assignment 50
Delp10
ch2UnderstandingRelationships.pptCUSTOMER RELATIONSHIP MANAGEMENT
CONCEPTS AND TECHNOLOGIES
Chapter 2
Understanding relationships
LEARNING OBJECTIVES
By the end of this lecture you will understand:
How to recognize a relationship
Attributes of successful relationships
The importance of trust and commitment within a relationship
Why companies and customers are motivated to establish and maintain relationships and sometimes not.
The importance of customer lifetime value
Satisfaction – Loyalty – Business performance
Defining ‘Relationship’
- A relationship is composed of a series of interactive episodes between parties over time.
- Episodes are time bound (they have a beginning and an end) and are nameable.
Defining ‘Relationship’
- Episodes are composed of a series of interactions. Interaction consists of action, and response to that action.
- The content of each episode is a range of communicative behaviors including speech, deeds (actions) and body language.
Defining ‘relationship’
- Is a relationship more than interaction-over-time?
What about emotional content ? Do relationships have some type of affective connection, attachment or bond?
- A relationship to exist only when the parties move from a state of independence to dependence or interdependence.
Defining ‘relationship’
- This suggests the parties may have very different ideas about whether they are in a relationship.
- Woodburn and McDonald identify five hierarchical levels of relationship between buyer and seller
Woodburn & McDonald’s hierarchy of relationship levels
- Exploratory
- Basic
- Cooperative
- Interdependent
- Integrated
What is the level of your relationship with ACK?!
Zone of Delusion vs. Frustration
- Suppliers and buyers each have their own preference of the level they wish to achieve in a relationship.
- Ideally they match, but often they don’t.
Zone of Delusion vs. Frustration
- The zone of delusion is when a supplier is investing in building a higher-level partnership with the customer, whilst the buyer is merely interested in the basic transaction.
- Conversely, the zone of frustration is where the buyer would like to partner but the supplier is focused only on the next transaction.
Application exercise
Provide an example of zone of delusion and frustration for the following supplier - customer relationships:
Car mechanic – customer
Banker – customer
Business consultant – company
Airline - passenger
Teacher – student !
Dwyer’s model of relationship change
Awareness (possible exchange partner)
Exploration (investigation and testing)
Expansion (increasing interdependence)
Commitment (increased adaptation)
Dissolution (termination of the relationship)
Dwyer’s model of relationship change
- Awareness is when each party comes to the attention of the other as a possible exchange partner.
- Exploration is the period of investigation and testing during which the parties explore each other’s capabilities and performance.
- Some trial purchasing takes place. If the trial is unsuccessful the relationship can be terminated with few costs.
Dwyer’s model of relationship change
- This exploration phase is thought to comprise five sub-processes:
attraction;
communication and bargaining;
development and exercise of power;
development of norms; and the
development of expectations..
Dwyer’s model of relationship change
- Expansion is the phase in which there is increasing interdependence. More transactions take place and trust begins to develop.
- The commitment phase is characterized by increased adaptation on both sides and mutually understood roles and goals including automated purchasing processes.
Dwyer’s model of relationship change
- Not all relationships will reach the commitment phase. Many are terminated before that stage.
- There may be a breach of trust that forces a partner to reconsider the relationship.
- Relationship termination can be bilateral or unilateral.
- The two attributes of highly developed relationships: trust and commitment.
Application Exercise
Apply Dwyer’s model to a selected customer-supplier relationship and describe in details the five general phases.
Types of trust
A party in a relationship may trust the other’s..
- Benevolence. A belief that one party acts in the interests of the other.
- Honesty. A belief that the other party’s word is reliable or credible.
- Competence. A belief that the other party has the necessary expertise to perform as required.
How trust emerges
- Trust emerges as parties share experiences, and interpret and assess each other’s motives.
- As they learn more about each other, risk and doubt are reduced.
- For these reasons, trust has been described as the glue that holds a relationship together across time and different episodes.
Commitment defined
- Commitment is shown by ‘an exchange partner believing that an ongoing relationship with another is so important as to warrant maximum effort to maintain it; that is, the committed party believes the relationship is worth working on to ensure that it endures indefinitely’.
Characteristics of commitment
- Commitment arises from trust, shared values, and the belief that partners will be difficult to replace.
