Relationship marketing

Introduction

Relationship marketing is a facet of customer relationship

management (CRM) that focuses on customer loyalty and longterm customer engagement rather than shorter-term goals like
customer acquisition and individual sales. The goal of relationship
marketing (or customer relationship marketing) is to create
strong, even emotional, customer connections to a brand that can
lead to ongoing business, free word-of-mouth promotion and
information from customers that can generate leads.
Relationship marketing stands in contrast to the more traditional
transactional marketing approach, which focuses on increasing
the number of individual sales. In the transactional model, the
return on customer acquisition cost may be insufficient. A
customer may be convinced to select that brand one time, but
without a strong relationship marketing strategy, the customer
may not come back to that brand in the future. While
organizations combine elements of both relationship and
transactional marketing, customer relationship marketing is
starting to play a more important role for many companies.
Implementing a relationship marketing strategy
Relationship marketing is based on the tenets of customer
experience management(CEM), which focuses on improving
customer interactions to foster better brand loyalty. While these
interactions can still occur in person or over the phone, much of
relationship marketing and CEM has taken to the Web.
With the abundance of information on the Web and flourishing use
of social media, most consumers expect to have easy, tailored
access to details about a brand and even expect the opportunity

to influence products and services via social media posts and

online reviews. Today, relationship marketing involves creating
easy two-way communication between customers and the
business, tracking customer activities and providing tailored
information to customers based on those activities.
For example, an e-commerce site might track a customer's
activity by allowing them to create a user profile so that their
information is conveniently saved for future visits, and so that the
site can push more tailored information to them next time. Site
visitors might also be able to sign in through Facebook or another
social media channel, allowing them a simpler user experience
and automatically connecting them to the brand's social media
presence.
This is where CRM and marketing automation software can
support a relationship marketing strategy by making it easier to
record, track and act on customer information. Social CRM tools
go further by helping to extend relationship marketing into the
social media sphere, allowing companies to more easily monitor
and respond to customer issues on social media channels, which
in turn helps maintain a better brand image.
RELATIONSHIP MARKETING

Relationship Management is a special field of its own, It is as

important as preserving and enhancing the intangible asset
known as "goodwill" as the management of hard assets. . The fact
that it is probably harder to do is that much more reason hard
effort be expended to do it. - Theodre Levitt
Modern marketing revolves around the Customer. It is an old and
by-now universally accepted concept that the Customer is the
King. Customers are treated as the eyeballs of all major
companies in the world. The little-guy-the-customer is the person
who has unique interests, needs, attitude preferences, issues and

opportunities, and most importantly the authority to spend the

money on the offerings of the company. Therefore the traditional
approach of making one-time sales is being replaced with making
long term commitment to the customer. The former approach is
popularly known as transactional marketing, while making long
term commitment is the basic of relationship marketing.
Relationship marketing basically represents a paradigm shift
within marketing away from acquisition- transaction focus
towards a retention-relationship focus. Relationship marketing is a
philosophy of doing business, a strategic orientation that focuses
on keeping and improving the current customers, rather than
acquiring new customers. This concept assumes that the
consumer prefers to have an ongoing relationship with one
organisation rather than switching organisations. Building on this
assumption and also on the fact that retention is cheaper than
acquiring new customers, the marketers of today offers prime
importance in the strategy of acquiring-satisfying-maintaining
customers. Marketing companies often ends up in doing lot more
in getting new customers but often forget to do the precise little
to find out what they should do to keep the customer in their
hands. It is a well-known truth that loss of one's customer is the
gain of the competitor.
Regardless of the advertising budget, and efforts to lure
customers to buy products through some other means like
innovative and new-to-the-world promotional campaigns, and the
best of the sales force, the customer is likely to spend
considerable amount of his disposable income on the company
which satisfies him most consistently. To satisfy a customer
consistently over time the company should equip itself with the
preferences of the customers to the greatest detail. The questions
to be answered in the process may be
What does he look for while buying a particular category of
products?
Who, among the competitors of the company, are in his
active consideration set?

 What does he want from a product (or from the producer of

the product)?
Does he give importance to the product or to the producer of
the product and so on?

