Business-to-business relationships offer opportunities for firms to create competitive advantages and achieve superior results Building long-term relationships with customers is therefore the essence of business-to-business marketing. Establishing and maintaining long-term business-to-business relationships require a supplier to establish a high level of customer loyalty, a core marketing goal. Therefore, what makes customers loyal is a key issue businesses and researchers face.
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This paper will attempt to review the literature with regards to the relationship between customer value and satisfaction and customer loyalty. It will also look at the link between organizational and salesperson’s relationship and customer loyalty. It will also explore loyalty strategies frequently used by businesses and lastly, it will also look at pricing and it effects on customer loyalty.
Customer loyalty is a vital issue to any business, as the loss of even one customer can cost a lot to a business. This is especially important in the business market in which businesses acquire goods and services that will be used in their production process.
More dollars and items are involved in sales to business buyers than to consumers. Business markets have several characteristics:
Fewer, larger buyers
Close supplier-customer relationship
Professional purchasing
Several buying influences
Derived demand
Inelastic demand (Kotler and Keller (2006), p.196)
Industrial marketing or B2B marketing is the marketing of goods and services to producers, resellers, governments and other non profit organizations for use in the goods and services that they, in turn produce for resale to other customers. In industrial (B2B) marketing, goods are normally bought for further incorporation into other goods or their subsequent resale, whereas in consumer markets, goods are bought for their final consumption and use. (Hinterhuber 2008)
Bonoma (1982) states the main difference between industrial marketing with consumer marketing has to deal with a buying center. Buying centers are comprised of the following roles which a varying number of persons occupy:
an initiator who recognizes the need to purchase a particular good or service
a user who consume the product or service
an influencer who has a say in the purchase decision
a gatekeeper who determines which vendors have the right to submit quotes
a decider who has the final say over whether or not the purchase is made.
Thus, industrial marketing and selling thus requires a sound understanding of the role of which different members of the buying center occupy and a commitment to meet each member’s different needs and requirements better than competitors. (Hinterhuber 2008)
Barback (1979) and Forman and Lancioni (2002) surmise industrial marketing as having the following exclusive traits:
A distinct customer basis (producers, resellers, governments, and other non profit institutions)-which usually is either profit or budget constrained.
The presence of a buying center with differing needs of its members
The presence of purchasing norms and requisitions which sellers must comply with
Customers in industrial markets are usually more knowledgeable about their products than customers in consumer goods market. (Hinterhuber 2008)
All these characteristics have a part to play in driving businesses to look at customer relationship management strategies as a tool to enhance customer retention through customer loyalty which can be achieved by providing value and satisfaction.
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Customer loyalty is important to any organization because of the following facts:
Acquiring new customers can cost five times more than the cost involved in satisfying and retaining current customers. It requires a great deal of effort to induce satisfied customers to switch away from their current suppliers.
The average company loses 10% of its customers each year
A 5% reduction in the customer defection rate can increase profits by 25% to 85%, depending on the industry.
The customer profit rate tends to increase over the life of the retained customer. (Kotler and Keller (2006), p.148)
Customers are becoming harder to please. They are smarter, more price conscious, more demanding, less forgiving and they are approached by many more competitors with equal or better offers. The challenge, according to Jeffrey Gitomer, is not necessarily to produce satisfied customers, several competitors can do this. The challenge is to produce delighted and loyal customers. ( Kotler and Keller (2006), p.147)
In light of this, the interest in customer relationship management (CRM) began to grow. According to Bauer et.al, regardless of the size of an organization, businesses are motivated to adopt CRM to create and manage the relationships with their customers more effectively. An enhanced relationship with one’s customer can ultimately lead to greater customer loyalty and retention, and also profitability. In addition, the rapid growth of the internet and its associated technologies has greatly increased the opportunities for marketing and has transformed the way relationships between companies and their customers are managed. (Ngai 2005)
Customer relationship management or (CRM) is increasingly at the top of corporate agendas. companies large and small across a variety of sectors are embracing CRM as a major element of corporate strategy for two important reasons: new technologies now enables companies to target chosen market segments, micro segments or individual customers more precisely and new marketing thinking has recognized the limitations of traditional marketing and the potential of more customer-focused, process based strategies. (Payne (2006), p.4)
The emergence of CRM as a management approach is a consequence of a number of important trends. These include:
– The shift in business focus from transactional marketing to relationship marketing
– The realization that customers are a business asset and not simply a commercial audience
– The transition in structuring organizations, on a strategic basis, from functions to processes.
