Relationship marketing

prof. pherwani 1

Relationship marketing

Prof. pherwani

prof. pherwani 2

Coverage 1. Conceptual foundation of relationship marketing-

evolution of relationship marketing-its significance in Indian context

2. Relationship marketing of services vs. Relationship marketing in consumer markets

3. Buyer-seller relationships4. Relationship marketing in mass markets-relationship

marketing and marketing strategy5. Relationship marketing & distribution channels6. Role of IT in building maintaining and enabling

relationships7. Customer profitability design and analysis

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Introduction to relationshipsIntuitively human beings & primates inclined to be

in relationships with others of the species-the disciplines of sociology & anthropology are essentially on this premise.

o in personal relationships people tend to forego the opportunity to exercise continual choice and instead commit themselves to a particular person for relationship over time-true in dating, marriage, best friends, mentoring, apprentices, business partners, associates.

o This is also essence of learning behavior.o Memory as a relevant construct of relationship marketing

is applicable to both from customer’s perspective & marketer’s perspective-organizational memory is key characteristic of RM-in which a firm retains all relevant information about consumers to use it as a guide for future interactions-the essence of a learning organization is creation & effective use of organizational memory- Senge

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Understanding customer relationshipsHugh Munro suggests-there are 4 distinct types of

marketing:1. Transactional marketing-an event during which

exchange of value [goods or services] takes place-even a series of such transactions doesn’t mean relationship marketing-which requires mutual recognition & knowledge between parties. each transaction is discrete, anonymous, no formal record kept of a customer’s purchasing history, little or no mutual recognition between parties-no meaningful relationship is sad to exist.

2. Three categories of relationship marketing-database [focus still on market transaction, but now includes information exchange]-interaction [closer relationship exists when there is face-to-face interaction, value is added by people & social processes] & network marketing when he is able to put an individual touch & works in B-2-B context where firms commit resources to develop positions in relationships wit stake holders in supply chain.

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• Total relationship marketing-according to Evert Gummerson is- marketing based on relationships, interactions and networks, is embedded in total management of networks of the selling organization, the market, society. It is directed to long-term win-win relationships with individual customers and value jointly created between involved parties. Some examples of relationships with customers recognized as:

Nature of service delivery

Membership relationship

No formal relationship

Continuous delivery of service Insurance-

cable TV, college enrollment, banking

Radio station, police protection, light house, public highway patrol

Discrete transactions

LD telephone from BSNL, theatre series subscription, travel on a railway ticket, repair of TV under warranty, health treatment under CGHS ,

Car rental, mail service, toll highway, pay phone, movie theatre, BEST Bus, restaurant.

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1. Conceptual foundation of RMComponents of a marketing conceptCustomer orientation coordinated marketing customer organizational activities satisfaction success Organization’s performance

Objectives

Mktg. concept is an appealing idea but must be converted into specific activity and one of them is- customer orientation

And this has led to customer relationship management.The idea is not new but benefits of use of extensive data has

created unique competencies and opened up opportunities.

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CRM defined- establishing multi-dimensional connections with a customer [relationships] such that organization is seen as a partner.

How? Sorting and analyzing data supplied by customer Data gathered from 3rd parties Data collected from previous transactions Requires a lot of time & effort to create & maintain

and are not appropriate for every exchange situation.Result Marketer is able to better understand a customer’s

needs and preferences There is more to relationships than data-it is building

successful partnerships in business, enduring relationships can be built upon trust & mutual commitment

Applying mktg. effort to build lasting relationships with selected customers.

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Relationship Marketing process framework

Formation

Management & Evolution governance

Performance Evaluation

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Formation governance & evaluation model of RMFormation management & governance performancePurpose . role specifications • Innovation .communicationeffectiveness .common bonds• Improve .planning process relationship performance• efficiency .process alignment . financial program .employee motivation . marketing . Rational selling .monitoring process . Strategic . Retention mktg. . operational . Co-op arrangements . General strategic partnership. Partners• Criteria• Process Evolution . enhancement . termination

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Harley Davidson uses web to build relationships with customers to personalize its interactions

www.harleydavidson.com The firm created a club Hog-Harley Owner’s Group

for bike owners. It offers more than 650,000 members insurance, free safety lessons, safe-riding competitions, and 1,150 local chapters that hold regular meetings

The Internet is a two-way communication capability

What do they hope to get in return?A feeling of goodwill among their best customers and

a sense that firm cares about more than making the next sale-they are seeking a long-term relationship with their customers which will be mutually beneficial.

http://www.harleydavidson.com/

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o Earlier narrow meaning- customer database management activity involving detailed information about individual customers and carefully managed customer touch-points in order to maximize customer loyalty-is now broadened to encompass- overall process of building and maintaining profitable CR by delivering superior customer value and satisfaction.

o Firms are going beyond designing strategies to attract new customers and create transactions with them-they’re using RM to retain current customers & build profitable, long-term relationships-marketing is an art of finding-retaining & growing profitable customers.

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Evolution of RM1960s Direct mail became a minor part of mktg.

mix. lists were stored on lead plates and selections using holes in index cards and needles. Many direct marketing associations existed with their roots firmly in mail order & direct marketing

1970s Direct response advertising became important to create sales leads-the prospect details began to be stored in simple main frames then used around in advanced offices-followed up using direct mail, telemarketing and persona; sales techniques.

1980s Data base marketing-became the catch phrase-marketers began to use computer technology far more than storing names & addresses-outcome of the tool was analysis selection & segmentation

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Late 1980s

One-to-one marketing became vogue-marketers realized they could now use the affordable technology to communicate with customers individually-as a part of larger campaign-tailoring messages & offers to info. known & stored about customer.

Early 1990s

Loyalty marketing-became fledgling discipline when marketers realized that applying similar tech. to lead generation & acquisition, they could sell more to existing customers & extend their life as customers-credit card & airline loyalty programs became well established parts of marketing landscape around the world.

Late 1990s

Relationship marketing-evolved as sophisticated marketers recognized that just because a person was a customer, they were not necessarily loyal-& that in some occasions it suited both the firm & customer to have a transitory relationship.

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Historical-its roots were established 75 years ago!1. 1933-Buttercup Bread company launched its -safety

club- where children were able to collect a range of safety tips from wrappers of loaf bread-the more bread the mum bought the more safety tips the kids collected

2. 1938-Curt Carlson founded the Gold Bond Stamp company-retailers gave customers one stamp for each dollar they spent in their shop-customers redeemed them for rewards with the firm.

3. 1951-Ovaltine launch-where kids collected Secret Squadron codes and then used a Oval tine Secret Squadron Decoder Ring-to read the secret messages.

4. 1981-American Airlines launched their AA Advantage Frequent Flyer Club

5. 1992- saw Citibank launch the first credit card loyalty program- and other airlines also ventured into o frequent flyer domain.

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Loyalty programs-some disasters• Pan Am’s-frequent flyer program was a major contributor to

its demise-their points had no expiry dates-they were evergreen! So passengers were able to build their points over several years-reaching a balance value where redemption equaled almost the flight costs-at one stage the planes were flying around North America with no fare-paying passengers-only those with FFpoints-a recipe for certain disaster.

• UK Green Shield Trading Stamps-were based on a revenue & a cost redemption based on a single stamp being issued-one stamp per set expenditure level-with some bonus stamps of double. 30% of stamps issued were redeemed-it was too hard for people to save up stamps for the merchandize of choice. Petrol companies started emulating issuing 40-fold stamps for some period-easier & quicker, just few weeks to get a toaster instead of 6 months-redemption increased to 60%-cost doubled-they had to exit-new avatar-high street catalog- ARGOS.

• Umpteen failures in India-IOC loyalty card-Binny’s coupons etc-all seen as tactical bribes, synthetic rewards for repeat purchase-not as recognition of loyalty.

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Types of RM programs customer type

Program type Individual consumers

Distributors/ retailers

Institutional buyers/B-2-B

Continuity marketing

Loyalty programs

Continuous replacement & ECR programs

Special supply arrangements [e.g JIT, MRP]

Individual marketing

Data warehousing & data mining

Customer business development

Key account management

Co-marketing /partnering

Co-branding Cooperative marketing

Joint marketing & co-development

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Transactional & Relationship marketing mutual interdependence


Competition conflicts mutual cooperation

Transactional marketing

Inter-dependence and choice

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process

relationship perspective

Value distribution value creation

exchange perspective outcome

Paradigm shift in marketing orientation

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RM summarized-1• This is an approach to mktg. that seeks to establish

long-term relationships with customers based on trust & mutual co-operation

• It involves establishments of personal contacts and bonds between the customer & firm’s reps-the eventual emergence of feelings within each party of mutual obligation of having common goals & of involvement with empathy for the other side.

• Integration of all firm’s activities concerned with customer care-not just marketing.

• It contrasts with conventional transactional marketing which has a short-term time horizons and focuses securing a single sale. TM has limited customer contact & little emphasis on customer service. Quality is seen as a matter to be dealt with by firm’s production not entire firm

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RM summarized-2• Techniques of RM-extensive provision of information

on the firm & products, personalization of communication with customers, free gifts, attractive premium offers & careful monitoring of relationships formed with particular customers.

• RM is characterized by total commitment to customer care-openness-genuine concern for delivery of high quality goods & services-responsiveness to customer suggestions-fair dealing-crucially sacrificing short-term advantage for long-term gain.

• Suppliers attempt to create & strengthen lasting bonds with customers -shift from making a profit on each individual transaction towards establishment of solid, dependable & permanent relationship with customers they serve.

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RM summarized-3• Customers are seen as partners in mktg. process-

not as individuals to be influenced simply to make a one-time sale.

• Repeat orders from existing customers are much more profitable than new business-there is no need to spend money on advertising-visit by sales people

• Implementation of RM has been facilitated by IT that enables firms to hold enormous databases containing extensive customer personalized details of individual customers enabling suppliers to customize their target promotions precisely using differentiated message based on known individuals-tech breakthroughs have occurred in database capacity-interconnectivity-enquiry language-operational efficiency

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RM summarized-4• The expansion of Internet & broadband

makes direct interactions possible with geographically remote foreign customers

• Direct marketing has expanded recently• Higher customer expectations in relation to

level of service• Example of success achieved by Japanese

firms that place great emphasis on long-term commitment to customers-suppliers-TQM-meticulous attention to customer care.

• More extensive consumer protection legislation-product liability-unfair contract terms-product recall the world over.

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RM summarized-5• Market as networks- Closer relations withCustomers- suppliers

manufacturers

• has led to network marketing comprising a supply company and other firms with which it has built solid, reliable, long-term business relationships-it has established links to provide mutual assistance & support for distributing several firm’s products-company’s own input suppliers, licensees or sub-contractors-partners in new product research and development.

• Within networks flow information as well as exchanges of money and goods-social interactions improves outcomes.

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Good relationships start with a good fit• Companies need to be selective about the segment

they target, if they want to build successful relationships-matching customers to firm’s capabilities is vital-whom should we be serving?

• how customers relate to operational elements-speed, quality & reliability, the times service is available, physical features & appearance of service facilities

• How ell their employees can meet the expectations of specific type of customers-personal style & technical competence.

• Match & exceed competing services that are directed at the same types of customers.

• A superior service in the eyes of customers who value what the firm offers.

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• Focus not on members from manning point of view-without considering the value of each customers heavy users buy more frequently 7 in large volumes & more profitable than occasional users.

• If you favor a particular restaurant, a car service, a telephone service provider,-you are potentially a lot more attractive to the firm than a one-time visitor-& it is tailoring it offer to attract people like you-service hours, price, doing its best to make you loyal-other places you may feel you are giving value but not being valued

• All segments are not worth serving & may not be realistic to retain them-use of resources relative to the revenue they supply

• Relational customers are not buying commodity services-lowest price seeking customers are not good target customers for RM in the first place-deal-prone customers always seek low price

• Employees have improved daily jobs from appreciative customers.

• Attracting wrong customers typically result in costly churn-a diminished reputation & disillusioned employees- no focus on unbridled acquisition.

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• Firms have built strategies around serving customers neglected by established players that didn’t perceive them as sufficiently valuable-Enterprise Rent-A-Car targeted customers who need temporary replacement car & avoided the big ones pursuing the business travelers, Paychex provide small businesses with payroll &HR services, Charles Schwab focused on retail buyers of shares. Some customers may be difficult to please or unable to decide what they want

• Portfolio-artists & writers prepare a portfolio of their work to show to prospective buyers-portfolio also describes a collection of financial instrument held by an investor or the array of loans & advanced by a bank. Goal of a portfolio is to determine a mix of investments or loans that are appropriate to one’s needs, resources & risk preference=contents should change over time in response to performance of individual elements, as well as changes in customer’s situation or preference.

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• Caliber of a professional firm is measured by the type of clients it serves & the nature of tasks it works-volume alone is no measure of its excellence, sustainability or profitability.

• Marketers should adopt a strategic approach to retaining, upgrading and even terminating customers-whose retention involves cost-effective, long-term links for mutual benefit the effort need not target all firm’s customers with same level of intensity.

• Its critical to understand the needs of customers within different profitability tiers & adjust their service levels.

• Tiering the customer base-like SIA or AMEX cards-platinum-gold-silver

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Significance of RM in Indian contextThe earliest example is going back to 1987, when Unit Trust of

India had computerized all accounts. The culture was if the annual dividend was coming due of 30th June, the dividend warrants should by in the hands of investors by 25th June! UTI was pioneer in sharp and agile Customer relationship to bond with their growing investor domain-73 million and competing against the following instruments:

• Hidden cash• Dormant bank accounts and time deposits• Post office saving instruments• Company fixed deposits• GoldThere was no concept of mutual funds-which UTI

pioneered later and no online trading. Pherwani committee was formed for acceding to their suggestion to have a parallel stock exchange and electronic trading[ NSE is the result and its accompanying demat culture-and this has reduced the strangle-hold of unscrupulous brokers on the investing public]

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They had kept a parallel accounting and high-speed dividend warrant printers with a IBM S-360S mainframe at Cochin, if the Bombay office goes on work stoppage or sabotage-[public sector unions were restive and local politicians with full backing of Bears –the broker category which just spoils the market for others, yet everyday earning for themselves-UTI was called the BIG BULL- Dhirubhai Ambani phenomenon happened few years later.] aim-customer service should not suffer at any cost-each customer felt he is the only one being serviced by UTI. There was a overly huge emphasis on customer care-these words are a commodity today only in lip-service, how do you get a public sector behemoth into a well-oiled service machine serving 73 million investors unless there is top-level involvement and full time dedication to s prevent service failure. Competition is like a wounded animal waiting for a minute failure and blow it out of proportion-the bear cartel had some papers like Indian Express and local ministers in their pocket and since more people were becoming UTI customers-their only method was strong investor-support.

