The 'R' of CRM stands for 'relationship'.

But what do we really mean by

the expression 'relationship'? Certainly, most of us would understand
what means to be in a personal relationship, but what is a relationship
between a customer and supplier?

At the very least a relationship involves interaction over time. If there

is only a one-off transaction, like buying a vacuum cleaner from a
specialist outlet, most of us wouldn't call this a relationship. Thinking in
terms of a dyadic relationship, that is a relationship between two
parties, if we take this interaction over time as a critical feature.
Relationships change over time. Parties become closer or more distant;
interactions become more or less frequent. Because they evolve, they
can vary considerably, both in the number and variety of episodes, and
the interactions that take place within those episodes. Dwyer has
identified five general phases through which customer-supplier
relationships can evolve.

1. Awareness.
2. Exploration.
3. Expansion.
4. Commitment.
5. Dissolution.
Trust is focused. That is, although there may be a
generalized sense of confidence and security, these
feelings are directed. One party may trust the other
party's

Benevolence. A belief that one party acts in the

interests of the other.
Honesty. A belief that the other party's word is reliable
or credible.
Competence. A belief that the other party has the necessary
expertise to perform as required

The development of trust is an investment in relationship

building which has a long-term payoff. Trust emerges as parties
share experiences, and interpret and assess each other's
motives. As they learn more about each other, risk and doubt
are reduced. For thew reasons, trust has been described as the
glue that holds a relationship together across time and
different episodes.
Commitment in an essential ingredient for
successful, long-term relationship Morgan and Hint
define relationship commitment as follows

Commitment is shown by an exchange partner

believing that ongoing relationship with another
important warrant maximum effort to maintain it, that
is, the committed party believes the relationship is
worth working to ensure that it endures indefinitely
This discussion of trust and commitment suggests that some
relationships can be thought to be of better quality than others.
Research into relationship quality generally cites trust and commitment
as core attributes of a high-quality relationship. However, a number of
other attributes have also been identified, including relationship
satisfaction, mutual goals and cooperative norms. Relationship
satisfaction is not the same as commitment. Commitment to a
supplier comes as investments are made in the relationship, and
investments are only made if the committed party is satisfied with their
transactional history.
• Economic relating to the production, distribution,
and consumption of goods and services.
• Companies aim to build long-term relationships
with customers to enhance profitability.
• Customer retention is more cost-effective than
acquiring new customers.
• High retention rates lead to increased customer
bases and reduced churn rates.
Churn Rate -the rate at which customers stop doing business with a
company over a given period of time.

• Company A (5% churn rate) retains more customers than Company B (10% churn rate).
• After five years, Company A’s customer base is 19% larger than Company B’s.
• Churn rates differ across industries; customer retention is essential for growth.
• Businesses should focus on retaining valuable customers and acquiring new ones.
• Prioritization is critical as not all customers have the same value.
• Higher retention rates
increase the average
customer tenure.
• For example, a 75%
retention rate results in
a 4-year tenure, while
95% leads to 20 years.
• Retaining customers reduces the need
for expensive marketing campaigns.
• Automation tools like EDI (Employ
Electronic data Interchange) streamline
operations and reduce costs.
• Longer customer tenure provides deeper understanding of customer needs.
• Helps identify and satisfy requirements profitably, enhancing sales and retention.
• Trust and commitment deepen relationships, increasing revenue and profit stability.
• Retention reduces customer acquisition costs and encourages loyalty.

Stages of customer
journey
This leads to the core CRM idea that a
customer should not be viewed as a set of
independent transactions but as a lifetime
income stream.

