By: Eric Giltner
Senior Area Manager
Grand Forks Area Office
North Dakota District Office
Many small businesses have seen a gradual shift from employing a transactional business model to one emphasizing customer relationships. A transactional business simply has products and or services available with no regard to building any kind of rapport with the customer. Examples of transactional businesses include most of the stores commonly found in an airport. Generally, they are there for the convenience of air travelers and see no value in developing any kind of long-term relationship with their customers. Transactional business are also common when consumption is a one-time (laser eye treatment) or long-lasting event (re-siding a home). These businesses employ a marketing strategy aimed at finding new customers.
Today’s customer demands more from a business than just having products and services available for purchase. This requires a business to focus on activities supportive of building long-term relationships with its customers, hence, the name, “Relationship Marketing.” Relationship marketing is an effective strategy for a business when there are alternative products or services for the customer to choose from; when the customer makes the selection decision; and when there is an ongoing and periodic desire for the product or service.
Customer’s Life Cycle
Relationship marketing involves understanding the customers’ changing needs as they go through their business life cycle. It emphasizes providing a range of products or services to existing customers as they need them. This requires engaging in activities devoted to gathering information about the present and future needs of customers and with this comes the added cost of time and effort spent with customers. However, this is offset by national studies showing the cost of retaining an existing customer is only about 10% of the cost of acquiring a new customer. This certainly makes a strong economic reason for paying more attention to existing customers.
The following concepts and activities are commonplace with using a relationship marketing strategy.
It is rare when a business can afford to apply relationship marketing activities to “every” customer. This is where the 80/20 concept comes into play. In many industries, 80 percent of a firm’s revenue comes from a "core" 20 percent of their customers. This core group of customers is then targeted for a deeper relationship.
Customer Retention Management
Customer retention is a measure of the percentage of valued customers at the beginning of the year that are still customers at the end of the year. The key activity here is to determine the reasons for leaving and then apply corrective action. This requires the difficult task of conducting exit interviews from reluctant, disappointed, or indifferent departed customers. Strong support and participation from top management or ownership is crucial in obtaining useful information.
Use of Customer Switching Barriers
Businesses will employ strategies to make it harder for a valued customer to “switch” to the competition. Common tactics used include: Product Bundling (combining several products or services into one “package” and offering them at a special price); Cross Selling (selling related products to current customers - expanded product line); Cross Promotions (giving discounts or other promotional incentives to purchasers of related products); Loyalty Programs (incentives for frequent purchases); Application of Switching Costs (termination fees); and Infrastructure Sharing (linking of computer systems and software to enhance supply and demand management of products/services).
A single point of contact will be assigned to a customer. To meet the ongoing needs of the customer, the “contact” will assemble varying teams of unique service providers from within the business as needed. Each successive team will spend considerable time with the customer with the rationale being that the more points of contact between the business and the customer, the stronger will be the bond, and the more secure the on-going relationship.
Can Your Business Employ Relationship Marketing?
Relationship marketing is most appropriate when marketing relatively high value customer products/services. It is also effective when the product or service can support value added extras specifically tailored for the customer. Remember, it takes time to implement the concepts and practices of relationship marketing and requires a complete "buy-in" by all employees of the business.
Eric Giltner has been a Business Development Specialist and the Grand Forks area manager for the U.S. Small Business Administration since 1998, having formerly been assistant to the dean of the UND College of Business and Public Administration. He received his B.S. Degree in Geological Engineering and his Master's Degree in Business Administration from the University of North Dakota. Eric can be reached at firstname.lastname@example.org.
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