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How relationship marketing works, its pros, cons and levels
An effective relationship marketing strategy can be a key component in acquiring new customers and retaining existing ones.
Whether a startup or full-fledged enterprise, every company should evaluate the overall cost of customer acquisition.
Getting a new customer is one of the most expensive and difficult activities of any organization and often marketers and business leaders are left asking, "How can we retain customers?" and "How can we find the right customers that will stay with us?" The answer is to use a relationship marketing strategy.
There are many levels of relationship marketing: basic, reactive, accountable, proactive and partnership marketing. All achieve the same goal of deeper, more meaningful connections with prospects and customers. This long-term strategy for customer engagement and loyalty can take away the pressure of customer acquisition and one-time sales.
A relationship marketing strategy aims to turn every new customer into a returning customer, and it has pros and cons as a strategy for businesses. To evaluate relationship marketing requires an understanding of how it works and the five levels that represent different relationship stages.
What is relationship marketing and how does it work?
Transactional marketing tries to earn the next sale through advertisements and solicitations. Companies invest extensive resources and money to get customers' attention, make a sales pitch, and then facilitate a sale. Therefore, they use different strategies for transactional sales versus growing relationships. Many marketing departments split resources to focus on one or the other.
Relationship marketing is a tactic to form long-term relationships with prospects and customers. Relationship marketing focuses on overall experience with the brand rather than sales alone. A brand experience helps attract new customers and retain them for a long time, earning repeat sales.
Businesses must foster customer loyalty and provide products that those customers deem exemplary. In turn, customers stay with the company longer and make unsolicited referrals. Companies that invest in relationship marketing have the potential to achieve a much greater ROI than with transactional marketing.
With relationship marketing, the goals can vary, including increased revenue, reducing customer turnover, higher customer lifetime value or average order size, and lowered costs.
Pros and cons of relationship marketing
Any business strategy has benefits and challenges. Relationship marketing yields high-value free referrals but also takes time to pay off, for example.
Pro: Returning customers purchase more than first-time customers. Relationship marketing increases the likelihood of retaining customers. These customers turn into repeat buyers, from cross-selling or upselling. Customer lifetime value (CLV) refers to what a customer spends over time with a brand. The more they buy, the higher their CLV.
Pro: Free word-of-mouth marketing. Customers who have a positive experience with a brand because of the relationship or the value the product provides are likely to tell others. These customers create a positive, viral, one-on-one marketing experience.
A good experience isn't enough to generate this type of marketing. Consumers are more likely to spread the word and leave positive reviews when an experience goes beyond their expectations.
Pro: Personal connections. Whether a business sells directly to customers or sells a service to businesses, they always reach a person who makes the purchase decisions. Personal connections with the buyers create meaningful individual interactions. Customers want the following:
- to be heard;
- to have problems and challenges addressed; and
- to receive regular communication, follow-through and support.
These personal connections build strong relationships and result in more, or continued, business.
Con: It takes time. A business needs to take the time to build customer relationships. Spend more time with each customer, for example. Or give customers room to make a purchase decision. Many sales do not happen on the first engagement point. It takes many interactions to establish the trust and relationship needed to garner results.
Con: Negative feedback. Word of mouth, if negative, can ruin a relationship marketing campaign. Consumers often expect immediate gratification. One negative experience shared with others has the power to derail a campaign. Consumers share experiences fast. If they don't get what they want, in the timeframe they expect, they will tell others about their bad experience. Balance strong relationships with the ability to capture buyers at the right time.
Con: New customers are no longer a priority. A strong relationship marketing strategy aims for customer retention and growth. But a business cannot succeed without new customers. Don't neglect opportunities to foster new relationships. No matter how much an organization prioritizes retention, some customers leave, and growth calls for repeat and new purchases.
Levels of relationship marketing
There are five levels of relationship marketing. Each level represents a different stage in the relationship marketing journey.
- Basic marketing. The first step in relationship marketing is to acquire a customer by guiding them through a sale, also referred to as a direct sale.
- Reactive marketing. The second step is encouraging the customer to provide feedback after that purchase.
- Accountable marketing. At this stage, the company contacts the customer to ensure that the product or service meets their needs. This is also a great opportunity to solicit feedback for future improvement.
- Proactive marketing. The fourth level of relationship marketing focuses on collaboration with the customer to develop improvised services and products. Regular feedback helps inform future relationships as well.
- Partnership marketing. The last level of relationship marketing is when a business tailors products and services to the customer to foster a long-lasting relationship.