Chapter 3:

Customer Relationship
Management Strategies
for Business Markets

PowerPoint by
Ray A. DeCormier, Ph.D.
Central Connecticut State University
Well developed relationships give business marketers
a significant competitive advantage. Topics include:
1. Patterns of buyer-seller relationships
2. Factors that influence customer profitability
3. Strategies for designing effective customer
relationships
4. critical determinants of relationship marketing
effectiveness.
Relationship Marketing

Relationship Marketing centers on

Establishing,
Developing, and
Maintaining

successful exchanges with customers.

 Exchange
Central to every relationship is an
exchange process where each side
gives something in return for a payoff
of greater value.

The take $ side of the transaction

must offer a perceived payoff of
greater value to the buying side for
the transaction to occur.
 Collaborative Advantage
New era of business marketing is
dependent upon managing relationships.

Collaborative advantage is:

Demonstrating special skills with key
customers or
Developing innovative strategies with
alliance partners
 Types of Relationships
Continuum of buyer-seller relationships
Transactional, Value-added & Collaborative exchanges

The Relationship Spectrum

 Transactional Exchange
Centers on timely exchange of basic products
at highly competitive market prices
These types of transactions are autonomous,
meaning that there is little or no concern as to
the needs of buyer or seller
Example: A person comes into a store and
buys a hammer. The buyer wants a hammer
and the seller sells him one. Thats all there
is to it!
 Transactional Exchanges
The business market includes items like:
Packaging,
Cleaning products or
Commodity-type products or service
activity where bidding is employed.

Transactional exchanges employ an

Arms-Length relationship.
 Occurs when alternatives are few, market is
dynamic, the purchase is complex and the
price is high
Features close information, social, and
operational linkages, as well as mutual
commitments
Switching costs are extremely important to
collaborative customers
Trust is the key and it exists when one party
has complete confidence in their partners
ability and integrity
Value-Added Exchanges

Value-Added Exchanges fall between

Transactional and Collaborative Exchanges
Value-Added Exchanges are those where the
selling firms shifts from just attracting
customers to keeping them by:
1. Adding additional services
2. Developing services that are customized to meet
the buyers needs
3. Providing continuing incentives that promote
repeat business
 The Element of Competition

Competition forces a war-like environment

whereby competitors are always trying to lure
customers from competitors.

Since customer situations (i.e., requirements,

expectations, people, preferences) change,
there is always opportunity for customers to
change from relationship to transactional to
relationship with new suppliers.
 Effects of Market Conditions
Market conditions force different types of
relationships.
The marketer needs to understand this
aspect of business to determine which
strategy to employ with various markets.
What is the best strategy: transactional or
collaborative?
Spectrum of Buyer-Seller Relationships
Buyers and sellers craft various relationships in response to:
a) Market conditions
b) Characteristics of the purchase situation
 Switching Costs
A major consideration before changing from
one supplier to another is the switching costs.
Organizational buyers invest heavily in their
relationships with suppliers.
Investments include:
1. Money
2. People
3. Training Costs
4. Equipment
5. Procedures and processes
Switching Costs
Buyers hesitate to switch because it can cause
costly disruptions.
Risk of making a wrong choice of less-
established suppliers can be costly.
From a marketing perspective, the prospects
PROBLEM must exceed the BENEFITS that
they are presently experiencing with their
current supplier before they will consider
switching.
Value Drivers in
Collaborative Relationships
Suppliers of routinely purchased products
offer three sources of value:

1. Value creation through core offerings

2. Value creation within the sourcing process
3. Value creation at the customers level of
operations
Furthering Collaborative Relationships
To develop key supplier status, sellers need to:

Target the right customer.

Match with their purchasing situation.
Develop strategies that are appropriate for each type of
buyer . Collaborative buyers seek long, strong and
lasting relationships.
Buyers perceive significant risks with suppliers, so
competence and commitment are vital when starting
the relationship.
 To improve customer loyalty and satisfaction,
many companies have developed specialized
services and customized products.

Question: Is this really profitable?

 Differentiation Strategy
For a differentiation strategy to work:
The value created, measured by higher
margins and higher sales volumes, has to
exceed the cost of creating and delivering
the customized features and services.

To determine this, the marketer needs to

understand the drivers of profitability.
Activity-Based Costing

Employing an activity-based costing (ABC)

process, one can accurately assess the
cost and profitability of each customer.

By linking financial information with

transactional data created in CRM
programs, companies are able to
accurately calculate cost-to-service
components to yield customer profitability.
 Measuring Customer Profitability

Activity-based costing (ABC) is a

technique that allocates the cost of
performing various services to each
customer (customer-specific costing).

