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CHAPTER

4

Customer Relationship Management
Strategies for Business Markets

A well-developed ability to create and sustain successful working relationships with
customers gives business marketing firms a significant competitive advantage. After
reading this chapter, you will understand:

1. the patterns of buyer-seller relationships in the business market.

2. the factors that influence the profitability of individual customers.

3. a procedure for designing effective customer relationship management
strategies.

4. the distinctive capabilities of firms that excel at customer relationship
management.

89

90 Part II Managing Relationships in Business Marketing

Every night, John Chambers, CEO of Cisco Systems, receives a personal update on 15
to 20 major customers via voice-mail. “E-mail would be more efficient but I want to hear
the emotion, I want to hear the frustration; I want to hear the caller’s level of comfort
with the strategy we’re employing,” says Chambers. “I can’t get that through e-mail.”1
Leading business marketing firms like Cisco succeed by providing superior value
to customers, by satisfying the special needs of even the most demanding customers,
and by understanding the factors that influence individual customer profitability.
Compared with the consumer packaged-goods sector, customer profitability is partic-
ularly important in business markets because marketing managers allocate a greater
proportion of their marketing resources at the individual customer level.2 The ability
of an organization to create and maintain profitable relationships with these most valu-
able customers is a durable basis of competitive advantage.3
A business marketer who wishes to find a place on Cisco’s preferred supplier list
must be prepared to help the firm provide more value to its demanding customers. To
this end, the marketer must provide exceptional performance in quality, delivery, and,
over time, cost competitiveness. The supplier must also understand how Cisco mea-
sures value and how its product and service offering can meet or surpass these value
expectations. Building and maintaining lasting customer relationships requires careful
attention to detail, meeting promises, and swiftly responding to new requirements.
The new era of business marketing is built upon effective relationship management.
Many business marketing firms create what might be called a collaborative advantage
by demonstrating special skills in managing relationships with key customers or by
jointly developing innovative strategies with alliance partners.4 These firms have learned
how to be good partners, and these superior relationship skills are a valuable asset. This
chapter explores the types of relationships that characterize the business market. What
market and situational factors are associated with different types of buyer-seller rela-
tionships? What factors influence customer profitability? What strategies can business
marketers employ to build profitable relationships with customers? What are the dis-
tinctive capabilities of firms that excel at customer relationship management?

Relationship Marketing5
Relationship marketing centers on all activities directed toward establishing, devel-
oping, and maintaining successful exchanges with customers and other constituents.6
Nurturing and managing customer relationships have emerged as an important strate-
gic priority in most firms. Why? First, loyal customers are far more profitable than
customers who are price sensitive and perceive few differences among alternative
offerings. Second, a firm that is successful in developing strong relationships with
customers secures important and durable advantages that are hard for competitors to
understand, copy, or displace.

1
Frederick E. Reichheld, “Lead for Loyalty,” Harvard Business Review 79 ( July–August 2001): p. 82.
2
Douglas Bowman and Das Narayandas, “Linking Customer Management Effort to Customer Profitability in Business
Markets,” Journal of Marketing Research 41 (November 2004): pp. 433–447.
3 George S. Day, “Managing Market Relationships,” Journal of the Academy of Marketing Science 28 (winter 2000): p. 24.
4
Rosabeth Moss Kanter, “Collaborative Advantage,” Harvard Business Review 72 ( July–August 1994): pp. 96–108.
5
This section is based on George S. Day, “Managing Market Relationships,” pp. 24–30, except when others are cited.
6
Robert M. Morgan and Shelby D. Hunt, “The Commitment-Trust Theory of Relationship Marketing,” Journal of
Marketing 58 ( July 1994): pp. 20–38.

For example. “Buyer-Seller Relationships in Business Markets. Copyright © 2000.” Journal of Marketing Research 36 (November 1999): pp. and ultimately enter a collaborative relationship with GE (sole source for particular items). economic. George Day notes that such exchanges include the kind of autonomous encounters a visitor to a city has with the taxi or bus from the airport. 303–320.9 7 Day. procedures. 8 Joseph P. such linkages provide the basis for order replenishment or just-in- time deliveries that Honda receives each day from suppliers at its Marysville. 96. Central to every relationship is an exchange process where each side gives something in return for a payoff of greater value.1 T HE R ELATIONSHIP S PECTRUM Transactional Value-Added Collaborative Exchanges Exchanges Exchanges Anonymous transactions/ Complete collaboration and Automated purchasing integration of supplier with customer or channel partner SOURCE: Figure from “Managing Market Relationships” by George S. as well as series of ongoing transactions in a business-to-business market where the customer and supplier focus only on the timely exchange of standard products at competitive prices. 25. Ohio. Collaborative exchange features very close information. Reprinted by permission of Sage Publications. According to James Anderson and James Narus.7 Moving across the continuum. Observe in Figure 4. See also Ven Srivam. Inc. social. thereby achieving mutual benefit. and operational linkages as well as mutual commitments made in expectation of long-run ben- efits. and Robert Spekman. and technical ties over time. The open exchange of information is a characteristic of collaborative (close) versus trans- actional (distant) exchange. 9 James C. and routines of the buying and selling firms have been connected to facilitate operations. Types of Relationships A business marketer may begin a relationship with GE as a supplier (one of many). “Antecedents to Buyer-Seller Collabora- tion: An Analysis from the Buyer’s Perspective. Cannon and William D. operational linkages reflect how much the sys- tems. service. Likewise. relationships become closer or more collaborative.” p. 25. Perreault. “Managing Market Relationships. . Day from JOURNAL OF ACADEMY OF MARKETING SCIENCE 28 (Winter 2000). with transactional exchange and collaborative exchange serving as the end points.1 that buyer-seller relationships are positioned on a continuum.. “Partnering as a Focused Market Strategy. Transactional exchange centers on the timely exchange of basic products for highly competitive market prices. 439–460. Anderson and James A Narus.” Journal of Business Research (December 1992): pp. with the intent of low- ering total costs and/or increasing value. collaborative exchange involves a process where a customer and supplier firm form strong and extensive social. p. move to a preferred supplier status (one of a few).” California Management Review 33 (spring 1991): p. Chapter 4 Customer Relationship Management Strategies for Business Markets 91 FIGURE 4. Jr. Robert Krapfel.8 These relationship connectors are a feature of a collaborative rela- tionship. production facility.

