UK: THE TIES THAT BIND. - It is cheaper and easier to keep existing customers than to try and woo new ones. Relationship marketing is changing the way companies and individuals tie their knot of loyalty.

by Alan Mitchell.
Last Updated: 31 Aug 2010

It is cheaper and easier to keep existing customers than to try and woo new ones. Relationship marketing is changing the way companies and individuals tie their knot of loyalty.

Ten days before it launched its new Range Rover at the Paris Motor Show, Rover let 10,000 of its most privileged customers into its secret. Each one of them received an invitation to a champagne breakfast or a candle lit dinner to see the new car - privately - before the rest of the world got to hear about it. This was no hard sell. Those who came along were not expected to make any commitments. Instead they were shown a BBC-style documentary which, at most, included incidental shots of the new car in action. Some saw Viscount David Linley and explorer Robin Hanbury Tenison exploring the rainy slopes of Mount Fuji, others saw General Sir Peter de la Billiere in Botswana working on irrigations projects and trying to save the elephant, and yet others Richard Branson in the Cotswolds, or Robin Knox-Johnston in Patagonia. Aside from a TV commercial - a three-minute version of the documentaries that was shown only once - that was the launch.

Compared to the usual mass media razzmatazz surrounding such occasions this was a damp squib. But Range Rover was up to something different. If all went well, over the next few years those 10,000 people would become the brand's most valued ambassadors. The aim of the preview, says John Russell, MD of Rover International, was 'to achieve the intimacy of a dinner party among friends where our launch messages would be passed on by word of mouth - overheard, not overhyped. We set out,' he continues, 'not to launch a product but to achieve a breakthrough in the quality of our customer relationships.' Along with many others, Russell is in search of what is fast becoming a new holy grail for marketers: relationship marketing. At its core lies a simple insight - it is often far more profitable, and easier, to keep existing customers from defecting than continually going out to recruit new ones. It is nevertheless an insight that's turning many companies' traditional marketing precepts and practices upside down. It is also the subject of dangerously misleading and overblown hype.

Since the early 1980s, studies on the effects of improved customer retention have been focusing marketers' minds. One credit card company calculated that a 5% increase in customer retention would create a 125% increase in profits. American Express believes that by extending customer lifecycles by five years, it could treble its profits per customer. According to a recent Coca-Cola study a 10% increase in retailer retention rates can translate to a 20% increase in sales.

Relationship marketing is the way to achieve such feats, say the gurus. The challenge, according to Adrian Payne, professor at Cranfield School of Management and co-author of the first UK book on relationship marketing, is to take consumers up a ladder of loyalty. The aim is to turn common-or-garden customers into the brand advocates Rover dreams of - people who automatically do your marketing for you. The more this happens, the juicier the financial returns as sales to existing customers blossom, investment in acquiring new ones falls, and referral business starts piling in. To achieve this, marketers must do three things. First, borrow the idea of customer/ supplier partnerships from industry. By sharing information and supporting each other's shared objectives, marketers and their customers can create real mutual benefit. Second, recreate the personal feel that characterised the old-fashioned corner shop or Edwardian department store. Make customers feel valued. And, using modern IT systems, convince them that their individual needs are being recognised and catered for. Third, continually deepen and improve the relationship by making sure that everything that impinges on the consumer's experience of the brand delights them.

In the past total quality management, customer service and marketing were like three separate spotlights on a stage, says Payne: the job now is to align them to maximise the impact on the customer. Today, many of the nation's best respected marketing organisations are busy trying to turn these concepts into a reality. Take British Airways. It has had a 10-year struggle to create a culture focused on continuous improvement and customer service. Now, its Executive Club is piggy-backing on these achievements to focus marketing efforts on its most profitable customers. The club offers Air Miles, status and recognition. But crucially, it is a data-capture exercise. Every new bit of information about a club member's flying habits and personal needs can be used to tailor the service offered. And the actual service level will depend on how valuable the customer is. A select few will be encouraged to meet BA executives face to face as guests at sports events or golf programmes. They may even dine with senior management.

