Chapter 11

Creating Value Through Customer and Supplier Relationships

Relationship Marketing (RM) Customer Relationship Management (CR Other RM Concepts value webs and lifetime value

Factors Causing the Decline of the Traditional Marketing Paradigm

This perspective is no longer sufficient The powerful forces of industry globalization The value movement Rapid advances in technology Shift in the balance of power toward customers have coalesced to change the rules for business success

The Transition from the Traditional Marketing Concept

The traditional marketing paradigm (the 4 Ps) is losing some of its influence among marketers. It focuses on the transaction and the core product, taking a short-term perspective; customer attraction (conquest marketing) is the overriding goal. The 5th P is people more important!

Traditional vs. Marketing

With the cost of customer attraction escalating, companies are paying more attention to holding on to their existing customers Long-standing customers are less expensive to reach and less expensive to serve Customer relationships are assets that should be evaluated and managed as rigorously as any financial or physical assets Relationship marketing not only focuses on customer retention, but also takes a long-term perspective

Relationship Marketing Defined

To establish, maintain, and enhance (usually but not necessarily long-term) relationships with customers and other partners, at a profit, so that the objectives of the parties involved are met. This is achieved by a mutual exchange and fulfillment of promises. ___Grnroos (Service Management and Marketing, 1990)

What is Relationship Marketing?

The cornerstone of marketing is getting close to customers in order to better identify and satisfy their needs Realize that marketing is responsible for more than just the sale

The focus is shifting from the transaction to the relationship

It is difficult to separate service operations and delivery from relationship building Managing customer relationships continues to be paramount, so is the growing importance of managing relationships with suppliers and resellers

Continuum of Relationships

Pure Transactional Exchange

Industry Relationship Bandwidth

Collaborative Exchange

Core Product

Augmented Product

Flaring - Out

Unbundling Strategy

Added Augmentation Strategy

Pure

Relationship Marketing Goals and Outcomes

Whereas the goal of traditional marketing is customer acquisition, under relationship marketing the focus shifts to creating value The objective is to create more value through interdependent, collaborative relationships with customers, the outcome is customer retention Relationship marketing is ongoing, constantly looking for opportunities to generate new value Retaining customers requires marketers to exhibit care and concern after they have made a purchase The sale often represents only the beginning of the relationship between the buyer and seller

Building Lasting Customer Relationships

Sellers can resist the natural tendency toward decline and complacency by developing what we refer to as relationship enablers It is the sellers responsibility to nurture the relationship beyond its simple dollar value Using the relationship enablers sellers can minimize relationship decay and strengthen the bonds that lead to long-term, perhaps even lifetime associations

Supplier Rankings of Relationship Enablers *

TRUST
COOPERATION

COMMITMENT

INFORMATION EXCHANGE

DEPENDENCE

Johnson, W. and Weinstein, A. (1999) Based on a study of Motorola and Lucent Marketing Managers.

Figure 11.3 - Information Sustains a Relationship

Relationship Selling

Partnership Relationship

that the Buyer is willing to invest in the relationship

Information, Time, or Trust Level

Transaction Selling

High Account Penetration

TransactionBased Relationship

Low Account Penetration

Services that the seller is willing to provide the relationship

4 Levels of Relationship Marketing*

Py rr ia m B o n d C id uz s e t o m S e re v i c Ct e oi m p e t i v Aa dg v e a n t

FC IN NL A I A

L O W

L O W

SL O C I A

M E D I U M

M E D I U M

ST T U M- H H RR E H UA D I CL I U M G I G H

*Source: Berry, L. (1995)

Customer Relationship Management (CRM)

Definition of CRM CRM is a business strategy that involves selecting and managing customer relationships to optimize the long-term value of a company Goal of CRM The goal of CRM is to acquire, grow, and retain the right customer relationships -- those with the best long-term profit potential
(Bob Thompson, founder of CRMGuru.com)

Customer Relationship Management (CRM)

as Collaboration

CRM is about collaborating with customers and partners so they receive superior value
Interactions with customers regardless of the sales channel should be constantly managed to optimize the value of those relationships Effective CRM systems provide a 360 degree view of the customer, including the frequency, response, and quality of customer interactions

Characteristics of a Good CRM System

A good CRM system is capable of describing customer relationships in sufficient detail so that management, salespeople, customer service and even suppliers have direct and real-time access to customer information The information gathered should help match customer needs with product/service offerings, remind customers of service requirements, predict future purchases, and alert the company when a customers purchase behavior has changed A key feature of CRM is sharing the customer experience across the organization and supply chain