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Strength of relationship over timeStrength ofRelationship connection

The-I- will-buy- level F the G point-down-turn in relationship has

E occurred response received response not received G

Positive emotions positive

relationshipsThe neutral level A B C D Negative emotions H Negative

relationships

I

JThe-I wont-buy-level

interest stimulated by response response

marketing-DM or advtg. expected overdue Time

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Strength of relationship connection over timepoint descriptionA-B Prospect unaware-no thought to open a relationship with firm

B Sees stimulation-ad-recognizes service/product-considers??

B-C Expectation & anticipation heightens as he considers need

C Realizes offering may bring some value-request information

C-D Expectation & anticipation increases strength of R-waiting for info.

D Here he expected the info. to arrive-if firm responds the , they invite him to a Relationship-it takes 2 alternative routes

Here’s the good news track !

D-E Info. Sought-received & meets expextation-potentail customer makes a purchase decision-crosses the I-will-buy- line

E Relationship is to be cemented-prospect buys-becomes a customer

E-F Enjoys product/service-strength of R is growing-expectations met

F Customer is so satisfied with product & supporting service=becomes an advocate-starts recommending to others & firm delivers same level of service to others too.

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Point Description D-G Prospect still feels he should have received

information he requested by now-he hasn’t-resulting is slowing down of his enthusiasm & expectation-not reverse yet-recovery possible but not easy.

G If organization doesn’t deliver information by this point-prospect’s initial expectation hasn’t been met-gap between expectation and delivery creates frustration & strength of relationship begins to decline.

G-H Nothing has happened so strength of relations hip is damaged & takes a negative turn-its still recoverable-but only just-& it’ll take a lot of expensive follow-up to save prospect’s expectation of relationship.

H-I Declining rate of relationship increases-& almost nothing can be done to recover the

I The point of no return-all is lost-previously potential customer has crossed from feeling positive about organization & its products or services to a space where they actually begin to feel negative about them-contact may aggravate situation

I-J

J

Now situation is declining even further towards relationship grave yard-the once prospect starts talking negatively about organization & becomes very cynical about failed promises.Gone. Lost forever-formerly potential customer has made decision he will never buy form the firm-no matter how good the product-best left alone.

Now the other track

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Some thoughts by sages Each & everyone of you will make or break promises that

our brand makes to the customer-Amex CEO to employees

A life is for one generation-good name is forever-Japanese proverb

Education costs money-so does ignorance- sir Claus Moser.

What is a cynic? A man knows the price of everything and value of nothing-Oscar wilde

Ultimately only one really matters in service encounters-the customer’s perception of what occurred-RB Chase

The right people are your most important asset-Jim Collins

The first step in managing a loyalty-based business is in finding & acquiring the right customers-FF Reicheld.

Strategy first and then CRM-SS Ramsey

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• One of the surest signs of a bad or declining relationship is the absence of complaints from the customers. Nobody is ever that satisfied, especially over an extended period of time-Theodore Levitt

• To err is human to recover , divine- Christopher Hart• Marketing is about getting better business not simply

more business- David Maister• Marketing is so basic that it cannot be considered a

separate function—it is the whole business seen from customer’s point of view. Concern & responsibility of marketing must therefore permeate all areas of the enterprise.-Peter Drucker

• Computations only speak only to appearances and not to realities-Plato

• In fast-moving and dynamic industries that involve customer relationships, product come and go but customers remain-Valerie Zeithaml &Katherine Logan.

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• Mind the back door while you greet new customers-David Dove

• World did not need another me-too bank, I had no capital, no brand name, and I had to search a way to differentiate from other players.-Hill founder of Commerce Bank, New Jersey.

• New York may be the most over-banked place in the world, but the most under banked market. there are over $ 1 trillion in deposits-it represents an enormous opportunity

• No one has built a power retailer in this country thru M&A you should continue to grow organically-its easier to build a bank than fix one.

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RM in services As a merchant, you’d better have a friend in each town

-an old proverb from the middle ages..

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o Marketing is a performance rather than an objecto Reality of customers forming relationship with

people rather than goods paves way for RMo Services are rendered on an ongoing basis-&

repeated contacts facilitates relationship.o Product intangibility requires reselling efforts.o Customer doesn’t know what he is getting till he

has got it and then he dwells on dissatisfaction only its then essential to remind customers what he is getting and occasional failures pale in relative importance.

o Improving service quality has engender customer loyalty-& its growth fosters interest in relationships.

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RM is on the mature stage-the concept is well set in.

4 convergent influences have propelled current focus on RM:

1.Maturing of services marketing

2.Increased recognition of potential benefits for the firm

3.Customer advances4.Technological advances.

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Benefits to customero Many customers desire to be

relationship customers-for continuously or periodically delivered servies-personaly important, complex or variable in quality-desire continuity with the same provider..

o High involvement services hold relationship appeal.

o a proactive service attitude, customized service delivery.

o Heterogeneity of service and intangibility encourages loyalty.

Examples-medical, banking, insurance, hairstyling, personal fitness trainers,

Benefits to firmo Profits climb steeply when

a service lowers its customer defection rate.

o Costs to service existing customers are lower than costs to acquire new customers.

Examples- credit cards, telecom, banks, warehouse clubs vs. supermarkets, online brokers vs. full service brokers, lower cost airlines,

3.A firm can capitalize on improved service investments by effective

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o Auto-repair firms want to find customers who will be loyal-but customers want to find auto repairers who will evoke their relationships.

o Risk reducing benefits of having a relationship with a given supplier, customers can reap social benefits-it fundamentally appeals to people to be dealt with on one-on-one basis-it’s a basic human need to feel important.

o Service encounters are also social encounters- repeated contacts assume professional as well as personal dimensions.

o More knowledge able about customer’s needs and requirements-combined with social rapport built over years of service contact facilitate tailoring service to need.

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Some customer comments They should be my partner and more actively

give me advice on what’s calculated risk-our money is their money too-business insurance firm

they should take care of the detail-I want them to be a distant extension of my company-truck leasing firm

They know technology & what’s best for us-equipment service co.

When employees come and recognize you as a regular customer you feel good-hotel customer.

As my assets increase they must come and advise me regarding more coverage-personal insurance company.

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Share of customer• RM leads to a different kind of thinking about nature

of a business-hitherto thought of in terms of single product & goal was to ensure a higher share of the market more customers than their competitors

• Company objective is to achieve a higher share of customer-firm tries to sell an individual customer as many goods and services as it can over the lifetime of that customer’s patronage.

• He determines LTV of each of his customer and adjust its strategy accordingly-treats its best customers differently than its other customers-sends them right message at the right time.

• New technology allows marketer to track individual customer & customize their marketing efforts.

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4. Technological advances An expensive alternative to mass marketing-need to

be affordable Rapid advances in IT & communications is reducing

costs. Potential benefits are becoming better known.Key tasks:1. Tracking the buying patterns & overall relationship of

existing buyers2. Customizing prices, promotions and service

customization.3. Coordinating or integrating the delivery of multiple

services to same customer4. Provides two-way communication5. Minimizing errors and service breakdowns6. Augmenting service offering and valued extras.7. Personalizing service encounters as appropriate.

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USAA, San Antonio insurance firmo Primarily serves military clientele who are

members of the association. USAA has invested heavily on automating insurance policy writing, member enquiry claims, billing & other processes.

o Building a computerized , integrated customer data base was a pivotal step, by 1994 2,6m were covered-members & their families-spread throughout the world-change locations frequently

o Policy changes are a simple matter-one brief phone call-a member can insure a new car, add a driver, change an address, effect any number of changes-member’s file is consolidated-no handoffs to other departments are required-transaction completion is a one-step process & mailed the next morning.

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Electronic imaging system at USAA-more than 30,000 pieces of information never leave the mail room. Correspondence is scanned into a optical disk and inserted into appropriate member’s electronic service file, which are accessible to 2,500 service persons a col. Smiths query is accessible on her IMAGE terminal and instant enhancement of service encounter takes place including Smith’s last correspondence.

o A breakdown Call gets to a customer anywhere in US in just minutes with a service car, computerized screen authenticates the validity and customer’s data comes alive on the mobile screen.

o One has to experience the efficiency and rapidity of service to change ideas on what technology is all about.

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Walgreen-USA’s largest drugstoreo Fills 7% of all prescriptionso Uses IT at the heart of its RM strategy-INTERCOM a

satellite-based computer system linking all 3,500 Walgreen stores in 30 states plus Puerto Rico-maintains customer prescription records for timely use in emergencies. Customers can obtain refill prescription in any state-Walgreen's can reach any pharmacy by a toll-free number 24x7 7 company will send a prescription by overnight mail.

o It can provide patient prescription records to any hospital emergency room swiftly.

o INTERCOM can provide customers printouts of bills & prescriptions for income tax and insurance needs.

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Brady’s-San Diego clothing firm uses technology for RM Captures customers preferences, demographic, size,

style, purchase history, hobbies, clothing assortment in its database to customize services.

Personalized letters are sent at start of each month to clients having birthdays that month attaching a 15% discount coupon for any merchandize in the store. Regular customers are notified a week before a sale is publicly announced-allowing them a first look at the sale merchandize. If overstocked in any items, Brady's writes and invites them over for their odd size.

Technology advances are moving firms to segmenting markets by groups to segmenting by individual households-it recreates

Old fashioned relationships with tailor, corner grocer, jeweler.

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Hertz & prof. Pherwani• It was 2002. place London on Edgeware Road Office of

Hertz Rent-a-Car Ltd. Time 0900 hours. We wanted a car on rent to accommodate four for an intended trip to Bath{ where ancient Roman Baths along with Roman Empire artifacts and carvings plus a museum thrown in. outside there is a shoppers Plaza-no vehicles allowed, you need to park far away in a Park House run by Bath Borough}.

Girl at the counter asked for my license-it is ancient about 40 years old-but valid. She stared at it. Passed on to her senior. I thought it is race and my skin color and India origin-Act I, Act II, Act III all in my mind-the reality was she observed it was my birthday, and had winked to her colleague who rushed to get a cake. It came in 10 minutes-the time I was asked to wait, with my thinking machine working. They celebrated it on the chin-high counter before upgrading me to Merc 300, waiving £ 7,5 insurance and handed over car keys! Their system knew I was a repeat customer and had used their services 2 years back.

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Amex CustomExtras program uses RM to attempt

to get customers

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Multiple levels of RMIt can operate on multiple levels depending upon type

of bonds used to foster customer loyalty=higher the level at which RM is practiced, greater is its potential for sustained competitive advantage.

Level 1Relies primarily on price incentives to secure customer

loyalty-higher interest rates for longer duration accounts in a bank, a free DVD rental after 10 paid, frequent flier program of an airline.

Potential for sustained CA is low, because price is the most easily imitated element of marketing mix-within 3years of AA establishment of Advantage frequent flier program, 23 other airlines offered their own frequent flier programs

Customers interested in price incentives are most vulnerable to competition for strongest possible relationships a firm needs to move to a higher level of bond.

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2. Relationship marketing of services vs. Relationship marketing in consumer markets

Three levels of Relationship marketing

level Primary Bond Degree of customization

Potential for sustained competitive advantage

examples

1 Financial Low Low SIA Kris Flyer program

2 Social Medium Medium HOGS

3 Structural Medium to high

High FedEx PowersShip program

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Financial bonds• America West’s Flight Fund is a typical frequency

mktg. program. It offers travelers a chance to enjoy awards once they have accumulated a minimum of 20,000 Flight Fund miles. Certificates are redeemable for travel on America West and Express & selected domestic and international carriers-awards can also be redeemed with car rental & hotel-9 chains-partners, Sprint LDCs, Visa card- a financial benefit for increased patronage of America West.

• Most frequency mktg. programs are based on financial incentives-season tickets for national games, movies theatre-banks offer higher interest on deposits for higher amounts-free trips for qualifying miles covered. A discount pricing incentive to reward consumers for high levels of spending for multiple purchases.

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Social relationships• Saturn owners converge on the car company’s

headquarters in Spring Hill Tennessee for a barbeque, a plant tour and a chance to talk with other Saturn owners about their cars.

• Chrysler goes one better with one weekend for JEEP owners to converge at the mountain town of Blending in Utah for Jeep Jamboree-jeep owners gas-up and form a convoy to Arches Canyon National Park, a 20 minute drive away. There for the next 2 days and nights they get to test their vehicles on narrow roads in natures roughest terrain-it offers a rare chance to experience the promise of Jeep commercials-only 10% of those who own SUVs ever get a chance to drive off-road. For Chrysler this offers a chance to bond with the customers & establish brand loyalty. The participants become ambassadors for the brand.

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• Structural bonds- www.charlesschwab.com a financial service provider provides its Velocity computer software so that its clients can check stock quotes, evaluate portfolio histories, get company info. Trade stocks on the internet and solicits advice about investing options and maturity alerts-it is creating a structural solution to an important customer problem.

• Relationships based on structural bonds don’t depend on the relation-building skills of the the service provider as in traditional customer-broker relationship-but on the service delivery system that is part of company structure. Internet is the medium to build structural bonds.

http://www.charlesschwab.com/

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Level 2 Relies primarily on social bonds-although

aggressive pricing may be a vital element of marketing mix. Here marketer capitalizes on the reality that many service encounters are also social encounters.

It involves personalization & customization of the relationship-

prof. pherwani 58

HD has forged a powerful RM strategy on the foundation of its HOGS-each dealership its own chapter. Harley-Davidson pays the first year membership dues for the customer who buys one of its motorcycles. It helps buyers enjoy and use their motorcycles they sponsor & facilitate weekend rallies, training session and other events that brings together like-minded people. It mails a bi-monthly magazine to HOGS members that lists national & international riding events. 250,000 members make HOGS program-illustrative of level 2 RM at its best. “ if customers use the motor cycles, they will stay involved. If there is no where to go and no where to ride the motorcycle stays in the garage, the battery goes dead and a year from now they will just sell it.”

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Social bonding involves personalization & customization of relationship-communication with customers regularly through multiple means, referring to customers by name during transactions, providing continuity of service thru the same rep, augmenting the core service with educational or entertainment activities such as seminars & parties.

