Relationship Marketing : Across the Retail Spectrum

Retailing, at first sight, appears to be an industry where relational strategies can be exploited. Despite this authors disagree about whether Relationship Marketing is likely to be beneficial across the wide spectrum of retailing activities. This paper seeks to investigate whether a claim for universality can be made or, if not, clarify those ‘conditions’ which most strongly support, or otherwise, the introduction of relational strategies. Introduction Relationship Marketing (RM) is probably the major trend in marketing (Mattsson 1997). It is a leading topic of discussion at academic conferences, at dedicated practitioner conferences, in academic journals (RM editions of major publications as well as dedicated RM journals), and texts by major marketing writers (e.g. Christopher et al 1994, Buttle 1996). Despite this explosion of interest the RM literature reveals little consistency in how researchers define RM, and even less how practitioners apply the concept (Barnes & Howlett 1998). Indeed much RM theory appears to have very little in the way of empirical observation of relationships over time to support it (Mattsson 1997) and it appears many service marketers have accepted the concept with little examination of the basis for genuine, quality, relationships (Barnes & Howlett 1998). Certainly much of the research to date appears highly selective (e.g. Reichheld 1996) and all too often designed to support a particular, usually consultant based, position. Indeed cynics have noted that consultancies peddling RM solutions are growing at a rate of 30-40 per cent per year whereas their clients are still growing at 3-4 per cent (Mitchell 1997). Even RM advocates have expressed doubts. Gummesson (1996) has summed up research efforts into the concept as a ‘theory-less stack of fragmented philosophies and observations’ not appearing to converge in the direction of an emerging theory. Despite these limitations the perceived wisdom of many marketers is to call for the application of RM across a wide range of industries. Indeed it seems to be widely assumed by scholars and practitioners alike that a relationship can be formed with any customer in any situation (Barnes & Howlett 1998). In consumer marketing it is in the broad area of retailing that has attracted most obvious interest in the development of relational strategies. Indeed many authors are now relating the widespread use of store loyalty cards as being evidence of the take up of relationship marketing in this field (Pressey & Mathews 1998). It is perhaps unsurprising that retailers should be interested in RM strategy development. The more intimate nature of the industry to the ultimate consumer relative to businesses further back in the distribution chain intuitively suggests that the closer the retailer can get to the customer the better they can provide the service that the customer seeks. The ‘moment of truth’ in consumer goods and services marketing is seen as that point when the consuming public comes face-to-face with the point of supply and it is the retailer who, most often, manages this interaction and who, historically, has gone beyond the mere ‘service encounter’(Strandvik & Storbacka 1996), 1 The Burroughs, London NW4 4BT, U.K. Tel: 0181 362 6836, E.mail: j.egan@mdx.ac. uk Reichheld (1996) is one author who, very strongly, exhorts the benefits of customer loyalty (a perceived outcome of relational strategies) in retailing. Although prefacing his comments with a warning that the arguments are based ‘mostly on implication’ he claims that the ‘operating advantages of customer loyalty are particularly strong in retailing and distribution’. He cites benefits such as a more streamlined inventory, minimised mark-downs and improved capacity forecasting as beneficial outcomes of these strategies. Closer examination of the examples used, however, suggests high selectivity in the choices of retail categories (Payne & Frow 1997) which may suggest a weakness in the universality argument. Other authors take an alternative view on the general application of relational strategies across the retail spectrum. They argue that RM strategies cannot be applied universally and that the conditions necessary for relationship marketing are unlikely to be met by most high street services, particularly in fast moving consumer goods (FMCG) retailing (Pressey & Mathews 1998). It is evident, therefore, that differences exist regarding the merits of RM strategies in at least part of the retail sector. This paper seeks to clarify whether a division exists and, if so, which retail ‘conditions’ most strongly support the introduction of relational strategies and which do not. Relationship Economics The objective behind most commercial activity must, at least ultimately, be seen as sustainable profitability. Logic suggests that, providing the profitability of relational strategies (over whatever time horizon most practically can be used) outweigh those of