relationship marketing: a strategy for consumer

Relationship Marketing: A strategy for consumer-owned utilities in a restructured industry Dupont, Randall Management Quarterly; Winter 1998; 38, 4; ABI/INFORM Complete, pg. 11-16.

RELATIONSHIP MARKETING: A STRATEGY FOR CONSUMER-OWNED UTILITIES IN A RESTRUCTURED INDUSTRY Randall Dupont

Consumer-owned utilities (COU) will have to compete for customers in a restructured environment. While price must provide a foundation, it will not be enough. COUs must look to their relationship with customers to gain a sustained competitive advantage. Relationship marketing focuses on retaining customers through building trust and commitment. Customers build relationships with people, not products. From these customer encounters, long-term relationships are built. The higher the level of relationship, the greater the sustained competitive advantage. Relationship marketing should be viewed as a strategy for the firm. The three dimensions of relationship are presented and integrated into a practical model to give managers a good framework for retaining customers in a competitive market.

INTRODUCTION With restructuring ahead, utilities may soon find themselves doing something they have not had to do on a broad scale in over 70 yearscompeting for customers. Power marketers are set to flex their muscles in the industry. They view their core competency as acquiring customers, regardless of the industrytelecommunications, natural gas, or electricity. On the other hand, utilities have had little reason to develop customer acquisition skills except to secure large power users. Winter 1998

Consumer-owned utilities (COUs) may be particularly vulnerable in a restructured industry, especially to price competition. Two surveys by Mississippi cooperatives revealed customer propensity to switch on the basis of price. One survey in late 1996 found that 31% of respondents would switch to another electric utility for 10% lower rates. Fifty-six percent would switch for 20% lower rates. A mid-1997 survey by another cooperative showed 27% would switch for a 5% rate reduction, 42% for a 10% rate reduction, and 51% for a 15% rate reduction. With such propensity to switch, can COUs compete on price alone or are other factors available to retain the consumer base? Does relationship marketing hold the answer for COUs sustaining an advantage in a restructured, competitive environment? PARADIGM SHIFT IN MARKETING Relationship marketing is one of the newest schools of marketing thought. Unlike the customer-acquisition focus on traditional marketing, relationship marketing focuses on retaining existing customers (Berry 1995). It concentrates on the long term, ongoing relational exchange so vital to service firms today (Dwyer, Schurr, and Oh 1987) and represents a genuine paradigm shift in marketing theory (Morgan and Hunt 1994). The recent work of the Electric Cooperatives Brand Identity Steering Committee of the National Rural Electric Cooperative Association (NRECA) 11


Figure 1: Factors Leading to Trust, Commitment, and Customer Retention Trust Shared Values

Commitment Shared Values

Communications Termination Cost Opportunistic Relationship Behavior Benefits Avoidance

underscores the importance of relationship marketing as a tool for long-term competitive advantage. The 42-member committee introduced Touchstone Energy to symbolize the various elements that "represent the relationship between COUs and their consumer-members and the communities they serve," said Glenn English, NRECA chief executive officer. "The brand identity embodied in Touchstone Energy is an important development in helping electric coops retain their current customer base and prepare for increasing competition in the industry" (Miller 1997). As shown in Figure 1, trust and commitment are key elements for retaining customers. Trust is particularly critical for service related firms since the product - a service - is intangible and difficult to evaluate before or after a purchase. Trust exists when one party has confidence in the reliability and integrity of the exchange partner. Commitment refers to the belief by both parties that the relationship is worth working on to ensure it endures indefinitely. However, commitment cannot exist without trust first being established (Morgan and Hunt 1994). But how can COUs build trust and commitment? Research indicates that trust is built through customer communications and low opportunistic behavior. In other words, communications should be meaningful and provide timely information to customers Winter 1998

Customer Retention

(Anderson and Narus 1991). Furthermore, trust is lowered when customers perceive that a firm acts opportunistically. Commitment results when customers perceive the cost of terminating the relationship are high or when the benefits received from the relationship are high. And finally, customers who share values with the firm have higher levels of trust and commitment (Morgan and Hunt 1994). How does trust and commitment lead to customer retention? The higher a customer's level of commitment to a COU, the lower their propensity to leave. Furthermore, higher levels of customer trust in a COU result in higher customer perception problems will be resolved fairly and in lower uncertainty about the decision (Morgan and Hunt 1994). Regarding the latter, consumers seek long-term relationships to improve their overall quality of life. Such relationships reduce customer stress that can result from uncertainty and vulnerability in a rapidly changing market. Customers learn what to expect and become comfortable with the level of service from the COU. This comfort tends to preclude any need to change service providers, giving the COU a competitive advantage in retaining the customer (Bitner 1995).

