Marketing Strategy Chapter 7 (Relationships) Marketing Principle #3

Marketing Strategy Chapter 7 (Relationships) Marketing Principle #3

Marketing Strategy Chapter 7 (Relationships) Marketing Principle #3 All Competitors React Managing Relationship-based Sustainable Competitive Advantage Robert Palmatier 1 Agenda Introduction Relationship Marketing Strategy Building and Maintaining Relationships Targeting and Adapting Relationship Marketing Strategies Relationship Dynamics and Lifecycle Stages Managing Relationship-Based Sustainable Competitive Advantage

Building Relationship Equity Measuring Relationship Equity Multiple Regression Takeaways Palmatier 2 Relationship Marketing Basics This relationship marketing (RM) processnamely, identifying, developing, maintaining, and terminating relational exchanges to improve performancecan produce relationship equity This form of equity, in combination with brands and offerings, in turn can lead to a sustainable competitive advantage (SCA) Relationship marketing and branding strategies that focus on building equity often overlap

Customer relationship management is the managerially relevant, organization-wide, customer-focused application of RM, using IT to achieve performance objectives Palmatier 3 Relationship Equity Represent an Important Source of SCA Relational-based exchange was the norm since Homeric Greece Transactional (product) marketing emerged only with the increase in mass production and middlemen a rebirth of marketing practices of the pre-industrial age Early brands were all family names Impact of relationship spending on sales twice as high as impact of advertising Large part of our cognitive and emotional function evolved to handle relationship-based processing $12 billion spent annually on relationship management Palmatier (Albers, Mantrala, and Sridhar 2010; Palmatier 2008) 4 Relationship Marketing Builds Customer

Relational Equity Marketing Principle #3 focuses on building and maintaining barriers, or sustainable competitive advantages (SCA), to competitive attacks, based on the premise that competitors react continually to a firms success Relationship equity refers to the aggregation of relational assets and liabilities, associated with the firms boundary-spanning employees and social networks linked to the offering or experience, that add to or subtract from the value provided by the firms offering Relationships powerfully affect behavior; relational-based decision making is ingrained in peoples psyches Strong affect on performance outcomes (meta-analysis of 20 years of data across 38,000 relationships) WOM (r = .61, p < .01) Loyalty (r = .52, p < .01) Objective performance (r = .35, Palmatier p < .01) (Palmatier et al. 2006) 5 5

Many Trends are Increasing Effectiveness of RM Strategies Shift to service economies Increase in use of marketing channels Aging population and shift of purchasing power Increased global competition, me too offerings, and faster product commoditization Firms look for additional sources of SCA and higher marketing ROI (advertising saturation) Palmatier (Fang, Palmatier, and Steenkamp 2007; Palmatier 2008) 6 6 Benefits from Relationship Equity Relationship marketing efforts seek to improve relationship characteristics with an exchange partner and build relationship equity, in the hope of ultimately improved financial performance RM activities do not affect financial performance directly Instead, they help build relationship equity, which influences customer behaviors, which improves the sellers financial outcomes

This chain of effects operates through four mechanisms: Cooperative behaviors Relational loyalty Referrals or word of mouth (WOM) Empathetic behaviors Palmatier 7 Example: Corning Corning is a committed partner to Apple, manufacturing all the touchscreens for the iPhone As new manufacturers step into the market with tougher, lighter, and glossy touchscreens, Corning is forced to innovate to maintain its relationship, as a top supplier, with Apple

In turn, Apple also devotes attention to Cornings R&D effort by informing Corning about the desired properties of the new touchscreens (e.g., size, toughness, texture) These efforts on the part of Apple and Corning support and strengthen the relationship bond between these partners. Palmatier 8 Cooperative Behaviors Cooperative behaviors are coordinated, complementary actions between partners to achieve a mutual goal This creates value beyond what each individual firm could do on its own, cooperation increases customers flexibility and adaptiveness to sellers requests for changes, information, or reciprocation If the customer obtains its portion of that created value before the seller (or vice versa), then the seller must wait for the reciprocal benefits Commitment encourages the parties to remain in their valued relationships and bonds, even if the reciprocity is delayed or non-equivalent Palmatier

9 Relational Loyalty Relational loyalty is the likelihood that the customer provides the seller benefits in the exchange process due to their relational attitudes and ties Relationships positively influence this loyalty, because customers perceive less risk dealing with trusted partners, act on relationally generated belonging, and minimize costs by buying from valued sellers Loyalty is very determinant of firm success in competitive marketplaces Palmatier 10 Referrals or Word of Mouth (WOM) Referrals or word of mouth (WOM), reflects the likelihood that a customer comments positively about a seller to others Relational bonds, feelings of gratitude, and positive attitudes drive the motivation and willingness to provide requested or unrequested referrals

