1Learning Objectives After studying this chapter you should be able to: understand the evolution of relationship marketing (RM)• define RM• describe what part loyalty schemes play in relationship development• name the different cost drivers associated with customers acquisition • and customer retention discuss the benefits of relationship longevity• explain the drivers of relationship management• describe RM’s context within marketing management• understand why marketing planning is so important• discuss the process of marketing planning• describe the concept of the business mission• describe rewards and problems associated with marketing planning• 1. Fundamentals of Relationship Marketing Kapitel_1.indd 1 03.08.2010 12:45:30 Uhr 1. Fundamentals of Relationship Marketing2 1.1 The Evolution of Relationship Marketing Although relationship marketing (RM) is rising as a new phenomenon, relationship oriented marketing practices date back to the pre-industrial era. In this section, we trace the history of marketing practices and illustrate how the advent of mass production , the emergence of middlemen, and the separation of the producer from the customer in the industrial era led to a transactional focus of marketing. Now, due to technological advances, direct marketing is staging a comeback, leading to a relationship orientation. Even though marketing practices can be traced back as far as 7000 B.C. (Carratu, 1987), marketing thought as a specific discipline was borne out of economics around the beginning of the 20th century. As the function gained momentum, and developed through the first three quarters of the twentieth century, the focus was on transactions and exchanges. However, the development of marketing as a field of study and practice is undergoing a re-conceptualization in its orientation from transactions to relationships (Webster, 1992). The emphasis on relationships as opposed to transaction based exchanges is likely to redefine the domain of marketing (Sheth, Gardener and Garett, 1988). Indeed, the emergence of a relationship marketing school of thought is imminent given the growing interest of marketing professionals in the relational paradigm. The paradigm shift from transactions to relationships is related to the return of direct marketing both in business-to-business and business-to-consumer markets. As in the pre-industrial era once again direct marketing, albeit in a different form, is becoming popular, and consequently so is the relationship orientation. When producers and consumers directly deal with each other, there is a larger potential for emotional bonding that transcends economic exchange. They can understand and appreciate each others’ needs and constraints better, are more inclined to cooperate, and thus, become more relationship oriented. This is in contrast to the exchange direction of the middlemen (sellers and buyers). To the middlemen, especially the wholesalers, the economics of transactions are more important, and therefore, they are less emotionally attached to products. Indeed, many middlemen do not physically see, feel, touch products but simply act as agents. The disconnection of the producers from the users was a natural outgrowth of the industrial era. On the one hand, mass production forced producers to sell through middlemen, and on the other, industrial organisations, due to specialization of corporate functions, created specialist purchasing departments and buyer professionals, thus separating the clients from the producers. However, today’s technological advancements that permit producers to interact directly with large numbers of users, and because of a variety of organisational development processes, such as empowerment and total quality programs, direct interface between producers and users has returned in both consumer and industrial markets, leading to a greater relational orientation among marketers. Academic researchers are reflecting these trends in marketing practice, and searching for a new paradigm of the discipline that can better describe and explain it. RM attempts to involve and integrate customers, suppliers and other infrastructural stakeholders into a firm’s marketing strategy and activities (McKenna, 1991; Shani and Chalasani, 1991). Such involvement results in interactive relationships with suppliers, customers or other value chain partners of the corporation. An integrative relationship approach assumes overlap in the plans and processes of the interacting parties and suggests close economic, emotional and structural bonds among them. It reflects interdependence rather than independence of choice among the parties; and it emphasizes co- Kapitel_1.indd 2 03.08.2010 12:45:30 Uhr 1.1 The Evolution of Relationship Marketing 3 operation rather than competition and consequent conflict among the marketing actors. Thus, development of RM points to a significant shift in the axioms of marketing: from competition and conflict to mutual cooperation, and choice independence to mutual interdependence. The discipline of marketing grew out of economics, and the growth was motivated by lack of interest among the economists in the details of market behaviour, in particular those related to the functions of the middlemen (Bartels, 1976; Houston, Gassenheimer and Maskulka, 1992). It coincided with the growth in the number of middlemen and the importance of distribution during the industrial era. Unlike mainstream economists of the late nineteenth century, who were more preoccupied with public policy and economic effects of market institutions, early marketing thinkers had operational interests. The process of marketing was thought to cause additional forms of utility including time, place and possession utilities to the consumer (Macklin, 1924). Thus, marketing as a discipline got organized around the institutional school of thought, and its main concerns centred