2. Exchange
Central to every relationship is an
exchange process where each side
gives something in return for a payoff of
greater value.
The “take money” side of the transaction
must offer a perceived payoff of greater
value to the buying side for the
transaction to occur.
3. Collaborative Advantage
New era of business marketing is dependent
upon managing relationships.
Collaborative advantage is:
◦ Demonstrating special skills with “key”
customers or
◦ Developing innovative strategies with alliance
partners
4. Types of Relationships
Continuum of buyer-seller relationships
Transactional, Value-added & Collaborative exchanges
The Relationship Spectrum
5. Transactional Exchange
Centers on timely exchange of basic products
at highly competitive market prices
These types of transactions are autonomous,
meaning that there is little or no concern as to
the needs of buyer or seller
Example: A person comes into a store and
buys a hammer. The buyer wants a hammer
and the seller sells him one. That’s all there is
to it!
6. Transactional Exchanges
The business market includes items like:
Packaging,
Cleaning products or
Commodity-type products or service
activity where bidding is employed.
Transactional exchanges employ an
Arms-Length relationship.
7. Collaborative Exchange
Occurs when alternatives are few, market is
dynamic, the purchase is complex and the
price is high
Features close information, social, and
operational linkages, as well as mutual
commitments
Switching costs are extremely important to
collaborative customers
Trust is the key and it exists when one party
has complete confidence in their partner’s
ability and integrity
8. Value-Added Exchanges
Value-Added Exchanges fall between
Transactional and Collaborative Exchanges
Value-Added Exchanges are those where the
selling firms shifts from just attracting
customers to keeping them by:
1. Adding additional services
2. Developing services that are customized to meet
the buyer’s needs
3. Providing continuing incentives that promote
repeat business
9. The Element of Competition
Competition forces a war-like environment
whereby competitors are always trying to lure
customers from competitors.
Since customer situations (i.e., requirements,
expectations, people, preferences) change,
there is always opportunity for customers to
change from relationship to transactional to
relationship with new suppliers.
10. Effects of Market Conditions
Market conditions force different types
of relationships.
The marketer needs to understand this
aspect of business to determine which
strategy to employ with various
markets.
What is the best strategy: transactional
or collaborative?
11. Buyers and sellers craft various relationships in response to:
a) Market conditions
b) Characteristics of the purchase situation
Spectrum of Buyer-Seller
Relationships
12. Switching Costs
A major consideration before changing from
one supplier to another is the switching costs.
Organizational buyers invest heavily in their
relationships with suppliers.
Investments include:
1. Money
2. People
3. Training Costs
4. Equipment
5. Procedures and processes
13. Switching Costs
Buyers hesitate to switch because it can cause
costly disruptions.
Risk of making a wrong choice of less-
established suppliers can be costly.
From a marketing perspective, the prospect’s
PROBLEM must exceed the BENEFITS that they
are presently experiencing with their current
supplier before they will consider switching.
14. Value Drivers in
Collaborative Relationships
Suppliers of routinely purchased products
offer three sources of value:
1. Value creation through core offerings
2. Value creation within the sourcing
process
3. Value creation at the customers level of
operations
15. Furthering Collaborative Relationships
To develop ‘key supplier’ status, sellers
need to:
Target the right customer.
Match with their purchasing situation.
Develop strategies that are appropriate
for each type of buyer . Collaborative
buyers seek long, strong and lasting
relationships.
Buyers perceive significant risks with
suppliers, so competence and
commitment are vital when starting the
16. Improving Transactional
Customer Loyalty
To improve customer loyalty and
satisfaction, many companies have
developed specialized services and
customized products.
Question: Is this really profitable?
17. Differentiation Strategy
For a differentiation strategy to work:
“The value created, measured by
higher margins and higher sales
volumes, has to exceed the cost of
creating and delivering the customized
features and services.”
To determine this, the marketer needs to
understand the drivers of profitability.
18. Activity-Based Costing
Employing an activity-based costing (ABC)
process, one can accurately assess the
cost and profitability of each customer.
By linking financial information with
transactional data created in CRM
programs, companies are able to
accurately calculate “cost-to-service”
components to yield customer profitability.
19. Measuring Customer
Profitability
Activity-based costing (ABC) is a technique
that allocates the cost of performing various
services to each customer (customer-
specific costing).
Through Customer Relations Management
(CRM) programs, one can relate revenues
and costs to each and every activity.
