Definition And Scope Of Relationship Marketing Marketing Essay

This chapter aims to evaluate the theoretical opinions of different theorist towards relationship marketing (RM) based on the objectives of determining the definition and scope of RM as well as understanding the different determinants and strategies used in RM and understanding current academic and industrial views and opinions on the values and effectiveness of RM.

2.1 Definition and scope of Relationship Marketing

Relationship Marketing (RM) has been defined by various theorists and each has given their respective viewpoints about RM. In order to simplify and understand RM, an analysis by Palmatier (2008) of some well-known definitions by various theorists is illustrated to narrow down and obtain the essence of what is RM. The analysis is based on two key aspects found in RM (e.g. Gronroos 1997; Sheth and Parvatiyar 2000). The first aspect deals with strategies across stages of the relationship lifecycle and thereby suggests that a relationship is a process that develops over time through typical strategies (Dwyer and Oh 1987; Wilson 1995). The second aspect is the scope of RM activities; as some definitions only include customer relationships, and others include relationships with different stakeholders such as internal departments, competitors, customers and suppliers. The table below illustrates the common RM definitions by different theorists and identifies the stages the respective definitions cover as well as the scope of the definition.

Definition

Stages/ Strategies

Scope

Attract/ Create/ Establish

Enhance/ Develop

Maintain

Customers only

Stakeholders

“Attracting, maintaining, and enhancing customer relationships.” Berry (1983, p. 25)

“RM refers to all marketing activities directed toward establishing, developing, and maintaining successful relational connections.” Morgan and Hunt (1994, p. 22)

“To establish, maintain, enhance relationships with customers and other stakeholders, at a profit, so that the objectives of all parties involved are met, where this is done by mutual exchange and fulfillment of promises.” Gronroos (1997, p. 407)

Based on synthesis of 26 definitions of RM: “organization engaged in proactively creating, developing and maintaining committed, interactive and profitable exchanges with selected customers [partners] over time.” Harker (1999,p. 16)

“RM is the ongoing process of engaging in cooperative and collaborative activities and programs with immediate and end-user customers to create and enhance mutual economic value at reduced cost.” Sheth and Parvatiyar (2000,p. 9)

“RM is a philosophy of doing business, a strategic orientation that focuses on keeping and improving current customers, rather than acquiring new customers.” Zeithaml and Bitner (2000)

As illustrated above in the table all definitions excluding Sheth’s and Parvatiyar’s have covered all the relationship lifecycle stages in their respective definitions of RM which are:-

Establishing, is the stage of RM or marketing process of advertising and attracting new customers towards a brand or product, Little & Marandi (2003).

Enhancing is the process differentiating from competitors’ offerings where more attractive offers and benefits are offered to customers (e.g. sales and price drops), Coyles & Gokey (2002).

Maintaining is the extra effort taken by sellers to retain and ensure that their existing customers obtain continuous benefits from the product or service they have to offer (e.g. loyalty scemes), Morgan & Hunt (1994).

Morgan, Hunt and Gronroos have explained RM to cover the scope of not only customers but other stakeholders as well; however the scope of RM in this research study will only consider customers. Therefore the analysis of RM definition suggested for this research study is “RM is a continuous marketing activity which involves establishing, enhancing and maintaining customers’ loyalty towards a certain product or service that is being offered by the seller involved.”

2.1.1 Relationship Lifecycle

The relationship lifecycle consists of the different stages (establishing, enhancing and maintaining) as aforementioned in the definitions of RM. Various RM theorists such as (Kotler, 2000; Jap & Ganesan, 2000; White, 2000; Zineldin, 1996) illustrated the relationship lifecycle according to the respective stages and definitions of RM. Therefore the relationship lifecycle

differs with additional stages in certain RM lifecycles by different theorists of RM (Little and Marandi, (2003: 69)). A suitable relationship lifecycle according to the agreeable definition of RM for this research study is illustrated below:-

Figure 1 Relationship Lifecycle

Source: Adapted from Little & Marandi (2003) Relationship Marketing Management.

