Relationship Marketing

Relationship marketing is a form of marketing that evolved from direct response marketing in the 1960s and emerged in the 1980s, in which emphasis is placed on building longer term relationships with customers rather than on individual transactions. It involves understanding the customers' needs as they go through their life cycles. It emphasizes providing a range of products or services to existing customers as they need them.

Development of relationship marketing

The origins of modern relationship marketing can be traced back to a passage by Schneider (Schneider, B. 1980) in which he observes: "What is surprising is that researchers and businessmen have concentrated far more on how to attract customers to products and services than on how to retain customers". The initial research was done by Len Berry at Texas A&M (Berry, L. 1982) and Jag Sheth at Emory, both of whom were early users of the term "relationship marketing", and by marketing theorist Theodore Levitt at Harvard (Levitt, T. 1983) who broadened the scope of marketing beyond individual transactions.

In practice, relationship marketing originated in industrial and b-2-b markets where long-term contracts have been quite common for many years. Academics like Barbara Bund Jackson at Harvard re-examined these industrial marketing practices and applied them to marketing proper (Jackson, B.B. 1985).

According to Len Berry (1983), relationship marketing can be applied: when there are alternatives to choose from; when the customer makes the selection decision; and when there is an ongoing and periodic desire for the product or service.

Fornell and Wernerfet (1987) used the term "defensive marketing" to describe attempts to reduce customer turnover and increase customer loyalty. This customer-retention approach was contrasted with "offensive marketing" which involved obtaining new customers and increasing customers' purchase frequency. Defensive marketing focused on reducing or managing the dissatisfaction of your customers, while offensive marketing focused on "liberating" dissatisfied customers from your competition and generating new customers. There are two components to defensive marketing: increasing customer satisfaction and increasing switching barriers.

Traditional marketing originated in the 1960s and 1970s as companies found it more difficult to sell consumer products. Its consumer market origins molded traditional marketing into a system suitable for selling relatively low-value products to masses of customers. Over the decades, attempts have been made to broaden the scope of marketing, relationship marketing being one of these attempts. Marketing has been greatly enriched by these contributions.

The practice of relationship marketing has been greatly facilitated by several generations of customer relationship management software.

Customer retention

At the core of relationship marketing is the notion of customer retention. According to Gordon (1999), relationship marketing involves the creation of new and mutual value between a supplier and individual customer. Novelty and mutuality deepen, extend and prolong relationships, creating yet more opportunities for customer and supplier to benefit one another.

Studies in several industries have shown that the cost of retaining an existing customer is only about 10% of the cost of acquiring a new customer so it can often make economic sense to pay more attention to existing customers.

It is claimed by Reichheld and Sasser (1990) that a 5% improvement in customer retention can cause an increase in profitability of between 25 and 85 percent (in terms of net present value) depending on the industry. However Carrol (Carrol, P. and Reichheld, F. 1992) disputes these calculations, claiming they result from faulty cross-sectional analysis.

According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs because:

• The cost of acquisition occur only at the beginning of a relationship, so the longer the relationship, the lower the amortized cost.
• Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
• Long-term customers tend to be less inclined to switch, and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.
• Long-term customers may initiate free word of mouth promotions and referrals.
• Long-term customers are more likely to purchase ancillary products and high margin supplemental products.
• Customers that stay with you tend to be satisfied with the relationship and are less likely to switch to competitors, making it difficult for competitors to enter the market or gain market share.
• Regular customers tend to be less expensive to service because they are familiar with the process, require less "education", and are consistent in their order placement.
• Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into better customer satisfaction in a virtuous circle.

Relationship marketers speak of the "relationship ladder of customer loyalty". It groups types of customers according to their level of loyalty. The ladder's first rung consists of "prospects", that is, people that have not purchased yet but are likely to in the future. This is followed by the successive rungs of "customer", "client", "supporter", advocate", and "partner". The relationship marketer's objective is to "help" customers get as high up the ladder as possible. This usually involves providing more personalized service and by providing service quality that exceeds expectations at each step.

