Scene 1: The executive committee meeting ends at 5:30 p.m. and the committee members adjourn, pleased with what they have accomplished. Their company, Superior Shipping Services, provides trucking to large industrial users, giving customers reliable scheduling and careful handling.
In response to decreased regulation in trucking and related industries, Superior’s executives believe their company needs a stronger marketing orientation. They want to build and maintain lasting—and profitable—relationships with their customers. That, they believe, is what getting “close to the customer” means.
At an earlier meeting, the executive committee had decided to recruit a sales-marketing manager from a renowned marketer in the computer industry. Superior’s president argued that such a person was likely to have attitudes and values that would fit well with the company’s reputation for especially high quality and service.
The president and administrative vice president then identified possible candidates. The leading choice was Dale Spencer, a senior salesperson with an impressive record. At this meeting, the committee has outlined an offer that Superior’s president believes would be attractive to Spencer.
Scene 2 (one month later): Dale Spencer assumes the job of vice president—sales for Superior Shipping. The negotiations have been smooth and Spencer is pleased. Spencer and Superior’s president have agreed completely on what Spencer ought to do.
In the past, Spencer had been a patient and successful builder of customer relationships. On occasion, sales efforts became protracted as Spencer and other support people devoted long hours to woo prospects. They eventually won most of the orders—and the resulting relationships proved close and highly satisfactory to both parties.
Superior managers want similar customer ties. They plan to invest time and effort in studying their customers’ shipping needs. They will help customers plan. They will also maintain the high quality of Superior’s service. As a result, they expect to maintain—indeed, strengthen—Superior’s relationships with its existing customers. They also expect to win important new customers.
Spencer will have responsibility for instilling the new attitude and approach in Superior’s sales force. Spencer will also personally handle sales efforts at some of the key new accounts. Spencer is excited about the challenge.
Scene 3 (two years later): Several of Superior Shipping’s important executives are discussing Dale Spencer’s future with the company. Spencer has been severely disappointed with the results to date. The executives, knowing that Spencer may leave, are thinking about whether to encourage or discourage the change. They wonder what has happened at Superior—and why.
Spencer has been a respected manager. The salespeople have indeed learned better ways of analyzing customers’ long-term shipping requirements and of identifying opportunities for improving them. Superior’s other managers have kept more in touch with customers as part of the overall sales effort; they have heard numerous compliments about their salespeople—and especially about Dale Spencer.
Yet all these efforts have not produced more sales. True, many prospects have responded to Superior’s attention by awarding the company some business. But many of those new customers—as well as many of Superior’s old accounts—have also experimented with other shippers.
One competitor, Efficiency Truckers, has proven especially irksome, competing on the basis of price and doing so increasingly effectively. Many of Superior’s established customers have given Efficiency their largest and most regular shipments in exchange for price concessions. Three of the company’s most desired new customers have done the same thing even after Superior salespeople had helped them create their shipment patterns through consolidation and more careful planning.
Virtually all those customers have also continued to do some business with Superior, giving the company their last-minute smaller shipments, severely testing Superior’s ability to provide quality service. Superior’s revenue has slipped, its sales force expenses have increased, and all of Superior’s managers are deeply concerned by the developments. Dale Spencer is especially upset by them.
Superior’s managers did not adequately consider the differences between the market for computers and the market for shipping services, from the customers’ point of view. They wanted to be close to the customer, but being close to the customer means different things in the two marketplaces. The Superior example is especially instructive because a surprising number of marketers don’t probe deeply enough into the nature of their relationships with customers. They want very much to believe that they’re building lasting ties with buyers—but they’re not. They want very much to do what I call “relationship marketing”—but their customers think more in terms of “transaction marketing.” Also, surprisingly, the distinctions between relationship marketing and transaction marketing are not clear, partly because successful relationship marketing is so complex and also because so many complicated and hard (or impossible) to measure factors determine what is appropriate to a situation, whether relationship marketing, transaction marketing, or something in between.