The cycle above illustrates up to the stage of maintaining a customer relationship. However several definitions for example White (2000) & Jap; Ganesan (2000) suggest that relationship lifecycle declines after the maintaining stage. Morgan & Hunt (1994) argued that, due to carelessness in handling the relationship it may decline but there is also a possibility of the relationship between the buyer and seller remaining constant, in cases where customers are continuously rewarded for their loyalty towards a certain company or continue to perceive value, (Morgan and Hunt (1994:22); Little & Marandi (2003:70)).

2.1.2 Understanding Perceived Value

Baines, Fill and Page (2008) explains “value is the customer’s estimate of the extent to which a product or service can satisfy their need. Customers determine a product’s value by considering alternative solutions and the costs associated with satisfying their need.” For example if a customer is to purchase a shower gel, there will be many alternatives of purchase, however a customer will chose from a seller that provides additional value to its product, for example a 20% extra amount of the shower gel for the same price. Added value to a product such as, a good price, special offers, and good customer service will lead to high customer satisfaction, (Baines, Fill and Page (2008:672)).

History of Relationship Marketing

Research on the history of marketing suggest that marketing emerged in the beginning of the twentieth century, however there is no evidence as to when the theory of marketing actually emerged. During the industrial age, exchange occurred in the local markets, where farmers and craftspeople (producers) sold their products directly to end users. Producers represented both manufacturers and retailers, and embedded relationships between producers and consumers provided the trust and business norms necessary to conduct the transaction because few institutionalized protections existed, (Palmatier (2008:8)).

Gronroos (1994) argues that RM is a paradigm shift in marketing from the previous concept of the marketing mix and the Four ‘Ps’ of marketing (product, price, place & place) which was introduced to the academic world in the 1950s by Neil Bordan. Groonroos also states that the marketing mix is a list of marketing variables that has become obsolete therefore the marketing academic occasionally offers additional Ps to the list, thus this proves that the marketing mix is very limited.

Type of Model

Theorist (Year)

Scope

4Ps

McCarthy (1960)

Product, Price, Promotion, Place

5Ps

Judd (1987)

Product, Price, Promotion, Place, People

6Ps

Kotler (1984)

Product, Price, Promotion, Place, Political power, Public perspective

7Ps

Booms & Bitner (1981)

Product, Price, Promotion, Place, Participants, Physical evidence, Process

Source: Gummesson, E. (1994) Making Relationship Marketing Operational, International Journal of Service Industry Management.

The changes in the marketing environment and the various factors that contributed to customer sophistication are; globalisation & internationalisation of markets; continuous development of technology; increasing brand competitiveness among customers and fragmentation of media, Little & Marandi, (2003). These factors have contributed a gap in the market which became a need for a new approach to retain customers, to gain their loyalty and to establish competitive approach. Therefore Gronroos (1994) states that RM can be said to be an evolved strategy to the marketing mix approach, which assists in obtaining sustainable competitive advantage and retain customers in the long run. However there is no evidence to when it was actually implemented but research by Palmatier (2008) suggest that RM emerged as a separate academic domain of marketing in the 1980s and it became more comprehensible in the 1990s from a historical perspective. Among those who were contributory in developing the concept of RM were Evert Gummesson at Stockholm University and Christian Gronroos at the Swedish School of Economics in the early 1980s (Gronroos (1994;4); Little & Marandi (2003;11); Palmatier (2008;9).

Effectiveness of Relationship Marketing

Many theorists have researched on the subject and made different judgments on the effectiveness of RM, some of whom are Reichheld (1996) who argues that the smallest efforts in customer maintenance can increase company profit because it costs less to serve long-term customers; loyal customers will pay price premium as well as generate word-of-mouth recommendations to other potential customers. A study by Reinartz and Kumar (2000) claims that loyal customers cost less to serve and are usually willing to pay more for product varieties than non-loyal customers, as well as acted as word-of-mouth marketers for the company. While McKenna (1993) claims that long-term customer relationships helps gaining competitive advantage which leads to higher lifetime profit for firms.

