Don’t Neglect the Relationship Part of Your Dealership CRM | Dealer Marketing
Relationship marketing basically represents a paradigm shift within marketing– away from acquisition- transaction focus towards a retention-relationship focus. Contents of Chapter 10 Class Notes. Introduction; Information Technology; Micro Marketing; Relationship Marketing; Evaluating Markets and Sales Forecasting. Understand the fundamentals of Relationship Marketing Strategy. 2. This course includes a combination of lecture notes, student discussion.
Businesses adopted mass production, mass communication and mass distribution to achieve economics of scale.
Don’t Neglect the Relationship Part of Your Dealership CRM
Manufactures started focusing on manufacturing and efficient operations to cut costs. Intermediaries like distributors, wholesalers and retailers took on the responsibilities of warehousing, transportation, distribution and sale to final customers.
This resulted in greater efficiencies and lower costs to manufacturers but brought in many layers between them and the customers. The resulting gap reduced direct contacts and had a negative impact on their relationships. The post-industrial era saw the re-emergence of relationship practices.
Firms operating in diverse sectors ranging from packaged goods to services started using these technologies to know their customers, learn more about them, and then build stronger bonds with them through frequent interactions. Marketers could gain knowledge about customers, which helped them respond to their needs through manufacturing, delivery, and customer service.
Technology also enabled ordering and product-use related services. Though the emergence of CRM in recent times coincided with the information age, one must remember that technology is just an enabler.
Technology enabled marketers overcome several long felt shortcomings of mass marketing. Some of these included: Manufacturing and related operations costs were reduced through business process reengineering, human resource costs were reduced through outsourcing, restructuring and layoffs, financial costs were reduced through financial reengineering but marketing costs kept increasing due to increased competition and product parity in virtually every industry.
Intensive Competition In competitive markets, specially the ones that were maturing and witnessing slow or no growth, marketers found it more profitable to focus on their existing customers. Studies have shown that it costs up to times more to attract a new customer than to retain an existing customer. Marketers have now started focusing on the lifetime value of customers. They are moving away from just trying to sell their products to understanding, customers needs and wants and then satisfying their needs.
This has led to a relationship orientation which creates opportunities to cross sell products and services over the lifetime of the customer. In India, the services sector contributes to over 50 per cent of the economy. One of the characteristics of the service industries is the direct interaction between the marketer and the buyer.
In services, the provider is usually involved in the production as well as delivery directly. For example, professional service providers like a doctor or consultant are directly involved in production as well as delivery of their services.
Similarly, the customers are directly involved in production in the purchase and consumption of these services. These direct contacts create opportunities for better understanding, a better appreciation of needs as well as constraints and emotional bonding all of which facilitate relationship building.
Therefore it should come as no surprise when you see the service firms pioneering many of the customer relationship initiatives. Firms operating in the financial services, hospitality business, telecom, and airlines are the early adopters and extensive users of CRM practices. Adoption of Total Quality Management TQM Programmes Total quality management programmes help companies offer quality products and services to customers at the lowest prices.
To enable this value proposition, organizations needed to work closely with their customers, intermediaries as well as suppliers thus fostering close working relationships with members of the marketing system.
Companies such as Intel, Xerox, and Toyota formed partnering relationships with suppliers and customers to practice TQM. Other developments such as an increase in the number of demanding customers, increased fragmentation of markets, and generally high level of product quality forced business to seek sustainable competitive advantages. A competitive advantage is sustainable only when it is not easily replicated.
One such sustainable competitive advantage is the relationship that a firm develops with its customers. The initial approaches to CRM can be broadly classified as: The Anglo-Australia Approach, 2. The Nordic Approach, and 3.
The North American Approach. The Anglo-Australian approach integrated the contemporary theories of quality management services marketing and customer relationship economics to explain the emergence of relationship marketing The Nordic approach views relationship marketing as the confluence of interactive network theory, services marketing and customer relationship economics. The interactive network theory of industrial marketing views marketing as an interactive process in a context where relationship building is an area of primary concern for marketers.
The broadened view of relationship marketing addresses a total of six key market domains, not just the traditional customer market. The six markets are as follows 1. Customer markets — existing and prospective customers as well as intermediaries. Influence markets — government, consumer groups, business press and financial analysts. Recruitment markets — for attracting the right employees to the organization, 5. Supplier markets — suppliers of raw materials, components, services, etc.
Internal markets - the organization including internal departments and staff. Similarly in marketing literature, the terms customer relationship management and relationship marketing have been used interchangeable to reflect a variety of themes and perspectives. A narrow perspective of customer relationship management is database marketing emphasizing the promotional aspects of marketing linked to database efforts, Another view point is to consider CRM only as customer retention in which a variety of after marketing tactics are used for customer bonding or staying in touch after the sale is done.
