Starbucks Relationship Marketing Strategy Sample
Category : Dell Case Studies, DELL Sample Essays, Dell Value Chain, Relationship Marketing, Supply Chain Redefined
While marketing activities can be linked back to 7000 BC (Carratu, 1987), relationship marketing (RM) is relatively new, surfacing in the late 1980s as marketers transitioned from simply acquiring customers to keeping them (Sheth and Kellstadt, 2002).
While numerous definitions of RM exist, this essay will use Gummesson’s (1996, p. 30) suggestion that “relationship marketing also includes relationships with other stakeholders, both inside and outside the organisation”.
According to Sheth and Kellstadt (2002), three events sparked the interest in relationship marketing. First, the gasoline crunch in the late 1970s resulted in reduced demand for raw materials and surplus inventories and business globalization. These events forced companies to rethink their marketing approach focus from transactional marketing (TM) to retaining customers or relational marketing (RM) (Sheth, et al, 1988). Next, many researchers began to differentiate between services and product marketing techniques resulting in the emergence of a new term, “relationship marketing” (Berry, et al, 1983). Finally, product quality became a primary focus and companies launched new programs to establish strong supplier relationships to better manage, improve and control quality. This new attitude inspired a view of suppliers as relational partners rather than a necessary evil (Sheth, 2002).
These events inspired a deepened interest and sudden increase of research into RM (Sheth and Parvatiyar, 2000). However, Sheth (2002) believes another transition is on the horizon as the Internet and related technology alter the meaning and future direction of RM.
This paper will first, review research on how relationship marketing is viewed today, next, evaluate its importance and relevance to businesses, and finally, offer perspectives as to the potential future direction of relationship marketing.
2.0 Relationship Marketing Today
Measuring a company’s value and future success has typically been determined by tangible assets reflected on its financials. However, value creation and management tenets today concentrate on a company’s relationships and customer lifetime value. Calculating an organization’s customer life time value and future success is more complex and has shifted to its stakeholder intangible assets such as; established relationship customer network , employees, suppliers and alliance partners. Experts suggest that companies first understand what comprises value creation, then design and implement strategies capitalizing on those elements (Galbreath, 2002).
Also, sustaining revenue and net income growth previously was based on a company’s ability to leverage it competencies and market opportunities. Many now believe the ultimate key indicator of future net income is stakeholders as the primary driver of future value (Lev, 2001). Based on the new millennium rules for value creation and long-term customer retention, companies should recognize and increase focus on their internal and external stakeholders.
2a. Valuing Customers
Customers should be viewed as strategic assets. According to Galbreath (2002) value creation begins with customers as they have true economic value. Research shows attracting new customers costs up to seven times more than maintaining them, shrinking
customer loss by 5% could potentially increase profits up to 85%, improving retention by 2% equates to reducing expenses by 10%. Further research illustrates that 15-40% of ‘so called’ satisfied customers change providers yearly, 98% of disappointed customers do not criticize, they just simply change providers, and completely content customers are six times more likely to purchase additional goods within the next one to two years (Bhote, 1996).
First, companies should consider the costs to acquire (firms lose money acquiring, Reichheld and Sasser, 1990), maintain and to lose customers. Recognizing the cost factors to achieve customer lifetime value, companies should invest considerable effort in locating and acquiring potentially loyal customers. Also, reducing customer defections, loyalty and retention are key factors. A possible solution is to implement effective programs to maintain these relationships long term as that will accelerate purchase frequency and company revenues.
Next, as described above, high customer satisfaction may not equate to loyal or lucrative consumers as the connection between happiness and loyalty is weak. Interestingly, a Juran Institute study showed that 90% of managers believe increasing satisfaction is the key to maximizing profit and share of the pie (Bhote, 1996).
Research also shows a clear association between loyalty (calculated by retention data) and company profits (Bhote, 1996). Given this reality, customer satisfaction should not be the single strategy, but balanced with a company’s ability to develop loyalty and retain the ‘correct’ set of profitable customers. Focusing on creating customer loyalty will develop long term relationship, resulting in customer lifetime value and mutual value exchanges (Galbreath, 2002).
2b. Employees as value creating assets
Human capital does affect company cash flows, profits and value creation. No matter the advancements in technology, people remain the most important asset (PricewaterhouseCoopers, 1999). Executives from Asia, North America, Latin America and Europe were interviewed to pinpoint the core driver to future competitiveness and the number one response was: quality people (PricewaterhouseCoopers, 1999). However, attract and retain qualified staff is the challenge and will become increasingly more difficult (Comeau-Kirschner, 1998).
