Module Nine Relationship Based Buying Customer Behavior Module Nine Relationship Based Buying
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
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
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
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
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
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
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
Perceived Risk Is the possibility that the decision may not yield the expected outcomes or may result in negative consequences. Customer Behavior
Perceived Risk Among the various types of risks; several are particularly relevant: Performance risk Financial risk Social risk Customer Behavior
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
Perceived risks and switching costs Constrained in relationship Transactional exchange Relational Buying Vulnerable Switching Costs Perceived Risk of Alternatives Low High Customer Behavior
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
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
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
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
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
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
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
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
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
Outcomes of Relationship-Based Buying The outcomes of successful relationship-based buying are: Supplier loyalty Increased buying Willingness to pay more. Customer Behavior
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
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
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
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
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
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
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
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
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
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
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