Customer retention efforts involve considerations such as the following:

1. Customer valuation - Gordon (1999) describes how to value customers and categorize them according to their financial and strategic value so that companies can decide where to invest for deeper relationships and which relationships served differently or even terminated.
2. Customer retention measurement - Dawkins and Reichheld (1990) calculated a company's "customer retention rate". This is simply the percentage of customers at the beginning of the year that are still customers by the end of the year. In accordance with this statistic, an increase in retention rate from 80% to 90% is associated with a doubling of the average life of a customer relationship from 5 to 10 years. This ratio can be used to make comparisons between products, between market segments, and over time.
3. Determine reasons for defection - Look for the root causes, not mere symptoms. This involves probing for details when talking to former customers. Other techniques include the analysis of customers' complaints and competitive benchmarking (see competitor analysis).
4. Develop and implement a corrective plan - This could involve actions to improve employee practices, using benchmarking to determine best corrective practices, visible endorsement of top management, adjustments to the company's reward and recognition systems, and the use of "recovery teams" to eliminate the causes of defections.

A technique to calculate the value to a firm of a sustained customer relationship has been developed. This calculation is typically called customer lifetime value.

Retention strategies also build barriers to customer switching. This can be done by product bundling (that is, combining several products or services into one "package" and offering them at a single price), cross selling (that is, selling related products to current customers), cross promotions (that is, giving discounts or other promotional incentives to purchasers of related products), loyalty programs (that is, giving incentives for frequent purchases), increasing switching costs (that is, adding termination costs, such as mortgage termination fees), and integrating computer systems of multiple organizations (primarily in industrial marketing).

Many relationship marketers use a team-based approach. The rationale is that the more points of contact between the organizations, the stronger will be the bond, and the more secure the relationship.

The broad scope of relationship marketing

Relationship marketing has been strongly influenced by reengineering. According to reengineering theory, organizations should be structured according to complete tasks and processes rather than functions. That is, cross-functional teams should be responsible for a whole process, from beginning to end, rather than having the work go from one functional department to another. Traditional marketing is said to use the functional department approach. This can be seen in the traditional four P's of the marketing mix. Pricing, product management, promotion, and placement are claimed to be functional silos that must be accessed by the marketer if she is going to perform her task. According to Gordon (1999), the marketing mix approach is too limited to provide a usable framework for assessing and developing customer relationships in many industries and should be replaced by an alternative model where the focus is on customers and relationships rather than markets and products.

In contrast, relationship marketing is cross-functional marketing. It is organized around processes that involve all aspects of the organization. In fact, some commentators prefer to call relationship marketing "relationship management" in recognition of the fact that it involves much more than that which is normally included in marketing.

Martin Christopher, Adrian Payne, and David Ballantyne (1991) at the Cranfield Graduate school of Management claim that relationship marketing has the potential to forge a new synthesis between quality management, customer service management, and marketing. They see marketing and customer service as inseperable.

In spite of this broad scope, relationship marketing has not lost its core marketing orientation though. It involves the application of the marketing philosophy to all parts of the organization. Every employee is said to be a "part-time marketer". The way Regis McKenna (1991) puts it:

"Marketing is not a function, it is a way of doing business . . . marketing has to be all pervasive, part of everyone's job description, from the receptionist to the board of directors."

Because of this, it is claimed that relationship marketing is a more pure form of marketing than traditional marketing.

Internal marketing

Relationship marketing stresses what it calls internal marketing. This refers to using marketing techniques within the organization itself. It is claimed that many of the traditional marketing concepts can be used to determine what the needs of "internal customers" are. According to this theory, every employee, team, or department in the company is simultaneously a supplier and a customer of services and products. An employee obtains a service at a point in the value chain and then provides a service to another employee further along the value chain. If internal marketing is effective, every employee will both provide and receive exceptional service from and to other employees. It also helps employees understand the significance of their roles and how their roles relate to others'. If implemented well, it can also encourage every employee to see the process in terms of the customer's perception of value added, and the organization's strategic mission. Further it is claimed that an effective internal marketing program is a prerequisite for effective external marketing efforts. (George, W. 1990)

The six markets model

Adrian Payne (1991) from Cranfield University goes further. He identifies six markets which he claims are central to relationship marketing. They are: internal markets, supplier markets, recruitment markets, referral markets, influence markets, and customer markets.

Referral marketing is developing and implementing a marketing plan to stimulate referrals. Although it may take months before you see the effect of referral marketing, this is often the most effective part of an overall marketing plan and the best use of resources.

