1. Customer Relationship Management Strategies for Business Markets
Chapter 4:
Customer Relationship Management Strategies for Business Markets
PowerPoint by
Ray A. DeCormier, Ph.D.
Central Connecticut State University

2. Chapter Topics
Well developed relationships give business marketers a significant competitive advantage. Topics include:
Patterns of buyer-seller relationships
Factors that influence customer profitability
Strategies for designing effective customer relationships
How successful firms excel at customer relationship management
Critical determinants for managing strategic alliances

3. Collaborative Advantage
Relationship Marketing centers on establishing, Developing, and maintaining successful exchanges with customers
New era of business marketing is dependent upon managing relationships.
Collaborative advantage is:
Demonstrating special skills with “key” customers or
Developing innovative strategies with alliance partners

4. Types of Relationships
Continuum of buyer-seller relationships
Transactional, Value-added & Collaborative exchanges
The Relationship Spectrum

5. Transactional Exchange
Transactional Exchange
Centers on timely exchange of basic products at highly competitive market prices
These types of transactions are autonomous, meaning that there is little or no concern as to the needs of buyer or seller
Example: A person comes into a store and buys a hammer. The buyer wants a hammer and the seller sells him one. That’s all there is to it!
The business market includes items like:
Packaging,
Cleaning products or
Commodity-type products or service activity where bidding is employed.
Transactional exchanges employ an Arms-Length relationship.

6. Collaborative Exchange
Occurs when alternatives are few, market is dynamic, the purchase is complex and the price is high
Features close information, social, and operational linkages, as well as mutual commitments
Switching costs are extremely important to collaborative customers
Trust is the key and it exists when one party has complete confidence in their partner’s ability and integrity
This strategy emphasizes joint-problem solving and multiple linkages such as R&D and manufacturing.

7. Value-Added Exchanges
Value-Added Exchanges fall between Transactional and Collaborative Exchanges
The selling firms shifts from just attracting customers to keeping them by:
Adding additional services
Developing services that are customized to meet the buyer’s needs
Providing continuing incentives that promote repeat business

8. Spectrum of Buyer-Seller Relationships
Buyers and sellers craft various relationships in response to: a) Market conditions b) Characteristics of the purchase situation

9. Switching Costs A major consideration before changing suppliers
A major consideration before changing suppliers
Buyers invest heavily in supplier relationships
Training, documentation, integration, process modifications
hiring specialized skill sets
contracting, publicity
Switching can cause costly disruptions.
Moving to less-established suppliers can be risky
The prospect’s PROBLEM must exceed the BENEFITS experiencing with current supplier before considering switching.
Good marketers seek to establish high switching costs through value-added services

10. Characteristics of Business Market Customers
Characteristics of Business Market Customers
Table 4.1 Value Drivers in Key Supplier Relationships
Sources of Value Creation Relationship Value Dimensions
Costs Benefits
__________________________________________________________________
Core offering Product quality Direct cost
Delivery performance
Sourcing process Service support Acquisition costs
Personal interaction
Customer operations Supplier know-how Operation costs
Time to market
_________________________________________________________________________
 SOURCE: Wolfgang Ulaga and Andreas Eggert, “Value-Based Differentiation in Business Relationships: Gaining and Sustaining Key Supplier Status,” Journal of Marketing 70 (January 2006): p. 122.

11. Furthering Collaborative Relationships
Obtain ‘key supplier’ status by…
Target the right customer.
Match with their purchasing situation.
Develop strategies that are appropriate for each type of buyer
Offer specialized services and customized products
Competence and commitment are vital to reducing buyer’s initial perceived risk
Good marketers know their key customers’ business model intimately

12. Measuring Customer Profitability
Activity-based costing (ABC) - allocates cost of performing various services to each customer (customer-specific costing).
Through Customer Relations Management (CRM) programs, one can relate revenues and costs to each and every activity.
By linking financial information with transactional data created in CRM programs, companies are able to accurately calculate “cost-to-service” components to yield customer profitability.
Differentiation & customization are costly – must always revisit ROI assumptions

13. Figure 4.3 The Whale Curve of Cumulative Profitability

14. Whale Curve & Profitability
20/80 Rule says “20% of customer provide 80% of sales
Whale Curve reveals:
20% of customers generate 150–300% of total profits
70% of customers break even
10% of customers lose from % of total profits
Leaving company with 100% of total profits

15. Characteristics of High Cost-to-Serve Customers
Order custom products
Order small quantities
Unpredictable order arrivals
Customized delivery
Frequent changes in delivery requirements
Manual processing
Large amounts of support –
Pre-sales - marketing, technical, and sales resources)
Post sales - installation, training, warranty, field service)
Require company to hold inventory
Pay slowly (i.e., high accounts receivable)
Source: Robert S. Kaplan and V.G. Narayanan, “p. 8. Measuring and Managing Customer Profitability,” Journal of Cost Management 15, No. 5 (September/October 2001):

16. Customer Profitably
As mentioned previously, some customers are profitable and some aren’t. To determine this, we look at the cost/profitability structure with the plan to:
Keep profitable customers w/proactive retention strategies
Convert unprofitable ones to profitability
Fire those who are not profitable

17. Customer Profitability
Customer Profitability
High
Passive
Product is crucial
Good supplier match
Costly to service,
but pay top
dollar
Profits
Net Margin Realized
Losses
Price-sensitive but
few special
demands
Aggressive
Leverage their buying power
Low price and lots of customization
Most challenging
Low
Low
High
Cost-to-Serve
SOURCE: From “Manage Customers for Profits (Not Just Sales)” by B.P. Shapiro et al., September-October 1987, p. 104, Harvard Business Review.