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Figure 2: Relationship Bond Levels Structural Social

Transactional

BUILDING RELATIONSHIPS FROM SERVICE ENCOUNTERS Customers build relationships with people, not products, and frequent customer contact helps facilitate the building of those relationships. However, not all encounters build long-term relationships equally. First impressions are most enduring. Poor initial encounters are difficult to overcome. Even if subsequent encounters are positive, they may only serve to confuse customers, leaving them unsure of the relationship and vulnerable to competitor appeals (Bitner 1995). Just as there are different levels of relationships in a social context, so are there different levels of relationships in marketing. As illustrated in Figure 2, in the lowest level relationship, the firm relies on price incentives to secure customer loyalty. Here, the firm has only a transactional bond with the customer. This is the weakest form of relationship marketing since price is easily imitated by competitors (Berry 1995). The next level of relationships relies on social bonds. This level involves the personalization and customization of the relationship. It recognizes that service encounters are social encounters (Berry 1995). The highest level relies on structural solutions to solve customer needs. It involves offering customers value-added benefits that are difficult or expensive to duplicate. Customer solutions are built into the service-delivery systems. Since higher levels of relationships are Winter 1998

built on top of lower ones, a firm should seek to satisfy all three levels simultaneously to truly sustain a competitive advantage. RELATIONSHIP MARKETING AS A STRATEGY Marketing strategies lie on a continuum with relationship marketing on one end and transaction marketing on the opposite end (see Figure 3). While transaction marketing is oriented toward short-term goals and getting customers, relationship marketing is oriented toward the long-term and retaining customers (Gronroos 1991). A relationship strategy requires a total, interactive marketing orientation of the firm. Marketing is not limited to the marketing department as with a transactional strategy. All employees become part-time marketers. Quality shifts from a focus on the technical quality of the core service to the quality of interaction between the firm and customers. In a relationship strategy, customer contact relies less on numbers and satisfaction surveys and more on direct customer feedback. CONSUMER-OWNED UTILITY MODEL The three models above present different dimensions of relationship marketing. While each is useful in its own right, successful implementation requires all three. Figure 4 illustrates an integrated model consumer13


Figure 3: Strategic Approach

Transactional

owned utilities can use to build, sustain, and implement relationship marketing. COUs must rank at the top of each dimension to have a sustained competitive advantage. For instance, it is not enough for a COU to rank high in customer trust and commitment while pursuing a price only (transactional) relationship and strategy. COUs should seek to combine high levels of trust and commitment with high levels of relationship bonding. While trust and commitment build the foundation for relationships, social and structural bonds with customers provide the mechanism for sustaining them. COUs can do this by embedding into their organization's structure those practices and policies that lead to higher levels of trust and commitment discussed earlier. One word of caution in interpreting Figure 4, higher levels of relationship such as social and structural bonds with customers do not serve as substitutes for uncompetitive pricing, but rather as compliments. Transactional bonding (price competitiveness) is the very foundation upon which other bonds rest. Without this foundation, social and structural bonds will not be as effective in sustaining long-term competitive advantage. Once relationships are built through trust and commitment and sustained through social and structural bonding mechanisms, COUs should implement strategies that benefit both parties of the relationship. For those customers who do not want a relationship, obtaining the lowest per unit price is the goal. These are Winter 1998

Relatiionship

transaction-oriented customers and strategies should be developed to capture their business. However, COUs should not count on these customers for long-term growth. Price is easily duplicated. Instead, COUs should strive to move these customers up the continuum by building relationships with them. Through building such relationships, COUs can better understand overall customer needs and jointly develop solutions that are mutually beneficial. Relationship-oriented strategies seek to lower total, long-term costs for both parties, rather than just short-term per unit costs. IMPLEMENTATION So how do COUs implement relationship marketing? Begin by adopting and building a strong brand identity, one that will convey the advantage customers have from their unique relationship with their power supplier. Touchstone Energy is designed to do just that. It represents the direct connection COUs have with "the communities they serve, as well as their unique characteristics in a marketplace where differences matter more and more every day . . ." (Miller 1997). Furthermore, it conveys the human element of providing local service and represents the home, place, and community as the center of the COUs relationship with the customers.