A more popular approach with recent application of information technology is to focus on individual or one to one relationship with customer that integrates database knowledge with a long-term customer retention and growth strategy. Berry, in a broader term stressed that attracting new customers should be viewed only as intermediate step in the marketing process. Developing closer relationships with this customers and turning them into loyal is an equally important aspect of marketing.
Thus, he defined relationship marketing as attracting, maintaining, and, enhancing customer relationships. By focusing on the value of interaction in marketing and its consequent impact on a customer relationships, a broader perspective espouses that customer relationship should be the dominant paradigm of marketing.
Marketing is to establish, maintain and enhance relationship with customers and other partners, at a profit, so that the objectives of the parties involved are met. This is achieved by a mutual exchange and fulfillment of promises. The implication of Gronroos definition is that customer relationships is should be devoted to building and enhancing such relationship.
Similarly, Morgan and Hunt suggested that relationship marketing refers to all marketing activities directed towards establishing, developing and maintaining successful relationships. When an organization retains the customer, it gets a larger share of the customers wallet at a higher profit-one percent increase in sale to existing customer increase profits by 17 per cent while the same amount of sale to new customer increased profit by only 3 per cent.
This huge different is explained by the fact that for most companies the cost of acquiring the customer is very high. It costs six to eight times more to sell to a new customer than to sell to an existing one. The same study also highlighted that a company can boost its profit up 85 per cent by increasing its annual customer retention by only 5 per cent.
Similarly, studies have shown that the probability of selling a product to a prospect is 15 per cent while it is 50 per cent to a existing customer. Thus, the time, the effort and the costs of selling are much lower for an existing customer. Experiences of Indian organizations are on similar lines. In a large public sector Banks, the top 23 per cent of the customers contribute to 77 per cent of the revenues.
Similarly, the top 27 per cent customers of a leading cellular phone service provider contributes to 75 per cent of the revenues. Competitors have to just lure these top customers and the organization would face serious problems. These benefits comprise feelings of trust or confidence in the provider, along with a sense of reduced anxiety and comfort in knowing what to expect. Across all the services studied in the research just cited, confidence benefits were the most important to customers.
Most consumers whether individuals or businesses have many competing demands for their time and money and are continually searching for ways to balance and simplify decision making to improve the quality of their lives. When they can maintain a relationship with a service provider, they free up time for other concerns and priorities.
In some long-term customer-firm relationship a service provider may actually become part of the consumer's social support system. Hairdressers often serve as personal confidant of the customer. Less common examples include proprietors of local retail stores who become central figures in neighborhood networks. These types of personal relationships can be developed for business-to-business customers as well.Relationship Marketing in a nutshell
Special treatment includes such things as getting the benefit of the doubt, being given a special deal or price, getting preferential treatment etc. However, interestingly enough, special treatment benefits were less important than the other types of benefits received in service relationship.
The benefits for the organisation for developing and maintaining effective relationship with the customer are numerous. A few obvious advantages are listed below. Researchers worldwide have reported that an effective relationship with a group of profitable customers results in more number of sales. As consumers get to know a firm and are satisfied with the quality of its services relative to that of its competitors, they will tend to give more of their business to the firm.
It is a well-known fact that retaining old customers is cheaper than luring new customers. Sometimes these initial costs can outweigh the revenue expected from the new customer in the short term. Even ongoing relationship maintenance costs are likely to drop over time. For example, early in a relationship a customer is likely to have questions and to encounter problems as he or she learns to use the service. As time goes by the customer will have fewer doubt or question and will make fewer mistakes assuming that the quality or service is maintained at a high level and the service provider will incur fewer costs in serving the customer.
Services are normally complex and difficult to evaluate before actually buying it, consumers most often look to others for advice on which providers to be considered. Satisfied, loyal customers are likely to provide a firm with strong word-of- mouth endorsements. Further, researchers report those customers show up based on a referral tend to be better quality customers in terms profitability, likelihood of being loyal than the customers who are attracted through other promotional campaigns like price promotion and advertising.
Employee retention may be an indirect benefit of customer retention. It is easier for a firm to retain employees when it has a stable base of satisfied customers. People like to work for companies whose customers are happy and loyal. Figure 3 explains this with a causal loop diagram. The positive signs within brackets show a positive change in the dependent variable with one unit change in the independent variable.
The overall changes on all the variables will be positive as well. Having discussed the benefits of Relationship Marketing let there be a discussion on one recent development in this field, which is helping popularising the concept among practicing marketers. Lifetime Value LTV is a concept through which the marketers can find out the profitability of a customer in advance.
