Chrissie Rucker, founder of the White Company, this month told the Financial Times “It only takes a couple of bad experiences, of being disappointed in the quality of products, for you to lose your customers in the future”.
For Ms Rucker this means she will not cut corners in her linens company. So she won’t lower the thread count on cotton towels or substitute a cuff for a simple hem on a blouse.
This principle of understanding your customer, what matters to them and giving them what they want consistently is all part of relationship marketing.
Marketing researcher, Berry (1983, page 25), defines relationship marketing as ‘attracting, maintaining and …. enhancing customer relationships’ while Morgan and Hunt (1994) say it is ‘establishing, developing and maintaining successful relational exchanges’.
1. Why does relationship marketing matter?
The obvious starting point is to look at the cost and effort you put into getting new customers. If you are then leaking customers from your business because they come, don’t like the experience and leave – well what a waste of your marketing budget! This is known as the leaky bucket theory.
Arthur Middleton Hughes looks at the financial impact of a 5-percentage-point increase in retention rate of customers in terms of the profit from that customer over their lifetime with your business. Based on the arguments made by Reicheld in the Loyalty Effect, he works out that the lifetime value of a customer can increase by 75% if retention rate is increased by 5%.
2. Create a customer value proposition
James C Anderson, James A Narus and Wouter van Rossum argue that ‘under pressure to keep costs down, customers may only look at price and not listen to your sales pitch. Help them understand -and believe in – the superior value of your offerings.’
To do this, you want to look at the customer satisfaction quadrant.
Satisfied customers generate more revenue than dissatisfied customers – and are more likely to return to your business. So you need to understand what customers see as really special and added value about products and services. Make sure everyone in the business understands what customers value and that they focus on these strengths.
And also find out what customers see as weaknesses and don’t value. Improve the products where you can and maybe drop parts of the product or service if customers don’t see the value in those areas.
3. Loyalty ladder
The concept of the loyalty ladder is to retain customers through different levels of relationship, moving from the bottom where they are just a prospect, but intend to buy, although they have not done so yet – through to customers who are intensely loyal brand champions and become advocates for your business and products.
4. Customer retention strategies
The key to retaining customers is to understand why they leave you for your competitors.When a customer leaves there is loss of revenue and the loss from the investment you made when acquiring them.
If you understand the patterns of why customers leave, you can use this information to predict which ones might leave next – and then put plans in place to keep them.
5. The building blocks of relationship marketing
As you will by now gather, relationship marketing is all about understanding your customer, data analysis and feeding this information into your whole business – it is not just about marketing.
I was recently teaching on our executive MBA and we outlined the process for this as
·Define target segment(s)
·Understand customer needs
·Define customer purchase decision making unit
·Understand customer purchase processes
·Analyse competitor offerings
·Articulate competitive advantage
·Promote the added value
·Define relationship effectiveness measures
When starting your analysis, Ford (1980) proposed that there are five stages to a relationship as follows, which can help to define the customer journey and help with research and understanding
·Pre relationship stage
·The early stage
·The development stage
·The long term stage
·The final stage
6. Who are the key stakeholders in relationship management?
Kotler (1992) suggests: suppliers, employees, distributors and end-user (consumers) in the micro-environment, with other key players such as government and investors in the macro-environment.
Reichheld (1996) points to: the right investors, the right customers and the right employees.
Morgan and Hunt (1994) point to 10 key groups spread across buyer, supplier, internal and lateral partnerships.
It seems to me that relationship management becomes even more important in difficult economic times.It is so hard to find any customers at all, that it must make sense to keep the ones you have got, rather than just focus on more marketing spend. But is it harder or easier to retain them in a recession?And what has been your most effective strategy to keep your customers?