BUILDING CUSTOMER RELATIONSHIPS IN A NETWORKED ECONOMY

Few forces have changed the rules of doing business as the Internet and few rules have changed as profoundly as those which govern companies’ relationships with their customers. Before the Internet, companies could be customer aware; but they did not necessarily have to be customer centric. Now, they have no choice. As this Ivey professor points out, developing and integrating on-line and off-line marketing tactics presents an unparalleled opportunity for a company to develop a strong relationship with its customers. In this article, professor Fisher offers advice which will help companies decide which on-line and off-line tactics are best for managing customer relationships.

The widespread popularity of the Internet has not changed two fundamental requirements for building strong customer relationships: interactivity and individualization. Firms must be interactive, that is, they must listen to and respond appropriately to their customers. Firms must also strive to treat customers as individuals, by allowing them to control the timing and depth of interaction, and by customizing their product offerings. It is difficult, if not impossible, to imagine a buyer-seller relationship without interactivity and individualization.

However, the Internet has changed the scale of that interactivity and individualization. Before the Internet, firms could still interact with their customers, but typically with only one person at a time. Similarly, firms could individualize their communications and product offerings, but only on a limited basis. The Internet is transformational because it allows firms to create high interactivity and individualization on an immense scale (see Philip Evans and Thomas S. Wurster, “Strategy and the New Economics of Information,” Harvard Business Review, September/October, 1997). As a consequence, the Internet provides firms with a unique opportunity to develop strong relationships with their customers.

At the same time, the Internet increases the complexity of managing customer relationships because firms must now integrate this new channel into their overall marketing strategy. Relationships are founded on trust, and that trust is weakened when channels are inconsistent in the quality of the content or service that they deliver. For example, a firm’s Web site and its sales force can each provide different prices and so erode trust. Building strong relationships demands the integration of off-line and on-line marketing tactics so consumers are presented with a consistent picture of the firm’s products and services. Moreover, firms now have another option when investing in marketing. Are we better off spending our incremental marketing budget on Internet banner ads or on traditional media? Should we emphasize our distribution capabilities or try to build a sense of community by using the Internet? Is it better to focus on our brand or change our pricing strategy? In all cases, the goal should be to use the most effective tactic, regardless of whether it is available off-line or on-line. Even “pure play” (i.e., solely on-line) firms such as E*Trade, Amazon, Yahoo! and Excite regularly invest in off-line marketing tactics such as media advertising, personal selling and public relations.

In this article, I discuss a framework that is designed to help firms decide which on-line and off-line marketing levers (i.e., tactics) are best for managing customer relationships. I begin by examining the nature of a relationship, and the types of relationships that are most important to consumers. Next, I introduce a model that describes the various stages through which relationships typically flow. Finally, I discuss the marketing levers that are most appropriate to the development of strong buyer-seller relationships.

WHAT IS A RELATIONSHIP?

In the context of this article, a relationship is a bond or connection between the firm and its customers. The bond may be strong or weak, and it can be based on either logic or emotion. An example of a logical bond is a customer’s realization that he or she simply can’t get a better product elsewhere. Here, the customer is motivated to maintain his or her relationship with the firm and to be loyal as long as no superior purchase options exist. However, the strongest relationships have an emotional dimension as well; think of your relationships with family and friends. But even with an emotional component, buyer-seller relationships are not as powerful as the connections we have with the people who are close to us. Buyer-seller relationships are based on the principle of exchange, in which each party expects—or perhaps even demands—value for what is given (i.e., money for products).

The greatest potential for strong buyer-seller relationships exists in situations where the product is an important part of consumers’ lives. For example, choices of automobiles, clothing, jewellery and vacations are often expensive and highly symbolic of “who we are as people.” Consequently, brand relationships are useful because they help reduce the risk associated with purchasing decisions and help us create and communicate our identities to others. Buyer-seller relationships are most likely to be established with consumers who are highly engaged or involved in a particular product category. Sports enthusiasts, music fans and hobbyists are motivated to recognize, understand and connect with the brands that suit their interests.