Because marketing practice and the marketing literature have devoted more attention to transaction marketing, this article and the research project on which it is based (see the insert) instead emphasize lasting relationship marketing between industrial companies and their customers. Accordingly, I first contrast customer behavior in the markets for computers and for shipping services, and then I consider a wider variety of customer behavior.
A customer for medium-size or large computer systems generally commits strongly to the vendor that provides the important parts of the system and that thereby defines the technical parameters of the installation. When a company chooses such a lead vendor, it generally expects to continue with that supplier for an extended period. In short, it expects a relationship.
The costs and pain of changing computer suppliers have led to this pattern. Most users are well aware of the expense and tumult involved in transferring programs from one computer to another; many have first-hand experience with the trauma. Further, leading computer vendors facilitate software conversions from one to another of their own machines, thus making it much easier for customers to remain with current suppliers than to switch.
Because commitments from their customers usually last a long time, mainframe computer vendors have been able to take a long view of their customers’ relationships. They have sensibly invested upfront resources to win commitments, helped customers with long-term planning for computers, and generally acted as if their customer relationships would continue. For them, relationship marketing has been a sound choice.
By contrast, customers for shipping services can easily share their business among multiple suppliers. A customer can award a small initial order to a new supplier. If all goes well, the customer can award more business to the supplier; if not, the damage from using the new supplier has been contained. In turn, a successful new vendor may find that yet another competitor will win away some of its business from the same customer.
The seller of shipping services cannot necessarily justify up-front investments to win accounts. The seller cannot assume that by helping customers plan for their longer-run needs it will gain a principal role in executing the long-term plan. Customers may gratefully accept the planning help today but, if switching costs are low, they may accept concessions from another source tomorrow.
Transaction marketing is appropriate here; relationship marketing can be dangerous. Perhaps Dale Spencer failed because he never understood transaction marketing.
Spectrum of Behavior
In many situations, sellers will benefit from an examination of the commitments they enjoy from customers, including consideration of the closeness of their ties with them and the time horizon their customers use in their commitments. Some sellers will identify strong ties that they expect to last—like those in the computer example. Others will find weaker, more transient affiliations—like those in shipping. Others may identify intermediate or even more extreme patterns.
The foregoing leads us into two simplified pictures or models of accounts’ possible behavior that can be considered as the end points of a spectrum. Accounts in real situations will generally occupy less radical positions along the spectrum.
One extreme is what I call the “always-a-share model,” which assumes that a customer making purchases of some product category repeatedly can easily switch part or all of its patronage from one vendor to another. The customer can therefore share its patronage among multiple suppliers. Though extreme, this model suggests the actual behavior of some buyers of commodity chemicals, some apartment building owners who purchase major appliances, some buyers of computer terminals, and some mailing services and shipping services, customers.
Because the always-a-share customer faces low switching costs, a vendor can sensibly assume that it has a chance of winning business from such an account—provided that the seller offers an immediate attractive combination of product, price, support, and/or other benefits. The seller is not locked into an account from which it currently enjoys patronage, nor is it locked out of one to which it does not now sell.
In some situations suggesting always-a-share behavior, a customer may make a series of purchases each from a single supplier but share its patronage among vendors over time (e.g., a purchaser of simple machine tools). In other situations suggesting the always-a-share model, the product is more divisible and the customer shares its business among multiple vendors at one time (e.g., a purchaser of carbon steel).
Implications of always-a-share.
The always-a-share buyer is likely to have a short time horizon in its ties with suppliers. Even vendors who make consistent sales to that customer are obliged to give good immediate reasons for continuing the relationship with each purchase.
Transaction marketing is apt for the always-a-share customer.
The opposite end of the behavior spectrum also assumes a series of purchases over time, but it presumes that at any one time the account is committed to only one vendor. The account faces high costs of switching vendors and therefore changes only reluctantly. As a result, it is likely to remain committed to its current supplier.
