Chapter

3:

Customer Relationship
Management
Strategies for Business
Markets

Fall 2017 MARK 3510 Professor Eugene R. Raitt 1

Chapter Topics
Well developed relationships give business
marketers a significant competitive advantage.
Topics include:
1. Patterns of buyer-seller relationships
2. Factors that influence customer profitability
3. Strategies for designing effective customer
relationships
4. How successful firms excel at customer
relationship management
5. Critical determinants for managing strategic
alliances

Fall 2017 MARK 3510 Professor Eugene R. Raitt 2

Relationship Marketing
Relationship Marketing centers on
• Establishing,
• Developing, and
• Maintaining

successful exchanges with customers.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 3

Exchange
• Central to every relationship is an exchange process
where each side gives something in return for a
payoff of greater value.

• The “take $” side of the transaction must offer a

perceived payoff of greater value to the buying side
for the transaction to occur.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 4

Collaborative Advantage

• New era of business marketing is dependent upon

managing relationships.

• Collaborative advantage is:

– Demonstrating special skills with “key” customers
or
– Developing innovative strategies with alliance
partners

Fall 2017 MARK 3510 Professor Eugene R. Raitt 5

 Types of Relationships
• Continuum of buyer-seller relationships
• Transactional, Value-added & Collaborative exchanges

The Relationship Spectrum

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Transactional Exchange
• Centers on timely exchange of basic products at
highly competitive market prices
• These types of transactions are autonomous,
meaning that there is little or no concern as to the
needs of buyer or seller
• Example: A person comes into a store and buys a
hammer. The buyer wants a hammer and the seller
sells him one. That’s all there is to it!

Fall 2017 MARK 3510 Professor Eugene R. Raitt 7

Transactional Exchanges
The business market includes items like:
• Packaging,
• Cleaning products or
• Commodity-type products or service activity
where bidding is employed.

Transactional exchanges employ an Arms-

Length relationship.

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Collaborative Exchange
} Occurs when alternatives are few, market is
dynamic, the purchase is complex and the price is
high
} Features close information, social, and operational
linkages, as well as mutual commitments
} Switching costs are extremely important to
collaborative customers
} Trust is the key and it exists when one party has
complete confidence in their partner’s ability and
integrity

Fall 2017 MARK 3510 Professor Eugene R. Raitt 9

Value-Added Exchanges
• Value-Added Exchanges fall between
Transactional and Collaborative Exchanges

• Value-Added Exchanges are those where the

selling firms shifts from just attracting
customers to keeping them by:

1. Adding additional services

2. Developing services that are customized
to meet the buyer’s needs
3. Providing continuing incentives that
promote repeat business
Fall 2017 MARK 3510 Professor Eugene R. Raitt 10
The Element of Competition
• Competition forces a war-like environment whereby
competitors are always trying to lure customers
from competitors.

• Since customer situations (i.e., requirements,

expectations, people, preferences) change, there is
always opportunity for customers to change from
relationship to transactional to relationship with
new suppliers.

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Effects of Market Conditions
• Market conditions force different types of
relationships.
• The marketer needs to understand this
aspect of business to determine which
strategy to employ with various markets.
• What is the best strategy: transactional or
collaborative?

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Spectrum of Buyer-Seller Relationships
Buyers and sellers craft various relationships in response to:
a) Market conditions
b) Characteristics of the purchase situation

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Switching Costs
• A major consideration before changing from one
supplier to another is the switching costs.
• Organizational buyers invest heavily in their
relationships with suppliers.
Investments include:
1. Money
2. People
3. Training Costs
4. Equipment
5. Procedures and processes

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Switching Costs

• Buyers hesitate to switch because it can cause costly

disruptions.
• Risk of making a wrong choice of less-established
suppliers can be costly.
• From a marketing perspective, the prospect’s
PROBLEM must exceed the BENEFITS that they are
presently experiencing with their current supplier
before they will consider switching.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 15

