CHAPTER 1.

2
Understanding relationships
 MAIN CONTENTS
✔ Definition and characteristics of relationships
✔ Change within relationships
✔ Discussion on the relationships between companies and
customers
 C- CUSTOMER
Who is customer?
Individual customers or organizational
customers

What do customers need?

They need solutions to their problems.

Why are customers important?

Customers are the only source that brings
economic value to the business.
 R - RELATIONSHIPS

A relationship is composed of a series of interactive episodes

between two parties over time.” (Butter & Maklan, 2019,
p28)
A relationship has been said to exist only when the parties
move from a state of independence to dependence or
interdependence
 Change within relationships

Awareness Exploration Expansion Commitment Dissolution

 AWARENESS
⮚ Awareness is when each party comes to the attention of the other
as a possible exchange partner.
⮚ No official interaction yet
⮚ Unclear future direction
 EXPLORATION
⮚ Exploration is the period of investigation and testing during which
the parties explore each other’s capabilities and performance
⮚ Some trial purchasing may take place at this stage. If the trial is
unsuccessful the relationship can be terminated with few costs.
⮚ During the interaction process, the standards, roles, and expected
patterns are still complex, the future direction is unclear, and
cooperation is still limited.
 EXPANSION
⮚ Expansion is the phase in which there is increasing interdependence.
⮚ More transactions take place and trust begins to develop
⮚ Standards and expectations are more clean; parties can evaluate
situations more easily.
⮚ Customer satisfaction increases.
⮚ Commitment may slightly decrease, and the likelihood of terminating
the relationship is still relatively high during or at the end of this stage.
 COMMITMENT

⮚ The commitment phase is characterized by increased adaptation on both sides and

mutually understood roles and goals
⮚ Automated purchasing processes are a sure sign of commitment.
⮚ Switching costs increase
⮚ Many resources are exchanged, including highly personal and abstract resources
⮚ Underlying issues are openly discussed, fairly, and with a focus on finding a
constructive solution
⮚ Suppliers identify ideal customers.
⮚ Customer satisfaction increases on all aspects compared to the development stage
 DISSOLUTION
⮚ This stage begins right after transactions decrease (it can also start
immediately after the exploration, development, or saturation stages)
Causes of Dissolution
⮚ Customer needs decrease or change.
⮚ Discrepancy between actual experiences and expectations.
⮚ Customers do not want to rely on a single supplier and often seek other
suppliers to achieve higher value/benefits.
⮚ Influenced by external factors.
 MAJOR RELATIONSHIP ATTRIBUTES

❖ Trust
❖ Commitment
 MAJOR RELATIONSHIP ATTRIBUTES

Trust
A party in a relationship may trust the other’s..
Benevolence. A belief that one party acts in the interests of the
other.
Honesty. A belief that the other party’s word is reliable or credible.
Competence. A belief that the other party has the necessary
expertise to perform as required.
 MAJOR RELATIONSHIP ATTRIBUTES

Trust
Trust emerges as parties share experiences, and interpret and assess
each other’s motives.
As they learn more about each other, risk and doubt are reduced.
For these reasons, trust has been described as the glue that holds a
relationship together across time and different episodes
 MAJOR RELATIONSHIP ATTRIBUTES

Commitment
Commitment is shown by “an exchange partner believing that an
ongoing relationship with another is so important as to warrant
maximum effort to maintain it; that is, the committed party believes
the relationship is worth working on to ensure that it endures
indefinitely”.
 MAJOR RELATIONSHIP ATTRIBUTES

Commitment

⮚ To maintain a relationship, both parties must have commitment, and each

party's commitment should be proportional to the commitment of the other party.
⮚ The level of commitment can be assessed through the investment of both
parties.
⮚ The level of commitment in a relationship affects the exchange and
sustainability of the relationship.
⮚ In a loosely connected relationship with low commitment, there won't be many
factors of personal exchange, and vice versa.
⮚ There are two main aspects of commitment in a relationship: emotional
commitment and calculative commitment.
 MAJOR RELATIONSHIP ATTRIBUTES

Evidence of commitment

⮚ Evidence of commitment is found in the investments that one party

makes in the other.
⮚ One party makes investments in the promising relationship and if the
other responds, the relationship evolves and the partners become
increasingly committed to doing business with each other.
⮚ Investments can include time, money, and the sidelining of current or
alternative relationships.
⮚ A partner’s commitment to a relationship is directly represented in the
size of the investment in the relationship, since these represent
termination costs.
RELATIONSHIP QUALITY
Trust, commitment, and relationship
satisfaction are the core attributes of
relationship quality. The higher the
levels of these three attributes, the
higher the quality of the relationship.
There are also relationship attributes
that moderate relationship quality.
These include
conflict, cooperative norms,
opportunism, mutual goals, power,
adaptation, atmosphere, and social
and/or structural bonds.
 DISCUSSION

⮚ Why do companies want relationships with customers?