– The recognition of the benefits of using information proactively rather than solely reactively
-the greater utilization of technology in managing and maximizing the value of information
– The acceptance of the need for trade off between delivering and extracting customer value.
– The development of one to one marketing approaches (Payne (2006), p.11)
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1.1 DEFINITIONS OF CRM
Although customer relationship management has become widely recognized as an important business approach, there is no universally accepted definition of customer relationship management. Swift defined CRM as an “enterprise approach to understanding and influencing customer behavior through meaningful communications in order to improve customer acquisition, customer retention, customer loyalty and customer profitability. (Ngai, 2005)
Kincaid viewed CRM as “the strategic use of information, processes, technology and people to manage the customer’s relationship with your company (marketing, sales, services and support) across the whole customer life cycle. (Ngai, 2005)
Parvatiyar and Sheth defined CRM as a comprehensive strategy and process of acquiring, retaining and partnering with selective customers to create superior value for the company and the customer. It involves the integration of marketing, sales, customer service and the supply chain functions of the organization to achieve greater efficiencies and effectiveness in delivering customer value.” (Ngai, 2005)
CRM is the value and strategies of relationship marketing- with particular emphasis on customer relationships turned into practical application. (Gummesson 2004)
Relationship marketing became a widespread term in the 1990’s but has a long history under many different names. In the wake, one to one marketing surfaced in the mid 1990’s. CRM emerged as the no 1 business buzzword at the turn of the millennium. (Storbacka and Lehtinen, 2000) One to one marketing and CRM are the same; although there may be some differences in emphasis and procedures, these and a host of other names are used by consultants to brand their offerings. Today, CRM is the dominant and generally used designation but in 1998, it was only one in a continuous flow of acronyms soliciting for attention. (Gummesson 2004)
Customer relationship management is the process of managing detailed information about individual customers and carefully managing all customer “touch points” to maximize customer loyalty. Customer relationship management enables companies to provide excellent real time customer service through the effective use of individual account information. Based on what they know about each valued customer, companies can customize market offerings, services, programs, messages and media. (Kotler and Keller (2006), p.144)
Customer relationship management comes in many guises and many names. Another widely used is relationship marketing in which the focus was on managing relationships with customers, but now has taken on a broader meaning covering all other stakeholder relationships in an organization.
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The relationship marketing concept emerged within fields of service marketing and industrial marketing (Christopher et al, 1991; Gummesson 1991, Lindgreen et al, 2004). Berry (1983) viewed relationship marketing as a strategy to attract, maintain and enhance customer relationships. Gummeson (11993) defined the term as a strategy in which the management of
interactions, relationships and networks are a fundamental issue. Rapp and Collins (1990)
suggest that its goals are to create and maintain lasting relationships between the firm and its customers that are rewarding for both sides; this is achieved by a mutual symbiosis and fulfillment of promises. Blomqvist et al (1993) proposed the following key characteristics of relationship marketing: every customer is considered an individual person or unit, activities of the firm are predominately directed towards existing customers, implementation is based on interactions and dialogues, and the firm is trying to achieve profitability through the decrease of customer turnover and the strengthening of customer relationships. (Ndubisi, 2006)
Gronroos states that relationship marketing is to identify and establish, maintain and enhance relationships with customers and other stakeholders at a profit, so that the objectives of all the parties involved are met. This is done by a mutual exchange and fulfillment of promises. (Liljander, 2000)
When the concept of relationship marketing was first launched by Berry in 1983, it only concerned customer relationships, and the need to expand it to other marketing relationships has been debated. Even though other stakeholders have been included, the emphasis in relationship marketing is still placed on the customer and continues to be at the center of all conceptualizations of relationship marketing. (Liljander, 2000)
