Chapter 2

Understanding Relationships

Dr Ahmad Khraiwish
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Chapter Objectives
 To recognise a relationship and the attributes of
successful relationships.
 To state the importance of trust and commitment
within a relationship.
 To identify why companies and customers are
sometimes motivated to establish and maintain
relationships with each other, and sometimes
not.
 To identify the meaning and importance of
Customer Lifetime Value (CLV).

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 C “Customer”
 The “C” in CRM can have a narrow definition or
a wide one.
 Customers can include your suppliers, your
partners, your employees “internal customer” and
your investors (financial publics).
 Each of these “customer groups” has different
needs that have to be managed.
 The focus will be on markets (consumer & non-
consumer) more particularly on business market.

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 “R” Relationship
 It is insufficient to define a relationship as interaction over
time.
 Some researchers suggested the following:
1. There needs to be some emotional content to the
interaction.
2. To exist, relationships require parties to move from a
state of independence to dependence or
interdependence.
3. “A relationship is composed of a series of interactive
episodes between dyadic parties over time”.
 Conclusion: a relationship is a social construct. It only
exists if people believe that there is a relationship
between them and acts upon this thought.
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 Types of Relationships
 Primary relationships: long-term relationship-
based on emotional ties/mutual responsibilities/
commitment, not restricted by rules governing
contact, and the partner can not be easily
replaced by another (social relationships).
 Secondary relationships: relatively short-term,
less interpersonal, less emotions and social ties,
governed by rules and etiquette, player can be
easily replaced (Customer-supplier relationships
in its very early stages).

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 Customer – supplier relationships
 Practically, some relationships (b2b / b2c) are
temporary.
 Initial secondary relationships with your favourite
stores evolve overtime resulting in a kind of
primary relationship.
 Generally, the better the service, the greater the
tendency towards primary relationships.
e.g. feeling attracted to and comfortable with a
store such as a coffee shop (both physical & social
environment) can lead to a primary relationship

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 Customer – supplier relationships
 Aspects to define and asses relationships include:
interaction, trust, & commitment.
1. Interaction: when parties share experiences and learn
more about each other, risk and doubt are reduced.
2. Trust: when mutual trust exists between partners, both
are motivated to make investment in a relationship.
However, if trust is absent, or there is a lack of trust, this
will lead to a shaky foundation for a successful customer-
supplier relationship.
3. Commitment: commitment arises from trust. Where the
committed party believes the relationship is worth working
on to insure its sustainability.
Q: when customers have choice, they make commitments
only to trustworthy partners. Why?
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 The Value Ladder Model
This model represents the potential customer
journey as follow:
1. Suspect - Does the potential customer fit your target
market profile?
2. Prospect -The customer fits the target market profile
and is being approached for the first time.
3. First-time customer -The customer makes a first
purchase.
4. Repeat customer - The customer makes additional
purchases. Your offer plays a minor role in the
customer’s portfolio.

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6. Majority customer - The customer selects your
company as supplier of choice. You occupy a
significant place in the customer’s portfolio.
7. Loyal customer -The customer is resistant to
switching suppliers and has a strong positive
attitude to your company or offer.
8. Advocate -The customer generates additional
referrals through positive word-of-mouth.

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The Nature of B2B Relationships

 Buyer-seller relationship can adversarial when

Transactional
either party views the situation from a purely
Relationships economic perspective.

Facilitative  Trust and cooperation between buyers and sellers is

Relationships better and can create value for both parties.

 Deepest relationship, where selling firm becomes

Integrative the buyer’s sole-source supplier.
Relationships  Buyers and sellers trust one another and cooperate
to reduce costs and advance their mutual goals.

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Why firms do NOT want relationships
with customers
 Although financial benefits would result from a
relationship. However, in some occasions firms tend to
reject and resist going through this relationship with
customers.
 This is quite often obvious in business-to-business (B2B)
context, and this is due to some reasons:
i. Loss of control:
All well-established relations should have give and take on
both sides.
However, sometimes a supplier may have to give-up the
control of other side over their own business resources.

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ii. Exit costs:
Generally speaking, not all relationships survive and goes to
infinity and beyond! Things might break-up and worst-case
scenarios might become true.
Therefore, investments are made in a particular relationship
are not necessarily recovered after the relationship falls apart.
iii. Resource commitment:
Remember the commitment thing? Therefore, think before
you act!
The idea of “sunk-costs” is there!

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iv. Opportunity costs:
Once the capitals are committed to one party, then
it becomes harder to assign them to a second
party (e.g. firms with banks).

