Relationship Marketing has nothing to do with managing your family, it refers to forming a long-term and mutually beneficial arrangement with your customers, where both the buyer and seller have an interest in providing a more satisfying exchange. This approach attempts to transcend the simple purchase-exchange process with a customer to make more meaningful and richer contact by providing a more holistic, personalized purchase, and uses the experience to create stronger ties.

According to Liam Alvey, relationship marketing can be applied when there are competitive product alternatives for customers to choose from; and when there is an ongoing and periodic desire for the product or service.

Fornell and Wernerfelt used the term "defensive marketing" to describe attempts to reduce customer turnover and increase customer loyalty. This customer-retention approach 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.

Modern consumer marketing originated in the 1950s and 1960s as companies found it more profitable to sell 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. Arguably, customer value has been greatly enriched by these contributions.

The practice of relationship marketing has been facilitated by several generations of customer relationship management software that allow tracking and analyzing of each customer's preferences, activities, tastes, likes, dislikes, and complaints. For example, an automobile manufacturer maintaining a database of when and how repeat customers buy their products, the options they choose, the way they finance the purchase etc., is in a powerful position to develop one-to-one marketing offers and product benefits.

In web applications, the consumer shopping profile can be built as the person shops on the website. This information is then used to compute what can be his or her likely preferences in other categories. These predicted offerings can then be shown to the customer through cross-sell, email recommendation and other channels.

Relationship marketing has also migrated back into direct mail, allowing marketers to take advantage of the technological capabilities of digital, toner-based printing presses to produce unique, personalized pieces for each recipient. Marketers can personalize documents by any information contained in their databases, including name, address, demographics, purchase history, and dozens (or even hundreds) of other variables. The result is a printed piece that (ideally) reflects the individual needs and preferences of each recipient, increasing the relevance of the piece and increasing the response rate.

 


 

Satisfaction

Relationship marketing relies upon the communication and acquisition of consumer requirements solely from existing customers in a mutually beneficial exchange usually involving permission for contact by the customer through an "opt-in" system.  With particular relevance to customer satisfaction the relative price and quality of goods and services produced or sold through a company alongside customer service generally determine the amount of sales relative to that of competing companies. Although groups targeted through relationship marketing may be large, accuracy of communication and overall relevancy to the customer remains higher than that of direct marketing, but has less potential for generating new leads than direct marketing and is limited to Viral marketing for the acquisition of further customers.

Retention

A key principle of relationship marketing is the retention of customers through varying means and practices to ensure repeated trade from preexisting customers by satisfying requirements above those of competing companies through a mutually beneficial relationship. This technique is now used as a means of counterbalancing new customers and opportunities with current and existing customers as a means of maximizing profit and counteracting the "leaky bucket theory of business" in which new customers gained in older direct marketing oriented businesses were at the expense of or coincided with the loss of older customers.  This process of "churning" is less economically viable than retaining all or the majority of customers using both direct and relationship management as lead generation via new customers requires more investment.

Many companies in competing markets will redirect or allocate large amounts of resources or attention towards customer retention as in markets with increasing competition it may cost 5 times more to attract new customers than it would to retain current customers, as direct or "offensive" marketing requires much more extensive resources to cause defection from competitors.  However, it is suggested that because of the extensive classic marketing theories center on means of attracting customers and creating transactions rather than maintaining them, the majority usage of direct marketing used in the past is now gradually being used more alongside relationship marketing as its importance becomes more recognizable.

It is claimed by Reichheld and Sasser 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, P. and Reichheld, F. dispute these calculations, claiming they result from faulty cross-sectional analysis.

According to Buchanan and Gilles, the increased profitability associated with customer retention efforts occurs because of several factors that occur once a relationship has been established with a customer.

  • The cost of acquisition occurs 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 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 need to be 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 lifecycle value.

Retention strategies also build barriers to customer switching. This can be done by product bundling (combining several products or services into one "package" and offering them at a single price), cross selling (selling related products to current customers), cross promotions (giving discounts or other promotional incentives to purchasers of related products), loyalty programs (giving incentives for frequent purchases), increasing switching costs (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 organization and the customer, the stronger the bond, and the more secure the relationship.

The text above is available under the Creative Commons Attribution-ShareAlike License.

 


 

The Fine Art of Relationship Marketing

by Heidi Richards

“Quality and service are important, if you want to make a sale. If you want to keep a customer for life, keep your promises.” – Heidi Richards

The buzzword these days is “relationship” marketing. Just what is it? And why is it important? Relationship marketing is so much more than “networking. It’s gathering the support of your friends, peers, and business contacts. It’s developing strong, lasting, unique relationships with your most valuable asset, your customer. It’s what keeps people “coming back for more.” It’s an excellent way to shorten the traditional routes of building trust, create opportunities, increase valuable contacts, to achieve success and excel in business.

Every opportunity you have to meet new people is an opportunity to grow your business! If you are willing to invest your time, networking is a process, and the payoffs are almost immeasurable. It’s not realistic to expect instant success. It takes time. You can plan your networking opportunities to shorten the time it takes to build those relationships.

What do you want and need to accomplish? Do you want to develop lifelong individual customers, land large accounts, or make an impact in your community? You will accomplish all three by getting involved in your local civic organizations, Chambers of Commerce, Business Associations, Non-Profit organizations, etc. One of the best ways to get to know people “up close and personal” is to volunteer to serve on a committee; give your time and talent to a cause. People want to do business with people who have similar interests and values.

Whom do you need to meet to accomplish your goals? And where do you meet them? Angel Cicerone, Associate Editor of the South Florida Business Journal says, “If you’re going fishing, go where the fish are.” Focus your efforts by being in the right place at the right time. It’s not just who you meet, but how and where you meet them. Meeting people in the “right places” adds credibility to that meeting. That’s not to say that striking up a conversation in the supermarket has no value. It does. It’s just that if you want to develop first class contacts, you must fly first class.

If you are flying first class, those sitting in the same section will view you as a peer. Of course, there’s no guarantee you’ll make those great contacts. However, if you don’t fly first class, you’ll never know. It may be worth the investment. The same people flying first class can also be found at those events, fundraisers and conferences in which you participate. Go where the people you wish to network with will be!

Are you willing to invest the time it takes to achieve your goals? How much time is enough? Begin with the end in mind. The key to relationship marketing’s success is to know what it is you want to accomplish. To start networking, you have to set your foot in the door.

Excerpt from The PMS Principles - Powerful Marketing Strategies to Grow Your Business by Heidi Richards

© 2004 - Heidi Richards is the author of The PMS Principles, Powerful  Marketing Strategies to Grow Your Business and 7 other books.  She is  also the Founder & CEO of the Women’s ECommerce Association,  International www.WECAI.org (pronounced wee-kī) – an Internet  organization that “Helps Women Do Business on the WEB.”  She can be  reached at www.HeidiRichards.com. 

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