Recognizing the importance of this most valuable asset, companies should quantitatively project future value and financial outcomes potentially generated from its human resources. Firms that are asset-centered can develop programs and processes to attract and retain qualified staff, as well as, increase their economic value to the company’s long term financial performance (Galbreath, 2002).
2c. Suppliers as assets
Supply chains have become a competitive tool and one of the company’s most valuable assets. The Internet has dramatically improved the supply chain equation providing real time information, creation of software driven processes and given smaller firms advantages only larger companies previously enjoyed.
Having a network of competent, reliable supplier(s) can be a major differentiator in creating a competitive advantage. For example, Dell Computers has enjoyed and exploited all the financial benefits and the ability to deliver outstanding customer performance by using effective supply chain management processes.
Today, companies are not simply competing on their products, but many times on their supply chains (Newton, 2000, p.e6). Supply chains must be supervised, not just for efficiencies or cost reductions, but also to attain market growth and value. Establishing a network of quality suppliers and technology managed supply chain is proving critical to sustainable competitive success (Galbreath, 2002).
2d. Partners as valuable assets
Various partner relationships have value and should be viewed the same as other company relationships. For example, alliances with competitors globally account for 50% of all alliance partnerships with the average company overseeing 30 plus relationships providing 6 to 15 percent of market worth (Kalmbach and Roussel, 1999).
Strategic alliances are generally shorter term, with easy exit and can terminate when value and mutual benefits become unclear. Alliances can accelerate market entry, fill gaps, and work together to create integrated products/services. Joint ventures are longer term, contractual, complex and difficult to exit, but involve sharing knowledge, assets, brands, skills, R&D, costs and many times creating new technologies.
Distribution and indirect channel partners are key to effectively reaching the end user. In global markets, getting a product to the end consumer can involve a series of multiple direct and indirect channels. Management of these partnerships for value is not an easy task, but do increase a firm’s capacity to create market worth and better economic results (Galbreath, 2002).
Although partnerships are proven to help create market value and generate attractive financial returns, for most firms effectively establishing them is difficult at best. The guidelines to successful partnerships include careful partner selection, coupled with continuous contact and management and, most importantly, consistently fostering a climate of trust and commitment throughout the relationship (Galbreath, 2002).
3. 0 Importance of Relationship Marketing
Markets are turbulent and effective business strategy formulation requires that management possess a thorough understanding its markets. This understanding should have two dimensions, 1) an internal perspective in terms of resources, capabilities and competencies and 2) an external perspective that identifies for example; developing and maintaining lasting market value (Huber, et al, 2001).
Although both dimensions have equal importance to a firm’s success, for purposes of this essay, under this model, the focus is on the external perspective, particularity the importance of establishing inner-company and external stakeholder relationships.
As mentioned, research shows attracting new customers is far more expensive than keeping existing ones (Rosenberg and Czepiel, 1984; Reichheld and Sasser, 1990; Holmlund and Kock, 1996; Buttle, 1996). Although the concept of customer lifetime value is a popular belief -- bottom line returns remain questionable and inconclusive. Surprisingly, many times the largest revenue customers simply do not provide the most profitable returns (Sheth, 2002).
3a. Is RM important to customer lifetime value?
While the debate rages on concerning the importance of customer lifetime value and relationship marketing, in my opinion and experience, relationship exchanges between buyers and sellers can help establish differentiation and create barriers to switching. Furthermore, establishing strong internal and external stakeholder relationships based on trust, commitment and value are essential to sustainable competitive advantages.
3b. Stakeholders: a unique strategic tool?
Stakeholders could be considered a “unique strategic tool” (Kandampully and Duddy, 1999) in collaboration with and interlinked with RM strategies (Carroll, 1989, Donaldson and Preston 1995, Campbell, 1997, Harrison and Freeman, 1999) and relationship marketing literature has focused on stakeholder importance (e.g. Buttle, 1999; Doyle, 1995; Grönroos, 1994; Gummesson, 1995; Hennig-Thurau and Hansen, 2000; Möller, 1992, 1994; Morgan and Hunt, 1994; Parvatiyar and Sheth, 1997; Sheth and Parvatiyar, 1995).
Stakeholder significance inspired development of the ‘six markets’ model (Christopher, et al, 1991) a proven and effective tool to analyse internal markets; customers and organizational processes and external markets; referrals, influencers and suppliers. This framework is considered the most comprehensive method to evaluate stakeholder relationships to develop potential successful strategies (Payne and Holt, 2001).
Starbucks’ RM activities and subsequent strategies seem to reflect the principles outlined in this model. For example, internally, relationships are enhanced by introducing a cooperative and goal oriented organizational structure with effective control systems, retaining competent management, employing effective operational processes and international expansion strategies. Employees are referred to as ‘partners’ with both part and full time staff treated equally by offering both stock options and full medical coverage (Schultz and Yang, 1997)..
