Relationship vs. Transaction Marketing

Customer relationship marketing means creating close and long-term relationships with your customers with the objective to secure steady revenues. It is common knowledge that keeping current customers happy is more cost effective than investing in new customer acquisitions. Relationship marketing has become a buzz word a long time ago. However, many companies are going too far and overextend themselves by trying to create too many close customer relationships.

Below are some points to consider:

1) For most companies, 20% of customers provide 80% of revenues. Therefore, prioritization is key and so is a careful calculation of opportunity cost and ROI.

2) It is difficult to sustain close relationships unless all of the following attributes are present: trust, loyalty, commitment and interdependence. Therefore, unless you are fairly confident that these attributes are achievable, do not invest in relationship marketing.

3) Relationship marketing is appropriate only when switching costs for the customer are high. In the presence of high switching costs, the customers tend to have a long-term view, are less price-sensitive, their systems are more integrated and their buying behavior centers around technology and vendor, rather than product or person. In these cases, once the customer switches, she is lost for good. This is a case where investments into relationship marketing is appropriate. Under reverse circumstances (low switching costs, focus on product, modular customer system, short-term customer time horizon), transaction marketing focusing on price and advertising is more suitable.

To sum up this short post, relationship marketing has its esteemed place in both B2B and B2C marketing. However, companies that invest into expensive relationship marketing programs for customers that face low switching costs are exposed to losing customers to low-cost competitors.

Technology Adoption Rates and the Role of Lead Users

In the high-tech industry, technology adoption life cycle is one of the most important concepts. It is used to segment the market into early adopters, early and late majority, followers and laggards, and to develop customized strategies for approaching these disparate target segments. In a graph, these adopter categories fall into normal, bell-shaped curve. Each segment has different psychographic characteristics and different reasons for adopting new technologies. Early adopters are typically companies that take higher risks and expect higher returns, while the majority and the laggards wait for the technology to prove itself in the mass market before making a purchasing decision. Marketers must distinguish between these segments in order to capture the largest possible share of a given market. In other words, they need to understand the buying dynamics and the motivations of these segments to develop an effective sales and marketing strategy. Customers in the early adopters segment demand personalized solutions, great support and knowledgeable sales force. They are more tolerant to glitches and are willing to pay a premium. They buy new technology to achieve breakthroughs in their competitive position. The majority market is not looking for revolutionary changes but rather evolutionary ways to improve their operations. They demand end-to-end solutions and proven applications (case studies are an effective sales tool for this segment), as well as a great technical support. Last, the laggards are extremely risk averse, price-sensitive and only buy solutions that have undisputedly higher ROI than alternatives. They are typically not worthy of significant investments but it is important to understand their characteristics, nonetheless. At the end of the day, focusing on early adopters has its advantages but market leadership comes from a successful capture of the majority market.

Below are examples of effective strategies for capturing the majority market:

1) Offer end-to-end solution and a great technical support (often these are achieved via collaboration with partners)

2) Simplify product features (focus on a few features of highest importance)

3) Develop vertical sales and marketing strategies

4) Assume responsibility for system integration (work with partners, SIs in particular)

5) Methodically assess the buying dynamics and adjust your sales and marketing strategy accordingly

6) Develop sales tools that demonstrate your competitive advantage (features, support, ROI, etc.), and include case studies to support your value proposition and messaging

Learn from Lead Users

Lead users are a sub-category of early adopters that has a unique value to a technology vendor. Lead users are those customers that buy the product mostly for the satisfaction of being on the technical cutting-edge. As I mentioned before, they require high customization and thus are an expensive segment to pursue. They have, however, a unique quality that can be extremely advantageous to technology marketers: they come up with break-through ideas that can result in dramatic product improvements, and a much better chance of winning the majority customers. Lead users often develop workarounds in packaged applications that enable them to achieve their business objectives. Often, they develop custom applications when they deem the functionality of packaged applications insufficient. Learning the reasons behind workarounds and development of custom applications can be extremely telling to R&D and marketing professionals at a technology firm. Thus, while the lead-users segment might not necessarily be profitable, the access to their knowledge and understanding the way they use your technology is extremely valuable for your ability to develop winning solutions. Gathering information from lead users is most often realized via empathic design, focus groups and customer visits. Traditional techniques such as surveys or interviews are not as effective (see my post Product Features: How to Get it Right).

Crossing the chasm from the early adopters to the profitable majority market is what makes or breaks a technology product. To cross the chasm, one must clearly understand the characteristics of each customer segment based on the technology adoption rates, and, while learning from lead users, develop a highly-focused strategy for capturing the majority-market customers.

Relationship vs. Transaction Marketing: How to Choose

Customer relationship marketing means creating close and long-term relationships with your customers with the objective to secure steady revenues. It is common knowledge that keeping current customers happy is more cost effective than investing in new customer acquisitions. Relationship marketing has become a buzz word a long time ago. However, many companies are going too far and overextend themselves by trying to create too many close customer relationships.

Below are some points to consider:

1) For most companies, 20% of customers provide 80% of revenues. Therefore, prioritization is key and so is a careful calculation of opportunity cost and ROI.

2) It is difficult to sustain close relationships unless all of the following attributes are present: trust, loyalty, commitment and interdependence. Therefore, unless you are fairly confident that these attributes are achievable, do not invest in relationship marketing.

3) Relationship marketing is appropriate only when switching costs for the customer are high. In the presence of high switching costs, the customers tend to have a long-term view, are less price-sensitive, their systems are more integrated and their buying behavior centers around technology and vendor, rather than product or person. In these cases, once the customer switches, she is lost for good. This is a case where investments into relationship marketing is appropriate. Under reverse circumstances (low switching costs, focus on product, modular customer system, short-term customer time horizon), transaction marketing focusing on price and advertising is more suitable.

To sum up this short post, relationship marketing has its esteemed place in both B2B and B2C marketing. However, companies that invest into expensive relationship marketing programs for customers that face low switching costs are exposed to losing customers to low-cost competitors.