74. 11 Das Narayandas and V. 35–51. and providing continuing incentives for customers to con- centrate most of their purchases with them. . customized. “An Examination of the Nature of Trust in Buyer-Seller Relationships. and preferences keep changing. In turn. The marketer pursues this objective by developing a comprehensive under- standing of a customer’s needs and changing requirements. Whereas transactional exchange centers on negotiations and an arm’s-length relationship. However. See also Patricia M. Rivals are continually working to attract the best accounts away. “Individuals who build trust in each other will transfer this bond to the firm level. limits are imposed by the characteristics of the market and by the significance of the purchase to the buyer. salespersons) assume in forging a long-term relationship. A central challenge for the marketer is to overcome the gravitational pull toward the transaction end of the exchange spectrum. customer requirements. “Building and Sustaining Buyer-Seller Relationships in Mature Industrial Markets. where the focus of the selling firm shifts from attracting customers to keeping cus- tomers. To illustrate.92 Part II Managing Relationships in Business Marketing Value-Adding Exchanges Between the two extremes on the relationship continuum are value-adding exchanges.10 Relationship commitment involves a partner’s belief that an ongoing relationship is so important that it deserves maximum efforts to maintain it. Kasturi Rangan.”11 Strategic Choices Business marketers have some latitude in choosing where to participate along the rela- tionship continuum. tailoring the firm’s offerings to those needs.” p. collaborative exchange emphasizes joint problem solv- ing and multiple linkages that integrate the processes of the two parties. “The Commitment-Trust Theory. Nature of Relationships Transactional exchange involves items like packaging materials or cleaning services where competitive bidding is often employed to secure the best terms. 12 Day. and the possi- bility of friction-free exploration of options in real time on the Web con- spire to raise the rate of customer defections. Dell Computer provides a customized Web page for each of its premier corporate customers that individual employees in the customer organization can access for an array of information and technical support services. Doney and Joseph P. Such exchanges are purely contractual arrangements that involve little or no emotional commitment to sustaining the relationship in the future. According to Day. “Managing Market Relationships. By contrast. 20–38. Trust and commitment provide the foundation for collaborative exchange.12 10 Morgan and Hunt.” Journal of Marketing 68 ( July 2004): p. Recent research highlights the powerful role that contact personnel (for example.” pp.” Journal of Marketing 61 (April 1997): pp. Cannon. 25. trust exists when one party has confidence in a partner’s reliability and integrity. high-technology products—like semiconductor test equipment—fit the collabora- tive exchange category. expectations.

“Buyer-Seller Relationships in Business Mar- kets. a advance the firm’s competitive advantage. . Salespersons not only work with the pur. ishes. Managing Buyer-Seller Relationships Buyers and sellers craft different types of relationships in response to market condi- tions and the characteristics of the purchase situation.2 T HE S PECTRUM OF B UYER -S ELLER R ELATIONSHIPS Transactional Collaborative Exchange Exchange Availability of Alternatives Many Alternatives Few Alternatives Supply Market Dynamism Stable Volatile Importance of Purchase Low High Complexity of Purchase Low High Information Exchange Low High Operational Linkages Limited Extensive SOURCE: Adapted from Joseph P. Figure 4. Here IBM adds value to the relationship tomer. 500 customers. The team comprises chasing staff but also have close ties to senior sales. In turn. the needs of that customer. Cannon and William D. the business marketer requires a deep by providing specific recommendations concern- understanding of the customer’s business. account executives are direct par. Some team members have worked exclusively with ticipants in the customer firm’s strategy planning a single customer organization for years.2 highlights the typical characteristics of relationships at the end points of the buyer-seller relationship spectrum. sessions. and its goals and strategies. service. for some of IBM’s Fortune extensive knowledge of the customer’s industry. FIGURE 4. the business marketer must understand that some customers elect a collaborative relationship.” Journal of Marketing Research 36 (November 1999): pp. Chapter 4 Customer Relationship Management Strategies for Business Markets 93 B2B T OP P ERFORMERS Understanding the Customer’s Business—the Key to Success To forge a collaborative relationship with a cus. To develop specific relationship- marketing strategies for a particular customer. and technical specialists who have executives. Perreault Jr. For example. its key ing how its products and services can be used to competitors.. 439–460. whereas others prefer a more distant or transactional relationship. a full-time sales team is often created to serve agement. As a wealth of communication links are required across relationship with a large account grows and flour- the partnering organizations at all levels of man.

453. they invest in lasting assets. commodity chemicals. such as equipment itself.” p. This profile fits some buyers of office supplies. In particular.94 Part II Managing Relationships in Business Marketing Transactional Exchange Customers are more likely to prefer a transactional relationship when a compet- itive supply market features many alternatives. Switching Costs In considering possible changes from one selling firm to another. or critical component parts. and the supply market is stable. enterprise software. the purchase decision is not com- plex. and shipping services. This behavior fits some purchasers of manufacturing equipment.14 Because of these past investments. . Switching costs are especially important to collaborative customers. “Build Customer Relationships That Last. Such relationships are characterized by lower levels of information exchange and are less likely to involve operational linkages between the buying and selling firms. Risk of exposure provides a second major category of switching costs. buyers seek close relationships with suppliers when they deem the purchase important and strategically significant. 14 BarbaraBund Jackson. as in training employees to run new equipment. buyers may hesitate to incur the disruptions and switching costs that result when they select new suppliers. and they invest in changing basic business procedures like inventory handling. customers emphasize a trans- actional orientation when they view the purchase as less important to the organiza- tion’s objectives. . organi- zational buyers invest in their relationships with suppliers in many ways. As Barbara Bund Jackson states: They invest money. the closest partnerships . Collaborative Exchange Buying firms prefer a more collaborative relationship when alternatives are few. . they invest in people. and the complexity of the purchase is high. arise both when the purchase is important and when there is a need—from the customer’s perspective—to overcome pro- curement obstacles that result from fewer supply alternatives and more pur- chase uncertainty. Attention centers on the risks to buyers of making the wrong choice. Customers perceive more 13 Cannon and Perreault. First.” Harvard Business Review 63 (November–December 1985): p. In turn. the relationships that arise for important purchases are more likely to involve operational linkages and high levels of information exchange. 125. rapidly changing technology). Indeed. “Buyer-Seller Relationships. the market is dynamic (for example. organizational buyers consider two switching costs: investments and risk of exposure. say Cannon and Perreault.13 Moreover.

15 M. and other benefits has a chance of winning business from a transactional customer. Strategy Guidelines The business marketer manages a portfolio of relationships with customers—some of these customers view the purchase as important and desire a close. are especially appropriate for these customers. guest engineers. price. customers are concerned both with the marketers’ long-term capabilities and with their immediate performance. Second.” Sloan Management Review 40 (summer 1999): p. 43. A business marketer who offers an immediate. Given the long time horizon and switching costs. This path is not only costly but also risky. Operational linkages and information-sharing mechanisms should be designed into the relationship to keep product and service offerings aligned with customer needs. when they buy from less established suppliers. . given the specialized investments involved.15 Rather than adopting the approach of “one design fits all. Chapter 4 Customer Relationship Management Strategies for Business Markets 95 risk when they purchase products important to their operations. “Portfolio of Buyer-Seller Relationships. they demand competence and commitment from sellers and are easily frightened by even a hint of supplier inadequacy. people. the intangible ones (for example. Regular visits to the customer by executives and technical personnel can strengthen the relationship. and when they buy technically complex products. M. and cross-company teams when the product and market context calls for simple. in particular. Collaborative Customers Relationship-building strategies. Given the differing needs and orientations of customers. Bensaou argues that it is unwise for marketers to make specialized investments in transactional relationships: Firms that invest in building trust through frequent visits. technical support. other customers assign a lower level of importance to the purchase and prefer a looser relationship. Because the customers perceive significant risk. tightly connected buyer-seller relationship. Bensaou. information. The salesperson centers primary attention on the purchasing staff and seldom has important ties to senior executives in the buying organization. a strategy must be designed that is appropriate for each strategy type. Business marketers can sensibly invest resources to secure commitments and directly assist customers with planning.” the astute marketer matches the strategy to the product and market conditions that surround a particular customer relationship and understands the factors that influence profitability. or knowledge). targeted on strong and lasting commitments. Transaction Customers These customers display less loyalty or commitment to a particular supplier and can easily switch part or all of the purchases from one vendor to another. impersonal control and data exchange mechanisms are overdesign- ing the relationship. the business marketer’s first step is to determine which type of relation- ship matches the purchasing situation and supply-market conditions for a particular customer. Here sales and service personnel work not only with purchasing managers but also with a wide array of managers on strategy and coordination issues. attractive combination of product.