Firms only want to build relationships that are profitable enough to justify the investment. As a result, firms must carefully assess the current or potential profitability of their customer relationships to determine where such investments are appropriate. Customers who don’t want a relationship with the firm may still generate profit, but they view each transaction as an independent or discrete event, and so have no loyalty or commitment. In contrast, customers who feel a connection or bond to the firm tend to feel good about remaining loyal. These customers also avoid or minimize searching for information on competitive offerings, and actively promote the firm to others. These existing customers are also willing to pay higher prices because they value the relationship.

LEVERS THAT BUILD RELATIONSHIPS

A typical relationship is built in four basic stages, and the level of buyer-seller interaction varies in each stage. The four stages are awareness, exploration and expansion, commitment and dissolution. Not all customers pass through all four stages, and as noted previously, firms can have important, profitable customers who are not committed to them. Firms have the potential to use a wide range of tactics or levers to establish and maintain relationships with consumers.

Marketing managers are responsible for deciding which levers to use, when to use them, and how much to invest in developing each one. In this sense, the role of the marketing manager is very similar to that of an investment manager. The manager of a mutual fund, for example, must decide which investments to make and then assemble investment portfolios that match the risk and return preferences of his or her clients. Similarly, marketing managers invest in those levers that will achieve the firm’s marketing objectives.

INVESTING IN RELATIONSHIPS

The first issue in managing customer relationships is the development of business objectives. For example, is the objective to increase market share, maximize growth, enhance profitability or increase share of wallet? Each of these objectives has different implications for investments in marketing levers. From a relationship perspective, firms can think either of increasing the number of new customers, moving customers from awareness and exploration toward commitment, or increasing the commitment of existing customers in order to maximize retention.

Deciding whether to use one lever rather than another will depend on how many customers there are at each stage, and an evaluation of the lever’s costs and benefits. For example, consider two firms, a start-up and an established provider. The start-up’s objective should be to quickly move consumers from awareness to purchase. Gaining commitment may be a long-term strategy that is simply too expensive in the short run. This firm must create awareness and trial purchases in order to generate positive cash flow. In contrast, the established firm already has significant awareness and so it might be better off focusing on keeping the existing customers. These customers may have explored the possibility of a committed relationship, but they are still vulnerable to competitors’ poaching. In this case, the mix of levers would be quite different.

After agreeing on the firm’s objectives, and conducting a thorough analysis of customers’ positions in the relationship model, the firm should then evaluate the likely impact each of the four levers will have on customer behaviour.

1. Awareness

In this stage, the customer recognizes that the firm is a possible exchange partner, but has yet to initiate any communication with the firm or purchase of its products. Here, the critical levers are the traditional sources of awareness-generating tactics used by marketers for years, as well as some new ones.

The primary awareness levers are communication-based. In this stage, the focus should be on “breaking through the clutter” by gaining the attention of target consumers. (It is important to distinguish between consumers who are actively seeking information and those who are merely passive.) The first way of gaining awareness is with a brand name that is distinctive, interesting and meaningful.

Generating awareness with a more passive consumer requires a more vivid and intense presentation. These consumers may be actively avoiding advertising, so grabbing their attention requires much more dramatic stimuli. They won’t read an ad closely enough to recognize that a low-price deal is available or to see that the product being advertised is “new and improved.” In this case, it may be most important to manipulate those aspects of the communication that can be seen or heard on-line.

Consumers are attracted by stimuli that are colourful, distinctively shaped, bright and moving. They will also tend to be attracted to audio stimuli that have a distinctive pitch, timing or texture. Again, the primary goal is to be noticed and to stimulate exploration.

COMMUNICATION: As the discussion above implies, communication from the firm to consumer is likely to be most important in the awareness stage. Consumers can learn about a site through information gained from on-line or offline advertising, or indirectly through publicity (hopefully favourable), or word of mouth. Although publicity and word of mouth are not entirely within the firm’s control, they are very powerful in terms of generating awareness.

BRAND: Brand is also a highly significant awareness lever for on-line and off-line firms. Given that brand equity is defined by consumers’ current knowledge and brand associations, a high-equity brand already has consumer awareness and favourable associations or meanings. Firms can leverage pre-existing knowledge of, and associations with, the brand by prominently displaying it in any communication lever that it uses.