⮚ Why do customers want relationships with companies?
⮚ When do companies not want relationships with customers?
⮚ Under what circumstances do customers not want relationships with
companies?
 COMPANIES WANT RELATIONSHIPS
WITH CUSTOMERS
The fundamental reason that companies want to build relationships
with customers is to enhance and sustain profitability. Profitability
increases through customer relationships in three main ways:
• Improving customer retention
• Reducing marketing and customer service costs
• Improving customer lifetime value (CLV)
 COMPANIES WANT RELATIONSHIPS
WITH CUSTOMERS
Improving customer retention
● Improving customer retention rates leads to a larger customer base. A larger
customer base increases demand for the company’s products.
● However, churn rates vary by industry, with utilities generally having low churn
due to monopoly positions. Nonetheless, high switching rates are seen in
deregulated markets, such as 19% of Australian households changing
electricity providers in 2021.
● Simply growing the customer base isn’t always viable if it includes unprofitable
customers. Not all customers are equally valuable, and some may not be worth
retaining, especially if they are high-cost, late payers, or frequently switch
providers.
 COMPANIES WANT RELATIONSHIPS
WITH CUSTOMERS
Reducing marketing and customer service costs
● Improving customer retention decreases the need to replace churned customers, leading
to lower marketing and acquisition costs.
● As customer relationships deepen, processes may become automated, reducing
overhead costs and increasing efficiency.
● Long-term customers tend to spend more over time, making revenue and profit streams
more secure.
● Significant investment is often required to convert prospects into first-time customers,
with costs that may take time to recover.
 COMPANIES WANT RELATIONSHIPS
WITH CUSTOMERS
Improving customer lifetime value (CLV)
● A customer relationship that endures and has a high CLV to the company, has a better
chance of contributing to the company’s profitability than low CLV ones.
● Customer life-time value is the present-day value of all net margins earned from a
relationship with a customer, customer segment or cohort.
● For most companies, it is important to find and attract those customers or segments that
have the highest CLV potential..
 COMPANIES WANT RELATIONSHIPS WITH
CUSTOMERS
Improving customer lifetime value (CLV)
Profit margins tend to accelerate over time. This has four causes:
✓ Revenues grow over time, as customers buy more.
✓ Cost-to-serve is lower for existing customers, because both supplier and
customer understand the other.
✓ Higher prices are paid by existing customers than new customers.
✓ Value-generating referrals are made by existing, satisfied customers through
their unpaid advocacy.
When do customers want relationships
with suppliers?
B2B B2C
Product complexity Confidence benefits
Requirement fit Social benefits

Performance risk Special-treatment benefits

Service requirements
Purchase cost
Reciprocity
When do companies not want relationships?
B2B B2C
Fear loss of control Customer-centricity is not the
Sunk cost
orientation that the company
pursues.
Resource commitment

High opportunity costs

Why do customers NOT want relationships
with suppliers
B2B B2C
Fear of dependency Customers do not find reasons to
establish a relationship with the
Lack of perceived value in the
relationship supplier.

Lack of confidence in the supplier.

Customer lacks relational orientation

Rapid technological changes
 CUSTOMER ENGAGEMENT,
CUSTOMER SATISFACTION,
LOYALTY, AND PROFITABILITY
 CUSTOMER ENGAGEMENT, CUSTOMER SATISFACTION,
LOYALTY, AND PROFITABILITY
Customer Engagement
Definition: Customer engagement reflects the psychological and emotional
connection a customer has with a brand, influenced by interactions with brand
touchpoints.
Company Strategy: Companies aim to facilitate positive customer interactions
with brand touchpoints, balancing customer satisfaction with cost efficiency. High
engagement often leads to customers exploring more brand touchpoints and
spending more time with the brand.
 CUSTOMER ENGAGEMENT, CUSTOMER SATISFACTION,
LOYALTY, AND PROFITABILITY
Customer Satisfaction
▪ The most common way to operationalise customer satisfaction is to compare the customer’s
perception of an experience, or some part of it, with their expectations for that experience.
▪ Where there is no gap between the customer’s expectations and their perceptions, then they
are satisfied.
▪ Where perceived benefits exceed customer expectations, then the customer is delighted.
Where the opposite occurs (i.e., perceived benefits < customer expectations), then the
customer experiences dissatisfaction. Kano’s model of customer satisfaction helps illustrate
this point.
 CUSTOMER ENGAGEMENT, CUSTOMER SATISFACTION,
LOYALTY, AND PROFITABILITY
Customer Loyalty

Behavioural Loyalty Attitudinal Loyalty

RFM Attitudinal loyalty is the beliefs and feelings
R = time elapsed since last purchase that customers have with respect to their
F = number of purchases in a given time repeat purchase intention.
period
M = monetary value of purchases in a given
time period
CUSTOMER ENGAGEMENT, CUSTOMER SATISFACTION,
LOYALTY, AND PROFITABILITY

Customer Loyalty
 CUSTOMER ENGAGEMENT, CUSTOMER SATISFACTION,
LOYALTY, AND PROFITABILITY
Business performance
❖ Share of Wallet (SOW):
Measures CRM performance. Focuses on
understanding what percentage of a customer's
spending a company captures. CRM efforts aim to
maximize SOW for key customers or segments.
 CUSTOMER ENGAGEMENT, CUSTOMER SATISFACTION,
LOYALTY, AND PROFITABILITY
Business performance
❖ Net Promoter Score (NPS®):
Developed by Fred Reichheld. Measures the likelihood of customers recommending a company to
others. NPS® is a simple yet powerful tool to assess customer satisfaction and loyalty.
American Customer Satisfaction Index (ACSI) scores and
company performance.
The ACSI organization states that
satisfied customers are more
profitable, while dissatisfied
customers may only purchase if
prices are reduced.
An independent study using ACSI
data also found that customer
satisfaction significantly impacts
Source: Butter, F. & Maklan, S. (2015, p 45) business performance, though
effects vary by sector.
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