If the account does leave a vendor, it is at least as hard to win back as it was to win in the first place. I call such behavior the “lost-for-good model,” emphasizing the pain of losing such a customer. The flip side is more cheerful; once won this type of customer is likely to be won for a long time.
The behavior picture in this lost-for-good model is indeed extreme. It is also a reasonable simplification for actual situations in which switching vendors involves considerable cost and disruption. The model suggests the behavior of some but not all purchasers of, for example, computers, communications equipment, office automation systems, heavy construction equipment, magazine fulfillment services, and aircraft engines.
Implications of lost-for-good.
The essence of this model is that since the account cannot easily switch its patronage, it will therefore view its commitment to a vendor as permanent and use a long time horizon in the relationship. In choosing a supplier, it will consider the seller’s likely future abilities to satisfy its needs and it will not focus exclusively on the seller’s immediate capabilities and inducements.
Because the customer takes a long time horizon, and industrial marketer can also sensibly take a long-term view of the relationship. Often the seller can justify heavy up-front investment in trying to win new (or significantly increased) commitments from such customers.
Relationship marketing is apt for the buyer who might be lost for good.
Real customers are likely to approximate various spectrum points between lost-for-good and always-a-share. The position of a certain customer will depend in part on characteristics of the product category, on the customer’s usage system for the product, and on actions both the vendor and the customer take. Examples of such customers are fleet purchasers of cars or trucks, buyers of carbon steel, and users of banking services.
At first glance, a fleet purchaser is appropriately placed near the always-a-share end of the behavior spectrum: the buyer could use products from several vendors and could switch its patronage easily. Other factors, however, might move fleet buyers somewhat closer to the lost-for-good model. A customer’s in-house maintenance staff might be skilled in working on a particular vendor’s products; mixing vendors might require retraining. Similarly, if a vendor designed its products to use a common set of parts, the customer who uses one vendor could save on spare parts inventory (and/or could reduce the time required to obtain needed parts). Thus while some fleet purchasers would be close to the always-a-share model, vendor actions and buyer investments would move others to the middle of the behavior spectrum—or even beyond.
In a similar way, a purchaser of carbon steel might appear to be the prototypical always-a-share buyer, able to mix and match suppliers even within a single time period. Many purchasers would indeed approximate that model. Consider, however, a steel user that is adopting a just-in-time system for its materials and component inventories. Just-in-time requires extremely close cooperation and scheduling between buyer and seller; it will usually work much more smoothly with a single supplier per time period. Moreover, once a supplier and buyer have learned to work well together, the buyer will be reluctant to change and have to orient a new vendor. Hence even for a commodity such as carbon steel, the customer’s usage pattern and the vendor’s investment in adapting to the buyer’s procedures can create behavior more like lost-for-good.
Finally, look at a customer for banking services. Again, it would appear that a company (or individual) could conduct business simultaneously with several banks—perhaps using checking accounts in multiple banks. While some banking customers do so, other corporate financial managers save time and money by using integrated financial packages from their banks. Along with the savings they gain, they establish closer ties to the bank—and end up in the middle of the behavior spectrum.
It is important to note that positions are determined in part by vendor actions. Marketers can consequently benefit from understanding their own customers’ positions—for two reasons.
First, diagnosis with regard to the spectrum can help sellers understand their customers’ concerns and interests. It can, for example, help them identify the issues that will determine purchase decisions. An always-a-share customer will almost certainly emphasize shorter-term, more immediate concerns. A lost-for-good account will place considerable emphasis on longer-term issues, like the seller’s ability to provide an ongoing stream of suitable products and to facilitate graceful upgrades from one product to another as appropriate over time. Such a customer will not ignore more immediate concerns, but it will not emphasize those considerations exclusively.