Correspondence of RM with other marketing concepts

RM shares some similarities with other marketing concepts such as, customer relationship management (CRM) and brand equity. Williams (2006) defined CRM as an information industry term for software, and Internet capabilities that help an enterprise manage customer relationships in an organized way. While Payne & Frow (2005) stated that “CRM is a management approach that seeks to create, develop and enhance relationships with carefully targeted customers using the potential of information technology.” Kotler & Armstrong (2009) maintains that “CRM involves building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. It deals with all aspects of acquiring, keeping and growing customers.” From the various definitions of CRM above Palmatier (2008) concludes that if RM is the skill of relationships, then CRM represents its application.

Keller (1993) argues that “brand equity represents different effects of brand knowledge on customer action, for example customers behave more favorably towards a product when they can identify the brand.” While Rust, Lemon and Zeithaml (2004) maintain that brand equity is a product-centered concept that does not capture drivers of customer behavior completely. Although RM and branding activities similarly focus on building intangible customer assets that positively influence customer loyalty, purchase behaviors, or financial performance while reducing marketing costs, they differ fundamentally where branding focuses on products with extensions to firms whereas RM focusses on relationships and their extensions to firms. However the effect of brands and relationships on a customer’s attitude towards the firm is difficult to distinguish, Palmatier (2008).

Strategies of Relationship Marketing

A strategy is a senior management’s plan of action with which the effort of the staff is coordinated, Waterman et al (1980). Little and Marandi (2003) argues that RM strategies assist to manage the assortment of the customer to ensure an even flow of profits in the long term, and to determine when relationships should be established, enhanced and maintained. As Groonroos (1996) points out, however, the essence of RM is in the organisation’s processes, rather than its planning. Little and Marandi (2003) illustrates the key strategies as follows; establishing relationships involves target marketing techniques and advertisement programmes that are able to communicate relevant value. It is also established by simplifying the service offer by giving clarity regarding the benefits and terms and conditions of payment and use as well as encouraging trial. Relationships with customers can be enhanced by differentiating among competitors offerings. Relationships are maintained by not neglecting existing and safeguarding the customer’s satisfaction with and trust in supplier. It is also done by communicating with customers for building successful long-term relationships, by fostering trust and creating customer satisfaction as well as rewarding loyalty as customers remain loyal for as long as the perceived benefits outweigh the perceived sacrifice.

Determinants of RM Outcomes

Several theorist have mentioned different determinants of lengthening the lifetime value of an existing customer, such as Oliver’s (1981) model of customer satisfaction suggests that quality of the product or service offered by the seller is one of the most essential to obtain customer satisfaction which will later attract the buyer to return and buy the same product again. Whereas Hennig-Thurau et al. (2002) proposes that loyalty benefits are essential to obtain customer long term relationship, as every giving expects a return, even customers expect their share of return after shopping from a particular seller. An example of a loyalty scheme is the loyalty card which helps hooking up customers to buy from a particular seller to obtain benefits such as discounts from that particular seller. Hennig-Thurau et al. also stated price, customer service and convenience as other factors that drive relationship marketing outcomes. The relationship between price and quality are parallel to each other. Customers are willing to pay extra to obtain better quality products, however customers naturally get attracted to lowest prices that offer a reasonable quality and quantity for the amount paid for. Another essential part of retaining an existing customer is during and after sale service. This gains customer trust and satisfaction as they are given the liberty and ease to exchange, return and obtain additional information about the product or service they purchased. Convenience created for customers such as a strategic location (nearby their housing arrears) and is accessible at any time makes customers to frequently return. Dibb et al. (2006) argues that CRM systems which uses technology that allows marketers to practice effective customer maintenance strategies by monitoring, rewarding and reminding them about goods and services, is a major factor for developing RM outcomes. Technology is also used to ease the process of buying for customers, for example, having an online site that allows customers to purchase, refund, review and complaint at anytime and anywhere and having self-service cashier machines at stores and etc. Humby et al. (2007) also recognize product range as a determinant because it influences daily and frequent business transactions, which also influences the ‘convenience’ factor aforementioned.

