There’s a fundamental
distinction between strategies intended to produce a single
Transaction and those designed
to create extended relationships with customers.
Repeated transactions form the
necessary basis for a relationship between customer and supplier, although we
shouldn’t assume that every customer who uses a service with some frequency
seeks an active relationship.
Relationship Marketing
The term relationship marketing has been widely used, but until recently it was only
Loosely defined.
In fact, four distinct types of marketing:
transactional marketing and three
categories of what they call relational marketing: database
marketing, interactive
Marketing, and
network marketing.
Transactional Marketing
A transaction is an event during which an
exchange of value takes place between two parties. One transaction or even a
series of transactions don’t necessarily constitute a relationship, which
requires mutual recognition and knowledge between the parties. When each
transaction between a customer and a supplier is essentially discrete and anonymous,
with no long-term record kept of a customer’s purchasing history, and little or
no mutual recognition between the customer and employees, then no meaningful marketing
relationship can be said to exist. This is true for many services, ranging from
passenger transport to food service or visits to a movie theater, in which each
purchase and use is a separate event.
Database Marketing
In database marketing the
focus is still on the market transaction, but now it includes information
exchange. Marketers rely on information technology, usually in the form of a
database, to form a relationship with targeted customers and retain their
patronage over time. However, the nature of these relationships is often not a
close one, with communication being driven and managed by the seller.
Technology is used to
(1) identify and build a
database of current and potential customers, (2) deliver differentiated messages
based on consumers’ characteristics and preferences, and (3) track each
relationship to monitor the cost of acquiring the consumer and the lifetime value
of the resulting purchases.14 Although technology can be used to personalize the
relationship, relations remain somewhat distant. Utility services such as
electricity, gas, and cable TV are good examples.
Interaction Marketing
A closer relationship often
exists in situations where there is face-to-face interaction
between customers and
representatives of the supplier (or “ear-to-ear” interaction
by phone). Although the
service itself remains important, value is added by
people and social processes.
Interactions may include negotiations and sharing of
insights in both directions.
This type of relationship exists in many local service
markets, ranging from
community banks to dentistry, in which buyer and seller
know and trust each other.
Both the firm and the customer are prepared to invest resources to develop a
mutually beneficial relationship. This investment may include time spent
sharing and recording information.
As service companies grow
larger and make increasing use of technologies such as
interactive web sites and
self-service technology, maintaining meaningful relationships with customers
becomes a significant marketing challenge. Firms with large customer bases find
it increasingly difficult to build and maintain meaningful relationships through
call centers, web sites and other mass delivery channels.
Network Marketing
We often say that someone is a
“good networker” because he or she is able to put
individuals in touch with
others who have a mutual interest.
The four types of marketing described
above are not necessarily mutually exclusive.
A firm may have transactions with some
customers who have neither the desire
nor the need to make future purchases,
while working hard to move others up the
loyalty ladder.
Marketing based on relationships,
networks, and interaction, recognizing
that marketing is embedded in the total
management of the networks of
the selling organization, the market, and
society. It is directed to long-term,
win–win relationships with individual
customers, and value is jointly created
between the parties involved.
Ideally, we would like to create ongoing
relationships with our customers. This is
easier when customers receive service on a
continuing basis. However, even where
the transactions are themselves discrete,
there may still be an opportunity to create
an ongoing relationship.
A
membership
relationship is a formalized
relationship between the firm and an
identifiable customer, which may offer
special benefits to both parties. Services
involving discrete transactions can be
transformed into membership relationships
either by selling the service in bulk (for
instance, a theater series subscription or a
commuter ticket on public transport) or by
offering extra benefits to customers who
choose to register with the firm (loyalty
programs for hotels, airlines, and car rental
firms fall into this category). The
advantage to the service organization of having
membership relationships is that it knows
who its current customers are and, usually, what use they make of the services
offered. This can be valuable information for segmentation purposes if good
records are kept and the data are readily accessible for analysis. Knowing the
identities and addresses of current customers enables the organization to make
effective use of direct mail (including e-mail), telephone selling, and
personal sales calls—all highly targeted methods of marketing communication.
