17-Dec-20

CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER RELATIONSHIP MANAGEMENT

Defining Relationship
• A relationship is composed of a
series of interactive episodes
between parties over time.
• Episodes are time bound (they
CONCEPTS AND TECHNOLOGIES have a beginning and an end) and
are nameable.
Theme 2 • Episodes are composed of a series
Understanding Relationships of interactions. Interaction
consists of action, and response to
that action.

CUSTOMER RELATIONSHIP MANAGEMENT Woodburn & McDonald’s hierarchy of relationship levels

Five hierarchical levels of

Defining Relationship
relationship:
• Is a relationship more than • Exploratory
interaction-over-time?
• Basic
• What about emotional content ?
• Do relationships have some type • Cooperative
of affective connection,
attachment or bond? • Interdependent
• Integrated

Dwyer, Schurr & Oh’s model of relationship change Relationship Attributes

Major relationship Attributes

Change within Relationships:
are:
• Awareness
• Trust
• Exploration
• Expansion
• Commitment
• Commitment
• Dissolution

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Types of Trust How Trust Emerges

A party in a relationship
may trust the other’s.. • Trust emerges as parties share
experiences, and interpret and
assess each other’s motives.
• Benevolence. A belief that one
party acts in the interests of • As they learn more about each
the other. other, risk and doubt are
reduced.
• Honesty. A belief that the
other party’s word is reliable • For these reasons, trust has
or credible. been described as the glue that
holds a relationship together
• Competence. A belief that the
across time and different
other party has the necessary
episodes.
expertise to perform as
required.

What is Commitment Characteristics of Commitment

Commitment is defined as:

• Commitment is shown by ‘an • Commitment arises from
exchange partner believing trust, shared values, and the
that an ongoing relationship belief that partners will be
with another is so important difficult to replace.
as to warrant maximum • Commitment motivates
effort to maintain it; that is, partners to cooperate in
the committed party believes order to preserve
the relationship is worth relationship investments.
working on to ensure that it
endures indefinitely’.

Characteristics of Commitment Evidence of Commitment

• Evidence of commitment is
found in the investments that
• Commitment means partners one party makes in the other.
forgo short-term alternatives
in favour of more stable, long- • One party makes investments
term benefits associated with in the promising relationship
current partners. and if the other responds,
the relationship evolves and
• Commitment entails the partners become
vulnerability, leaving partners increasingly committed to
open to opportunism. doing business with each
other.

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Evidence of Commitment Attributes of high-quality relationships

• Investments can include • Core attributes

time, money and the • Trust
sidelining of current or • Commitment
alternative relationships.
• Additional attributes
• A partner’s commitment to a
• Relationship satisfaction
relationship is directly
represented in the size of the • Mutual goals
investment in the • Cooperative norms
relationship, since these
represent termination costs.

Relationship with Customers Relationship with Customers

Companies want relationship Companies want relationship

with customers? with customers?
• Why? • reduced customer churn
• because companies that creates
manage their customer • A larger customer base
base in order to identify, • Longer average customer
satisfy and retain tenure
profitable customers • Reduced marketing costs to
replace defected customers
enjoy better business • Better understanding of
results customer requirements
• More cross-selling
opportunities

Relationship with Customers Relationship with Customers

Impact of churn on customer numbers Connecting customer retention to customer
tenure
Company A (5% churn) Company B (10% churn)
Year Customer retention rate (%) Average customer tenure
Existing New Total Existing New Total
customers customers customer customers customers customer
base base 50 2 years
67 3 years
1 1,000 100 1,100 1,000 100 1,100 75 4 years
80 5 years
2 1,045 100 1,145 990 100 1,090
90 10 years
3 1,088 100 1,188 981 100 1,081 92 12.5 years
95 20 years
4 1,129 100 1,229 973 100 1,073 96 25 years
97 33.3 years
5 1,168 100 1,268 966 100 1,066 98 50 years
99 100 years

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Organizational benefits from managing customer retention Organizational benefits from managing customer retention

• Consequently, suppliers
• Reduced marketing costs become better placed to
• Fewer dollars need to be identify and satisfy customer
spent replacing churned requirements profitably,
customers selling more product and
service to the retained
• Better customer insight customer.
• Suppliers are able to develop • Over time, as relationships
a better understanding of deepen, trust and
customer requirements and commitment between the
expectations. Customers parties is likely to grow, and
also come to understand revenue and profit streams
what a supplier can do for from customers become
them. more secure.