A company must know what is relevant to the customer and must

work accordingly. One of the biggest disadvantages of mass
marketing campaign is that the amount of money invested in the
programme reaches out to all segments of the customers without
any considerable differentiation in the exposure and thus in the
investment level. When a company is interested in understanding
the customers in great detail it is also easier for the company to
differentiate profitable customers from less profitable ones. The
next job will then be the selection of the segments of the most
profitable customers, which are to be targeted. (A detail
discussion on this is offered below.)
And thus the company should try to begin a long standing
commitment, rather than a one time or myopic bump-on-you and
thank-you attitude. If the job of the traditional copywriter and
creative directors of an ad agency is to create awareness,
relationship marketing is to embrace the customer for the whole
lifecycle.

Goals of Relationship Marketing

The primary goal of relationship marketing is to build and
maintain a group of committed customers who are profitable for
the organisation. Following methods exemplifies how the
company may choose to segment and target particular group of
customers for potential relationship marketing.
Identify the customers who spend above average. Find out
whether they are loyal to the company, if not find out ways
to keep them with the company. The company should try to
continuously lure them to buy its product, even by
offeringloyalty discounts.
Loyal customers can be even better customers if they buy
more products and services from the company over time.
Loyal customers not only provide a solid base for the
organization; they may represent growth potential too.
Find out the group of new customers, which hold better
promise than the others do. One way of doing so is to tap the
customers who are buying the companys product not in
response to a price discount. Then the company should try
to nurture such customers by finding out why they bought
the product and by trying to strive to give the customer
whatever they look from it.
As customers move from one life cycle stage from another,
needs evolve, buying pattern fluctuates and product choices
shift. A smart and live relationship company should
recognise such change of needs and wants, and should gear
itself up to suit the advantage. Failure to do so might result
in drifting of the customer.
To achieve these the firm will focus on attraction and retention of
the customer, and enhancement of customer relationship.

In Figure 2 it is shown that the organization should focus on

converting prospects into advocate through creating and
maintaining relationship with the customers. Thus the ultimate
goal of relationship marketing is to create a band of Advocate
customers, who would always be with the organization and not
only spread good word-of-mouth, but also act as spokespersons
when need arises. Obviously, as the pyramid suggests the
number of advocate will be far less than the number of initial
prospects.
Benefits of Customer Relationship:
Both parties in the customer/firm relationship can benefit from
customer retention. That is, it is not only in the best interest of
the organization to build and maintain a loyal customer base,
but customers themselves also benefit from long-term
associations.
BENEFITS FOR CUSTOMERS: Customers will remain loyal to a firm
when they receive greater value relative to what they expect from
competing firms. Apart from this obvious benefit the customer
may be inclined to stick to one product or organisation because of
his/her believe that1. he will comfortable in the relationship,
2. he knows what to expect,

3. he has a good working relationship with the organisation

4. he knows he will be taken care of even for an unusual
request.
Research has uncovered specific types of relational benefits, of
the sort just described, that customers experience in long-term
service relationships including confidence benefits, social
benefits, and special treatment benefits.
Confidence Benefits: These benefits comprise feelings of trust
or confidence in the provider, along with a sense of reduced
anxiety and comfort in knowing what to expect. Across all the
services studied in the research just cited, confidence benefits
were the most important to customers.
Most consumers (whether individuals or businesses) have many
competing demands for their time and money and are continually
searching for ways to balance and simplify decision making to
improve the quality of their lives. When they can maintain a
relationship with a service provider, they free up time for other
concerns and priorities.
Social Benefits: In some long-term customer-firm relationship a
service provider may actually become part of the consumer's
social support system. Hairdressers often serve as personal
confidant of the customer. Less common examples include
proprietors of local retail stores who become central figures in
neighborhood networks.
These types of personal relationships can be developed for
business-to-business customers as well. The social support
benefits resulting from these relationships are important to the
consumer's quality of life (personal and/or work life) above and
beyond the technical benefits of the service provided.
Special Treatment Benefits: Special treatment includes such
things as getting the benefit of the doubt, being given a special
deal or price, getting preferential treatment etc. However,
interestingly enough, special treatment benefits were less

