Essay: Principles of relationship marketing

This essay will initially describe and provide an understanding of the principles of Relationship Marketing (RM), giving a brief outline of the elements involved, and also discussing the development, Scope, and approaches to real. It will go on to elaborate as to how Relationship Marketing can offer organisations the ability to achieve competitive advantage within the market place. Theory will be discussed through the use of secondary data sourced form various academic professional marketing related publications.

Gummesson, E. (1999), describes Relationship Marketing as ‘a network of set relationships which can grow into enormously complex patterns’. Relationship Marketing is a form ofmarketingdeveloped from direct response marketing campaigns conducted in the 1960’s and 1980’s which emphasized customer retention and continual satisfaction rather than individual transactions. Relationship Marketing differs from other forms of marketing in that it targets an audience with more directly suited information on products or services which suit retained customer’s interests, as opposed todirector "Intrusion" marketing, which focuses upon acquisition of new clients by targeting majority demographics based upon prospective client lists.

Jobber, D. (2004) discusses that traditional marketing originated in the 1960s and 1970s as companies found it more difficult to sell consumer products. Its consumer market origins molded traditional marketing into a system suitable for selling relatively low-value products to masses of customers. Over the decades, attempts have been made to broaden the scope of marketing, Relationship Marketing being one of these attempts. The practice of Relationship Marketing has been greatly facilitated by several generations ofcustomer relationship managementsoftware that allow tracking and analysing of each customer’s preferences, activities, tastes, likes, dislikes, and complaints. This is a powerful tool in any company’s marketing strategy. For example, Tesco maintaining a database of when and how repeat customers buy their products, the options they choose, the way they finance the purchase etc., is in a powerful position to custom target sales material. In return, the customer benefits from the company targeting promotions and services and communicating directly, providing money off vouchers and other loyalty related rewards.

According to Gummesson, E. (1999) ‘Cross-functional teamsshould be responsible for the entire Relationship Marketing process, from beginning to end, rather than having the work go from one functional department to another. Traditional marketing is said to use the functional department approach. This can be seen in the traditional four P’s of themarketing mix.Pricing,Product,Promotion, andPlacementare claimed to be functional sources of information that must be accessed by the marketer if he or she is going to perform their task. Yeshin, T. (1998) contends that Relationship Marketing can reach consumers on a highly segmented or even one-to-one basis. It also has the potential to become two-way, encouraging feedback between the customer and the service or consumer item provider. Yeshin goes on to say that companies such as Nestle and Heinz have also announced moves into the ‘club’ format, which will enable the establishment of direct relationship between the manufacturer and the consumer. This can be widely seen via frequent flyer and frequent stayer loyalty programmes driven by airlines and hotel chains, whereby the objective is to establish a relationship with the consumer, to provide mutual benefits. The encouragement of a ‘feedback loop’ is destined to grow apace over the next few years, and as companies perceive the benefits of encouraging a positive relationship with their customers, their consumers, their suppliers, and others, so we will witness the development of two-way marketing communication programmes. Shultz et al. (1992) argue that of the four marketing mix variables, the area of marketing communications will become the greatest and only opportunity of achieving sustainable competitive advantage through. He goes on to state that ‘If all things are equal – or, at least more or less so – then it is what people think, feel and believe about a product and its competitors which will be important’. Meaning, since products in many areas will achieve a parity or comparability purely in a ‘perfect competition’ sense; it will be perceptual differences which consumers will use to discriminate between rival brands. Thus the sustained and integrated use of marketing communication campaigns as discussed above will be able to achieve the differentiation they require (Figure 1).

Jimnovo website (2008) States that the Relationship Marketing process is usually defined as a series of stages, and there are many different names given to these stages, depending on the marketing perspective and the type of business. For example, working from the relationship beginning to the end:

1. Interaction > Communication > Valuation > Termination
2. Awareness > Comparison > Transaction > Reinforcement > Advocacy
3. Suspect > Prospect > Customer > Partner > Advocate > Former Customer

Using the Relationship Marketing approach, programs can be customised and targeted for individual consumer groups and thestage of the process they are going through as opposed to some forms of database marketing where everybody would get virtually the same promotions, with perhaps a change in offer.The stage in the customer life-cycle determines the marketing approach used with the customer. A simple example of this would be sending new customers a ‘Welcome Kit’, which might have anincentive to make a second purchase. If a further allotted number of days pass and the customer has not made a second purchase, a follow up could be made offering a further discount. This method is using customer behaviour over time (the customer life-cycle) to trigger the marketing approach.

