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Customer Relationship Management
Marketing Evolution
Late 19th and 20th century’s business attitude completely undermined the role of the customer. This was as a result of producers’ ability (success) to sell whatever goods or services they produced. It was an era perpetrated by the lack of mass industrial production of goods and services. When manufacturers started facing competition, they suddenly realized that their success in business depended not only on what they produced but on how to sell it. It was at this time that their orientation changed from production to sales, though very little or no attention was still given to individual customers.
Until recent times this manufacturing mentality is being practised by many business enterprises through the “get it out the door”[1] policy. They are concerned with selling a product or a service without bothering to find out how their customers are treated. Even nowadays some businesses reward their sales executives with bonuses for the total volume of goods sold with little emphasis laid on how to achieve customer retention and loyalty.
As time goes on many companies realize that they cannot always sell what they produce, but to produce what could be sold. This has led to the “marketing concept”[2] which is responsible for “a customer orientation, the coordination and integration of all marketing activities, and a focus on the long-term profitability of the organisation.”[3] This concept was based also on the “brick and mortar” nature (which deals with the location of a business) or with advertisement as a means to lure customers to buy goods and services. The typical sales oriented businesses were convinced that customers hadn’t the will power to make purchase decisions. But as time goes on, they have realized that customers, who have been tricked to buy goods with very poor quality, do not buy them the second time. Besides, there has been a considerable shift of business from its “brick and mortar” nature to e-commerce. Better still, customers are no longer excited with advertisement. Businesses have also realized that customers are to be treated as individuals and not as a group. What one customer finds appealing may be the contrary to the other.
With all these changes in the attitude of the customers, there has been the quest for a new marketing approach. This was the main preoccupation of marketers, which began in the latter part of the 1960s. This resulted to an era of the “strategic approach toward market segmentation, product and brand positioning, differentiation of the product offering, and really understanding what customers want and need.”[4]
THE NEED FOR A RELATIONSHIP
As companies gradually moved from product orientation to sales orientation marketing, they realized that it was time to create relationships between them and their customers. This process slowly replaced transaction-marketing with relationship-based marketing. This was as a result of the following reasons:
Advancement in Information Systems
With the advancement in information technology, marketing executives were able to calculate and arrive at the life time value (LTV) of individual customers. Thereby realising the loss incurred by an improper treatment of customers. The cost of replacing lost customers was a predicament which companies had to deal with it. Any attempt to replace defecting customers with new ones without an attempt to retain them is likened to filling a bottomless bucket. After these early experiences, companies started treating their customers as valuable assets.
Customers’ Indifference to Price
Due to a rapid growth in the service sector, business organisations have discovered that a great product with a comfortable price (commoditization) does not convince customers to keep doing business with them. They realized that customers were very concerned with the way they are being treated--hence, leading to a personal relationship between companies and customers. Customer satisfaction at this point was considered one of the main factors of a successful relationship-based marketing.
Production Technology and Service Level
In the late 19th and 20th centuries, markets were dominated by a few large manufacturing companies, whereby little or no thought was given to customer service. But with the advancement in production technology and service industry, companies have emerged leaps and bounds in all parts of the world thereby leading to keen competition.
This advancement has created a broader availability of similar goods and services. This means customers obtain the same satisfaction from the goods. The major challenge faced by companies at this point was not only to provide high quality goods or services to their customers but to find ways of retaining them.
The Need for Long-term Relationships
With the lesser role product and price play, companies have finally resorted to create valuable relationships with their customers. They have discovered that to retain one committed customer pays off better in the long-run, than acquiring five customers who soon defect. Inasmuch as product and price are important, relationship-based marketing is considered a major factor in business nowadays.
Relationship and Customer Loyalty
A healthy relationship between businesses and their customers certainly leads to loyalty. But if one is asked, can a company realize 100% loyalty from its customers? The answer will certainly be in the negative because of the following reasons:
a) Some customers find themselves in a relationship much against their liking and have no choice but to live with it. A customer who has a ten year mortgage and in the course of this time span is not happy has no choice but live with the situation until the mortgage matures. Another example is with public utilities especially in societies with a slow pace of deregulation. A customer with an electricity or gas company will not find it comfortable to move to some other company since the conditions are not only similar but the same. This could be termed an involuntary loyalty.
b) Some customers do business with a given company for convenience rather than for the satisfaction they derive from the service. They may patronize the business for years—leading the business owner to believe this to be loyalty. However, a rapid change of mind by the customers results as soon as a competitor enters the market and there is broader range of choices to make or the competitor offers more favourable terms and conditions leading to a superior service. We could call this loyalty determined by time.
c) If a customer visits an Italian restaurant about 80% of the time he or she eats out, the restaurant owner may construe it for loyalty. He does not know that for reasons of variety, this same customer visits a Mexican restaurant in the neighbourhood as well.