Lifetime value of a customer is a concept or calculation that looks at customers from the point of view of their lifetime revenue and profitability contributions to a company. The lifetime value of a customer is influenced by the length of an average "lifetime," the average revenues generated per relevant time period over the lifetime, sales of additional products and services over time, and referrals generated by the customer over time.
LTV sometimes refers to lifetime revenue stream only; other times, when costs are considered, LTV may truly mean "lifetime profitability. Reichheld and Sasser, Jr observed -"If companies knew how much it really costs to lose a customer, they would be able to make accurate evaluations of investments designed to retain customers. Unfortunately, today's accounting systems do not capture the value of a loyal customer.
During calculation, time present value of money may be considered for the future transactions those are expected from the customer, from the new customers generated through referrals of the customer under consideration. Following important aspects might as well be considered while calculating the LTV of a customer. Importance of referrals to the new customers The frequency at which existing customers refer the product to new customers.
Attrition curve indicates how many customer become inactive as a percent of total base every year. An attrition curve is derived by analysing the activity of multiple cohorts- customer groups that started at different times- to see how many survived with each successive year. Attrition rates are influenced by many factors, ranging from population age and mobility in product life cycle, and will differ from one business sector to another.
Average life time of a customer based on the attrition curve. Average annual spending by the customers Direct Cost: Includes merchandising, operating and fixed costs. Includes the costs of advertising and promotion, and cost of maintaining a marketing database system. It is well appreciated that the first step in relationship marketing is the retention of the customer.
Unless the company is able to retain the customer, it is meaningless to talk about relationship marketing. For this the company as well as the products under sale must meet certain criteria. These are, A consistently good quality product, so that the consumer satisfaction is assured for a long time. Proper market segmentation is done and right target is selected.
If more than one segment is targeted the segments must be compatible with each other. The product should be competitive in the target market. That means the product must be very best among the competitors.
Thorough monitoring and evaluating relationship quality over time. Basic market research in the form of annual customer relationship survey may be carried out for this evaluation. Berry and Parasuraman, two early advocates of relationship marketing have developed a framework for understanding the type of relationship strategies. The framework suggests that retention marketing can occur at different levels and that each successive level of strategy results in ties that bind the customer a little closer to the firm.
At each successive level, the potential for sustained competitive advantage is also increased. Building on the levels of the retention strategy idea, Figure 4 illustrates four types of retention strategies, which are discussed below.
At level I, the customer is tied to the firm primarily through financial incentives- lower prices for greater volume purchases or lower prices for customers who have been with the firm a long time. Examples of level 1 relationship marketing are not hard to find. Airline industry and related travel service industries like hotels and car rental companies are following this type of incentive for a long time. Frequent flier programs provide financial incentives and rewards for travelers who choose their airline for long time.
Hotels and car rental companies do the same.
Relationship Management, Customer Relationship Marketing
Long-distance telephone companies in the United States have engaged in a similar battle, trying to provide volume discounts and other price incentives to retain market share and build a loyal customer base.
Unfortunately, financial incentives do not generally provide long-term advantages to a firm since, unless combined with another relationship strategy, they don't serve to differentiate the firm for a long period. Many travelers belong to several frequent flyer programs and don't hesitate to trade off among them. While price and other financial incentives are important to customers, they are generally not difficult for competitors to imitate, since the primary customized element of the marketing mix is price.
Other types of retention strategy are cross selling of services, like the tie up of airlines industry with hotel chains and credit card companies.
Level 2- Social Bonds: This strategy bonds the customers to the firm through more than financial incentives. While price is still assumed to be important, level 2 retention marketers build long term relationship through social and interpersonal as well as financial bonds.
Customers are viewed as clients rather than mere customers. The clients are the individuals whose wants and needs the firm tries to understand and design the product accordingly. Services are customised to fit individual needs, and the marketers find ways of sticking to the customers, thereby developing social bonds with them. Social, interpersonal bonds are common among professional service providers e.
A dentist who takes a few minutes to review his patient's file before coming in to the exam room is able to jog his memory on personal facts about the patient occupation, family details, interests, dental health history.
By bringing these personal details into the conversation, the dentist reveals his genuine interest in the patient as an individual and builds social bonds. Sometimes relationships are formed with the organization due to the social bonds that develop among customers rather than between customers and the provider of the service. Over time the social relationships they have with other customers are important factors that keep them from switching to another organization.
While social bonds alone may not tie the customer permanently to the firm, they are much more difficult for competitors to imitate than are price incentives.
In the absence of strong reasons to shift to another provider, interpersonal bonds can encourage customers to stay in a relationship. In combination with financial incentives, social-bonding strategies may be very effective. Level 3 strategies involve more than social ties and financial incentives, although there are common elements of level 1 and 2 strategies encompassed within a customisation strategy and vice-versa.
Two commonly used terms fit within the customization bonds approach: