Customer BehaviorCustomer Behavior

Module NineRelationship Based

Buying

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Module 9

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.

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A Model of Relationship-Based Buying

Outcomes

Socio-Cultural Factors

Early socializationReciprocityKeiretsuFriendships

Socio-Cultural Factors

Early socializationReciprocityKeiretsuFriendships

Supply loyaltyIncreased buyingWillingness to pay-moreProactive word-of-mouthGoodwill (customer equity)

Supply loyaltyIncreased buyingWillingness to pay-moreProactive word-of-mouthGoodwill (customer equity)

Relationship Based Buying

TrustCommitment

Antecedents (Motivators) Relationships

Cost-Benefit Factors

Search costsRisk reductionSwitching costsValue-added benefits

Cost-Benefit Factors

Search costsRisk reductionSwitching costsValue-added benefits

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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 factorsSocio-cultural factors.

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Cost-Benefit Factors

When customers make buying

decisions, including whether to enter an ongoing relation ship with a supplier, they weigh the potential costs and benefits.

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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.

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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.

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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.

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Perceived Risk

Is the possibility that the decision

may not yield the expected outcomes or may result in

negative consequences.

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Perceived Risk

Among the various types of risks; several are particularly relevant:

Performance riskFinancial riskSocial risk

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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.

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Perceived risks and switching costs

Constrained in relationship

Transactional exchange

Relational Buying

Vulnerable relationship

SwitchingCosts

Perceived Risk of Alternatives

Low High

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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Commitment

Long-term customer relationships are also characterized by commitment,

that is, an en during desire to continue the relationship and to work to ensure its continuance

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Outcomes of Relationship-Based Buying

The outcomes of successful relationship-based buying are:

Supplier loyalty Increased buyingWillingness to pay more.

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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.

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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.

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Characteristics of Relational Buying

The IMP model has identified three key factors that characterize all relational buying by business customers:

1. Transaction-specific investments/adaptations2. Power dependence3. Role formalness

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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

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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.

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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

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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

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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.

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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.

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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.

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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.