Because it is not affected by switching costs or lack of time or motivation, WOM provides an effective indicator of customer loyalty; only customers with strong, trusting relationships are likely to risk their reputations by advocating a seller to another potential customer Referrals and WOM differ from loyalty-favored behaviors, because they represent different performance-enhancing pathways Palmatier 11 Empathetic Behaviors Empathic behaviors are defined as having a greater likelihood to be influenced by perceptions of the sellers position Customers in a strong relationship may attribute service failures to external causes that the seller cannot control, which would reduce the impact of those failures on their purchase behaviors Their sensitivity to and empathy for the sellers difficult also may prevent them from imposing the price-reduction pressures that are common responses to service failures Palmatier

12 Example: E-Commerce (China) E-commerce is a fiercely competitive and growing market in China, with annual consumer spending of $540 billion and hundreds of notable players Yet 61 percent of consumers are loyal mainly to just three firms: Taobao, JD, and Tmall A recent report indicates that many of these loyal consumers remain open to receiving promotions from these e-commerce brands via e-mail or mobile messaging They also are 19 percent more likely to visit their preferred brands websites, where they not only spend more but also are more forthcoming when it comes to sharing private information about their brand preferences Palmatier 13 Agenda Introduction

Relationship Marketing Strategy Building and Maintaining Relationships Targeting and Adapting Relationship Marketing Strategies Relationship Dynamics and Lifecycle Stages Managing Relationship-Based Sustainable Competitive Advantage Building Relationship Equity Measuring Relationship Equity Multiple Regression Takeaways Palmatier

14 Power of Gratitude and Reciprocation The sentiment which most immediately and directly prompts us to reward, is gratitude. Evolutionary psychologists show gratitude and reciprocity have some heredity basis and argue that it provides individuals competitive advantage Enforced by positive (pleasure) and negative emotions (guilt) Punishment of moocher, ingrate, welsher Coke/raffle tickets, Krishna flower, 3-to-1 returns Gratitude is a catalyst for starting relationships; leads to reciprocity norms (residual of gratitude) Failure to feel gratitude sign of psychosis (Emmons and McCullough 2004) (Adam Smith 1790; (Palmatier, Jarvis, Bechkoff, and Kardes 2009) Palmatier 15 15 Many Factors Leverage the Effects of RM on Gratitude: Enhancing Returns

Freewill Motive Risk Need Together determines effectiveness of RM Relationship Marketing Feelings of gratitude Gratitude-based reciprocal behaviors See The Role of Customer Gratitude in RM to understand how it works (experiment and survey) Customer Trust Performance Outcomes Customer Commitment Palmatier

(Palmatier, Jarvis, Bechkoff, and Kardes 2009) 16 16 Higher Payoff when RM Program Operates in the Social vs. Financial Domain Factors Leveraging RM Investments RM Investments Social RM Structural RM Interaction Frequency Customer loyalty CRM use Profit share by salesperson 180% ROI 100 to 120% ROI Incremental customer return (CLV) Negative ROI Financial RM [313 customers across 34 different firms] Palmatier

(Palmatier, Gopalakrishna, and Houston 2006) Controls 17 Other Factors are Also Critical When Building Interfirm Relationships Customer Firm Selling Firm Contact density- number of relational ties with an exchange partner (network density) Relationship qualitycaliber of relational ties (tie strength) Contact authority- decision making capability of relational contacts (attractiveness or social capital) Social Network Perspective of RM Palmatier (Palmatier 2008) 18 18 Density and Authority of Relationship

Portfolio Impacts B2B Performance Customer Factors Leveraging the Impact of Relational Drivers Relational Drivers Turnover in contacts Service content Interface difficulty Contact density Relationship quality Customer value Contact authority [313 B2B relationships matched to objective performance data] Palmatier (Palmatier 2008) Controls 19

Model of Interfirm Relationships Key Relational Dimensions Relationship Breadth: Number of relational ties with an exchange partner Relationship Quality: Nature of relational bonds with an exchange partner Seller performance outcomes Relationship Composition: Decision-making capability of the relational contacts at an exchange partner Palmatier 20 Customer Relationship Develop at Multiple Levels Simultaneously Measures of relationship and loyalty to selling firm often commingles firm and the salesperson effects leading to illusionary loyalty Typical Measures Commingles Both Types of Loyalty Selling firm-owned loyalty Salesperson-owned loyalty Relationship with individuals typically have a larger

effect on behaviors than relationship with groups Individuals: on line model (e.g., 26% shift) Firms: recall heuristics Palmatier (Palmatier, Scheer, and Steenkamp 2007) 21 Highest Impact Relationship Marketing Activities Table 7.1 Highest Impact Relationship Marketing Activities Relationship Activity Definitions Correlation Coefficient Between Activity and Relationship Quality Conflict Overall level of disagreement between exchange partners -0.67 Seller expertise Knowledge, experience, and overall competency of seller 0.62 Communication Amount, frequency, and quality of information shared between exchange partners

