1. Module Nine Relationship Based Buying
Customer Behavior
Module Nine
Relationship Based Buying

2. Value of Relationship-Based Buying Customer to Marketers
Many marketers fail to realize the financial payoffs of keeping customers for the long term. But the payoffs are impressive. It had been shown that a 5 percent increase in customer retention is associated with profit gains of 25 to 125 percent.
Customer Behavior

3. A Model of Relationship-Based Buying
Outcomes
Socio-Cultural Factors
Early socialization
Reciprocity
Keiretsu
Friendships
Supply loyalty
Increased buying
Willingness to pay-more
Proactive word-of-mouth
Goodwill (customer equity)
Relationship Based Buying
Trust
Commitment
Antecedents (Motivators)
Relationships
Cost-Benefit Factors
Search costs
Risk reduction
Switching costs
Value-added benefits
Customer Behavior

4. Customer Motivations for Relationship-Based Buying
The antecedents in the model are customer motivations for engaging in relationship-based buying.
These motivations can be grouped in two broad categories:
Cost-benefit factors
Socio-cultural factors.
Customer Behavior

5. Cost-Benefit Factors
When customers make buying decisions, including whether to enter an ongoing relation­ship with a supplier, they weigh the potential costs and benefits.
Customer Behavior

6. Cost-Benefit Factors
Marketing professors Jagdish N. Sheth and Atul Parvatiyar have proposed that many of these decisions are driven by the desire to reduce choices:
Customers favor relationship buying when it saves time, effort, and inconvenience, and they avoid considering new choices if doing so will entail extensive search and information processing.
Customer Behavior

7. Cost-Benefit Factors
Customers favor relationship buying if they expect positive reinforcement from it.
Customers favor relationship buying if they perceive that it will help them avoid risk.
Customers maintain buying relationships if a change involves costs, such as legal penalties or loss of peer-group approval.
People tend to resist change because change involves effort. Consequently, they maintain buying relationships out of inertia.
Customer Behavior

8. Search Costs
The principal cost of breaking free from a relationship with a marketer is the cost of finding a new product, service, or supplier. Purchasing is problem solving; customers buy a product or service to solve a problem.
Customer Behavior

9. Perceived Risk
Is the possibility that the decision may not yield the expected outcomes or may result in negative consequences.
Customer Behavior

10. Perceived Risk
Among the various types of risks; several are particularly relevant:
Performance risk
Financial risk
Social risk
Customer Behavior

11. Switching Costs
Changing suppliers may generate switching costs, costs directly related to switching suppliers.
For example:
The purchase contract may stipulate termination penalties.
The buyer may not have fully recovered its sunk costs, meaning some costs of writing off investments are not recovered yet.
Customer Behavior

12. Perceived risks and switching costs
Constrained in
relationship
Transactional
exchange
Relational
Buying
Vulnerable
Switching
Costs
Perceived Risk of Alternatives
Low
High
Customer Behavior

13. Value-Added Benefits
When you buy repeatedly from a supplier or marketer, you treat that supplier as a preferred supplier. In turn, to retain you as a customer, the supplier tends to treat you as a preferred customer.
For business customers, firms differentiate themselves on the basis of added benefits, especially when the core product remains the same.
Customer Behavior

14. Sociocultural Factors
Buying decisions are not purely rational decisions based on objective data.
For example, a person's culture and business and personal relationships influence buying decisions. With regard to relationship-based buying, the sociocultural factors that influence the formation of a customer relationship include socialization, reciprocity, networks, and friendships.
Customer Behavior

15. Early Socialization
One reason why customers choose to engage in relationship-based buying is that they get socialized into it from the time they first began to use that product or service.
Customer Behavior

16. Reciprocity
In some cases, a customer buys from a particular supplier because the supplier in turn buys something from the customer. This practice is called reciprocity.
Customer Behavior

17. Networks
Networks are a group of firms that deal with each other on a preferential basis.
The firms are linked into the network either by common ownership (such as Mitsubishi Industries) or by contractual arrangement
Customer Behavior

18. Buying Based on Friendship
Many purchases are made on the basis of friendship. Thus, if your neighbor or friend is an insurance agent, you are likely to buy your insurance from him or her.
Customer Behavior

19. The Supplier-Customer Relationship
Trust and commitment are the twin legs of relationship-based buying.
For a customer to be engaged in relationship-based buying at all, the customer has to trust the marketer and then make a commitment to the marketer.
Customer Behavior

20. Trust
The most essential ingredient in any relationship, whether a business or a social relationship, is trust.
It is also a key arbitrator of commitment. If there is no trust, there will be no commitment.
Customer Behavior

21. Commitment
Long-term customer relationships are also characterized by commitment, that is, an en­during desire to continue the relationship and to work to ensure its continuance
Customer Behavior

22. Outcomes of Relationship-Based Buying
The outcomes of successful relationship-based buying are:
Supplier loyalty
Increased buying
Willingness to pay more.
Customer Behavior

23. Relationship Buying and Selling in Business Markets
Business customers tend to place larger orders than individual consumers do. This makes customer relationships especially important in business markets.
Customer Behavior

24. Process of Relationship Buying: The IMP Model
The Industrial Marketing and Purchasing (IMP) group, used case studies of business buying. On the basis of case studies of some 300 companies in five European countries, the IMP group established that long term patronage is quite common in business buying.
Customer Behavior

25. Characteristics of Relational Buying
The IMP model has identified three key factors that characterize all relational buying by business customers:
1. Transaction-specific investments/adaptations
2. Power dependence
3. Role formalness
Customer Behavior

26. Steps in Relationship Development
Based on the case studies of business buyers and sellers, the IMP group also identified the steps that companies go through in building a relationship.
4. Investment
3. Customer + Satisfaction
2. Interactions
1. Complementary needs
5. Commitment
Customer Behavior

27. Reasons for Relationship Development in Business Buying
In addition to the motivations for relationship-based buying described earlier, business customers may also have a few special reasons for relationship-based buying.
First, businesses may need a long-term exchange contract to assure long-term supply.
Customer Behavior

28. Determinants of Trust and Commitment from Business Customers
Switching costs
Partner – specific investments
Mutually shared goals
Communication and product support
Supplier avoidance of opportunistic behavior
Customer Behavior

29. Partner Specific Investments
The parties build and sustain relationships when they make partner-specific/investments, that is, investments that one party makes in processes dedicated to the other party
Customer Behavior

30. Mutual Goals
Long-term relationships are also strengthened by mutual goals, or goals that require each exchange partner's cooperation, and by whose achievement each partner profits.
Customer Behavior

31. Communication and Support
If there is open communication, then the customer acquires more knowledge about the supplier activities and knows that the supplier is not secretive.
In communicating openly, the supplier confides in the customer.
Customer Behavior

32. Avoidance of Opportunistic Behavior
To cultivate an ongoing relationship, the supplier must avoid engaging in opportunistic behavior. Opportunistic behavior concerns unilateral acts of profiting from opportunities that may arise and that were not stipulated in the contract.
Customer Behavior

33. Determinants of Supplier Trust in Customers
Suppliers also need to trust their customers. If they believe that their customers have no commitment to them and that they (the customers) would themselves engage in opportunistic buying, then suppliers would not have any trust in customers. Consequently, suppliers will not be committed to the relationship.
Customer Behavior