important than the other types of benefits received in service

relationship.
BENEFITS FOR THE ORGANISATION:
The benefits for the organisation for developing and maintaining
effective relationship with the customer are numerous. A few
obvious advantages are listed below.
Increase in Purchase: Researchers worldwide have reported
that an effective relationship with a group of profitable customers
results in more number of sales. As consumers get to know a firm
and are satisfied with the quality of its services relative to that of
its competitors, they will tend to give more of their business to
the firm.
Lower Costs: It is a well-known fact that retaining old customers
is cheaper than luring new customers. Sometimes these initial
costs can outweigh the revenue expected from the new customer
in the short term. Even ongoing relationship maintenance costs
are likely to drop over time. For example, early in a relationship a
customer is likely to have questions and to encounter problems as
he or she learns to use the service. As time goes by the customer
will have fewer doubt or question and will make fewer mistakes
(assuming that the quality or service is maintained at a high
level) and the service provider will incur fewer costs in serving the
customer.
Good word-of-mouth: Services are normally complex and
difficult to evaluate before actually buying it, consumers most
often look to others for advice on which providers to be
considered. Satisfied, loyal customers are likely to provide a firm
with strong word-of- mouth endorsements.
Further, researchers report those customers show up based on a
referral tend to be better quality customers (in terms profitability,
likelihood of being loyal) than the customers who are attracted
through other promotional campaigns like price promotion and
advertising.

Employee Retention: Employee retention may be an indirect

benefit of customer retention. It is easier for a firm to retain
employees when it has a stable base of satisfied customers.
People like to work for companies whose customers are happy
and loyal. Figure 3 explains this with a causal loop diagram. The
positive signs (within brackets) show a positive change in the
dependent variable with one unit change in the independent
variable. The overall changes on all the variables will be positive
as well.
Having discussed the benefits of Relationship Marketing let there
be a discussion on one recent development in this field, which is
helping popularizing the concept among practicing marketers.

Lifetime Value (LTV) is a concept through which the marketers

can find out the profitability of a customer in advance. Lifetime
value of a customer is a concept or calculation that looks at
customers from the point of view of their lifetime revenue and
profitability contributions to a company.
The lifetime value of a customer is influenced by the length of an
average "lifetime," the average revenues generated per relevant
time period over the lifetime, sales of additional products and
services over time, and referrals generated by the customer over
time. LTV sometimes refers to lifetime revenue stream only; other
times, when costs are considered, LTV may truly mean "lifetime
profitability."

Estimating Lifetime Value: Reichheld and Sasser, Jr observed

-"If companies knew how much it really costs to lose a customer,
they would be able to make accurate evaluations of investments
designed to retain customers. Unfortunately, today's accounting
systems do not capture the value of a loyal customer." One way of
documenting the money value of loyal customers is to estimate
the increased value or profits that accrue for each additional
customer who remains loyal to the company rather than defecting
to the competition.
During calculation, time (present) value of money may be
considered for the future transactions those are expected from
the customer, from the new customers generated through
referrals of the customer under consideration. Following important
aspects might as well be considered while calculating the LTV of a
customer.
i.

Importance of referrals to the new customers

ii.

The frequency at which existing customers refer the product

to new customers.

iii.

the size of the customer referred.

iv.

the LTV calculation of the new customers.

Stephen Shaw, the Executive Editor, CRM Journal observed that

the following information are needed to figure out the LTV of an
average customer.
Attrition Curve: Attrition curve indicates how many customer
become inactive as a percent of total base every year. Attrition
curve may decay at a steady rate or may be "kinked" higher in
some initial period, then gradually stabilising. An attrition curve is
derived by analysing the activity of multiple cohorts- customer
groups that started at different times- to see how many survived
with each successive year. Attrition rates are influenced by many
factors, ranging from population age and mobility in product life
cycle, and will differ from one business sector to another.

