Effective Relationship Marketing and Loyalty Strategies for Acquiring and
Retaining Customers
Rob Palmatier, PhD; University of Washington
Global Research Director of SAMS [email protected]
Agenda
• What Are and Why Use Relationship Marketing and Loyalty Strategies
• Effective Strategies for Building Customer Relationships
• Effective Strategies for MaintainingCustomer Relationships
2
The “What” and “Why” of Relationship Marketing
• What: Relationship marketing (RM) is the process of identifying, developing, maintaining, and terminating relational exchanges with the purpose of enhancing performance
• Why:
– Relational-based exchange was norm since Homeric Greece
– Large part of our “cognitive and emotional function”
– Strong affect on performance outcomes (meta-analysis of 20 years of data across 38,000 relationships)
– Biggest Driver to Customer Loyalty and WOM
3(Palmatier 2008; Palmatier et al. 2006)
Payoff from Relationships Varies Across Different Countries
4
• On average, RM 11% more effective outside the US
• Relationships have the largest payoff in China: 100% larger than in US
(Samaha, Beck, and Palmatier 2014)
See Role of Culture in Intl Relationship Marketing
© Palmatier and Steinhoff 2019 5
The Value of Customer Relationships Passed Brands in 2009
0
5
10
15
20
25
2003 2005 2007 2009 2011 2013
ENTERPRISE VALUE(Purchase price of acquired business for 100% of shares, plus interest-bearing debt minus cash acquired)
CUSTOMER RELATIONSHIP VALUE(Gauge of the worth of existing repeat customers who are known in person)
BRAND VALUE(Brands, trademarks, trade names, product names, banners and mastheads, publishing titles, domains, and other similar items owned by the acquired business)
Pe
rce
nta
ge
of
En
terp
rise
Va
lue
(Binder and Hanssens 2015)
Agenda
• What Are and Why Use Relationship Marketing and Loyalty Strategies
• Effective Strategies for Building Customer Relationships
• Effective Strategies for MaintainingCustomer Relationships
6
Most Effective Relationship Building Strategies• Insights from meta-analysis of 20 years of data
across 38,000 relationships, but can…
• Only analyze what has been previously studied:
1. Expertise (.62) and communication (.54) most effective positive drivers
2. Relationship investments (.46), similarity (.44), and relationship benefits (.42)
3. Dependence (.26), frequency (.16), and duration (.13) are not effective strategies for building relationships
(Palmatier, Dant, Grewal, and Evans 2006)(Palmatier et al. 2006)
Power of Gratitude and Reciprocation
• “The sentiment which most immediately and directly prompts us to reward, is gratitude.”1
• Evolutionary psychologists show gratitude and reciprocity have some heredity basis and argue that it provides individuals’ competitive advantage2
– Enforced by positive (pleasure) and negative emotions (guilt)
– Punishment of moocher, ingrate, welsher– Coke/raffle tickets, Krishna flower, 3-5$ to 1$ returns
• Gratitude is a catalyst for starting relationships; leads to reciprocity norms (residual of gratitude)2
• Failure to feel gratitude sign of psychosis
(Emmons and McCullough 2004)
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(1Adam Smith 1790; 2Emmons and McCullough 2004)
Relationship marketing
Customer commitment
•Feeling of gratitude•Gratitude-based reciprocal behaviors
Performance outcomes
Many Factors Leverage the Effects of RM on Gratitude: Enhancing Returns
Customer trust
•Freewill•Motive•Risk•Need
9
(Palmatier, Jarvis, Bechkoff, and Kardes 2009)
Together determines
effectiveness of RM
See The Role of Customer Gratitude in RM to understand how it works
Reciprocity is Key for Effective Online Relationship Marketing
Seller unilateral relationships
Unilateral Relationships
Controls
Buyer unilateral relationships
Reciprocal relationships
Seller performance ($)
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• All relationship types increase sales.
• Reciprocal relationships increase sales the most.
• The increase from reciprocal relationships lasts the longest.
• Online reciprocity can be as trivial as following someone back or
pressing “like” but still have a significant effect on performance.
7 days
4 days
1 day$3.31
$6.21
$9.93
See Online
Relationship
Formation
Higher Payoff for Social Programs than for “Financial” Discounts or Promotions
Social RM
Financial RM
Structural RM
Incremental customer
return
RM
Investments
Controls
(Palmatier, Gopalakrishna, and Houston 2006)
180% ROI
Negative ROI
100 to 120% ROI
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[313 customers across 34 different firms]
• Measures of relationship and loyalty to “selling firm” often commingles firm and the salesperson effects leading to illusionary loyalty
(Palmatier, Scheer, and Steenkamp 2007; Hamilton and Sherman 1996)
Customer Relationship Develop at Multiple Levels Simultaneously
Salesperson-owned loyalty
Selling firm-owned loyalty
Typical Measures Commingles Both Types of Loyalty
• Relationship with individuals typically have a larger effect on behaviors than relationship with groups– Individuals: on line model (e.g., 26% shift)
– Firms: recall heuristics
Multichannel Customer Onboarding
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Customer
share-of-
wallet
Face-to-face
Communication Channel Frequency
Relationship Performance
Telephone
Ch
an
ne
l
Ric
hn
ess
Customer onboarding – dynamic process where new customers have first experiences with a firm’s offerings and employees, and influential relationship foundations are formed.