- Commitment motivates partners to cooperate in order to preserve relationship investments.
Characteristics of commitment
- Commitment means partners forgo short-term alternatives in favour of more stable, long-term benefits associated with current partners.
- Commitment limits vulnerability which leaves partners open to opportunism.
Evidence of commitment
- Evidence of commitment is found in the investments that one party makes in the other.
- One party makes investments in the promising relationship and if the other responds, the relationship evolves and the partners become increasingly committed to doing business with each other.
Evidence of commitment
- Investments can include time, money and the sidelining of current or alternative relationships.
- A partner’s commitment to a relationship is directly represented in the size of the investment in the relationship, since these represent termination costs.
Attributes of high-quality relationships
- Some relationships can be thought to be of better quality than others.
- Core attributes
Trust
Commitment
- Additional attributes
Relationship satisfaction
Mutual goals
Cooperative norms: parties work together constructively and interdependently to resolve problems.
Companies want relationships with customers
companies that manage their customer base to identify, satisfy and retain profitable customers enjoy better business results
reduced customer churn (leaving) creates
A larger customer base
Longer average customer retention
Reduced marketing costs to replace defected customers
Better understanding of customer requirements
More cross-selling opportunities
CASE STUDY 5: CUSTOMER CHURN AT EIRCOM
Read the case study and answer the following questions:
What is the sector that EIRCOM is operating?
What problems the company was facing?
How they addressed those problems?
What are the benefits of using an automated churn prediction system?
Organizational benefits from managing customer retention
- Reduced marketing costs
Fewer dollars need to be spent replacing churned customers
- Better customer insight
Suppliers are able to develop a better understanding of customer requirements and expectations. Customers also come to understand what a supplier can do for them.
Organizational benefits from managing customer retention
Consequently, suppliers become better placed to identify and satisfy customer requirements profitably, selling more product and service to the retained customer.
Over time, as relationships deepen, trust and commitment between the parties is likely to grow, and revenue and profit streams from customers become more secure.
The customer journey
| Suspect | Does the potential customer fit your target market profile? |
| Prospect | The customer fits the target market profile and is being approached for the first time. |
| First-time customer | The customer makes a first purchase. |
| Repeat customer | The customer makes additional purchases. Your offer plays a minor role in the customer’s portfolio. |
| Majority customer | The customer selects your company as supplier of choice. You occupy a significant place in the customer’s portfolio. |
| Loyal customer | The customer is resistant to switching suppliers, and has a strong positive attitude to your company or offer. |
| Advocate | The customer generates additional referral dollars through positive word-of-mouth. |
Customer lifetime value (CLV) defined
- CLV is the present-day value of all net margins earned from a relationship with a customer or a segment.
To compute CLV, all historic net margins are compounded up to today’s value and all future net margins are discounted back to today’s value.
Four causes of profit margin growth over time
Revenues grow over time, as customers buy more.
Cost-to-serve is lower for existing customers, because both supplier and customer understand the other.
Higher prices are paid by existing customers than new customers.
Value-generating referrals are made by existing, satisfied customers through their unpaid advocacy.
Customers are potential income streams
- A core CRM idea is that a customer should not be viewed as a set of independent transactions but as a lifetime income stream.
Customer relationship value at US Bancorp
- top tier, 11% of customers
- threshold, next 22%
- fence sitters, next 39%
- value destroyers, bottom 28%
Read also the example of Barclays Bank.
Core strategies to improve cohort profitability
Improve customer retention rate in the early years of the relationship. This will produce a larger number of customers to generate higher profits in the later years.
Increase the profit earned per customer by
Reducing cost-to-serve
Cross-selling or up-selling additional products and services.
Core strategies to improve cohort profitability
Become better at customer acquisition by
Using more cost-effective recruitment channels
Better qualification of prospects Customers who defect early on perhaps should have not been recruited in the first place,
Careful nurturing of prospects with high CLV potential.
Recruit new customers who match the profiles of current customers with high CLV.
When B2B companies do not want relationships?
- When they fear loss of control. Relationships are bilateral arrangements, which involve giving up unilateral control over resources.
- When exit costs are high. Not all relationships survive. It is not necessarily easy or cost-effective to exit a relationship.