Marketing to suppliers is aimed at ensuring a long-term conflict-free relationship in which all parties understand each other's needs and exceed each other's expectations. Such a strategy can reduce costs and improve quality.

Influence markets involve a wide range of sub-markets including: government regulators, standards bodies, lobbyists, stockholders, bankers, venture capitalists, financial analysts, stockbrokers, consumer associations, environmental associations, and labour associations. These activities are typically carried out by the public relations department, but relationship marketers feel that marketing to all six markets is the responsibility of everyone in the organization.

At times Payne sub-divides customer markets into existing customers and potential customer, yielding seven rather than six markets. He claims that each market will require its own strategies and recommends separate marketing mixes for each of the seven.

When to use relationship marketing

Relationship marketing and transactional marketing are not mutually exclusive and there is no need for a conflict between them. However, one approach may be more suitable in some situations than in others. Transactional marketing is most appropriate when marketing relatively low value consumer products, when the product is a commodity, when switching costs are low, when customers prefer single transactions to relationships, and when customer involvement in production is low. When the reverse of all the above is true, as in typical industrial and service markets, then relationship marketing can be more appropriate. Most firms should be blending the two approaches to match their portfolio of products and services. Virtually all products have a service component to them and this service component has been getting larger in recent decades. (See service economy and experience economy.)

Criticisms of relationship marketing

Internal marketing and the six markets model has been criticised as not really being marketing at all. At the core of marketing is the marketing philosophy of first determining what the market wants, then providing it. It is doubtful that this is what is occurring in influence markets, supplier markets, recruitment markets, or internal markets. What is occurring is closer to public relations, persuasion, and management. It appears to be marketing because it uses some marketing techniques, but it would more accurately be described as salesmanship.

Relationship theorists tend to compare themselves to traditional marketing. In doing so they frequently present traditional marketing in an unfavourable light. For example, Adrian Payne (1991) claims that traditional marketing concentrates on product features, has minimal interest in customer service, limited customer contact, and quality is primarily a concern of production. Although there may still be some marketers that think this way, these statements have not reflected marketing best practices for more than three decades.

See also

• marketing paradigms
• customer relationship management
• customer experience management
• patronage concentration
• Participation marketing
• loyalty business model

References

• Berry, L. (1983) "Relationship Marketing" in Berry, Shostack, and Upah (eds), Emerging Perspectives on Services Marketing, American Marketing Association, Chicago, 1983.
• Buchanan, R. and Gilles, C. (1990) "Value managed relationship: The key to customer retention and profitability", European Management Journal, vol 8, no 4, 1990.
• Carrol, P. and Reichheld, F. (1992) "The fallacy of customer retention", Journal of Retail Banking, vol 13, no 4, 1992.
• Christopher, M. Payne, A. and Ballantyne, D. (1991) Relationship Marketing, Butterworth-Heinemann, Oxford, 1991.
• Dawkins, P. and Reichheld, F. (1990) "Customer retention as a competitive wapon", Directors and Boards, vol 14, no 4, 1990.
• Fornell, C. and Wernerfet, B. (1987) "Defensive marketing strategy by customer complaint management : a theoretical analysis", Journal of Marketing Research, November, 1987, pp 337-346.
• George, W. (1990) "Internal marketing and organizational behaviour", Journal of Business Research, vol 20, no 1, 1990.
• Gordon, I.H. (1999), "Relationship Marketing: New Strategies, Techniques and Technologies to Win the Customers You Want and Keep Them Forever", John Wiley and Sons Publishers, 1999.
• Jackson, B.B. (1985) "Build customer relationships that last", Harvard Business Review, Nov-Dec, 1985.
• Levitt, T. (1983) "After the sale is over", Harvard Business Review, Sept-Oct, 1983.
• McKenna, R. (1991) "Marketing is everything", Harvard Business Review, Jan-Feb, 1991, pp 65-70.
• Payne, A. (1991) Relationship marketing: The six markets framework, working paper, Cranfield Graduate School of Management.
• Reichheld, F. and Sasser, W. (1990)"Zero defects: quality comes to services", Harvard Business Review, Sept-Oct, 1990, pp 105-111.
• Schneider, B. (1980) "The service organization climate is critical", Organizational Dynamics, 1980.