The lack of clarity about CRM is evident in CRM terminology. Customer relationship management is often used interchangeably with the terms “relationship marketing”, “customer relationship marketing”, “enterprise relationship marketing” (ERM), “technology enabled relationship marketing” (TERM), “customer managed relationships’ (CMR) or ‘customer management’ (CM). It is also used to refer to a specific IT solution such as a data warehouse or a specific IT solution such as a data warehouse or a specific application such as campaign management or sales force automation. In our experience of dealing with many companies we have found that the term “CRM” is used very differently across different industries and within specific vertical markets. (Payne (2006), p.18)
2.0 FINDINGS
Under this section, we will move on the broad classification of CRM into five broad categories. Next we will discuss the importance of CRM in retaining customers through customer satisfaction and customer loyalty. Ultimately, all these will affect the customer’s life time value to an organization and contribute to its profitability. Next, we will also discuss the various strategies and programs used by organizations to achieve this, such as loyalty programs, relationship quality and pricing and see it effects on customer loyalty.
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2.1 CLASSIFICATION METHOD/TYPES OF CRM
According to Kincaid (2003), West (2001) and Xu et al (2002), CRM comprises three major functional areas:
1) Marketing
2) Sales
3) Service and support (Ngai, 2005)
Ngai has further streamlined the classification into five broad categories as follows:
1) CRM. This is the core part of the classification framework that includes general discussion, concept and managerial aspects of CRM.
2) Marketing. Marketing is the function most often associated with CRM. (Kincaid, 2003). CRM is founded in marketing (Russell-Jones, 2002) and relationship marketing (Ryals and Knox, 2001). Ling and Yen (2001) have described the evolution of CRM from direct sales to mass marketing, target marketing and then to customer relationship marketing thus emphasizing that marketing and CRM are inseparable.
3) Sales. The sales function is direct interaction with customers, which makes up CRM (Kincaid, 2003). It is important to develop sales strategies at the customer level to build and maintain relationships with customers to achieve revenue goals. (Ingram et al., 2002). With technologies emerging for the sales function, it is possible to make the sales process more efficient and automated to increase sales.
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4) Service and support. High quality customer service and support is the key to improving customer retention sales and maintaining a good relationship with customer. (Yelkur, 2000). In today’s highly competitive environment, companies must pay attention to fulfilling the needs of each customer quickly and accurately. Customer satisfaction is hard to win and easy to lose. If customers are not satisfied, they simply move on to other companies.
5) IT and IS. IT and IS play a key role in the development of CRM. (Kincaid, 2003, Ling and Yen, 2001). They can be used to automate and enable some or all CRM processes. Appropriate CRM strategies can be adopted through the assistance of technology, which can manage the data required to understand customers. Moreover, the use of IT and IS can enable the collection of the necessary data to determine the economics of customer satisfaction, retention and life time value. Advanced technology involves the use of databases, data warehouses, and data mining to help organizations increase customer retention rates and their own profitability. (Ngai, 2005)
Payne (2006) offers a similar classification, but he clusters them into types, as follows:
Operational CRM. This area that is concerned with the automation of business processes involving front office customer contact points. These areas include sales automation, marketing automation and customer service automation. Historically, operational CRM has been a major area of enterprise expenditure as companies develop call centers or adopt sales force automation systems. CRM vendors focus on offering an increasingly wide range of operational CRM solutions.
Analytical CRM. This involves the capture, storage, organization analysis interpretation and use of data created from the operational side of the business. Integration of analytical CRM solutions with operational CRM solutions is an important consideration.
