In this article we will discuss about the role and importance of relationship marketing.
Over the past 15 years, RM has become a topic of great interest to many organizations. It has its origins in industrial and business-to-business markets. However, since the early 1990s, interest in RM has extended to service markets. In the past five years, many consumer goods companies have started to seek ways to develop stronger relationships with their final consumers, in addition to building traditional business-to-business relationships with their immediate customers. Thus all sectors – industrial, service and consumer – are now increasingly examining ways to gain greater competitive advantage through relationship-based strategies.
Many marketing authors have concerns about the relevance of much of traditional marketing theory, with its inherent short-term transactional emphasis. Customary marketing practices have been found to be lacking, especially in business-to-business marketing where establishing and maintaining long-term relationships with customers is critical to the organization’s success.
The traditional marketing approach emphasizes the management of key marketing mix elements within a functional context. The new RM approach, while recognizing that these key elements must be addressed, reflects the need to create an integrated, cross-functional means of marketing: one which stresses keeping as well as winning customers.
Current marketing focus is shifting from customer acquisition to customer retention, and is ensuring that the appropriate amounts of time, money and managerial resources are directed at both these key tasks.
The new RM paradigm reflects a marked change from traditional marketing to the market orientation. Hence the term RM embraces an organization-wide perspective of marketing, rather than a narrow, functional focus. Although the term RM is now widely adopted, perhaps a better term to describe the emphasis on cross-functional activities might be relationship management, for RM involves a pan-company approach to managing market relationships.
Our approach to RM is derived from the work of Christopher, Payne and Ballantyne, who developed a broad theory of RM.
The key elements of their marketing theory involve:
1. Emphasizing a relationship, rather than a transaction, approach to marketing.
2. Understanding the economics of customer retention and thus ensuring the right amount of money and other resources are appropriately allocated between two tasks (retaining and attracting customers).
3. Highlighting the critical role of internal marketing in achieving external marketing success.
4. Showing how the principles of RM can be applied to a range of diverse market domains, not just customer markets.
5. Recognizing that quality, customer service and marketing need to be integrated in a much closer manner than has previously been the case in many organizations.
6. Illustrating how the traditional marketing mix concept of the four Ps (Product, Price, Promotion and Place) does not adequately capture all the key elements which must be addressed in building and sustaining relationships with markets.
7. Ensuring that marketing is considered in a cross-functional context.
This broad concept of RM is depicted in Figure 2.1. The diagram illustrates the transition from transaction marketing to RM. The move to cross-functional marketing reflects the difficulties encountered by traditional hierarchically- structured and functionally-oriented organizations that adopt a departmental or functional approach to marketing.
RM highlights the organization of marketing activities around cross-functional processes as opposed to organizational functions. This cross-functional approach to customer management has become a major theme in RM.
The RM philosophy also stresses the need to change from employing marketing strategies that are based mainly on customer acquisition to those that focus on customer retention. Customer retention lies at the heart of RM.
1. Addressing Multiple Markets:
The outstanding feature of our RM approach is that it recognizes a diversity of key ‘markets’, or ‘market domains’, that organizations need to consider. Figure 2.2 illustrates one such expanded view of marketing- the RM multiple markets model. This model has been applied with great success in many diverse sectors.
The framework is constructed of typical key market domains where organizations should direct marketing activity and where the development of detailed marketing strategies may be required. Apart from customer markets, these main focal points might include: referral markets; supplier and alliance markets; recruitment markets; influencer markets; and internal markets.
To achieve success in the complex and fast-paced market place of today, it is increasingly being acknowledged that a number of key market areas need to be addressed. The multiple markets model enables a diagnostic review to be undertaken of the key market domains that may be of importance to any given organization. As a result of such a diagnosis, a number of key groups will be identified which are of special importance.
The exact number of markets to be focused on by any given organization will vary. Thus some organizations will need to focus significant emphasis on relatively few, while others will have a much greater number to take into account.
Let us now consider each of the exemplar markets in turn:
i. Customer Markets:
Customer markets are central to the multiple markets model. Customers must, of course, remain the prime focus of marketing activity; however, marketing activities need to be directed less at transactional marketing with its emphasis on the single sale and more on building long-term customer relationships.
Transactional marketing exhibits a number of specific characteristics, including:
1. Focus on single sales
2. Orientation to product features
3. Short timescale
4. Little emphasis on customer service
5. Limited customer commitment
6. Moderate customer contact
7. Quality is primarily a concern of production
RM, by contrast, displays the following attributes:
(i) Focus on customer retention
(ii) Orientation to customer value
(iii) Long timescale
(iv) High customer service emphasis
(v) High customer contact
(vi) Quality is the concern of all
While it is clear that a relationship focus has been fully adopted by some businesses, it is noticeably absent in others. Many companies still take the transactional route where the attention given to winning a new customer, once successful, is immediately transferred to the next prospect. Little effort is expended in keeping the existing customer.
