Consumer Behavior: Building Marketing Strategy 13th Edition by Delbert Hawkins, David Mothersbaugh

Exercise 4

Loyalty and Relationship Marketing Strategies
Not all relationships are created equal and not all buyers are worth a relational investment. Buyers who want and are willing to pay for value-added services and who desire positive relationship outcomes such as enhanced performance and lower costs of transactions are worth investing in and having relationships with. Those who see the world through a strict price lens and don't want, or won't pay for, value-added services need to be treated in a different manner. 55
It begins by understanding two things about a buyer:
1. How much does it cost to serve the buyer This relates to the profitability of a buyer and also how much of an investment in value-added services can be made while still being profitable.
2. Where is the buyer on the "loyalty ladder." Buyers at higher levels of loyalty want to make relationship-specific investments in your firm, want to collaborate on new ventures, are willing to pay premiums, and so on.
Combining these two factors leads to four different organizational buyer segments:
• Commodity Buyers (Low Cost\Low Loyalty). These customers don't want value-added services and don't want to pay for them. They simply want the basic product (commodity) at the lowest price. These customers, if they are profitable due to their low cost, should be served as a transactional customer.
• Underperforming Buyers (High Cost\Low Loyalty). Unless the firm can cut costs to make them a profitable commodity buyer, or convince them to pay for the value-added services to make them a profitable partner, they should generally be terminated. While not easy, it can actually be more profitable to NOT sell to a buyer.
• Partner Buyers (High Cost\High Loyalty). Although expensive to serve, these customers generally are loyal and thus tend to be willing to pay for the value-added services provided. These customers should be managed in a relational manner, with an eye toward increasing the efficiencies of the relationship to lower costs and increase profits.
• Most Valuable Customers (Low Cost\High Loyalty). These buyers are most profitable because they demand and pay for value-added services but are lower in cost to serve due to economies of scale, experience, and so on. These customers, like partners, should be managed in a relational manner.
Many businesses market and manage to their buyers in the same way. The buyer segments listed above, however, show that some buyers are worth having a relationship with and others are not. One expert estimates that fewer than 10 percent of buyers fall into the most valuable customer category. Because relational or relationship marketing is expensive in terms of both time and effort, only some buyer segments are worthy of having a relationship with.
How might you move an underperformer to partner status