21. Whale Curve & Profitability
20/80 Rule says “20% of customer provide
80% of sales
Whale Curve reveals:
◦ 20% of customers generate 150–300% of total
profits
◦ 70% of customers break even
◦ 10% of customers lose from 50-200% of total
profits
◦ Leaving company with 100% of total profits
22. High-Cost-to-Serve Customers
Order custom products
Order small quantities
Unpredictable order arrivals
Customized delivery
Frequent changes in delivery requirements
Manual processing
Large amounts of presales support
(i.e., marketing, technical, and sales resources)
Large amounts of post-sales support
(i.e., installation, training, warranty, field service)
Require company to hold inventory
Pay slowly (i.e., high accounts receivable)
Low-Cost-to-Serve Customers
Order standard products
Order large quantities
Predictable order arrivals
Standard delivery
No changes in delivery requirements
Electronic processing (EDI)
(i.e., zero defects)
Little to no presales support
(i.e., standard pricing and ordering)
No post-sales support
Replenish as produced
Pay on time
Source: Robert S. Kaplan and V.G. Narayanan, “p. 8. Measuring and Managing Customer Profitability,” Journal of Cost Management 15, No. 5
(September/October 2001):
High- vs. Low-Cost-to-Serve Customers
23. Customer Profitably
As mentioned previously, some
customers are profitable and some
aren’t. To determine this, we look at the
cost/profitability structure with the plan
to:
1. Keep profitable customers
2. Convert unprofitable ones to
profitability
3. Fire those who are not profitable
24. High
Low
NetMarginRealized
Cost-to-Serve
Passive
Product is crucial
Good supplier match
Costly to service,
but pay top
money
Price-sensitive but
few special
demands
Aggressive
Leverage their buying power
Low price and lots of
customization
Most challenging
Low High
SOURCE: From “Manage Customers for Profits (Not Just Sales)” by B.P. Shapiro et al., September-October 1987, p. 104, Harvard Business Review.
Figure 3.4 Customer Profitability
25. Managing Unprofitable
Customers
Low margin / high cost customers offer
the most challenge for marketing
mangers.
Start with ways to reduce costs
Next, work with customers to possibly
change their actions resulting in
lowering costs or increasing
profitability
26. Firing the Customer
We must try everything to make a
customer profitable before firing them.
If after trying, and the customer
continues to be reluctant to change, and
the relationship remains unprofitable, we
can say outright, “YOUR FIRED!” but…
There are better approaches. We can let
customers ‘fire themselves’ by raising our
prices, reducing or charging more for
services, eliminating discounts, etc., until
they become profitable or find another
distributor.
27. Customer Retention
Retention of profitable customers is
crucial to business. However, due to
competition and internal / external
environmental factors, achieving this
goal is difficult.
One method that is proving successful
for customer retention is the use of CRM
programs.
28. Customer Relationship
Management
Customer Relationship Management (CRM) is a
cross-functional process for achieving:
a.Continuing dialog with customers across all
contact and access points
b.Personalized service to the most valuable
customers
c.Increased customer retention
d.Continued marketing effectiveness
29. CRM Technology
CRM programs are software systems that capture
information and integrate sales, marketing and
customer service information.
CRM programs can gather information from many
sources including email, call centers, service and
sales reps.
The information is available to the right people in
the organization in real time.
30. CRM Software Programs
There are many types of CRM programs:
1. Some companies develop their own
proprietary programs.
2. Some companies purchase off-the-
shelf programs.
31. Responsive Strategies
A CRM program cannot help unless a
company employs the proper strategy
to secure and retain profitable
customers.
Special attention must be given to five
areas.
32. CRM Strategy - Priorities
1. Acquire the right customer.
2. Craft the right value proposition.
3. Institute the best processes.
4. Motivate employees.
5. Learn to retain customers.
33. #1 - Acquiring the Right Customer
Account selection demands a clear
understanding of:
1. Seller’s resources
2. Customer’s needs
3. Cost of serving various groups of
customers
4. Potential profit opportunities
5. How customers define value and how to
meet those expectations
34. What do customers value?
Some demand low price
Some demand customer service
Some demand quick delivery
The question is: “Can the seller
deliver it profitably?”
Many sellers try to meet all their
customer’s needs, and may do so, but
fail to do it profitably.
35. #2 – Crafting the Right Value
Proposition
A value proposition encompasses the
products, services, ideas and solutions
that a business marketer presents to
the prospect/customer that is designed
to solve the customers’ problems.
They can be generic or customized.
36. Value Proposition
A value proposition may include:
1. Points of parity to a competitive option
2. Points of difference
Best practice suppliers base their value
proposition on their target market’s
needs by communicating their offering of
superior performance in a way that
conveys they understand their
customer’s business priorities.