Customer lifetime value is a measure of a

customers profit generation for a company
1. Revenues grow over time, as customers buy
more.
2. Cost-to-serve is lower for existing customers,
because both supplier and customer understand
the other.
3. Higher prices may be paid by existing customers.
4. Value-generating referrals are made by satisfied
customers.
The computation of CLV potential is very straightforward in principle, but
can be complicated in practice. Several pieces of information are needed.
For an existing customer, you need to know:

1 What is the probability that the customer will buy products and services
from the company in the future, period-by-period?
2 What will be the gross margins on those purchases period-by-period?
3 What will be the cost of serving the customer, period-by-period?
For new customers an additional piece of information is needed:
4 What is the cost of acquiring the customer?
Finally, to bring future margins back to today's value, another question
needs to be answered for both existing and new customers
5 What discount rate should be applied to future net margins?
US bancorp identify four CRV segments, cach having
different value, cost, attrition and risk profiles:

top tier, 11 per cent of customers

threshold, next 22 per cent

fence sitters, next 39 per cent

value destroyers, bottom 28 per cent.

It is feasible to use data such as these to manage a business
for improved profitability. Several strategies are available:

1. Improve customer retention rate in the early years of the

relationship.

2. Increase the profit earned per customer by:

a. Reducing cost-to-serve;

b. cross-selling or up-selling additional products and services..

3. Become better at customer acquisition by:

a. using more cost-effective recruitment channels;

b. better qualification of prospects. Customers who defect early on

perhaps should have not been recruited in the first place,

careful nurturing of prospects with high CLV potential;

d. recruiting new customers matched to the profiles of current

customers having a high CLV.
LOSS OF CONTROL
In close customer-supplier relationships, suppliers may need to give up some control over their resources to meet
customer expectations, potentially incurring costs.

EXIT COSTS
Ending a business relationship can be expensive due to investments made specifically for that relationship,
which may not be recoverable.

RESOURCE COMMITMENT
Building a business relationships demands resource s (time, money, personnel). Companies must strategically decide
how much to invest in customer management versus other areas. These resources can become sunk costs.

OPPORTUNITY COSTS
Committing to one customer means potentially missing out on opportunities with
others. There’s a trade-off in choosing where to invest resources
REDUCED PERCEIVED ADDED VALUE (B2C)
RISK (B2B)
• Risk Reduction
• Product Complexity
• Recognition
• Strategic Significance • Personalization
• Power
• Service • Status
Requirements • Affiliation

• Purchase Cost

• Reciprocity
 DEPENDENCY FEAR: Customers worry suppliers will exploit their position by raising prices
or limiting flexibility, causing loss of control

LOW PERCEIVED VALUE: No significant benefits seen beyond the basic product/service
(e.g., no cost savings, competitive edge, etc.).

LACK OF SUPPLIER CONFIDENCE: Concerns about reliability, size, reputation, or lack of innovation
make customers hesitant.

TRANSACTIONAL CULTURE: Some companies prefer deal-focused interactions over relationship-

building.

TECH CHANGE SPEED: In fast-evolving industries, customers might avoid supplier

relationships to maintain flexibility and access new technologies from various
sources.
An Important rationale for CRM is
that it improves business
performance by enhancing
customer satisfaction and driving up
customer loyalty, as shown in Figure
2.1
• Is the customer’s fulfilment response to a customer
experience, or some part thereof.
• Customer Satisfaction is a pleasurable fulfillment response.
Dissatisfaction is an unpleasurable fulfilment response.

• The most common way of operationalizing satisfaction is

to compare the customer’s perception of an experience, or
some part of it, with their expectations. This is known as
the Expectation-Disconformation model of customer
satisfaction.
-is when customers consistently choose
a company or business over its
competitors. It’s a lasting relationship
between a business and its satisfied
customers.
Behavioural Loyalty
Is measured by reference to customer purchasing
behavior. Loyalty is expressed in continued patronage
and buying.
There are two behavioral aspects to Loyalty;
1. Is the customer still active?
2. Have we maintained our share of customer
spending?
R = Time elapsed since last purchase
F = Number of purchases in a given time period
M = Monetary value of purchase in a given time
period.