First Impression: Encoding and Carryover Mechanisms
Multichannel Customer Onboarding Effects: Encoding and Carryover
• F2F communication on performance - 19 times larger in month 1 vs. month 24
• 50% of benefits from onboarding communication dissipate after just four months
Agenda
• What Are and Why Use Relationship Marketing and Loyalty Strategies
• Effective Strategies for Building Customer Relationships
• Effective Strategies for MaintainingCustomer Relationships
15
Maintaining Relationships: Preventing the “Bad” is More Important than Adding More “Good”
• Negative behaviors impact relationships more than positive behaviors– Meta of 38,000 relationship shows negative activities have
twice the effect of positive activities
• People seek explanation for negative more than positive events; unfairness judgments provide insight into motivation for bad events
• Unfairness plays a large role in undermining relationships since individuals feel emotional need to punish unfair behaviors, even at a cost to themselves– Hardwired psychological behavior to prevent benefit to cheaters
– Starbucks/United Airlines
(Emmons and McCullough 2004)
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(Baumeister et al. 2001; Palmatier et al. 2006; Fehr and Gächter 2000, Offerman 2002)
Perceived unfairness
Interfirm performance
Unfairness Aggravates the Negative Effect of Other Damaging Activities
17
Conflict
Opportunism
Interfirm cooperation
Interfirm flexibility
Relationship Damaging
Factors
_
+
+
+_
_
Relationship Capabilities
(Samaha, Palmatier, and Dant 2011)[493 customers over three years]
See Poisoning Relationships:
Perceived
Unfairness in Channels of
Distribution
Perceived unfairness
Interfirm performance
Strategies to Suppress Conflict and Opportunism can Worsen Unfairness
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Conflict
Opportunism
Interfirm cooperation
Interfirm flexibility
Contractutilization
Relationship Damaging
Factors
_
++
+
+_
_
_
_
Relationship Capabilities
Model supported except for
conflict x contract on
cooperation
(Samaha, Palmatier, and Dant 2011)[493 customers over three years]
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Effects on Cooperation
Low Unfairness High Unfairness
Sta
nd
ard
Dev
iati
on
s a
wa
y f
rom
Mea
n C
oo
per
ati
on
Low Conflict
High Conflict
Low Opportunism
High Opportunism
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Effects on Flexibility
Low Unfairness High Unfairness
Sta
nd
ard
Dev
iati
on
s a
wa
y f
rom
Mea
n F
lex
ibil
ity
Low Conflict
High Conflict
Low Opportunism
High Opportunism
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High Conflict and Opportunism Have Minimal Effect in Absence of Unfairness
(Samaha, Palmatier, and Dant 2011)
However, Firms Often Expose Themselves to the Toxic Effects of Unfairness
• Lost customer analysis shows that customers often leave due to the emotional push from unfairness (overcome exit barriers)
• Loyalty, reward, and relationship programs are often the culprit– Program participation tops 1.8 billion; average US
household subscribes to 14 different programs– But, often fail to meet financial expectations
• Benefits to target customers can be overcome/offset by damage to bystanders– Some programs are only available to new
customers
(Henderson, Beck, and Palmatier 2011; Steinhoff and Palmatier 2013)
20
You Must Evaluate Loyalty Programs’ Effects Across the Complete Customer Portfolio
21
Gratitude
Status
Unfairness
Loyalty-Influencing Mechanisms
Target Loyalty
Bystander Loyalty
Customer Loyalty
Loyalty Program
Visibility Rule Clarity Exclusivity
Managerial Levers
62% of Sales Lift Comes from Gratitude and 68% of Drop Comes from Unfairness
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Customers Across Multiple US Airlines
-10
-5
0
5
10
15
Inc
rem
en
tal S
ale
s (
%)
PriorityBoarding
FreeServicesPriority
Check-In
Loyalty Program Rewards
Ta
rge
t
Ta
rge
t
Ta
rge
t
Bysta
nd
er
Bysta
nd
er
Bysta
nd
er
Gratitude
Status
UnfairnessSee Understanding the Effectiveness of Loyalty Programs for overview
Data Policies Can Impact Customer Relationships
• 146,000 customers affected
• Has Low Transparency + Low Control = $1.3 billion stock value loss
• If High transparency + high control = $63 million loss
• $1.2 billion saving
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A Strong Privacy Policy Can Save Your CompanyMillions, HBR 2018; by Martin, Borah, Palmatier
Firm Strategies to Deal with Changing Privacy Landscape
• Defensive strategies Data minimization (SAP; 80% never used)
Data pooling
Quick and transparent recovery (use apologies)
Inoculate firm from data breaches (transparency/control)
• Offensive strategies Use privacy as a proactive marketing strategy (brand,
relationship)
Build relationships so share data from reciprocity
Use loyalty programs and rewards so customer self-select sharing
Avoid selling data to third party, use targeted advertising only when not perceived as stalking or personal violation
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Thank You
Rob PalmatierUniversity of Washington
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