Chapter 3:

Customer Relationship
Management Strategies
for Business Markets

Prof Dheeraj Sharma

Chapter Topics
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 money” 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. That’s 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.
 Collaborative Exchange
 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 partner’s 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 buyer’s 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 prospect’s
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.
Improving Transactional
Customer Loyalty

 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
 Whale Curve & Profitability
 20/80 Rule says “20% of customer provide 80%
of sales

 Whale Curve reveals:

◦ 20% of customers generate 150–300% 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 aren’t. 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 money

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.

#1 - Acquiring the Right Customer
Account selection demands a clear understanding
of:

1. Seller’s resources
2. Customer’s 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
customer’s 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 market’s needs
by communicating their offering of superior
performance in a way that conveys they
understand their customer’s 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. 3.5 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 3.5b) 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.
 Best Practices Follow-Up
 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 don’t
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
customer’s 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
 RM Programs

 SocialRM Programs
 Structural RM Programs
 Financial RM Programs
Social RM Programs
 Social RM programs:
◦ Social engagements (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
customer’s needs