As competition intensifies, it becomes imperative for organizations to recognize that existing customers are easier to sell to and are frequently more profitable. Managers may agree intellectually with this view, but the practices within their organizations often tell a different story.
Frequently, much greater emphasis and resources are placed on attracting new customers, while existing customers are taken for granted. It is only when some breakdown in service quality occurs and the customer leaves or is on the point of defection that the spotlight is focused on the existing customer.
The experience of a large city firm of solicitors provides a good illustration of how marketing effort can be dangerously misdirected. In this firm, two events occurred within a short period of each other. The first incident involved the acquisition of a contentious piece of litigation work from a new client.
This work, worth around £200000, was likely to be a one-off contract as the client’s regular legal advisers were unable to handle it due to a conflict of interest. The law firm’s partners were delighted with the litigation partner’s brilliant coup in winning this new client.
Six weeks later, another partner in the firm persuaded an existing client, a large corporation that had dealings with several law firms, to give his law firm all the company’s conveyance work. Prior to this moment, the city firm had served the client in only one area of law.
The appointment represented additional work worth about £300 000 in the first year, with the expectation that it would provide an ongoing and growing source of future income. As such, it represented, in net present value (NPV) terms, perhaps five times as much profit as the piece of litigation work, yet news of the conveyance assignment received little attention in the firm.
This illustration is not meant to suggest that new customers are not important, for indeed they are vital to the future success of most organizations. However, a balance needs to be achieved between the effort that is directed towards winning new customers and that which is given to serving existing customers. All too often it is the existing customer who receives insufficient attention.
ii. Referral Markets:
What is the best form of marketing? One view is that the best marketing for your organization is that which is undertaken by your own customers. Customer referrals provide a formidable means of marketing at little cost to the company, and thus the creation of customer ‘advocates’ is vitally important.
But existing customers are not the only type of referral market- many other groups can refer business to organizations. These other referral markets include intermediaries, connectors, multipliers, agencies, and so on.
Let us consider an example from a bank to illustrate this point. Referral sources for the bank included insurance companies, real estate brokers, accountancy and law firms, as well as existing customers and the bank’s employees. The bank commissioned an internal review to identify the amount of business (both historic and projected) generated through referral sources.
The study served to confirm that referral sources accounted for significant business volume, although the bank had traditionally made little effort to promote custom from this direction.
Shortly after undertaking the study, the bank held a strategy retreat. The programme included a discussion on referral sources as well as presentations from several of them – in this case, important intermediaries. The bank was surprised at the criticism it received from these intermediaries, which reinforced the research finding that the bank’s referral markets were being neglected.
Equipped with an enhanced understanding of the value of referred business, the bank then established a task force to develop better relations with referral sources and to design a marketing plan incorporating referral markets. These measures produced a continued improvement in the business generated by the bank’s referral sources.
Most organizations need to consider both existing customers and intermediaries as sources of future business. Therefore, both present and prospective referral sources should be identified and a plan developed for allocating marketing resources to them.
Efforts should also be made to monitor the cost benefit. However, it should be noted that the benefits of increased marketing activity in this area may take some time to come to fruition.
iii. Supplier and Alliance Markets:
Organizations’ relationships with their suppliers are undergoing fundamental change. The old adversarial relationship – where a company tries to squeeze its suppliers to its own advantage – is, in many instances, giving way to one based much more on partnership and collaboration.
This trend represents good commercial sense. Manufacturers, for example, typically spend over 60 per cent of total revenue on goods and services from outside suppliers.
The new ‘cooperative’ relationship with supplier markets is being described under a number of different names. At AT&T, it is known as ‘vendorship partnership’, while at the European electronics group, Philips, it is called ‘co-makership’. In the USA, it is referred to as ‘reverse marketing’.
Whatever term is used, the aims of this new business relationship are closer cooperation between customer and supplier from a very early stage, mutual concentration on quality, commitment to flexibility, attainment of lowest costs, and achievement of long-term relationships.
A feature of the 1990s was the increasing importance of various forms of strategic alliance. Alliances are a potential source of supply of capital, managerial skills, market position, global coverage, technological skills, and much more.
iv. Recruitment Markets:
The scarcest resource for most organizations is no longer capital or raw materials- it is skilled people. An appropriately trained and experienced workforce is perhaps the most vital element in customer service delivery. Global economics and the changing nature of employment have not helped to enlarge the recruitment pool, even if unemployment levels are climbing to historic levels.
The basic reason for the current lack of skilled workers is demographic trends. In the USA, the percentage of people aged between 16 and 24 is expected to fall from around 20 per cent in 1985 to 16 per cent in 2000, with a projected decline in the 25-34 age groups from 23 per cent to 19 per cent over the same period. This broad pattern of reduced population growth exists in most western countries.
