Unit-10 Relationship Marketing

Unit- 10
Relationship Marketing
Unit-10 Relationships Marketing 1

Meaning of Relationship Marketing
Relationship Marketing - a paradigm shift
from an acquisitions/transaction focus (the “first

act”)toward a retention/relationship focus(the
“second act”).

Relationship marketing (or relationship

management) is a philosophy of doing
business, a strategic orientation that focuses
on keeping and improving current
customers, rather than on acquiring new
customers.

Relationship Marketing philosophy

assumes that consumers prefer to
have an ongoing relationship with one
organization than to switch continually
among providers in their search for
value.

Relationship Marketing Values (Gummesson, 1999)
 Collaboration for mutual value creation with

win–win outcomes
 All parties recognized as active where the
relationship is co-managed.
 Relational and service values – bureaucratic–
legal values are discarded in favor of treating
customers as differing.

Relationship vs. Transaction Marketing
Traditional Transaction Oriented Marketing Relationship Marketing
 Focus on a single sale  Focus on customer orientation
 Short term orientation  Long term orientation
 Sales to anonymous buyer  Tracking of identifiable buyers
 Limited customer commitment  High customer commitment
 Quality is the responsibility of  Quality is the responsibility of all

production department

The theoretical origins of Relationship Marketing
1) Neo-classical Microeconomic Theory

2) Transaction Cost Theory
3) Relationship Marketing
4) Social Exchange Theory
5) Equity Theory
6) Political Economy Theory
7) Resource Dependence Theory
8) Resource-Advantage Theory
9) Institutional Theory

1)Neo-Classical Microeconomic Theory
 Emphasizes on profit maximization in competitive

markets in explaining relative prices, market
equilibrium, and income distribution.
 Exchange parties are price takers seeking to maximize
utility in price equilibrium markets.
 Market transactions incur the costs associated with the
price paid, searching costs, negotiating and contracting
costs, and costs of monitoring supplier performance.

Limitations of The Microeconomic Approach
 The assumption of rational behavior

 Economists have generally viewed
markets as social ‘vacuums’ in which
buyers and sellers only know each other
in their roles as dictated by the market
(i.e. as no more than buyer and seller).

2)Transaction Cost Theory (Williamson,

1975)
 Every market transaction involves transaction costs that lead to
inefficiencies for those engaged in exchanges.
 Transaction costs include costs of information search, of reaching a
satisfactory agreement, of relationship monitoring, of adapting
agreements to unanticipated contingencies, and of contract
enforcement.
 Transaction costs are minimized by selecting a mode of relationship
governance that is ‘optimal’

Major limitations Transaction cost theory
 Transaction cost theory focuses on the single criterion of

cost-efficiency for shaping transactions.
 The role and importance of people in the

governance of exchanges is ignored.

3)Relational Contracting Theory (MacNeil (1980)
Rooted in contract law that applies to the

legal rights of exchange parties and guides
the planning and conduct of exchange.

Merits of Relational Contracting Theory (MacNeil (1980)
 Deals with the criticisms that have been directed at

transaction cost theory by including social
dimensions of exchange, and by making clear that
hierarchical relationship governance mechanisms
are not the only mechanisms available

Limitations of Relational Contracting Theory (MacNeil (1980)
Criticized for failing to prescribe

optimal types of governance to deal
with specific characteristics of the
exchange.

4)Social Exchange Theory (Gro¨nroos, 1994)
 The basis of social exchange theory is derived from marital theory,

bargaining theory, and power theory.
 Marketing is seen as an interactive process occurring in a social
context where relationship management is central (Gro¨nroos,
1994).
 The interaction approach suggested six different types of bond:
1) Social,
2) Technological ,
3) Knowledge,
4) Planning,
5) Legal, and
6) Economic.

5)Equity Theory
 Equity theory postulates that parties in exchange
relationships compare their ratios of exchange inputs to
outcomes.
 Inequity is said to exist when the perceived inputs
and/or outcomes in an exchange relationship are

psychologically inconsistent with the perceived inputs
and/or outcomes of the referent.
 Equitable outcomes stimulate confidence that parties do
not take advantage of each other and that they are

concerned about each other’s welfare.

6)Political Economy Theory

 The political economy paradigm integrates economic efficiency
theories of organizations with behavioral power theories.
 Economy refers to institutions that transform inputs into output
and to the processes by which goods and services are allocated
within and between institutions.
 Polity refers to the power and control systems that legitimize,
facilitate, monitor, and regulate exchange transactions.
 The economy and polity can be considered as allocation systems,
allocating scarce economic resources and power.

7)Resource Dependence Theory(Hunt, 1997)
 Resource dependence theory explicitly addresses issues on

differences in negotiation power and the consequently
unequal and unsatisfactory nature of exchange transactions
by examining sources of power and dependence in
exchange relationships.
Resource-Advantage Theory (Hunt and Morgan, 1995)
 Comparative advantage in resources allows the firm

to occupy a position of competitive advantage in the
marketplace.

 Relationship Marketing is theoretically supported by the
possibility that some kinds of co-operative relationships
can enhance competition.
 Hunt’s Resource-Advantage Theory; Hunt, 1997) allows

resources to be: financial, physical, human, organizational,
informational, and relational.
 Resources need not be owned by the firm, but must be

available for the purpose of producing value for some
segment(s).
 Relationships are conceived of as organizational capital.