traditional transactional strategies then a strong argument exists for their introduction. Much of the growth in interest in RM has been driven by so-called ‘relationship economics’ (Barnes & Howlett 1998). RM, it is suggested, is not altruistic but based on two profit driven arguments (Buttle 1996). These can be described, perhaps over simply, as the complimentary views that existing customers are less expensive to retain than to recruit and that securing customers’ loyalty over time produces superior profits. Advocates (e.g. Reichheld 1996) suggest that retention is best achieved through the development of supplier/customer relationships which promotes customer satisfaction (itself restricting defections) and that savings can be delivered by increasing customer retention and reduced transaction costs (Tynan 1997, Gummesson 1997). Although the arguments are appealing there appears to be several inconsistencies with the ‘retention economics’ perspective when applied generally across the retail sector. Acquisition/Retention costs The industries chosen most frequently as examples of the successful working of relational strategies (e.g. banks, credit card and insurance companies) appear all to have high ‘front end’ acquisition costs inherent in their make-up. Most important among these are the high costs of personal selling and the direct and indirect costs of detailed information gathering. Logic suggests that, in any industry where the greater part of expenses are ‘up-front’, benefits accrue from ‘writing off’ these costs over an extended period of time. In these instances the longer the relationship the lower the costs relative to income. At the other end of the retail spectrum (e.g. FMCG retailing) the cost of customer acquisition is marginal as intense personal selling and/or detailed information gathering are not necessary to make an individual sale. Although it may be argued that FMCG retailers will invest considerable resources in research into store location and customer profile these are ‘sunken costs’ which should not form part of the acquisition cost equation. Indeed the FMCG consumer would only seem to require one or more of a limited number of drivers, such as location, perceived service quality, price competitiveness, product range and quality and/or promotional offerings, to stimulate a sale. It can be argued that these are the same factors that influence the customer retention process. Similarly advertising and other marketing communication costs are commonly included in the FMCG customer acquisition calculations but are not enough to justify the ‘up front’ cost argument. High communication costs attributed to customer acquisition fail to acknowledge the part played by those same messages in the retention process. As has been noted (Barnard & Ehrenberg 1997) advertising may often work defensively to protect the existing customer base, rather than aggressively bringing in new buyers. If drivers promoting the sale of goods for potential customers are similar or the same as those for existing clients then the cost of acquisition must nearly equal the cost of retention. Indeed if the retailer introduces schemes which reward repeat buying over and above the single purchase (the basis of most schemes) then the cost of retention may, potentially, exceed the cost of acquisition in the FMCG sector. The economics of costly relational techniques must, in circumstances where acquisition/retention cost ratios are small, be closely scrutinised. This is particularly evident in the case of many costly loyalty schemes which are, perhaps ironically, most prevalent in those sectors where validity is most highly questionable (e.g. FMCG retailing). As the 1998 Mintel ‘Customer Loyalty in Retailing’ research report suggests customers are still getting more out of loyalty schemes that retailers (Khan 1998). Incentives to retention in these schemes are costs which (if profitability is to be maintained) leads ultimately to higher prices. In such markets differentials may occur in costs between the loyalty incentivisors and the lower priced competition (Palmer & Beggs 1997). The phenomenon is not new. The history of British Supermarket retailing is peppered by swings between ‘price wars’ and ‘differential advantage’ strategies. What evidence exists suggests that industries where recognisable high ‘front end’ costs such as personal selling and information gathering are involved these are ‘drivers’ to relational strategies which promote customer retention. Where acquisition costs are low and/or where the real differences between acquisition and retention costs are marginal the introduction of costly relational strategies may become a burden. Long Term Benefits ‘Retention economics’ is also promoted as a time-based form of competitive advantage through the suggestion that long-term term relationships bring long-term advantages (Murphy 1997). Reichheld (1996) lists a number of accumulating benefits which, he considers, contribute to revenue and prof