Customer Retention marketing (CRM) is a tactically-driven approach based on customer behaviour. It is the core activity behind Relationship Marketing, Loyalty Marketing, and Database Marketing.Past and current customer behaviour is generally the best predictor of future customer behaviour.

Targeted groups can be classified as:

1. Those who match the required demographic parameters; however they have never made a purchase online before.
2. Those who are outside the required demographics, but have purchased repeatedly online on many previous occasions.

If you sent a discounted promotional offer to both groups, asking them to visit and make a first purchase, response would be higher from the second group than the demographically targeted group, the first group. This effect has been demonstrated for years with many types of direct marketing, for example WARC.com (2008) who argue that charities such as the PDSA who used the Royal Mail extensively during their campaign, and many mobile phone companies use today, effective direct marketing techniques. It works because actual behaviour is better at predicting future behaviour than demographic characteristics are. You can tell whether a customer is about to defect or not by watching their behaviour, and once you can predict defection, you have an opportunity of retaining the customer by taking specific targeted action.

Gummesson, E. (1999), contends that ‘The essence of the Relationship Marketing concept is based on the understanding of customer needs and wants. If a company that satisfies needs and creates value for the customer, customer satisfaction and the right customer perceived quality, the company stands the best chance of success. The article goes on to say that there are key and fundamental values involved in Relationship Marketing. They are:

• Long-term collaboration and win-win
• Recognising that all parties be active
• Relationship and service values instead of bureaucratic-legal values
• Long-term collaboration and win-win

The core values emphasize collaboration and the creation of mutual values. This includes viewing suppliers, customers and others as partners rather than opposite parties. Relationship Marketing should be a win-win than win-lose, more of a plus-sum game as opposed to a zero sum game. In a plus sum game, the parties increase value for each other, in a zero sum game, what one party gains is the other party’s loss. If these values are fulfilled, the relationships may become long term and sustaining. Relationship Marketing encourages customer retention and discourages defection. As a process, Relationship Marketing encourages retention marketing as a first priority, and attraction marketing, obtaining new customers, as second priority.

Recognising that all parties be active

This value specifies that action cannot be left to the supplier or a single party of a network alone, and that everyone can and should be actively involved in the relationship. Within this network, Gummesson, E, (1999), goes on to contend that contrary to the mythology of marketing, the supplier is not necessarily the active party in innovation and account and portfolio management. In business it is generally customers who initiate innovation, forcing suppliers to change their products and services. From personal long-term experience of the party goods industry, this can be confirmed as highly appropriate and a highly accurate statement of reality.

Relationship and service values instead of bureaucratic-legal values

Bureaucratic and legal values are regarded as being rigid, as are the application of regulations and internal routines, with the belief that the supplier has always been the expert and the customer as ignorant. Customers are in reality, much more than this and are indeed the necessary statistical averages from massed date, not individual. In essence, the customer should be regarded as the main source of revenue, ands should be in focus, and that the supplier’s task is to create value for the customer.

Wilson, I. (1994) contends that United Kingdom based businesses have been poor in the activity of Relationship Marketing in comparison to some European competitors, and have failed to identifying and building relationships, and have failed to involve sufficiently senior ranking personnel. He goes on to state that careful attention must be paid to designing mechanisms to capture feedback from customers, as most customers are lost due to neglect. A key principle of Relationship Marketing is the retention of customers through varying means and practices to ensure repeated trade from existing customers by satisfying requirements above those of competing companies through a mutually beneficial relationship. Aaker. D (2005) contends that this technique is now used as a means of ‘counterbalancing’ new customers and opportunities with current and existing customers as a means of maximizing profit. This process is less economically viable than retaining all or the majority of customers using both direct and Relationship Management, as business generation through brand new customers requires much more investment. Many companies in competing markets will redirect or allocate large amounts of resources or attention towards customer retention, as in markets with increasing competition it may cost more to attract new customers than it would to retain current customers. However, it is suggested that because of the extensiveclassic marketingtheories center on means of attracting customers and creating transactions rather than maintaining them, the majority usage of direct marketing used in the past is now gradually being used more alongside relationship marketing as it’s importance becomes more recognizable. It is also claimed that a 5% improvement in customer retention can cause an increase in profitability of between 25 and 85 percent.

