Relationships in CRM

What is a Relationship?

The “R” of CRMOpens in new window stands for relationship. But what do we really mean by the expression relationship? Certainly, most of us would understand what it means to be in a personal relationship, but what is a relationship between a customer and supplier?

Although there are differing beliefs about what counts as a relationship, at the very least a relationship involves interaction over time. Successful relationships are based on a foundation of trust and commitment.

Relationship involves interaction over time. If there is only a one-off transaction, like buying a vacuum cleaner from a specialist outlet, most of us wouldn’t call this a relationship.

Thinking in terms of a dyadic relationship, that is a relationship between two parties, if we take this interaction over time as a critical feature, we can define the term relationship as follows:

A relationship is composed of a series of interactive episodes between dyadic parties over time.

Let’s be clear about what is meant by interactive episode.

Episodes are time bound (they have a beginning and an end) and are identifiable; you can put names to the episodes.
Within a sales representative-customer relationship it is often possible to identify a number of discrete episodes, such as making a purchase, enquiring about a product, making a sales call, negotiating terms, dealing with a complaint, resolving an invoicing dispute and playing a round of golf.
For consumers taking on a mobile phone contract there is the enquiry-to-purchase episode, the on-boarding (getting connected), billing and other customer service episodes — mostly over the phone.

Each episode in turn is composed of a series of interactions. Interaction consists of action, and response to that action.

Within each episode, each participant will act towards, and interact with, the other. The content of each episode is a range of communicative behaviors including speech, deeds (actions) and body languageOpens in new window.

Some authorities think that it is insufficient, even naïve, to define a relationship as interaction over time. Jim Barnes, for example, suggests that there needs to be some emotional content to the interaction. This implies some type of affective connection, attachment or bond.

Similarly, a relationship has been said to exist only when the parties move from a state of independence to dependence. When a customer buys an occasional latte from a coffee shop, this is a transaction, not a relationship. If the customer returns repeatedly because she likes the store’s atmosphere, the way the coffee is prepared or has taken a shine to the barista, this looks more like a relationship. And whilst in this instance there is dependence (of customer on coffee shop), there is no interdependence.

This suggests the parties may have very different ideas about whether they are in a relationship. For example, in a professional procurement context for a multinational organization, corporate buying staff may think they are being tough and transactional. Their suppliers may feel that they have built a relationship.

Woodburn and McDonald have explored the potential mismatching of buyer and seller preferences for their relationship. They identify five hierarchical levels of relationship: exploratory, basic, cooperative, interdependent and integrated.

Suppliers and buyers each have their own preference of the level they wish to achieve. Ideally they match, but often they don’t.

The zone of delusion is when a supplier is investing in building a higher-level partnership with the customer, whilst the buyer is merely interested in the basic transaction. Conversely, the zone of frustration is where the buyer would like to partner but the supplier is focused only on next transaction.

Of course, modern business relationships are typically more complex than simple dyads. In a business-to-business (B2B) relationship, there may be many interpersonal relationships formed between people on both sides.

The CEOs may be talking about building a formalized partnership; the customer’s engineers may be talking with the supplier’s product management about product quality; the customer’s product users may be talking to the supplier’s customer service team about product training, and so on.

Sometimes, when purchasing large complex business solutions a customer will build relationships with companies in the supplier’s own supply chainOpens in new window, so as to ensure that the right levels of product functionality, quality and innovations are built into future offerings.

And to make it even more complex, one can imagine many customers dealing with many suppliers in a collaborative network of relationships. However, we will be begin by focusing upon the single dyad: a customer and a supplier.

Change within Relationships

Relationships change over time. Parties become closer or more distant; interactions become more or less frequent. Because they evolve, they can vary considerably, both in the number and variety of episodes, and the interactions that take place within those episodes.

Dwyer has identified five phases through which customer-supplier relationships can evolve.

Awareness.
Exploration.
Expansion.
Commitment.
Dissolution.