Externally, Starbucks’ core strategy is centered on building lasting customer relationships through trust and commitment with its stakeholders. This is viewed by many experts as essential to any successful strategy (Morgan and Hunt, 1994, p. 22).
Spekman (1988) called trust the “cornerstone of the strategic partnership” and Moorman et al (1992) defines commitment as the “enduring desire to maintain”.
Initially, Starbucks connects by developing a unique status with customers by treating them as family in an inviting and friendly environment (Plog, 2005). Referral business is based on word of mouth as the company does little if any traditional marketing (Bedbury et al, 2002). The company further influences its relationships by enhancing its brand image with global social responsibility programs, and by assisting its coffee bean suppliers obtain credit and improve their lives (Starbucks Company Profile, May 2006), staff quality and reliability, a warm, inviting environment and color scheme, coffee smell, and consistent overall high quality (Mitchell et al, 1998, p.160).
The effectiveness of using the stakeholder strategy is evidenced by the company’s consistent profitability and rapid growth.
4.0 Is Relationship Marketing Relevant to All Businesses?
Today, companies have come to realize their success is largely linked to their network and ongoing maintenance of internal and external stakeholder relationships (Kandampully and Duddy, 1999).
However, studies show that while RM may be practical and profitable for some companies, it may not be appropriate for all (Mitchell, 1997, p 37). The primary consideration is ‘if’ the situation is right and the success factors of RM are present, then success will follow. But simply adopting RM strategies because management believes it will produce long term profits is destined for failure. The suggested approach is to ask how implemented?, with whom the relationships will be established? and what form it should take? (Barnes, 1994, p. 562).
4a. When is an RM strategy appropriate?
To determine if and when an RM strategy is appropriate, a company can elect to use the TM/RM continuum model (Gronnroos 1995, p. 252). This model proposes that companies develop a hybrid marketing strategy portfolio employing a combination of TM and RM strategies. Choice and implementation of a strategy would be determined by how important the product and or service is to that particular segment. When customers in a segment are deemed unprofitable, management could; shrink costs associated with them; increase their price structure or; consider ending the relationship or outsourcing them to the competition (Knowledge @ Wharton).
Under this portfolio approach RM would just be one of many marketing strategies to segment customer bases into TM and RM categories to better analyse the financial investment and potential short and long-term returns (Sheth and Parvatiyar, 1997).
5.0 Future of Relationship Marketing
Going forward into the new millennium researchers believe RM could shift course and even be redefined, impacting the way business is conducted both at home and globally. The following attempts to predict the factors that will ultimately impact RM:
The primary antecedent to altering RM practices is technology, specifically the Internet and IT (information technology). Over the past decade CRM (customer relationship management) and ERP (enterprise resource planning) software programs have automated functions and changed the way companies operate, especially in the
area of back office (finance, accounting, HR, manufacturing etc.) and front office functions (sales, marketing, advertising etc).
In an IT marketing world, acquiring customers with an attractive website and simple online purchasing is easier than retaining them (Bejou, 1997). As the computerization of marketing functions removes it as a driver, similar to what happened during the TQM craze which distracted customers away from the importance of establishing marketing relationships. Although CRM has a rocky past, researchers feel it will reemerge and shift to deliberate marketing strategies as loyalty programs, affinity marketing and campaign management will materialize (Sheth and Kellstadt, 2002).
Data mining can also help companies a) identify common characteristics, b) predict dissatisfaction and substitute searching, c) identify which customers will provide the best returns, d) predict what customers want to see on websites, e) provide a comparison of customer differences from month to month (Bejou, 1997). Overall, data mining can prove to be an invaluable tool to better understand customers and develop RM programs to match expectations (McCarthy, 1997).
5b. Liquid organizations
Another factor is the rapidly changing landscape. Today, companies must be flexible and able to quickly adapt to the needs of its stakeholders. New RM strategies to reflect and address the ever changing internal and external environments (see section 2.0 for details). For example, the use of business blogs is quickly becoming a recognized and acceptable method to establish effective customer relationships (Hill, 2005) (see section 6.0 below for details).
5c. Hybrid RM programs
A third influence is determining the real value of RM and how it impacts profitability. As previously mentioned, no research has conclusively endorsed that the customer lifetime value, one-to-one marketing and lifetime wallet concepts deliver long term value and profitable returns particularly in B2B marketing. As previously mentioned, research shows that the largest customers are not the most profitable. This reality is forcing companies to create RM strategies in favor of developing a hybrid portfolio of strategies to address both transactional and relational customers (Sheth and Kellstadt, 2002). Under this scenario, RM is not ‘the’ marketing strategy but simply one of many (El-Ansary, 1997) (see Section 4a above for details).