In other words.” Harvard Business Review 82 (November 2004): pp. Although customers embrace such actions. Robert S. “Measuring and Managing Cus- tomer Profitability. The ABC system provides marketing managers with a clear and accurate picture of the gross margins and cost-to-serve components that yield individ- ual customer profitability.. p. 20 Kaplan and Narayanan.”17 By understanding the drivers of customer profitability. expedited deliveries.19 The ABC system and associated software link cus- tomer transaction data from customer relationship management (CRM) systems with financial information. many firms have adopted activity-based costing. Unlocking Customer Profitability By accurately tracing costs to individual customers. 11. .” Journal of Cost Management 15. After a quick internal 16 This section. 19 Ibid. product or territory). Kaplan and V. 18 Kaplan and Narayanan. For example.96 Part II Managing Relationships in Business Marketing Measuring Customer Profitability16 To improve customer satisfaction and loyalty. 131–138. draws on Robert S.”18 Why? Many firms fail to examine how the costs of specialized products and services vary among individual customers. 17 Robert S. G. Kaplan. no. many business-to-business firms have developed customized products and increased the specialized services they offer. especially when the enhanced offerings are not accompanied by increases in prices or order volumes. July–August 2005 (Boston: Harvard Business School Publishing Corporation). For a dif- ferentiation strategy to succeed. fail to assign operating expenses to customers. 5. p. To capture customer-specific costs. they often lead to declining profits. “Add a Customer Profitability Metric to Your Balanced Scorecard. learned to its surprise that one of its largest and most coveted accounts— General Electric’s Appliance Division—was also one of its most unprofitable cus- tomers. 7.20 A customer order that normally would cost Kanthal $150 to process cost more than $600 from GE because of frequent order changes. See also. and sched- uling adjustments. Activity-based costing (ABC) illuminates exactly what activities are associated with serving a particular customer and how these activities are linked to revenues and the consumption of resources. Anderson. Kanthal. 3. the business marketing manager can more effectively allocate marketing resources and take action to convert unprofitable relationships into profitable ones. Narayanan. unless otherwise noted. managers are better equipped to diagnose problems and take appropriate action. “the value created by the differentiation—measured by higher margins and higher sales volumes—has to exceed the cost of creating and deliv- ering customized features and services. Kaplan and Steven R. p. A senior manager at Kanthal suggested to GE that the numerous change orders were costly not only to Kanthal but also to GE.” p. Activity-Based Costing Most studies of customer profitability yield a remarkable insight: “Only a minority of a typical company’s customers is truly profitable. 5 (September–October 2001): pp. they focus on profitability at an aggregate level (for example. a heating wire manufacturer.” Balanced Scorecard Report. “Measuring and Managing Customer Profitability. and misjudge the profitabil- ity of individual customers. “Time-Driven Activity-Based Costing. 5–15.

21 21 Ibid.3 T HE W HALE C URVE OF C UMULATIVE P ROFITABILITY 350 300 250 (% of Total Profits) Cumulative Profits 200 150 100 50 0 20 40 60 80 Most Profitable Least Profitable Customers Customers SOURCE: From “Measuring and Managing Customer Profitability” by Robert S. 20 percent of the customers provide 80 percent of the sales). Narayanan. . G. a striking portrait emerges that is often referred to as the whale curve (Figure 4. who is codeveloper of activity-based costing. V. Robert S. September 2001. p. Chapter 4 Customer Relationship Management Strategies for Business Markets 97 FIGURE 4.. The middle 70 percent of customers break even and the least prof- itable 10 percent of customers lose from 50 to 200 percent of total profits. Copyright © 2001. Kaplan. and his colleague.3). Kanthal converted an unprofitable relationship to a profitable one and provided further value by helping a key customer reduce costs. corrected internal inefficiencies. Reprinted by permission of Warren. By isolating the true cost of serving GE. 7. the whale curve for cumulative profitability usually reveals that the most profitable 20 per- cent of customers generate between 150 percent and 300 percent of total profits. describe the pattern that many companies find: Whereas cumulative sales usually follow the typical 20/80 rule (that is. and then awarded Kan- thal with the largest contract in the firm’s history. GE managers agreed. Kaplan from JOURNAL OF COST MANAGEMENT. review. Gorham. leaving the company with its 100 percent of total profits. Lamont via Copyright Clearance Center. The Profitable Few Once a firm implements an ABC approach and plots cumulative profitability against customers. The contract incorporated a surcharge for any change GE made to an existing order and established a minimum order size.

standard pricing and ordering) Large amounts of postsales support No postsales support (i. By contrast.. desire customized products.e. low-cost-to-serve customers appear on the profitable side of the whale curve and high-cost-to-serve customers end up on the unprofitable side unless they pay a premium price for the specialized support they require. Kaplan from JOURNAL OF COST MANAGEMENT... marketing.e. Copyright © 2001. field service) Require company to hold inventory Replenish as produced Pay slowly (i. Managing High. Look Inside First After reviewing the profitability of individual customers.1 THE CHARACTERISTICS OF HIGH.e. Gorham.and Low-Cost-to-Serve Customers What causes some customers to be more expensive than others? Note from Table 4. managers should first examine their company’s own internal processes to ensure that it can accommodate customer preferences for reduced order sizes or special services at . However.VERSUS LOW-COST-TO-SERVE CUSTOMERS High-Cost-to-Serve Customers Low-Cost-to-Serve Customers Order custom products Order standard products Order small quantities Order large quantities Unpredictable order arrivals Predictable order arrivals Customized delivery Standard delivery Frequent changes in delivery requirements No changes in delivery requirements Manual processing Electronic processing (EDI) (i.. As a rule. place orders and schedule deliveries on a predictable cycle. high accounts receivable) Pay on time SOURCE: From “Measuring and Managing Customer Profitability” by Robert S.3. large customers tend to be included among the most profitable (see left side of Figure 4. fre- quently change orders. Reprinted by permission of Warren. installation. training.e. Lamont via Copyright Clearance Center. warranty.1 that high-cost-to-serve customers. In Figure 4. and sales resources) (i. low-cost-to-serve customers purchase standard products. technical.e.98 Part II Managing Relationships in Business Marketing TABLE 4. the business marketer can consider possible strategies to retain the most valuable customers and to transform unprofitable customers into profitable ones.. Interestingly. for example. and require a significant amount of presales and postsales sup- port. and require little or no presales or postsales support. some of the firm’s largest customers often turn out to be among the most unprofitable. zero defects) Large amounts of presales support Little to no presales support (i. A firm does not generate enough sales volume with a small customer to incur large absolute losses. Only large buyers can be large-loss customers.3) or the least profitable (see right side of Figure 4.3)—they are seldom in the middle. September 2001.