Awareness

Awareness is when each party comes to the attention of the other as a possible exchange partner.

Exploration

Exploration is the period of investigation and testing during which the parties explore each other’s capabilities and performance. Some trial purchasing takes place. If the trial is unsuccessful the relationship can be terminated with few costs.

This exploration phase is thought to comprise five sub-processes: attraction; communication and bargaining; development and exercise of power; development of norms; and the development of expectations.

Expansion

Expansion is the phase in which there is increasing interdependence. More transactions take place and trust begins to develop.

Commitment

The commitment phase is characterized by increased adaptation on both sides and mutually understood roles and goals. Automated purchasing processes are a sure sign of commitment.

Dissolution

Not all relationships will reach the commitment phase. Many are terminated before that stage. There may be a breach of trust that forces a partner to reconsider the relationship.

Relationship terminationOpens in new window can be bilateral or unilateral.

Bilateral termination is when both parties agree to end the relationship. They will probably want to retrieve whatever assets they invested in the relationship.
Unilateral termination is when one of the parties ends the relationship.

Customers exit relationships for many reasons, such as repeated service failures or changed product requirements.

Suppliers may choose to exit relationships because of the relationship’s failure to contribute to sales volume or profit goals. One option to resolve this problem and continue the relationship may be to reduce the supplier’s cost-to-serve the customer.

This discussion of relationship developmentOpens in new window highlights two attributes of highly developed relationships: trust and commitment. These have been the subjects of a considerable amount of research.

Core Elements of Relationship

Trust

Trust is focused. That is, although there may be a generalized sense of confidence and security, these feelings are directed. One party may trust the other party’s:

Benevolence — This is a belief that one party acts in the interests of the other.
Honesty — A belief that the other party’s word is reliable or credible.
Competence — A belief that the other party has the necessary expertise to perform as required.

The development of trust is an investment in relationship-building which has a long-term payoff. Trust emerges as parties share experiences, and interpret and assess each other’s motives. As they learn more about each other, risk and doubt are reduced. For these reasons, trust has been described as the glue that holds a relationship together across time and different episodes.

When mutual trust exists between partners, both are motivated to make investments in the relationship. These investments, which serve as exit barriers, may be either tangible (e.g. property) or intangible (e.g. knowledge). Such investments may or may not be retrievable when the relationship dissolve.

If trust is absent, conflict and uncertainty rise, whilst cooperation falls. Lack of trust clearly provides a shaky foundation for a successful customer-supplier relationship.

Commitment

Commitment is an essential ingredient for successful, long-term relationships. Morgan and Hunt define relationship commitment as follows:

Commitment is shown by “an exchange partner believing that an ongoing relationship with another is so important as to warrant maximum effort to maintain it ; that is, the committed party believes the relationship is worth working on to ensure that it endures indefinitely”.

Commitment arises from trust, shared values and the belief that partners will be difficult to replace. Commitment motivates partners to cooperate in order to preserve relationship investments.

Commitment means partners forgo short-term alternatives in favor of more stable, long-term benefits associated with current partners. Where customers have choice, they make commitments only to trustworthy partners, because commitment entails vulnerability, leaving them open to opportunism.

For example, a corporate customer that commits future purchasing of raw materials to a particular supplier may experience the downside of opportunistic behavior if that supplier raises prices.

Evidence of commitment is found in the investments that one party makes in the other. One party makes investments in the promising relationship and if the other responds, the relationship evolves and the partners become increasingly committed to doing business with each other.

Investments can include time, money and the sidelining of current or alternative relationships. A partner’s commitment to a relationship is directly represented in the size of the investment in the relationship, since these represent termination costs.

Highly committed relationships have very high termination costs since some of these relationship investments may be irretrievable, for example, investments in capital equipment made for a joint venture. In addition there may be significant costs incurred in switching to an alternative supplier, such as search costs, learning costs and psychic (stress, worry) costs.

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