The advantages and disadvantages of relationship management

How can a company integrate recent research findings in order to make its CRM system more efficient?


Bachelor Thesis, 2008

19 Pages, Grade: 1,2


Excerpt

Table of contents

1. General introduction

2. Advantages of CRM
2.1 Benefits for the company
2.2 Benefits for the customer

3. Disadvantages of CRM
3.1 Drawbacks for the company
3.2 Drawbacks for the customer

4. Conclusion

5. References

1. General introduction

Up to now, it has always been the task of marketing to be close to the customer and to know how to reach him in order to ultimately increase sales of the company’s product or service. This focus on customer acquisition is widespread among companies, and many companies consider this to be sufficient in order to survive in the business world. Nonetheless, a vital flaw of this common view is that there is more thanjust focusing all efforts on acquiring new customers - That is, convincing the customer that it pays for him/her to continue doing business with the provider, which is called customer retention.

Enter Customer Relationship Management (CRM).

Throughout this paper, the definition of a CRM will be equivalent to the interpretation by Payne and Frow (2005), who state that CRM is a strategic approach that is concerned with creating improved shareholder value through the development of appropriate relationships with key customers and customer segments (Payne and Frow, 2005a).

In the 1990s, organizations recognized the need for not relying on customer acquisition all alone, and stressing the relationship with the customer became imperative in the business world’s strategic orientation. Unfortunately, implementing CRM systems turned out to require more work than the plain desire to be chosen as a provider over and over again. A great source of uncertainty was the vague definition of relationship management itself. Another pitfall was how to establish a CRM system in an organization. As relationship management was not up to executives’ expectations, many companies were disappointed by the results - And yet, there were companies that succeeded in implementing a CRM system. Taking a closer look at the markets all over the world shows that all leading companies within their industries possess CRM systems, no matter whether it is in a B2B or B2C setting.

This paper aims to convey how a company can use latest research findings to enhance a CRM system in order to maximize benefits and minimize drawbacks and critically portray the pros and cons of relationship management. Therefore, the following pages endeavour to answer the problem statement:

The advantages and disadvantages of relationship management: How can a company integrate recent research findings in order to make its CRM system more efficient?

This problem statement was chosen for several reasons. First of all, it evaluates on whether CRM is a win-win for both customer and company or, if not, who profits most of relationship management. Furthermore, guidance will be given on how companies can use the research findings from the literature in order to find out more about the do’s and don’ts of CRM.

In the following, the argumentation can be divided into three parts. The first part will evaluate the advantages of relationship management, both for the company and for the customer. Afterwards, drawbacks of CRM systems will come under scrutiny, again for both companies and customers. The advantages and disadvantages for customers and companies will be accompanied by recommendations for companies and how they can improve their CRM systems. Ultimately, a conclusion will be drawn about the features of CRM and how it should be seen in the future business world.

2. Advantages of CRM

2.1 Benefitsfor the company

As mentioned above, Payne and Frow (2005) define relationship management as a strategic approach that is concerned with creating additional shareholder value through the development of appropriate relationships with key customers and creating customer segments. This definition already comprises three benefits a company can reap once it has established a well-functioning CRM system:

- Identifying key customers
- Developing appropriate relationships with key customers
- Establishing customer segments

The first way a company can derive an advantage of a CRM system is identification of the organization’s key customers. Many companies make a substantial proportion of their earnings with only a few customers, mostly in B2B settings. This is known as the 80/20 rule, as 20% of a company’s customers can contribute 80% of the profits (Wikipedia, n.d.). Yet, an important prerequisite for this is establishing a proper IT landscape with up-to-date databases that provide the marketing department with all the necessary information. This enables the company to gather customer data quickly and react to identified needs, which minimizes lead times and ultimately increases customer satisfaction. Identifying current key customers and potential key customers really adds value to the organization since the company knows with whom to bond more closely, e.g. by customized offerings or discounts. The enhanced skills of the company to serve its customers ultimately lead to reduced costs of serving them and also make it easier to target and acquire alike customers (Rigby, Reichheld and Schefter, 2002a). A rule of thumb in marketing is that acquiring new customers is far more expensive and difficult than retaining existing ones, which makes CRM extremely valuable. Retained customers spend more money in an organization, therefore contributing to increased revenues because of cross-selling activities and more frequent interactions with the providing company (Hennig-Thurau, Gwinner and Gremler, 2002a).

The third benefit, establishing customer segments, may be more appropriate in B2C settings, where millions of key customers exist compared to a handful in the B2B setting. With the help of CRM, insights from consumer databases help in shaping customer segments and add value to interactions with the customer.

So far, it is clear how a company can gain from using CRM with regard to customer retention - But what about customer acquisition? As Hennig-Thurau, Gwinner and Gremler (2002) notice, an organization has to be both active and passive with regard to maintaining and widening its customer base in order to guarantee long-term economic success (Hennig- Thurau, Gwinner and Gremler, 2002b). According to their research findings, relationship management enables a firm to combine these two approaches and is therefore crucial for the company in order to survive. In the article of Hennig-Thurau et al., a model is developed that shows how the benefits a customer receives relate to relationship quality and, ultimately, to relational outcomes (Hennig-Thurau, Gwinner and Gremler, 2002c).

