Relationship

MBA 4644, Unit 3

Marketing
What is Relationship Marketing?
 Understanding marketing
concepts
 Defining relationship
marketing (RM)
 Transactional VS.
relationship marketing
 Understanding the
advantages of RM
Are these companies
successful?

JEFF BEZOS

MICHAEL DELL
PIERRE OMIDYAR
Are these companies
successful?
Are these companies
successful?
Marketing Management
Philosophies

Production Product Selling Marketing

concept concept concept concept
Production concept
 Companies believe that customers choose
low-price products
 Customers will favour products that are
highly affordable
 Companies focus on production of a few
specific products, perhaps because few of
these products are available in the market
 Firms emphasise production techniques and
unit-cost reduction rather than the needs
and wants of the target market. If we can
make it, it will sell
 The majority of customers have other
Product concept
 Customers choose products with the best
quality, performance, design or features
 Companies emphasise the quality of the
product rather than the needs and wants of
the target market
 The customer’s voice to be missing when
important marketing decisions are made
 Management makes assumptions about
what customers want
 The outcome is that products are over-
specified for the requirements of the market,
and therefore too costly for the majority of
Selling concept
 Companies aim is to sell what they make
rather than make what the market wants
 If companies invest enough in advertising,
selling, public relations and sales promotion,
customers will be persuaded to buy
 Customers who are coaxed into buying the
product will like it. Or, if they don't like it,
they may forget their disappointment and
buy it again later
 It focuses on short-term results - creating
sales transactions - rather than on building
long-term, profitable relationships with
Marketing concept
 Achieving organizational goals depends on
determining the needs and wants of target markets
and delivering the desired satisfactions more
effectively and efficiently than competitors do

 It starts with a well-defined market, focuses on

customer needs, co-ordinates all the marketing
activities affecting customers and makes profits by
creating long-term customer relationships based on
customer value and satisfaction

 Companies produce what customers want, thereby

satisfying customers and making profits
Developments in Marketing
1950s 1960s 1970s 1980s 1990s 2000 2010

1950-1970 1970-1990 1990-2010

• Spending x • Saturated Mkts• From bad to

2 • Sm.Brand Growth worse
• Brand Mgt • Consumers more
model • demanding &
“the homogeneity
• Toolbox • sophisticated marketers continue
model • Advertising to seek what was a
myth advanced by
• North effectiveness those still using the
America down American model
circa 1950/60”
• Media McKENNA 1991
Transactional marketing
 Transactional Marketing focuses on the sale,
the single event of a transaction and the
objective of the marketing activities
(Webster, 1992)
 The objective of marketing activities is to
maximise sales volume (sales volume holds
the key to profitability!)
 The more the sales, the more the profits
(Shajahan 2004)
 The process between two or more
transactions is neither analysed nor
influenced
Problems with Traditional
marketing approach
 Customers were more sophisticated and
less responsive to the traditional marketing
pressures, particularly advertising
 Greater customer choice and convenience
existed as a result of the globalization of
markets
 New sources of competition and the
emergence of new media and channels
 Innovative business thinking and action
was required to meet the challenges of this
new competitive environment
 It assumes short-term and often one-off
Developments in Marketing
Industrial (B2B) Services Marketing
Marketing Services the
B2B the poor relation
misunderstood
Research from IMP group
Child; yet 2005 75%
Industrial Marketing & serviceCharacteristics
Service economy
Purchasing Group •Intangibility
•Inseparability
Not just managing •Perishability
exchanges….but •Variability
managing •Inability to own
relationships
Didn’t fit the model
suggested by consumer
goods marketing
Developments in Marketing