Second, the behavior spectrum can help vendors evaluate possible marketing strategies. Obviously, marketing actions that are well suited to customers toward one side of the spectrum will not necessarily be at all appropriate for customers toward the opposite end. In addition, the spectrum can help marketers evaluate the potential impact of marketing actions on moving customers closer to one end of the spectrum or the other.
Costs of Change
An important point about switching costs is that customers face such costs in making many types of changes, regardless of whether a vendor change is involved. For example, a computer user faces some switching costs to modify existing programs even in changing from one operating system to another with the same vendor. In a similar way, a customer often faces switching costs when its vendor institutes new procedures—even if those procedures eventually improve service to the customer. For example, a supplier of manufactured parts may install an efficient new system for entering orders and for tracing previous orders. While the intended result is better service, the change will require an adjustment on the part of the customer.
In considering possible changes from one selling company to another, a customer will consider the relative switching costs (or savings) of the available choices. Therefore, marketers should consider both the absolute and the relative levels of disruption that changes will mean for the customer. The seller may find it useful to design its products and services so as to reduce switching costs that customers will face if they stay with that seller. To put it another way, the marketer should try to get the costs of intravendor switches considerably lower than the costs of inter-vendor changes.
The first, most obvious types of switching costs are the investments of time and money that customers must make to adapt to new products, services, or systems. Customers invest in their relationships with vendors in a variety of ways. They invest money; they invest in people, as in training employees to run new equipment; they invest in lasting assets, such as the equipment itself; and they invest in changing basic business procedures like inventory handling.
Naturally, the larger and more disruptive the investment actions required, the greater customer reluctance to change commitments and incur switching costs. Reluctance is especially high to abandoning previous investments in dollars, people, lasting assets, or procedures.
The amounts spent on products, being the only type of switching costs that can usually be determined precisely, are often emphasized in procurement evaluations. Other types of investments, however, can be more disruptive for the customer—and therefore can be more important switching costs. My field investigation suggests that past investments in procedures are particularly likely to create inertia against change.
For example, in adopting a comprehensive office automation system, many organizations must undergo thorough revisions in their procedures. The effects of change will reach widely throughout their organizations. As a result, many managers are wary of making mistakes; they want to move slowly into office automation. They especially want to avoid errors that would require yet another round of investments in procedures.
In the same way, because of past investments, buyers may be reluctant to incur the switching costs of modifying or replacing lasting assets. Computer software programs act as lasting assets. So do pieces of industrial equipment adapted to raw materials from a particular vendor.
Risk or exposure
The second major category of switching costs concerns risk or exposure—that is, the danger to customers of making bad choices. While obviously not as immediately tangible or quantifiable as investments in time and money, the risks involved in switching can be just as important in determining customer behavior. The immediate risks involved in changes frequently concern performance—that is, whether a purchase will work as intended and for the intended cost. Fear of immediate disruption and unsatisfactory performance can make a customer reluctant to change. Customers will feel more exposed when they buy products important to their own operations, when they buy from less well-known and less-established vendors, and when they buy complex and difficult-to-understand products. In the short run, a manager or an organization may feel considerably safer with the status quo—not fixing something that is not demonstrably broken.
In the long run, however, customers often face risks in not changing. Fear of exposure can interfere with an organization’s willingness and ability to adapt to external changes and to take advantage of strategic opportunities. It can also give competitors time to make successful preemptive moves.
Today some advanced users of computers are experiencing the pain of large conversions to new systems and vendors with which they can grow. Such customers are willing to undergo the immediate switching costs because of the benefits they will gain from being up-to-date in a product area that is growing in strategic importance.
A customer’s position on the behavior spectrum does not remain constant over time, of course, especially in dynamic marketplaces. Changes occur because of environmental fluctuations, competitors’ actions, other customer changes, sellers’ actions, or simply because of the passage of time.