The Customer Journey 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.
The Customer Journey Majority customer The customer selects your company as supplier of choice. You
A path from “Never-a-customer” occupy a significant place in the customer’s portfolio.
to “Always-a-customer”
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 revenue through

positive word-of-mouth.

Customer lifetime value (CLV) Customer lifetime value (CLV)

• CLV is the present-day value

of all net margins earned • Estimates of CLV potential
from a relationship with a look to the future only, and
customer, customer ignore the past.
segment or cohort.
• To compute CLV, all historic • A customer that appears to
net margins are be valuable on the basis of
compounded up to today’s the gross margins generated
value and all future net will most likely be less
margins are discounted back profitable once cost-to-serve
to today’s value. the customer is taken into
account.
• Example: Banking Industry

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Four causes of profit margin growth over time Profit from customers 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.

How to Calculate CLV? How to calculate CLV?

Customers are potential

• The total present-day value of a
income streams. customer is the sum of
• all past net margins compounded
to today’s value, and
A core CRM idea is that a • all future net margins discounted
customer should not be viewed to today’s value
as a set of independent
transactions but as a lifetime • The potential value of a customer
income stream. is
• all future net margins discounted to
today’s value

Core strategies to improve cohort profitability When do B2B companies not want relationships?

1. Improve customer retention rate in • When they fear loss of control.

the early years of the relationship. Relationships are bilateral
arrangements, which involve giving
2. Increase the profit earned per up unilateral control over resources.
customer by • When exit costs are high. Not all
• Reducing cost-to-serve relationships survive. It is not
• Cross-selling or up-selling additional necessarily easy or cost-effective to
products and services. exit a relationship.
3. Become better at customer • Resource commitment. Relationships
acquisition by require the commitment of scarce
• Using more cost-effective recruitment resources such as people, time and
channels money.
• Better qualification of prospects • When opportunity costs are high. If
• Careful nurturing of prospects with high resources are committed to one
CLV potential. customer relationship, they cannot
• Recruiting new customers matched to the be used for another.
profiles of current customers having a high
CLV.

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Business customers want relationships when … When do customers want relationships with suppliers?
In the B2C context, customers may value relationships
1. The product or its applications are for several reasons:
complex, for example, networking
infrastructure • Recognition. Customers may feel more valued
2. The product is strategically important or when recognized and addressed by name.
mission-critical, for example, core raw
materials supply for a manufacturer • Personalization. Products or services can be
3. There are downstream service customized.
requirements, for example, for machine • Power. Relationships with suppliers can be
tools empowering.
4. Financial risk is high, for example, in
buying large pieces of capital • Risk reduction. A relationship can reduce, or
equipment even, perhaps, eliminate perceived risk.
5. Reciprocity is expected. A financial • Status. Customers may feel that their status is
audit practice may want a close enhanced by a relationship with a supplier.
relationship with a management
consultancy, so that each party may • Affiliation. People’s social needs can be met
benefit from referrals by the other. through commercially based, or non-
commercially based, relationships.

Why B2B customers do NOT want relationships with suppliers? The Satisfaction – Profit Chain

• Fear of dependency
• Lack of perceived value in
the relationship
• Lack of confidence in the
supplier The Satisfaction Profit Chain
• Customer lacks relational
orientation
• Rapid technological changes

The satisfaction–profit chain Customer satisfaction defined

• Customer satisfaction is
the customer’s fulfilment
response to a customer
experience, or some part
thereof.

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Customer Loyalty Customer Loyalty

• Customer loyalty is the

result of consistently
positive emotional
experience, physical
Customer Loyalty attribute-based
Customer loyalty is the result of consistently positive emotional experience, physical satisfaction
attribute-based satisfaction and perceived
andorperceived
value of an experience, which includes the product services. value of an
experience, which includes
the product or services.