We are all the same We are all individuals

Developments in Marketing
Developments in Marketing
Defining Relationship Marketing
Harker (1999), in a review of relationship
marketing definitions noted no fewer than
26 substantial definitions of RM. Grönroos’
(1994) definition seemed both ‘more
elegant
“Identifyand
andsuccinct’.
establish, maintain and
enhance and, when necessary, terminate
relationships with customers and other
stakeholders, at a profit so that the
objectives of all parties involved are met;
and this is done by mutual exchange and
fulfilment of promises”
(Gronroos 1994b)
Defining Relationship Marketing
• Seeks to create new value for customers and
share it
• Recognises the key role that customers have
both as purchasers and in defining the value
they wish to achieve
• Businesses are seen to design and align
processes, communication, technology and
people  customer value
• Represents continuous co-operative effort
between buyers and sellers
• Recognises the value of customer’s
purchasing lifetimes (i.e. lifetime value)
What is Relationship Marketing?
• Seeks to build a chain of relationships within
the organisation (to create customer value) &
between the organisation and its main
stakeholders including suppliers, distribution
channels, intermediaries and shareholders
• Differs from other forms of marketing in that
it recognizes the long term value of customer
relationships and extends communication
beyond intrusive advertising and sales
promotional messages

(Gordon 1998:9)
Influences on Relationship
Marketing

Se Nordic
M rv School Anglo-Australian
ar ic
ke es Approach
tin
g

What influences? Relationship

Consumer Gds Marketing
tin 2B
ke l B
g
ar ia

Network Strategic Alliances

M s tr

Approach & Partnership

du
In

Research
 ransactional vs Relationship
Marketing
Transactional Relational
• Orientation to single • Orientation to Customer
sales retention
• Discontinuous Customer• Continuous Customer
Contact Contact
• Focus on Product • Focus on Customer Value
Features • Long Time Scale
• Short time scale • High emphasis on
• Little emphasis on Customer service
Customer Service • High Commitment to
• Limited Commitment to meeting customer
meeting customer expectations
expectations • Quality as the
Adapted fromconcern
Payne etof
al 1995
•
Relevant concepts
Transactional Relationship
Marketing Marketing
 Traditional Marketing  Direct Marketing
 4Ps Marketing  Database Marketing
 Marketing Mix  CRM
 Mass Marketing  1-To-1 Marketing
 Loyalty Marketing
Transactional vs Relationship
Marketing
Transactional Relationship
Marketing Marketing
 Short-term orientation  Long-term orientation

 Acquiring new  Retaining customers

customers
 Profitable transactions  Profitable relationships

 Low customer service  High customer contact

 Limited customer  Less price sensitive

contact customers

 Price sensitive
customers
Transactional / Relational
Marketing Continuum
Transactional drivers
Company A Company B Company C
Largely Balanced Largely
Requirement transactional portfolio of relational
approach strategies approach

TMTransactional / Relational continuumRM

Develop & Develop &

maintain Customer maintain
Strategies discrete dependent ongoing
exchanges relationships