around the tasks performed by wholesalers and retailers as marketing institutions. Although the institutional thought of marketing was later modified by the organisational dynamics viewpoint, and marketing thinking was influenced by other social sciences, such as psychology, sociology and anthropology, exchange remained and still remains one of the central principles of marketing (Alderson, 1965; Bagozzi, 1974; Kotler, 1972). Formal marketing theory developed around the idea of exchange and exchange relationships, placing considerable emphasis on outcomes, experiences and actions related to transactions. However, the relationship orientation of marketing is not an entirely a new phenomenon. If we look back to the practice of marketing before the 1900s, we find that relationship orientation to marketing was fairly prevalent. In short, current popularity of RM is a reincarnation of the marketing practices of the pre-industrial era in which producers and consumers interacted directly with each other and developed emotional and structural bonds. The relationship orientation in marketing continued into the early years of the Industrial Revolution and the appearance of capitalism. Fullerton (1988) describes some of the efforts adopted by marketers during this period to build and maintain relationships with buyers. Marketing practices were also vastly individualized, relationship oriented and custom-made. In the industrial era the market conditions gave rise to forceful selling and the development of marketing organisations that were willing to bear the risks and costs of inventory ownership and storage. Wholesalers, distributors and other marketing intermediaries assumed the role of middlemen who, on the one hand, stored the excess production of manufacturers, and, on the other hand, helped in locating and persuading more buyers to purchase. So vital became this function that early marketing thought was developed on the concept of distribution and the creation of time and place utilities. It was also around this time that the term ‘marketing’ itself was added to the lexicon as a noun opposed to its earlier use as a verb (Petrof, 1997). Among highly influential writers of the period Ralph Starr Butler and Arch W. Shaw are considered important to the evolution of the new marketing discipline. Ralph Butler (1882-1971) believed marketing was all about organisation, planning and the management of relationships. It was also in this Kapitel_1.indd 3 03.08.2010 12:45:30 Uhr 1. Fundamentals of Relationship Marketing4 period that theories developed that were later to become known as the commodity approach (focusing on all marketing actions involved in a particular product category), the institutional approach (focusing on describing the operations of a specialized type of marketing agency) and the functional approach (focusing on the purposes served by various marketing activities) (Wilkie and Moore, 2003). This period also gave rise to modern marketing practices, such as sales, advertising and promotion, for the purpose of creating new demand to absorb the oversupply of goods. Thus emerged the transactions orientation of marketing whereby marketers became more concerned with sales and promotion of products and less with building enduring relationships. This shift was further accentuated during the Great Depression of 1929, when the oversupply of goods in the system heightened the pressure on marketers to sell their products. Thus the transaction orientation has been a major influence in marketing thought and scholastic research throughout the industrial era. During the height of the industrial period, marketing practices were aimed at supporting mass consumption. Developed out of the need to support the mass production machinery, the emphasis was aimed at increasing the sale of products and services. Marketing was considered successful only when it resulted in a transaction. Measures of marketing performance were linked, as is still the practice today in many corporations, to sales and market share. Aided by the managerial school of marketing thought, two important developments occurred in the later period of the industrial era. The first development was the marketer’s realization that repeat purchase by customers was important, making it necessary to foster brand loyalty . Several marketing scholars also became interested in repeat purchase and brand loyalty behaviour as early as World War II (Churchill, 1942; Womer, 1944; Barton, 1946). This research was further advanced in the buyer behaviour theory of Howard and Sheth (1969), wherein they examined repeat purchase behaviour and brand loyalty. In order to achieve a brand image, brand differentiation and effective advertising, different marketing techniques emerged. In a seminal work, McCarthy presented the ‘marketing mix’ in the framework of the ‘4Ps model of marketing’ (price, product, promotion and placement). Although this concept retained many of the key elements of the functional school it did shift the perspective toward the marketing management approach. In this respect, the development of market segmentation and targeting became imperative tools for marketing planning. In the face of competition, marketers realized the benefits of focusing on specific groups of customers for whom they could tailor their marketing programs and effectively differentiate themselves from their competitors (Peterson, 1962). The second significant change was the development of administered vertical marketing systems (McCammon, 1965), whereby marketers not only gained control over channels of distribution, but also developed means of blocking competitors from entering into these channels. Vertical marketing systems such as franchising permitted marketers to extend their representation beyond their own corporate limits to reach final customers (Little, 1970). These developments represented