18. Customer Relationship Management
Customer Relationship Management
Customer Relationship Management (CRM) is a cross-functional process for achieving…
Continuing dialog with customers across all contact and access points
Personalized service to the most valuable customers
Increased customer retention through continuous feedback
Improved marketing effectiveness through superior customer insight

19. CRM Technology
CRM programs are software systems that capture information and integrate sales, marketing and customer service information.
CRM programs can gather information from many sources including , call centers, service and sales reps.
The information is available to the right people in the organization in real time.
Everyone has the same 360 degree view of a customer

20. CRM Strategy - Priorities
Acquire the right customer
Craft the right value proposition
Institute the best processes
Motivate employees
Learn to retain customers

21. Figure 4.5 - Transactional & Collaborative Working Relationships
(a) Industry Relationship Bandwidths
Pure
Transactional
Exchange
Collaborative
Hospital Supplies
(e.g. surgical gloves, syringes)
Medical Equipment
(e.g. imaging systems)
(b) “Flaring Out” from the Industry Bandwidth
Pure
Transactional
Exchange
Collaborative
Hospital Supplies A B C D
SOURCE: Adapted from James C. Anderson and James A. Narus, “Partnering as a Focused Marketing Strategy,” California Management Review 33 (spring 1991)’ p. 97. Copyright © by the Regents of the University of California. Reprinted by permission of the Regents.

22. Flaring Out Strategy
‘Flaring out’ strategy (Fig 4.5b) states that the seller can either unbundle (point A), that is, reduce the service associated with a lower price (transactional in nature), or
Augment by adding more services to the core offerings (point D) which adds cost to the services. This is collaborative in nature.

23. Creating Customized Products
The seller starts with a core service (“naked solutions”) and adds customized services to it (“custom wrapped”) that create more value.

25. #3 - Institute Best Practices
The sales force plays a key role in establishing and growing a customer from a transactional account to a collaborative partnership.
They can do this by aligning and deploying technical and service support units to match with their customers’ units.
Technical groups can consist of research, logistics and customer service units.
Through careful management and screening, transactional accounts can progress to partnerships.

26. Best Practices Follow-Up
In addition to using best practices, successful organizations (like IBM) employ follow-up techniques such as:
Assigning a client representative to take ownership of the relationship.
Assigning a Project Owner who completes the project or solves project problems.
Developing an in-process feedback and measurement system.

27. #4 - Motivating Employees
Dedicated employees are the key to a successful customer relationship strategy.
The best approach is to:
Hire good people.
Invest in them to increase their value to the company and its customers.
Develop challenging careers and align incentives to performance measures.

28. Why Retain Loyal Customers?
Less expensive than acquiring new customers.
Established customers buy more.
Cost of serving loyal customers declines.

29. How to Pursue Growth from Existing Customers
Identify and cultivate customers that offer the most growth potential by:
Estimating current percent “share of wallet”
Pursuing opportunities to increase share
Projecting and enhancing customer profitability

30. Strategic Alliances vs. Joint Ventures
Strategic alliances involve a “formal long-run linkage, funded with direct co-investments by two or more companies, that pool complementary capabilities and resources to achieve generally agreed objectives.”
Joint Ventures involve the formation of a separate independent organization by venture partners.

31. Benefits of a Strategic Alliance
Access to new markets
Access to new technologies
Economies of scale
Faster entry of new products into markets due to established distribution channels
Sharing costs and risks

32. Elements of Successful Alliances
Start with a strategy map detailing each partners goals and contributions.
What does JV offer the customer?
Aligned around common goals?
Are unique customer benefits jointly agreed to?
Agree on each partner’s contribution to alliance
Select good communicators to convey alliance’s strategic role and create its “identity”
Establish direct ties at top levels to engender organizational commitment.
Combats inevitable post-honeymoon cynicism

33. Social Connections in an Alliance

34. Five Levels of Integration
Strategic
Senior executives continuously define and communicate broad goals or changes in each company
Tactical
Middle managers plan joint ventures, transfer knowledge and work to improve inter-firm connections
Operational
Concerned with providing information, resources and personnel to carry out daily work
Interpersonal
Facilitate an environment for people to know each other, learn together and create new value
Cultural
Managers are required to have communications skills and be culturally aware to bridge differences