The computer marketplace provides an example of behavior change in the process. One important force has been the movement toward what is called “network architecture” in large computer systems, with explicit rules for interfacing different parts of a system, facilitating the use within a single network of individual parts of different types, often from different vendors. Incomparable fashion, conventions for interfacing can facilitate the use of software packages from different sources. It is becoming easier to mix and match components from different vendors or different components from the same vendor.
My field investigation shows that large computer system users are well aware of these networking effects. They have welcomed the change, sensing that it gives them bargaining power with suppliers and access to the innovations of more than one marketer.
Customers are making strong lost-for-good commitments to the technology of the lead vendor that determines the backbone or underlying network design. At the same time, however, customers are beginning to show always-a-share behavior in their purchases of individual hardware and software items.
A computer seller in the 1980s cannot assume that a customer is either totally committed or totally lost for the future, though such an assumption would have been reasonable in the 1960s. In the 1980s, customers’ choices of their lead vendors and basic techniques have been made with long time horizons and have emphasized long-term concerns and capabilities. At the same time, however, even marketers that won commitments as lead vendors have had to compete on short-term issues to win customers’ patronage for components of the newer computer networks. Customers can view those individual purchases as separate transactions.
Other changes along the behavior spectrum can be induced by the actions of customers and/or vendors, such as the use of formal procedures to create buying systems for customers and suppliers. Such systems provide efficiencies and improved service for the customer. They also create stronger links between the two organizations and raise the costs of switching suppliers.
American Hospital Supply’s ASAP system demonstrates a strong bond between a vendor and its customers. The ASAP system allows customers to place orders for supplies and equipment easily and efficiently. For example, customers can order via a computer terminal, use standing or repetitive order files (to avoid retyping regularly ordered lists of products), and obtain order confirmations on their own tailored forms. The most advanced ASAP systems provide computer-to-computer links between the vendor and the hospital’s materials management computer program; the customer’s computer can automatically order needed items from the vendor without any human intervention.
While one might expect hospitals to show always-a-share behavior in purchasing such items as syringes and hospital gowns, the ASAP system has moved its customers close to the lost-for-good end of the spectrum. Customers buy groups of products as a system; they lose efficiency and convenience when they mix and match.1
In the example at the beginning of this article, Superior Shipping’s sales force was trying to help customers plan their logistics. Superior might be able to help customers set up procedures that link them more closely to the seller, using information exchanged between buyer and seller that will facilitate efficient service. Superior might in this way offer improved service if customers involve Superior more closely in their scheduling procedures. If Superior’s customers could be induced to make such investments in procedures, their behavior would move toward the lost-for-good end of the spectrum and Superior might then find it worthwhile to invest in helping customers plan and improve. (If Dale Spencer had done some of these things, perhaps he might have succeeded at Superior.)
In other cases, vendors can raise customer switching costs and move accounts closer to the lost-for-good model by offering system benefits—additional real benefits that customers can obtain if they source more (or all) of their purchases from a single vendor. For example, a chemical company offers auto body shops access to a computer program for matching colors; the program translates information about a car’s original color, age, condition, and other factors into instructions for using the vendor’s pigments to match the car’s current color for touch-ups and repairs. The program uses only the vendor’s set of pigments; customers cannot easily mix and match.
Likewise, potential customers for private branch communication exchanges are urged to buy whole PBX systems from one vendor to obtain full software compatibility among individual products. For example, some procedures for reducing costs of long-distance calls and future electronic mail systems will depend on such compatibility.
In other situations, actions by one vendor can move another supplier’s accounts closer to the always-a-share end of the spectrum, thus allowing the new vendor to enter the accounts. Product designs compatible with those of an established vendor can serve this purpose. Many suppliers of computer peripherals and software, for example, offer products that are compatible with IBM products; customers, therefore, can buy individual items that fit into an existing IBM system. Customers can experiment with new vendors in a limited way. In the process, they show behavior a little closer to the always-a-share model.