Collaborative CRM. This involves the use of collaborative services and infrastructure to make interaction between a company and its multiple channels possible. This enables interaction between customers, the enterprise and its employees. (Payne (2006), p.23)
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2.2 THE IMPORTANCE OF CRM
Much has been written about the importance of CRM in increasing customer satisfaction and establishing customer loyalty towards an organization. According to Duffy (2003), there are many different terms used to describe the process of keeping customers longer and earning a greater share of each customer’s business. It has been called many things, including the following:
– customer relationship design
– customer relationship management
– customer relationship optimization
– frequency marketing
– one to one marketing
– relationship marketing
– retention marketing
As we have discussed earlier, CRM comes in many guises and names, but yet its main aim is to retain customers with the intention of contributing to an organization’s bottom line. Customer satisfaction is a concept that is closely related to customer loyalty.
To achieve success in the complex and competitive market today, researchers have maintained and practitioners agree that customer satisfaction is the key. Kotler and Keller (2006) define satisfaction as a person’s feeling of pleasure or disappointment resulting from comparing a product’s perceived performance (or outcome) in relation to his or her expectation. If the performance falls short of expectations, the customer is dissatisfied. If the performance matches the expectations, the customer is satisfied. If the performance exceeds expectations, the customer is highly satisfied or delighted.
Satisfaction feelings motivate customers to behave in the marketplace. Those who are highly satisfied with a supplier are the ones most likely to buy again from the supplier, spread positive word of mouth information to other customer’s and develop loyalty (Jones & Sasser, 1995, Oliver, 1997) On the other hand, dissatisfaction can lead to negative behavior, such as switching to another supplier, reducing the percent of purchases allocated to the supplier, engaging in negative word of mouth, and even initiating retaliation to get revenge. (Garver, Gardial and Woodruff, 1999) Because of its motivational role, successful customer retention strategies place major emphasis on gaining customer satisfaction. (Woodruff and Flint 2003)
Many companies are systematically measuring customer satisfaction and the factors shaping it. A company would be wise to measure customer’s satisfaction regularly because one key to customer retention is customer satisfaction. A highly satisfied customer generally stays loyal longer, buys more as the company introduces news products and upgrades existing products, talks favorably about the company and its products, pays less attention to competing brands and is less sensitive to price, offers product or service ideas to the company, and costs less to serve than new customers because transactions are routine. (Kotler and Keller (2006), p.137)
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In a research conducted by Ndubisi (2005), the findings suggest banks can create customer satisfaction by exhibiting trustworthy behavior, showing genuine commitment to service, communicating information to customer efficiently and accurately, delivering services competently, handling potential and manifest conflicts skillfully and improving overall customer relationship quality. This research demonstrates the dimensions that customer’s value in a relationship.
There is a strong link between customer satisfaction and customer loyalty. Suppose customer satisfaction is rated on a scale from one to five. At a very low level of customer satisfaction (level one), customers are likely to abandon the company and even bad mouth it. At levels two to four, customers are fairly satisfied but still find it easy to switch when a better offer
comes along. At level five, the customer is very likely to repurchase and even spread good word of mouth about the company. High satisfaction or delight creates an emotional bond with the brand or company, not just rational preference. (Kotler and Keller (2006), p.137)
The concept of value is also closely tied to customer satisfaction and thence to customer loyalty as mentioned earlier. The value creation process is a critical component in most CRM programs. The value the customer received from any organization is the total package of benefits or added value that enhances the core product. Customers do not really just buy products or services- when they buy they expect benefits and value from the total offer the company provides. For an effective CRM strategy to be realized, an understanding of exactly what customer’s want is critical. (Payne (2006), p.104)
The interest in the topics of value and value creation is explainable by the recognition that providing value to customers is a key factor to win customers loyalty and to increase the firm overall retention rates. (Webster 1994). Empirically, Chang and Widt (1994) test the
relationship between quality, value and loyalty and report a positive link between value and