DISTRIBUTION: Distribution can be an important awareness lever because of its ability to make the firm’s products available to a wider audience. Increasing the number of intermediaries (i.e., sites that provide hot links to the home site) and number of channels (e.g., traditional retail, on-line retailer, electronic exchange) increases the likelihood that consumers will be exposed to the firm’s brand and message.

PRODUCT: The product can increase awareness in at least two ways. The first one is through packaging. In both the on-line and off-line worlds, unusual packaging shapes, materials or colours tend to be noticed, and therefore increase awareness. For example, a package that is unusual in some way attracts attention when it sits in the customer’s in-box. A second way in which a product can create awareness is through publicity and word of mouth. Truly outstanding or break-through products generate interest in the press and create awareness among consumers.

PRICE: As with product, the effect of price on awareness is also likely to be indirect. Prices create awareness when they are delivered in concert with the brand through advertising or some other form of communication. Price can also create awareness through word of mouth. When a price is highly unusual or dramatic, consumers are more likely to notice and react to this lever.

COMMUNITY: By creating a sense of community, firms can create awareness through off-line or on-line word of mouth. Having a strong collective identity and a membership whose values are already strongly associated with the firm creates a constant “buzz.” This buzz in turn becomes a source of awareness in addition to those sources created by the firm’s direct marketing actions. Members become evangelists who raise awareness and ultimately try to convert others to “the cause.”

2. Exploration

Now that the consumer is aware of the firm, the focus should shift to generating enough interest to motivate the consumer to gather additional information. In this, the exploration stage, the customer considers the possibility of exchange and perhaps initiates trial purchases. In a B2C context, it is often the consumer who gathers the information needed to make a choice about whether to establish stronger bonds with the firm. For example, the consumer visits the site for the first time, and then returns to learn more. In a B2B (business-to-business) context, both parties are involved in the exploration process. Regardless of whether the context is B2C or B2B, there is a minimal investment in the relationship, and so termination is simple.

Communication is critical during the exploration phase because:

  • Prospective consumers must be persuaded that the firm is an attractive exchange party. This usually means ensuring that consumers perceive that the firm has superior products and services.
  • Prospective consumers must understand what is expected of them and what they can expect from the firm. Establishing these norms is critical to the smooth functioning of the relationship, especially where there is a large C2C (consumer-to-consumer) component.
  • Communication will be shaped by the balance of power in the relationship. A firm that is in a weak market position (i.e., there is strong competition and a lack of product differentiation) must recognize this and try to provide other forms of value to customers.
  • Communication is needed to develop trust and satisfaction, though actions speak louder than words. The firm must position itself as a trusted partner that delivers its product and service promises.

The levers that stimulate the desire to learn and explore are those which create involvement. Very simply, involvement is the importance of the firm or brand to the consumer. Consumers who perceive that the firm can offer them something meaningful are likely to pursue additional interactions. There are three basic types of benefits that motivate consumers to explore: functional, symbolic or hedonic. Functional benefits are those that relate to the product’s ability to provide utility, or to perform its primary purpose. For a lawn mower, for example, the functional benefit would be cutting the grass. Saving money on a product would also be a functional benefit. Symbolic benefits are those that relate to the anticipated reaction of other individuals. A user who experiences positive feedback from a friend because he or she was one of the first persons to visit a cool Web site has received symbolic benefits. Finally, hedonic benefits relate to the experience itself. Some visits to a Web site might simply be enjoyable for the sights, sounds or social interactions that take place at the site. Consumers could be motivated to explore a site by one or more of these benefits.

PRODUCT: A great value proposition for the customer is the surest way to stimulate interest and exploration. A product that provides superior functional, symbolic or hedonic benefits will drive further investigation, and perhaps a trial.

PRICE: A great deal on a product is a sure way to generate interest. A dramatic discount, or simply one that is unusual or exciting, is a very direct way to stimulate curiosity. Consumers who have been thinking about buying something in a product category can be “driven over the edge” by a dramatic price. Click-through promotions, referrals, bundles, frenzy pricing and dynamic pricing, can all be used to stimulate exploration.