Social bonding cant overcome a noncompetitive core product-it can drive when competitive differences are not strong- a tolerant customer of service failure or give a firm time to respond to competitors entreaties.

Relational selling behaviors of life insurance sellers-staying in touch, personalizing the relationship, sending cards, gifts.

Demonstrating a cooperative, responsive attitude.on relational quality-client trust and satisfaction

with the person and anticipation of future interactions have a positive influence.

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Level 3The structural solution to the customer problems is the

base of RMIt offers value-adding benefits that are difficult &

expensive to provide & not easily available elsewhere, they create a strong foundation for maintaining and enhancing relationships. If marketers are also using financial and social bonds, the foundation is even more difficult to penetrate for the competitors.

The solution to customers problems is designed into the service delivery system-rather than dependent on relation building skills of the individual service providers. The problem solution is structural and binds the customer to company instead of the individual who may leave the company.

.

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FedEx’s Power Ship Program which installs computer terminals in offices of high-volume customers illustrates level 3 relationships

It consists of a series of automated invoice and shipping systems that save customers time & money while solidifying their loyalty to, a microcomputers terminal with modem, a bar code scanner and a laser printer. FedEx. The system is scaled down to customer usage. They receive free electronic weighing scale-Power Ship rates packages with correct charges-combines package weight by destination to provide volume discounts & prints address labels from the customer’s own database. User can automatically prepare their own invoice, analyze their shipping expenses and trace their packages through Federal express tracking system-the score is 70 % of its volume and 100,000 packages are thru Power ship systems deployed at customer sites.

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Until recently-marketing focus was acquiring new customers-marketing to existing customers wasn’t a top priority-concentration was how to attract new customers rather than how to retain existing ones-retaining services consumers or consumer evaluation of products or services was not used as a criterion.

Five strategic elements for practicing RM:1. Developing a core service around which to build

customer Relationship.2. customizing the relationship to individual customer3. Augmenting the service with extra benefits.4. Pricing service to encourage loyalty5. Marketing employees so that they in turn will

perform well for the customers.

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2. RM in consumer markets

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2. Relationship marketing in consumer marketso Basic principle is consumers like to reduce choices by

engaging in ongoing relationships with marketers-reflected in continuity of patronage over time-it is a form of commitment to patronize certain selections rather than narrowing choices- this reduction of choices is the crux of RM in consumer products-a prevalent, natural and normal consumer practice.

o Consumers visit the same supermarkets, the same process of purchasing, the same brands again and again-store loyalty-person loyalty-process loyalty, all forms of committed behavior.

o Consumers engage in RM to achieve greater efficiency in their decision-making-reduce task of information processing & increase cognitive consistency, reduce perceived risks associated with new choices, norms of behavior set by family tradition, influence of peers, government mandate, religious groups, tenets, employer influence, marketer induced policies.

o The RM here goes beyond repast purchase behavior and inducements-repeat purchases are only a precursor of relationships.

o Bonding is created through partnering activities and value creation

more closer the bonding, the more committed the customer becomes and patronizes other marketers less.

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Relationship marketing in consumer marketsConsumer behavior theories & RM behavior

11.Theoretical approaches

Illustrative works

Problems explained

Relevance to RM behavior

1. Buying behavior theory

Engel, Blackwell, Nicosia, Howard & Sheth

Consumer problem solving behavior

Consumers reduce choice thru use of evoked set-desire for simplification & routinization of tasks drive relational behavior.

2. Learning conditioning theories

Berlyne, Dawson, Bears & Kelly, shimp, Skinner

How consumer behavior is conditioned over time

Learned experiences help in stimulus generalization. Expectations of positive reinforcements induce relational market behavior

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Consumer behavior theories & RM behavior 11. Theoretical approaches

Illustrative works

Problems explained


3. Information processing & memory

Alba, Miller, Hutchinson, Belt man

Consumer ability to process information

RM behavior helps rehearse memory & simplifies the info. Processing task

4. Perceived risk Bauer, Beatly, Taylor

Consumer risk reduction behavior

Consumers become loyal-a manifestation of RM behavior to reduce perceived risk-rational behavior develops self-confidence.

5.Cognitive,concistency, balance, congruity, confirmation, disconfirmation, attitudes, cognitive dissonance-theories

Hunt, McGuire How consumers” beliefs and feelings affect their behavior

RM behavior reduces psychological tension by creating more consistency in the cognitive system & reduces potential cognitive dissonance

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11. Theoretical approaches

Illustrative works

Problems explained


6. Family buying behavior

Childers & Rao, Sheth

Influence of family on consumer behavior

Consumers engage in RM behavior to confirm to family norms & interests, given the power of family over the individual

7. Social groups/social exchanges theory group influence processes

Blau, Coleman, Goodwin

Influence of social groups on consumer behavior

Consumers engage in RM behavior by confirming to group norms in order to avail themselves of socialization and avoid conflict

8. Reference group theory and word-of-mouth communication

Arndt, Rogers How consumer behavior is influenced by reference groups and word-of-mouth communication

Motive to be socially integrated drives consumers to engage in RM behavior in accordance with reference groups and WOM from opinion leaders

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11.Theoretical approaches

Illustrative works

Problems explained


9.governemnt, civic responsibility, compliance, welfare theories

Levine & kamakura Why consumers abide by government mandates

Consumers engage in RM when mandated by Govt. because of fear of legal action, civic responsibilities,

10.Religion patronage, self-efficacy theories

Benghazi & wars haw How religion & moral values influence consumer behavior

Strong faith, self-efficacy, fear of negative consequences, motivate consumers to engage in RM behavior, where choice is associated with religion

11. Employers organization influence

Whyte How employers & organizations influence the personal lives of individuals

Consumers patronize those mkt. behavior choices formally/ informally patronized by employers

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Circumstances when consumers terminate relationships in consumer markets

1. Satiation-consumers seek novelty due to boredom with current consumption

2. Dissatisfaction-if suppliers fail to match their offering with customer expectations-which rise with very level of satisfaction achieved& when their expectations are not fulfilled they terminate the relationship with that marketer.

3. Superior alternative-this has a higher perceived value

4. Conflict-disagreement with the existing marketer5. High exit barriers-if consumers experience high exit

barriers, they revolt-it is appropriate for marketer to provide an opportunity to voice their concern, specially when choice is restricted.

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Consequences of Relationship marketing

1. Improvement in marketing productivity2. Achieving marketing effectiveness3. Individual marketing4. Consumer involvement5. Minimization of negative image of

marketing6. Achieving marketing efficiency7. Customer retention8. Making resource more productive9. Asking consumers to do marketer’s work.

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Future of RM in consumer markets1. Technological advances have made it affordable and

possible2. It is economically more advantageous to retain existing

customers than constantly seek new customers.3. Institutionalization of RM–create corporate bonding & multi-

level instead of only frontline relations4. Extension of relationships to family members and friends of

the consumer-develop psychological bonds5. Technology is the prime facilitator of such bonding-

electronic frontline intelligent agent interface-coupled with desirable human backup. It will help relationship enhancement or termination.

6. Ono-to-one relationships now possible-consumers seek these.

7. Direct relationships rather than thru’ intermediaries-who are more transaction-oriented & lack emotional attachment.

8. Relationship approach will become more prevalent

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3. buyer-seller relationships

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3.Buyer-seller relationshipso It is an integral part of B-2-B marketso Relationship emerge in hi-impact areas in the

buying areao Buyers-sellers developed trust & friendship over

time supported by good quality so products & services-firms strive to create these relationships-acceleration here creates a stressful environment-performance expectations have increased making successful RM more difficult-became strategic as firms needed to achieve goals-the range remained unexplored in the long-term.

o Buyers are developing single-source suppliers with view to increase quality-reduce inventory-develop JIT-decrease time to market –the intensity of which cant be accomplished with multiple sources.

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Ultimate aim is to reduce costs for everyone-realized by 2 models:

1. An adversarial model-buyers pit suppliers against each other

2. Cooperative model- both parties lower costs by working together to lower operating costs-by better inventory management, elimination of unnecessary risks and process simplification-Wal-Mart is the most successful working model where a vendor also makes money in the partnership.

Buyer-seller relationship is dyadic interaction- at both firm and individual level [power-dependence-cooperation-expectation-closeness]-interaction is a series of short-term social interaction that are influenced by long-term business processes that binds the firms together.

Technology resources of firm, organizational structure influence these relationships.

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o Individual’s attitude, goals, expectations influence behavior within the interchanges. 14 of the Relationship variables can include:

1. Commitment- discriminates between stayers & leavers-an implicit or explicit pledge of rational continuity between exchange partners-an enduring desire to maintain Relationship.

2. Trust-one partner will act in the best interest of the other-willingness to rely on an exchange partner-belief that its needs will be fulfilled in future actions-other party desires coordination-will fulfill obligations & pull its weight in the relationships-its word is reliable

3. Cooperation-similar or complementary actions to achieve mutual outcomes with expected reciprocation over time-pro-active aspect -both parties receive benefits of relationship.

4. Mutual goals-degree to which partners share goals-can be achieved thru joint actions &-maintenance of relationship-influence performance satisfaction & level of commitment-shared values-enhancement of relationship as a whole.

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5.Interdependence/power imbalance-power of the buyer or seller & ability of one to make the other do depends on degree of dependence-need to increase interdependence.

6. Performance satisfaction-sellers must deliver a high level of satisfaction on basic elements of business transaction or risk getting marginalized-Telco had battered suppliers for their own gain by driving hard bargains in 1980-90-people will not take new designs to Telco because they would give it to the lowest bidder-drying up of innovation will eventually made Telco less competitive-performance satisfaction includes product-specific and other attributes.

7. Comparison level of alternative-quality of outcomes available from best available relationship-dependence will be low when many high-quality firms are available

8. Adaptation- one alters its process to accommodate the partner-varies over lifetime of relationship-means to develop trust early stage-in mature stage expands relationships & creates entry-barrier for rivals

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9. Non-retrievable investments-relation-specific commitment of resources invested by a partner-capital-training-equipment-cant be recovered if relationship terminates-also the amount at stake causes a hesitancy to stop-existence of economic opportunism exists in transaction cost analysis-risk if safeguards are not developed to control exploitation of the at-risk partner.

10. Shared technology-contributed by one-product-level-linkage of computers-early stages strains are overcome at maturity.

11. Summative constructs-non-retrievable investments, Clalts, shared tech.

12. Structural bonds-vector of forces that creates impediments to termination of relationship & above strengthen [by higher levels] or weaken relationship-interaction may be greater than summation of parts.

13. Social bonds-buyers having strong personal relationships stay longer-it is the degree of mutual personal friendship shared by buyer-seller.

14.Situational factors-may add or delete from above 14 factors

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o Not all supplier can be appropriate partners for cooperative relationships candidates for in-depth relationships are:

Low QI amount of

operating risk* associated with doing business

with seller High * operating risk-

refers to risk buyer incurs Low High because supplier’s

failure to produce quality value added to the buyer’s product by seller goods on time or

other factors growing awryInterpretation:o Firms in 1st quadrant add value to the firms product have low

operating risks-makes them candidates for relationship development- & as partners who as high value-adding makes them important to the firm-Even at the market stage-where higher prices can be fetched-for example Rolls Royce aircraft engines add value to Boeing Aircraft, which is superior to Airbus or other rivals and fetch consumer preference.

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Process model of buyer-seller relationship• We integrate the variables with relationship

development stages:Active phase-during which they are center of

Relationship development process-receives a great deal of manager’s time & energy.

Latent phase-they are important but not under active consideration in relationship interaction-main issues have been settled to manager’s satisfaction & don’t need more time or attention-this construct has become part of operating environment.

Environment affects RM-trust may be active initially later becomes latent till a change of a new manager at the customer’s place, when they become active again.

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A hybrid relationship-a composite of the buying & selling cultures of the firms-these straddle markets and hierarchies-use resources from more than one organization-has 5 stages:

1. Search for appropriate partner-awareness stage-feasible partner-an existing buying turns into relationships to meet firm’s goals of lowering costs thru’ JIT, TQM.

2. Defining purpose of relationship-problems arise during JV’s M&A-difference between shared {the glue holds RM in time of stress} & individual goals is area of conflict resolution

3. Boundaries of relationship-where does one end & another begin? JVs have clear legal boundaries but supplier-buyer & strategic partnerships, channel partnerships don’t have legal lines & need clear definition-one commits most order, other commits production resources to the relationship-altering accounting & systems too to accommodate-creation of a governance structure-reciprocal adaptation implies costs-clarified resources available to keep the relationship going.

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4. Value creation-competitive abilities re enhanced by R-it’s a joint effort-synergistic combination of partner’s strengths-some benefit must be seen in working together more than working alone-sharing value created is an issue-value forms include-technology, market access, I.T.- lower operating costs for the seller +lower prices for the buyer can be one outcome, knowledge gained by one embedded in the routines of another can be second, forming complex intimate relationship-customizing of hybrid bonds come with innovative technology-a balanced R implies both are reasonable & get a fair share & risk-pushing too hard can damage R

5. Hybrid stability-is the degree of creating positive outcomes for key variables in the R-key variables-trust- performance- satisfaction become latent in maintenance of R phase.-positive aspects of relationships goes beyond financial issues as social bonding-trust-cooperation-cooperation norms-commitment-create a stable atmosphere.

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Future directions in buyer-seller relationshipso Concept-very difficult to measure a powerful variable

as trusto Model level-situational factors-buyer-seller

relationships- strategic alliance or channel relationship-time available is a variable. Buyer-seller path to commitment ascribed to channel partners may be different-cultures may be different-experience level may differ-level of intensity of relationship may differ too.

o Process of relationship has to be tracked and not easy-firm needs, roles required to maintain relationships-survival when focus alters,

o Future managerial implications-R is becoming part of creating a competitive advantage for the system by developing sets of relationships that create value in the network & are difficult to duplicate.