Through Customer Relations

Management (CRM) programs, one can
relate revenues and costs to each and
every activity.
Figure 3.3 The Whale Curve of
Cumulative Profitability
 20/80 Rule says 20% of customer provide 80%
of sales

Whale Curve reveals:

20% of customers generate 150300% of total profits
70% of customers break even
10% of customers lose from 50-200% of total profits
Leaving company with 100% of total profits
 High- vs. Low-Cost-to-Serve Customers
High-Cost-to-Serve Customers Low-Cost-to-Serve Customers

Order custom products Order standard products

Order small quantities Order large quantities

Unpredictable order arrivals Predictable order arrivals

Customized delivery Standard delivery

Frequent changes in delivery requirements No changes in delivery requirements

Electronic processing (EDI)
Manual processing
(i.e., zero defects)

Large amounts of presales support Little to no presales support

(i.e., marketing, technical, and sales resources) (i.e., standard pricing and ordering)

Large amounts of post-sales support No post-sales support

(i.e., installation, training, warranty, field service)

Require company to hold inventory Replenish as produced

Pay slowly (i.e., high accounts receivable) Pay on time

Source: Robert S. Kaplan and V.G. Narayanan, p. 8. Measuring and Managing Customer Profitability, Journal of Cost Management 15, No. 5
(September/October 2001):
Customer Profitably

As mentioned previously, some customers are

profitable and some arent. To determine this,
we look at the cost/profitability structure with
the plan to:

1. Keep profitable customers

2. Convert unprofitable ones to profitability
3. Fire those who are not profitable
 Figure 3.4 Customer Profitability

High

Passive Costly to service,

Product is crucial but pay top
Net Margin Realized

Good supplier match dollar

Price-sensitive but Aggressive

few special Leverage their buying power
demands Low price and lots of
customization
Most challenging
Low
Low High

Cost-to-Serve

SOURCE: From Manage Customers for Profits (Not Just Sales) by B.P. Shapiro et al., September-October 1987, p. 104, Harvard Business Review.
Managing Unprofitable Customers

Low margin / high cost customers offer the

most challenge for marketing mangers.

Start with ways to reduce costs

Next, work with customers to possibly
change their actions resulting in lowering
costs or increasing profitability
Firing the Customer
We must try everything to make a customer
profitable before firing them.
If after trying, and the customer continues to be
reluctant to change, and the relationship
remains unprofitable, we can say outright,
YOUR FIRED! but
There are better approaches. We can let
customers fire themselves by raising our
prices, reducing or charging more for services,
eliminating discounts, etc., until they become
profitable or find another distributor.
 Customer Retention

Retention of profitable customers is

crucial to business. However, due to
competition and internal / external
environmental factors, achieving this goal
is difficult.

One method that is proving successful for

customer retention is the use of CRM
programs.
Customer Relationship Management

Customer Relationship Management (CRM)

is a cross-functional process for achieving:

a.Continuing dialog with customers across

all contact and access points
b.Personalized service to the most valuable
customers
c.Increased customer retention

d.Continued marketing effectiveness

CRM Technology

CRM programs are software systems that capture

information and integrate sales, marketing and
customer service information.

CRM programs can gather information from many

sources including email, call centers, service and
sales reps.

The information is available to the right people in

the organization in real time.
 CRM Software Programs

There are many types of CRM programs:

1. Some companies develop their own

proprietary programs.

2. Some companies purchase off-the-shelf

programs.
 Responsive Strategies
A CRM program cannot help
unless a company employs the
proper strategy to secure and
retain profitable customers.

Special attention must be given

to five areas.
CRM Strategy - Priorities
1. Acquire the right customer.
2. Craft the right value proposition.
3. Institute the best processes.
4. Motivate employees.
5. Learn to retain customers.
Account selection demands a clear
understanding of:
1. Sellers resources
2. Customers needs
3. Cost of serving various groups of
customers
4. Potential profit opportunities
5. How customers define value and how
to meet those expectations
 What do customers value?
Some demand low price
Some demand customer service
Some demand quick delivery
The question is: Can the seller
deliver it profitably?
Many sellers try to meet all their
customers needs, and may do so,
but fail to do it profitably.
#2 Crafting the Right Value
Proposition
A value proposition encompasses the
products, services, ideas and solutions that
a business marketer presents to the
prospect/customer that is designed to solve
the customers problems.

They can be generic or customized.