Obviously, these age groups represent key markets of new skilled workers entering the labour market. If attracting the best quality recruits is important to business success then this market will become a priority.
A large and well-known accountancy practice was having difficulty attracting newly qualified recruits. The reasons were not hard to discover. Its recruitment literature was old-fashioned and lacking in visual impact. On visits to university campuses – a traditional source of recruits – the company was represented by an old and uninspiring partner, and disinterested administrative staff.
The firm then Instituted a marketing plan to try to improve the situation and this involved redesigning recruitment literature (with the help of recent graduates), sending the brightest partners on university visits accompanied by managers with interesting experiences to recount, and sponsoring awards and prizes at target universities. As a result of the recruitment marketing campaign, the firm’s ‘offers to acceptances’ ratio increased dramatically.
v. Influencer Markets:
Influencer markets include a range of markets, which tend to vary according to the type of industry concerned. In the context of RM, members of the influencer market include individuals or groups that directly or indirectly impact on the organization. For instance, companies involved in selling infrastructure items, such as communications or utilities, will place government departments and regulatory bodies high on their lists of important influencers.
Companies registered on the stock exchange interface with a diverse financial community, including brokers, analysts, financial journalists, and so on, who together comprise a powerful influencer market. Other influencer markets include the media, shareholders, standards bodies, consumer associations, and environmental control authorities.
MCI Communications Corporation in the USA provides a good example of the need to identify target influencer markets. William G. McGowan, who some years ago was Chairman and Chief Executive of MCI Communications, faced some key marketing tasks with respect to influencer markets in the early days of MCI.
These influencer markets included:
1. Venture capitalists – McGowan had a business start-up that was a capital- starved communications company and he had to raise sufficient finance from venture capitalists.
2. Regulators – McGowan had to convince the regulators that he could construct and satisfactorily operate a long-distance telecommunications network.
3. Lobbyists – members of MCI had to become skilled lobbyists to get past the strict regulations of the Federal Communications Commission, which was dominated by AT&T (it was for this reason that the company established their headquarters in Washington, DC).
4. Litigators – in challenging AT&T’s domination of long-distance telephone lines by way of a private anti-trust case, MCI became involved in a complex lawsuit where relationships with law firms and lawyers were critical.
To grow the company, MCI had to focus on its important influencer markets as well as its original mission. This suggests that involvement in other activities outside the scope of core business operations may be necessary to protect and progress the core business.
While such activities are often carried out under the heading ‘public relations’ or ‘corporate affairs’, it is important that they be recognized as an essential component of RM and that they are allocated sufficient and appropriate resources.
vi. Internal Markets:
Internal marketing encompasses many issues in management, but has only two main aspects. The first is the idea that every employee and every department in the organization is an internal customer and/or an internal supplier. The objective here is to optimize the operations of the organization by ensuring that every individual and department both provides and receives excellent service.
The second aspect is making certain that all members of staff work together in a manner befitting the organization’s stated mission, strategy and goals. The importance of achieving this internal alignment is particularly apparent in service firms where there is a close interface with the customer. In this context, internal marketing aims to ensure that staff provides the best representation of the organization in all telephone, mail, electronic and personal contacts with customers.
Internal marketing is regarded as an important activity in developing the market orientation. In practice, internal marketing is concerned with communications, and with developing responsiveness, responsibility and unity of purpose.
The fundamental objectives of internal marketing are to develop internal and external customer awareness and to remove functional barriers to organizational effectiveness. Further, internal marketing plays an important role in employee motivation and retention.
While relatively little research has been undertaken into internal marketing practices, it is clear that a consideration of internal markets is essential to overall business success. Where internal marketing is concerned with the development of an improved market orientation, the alignment of internal and external marketing ensures coherent RM.
2. Identifying Groups or Segments within Each Market Domain:
The identification of the key groups or segments in each market domain is the first step in applying a multiple markets framework to an organization. In this article, we will consider this initial step in relation to the customer market domain, as it is the most critical market within the RM multiple markets model. A similar approach can be used for each of the other five market domains.
The customer market domain may be concerned with up to three broad groups- direct buyers, intermediaries and final consumers. To define these groups, let us consider the situation of a washing machine manufacturer. The manufacturer sells washing machines to a number of approved wholesalers, who in turn sell them to retail outlets. The retail outlets then sell the appliances to individuals.
In this example, the wholesaler is referred to as the ‘direct buyer’, the retailer who buys from the wholesaler is called the ‘intermediary’, and the individual who purchases the appliance from the retailer is the ‘consumer’. In this example, the description of ‘customer’ applies to all three groups. (In some industries, there may be further intermediaries who represent additional steps within the distribution channel.)
Market segmentation needs to be undertaken at all levels of the customer market domain, not just with the organization’s direct buyer.
