A New Brand of Relationship Marketing - Essay Example

A New Brand of Relationship Marketing in Introduction Relationship Marketing has recently been a of much concern from researchers andmarketers. Relationship marketing has been used to attain customer loyalty by way of satisfaction. Can satisfaction lead to loyalty and hence profitability for the firm? Before this question can be answered, it is fit to discuss first the important aspects of relationship marketing. The subject requires in depth examination. Customer retention is significant in business. A returning customer is less costly to serve, but this returning customer purchases more, pays higher prices, and can spread the good news by word of mouth. (Skogland & Siguaw, 2004, p. 221) Research has shown that in the United States, customer defection is high; this means that customers will not return for a second purchase of the product from businesses or firms. U.S. corporations lose half of their customers over a span of five years resulting in 25 to 50 percent reduction of corporate performance. Companies invest millions of dollars in customer retention programs. Skogland & Siguaw’s (2004, p. 221) study cite Marriott who spent $54 million in 1996 on its Honored Guest program, while Hyatt invested $25 million in its loyalty program that same year. Research on customer loyalty has primarily focused on customer satisfaction and involvement. However, findings on the linkage between repeat-purchase behavior and satisfaction have provided mixed results. Some report significant links, while others are doubtful. Our knowledge of customer loyalty and its determinants is replete with ambiguities. Studies should be provided; researches are a challenge. 1.1 Objectives Questions this paper will have to deal with are: Can customer satisfaction lead to retention or loyalty and thus improve profitability? To what extent will satisfaction lead to loyalty? How can we improve customer relationship to attain customer satisfaction? Does customer satisfaction guarantee that customer will return? Can customer satisfaction influence or lead to customer involvement? 2. Literature Review 2.1 Background In the past century, RM was a major trend and a controversial talking point in business management. Strategic competitive advantage could no longer be delivered with just product characteristics but with emphasis on satisfying customers. (Barnes, 1994, cited in Egan, 2003, p. 145) Relationship marketing (RM) and customer relationship marketing (CRM) are two interrelated subjects. “Relationship marketing is marketing based on interaction within networks of relationship… CRM [includes] values and strategies of relationship marketing – with particular emphasis on customer relationships – turned into practical application” (Gummesson, 2002, p. 3). Relationships require two parties and in marketing this is between a supplier and a customer. A network is a complex interaction of relationships, as in the figure below. Relationship marketing was first contributed by Berry (1983) as a new rubric for services marketing, with insights in the 1980s pointing to service risk points in the customer relationship life cycle. In the 1990s, relationship marketing became a key marketing issue (Ballantyne et al., 2003, p.159-160). Due to constant changes in marketing, there have been departures from mainstream marketing thinking. Among these so-called departures are direct marketing, which emphasizes continuity of direct contact with existing customers, one-to-one, and database marketing, supported by improvement and general availability of relational database technology (Sheth and Parvatiyar, 1995, cited in Ballantyne et al., 2003, p. 160). But what has become popular with suppliers of new technologies, is relationship marketing or RM. There is also relationship-building amongst marketers which ‘demands mutual trust as a corollary to ongoing commitment’ (Morgan and Hunt, 1994, p. 160). Before the concept of relationship marketing emerged in the minds of marketers, people were focused on product enhancement. It’s meeting the needs and wants of the customers; they were for customer satisfaction. The 4Ps (Product, Price, Place, Promotion) is a marketing strategy employed by most firms to enhance competitive advantage. This has been extended to become the 7 Ps. (Jobber & Lancaster, 2003, p. 13) The concept of relationship marketing is built on behavioral perspective of relationships. Progress with relational constructs like trust and satisfaction, the conceptualization and economic evaluation of customer retention, and most work on internal relationships, can all be attributed to this behavioral perspective. (Hennig-Thurau & Hansen, 2000, p. 3) Relationship marketing is becoming a general marketing approach. It offers a paradigm shift in marketing. Here are some examples of the variety of marketing situations in which relationships are crucial: Amazon.com founder Jeff Bezos used the opportunities inherent in the new infrastructural network of the Internet to reach globally, create an individual relationship with each customer, and effectively interact with customers. Instead of letting a large number of suppliers fight for contracts at lowest price, companies increasingly choose to develop intimate relationships with a limited number of suppliers. In the 1990s, Motorola cut the number of suppliers by 70 percent, 3M by 64 per cent and Ford by 45 per cent. Information technology (IT) can facilitate the creation of close customer-supplier networks. Procter & Gamble joined forces with Wal-Mart, the world’s largest retailer, by setting up an information system which coordinates online the production and delivery of the goods with the sales in the stores. Resources are increasingly being built through networks of cooperating companies. In the early 1990s, IBM had formed alliances with several of its major customers, competitors and suppliers, like Toshiba, Mitsubishi, Intel, Apple, Lotus, Sears and Siemens (Gummesson, 2002, pp. 6-7). British retailer Next has a huge website with an online catalogue allowing extensive online shopping and delivery, and positive customer relation (Next, 2010). The significance