Value Drivers in
Collaborative Relationships
Suppliers of routinely purchased products offer
three sources of value:

1. Value creation through core offerings

2. Value creation within the sourcing process
3. Value creation at the customers level of
operations

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Furthering Collaborative Relationships

To develop ‘key supplier’ status, sellers need to:

• Target the right customer.
• Match with their purchasing situation.
• Develop strategies that are appropriate for each
type of buyer. Collaborative buyers seek long,
strong and lasting relationships.
• Buyers perceive significant risks with suppliers, so
competence and commitment are vital when
starting the relationship.
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Improving Transactional
Customer Loyalty

• To improve customer loyalty and satisfaction,

many companies have developed specialized
services and customized products.

• Question: Is this really profitable?

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Differentiation Strategy
For a differentiation strategy to work:

“The value created, measured by higher

margins and higher sales volumes, has to
exceed the cost of creating and delivering the
customized features and services.”

To determine this, the marketer needs to

understand the drivers of profitability.

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Activity-Based Costing
• Employing an activity-based costing (ABC)
process, one can accurately assess the cost
and profitability of each customer.

• By linking financial information with

transactional data created in CRM programs,
companies are able to accurately calculate
“cost-to-service” components to yield
customer profitability.

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Measuring Customer Profitability

• Activity-based costing (ABC) is a technique that

allocates the cost of performing various services
to each customer (customer-specific costing).

• Through Customer Relations Management

(CRM) programs, one can relate revenues and
costs to each and every activity.

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 Figure 3.3 The Whale Curve of
Cumulative Profitability

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 Whale Curve & Profitability
• 20/80 Rule says “20% of customer provide 80%
of sales

• Whale Curve reveals:

– 20% of customers generate 150–300% of total profits
– 70% of customers break even
– 10% of customers lose from 50-200% of total profits
– Leaving company with 100% of total profits

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High- vs. 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

Electronic processing (EDI)
Manual processing
(i.e., zero defects)

Large amounts of presales support Little to no presales support

(i.e., marketing, technical, and sales resources) (i.e., standard pricing and ordering)

Large amounts of post-sales support No post-sales support

(i.e., installation, training, warranty, field service)

Require company to hold inventory Replenish as produced

Pay slowly (i.e., high accounts receivable) Pay on time

Source: Robert S. Kaplan and V.G. Narayanan, “p. 8. Measuring and Managing Customer Profitability,” Journal of Cost Management
15, No.
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MARK 3510 2001): Professor Eugene R. Raitt 24
Customer Profitably
As mentioned previously, some customers are
profitable and some aren’t. To determine this,
we look at the cost/profitability structure with
the plan to:

1. Keep profitable customers

2. Convert unprofitable ones to profitability
3. Fire those who are not profitable

Fall 2017 MARK 3510 Professor Eugene R. Raitt 25

Customer Profitability

High

Passive Costly to service,

Product is crucial but pay top
Net Margin Realized

Good supplier match dollar

Price-sensitive but Aggressive

few special Leverage their buying power
demands Low price and lots of
customization
Most challenging
Low
Low High

Cost-to-Serve

SOURCE: From “Manage Customers for Profits (Not Just Sales)” by B.P. Shapiro et al., September-October 1987, p. 104, Harvard Business Review.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 26

Managing Unprofitable Customers
Low margin / high cost customers offer the most
challenge for marketing mangers.

• Start with ways to reduce costs

• Next, work with customers to possibly change
their actions resulting in lowering costs or
increasing profitability

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Firing the Customer
• We must try everything to make a customer
profitable before firing them.
• If after trying, and the customer continues to be
reluctant to change, and the relationship remains
unprofitable, we can say outright, “YOUR FIRED!”
but…
• There are better approaches. We can let customers
‘fire themselves’ by raising our prices, reducing or
charging more for services, eliminating discounts,
etc., until they become profitable or find another
distributor.

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Customer Retention
• Retention of profitable customers is crucial to
business. However, due to competition and
internal / external environmental factors,
achieving this goal is difficult.