The important role played by customer relationship management to achieve customer loyalty cannot be underestimated. We have realized from the few examples mentioned above that customer loyalty could result as a situation whereby the customer has been taken ‘hostage’ by the regulations in place or the customer does not have a range of choices to make. Since we are beings of change, we may find it monotonous to visit the same restaurant for the same kinds of food day in day out. One can conclude at this point in time by saying that customer loyalty is a state of mind. A detail examination of this topic will be examined in a subsequent chapter.
QUALITIES OF CUSTOMER RELATIONSHIP
Any relationship requires the wholesome contribution of both parties to keep it healthy. Great care must be taken in its management so it keeps going on without a hitch. As Steve Druck says a relationship is “a very complicated and prolonged process with many pitfalls and challenges. Relationships do not just happen; they have to be made—made to start, made to work, made to develop, kept in good working order and preserved from going sour.”[5]
Relationship interactions are bound to change as time goes on, given the way they are handled or taken care of. They can never remain static. Therefore, for a successful relationship to be established and maintained there should be trust and commitment from both parties (business enterprises and customers).
A successful relationship begins with both parties being likeable. As Bennet points out this “likeability is closely related to sincerity, dependability, truthfulness, thoughtfulness, and consideration, all of which are connected to trust. Other factors commonly associated with attraction and attractiveness of a relationship partner are ease and frequency of interaction; propinquity—feelings of closeness, familiarity, and nearness; similarity—possessing similar values, attitudes, and perspectives; mutually—sharing goals and a sense of “being in this together”; and interdependence—the sense of relying on the other party in order to achieve certain goals.”[6]
Just as genuine relationships between individuals involve feelings and emotions, so too is it between customers and business enterprises. Individual customers expect to be treated differently by different firms at different situations. A customer who goes shopping for grocery certainly expects a different treatment from a supermarket assistance from when he or she visits his or her bank. These are the complex issues companies have to understand and deal with for a genuine relationship to be maintained. Despite the differences in customers’ expectations at different business interactions and places, the following benefits accrue from a genuine relationship management.
Trust
The Oxford Advanced Learner’s Dictionary of Current English defines ‘trust’ as:
‘confidence, strong belief, in the goodness, strength, reliability of something or somebody.’
Trust is considered one of the most important factors for any interpersonal relationship to exist and succeed. When one trusts someone, he or she develops confidence in him or her. When confidence is established, then, the chances of taking a risk on each other’s behalf are even greater. So too is it between customers and business enterprises. As soon as customers trust their bank for instance, they are prepared to deposit their lives’ earnings with it because they feel confident of their safety. Since they can count on their bank, they therefore have faith in it. This aspect of a customer’s behaviour develops with time between firms and their customers. It is a process that must be allowed to develop naturally. Firms should only encourage it through their display of trustworthy customer service. No ‘make beliefs’ should be practised.
Commitment
Just as commitment plays a significant role in customer loyalty, so too is it very important when a genuine relationship exists between customers and business enterprises. Commitment requires a high degree of reciprocity for a relationship to be successful. As expressed by Robert Morgan and Shelby Hunt, “commitment and trust are ‘key’ because they encourage marketers to (1) work at preserving relationship investments by co-operating with exchange partners (2) resist attractive short-term alternatives in favour of the expected long-term benefits of staying with existing partners, and (3) view potentially high-risk action as being prudent because of the belief that their partners will not act opportunistically.”[7]
Commitment results from long-term relationships. For it to exist between customers and business enterprises just as it is between individuals, there should be the willingness from both parties to keep to their promise. In order to determine the degree of “a person’s commitment in a relationship”,[8] two main factors must be indentified: “satisfaction level and the level of investment”.[9] The two main aspects of satisfaction are “(1) the degree to which a relationship provides valued outcomes by fulfilling important needs, and (2) the comparison level of alternatives, which is based on a qualitative expectation of what a relationship’s outcomes ought to be in an ideal involvement, as well as a comparison of one’s own outcomes to partner’s inputs and outcomes.”[10]
In examining the points mentioned above, we realize that customers’ commitment to a firm is not only determined by its services to and interaction with them, but also by external circumstances such as the presence of its competitors. Firms must be able to differentiate themselves from their competitors in order to maintenance a genuine relationship with their customers.