0.54 Relationship investments Seller's investment of time, effort, spending, and resources focused on building a stronger relationship 0.46 Similarity Commonality in appearance, lifestyle, and status between individual boundary spanners or similar cultures, values, and goals between buying and selling organizations 0.44 Relationship benefits Benefits received, including time saving, convenience, companionship, and improved decision making 0.42 Dependence on seller Customer's evaluation of the value of seller-provided resources, for which few alternatives are available from other sellers 0.26 Interaction frequency Number of interactions or number of interactions per unit time between exchange partners 0.16

Relationship duration Length of time that the relationship between the exchange partners has existed 0.13 Note: The results in this table are from a meta-analysis performed by Palmatier, Dant, Grewal, and Evans (2006), which only evaluated relationship activities studied in previous research. Palmatier 22 22 Building Relationships: Takeaways RM has a strong impact on performance especially WOM and may be getting more important RM needs to build gratitude/reciprocity norms, trust, and commitment Gratitude helps start relationships Effect on gratitude can be leveraged by delivery (freewill, motive, timing/value) Interfirm RM needs to build breadth and authority Relationship operate at many levels simultaneously Individual > firm, but susceptible to turnover RM strategies

Expertise and communication RM investments (social > structural > financial) Dependence, duration, and frequency not effective Palmatier 23 Maintaining Relationships A negative event can overwhelm an accumulation of positive activities Long-term RM success often depends more on preventing the bad than on promoting the good Negative activities generally have approximately twice as strong an effect as positive activities, but not all negative events are the same Companies sometimes welcome toxic poisons, by engaging in actions that generate and even encourage perceptions of unfairness When managers recognize unfairness as a relationship poison, they should find the antidote by revising their RM and loyalty programs to make the benefits for targeted customers invisible to bystanders Preemptive approaches might be the best antidote

Palmatier 24 Example: United Airlines United Airlines cited its contractual policies when it refused to spend $1200 to repair a passengers guitar that its baggage handlers had carelessly broken The passenger received word that he was ineligible for compensation because he failed to make the claim within Uniteds stipulated 24-hour timeframe The passenger vented his frustration by creating a song entitled United Breaks Guitars and uploaded it on YouTube As of 2014, it garnered almost 14 million views and may have cost United Airlines $180 million. Palmatier 25 Maintaining Relationships: Preventing the Bad is More Important than Adding More Good Negative behaviors impact relationships more than

positive behaviors Meta of 38,000 relationship shows negative activities have twice the effect of positive activities Conflict and opportunism also have strong negative effects People seek explanation for negative more than positive events; unfairness judgments provide insight into motivation for bad events Unfairness plays a large role in undermining relationships since individuals feel emotional need to punish unfair behaviors, even at a cost to themselves Hardwired psychological behavior to prevent cheating Starbucks/United Airlines (Emmons and McCullough 2004) (Palmatier et al. 2007; Samaha, Palmatier, and Dant 2011) Palmatier 26 26 Unfairness Aggravates the Negative Effect of Other Damaging Activities Relationship Damaging Factors Conflict Relationship Capabilities

+ _ Interfirm cooperation _ Perceived Unfairness _ Opportunism + Interfirm performance Interfirm flexibility + [493 customers over three years] Palmatier (Samaha, Palmatier, and Dant 2011) 27 27 Strategies to Suppress Conflict and Opportunism can Worsen Unfairness Relationship

Damaging Factors Conflict Contract utilization + _ Relationship Capabilities _ Interfirm cooperation + Perceived Unfairness _ Opportunism _ _ + Interfirm performance Interfirm

flexibility + [493 customers over three years] Palmatier (Samaha, Palmatier, and Dant) 28 28 High Conflict and Opportunism Have Minimal Effect in Absence of Unfairness 1.0 Effects on Flexibility 0.5 Standard Deviations away from Mean Flexibility 0.0 Low Conflict -0.5 Low Conflict -1.0 High Opportunism -1.5

High Opportunism -2.0 -2.0 -1.5 High Conflict High Conflict -1.0 -0.5 Low Opportunism Low Opportunism 0.0 0.5 Standard Deviations away from Mean Cooperation 1.0 Effects on Cooperation Low Unfairness Palmatier High Unfairness