loyalty, proposing that value mediates the link between quality and loyalty. Kumar and Grisaffe (2004) examine whether buyer perceptions of quality and value influence behavioral intentions, such as loyalty, in business markets, they report a positive albeit indirect effect of value on loyalty. (Hinterhuber 2008)
Zeithmal (1988) proposes four definitions of value: value is low price, value is whatever I want in a product, value is the quality I get for the price I pay, and finally value is what I get for what I give. According to Zeithmal, intrinsic product attributes not strictly linked to product quality (e.g. certain colors in soft drinks) can well be the benefits and thus components of value. Furthermore, even extrinsic product attributes, such as convenience or even higher level abstractions (such a psychological benefits perceived by consumers) are components of a consumer’s overall assessment of value. (Hinterhuber 2008)
Values, whether personal, role or organizational are closely related to the goals customers have. A customer’s firm’s values, as well as the values of the individuals are not likely to change very often. Customer value is created by products and services when the benefits they deliver help customers achieve their goals in various situations. For example: a customer might desire interactions with suppliers to be hassle free, save time, save cost, thus a supplier must be proactive by providing timely and accurate solutions. (Flint, Woodruff and Gardial, 1997)
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Customers combine attributes in their overall assessment of value, but all must have benefits or having positive worth to them. For example: cost which is the supplier’s price. Which consequence is most valued by a customer? It will depend on the end states or purpose or goals that a customer wants to accomplish at that moment. For example: a B2B customer may want to make more money, look good with customers, and be an innovator. and the like Thus, customers value most those supplier’s because they can help them achieve their important desired end state. (Woodruff and Flint 2003)
Customer satisfaction may be seen as a process which influences customers, and customer loyalty as the result of this process. Customers will declare themselves loyal to a supplier through feelings and perceptions of (high) satisfaction, through positive attitudes and through certain preferences for the supplier, meaning that customers will be willing to repurchase from this supplier. (Diller 2000)
Oliver (1997) defined customer’s loyalty as a “deep held commitment to rebuy or repatronize a preferred product/ service consistently in the future, thereby causing repetitive same brand or same brand set purchasing. despite situational influences and marketing effort that have the potential to cause switching behavior.
Customer loyalty is a customer’s commitment to a brand or a store or a supplier, based on a strong favorable attitude and manifested in a consistent repatronage. This definition of loyalty includes both behavior and attitude. (Sheth, Mittal and Newman (1999), p.701)
A literature search found three main streams of loyalty, behavioral loyalty, attitudinal loyalty and composite loyalty. In an early school of thought, Tucker (1964) argues that behavior (past purchases of the brand/product) completely accounts for loyalty. Jacoby and Chestnut (1978) observe behavioral loyalty studies have focused on interpreting patterns of repeat purchasing in primarily panel data as a manifestation of loyalty. In terms of attitudinal loyalty, various authors identify attitudinal concepts as providing positive word of mouth (e.g. Zeithaml et.al. 1996) recommending the service to others and encouraging others to use the service. Composite loyalty has both behavioral and attitudinal aspects. (Rauyruen and Miller 2006)
According to Duffy (2003) loyalty is the feeling that a customer has about a brand. Loyalty ultimately generates positive and measurable financial results. Improvements in retention and increases in share of customers are the obvious benefits. There are certain other benefits that are not always quite so obvious. (Duffy 2003)
The benefits of loyalty include:
Cost savings. Customers who are loyal are familiar with your brand; they know how to transact with you. The assistance they need is specific. They are more efficient in terms of the way they use your resources.
Referrals. Customers who become familiar with your brand mention it to their friends and acquaintances. Loyal customers won’t hesitate to make recommendations to friends and neighbors.
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Complain rather than defect. Customers who are loyal feel like they are stakeholders in the retail brand. When they have a bad experience, they complain. They want to fix it. They complain rather than quietly defecting. This “second chance” opportunity is very important in today’s business environment in which customers are so fickle.
Channel migration. Loyal customers are much more likely to buy through multiple channels increasing their total consumption and reducing your cost of doing business with them.
