University of Cincinnati Marketing Researcher Hits the Marketing Journal Trifecta

Most researchers and managers assume that relationship marketing (RM) efforts improve customer loyalty and generate stronger sales and higher profits.

Building strong customer relationships, focusing on retaining existing customers, implementing costly customer relationship management (CRM) systems, and offering loyalty programs all are built on the premise that RM works. However, some business executives have been disappointed in the returns on their RM investments. Three recent research papers by UC Prof Robert Palmatier investigate how and when relationship marketing strategies actually pay off, increasing our understanding of the effectiveness of RM.

Effectiveness of Relationship Marketing

To understand which RM strategies are most effective, researchers conducted an analysis of more than 100 research studies that represent more than 20,000 relationships within a meta-analytic framework. Palmatier’s research, as published in “Factors Influencing the Effectiveness of Relationship Marketing: A Meta-Analysis” (

Journal of Marketing,

October 2006), identifies the most effective strategies for building relationships and under what conditions a relationship pays off.

Palmatier and his colleagues found that most RM strategies lead to stronger customer–seller relationships, which enhances seller performance. “Nonetheless, this general relationship can be quite complex and requires some specific considerations,” he says.
 
First, expertise, communication and similarity to the customer are the most effective RM strategies. Therefore, selecting and training salespeople effectively are critically important to strong relationships and effective RM programs. Developing strong relationships may prove difficult for firms that want to move customers from dedicated salespeople to offshore call centers for various reasons. These firms should recognize that a lack of seller expertise, dissimilarities between boundary spanners and customers, ineffective communication, and shifts from interpersonal to person-to-firm relationships can negatively affect customer–seller relationships.
 
Second, RM is more effective when the relationship is more important to the customer. Specifically, RM pays higher dividends for service versus product offerings, business versus consumer markets, and channels versus direct relationships. Marketers with a portfolio of customers, channels, and products could improve the return on their RM expenditures by targeting their spending toward segments in which RM is more likely to pay off, such as those customers who purchase more services, channel versus direct customers and business versus consumer segments.
 
Third, proactive RM efforts may be wasted if firms allow customer conflict to remain unresolved, because the negative impact of conflict overwhelms the positive effects of other relationship-building strategies. In scenarios that involve customer conflict, companies should allocate funds away from other RM activities to resolve the conflict.
 
Fourth, RM certainly has a positive effect on financial performance, but strong seller–customer relationships had the largest influence on cooperation and word-of-mouth outcomes. Companies that depend on word of mouth and other “viral” marketing strategies should invest in effective RM programs.

Fifth, the results suggest that customer relationships have stronger effects on exchange outcomes when their target is an individual person rather than a selling firm. Thus, RM strategies focused on building interpersonal relationships between boundary spanners (e.g., dedicated salesperson, social entertaining) may be more effective than those focused on building customer-to-firm relationships (e.g., team selling, frequency-driven loyalty programs).

Illusionary Loyalty
Palmatier and his colleagues suggest that the way “loyalty to the firm” has typically been measured inherently encompasses customer loyalties to both the selling firm and to the salesperson. This can be dangerously deceptive if customer loyalty is composed largely of salesperson-owned elements. Thus, many measures of loyalty may be largely illusionary as loyalty would evaporate if the salesperson leaves. But, salesperson-owned loyalty can pay huge dividends in financial outcomes for the selling firm as long as the salesperson remains with the firm, since relationships with individuals pay greater dividends than relationships with groups. The tradeoffs inherent in the larger impact of customer-salesperson relationships and potential salesperson defection is the focus of a study “Customer Loyalty to Whom? Managing the Benefits and Risks of Salesperson-Owned Loyalty,” soon to be published in the Journal of Marketing Research.

According to social judgment theory, people use online models to evaluate other individuals but a recall model to evaluate collective groups or firms. For individuals, we expect consistency, so from first acquaintance we form inferences using a regularly updated online model and contradictory information tends to be discounted or attributed to situational forces. Thus, when asked to evaluate an individual, people access their online models and offer previously formed, well-developed, readily accessible judgments.

In contrast, firms often do not exhibit consistent behavior, so people are unlikely to invest the cognitive effort required to develop and maintain an online judgment model. When asked to render a judgment about a firm, customers form a contemporaneous evaluation using a simple episodic recall model. Based on recollection, the recall model is heavily weighted by recent, unusual, and inconsistent behaviors. When evaluating a firm, people make weaker, slower, less-confident judgments than they would to evaluate an individual.

Thus, managers face a dilemma. Individual relationships pay higher dividends than relationships focused toward the firm but if the salesperson goes to a competitor they take these relationships with them. For example, customers reported they would try to shift an average of 26% of their current purchases to follow a defecting salesperson.
 
This research identifies strategies for managing where a customer’s loyalty lies, says Palmatier. “Team selling, corporate communication and high levels of employee consistency or scripted behavior reduce the levels of salesperson-owned loyalty, whereas salesperson strategies—such as being a single point of contact, suggesting that benefits come from the salesperson, or being the sole customer champion—all increase the level of salesperson-owned loyalty.”
 
Conclusions such as these inform businesses that rely on a variety of people to interact with the customer. For example, “If you rotate people, you get less ‘bang for your buck’  from relationship marketing efforts,” says Palmatier.
 
Also, if a business uses a “return” center for returning purchased goods — instead of the original sales contact — then there is less of an individual relationship. “You may be better off using the same person in order to shelter the service failure within a strong relationship.”
 
The Return on Relationship Investment Strategies
Another aspect that Palmatier has researched is what strategies lead to better profits. For example, financial strategies would be those that offer a discount or special billing arrangements. Social strategies might offer baseball game tickets or special meals to certain customers. Or structural strategies offer special processes or systems for customers to use, such as a special toll-free number or order-tracking software.
 
“How much profit do they generate? What’s the actual return on investment?” Palmatier asks. “Then, we look at what factors could leverage these strategies.” In the September-October 2006 issue of Marketing Science, Palmatier published his answer in the article “Returns on Business-to-Business Relationship Marketing Investment: Strategies for Leveraging Profits.” He found that financial incentives are often sought by deal-conscious customers and fail to pay off economically. However, the payoff from social strategies was the highest in the short term.
 
“Our findings suggest that investments in social programs deliver the highest short-term returns of $1.80 for every $1 invested,” says Palmatier. “Structural RM investments generate positive short-term economic returns but only for those customers with which the seller interacts two or more times per week. For these customers with a high interaction frequency, structural programs generate $1.20 for every $1 invested.
 
“In contrast, the return on financial RM expenditures does not appear to be economically viable in the short run, but such efforts may be required to respond to competitive pressures. Financial programs are more effective for committed customers, who are less likely to be ‘deal prone’ and shop around for financial incentives.”

Results support the premise that returns on financial programs is enhanced when the seller employs a CRM system possibly by improving the allocation and targeting of marketing efforts.