IS RELATIONSHIP MARKETING APPROPRIATE FOR YOUR FIRM?
Within mature industries it is critical for success to retain profitable customers at a greater rate. Because most firms inadvertently drive some customers away, the competitor with the lowest defection rate will grow faster and more profitably than the rest. Depending on the industry, surveys suggest that 7 to 9 out of 10 customers who switched suppliers did so because they were more disappointed with the first supplier than they were attracted to the second supplier.
Retention economics has in turned sparked interest in "relationship marketing" (RM) methods for retaining good customers. Common tactics for keeping best customers are: loyalty pricing programs; extra service gimmicks and attention; and value-added services that attempt to improve total purchasing and usage economics for the customer as well as locking-out the competition.
RM measures are not, however, equally beneficial for all businesses. And, there are pitfalls and possible shortcomings in pursuing common RM methods. We should first decide, though, where our business and customer niches fall on a continuum between pure transactional selling and pure relationship marketing.
TRANSACTIONAL OR RELATIONSHIP MARKETING?
Let's define RM as the pursuit of a strong, lasting, growing, and interdependently successful relationship. The mainframe computer sale has traditionally exemplified this type of marketing. Transactional Marketing (TM), on the other hand, is the pursuit of the immediate sale at the best (or any) price. Many retail, tourist-trap stores and concession stands illustrate this approach.
There are structural aspects about the product, services and target customers of each business which will determine where they will be located on the TM-RM continuum diagrammed below.
(Tourist Trap) (50/50) (Mainframe)
RM and TM appropriateness can be determined by the following characteristics:
- What share of a customer's business is possible for a supplier? In a pure RM sell, the customer must give 100% of the business to one supplier; while in a TM relationship the customer is able and often desires to spread the business among a number of similar suppliers.
- Low or High switching costs? Before "open-system architecture," if a firm historically decided to switch mainframe vendors, then all application software and peopleware for using the system had to be changed too- a prohibitive cost. At the other extreme, many consumers buy their food needs from two or more stores on a regular basis. And many businesses regularly buy supplies from two or more wholesalers for multiple reasons.
- If a purchase: involves a small investment; has low significance; and/or has little risk or cost of post-purchase failure, then the customer may shop for price and convenience. If these factors are high as with brain surgery or mainframe selection, then we all want the best, guaranteed solution and price becomes less of an issue.
- Regardless of where a certain industry's logical location might be on the TM-RM continuum, there are apt to be pockets of customers who are psychological buyers. This explains why some customers are loyal to a good salesperson who works for a poor transactional firm. Many people are loyal to their brand of consumable and will pay a premium for it even though most cannot identify what they are tasting in blindfold tests. And, carriage trade customers will pay disproportionate premiums for extra glitz, services and personal attention.
Using the criteria above, if we plot our firm towards the TM end, then we should generally sell price, personality and gimmicks to load up customers before the competitors do. At the RM end, we should sell the security and synergy of getting married to our ever-improving offerings and point out the risks of failure that might exist with competitive alternatives.
It might be unproductive for a natural TM firm to offer lots of extras if: the customer is not looking for a relationship; will take free service benefits; and then go elsewhere for price. RM firms, conversely, may not win new business with gimmicks and price deals, but might upset existing customers who have been paying higher prices.
Most every firm can benefit by shifting their marketing methods a bit past their natural location on the TM-RM spectrum towards the RM end, but do so cautiously. Start by achieving and selling perfect quality goods and basic services both tuned to the targeted customer. Firms that sell unconditionally guaranteed basics don't lose many customers, and they outperform competitors with mediocre basics and lots of RM extras. Basic excellence is a necessary prerequisite for the RM methods to work.
Next, be cautious with loyalty or contract pricing deals for larger and regular customers. These programs burgeoned in the '80's, but they are easily and quickly copied by competitors, and then they can become irreversible as the airlines have found out with their frequent traveler programs.
Extra services and amenities can create some initial enthusiasm with customers, but when the novelty disappears they are taken for granted and deliver no retention benefit especially when the competition imitates them. They may even backfire if they are the service icing for a weak basic service cake.
Creating more and stronger people bonds with key accounts helps to insure that business is maintained if one strand of the rope breaks because a key player on either side leaves. Such ties can also help to proactively stay on top of emerging needs with key accounts and do many personalized extras if the personnel are so motivated. In transactional industries, however, such social bonding will not usually keep competitors completely out or bullet-proof margins. If price-cutting breaks out, the entrenched player will probably get last look, but will also have to remain competitive.
With improving data-processing capability, a firm can enable more employees to give faster, more personalized and informed service to existing accounts. Well-designed databases allow for targeted, if not customized mailings for even transactional businesses. First-movers who use technology in customer-friendly ways can gain some momentum, but they must have customer-oriented employees who use the tools well.
Value-added services that try to create synergistic, best total economics for the customer and lock-out the competition are tough to find, develop, sell, install and get paid for. Such services should fill a compelling need for the customer at a cost to the supplier that is less than what the customer values and will pay for it ideally on an unbundled basis from any goods. It should not be easily copied by the competition or stripped away initially by the customer who could then shop for price too.
A family of such services is usually necessary to facilitate a just-in-time, perfect-quality, sole-supplier relationship with streamlined and automated information flow. But, to sell, install, measure benefits and switching costs, and maintain these relationships on a sustainable win-win basis, takes better salespeople, support staff specialists and top management involvement. If customers are going to marry a supplier, they want assurances from and access to the supplier's top management.
Finally, all RM methods are best aimed at customers who want to be partners and believe in other-oriented, win-win relationships. Many big potential customers talk win-win, but then systematically nibble away all of the created benefit; the gullible supplier is left with empty volume, large dedicated overhead costs and no quick prospect of finding a big, good, substitute customer. Sears developed an historical reputation for this process, and the big Japanese manufacturers apparently have done this to many of their downstream suppliers.
Choose big potential partners carefully based on their track record for win-win dealings with other suppliers and stakeholders. Don't be afraid to insist before or during a relationship that it must be win-win or no deal. And if the customer will have more power in the relationship, then consider negotiating a pre-nuptial, breakup-agreement before starting the joint effort.
"Relationship Marketing" can improve a firm's customer retention rate. Firms that are in transactional industries should use the methods sparingly, and all firms should use RM methods only after having quality goods and basic service excellence. Regardless of execution quality, the biggest success factor in achieving a sustainable win-win relationship is choosing customers who want to and can be partners.