Recency of purchases(R) , Frequency of purchase(F) , and

Monetary value of purchases(M)
Is measured by reference to components
of attiude such as beliefs, feelings, and
purchasing intention. Those customers
who have a stronger preference for,
involvement in or commitment to a
supplier are the more loyal in attitudinal
terms.
Figure 2.2 Two-Dimensional Model of
Customer Loyalty
Business performance can be measured in many
ways. The recent trend has been away from
simple short-term financial measures such as
quarterly profit or earnings per share. Leading
companies have moved towards a more
rounded set of performance indicators, such as
represented by the triple bottom line and
balanced scorecard.
Companies need to ask the following
questions;
1. What customer outcomes drive our financial
performance?
2. What process outcomes drive our customer
performance?
3. What learning and growth outcomes drive our
process performance?
The ACSI model At the national level,
customer data from the
underpins customer
Swedish Customer
satisfaction research
Satisfaction Barometer
in Brazil, Colombia, (SCSB) have been
Korea, Mexico, correlated with corporate
Portugal, Singapore, profit performance since
Turkey and the UK. 1989.
One study of the telecoms industry
found that a 10 per cent lift in a
customer satisfaction index predicted
a 2 per cent increase in customer
retention (a behavioural measure of
loyalty) and a 3 per cent increase in
revenues.
Another study found that customer
satisfaction in retail banking correlated
highly with branch profitability. Highly
satisfied customers had balances 20 per
cent higher than satisfied customers, and
as satisfaction levels went up over time so
did account balances.
A study in the airline industry examined
the link between customer dis-
satisfaction, operating income, operating
revenue and operating expense. The study
identified the drivers of dissatisfaction as
high load factors (i.e. seat occupancy),
mishandled baggage and poor punctuality.
A study of Volvo car owners examined the links
between customer satisfaction with the car
purchase experience, workshop service and the
vehicle itself, and dealer business performance.
The results indicated that a one scale-point
increase in overall customer satisfaction was
associated with a 4 per cent increase in dealer
profitability at next car purchase."
Using 400 sets of matched corporate-level data obtained from
two databases the ACSI (see above, which provided customer
satisfaction scores) and Standard and Poor's Compustat (which
provided business profitability data) - Yeung and colleagues
found a linear relationship between customer satisfaction
scores and business profitability "They rise and fall together in
the same time period. Another study demonstrates that
customer satisfaction improves cash flow and reduces its
variability Lower variability of cash flow is associated with lower
risk. These two effects-improved cash flow and reduced risk
combine to enhance shareholder value.
 There are five main schools of thought
that offer different perspectives on
relationships between customers and
suppliers.
The Industrial Marketing and Purchasing (IMP) school
of thought, which focuses on Business-to-Business
(B2B) relationships. The IMP school argues that B2B
transactions aren't isolated events but occur within a
broader network of long-term relationships. These
relationships are complex and involve multiple actors,
activities, and resource ties.
 The Nordic school's perspective thought in
business-to-business (B2B) shifts the focus
from a transactional exchange to a
collaborative value-creation process,
emphasizing the ongoing interaction and
dialogue between buyer and seller as
fundamental to the relationship.
 The Anglo-Australian school of thought on
business relationships. Unlike the IMP school's
descriptive approach, the Anglo-Australian
school takes a more prescriptive approach,
offering a framework for managing
relationships. Its key contribution is the "Six-
Markets Model."
The North American school of thought on B2B
relationships emphasizes the importance of trust and
commitment in fostering successful relationships.
Unlike some other schools that focus on broader
networks, this school highlights how strong, dyadic (two-
party) relationships between buyers and suppliers are
key for reducing transaction costs and improving
performance.
The Asian (Guanxi) school of thought emphasizes the
importance of personal relationships and networks
("Guanxi") in conducting business, particularly within Asian
contexts. It highlights the informal social bonds and
reciprocal obligations that influence business interactions.
This contrasts sharply with Western business models that
often prioritize formal contracts and impersonal
transactions.
• Abala, Mary Grace • Bagaporo, Marc Andrew

• Abonita, Mica • Balid, Archie

• Agonos, Laraein Anne • Elgario, Anthony

• Baal, Kyla • Villar, Ray John