CRM BUSINESS DRIVERS

Automation/Productivity/Efficiency Competitive Advantage Customer Demands and Requirements Increased Revenue Cost or Price Reduction Speed/Saving Time Keeping Track of All Aspects of Business Customer Support Inventory Control/Resource Management Better/Expanded Communication Integration Customer Satisfaction Accessibility ConformityStandardization
0%

33%
22% 15% 14%
10% 9%

7%
7% 6% 6% 6% 6% 4%

4%
5% 10% 15% 20% 25% 30% 35%
Source: AMR Research, 2002

Figure 11.5 Customer Relationship Model Figure 11.5 Customer Relationship Model
CUSTOMER STRATEGY Customer centric strategy MARKETING KNOWLEDGE BADI Competitors value proposition RFM Customer Lifetime Value Acquisition costs Retention Rates

Customer focused strategies drive marketing execution

Clear value proposition Channel bonding Dominate the segment (DTS) Dominate the cycle (DTC) Integrated marketing processes (internal) Supply chain network coordination

Customer experience is shared across the organization and supply chain

Planning

Relationship Marketing activities are coordinated

Direct Sales Analysis Web Site Call Center

Customer Service Cross-Sell Up-Sell Implementation

Control Adapted From Levine, S (1998) Selling Smart Americas Network, Sept. 1, p. 3

CRM & Critical Customer Data

Companies should continuously gather critical customer data known as BADI

Behaviors (how often and where customers visit) Attitudes (customers satisfaction, service
quality assessments) Demographics Insights (share of market, share of wallet)

Marketing Knowledge & CRM

Marketing knowledge forms the basis of a customer strategy by analyzing, planning, implementing, and control re:

a customer-centric orientation a clearly defined value proposition alignment with key channel partners dominating the segment (focused on a particular market segment) or cycle (dominate the evolving value proposition aimed a group of customers) internal and supply chain process integration. the coordination and practice of relationship marketing activities

Why CRM Efforts Fail

Lack of focus No change management policies No buy-in Business unit silos Complicated procedures Poor training

Avoiding CRM Failure

Careful planning Appropriate use of people in the organization Get supply chain members involved Using customer-driven processes Have a sound platform for introducing CRM systems and activities

The Customer Relationship Philosophy and Techniques

Customer relationships are improved by responding to customer needs
Companies who successfully practice relationship marketing have mastered mass customization In many markets it is not only possible, but imperative to mass customize for customers

New technology enables efficient customization of products and services, even when the customer base is quite large

CRM Value Webs & Web Alliances

More and more companies are utilizing web alliances in order to create superior customer value.

These value webs now represent the new economy supply chains The key to creating superior value in the new economy resides in understanding and leveraging the power of supply chain network relationships Value is created (or captured) by a firm moving upstream or downstream in the supply chain

The Value Web: Definition and Relationships

A value web can be described as an inchoate network of customers, suppliers, complementors, allies and competitors whose services either enhance or drain a firms value These relationships can be vertical or horizontal (or both) and are less enduring than in traditional supply chains Unlike conventional supply chains, adding more users to a value web actually creates more, not less value

The Value Web: Uses and Applications Value webs are optimized to the extent a firm
understands its relationship with other actors in the web, how its activities will affect the network and how the other actors will respond
True value creation takes place when several organizations in the value web share common technologies and/or intellectual capital

eBay Value Web

Complements Allies Customers

eBay Suppliers

Competitors

eBay primarily competes for these flows

Life Time Value (LTV) & Relationship Marketing

A final key to practicing relationship marketing is to track each relationship LTV is simply a projection of what customers are worth over a lifetime of doing business with them Calculating LTV is important because of the impact of retention levels on profitability Companies successful at practicing relationship marketing look for opportunities to add value through their business relationships, offering new features, services or customized offerings

What is a Customer Worth?

GM Cadillac Gateway Computer Pizza Hut Proctor & Gamble Safeway
Proof
The

$ 426,000 $ 25,000 $ 12,400 $ 10,000 $ 4,800

top 6% of cellular phone users represent 69% of total usage

The top 6% of the UK cola users represent 60% of all consumption 25% of cars are rented by the top 0.02% of clients
Source: Watt Solutions, Inc., 2002