UNDERSTANDING THE CUSTOMER–FIRM RELATIONSHIP

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