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o Managerial implications-firm seeks to interlock set of R’s to seek competitive advantage over rivals-dyadic and triadic relationships- enveloping designers, manufacturers & shippers-difficult for rivals to replicate.

o Global businesses forge multiple relationships at a fast rate-adversarial competitive models are replacing buy cooperative buying where savings occur thru cost reductions in total operation rather than price reduction focus-many hybrid relationships benefit from even single-source buying-buying caters are thriving-it also acts as a barrier due to its organizational reward system-for driving down costs & not manage the R-senior managers talk about r while operations level operate in a transactional mode making trust development & mutual goal achievement difficult-balance needs to be restored

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Integrating the 14 relationship variables

variable Partner selection

Defining purpose

Setting relationship boundaries

Creating relationship values


1,Reputation ¤2. Performance satisfaction

¤ ¤3. Trust ¤ ¤4. Social bonds ¤ ¤ ¤5. Comparison level of alternatives

¤ ¤6. Mutual goals ¤ ¤ ¤ ¤

prof. pherwani 85

7. Power /dependence ¤ ¤ ¤8. Technology ¤ ¤ ¤9. Non-retrievable investments

¤ ¤ ¤10. Adaptation ¤ ¤ ¤11. Structural bonds ¤ ¤12. Cooperation ¤ ¤13. Commitment14. Situational factors

¤ ¤

variable Partner selection

Defining purpose

Setting relationship boundaries

Creating relationship values


Integrating the 14 relationship variables

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Industrial selling process-distinctive characteristics

1. Prospecting

3.Sale

4. Post sale&

service

2. Preparation&

presentation

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Factors-involve more than finding organizations that can use co' product:

1. Cost of personal sales call is such that sakes manager wants to ensure that a given firm is a viable prospect

2. reasons to avoid a particular prospect-High customer switching costs-deep-seated loyalties to other vendors-small potential orders-excessive service-level demands-inefficient location-among many

3. Prospecting-thru telemarketing-referrals from current customers-inquiries generated thru info request calls-toll-free nos.-print media advertisements-trade shows-cold calls, though inefficient method for finding customers-sales leads thru databases-leads have to be worth something if qualified this way-sophisticated lead-processing systems reduces qualifying time.

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• Buying decision process is lengthy-content will have to be tailored to different members of the customer’s organization in different functions

Qualityfunction

CommercialIncoming stores

Design & methods

FinancialCosting

accounts

SeniorManagerial

levels

user

prof. pherwani 89

• Buyer is vary of commercial tactics-important to know who are influencing the buying decision-tread carefully here-each needs working

• Preparation needs extensive research of buyer’s structure-the way in which he will apply the vendor’s product

• Setting of specifications-bid solicitation-supplier selection-rules governing behavior of purchase function-all will need special tactics

• Competition is invited too-what’s their strategy?

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Dyadic perspective in B-2-B MARKETS• Marketing transaction involves at least two parties-

both of which seek benefits & both of which determine the outcome of the transaction-both have to be examined together-this is called a Dyadic approach-a dyad is a unit of two-in contrast to traditional approaches where buyers/sellers are examined in isolation. There 4 key dimensions to a dyadic relationship:

1. Relational characteristics-how we are on this customer? How dependent they are on us? What are sources of our respective dependencies? What are implications of the power balance for sale?

2. Social structure-buying process centralized or formalized –determines the buying process-level in hierarchy for decision making-title & qualification of sales/service level people.

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1. Social actor-demographic2. normative

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Post sale stage:It is of special consequence to the marketer, once

the sale is closed the salesperson continues to work with customer in such areas as :

1. installation2. training3. servicing4. Maintenance5. spares6. returnsAttempts to solidify a source-loyal

relationship-he is better informed regarding the purchase decision process in the customer’s organization-is in a position to reinforce key buying influences while establishing more personal relationship with them.

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4. R.M IN MASS MARKETS& STATEGY

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4. Mass customizationDeveloping, producing, and delivering affordable products with

enough variety & uniqueness that nearly every potential customer can have exactly what he wants.

How? Mass customization is made possible by advances in

information, mfg. technology. Firms learn a lot more about current and prospective

customers & use that information to design, produce, market products and services

They can communicate thru’ electronic mediaResult –proliferation of products in many categories-though

more variety is not always better-lack of shelf space and customer confusion caused by this explosive expansion.

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firms are increasingly applying RM in even mass markets Enabler is advances in CIT & Internet for order taking-

complaints Focus is customer retention-being less costly than

acquisition Small increase in retention rate has a dramatic effect on

profitability the extreme some drive one-to-one Relationships

Customer intimacy-relationships extend beyond economic boundaries

Evoking of emotions thru broadcast media create a sense of identity & affiliation with the firm-business process ensures fairness of the exchange transaction-personalized service can influence customer’s perception of helpfulness & friendliness-evoking happiness, pride & achievement-in unfavorable conditions just the opposite-anger frustration-customers & employees feel a sense of commitment or connection towards each other.

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• Two-way interactions required due to its very nature of RM• Firms in mass marketing conduct RMthru marketing mix-in

service firms customers contact the organization-in mass marketing when they come in contact with sales personnel-outside & inside & service providers-they use stored customer information & create mail contact-newsletters, upcoming events, contests, appointments-interactive many-to-many communications possible-reduces propensity to switch-www.amazon.com www.ebay.com ww.ggogle.com

• Customers invest in educating suppliers about their needs & realize they have to go all over gain with a different one if they move.

• Extended time intervals-relationship occurs over time one or more exchanges take place beyond the time of actual transaction-involves psychological, social, economic resources-relationship spreads over various stages of process-pre-during & after sales interior. Multiple exchanges-have regular or intermittent transactions-hair-dresser, dentists, message therapist, or continuous transactions- decoration, real estate, automobiles, appliance repairs & maintenance.

http://www.amazon.com/

http://www.ebay.com/

http://www.ggogle.com/

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Stages of RMValue of relationships

performance prompt accessories upgrades

call backs by service

η in paperwork dealer -prompt delivery information of -attitude -features of sales persons -price -attitude of salesmen presale sale consumption

service cross-selling repeat selling

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Stages of relation building process over time between a customer & marketer shown in the chart involve multiple episodes or interactions-in single exchange-auto dealership or insurance —over lengthy periods of time.

It highlights elements which are not at the core of product offering

Social & psychological resources are exchanged between buyer-seller at each stage- an important role in determining the likelihood of R moving to the next stage.

Car sales initially provides psychological and social resources-courtesy, respect-economic resources-test drive, brochures-outcomes may motivate a buyer to come back-result in to purchase-further inputs result in to accessories, upgrading his purchase & recommend to his friends& relatives.

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Conditions facilitating RBo Customer’s propensity to switch brands in packaged

goods is different from those switching their primary care physician.

o 3 product categories that should influence customer’s decision to invest in-maintain or withdraw from R 7 relevant rational behaviors observed at each situation.

1. Product category heterogeneity-RM is possible only when some degree of customization is possible in mass markets-it is major benefit to the customer & adds value to exchange relationship. Product category heterogeneity is associated with large number of alternatives-shampoos-complex alternatives-PCs-significant differences among alternatives-cars-variance in retail operations. These differences are created thru brand & image advertising-they expand their consideration sets beyond existing exchange partner when there is product homogeneity.

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1. Perceived risk-customer’s decision involves risk-consequences cant be predicted with certainty-probability of loss that may occur as a result of alternative exclusion & importance of that loss-financial risk, performance risk, physical risk, convenience risk-greater the risk greater will he indulge in RM behavior to reduce social risks-trust becomes an important factor.

2. Switching costs-one-time costs that buyers incur switching from one supplier into another-monetary costs + non-monetary costs [mental stress when product knowledge is low, social costs]-self evident in B-2-B marketing [make or BPO decision]-new who switches from CVD to DVD incurs additional costs-purchasing intensions depend upon customer’s acceptance of switching costs-they value existing relationships when switching costs for both monetary & non-monetary Rs are heavy.

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Product category characteristics for facilitating RMLOW

RISKHIGH RISK

HOMOGENOUS

HETEROGENOUS

HOMOGENOUS

HETEROGENOUS

Low switching costs

Packaged goods, telecom services

Retail merchandizing, restaurants

Airlines, hotels, package delivery

Hair salons, clothing, OTC medicines

High switching costs

Cable television, car insurance

computers

Life insurance

Housing, child care, financial services

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Joint effects of switching costs, heterogeneity, & perceived risk

• Customers will have greater propensity to engage in relationships behaviors in categories characterized by above 3 factors-high switching costs-heterogeneity-perceived risk.

• Last table shows some product categories & 3 factors which are not independent but interaction between them also affects R behavior-heterogeneity in computer systems may inflate a customer’s perception of high switching costs or risk perception of switching hair dresser may influence perception of heterogeneity in their capabilities.

• Customer may need variety-here marketer need to develop a wider assortment of goods & services or providers.

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Model of the consumer’s decision to maintain, build or withdraw from a relationship

Company characteristics-perceived risk cumulative satisfaction-product cumulative value heterogeneity-switching costs intermediate mktg. attitudes Future value -equity of subjective

-commitment -norms& expectations relationship expected

-relational -effect value

behaviors RM effects.perceived quality.flexibility.PR, promotion, warranties prior experience trust.frequent buyer awards.consumer licensing posts new experiences .forumsCorporate partnerships & sponsorships

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A customer’s decision to withdraw, build or maintain a relationship• It is viewed from cost-benefit perspective rather than from perceptual or a

processing angle.• It represents customer’s informal heuristic process for

evaluating decision alternatives. As trade off between costs & benefits/utility

• A customer seeks to maximize his expected value from a R, and his long-run assessment of future value-alternatives with greater benefits-customization of economic, psychological, social exchange costs-mental processing costs-search costs opportunity lost costs.

• Trust-confidence in an exchange partner’s reliability & integrity-his trust in the organization is a measure of future value of RM-it is a probilistic belief that it will perform actions that will result in positive outcomes & not take actions that result in-ve outcomes.

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Other factors affecting RM in mass markets• Long-term future value & trust are considered

similar to belief, attitude or cumulative perception-customer updates these beliefs through a sequential anchoring & adjustment process as new experiences impact the current level-thru advtg. letters & RM .

• Influence of RM variables on subjective expected value- where higher heterogeneity among alternatives & higher perceived switching costs & risk exist. organization may lower his search costs or decrease it by customization & create cumulative satisfaction-deepen customer commitment & encourage RB.

• RB include repeat purchase, increased usage, positive W-O-M, multi-product purchases, customer advocacy-

• RB- 4Ps-product-price-promotion-place- exploit the conditions in RM as a two-way exchange, extended time intervals

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• Product variables-perceived quality-warranties are central to customer satisfaction & value perception in the delivered core

• Augmented product attributes signal product quality & increase customer satisfaction & future value of R

• Guarantees & return policies are signals that create customer expectations about product performance & risk-complaint management & continuous improvement efforts reinforces employees’ use of RM practices.

• Pricing and promo practices-usage rewards-tailored promotions

• Distribution variables that facilitate relationships-flexibility, leads to customization, travel agents keep preferred seats, hotels car rentals with maintained database, Ritz Carlton offer without being asked, preferred breakfasts, newspaers,rooms-people-face-to-face interaction by delivery/service people, over telephone, mail, effective HR practices are critical-Star Bucks creates employee satisfaction & is able to retain friendly courteous employees creating customer satisfaction & increase future value of R-merchandizing efforts by Wal-Mart- value-creating networks are managed to assist RM

• PR, Customer listening posts forums, corporate partnerships & sponsorships-to influence customer attitudes & behaviors thru associations-cognitive & social in nature-signals CSR.

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Conclusion of RM in mass markets• Attitudes [service quality], underlying

predisposition [loyalty], influence of inter-purchase durations [long-run reputation effect insulating organizations practicing RM, more satisfied customers, more mutual benefits], reflection in performance [M.S., share of customers, profits]

• Lateral relationships among groups of customer groups-MCI’s friends & family campaign, HOGS, Blogging, E-bay,-are important determinants of outcomes-decides whether a customer will continue or withdraw from a relationship-how equity is maintained over time effect of brand loyalty and withdrawal behavior & its effect on negative W-O-M.

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5. Relationship marketing & distribution channels

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FACTOR CONFLICT VIEW COOPERATION VIEW

Profit One organization at the expense of the other

Both share profits

Relationship One is dominant Equal partners

Trust Little Considerate

Communication Limited & formal Widespread & open

Information Secretive Open & shared

Control Intensive policing Delegation & empowerment

Quality Blame for faults Solving shared problems

Contract Rigid Flexible

Focus on Own operations Customers

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• Integrating logistics within an firm has all the related activities working together as a single function.

• It tackles problems from the view point of the whole organization & looks for the greatest overall benefit.

• Integration of logistics along the supply chain in an own organization has unnecessary boundaries between them increasing costs, disrupting material flows. External integration removes these boundaries to improve whole chain-where most opportunities for cost reduction/value enhancement lie at the interface between supply chain partners-Christopher.

• Organizations within the same supply chain should cooperate to get final customer satisfaction-they shouldn’t compete with each other, but with organizations with other supply chains.

prof. pherwani 111

3 levels of integrationSupplier operations

customers logistics activities logistics with internal integration Supplier operations

customers

logistics with external integrationSupplier operations

customersThis effectively gives the 3 levels of integration shown above:• The first has logistics as separate activity within an organization• The second has internal integration to bring them together into a single

function• The third has external integration-where organization looks beyond tits

own operations & integrates more of supply chain

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• Classification of channel relationship management is based on mechanisms used to control & coordinate channel activities.

• Method used to control is fundamental to channel management

• There are inherent conflicts of interest in conventional channels.

• Each member in a channel has a fiduciary responsibility towards his stakeholders-it has to focus on long-term firm’s financial performance, besides considering other parties’ interest.

• In a firm though each member has his won personal goal but a common corporate goal.

• The rows in the table show 3 control mechanisms to coordinate activities-authoritative-contractual-normative-confirm to 3 inter-organizational mechanisms-hierarchical-market-clan.

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Channel relationship managementControl/coordination mode

Corporate channel-vertical integration

Independent firms performing channel functions

Authoritative Rules policies supervision

Power

Contractual

Normative

Incentives compensation

Organization culture

Terms & conditions, franchisingRelationship norms

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1. Authoritative control-one party using its power to control activity of other party-internally nature of employment legitimizes the use of this authoritative control mechanism to control activities of subordinates by policies of promotion from within & supervision styles to ensure implementation-externally one party controls others by use of power of greater resources in its possession and highly valued by the lesser member.

2. Contractual control-involves an agreement by parties in relationship-Definition of their responsibilities & rewards for performance-established by negotiation process by a priori& can be rejected or accepted by any. these can be altered during contract due to changed circumstances-uncertainty-differential information-risk preferences.