so net margins are low. • Product is Crucial but Pay Top • Good Supplier Match Dollar Net Margin Realized its Prof es Price Sensitive but Loss Aggressive Few Special • Leverage Their Buying Demands Power • Low Price and Lots of Customized Features Low Low High Cost-to-Serve SOURCE: Reprinted by permission of HARVARD BUSINESS REVIEW. “Creating a Superior Customer-Relating Capability. minus manufacturing costs. including order-related costs plus the customer-specific marketing. . Identifying Profitable Customers Observe from Figure 4. To illustrate. after all discounts. The vertical axis shows the net margin earned from sales to a particular customer. technical. Copyright © 1987 by the Harvard Business School Publishing Corporation.22 These actions not only cut costs dramatically but also gave each group of customers what they had wanted all along: Large customers wanted a central point of contact where they could secure services customized to their needs. small customers preferred minimal contact with a direct salesperson but wanted the assurance that they could receive advice and support if required. 104. The net margin equals the net price. Day. P. Chapter 4 Customer Relationship Management Strategies for Business Markets 99 FIGURE 4.” MIT Sloan Management Review 44 (spring 2003): pp. 77–82.4 that profitable customers can take different forms. all rights reserved. a large publisher of business directories reduced the cost of serving its customer base by assigning key account managers to its largest customers (that is. September–October 1987. High-cost-to-serve customers who occupy the upper right corner of 22 George S. For example. Shapiro et al. The horizontal axis shows the costs of serving the customer. p. A Sharper Profit Lens Business marketing managers can view their customers through the lens of a simple 2 × 2 diagram (Figure 4.4 C USTOMER P ROFITABILITY High Passive Costly to Service. the lowest cost. the 4 percent of customers who accounted for 45 percent of its sales) and serving the smallest customers over the Internet and by a telephone sales force. and administrative expenses. but also working with its suppliers to streamline activities so that the cost-to- serve is also low. a customer like Honda of America would be at the lower left corner of the diagram: demanding low prices. From “Manage Customers for Profits (Not Just Sales)” by B.4).

Second. 200. pp. Cost and Effect. Kaplan and Robin Cooper. What should we do with those unprofitable customers that remain in the high-cost-to- serve quadrant of Figure 4. but not all. and have protective measures (for exam- ple. the high cost-to-serve may be caused by the customer’s unpredictable ordering patterns or by the large demands it places on technical and sales personnel.4: low margins and high cost-to-serve. we have to dig deeper into the customer relationship and assess the other benefits that certain customers may pro- vide. but a more subtle approach will do: “We can. Furthermore. Some customers are new and the initial investment to attract them will ulti- mately be repaid in higher sales volume and profitability. Other customers provide an opportunity for learning.4 can also be profitable if the net margins earned on sales to them more than compensate the company for the cost of the resources used in serving them. however. p. let the customer fire itself by refusing to grant discounts and reducing or eliminating marketing and technical support. A company is indeed fortunate if several of its customers occupy the upper left- hand quadrant of the diagram: high margins and low cost-to-serve. Suppose. Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance (Boston: Harvard Business School Press. special services) in place in case competitors attempt to win them away. First. suppose that the customer resists all attempts to convert the unprofitable relationship into a profitable one. To illustrate. From the ear- lier example. Under these conditions. Robert S. not new. business marketing managers can transform many. the business marketing manager can encourage the customer to work with the company more efficiently. 1998). that a customer is unprofitable. . Because these cus- tomers represent a valuable asset. Managing Unprofitable Customers23 The most challenging set of customers for marketing managers is found in the lower right-hand corner of Figure 4. perhaps. For example.”24 23 This section is based on Robert S. refine its internal processes and reduce its costs. and offers little or no opportunity for learning. Kaplan and Robin Cooper observe that we might consider firing them. Firing Customers By improving processes and refining pricing strategies. marketing managers should forge close relationships with them. perhaps postsales support could be shifted to the Internet. some firms that serve Toyota or Honda incurred initial losses in serving these demanding customers but secured insights into management processes and technology they could effectively apply to all their customers.100 Part II Managing Relationships in Business Marketing Figure 4. recall that Kanthal used this approach not only to restore profitability but also to help one of its largest customers.4? To answer this question. General Electric’s Appliance Division. 193–201. anticipate their changing needs. By detailing the costs of these activities and openly sharing this information with the customer. customers from unprofitable to profitable. For example. 24 Kaplan and Cooper. the manager should direct attention to the customer actions that contribute to higher selling costs. the mar- keting manager should explore possible ways to reduce the cost of activities associated with serving these customers.

marketing. 00-118. (4) motivating employees. 18. 27 Darrell K. large and small. and supply chain management. Reichheld.” Working Paper. Observe how CRM technology from leading producers such as Oracle Corporation and Siebel Systems can be used to capture critical customer data. special attention must be given to five areas: (1) acquiring the right customers.”27 CRM software can help. and (5) learning to retain customers (Table 4. sales and ser- vice representatives—to support later customer interactions and to inform market forecasts. Rigby. and Phil Schefter. CRM systems synthesize information from all of a com- pany’s contact points or “touch points”—including e-mail.25 To meet these challenging requirements. Web managers. product design. Mass.26 Salespersons. with • personalized treatment of the most valuable customers. To develop responsive and profitable customer strategies. and customer service representatives all have the same real-time information on each customer. (3) instituting the best processes. “Successful Customer-Relationship Management.” Harvard Business Review 80 ( January–February 2002): p. provides the financial payoff. “Capabilities for Forging Customer Relationships. To improve service and retain customers. transform it into valuable infor- mation. Customer relationship management (CRM) is a cross-functional process for achieving • a continuing dialogue with customers • across all their contact and access points. Report No. are making substantial investments in CRM systems—enterprise software appli- cations that integrate sales. but only after a cus- tomer strategy has been designed and executed.2). corporate profitability. 2000. Acquiring the Right Customers Customer relationship management directs attention to two critical assets of the business- to-business firm: its stock of current and potential customer relationships and its 25 George S. Chapter 4 Customer Relationship Management Strategies for Business Markets 101 Customer Relationship Management Customer retention has always been crucial to success in the business market. (2) crafting the right value proposition. For an investment in CRM software to yield positive returns. p. resellers. and it now provides the centerpiece of strategy discussions as firms embrace customer relation- ship management. a well-designed and executed customer strategy. 4 26 Larry Yu. Frederick F. call centers. . Thus. eventually. supported by a CRM system. Strategy experts contend that many CRM initiatives fail because exec- utives mistake CRM software for a marketing strategy.” MIT Sloan Management Review 42 (summer 2001): p. business marketing firms. for the purpose of improving customer loyalty and. Day.. Cambridge. 102. and customer service information. • to ensure customer retention and the effectiveness of marketing initiatives. call center personnel. Darrell Rigby and his colleagues contend: “It isn’t. and distribute it throughout the organization to support the strategy process from customer acquisition to customer retention. “Avoid the Four Perils of CRM. supported by relevant software. CRM is the bundling of customer strategy and processes. Marketing Science Institute. a firm needs a cus- tomer strategy.

SOURCE: Adapted from Darrell K. Lemon. collective knowledge of how to select. contact customer satisfaction • Target marketing • Create new employees. “Diversifying Your Customer Portfolio. information • Track customer- high-value customer to customer • Distribute service customers. • Calculate your today and will to customers. investments appropriate that are required career paths • Identify new to implement for employees.” MIT Sloan Management Review 46 (spring 2005): pp. Hogan. Frederick F.” Harvard Business Review 80 ( January–February 2002): p.28 Customer portfolio management. and an accurate forecast of 28 John E. Katherine N. communications distribution employees • Manage logistics to high-value channels. 4–12. 11–14. 106. 29 Michael D. should be offering. purchases (wallet) • Determine • Earn employee strategies your for your goods • Assess the the service loyalty by competitors are and services. Rigby. efficiently. knowledge to levels.102 Part II Managing Relationships in Business Marketing TABLE 4. and Roland T. Johnson and Fred Selnes. is the process of creating value across a firm’s customer relationships—from transactional to collaborative—with an emphasis on balancing the customer’s desired level of relation- ship against the profitability of doing so. Rust. Reichheld. share of their • Identify the need tomorrow. develop. incentives and defection and data to identify service behavior performance retention levels. • Provide better current and future data from measures. relationships. throughout the and the supply customers.” Journal of Services Research 5 (August 2002): pp. “Avoid the Four Perils of CRM. CRM Technology Can Help • Analyze customer • Capture relevant • Process • Align employee • Track customer- revenue and cost product and transactions faster. . products or capabilities investing in using to win your services that that must be training and high-value your competitors developed and development and customers.29 Account selection requires a clear understanding of customer needs. transactions. • Develop new chain more pricing models. products or customer services that you strategy. organization. initiate. offer today the technology constructing and tomorrow. services your your products need to foster and how to win customers need or services customer them back. and maintain profitable rela- tionships with these customers. and Phil Schefter. then.2 CREATING A CUSTOMER RELATIONSHIP MANAGEMENT STRATEGY CRM Priorities Acquiring the Crafting the Right Instituting the Motivating Learning to Retain Right Customers Value Proposition Best Processes Employees Customers Critical Tasks • Identify your • Determine the • Research the best • Identify the tools • Understand why most valuable products or way to deliver your employees customers defect customers. “Customer Equity Management: Charting New Directions for the Future of Marketing. a tight grasp on the costs of serving different groups of customers.