of relationships, networks and interaction, through personal contact and IT in different countries and cultures, is much needed for firms in the technological age. The traditional paradigm – based on the marketing mix, and the concept of exchange – was developed using assumptions derived from experiences drawn from the huge US market for consumer goods. Critics point out that this short-term transactional focus is inappropriate for industrial and services marketing, where establishing longer-term relationships with customers is critical to organizational success. (Payne, 1995, p. 3) Relationships between customers and suppliers are the key ground for all marketing. Within the current marketing management mode of thinking, much of marketing is reduced to impersonal exchange through mass promotion and mass distribution. The prime focus of RM and CRM is on the individual, on the segment of one. It’s 1to1 marketing. But there is also the function of like-minded groups where members share common interests; they want a relationship with the supplier and with each other. (Gummesson, 2002, p. 10). 2.2 The Loyalty Concept Loyalty has been operationalized based on its predicted outcomes (Fournier 1998; Pritchard, Havitz, and Howard, 1999). Loyalty is a complex phenomenon. Understanding loyalty is very important for marketers who are trying to cope with increasing product competition (Oliver, 1999, cited in Morais et al., 2004, p. 235); customer loyalty is one of the key ingredients of relationship marketing. Added to this is trust. Trust is one of the criteria in building good long-term customer/supplier relationships through encouraging the marketer to work at preserving relationships, resist short-term alternatives and assume that partners will not act in an opportunistic manner (Morgan and Hunt, 1984, cited in Buttle, 1996, p. 155). Many academics and professionals believe that customer loyalty improves business and thus increase profitability. Loyal customers spend more than the first time they came in contact or experience the product or service of a particular firm. “Loyal customers are logically at the heart of a company’s most valuable customer group” (Ganesh, Arnold, & Reynolds, cited in Skogland & Siguaw, 2004, p. 222). True customer loyalty is a substantial intangible asset for a company, for branded products the most valuable asset of all, because it is an indicator of future sales and profits. On markets where lifetime economy is a critical factor, marketing must concentrate on giving the customer continuous motivations and arguments to keep coming back to do business. This will typically consist of positive inducements that confirm the value of the relationship for the customer stimulating repeat business. However, present studies reveal that there are no companies that have any factual based knowledge about their customer’s loyalty and the value of such loyalty (Hougaard & Bjerre, 2002, p. 113). Satisfaction with a product or service offered has been identified as a key determinant for loyalty and, perhaps more important, a firm’s profitability. Research has shown that satisfied customers are not anymore that keen or sensitive to the price of a particular product, but they increase customer base through positive recommendations to other customers. Satisfied customers tend to come back to do business again. 2.3 Theoretical Foundations Satisfaction is defined as “an overall evaluation of performance based on all prior experiences with a firm” (Jones et al., 2000, cited in Skogland & Siguaw, 2004, p. 222). There are two theoretical bases for the study of customer satisfaction: the confirmation-disconfirmation paradigm and comparison-level theory. 2.3.1 Confirmation-disconfirmation theory According to the confirmation-disconfirmation paradigm, customers assess their levels of satisfaction by comparing their actual experiences with their previous experiences, expectations, and perceptions of the product’s performance (Oliver, 1980, cited in Skogland & Siguaw, 2004). Three outcomes of this evaluation are possible: ‘(1) confirmation occurs when the actual performance matches the standard, leading to a neutral feeling; (2) positive disconfirmation occurs when the performance is better than the standard, which then leads to satisfaction; and (3) negative disconfirmation occurs when the performance is worse than the standard, which then leads to dissatisfaction’ (p. 222). Satisfaction is the outcome of a comparison between expectations and perceived performance of a product or service, whereby expectations are influenced by various factors such as needs, previous experience, and word-of-mouth or commercial communication (Parasuraman, Bery, and Zeithml 1991; Parasuraman, Zeithaml, and Berry 1985; Matzler et al., 2008, p. 405). Customer satisfaction is higher if the customer’s expectations which were formed before the purchase are exceeded by experiences, that is, after the purchase. Satisfaction is achieved if expectations are at least reached, whereas dissatisfaction arises if experience falls short of expectations. Consequently, a higher degree of satisfaction results from a larger positive deviation between experience and expectation, whereas rising discontent results from a larger negative discrepancy (Herrmann and Johnson, 1999; Homburg and Rudolph, 1998; Oliver and DeSarbo, 1988, cited in Rese, 2003, p. 102). 2.3.2 Comparison-level theory This theory proposes that consumers use comparison levels for their relationships with suppliers and also use comparison levels for alternative relationships to determine satisfaction with and propensity to remain in a relationship. The comparison level is “the standard against which a member evaluates the ‘attractiveness’ of the relationship” (Thibaut and Kelley) and they reflect what the brand should achieve not just what it will achieve (Cadotte, Woodruff, & Jenkins, 1983, cited in Skogland & Siguaw, 2004, p. 223). Previous research has found a positive relationship between prior experiences and current levels of expectations (Zeithaml, Berry, & Parasuraman, 1993, cited in Skogland & Siguaw, p. 223). 