships (service providers use the personal details into the conversation and reveals the genuine interest in the customer)

• Social bonds among customers (in health clubs, country clubs, educational settings and other service environments where customers interact with each other)

Customization Bonds

• Customer intimacy (intimate knowledge of individual customers)

• Mass customization (one-to-one solution using flexible processes and organizational structures)

• Anticipation/Innovation

Structural Bonds

• Integrated information systems • Joint investments• Shared processes and equipmentNote: Structural bonds can be seen in a B2B

context more prominently.

RELATIONSHIP CHALLENGES

Situations arise in which either the firm, the customer, or both want to end(or have to end) their relationship.

• The Customer is Not Always Right• Ending Business Relationships

The Customer is Not Always Right

• The Wrong Segment• Not Profitable in the Long Term

(in the banking industry it has been estimated that 40 to 70% of customers are not profitable)

• Difficult Customers (dysfunctional customer behavior refers to actions by customers who intentionally, or perhaps unintentionally, act in a manner that in some way disrupts otherwise functional service encounters)

Ending Business Relationships

• Relationship Endings (For a certain purpose/time- A house painting service; Natural ending- Piano lessons for children; An event may occur- A bank may choose to end the relationship with a customer who regularly has insufficient funds in the account)

Note: Whatever the reason for ending the relationship, firms should clearly communicate their reasons for wanting (or needing) to terminate it so that customers understand what is occurring and why.

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• Should Firms Fire Their Customers? (More and more companies are making these types of decisions based on the belief that troublesome customers are usually less profitable and less loyal and that it may be counterproductive to attempt to retain their business. Another reason is the negative effect that these customers can have on employee quality of life and morale.)

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• Although it may sound like a good idea, firing customers is not that simple and needs to be done in a way that avoids negative publicity. Sometimes raising prices or charging for services that previously had been given away for free can move unprofitable customers out of the company. Helping a client find a new supplier who can better meet its needs is another way to gracefully exit a nonproductive relationship.

THANK YOU