Outcomes of Relationship Marketing

RM determinants that are applied in a certain company to eventually obtain outcomes that bring an overall increase in the profit margin of a company, Little and Marandi (2003). These outcomes are classified into two key main RM outcomes that lead to customer loyalty which are trust and commitment, Morgan & Hunt (1994). Trust is defined as willingness to rely on an exchange partner in whom one has confidence, Rotter (1967). The literature on trust argues on the confidence of the buyer towards the seller which results from the firm believed to be reliable and has high integrity and is responsible for their actions, Morgan & Hunt (1994). Commitment is the variable believed to be central in distinguishing social from economic exchange, Cook & Emerson (1978). For a company to achieve commitment from a customer is the most challenging task, as customers are vulnerable towards better quality and price offered elsewhere. To be able to maintain a committed relationship with a customer a firm has to keep updated with attractive return benefits for customers to continuously shop from them, Little and Marandi (2003).

The commitment and trust theory (Morgan & Hunt, 1994) suggests that RM can be achieved if customer satisfaction is exceptionally high. Customer satisfaction is achieved when all the determinants of RM are applied and practiced well by the firm. Highly satisfied customers will increase customer loyalty as well as spread the word of mouth to their circle of communication which gives a high possibility of attracting new customers.

Demographic factors influencing Relationship Marketing

Demographic factors such as age, gender, income, location, occupation and education are used to target consumers for marketing purposes, Schmidt & Spreng (1996). Consumer behavior differs by demographic factors as Gaurav (2008) argues that significant gender difference in the trust loyalty relationship shows that women are significantly more loyal than men at higher levels of trust. Klein and Ford, (2003) maintained that the age of consumers is positively linked with knowledge and experience, such that older consumers could be more committed than younger consumers. According to Kotler et al. (2009) place or location of a business entity influences the type of target customers it attracts as well as the convenience it delivers to the consumers. Aforementioned demographic factors, such as gender, age and place are clearly linked to RM and therefore are used for this study.

Criticism of Relationship Marketing

Although there are many marketing theorist supporting the RM concept, however the subject is not without its critics. Blois (1998) has criticized RM by stating that developing a relationship inevitably results in some loss of control over matters such as resources, activities and intentions. Blois continues his argument by stating that a relationship is subject to continuous change, with an uncertain future which is determined by its history, current events and the parties’ expectations of future events. Other than that effort is required to build and maintain a relationship. This can be viewed as an investment and a maintenance cost. Moreover there is always a need to prioritize the use of limited resources and, hence, it may not be possible to pursue all of the individually attractive opportunities. Additionally, some relationships may be irreconcilable with an existing relationship. Reinartz & Kumar (2005) adds that although some companies are happy with the results of their RM programs, yet they are unable to identify precisely the factors that explain such success,

Summary

The literature review enclosed different definitions of RM by various theorists which all proposed three different stages of RM which are establishing, enhancing and maintaining relationships; and the scope of RM which focuses upon stakeholders or customers only, however this analysis will only take customers into consideration. It then continued to discuss on the strategies used by RM which explains tactics to manage the relationship across the different stages of RM aforementioned, which are establishing, enhancing and maintaining relationships. It also includes view and opinions of different theorists regarding the effectiveness of RM. Followed by the views of theorists about the determinants of RM which lead to a discussion on several theorists’ views and opinions on how a seller-customer relationship is build. In order to test the opinions of the theorists between the relationship of RM determinants, customer satisfaction and word or mouth marketers four hypotheses are drawn out which are illustrated in Figure 2. An overview of the literature review is summarized in Figure 3.

Figure 2 Hypotheses drawn from RM statements by theorists

Figure 3 Process of Relationship Marketing

The effectiveness and values of RM were further elaborated by discussing the relationship lifecycle and customers perceived value which explained the criteria of RM as well as the importance of having it and how do customers perceive it. Although some theorists claimed it as effective others such as Blois condemned the effectiveness of RM.