According to Buchanan and Gilles (1990) the increased profitability associated with customer retention efforts occurs because of several factors that occur once a relationship has been established with a customer.

• The cost of acquisition occurs only at the beginning of a relationship, so the longer the relationship, the lower the amortized cost.
• Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
• Long-term customers tend to be less inclined to switch, and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.
• Long-term customers may initiate free word of mouth promotions and referrals.
• Long-term customers are more likely to purchase ancillary products and high margin supplemental products.
• Customers that stay with you tend to be satisfied with the relationship and are less likely to switch to competitors, making it difficult for competitors to enter the market or gain market share.
• Regular customers tend to be less expensive to service because they are familiar with the process, require less "education", and are consistent in their order placement.
• Increased customer retention and loyalty makes the employees’ jobs easier and more satisfying. In turn, happy employees feed back into better customer satisfaction in a virtuous circle.

Relationship marketing stresses on what it calls internal marketing. This refers to using marketing techniques within the organization itself. It is claimed that many of the traditional marketing concepts can be used to determine what the needs of ‘internal customers’ are. According to this theory, every employee, team, or department in the company is regarded as a supplier and a customer of services and products. An employee obtains a service at a point in the value chain and then provides a service to another employee further along the value chain. If internal marketing is effective, every employee will both provide and receive exceptional service from and to other employees. It also helps employees understand the significance of their roles and how their roles relate to others’. If implemented well, it can also encourage every employee to see the process in terms of the customer’s perception of value added, and the organization’s strategic mission of achieving excellent and effective Relationship Management.

(George, W. 1990).

Adrian Payne (1991) fromCranfieldUniversitygoes further. He identifies six markets which he claims are central to relationship marketing.

They are:

1. Internal markets
2. Supplier markets
3. Recruitment markets
4. Referral markets
5. Influence markets
6. Customer markets.

Referral marketing is developing and implementing a marketing plan to stimulate referrals. Although it may take months before you see the effect of referral marketing, this is often the most effective part of an overall marketing plan and the best use of resources. Marketing to suppliers is aimed at ensuring a long-term conflict-free relationship in which all parties understand each other’s needs and exceed each other’s expectations. Such a strategy can reduce costs and improve quality. Influence markets involve a wide range of sub-markets including: government regulators, standards bodies, lobbyists, stockholders, bankers, venture capitalists, financial analysts, stockbrokers, consumer associations, environmental associations, and labour associations. These activities are typically carried out by the public relations department, but relationship marketers feel that marketing to all six markets is the responsibility of everyone in the organization. Customer markets are divided into existing customers and potential customers, resulting in seven rather than six markets. He claims that each market will require its own strategies and recommends separate marketing mixes for each of the seven.

In conclusion, Relationship Marketing has a ‘kilter’ effect on the success of retaining and increasing business. Hakanson, H. (1995) contends that through Relationship Marketing, people build trust in each other and so plan to make future business with each other. The relationships open up for a ‘plus-sum’ game (as discussed earlier), for a win-win scenario. An organisation must continue to satisfy its customers, however it is very difficult to keep 100% of your customers satisfied all the time, one reason is because needs and wants of customers change and evolve over time, so we have to monitor what is happening in our customer environment continually.

Tried and trusted methods used to monitor customer satisfaction include a selection of some or all of the following:

• Focus groups
• Personal interviews
• Questionnaires
• Mystery Shoppers
• Customer complaints
• Suggestion boxes
• Online surveys
• General comments

learnmarketing.net (2008)