Low Unfairness (Samaha, Palmatier, and Dant 2011) High Unfairness 29 29 However, Firms Often Expose Themselves to the Toxic Effects of Unfairness Lost customer analysis shows that customers often leave due to the emotional push from unfairness (overcome exit barriers) Loyalty, reward, and relationship programs are often the culprit Program participation tops 1.8 billion; average US household subscribes to 14 different programs But, often fail to meet financial expectations Benefits to target customers can be overcome/offset by damage to bystanders Up in the Air Link Some programs are only available to new customers Palmatier (Henderson, Beck, and Palmatier 2011; Steinhoff and Palmatier 2014) 30

30 RM Can Simultaneous Help and Hurt Firms Overall Performance: 3 Key Elements 3) Customer Loyalty Portfolio 1) RM Reward Elements Target 1 Reward 1: priority check in Reward 2: lounge access + Gratitude + Target 2 + Target n Firm portfolio performance _

Status Bystander 1 _ Reward n: Unfairness 2) RM Delivery Visibility of reward Clarity of rules Palmatier Bystander 2 + Bystander n (Steinhoff and Palmatier 2014) 31 31 60% of Sales Lift Comes from Gratitude and 70% of Drop Comes from Unfairness Target Unfairness Target Gratitude Bystaander

Target Bystaander Bystaander Target 5 Bystaander See Understanding the Effectiveness of Loyalty Programs for overview 10 0 Free Checked Bag -5 -10 Palmatier Status Bystaander Incremental Sales evoked by Customer Gratitude, Status, and Unfairness (%) 15

Target Customers Across Multiple US Airlines Lounge Access Free Services Priority Check-In Priority Boarding Loyalty Program Rewards (Steinhoff and Palmatier 2014) 32 Maintaining Relationships: Takeaways Preventing customer perceptions of unfairness; may be highest impact RM strategy Prevents large negative effect Suppresses negative effect of other negative activities Prevents punishing or retaliatory behaviors Understanding true effectiveness of loyalty programs needs a multidimensional view: Reward element perspective Reward delivery perspective Portfolio perspective (targets and bystanders) Palmatier

33 However, RM Doesnt Always Work Some customers try to avoid relationships Hassle, cost, and time Prevent psychological debt as know they will feel pressure to reciprocate and/or guilt RM more effective to customers that are relationship oriented, desire or need relationship to solve an exchange problem, and want governance benefits: Flexibility Minimize need for monitoring Cooperation Safeguard assets Manage risk Palmatier (Palmatier et al. 2008) 34 34 Targeting and Adapting Relationship Marketing Strategies Various causal drivers are responsible for RM effectiveness and building relationship equity; their effects also depend on environmental or contextual factors though When contextual factors increase a customers relationship orientation, or desire to engage in a strong relationship, they increase its receptivity to relationship building,

prompting more effective RM RM with customers without a strong relationship orientation imposes costs without parallel benefits Palmatier 35 Intensity of RM Should be Matched to the Relational Governance Needs of Customer Customers Evaluation of Relational Governance + Relationship Marketing Activities _ + _ + Palmatier Exchange

Inefficiency (- mechanism) Relationship proneness Product dependence Category involvement Relationship stage Salesperson competence Industry Norms + _ + Exchange Performance Relationship quality (+ mechanism) Relationship Orientation (Palmatier et al. 2008) 36 36 Firms Are Becoming More Global, But Use US-based RM Insights International trade accounts for 20% of global GDP Among the S&P 500 firms that report foreign sales, 46% of their total revenues in 2010 came from foreign markets

Meta-analysis of 144 papers, across 29 countries, 43,000 relationships, which represents 82% of global GDP US ranks only as 16 of 25 countries in terms of RM effectiveness on performance: RM is more effective outside the US Especially in BRIC countries, RM is 55% more effective than in US at driving performance Palmatier (Samaha, Beck, and Palmatier 2014) 37 37 RM Payoff Varies Across Different Countries On average, RM 11% more effective outside the US Relationships have the largest payoff in China: 100% larger than in US Relationships have the smallest payoff in Norway and Netherlands: 37% smaller than in US Palmatier

(Samaha, Beck, and Palmatier 2014) 38 38 Targeting RM: Takeaways RM strategies need to be adapted based on: Customers governance needs (i.e., customers desire or need for a relationship, or relationship orientation) Customers culture In general, RM will be more effective when: Product dependence is high Category involvement is high Industry has high relational norms Salesperson is more competent Individualism is low Power distance is high (for status related constructs) Institutional trust is low (for remerging economies) In service and channel contexts RM effectiveness will also depend on the relationships stage or state Palmatier 39 Relationship Dynamics and Lifecycle Stages