Level of Investment
Relationship and commitment can be influenced by the degree of individual investment. The degree of investment in this case does not only involve financial resources but “include time, emotional energy, personal sacrifice, and other indirect investments, such as shared memories, mutual friends, and activities or possessions that are uniquely linked to a relationship.”[11] When investment has reached this level, there is no doubt that a very high level of commitment is attained by both customers and business enterprises. However, this must not be misconstrued as an opportunity to keep one of the parties ‘locked’ in the relationship. Firms should not use unorthodox ways to get their customers committed so they are not able to pull out of the relationship. On the other hand, customers are discouraged from taking advantage of the business enterprises that might have been too committed to them and cannot easily pull out of the relationship.
Reliability
It takes a reasonable degree of reliability for a genuine relationship to be established whether between individuals or customers and business enterprises. While in interpersonal relationships “each party relies on the other to satisfy certain needs”[12], the relationship between customers and a company is different. The company earns its money by either selling a good or a service to its customers. Dependability must not get to a stage in a business relationship whereby one of the parties is dissatisfied and sees alternatives for a change but cannot pull out. For a genuine relationship to exist, both parties must be voluntarily dependent on each other.
Communication
Relationships can only be improved and maintained between customers and business enterprises when there is perfect flow of information. The flow of information must not be one-sided whereby only the company passes on pieces of information to its customers about some new project or innovations taking place. Proper communication is achieved when both the customer and the firm exchange information and know exactly how each of the two party feels. This is the area where small businesses (sole proprietorship) have an edge over bigger business enterprises because of the opportunity to communicate with the customers in a more personal manner thereby strengthening the bond of business relationship and keep the custom. Bigger business enterprises should not reduce communication with their customers to sending letters, adverts and e-mails to them. They should make sure customers’ calls are returned and face-to-face communication is encouraged. In this way, they will be able to discover where they falter so improvements can be made.
Late 19th and 20th century’s business attitude completely undermined the role of the customer. This was as a result of producers’ ability (success) to sell whatever goods or services they produced. It was an era perpetrated by the lack of mass industrial production of goods and services. When manufacturers started facing competition, they suddenly realized that their success in business depended not only on what they produced but on how to sell it. It was at this time that their orientation changed from production to sales, though very little or no attention was still given to individual customers.
Until recent times this manufacturing mentality is being practised by many business enterprises through the “get it out the door”[1] policy. They are concerned with selling a product or a service without bothering to find out how their customers are treated. Even nowadays some businesses reward their sales executives with bonuses for the total volume of goods sold with little emphasis laid on how to achieve customer retention and loyalty.
As time goes on many companies realize that they cannot always sell what they produce, but to produce what could be sold. This has led to the “marketing concept”[2] which is responsible for “a customer orientation, the coordination and integration of all marketing activities, and a focus on the long-term profitability of the organisation.”[3] This concept was based also on the “brick and mortar” nature (which deals with the location of a business) or with advertisement as a means to lure customers to buy goods and services. The typical sales oriented businesses were convinced that customers hadn’t the will power to make purchase decisions. But as time goes on, they have realized that customers, who have been tricked to buy goods with very poor quality, do not buy them the second time. Besides, there has been a considerable shift of business from its “brick and mortar” nature to e-commerce. Better still, customers are no longer excited with advertisement. Businesses have also realized that customers are to be treated as individuals and not as a group. What one customer finds appealing may be the contrary to the other.
With all these changes in the attitude of the customers, there has been the quest for a new marketing approach. This was the main preoccupation of marketers, which began in the latter part of the 1960s. This resulted to an era of the “strategic approach toward market segmentation, product and brand positioning, differentiation of the product offering, and really understanding what customers want and need.”[4]
THE NEED FOR A RELATIONSHIP
As companies gradually moved from product orientation to sales orientation marketing, they realized that it was time to create relationships between them and their customers. This process slowly replaced transaction-marketing with relationship-based marketing. This was as a result of the following reasons:
Advancement in Information Systems
With the advancement in information technology, marketing executives were able to calculate and arrive at the life time value (LTV) of individual customers. Thereby realising the loss incurred by an improper treatment of customers. The cost of replacing lost customers was a predicament which companies had to deal with it. Any attempt to replace defecting customers with new ones without an attempt to retain them is likened to filling a bottomless bucket. After these early experiences, companies started treating their customers as valuable assets.
