Customer Behavior Module Nine Relationship Based Buying.
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Customer BehaviorCustomer Behavior
Module NineRelationship Based
Buying
Customer Behavior2
Module 9
Value of Relationship-Based Buying Customer to Marketers
Many marketers fail to realize the financial payoffs of keeping customers for the long term. But the payoffs are
impressive. It had been shown that a 5 percent increase in customer retention is associated with profit gains of 25 to
125 percent.
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A Model of Relationship-Based Buying
Outcomes
Socio-Cultural Factors
Early socializationReciprocityKeiretsuFriendships
Socio-Cultural Factors
Early socializationReciprocityKeiretsuFriendships
Supply loyaltyIncreased buyingWillingness to pay-moreProactive word-of-mouthGoodwill (customer equity)
Supply loyaltyIncreased buyingWillingness to pay-moreProactive word-of-mouthGoodwill (customer equity)
Relationship Based Buying
TrustCommitment
Antecedents (Motivators) Relationships
Cost-Benefit Factors
Search costsRisk reductionSwitching costsValue-added benefits
Cost-Benefit Factors
Search costsRisk reductionSwitching costsValue-added benefits
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Customer Motivations for Relationship-Based Buying
The antecedents in the model are customer motivations for engaging in
relationship-based buying. These motivations can be grouped in two broad categories: Cost-benefit factorsSocio-cultural factors.
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Cost-Benefit Factors
When customers make buying
decisions, including whether to enter an ongoing relation ship with a supplier, they weigh the potential costs and benefits.
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Cost-Benefit Factors
Marketing professors Jagdish N. Sheth and Atul Parvatiyar have proposed that many of these decisions are driven by the desire to reduce choices:
Customers favor relationship buying when it saves time, effort, and inconvenience, and they avoid considering new choices if doing so will entail extensive search and information processing.
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Cost-Benefit Factors
Customers favor relationship buying if they expect positive reinforcement from it.Customers favor relationship buying if they perceive that it will help them avoid risk.Customers maintain buying relationships if a change involves costs, such as legal penalties or loss of peer-group approval.People tend to resist change because change involves effort. Consequently, they maintain buying relationships out of inertia.
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Search Costs
The principal cost of breaking free from a relationship with a
marketer is the cost of finding a new product,
service, or supplier. Purchasing is problem solving; customers buy a product or service to
solve a problem.
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Perceived Risk
Is the possibility that the decision
may not yield the expected outcomes or may result in
negative consequences.
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Perceived Risk
Among the various types of risks; several are particularly relevant:
Performance riskFinancial riskSocial risk
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Switching Costs
Changing suppliers may generate switching costs, costs directly related to switching suppliers.
For example: The purchase contract may stipulate termination penalties. The buyer may not have fully recovered its sunk costs, meaning some costs of writing off investments are not recovered yet.
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Perceived risks and switching costs
Constrained in relationship
Transactional exchange
Relational Buying
Vulnerable relationship
SwitchingCosts
Perceived Risk of Alternatives
Low High
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Value-Added Benefits
When you buy repeatedly from a supplier or marketer, you treat that supplier as a
preferred supplier. In turn, to retain you as a customer, the supplier tends to treat you
as a preferred customer. For business customers, firms differentiate themselves on the basis of added benefits, especially when the core product remains
the same.
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Sociocultural Factors
Buying decisions are not purely rational decisions based on objective data.
For example, a person's culture and business and personal relationships
influence buying decisions. With regard to relationship-based buying, the
sociocultural factors that influence the formation of a customer relationship
include socialization, reciprocity, networks, and friendships.
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Early Socialization
One reason why customers choose to engage in relationship-based buying is that they get socialized into it from the
time they first began to use that product or service.
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Reciprocity
In some cases, a customer buys from a particular supplier because the supplier
in turn buys something from the customer. This practice is called
reciprocity.
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Networks
Networks are a group of firms that deal with
each other on a preferential basis.
The firms are linked into the network either by common ownership (such as Mitsubishi
Industries) or by contractual
arrangement
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Buying Based on Friendship
Many purchases are made on the basis of friendship. Thus, if your neighbor or
friend is an insurance agent, you are likely to
buy your insurance from him or her.
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The Supplier-Customer Relationship
Trust and commitment are the twin legs of relationship-based buying.
For a customer to be engaged in relationship-based buying at all, the
customer has to trust the marketer and then make a commitment to the
marketer.
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Trust
The most essential ingredient in any
relationship, whether a business or a
social relationship, is trust.
It is also a key arbitrator of
commitment. If there is no trust, there will be no commitment.
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Commitment
Long-term customer relationships are also characterized by commitment,
that is, an en during desire to continue the relationship and to work to ensure its continuance
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Outcomes of Relationship-Based Buying
The outcomes of successful relationship-based buying are:
Supplier loyalty Increased buyingWillingness to pay more.
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Relationship Buying and Selling in Business Markets
Business customers tend to place larger orders than individual consumers do. This makes customer relationships
especially important in business markets.
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Process of Relationship Buying: The IMP Model
The Industrial Marketing and Purchasing (IMP) group, used case studies of business buying. On the basis of case studies of some 300
companies in five European countries, the IMP group
established that long term patronage is quite common in
business buying.
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Characteristics of Relational Buying
The IMP model has identified three key factors that characterize all relational buying by business customers:
1. Transaction-specific investments/adaptations2. Power dependence3. Role formalness
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Steps in Relationship Development
Based on the case studies of business buyers and sellers, the IMP group also identified the steps that companies go through in building a relationship.
4. Investment
3. Customer + Satisfaction
2 .Interactions
1 .Complementary needs
5. Commitment
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Reasons for Relationship Development in Business Buying
In addition to the motivations for relationship-based buying described earlier, business customers may also
have a few special reasons for relationship-based buying.
First, businesses may need a long-term exchange contract to assure long-term
supply.
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Determinants of Trust and Commitment from Business Customers
Switching costs Partner – specific investments Mutually shared goals Communication and product support Supplier avoidance of opportunistic
behavior
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Partner Specific Investments
The parties build and sustain relationships when they make partner-
specific/investments, that is, investments that one party makes in
processes dedicated to the other party
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Mutual Goals
Long-term relationships are also strengthened by mutual goals, or goals that require each exchange partner's
cooperation, and by whose achievement each partner profits.
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Communication and Support
If there is open communication, then the customer acquires more knowledge
about the supplier activities and knows that the supplier is not secretive.
In communicating openly, the supplier confides in the customer.
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Avoidance of Opportunistic Behavior
To cultivate an ongoing relationship, the supplier must avoid engaging in
opportunistic behavior. Opportunistic behavior concerns unilateral acts of
profiting from opportunities that may arise and that were not stipulated in
the contract.
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Determinants of Supplier Trust in Customers
Suppliers also need to trust their customers. If they believe that their
customers have no commitment to them and that they (the customers) would themselves engage in opportunistic
buying, then suppliers would not have any trust in customers. Consequently, suppliers will not be committed to the
relationship.
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