and social benefits received by a customer firm in exchange for the price paid for a product offering. these firms enjoyed ized by viewing customers as assets and diversify. Microsoft. SMB customers were the first to fied mix of investment assets that includes the return and aggressively buy IT products and serv- stocks of both large and small firms.” Industrial Marketing Management 30 ( June 2001): pp. 1995). p. The marketer wishes to develop a broader and deeper relationship with the most profitable ones and assign a low priority to the least prof- itable ones. asset category) and were technology (IT) companies. Other customers are most costly to serve.” Journal of Business-to-Business Marketing 12. like IBM and “caught waiting” for large enterprise customers to Microsoft. and IBM each have both U. technical advice and training) and are willing to pay a pre- mium price for them. refers to “the economic. and medium-sized businesses (SMB) fueled the recovery in IT spending. Why? Most of the SMB SOURCE: Mark Veverka. “Understanding Customer Value in Business-to-Business Relationships. therefore. and software upgrades to the same extreme extent strates that optimal performance. Sales.31 Frank Cespedes asserts that account selection. 193.” Barron’s.32 30 Anderson and Narus. and foreign companies. Otherwise. “Is Your Company Ready for One-to-One Market- ing?” Harvard Business Review 77 ( January–February 1999): pp. Reichheld. 31 Frederick F. “Little Guys Lead IT Spending customers did not overindulge in massive hardware Recovery. can best be achieved by building a diversi. Sun Microsystems that were less focused on this after the technology bubble. Chapter 4 Customer Relationship Management Strategies for Business Markets 103 I NSIDE B USINESS M ARKETING Diversify a Customer Portfolio Too! For an investor. 32 Frank V. p. terparts did. 1–33. modern portfolio theory demon. 73. See also.” Harvard Business Review 79 ( July–August 2001). In building a a customer portfolio that includes a strong repre- customer portfolio. similar benefits can be real. “Lead for Loyalty. pp. and Nikolas Beutin. 76–84. technical. 525–540. a marketer should divide its customers into groups. Ajay Menon. Because Dell. and Bob Dorf. no. and Wolfgang Ulaga and Samir Chacour. See also Don Peppers. 98. an edge over rivals such as Hewlett-Packard and ing across categories of customers. must be explicit about which demands the seller can meet and leverage in dealings with other customers. business marketers are better equipped to target accounts and to determine how to provide enhanced value to particular customers. October 20. some customers place a high value on support- ing services (for example. p.”30 By gauging the value of their offerings to different groups of customers. do not value service support.S. and are extremely price sensitive. were surprised to observe that small return. representing ices. “Measuring Perceived Customer Value in Business Markets: A Prerequisite for Marketing Strategy Development and Implementation. Christian Homburg. many information customer group (that is. sentation of SMB customers. service. So. The account selection process should also consider profit potential. 2 (2005): pp. Cespedes. the seller risks overserving unprofitable accounts and wasting resources that might be allocated to other customer groups. . and Service (Boston: Harvard Business School Press. for a given level during the bubble as their large-enterprise coun- of risk. as defined by James Anderson and James Narus. Concurrent Marketing: Integrating Product. 2003. For example. 151–160. The choice of potential accounts to target is facilitated by an understanding of how different customers define value. Because the product is critical to their operations. Martha Rogers. Because customers have different needs and represent different levels of current and potential opportunities. potential profit opportunities. Value.

profes- sional training. Here. 95–113. installation. imaging systems) Exchange (b) "Flaring Out" from the Industry Bandwidth Pure Pure Transactional Collaborative Exchange Hospital Supplies Exchange a b c d SOURCE: Adapted from James C. services. surgical gloves.” California Management Review 33 (spring 1991): p. syringes) (e. . Observe in Figure 4.” pp. efficient ordering processes and timely delivery). Anderson and James A. Crafting the Right Value Proposition A value proposition represents the products.5 how two different industries (medical equipment and hos- pital supplies) are positioned on the relationship continuum. ideas.g. The strategies competing firms in an industry pursue fall into a range referred to as the industry bandwidth of working relationships. Because the underlying technology is complex and dynamic. 97. By con- trast. To develop customer-specific product offerings. 33 This discussion draws on Anderson and Narus. collaborative relations characterize the medical equipment industry. thereby having a narrower range of relationships than the industry bandwidth. a range of services—technical support. “Partnering as a Focused Market Strategy.5 T RANSACTIONAL AND C OLLABORATIVE W ORKING R ELATIONSHIPS (a) Industry Relationship Bandwidths Pure Pure Transactional Hospital Supplies Medical Equipment Collaborative Exchange (e.g. and maintenance agreements—can augment the core product.33 Business marketers either attempt to span the bandwidth with a portfolio of relationship-marketing strategies or concentrate on a single strategy. the business marketer should next examine the nature of buyer-seller relationships in the industry.104 Part II Managing Relationships in Business Marketing FIGURE 4. Narus. and solutions that a business marketer offers to advance the performance goals of the customer organiza- tion. “Partnering as a Focused Marketing Strategy. collaborative relations in the hospital supply industry tend to be more focused and center on helping health-care organizations meet their operational needs (for example.