• One method that is proving successful for

customer retention is the use of CRM programs.

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 Customer Relationship
Management
Customer Relationship Management (CRM) is a
cross-functional process for achieving:

a. Continuing dialog with customers across all

contact and access points
b. Personalized service to the most valuable
customers
c. Increased customer retention
d. Continued marketing effectiveness

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CRM Technology
• CRM programs are software systems that capture information
and integrate sales, marketing and customer service
information.

• CRM programs can gather information from many sources

including email, call centers, service and sales reps.

• The information is available to the right people in the

organization in real time.

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CRM Software Programs
There are many types of CRM programs:

1. Some companies develop their own

proprietary programs.

2. Some companies purchase off-the-shelf

programs.

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Responsive Strategies
• A CRM program cannot help unless a company
employs the proper strategy to secure and
retain profitable customers.

• Special attention must be given to five areas.

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CRM Strategy - Priorities
1. Acquire the right customer.
2. Craft the right value proposition.
3. Institute the best processes.
4. Motivate employees.
5. Learn to retain customers.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 34

 #1 - Acquiring the Right Customer
Account selection demands a clear understanding
of:
1.Seller’s resources
2.Customer’s needs
3.Cost of serving various groups of customers
4.Potential profit opportunities
5.How customers define value and how to meet
those expectations

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What do customers value?
• Some demand low price
• Some demand customer service
• Some demand quick delivery
• The question is: “Can the seller deliver it
profitably?”
• Many sellers try to meet all their
customer’s needs, and may do so, but
fail to do it profitably.

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#2 – Crafting the Right Value Proposition

• A value proposition encompasses the

products, services, ideas and solutions
that a business marketer presents to the
prospect/customer that is designed to
solve the customers’ problems.
• They can be generic or customized.

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Value Proposition
A value proposition may include:
1. Points of parity to a competitive option
2. Points of difference

Best practice suppliers base their value

proposition on their target market’s needs
by communicating their offering of superior
performance in a way that conveys they
understand their customer’s business
priorities.
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Value Proposition Strategies
Strategies that competitors employ fall into a
range referred to as:
“Industry Bandwidth of Working
Relationships”

It ranges from pure transactional to pure

collaborative exchanges (see Fig. 4.5 on the
next slide).

Fall 2017 MARK 3510 Professor Eugene R. Raitt 39

 Figure 3.5 - Transactional & Collaborative
Working Relationships
Pure
(a) Industry Relationship Bandwidths Pure
Transactional Collaborative
Exchange Exchange
Medical Equipment
Hospital Supplies (e.g. imaging systems)
(e.g. surgical gloves, syringes)

(b) “Flaring Out” from the Industry Bandwidth

Pure Pure
Transactional Collaborative
Exchange Exchange
Hospital Supplies

A B C D

SOURCE: Adapted from James C. Anderson and James A. Narus, “Partnering as a Focused Marketing Strategy,” California Management Review 33 (spring
1991)’ p. 97. Copyright © by the Regents of the University of California. Reprinted by permission of the Regents.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 40

Flaring Out Strategy
• ‘Flaring out’ strategy (Fig 3.5b) states that
the seller can either unbundle (point A), that
is, reduce the service associated with a lower
price (transactional in nature), or

• Augment by adding more services to the core

offerings (point D) which adds cost to the
services. This is collaborative in nature.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 41

Creating Customized Products
The seller starts with a core service
(“naked solutions”) and adds
customized services to it (“custom
wrapped”) that create more value.

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Fall 2017 MARK 3510 Professor Eugene R. Raitt 43
#3 - Institute Best Practices
• The sales force plays a key role in establishing and
growing a customer from a transactional account to a
collaborative partnership.
• They can do this by aligning and deploying technical and
service support units to match with their customers’
units.
• Technical groups can consist of research, logistics and
customer service units.
• Through careful management and screening,
transactional accounts can progress to partnerships.