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Figure 4: Consumer Owned Utility Model

Relationship

High

Level of Trust and Commitment

Structural

Social Level 2

Transactional

Strategic Approach

Level 3

Level 1

Low

Transactional

Level of Relationship Bond Communications and avoidance of opportunistic behavior build trust and commitment. Communicate with customers regularly through monthly publications, bill inserts, and press releases. Look for ways to combine resources to utilize more expensive mediums such as statewide television and image building campaigns. For more direct communications, establish a call center and extend customer service telephone hours to early mornings, evenings and weekends. Don't ignore newer ways to communicate either. Employ auto attendants, auto responders, voice mail systems, and interactive web sites. COUs can build customer retention by not only avoiding opportunistic behavior, but also by avoiding any perception of it. Customers Winter 1998

may develop such negative perceptions in a number of ways. For instance, inequitable rates contribute to this behavioral perception. Failure to conduct timely cost of service studies result in rate inequities from cross subsidization. Up front security deposits and excessive connection charges leave customers with the feeling they are not trusted and are being taken advantage of. These utility practices are designed to avoid being "stuck with the bill." However, such practices conflict with the goal of relationship marketing which is to build trust. Requiring security deposits up front sends the wrong message. Instead, COUs should take the initiative to establish trust early in the relationship by not charging security deposits upon initial request for service. A 15


deposit can always be added later if the customer proves untrustworthy. COUs can also build customer retention through values they share with the customer. As consumer-owned organizations, COUs do not have to balance the competing interests of owners and customers. For them, the customer is the owner. It is through this structural arrangement that COUs have a bond with customers that no other form of utility can easily duplicate. This is the highest level of relationship and will help ensure a sustained competitive advantage for COUs in a restructured industry. Customer retention can be improved by expanding the benefits customers receive from their COU. This requires COUs to take a broader view of how they improve customer quality of life. Value-added services such as home security systems, Internet access, satellite programming, and home financing all expand the benefits customers receive from their relationships with the COU. Other valueadded benefits that make doing business with the COU more enjoyable include electronic funds transfer, third-party notification before disconnect, over-the-telephone no-signaturerequired service connections, customized billing information and due dates, easy or automated outage notification and bill consolidation for multiple accounts. These are just some of the ways COUs can improve customer retention through increased benefits from the relationships. Managers should evaluate their organizations to determine whether they are pursuing a transactional- or relationshiporiented strategy. For instance, they should consider whether they perceive marketing as a function of the marketing department or an organization-wide responsibility? Do they measure quality in terms of technical quality of the core product/service alone or do they measure it in terms of interaction between the firm and the customer? Do they invite direct customer feedback or assume no news is good Winter 1998

news? And do they market to just external customers or do they also market internally to employees? CONCLUSION Faced with a highly competitive market in the future, COUs need to take advantage of their greatest strength -- their relationship with customer-owners. No other form of utility entering restructuring is in such a unique position. Traditional profit-oriented companies have just recently realized the value of having a relationship with their customers. COUs have long recognized this importance. While competitors are looking for customers in which to establish relationships, COUs can move forward. By building on the relationship they have already established, COUs are well positioned to achieve a sustained competitive advantage in the future.

References Anderson, J.C. & Narus, J.A. 1991. Partnering as a focused market strategy. California Management Review, (Spring), 95-113. Berry, L.L. 1995. Relationship marketing of services-growing interest, emerging perspectives. Journal of the Academy of Marketing Science, 23 (4), 236245. Bitner, M.J. 1995. Building service relationship: It's all about promises. Journal of the Academy of Marketing Science, 23, 246-251. Dwyer, F.R., Schurr, P.H., & Oh, S. 1987. Developing buyer-seller relationships. Journal of Marketing, 51 (April), 11-27. Gronroos, C. 1991. The marketing strategy continuum: Toward a marketing concept for the 1990s. Management Decision, 29 (I), 7-13. Miller, E. 1997. Electric cooperatives begin brand identity campaign: Launch of Touchstone Energy Planned (news release). National Rural Electric Cooperative Association, Arlington, VA, April 7. Morgan, R. & Hunt, S. 1994. The commitment trust theory of relationship marketing. Journal of Marketing, 58 (July), 53-70. 16