1. © 2008 by Nelson, a division of Thomson Canada Limited 1 Customer Behaviour A Managerial Perspective First Canadian Edition Jagdish N. Sheth Emory University Banwari Mittal Northern Kentucky University Michel Laroche Concordia University

2. © 2008 by Nelson, a division of Thomson Canada Limited 2 CHAPTER 10 Relationship-Based Buying

3. © 2008 by Nelson, a division of Thomson Canada Limited 3 Conceptual Framework Payer UserBuyer UNDERSTANDING CUSTOMER BEHAVIOUR Model of Relationship-Based Buying Relationship Buying and Selling in Business Markets Art of Nurturing Suppliers Supplier-Customer Partnering Customer Relationship Management on the Web Relationship-Based Buying

4. © 2008 by Nelson, a division of Thomson Canada Limited 4 A Model of Relationship-Based Buying Relationship- Based Buying Trust Commitment Search costs Risk reduction Switching costs Value-added benefits Cost-Benefit Factors Early socialization Reciprocity Keiretsu Friendships Socio-Cultural Factors Supplier loyalty Increased buying Willingness to pay more Proactive word-of-mouth Goodwill (customer equity) Antecedents (Motivators)RelationshipsOutcomes

5. © 2008 by Nelson, a division of Thomson Canada Limited 5 Cost-Benefit Factors The cost-benefit factors that drive decisions about relationship-based buying include: The cost-benefit factors that drive decisions about relationship-based buying include:  The search costs  The potential for risk reduction  The switching costs  The value-added benefits of the relationship

6. © 2008 by Nelson, a division of Thomson Canada Limited 6 Combinations of Perceived Risk and Switching Costs HighLow Switching Costs High Constrained in relationship Relational buying Low Transactional exchange Vulnerable relationship Perceived Risk of Alternatives

7. © 2008 by Nelson, a division of Thomson Canada Limited 7 Value-Added Benefits Differentiation Differentiation  These added benefits serve as a motivation for customers to engage in relationship-based buying

8. © 2008 by Nelson, a division of Thomson Canada Limited 8 Sociocultural Factors The sociocultural factors that influence the formation of a customer relationship include: The sociocultural factors that influence the formation of a customer relationship include:  Socialization  Reciprocity  Networks  Friendships

9. © 2008 by Nelson, a division of Thomson Canada Limited 9 The Supplier-Customer Relationship Trust Trust  A willingness to rely on the ability, integrity, and motivation of the other party to act to serve my needs and interests as agreed upon implicitly or explicitly Commitment Commitment  An enduring desire to continue the relationship and to work to ensure its continuance

10. © 2008 by Nelson, a division of Thomson Canada Limited 10 Outcomes of Relationship-Based Buying Supplier loyalty Supplier loyalty Increased buying Increased buying Willingness to pay more Willingness to pay more Proactive word-of-mouth Proactive word-of-mouth Goodwill (customer equity) Goodwill (customer equity)

11. © 2008 by Nelson, a division of Thomson Canada Limited 11 Process of Relationship Buying in Business Markets IMP Model IMP Model  A model that describes the processes or steps in the development of relationships in a series of interactions  Industrial Marketing and Purchasing (IMP) group established that long-term patronage is quite common in business buying

12. © 2008 by Nelson, a division of Thomson Canada Limited 12 Characteristics of Relational Buying The IMP model has identified three key factors that characterize all relational buying by business customers: The IMP model has identified three key factors that characterize all relational buying by business customers:  Transaction-specific investments/adaptations  Power dependence  Role formalness

13. © 2008 by Nelson, a division of Thomson Canada Limited 13 Steps in Relationship Development The IMP group identified the steps that companies go through in building a relationship The IMP group identified the steps that companies go through in building a relationship  Needs complementarity  Interactions  Outcomes and satisfaction  Investments  Commitment

14. © 2008 by Nelson, a division of Thomson Canada Limited 14 Reasons for Relationship Development in Business Buying Businesses may need a long-term exchange contract to assure long-term supply Businesses may need a long-term exchange contract to assure long-term supply Business customers also want to reduce the cost of buying transactions Business customers also want to reduce the cost of buying transactions Buyers and sellers may also have quality and cost goals that require collaboration Buyers and sellers may also have quality and cost goals that require collaboration