- Resource commitment. Relationships require the commitment of scarce resources such as people, time and money.
- When opportunity costs are high. If resources are committed to one customer relationship, they cannot be used for another.
Business customers want relationships when …
the product or its applications are complex, for example, networking infrastructure
the product is strategically important or mission-critical, for example, core raw materials supply for a manufacturer
there are downstream service requirements, for example, for machine tools
financial risk is high, for example, in buying large pieces of capital equipment
Reciprocal benefit is expected. A financial audit practice may want a close relationship with a management consultancy, so that each party may benefit from referrals by the other.
When do customers want relationships with suppliers?
- Recognition. Customers may feel more valued when recognized and addressed by name.
- Personalization. Products or services can be customized.
- Power. Relationships with suppliers can be empowering. E.g. Personal relationship with a banker.
- Risk reduction. A relationship can reduce, or even, perhaps, eliminate perceived risk.
- Status. Customers may feel that their status is enhanced by a relationship with a supplier.
- Affiliation. People’s social needs can be met through commercially based, or non-commercially based, relationships.
Why B2C customers do NOT want relationships with suppliers
- Fear of dependency
- Lack of perceived value in the relationship
- Lack of confidence in the supplier
- Customer lacks relational orientation
- Rapid technological changes
The satisfaction–profit chain
(Group project question 4)
Customer satisfaction defined
- Customer satisfaction is the customer’s fulfilment response to a customer experience, or some part of it.
- Customer satisfaction is a pleasurable fulfilment response.
Two dimensions of customer loyalty
- Behavioural loyalty (purchasing)
Is the customer active?
What is our share of customer spend?
RFM measure
Recency
Frequency
Monetary value
- Attitudinal loyalty (+ or -)
Beliefs
Commitment
Preference
Intention to buy
Loyalty squares (Dick and Basu)
repeat purchase
high
low
attitude
strong
weak
true
loyalty
latent
loyalty
Spurious (fake)
loyalty
no
loyalty
Loyalty squares (Dick and Basu)
- ‘Spurious loyals’ repeated purchasing can be explained by passivity, high switching costs or indifference.
- ‘Latent loyals’ might be evidence of weakness in the company’s distribution strategy, as the product or service not being available when and where customers want.
Loyalty squares (Dick and Basu)
- Companies’ knowledge of the causes of customers’ negative or positive attitudes can help to understand the causes of barriers to purchase or competitor-resistant commitment.
- However, it is not clear from the Dick and Basu model whether attitude precedes behaviour or behaviour precedes attitude.
- Researchers generally accept that causation is circular rather unidirectional.
Business performance
- Can be measured in many ways. The recent trend has been short-term financial measures such as quarterly profit or earnings per share.
- Leading companies have moved towards a more comprehensive set of performance indicators, such as the balanced scorecard that employs four sets of linked key performance indicators (KPI):
financial, customer, process, and learning and growth.
Business performance
- The implied connection between these indicators is that people (learning and growth) do things (process) for customers (customer) that have effects on business performance (financial).
- The satisfaction–profit chain suggests that the customer outcomes of satisfaction and loyalty are important drivers of business performance.
Business performance
- Customer-related KPIs can also be used to evaluate business performance following the adoption of CRM include:
customer satisfaction levels, customer retention rates, customer acquisition costs, number of new customers acquired, customer loyalty (behavioral or attitudinal), sales per customer and share of customer spending (wallet).
Industry studies
- Telecommunications: a 10 per cent increase in customer satisfaction caused a 2 per cent increase in customer retention and a 3 per cent increase in revenues.
- Banking: customer satisfaction correlated highly with branch profitability. Highly satisfied customers had balances 20 per cent higher than satisfied customers.
Industry studies
- Airlines: as dissatisfaction rose, operating revenue and operating profit both fell, and operating expense rose.
- Car retailing: a one point increase in customer satisfaction was associated with a 4 per cent increase in dealer profitability.
Actor bonds, activity links and resource ties
- Actor bonds are interpersonal contacts between actors in partner firms that result in trust, commitment and adaptation between actors
- Activity links are the commercial, technical, financial, administrative and other connections that are formed between companies in interaction
- Resources are the human, financial, legal, physical, managerial, intellectual and other strengths or weaknesses of an organization