In turn, members can be given access to
special numbers or even designated
account managers to facilitate their
communications with the firm.
THE WHEEL
OF LOYALTY
Building customer loyalty is difficult.
Just try and think of all the service firms you
yourself are loyal to. Most people cannot
think of more than perhaps a handful of
firms they truly like (i.e., give a high
share of heart) and to whom they are committed
to going back (i.e., give a high
share-of-wallet). This shows that although firms put
enormous amounts of money and effort into
loyalty initiatives, they often are not
successful in building true customer
loyalty.
First, the firm needs a solid foundation
for creating customer loyalty, which
includes having the right portfolio of
customer segments, attracting the right customers, tiering the service, and
delivering high levels of satisfaction.
Second, to truly build loyalty, a firm
needs to develop close bonds with its customers, which either deepen the
relation ship through cross-selling and bundling, or add value to the customer
through loyalty rewards and higher-level bonds. Third, the firm
needs to identify and eliminate factors that result in
“churn”—the loss of existing customers and
the need to replace them with
new ones.
Good Relationships Start with a Good Fit
Between Customer
Needs and Company Capabilities
The process starts with
identifying and targeting the right customers. “Who should
we be serving?” is a question
that every service business needs to raise periodically.
Customers often differ widely
in terms of needs. They also differ in terms of the
value that they can contribute
to a company. Not all customers offer a good fit with
the organization’s
capabilities, delivery technologies, and strategic direction.
Companies need to be selective
about the segments they target if they want to
build successful customer
relationships. It is important to choose
to serve a portfolio of several
carefully chosen target segments and taking pains to build and maintain their
loyalty. Matching customers to the firm’s capabilities is vital.
Searching for Value, Not Just Volume
Too many service firms still
focus on the number of customers they serve, without
giving sufficient attention to
the value of each customer. Generally
speaking, heavy
users who buy more frequently
and in larger volumes are more profitable than occasional users.
Managing
the Customer Base Through Effective Tiering of Services
Marketers should adopt a
strategic approach to retaining, upgrading, and even terminating customers.
Customer retention involves developing long-term, cost-effective links with
customers for the mutual benefit of both parties, but these efforts need not necessarily
target all customers with the same level of intensity. Recent research has confirmed
that most firms have different tiers of customers in terms of profitability, and
these tiers often have quite different service expectations and needs.
Examples
• Platinum. These customers constitute a
very small percentage of a firm’s customer
base, but they are heavy users
and contribute a large share of the firm’s
profits. Typically, this
segment is less price-sensitive but expects highest service
levels, and it is likely to be
willing to invest in and try new services.
• Gold. The gold tier includes a larger
percentage of customers than the platinum
tier, but individual customers
contribute less profit than platinum customers.
They tend to be slightly more
price-sensitive and less committed to the firm.
• Iron. These customers provide the
bulk of the customer base. Their numbers
give the firm economies of
scale. Hence, they are often important so that a firm
can build and maintain a
certain capacity level and infrastructure, which is often
needed to serve gold and
platinum customers well. However, iron customers in
themselves are often only
marginally profitable. Their level of business is not
sufficient to warrant special
treatment.
• Lead. Customers in this tier tend to
generate low revenues for a firm, but often
require the same level of
service as iron customers, which turns them into a loss making segment from the
firm’s perspective.
Customer
Satisfaction and Service Quality Are Prerequisites for Loyalty
The foundation for true loyalty lies in customer satisfaction, for
which service quality
is a key input. Highly satisfied or even delighted customers are
more likely to
become loyal apostles of a firm, consolidate their buying with one suppler, and
spread positive word of mouth. Dissatisfaction, in contrast,
drives customers away
and is a key factor in switching behavior