Greater awareness of brand assets. Loyal customers tend to be more aware of some of the auxiliary benefits your brand offers. It has been demonstrated that auxiliary benefits or “hidden assets” has an impact on retention and share of customer. (Duffy 2003)
The main aim of achieving customer value, satisfaction and loyalty is to increase the customer lifetime value (CLV) to the business. CLV describes the net present value of the stream of future profits expected over the customer’s lifetime purchases. (Kotler and Keller (2006), p.142)
Another aim is to produce high customer equity. Customer equity is the total of the discounted lifetime values of all of the firm’s customers. The more loyal the customer the higher the customer equity. (Kotler and Keller (2006), p.143)
Maximizing the lifetime value of a customer is a fundamental goal of relationship marketing. Adopting the principle of maximizing customer lifetime value, forces organizations to recognize that not all customers are equally profitable and that it must devise strategies to enhance the profitability of those customers it seeks to target. (Payne (2006), p.9)
2.3 CUSTOMER RELATIONSHIP MANAGEMENT STRATEGIES/TACTICS
After establishing customer loyalty as an important variable in retaining customers, we will now move on to look at various strategies used by businesses
The past decade has seen many firms readopt a customer focus- often through a formal program of customer relationship management (CRM). Recent advances in information technology have provided the tools for marketing managers to create a new generation of CRM tactics. One such tactic that thousands of firms have considered and which many have adopted is to establish a customer loyalty program. Example of these schemes can be found in Japanese retailing, US airlines and hotels, French banks, UK grocery stores, German car companies, Australian telecommunications, Italian fashion stores, US universities and many other areas. Typically these programs offer financial and relationship rewards and in some instances benefits also accrue to third parties. (Uncles, Dowling and Hammnond , 2003)
Two aims of customer loyalty programs stand out. One is to increase sales revenues by raising purchase/usage levels, and/or increasing the range of products brought from the supplier. A second aim is more defensive- by building a closer bond between the brand and current customers it is hoped to maintain the current customer bases. (Uncles, Dowling and Hammond, 2003)
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Other names for loyalty programs could be frequency programs and club marketing programs. Frequency program (FP’s) is designed to provide rewards to customers who buy frequently and in substantial amounts. Frequency programs is an acknowledgement of the fact that 20% of a company’s customers might account for 80% of its business. Frequency programs are seen as a way to build long term loyalty with these customers, potentially creating cross selling opportunities in the process. (Kotler and Keller 92006), p.151)
Another way in which business retains customers is to create structural ties that bind them with the customer so that they will not be to migrate. Some ways to create structural ties with customers are:
Create long term contracts. A newspaper subscription replaces the need to buy a newspaper each day. A 20 year mortgage replaces the need to re-borrow the money each year.
Charge a lower price to consumers who buy large supplies. Offer lower prices to people who agree to be supplied regularly with a certain brand of product.
Turn the product into a long term service. Daimler Chrysler could sell “miles of transportation” instead of cars, with the consumer able to lease different cars at different times or for different occasions such as a station wagon for shopping and a convertible for the weekend. Gaines, the dog food company, could offer a Pet care service that includes kennels, insurance and veterinary care along with food. (Kotler and Keller (2006), p.154)
Conceptually, loyalty strategies seek to build stronger and more durable relationships with customers. Durable relationships help encourage customers to do something about a problem they have had with a product or service rather than quietly defecting from the brand. Airline frequent travelers take it upon themselves to call their exclusive toll free customer service numbers to talk about problems with the airline. They know their status as frequent travelers makes the airline listen carefully and act on any issues or concerns. And the traveler feels that he has a stake in the future of the airline because he has equity in the form of miles. Ultimately, customers that feel good about the brand feel they have a say in the delivery of the brand experience become advocates for the brand. (Duffy 1998)
Loyalty program are not magic. But carefully crafted and diligently executed, a loyalty strategy can create a reluctance to defect on the part of customers. Sometimes it is an economic reluctance to defect because the customer feels he loses something by defecting to another brand. Sometimes it is a psychological reluctance to defect because the customer feels engaged with the brand and feels that a mutually successful relationship is lost if he defects. (Duffy 1998)
However, merely creating loyalty programs is not enough. It needs to be leveraged by building lasting relationships or bonds with customers too.
Customers value relationships with trusted suppliers who make a s
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