LTV Horizon: Average life time of a customer based on the

attrition curve. For example a steady 20% attrition means that the
average life time is about five years
Average Spending: Average annual spending by the customers
Direct Cost: Includes merchandising, operating and fixed costs.
Selling Costs: Includes the costs of advertising and promotion,
and cost of maintaining a marketing database system.
Discount Rate: The value of future earnings expressed in todays
money value, which is typically the current market rate of
interest.
It is well appreciated that the first step in relationship marketing is
the retention of the customer. Unless the company is able to
retain the customer, it is meaningless to talk about relationship
marketing. For this the company as well as the products under
sale must meet certain criteria. These are,
A consistently good quality product, so that the consumer
satisfaction is assured for a long time.
Proper market segmentation is done and right target is
selected. If more than one segment is targeted the segments
must be compatible with each other.
The product should be competitive in the target market. That
means the product must be very best among the
competitors.
Thorough monitoring and evaluating relationship quality over
time. Basic market research in the form of annual customer
relationship survey may be carried out for this evaluation.
Retention Strategies: Berry and Parasuraman, two early
advocates of relationship marketing have developed a framework
for understanding the type of relationship strategies. The
framework suggests that retention marketing can occur at

different levels and that each successive level of strategy results

in ties that bind the customer a little closer to the firm. At each
successive level, the potential for sustained competitive
advantage is also increased. Building on the levels of the
retention strategy idea, Figure 4 illustrates four types of retention
strategies, which are discussed below.
Level-1 : Financial Bond: At level I, the customer is tied to the
firm primarily through financial incentives- lower prices for
greater volume purchases or lower prices for customers who have
been with the firm a long time. Examples of level 1 relationship
marketing are not hard to find. Airline industry and related travel
service industries like hotels and car rental companies are
following this type of incentive for a long time. Frequent flier
programs provide financial incentives and rewards for travelers
who choose their airline for long time. Hotels and car rental
companies do the same. Long-distance telephone companies in
the United States have engaged in a similar battle, trying to
provide volume discounts and other price incentives to retain
market share and build a loyal customer base. One reason of
these financial incentive programs' proliferation is that they are
not difficult to initiate (and to be copied from competitors) and
frequently result in at least short-term profit/gains. Unfortunately,
financial incentives do not generally provide long-term
advantages to a firm since, unless combined with another
relationship strategy, they don't serve to differentiate the firm for
a long period. Many travelers belong to several frequent flyer
programs and don't hesitate to trade off among them. While price
and other financial incentives are important to customers, they
are generally not difficult for competitors to imitate, since the
primary customized element of the marketing mix is price.
Other types of retention strategy are cross selling of services, like
the tie up of airlines industry with hotel chains and credit card
companies.
Level 2- Social Bonds: This strategy bonds the customers to the
firm through more than financial incentives. While price is still
assumed to be important, level 2 retention marketers build long
term relationship through social and interpersonal as well as

financial bonds. Customers are viewed as clients rather than mere

customers. The clients are the individuals whose wants and needs
the firm tries to understand and design the product accordingly.
Services are customised to fit individual needs, and the marketers
find ways of sticking to the customers, thereby developing social
bonds with them.
Social, interpersonal bonds are common among professional
service providers (e.g., -lawyers, accountants, and teachers) and
their clients as well as personal care providers (hairdressers,
counselors, and healthcare provider) and their clients. A dentist
who takes a few minutes to review his patient's file before coming
in to the exam room is able to jog his memory on personal facts
about the patient (occupation, family details, interests, dental
health history). By bringing these personal details into the
conversation, the dentist reveals his genuine interest in the
patient as an individual and builds social bonds.
Interpersonal bonds are also common in business-to-business
relationships where customers develop relationships with
salespeople and/or relationship managers working with their
firms.
Sometimes relationships are formed with the organization due to
the social bonds that develop among customers rather than
between customers and the provider of the service. Over time the
social relationships they have with other customers are important
factors that keep them from switching to another organization.
While social bonds alone may not tie the customer permanently
to the firm, they are much more difficult for competitors to imitate
than are price incentives. In the absence of strong reasons to shift
to another provider, interpersonal bonds can
encourage customers to stay in a relationship. In combination
with financial incentives, social-bonding strategies may be very
effective.
Level 3-Customisation Bonds: Level 3 strategies involve more
than social ties and financial incentives, although there are