9)Institutional Theory
 This is an alternative, multi-constituent, and dynamic view
that sees social actors in support of the corporation when
institutional norms are upheld.
 The corporation is seen as legitimate.

The “Bucket Theory of Marketing”
 According to James L. Schorr marketing can be thought of

as a big bucket with a hole in the bucket.
 When the business is running well and the firm is
delivering on its promises, the hole is small and few
customers are leaving.
 When customers are not satisfied they
start failing out of the bucket.

Goals Of Relationship Marketing
 The primary goal of relationship marketing is to build and

maintain a base of committed customers who are
profitable for the organization.
 A firm which holds the view of relationship marketing shall
focus on the attraction, retention, and enhancement of
customer relationships.
 Market segmentation for building lasting customer
relationships.
 Customers’ retention through quality products and services
and good value over time.
 Loyal customers not only provide a solid base for the
organization, they may represent growth potential

The Goals of Relationship Marketing Graphically
Enhancing
Retaining
Satisfying
Getting

Benefits of Customer/Firm Relationships

Benefits for Customers
1)Inherent benefits (the attributes of the core service)
 Consumers are more likely to stay in a relationship when
the gets (quality, satisfaction, specific benefits) exceed
the gives (monetary and non monetary costs.
2)Relational benefits
 Confidence benefits - Feelings of trust or confidence in the provider, along
with a sense of reduced anxiety
 Social benefits and the personal banker
 Special treatment benefits.

Benefits for the Organizations

 The benefits to an organization of maintaining
and developing a loyal customer base are
numerous.
 The major benefits include:
 Increasingsales and profit
 Lower costs
 Free advertising through word of mouth
 Employee retention

Life Time Value of a Customer
 A concept or calculation that looks at customers from the point of view
of their lifetime revenue and profitability contributions to a company.
Factors That Influence Lifetime Value
The lifetime value of a customer is influenced by:
 The length of an average “lifetime,”
 The average revenues generated per relevant time
period over the lifetime,

 Sales of additional products and services over time, and
 Referrals generated by the customer over time.

Foundations for Relationship Strategies
1) Quality offered in the core service
2) Careful market segmentation and targeting
3) Continuous monitoring of relationships

Retention Strategies
1) Financial bonds
 Volume and frequency rewards
 Bundling and cross selling
 Stable pricing
2) Social bonds
 Continuous relationships
 Personal relationships
 Social bond among customers

3)Customization bonds
 Anticipation/innovation
 Mass customization
 Customer intimacy
4)Structural bonds
 Integrated information system

 Joint investments
 Shared processes and equipment
Thank You !!!

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Unit- 10

Unit-10 Relationships Marketing 1

Meaning of Relationship Marketing

Relationship Marketing - a paradigm shift

from an acquisitions/transaction focus (the “first

Unit-10 Relationships Marketing 2

Relationship marketing (or relationship

Unit-10 Relationships Marketing 3

Relationship Marketing philosophy

Unit-10 Relationships Marketing 4

Relationship Marketing Values (Gummesson, 1999)

 Collaboration for mutual value creation with

Unit-10 Relationships Marketing 5

 Focus on a single sale  Focus on customer orientation

 Short term orientation  Long term orientation

 Sales to anonymous buyer  Tracking of identifiable buyers

 Limited customer commitment  High customer commitment

 Quality is the responsibility of  Quality is the responsibility of all

Unit-10 Relationships Marketing 6

The theoretical origins of Relationship Marketing

1) Neo-classical Microeconomic Theory

Unit-10 Relationships Marketing 7

 Emphasizes on profit maximization in competitive

Unit-10 Relationships Marketing 8

Limitations of The Microeconomic Approach

 The assumption of rational behavior

Unit-10 Relationships Marketing 9

2)Transaction Cost Theory (Williamson,

Unit-10 Relationships Marketing 10

Major limitations Transaction cost theory

 Transaction cost theory focuses on the single criterion of

 The role and importance of people in the

Unit-10 Relationships Marketing 11

3)Relational Contracting Theory (MacNeil (1980)

Rooted in contract law that applies to the

Unit-10 Relationships Marketing 12

Merits of Relational Contracting Theory (MacNeil (1980)

 Deals with the criticisms that have been directed at

Unit-10 Relationships Marketing 13

Criticized for failing to prescribe

Unit-10 Relationships Marketing 14

4)Social Exchange Theory (Gro¨nroos, 1994)

 The basis of social exchange theory is derived from marital theory,

Unit-10 Relationships Marketing 15

and/or outcomes in an exchange relationship are

not take advantage of each other and that they are

Unit-10 Relationships Marketing 16

6)Political Economy Theory

Unit-10 Relationships Marketing 17

7)Resource Dependence Theory(Hunt, 1997)

 Resource dependence theory explicitly addresses issues on

Resource-Advantage Theory (Hunt and Morgan, 1995)

 Comparative advantage in resources allows the firm

Unit-10 Relationships Marketing 18

 Hunt’s Resource-Advantage Theory; Hunt, 1997) allows

 Resources need not be owned by the firm, but must be

 Relationships are conceived of as organizational capital.

Unit-10 Relationships Marketing 19

 The corporation is seen as legitimate.

Unit-10 Relationships Marketing 20

 According to James L. Schorr marketing can be thought of

Unit-10 Relationships Marketing 21

Goals Of Relationship Marketing

 The primary goal of relationship marketing is to build and