” Harvard Business Review 73 ( January–February 1995): pp. optional services are created that add value by reducing costs or improving the performance of a customer’s operations. such as technical assistance. Narus. Creating Flexible Service Offerings Business marketers can gain a competitive edge by creating a portfolio of service offerings and then drawing on this portfolio to provide customized solutions for groups of customers or even individual customers. the price is lowered. The strategy involves flaring out from the industry bandwidth in the collab- orative as well as in the transactional direction (see Figure 4. “Capturing the Value of Supplementary Services.5b). Anderson and James A. delivery. technical assistance.” Second. Rust. Flaring Out with Augmentation At the other extreme. This pricing policy is market oriented in that it allows customer firms to choose the product and relationship offering that they perceive to provide the greatest value. and availability requirements. 34 Valarie A. Zeithaml. and cooperative advertising. Augmented features might include coordinated cost-reduction programs. the collaborative offering (d in Figure 4. consulting. but in a menu fashion. hospitals can secure a structural connection to Allegiance through its ValueLink ordering system for added value and convenience. Microsoft refers to these offerings as “naked solutions. Lemon. which meets a customer’s basic price. they arrive on “client-friendly” pallets customized to meet the dis- tribution needs of the individual hospital. Anderson and James A. Flaring Out by Unbundling An unbundling strategy can reach customers who desire a greater transaction emphasis. the price increments for the entire set of unbundled services should be greater than the price premium sought for the collaborative offering. “The Customer Pyramid: Creating and Serving Profitable Customers. quality. optional services can then be “custom wrapped” with the core offering to create added value. Here. delivery schedule guarantees. and Katherine N.” Harvard Business Review 76 (November–December 1998): pp. a business marketer can tailor strategies that more closely respond both to cus- tomers who desire a collaborative emphasis and to those who seek a transaction emphasis. a price premium should be received for the collaborative offering.5b). . This reflects the efficiencies of providing the complete bundle of services to a collaborative account. related services are unbundled to yield the core product (a in Figure 4. See also James C. To meet the needs of particular customers. and billing that provide enhanced value to the customer. Roland T. Augmented services. Moreover. 53–67. “Business Marketing: Understand What Customers Value. 134. Because collaborative efforts are designed to add value or reduce the costs of exchange between partnering firms. Chapter 4 Customer Relationship Management Strategies for Business Markets 105 By diagnosing the spectrum of relationship strategies competitors in an industry follow.35 First. For each service that is unbundled. and just-in-time delivery.34 Instead of miscellaneous supplies arriving in boxes sorted at the convenience of Alliance’s needs. are each offered. 75–83. Importantly. on an incremental price basis. Allegiance Healthcare Corporation has developed ways to improve hospital supply ordering.5b) becomes the augmented product enriched with features the customer values. an offering should be created that includes the bare-bones-minimum number of services valued by all customers in a particular market segment. 35 James C.” California Management Review 43 (summer 2001): p. Narus.

The IBM client representative assigned to the customer is the relationship owner. As a project owner. “How Customer Satisfaction Improvement Works to Fuel Full Business Recov- ery at IBM. Consider an IBM technical manager assigned responsibility for installing CRM software for a large bank. promising transaction accounts are periodically upgraded to partnerships. Technical service and customer service personnel also assume implementation roles that are important and visible in buying organizations. get customer Results Transaction feedback Problem Resolution Fix Customer Problems Solve in seven days or meet Customer Satisfaction with action plan Problem Resolution SOURCE: Adapted from Larry Schiff. Some firms divide the sales organization into units that each serve a distinct relationship cat- egory such as transactional accounts or partnership accounts. but the account team may include other specialists who complete a project for the customer (project owner) or solve a particular customer problem (problem resolution owner). . there is an in-process measure and a customer feedback measure. When the work is completed. a sound complaint management process is essential. and monitors the customer’s degree of satisfaction with each role (Table 4.” Journal of Organi- zational Excellence (spring 2001): pp. this manager’s goal is to determine the customer’s conditions of satisfaction and then exceed those expectations.” Journal of Organizational Excellence 20 (spring 2001): pp. specifies desired measurable actions for each role. a number of IBM employees come into contact with the customer organization. for each role. To ensure consistent strategy execution.3). members of the customer organization are queried concerning their satisfaction and the project owner acts on the feedback to ensure that all prom- ises have been kept. Moreover. Any IBM employee who works on the account can secure timely information from the CRM system to identify recent actions or issues to be addressed.106 Part II Managing Relationships in Business Marketing TABLE 4. IBM identifies three customer-contact roles for each of its accounts. such as logistics and technical service. 36 This discussion is based on Larry Schiff.3 ROLE-BASED STRATEGY EXECUTION AT IBM: MEASURED ACTIONS AND RESULTS Measured Results Role Strategy Goal Measured Actions (Customer) Relationship Owner Improve Customer Meet with customer twice IBM Customer Satisfaction Relationships per year to identify Survey Results customer’s expectations and set action plan Project Owner Exceed Customer Collect conditions of IBM Transaction Survey Expectations for Each satisfaction. Clearly. Through a careful screen- ing process. Instituting the Best Processes The sales force assumes a central relationship-management role in the business market. 12–14. “How Customer Satisfaction Improvement Works to Fuel Business Recovery at IBM. 3–18. Successful relationship strategies are shaped by an effective organization and deployment of the personal selling effort and close coordination with supporting units. Best Practices at IBM36 In serving a particular customer.

Square D. 104. That’s partly because higher profits result from customer reten- tion.37 Research suggests that the performance attributes that influence the customer sat- isfaction of business buyers include: • the responsiveness of the supplier in meeting the firm’s needs • product quality • a broad product line • delivery reliability • knowledgeable sales and service personnel.” p. but more important. share of wallet). “Lead for Loyalty. Leaders who are dedicated to treating people right drive themselves to deliver superior value. “How Organizational Complaint Handling Drives Customer Loyalty: An Analysis of the Mechanistic and the Organic Approach.” pp. 76–84. provid- ing challenging career paths to facilitate professional development.” pp. Chapter 4 Customer Relationship Management Strategies for Business Markets 107 Recent research found that if a complaint is ineffectively handled. it’s because providing excellent service and value generates pride and a sense of purpose among employees. and Schefter. 39 Reichheld. Thus. 41 Reichheld. a goal for IBM is to gain an increasing share of a customer’s total information tech- nology expenditures (that is. Frederick F. Learning to Retain Customers Business marketers track customer loyalty and retention because the cost of serving a long-standing customer is often far less than the cost of acquiring a new customer. “Avoid the Perils of CRM. Reichheld. which allows them to attract and retain the best employees.40 For example. The firm learns how to serve them more efficiently and also spots opportunities for expanding the relationship. and aligning employee incentives to performance measures. 95–114. the profit from that customer tends to increase over the life of the relationship. altered its performance-measurement and incen- tive systems to fit the firm’s new customer strategy. “Lead for Loyalty.39 Employee loyalty is earned by investing heavily in training and development. an Illinois-based producer of electrical and industrial equipment.” p. as they do. salesperson incentives are no longer based on the number of units sold but on the number of customers acquired and on profit margins. 40 Rigby.” Journal of Marketing 69 ( July 2005): pp. Consistent with the goal of attracting high-value customers.38 Motivating Employees Dedicated employees are the cornerstone of a successful customer relationship strat- egy. the firm faces a high risk of losing even those customers who had previously been very satisfied. Rather than merely attempting to improve 37 Christian Homburg and Andreas Fürst. “Linking Customer Management Effort. the cost of serving them declines. Reichheld notes. To that end.41 Why? Established customers often buy more products and services from a trusted sup- plier and. 38 Bowman and Narayandas. . 78. 433–447.