Most relationships begin with an exploratory or early stage, featuring limited confidence in the partners ability and trustworthiness but also a willingness to explore the relationship to determine if the potential benefits exceed those available from alternative options If the initial experiences are positive and produce the desired outcomes, as well as evidence of trustworthiness, relationships move into the growth or developing stage If the relationship continues, the partners continue to obtain benefits and greater interdependence, such that they reach the maturity or maintaining stage Even successful relationships can enter a decline or recovery stage in response to specific events (conflict, unfairness, betrayal) or passive neglect (failure to communicate, ending investments) Palmatier 40 Relationship Dynamics and Lifecycle Stages Across the different relationship stages, RM strategies should be adapted as follows: Early use gratitude-, communication-, and competency- based strategies to build reciprocity norms and explore potential Growth use bilateral investments to exploit relationship

potential, though the window for investments is small Maintain dont neglect (ongoing communication and investments) or betray (unfairness and conflict) customers Recovery use communication together with compromise to rebuild relationships and avoid exchanges based solely on dependence Palmatier 41 Customer Relationship Lifecycle Exploratory/Early Stage Growth/Development Stage Maturity/Maintain Stage Use bilateral investments to exploit relationship potential by building strong relationship bonds. Dont neglect (ongoing communication and investments) or betray (unfairness and conflict) the partner. Decline/Recovery Stage Relationship Quality High

Relationship Quality Low Most Effective Relationship Marketing Strategies Palmatier Use gratitude-, communication-, and competency-based strategies to build reciprocity norms and explore potential. Use communication together with compromise to recover the relationship and avoid an exchange that is based solely on dependence. 42 Agenda Introduction Relationship Marketing Strategy

Building and Maintaining Relationships Targeting and Adapting Relationship Marketing Strategies Relationship Dynamics and Lifecycle Stages Managing Relationship-Based Sustainable Competitive Advantage Building Relationship Equity Measuring Relationship Equity Multiple Regression Takeaways Palmatier 43 Building Relationship Equity

The process of building relationship equity consists of two main steps: 1. 2. Palmatier A firm needs to develop a strong foundation that supports relationship building and maintenance With this foundation, the firm can begin to implement relationship marketing and loyalty programs targeted at specific customer groups, designed to generate specific relational outcomes across the firms customer portfolio 44 Step 1: Developing a Strong Relationship Foundation Unfairness and unresolved conflict can undo years and fortunes spent on relationship building Counterproductive to increase RM budgets without having a process that deals with customer problems, service failures, or trust violations The individual, boundary-spanning personnel with whom customers interact usually are the most critical means to create and maintain strong customer relationships

Because so many drivers of customer relationships revolve around boundary spanners, sellers need to dedicate their RM investments to selecting, training, and motivating boundary-spanning employees Increasing the amount, frequency, and quality of communication with customers also can be effective Regardless of the extensiveness of such external communication though, a poor alignment of internal, organizational elements with RM can undermine any effort to build customer relationships Palmatier 45 Relationship Marketing Best Practices How to Build and Maintain Strong Customer Relationships Assign customers a dedicated contact person, even if customers interface through multiple channels (e.g., call center, online). Conduct relationship marketing audits to verify that the seller's organizational elements (relationship marketing strategy, leadership, culture, structures, and control) and business processes are aligned with relationship marketing objectives. Do not let conflict go unresolved, because it will overwhelm other relationship-building efforts.

Focus the largest portion of relationship marketing investments on selecting, training, and motivating boundary-spanning employees, who represent the most effective means to build and maintain relationships. Institute relationship marketing programs focused on increasing the amount, frequency, and quality of communication with customers, especially early in the relationship lifecycle, because communication is a strong driver of relationship quality and future relationship growth. Minimize the proactive use of financial relationship marketing programs (e.g., price rebates, points programs) for relationship building; rather consider these programs as price/volume discounts or competitive responses. Measure multiple aspects of relational assets (relationship quality, breadth, composition, and growth/velocity) on an ongoing basis. Allocate relationship marketing investments dedicated to specific programs primarily to social and structural programs. How to Target and Adapt Relationship Marketing Give customers an opportunity to reciprocate soon after receiving a relationship marketing benefit (not quid pro quo), which takes advantage of high levels of gratitude, prevents guilt rationalization, and leads to a relationship marked by reciprocity. Leverage relationship marketing investments by providing the benefit when the customer's need is the highest and the benefit provides the most value. Leverage relationship marketing investments by designing programs to increase customers' perceptions of seller's free will, benevolence, risk, and cost in providing the relationship marketing benefit (leave some random or discretionary element to programs). The effectiveness of relationship marketing can be enhanced by actively targeting investments toward customers with high relationship orientation (need and desire for a relationship). Note: Adapted from Palmatier 2008.