the recurrence of direct marketing and in maintaining a long-term relationship with consumers. Post-industrial era has seen substantial development toward RM, both in practice and in managerial philosophy. Marketers started realizing the need to supplement a transaction-orientation with an orientation which showed additional concern for customers. It began with the advent of compound products, which gave rise to the systems selling approach. At the same time, some companies started to insist upon new purchasing ap- Kapitel_1.indd 4 03.08.2010 12:45:30 Uhr 1.1 The Evolution of Relationship Marketing 5 proaches such as national contracts and master purchasing agreements, making major vendors develop key account management programs (Shapiro and Wyman, 1981). These measures forced intimacy and durability in the buyer-seller relationships. Instead of purchasing a product or service, customers were more interested in buying a relationship with a seller. The key account management program designates account managers and account teams that assess the customer’s needs and then husband the selling company’s resources for the customer’s benefit. Key account programs reflect higher commitment of selling organisations toward their major customers. Such programs, concurrently, led to the foundation of strategic partnering relationships that have emerged under RM ( Anderson and Narus, 1991). The expansion of relationship orientation of marketing in post-industrial era is the rebirth of direct marketing between producers and consumers. The impact of technological revolution is changing the nature and activities of the marketing organisations. The current development and introduction of sophisticated electronic and computerized communication systems into society is making it easier for consumers to interact directly with the producers. Producers are also becoming more knowledgeable about their consumers by maintaining and accessing sophisticated internet databases that capture information related to each interaction with individual consumers, at no or very low cost. As a result, the functions formerly performed by the middlemen are now being undertaken by either the consumer or the manufacturers. Producers are building such systems that allow them to undertake quick responses with regard to manufacturing, delivery and customer service, reducing the need for inventory management, financing and order processing through middlemen. Also, consumers have less time and thus a condensed inclination to go to the store for every purchase. They are willing to undertake some of the responsibilities of direct ordering, personal merchandising, and product use related services with little help from the producers. Hence, given the recent technological strides and consumer attitudes, some functions performed by middlemen may be entirely removed. Similarly, the rapid convergence of technologies, such as communication and computers, mandates that companies in such industries work on joint projects to leverage their combined resources and to share risks. Thus, inter-firm partnering and alliances is becoming increasingly popular and important. Another major force driving the adoption of RM is the area of Total Quality Management (TQM) that lately revolutionized industry’s perspectives regarding quality and cost. Most companies saw the value of offering quality products and services to consumers at the lowest possible prices. When companies embraced Total Quality Management to improve quality and reduce costs, it became obligatory to involve suppliers and customers in implementing the program at all levels of the value chain. This needed close working relationships with customers, suppliers and other members of the marketing organisation. Thus, several companies, such as Motorola, IBM, Xerox, Ford, AT&T, etc., formed partnering relationships with suppliers and customers in order to practice TQM. Other programs such as Just-in Time (JIT) supply and Material-Resource Planning (MRP) also made use of the inter-reliant relationships between suppliers and customers (Frazier, Spekman and O’Neal, 1988). In addition to this, another force is the growth of the service economy . As more and more organisations depend upon revenues from the services sector, RM becomes more and more established. One reason being that services are typically produced and delivered Kapitel_1.indd 5 03.08.2010 12:45:30 Uhr 1. Fundamentals of Relationship Marketing6 by the same institution. Service providers are usually involved in the production and delivery of their services. For instance, in the case of personal and professional services, such as consulting services, accounting services, and legal services, the individual producer of the service is also the service provider. In much the same way as the users of these services are directly engaged in obtaining and using the service thus, minimizing or even eradicating the role of the middlemen. In such a situation, a greater emotional bond between the service provider and service user develops and the urge for maintaining and enhancing the relationship. It is therefore evident that RM is equally important for scholars and practitioners of services marketing (Berry 1983; Crosby and Stephens 1987). Certain organisational changes have facilitated the augmentation of RM. Amongst these the most significant is the role definition of the members of the institution. Through a variety of changes in organisational processes, companies are now directly involving users of products and services in the purchase and acquisition decisions. For a considerable time, these functions were managed by the procurement department as a specialized function, with little or no input from the actual users of these products and services. Thus, the separation that existed between the producer and the consumer due to the existence of middlemen, acting as