Abbildung in dieser Leseprobe nicht enthalten

Figure 2.1 - Integrative model of determinants of key relationship marketing outcomes

(Source: Hennig-Thurau, Gwinner and Gremler, 2002)

Factors influencing the relational outcomes will be dealt with in more depth in the following section. As can be seen in Figure 2.1 above, a sound relationship between the customer and the organization has two favorable effects: Higher customer loyalty and increased word-of- mouth communication. On the one hand, the customer is more loyal to the company. Increased knowledge about the characteristics of the customer and customizing products and services leads to improved service quality and, eventually, to higher customer satisfaction with the company (Rigby, Reichheld and Schefter, 2002a). As a result, the probability of the customer changing the provider is reduced, leading to increased earnings from the customers and therefore higher customer lifetime value. Research conducted has shown that a company can increase customer loyalty by delivering high performance in four areas. Most important in this context is customer satisfaction, which can be interpreted as whether the product/service of the organization is up to the customer’s expectations. Second in its impact on loyalty is commitment, which consists of emotional bonds and the customer’s opinion that the relationship with the company is still beneficial for him. Social benefits represent gains from the relationship itself. Consequently, making interactions between the company and the customer more pleasant leads to higher customer loyalty. Finally, confidence benefits and trust, meaning confidence in the provider’s actions and feelings of reduced anxiety, contribute to customer loyalty (Hennig-Thurau, Gwinner and Gremler, 2002c). A company that wants to increase customer lifetime value with CRM systems should therefore try to put more effort into the four areas mentioned to receive a competitive advantage. However, it should be noted that the weighting of the factors is highly dependent on the nature of the organization’s industry.

The second effect, word-of-mouth communication, is more active and vital for company growth. Having a good relationship with an organization increases the probability of a satisfied customer telling relatives and peers about this. Factors having a high impact on word-of-mouth communication are, again, customer satisfaction and commitment to the organization. As both customer satisfaction and commitment are equally important for both customer loyalty and word-of-mouth communication, a company can kill two birds with one stone by delivering superior results in these areas. The remaining, moderately important factors (social benefits and confidence benefits/trust) are nonetheless important as well in increasing customer lifetime value. In a nutshell, one can say that a company benefits by CRM systems through increased customer loyalty and word-of-mouth communication, which result in higher customer lifetime value and profits. Therefore, relationship management is a vital component for a ensuring a company to survive and grow.

2.2 Benefitsfor the customer

Maybe the biggest benefit the customer can get from a relationship is the relationship itself. Granovetter (1985) discovered in his research that the consumer is a social animal by nature, looking for a personal human relationship, which he called embeddedness. Researchers after him added other factors of importance. Research from Berry (1995) uncovered three types of benefits - Financial benefits (pricing incentives), social benefits (being treated as an important customer) and structural benefits (saved time and money thanks to the relationship) (Noble and Phillips, 2004a). Gwinner, Gremler and Bitner (2002) confirmed in their research that there are other factors that matter except the social component, namely economic and customization factors (Noble and Phillips, 2004b). Social benefits, bottom-line savings and the absence of spending additional resources, like time and money, are the main benefits the customer receives out of a close relationship.

In order to understand relationship marketing outcomes properly, Hennig-Thurau et al. came up with two approaches: The relational benefits approach and the relationship quality approach (Hennig-Thurau, Gwinner and Gremler, 2002d). According to the relational benefits approach, both parties involved in the relationship (the company and the customer) have to benefit from a relationship in order to hold for a longer period. One example of what the customer might consider as being valuable is relational benefits. This can be split up into confidence benefits and trust (opinion of lowered anxiety), social benefits (emotional gains from the relationship) and special treatment benefits (enhanced treatment of the customer in the relationship compared to other customers) (Hennig-Thurau, Gwinner and Gremler, 2002e). Furthermore, according to the relationship quality approach, the continuing of the relationship depends on the customer’s assessment of the relationship - The relationship will only be continued if he perceives to receive further gains from it (Hennig-Thurau, Gwinner and Gremler, 2002d).

Again, Figure 2.1 is a good graphical representation of how relationship management should be seen, namely as a win-win situation for both the customer and the company. Taking a look at the integrative model by Hennig-Thurau et al. reveals one more time how these benefits do not only affect satisfaction with the provider and commitment to the providing company, but also have an impact on the scopes of word-of-mouth communication and customer loyalty. Special treatment benefits appear to be an exception here, as they do not have an impact on customer loyalty (Hennig-Thurau, Gwinner and Gremler, 2002c). Yet, not all sorts of special treatment benefits were covered here, so further research might be appropriate in order to uncover sources of special treatment benefits that matter in this context. Another shortcoming of the model is that is was not tested in other countries except the USA. Due to globalization, commerce is getting more and more transnational, and cultures differ in their values.

[...]

Excerpt out of 19 pages

Details

Title
The advantages and disadvantages of relationship management
Subtitle
How can a company integrate recent research findings in order to make its CRM system more efficient?
College
Maastricht University  (School of Business and Economics)
Course
-
Grade
1,2
Author
Year
2008
Pages
19
Catalog Number
V158342
ISBN (eBook)
9783640712144
ISBN (Book)
9783640713035
File size
630 KB
Language
English
Notes
Diese Arbeit behandelt die Vor- und Nachteile von Customer Relationship Management aus Kunden- und Firmensicht.
Quote paper
Master of Science in International Business Michael Bock (Author), 2008, The advantages and disadvantages of relationship management, Munich, GRIN Verlag, https://www.grin.com/document/158342

Comments

  • guest on 3/31/2012

    Could you upload the references please?

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