Building relationships need not be confined to relatively frequent, high-value purchases like air travel. Nestle, for example, is convinced that the same approach can be applied to fast moving consumer goods. For the past two years it has been experimenting with the Buitoni Club, a club for consumers who want to 'share the love of Italian cooking'. Built around its Buitoni pasta brand, club members receive a regular newsletter full of recipes and articles about Italian food and wine. There are special offers and competitions to win, for example, a cooking holiday in a posh Tuscan villa. Again, a crucial part of the exercise is understanding, says Duncan MacCallum, Buitoni's UK marketing manager. 'We want to understand our consumers much better than the multiples, despite the information they glean through EPOS.' But that is not all. Club members are a valuable testing ground for new products. Members' per capita consumption of pasta is five times the national average, and the proportion staying loyal to the brand has increased 10% over the past 18 months, boasts MacCallum.

Both BA and Buitoni have used clubs as a means of building relationships with the most profitable segment of their customer base: the heavy spending, frequent user. But some companies want relationships with all their customers. Among the latest American Express initiatives is 'relationship billing'. Using sophisticated IT to interrogate its detailed database of customer transactions, the relationship bill includes specially generated and targeted offers along with the monthly demand for money. If the cardholder eats frequently at a certain restaurant Amex may, for example, offer them 'a bottle of wine on us'.

Next step, says loyalty manager Mark Stevens, is 'closed loop marketing' where Amex brings hotels, restaurants and shops into the relationship, providing them with information about who shopped with them using Amex, and allowing them to use the relationship bill to make their own special offers. The core thinking, says Stevens, is 'if I get value from you I'm prepared to give back value to you. As long as it is net-net, that's fine.' First Direct, the direct line bank, is taking a similar line. Every time customers contact the bank, it is a chance for First Direct to learn more about their needs and their habits, points out Peter Simpson, the bank's commercial director. He is working on schemes designed to allow customers to specify how they like to conduct business (via post or phone), when, and about what. At the core of the relationship is an exchange - even trading - of information, he says. 'If you give us more information we can serve you better.' His next step is to reach a state where all the bank's selling is driven by customer-initiated contacts.

So far, 20% of all sales calls are driven from customer contacts. By the end of next year it will be over 40%, he predicts.

However, the big question is: how close companies like these can get to the relationship marketing ideal - and the degree to which they can avoid the many pitfalls along the way. Enthusiasts for the concept see relationship marketing as a once-in-a-generation sea change. The shift from a focus on customer acquisition and one-off transactions to establishing 'enduring and mutually profitable relationships' with customers is redefining marketing, says Cranfield's Payne. 'It is a fundamental opportunity to transform the economics of the organisation,' agrees Paul Forster, who heads the Lifetime Business Group.

If practised correctly, the scheme could offer marketers a chance to achieve that goal of a sustainable competitive edge, claims US marketing guru Don Pepper, author of The One-to-One Future. 'In a learning relationship (as he calls it) an individual customer teaches the company more and more about his own preferences and needs. The more a particular customer teaches the company, the better it can provide exactly what he wants - when, where and how he wants it - and the more difficult it will be for that customer to be enticed away. Even if a competitor were to build the same capabilities, a customer already involved in a learning relationship with a firm would have to spend a pre-emptive amount of time and energy teaching the competitors what the firm already knows.' In an environment where every market is driving itself towards cost-efficient excellence it is this time and commitment factor that's crucial, argues Forster. Only companies that are willing to invest the time and the effort in building the trust and in trading information can achieve this edge, he argues. One problem is that not many of those who espouse relationship marketing seem to be thinking like this. Indeed, 'relationship marketing' is fast becoming just another bandwagon, like loyalty schemes. Far from generating loyalty and trust, it is now generally recognised that most loyalty schemes have the opposite effect. In America, for example, telephone loyalty wars have consumers simply switching according to the latest 'loyalty' incentive, notes Payne.

Is relationship marketing headed in the same direction? There are signs that it is. Already it is commonly equated with loyalty schemes, direct marketing, database marketing or all three. Sending out a piece of junk mail has become 'opening a dialogue'. Sending out six pieces of junk mail over a year has become 'deepening the relationship', while offering bribes to keep consumers from defecting is, of course, 'rewarding them for loyalty'.

To avoid the ever-growing number of pitfalls, here is a checklist. Direct marketing is not relationship marketing. 'Without two-way communications where I tell you about myself and you tell me about yourself, and we both make observations designed to be helpful, there is no relationship,' argues Mark Sherrington, managing director of the Added Value marketing consultancy. Similarly with loyalty schemes: 'If anything, they are the opposite (of relationship marketing),' says Bob Tyrrell, chief executive of the Henley Centre.