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Why customers want relationships with
suppliers
First, in the B2B context:
A number of reasons can arise when a long-term
relationship with a supplier is wanted:
i. Product complexity:
Depends on the level of complexity of the provided
product. The need for assistant might become
essential.
ii. Product strategic significance:
Whether the product or part of it is strategically
important for the firm (e.g. raw material for a focal product).

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iii. Service requirement:
Whether one or more products require further and
long-term service from the manufacturer (heavy-duty
machines/tools).
iv. Financial risk:
e.g. buying large/core items of capital equipment.
v. Reciprocity (interchange):
Basically, a common-benefit/interest for both
parties.

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Second, in the B2C context:
In this particular context, relationships can be taken to
another level far from being standard and can also be
valued when customers touch more benefits than
normal ones.
This can be summarised as follow:
i. Recognition:
When customers are being distinguished and
addressed by name (e.g. banks).

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ii. Personalisation:
Nowadays, nearly everything can be customised
as per-order.
e.g. Shoemakers, based on the data and records,
they may come up with a uniquely “just for you”
item. (tattooed shoe!).
iii. Power:
Privilege, leverage and prestige!

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iv. Risk reduction:
When you feel the ground is shacking beneath
you, this is a ‘no-good’ sign! Having that feel of risk
is uncomfortable by all means.
A factual relationship can mitigate or even
eliminate that feeling.
v. Status:
Enhancing image of customers. E.g. prestigious
products or services (elite services).

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vi. Affiliation:
It can be seen that some customers are being
linked-to some associations or particular
communities.
However, those segments can vary in the
willingness to have a relationship with firms.

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Why customers do NOT want
relationships with suppliers
 The common sense is that companies are after a
long-term relationships with its customers. However,
in the context of B2B, there are a number of
concerns can be addressed when customers are
NOT after a relationship:
i. Fear of dependency:
In the case of opportunism, which means ‘loss of
control’.
ii. Lack of perceived value in the relationship:
The product/service itself does the job! Why need a
relationship! (no added value).
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iii. Lack of confidence in the supplier:
Looks like (Maglab!).
The fear of being unreliable, strategically pointless,
not innovative enough.
iv. Customers lacks relational orientation:
One size fits all? (Incorrect). So do firms’
philosophies.
Some customers are transactional oriented rather
than relational oriented.

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v. Rapid technological changes:
Technological development is SO fast nowadays.
From a customer perspective, committing yourself to a
particular supplier, could result in missing out other new
technologies might be introduced by another supplier.
In the B2C context:
It varies dramatically. It’s basically depends on the
products and services provided.
e.g. family doctor vs household detergent manufacturer!

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Customers satisfaction, loyalty and
business performance
 It is axiomatic to look at it from one simple angle,
is that :
“Satisfying a customer, will make him/her loyal,
and by that enhancing the business performance!”.
 It is logically valid, isn't it?

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 Customer satisfaction:
This has been the focal point of research due to its
importance.
It has been defined as: “the customer’s fulfilment
response to a customer experience, or some part
thereof”.
This means: any part at any stage!
Those elements can include; product, service,
process and/or any other component of the whole
experience.
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 Therefore: most companies do investigate
and explore their customers’ requirements
and expectations in order to find out what
matters to them (i.e. customers) and then
measure customers’ perceptions of their
performance compared to the performance of
competitors.

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 Customer loyalty:
Another important element and has been
researched widely.
Two main approaches for loyalty:
1. Behavioural loyalty.
It is based on purchasing behaviour and continual
buying.

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 Many direct marketing firms (where the seller directly
reach-out customers) practice certain measures for
behavioural loyalty called RFM where;
o R = recency of purchase (time passed since last
purchase).
o F = frequency of purchase.
o M = monetary value of purchases.

 The high number is, the high rate of loyalty the

customer is.

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2. Attitudinal loyalty.
Based on customers attitude such as; beliefs, feelings
and purchasing intention.
Technically, customers who are more committed or
have a stronger preference to a certain supplier are
more loyal according to attitudinal loyalty terms.
• Practically, behavioural loyalty makes more sense
because sales and profits are based on purchases
NOT attitudes!
• However, attitudinal loyalty can provide solid reasons
which can help firms to identify barriers to purchase.
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 Business performance:
It can be measured through several ways. One of
the key and well-adopted ways used by leading
companies is Key Performance Indicators (KPIs).
When CRM is fully employed, KPIs can be used to
assess the business performance such as;
customer satisfaction, customer retention rates,
customers acquisition costs, number of new
customers, customer loyalty, revenue growth …
etc.

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