Relationship marketing (RM) has recently become very popular. This article lies the foundations to understand what it is all about. Since the topic is complex and comprehensive I’m going to divide the content into several posts for a better and more focused understanding.
Customer acquisition becomes more and more difficult. Relationship marketing could be a remedy.
The financial crisis and its aftermath increased the difficulties to acquire new customers. Many companies invest significant amounts of (marketing)money into customer acquisition without the desired outcome. They struggle to acquire the right customers (which is mostly down to wrong segmentation and personas) and finally they’re not able to convert prospects into frequently buying customers. However, the financial targets nonetheless need to be met which is why companies rethink their strategy. Relationship marketing could support this undertaking by building up on a relational relationship rather than a transactional with customers. Furthermore, many scholars have proven that the costs of customer acquisition are higher than the costs for retention due the costs of information and missing experience. If the industry is on heavy competition the costs for acquisition might increase even more. From a profit point of view Reichheld & Sasser found in their article “Putting the service-profit-chain to work” that an increase in customer retention by only 5% might lead to an increase of profitability of 25% to 85%. Customer retention on the other hand is a result or objective of relationship marketing.
What is relationship marketing? A definition.
There are many definitions of relationship marketing. CRM and RM are used many times interchangeably. I personally like the following statement that summarizes many facets of relationship marketing:
Relationship marketing is how a company finds you, gets to know you, keeps in touch with you, tries to ensure you get what you want from them, checks that you are getting what they have promised – all to it being mutually beneficial.
What you can see is that RM is about a two dimensional communication rather than just a single way of communication. Relationship that is the underlying term in RM is based on trust and commitment. There are two kind of relationships that we need to understand first:
|Single sales||Orientation to customer retention|
|Single transaction||Emphasis on customer lifetime value|
|Discontinuous customer contact||Continuous customer contact|
|Focus on product features||Focus on customer value|
|Short time scale||Long time scale|
|Little emphasis on customer service||High emphasis on customer service|
|Limited commitment to meeting customers expectations||High commitment to meeting customer expectations|
|Quality perceived as a concern of production staff||Quality as concern of all staff|
Despite the fact that the advantages of a relational business relationship can be seen and are proven we nevertheless have to bear in mind that under certain circumstances a transactional relationship is more appropriate and desired. E.g. in low risk purchase situations none of the involved parties sees a reason for a relational relationship or for example in price sensitive markets when buyers try to play off suppliers against each other. Sometimes customers just want to make a one-off purchase.
Drivers of relationship marketing
It is furthermore beneficial to understand what really drives relationship marketing. These drivers could serve you as arguments why relationship marketing could mitigate your revenue and profit issue.
Some drivers for relationship marketing could be identified as:
- High acquisition costs vs. low retention costs
- High exit barriers
- Sustainable competitive advantage
- High emotional content in the exchange
- Need for closeness
- Trust & Commitment
- Satisfaction leads to retention
- Falling growth rates
Some resistors can be identified as:
- Low exit barriers desired
- Competitive advantage unsustainable
- Low risk and importance to buyer of products / services
- Low emotional content in exchange
- No perceived need for closeness
- Requirement for trust only – which can be satisfied through guarantees and warranties
Objectives of relationship marketing
Relationship marketing aims at customer retention primarily to be able to establish longterm business with the customer. Customer lifetime value as future-oriented measure of customer value goes hand in hand with customer retention.
Apart from pure retention RM tries to develop the customer intitially from an prospect into a partner of the company that makes referrals. Payne developed the loyalty ladder model to show how the customer could climb up the ladder to become a partner (see below). The notion of having a mutually beneficial relationship that is based on trust and commitment is crucial and a central goal of RM as well. All marketing activities within the company are directed into a relational mind set to serve the customer in the best possible way.
Whether to enter into a relational operating mode is a strategic decision and can’t be left to sales, customer service etc. It is basically a philosophical approach that needs to be implemented into processes, structures, mind sets etc. of a company. As with any strategy this should be represented by senior management to ensure that the strategy is really happening. Marketing in that sense is perceived to act as a holistic mindset of the company rather than just as a functional department. Everyone in the company is therefore part of relationship marketing and acts as a marketeer towards various internal & external stakeholders.
See what Peter Doyle says about relationship marketing
You’ll read in the next RM post more about the strategic nature of relationship marketing and some important models (e.g. Six markets model) that can be used in RM.