notes: “If you delight your customers and are perceived to provide the best value in your market.” p. Day. 8. many firms fail to gain a com- petitive advantage from their CRM initiatives. IBM seeks to be recognized as providing superior value to its cus- tomers.45 By isolating customer needs and the costs of augmented service features. the question becomes: Which of our existing customers represent the best growth prospects? In targeting individual customers. “Selectively Pursuing More of Your Customer’s Business.”42 Although loyal customers are likely to be satisfied. The goal of a relationship is to enable the buyer and seller to maximize joint value. Motorola sales executives work closely with their partnership accounts to establish mutually defined goals. 11. For example. Day.” MIT Sloan Manage- ment Review 44 (spring 2003): pp. 44 James C. 1994).. 46 This section is based on George S. .” pp. Based on the cost-to-serve and projected profit margins.43 Pursuing Growth from Existing Customers Business marketers should identify a well-defined set of existing customers who demonstrate growth potential and selectively pursue a greater share of their business.” pp. 3–33.44 Evaluating Relationships Some relationship-building efforts fail because the expectations of the parties do not mesh—for example. “Capabilities for Forging Customer Relationships. the marketer is better equipped to profitably match product offerings to the particular customer’s needs. 42–49. 45 Frederick E. Working relationships with customer firms are among the most important mar- keting assets of the firm. They deserve delicate care and continual nurturing! Gaining a Customer Relationship Advantage46 George Day argues that now that CRM has become fashionable and there is broad acceptance of the need to forge close ties with customers.” p. Larry Schiff. Narus. “Capabilities for Forging Customer Relationships. This points to the need for a formal evaluation of relationship outcomes. Business marketers earn customer loyalty by providing superior value that ensures high satisfaction and by nurturing trust and mutual commitments. particular attention should be given to: (1) estimating the current share of wallet the firm has attained. Attention here should center on particular new services that might be incorporated as well as on existing services that might be unbundled or cur- tailed. See also George S. 166–171. and (3) carefully projecting the enhanced customer profitability that will result. Business marketers should also continually update the value of their product and relationship offering. all satisfied customers do not remain loyal. Market-Driven Management: Using the New Marketing Concept to Create a Customer-Oriented Com- pany (New York: John Wiley & Sons. you’ll gain loyalty and market/wallet share. After an appropriate period. Webster Jr. (2) pursuing opportunities to increase that share. partnerships that do not meet these goals are downgraded and shifted from the strategic market sales force to the geographic sales force. Why? As software manufacturers and 42 Schiff.108 Part II Managing Relationships in Business Marketing satisfaction ratings. “How Customer Satisfaction Improvement Works to Fuel Full Business Recovery at IBM. when the business marketer follows a relationship approach and the customer responds in a transaction mode. an IBM strategist. 43 Day. pp. “Creating a Superior Customer-Relating Capability. Anderson and James A. 77–82.

sharing. Such strategies give the buyer a three factors influence the buyer’s decision to greater stake in the firm’s offerings. Wathne. • All employees understand and appreciate the lifetime value of a customer. product/price. • Organizational members demonstrate a commitment and act quickly on infor- mation received from customers such as complaints. Harald The results indicate that although interpersonal Biong. • Employees have considerable latitude when taking action to satisfy customers. why are some firms rewarded by customers with higher rates of loyalty and lower rates of defection? Customer-Relating Capability A customer-relating capability is best nurtured in a market-driven organization and is exercised through a complex process of knowledge acquisition.6). 54–66. or special training pro- commercial bank and 114 of the bank’s corpo. petition. Because switching costs create a buffer to com- corporate buyer’s decision to switch suppliers. and Jan B. custom software. Orientation toward Relationships A relationship orientation is embedded within the culture of the firm and reveals the standards members of the organiza- tion use to set priorities and make decisions about customer retention. requests. Harald Biong. or changes in requirements. the researchers examined how firm’s offerings. Information about Relationships This component of a firm’s customer-relating capability hinges on the availability. relationships between the account manager and the buyer. and depth of relevant customer . 1. bundled services. Research suggests that this capability includes three tightly connected compo- nents (Figure 4. What are the distinctive capabilities of firms that excel at customer relationship management? Compared with rivals. thereby making switch to another supplier: (1) interpersonal them reluctant to switch to another supplier. A firm with a superior orientation would display these characteristics: • Customer retention is a shared goal throughout the organization. and Jan B.” Journal of Marketing 65 (April 2001). business marketers could create customized Using a survey of 39 key account managers at a products. SOURCE: Kenneth H. Chapter 4 Customer Relationship Management Strategies for Business Markets 109 I NSIDE B USINESS M ARKETING Do Interpersonal Relationships Matter to Corporate Buyers? Recent research by Kenneth H. and (3) the marketing program: Marketing Program Effect. quality. This raises impor- tant questions for business marketers. price and switching costs are more impor- into the role of interpersonal relationships on a tant. and applica- tion. all competitors are equally equipped. pp. Wathne. grams to connect the customer more closely to the rate customers. Heide. consulting organizations diffuse best practices. or other switching costs on the “Choice of Supplier in Embedded Markets: Relationship and buying side. and the relevant software becomes widely available and economical to use. (2) the existence of special processes. 2. Heide reveals new insights ties matter.

. • The organization is designed around customers rather than partitioned by products or functions. 3. Cambridge. Configuration This element of customer-relating capability includes the struc- ture. some firms are better equipped than others to gather timely customer information. information and. and then convert that information into knowledge that can be used to develop offerings that more precisely fit customer needs. systems. 10. 2000. Boisi Professor. “Capabilities for Forging Customer Relationships. Marketing Science Institute. competitive advantage means outperforming rivals during all stages of the market-learning process.”47 • The firm’s supporting resource base features processes that enable the organi- zation to personalize or mass-customize marketing communications. Day.110 Part II Managing Relationships in Business Marketing FIGURE 4. Day. Mass. products. Noteworthy characteristics include the organizational design. share the information throughout the organization. University of Pennsylvania. “Capabilities for Forging Customer Relationships. 47 Day.” Working Paper. 00-118. Copyright 2000 by Marketing Science Institute and George S. • Performance measures and incentive systems emphasize customer retention. and services. Clearly. p. more importantly.. In short. and activities and processes that enable personalized solutions for customers. The Wharton School. and processes that enable information to be applied within the organization. Firms that demonstrate a superior configuration of a customer- relating capability fit the following profile: • Organizational members support the goal and means of achieving a relation- ship advantage.6 A CHIEVING A R ELATIONSHIP A DVANTAGE Positions of Advantage • Superior value (benefits minus costs) • Mutual commitments = Relationship advantage Customer- Relating Capability • Orientation Systems and • Information Performance Outcomes databases • Configuration • Rate of defections Supporting resources • Loyalty/retention Reinvestment • Contribution to overall profitability Sources of Advantage SOURCE: George S. 15.” p. Report No. on how that information is used to change how the organization collectively responds to customers. • A compelling value proposition is offered to customers “that recognizes cus- tomer differences and puts customer retention at the center of strategy. incentive systems.

whereas the rest offer far less opportunity. like GE Capital and Square D. The Purchasing Machine (New York: The Free Press. might include technical assistance. the firm’s relationship advantage will be rewarded with lower rates of customer defection. If the appropriate market conditions are present. customized relationship-building strategies are not productive if customer needs are homogeneous. and J. D. 49 Holm Blankenburg. pp. greater customer loyalty and retention. ben- efits that exceed costs).50 However. 2001). Experts suggest that the strongest positional advantages are secured when customers are willing to make mutual commitments. Alternatively. Harris. “How Do They Know Their Customers So Well?” MIT Sloan Management Review 42 (winter 2001): pp. 50 Dave Nelson. the product has a low frequency of purchase. Chapter 4 Customer Relationship Management Strategies for Business Markets 111 Leading firms with strong customer-relating capabilities. Johansson. Such benefits. and Jonathan Stegner. or a customized solution precisely tailored to the customer’s needs. not a one-time purchase) and the value of individual transactions must be large enough to warrant a personalized strategy. . Moody. 63–72. superior responsiveness to service requests. and the value of a transaction is low.” Strategic Management Journal 20 (May 1999): pp. and Ajay K. 48 Thomas H.49 These mutual commitments might range from open information exchanges or the creation of oper- ational linkages to the cross-firm coordination of new-product-development activities. Jeanne G. key suppliers to Harley-Davidson work on-site during new product development projects. relationship-building strategies yield more productive results in some market environments than in others. The highest payoff comes when the customer base includes a small proportion of customers who represent high levels of long-term profit potential. Kohli. 89–90. 467–486. and have access to internal information systems. the product or service must represent a continuing requirement (that is. and higher profit margins than its competitors. Eriksson. Davenport. for example. K. Gauging the Payoff The contribution of a customer-relating capability to a firm’s competitive position depends on the profit potential that customized strategies may provide in the industry and the edge the firm enjoys over rivals in implementing this strategy. To justify the cost of personalization and offer the potential for positive results. Patricia E. emphasize a customer-centric culture and are organized around customer segments rather than product groups. Achieving Performance Rewards The contribution of a firm’s customer-relating capability to the firm’s position of advantage depends on (1) the degree to which the market offers an attractive opportu- nity for a strategy that highlights customer-relationship building and (2) the edge the firm enjoys over its competitors in pursuing this strategy. To illustrate. wear company badges.48 Gaining a Position of Advantage Whether a firm gains a relational advantage ultimately depends on the customer’s judgment that a close relationship with a supplier provides superior value (that is. “Creating Value through Mutual Commitments to Business Network Relationships.