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• 3. normative control-involves a set of implicit principles or norms that coordinate activities performed by parties that govern the relationship-internally firm’s employees have shared beliefs & coordinate activity-learn about norms thru informal communications with fellow employees-externally learned thru past experiences, interactions, market reputation-how parties will make trade-offs between long & short-term profit opportunities-fairness norms-flexibility norms –where conditions can be altered- impact is well known but control mechanism is new & subtle.

• Unilateral & bilateral control-or governance mechanisms based on how parties participate in decision-making-authoritative control is unilateral-power is defined as the degree to which one party can influence another party to undertake action that the 2nd party wouldn’t have done. it doesn’t always have negative consequences for the less powerful party-but relies on fair distribution of benefits.

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• Multiple control mechanisms-used to coordinate the activities in actual channel relationships-needed to have unique + & - effect on relationship-activates that need to be done & how to do them. Unidirectional nature of communication causes conflicts due to unmet needs & lack of mutual acceptance of norms mostly uncodified -ambiguity exists on expectations, coordination & miscommunication.

• Shifting focus of channel relationships-vertical marketing systems-a centrally programmed network that is pre-engineered to chive operating economies and maximum market impact-plan is developed by channel management in a vertically integrated firm uses its power to ensure implementation-associated with centralized planning & control mechanisms. There is shift from this to contractual & normative control mechanisms due to-growing disenchantment with vertical integration-consolidation & increasing power of the intermediary channel firms-recognition of opportunities to gain strategic advantages thru management of channel activities.

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Strategic alliances• When an organization & supplier work well

together, they may feel they are getting the best possible results & neither could benefit from trading with other partners-then they look for a long-term relationship that will guarantee that this continues-this is the basis of strategic alliances shown next.

• The supplier knows that it has repeat business for a long time, & it can invest in improvements to products & operations-the firm knows that it has guaranteed & continually improving supplies.

• These are also called supplier partnering-an ongoing relationship between firms which involves a commitment over an extended time period & a mutual sharing of information & the risks & rewards of the relationship.

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Main features of alliances:• Organizations working closely together at all levels• Senior managers & everyone in the organization

supporting the alliance• Shared business culture, goals, & objectives• Openness & mutual trust• Long-term commitment• Shared information, expertise, planning and

systems• Flexibility and willingness to solve shared problems• Continuous improvements in all aspects of

operations• Joint development of products and processes• Guaranteed reliable and high quality goods and services• Agreement on costs and profits to give fair & competitive pricing• Increasing business between partners.

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Spectrum of relationships

Adversarial informal contractual formal minority joint vertical

cooperation alliance investment venture integration

Relationship arm’s length unspecified medium-term long-term

contract contract

Information little more full

Sharing

Trade with much less little

Competitors

Culture different coming together shared

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Partnerships can lead to changes in operations-the stability might encourage suppliers to specialize in one type of product.

They give such a commitment to the alliance that they reduce their product range-make these as efficiently as possible & concentrate giving a small number of customers a very high quality service sharing information with customers without threat of misuse to obtain trading advantage.

Customers reduce number of suppliers as they no longer need to look around to get the best deals-Japanese firms were the first to develop strategic alliances & at the same time when Toyota had formed partnership with 250 vendors, GM was still working separately with 4,000.

Outcomes-high level of achieved service-real cost savings-growing business-compatibility of cultures-joint IT systems.

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Difficulties forming partnerships• Starting point could be analyze current operations &

future plans to see if alliances will be useful-it won’t be, if it only buys a few materials or is changing manufacturing base or is sensitive about confidentiality or can’t find reliable suppliers.

• Most firms see potential benefits & they should start looking at possible arrangements-form a project team to identify potential partners, define objectives, set timetables, list resource implications, negotiate terms.

Efforts to make it a success• Drivers-compelling reasons for forming partnerships such as

cost reduction, better customer service or security.• Facilitators-supportive corporate factors that encourage-such

as compatibility of operations-similar management styles-common aims

• Components-joint captivities and operations used to build relationship such as- communication channels-joint planning-shared risks & rewards, investments.

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1950s businesses increased sales thru unrelated diversification-Sears expanded by acquiring real estate & stock exchange firms-with increased demands on improved returns they reverted back to core business-this led to re-examination of firms on which functions to perform & which to outsource-Kmart uses independent trucking firms to ship merchandize between its suppliers ,warehouses & stores.-who have unique expertise in moving merchandize & managing transportation & reduce costs thru backloads-Kmart lost some of the coordination opportunity.Retailers are less interested in backward integration to manufacturing & vice versa. Independent firms are performing conventional channels.

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o Strategic implications of outsourcing-value-added activities and advantages & disadvantages-Nike is characterized by heavy outsourcing, are networked & are winners due to flexibility or. Have inadequate control?

o Power of intermediaries-functional & dysfunctional effects of power as control mechanism in asymmetrical channel mechanism-where one member has more power than the other-manufacturers with their size & scale economies have exercised more power & channel relationship has been from manufacturers’ perspective-Wal-Mart has changed all that today P&G regularly go to Arkansas and wait on Wal-Mart buyer plus 50 permanently stationed there-only a few years ago they had to fly to Cincinnati and wait to meet P&G .

o Consolidation of distributive trade has been made possible by IT, communication & logistics-earlier it was localized sourcing & selling-industry was highly fragmented-large ones Sears & federated Stores had a decentralized approach-scale economies have led to rise of national Chains.

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Manufacturers are unable to realize power over channel members-asymmetrical relationships are inherently unstable & less profitable for one party-now becomes less committed to the relationship & seeks alternative more rewarding relationships-Mfrs. No longer can use authoritative control on channel coordination-bilateral control mechanisms & symmetrical relationships for managing powerful independent channel members.

• Strategic advantage thru’ channel relationship management-to obtain extraordinary financial performance due to logistics management-a major source of value-added benefits to end users-greater than by other mktg. actions-firms use distribution to differentiate their offering-information exchange & coordination has saved consumers billions-relationship building here needs more closer look by consulting firms-Dell, 5th largest PC company has direct distribution as its CA & not its manufacture or design capability.

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1994-Merck purchased mail-order distributor-Med co- Smith Kline Beecham purchased Diversified Pharmaceutical Services & Elli Lily PCS division of McKesson for $12bn.these intermediaries have unique resources-exceptional information systems containing databases linking patients , physicians, managed care organizations, pharmacies, 3rd Party payers & pharmaceuticals prescribed.Merck, SK & Elli lily have been historically R&D-oriented firms-the acquisition demonstrated each company’s conclusion that-distribution holds the key to its future-it also signals that each company felt it was unable to meet the challenge of emerging health care environment on its own-existing distribution skills wee inadequate.The above 2 examples of creating strategic advantage thru channel management involve vertical integration.

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Dell & pharmacy firms decided to manage development, production & distribution functions under their corporate umbrellas-to what extent firms can go beyond their efficiency to develop CA by managing relationships in conventional channels?Impact of RM in a channel context differs from its impact in supplier-manufacturer, manufacturer-consumer or strategic alliance context. Exclusive or sole-source relationships do exist with key suppliers & consumers are loyal to one brand in a product category-however assortment is a key benefit offered by a retailer or a wholesaler.These channel members deal with a multiple competitive suppliers to satisfy the needs of consumers-even though P&G has a partnering relationship with Wal-Mart, it cant develop to the point that Wal-mart only offers P&G products or vice versa.

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Problems can arise when firms enter into multiple relationships with competing suppliers-hesitancy of suppliers to share sensitive information with other channel firms-even at the cost of coordination fearing it may be revealed to rivalsAssortment need limits the degree to which trust & committed relationship can develop & strategic advantage achieved.Channel relationships governed predominantly by mutually accepted explicit contractual terms, implicit norms or relationship governed by use of authoritative control. Transaction cost analysis-TCA concerned mainly with role of transaction-specific investments in determining whether a channel activity will be efficiently performed in a corporate vs. conventional channel structure-it ignores interdependencies between firms & takes perspective of a single firm not costs incurred by both partners in transaction.

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Primary contribution of TCA is hostages-or investments to commit parties to maintaining relationships.To preserve relationship-additional trust & commitment is also neededAgency theory focuses on use of contractual terms to control & coordinate channel relationships-principal-agent structure implies unilateral control by the principal vs., the bi-lateral control in which both parties participate-principal offers a menu of contracts to the agent-the selection made by the agent reveals information not possessed by the agent-that is used to maximize profit of the principal not both parties.

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Inefficiencies in vertical integrationVertical integration-describes the amount of

a supply chain that is owned by one organization

• If an organization wants to go beyond partnerships, it has to own more of the supply chain-one common arrangement is to take a minority share in another company-this gives it some say in their operations but not necessarily control them-a mfr. Having a minority share in a wholesaler to get some influence in the way products are distributed.

• Another option is for two to start a joint venture, where they put up funds to start a 3rd firm with shared ownership-a mfr. & supplier might form a transport firm for moving material between the two.

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• The most common arrangement has one organization simply buying other organization in the supply chain, this increases its level of vertical integration.

• If an organization buys materials from outside suppliers and sells products to external customers, it doesn’t own much of the supply chain & has little vertical integration as shown in the chart next.

• If the firm owns initial suppliers, does most of the value-adding operations & distributes products to its final customers, it owns a lot of supply chain & is highly vertically integrated.

• If it owns a lot of the supply side it has backward or upstream integration, if it owns a lot of the distribution network, it has downstream or forward integration

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• Vertical integration is the best way of getting different parts of the supply chain to work together in some cases

• Ford of America has at different time owned everything from steel mills thru to distributor networks & repair shops

• Widespread vertical integration would be very expensive, leading to huge organizations that spread their resources too thinly needing specialized skills & experience that one firm doesn’t have, reducing flexibility to respond to changing conditions.

• Vertical integration is not necessarily desirable & its impossible even for large firms to own much of their supply chain.

• Heinz cant buy all the farmers, processors, steel mills, canners, wholesalers, retailers & other firms in there baked beans supply chain.

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Different levels of vertical integrationType of vertical Suppliers

Operations Customers Integration Parts

owned by the

organization

Little

Backward

Forward

High

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6. Role of IT in building maintaining and enabling relationships

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Success rate in IT applications

Organization perspective success 20%

marginal 40% gain

failure 40% rejection poorly designed system fit

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Dealing with of IT applications on marketing side• Information is life blood of all marketing-but

effective RM requires a highly enriched stream of information than does traditional product or transaction-driven mktg.-critical to it are having the right info. In timely fashion, in appropriate amount & delivering it in right style & at the right tempo to maintain satisfying relationships.

• Human aspect of IT has scarce information in IT-it has plenty on systems, design, processes, applications & potentials- a grave strategic error by firms obsessed with only technology spending far too little time on effective relationships these networks should support.

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IT application in traditional & relationship marketingTraditional marketing Relationship marketing

Suppliers push distributors & retailers into taking their products with no concern fro their preferences

Suppliers collaborate with channel members on an individual basis & IT is aligned.

Overriding emphasis is acquiring many customers by assembling mktg. mix that results in this outcome.

Repeated contacts, & mutual gain for both which is moving towards a relational paradigm.

Traditional mktg. is becoming too expensive & less effective over time- 40%-53% A&S costs in perfume, cosmetics & toilet products-information is at remote sites-individual

Revolution in IT has delivered unprecedented price performance for storage, processing & delivery locally, highly intuitive interface has spurred managers to make greater use of information

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Information needs are cursory in information management emphasis is on transaction marketing

Information is enriched stream-more focused-more time spent on effective relationships that are created & supported by IT networks-emphasis is on Relationship management.

Information is gathered on sampling basis & averaged into marketing messages that are generalized for a broad market.

Increased intimacy with channel partners due to information possible on an individual basis & used to tailor products & distribution.

Balance of power is with providers

Balance of power is shifted to consumers

Mass marketingMonologuesPush marketing product-driven-doesn’t need intimate relationships

One-to-one marketingDialoguesPull marketing-consumer driven, needs intimate relationships

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• IT is seen as a surrogacy to be enlisted to help marketers re-create the operating style of yesterday's merchants who diligently cultivated individual relationships with their buyers-here primary focus is on application of IT in marketing & channel relationships.

www has created JIT information that allows marketers to implement essential aspects of relationship marketing

• Technology has become more affordable & deployed across a broad spectrum of customers.

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Virtuous cycle between IT & relationship Marketing increased competition greater

new technology Changing marketing demand for

developmentCustomers evolution RM

IT revolution relationship

marketing more

affordable & effective • There is a symbiotic relationship-a virtuous cycle-between tech

advances and change in market relationships-impetus for RM comes only partly from developments in IT-its driven primarily by dysfunctionality of traditional marketing-rising expectations of customers & greater competitive pressures.

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push-pull effects are at work-Push is from technology-pull from customer expectations

Proliferation of RM is in turn gives rise to IT innovations geared to improved RM.

Web casting-a push technology-facilitates RM by

enabling marketers proactively to push relevant information to customers. Content-focused matchmakers use deep interviewing techniques to match customers with exactly with exactly the right products.-thus initiate a high likelihood of success & endurance.

Communities of users of books, music, movies congregate on sites such as www.firefly.com which makes use of info. to recommend products & services & sustain relationships with each success.

http://www.firefly.com/

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• RM has been the norm before advent of mass mktg.&massmedia

Sellers had first hand knowledge of buyer & successful ones used it over lifetimes-today with high volumes of trade it isn’t possible to know this without sophisticated IT systems in place.

• Even this is not enough to fathom human mind- an unquantifiable, subjectivity that is part of human behavior every waking moment.

• Oral exchange was superior with merchants who had index cards-the only database-information is discrete bundles of fact, trivial or useful-never the substance of thought-information offers value when presented in context of relationships-today IT helps relate investments to relationships & returns the customer will get.

• Old RM has been replaced by tech-enabled RM thru falling cots and improved effectiveness-mktg. makes use of each customer’s info.

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Effectiveness High

1970s 1940s

1997 OLD FASHIONED RM 1997 1970

technology-enabled RM

1970 mass marketing 1997 1940

low efficiency high

PRODUCTIVITY OF DIFFERENT MODES OF MARKETING

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• Marketing success comes from customer’s proximity to its customers-not from product features alone-which can be copied-how a firm enriches these relationships over time & leverages them to growing base of customers and knowing about them.

• P&G transaction marketer has started paying attention to retailers circumstances and align its mktg. to this using IT-a virtual integration with Wal-Mart and as sale gets recorded both firms in relationship get instant knowledge about velocity of product movement-leading to improved logistics & inventory management-changing the direction from which mktg. decisions develop-from bottom up-continuous dialogue with all members of the value chain.