46 Step 2: Implementing Targeted RM and Loyalty Programs Different RM programs build different forms of relational ties that generate varying returns from different types of customers Social RM programs use social engagements like meals and sporting events to convey the customers special status Structural RM programs provide investments that customers might not make themselves, such as in electronic order processing interfaces or customized packaging Financial RM programs provide economic benefits, in the form of special discounts, giveaways, free shipping, or extended payment terms that ultimately tend to offer little relative advantage, because competitors can easily match them Palmatier 47 Example: Telstra (Australia) Telstra, Australias telecoms giant, launched a loyalty program called Thanks that rewards its customers with movie tickets and access to live

music and sporting events Mark Buckman, the chief marketing officer of Telstra, indicated that: We want our customers to turn into advocates for our business. They stay longer with you, they spend more money with you and they recommend you to friends and family The program was launched to recognize the relationship Telstra has with its customers, while enhancing the commitment to the brand. Palmatier 48 Example: Your World Rewards (UAE & US) Emirates Airline and Starwood Hotels & Resorts Worldwide, Inc. formed a partnership, Your World Rewards, to provide reciprocal benefits to Emirates Skywards and Starwood Preferred Guest (SPG) customers The combined program allows Skywards and SPG elite members to gain points and rewards when they fly with Emirates or stay with Starwood.. Thierry Antinori, executive vice president and chief commercial officer of Emirates Airline, reports that: The combination of Emirates growing global network, Starwoods innovative take on hospitality and our toprated loyalty programs allow us to recognize our most valuable customers with a heightened level of service and greater rewards

wherever they travel be it to one of our more than 140 destinations or at any of Starwoods 1,200 hotels. Palmatier 49 Step 2: Implementing Targeting RM and Loyalty Programs Overall, targeting RM programs toward customers with high relationship orientations will make them more effective Sellers need to leverage their RM investments by designing and delivering programs that increase their customers perceptions of the sellers free will, benevolence, risk, and cost The next step, beyond inducing gratitude, is getting customers to act on these feelings in ways that produce the most benefits RM investments should be targeted and adapted according to the relationship stage Palmatier 50 Measuring Relationship Equity A central measure of the effectiveness of RM efforts is relational equity, which should be assessed on an ongoing basis to support learning and refinement over time

An effective measure of relational equity requires a clear definition of the target of that measure If RM efforts inherently result in longer relationships, then it may seem that duration should be a good proxy for relationship strength or equity Another approach links RM programs and relationship equity measures to customer lifetime value, to isolate what portion of the CLV results from relationship equity or specific RM programs Although this CLV approach is very helpful, in that it integrates multiple financial outcomes into one measure and captures future financial benefits, it cannot capture some of the potential benefits of a strong relational bond, such as positive WOM that leads to new customer acquisition Palmatier 51 Key Relationship Dimensions and Example Measures Constructs Definitions Representative Measurement Items Commitment

An enduring desire to maintain a valued relationship I am [My firm is] willing to go the extra mile to work with this salesperson [selling firm]. I feel [My firm feels] committed to the relationship with this salesperson [selling firm]. I [My firm] would work hard to maintain my [our] relationship with this salesperson [selling firm]. Trust Confidence in an exchange partners reliability and integrity This salesperson [selling firm] gives me a feeling [us feelings] of trust. This salesperson [selling firm] is always honest. This salesperson [selling firm] is trustworthy. Gratitude Feelings of gratefulness, thankfulness, or appreciation toward an exchange partner for benefits received I feel [My firm feels] grateful to this salesperson [selling firm]. I feel [My firm feels] thankful to this salesperson [selling firm]. I feel [My firm feels] obligated to this salesperson [selling firm]. Reciprocity norms Internalized patterns of behaviors and feelings that regulate the balance of obligations between two exchange partners I [My firm] would help this salesperson [selling firm] if there was a need or problem in the future. In the long term the benefits this salesperson [selling firm] and I [my firm] receive from each other will balance out. Buying from this salesperson make [selling firm makes] me [us] feel good. I [My firm] would expect this salesperson [selling firm] to help me [us] in the future.

