Chapter Two

Relationship Marketing

2.1. Basics of RM

 Relationship Marketing - a paradigm shift from an acquisitions/transaction focus (the “first

act”) toward a retention/relationship focus (the “second act”).
 Relationship marketing (or relationship management) is a philosophy of doing business, a
strategic orientation that focuses on keeping and improving current customers, rather than on
acquiring new customers.
 Relationship Marketing philosophy assumes that consumers prefer to have an ongoing
relationship with one organization than to switch continually among providers in their search
for value.

Relationship Marketing Hierarchy

2.2. The Transition o Relationship Marketing

Relationship marketing emphasizes two important issues.

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  First, you can only optimize relationships with customers if you understand and manage
relationships with other relevant stakeholders.
 Most businesses appreciate the critical role their employees play in delivering superior customer
value, but other stakeholders may also play an important part.
 Second, the tools and techniques used in marketing to customers, such as marketing planning and
market segmentation, can also be used equally as effectively in managing non-customer
relationships.

The figure above 10.1 suggests three distinguishing characteristics of relationship marketing.

 The first is an emphasis on customer retention and extending the ‘lifetime value’ of customers
through strategies that focus on retaining targeted customers.
 The second is a recognition that companies need to develop relationships with a number of
stakeholders, or ‘market domains’, if they are to achieve long-term success in the final
marketplace.
 The third feature of relationship marketing is that marketing is seen as a pan-company or cross-
functional responsibility and not solely the concern of the marketing department.

Transactional vs Relationship Marketing

Traditional Transaction Oriented Marketing Relationship Marketing

 Focus on a single sale  Focus on customer orientation

 Short term orientation  Long term orientation
 Sales to anonymous buyer  Tracking of identifiable buyers
 Limited customer commitment  High customer commitment
 Quality is the responsibility of production department  Quality is the responsibility of all

The Rise Of CRM

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The emergence of CRM as a management approach is a consequence of a number of important trends.

These include:

The shift in business focus from transactional marketing to relationship marketing the realization that
customers are a business asset and not simply a commercial audience the transition in structuring
organizations, on a strategic basis, from functions to processes the recognition of the benefits of using
information proactively rather than solely reactively the greater utilization of technology in managing
and maximizing the value of information the acceptance of the need for trade-off between delivering and
extracting customer value the development of one-to-one marketing approaches.

2.3. The theoretical origins of Relationship Marketing

1. Neo-classical microeconomic theory

2. Transaction cost theory
3. Relationship marketing
4. Social exchange theory
5. Equity theory
6. Political economy theory
7. Resource dependence theory
8. Resource-advantage theory
9. Institutional theory

1. Neo-Classical Microeconomic Theory

 Emphasizes on profit maximization in competitive markets in explaining relative prices, market

equilibrium, and income distribution.
 Exchange parties are price takers seeking to maximize utility in price equilibrium markets.
 Market transactions incur the costs associated with the price paid, searching costs, negotiating and
contracting costs, and costs of monitoring supplier performance.
 Generally viewed markets as social ‘vacuums’ in which buyers and sellers only know each other
in their roles as dictated by the market (i.e. as no more than buyer and seller).

2. Transaction Cost Theory (Williamson, 1975)

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  Every market transaction involves transaction costs that lead to inefficiencies for those
engaged in exchanges.
 Transaction costs include costs of information search, of reaching a satisfactory agreement, of
relationship monitoring, of adapting agreements to unanticipated contingencies, and of
contract enforcement.
 Transaction costs are minimized by selecting a mode of relationship governance that is
‘optimal’
 Transaction cost theory focuses on the single criterion of cost-efficiency for shaping
transactions.
 The role and importance of people in the governance of exchanges is ignored.

3. Relational Contracting Theory (MacNeil (1980)

 Rooted in contract law that applies to the legal rights of exchange parties and guides the
planning and conduct of exchange.
 Deals with the criticisms that have been directed at transaction cost theory by including
social dimensions of exchange, and by making clear that hierarchical relationship
governance mechanisms are not the only mechanisms available
 Criticized for failing to prescribe optimal types of governance to deal with specific
characteristics of the exchange.

