Relationship marketing and contract theory

relationship marketing and contract theory

Diathesopoulos, Michael (): Relational contract theory and M - Business Administration and Business Economics ; Marketing. The focus to date has been in the psychological contract between employer and studies, this paper translates this theory to marketing relationships and develops a This relationship marketing mechanism is validated by an empirical study. Relationship marketing and contract theory. Sudhi Seshadria,*, Randhir Mishrab a. School of Business, Singapore Management University, Bukit Timah Road.

Relationship marketing - Wikipedia

From a social anthropological perspective, relationship marketing theory and practice can be interpreted as commodity exchange that instrumentalise features of gift exchange. This perspective on marketing opens up fertile ground for future research, where marketing theory and practice can benefit from in-depth research of the principles governing gift exchange.

According to Liam Alvey, [5] relationship marketing can be applied when there are competitive product alternatives for customers to choose from; and when there is an ongoing desire for the product or service.

relationship marketing and contract theory

Relationship marketing revolves around the concept of gaining loyal customers. Research conducted to developing relationship marketing suggests that firms can best do this through having one of the three value strategies; best price, best product, or best service. Firms can relay their relationship marketing message through value statements.

For example, an automobile manufacturer maintaining a database of when and how repeat customers buy their products, the options they choose, the way they finance the purchase etc. In web applications, the consumer shopping profile can be built as the person shops on the website.

This information is then used to compute what can be his or her likely preferences in other categories.

Relationship marketing class lectures_153347652-Relationship-marketing-and-contract-theory-pdf

These predicted offerings can then be shown to the customer through cross-sell, email recommendation and other channels. Relationship marketing has also migrated back into direct mail, allowing marketers to take advantage of the technological capabilities of digital, toner-based printing presses to produce unique, personalized pieces for each recipient through a technique called " variable data printing ". Marketers can personalize documents by any information contained in their databases, including name, address, demographics, purchase history, and dozens or even hundreds of other variables.

The result is a printed piece that ideally reflects the individual needs and preferences of each recipient, increasing the relevance of the piece and increasing the response rate.

Scope[ edit ] Relationship marketing has also been strongly influenced by reengineering. According to process reengineering theory, organizations should be structured according to complete tasks and processes rather than functions. That is, cross-functional teams should be responsible for a whole process, from beginning to end, rather than having the work go from one functional department to another.

Traditional marketing is said to use the functional or 'silo' department approach. The legacy of this can still be seen in the traditional four P's of the marketing mix. Pricingproduct managementpromotionand placement. According to Gordonthe marketing mix approach is too limited to provide a usable framework for assessing and developing customer relationships in many industries and should be replaced by the relationship marketing alternative model where the focus is on customers, relationships and interaction over time, rather than markets and products.

In contrast, relationship marketing is cross-functional marketing. It is organized around processes that involve all aspects of the organization. In fact, some commentators prefer to call relationship marketing "relationship management" in recognition of the fact that it involves much more than that which is normally included in marketing. Because of its broad scope, relationship marketing can be effective in many contexts.

As well as being relevant to 'for profit' businesses, research indicates that relationship marketing can be useful for organizations in the voluntary sector [7] and also in the public sector.

Satisfaction[ edit ] Relationship marketing relies upon the communication and acquisition of consumer requirements solely from existing customers in a mutually beneficial exchange usually involving permission for contact by the customer through an " opt-in " system.

Although groups targeted through relationship marketing may be large, accuracy of communication and overall relevancy to the customer remains higher than that of direct marketing, but has less potential for generating new leads than direct marketing and is limited to Viral marketing for the acquisition of further customers.

Research by John Fleming and Jim Asplund indicates that engaged customers generate 1. According to Buchanan and Gilles, [18] the increased profitability associated with customer retention efforts occurs because of several factors that occur once a relationship has been established with a customer. The cost of acquisition occurs only at the beginning of a relationship, so the longer the relationship, the lower the amortized cost.

Account maintenance costs decline as a percentage of total costs or as a percentage of revenue. Long-term customers tend to be less inclined to switch, and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.

Long-term customers may initiate free word of mouth promotions and referrals. Long-term customers are more likely to purchase ancillary products and high margin supplemental products.

Customers that stay with you tend to be satisfied with the relationship and are less likely to switch to competitors, making it difficult for competitors to enter the market or gain market share. Regular customers tend to be less expensive to service because they are familiar with the process, require less "education", and are consistent in their order placement.

Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into better customer satisfaction in a virtuous circle. Relationship marketers speak of the "relationship ladder of customer loyalty ".

relationship marketing and contract theory

It groups types of customers according to their level of loyalty. The ladder's first rung consists of "prospects", that is, people that have not purchased yet but are likely to in the future. This is followed by the successive rungs of "customer", "client", "supporter", "advocate", and "partner".

The relationship marketer's objective is to "help" customers get as high up the ladder as possible. This usually involves providing more personalized service and providing service quality that exceeds expectations at each step. Customer retention efforts involve considerations such as the following: Customer valuation — Gordon describes how to value customers and categorize them according to their financial and strategic value so that companies can decide where to invest for deeper relationships and which relationships need to be served differently or even terminated.

relationship marketing and contract theory

Customer retention measurement — Dawkins and Reichheld calculated a company's "customer retention rate". This is simply the percentage of customers at the beginning of the year that are still customers by the end of the year. This ratio can be used to make comparisons between products, between market segments, and over time. Determine reasons for defection — Look for the root causes, not mere symptoms.

This involves probing for details when talking to former customers.

Relational contract - Wikipedia

Other techniques include the analysis of customers' complaints and competitive benchmarking see competitor analysis. Develop and implement a corrective plan — This could involve actions to improve employee practices, using benchmarking to determine best corrective practices, visible endorsement of top management, adjustments to the company's reward and recognition systems, and the use of "recovery teams" to eliminate the causes of defections.

A technique to calculate the value to a firm of a sustained customer relationship has been developed. This calculation is typically called customer lifetime value. Retention strategies may also include building barriers to customer switching.

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  • Relational contract
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Relational contract theory was originally developed in the United States by the legal scholars Ian Roderick Macneil and Stewart Macaulay. Thus, even a simple transaction can properly be understood as involving a wider social and economic context. For instance, if A purchases a packet of cigarettes from a shop he has never been into before and will never enter again, that seems quite discrete. However, A will almost certainly have a loyalty to a particular brand of cigarettes and expectations about quality about which he would be prepared to complain to the manufacturer, although he has no contractual privity with the manufacturer.

Thus, even the simplest transaction has a good deal that is unstated and dependent on a wider web of social and economic relations. How far outwards into that web one needs to investigate will depend on the transaction and on the purpose for which it is being examined.

This last is not to say that relational contract theory is normative in nature, setting out what ought to be the case properly, but rather that there are actual observable normal characteristics or factors at play in relations.

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Recent research from the International Association for Contract and Commercial Management, the University of Tennessee and Lindahl law firm takes the relational contracting theories expressed by Macneil, Macaulay and others and makes them relevant for contracting practitioners trying to craft strategic, collaborative relationships with their procurement and outsourced business partners.

The Unpacking Relational Contracting white paper also describes a five-step process for developing a relational contract: Focus on the relationship, not the deal. This step is designed to help build the trust necessary to focus on the relationship.