Vendors sometimes commit themselves to making their products work with those of other vendors. Lanier Business Products, for example, a supplier of individual devices for office automation, has advertised that its products will plug into (or work with) any of the emerging standards for networking such products together. Such accommodations allow customers to make purchase decisions without fear of locking themselves into a prescribed choice for their office networks.
Using the Spectrum
Effective use of the behavior spectrum in marketing thus first involves analyzing patterns of customer behavior. It then calls for exploring possible actions by the vendor (or by the vendor’s competitors) that can affect customers’ positions along the spectrum. Here are some points to remember:
1. To diagnose customers’ behavior, analyze switching costs.
What are the investments in dollars, people, lasting assets, or procedures required for the buyer to change? As noted, the larger and more disruptive the required investments, the closer the account will be to the lost-for-good end of the spectrum; the smaller the investments, the closer it will be to always-a-share.
What is the risk or exposure involved in changing? Will a difficult or unsuccessful change seriously hurt the customer’s operations or the career of one of its managers? Such exposure will make the buyer more conservative, more reluctant to change.
What is the nature of the customer’s usage system? Is it modular so that the buyer can try a new product in a reasonably isolated experiment? If so, the account can behave more like the always-a-share model. On the other hand, a closely integrated usage system that allows only substantial changes will produce behavior more like lost-for-good.
2. To select a marketing approach, consider the position along the behavior spectrum.
Use relationship marketing for buyers near the lost-for-good end of the spectrum. Purchasers of office automation systems or aircraft engines are apt examples.
Use transaction marketing for buyers near the always-a-share end of the spectrum, for example, purchasers of many commodity chemicals.
For customers in intermediate positions on the spectrum, use intermediate approaches. Such buyers will look beyond the immediate transaction but they will not have the long-term orientations of lost-for-good buyers.
3. To analyze additional possible marketing actions, consider changes along the behavior spectrum.
To move accounts closer to the lost-for-good end, build switching costs. Create systems that link the customers more closely to the vendor, for example, either through ordering systems or through procedures for delivery and inventory. Make it easier for the customer to do business with one supplier than with many. Or choose product designs that give customers substantial benefits from using a system of products from the same vendor.
To move accounts closer to always-a-share, give the buyers painless ways to mix and match. Sell products that fit into the customer’s existing system built from other suppliers’ products. Provide easy interfaces; give the customer assistance in making mixed usage systems work. Promise and deliver compatibility.
4. To use the concept of the spectrum successfully, consider the dimension of time.
Select a time horizon for evaluating marketing actions in light of the time horizons customers use in making commitments to suppliers. Obviously, don’t make substantial up-front investments to win commitments that won’t last. In addition, plan for and/or guard against preemptive moves that will affect customers’ behavior along the spectrum. Successful competitive actions that move customers closer to the lost-for-good end can be extremely difficult to counter. Try to get there first.
The picture of long-term commitments from customers in the lost-for-good end of the behavior spectrum seems to be attractive in many ways. Close to the customer is good, isn’t it? The answer to this question appears to be “yes, but.” First, different degrees of closeness are possible in different situations; marketers should assess how much closeness is feasible. Also, my research indicates that building and maintaining strong, lasting customer ties (even where feasible) is a difficult marketing challenge.
Customers who are making strong commitments with long time horizons are concerned both with marketers’ long-run capabilities and also with their immediate performance. Because the customers feel exposed, they especially demand vendor competence and commitment. They are likely to be frightened by even minor signs of supplier inadequacy.
As a result, successful relationship marketing involves doing a large number of things right, consistently, over time. It takes coordination on the part of the seller of resources and tools to meet the customer’s future as well as its immediate needs.
The good news, therefore, is that (where feasible) strong, long-lasting relationships toward the lost-for-good end of the spectrum can be extremely attractive for marketers, whose actions can sometimes effectively encourage such behavior. The bad news—but also the opportunity—is that relationship marketing can be a difficult challenge for the marketer, often requiring up-front investment and consistently good performance on a variety of tasks.