When to Use Relationship Marketing

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Relationship marketing is not effective in all situations. Transaction marketing, which focuses on one sales transaction at a time, is more appropriate than relationship marketing for customers that have short time horizons and can switch from one supplier to another with little effort or investment. This situation often occurs in 'commodity' markets, such as steel, where various suppliers oifer largely un differentia ted products. A customer buying steel can buy from any of sever* steel suppliers and choose the one offering the best terms on a purehase-by-purchase basis. The fact that one steel supplier works at developing a longer-term relationship with a buyer does not automatically earn it the next sale; its price and other terms still have to be competitive.

In contrast, relationship marketing can pay off handsomely with customers that have long time horizons and high switching costs, such as buyers of office automation systems. Such major system buyers usually research conipetinj > suppliers carefully and choose one from whom they can expect state-of-the-art technology and good long-term service. Both the customer and the supplier invest a lot of money and time in building the relationship. The customer would find it costly and risky to switch to another supplier and the seller would find that losing this customer would be a considerable loss. Thus each seeks to develop a solid long-terra working relationship with the other. It is with such customers that relationship marketing has the greatest pay-off.

In these situations, the 'in-supplier' and 'out-supplier' face very different challenges. The In-supplier tries to make switching difficult for the customer. It develops product systems that are incompatible with those of competing suppliers and installs its own ordering systems that simplify inventory management and delivery. It works to become the customer's indispensable partner. Out-suppliers, in contrast, try to make it easy and less costly to switch suppliers. They design product systems that are compatible with the customer's system, that are easy to


Sleeping giants


Comparing customer relationship revenues with relationship costs install and learn, that save the customer a lot of money, and that promise to improve through time.

The appropriateness of transaction versus relationship marketing depends on the type of industry and the wishes of the particular customer. Some eustomers value :i high-service supplier and will stay with that supplier for a long time. Other customers want to cut their costs and will switch suppliers readily to obtain lower costs. Tn the latter case, the compuny ean still try to keep die customer by agreeing to reduce the price, providing that the customer is willing to accept fewer services. For example, the customer may forgo tree delivery, design assistance, training or some other extra. However, die seller should probably treat this type of customer on a transaction basis rather than on a relationship-building basis. As long as the company cuts its own costs by as much as or more than its price reduction, the transaction-oriented customer will still be profitable.

Thus relationship marketing is not the best approach in all situations. For it to he worthwhile, relationship revenue needs to exceed relationship costs. Figure 11.4 suggests that some customers are very profitable sleeping giants, which generate significant revenue and are profitable but relatively undemanding. Much of the relationship marketing activity is taken up by the power traders, which provide significant revenue but are demanding. These are as profitable as the pets, which provide little revenue but have appropriately small relationship costs. Transaction marketing is probably adequate for these. The most difficult group is the delinquents, which provide little revenue but are demanding. What can a company do about these? One option is to shift the delinquents' eustomers to products that are likely to be less difficult to operate or less complicated. Vodaphone's Pay as you Talk phone service does this by providing contracts to less well-off customers who prepay for the phone's use. Banks' high charges on imnegotiated overdrafts are a way of doing this. If these actions cause the unprofitable customer to defect, so be it. In fact, the company might benefit by encouraging these unprofitable customers to switch to competition.19

Ultimately, marketing is the art of attracting and keeping profitable customers. Yet, companies often discover that between 20 and 40 per cent of their customers are unprofitable. Further, many companies report that their most profitable customers are not their largest customers, but their mid-size customers. The

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