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 Best Practices Follow-Up
• In addition to using best practices, successful
organizations (like IBM) employ follow-up techniques
such as:
1. Assigning a client representative to take ownership of
the relationship.
2. Assigning a Project Owner who completes the project
or solves project problems.
3. Developing an in-process feedback and measurement
system.

Fall 2017 MARK 3510 Professor Eugene R. Raitt 45

#4 - Motivating Employees
Dedicated employees are the key to a
successful customer relationship strategy.
The best approach is to:
1. Hire good people.
2. Invest in them to increase their value to the
company and its customers.
3. Develop challenging careers and align
incentives to performance measures.

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Why Retain Loyal Customers?

Established customers buy more.

Cost of serving loyal customers declines.

Less expensive than acquiring new customers.

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 #5 - Retaining Customers

Retain customers by:

• Providing superior value (more than expected) to ensure

high satisfaction.
• Nurturing trust.
• Developing mutual commitment.
• If possible, helping customers grow their business.

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 How to Pursue Growth from Existing
Customers
Identify and cultivate customers that offer the
most growth potential by:

1.Estimating current percent “share of wallet”

2.Pursuing opportunities to increase share
3.Projecting and enhancing customer
profitability

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Evaluating Relationships
• Some relationship-building efforts fail
because expectations of the parties don’t
mesh.
• Example: Seller wants a business
relationship whereas the customer responds
in a transactional mode.
• By understanding and isolating customer
needs, the marketer is better equipped to
match their product offerings to a particular
customer’s needs.
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 Drivers of RM Effectiveness: Definitions

• Relationship Quality: High-caliber relational

bond characterized by commitment and trust
• Relationship Breadth: Number of interpersonal
ties that connect the relationship
• Relationship Composition: Portfolio of
contacts ranging from low-level influencers to
high-level decision makers
• Relationship Strength: The ability of the buyer-
seller relationship to withstand stress and/or
conflict
• Relationship Efficacy: The ability of an inter-
firm relationship toProfessor
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achieve desired objectives 51
Eugene R. Raitt
Fall 2017 MARK 3510 Professor Eugene R. Raitt 52
 RM Programs

• Social RM Programs
• Structural RM Programs
• Financial RM Programs

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Social RM Programs
• Social RM programs:
– Social engagements (sporting events, meals, etc.)
– Frequent and personalized communications that
develop bonds
– Make the relationship special
• Results:
– Customers reciprocate with repeat business and
referrals
– Difficult for rivals to duplicate
• Affect:
– Has a direct affect on profits & is long lasting
Fall 2017 MARK 3510 Professor Eugene R. Raitt 54
Structural RM Programs
• Structural RM programs:
– Provide a service/product to increase
productivity and/or efficiency for customers
through targeted investment that customers
would not make for themselves.
For example they provide:
– Order-processing interfaces
– Free analysis of operations

• Results:
– Creating a structural bond makes it difficult for
companies to switch to competitors
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 Financial RM Programs
• Financial RM programs provide economic
benefits such as:
• Discounts
• Free shipping
• Extended payment terms

• Results:
Companies respond financially to protect customer
relationships, but they do not necessarily enhance the
relationship because all companies do it.
Fall 2017 MARK 3510 Professor Eugene R. Raitt 56
 Targeting RM Programs
• Some companies are Relationship Oriented (RO),
and some are not.
– RO companies seek to develop relationships with
current or potential supplier.

• RO buyers look for companies that:

– Offer expertise
– Are able to be flexible (i.e., payment terms, R&D, etc.)
– Help reduce risk for both parties benefit
– Help both parties benefit from the relationship
Fall 2017 MARK 3510 Professor Eugene R. Raitt 57
 Strategy for Dealing with
High and Low RO
• HIGH RO: Target those with high RO goals since
they are looking for and are open to developing
relationships

• LOW RO: For these companies, the strategy is to

create high switching cost:
– Tie them into electronic ordering interfaces
– Stay in constant contact to keep what exists
– Align RM resources as closely as possible to the
customer’s needs
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