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Role of technology in RMSalient characteristics Leads to truer customer focus Respect for customer’s time & intelligence Empathy for his priorities. Differences between individual customers become clearer-

they were blurred in traditional marketing statistical representation of clusters or typologies that contained benchmarks for developing one-size-fits all, non-relational approach to marketing-businesses have been moving away from viewing consumers as individuals

Modern consumer has been dehumanized, turned in to phantoms-replaced by a statistic consumer who resides not on the main street but in mathematical model & market planning scenarios-real consumer lurks on the sidelines of failed marketing programs everywhere.

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One-to-one marketing-instead of selling one product at a time to as many customers as possible, in a particular sales period, the one-to-one marketer uses customer databases & interactive communications to sell one customers as many products & services as possible over the lifetime of that customer’s patronage.

• Emphasizes retaining the most valuable customers & growing them

• Learning relationships can enhance customer convenience by maintaining a memory of customer preferences & tastes.

• Customer dialogues are ongoing from encounter to encounter, creating a growing barrier of inconvenience that serves as powerful reason for customers not to do business with other providers-provided they continue to receive quality products & services at a fair price.

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Transition can be done customer by customer rather than by product or division-a fir could identify its most valuable customers & assign them the most talented employees in the company-from mktg. Sales or customer service-designated as customer mangers-gradually it could expand this number served this way.

Technology is a heavy component of cost in one-to-one marketing mode, declining costs make it affordable to to transition more customers over time cost of technology falls by 50% every 18 months-it can figure out how many can be switched.

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Customers as assets• Customers be seen as assets-after years of

pushing products into market place with limited concern for circumstances of individual customers-businesses have also abandoned lifetime employment philosophies-a surge of having lifetime customer philosophies has merged-a stable employee base goes hand in hand with a stable customer base-a cause & effect relationship exists-best employees prefer to work for companies that deliver superior customer value that builds customer loyalty.

• RM is essentially holistic marketing that operates within a total economic system which dwells in numerous specimen of interdependent human beings who generate economic value for each other-cost of generating one unit of income from a new customer is more than that from existing customer-income from long-term customers is far higher-only IT usage has charted economics of customer acquisitions and maintenance.

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Technology impact on RM –scale economies• Scale economies are changed in that

individualized attention now becomes possible for a much larger number of customers, each representing a small transaction volume-it is possible to practice RM for a small no. of customers without extensive use of IT, it is impossible to do so on a large scale-rapidly increasing affordability & capability of IT augurs well for an ever increasing portion of customers.

• Today IT enables on a mass scale the kind of individualized attention that marketers routinely bestowed on customers few years ago

• IT enables marketers to collect, store, leverage information on individual customers on a large scale.

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Technology impact on Scope economiesScope economies are those characteristics of a

process that makes it easy to produce multiple products

because there are similar components made in the same way.

• Scope economics reflect the fact that technology enables a broadening of geographic scope of relationships-expands the time scope & range of offerings to a customer

• It expands the domain of customer relationship over time space & categories.

• Many of these offerings may be produced by other entities-they are packaged & assembled by the company managing the relationship.

• It goes beyond marketing into operational and technological linkages between companies that create a strong bond-Internet makes hitherto impossible task of linkages possible [in referral systems, inventory management links, automatic order processing]

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Drivers of tech-enabled RM-Supply sideTech changes:1. Processing- Moore’s Law says circuit density of

computer chips-their computing power doubles every 18 months-cost [experience-based] is declining every 6 months-a Game console for kids is more powerful than a 1980 CRAY supercomputer! Microprocessor was developed in 1971-the Intel's 4004-single chip, could be made in bulk-over time wafer was enlarged & transistors shrunk-more & more processing power was stamped Pentium Pro has 5,5m transistors.

1st microprocessor had 2,300 transistors-early PC users were dazzled by Intel’s i386 chips-contained ¼ million transistors -ran at clock speeds 20 M hertz- just 15 years later current buyers yawn over Intel’s Pentium 4 microprocessor-55 m transistors, at speeds 2 Gigahertz-the incredibly cool microprocessor of 2009 will pack 1 billion transistors blazing along at 300 Gigahertz!

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1. Data storage-trend is towards greater capacity, easier access, lower costs-parallel with improvement in hardware, data storage capabilities are expanding-costs declining-in 1956 IBM launched 1st disk drive with 5 MB @ $10,000 today disk drive capacities are staggering, a mere $2 flash disk contains 5 GB price has fallen form $5,23 per megabyte to 0,02 cents

2. Communications-promises an even greater change of discontinuous nature-band width usage is exploding-led by Koreans, Japanese, Finland, US & now China-enables interactive media & video info in every hand held-thru air from satellites, & terrestrial wireless systems, thru optical fiber cables, by Blue-tooth, WiFi, phone company’s co-axial cables.

3. Displays-greater resolution, less bulk, less cost, active matrix color LCDs used in laptops & notebook computers-flat panel displays, HDTV-digital high definition television

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5. Key properties of digital electronic IT-convergent & versatile- boundary less & global-affordable-addictive-easy and fun to use.

• Pure genius of It since the invention of programmable computers is sheer plasticity-getting the PC to do previously unimaginable things by just programming rightly-a dramatic shift towards virtuality-this happened decades ago when computers started replacing adding & tabulating machines-PC & its peripherals are taking over office & shopfloor tasks previously performed by stand-alone entities-churning out physical prototypes in minutes-chips perform functions handled by mechanical & electrical devices-convergence means same technology can be used to perform myriad tasks.

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Boundary less & globalGuiding spirit of Industrial Revolution-two

centuries back was separation-the breaking up of work into its component parts to allow mass production.

I T-the central organizing principle here is the opposite-unification -networks of computers allow company departments to fuse & enterprises grow so closely allied with customers & suppliers that boundaries between them seem to dissolve-this unification can make a division or company across the world seem as if it is down the hall, transforming the concept of distances- as radically as the supplanting of stagecoaches by railways in the 1840s.

IT is essentially unbound by geographic limitations-it is distance-irrelevant & available anytime , anyplace. Internet knows no global boundaries-any individual regardless of time, location, distance has created virtual communities to discuss, share information on any subject

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Affordable-volume production drives down the incremental costs f producing electronic products-evidenced in falling prices of calculators, PCs, cell phones, microprocessors currently-volume production can be achieved only thru aggressive penetration pricing & targeting of the broadest possible market.

Addictive-IT technologies are extremely addictive to users-offer significant improvements in price, performance & convenience over alternative means-affect vital areas of human activity-work-socialization-entertainment- these tech-based improvements represent a one-way street for adopters-a property significant & fortuitous for mktrs.

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easy and fun to use-overtime technology evolves to hide its complexity [TV sets used to have simple technology inside-but had complicated interfaces-requiring users to control tuning-vertical hold, contrast, color saturation. Today’s TV sets are very sophisticated inside but extremely easy interfaces]-this transition has already occurred with web-enabled apps, accounting for its explosive growth.

• Any technological interaction that users regard as dehumanizing will be shunned- quality of interface is critical to adoption- high-tech companies pay a great attention to high-touch issues.

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• Video-conferencing & work-at-home technologies are 2 recent examples-where the dehumanization aspect is balanced by increasing the human quotient-each can be positioned as a time& money saving substitute for physical human contact or a way to improve the quality of life by adding flexibility & visual connection.

• Consumer-oriented systems will have to be extraordinarily easy & fun to use-designers will have to pay attention to crucial human dimension or high-touch when designing high-tech systems in mktg. as well as advertising. The great advantage is abundant computing power & low cost of broadband communications.

• In a GUI [graphic user interface]-80% of typical microprocessor’s capability is used to create the interface and 20% to-do-the work.

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• Use vast amount of computing & communicating power to hide the complexity of the system from its user-interface will evolve to learn the user’s preferences rather than other way-voice recognition, handwriting recognition, eye configurations, finger print recognition are realities today.

• www has become popular today in all aspects-presents users of multi-media GUI & instantaneous linkages to related information anywhere. virtual shopping malls, impulse-oriented shoppers stroll down aisles of virtual shops custom-try them electronically-designed for them & click their desired item.

• People can now serve themselves at their convenience at a negligible cost, but they have to accept little or no human contact in return.

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Internet• An interactive media-allows marketers to deliver

real-time, personalizes information to one consumer at a time-provide better service at lower cost-

• A delivery channel for IT, education, medical advice, legal work, business process-front-end & back-end, e-tickets, auctions, logistics info [EDI] and money flows [EFT], knowledge [GOOGLE]

• Relationships are one of the defining qualities of marketer-customer interactions over the Internet.-use it to collect data, to question it, to listen to & respond to customers-and automatic relationships are computer-to-computer interactions online instantly & provide instant fulfillment-

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• this requires customer come to the marketer, reversing the traditional marketer go to the customer.

• Technology is playing a bigger role in ways customers interact with businesses-internet has revolutionized the nature of customer services. Technology can replace what the human does-you wanted to know to know if your bank has processed one of your cheque, you had to call on your bank branch, or await a busy signal redialing or put on wait-today you access their website to learn your bank balance, and other related requests-what is to be seen by the marketer is whether there is service enhancement-not service replacement.

• Order status can be checked on site of a service provider.

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• IT-based customer service can give customer control over all aspects of their interaction with a firm thru a user-friendly website a FAQ list can be most beneficial-offer an e-mail address where they ask expert advice

• Internet allows customer service to be personalized-MyYahoo offered by is a customizable version of popular portal. When a visitor logs on to MyYahoo she can get local whether, scores of teams of personal interest, prices for stock that she has entered into their database-availability of a cosmetic

• Speed can be enhanced by using e-mail-an inexpensive way of responding to a complaint or answering queries. C.NET covers technology industry sends daily e-mail listing of headlines and special features to 1000s of its subscribers-making sure of speedy dispersion of information

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Division of work between people & PCs

Elements of work people doThinking Creating Making decisionsCommunicatingRecognizing patternsTaking actionForecasting data

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Division of work between people & PCs

Tasks that computers performCapture dataStore/retrieve dataManipulate dataDisplayNetworkTransmit

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• FedEx saves money & enhances customer service by transferring its package tracking system on to the web-using fewer customer service reps and spending less on traditional support services such as telephone. A customer can learn about shipments or drop=off locations at her own convenience and obtain printed records instantaneously.

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EXPERT SYSTEMCan be used to leverage employee skills to perform

work that previously required higher qualification-extensive trg-years of experience

It has 3 elements:1.A knowledge base2.an inference engine that mimics a human expert’s

reasoning to draw conclusions from facts & figures, solve problems, answer questions

3. A user interface that gathers information from & to user-here it identifies ROL-calculates SS / ROQ/vendor from whom to order& at what price

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EXPERT SYSTEM Gives customized advice Accepts incomplete data Trains an employee to perform at a higher level Captures & make available scarce expertise of

outstanding performersAMEX- uses LARA’S BRAIN [authorizer's

assistant]which contains the expertise of its best credit authorizers-improving quality & speed of credit decisions dramatically & profitability.

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• Web-based commerce has grown at an exponential rateNet Advertising-Online brands are making the real money [2004]

company Affiliate sales $bn.

Affiliate commissions

amazon.com

eBay

Google

$ 0,460bn. $ 0.100bn.

0,300bn. $ 0,140bn

Google $1,400 bn $1,100bn.

Yahoo ! $ 1,100bn. $ 0.910bn.

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Global online brands

AOL-MSN

http://www.ebay.com/

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• Web-based commerce has to be significantly better than traditional commerce for a widespread transition to occur.

• Technology alone is not enough-broad band availability also has become affordable & widespread-there are privacy, security and payment concerns occupying industry’s mind-encryption is a solution here.

• It requires naturalness of the interface with real time exchange

• Electronic communities like steel exchanges, parts exchanges emerge, only then existing distribution channels will be disturbed.

• Web based businesses have accomplished huge interfaces only predicted in 1990s are already a reality-& those who have established trust are already prospering-community precedes commerce & if thoughtfully done can actually reinforce community & extend value to its members.

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• Old marketing involved responding to customer queries about product, problems, feature, upgrades , invest heavily in customer hot lines, follow-up calls & large-scale customer service departments-now web companies can respond to most such needs at low cost-his visit opens opportunities for more cross-selling & up selling.

• Cookies-an ingenious way of delivering customized information & services to customers is use of cookies –files of information that reside on the customer’s machine, contain information about sites visited by customer-marketers use this information to determine user’s preferences-they in turn view it is a violation of their privacy-marketers need to convince them that cookies will be used only to enhance value & reduce noise to the consumer.

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CAROL-consumer’s anonymous reporting omnibus link preserves consumer’s privacy while enabling marketer to enjoy benefit of tailored targeted offering.

• CAROL travels thru cyberspace on behalf of her client’s user-needs information about him to best represent him-amount of info. He is willing to share is connected to trust-it doesn’t build databases, but locates & retrieves info for consumer for a fee vendors are linked to a CAROL, who knows what products are suited to her client.-bases her information gathering for clients upon both explicit & implicit reports that clients make about themselves. With this CAROL forays into cyberspace, gathers relevant info. And with each online encounter acquires more knowledge about its client.

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Firefly- harnesses the power of word-of-mouth marketing-collaborative filtering has changed less satisfying buying experiences of customer on the web as compared to toll-free & paper catalogs regime. Firms pool information volunteered by user-computers then predict what products or services people may like & can guide their shopping based on experience of their peers. www.firefly.com works by building detailed psychographic profile of members based on their answers to scores of questions-using this info. It identifies individuals-psychographic neighbors-other individuals that have similar pre-depositions.-then makes recommendations for offerings-music, movies, gadgets, electronics all have used it, user-to user communications-communities based on shared intersts-Merill Lynch, MCI, Dun & Bradstreet, Reuters, Yahoo-It aggressively maintains user’s privacy & doesn't require names & addresses unless they choose to-hires Coopers & Lybrand to audit.

http://www.firefly.com/

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Data base marketing• Can make customer contact more meaningful &

profitable• Here communications are directed to individuals,

households or organizations by name. it invites 3 T’s:1. Targeting messages to specific types of

customers or prospects and not others.2. Tailoring messages to customer’s interests or

other characteristics.3. Development of ties or long-term relationships

with preferred customers.• Database marketing has long been used by catalogue

houses and magazines-improvements in IT have made the approach increasingly practical for mass marketing as well-cars, cigarettes, alcoholic beverages, foods, personal care products & services, high-end lingerie

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• Types of databases used in marketing-a. company’s own customers with transaction history-ability to store & analyze has only now become manageable due to IT becoming affordable & user-friendly

• Marketers who don’t deal directly with customers have now stated collecting customer names in order to assemble databases.

