Do Business Well

Having established the role of employees as a key stakeholder group in the development of effective customer service, we will now go on to examine the subject of customer relationship marketing (CRM) in more detail. There are many definitions of relationship marketing. Here are just a few:

Attracting, maintaining, and — in multi-service organisations — enhancing customer relationships.

(Berry et al. 1983: 25)

Establishing, developing and maintaining successful relational exchanges.

(Morgan and Hunt, 1994: 20)

a business strategy which pro-actively builds a bias or preference for an organisation with its individual employees, channels and customers resulting in increased retention and increased performance.

(Newell 2000: 182)

key to successful relationship marketing is quality service. As Bolton claims,

In ongoing service relationships, customers subjectively assess the future value
of the relationship relative to the expected benefits, costs of continuing and
costs of discontinuing the relationship From this viewpoint, a significant part
of the value assessment in a retention decision rests on service performance.
(1998: 48)

Relationship marketing, therefore, is based on retaining existing customers rather than acquiring new ones. For the company, relationship marketing can enhance customer retention rates. This impacts directly on profitability because it can cost much more to attract a new customer than it does to retain an existing customer. For example, Bain and Co. found that a 5 per cent increase in the number of retained customers could lead to increased profitability of 25-85 per cent (Payne 1995). Retained customers become more profitable over time as the relationship between them and the supplier develops.

By focusing on the provision of a quality service to a customer, a company is increasing the chance that the customer will return. If that customer is subsequently treated in an individual way in accordance with what the company has learned about his or her preferences, then the customer starts to move further up the ladder. If customers are so pleased with the attention and service received that they start recommending the company to others, then marketing costs begin to fall, as word-of-mouth recommendations are completely free. From the customer’s perspective, developing a long-term relationship with a company can also help to reduce the perceived risk associated with the purchase of goods or services. It is not feasible, of course, for a company to try to develop a relationship with all its customers. The key is to focus on those customers with the greatest profit potential. The Pareto principle applies here because just 20 per ent of customers may account for 80 per cent of profit generation. The key is work out which particular customers make up the lucrative 20 per cent! Traditionally, the majority of marketing resources have been expended on the e costly activity of acquiring new customers, without any significant effortat retaining customers once the transaction has been completed. This can leadto disenfranchisement among existing customers, who feel neglected and under‑valued when potential customers are offered better deals (Rosenfield 1999). Thisproblem is clearly evidenced in the UK mortgage market at the time of writing,where a plethora of special deals are offered only to prospective rather thanexisting customers. Reichheld (1993) notes that segmentation based on the degreeof potential customer profitability is vital to focus resource expenditure on themost lucrative customers. This important feature of relationship marketing is alsoemphasized by Newell (2000) in the context of online relationship-building.

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