Relationship Quality Interfirm Relationships Relationship breadth Number of relational ties with an exchange partner Relationship composition Decision-making capability of the relational contacts at an exchange partner How many different relationship ties are there among employees at [selling firm] and your firm? (number) [Selling firm] knows the key decision makers at our firm. [Selling firm] has relationships with the important gatekeepers at our firm. [Selling firm] deals with the important decision makers in our company. [Selling firm] has contacts with what percent of the key decision makers at your firm? (percentage) [Selling firm] has contacts in how many different functional departments in your firm? (number) Other Measures Relationship orientation Customers' desire to engage in a strong relationship with a partner to conduct an exchange. This business transaction requires a close relationship between me and [selling firm] to ensure its success. A close relationship with [selling firm] is important to my success. A strong relationship with [selling firm] would be very helpful in buying this product. I don't need a close relationship with [selling firm] to successfully buy this product. (Reverse) I believe that a strong relationship with [selling firm] is needed to successfully buy this product. Lifecycle stage Qualitative path-dependent phases through which a relationship transitions. Relationships typically expand during the exploration and buildup stages,

peak and remain relatively flat during the maturity stage, and weaken during the decline stage. Exploration: You both are in the very early stage of discovering and evaluating compatibility, integrity, and performance of the other party. Buildup: You both are receiving increasing benefits from the relationship, and the level of trust and satisfaction is growing in such a way that you are increasingly willing to commit to a long-term relationship. Maturity: You both have an ongoing, long-term relationship in which both parties receive acceptable levels of satisfaction and benefits from the relationship. Decline: One or both of you have begun to experience dissatisfaction and are evaluating alternatives, contemplating relationship termination, or beginning to end the relationship. Note: Adapted from Palmatier 2008. 52 DAT 7.1 Multivariate Regression Analysis Description Multivariate regression is a statistical approach used to quantify the sign and magnitude of the relationship between a focal dependent variable (marketing outcome in our context) and several independent variables (e.g., marketing efforts). When to Use It To determine how one of multiple marketing interventions incrementally affects observed marketing outcomes. To compare the effects of multiple marketing interventions on marketing outcomes. To predict the likely market outcomes due to various combinations of marketing interventions. How it Works

The purpose of multivariate regression is to capture the statistical association between a focal marketing outcome of interest (e.g., sales, loyalty, CLV, profitability) and several marketing interventions that simultaneously may affect the focal outcome (e.g., relationship marketing efforts, marketing mix). Performing a multivariate regression enables five important discoveries. First, we can discern whether a particular marketing intervention truly influences a marketing outcome. That is, a multivariate regression can provide statistical validation of the significance of the impact of a certain marketing intervention. Second, we learn the sign of the relationship between a marketing invention and a marketing outcome. In some cases, the sign is wellknown a priori (e.g., as the price increases, sales decrease), but in others, it remains unclear. For example, a firm may not know whether a financially oriented relationship marketing program offering free shipping ultimately increases CLV. The regression can help the firm verify the sign of the relationship. Third, a multivariate regression helps researchers compare the relative strength of multiple marketing interventions. For example, a firm may need to know which of its social, structural, or financial relationship marketing efforts are most and least influential, and this determination is enabled by a regression. Fourth, with a multivariate regression, we can control for confounds while gauging the relationship between marketing interventions and marketing outcomes. For example, while trying to understand the relationship between financial relationship marketing efforts by a supplier firm devoted to a buyer firm and marketing outcomes earned from this buyer firm, we might control for the buyer firms size, because larger firms typically buy more, regardless of whether they receive marketing interventions. Fifth and finally, multivariate regression enables predictions of the marketing outcomes following from various scenarios of marketing interventions, which is useful in scenario analysis. If the marketing outcome is given by Y, and we have three marketing interventions (X1, X2, and X3), and two confounds (Z1, and Z2), the formula is given by: where to are the coefficients (or weights) that capture the sign and strength of the relationship between the marketing interventions and the marketing outcome, and is a random error term. In most cases, we would have data about past outcomes and marketing inventions/confounds, then rely on software such as SAS or SPSS to provide the sign, strength, and statistical significance of the coefficients. 53 DAT 7.1 Multivariate Regression Analysis Example Example A B2B supplier of electrical equipment is going through a redesign of its relationship marketing efforts directed at buyers, and it seeks to ensure that it is investing in RM efforts that boost the CLV of each of its buyers. Currently, the supplier is investing in three kinds of RM efforts: social (e.g., meals, sporting events), structural (e.g., customized packaging), and financial (e.g., free giveaways of small electrical parts that are part of the electrical installation service it provides). To perform this exercise, the supplier created a database of the CLV of its 3,500 buyers, as well its investments in social RM (SRM), structural RM (StRM), and financial RM (FRM) for each of these buyers. It also collected data on the buyers location (east or

west coast), the number of employees in the buyer firm, and the firm industry type (corporate or government). The results showed: Variable Coefficient Capturing Weight of Intervention p-Value for Statistical Significance Social RM Efforts 1.26 0.03 Structural RM Efforts 0.20 0.89 Financial RM Efforts 2.50 0.01 Buyer Firm Location (East Coast) 0.80 0.02 Buyer Firm Number of Employees 1.10