• External household customer databases include customers or subscriber lists from direct marketers or publishers-special purpose lists derived from public records-car registrations, births

• Database assembled from voluntary consumer responses to questionnaires published in newspapers.

• Business & industrial database is derived from directories, updated by periodic telephone surveys

• Very large scale databases are stored on CD & utilized on PCs or LAN for easy implementation.

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• RM DB have been used interchangeably-close information-focused connection many people make between IT &RM

• It is also termed automated transaction marketing-here it is targeted because of info. Obtained about individual consumer either bought or captured from previous transactions-dynamics is basically same. As conventional marketing-products are pushed towards consumers without their active collaboration or two-way communication that is critical to RM scenarios. Push aspect ignores role of collaboration, building trust, essential in RM.

• Determining real meaning & interpretation of data gathered by computers still needs a human judgment-hence alert systems have to be built-in to trigger human involvement at critical junctures.

• Strongly bonded, emotionally satisfying relationships still require periodic human presence to achieve qualitative threshold-absence of this is compromise of authenticity in DB marketing.

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• Neural networks-look for unusual patterns in marketing data

• They help spot sales opportunities-reduce customer churn & forecast demand more accurately.

• Neural network-based software is available for identification and tracking of opportunities, post-sales customer service and the generation of new leads using geographic and demographic databases.

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Drivers of tech-enabled RM-demand side• Changing customers-a major impetus on demand side

comes form the customers in RM whose needs & expectations have changed to the point that traditional marketing solutions simply don’t satisfy them nay more-they are increasingly heterogeneous & don’t fit into traditional stereotype categories-don’t respond to mass market approaches-customers have become capricious- natural reaction to decades of marketing over-indulgences-never ending promotions & long history of over-promising & under-delivering have become cynical & deal-prone about marketing claims.

• They have little tolerance for under-performance & switch suppliers at the slightest provocation-evidenced by high churn rates-30-50%-cell phones, long distance-its like McDonalds one & done transaction s have lower customer expectations & higher ones for long-term relationships [dentists].

• Without a heavy dose of IT its not possible to maintain relationships with large number of customers economically & effectively.

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• Payoff from RM is greatest in meeting long-term expectation fulfillment, which means penalties for not doing so-dichotomy is short-term where Relationship is not expected, are doing RM

• Customer have far more knowledge & power, due to cynical, lack of trust in marketers-arm themselves with as much information as possible-due to easy availability of information from 3rd party sources-posing a thereat for traditional marketers-allows customers to get a better deal each time.

• In RM customer knowledge is seen as an advantage-they are more demanding in terms of quality & value but less demanding for customer service & support-a firm can leverage customer's knowledge & expertise to mutual advantage provided it is capable of delivering good quality and enlightened.

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• In future customers may manage relationships themselves using new technologies & companies need to prepare themselves for this world.

Increasing competition• Competition intensity is higher in most

industries than ever before despite extensive consolidation-greater the completion-intensity higher is the performance bar raised.

• Markets are opening up globally to best players-the hardy survivors of Darwinian battles that have raged for decades

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Role of ITMarket sampling becomes largely unnecessary

when real customer data on an individual basis is available due to IT models.

Even focus groups become irrelevant-IT stores, retain & process data describing real customers on an individual basis-it can boost marketer’ intuitive insights & creativity of highest order because of superlative speed & volume of quantifiable information processed-which is its most productive role not replacement but amplification of human faculties. It gives a platform to business for rendering customized attention-customer retention depends upon human qualities of relationship between supplier & buyer in pull marketing models-IT mediated.

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• The real consumer has lowered steadily his degree of brand loyalty-real customers don’t abandon brands-but brands, companies and the marketers behind them have abandoned the customer-phantom consumer syndrome haunts business journals, trade media which prefers dealing with tangibles-things which can be measured, units sold, technology, unit s manufactured-& case studies from which lessons can be applied regarding human behavior-which is difficult to fathom-sweeping generalization about broadly defined demographics groups-genX etc-boomers, seniors-wrongly presuming that personality is a cause of human behavior-none has gained the confidence of decision makers.

• Designers of IT expert systems also bear in mind that analytical protocols based on personality typologies alone wont be productive-real customers emotional creatures who easily feel abandoned-statistical customer are imaginary& acquire some of the characteristics of the marketer.

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Durability depends upon consumer's subjective measure of satisfaction-a major challenge of IT-mediated marketing captivity is facilitation of credible responsive dialogue- it is the most essential psychological element in RM & depends on 4 conditions:

1. Bilateral or reciprocal empathy-ability to identify with & understand other person’s condition-motives & feelings.

2. Bilateral vulnerability-lowering of defenses- a prerequisite of enduring, satisfying relationship

3. Bilateral faith-confidence in relationship will meet expectations

4. Bilateral trust-belief that parties to relationship will morally work to its benefit- a reciprocal empathy-it is a foundation of lasting relationship-a good chemistry between the two- a robust understanding of real individual consumer

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Dialogue-is a collaborative exchange of information-state-of-the-art in managing dialogue in consumer-based marketing is still primitive-Dialogue doesn’t matter in transaction marketing-but it is critical in relationship marketing.

• Lawyers also have traditionally discouraged from forming close relationships with consumers on the ground that this broadens the company liability & risk of litigation-marketers have to negotiate a transition of thought from mktg. philosophies that have been dialogue averse-people are not inclined to sue firms to which they are bonded.

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Migration of Services: A BT’s Perspective

VOICEDATA

ENTERTAINMENT

CONVERGENCE

REQUIREMENT OF

SERVICES

Timeline TwoVoice + Data – The

Present

Timeline OneVoice – The Past

Timeline ThreeVoice + Data + Entertainment

The Future

Timeline FourTotal

ConvergenceThe Final Frontier

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Technology Greater affordabilityGreater capabilityNew media/new channels

CustomersBetter value Relationship Less noise marketing More personalization leveraging information technology

customized products & services

Marketing greater customer-control-increasedDoing less with more returns-high accountabilityLoss of credibilityPoor accountability

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Implementation issues in mind for firms making transition to IT-enabled RM

• Early mover advantage• Each generation of technology builds upon learning curves from

previous generation or even leap frog generations when rapid changes take place.

• Customize IT to suit the firm’s need• Reorganize activities when business gets re-defined & processes get

re-engineered, reorganize the business activity-defining it in service terms & importance of customer service function-recognition of its role in retention.

• Both customer service & customer acquiring must report to mktg. function

• Firm must also enable self-service by using customer –focused tools.• Cutting-edge IT provision to sales-customer service-frontline

personnel. • FIS-the frontline information system can help firm achieve dramatic

impacts where it directly affect customers- the info. Co. needs for management control-MIS & EIS is collected as a by-product of FIS. See block overleaf.

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THE M I S APPROACH THE F I S APPROACH

Top management E I S CUTTIN-EGDE IT

High-level IT relationship support

front line employees

Middle management M I S middle management

support systems

Front line employees top management

Low-level IT-needTransaction support CUSTOMERS Frontline Information systems for relationship marketing

CUSTOMERS

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Limitations• Lack of authenticity-an exclusive quality in one-to-one

marketing-requires periodic interventions by humans extremely sophisticated & self-learning system-in-depth understanding of experiential elements of service design.

• If mismanaged, technology-intensive relationship marketing can degenerate into an impersonal & faceless experience by customers-results are- no referrals, no loyalty, only a relentless price-driven customer who uses power of technology to obtain the best price on each transaction.

future directions• How to speed up customer adoption of new IT-based RM

processes• Mechanisms of sharing new value-created• The development of authenticity in RM• Extent to which strong customer relationship can

translate into provision of unrelated products.• Creation of shared infrastructures to enable RM in a

cost-effective manner.

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• In moving towards tech-enabled RM there are 3 possible scenarios:

1. high-tech marketer & hi-tech customer-best situation-maximum potential for new value-creation & sharing

2. Low-tech marketer & hi-tech customer-worst from marketer’s point of view-customer can cherry-pick & play one against the other-a sitting duck-marketer’s margins disappear-he needs to acquire technological savvy.

3. High-tech marketer & low-tech customer-a middle coarse-primary drawback is it is inefficient-marketer must continue to make inexpensive low-tech modes of doing business-& market the technology itself-pay special attention to high-touch issues.

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7. Customer profitability design and

analysis

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CUSTOMER PROFITABILITYDefinition of RM-Gronroos-RM is a process of

identifying & establishing, maintaining & enhancing & when necessary terminating the relationship with customers at a profit so that objectives of all parties are fulfilled by mutual giving & fulfillment of promises.

• effect of RM, context, & design issues weren't focal issues for marketers thus far-in single or multiple exchange transactions-only price & product costs are considered & efficiency is measured. Metrics are M.S. –sales volume-gross margin-product cost

• As relationships become more complex the cost structure also becomes complex-a customer purchasing only profitable products may end up as unprofitable himself-due to firm’s inability to account for all the non-goods components connected to relationship.

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• In RM encounters are called episodes [in services marketing they are called moment of truth or service encounter]

• Episodes –a visit to a restaurant, staying overnight at a hotel, a trip to a place on an airline

• Relationship -implies the link between provider & customer lasts longer than one episode. Long-term relationship- can be described as a string of episodes.

• Total benefit or value-that the customer receives during relationship is not provided in one episode-delivered in small portions during a relationship.

• Some relationships are built from a series of discrete episodes in which customer makes repeated purchases. Or contracts with providers & receives offers on demand.

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• Telephone, maintenance, banking services-simple episodes-cash withdrawals from ATMs-complex ones-long-term loan negotiations.

• Customer profitability calculated from continuous info. Gathering

• Anatomy of relationships- configuration of episodes generated by different customers –each having different impact on profitability-some costly to produce & some inexpensive-a bank house loan episode may occur once in a lifetime for a customer-while a ATM one is repeated & familiar & customer assumes a greater role in production of the episode.

Relationship episode configuration matrix-can be created x-axis describes relationship & types of episodes-not number-& can be analyzed from customer’s or provider’s perspective [add number of episodes-a sum of all customers who have chosen the distinct type of episode]-customer base consist of a series of customer relationships & each episode built in turn out of each set of activity level. Profitability can be analyzed from customer-base level, R-level, the episode-level & the activity level.

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Episode-configuration matrix-storbacka 1994

Customer relationship

R1 R2

R3

R4

RnEpisodes E1 E2 E3 E4

E5 E6 Em

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Customer base can be regarded as fixed assets due to long-term relationship-provider has to choose the right customer in which to invest, to get the return on investment.

Typical questions here:• How is profitability of a company

distributed among customers?• How should customer be grouped?• Where is the biggest profitability

potential?• What is the retention rate for different

parts of the customer base?• Is the provider losing customers in a

certain part of business?• How should resources be allocated among

different customer groups?• Could the processes toward different

parts of customer base be differentiated?

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• Key tool for analysis is distribution of profitability within customer base

• Distribution can be used to measure sensitivity of the customer base since it indicates how independent the company is on a few customers & shows the cross-subsidizing effect in the customer base-a good comparison tool for potential & risk profiling.

• Dispersion of customer profit is evident in large number of industries-some relationships are profitable others not-proportion varies among providers-20% contribute 225% of profit in certain industrial markets-retail banks show 20% of customers account for 130-200 % of total profit.-thus profit distribution is skewed-they are best analyzed as ordered distribution.

• Storbachoff curves-used in comparison of ordered distribution of customer bases. y-axis shows cumulative profitability of customer base as a fraction of the aggregated customer base profitability-the customers are ranked on the x-axis according to their profitability-most profitable customer is to the far left of the axis-the profitability of the 2nd customer is added to the profitability of the 1st & the sum is compared with aggregated profitability of the customer base.

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PROFITABILITY DISTRIBUTION OF A CUSTOMER BASE-THE STOBACHOFF CURVE

Cumulative fractionOf total customer Base profitability 1,6

1,4

1,0 AREA A 0 2

0,8

0,6

0,4 AREA C

0,2 0 1 ,2 ,4 ,6

,8 1,0 cumulative fraction of total customer base

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• Logic –figure reveals that some customer relationships are much more important to providers than others-the 25% or more customers are the provider’s lifeline-also 255 or more erode the profitability to the final level are unimportant-these may be unprofitable due to high relationship costs-large portion of fixed costs allocated –these customers account for a large part of provider’s fixed cost mass-removing these customers would mean that the fixed costs will have to be reallocated among remaining customers, making the lot unprofitable.

• Customer-base portfolio analysis-Stobachoff index combined with

Proportion of profitable customers can be used to follow the development of a certain customer base over time or grade them within same company or in widely dispersed locations it gives sensitivity of profitability of customer bases & risk involved in management of customer relationships in any area.

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• If every customer was equally profitable and all customers were profitable, the Stobachoff Index would be a linear function & not a curve-a straight line between the points 0 1 & 0 2-the curve’s shape correlates with the equality of distribution & degree of subsidization between profitable & unprofitable customers.

• Based on the above discussion, an index can be developed

• Stobachoff Index-is measure of the cross-subsidizing between customers in the provider’s customer-base. Provider can use index as management measure instrument that can facilitate the assessment of different customer bases over time.

S = A where A is the area under yellow curve above line 0 1 & 0 2, &

T C is area below straight line 0 1 & 0 2, white, and T is the total area

A+C -trapezoidal area

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• It is the measure of studied customer base’s deviation from ideal customer base. When stobachoff index is zero, the profitability is equally distributed-all customers are equally profitable & all customers are profitable. as soon as the index is greater than zero, the profitability is unequally distributed & theoretical maximum is 1 and this value is there if there is one profitable customer with infinite profitability & large number of customers with zero profitability, and an unprofitable customer with infinite negative profitability.

• based on the index we can analyze generic development of customer base by combining 2 dimensions

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• The generic situations are valid when one compares profitable companies with same level of aggregate profitability.

• The 4 figures below show best situation will be when stobachoff index is 0 & proportion of profitable customers is 1. here the risks involved in dealing with the customer base are proportionately smaller as the company is not as dependent on small number of customers-the need to segment the customer base grows smaller as P approaches 1, & S approaches 0-there would be no need to group the customer base in ideal situations.