A market segment is a group of customers with the same or similar needs. Market segmentation is the process of dividing a generic market into a number of smaller groups, or market segments, so that an appropriate offer can be created and presented to each group. For example, a manufacturer of consumer durables, serving many international markets, may segment its direct buyers (the wholesalers to which it sells directly) in terms of country, size, volume, level of sophistication, ownership, and so on.
The manufacturer can also segment the retailers (the intermediaries to whom the wholesalers sell) according to relevant segmentation criteria. Finally, the manufacturer can segment the final consumers (to whom the retailers sell). In the process of segmenting these customers, the manufacturer should develop a detailed understanding of the needs and preferences of customer segments.
Once the relevant segmentation base (or bases) has been determined, the market segments or sub-groups at the direct buyer, intermediary and consumer levels of the distribution chain can be identified. The opportunities presented by each of these segments can then be examined, providing an indication as to which are the most attractive segments and what are the most appropriate strategies for exploiting them.
The failure of many manufacturers to develop constructive relationships with their final consumers is fairly common. Many readers will have had disappointing experiences in terms of purchasing durable consumer products such as motor cars.
They might have been motivated to purchase a certain vehicle by the appeal of promotional activities, only to be disappointed by the subsequent lack of service provision by the vendor dealer. They might have been further upset when their attempts to obtain redress directly from the manufacturer were met with total disinterest or disregard.
Within the automotive sector, radical changes in both distribution and RM practices, such as the innovative approach being adopted by Daewoo, are now causing other motor car manufacturers to question what can be done to develop closer relationships with final consumers.
A similar approach to that employed in the customer domain can be used to identify the target relationships in each of the other five market domains. For example, Figure 2.3 lists the key markets and market segments for a property company. It should be emphasized that, within a multiple markets model, any one group may play a role in a number of these markets.
For example, customers may participate in- the customer market where the interaction is between the firm and its customers; the referral market where the interaction is between an existing customer and a prospective customer; and the influencer market where they may be part of a user group which interacts with the firm.
3. Determining Market Emphasis:
Once the broad groups and the segments within them have been identified for each market domain, we can proceed to assess the present and desired levels of marketing emphasis for each of the market domains. To consider these levels of emphasis for each market, a RM network diagram (also known as a ‘spider gram’), as shown in Figure 2.4, can be used.
This diagram has seven axes- two for customers (existing and new) and one for each of the other five relationship markets. The scale of one (low) to ten (high) reflects the degree of emphasis (cost and effect) placed on each relationship market.
The division of customers into ‘new’ and ‘existing’ reflects the two critical tasks within the customer domain, that of customer attraction and customer retention. A group of managers within a firm can then make an assessment as to the current and desired levels of emphasis on each market domain by means of a jury of executive opinion and place these on the RM network diagram.
This approach to reviewing relationships within the key markets can be illustrated by a reference to the illustrative RM network diagram for The Royal Society for the Protection of Birds (RSPB), a leading conservation charity, as shown in Figure 2.5. This diagram is based on the views of a number of people, including former executives at the RSPB, and represents an external assessment of developments in that organization.
In the mid-1990s, the RSPB might have considered a number of issues regarding relationship markets, as delineated in ‘1995/6’ in Figure 2.5.
These issues include:
1. Greater attention on retaining existing members (the RSPB has placed much emphasis on member acquisition. Should more attention now be directed towards existing members?)
2. Reinforcement of customer care and service quality issues within internal staff.
3. Stronger focus on influencer markets.
This identification of the relationships within the key market domains represents the first stage of the marketing diagnostic process. The second stage of analysis examines the groups or segments within each market domain in terms of present and desired marketing emphasis. Useful network diagrams, or spider grams, can then be developed for each market domain.
4. Planning for Multiple Markets:
The foregoing two stages of market analysis serve to identify the key groups or segments in each market domain and to provide an initial view of the existing and potential levels of marketing emphasis directed at them. The final two steps in the marketing planning process involve researching the expectations and needs of the key segments, and then determining the appropriate market strategies, including which segments require a detailed marketing plan.
The market domains do not always require their own formal written marketing plan, although many organizations may find it useful to develop them. However, some form of marketing strategy must be developed for each one.
In addition to the obvious benefits that it provides within the customer market domain, a rigorous marketing planning process can potentially deliver a superior relational approach to all the segments within the five ‘non-customer’ market domains.
For example, in the influencer market, this structured and relational approach to marketing planning surpasses the methods of market communication and persuasion advocated by so much of public relations and corporate affairs literature.
The marketing planning process follows four phases, which are- goal-setting, including the establishment of specific market objectives for each segment; situation review, including research on segment expectations and needs; strategy formulation; and resource allocation and monitoring. The constituent steps within these phases of the marketing planning process enable the objectives of each segment to be achieved.