Customers’ Indifference to Price
Due to a rapid growth in the service sector, business organisations have discovered that a great product with a comfortable price (commoditization) does not convince customers to keep doing business with them. They realized that customers were very concerned with the way they are being treated--hence, leading to a personal relationship between companies and customers. Customer satisfaction at this point was considered one of the main factors of a successful relationship-based marketing.
Production Technology and Service Level
In the late 19th and 20th centuries, markets were dominated by a few large manufacturing companies, whereby little or no thought was given to customer service. But with the advancement in production technology and service industry, companies have emerged leaps and bounds in all parts of the world thereby leading to keen competition.
This advancement has created a broader availability of similar goods and services. This means customers obtain the same satisfaction from the goods. The major challenge faced by companies at this point was not only to provide high quality goods or services to their customers but to find ways of retaining them.
The Need for Long-term Relationships
With the lesser role product and price play, companies have finally resorted to create valuable relationships with their customers. They have discovered that to retain one committed customer pays off better in the long-run, than acquiring five customers who soon defect. Inasmuch as product and price are important, relationship-based marketing is considered a major factor in business nowadays.
Relationship and Customer Loyalty
A healthy relationship between businesses and their customers certainly leads to loyalty. But if one is asked, can a company realize 100% loyalty from its customers? The answer will certainly be in the negative because of the following reasons:
a) Some customers find themselves in a relationship much against their liking and have no choice but to live with it. A customer who has a ten year mortgage and in the course of this time span is not happy has no choice but live with the situation until the mortgage matures. Another example is with public utilities especially in societies with a slow pace of deregulation. A customer with an electricity or gas company will not find it comfortable to move to some other company since the conditions are not only similar but the same. This could be termed an involuntary loyalty.
b) Some customers do business with a given company for convenience rather than for the satisfaction they derive from the service. They may patronize the business for years—leading the business owner to believe this to be loyalty. However, a rapid change of mind by the customers results as soon as a competitor enters the market and there is broader range of choices to make or the competitor offers more favourable terms and conditions leading to a superior service. We could call this loyalty determined by time.
c) If a customer visits an Italian restaurant about 80% of the time he or she eats out, the restaurant owner may construe it for loyalty. He does not know that for reasons of variety, this same customer visits a Mexican restaurant in the neighbourhood as well.
The important role played by customer relationship management to achieve customer loyalty cannot be underestimated. We have realized from the few examples mentioned above that customer loyalty could result as a situation whereby the customer has been taken ‘hostage’ by the regulations in place or the customer does not have a range of choices to make. Since we are beings of change, we may find it monotonous to visit the same restaurant for the same kinds of food day in day out. One can conclude at this point in time by saying that customer loyalty is a state of mind. A detail examination of this topic will be examined in a subsequent chapter.
QUALITIES OF CUSTOMER RELATIONSHIP
Any relationship requires the wholesome contribution of both parties to keep it healthy. Great care must be taken in its management so it keeps going on without a hitch. As Steve Druck says a relationship is “a very complicated and prolonged process with many pitfalls and challenges. Relationships do not just happen; they have to be made—made to start, made to work, made to develop, kept in good working order and preserved from going sour.”[5]
Relationship interactions are bound to change as time goes on, given the way they are handled or taken care of. They can never remain static. Therefore, for a successful relationship to be established and maintained there should be trust and commitment from both parties (business enterprises and customers).
A successful relationship begins with both parties being likeable. As Bennet points out this “likeability is closely related to sincerity, dependability, truthfulness, thoughtfulness, and consideration, all of which are connected to trust. Other factors commonly associated with attraction and attractiveness of a relationship partner are ease and frequency of interaction; propinquity—feelings of closeness, familiarity, and nearness; similarity—possessing similar values, attitudes, and perspectives; mutually—sharing goals and a sense of “being in this together”; and interdependence—the sense of relying on the other party in order to achieve certain goals.”[6]
Just as genuine relationships between individuals involve feelings and emotions, so too is it between customers and business enterprises. Individual customers expect to be treated differently by different firms at different situations. A customer who goes shopping for grocery certainly expects a different treatment from a supermarket assistance from when he or she visits his or her bank. These are the complex issues companies have to understand and deal with for a genuine relationship to be maintained. Despite the differences in customers’ expectations at different business interactions and places, the following benefits accrue from a genuine relationship management.