Companies have recognized that potentially thirty percent of their customer base will be unprofitable and servicing them is not financially feasible. This has been evidenced in service sectors such as banking, communications and utilities. As a result, companies are outsourcing customers to other subsidiaries or even competitors.
6.0 Relationship Marketing Gap – BLOGS
An obvious gap in RM research and academic journals are studies concerned with the use and effectiveness of a blog. Given the lack of academic research, the following information originates from business books, business press articles and blog postings.
The term Blog originated from the combination of Weblog. Blogs began as personal online websites to offer personal information to friends and anyone who happened upon the site.
A typical company website is considered a platform to promote the company with usually meaningless company rhetoric (Levine et al., 2002). Conversely, blogs have an image of honesty, openness and transparency (Gardner, 2005; Kaye, 2003).
6a. A revolutionary business trend?
Today, business blogging is a relatively new phenomenon, but companies are beginning to recognize their and value to relationship building and marketing (Hill, 2005). For example, Fortune magazine placed blogs at the top of its “10 Tech Trends to Watch for”, stating that they are impacting and altering business practices in advertising, marketing and PR (Kirkpatrick and Roth, 2005). Also, the Harvard Business Review placed blogs as one of the “Breakthrough Ideas for 2005”, commenting that “blogs are the most conversational of all the forms of media, and marketers can't afford to be left out of the talk” (Sawhney, 2005). Then, The Economist (February2005) suggested that blogging might be the end of PR. However, it was May 2005 when blogs officially entered the business world adorning the front cover of Business Week boldly claiming “Blogs will change your business”. Although blogs have received much press and positive feedback, the following will provide an overview of its potential value to relationship marketing and business:
6b. Better customer communications?
Blogs are capable of establishing trusting customer relationships that meet the concept of one-to-one marketing” and are a vehicle to reach niche markets (Kaye, 2003, p. 4). According to Gardner (2005, p. 20), a blog has the capacity to establish a two way dialogue with the participants. Kaye (2003, p. 18) calls it “customer relationship blogs” because it allows companies to interact and connect with customers in an immediate, convenient and personal way.
6c. Reputation enhancer?
Blogs are effective at demonstrating special services or expertise in specific business arenas. For example, a law firm created a blog specialising in Brain Injury Law (Gardner, 2005) and well-known leaders such as Jonathan Schwartz, President and COO of Sun Microsystems, and Alan Meckler, CEO of Jupitermedia, created blogs to establish themselves as industry “thought leaders”. In addition, companies that are innovators can quickly gain market attention and a reputation in their particular arena. (Stone, 2004). Others have similar perspectives, believing that blogs help companies establish and manage a public profile and reputation of goodwill that allows even total strangers to establish trust to commit and perform online activities (Crumlish, 2004). However, corporate users must be very careful managing blogs because once credibility vanishes, it can never be recovered (Scoble, 2004).
6d. A more effective PR tool?
The PR industry has been reluctant to accept the value of business blogs as they fear its popularity might signal their demise --- it’s not the first time PR was marked for doom (Stern, 2003). Also, The Cluetrain Manifesto (Levy et al, 2000, p. xxiv) explains that “Public Relations does not relate to the public. Companies are afraid of their markets”. Market watchers believe blogs could replace traditional PR functions as blogging is necessary because customers do not trust nor relate to insincere company promotional data, nor representatives (Scoble and Israel, 2005)
In conclusion, although the business community has not totally embraced the concept of blogging, using a blog to establish closer customer relationships is attractive. The benefits are illustrated in various articles as to its efficiency in communications, immediate credibility, proven marketing tool, establishing customer connections and
cooperation and managing knowledge (Dafermos, 2003, p.82). The next logical phase is for academic researchers to begin arduous research and deliver analyses in order to further validate its value creating potential.
The majority of the relationship marketing, value creation and management literature discussing RM future trends seem to center on importance of developing relationships and lifetime customer value. They highlight the value of stakeholders in terms of customers, staff, suppliers, influencers and partners – constituting a company’s most precious assets. Globalization has created an environment of intense competition, price wars human capital issues, product and services becoming commodities and technology invading every aspect of business. After all is said and done, the core to a company’s real value and worth are its relationships.
Relationships are fundamental to every company’s long term success. Companies that acknowledge and comprehend the value of relationships and how to leverage them to enhance value will surface as the market leaders and maintain a competitive market advantage. Therefore, the development of effective RM platforms that demonstrate trust and commitment is crucial to profitable relational customers, maximizing overall customer lifetime value and bottom line results.
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