Do not assume consumers want a 64e relationships with you. 'One of the paradoxes of the whole relationship marketing side is that the consumer needs a reason to want a relationship - and it is much harder than you might initially think to find such a reason other than pay me the money,' says Anthony Freeling, a principal at McKinsey's London office. Recent consumer research by database marketing firm Brann and the Henley Centre backs this. 'As far as consumers are concerned relationships are for people, not organisations,' says Chris Gater, Brann's managing director. Indeed, 'consumers are decreasingly inclined to trust institutions, including advertised brands. And they are more inclined to trust friends because they have no axe to grind.' Do not hog control. Too many marketing initiatives are transparently driven by the company's - and not the consumer's - agenda, notes Gater. 'Consumers see it as a one-way street.' However, while people may not want a relationship with your company 'the idea of being part of a club, of having an influence where appropriate, is powerful', says Tyrrell. 'It's more to do with control and influence in a no-hassle way.' Do not intrude. Consumers are usually happy to receive helpful communications, such as customer satisfaction questionnaires. But consumers may resent attempts to personalise the relationship, especially where it's a low-involvement product.

Do not demand monogamy. Many consumers are deliberately 'promiscuous'. They enjoy variety. They might happily pick up loyalty incentives where it suits them, but they will consciously resist any attempts to force them into monogamous relationships. As Mark Uncles, Heinz professor of brand management at the Bradford Management Centre, mocks: 'Do you swear to use the one airline, and nothing but the one airline, so help you god?' Be prepared for the expense. Many companies still cannot name their individual customers, never mind calculate how much it cost to acquire them or how valuable their future custom may be. And finding out can be time-consuming and expensive. 'Companies continually underestimate the investment that's required,' says Roger Hymas, MD of BUPA.

And then there is the commitment. Relationship marketing exercises like those under way at BA, Nestle, Amex and First Direct are major strategic decisions requiring commitment. 'Building a relationship is a long-term thing. You must have clearly defined goals. You can change your ads overnight. But with relationship marketing you can't do that,' says Buitoni Club's MacCallum.

Keep your powder dry. It is the unexpected little bonus that really warms people's hearts. When some holiday-makers complained to tour operator Saga about a substandard hotel, instead of just sending the complainants a cheque, the company sent one to all those had stayed at the hotel, even those who hadn't complained. 'Don't dangle it as a carrot. Give it as a gift, so the recipient is surprised and delighted,' says Gater.

And, finally, do not get carried away. Low-value or infrequently purchased products may not be appropriate to the relationship marketing game. 'If it costs £10 a year to have a great relationship with consumers when it's a £7 sale, you don't have to be a brain surgeon to work out it isn't a way to make money,' comments Freeling.

Indeed, marketers would be better off getting the basics right, argues Peter Doyle, professor of marketing and strategic management at Warwick University: 'Many of the most powerful relationships are made with customers simply by offering them superior value. Just look at M&S.' It may be 'fundamental to a new model for marketing', says Added Value's Sherrington. But on the other hand, 'relationship marketing, where your relationship with your customer enables you to meet their needs better and more profitably, is the oldest form of marketing.' It is clear that many marketers feel they are still groping for an accurate way to describe what they are up to - and many are trying to avoid the word relationship altogether. 'Nobody is forming the type of relationship that the man from the Pru did,' notes Hymas. Consumers 'are not looking for love and kindness. They want a deal,' agrees First Direct's Simpson. 'You can't have a relationship with a computer. We are replacing old-fashioned relationships with interactive communication. We haven't yet found the right words to describe this connectivity between organisations and individuals.' There is widespread agreement that somehow 'connectivity' will be important in the years ahead. According to McKinsey's Freeling, the battle to 'own' the relationship with the customer is one of three key requirements for those hoping to 'win the right to brand' - the other two being offering a superior total value proposition, and controlling the key assets behind that proposition. Looking at relationships in different ways will force marketers to invent a whole array of new branding models, he suggests. Pepper agrees: 'If the managers of a company do not themselves determine the answer to the question "who will own the relationship with the end customer?" they are likely to find it answered for them.'.

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