15. © 2008 by Nelson, a division of Thomson Canada Limited 15 Determinants of Trust and Commitment in Business Relationships Determinants for the CustomerDeterminants for the Supplier Switching costsSupplier-specific investments Partner-specific investmentsCustomer avoidance of opportunistic behaviour Mutually shared goalsSingle-source policy Communication and product supportData sharing and nurturance Supplier avoidance of opportunistic behaviour

16. © 2008 by Nelson, a division of Thomson Canada Limited 16 Relationship-Based Buying: The Art of Nurturing Suppliers The art of nurturing suppliers is clearly needed when the existing suppliers cannot meet the required quality, quantity, price, service, and delivery objectives The art of nurturing suppliers is clearly needed when the existing suppliers cannot meet the required quality, quantity, price, service, and delivery objectives Rather than select from the slate of existing suppliers, the purchaser task is then to create suppliers Rather than select from the slate of existing suppliers, the purchaser task is then to create suppliers

17. © 2008 by Nelson, a division of Thomson Canada Limited 17 Reasons For Nurturing Suppliers Meeting future needs Meeting future needs Government policy compliance Government policy compliance Good citizenship Good citizenship Promoting environmental policies Promoting environmental policies Quality assurance Quality assurance Cost reduction Cost reduction

18. © 2008 by Nelson, a division of Thomson Canada Limited 18 Supplier-Customer Partnering Supplier-customer partnering is establishing a partnership-like relationship with one’s supplier or with one’s customer Supplier-customer partnering is establishing a partnership-like relationship with one’s supplier or with one’s customer The supplier and customer firm would not merge ownership The supplier and customer firm would not merge ownership

19. © 2008 by Nelson, a division of Thomson Canada Limited 19 Vendor Relations in North America and Japan Traditional North American ModelJapanese Partnering Model Department or firm focus, optimize firm efficiency. Business system focus (includes supplier/customer economics), optimize value chain efficiency. Emphasis on unit cost/price (minimum quality standards). Emphasis on full value chain (systems) costs as well as on improving quality. Manufacturer defines needs; specifications of activities; sequential planning. Joint efforts to define needs and problem solve; highly integrated operations and planning. Communication is sporadic, problem driven; little sharing of information or assistance. Communication is frequent and planned; continuous sharing of information and assistance. General investments; uniform approach.Customized investments to meet unique customer or supplier needs (e.g., in information systems, people, manufacturing equipment). Precise contracts that split economic benefits beforehand. Flexible contracts that adjust to spilt economic gains fully as market conditions change.

20. © 2008 by Nelson, a division of Thomson Canada Limited 20 Factors for the Growth of Supplier Partnering Competitive intensity Competitive intensity Pressure on market prices Pressure on market prices Concern with quality Concern with quality Enabling technology Enabling technology

21. © 2008 by Nelson, a division of Thomson Canada Limited 21 Customer Relationship Management and the Three Customer Roles CONCEPTBUYERPAYERUSER General concept of relationship marketing Marketer refocuses on the user after the sale. A model of relationship- based buying Motivation Search costsSearch entails time and effort of the buyer role. Risk reductionPerformance risk to user is reduced. Switching costsEffort to learn to deal with the new supplier. Retooling costs.Usage learning of product from new supplier. Value-added benefitsBetter financing plan may benefit the payer. Add-on benefits for the user.

22. © 2008 by Nelson, a division of Thomson Canada Limited 22 Customer Relationship Management and the Three Customer Roles (cont’d) CONCEPTBUYERPAYERUSER Early socializationBuyer socialization.User socialization. ReciprocitySource availability assured. Payment through reciprocal exchange assured. NetworksEasier to do business.Firms in network are accommodating in financial exigencies. Suppliers in network more trustworthy with product/service quality. FriendshipsFriendly vendors give friendly service. Friendly supplier assures quality product/service. Reverse marketingLower costs over the long run. Better performance value. Supplier partneringBuying function becomes more efficient. Total cost reduction.Better performance value; data sharing; joint planning helpful to user.