Two dimensions of customer loyalty Two dimensions of customer loyalty

• Behavioural loyalty • Attitudinal loyalty

• Is the customer active? • Beliefs
• What is our share of • Commitment
customer spend? • Preference
• RFM variables • Intention to buy
• Recency
• Frequency
• Monetary value

RFM measures behavioural loyalty Loyalty Squares

• R = time elapsed since

last purchase
• F = number of
purchases in a given time
period Dick and Basu Loyalty Model
• M = monetary value of
purchases in a given time
period

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Loyalty squares (Dick and Basu) Share of Market vs. Share of Customers

Repeat purchase
high low

strong
true latent Share of Market vs. Share of
loyalty loyalty
Customer loyalty is the result of consistently positive emotional experience, physical attribute-based satisfaction and perceived Customers
value of an experience, which includes the product or services.
Attitude

spurious no
weak loyalty loyalty

Share of market vs. share of customer The American Customer Satisfaction Index (ACSI) model

Customer loyalty is the result of consistently positive emotional experience, physical attribute-based satisfaction and perceived ACSI Model
value of an experience, which includes the product or services.

The American Customer Satisfaction Index (ACSI) model Returns from investments in customer satisfaction

Customer loyalty is the result of consistently positive emotional experience, physical attribute-based satisfaction and perceived Customer loyalty is the result of consistently positive emotional experience, physical attribute-based satisfaction and perceived
value of an experience, which includes the product or services. value of an experience, which includes the product or services.

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Relationship management theory: Five schools of thought Relationship management theory: IMP school

1. Industrial Marketing and • Focuses on B2B context

Purchasing (IMP) school • Argues that B2B transactions
2. Nordic school occur within the context of
broader, long-term
3. Anglo-Australian school relationships, which are, in
4. North American school turn, situated within a broader
network of relationships
5. Asian (guanxi) school
• Any single B2B relationship
between supplier and customer
is composed of activity links,
actor bonds and resource ties

Actor bonds, activity links and resource ties Relationship management theory: Nordic school
• Actor bonds are interpersonal
contacts between actors in • Emphasizes the role of
partner firms that result in trust, service in supplier–customer
commitment and adaptation
between actors relationships
• Activity links are the commercial, • Identifies three major
technical, financial,
administrative and other characteristics of
connections that are formed commercial relationships –
between companies in
interaction interaction, dialogue and
• Resources are the human, value – known collectively as
financial, legal, physical, the ‘Triplet of Relationship
managerial, intellectual and other
strengths or weaknesses of an Marketing’.
organization

Relationship management theory:

The Triplet of Marketing Anglo-Australian school six-markets model

• Interaction
• Inter-firm exchanges occur in a
broader context of ongoing
interactions.
• Dialogue
• Suppliers and customers are in
dialogue with each other.
• Value Anglo- Australian school Model
• Value in relationships is mutual.
To generate value from
customers, companies need to
generate customer-perceived
value, that is, create and deliver
something that is perceived to be
of value to customers.

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Anglo-Australian school six-markets model Relationship management theory: North American

school
• Links successful inter-firm
relationships to excellent
business performance
• Relationships reduce
transaction costs
• Focus on trust and commitment
Customer loyalty is the result of consistently positive emotional experience, physical attribute-based satisfaction and perceived
value of an experience, which includes the product or services. • Views relationships as tools that
a well-run company can
manipulate for competitive
advantage
• Focus on dyadic relationships
rather than networks.

Relationship management theory: Asian (guanxi)

school

• The foundations of guanxi are

Buddhist and Confucian teachings
regarding the conduct of interpersonal
interactions.
• Guanxi refers to the informal social
bonds and reciprocal obligations
between various actors that result
from some common social context, for
example families, friendships and clan
memberships.
• These are special types of relationship
which impose reciprocal obligations to
obtain resources through a continual
cooperation and exchange of favours.

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