Relationship Marketing

 is a philosophy of doing business, a strategic orientation, that

focuses on keeping current customers and improving
CHAPTER 6: relationships with them
BUILDING CUSTOMER  does not necessarily emphasize acquiring new customers
RELATIONSHIPS
 is usually cheaper (for the firm)
 keeping a current customer costs less than attracting a new one

 thus, the focus is less on attraction, and more on retention and

Dr. Md. Shariful Alam
enhancement of customer relationships
Asst. Prof, SOBE, UIU

P3 (Ch 5, 6, 7): Understanding Customer requirements

(Listening GAP)

Objectives for Chapter 7:

Building Customer Relationships The “Bucket Theory of Marketing”
 Explain relationship marketing, its goals, and the benefits of long-
term relationships for firms and customers.

 Explain why and how to estimate customer relationship value.

 Introduce the concept of customer profitability segments as a

strategy for focusing relationship marketing efforts.

 Present relationship development strategies—including quality core

service, switching barriers, and relationship bonds.

 Identify challenges in relationship development, including the

somewhat controversial idea that “the customer is not always right.”

Figure 7.1

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 Customer Goals of Relationship Marketing A Typology of Exchange Relationships
Figure 7.2 Exhibit 6.1
A Typology of Exchange Relationships
A Typology of Exchange Relationships Customers As . . .
Product offering
Source of competitive advantage
Buying activ ity
Focus of selling activities
Relationship time horizon
Sustainability of competitive
adv antage
Primary relationship marketing
goal
Exhibit 7.1 Source: Adapted from M. D. Johnson and F. Seines, “Customer Portfolio Management: Toward a
Dynamic Theory of Exchange Relationships,” Journal of Marketing 68 (April 2004), p. 5.
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Source: Adapted from M. D. Johnson and F. Seines, “Customer Portfolio Management: Toward a
Dynamic Theory of Exchange Relationships,” Journal of Marketing 68 (April 2004), p. 5.
Strangers
Attractive relative
Acquaintances
Parity product as to competitive
Friends
Differentiated product adapted to
Partners
Customized product and dedicated resources
a form of industry offerings or al terna- specifi c market segments. adapted to an individual
standard. customer or organization.
ti ve purchases. Sati sfaction 1 trust
Sati sfaction 1 trust
Attractiveness Sati sfaction 1 com mitment
Commitment in the form of information sharing
Trust in firm is needed to continue the and idiosyncratic invest-
Interest, Sati sfaction buying activity. ments is needed to achieve customized
exploration, facilitates and
and trial. reinforces buy- ing activity and reduces product and to adjust product continuously to
need to search for market information. changing needs and situations.
Speci fic knowledge of customer’s need and
situation and idiosyncratic investments
Awareness of fi rm’s Fam iliarity offerings (encourag- and general facilitates sel ling.
ing trial) facilitates knowledge initial sel ling.
of customer Speci fic knowledge of customer’s
(identification) facilitates sel ling. Long: Generally long because it takes ti me to
need and situation facilitates sel ling. build (or replace) inter- connected activities
None: Buyer Short: Generally may have had
short because the no previous and to develop a detailed
buyer can often interactions with or knowledge of a customer’s needs and the
unique resources of a supplier to commit
switch fi rms with- knowledge of the out much effort firm. Medium: Generally longer than
or cost. acquain- tance relationships because resources to the rel ationshi p.
trust in a di fferentiated position takes High: Generally high, but depends on how
a longer ti me to build and imitate. unique and effective the interconnected
activities between customer and supplier are
organized.
Low: Generally low, Low: Generally as fi rm must
low, but competi- continually find Medium: Generally medium, but
tors can vary in ways to be depends on ability of competitors to
how they under- stand heterogeneity of
attractive, in terms build unique value of the value offered, customer needs
into sel ling and and situations and the ability to
to induce trial. serving even if the product is a form of transform this knowledge into
meaningful, differentiated products. Enhance the relationship with the customer.
industry standard.
Retain the customer’s business.
Acqui re the Sati sfy the cus- customer’s business.
tomer’s needs and
wants.
 Benefits of Relationship Marketing
 Benefits for Customers:  Benefits for Firms:
 Receipt of greater value
 Confidence benefits:
 trust
 confidence in provider
 reduced anxiety
 Social benefits:
 familiarity
 social support
 personal relationships
 Special treatment benefits:
 special deals
 price breaks
The Customer Pyramid
 Economic benefits: Most profitable What segment spends more with us
increased revenues customers Platinum
 over time, costs less to maintain,
 reduced marketing and administrative spreads positive word-of-mouth?
costs
Gold
 regular revenue stream
 Customer behavior benefits:
 strong word-of-mouth endorsements Iron
 customer voluntary performance
 social benefits to other customers What segment costs us in time,
Lead
 mentors to other customers effort, and money yet does not
provide the return we want?
 Human resource management benefits: What segment is difficult to do
Least profitable
 easier jobs for employees due to customers business with?
coproduction
 social benefits for employees
 employee retention Figure 7.4

