Chapter 4:
Customer Relationship
Management
Strategies for Business
Markets
PowerPoint by
Ray A. DeCormier, Ph.D.
Central Connecticut State University
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. How successful firms excel at customer
relationship management
5. Critical determinants for managing strategic
alliances
Collaborative Advantage
• Relationship Marketing centers on establishing,
Developing, and maintaining successful exchanges with
customers
• 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!
• 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
This strategy emphasizes joint-problem solving and
multiple linkages such as R&D and manufacturing.
Value-Added Exchanges
•
Value-Added Exchanges fall between
Transactional and Collaborative Exchanges
•
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
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 suppliers
• Buyers invest heavily in supplier relationships
– Training, documentation, integration, process modifications
– hiring specialized skill sets
– contracting, publicity
• Switching can cause costly disruptions.
• Moving to less-established suppliers can be risky
• The prospect’s PROBLEM must exceed the BENEFITS
experiencing with current supplier before considering
switching.
Good marketers seek to establish high switching costs
through value-added services
Characteristics of Business Market Customers
Table 4.1
Value Drivers in Key Supplier Relationships
Sources of Value Creation
Relationship Value Dimensions
Costs
Benefits
__________________________________________________________________
Core offering
Product quality
Direct cost
Delivery performance
Sourcing process
Customer operations
Service support
Personal interaction
Supplier know-how
Time to market
Acquisition costs
Operation costs
_________________________________________________________________________
SOURCE: Wolfgang Ulaga and Andreas Eggert, “Value-Based Differentiation in Business Relationships: Gaining and Sustaining Key
Supplier Status,” Journal of Marketing 70 (January 2006): p. 122.
Furthering Collaborative Relationships
Obtain ‘key supplier’ status by…
• Target the right customer.
• Match with their purchasing situation.
• Develop strategies that are appropriate for each
type of buyer
– Offer specialized services and customized
products
• Competence and commitment are vital to
reducing buyer’s initial perceived risk
Good marketers know their key customers’ business
model intimately
Measuring Customer Profitability
• Activity-based costing (ABC) - allocates 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.
• 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.
Differentiation & customization are costly – must always
revisit ROI assumptions
Figure 4.3 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
Characteristics of High Cost-to-Serve Customers
Order custom products
Order small quantities
Unpredictable order arrivals
Customized delivery
Frequent changes in delivery requirements
Manual processing
Large amounts of support –
• Pre-sales - marketing, technical, and sales resources)
• Post sales - installation, training, warranty, field service)
Require company to hold inventory
Pay slowly (i.e., high accounts receivable)
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 w/proactive
retention strategies
2. Convert unprofitable ones to profitability
3. Fire those who are not profitable
Customer Profitability
Net Margin Realized
High
Passive
Product is crucial
Good supplier match
Costly to service,
but pay top
dollar
Price-sensitive but
few special
demands
Aggressive
Leverage their buying power
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.
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 through
continuous feedback
d. Improved marketing effectiveness through
superior customer insight
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.
– Everyone has the same 360 degree view of a customer
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
Figure 4.5 - Transactional & Collaborative
Working Relationships
Pure
Transactional
Exchange
(a) Industry Relationship Bandwidths
Pure
Collaborative
Exchange
Medical Equipment
(e.g. imaging systems)
Hospital Supplies
(e.g. surgical gloves, syringes)
(b) “Flaring Out” from the Industry Bandwidth
Pure
Transactional
Exchange
Pure
Collaborative
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.
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.
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
Strategic Alliances vs. Joint Ventures
• Strategic alliances involve a “formal long-run
linkage, funded with direct co-investments by two
or more companies, that pool complementary
capabilities and resources to achieve generally
agreed objectives.”
• Joint Ventures involve the formation of a separate
independent organization by venture partners.
Benefits of a Strategic Alliance
1.
2.
3.
4.
Access to new markets
Access to new technologies
Economies of scale
Faster entry of new products into markets
due to established distribution channels
5. Sharing costs and risks
Elements of Successful Alliances

Start with a strategy map detailing each partners
goals and contributions.
1. What does JV offer the customer?
2. Aligned around common goals?
3. Are unique customer benefits jointly agreed to?
•
•
•
Agree on each partner’s contribution to alliance
Select good communicators to convey alliance’s
strategic role and create its “identity”
Establish direct ties at top levels to engender
organizational commitment.
– Combats inevitable post-honeymoon cynicism
Social Connections in an Alliance
Figure 4.7 Social Connections in an Alliance
Alpha
22
Omega
17
2
3
5
34
38
20
14
35
26
25
36
7
16
8
24
4
23
12
9
31
11
19
42
21
27
39
37
29
15
Peripheral
Participants
Strong Linkages Across Firms
Strong Linkages Within Firms
Most Senior Executive
Project Manager
33
Boundary Spanners
41
40
13
Core
Participants
30
6
10
1
28
18
32
Peripheral
Participants
Five Levels of Integration
Strategic
Senior executives continuously define and communicate
broad goals or changes in each company
Tactical
Middle managers plan joint ventures, transfer knowledge and
work to improve inter-firm connections
Operational
Concerned with providing information, resources and
personnel to carry out daily work
Interpersonal
Facilitate an environment for people to know each other, learn
together and create new value
Cultural
Managers are required to have communications skills and be
culturally aware to bridge differences