0.03 Buyer Firm Industry (Corporate) 0.08 0.41 1. Social RM efforts and financial RM efforts paid off, whereas structural RM efforts did not exert any statistically significant impact on buyer CLV (coefficient = .20, p > .05). 2. Financial RM and social RM efforts significantly increased CLV; financial RM efforts were twice as effective as social RM efforts in this context, because the coefficient associated with FRM (coefficient =2.50, p < .05) was approximately twice as large as the coefficient associated with SRM (coefficient = 1.26, p < .05). 3. Firms on the east coast were much more likely to buy compared with firms on the west coast (coefficient = .80, p < .05). Similarly, larger firms generally had a higher CLV than smaller firms (coefficient = 1.10, p < .05). Whether the buyer was a corporate or government buyer did not matter (coefficient = .08, p > .05). 4. The supplier used the coefficients obtained from this regression to predict the increase in the CLV when it instituted various financial and social RM combinations. Based on the analysis, the supplier also launched another study, to understand why its structural RM efforts were not successful. Palmatier 54 RM Program Audit/Design Process (same process for any BOR program) 1. Determine AER objective(s) for targeted persona(s) using CLV 2. Collect and analyze data to identify effective RM strategies 3.

4. Evaluate past programs using choice models, natural experiments, etc. Qualitative interviews and/or surveys personas Qualitative interviews within exemplar boundary spanners Benchmark competitors and/or best in class Design RM/loyalty program Rank reward elements to build gratitude and status with targets and prevent unfairness with bystanders (gifts, interpersonal, specialness, communication, similarity, trust) Identify delivery options to magnify effects with targets (visibility, rules, surprise, randomness, timing, control attributions) Evaluate effect on portfolio (prevent unintended consequences) Estimate ROI of programs

Perform field experiment to test effectiveness of top few programs versus control group, analyze, and then launch Palmatier 55 Agenda Introduction Relationship Marketing Strategy Building and Maintaining Relationships Targeting and Adapting Relationship Marketing Strategies Relationship Dynamics and Lifecycle Stages Managing Relationship-Based Sustainable Competitive Advantage

Building Relationship Equity Measuring Relationship Equity Multiple Regression Takeaways Palmatier 56 Takeaways Relationship marketings (RM) influence on decision making is supported by the underlying psychological emotion of gratitude, which leads to a desire to repay The linkages between relationships and financial performance operate through four mechanisms, including increased cooperation, loyalty, word-of-mouth, and empathetic behaviors The most effective RM strategies emphasize positive factors such as seller expertise, communication, relationship investment, and similarity while minimizing negative factors such as unfairness and conflict

The effect of negative activities on relationships is twice as strong as positive activities; it is important to prevent negative events while continuing positive RM Palmatier 57 Takeaways Bystanders of loyalty programs often perceive their treatment as unfair; this is why loyalty program preferential treatment should be invisible to bystanders To optimize RM effectiveness, sellers must match the level of RM activities to the customers relationship orientation. Some of the factors that determine a customers relationship orientation are relationship proneness, exchange and product uncertainty, product category involvement or dependence, relational norms, relation-centric reward systems, services, business-to-business markets, and emerging markets Because RM is not effective for all customers, sellers must determine where to allocate RM resources across their customer portfolios Palmatier 58 Takeaways

Factors that help leverage the effectiveness of RM delivery include free will, motive, risk, and value Relationships operate through a typical lifecycle with four phases: exploration, growth, maturity, and decline/recovery. Each phase requires different RM strategies There are two steps to building relationship equity: developing a strong relationship foundation and implementing targeted RM and loyalty programs To understand the effectiveness of RM efforts, firms should measure their relational equity on an ongoing basis and link it to customer lifetime value Palmatier 59 Readings The Role of Customer Gratitude in Relationship Marketing (academic paper on how RM programs work, experiment and survey) Understanding the Effectiveness of Loyalty Programs: Managing Target and Bystander Effects (framework for understanding loyalty programs) Effect of Service Transition Strategies on Firm Value

(academic paper using secondary data to understand when shifting to services payoffs) Marketing Strategy Book: Chapter 7 Relationship Marketing Book Palmatier 60 60

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