gatekeepers, is potentially bridged in many cases. Wherever such changes are being made, direct interaction and cooperative relationship between producers and users develop. Finally, in the post-industrialization period the increase in competitive concentration is forcing marketers to be concerned with customer retention. As several studies have indicated, retaining customers is less expensive and perhaps a more sustainable competitive advantage than acquiring new consumers. Marketers are realizing that it costs less to retain customers than to compete for new ones (Rosenberg and Czepiel, 1984). On the supply side it pays more to develop closer relationships with a few suppliers than to build up more vendors (Spekman, 1988). In addition, several marketers are also concerned with keeping customers for life, rather than predominantly making a one-time sale (Cannie and Caplin, 1991). In summary, relationship-orientation in marketing has staged a comeback. It was only during the peak of industrialization that marketing’s orientation shifted toward a transactional approach. With the advent of middlemen, and the separation of producers and users, there was a superior transactions orientation. Industrialization led to a reversal in the relationship between supply and demand, when due to mass production efforts producers created excess supply of goods and were themselves preoccupied with achieving production efficiencies. Thus, they needed middlemen to service the consumer. The middlemen in turn, adopted a transactional approach as they were more interested in the economic benefits of exchange than the value of production and/or consumption. Now with one-to-one connection between the manufacturer and user, relationship orien tation in marketing has returned. In the era of RM, the roles of producers, sellers, buyers and consumers are blurring. Consumers are progressively becoming co-producers. Not only there is a not as much of a need for middlemen in the process, there is also less of a boundary between producers and consumers and other stakeholders in the value chain. In many instances, market participants jointly participate in design, innovation, production and consummation of goods and services. Sometimes these relationships and activities become so enmeshed that it is difficult to separate the marketing actors from one another. There is also a blur- Kapitel_1.indd 6 03.08.2010 12:45:30 Uhr 1.2 Definition of Relationship Marketing 7 ring of time and place boundaries. For example, Procter & Gamble has assigned twenty of its employees to live and work at Wal-Mart’s headquarters to improve the speed of delivery and reduce the cost of supplying P&G goods to Wal-Mart’s branch outlets (Kotler, 1994). It is therefore hard to distinguish the elements as well as the time of occurrence of exchange. In RM, organisational boundaries are hard to distinguish as companies are more likely to be involved in shared relationship with their stakeholders. Some of these activities relate to joint planning, co-production, co-marketing, co-branding, co-creation, co-invention etc. where the parties in the relationship bring their resources together for creating a greater market value. In summary, we observe that a relational orientation to marketing existed until the early years of industrial development. It was only when mass production led to an oversupply of goods that marketers became transaction oriented. However, this transaction orientation in marketing is giving way to the return of relationship orientation. This re-emergence of RM has the potential for a new ‘General Theory of Marketing’ (Sheth, Gardener and Garrett, 1988), as its fundamental axioms better explain marketing practice. 1.2 Definition of Relationship Marketing Although a clearer picture of RM is becoming evident in the framework of the above mentioned evolution of the concept we would like to determine, more specifically, what is meant by the term. Despite considerable academic research and management interest, RM may still be regarded more as an ‘umbrella philosophy’ with several relational variations rather than as a wholly unified concept with strongly developed objectives. There are numerous published definitions on the concept and further other terms have been frequently used either as substitutes for RM, or to describe similar concepts. These include direct marketing, customer relationship management, micromarketing, one-to-one marketing, loyalty marketing and interactive marketing, to name but a few. In general, however, the major characteristic of these techniques are more transactional than relational in nature (Egan, 2008). As stated above RM is not an independent philosophy but draws on conventional marketing principles (Gordon, 1998). This view implies that the basic focus upon customer needs still applies but that it is the way marketing is practiced that requires change. As RM is a descendant of traditional marketing a good starting point in developing a definition is to look at how marketing has traditionally been perceived. This view might be summed up using the Chartered Institute of Marketing’s definition of marketing: Marketing can be defined as the management process of identifying, anticipating and satisfying customer requirements profitably (CIM, 2005). This definition of traditional marketing and others of similar nature emphasize above all the functional and process nature of traditional marketing and make no explicit recognition of the long-term value of the customer. Berry was among the first to introduce the term ‘relationship marketing’ as a modern concept in marketing and suggested it to be defined as attracting, maintaining and enhancing consumer relationships (Berry, 1983). While recognizing that customer acquisition was, and would still remain, part of marketer’s responsibilities this viewpoint Kapitel_1.indd 7 03.08.2010 12:45:30 Uhr