Value Proposition
A value proposition may include:

1. Points of parity to a competitive option

2. Points of difference

Best practice suppliers base their value

proposition on their target markets needs by
communicating their offering of superior
performance in a way that conveys they
understand their customers business
priorities.
 Value Proposition Strategies
Strategies that competitors employ fall
into a range referred to as:
Industry Bandwidth of Working
Relationships

It ranges from pure transactional to pure

collaborative exchanges (see Fig. 4.5 on
the next slide).
 Figure 3.5 - Transactional & Collaborative Working
Relationships
Pure
(a) Industry Relationship Bandwidths Pure
Transactional Collaborative
Exchange Exchange
Medical Equipment
Hospital Supplies (e.g. imaging systems)
(e.g. surgical gloves, syringes)

(b) Flaring Out from the Industry Bandwidth

Pure Pure
Transactiona Collaborative
l Exchange
Exchange Hospital Supplies

A B C D

SOURCE: Adapted from James C. Anderson and James A. Narus, Partnering as a Focused Marketing Strategy, California Management Review 33 (spring
1991) p. 97. Copyright by the Regents of the University of California. Reprinted by permission of the Regents.
 Flaring Out Strategy
Flaring out strategy (Fig 4.5b) states that
the seller can either unbundle (point A),
that is, reduce the service associated with
a lower price (transactional in nature), or

Augment by adding more services to the

core offerings (point D) which adds cost to
the services. This is collaborative in
nature.
Creating Customized Products

The seller starts with a core

service (naked solutions) and
adds customized services to it
(custom wrapped) that create
more value.
 #3 - Institute Best Practices
The sales force plays a key role in establishing and
growing a customer from a transactional account to
a collaborative partnership.
They can do this by aligning and deploying technical
and service support units to match with their
customers units.
Technical groups can consist of research, logistics
and customer service units.
Through careful management and screening,
transactional accounts can progress to
partnerships.
 In addition to using best practices, successful
organizations (like IBM) employ follow-up
techniques such as:
1. Assigning a client representative to take
ownership of the relationship.
2. Assigning a Project Owner who completes the
project or solves project problems.
3. Developing an in-process feedback and
measurement system.
#4 - Motivating Employees
Dedicated employees are the key to a
successful customer relationship strategy.
The best approach is to:
1.Hire good people.
2.Invest in them to increase their value to
the company and its customers.
3.Develop challenging careers and align
incentives to performance measures.
 Why Retain Loyal Customers?

Established customers buy more.

Cost of serving loyal customers declines.

Less expensive than acquiring new customers.

 #5 - Retaining Customers

Retain customers by:

Providing superior value (more than expected) to

ensure high satisfaction.
Nurturing trust.
Developing mutual commitment.
If possible, helping customers grow their business.
 How to Pursue Growth from
Existing Customers
Identify and cultivate customers that offer
the most growth potential by:
1.Estimating current percent share of
wallet
2.Pursuing opportunities to increase share
3.Projecting and enhancing customer
profitability
 Evaluating Relationships
Some relationship-building efforts fail because
expectations of the parties dont mesh.

Example: Seller wants a business relationship

whereas the customer responds in a
transactional mode.

By understanding and isolating customer

needs, the marketer is better equipped to
match their product offerings to a particular
customers needs.
 Drivers of RM Effectiveness:
Definitions
Relationship Quality: High-caliber relational
bond characterized by commitment and trust
Relationship Breadth: Number of interpersonal
ties that connect the relationship
Relationship Composition: Portfolio of
contacts ranging from low-level influencers to
high-level decision makers
Relationship Strength: The ability of the buyer-
seller relationship to withstand stress and/or
conflict
Relationship Efficacy: The ability of an inter-
firm relationship to achieve desired objectives
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 RM Programs

Social RM Programs
Structural RM Programs

Financial RM Programs
Social RM Programs
Social RM programs:
Socialengagements (sporting events, meals, etc.)
Frequent and personalized communications that develop
bonds
Make the relationship special

Results:
Customers reciprocate with repeat business and referrals
Difficult for rivals to duplicate

Affect:
Has a direct affect on profits & is long lasting
Structural RM Programs
Structural RM programs:
Provide a service/product to increase productivity
and/or efficiency for customers through targeted
investment that customers would not make for
themselves.
For example they provide:
Order-processing interfaces
Free analysis of operations

Results:
Creating
a structural bond makes it difficult for
companies to switch to competitors
Financial RM Programs

Financial RM programs provide economic benefits

such as:
Discounts
Free shipping
Extended payment terms

Results:
Companies respond financially to protect customer
relationships, but they do not necessarily enhance the
relationship because all companies do it.
 Targeting RM Programs

Some companies are Relationship Oriented (RO), and

some are not.
RO companies seek to develop relationships with current
or potential supplier.

RO buyers look for companies that:

Offer expertise
Are able to be flexible (i.e., payment terms, R&D, etc.)

Help reduce risk for both parties benefit

Help both parties benefit from the relationship

 Strategy for Dealing with
High and Low RO
HIGH RO: Target those with high RO goals since they
are looking for and are open to developing
relationships

LOW RO: For these companies, the strategy is to

create high switching cost:
Tie them into electronic ordering interfaces
Stay in constant contact to keep what exists

Align RM resources as closely as possible to the customers

needs