COMMUNICATION: Exploration is motivated by communication that creates interest. This usually means communications that highlight the Web site’s value proposition. For example, what benefits can the user expect? These benefits can also be communicated through the tone and manner of the firm’s advertising. For example, is the tone warm and friendly, hip or edgy, or fun?

COMMUNITY: The opportunity to become part of a community can also spur exploration. Consumers who value the potential for C2C interactions will want to learn more about the firm. They will research the Web site to see if it is easy to explore, if they can expect to receive individualized attention, and to find others who share their interests.

One of the critical aspects of community is the assurance that the new member will “fit in.” The use of a unique language, or the existence of strong norms, can make exploration a daunting experience for “newbies.”

BRAND: A strong brand ensures that customers will correctly anticipate what they are likely to receive from exploring a site. Visiting the site of a brand with symbolic value, such as Ferrari, holds the promise of beautiful pictures of exotic automobiles, a sense of the brand’s racing heritage and lots of technical information about product performance. The brand’s strength ensures that those who understand and value it will be motivated to explore.

3. Commitment

In this stage, the focal question is the degree to which the consumer can see a long-term flow of benefits from dealing with the firm. To be motivated to explore, consumers only need to see a one-time, immediate payoff. Even if customers have a positive experience during one or a series of visits, they may not see the value of committing to a relationship. For example, if consumers anticipate that all sites will offer a similarly great experience in terms of products, customer care and prices, there is no reason for them to commit to one firm. Or, in some instances, the product may be purchased infrequently, and so the anticipated benefits of an ongoing relationship are not that important. Finally, the perceived costs of being committed to a particular relationship can be high relative to the actual benefits. This is due to the difficulties associated with customizing a new home page, or adding one more electronic newsletter to one’s in-box every morning.

In rational terms, consumers who are willing to invest in a relationship perceive that the net present value of future benefits is greater than the cost of commitment. Consumers must anticipate that their investments in activities such as personalizing a home page, developing a unique user name and password, or learning a new customer interface are worthwhile. The levers that are most likely to gain or increase commitment are those that reduce costs and increase the benefits associated with developing a buyer-seller relationship.

In the commitment stage, the parties in a relationship feel a sense of obligation or responsibility to each other. Firms can create this sense by encouraging customers to state that they intend to have a long-term relationship, or by stimulating them to undertake behaviours that signal commitment. For example, firms such as MP3.com provide a free music player to motivate frequent interactions with their firm, product and brand. A high level of interaction can lead consumers to pay for an upgraded version of its player rather than an alternative brand. Levers that are particularly significant in creating commitment are those that encourage investment-related behaviours, or that increase the economic or psychological costs of switching. Consider the following levers:

PRODUCT: At this stage in the relationship, customers have a very good sense of the firm, its products, and the value it offers. Customers must not only believe that the firm offers a value configuration that is highly desirable, but also that it will continue to offer this value into the future. Specific product-related levers include upgrades that suggest that long-term value will be created, and customer care that cultivates a strong emotional bond.

PRICE: Here, commitment can be formed through levers that create both economic and psychological switching costs. In particular, loyalty and volume discount programs increase the economic costs associated with buying from a competing firm. Targeted price promotions are likely to be particularly effective in creating commitment because they have the potential to make customers feel that they are being treated uniquely. Profit-enhancing programs treat the customer or partner as a collaborator and recognize the customer as someone whose interests coincide with those of the firm.

COMMUNICATION: Communication creates commitment when it reinforces customers’ beliefs that they are deriving value from dealing with the firm. As noted earlier, this “value” is not only about the product’s ability to perform, but also about the symbolic and hedonic elements of value. It is critical that communication be bi-directional or interactive. The firm’s goal should be to engage customers in a dialogue so that it can better understand and respond to their ever-changing needs.

COMMUNITY: A sense of community is likely to be one of the strongest levers in creating commitment. As noted earlier, communities are built on relationships between people, and interpersonal relationships tend to be stronger than buyer-seller relationships. Moreover, communities can satisfy customer needs in ways that other levers cannot. As a result, even though a buyer-seller relationship is unfulfilling for the customer, he or she may still remain loyal and committed because of his or her membership in the community created by the firm.