37. Value Proposition Strategies
Strategies that competitors employ fall
into a range referred to as:
“Industry Bandwidth of Working
Relationships”
It ranges from pure transactional to pure
collaborative exchanges (see Fig. 3.5 on
the next slide).
39. Flaring Out Strategy
‘Flaring out’ strategy (Fig 3.5b) states
that the seller can either unbundle
(point A), that is, reduce the service
associated with a lower price
(transactional in nature), or
Augment by adding more services to
the core offerings (point D) which adds
cost to the services. This is
collaborative in nature.
40. Creating Customized
Products
The seller starts with a core
service (“naked solutions”) and
adds customized services to it
(“custom wrapped”) that create
more value.
41.
42. #3 - Institute Best Practices
The sales force plays a key role in establishing
and growing a customer from a transactional
account to a collaborative partnership.
They can do this by aligning and deploying
technical and service support units to match with
their customers’ units.
Technical groups can consist of research,
logistics and customer service units.
Through careful management and screening,
transactional accounts can progress to
partnerships.
43. Best Practices Follow-Up
In addition to using best practices, successful
organizations (like IBM) employ follow-up
techniques such as:
1. Assigning a client representative to take
ownership of the relationship.
2. Assigning a Project Owner who completes the
project or solves project problems.
3. Developing an in-process feedback and
measurement system.
44. #4 - Motivating Employees
Dedicated employees are the key to a
successful customer relationship strategy.
The best approach is to:
1.Hire good people.
2.Invest in them to increase their value to
the company and its customers.
3.Develop challenging careers and align
incentives to performance measures.
45. Why Retain Loyal
Customers?
Less expensive than acquiring new customers.
Established customers buy more.
Cost of serving loyal customers declines.
46. #5 - Retaining Customers
Retain customers by:
Providing superior value (more than expected) to
ensure high satisfaction.
Nurturing trust.
Developing mutual commitment.
If possible, helping customers grow their business.
47. How to Pursue Growth from Existing
Customers
Identify and cultivate customers that offer
the most growth potential by:
1.Estimating current percent “share of wallet”
2.Pursuing opportunities to increase share
3.Projecting and enhancing customer
profitability
48. Evaluating Relationships
Some relationship-building efforts fail
because expectations of the parties don’t
mesh.
Example: Seller wants a business
relationship whereas the customer
responds in a transactional mode.
By understanding and isolating customer
needs, the marketer is better equipped
to match their product offerings to a
particular customer’s needs.
49. • Relationship Quality: High-caliber relational
bond characterized by commitment and trust
• Relationship Breadth: Number of interpersonal
ties that connect the relationship
• Relationship Composition: Portfolio of
contacts ranging from low-level influencers to
high-level decision makers
• Relationship Strength: The ability of the buyer-
seller relationship to withstand stress and/or
conflict
• Relationship Efficacy: The ability of an inter-
firm relationship to achieve desired objectives
Drivers of RM Effectiveness:
Definitions
52. Social RM Programs
Social RM programs:
◦ Social engagements (sporting events, meals, etc.)
◦ Frequent and personalized communications that
develop bonds
◦ Make the relationship special
Results:
◦ Customers reciprocate with repeat business and
referrals
◦ Difficult for rivals to duplicate
Affect:
◦ Has a direct affect on profits & is long lasting
53. Structural RM Programs
Structural RM programs:
◦ Provide a service/product to increase
productivity and/or efficiency for
customers through targeted investment
that customers would not make for
themselves.
For example they provide:
Order-processing interfaces
Free analysis of operations
Results:
◦ Creating a structural bond makes it difficult
54. Financial RM Programs
Financial RM programs provide
economic benefits such as:
Discounts
Free shipping
Extended payment terms
Results:
Companies respond financially to protect
customer relationships, but they do not
necessarily enhance the relationship because
all companies do it.
55. Targeting RM Programs
Some companies are Relationship
Oriented (RO), and some are not.
◦ RO companies seek to develop relationships
with current or potential supplier.
RO buyers look for companies that:
◦ Offer expertise
◦ Are able to be flexible (i.e., payment terms,
R&D, etc.)
◦ Help reduce risk for both parties benefit
◦ Help both parties benefit from the relationship
56. Strategy for Dealing with
High and Low RO
HIGH RO: Target those with high RO goals
since they are looking for and are open to
developing relationships
LOW RO: For these companies, the
strategy is to create high switching cost:
◦ Tie them into electronic ordering interfaces
◦ Stay in constant contact to keep what exists
◦ Align RM resources as closely as possible to the
customer’s needs
