Relationship marketing
Relationship marketing is a form of marketing that emerged in the 1980s, in which emphasis is placed on building longer term relationships with customers rather than on individual transactions. It involves understanding the customers' needs as they go through their life cycles. It emphasizes providing a range of products or services to existing customers as they need them.
The origins of modern relationship marketing can be traced back to a passage by Schneider (Schneider, B. 1980) in which he observes: "What is surprising is that researchers and businessmen have concentrated far more on how to attract customers to products and services than on how to retain customers". The initial research was done by Christian Gronroos at the Swedish School of Economics (Gronroos, C. 1982) who describes what he called "interactive marketing", by Len Berry at Texas A&M (Berry, L. 1982) who coined the term "relationship marketing", and by first generation marketing theorist Theodore Levitt at Harvard (Levitt, T. 1983) who wanted to broaden the scope of marketing beyond individual transactions.
In practice, relationship marketing originated in industrial and b-2-b markets where long term contracts have been quite common for many years. Academics like Barbara Bund Jackson at Harvard re-examined these industrial marketing practices and applied them to marketing proper (Jackson, B.B. 1985).
Today most of the relationship marketing research is being done in services marketing. According to Evert Gummesson at the Swedish School of Economics, this is because long term relationships are most expensive to create and most profitable to nurture in the service sector (Gummesson, E. 1987). However, there is no reason why the techniques could not be applied ubiquitously. According to Len Berry (1983), relationship marketing can be applied: when there are alternatives to choose from; when the customer makes the sellection decision; and when there is an ongoing and periodic desire for the product or service.
Traditional marketing originated in the 1960s and 70s 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. Marketing has been greatly enriched by these contributions.
Customer retention
At the core of relationship marketing is an understanding of the economics of customer retention. Studies in several industries have shown that the cost of retaining an existing customer is only about 10% of the cost of acquiring a new customer. Researchers concluded that traditional marketers spent far too much on customer acquisition and far too little on customer retention.
According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs beceause:
- The cost of acquisition occur 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 supplimental products.
- Customers that stay with you tend to be satisfied with the relationship and are less likely to switch to competitors, making market entry or competitors' market share gains difficult.
- 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 feeds back into better customer satisfaction in a virtuous circle.
Dawkins and Reichheld (1990) calculated a company's "customer retention rate". This is simply the percentage of customers at the beginning of the year that are still customers by the end of the year. In accordance with this statistic, an increase in retention rate from 80% to 90% is associated with a doubling of the average life of a customer relationship from 5 to 10 years.
A technique to calculate the value to a firm of a sustained customer relationship has been developed. This calculation is typically called customer lifetime value.
Relationship marketers speak of the "relationship ladder of customer loyalty". It groups
