Chapter 4

Relationship economics
John Egan
Key issues
■ The economic justification for relationship marketing
■ Customer acquisition versus customer retention
■ Stages of relationship development
■ Lifetime value concepts
■ Switching costs
■ Relationship longevity
The economic justification for relationship marketing
• The focus of traditional marketing has been on creating new
customers.
• Although the acquisition of the customers is important, it is an
intermediate step in the process.
• The first line of defense for any company is maintaining its existing
customers.
• To succeed a company, must both have a flow of new customers and
restrict customer exist.
To achieve profitability, the dual strategies of (offensive and defensive)
acquisition and retention must work in tandem.
 Leaky Bucket Theory

 The focus of traditional marketing has been on

creating new customers.
 This ‘offensive marketing’ strategy included, in
addition to acquiring wholly new customers,
attempting to attract dissatisfied customers away
from competitors, particularly in periods of heavy
competition (Storbacka et al., 1994, pp. 22–3).
 Many authors take the view that, although the
acquisition of customers is important, it is an
intermediate step in the process (Berry and
Gresham, 1986, p. 43).
 The first line of defense for any company is
maintaining its existing customers (Kotler, 1992, p.
50).
Customer acquisition
• Companies in the past have tended to concentrate on the customer
acquisition process as, in general, market growth provided a steady
supply of new prospects.
Acquisition and Retention costs
• front-end costs
■ the high costs of personal selling;
■ commission payments;
■ direct and indirect costs of detailed information gathering;
■ upfront supply of equipment;
■ advertising and other communications expenditure.
• High Front- end- cost industries
Biaya yang dikeluarkan sama dengan biaya pada front-end cost (personal selling, commission payment,
direct and indirect costs of detailed information gathering, upfront supply of equipment; advertising and
other communications expenditure)
• Low front-end-cost-industries, biaya akuisisi pelanggan rendah krn biaya-biaya seperti personal selling,
komunikasi, komisi dll tidak dikeluarkan lagi oleh perusahaan. Perusahaan focus pada biaya akhir
seperti distribusi, daya saing harga, perceived service quality dll.
Economics of Retention strategies
• RM appears to be an expensive alternative to mass marketing and, as such, marketers’
commitment to such strategies are only valid when they are deemed to be affordable
and practical (Berry, 2000, p. 154).
• the current discussion about RM management ignores how the economic effects of
establishing such relationships can be or are measured (Blois, 1999, p. 91).
• RM literature depends on the mostly implicit, suggestion that a causal effect of
relationships is always effective performance (Ambler and Styles, 2000, p. 499).
• The economics of costly relational techniques must, in circumstances where
acquisition/retention cost ratios are small, be closely scrutinized. This is particularly
evident in the case of many costly loyalty schemes which are, perhaps ironically, most
prevalent in those sectors where the validity of relational Strategies is most highly
questionable .
• Incentives to retention in these schemes are costs that (if profitability is to be
maintained) lead ultimately to higher prices. In such markets differentials may occur in
costs between the ‘loyalty incentivisors’ and their lower-priced competition (Palmer
and Beggs, 1997).
Relationships Stages
Stages models
Lifetime value
Switching costs
Relationship longevity
• Reichheld (1996, p. 39) echoes this claim by proposing a list of
accumulating benefits that contribute to an entire ‘life cycle of profits’
from the customer. The model (see Figure 4.5) presented assumes:
• ■ revenue growth over time;
• ■ cost savings over time;
• ■ referral income;
• ■ price premiums.