P= [n- n u / n], where n= total no. of customers, n u = unprofitable customers in the customer base, and P is the profitability proportion.

• Customer base with greater proportion of profitable customers is preferred. Given in the next slide below is showing various curve shapes.

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CUSTOMER BASE PORTFOLIO ANALYSIS- verbal and graphic depictions-High

Proportion of Profitable Customers

Low low

high STOBACHOFF

INDEX

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Interpretation • High stobachoff index combined with a high proportion of

profitable customers would indicate that there are a small number of very unprofitable customers eroding aggregate profitability-unit under investigation may radically improve its profitability by identifying the unprofitable ones & influencing the reasons behind the unwanted results.

• A unit who has a total cost largely variable-it would in order to terminate its relationship with most unprofitable customers & radically improve its result-this wont be the case in a most retail bank where total costs to large extent are fixed.

• a low proportion of profitable customers combined with allow Stobachoff index indicates that there may be no extremely unprofitable customers-even though there are only a small no. of profitable customers-the risks involved with customer base are fairly low. As profitability is equally distributed, there is little need for a differentiated strategy towards different customers.-hence no need to segment the customer base.

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• High stobachoff index combined with a low proportion of profitable customers is the worst case-indicates firm is essentially dependent on a small number of customers-a state which makes it vulnerable to competition & potential customer defection. The power position of the profitable customers will be such, they may be able to negotiate terms that will make them unprofitable very soon-this will force the unit to have an extremely differentiated strategy based on segmentation of the customer base.

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Best customers

Normal customers

Other customers

Most profitable customer what segment spends

more with us over time,

costs less to maintain &

spreads positive w-o-m

what segment costs us in time effort &

money yet doesn’t

provide the Least profitable return we want?

whatCustomers segment is

difficult to business with?

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Segmenting customer bases• 2 distinct segmentation needs:1. Need to determine customer base state in terms of

homogeneity over a variety of variables describing both documented patronage behavior & background data on customers. This analysis is labeled retrospective [based on historical data]-more of a strategic tool helps make decisions on price-positioning-product-discrimination, it also allows systematic evaluation of the state of customer base in terms of possible risks & possibilities .

2. 2nd type of analysis is labeled-prospective-deals with the provider’s ability to enhance existing relationships-it is operative or tactical in nature-key issue is to find ways to enhance a particular relationship or a group of relationships-such analysis is oriented towards creating practical solutions as to how to approach customers-how to communicate with them & how to influence their behavior-these solutions are transitory because they re used basically for a campaign of different activities.

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Steps in segmentation & targeting for services

Step 1 step 2 step 3 step 4 step 5

Identify basis develop profiles develop select the ensure that

For segmenting of resulting measures target segments

The market segments of segment segment are compatible

attractiveness

The basic segmenting & targeting of services here is same as those for goods, except that it involves compatibility in segments.

Other customers are present when service is delivered-providers must recognize then need to ensure incompatible segments are not receiving service at the same time.

Service providers have a greater ability to customize service offering in real time than mfg. firms have.

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Segmenting is the second basic foundation of Relationship marketing.-learning & defining who the organization wants to have relationship with. If we aggregate all behavior, expectation & perception information for all customers in a particular market, we will be overwhelmed by with variations across customers.

At one end service firms treat customers as individuals & develop individual marketing plans for each-law firm, ad agency, a large mfr. Like Boeing will offer customized service offering, while some offer one offering to all as if their expectations, needs & preferences were homogenous-gas electricity.

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• The need for segmenting the customer base is a function of preferences-sales volume-transaction intensity-customer profitability-key attribute is distribution of profitability within the customer base.

• 4 Ways to segment:1. Based on relationship revenue2. Based on combining relationship revenue &

relationship cost3. Based on customer profitability4. Based on combining relationship revenue &

customer relationship profitability• Grouping of customers is static & therefore require

additional analysis in which customers are followed over time to identify migration patterns for both profitable & non-profitable customers, turnover rate of customers & degree of migration.

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Designing customer relationships• Cultivating relationships is the core of customer

management• 3 key design issues:1. Revenue that provider gets from relationship RR2. Cost incurred by relationship RC3. Length of relationship with a specific customer-

longevity RL• Typical questions:How can provider get the customer interested in

concentrating his business- larger share?Can new price carriers for services be identified in

order to increase revenues?How can provider change the customer’s configuration

of episodes his BB & still produce the same value for the customer?

How can customer loyalty be ensured?

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Increasing relationship revenue• It is only a share of total volume customer spends

in a particular industry-TIV, total industry volume in turn is only a share of customer total volume CTV-customers have certain money at their disposal & they divide this among may sectors of their lives, including savings-housing-food-clothes-hospitality services. Money spent in other sectors is not readily available to the providers in other industries.

• Measure provider’s hare of TIV, the RR/TIV ratio is called patronage concentration-it measures the actual patronage behavior of customer-bigger the quota, stronger the provider’s position & stronger the relationship. When RR < TIV the customer has other relationships with other providers & is only a partial customer-who forms a potential for growth when firm is trying to increase relationship volume & revenue.

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3 ways to increase Relationship revenue:1. By raising prices2. By increasing the patronage concentration of

customers RR/TIV3. By increasing RR/CTV ratio-by cross-selling products

other than own• Price bundling-a way of revenue increasing-relates

to offering always consists of several components that re difficult to separate from each other-sold as a bundle-at a price that makes it difficult for a consumer to purchase the components separately-used as a tool to regulate demand-bundling a service that a customer might not be interested in paying for with a very attractive service may increase the demand for less attractive service-increases customer’s patronage concentration.

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• Price bundling can enhance attractiveness of a specific service-common for retail banks-a/c s bundled with debit or credit card, house loan, life policy-bundling bank & insurance enables provider to increase share of customer’s total potential.

• Demand for different type of components is dependent on type of offering-intra-industry dependence & [a bank customer uses several instruments], inter-industry dependence [personal financing is bundled offered in several elements]-service packages that model the buying behavior of ideal customer archetypes.

Risks with price bundling:• Create resentment from customer’s side-he is

forced to buy something he may not need.

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Decreased relationship costs• Provider has to increase episode configuration of

customer relationship. The relevant changes are;1. Decreasing the intensity of episodes-are lower no.

of episodes possible to generate the same amount of business?

2. Changing to cheaper episode variants-any substitutes for this type of episode?

3. Changing cost structure of present episode type in order to make it cheaper to produce.

• Providers have to take into consideration the complexity and divergence of process, the potential role of customers, and how to script them, in order to achieve these objectives. Also define how to regulate the customer’s access to certain episode types.

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Relation cost as a function of complexity & divergence

• Design & execution is a focal area of interest in analysis of R

• 2 dimensions are important: complexity-seen as a technical description of the number

of steps required to deliver a service, every activity carries a production cost & adding cost-carrier steps increases the cost of service-complexity is a cognitive issue from both perspectives-technically simple episodes can be regarded as complex if employees and customers are unfamiliar with the type of step & are inexperienced performers of their tasks-they both drive costs-adding new activity to the episodes will add to direct costs of relationship, while cognitive complexity will add to indirect cost in that both employees & customers spend more time in actual production process's

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• Divergence-design & execution of process can be analyzed on basis of divergence of process

• It pertains to amount of adaptation allowed in the process

• It can also be divided into technical divergence-relates to idea that there are several options that are built into the process from which customer chooses during episode process-making options available means each is different for each discrete episode-it increase as a function of both the number of decision points & range of potential choices available at each point-it is also called option personalization-which can be delivered by programmed personalization -elements scripted into the process that acknowledges customer as an individual-using his name, greeting him-in customized personalization employee makes a cognitive effort to assist the customer called -cognitive divergence. See chart overleaf:

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Complexity & divergence are separate dimensions that may be combined into a matrix as shown-episodes in Q IV are the most expensive to produce & thus generate high relationship costs. Episodes in Q I are the cheapest to produce & thus generate less costsconclusion-providers should reduce the divergence & complexity of relationship

COMPLEXITY

LOW Q I Q IIDIVERGENCE

HIGH

Q III Q IV

LOW HIGH

prof. pherwani 222

• Divergence drives both direct & indirect costs• Divergence requires more competencies from

performers during episode• Production process is longer and more complicated.Decreasing customer costs thru customer

participation• Concept of customer management implies that

customers are regarded as partial employees-their participation is viewed as important-how to create value jointly? How they both perform during episodes? Each enacts his role to his own satisfaction-the code that influences the role playing is called a script-both have their own scripts-elaboration defends upon experience 7 less explicit it is to role player.-changes in script would encounter more resistance from the experienced role player-discrepant role expectations reduce efficiency

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• When role players read from different scripts-communication is inhibited & considerable confusion results-which ahs negative effect on productivity

• All relationship processes consist of scripted activities & discretionary activities-which seem to have been invented as they become necessary in order to produce the service. The script consists of explicit codes in form of work standards, directives & written or oral instructions on how to behave in the episode & implicit rules that direct behavior-implicit scripts dominate.

• Behavior settings influence the customer-program sets the stage for customer & contact resource [the human component] & tells him how to perform. Episodes are designed either to have a very low-level of discretionary steps-low level of divergence- or a strong setting program of experienced player .Changing scripts require many learning captivities-for both-includes changes in implicit & explicit steps-the learning organization has developed capabilities.

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Using access barriers to decrease relationship costs • Limited access to different types of episodes is one way to

influence customer behavior-used primarily in relationships of a continuous nature-used to differentiate between groups.

• Relates to price discrimination as another way to decrease costs

In banking customers pay different prices for same service or provided different service package for same prices-students programs & senior citizens products-product form discrimination-different versions of the same products are priced differently but not proportionately-credit cards-access channels discrimination -prices differs for ATM or teller transaction and time discrimination.

• Access barriers are built as volume or behavioral barriers-achieving a certain volume he gains access to certain privileges or discounts-relate to both number & type of episodes-or force customers to use self-service option at lower price & not use personnel intensive services-persons who pass the barriers usually get discounted prices.

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• Increasing relation longevity• Relation longevity is important to provider from efficiency

point of view originates in relationship-intrinsic & relationship-extrinsic factors [market structure competitive situation and concentration, in which relationship exists and geographical limitations when customer moves to a different location where provider doesn’t have presence]

• The number of service providers has to choose from influences a customer’s interest and his evaluation of options

• Longevity originates in relationship strength-a function of relationship-intrinsic factors-history-volume-relative importance of relationship for both-customer’s commitment & satisfaction-bonds developed-provider's ability to handle critical episodes-relationship inertia-mutually positive history-he remains for a long time without seriously contemplating the existing alternatives.

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• Relative worth of the relationship to both parties in the dyad

• Low volume customers have little power in the R because the provider's survival doesn’t depend upon his business-high volume customers have a better deal-exercises during price negotiations

• Customer places a major part of his business with provider makes the R strong-his relationships with other providers is inversely proportional to his patronage concentration- and is in a position to compare offers & performance-one who has all with new has no knowledge of options & is more loyal-a patronage concentration can be regarded as switching barrier. Every episode doesn't carry same importance or weight-

• Routine -largest proportion low level of mental involvement & routinized behavior customer has clear script.

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• critical episode is of great importance to or has great economic significance-volume of exchange-cost of episode-risks involved- or casual.

• Continuation of relationships is dependent upon both –ve & +ve ways on critical episodes-a successful critical episode can strengthen relationship so that it withstands many unsatisfactory routine episodes-an unsuccessful one abruptly end even though preceded by years of satisfactory routine work. The most important part of longevity is the art of service recovery-that is the provider’ skill to in escalating activities in cases where critical episodes have occurred.

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Tactics used by companies to stiffle service• Companies know how good a customer you are-and unless

you are a high roller, they would rather lose you than take time to fix your problem.

• Flying-cancelled flight?-no problem. with top status you are whisked past a queue, handed a ticket for the next flight , and driven to the 1st class lounge

• Billing-big spenders can expect special discounts, promotional offers and other goodies when they open their bills. The rest might get higher fees, stripped down service, and machine to answer their questions.

• Banking-there's nothing like a big bank account to get those complaints answered and service charges waived very time. Get pegged as a money loser and your negotiating clout vanishes.

• Lodging-another day, another upgrade for frequent guests. Sip champagne before chef prepares your meals. 1st time guest? So sorry. Your room is up three flights to the left.

• Retailing-welcome to an after –hours preview for key customers where great sales abound and staff await your every need. Out in the aisles, its back to self-service.

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Companies have become sophisticated about figuring out if you’re worth pampering-or whether to just let the phone keep ringing. Here are some of the techniques:

o Coding-some companies grade customers based upon how profitable their business is. They give each account a code with instructions to staff on how to handle each category.

o Routing-based on customer's code, call centers route to different queues. Big spenders are whisked to high-level problem solvers. Others may not speak to a live person at all.

o Targeting-choice customers have fees waived and get other hidden discounts based on value of their business. Less valuable customers may never even know promotions exist.

o Sharing-firms sell data about your transactions history to outsiders. You may be slotted before you even walk in the door, since your buying potential has already been measured.

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Making the grade-how to get better service• Consolidate your activities-few things elevate

status and trim costs like spending big in one place. Be on the lookout for packages or programs that reward loyal behavior.

• Protect your privacy-avoid surveys & be frugal with releasing credit card or other social information. The less companies know the less they can slot you.

• Jump the phone queue-if you wish to reach a live human, don’t admit to having a touch-tone phone at the prompt or listen options that are less likely to be handled automatically.

• Fight back-if you feel badly treated complain. Make sure management knows just how much business you represent and that you’re willing to take it elsewhere.

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Future trends• Longitudinal studies-migration pattern customers

between segments in customer bases-studies on a yearly basis can be dangerous if they management to actions that are perceived in negative way by customers. Who are unprofitable for the previous year but have great potential in future. New constructs will be necessary-calculation often present values for customer relationships and retensiongrams for longevity studies.

• Valuation of relationships- beside the profit generation, he has referral value, w-o-m effects, competence value of customer which is brought to the relationship-its future potential.

• Analysis of relationship profitability-usage of customer profitability information-insight gained-what constitutes relationship strength? Connection between loyalty-satisfaction-profitability.

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HOSTED MULTI-CHANNEL RELATIONSHIP MARKETING

http://www.responsewave.com/index.cfm?id=2543

http://www.responsewave.com/index.cfm?id=2543

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Relationship marketing

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