Relational drivers
Transactional / Relational
Marketing Continuum

RELATIONSHIP MARKETING
TRADITIONAL MARKETING

Importance of
Customer Service

Danger
Area

Importance of
Core Product

TMTransactional / Relational continuumRM

Drivers to Strategic Decision
Making
Transactional Relational
Drivers promoting TM Drivers promoting RM
High Acquisition costs
Acq/Retention diff small
Low Exit Barriers High Exit Barriers
Sustainable Comp. Advantage
Unsustainable Comp.Adv
Saturated Markets Buoyant/Expanding Market
Low Risk/Salience High Risk/Salience
Low Emotion High Emotion
Trust only required Require Trust & Commitment
Perceived Need for Closeness
No Reason for Closeness
Repeat Behaviour Satisfaction benefits Retention
Economics of Relationship
Marketing
 The ultimate goal of firms is to fulfil
customer needs ?!, or
 The ultimate goal of firms is to satisfy
customers ?!
 The ultimate goal of firms is to build long
term relationships with customers?!
 The ultimate goal of firms is to maximise
profits?! Retaining customers?
Economics of Relationship
Marketing
 It is more expensive to win a new customer
than it is to retain an existing customer
 Most profitable customers - 80 per cent of
profits come from 20 per cent of customers
 Should all customers be treated equally?
 Long term - the longer the association
between company and customer the more
profitable the relationship for the firm.
 RM is a means to a profitable end
Retaining customers
 Customer retention is the number of
customers doing business with a firm at the
end of a financial year expressed as
percentage of those who were active
customers at the beginning of the year
(Buttle 2004)
 It is evident that recruiting new customers is
a costly business
 It is between five and ten times as
expensive to win a new customer than it is
to retain an existing one
 Direct costs of the successful conversion of
Why retention improvement
impacts profitability
 Acquiring new customers involves costs that
can be significant and take years to turn a
new customer into a profitable customer
 As customers become more satisfied and
confident in their relationship with a supplier,
they are more likely to give the supplier a
larger proportion of their business
 As the relationship with a customer develops,
there is greater mutual understanding and
collaboration, which produces efficiencies
that lower operating cost
Retaining customers
 Satisfied customers are more likely to refer
others, which promotes profit generation as
the cost of acquisition of these new
customers is dramatically reduced
 Loyal customers can be less price-sensitive
and may be less likely to defect due to price
increases
 Company A has a churn rate (customer
defection rate) of 5 per cent per annum;
company B’s churn rate is 10 per cent
 Company A’s customer base is 19 per cent
larger than company B’s after 4 years:
Source: Peppers &
Rogers 2004
Customer profitability

 A profitable customer is a customer whose

revenues over time exceed the company's
costs of attracting, selling and servicing that
customer

 Between 20 and 40 per cent of customers

are unprofitable

 Is it always worthwhile to keep a customer?

Relationship economics
Relationship economics is a form of Ronald Coase's
transaction cost economics which hypothesizes that
the costs of forming and maintaining personal
relationships, and the benefits of those relationships,
dominate decision-making in many contexts. Famed
CEO Jack Welch (Welch and Byrne 2001: 348) offered
this as his "cardinal rule of business“

Never allow anyone to get between you and your

customers or your suppliers.  Those relationships
take too long to develop and are too valuable to lose.
Relationship economics
“The language of management is money, a good question is
how the relationship portfolio pays off” GUMMESSON

The 2 pillars underpinning relationship economics

Relationship Economics
Customers are
less expensive
to retain than
to recruit
Securing customers
loyalty over time
produces superior
profits
Relationship economics
Relationship Marketing

(Dissolution)
Commitment
Partners Partners
Members Members

Expansion Advocates Advocates

Clients Clients
Customers Repeat Cust
Traditional
Marketing

Exploration 1st Time Cust

Awareness Prospects Prospects
Suspects

Dwer et all 1987 Payne et al 1995

Relationship economics

Year 5
Year 4
Year 3
Year 2
Profit
Loss Year 1
LOYALTY
Motivational Investments
Buyer’s motivational investment Seller’s motivational investment
HIGH
Seller-
maintained

Bilateral

LOW HIGH

No Buyer-
Discreet maintained
Exchange
or

Dwer et al 1987
LOW
Relationship Loyalty

Commercial Loyalty

BEHAVIOURAL ATTITUDINAL

“The biased (i.e. non-random) behavioural

response (i.e. re-visit), expressed over time,
by some decision-making unit with respect
to one (supplier) out of a set of (suppliers),
which is a function of psychological
[decision making and evaluative] processes
resulting in brand commitment.” (Bloemers
& de Ruyter 1998:500)
Relationship Loyalty
Hart at al (1999:546) offer a wider
range of motives for setting up loyalty
schemes;
 To build lasting relationships with
customers by rewarding them for their
patronage.
 To gain higher profits through extended
product usage and cross-selling
 To gather customer information
 To de-commodify brands (i.e. differentiate
from the crowd)
 To defend market position (against a
competitor’s loyalty schemes)
 Relationship economics

Switching Costs/Barriers

Search Learning Emotional

Costs Costs Costs

Inertial
Risk
Costs

Social Financial Legal

Costs Costs Barriers
Customer loyalty – An
integrated model
Barriers to Market
Image
Switching environment

Market
Value relative Attraction & share
Quality
to competition Loyalty and
profit

Individual/Org
Price Experiences
Characteristics

Fredericks & Salter 1998