a customer strategy encompasses (1) acquiring the right customers. collaborative exchange involves very close per- sonal. a firm requires a customer-relating capability. best nurtured in a market-driven organization. and (5) learning to retain customers. To that end. . or relationship management. (2) crafting the right value proposition. menu-based pricing. When the full costs of serving customers are known. Evaluate this decision and suggest a set of criteria that the firm might use to screen new clients. Discussion Questions 1. processes. To excel at customer- relationship management. provide the central focus in business marketing. 70 percent of its clients provided annual billings (revenue) that were below break-even levels.112 Part II Managing Relationships in Business Marketing Summary Relationships. Across the relationship spectrum. many companies find that 15 to 20 percent of the customers generate 100 per- cent (or much more) of the profits. Customer relationship management involves aligning customer strategy and busi- ness processes for the purpose of improving customer loyalty and. eventually. This capabil- ity. and incentives that enable personalized solutions for customers. Describe how a firm might use menu-based pricing to restore profitability to a high- cost-to-serve customer who demands extensive service and customized support. a rich and widely used information base. business marketing managers can take actions to transform unprofitable relationships into profitable ones through process improve- ments. For example. rather than simple transactions. Transactional exchange centers on the timely exchange of basic products and services for highly competitive market prices. 3. because these customers required an extensive amount of serv- ice from research employees. 2. and operational connections the parties develop to achieve long- term mutual goals. (3) instituting the best processes. By contrast. Evaluate this statement: Large customers tend to be either the most or least profitable in the customer base of a business-to-business firm. business marketing firms can create a collabo- rative advantage. At the other end of the continuum. business marketers must first understand the different forms that exchange relationships can take. and 5 to 10 percent of the customers generate sizable losses. The company took immediate action to terminate relationships with clients who would not give them a higher share of their mar- keting research expenditures. corpo- rate profitability. By demonstrating superior skills in managing relationships with key cus- tomers as well as with alliance partners. Activity-based costing provides a solid foundation for measuring and managing the profitability of individual customers. collaborative relationships for important purchases emphasize operational linkages that integrate the operations of the buying and selling organization and involve high levels of information exchange. (4) motivating employees. and systems. includes a strong relationship orientation among employees. a large group of customers break even. informational. different types of relationships feature different relationship connectors. To develop profitable relationships with customers. By measuring the cost-to-serve and the net profit from individual customers. A marketing research company found that 6 percent of its clients generated 30 percent of sales and nearly all of its profits.

What steps could Airbus take to reduce these switching costs? How might Boeing counter to strengthen its relationship with Southwest? 9. Explore how a buyer- seller partnership might create these cost savings. Some consulting organizations persuasively argue that by properly incorporating suppliers into their product development process. 10. Chapter 4 Customer Relationship Management Strategies for Business Markets 113 4. Describe how the operational linkages might differ by relationship type.com and review “success stories” and 1. 5. Why is the cost of serving a long-standing customer far less than the cost of acquiring a new customer? 8. and 2. Ford develops “collaborative relationships” with some suppliers and “transac- tional relationships” with other suppliers. 6. Discuss the switching costs that Southwest Airlines would incur if it began to phase out its fleet of Boeing airliners with replacements from Airbus Industrie. identify a particular Oracle customer from the government sector. it will be nearly impossible for one firm to secure a competitive advantage on the basis of its customer strategy. firms can cut their bills for purchased parts and materials by as much as 30 percent. Internet Exercise Oracle Corporation provides customer relationship management software solutions to all sectors of the business market. Describe how an office supply firm may have a core offering of products and services for a small manufacturer and an augmented offering for a university. Go to http://oracle. What criteria would purchasing execu- tives use in segmenting suppliers into these two categories? Describe the steps a business marketer might take to move the relationship with Ford from a transac- tion relationship to a more collaborative one. Evaluate this statement: Once all firms in an industry have adopted CRM soft- ware. Concerning buyer-seller relationships. . compare and contrast the features of a collaborative relationship versus a transactional relationship in the business market. 7. describe the benefits that this government customer received from the software solution.

” Siebel notes. Tom Siebel. The guiding principle that drives the strategy at Siebel is the belief that. service. Rigby. and retain the most valuable customers while ensuring the highest levels of customer satisfac- tion. as well as senior marketing and sales executives. according to Forrester Research.” p.”54 Discussion Questions 1. Based on this prized customer list. the resource-planning software leader. “It seemed highly likely that one could use computer technology to establish and maintain customer relationships. 53 DarrellK.. 3.53 But experts counter that many of these shortcomings are due to “companies rushing to install the software with- out having a sharply-defined customer strategy in the first place. Whirlpool Corporation. Despite the fast start and enor- mous potential. Siebel versus SAP). among others. and marketing professionals can use to tailor product and service offerings to the needs of their customers. often including the CEO and the CIO (chief information officer). It seemed to me there would be an opportunity to build a pretty nice business here. “The King of Customer. of Siebel Systems. some critics charge that CRM is losing its luster because the concept was “overhyped” from the start. 102. What purchase criteria might these different members of the buying center emphasize? Would marketing executives reflect different priorities than their information technology colleagues? 2. 2. How could a CRM system be used to improve the efficiency and effectiveness of marketing strategy? 3. 54Bartholomew. and it takes at least 24 months to implement CRM within an organization.114 Part II Managing Relationships in Business Marketing CASE Siebel Systems51 Rather than merely creating a superb company. companies must apply sophisticated information technology to identify. how could a firm gauge the financial returns that it is receiving on its investment? 51 This discussion is drawn from Doug Bartholomew.com (February 2002): pp. the success of Siebel and the large market opportunity have attracted a field of strong competitors. Research by Gartner Group found that more than half of all CRM projects fail to meet customer expectations. When evaluating alternative CRM software solutions (for example. 52 Ibid. Oracle paid nearly $6 billion to acquire Siebel Systems in 2006. Once the CRM system has been fully implemented. and Chase Manhattan Bank. including Oracle and SAP AG. p. “Avoid the Four Perils of CRM. . to succeed. the cost of a CRM solution can range from $60 million to $130 million. Frederick F. Reichheld. Included among Siebel customers are Lockheed Martin. 1–3. the buying center includes members of top management. CRM software applications allow organizations to create a single source of customer information that sales. which has launched a massive CRM initiative.” IndustryWeek. is iden- tified by some as the founder of a new business area: customer relationship manage- ment (CRM). and Phil Schefter.” Harvard Business Review 80 ( January–February 2002): p. Although com- puter technology has been successfully applied to other business activities—like man- ufacturing and accounting—“the problems of sales and customer service had been largely untouched. Charles Schwab.”52 He was right! However. “The King of Customer. In addition. acquire.