DISTRIBUTION: The distribution levers that are most important for gaining commitment are those that are closely aligned with customer service—care and value. Commitment is engendered when the firm correctly matches the needs of customers with the appropriate distribution channels and intermediaries. Price-sensitive customers will be happiest when they are served via channels and intermediaries that enable the firm to sell at a lower price. In contrast, customers with high service needs will tend to shop via channels and intermediaries that have higher levels of customer care and service. A second way in which distribution encourages commitment is by providing access in a large number of outlets.

BRAND: The brand is a powerful lever in the commitment stage because it reflects consumers’ prior experiences with the firm and its products. As such, the brand also represents the promise of future satisfaction. The brand should be prominently displayed throughout all relationship stages, but in this stage it is a particularly powerful symbol of the buyer’s connection with the firm.

4. Dissolution

In the dissolution stage, any one of a variety of levers can be used to weaken or terminate the buyer-seller relationship. In many instances, customers can be retained because the costs of serving them have been reduced by eliminating product or service offerings. Of course, this strategy depends on the firm’s ability to identify marginal customers and move them to a level of service that retains them in a profitable way. In other situations, no amount of reduced service will allow the firm to profit from a specific customer or a segment of customers. Here, drastic measures must be taken.

PRODUCT: The firm must be careful to redesign the product or service offering so that it does not weaken or dissolve the relationship with profitable customers. The product is the core of the firm’s success, and degrading the product can have a detrimental effect on the firm’s competitive position. Even a line extension that offers a cheaper, no-frills version of the product can ultimately weaken brand equity (see Al Ries and Jack Trout, Positioning: The Battle For Your Mind; Warner Books, New York, 1982). Offering multiple lines can cheapen the entire product experience and disenchant more valuable customers.

PRICE: Price strategies designed to weaken or dissolve relationship ties include the discontinuation of discounts or the reconfiguration of programs that reward loyal customers. If not appropriately targeted, however, a pricing strategy can have a detrimental impact on the entire business. Increasing prices only for selected customers or for specific types of transactions is not always easy to do.

COMMUNICATION: Relationships without communication typically don’t last long. Reducing the frequency of communications initiated by the firm sends a direct signal to customers that they aren’t valued. Even more significant is reducing interactive communications. Customers quickly recognize that they aren’t important or valued when a firm does not respond to their inquiries or requests. However, they may share this feeling with people they know. No matter how justified the firm is in reducing service costs, the negative word of mouth can be deadly. As a result, the best approach seems to be to maintain customer responsiveness and reduce broadcast communications.

COMMUNITY: The on-line community can be a significant obstacle to dissolution. Ending a relationship with a firm is doubly difficult when customers must simultaneously end their connections with on-line friends. A strong sense of community will help the firm retain customers who would otherwise be very dissatisfied with the firm. On the negative side, a strong community can increase the likelihood that the firm will be pressured to reverse unpopular positions or strategies, and the likelihood of boycotts or action by consumer lobby groups will increase dramatically.

DISTRIBUTION: Dissolution is encouraged by removing points of access and specific types of retailers that serve high-cost, low-margin customers. It is also possible to reduce integration across channels, such as that between on-line and off-line retailers. This reduction cannot be easily tailored to the needs of individual customers. As a result, this tactic can have a negative effect on relationships with attractive, as well as unattractive, customers.

BRAND: A strong brand reduces the negative impact of other dissolution levers. Customers’ positive perceptions of a brand mitigate the potential harm of service reductions, price increases and reduced communications. For example, customers who no longer desire a relationship might be less likely to engage in negative word of mouth for a strong brand compared to what they might engage in for a weak brand.

The Internet has dramatically increased the potential for firms to develop and maintain relationships with their customers because of its capacity for interactivity and individualization on a grand scale. But, to exploit that potential, firms must integrate their off-line and on-line marketing tactics so that the content of their communications and the service quality they provide are consistent. It is also important that firms respond differently to customers in each of the four relationship stages: awareness, exploration, commitment and dissolution. Finally, the firms that invest in the appropriate combination of on-line and traditional marketing levers are those that are most likely to develop strong, profitable customer relationships.

About the Author

Robert Fisher is Associate Professor of Marketing, and the R.A. Barford Professor in Marketing Communications, at the Richard Ivey School of Business.

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