Marketing of High-Technology Products and Innovations Chapter 3: Relationship Marketing: Partnerships and Alliances

Chapter Outline Partnerships Relationship Marketing Types of Partnerships Reasons to Partner Risks in Partnering Keys to Success Relationship Marketing Customer Equity Customer Acquisition Customer Retention © Mohr, Sengupta, Slater 2005

Types of Partnerships Complementors Suppliers Focal Firm Distribution Customers Competitors © Mohr, Sengupta, Slater 2005

Types of Partnerships (cont.) Vertical partnerships: with members at other levels of the supply chain Suppliers Distribution channel members Customers Horizontal partnerships: with members at the same level of the supply chain “Complementors:” makers of jointly-used products Competitors—”competition” © Mohr, Sengupta, Slater 2005

Antitrust Laws Related to Competitive Collaboration National Cooperative Research Act (1984) Eased traditional antitrust laws to allow competitors to form relationships to jointly pursue research and development projects. National Cooperative Production Amendment (1993) Expanded the 1984 Act to allow joint production © Mohr, Sengupta, Slater 2005

Example of Competitive Collaboration: Sematech The semiconductor manufacturing technology consortium of US semiconductor manufacturers and the US government http://www.sematech.org/ © Mohr, Sengupta, Slater 2005

Reasons to Partner Access resources and skills Gain cost efficiencies Speed time-to-market Access new markets Define industry standards Develop innovations and new products Develop complementary products Gain market clout © Mohr, Sengupta, Slater 2005

The Product Life Cycle, Innovation, and the Role of Alliances High Rate of Major Innovation Process Innovation Low Stage of Product Life Cycle Emergence Growth Maturity Decline Alliance Types Standards Licensing Technology Licensing R&D Marketing Manufacturing Marketing Process R&D Attacker Incumbent © Mohr, Sengupta, Slater 2005

Risks in Partnering Outright failure of relationships Loss of autonomy and control Loss of proprietary information to partner Potential legal issues and antitrust problems Failure to achieve alliance objectives Residual allocation when success Responsibility delineation when failure © Mohr, Sengupta, Slater 2005

Factors Contributing to Partnership Success Joint (bilateral) interdependence Caution warranted with partners of unequal size Governance Structure (next slide) Joint Commitment (credible, safeguarding) Trust in the partner’s motives and intents Effective Communication Compatible Corporate Cultures Integrative conflict resolution and negotiation (vs. “hard,” win/lose bargaining) © Mohr, Sengupta, Slater 2005

Factors Contributing to Partnership Success (Cont.) Effective structure to govern the alliance Unilateral: one party has authority to make decisions Bilateral: governance based on mutual expectations regarding behaviors and activities © Mohr, Sengupta, Slater 2005

More on Governance Match type of governance to degree of risk: High risk (arising from uncertainty or investments dedicated to the relationship) warrants either: “Credible commitments” and safeguards that create mutual dependence -or- Narrow terms and conditions that keep the firms only loosely-coupled Bilateral governance based on commitment, trust, and communication Escape clause © Mohr, Sengupta, Slater 2005

Relationship Marketing “The formation of long-term relationships with customers and other business partners, which yield mutually-satisfying, win/win results.” Why relied upon so heavily? Time to market cycle is short Development costs/risks are high Faster and more cost efficient to pursue projects jointly than alone Synergy! © Mohr, Sengupta, Slater 2005

Relationship Marketing Building strong and lasting relationships is hard work and difficult to sustain. But I believe that in a world where the customer has so many options, even in narrow product-market segments, a personal relationship is the only way to retain customer loyalty. Regis McKenna © Mohr, Sengupta, Slater 2005

Customer Relationship Marketing Forming long-term relationships with customers that provide mutually-beneficial solutions Cheaper to keep current customers coming back than to prospect for new ones. May require sacrificing short-term profits for long-term gains. © Mohr, Sengupta, Slater 2005

Computing Customer Equity Profit stream from customer <less> acquisition costs © Mohr, Sengupta, Slater 2005

Computing Customer Equity © Mohr, Sengupta, Slater 2005

Customer Acquisition Strategies High Full Throttle Selective Retention Profit Potential Restructure/ Divest Pay as You Go Low Short Long Acquisition Investment Recovery Time © Mohr, Sengupta, Slater 2005

Aspects of Cost to Serve Acquisition Costs Production Costs Distribution Costs Service Costs Why do some customers cost more to serve than others? © Mohr, Sengupta, Slater 2005

Customer Acquisition Rules Acquire any customer as long as the discounted future value of the customer exceeds the acquisition costs for that customer. When you broaden the acquisition effort, be prepared for lower response rates. The greater its profits from retention, the greater a firm's customer acquisition investment should be. The higher the percentage of the initial acquisition investment that a firm recovers in the first period, the greater its acquisition investment should be. © Mohr, Sengupta, Slater 2005

Developing and Maintaining Relationships: Acquiring Customers Segment the market by value perceptions Target segments that appreciate value Segment attractiveness Competitive position ( & capability assessment) Generate awareness (promotion & communication) Pricing Skimming or penetration Trial Post-purchase service © Mohr, Sengupta, Slater 2005

Switching Costs Arising from: investments in equipment, procedures, or people that make it costly or risky for a customer to switch to another firm’s products. perceived risk of making a bad choice Other factors related to switching costs: Platform considerations (inter-operability) Vendor Considerations (the lock-in effect) © Mohr, Sengupta, Slater 2005

Customer Relationship and Retention Strategies Is Customer Loyalty Profitable? Claim 1: It costs less to serve loyal customers. Claim 2: Loyal customers pay higher prices for the same bundle of benefits. Claim 3: Loyal customers market the company. As opinion leaders & benchmarks © Mohr, Sengupta, Slater 2005

Which Customers Are Really Profitable? Transaction Relationship Service provider 20% Grocery retail 15% Mail-order 19% Brokerage 18% Service provider 30% Grocery retail 36% Mail-order 31% Brokerage 32% High Profit Service provider 29% Grocery retail 34% Mail-order 29% Brokerage 33% Service provider 21% Grocery retail 15% Mail-order 21% Brokerage 17% Low Profit © Mohr, Sengupta, Slater 2005

Loyalty Strategies Transaction Relationship High Profit Low Profit Butterflies: Good fit High profit potential Transaction satisfaction Milk active accounts Cease investing True Friends: Good fit Best profit potential Consistent communication Attitudinal & behavioral loyalty Delight customers High Profit Strangers: Little fit Lowest profit potential Make no investment Max transaction profit Barnacles: Limited fit Low profit potential Measure size and share of wallet Low share, up- and cross-sell Small wallet, strict cost control Low Profit © Mohr, Sengupta, Slater 2005

Relationship Marketers Perform a long-term business planning function for their customers. Help customers define their businesses, their markets, and their product-service needs. Maintain high-level, multi-function access in customer companies. Sell systems of products and services. Draw on the full complement of company functions and services for support. IBM plans businesses for her IT users MS provides anything for her users © Mohr, Sengupta, Slater 2005

Appendix: Inter-firm Learning Issue: Must learn to have effective partnership, but too much information sharing can dilute source of competitive advantage Types of knowledge: Explicit (migratory) Tacit (embedded) © Mohr, Sengupta, Slater 2005

Managing the Paradox Want closest partnership possible to enhance learning Want loosely-coupled partnership to prevent unintended transfers of information Use caution! Cross-licensing agreements © Mohr, Sengupta, Slater 2005