Many small businesses owners and managers have observed the gradual shift from a transactional business model to one emphasizing customer relationships.
A transactional business offers products and services with no regard to building any kind of rapport with the customers. Examples of transactional businesses include stores commonly found in an airport. Those businesses are there for the convenience of air travelers and see no value in developing long-term relationship with customers they might serve only once.
Transactional business are also common when consumption is a one-time or long-lasting event, such as laser eye treatment or re-siding a home. These businesses employ a marketing strategy focused on finding new customers.
However, customers often demand more from a business than just having products and services available for purchase. This requires businesses to focus on activities that build long-term relationships with customers — in other words, relationship marketing.
Relationship marketing offers an effective strategy for a business when there are alternative products or services from which to choose, when customers make selection decisions and there’s an ongoing or periodic demand for the product or service.
Relationship marketing involves understanding customers’ changing needs as they go through their business life cycles. It emphasizes providing a range of products or services to existing customers as they need them. This requires engaging in activities devoted to gathering information about the present and future needs of customers, and with this comes the added cost of time and effort spent with customers. However, this is offset by national studies showing the cost of retaining an existing customer is only about 10 percent of the cost of acquiring a new customer. This certainly makes a strong economic argument for paying more attention to existing customers.
Here are some of the common concepts and activities involved in relationship marketing:
Customer valuation: It’s rare when a business can afford to apply relationship marketing activities to every customer. This is where the 80/20 concept comes into play. In many industries, 80 percent of a firm’s revenue comes from 20 percent of customers. This core group of customers is then targeted for a deeper relationship.
Customer retention: Customer retention is a measure of the percentage of valued customers at the beginning of the year that remain customers at the end of the year. The key activity here is to determine the reasons for leaving and then apply corrective action. This requires the difficult task of conducting exit interviews from reluctant, disappointed or indifferent departed customers. Strong support and participation from top management or ownership is crucial in obtaining useful information.
Customer switching barriers. Businesses employ strategies to make it more difficult for a valued customer to switch to the competition. Common tactics include product bundling, combining several products or services into one package and offering them at a special price; cross selling, selling related products to current customers; cross promotions, giving discounts or other promotional incentives to purchasers of related products; loyalty programs, incentives for frequent purchases; application of switching costs, termination fees; and infrastructure sharing, linking computer systems and software to enhance supply and demand management of products and services.
Team approach: A single point of contact will be assigned to a customer. To meet the ongoing needs of that customer, the contact will assemble varying teams of unique service providers from within the business as needed. Each successive team will spend considerable time with the customer with the rationale being the more points of contact between the business and customer, the stronger the bond and more secure the ongoing relationship.
Relationship marketing is most appropriate when marketing relatively high-value customer products and services. It’s also effective when the product or service can support value added extras specifically tailored for the customer. Remember, it takes time to implement the concepts and practices of relationship marketing and requires a complete buy-in by all employees of the business.