Relationship Marketing

Question 1

What is relationship marketing?

Answer 1

Relationship Marketing is a concept that shifts away from transactional marketing and the traditional production and selling eras of businesses. It focuses on repeat business (not one-off sales), and is involved in securing, developing and maintaining strong long-term connections with profitable customers. This can be achieved by promoting open communication and providing customers with information specifically tailored to their needs, wants and interests.

Question 2

What are the 4 principles of relationship marketing logic?

Answer 2

1. recognition of market failure
2. the improved understanding of consumer behaviour
3. the improved understanding of value chain characteristics
4. The financial argument (or economics) of customer retention

Question 3

What is recognition of market failure?

Answer 3

The threat of market failure motivates firms’ pursuit of long-term relationships. Markets may fail if customers/markets are not well informed (lack of information) where opportunistic behaviour is high, there are customer switching costs and a small number of suppliers or manufacturers, as this reduces customer bargaining power.

Question 4

What is the improved understanding of consumer behaviour?

Answer 4

Marketers must acknowledge that consumers frequently satisfice when making purchasing decisions. They are irrational and often have incomplete, distorted and asymmetric information and knowledge about products.

Question 5

What is the improved understanding of value chain characteristics?

Answer 5

Marketers must recognise that it is the constellation of firms that help create value for the end consumer. Stakeholders, such as suppliers, intermediaries (wholesaler, retailer), employees, government and competitors, have the potential to influence the firm’s ability to create value for customers. Cooperation and building high quality partnerships with these stakeholders may be more effective than competition, as it ensures for smooth, on-going business transactions.

Thus, firms should aim to build: internal relationships, supplier relationships, lateral relationships, as well as buyer relationships.

Question 6

What is the financial argument of customer retention?

Answer 6

Marketers should recognise that loyal customers are more profitable overtime. Therefore, they should aim to reduce customer turnover by retaining existing customers and maintaining their loyalty to the organisation. Existing customers will buy more of the firm’s products/services (often at a higher price) over time, and operating costs of servicing the customer will fall. Hence, profitability and firm value will increase, and brand equity will strengthen. 


Question 7

What are the costs of customer defections?

Answer 7

It is 5 more times expensive to get a new customer than it is to retain an existing one (due to promotion, advertising, time, personnel, research and set-up costs), and it is 3-5 times more costly to win back a lost customer than to find a new one. The real costs of defection to firms: 20-30% of revenue and 15-40% of operating expenses.

Question 8

Why are long-term customers more profitable over time?

Answer 8

• provide firms with base profits by purchasing more of their products
• reduce operating costs
• provide referrals
• word-of-mouth marketing for the firm
• more inclined to purchase the firms goods/services at a premium price.

Question 9

What is the leaky bucket approach to customer management?

Answer 9

It involves firms going into the market to find new customers to replace lost customers, then losing those new customers and having to find new ones, and so on. The bucket keeps leaking because firms fail to meet the needs of every customer. As new customers continue to come in, there will be increased operating, promotion, advertising, time, personnel, research and set-up costs that firms must incur. Therefore, individual transactions (or short-term relationships) can be detrimental as these short-term customers are more expensive to retain than other, while long-term relationships tend to be more profitable.

Question 10

What is the pareto-type view of profits?

Answer 10

3 customers: desired, break-even, and costly.

Question 11

Why do customers stay?

Answer 11

• The firm cares about their clients
• The firm communicates effectively with their clients
• The firm is cost conscious and gives customers a better price
• Reliability
• Technical expertise

Question 12

Why do customers leave?

Answer 12

• move away
• ethical problems
• develop other friendships/network
• dissatisfied with price
• found a better product
• service failure/ customers perceive an attitude of indifference

Question 13

What are the drivers of customer defection or disregard?

Answer 13

• Cumbersome complaint procedures
• Delays in product or service changes
• Slow and grudging response to breakdowns
• Poor or nonexistent customer information management
• Premise that customers cause product/service problems
• Many escape clauses in promises and agreements

Question 14

What is customer loyalty?

Answer 14

Customer (or brand) loyalty is a pattern of repeat purchases, accompanied by an underlying positive attitude towards the brand, that is based on the belief that the brand makes products superior to its competition.

Question 15

What are the frameworks for assessing customer loyalty?

Answer 15

1. Brand loyalty is more than simply repurchasing (repeat patronage).
2. Loyalty should be both behavioural and attitudinal

Question 16

What is true brand loyalty?

Answer 16

• Customers have a high relative attitude toward the brand, which is then exhibited through repurchase behaviour.

This type of loyalty can be a great asset to the firm: customers are willing to pay higher prices, they may cost less to serve, and can bring new customers to the firm through referrals and word-of-mouth. This is the direction firms want customers to take.

Question 17

What is latent loyalty?

Answer 17

Loyalty is existent, but dormant or hidden (not yet developed). So, these customers may like a company’s brand and image, but have not yet purchased their product/service yet.

Question 18

What is spurious loyalty?

Answer 18

Customers may repurchase a brand due to situational constraints, a lack of viable alternatives, or out of convenience. They may not necessarily like it, but are effected by increased switching costs and lack of competitive alternatives.

Question 19

What is the customer loyalty ladder?

Answer 19

To make customers move up the ladder as high as possible, involves providing more personalised service and providing service quality that exceeds expectations at each step. Consistently exceeding expectations will lead a customer’s enthusiasm for a company to grow with every satisfying interaction until it reaches a peak level of support. The customer then will become a brand partner/apostle and helps grow the business through championing and word-of-mouth.

Question 20

What are the customer responses zones?

Answer 20

1. zone of delight
2. zone of satisfaction
3. zone of dissatisfaction
4. zone of outrage

Question 21

How may firms delight their customers?

Answer 21

• Genuine courtesy and empathy
• Delivering unanticipated value
• Customer intimacy
• Novelty and entertainment
• Focusing on ‘moments of truth’

Question 22

What are loyalty programs?

Answer 22

Genuine long lasting loyalty is often the result of connecting with customers on a deeply personal and somewhat emotional level.

Customers that are emotionally connected to a brand/company are less likely to defect (i.e. customer retention).

They are also more likely to promote the brand to people they know (WOM marketing).

Question 23

What are the characteristics of loyalty programs?

Answer 23

1. Loyalty programs based on “point” transactions command loyalty up to a point.
2. Emotional connectivity cannot be easily replicated by competitors.
3. Point-based loyalty programs (rewarded based on frequency of shopping and/or amount spent in which they work toward a certain amount of points to redeem their reward) can be easily replicated and improved on by competitors > diminishes the ‘value’ of the loyalty program.