4. Social Exchange Theory (Gro¨nroos, 1994)

 The basis of social exchange theory is derived from marital theory, bargaining theory, and power
theory.
 Marketing is seen as an interactive process occurring in a social context where relationship
management is central (Gro¨nroos, 1994).
 The interaction approach suggested six different types of bond:

o Social,
o Technological ,
o Knowledge,
o Planning,
o Legal, and

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o Economic.

5. Equity Theory

 Equity theory postulates that parties in exchange relationships compare their ratios of exchange
inputs to outcomes.
 Inequity is said to exist when the perceived inputs and/or outcomes in an exchange relationship
are psychologically inconsistent with the perceived inputs and/or outcomes of the referent.
 Equitable outcomes stimulate confidence that parties do not take advantage of each other and
that they are concerned about each other’s welfare.

6. Political Economy Theory

 The political economy paradigm integrates economic efficiency theories of organizations with
behavioral power theories.
 Economy refers to institutions that transform inputs into output and to the processes by which
goods and services are allocated within and between institutions.
 Polity refers to the power and control systems that legitimize, facilitate, monitor, and regulate
exchange transactions.
 The economy and polity can be considered as allocation systems, allocating scarce economic
resources and power.

7. Resource Dependence Theory(Hunt, 1997)

 Resource dependence theory explicitly addresses issues on differences in negotiation

power and the consequently unequal and unsatisfactory nature of exchange transactions by
examining sources of power and dependence in exchange relationships.
 Comparative advantage in resources allows the firm to occupy a position of competitive
advantage in the marketplace.
 Relationship Marketing is theoretically supported by the possibility that some kinds of co-
operative relationships can enhance competition.
 Hunt’s Resource-Advantage Theory; Hunt, 1997) allows resources to be: financial,
physical, human, organizational, informational, and relational.
 Resources need not be owned by the firm, but must be available for the purpose of
producing value for some segment(s).
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  Relationships are conceived of as organizational capital.

8. Institutional Theory

 This is an alternative, multi-constituent, and dynamic view that sees social actors in
support of the corporation when institutional norms are upheld.
 The corporation is seen as legitimate.

The “Bucket Theory of Marketing”

 According to James L. Schorr marketing can be thought of as a big bucket with a hole in
the bucket.
 When the business is running well and the firm is delivering on its promises, the hole is
small and few customers are leaving.
 When customers are not satisfied they start failing out of the bucket.

2.4. The Six Markets models of RM

The Six Markets model provides the basis for a simple framework to convey the complex reality of
relationship marketing. It has the potential to provide a strategic overview of relationship marketing; its
scope, nature and purpose. The Six Markets model addresses relationship marketing at the organizational
level. It presents for consideration six role related market domains or ‘markets’, each representing
dimensions of relationship marketing and involving relationships with a number of parties –
organizations or individuals – who can potentially contribute, directly or indirectly, to an organization’s
marketplace effectiveness. The six market domains were initially presented as is shown in Figure 1.1,
with the focal firm, the ‘internal market’, placed at the center of the model. This configuration
emphasizes internal marketing’s role as an integrator and facilitator, supporting the management of
relationships with parties within the other ‘markets’.

1. Customer markets

 The link between customer retention and profitability in a service situations has done much to
promote the benefits of customer retention through relationship building. Whether a customer is
the end user of a product or service does of course depend on the position a supplier occupies in a
particular value delivery sequence. Many organizations market both to trade customers

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 (intermediaries, distributors or retailers) and consumers (end purchasers, users and consumers),
but their relative power within the value system is likely to determine which relationships are
cultivated most diligently. For the manufacturers of consumer goods, the rising power of retailers
has focused their attention on these relationships. Meanwhile retailers and distributors are pouring
considerable effort into managing direct relationships with increasingly capricious consumers. A
point which must not be overlooked, however, is that relationship marketing is not a universal
panacea.
 There are situations, often involving low-involvement or commodity products, when a swift and
simple transaction approach is most appropriate and most valued by the customer. For businesses
offering professional or financial services, regularly replaced consumer durables such as cars, and
for many organizations involved in business-to-business marketing, the long-term investment in
building relationships with individual customers is easily justified. Similarly, for manufacturers of
some low-priced consumer products with high frequency purchase rates and easily identifiable
target groups, the approach can readily prove its worth.