2.4 Dimensions of customer satisfaction Studies focused on the relationship between satisfaction and loyalty have identified two major groups of moderating variables: (a) personal characteristics (e.g., age, gender, income, and involvement) and (b) situational characteristics (e.g., relational characteristics, switching costs, attractiveness of alternative, critical incident recovery). (Matzler et al., 2008, p. 404) There are instances where customers are satisfied or dissatisfied with a product or service that they may refer to more specific attributes such as friendliness or employees, and so forth. Common dimensions of satisfaction with a service include service quality, product quality, price, and location. Theory suggests that the “people factor” (i.e., service quality), in terms of tangibility, reliability, responsiveness, assurance, and empathy, may be the most salient in determining overall satisfaction and repeated purchasing in service industries. (Skogland & Siguaw, 2004, p. 223) Rese (2003), who is concerned with the economic level of customer satisfaction, says that the question is primarily controlled by the amount of transaction costs involved in conducting repeated comparisons of competitors. A buyer acting in an economical way will accept the exclusion of alternative suppliers only if this results in an economic advantage. 2.5 Theoretical Foundations for Involvement Involvement, in relation to the subject customer satisfaction, comprises both purchase and ego involvement. Purchase involvement is defined as “the level of concern for or interest in the purchase process that is triggered by the need to consider a particular purchase” (Ganesh, Arnold, & Reynolds, cited in Skogland & Siguaw, 2004, p. 223). Purchase involvement consists of the time, effort, and costs invested in making a purchase, including any internal and external research that may precede the transaction. Purchase involvement is seen as it relates to price comparison and risk reduction. Service failures are exceedingly memorable and readily recalled (Folk, 1988), because they are “highly salient . . . distinctive, atypical, and emotionally charged” (Ganesh, Arnold, and Reynolds). These are negative experiences that influence future expectations or result into how the customer makes future purchase (Bloch & Richins, 1983). Consequently, low levels of satisfaction may result in high levels of purchase involvement (so that one may ensure that a purchasing error does not reoccur), and high levels of purchase involvement may result in low levels of loyalty, as the consumer focuses on better alternatives (Skogland & Siguaw, 2004, p. 223). The findings in the study of Skogland & Siguaw (2004) revealed some contrary results from the literature. They found that overall satisfaction and satisfaction with hotel ambience were unrelated to any dimensions of involvement. Satisfaction with the people factor was positively related to price-comparison involvement, self-image involvement, and need for recognition involvement, which emphasizes the value of human resources in the lodging industry and substantiates prior studies that have argued for the importance of the people factor in services. The study concluded that hoteliers should not assume that satisfying their guests will ensure repeat purchases. But the connection between satisfaction and loyalty is tenuous, at best. The researchers suggested that the funds intended for loyalty programs should better be applied in other ways. For example in hotels, funds should further be applied to hotel design and amenities which are shown to be primary drivers of loyalty. In other words, loyalty programs should be studied properly instead of outright spending millions. There are positive programs that can drive customer loyalty. One should be able to point the right customer experience and satisfaction. How should one get the real customer relationship? Of course, it is a challenge. But Temkin (2009) advises executives that in 2010, they should be more focus on the 7 keys to customer experience. These are: 1) Drop the executive commitment façade Executives know the importance of customer relationship but they have to develop a customer experience dashboard and manage the results with the same energy dedicated to managing financial results. 2) Acknowledge that you don’t know your customers Executives should know customer experience requires significantly deeper customer insight by listening to customers, and acting on their feedback on the product and service. 3) Don’t get too distracted by social media Surveys and calls from customers must be given attention, and not much dependence on social media. 4) Stop squeezing the life out of customer service Companies need to start viewing customer service as a strategic asset. 5) Restore purpose to the brand True brands represent a firm’s raison d’être. 6) Don’t expect employees to get on board on their own Employees have to be motivated to do the right way of dealing with customers. 7) Translate customer experience into business terms (Temkin, 2009). 3. Conclusion Though in some studies, it is not conclusive that customer satisfaction can enhance loyalty, some researchers found that customer experience and loyalty can generate profitability. In other words, satisfaction can still lead to loyalty and hence profitability. But it just needs to be examined closely how satisfaction can be attained. For example, Temkin’s (2009, p. 11) research has uncovered a strong correlation between customer experience and loyalty, and that an average $10 billion company can generate $284 million of additional revenues from customer experience improvements. But most companies don’t fully understand the connection, and that’s something they can strive to identify in 2010: how customer experience impacts financial results. References Ballantyne, D., Christopher, M. & Payne, A., 2003. Relationship marketing: looking back, looking forward. Marketing Theory, Vol. 3(1), 159-166. DOI: 10.1177/1470593103003001009. Egan, J., 2003. 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Available from: http://0-web.ebscohost.com.emu.londonmet.ac.uk/ehost/pdf?vid=4&hid=2&sid=11f110d4-7d46-471c-ae73-6e2ae23be942%40sessionmgr4 [Accessed 9 Jan. 2010]. Read More