common elements of level 1 and 2 strategies encompassed within

a customisation strategy and vice-versa.
Two commonly used terms fit within the customization bonds
approach: Mass customization and customer intimacy. Both of
these strategies suggest that customer loyalty can be encouraged
through intimate knowledge of individual customers, and through
the development of one-to-one solution that fits the individual
customers needs.
Mass customisation has been defined as the use of flexible
processes and organisational structures to produce varied and
often individually customized products and services at the price of
standardised mass-produced alternatives. Mass customisation,
however, does not mean providing customers with endless
solutions or choices that only make them work harder for what
they want; rather, it means providing them through little effort on
their part with tailored services to fit their individual needs.
Level 4- Structural Bonds: Level 4 strategies are the most
difficult to imitate and involve structural as well as financial,
social, and customization bonds between the customer and the
firm. Structural bonds are created by providing services to the
client that designed right into the service delivery systems. Often
structural bonds are created by providing customised services to
the client that are technology based and serve to make the
customer more productive.
Tools of Relationship Marketing:
Customer database: One of the most important and basic tools
of relationship marketing is the customer database. For some
organisations, the database is so huge and complex, it is often
called as Marketing Warehouse or data warehouse. However,
smaller version of the database is known as data mart. In all
these types of database efforts are made to save, as many data
about the customer as available and to retrieve them on demand.
The database captures data regarding almost all aspects of the
customer like their transaction habits, their life cycle stages,
personal likeness and disliking, date of birth of the family

members etc. so that whatever information is required about the

customer can be retrieved almost without any effort. A complete
and reliable database helps the company in many ways like
deciding about the attrition curve, the average purchase of the
customer, the brand switching habits, segmentation of the
customer and the targeting etc. For example, a world-renowned
chain of hotels makes it a policy to treat each and every customer
in customised manner. One such customisation is delivering the
customer his or her favourite newspaper in the morning. This
information is stored in the central network of the chain and the
housekeeping staff at any country can have access to the
customer preferences database when the customer books himself
or herself for that particular branch of the chain. This is possible
only through a thorough database about the preferences of the
customer, recorded when he/she had visited the hotel chain last.
The customer remains satisfied with such individual attention and
will in all probability be loyal to the chain.
Data Mining: It is observed that even with the fastest
microprocessors available for data warehousing serious problems
are encountered in retrieving the required information on time.
Data Mining is a development in Information Technology, through
which required information is mined from the server. However, a
detail discussion on this is beyond the scope of this material and
hence no further discussion is offered.
OLAP (online Data Processing) is another tool through which
retrieval and storage are made faster than ever before. This tool
stores data in hypercube format specially designed to summary
values of each of the transaction points across all of the various
dimensions. Source record are extracted from the relational
database, aggregated and batch loaded into predefined
dimensions on a dedicated multidimensional server. If any time a
user needs to see a new dimension, it can be created with the
next reload by the database administrator. The user may see
the combination of dimensions at a time, say, past years sales by
trading area and product category; go down immediately to see
whats going on in a specific store by department and item; then
roll right back up to a regional level, merely by clicking at the

appropriate dialogue boxes. This subject is also beyond the scope

of this material.
It must be mentioned here that these tools may not be seen in
isolation and all these are used at the same time by the same
programme.
RFM Model : This model is helpful in monitoring retention of a
particular customer. This method tries to rank a customer relative
to all other customers in terms of Recency,
Frequency and Monetary Value. Recency is how recently a
customer has visited for a purchase, which according to Jim Novo
is the most important indicator of future behaviour. Frequency is
the repeat rate, while monetary value means the volume of
transaction in one go (or over a period of time). The RFM model
suggests that a company should find out segments of customers
on the basis of their recency, repeat rate and monetary value.
The propagators of this model insist that each company might
have different strategies to deal with the RFM segments, but such
segmentation is a must for relationship marketing.
Relationship marketing is essentially based on the skills of
relationship building and maintenance between the firm and the
customer. To make a customer loyal to the organisation the
marketers must delight he customer each time he/she is visiting
the firm. For this the firm must think ahead of its competitors and
the customer himself. Every time some pleasant surprise should
be offered to delight the customer.