Customer Loyalty Exercise The Customer Pyramid

 Think of a service provider to whom you are loyal.

Company’s most profitable customers, typically heavy users of
Platinum the product, not overly price sensitive, willing to invest in and try
Tier new offerings, and committed customers of the firm
 What do you do (your behaviors, actions, feelings)
Profitability levels are not as high, perhaps because customers
that indicates you are loyal? want price discounts that limit margins or are simply not as loyal.
Gold Tier May be heavy users who minimize risk by working with multiple
vendors.
 Why are you loyal to this provider? Essential customers that provide the volume needed to utilize the
Iron Tier firm'’ capacity but their spending levels, loyalty, and profitability
are not substantial enough for special treatment
 What factors have influenced the formation of your Customers who are costing the firm money. They demand more
attention than they are due given their spending and profitability
loyalty? Lead Tier and are sometimes problem customers—complaining about the
firm to others and tying up firm resources.

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 Segmenting Customers Based on Commitment
and Profitability Strategies for Building Relationships
 Core Service Provision:
BUTTERFLIES TRUE FRIENDS
• Good fit of company offering and • Good fit of company offering and  service foundations built upon delivery of excellent service:
customer needs customer needs
High • High profit potential • Highest profit potential
 satisfaction, perceived service quality, perceived value
• Action:
–Aim to achieve transactional satisfaction, not
• Actions:
–Consistent intermittently spaced
 Switching Barriers:
(Behavioral Loyalty)

attitudinal loyalty
–Milk the accounts as long as they are active
communication
–Achieve attitudinal and behavioural loyalty
 customer inertia
–Key challenge: cease investment once
switching costs:
CLV

inflection point is reached
STRANGERS
• Little fit of company offering and
customer needs
Low
• Lowest profit potential
• Action:
–No relationship investment
–Profitize every transaction
Relationship Commitment
Low
–Invest to nurture/defend/retain

BARNACLES  set up costs, search costs, learning costs, contractual costs
• Limited fit of company offering and
customer needs
 Relationship Bonds:
• Low profit potential
• Action:
 financial bonds
–Measure size and share-of-wallet  social bonds
–If share-of-wallet is low, specific up and
cross-selling  customization bonds
–If size of wallet is small, strict cost control
 structural bonds
High
(Attitudinal Loyalty)

W. Reinhartz & V. Kumar, "The Mismanagement of Customer Loyalty," Harvard Business Review 80 (July 2002), pp. 86-94.

Levels of Relationship
Relationship Development Model Strategies
Stable
Volume and pricing Bundling and
frequency cross selling
rewards

1.
Integrated Financial Continuous
information relationships
bonds
systems
Excellent
4. service 2.
Joint Structural Social Personal
investments and relationships
bonds bonds
value

Shared Social bonds

processes 3.
among
and Customization customers
equipment Bonds

Anticipation/ Customer
innovation intimacy
Mass
customization
Figure 7.4 Figure 7.6

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 “The Customer Is NOT Always
Right”
 Not all customers are good relationship customers:

 wrong segment

 not profitable in the long term

 difficult customers

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