Trust
The Oxford Advanced Learner’s Dictionary of Current English defines ‘trust’ as:
‘confidence, strong belief, in the goodness, strength, reliability of something or somebody.’
Trust is considered one of the most important factors for any interpersonal relationship to exist and succeed. When one trusts someone, he or she develops confidence in him or her. When confidence is established, then, the chances of taking a risk on each other’s behalf are even greater. So too is it between customers and business enterprises. As soon as customers trust their bank for instance, they are prepared to deposit their lives’ earnings with it because they feel confident of their safety. Since they can count on their bank, they therefore have faith in it. This aspect of a customer’s behaviour develops with time between firms and their customers. It is a process that must be allowed to develop naturally. Firms should only encourage it through their display of trustworthy customer service. No ‘make beliefs’ should be practised.
Commitment
Just as commitment plays a significant role in customer loyalty, so too is it very important when a genuine relationship exists between customers and business enterprises. Commitment requires a high degree of reciprocity for a relationship to be successful. As expressed by Robert Morgan and Shelby Hunt, “commitment and trust are ‘key’ because they encourage marketers to (1) work at preserving relationship investments by co-operating with exchange partners (2) resist attractive short-term alternatives in favour of the expected long-term benefits of staying with existing partners, and (3) view potentially high-risk action as being prudent because of the belief that their partners will not act opportunistically.”[7]
Commitment results from long-term relationships. For it to exist between customers and business enterprises just as it is between individuals, there should be the willingness from both parties to keep to their promise. In order to determine the degree of “a person’s commitment in a relationship”,[8] two main factors must be indentified: “satisfaction level and the level of investment”.[9] The two main aspects of satisfaction are “(1) the degree to which a relationship provides valued outcomes by fulfilling important needs, and (2) the comparison level of alternatives, which is based on a qualitative expectation of what a relationship’s outcomes ought to be in an ideal involvement, as well as a comparison of one’s own outcomes to partner’s inputs and outcomes.”[10]
In examining the points mentioned above, we realize that customers’ commitment to a firm is not only determined by its services to and interaction with them, but also by external circumstances such as the presence of its competitors. Firms must be able to differentiate themselves from their competitors in order to maintenance a genuine relationship with their customers.
Level of Investment
Relationship and commitment can be influenced by the degree of individual investment. The degree of investment in this case does not only involve financial resources but “include time, emotional energy, personal sacrifice, and other indirect investments, such as shared memories, mutual friends, and activities or possessions that are uniquely linked to a relationship.”[11] When investment has reached this level, there is no doubt that a very high level of commitment is attained by both customers and business enterprises. However, this must not be misconstrued as an opportunity to keep one of the parties ‘locked’ in the relationship. Firms should not use unorthodox ways to get their customers committed so they are not able to pull out of the relationship. On the other hand, customers are discouraged from taking advantage of the business enterprises that might have been too committed to them and cannot easily pull out of the relationship.
Reliability
It takes a reasonable degree of reliability for a genuine relationship to be established whether between individuals or customers and business enterprises. While in interpersonal relationships “each party relies on the other to satisfy certain needs”[12], the relationship between customers and a company is different. The company earns its money by either selling a good or a service to its customers. Dependability must not get to a stage in a business relationship whereby one of the parties is dissatisfied and sees alternatives for a change but cannot pull out. For a genuine relationship to exist, both parties must be voluntarily dependent on each other.
Communication
Relationships can only be improved and maintained between customers and business enterprises when there is perfect flow of information. The flow of information must not be one-sided whereby only the company passes on pieces of information to its customers about some new project or innovations taking place. Proper communication is achieved when both the customer and the firm exchange information and know exactly how each of the two party feels. This is the area where small businesses (sole proprietorship) have an edge over bigger business enterprises because of the opportunity to communicate with the customers in a more personal manner thereby strengthening the bond of business relationship and keep the custom. Bigger business enterprises should not reduce communication with their customers to sending letters, adverts and e-mails to them. They should make sure customers’ calls are returned and face-to-face communication is encouraged. In this way, they will be able to discover where they falter so improvements can be made.
Comment
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Comment by PeeJay on October 21, 2009 at 9:43am -
Wow! I found it well thought out and carefully crafted. What an educational read for me. Bring your written word into the light Joseph. My eyes can't wait to read more of your stuff.
xoxoxo,
PeeJay
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Comment by Joseph F. on October 20, 2009 at 2:06pm -
Dear Network Readers,
This is a humble attempt to publish something in the future. Your constructive critique is welcome.
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