2. Referral markets

 Referrals can be a decisive element in the creation of relationships between an organization and
its customers. The professional services sector has always used informal networks and reciprocal
referrals to direct business towards established contacts. Word-of-mouth recommendations are
certainly known to be an important part of the information search undertaken by consumers
before buying high value or high risk services.
 Recommendations may also be used by consumers as a convenient way of reducing choice
between many seemingly similar products or services. Similarly, in situations where the product
or service may be complex or difficult to evaluate, customers will seek the advice of trusted third
parties to reduce the perceived risk associated with the purchase. Given that satisfied customers
will happily endorse the products or services of the supplier if prompted, relationships with
existing customers are an unrecognized or underutilized facility for many organizations. Closer
relationships with referral sources can provide early access to specifications and a better
understanding of non-product related buying criteria.

3. Internal markets

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 In 1987 Judd conceptualized the employee of an organization as an element of the organization’s
marketing strategy. Schlesinger and Heskett linked the constructs of employee satisfaction and
retention to customer satisfaction and retention in service businesses. The links between
employee retention (particularly front-line employee retention) and customer or business retention
also exist in product-centred, business to business marketing situations.

4. Recruitment markets

 The move away from traditional employment practices towards contract working, outsourcing
and partnering allows organizations to access a wider range of specialist skills on a temporary
basis. Nevertheless, there are certain categories of employees whose skills and experience create
and sustain the organization’s core competencies.
 Christopher, Payne and Ballantyne’s recruitment market represents those potential employees
who possess the attributes needed to sustain and enhance these core competencies. It also refers to
third parties – colleges, universities, recruitment agencies or other employers – who have early
access to pools of these potential employees. The logic is that if a would-be employer wants to
attract the best people, it must present itself to influential third parties and to the individuals
themselves as the employer of first choice. But if it also wants to keep these valuable employees,
it must be the employer of first choice.

5. Influence markets

 Whereas Webster and Wind list influencers and gatekeepers among the members of a buying unit
within the firm, Christopher, Payne and Ballantyne look beyond the confines of customers’
internal buying units and into the wider business environment. They apply the term ‘influencer’ to
a range of third parties who exercise influence over the organization and its potential customers.
These influencers may be governments and their agencies, press and other media, professional
bodies, investors and pressure groups. In fact ‘influence markets’ will likely include all of the
constituencies that have traditionally fallen within the domain of public relations and corporate
affairs. While relationships with these parties may not directly add value to a product or service,
they can directly influence the likelihood of purchase or prevent an offer from even reaching the
market.
 If carefully and proactively managed, these relationships can not only open doors to markets, but
they can enhance or even replace some other marketing activities. The skilful management of

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 media relationships can, in some instances, be cheaper and more effective than formal advertising.
While well-managed relationships with other influencers might not be so overtly beneficial, they
can be used to influence public opinion and legislators in the organization’s favour. They can also
mitigate the effects of potentially disastrous operational mishaps.

6. Supplier markets

 During the 1980s, changes began to occur in purchasing behaviour of some large manufacturing
companies. The traditional adversarial approach to procurement that played multiple suppliers off
against each other began to take on a more cooperative nature. This followed the gradual
realization that, when suppliers were squeezed to the point of collapse, they were unwilling and
unable to invest in the new plant and technologies required to allow them to deliver better
products and services, faster and more cheaply.
 Instead, these manufacturers were choosing to build less exploitative relationships with fewer
suppliers. In doing so they are creating integrated and relatively stable supply chains, which allow
quality and flexibility to be engineered into the systems while costs are reduced. Often this will
involve shared infrastructural investments and the merging of some business systems. The result
is improved competitiveness through the creation and delivery of a better value proposition for
the end customer.

2.5. Goals of Relationship Marketing

 The primary goal of relationship marketing is to build and maintain a base of committed
customers who are profitable for the organization.
 A firm which holds the view of relationship marketing shall focus on the attraction, retention, and
enhancement of customer relationships.
 Relationship Marketing is theoretically supported by the possibility that some kinds of co-
operative relationships can enhance competition.
 Hunt’s Resource-Advantage Theory; Hunt, 1997) allows resources to be: financial, physical,
human, organizational, informational, and relational.
 Resources need not be owned by the firm, but must be available for the purpose of producing
value for some segment(s).
 Relationships are conceived of as organizational capital.

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 Enhancing
 Retaining
 Satisfying
 Getting

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