Given all the talk these days about relationship marketing, B-to-B auctions, and eWebs of all sorts, one might get the impression business relationships are changing in a fundamental way. This view, however, is likely to be misguided. This is because it is based on the idea that the Internet will do away with all social aspects of business relationships.
One central idea throughout current discussions is the challenge of building close relationships with customers. While this is a reasonable goal, it begs the question as to whether all business customers want a close relationship.
Here we will try to examine the conditions under which a customer might want such a relationship. More importantly, a good understanding of this will help you to appreciate when the efforts of building a close relationship are not warranted (just think how much time you can save if you stop trying to build close relationships with a customesr who don't want one!).
DEPENDENCE IS THE KEY
Academics in marketing and sociology have, based on several years of close observation, pointed out the importance of "dependence" in understanding close relationships.
In short, business customers want a close relationship with a seller when they are buying something that makes them dependent on the seller. If you think about it, this makes perfect sense.
When a customer is dependent on a seller, they need a close relationship. For example, imagine the customer is putting their entire Internet business in the hands of a Internet consulting company. The customer is now dependent on the consulting company. Can you see how the customer might now want a close relationship? Won't they need the consulting company to be their in case anything happens?
We've written about this in some previous articles (Is CRM really about Relationships? and Customer Loyalty is Underwater), but we never really mentioned what makes a customer dependent. So, here we will try to fill out the story.
WHAT MAKES A CUSTOMER DEPENDENT?
Essentially you can think of a few things that would make a customer dependent. We will list those below along with some short discussion.
Strategic Importance of the Product – when a customer is purchasing something that is strategically important to them, it makes the customer more dependent on the seller – and therefore more close relationship-oriented.
What do we mean by strategically important? Well, essentially it means something that allows the customer to differentiate what it sells or how develops and sells in the market. Here is a simple, but realistic example.
MS2.com sells a software product known as Product Lifecycle Automation. Without going into the specifics, the software essentially allows companies to develop and market their own products faster. By so doing, these customer companies are able to differentiate themselves in the market. This make customers who purchase the software dependent on MS2.com.
Now, before concluding that it must be complex (like fancy software) to be strategic, here's another example.
When NutraSweet (a sweetener) first entered the market, it sold its formula to Coca-Cola. This allowed Coke to differentiate its cola from all competitors in the market. Thus, NutraSweet was strategically important to Coke. NutraSweet, however, is not complex.
Thus, you don't have to sell something that is complex for it to be strategically important!!
So, ask yourself: Is what you sell strategically important to your customers?
Downside Risks – when a customer is purchasing something for which there are large downside risks (i.e., if it doesn't work, the customer is out of business), this obviously makes a customer more close relationship-oriented.
Note how similar this is to the so-called "Mission Criticality" of the product or service they're buying. If you're selling something that is mission critical to a customer, they are close relationship-oriented.
So, ask yourself: Does what you sell have big downside risks for your customers?
Switching Costs – when a customer must build up high switching costs in order to buy and use your product or service, they become more close relationship oriented. What types of switching costs are there?
We typically think of switching costs in terms of obvious things like equipment or software. So, if you have to change software in order to buy a seller's product, you incur high switching costs. While this true, it is a limited view of switching costs.
For example, switching costs can come in the form of training or replacing people, or even new procedures that are geared to work with a specific seller (such as information links or administrative controls).
When a buyer must build up any of these switching costs in order to buy a seller's product, the buyer becomes close relationship oriented.
Finally, we should note that switching costs might take the form of psychological switching costs. These arise due, in part, to the comfort a customer may derive from purchasing from a seller with a strong brand name.
So, ask yourself: Does what you sell require large switching costs for your customers?
Modularity – when a customer is buying something that is easy to mix and match within their usage system, it makes them less (not more) close relationship-oriented.
To understand this, first understand the concept of a "usage system". Most products are purchased as part of an overall system. A "usage system" is simply a set of products that must be used together to be useful to a customer. An example would be an Internet connection. By itself, and Internet connection is worthless. Its value becomes apparent only within the context of its usage system (a computer, browser, and the Internet connection).
Many things that firms sell are in fact part of a larger usage system (databases and applications, WAP-enabled cell phones and WML coded content, etc.).
To the extent that what a customer is buying is easily mix and matched inside the usage system, they become less relationship-oriented. Thus, if any database can be used with a given application, then the customer for databases becomes less relationship oriented towards a database vendor. You can readily see how industry standards and the open source movement has a profound impact on modularity when it comes to technology and the Internet.
So, ask yourself: Is what you sell highly modular for your customers?
THE BOTTOM LINE
As you can see there are various forces acting on customers to make them more or less close relationship-oriented. It's the combination of these different forces that will inform you whether your customer is really close relationship-oriented, or simply looking for transaction.
The important point to remember is this. Not all customers want a close relationship. It depends on what they're buying.
In my experience, the answer to this question typically is immediately apparent. For example, if what you sell is 1) not strategically important to a customer, 2) is not mission critical, 3) requires very little switching costs, and 4) is modular, then you are likely dealing with customers who don't want or need a close relationship. They want a transaction...and the driving force of choice will likely be the best price.
But if these factors point to a customer who wants a close relationship, well you must be prepared for being a great partner in that relationship.
Now you might be able to understand the limitations of these auctions for all business transactions. Customers buying products and services that make them close relationship-oriented are not going to be interested in an auction. Auctions put the emphasis on price, but that's not what close relationship oriented customers are interested in.
What they want is a partner who is willing to be there with them (remember they are now dependent on the seller), and such customers are typically willing to pay more for a good partner.
The follow-up question, is what it takes to be a great partner of a relationship oriented customer, and this we will discuss in a future tutorial.