Understanding Relationships

Relationships


A relationship is composed of a series of
interactive episodes between dyadic parties
over time

A relationship has been said to exist only when
the parties move from independence to
dependence or interdependence

First time purchase or service experience is a
'transaction'; a repeat purchase or revisit to
experience is 'relationship'
Relationship Stages


Awareness

Exploration

Expansion

Commitment (arises from Trust and shared
values)
– Benevolence (act in the interest of the other)
– Honesty (other party's word is reliable)
– Competence (other party has necessary expertise)

Dissolution
Reasons for Company seeking Customer
Relationship

Economic reason

Reduced marketing costs

Better customer insight (the customer journey)

Lifetime value
– Revenues grow
– Cost-to-serve is lower
– Likely to pay higher prices (denied entry
discounts)
– Computing LTV
The Customer Journey

Suspect – is customer within the target market

Prospect – fits the target market, approaches
first time

First time customer – first transaction

Repeat customer

Majority customer – part of customer portfolio

Loyal customer – resists to shift and has strong
+ve attitude to the company and its offerings

Advocate: spreads +ve WOM
Lifetime Value

Lifetime value is the present day value of all net
margins earned from a relationship with a
customer, customer segment or cohort (customers
of common characteristics)

Computing LTV (Reichheld and Sasser)

Probability of customer purchases in future by period

Gross margins on those purchases by period

Cost of serving customers by period + cost of acquiring
in the case of new customers

Discount rate to be applied (weighted average cost of
capital)
Customer Relationship Value

Customer Relationship value is derived from
customer profitability metric to generate
'propensity to buy' indices

Top tier customers

Threshold customers

Fence sitters

Value destroyers
Strategies for increasing Profitability


Improve customer retention rate in the early
years of the relationship

Increase the profit by:
– Reducing cost-to-serve
– Cross-sell and up-sell

Improve customer acquisition process
– Better qualification process
– Use 'discrminant analysis' method
Reasons for Company seeking Customer
Relationship (B2B Context)

Product complexity

Product strategic significance

Service requirements

Financial risk

Reciprocity
Reasons for Company not seeking
Customer Relationship (B2B Context)

Loss of control

Exit costs

Resource commitment

Opportunity costs
Reasons for Customer seeking Company
Relationship (B2C Context)

Recognition

Personalization

Power

Risk reduction

Status

Affiliation
Reasons for Customers not wanting
Relationship with Suppliers

Fear of dependency

Lack of perceived value in relationship

Lack of confidence in supplier

Cutomer lacks relationship orientation

Rapid technological changes
Satisfaction – Profit Chain

Customer Satisfaction:
– Customer's fulfilment response to a customer
experience, or some part there of

Customer Loyalty: RFM measures
– Recency: Time elapsed since last purchase
– Frequency: number of purchases in a given period
– Monetary value of a purchases in a given period

Business performance:
– Balanced score-card
– Share of wallet
Relationship Management Theories


The Industrial Marketing and Purchase School

The Nordic School

The Anglo-Australian School

The North American School

The Asian (Guanxi) School
Industrial Marketing and Purchasing School

B2B relationship is composed of activity links,
actor bonds and resource ties
– Activity Links: are commercial, technical,
financial and administrative connections that
are formed between companies in interaction
– Actor Bonds: are interpersonal contacts
between people in partner firms that result in
trust, commitment and adaptation between
these people
– Resource Ties: are formed when rersources like
human, financial, legal, physical, managerial
and intellectual strengths are deployed in the
performance of activities
Nordic School

Relationship marketing article by Christian
Gronroos and Evert Grumesson: interactions,
dialogue and values
– Interaction:Interactions are ongoing and
service- dominant. Customers supply
information and suppliers provide solutions
– Dialogue: Stresses bilateral communication
– Value: Stresses mutual nature of values. Create
and deliver customer perceived value. Thus
value creation requires contribution from buyers
and sellers
Nordic School

Relationship marketing article by Christian
Gronroos and Evert Grumesson: interactions,
dialogue and values
– Interaction:Interactions are ongoing and
service- dominant. Customers supply
information and suppliers provide solutions
– Dialogue: Stresses bilateral communication
– Value: Stresses mutual nature of values. Create
and deliver customer perceived value. Thus
value creation requires contribution from buyers
and sellers
Anglo-Australian School

Takes the view that companies not only form
relationships with customers, but also with
many stakeholders like employees,
shareholders, suppliers, and governments

Advocates 'Six-Market' model
– Internal Markets (employees)
– Supplier/alliance Markets
– Recruitment (labour) Markets
– Referral Markets (WOM)
– Influence Markets (Govt., media, shareholders)
– Customer Markets (intermediaries & end-users)
North American School

This model is built on trust and commitment in
relationships. Focuses on dyadic relationships

Trust: is demonstrated by:
– Shared values
– Communication
– non-opportunistic behaviour
– Low functional conflict and high cooperation

Commitment: is associated with
– High relationship benefits
– High relationship termination costs
The Asian (Guanxi) School

Guanxi is a Chinese philosophy of conducting
business based on Confucian teachings

Guanxi refers to informal social bonds and
reciprocal obligations to obtain resources
through continual cooperation and exchange of
favours

There is lack of codified, enforceable contracts

Networks are created based on status
hierarchy