is a form of marketing
developed from direct response marketing campaigns conducted in the 1970's and 1980's which emphasizes customer retention and satisfaction, rather than a dominant focus on 'point of sale' transactions.
Relationship marketing differs from other forms of marketing in that it recognizes the long term value to the firm of keeping customers, as opposed to direct or "Intrusion" marketing, which focuses upon acquisition of new clients by targeting majority demographics based upon prospective client lists.
According to Leonard Berry , 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 was 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 is 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.
Relationship marketing has been strongly influenced by reengineering
. According to (process) reengineering theory, organizations should be structured according to complete tasks and processes rather than functions. That is, cross-functional teams
should be responsible for a whole process, from beginning to end, rather than having the work go from one functional department to another. Traditional marketing is said to use the functional (or 'silo') department approach. The legacy of this can still be seen in the traditional four P's of the marketing mix
, product management
, and placement
. According to Gordon (1999), the marketing mix approach is too limited to provide a usable framework for assessing and developing customer relationships in many industries and should be replaced by the relationship marketing alternative model where the focus is on customers, relationships and interaction over time, rather than markets and products.
In contrast, relationship marketing is cross-functional marketing. It is organized around processes that involve all aspects of the organization. In fact, some commentators prefer to call relationship marketing "relationship management" in recognition of the fact that it involves much more than that which is normally included in marketing.
Martin Christopher, Adrian Payne, and David Ballantyne | at the Cranfield School of Management claim that relationship marketing has the potential to forge a new synthesis between quality management, customer service management, and marketing. They see marketing and customer service as inseparable.
Relationship marketing involves the application of the marketing philosophy to all parts of the organization. Every employee is said to be a "part-time marketer". The way Regis McKenna (1991) puts it:
- "Marketing is not a function, it is a way of doing business . . . marketing has to be all pervasive, part of everyone's job description, from the receptionist to the board of directors."
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.
A key principle of relationship market 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 it's 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:
- 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.
- 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.
- 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).
- 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 lifetime 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 customer, the stronger will be the bond, and the more secure the relationship.
Relationship marketing and traditional (or transactional) marketing are not mutually exclusive and there is no need for a conflict between them. A relationship oriented marketer still has choices at the level of practice, according to the situation variablles. Most firms blend the two approaches to match their portfolio of products and services. Virtually all products have a service component to them and this service component has been getting larger in recent decades. (See service economy
and experience economy
Relationship marketing also stresses what it calls internal marketing. This refers to using a marketing orientation within the organization itself. It is claimed that many of the relationship marketing attributes like collaboration, loyalty and trust determine what "internal customers" say and do. According to this theory, every employee, team, or department in the company is simultaneously a supplier and a customer of services and products. An employee obtains a service at a point in the value chain
and then provides a service to another employee further along the value chain. If internal marketing is effective, every employee will both provide and receive exceptional service from and to other employees. It also helps employees understand the significance of their roles and how their roles relate to others'. If implemented well, it can also encourage every employee to see the process in terms of the customer's perception of value added, and the organization's strategic mission. Further it is claimed that an effective internal marketing program is a prerequisite for effective external marketing efforts. (George, W. 1990)
The six markets model
Adrian Payne (1991) from Cranfield University goes further. He identifies six markets which he claims are central to relationship marketing. They are: internal markets, supplier markets, recruitment markets, referral markets, influence markets, and customer markets.
Referral marketing is developing and implementing a marketing plan to stimulate referrals. Although it may take months before you see the effect of referral marketing, this is often the most effective part of an overall marketing plan and the best use of resources.
Marketing to suppliers is aimed at ensuring a long-term conflict-free relationship in which all parties understand each other's needs and exceed each other's expectations. Such a strategy can reduce costs and improve quality.
Influence markets involve a wide range of sub-markets including: government regulators, standards bodies, lobbyists, stockholders, bankers, venture capitalists, financial analysts, stockbrokers, consumer associations, environmental associations, and labor associations. These activities are typically carried out by the public relations department, but relationship marketers feel that marketing to all six markets is the responsibility of everyone in the organization. Each market may require its own explicit strategies and a separate marketing mixes for each.
- Dawkins, P. and Reichheld, F. (1990) "Customer retention as a competitive weapon", Directors and Boards, vol 14, no 4, 1990
- George, W. (1990) "Internal marketing and organizational behavior: A partnership in developing customer-conscious employees at every level", Journal of Business Research, vol 20, no 1, 1990, pp 63-70
- Levitt, T. (1983) "After the sale is over", Harvard Business Review, Sept-Oct, 1983
- McKenna, R. (1991) "Marketing is everything", Harvard Business Review, Jan-Feb, 1991, pp 65-70 (ebook)
- Schneider, B. (1980) "The Service Organization: Climate Is Crucial", Organizational Dynamics, vol 9, no 2, 1980, pp 52-65