Effective Relationship Marketing and Loyalty Strategies for Acquiring and

Retaining Customers

Rob Palmatier, PhD; University of Washington

Global Research Director of SAMS Instituterp@SAMSinstitute.com

Agenda

• What Are and Why Use Relationship Marketing and Loyalty Strategies

• Effective Strategies for Building Customer Relationships

• Effective Strategies for MaintainingCustomer Relationships

2

The “What” and “Why” of Relationship Marketing

• What: Relationship marketing (RM) is the process of identifying, developing, maintaining, and terminating relational exchanges with the purpose of enhancing performance

• Why:

– Relational-based exchange was norm since Homeric Greece

– Large part of our “cognitive and emotional function”

– Strong affect on performance outcomes (meta-analysis of 20 years of data across 38,000 relationships)

– Biggest Driver to Customer Loyalty and WOM

3(Palmatier 2008; Palmatier et al. 2006)

Payoff from Relationships Varies Across Different Countries

4

• On average, RM 11% more effective outside the US

• Relationships have the largest payoff in China: 100% larger than in US

(Samaha, Beck, and Palmatier 2014)

See Role of Culture in Intl Relationship Marketing

© Palmatier and Steinhoff 2019 5

The Value of Customer Relationships Passed Brands in 2009

0

5

10

15

20

25

2003 2005 2007 2009 2011 2013

ENTERPRISE VALUE(Purchase price of acquired business for 100% of shares, plus interest-bearing debt minus cash acquired)

CUSTOMER RELATIONSHIP VALUE(Gauge of the worth of existing repeat customers who are known in person)

BRAND VALUE(Brands, trademarks, trade names, product names, banners and mastheads, publishing titles, domains, and other similar items owned by the acquired business)

Pe

rce

nta

ge

of

En

terp

rise

Va

lue

(Binder and Hanssens 2015)

Agenda

• What Are and Why Use Relationship Marketing and Loyalty Strategies

• Effective Strategies for Building Customer Relationships

• Effective Strategies for MaintainingCustomer Relationships

6

Most Effective Relationship Building Strategies• Insights from meta-analysis of 20 years of data

across 38,000 relationships, but can…

• Only analyze what has been previously studied:

1. Expertise (.62) and communication (.54) most effective positive drivers

2. Relationship investments (.46), similarity (.44), and relationship benefits (.42)

3. Dependence (.26), frequency (.16), and duration (.13) are not effective strategies for building relationships

(Palmatier, Dant, Grewal, and Evans 2006)(Palmatier et al. 2006)

Power of Gratitude and Reciprocation

• “The sentiment which most immediately and directly prompts us to reward, is gratitude.”1

• Evolutionary psychologists show gratitude and reciprocity have some heredity basis and argue that it provides individuals’ competitive advantage2

– Enforced by positive (pleasure) and negative emotions (guilt)

– Punishment of moocher, ingrate, welsher– Coke/raffle tickets, Krishna flower, 3-5$ to 1$ returns

• Gratitude is a catalyst for starting relationships; leads to reciprocity norms (residual of gratitude)2

• Failure to feel gratitude sign of psychosis

(Emmons and McCullough 2004)

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(1Adam Smith 1790; 2Emmons and McCullough 2004)

Relationship marketing

Customer commitment

•Feeling of gratitude•Gratitude-based reciprocal behaviors

Performance outcomes

Many Factors Leverage the Effects of RM on Gratitude: Enhancing Returns

Customer trust

•Freewill•Motive•Risk•Need

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(Palmatier, Jarvis, Bechkoff, and Kardes 2009)

Together determines

effectiveness of RM

See The Role of Customer Gratitude in RM to understand how it works

Reciprocity is Key for Effective Online Relationship Marketing

Seller unilateral relationships

Unilateral Relationships

Controls

Buyer unilateral relationships

Reciprocal relationships

Seller performance ($)

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• All relationship types increase sales.

• Reciprocal relationships increase sales the most.

• The increase from reciprocal relationships lasts the longest.

• Online reciprocity can be as trivial as following someone back or

pressing “like” but still have a significant effect on performance.

7 days

4 days

1 day$3.31

$6.21

$9.93

See Online

Relationship

Formation

Higher Payoff for Social Programs than for “Financial” Discounts or Promotions

Social RM

Financial RM

Structural RM

Incremental customer

return

RM

Investments

Controls

(Palmatier, Gopalakrishna, and Houston 2006)

180% ROI

Negative ROI

100 to 120% ROI

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[313 customers across 34 different firms]

• Measures of relationship and loyalty to “selling firm” often commingles firm and the salesperson effects leading to illusionary loyalty

(Palmatier, Scheer, and Steenkamp 2007; Hamilton and Sherman 1996)

Customer Relationship Develop at Multiple Levels Simultaneously

Salesperson-owned loyalty

Selling firm-owned loyalty

Typical Measures Commingles Both Types of Loyalty

• Relationship with individuals typically have a larger effect on behaviors than relationship with groups– Individuals: on line model (e.g., 26% shift)

– Firms: recall heuristics

Multichannel Customer Onboarding

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Customer

share-of-

wallet

Face-to-face

Communication Channel Frequency

Relationship Performance

Telephone

Email

Ch

an

ne

l

Ric

hn

ess

Customer onboarding – dynamic process where new customers have first experiences with a firm’s offerings and employees, and influential relationship foundations are formed.

First Impression: Encoding and Carryover Mechanisms

Multichannel Customer Onboarding Effects: Encoding and Carryover

• F2F communication on performance - 19 times larger in month 1 vs. month 24

• 50% of benefits from onboarding communication dissipate after just four months

Agenda

• What Are and Why Use Relationship Marketing and Loyalty Strategies

• Effective Strategies for Building Customer Relationships

• Effective Strategies for MaintainingCustomer Relationships

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Maintaining Relationships: Preventing the “Bad” is More Important than Adding More “Good”

• Negative behaviors impact relationships more than positive behaviors– Meta of 38,000 relationship shows negative activities have

twice the effect of positive activities

• People seek explanation for negative more than positive events; unfairness judgments provide insight into motivation for bad events

• Unfairness plays a large role in undermining relationships since individuals feel emotional need to punish unfair behaviors, even at a cost to themselves– Hardwired psychological behavior to prevent benefit to cheaters

– Starbucks/United Airlines

(Emmons and McCullough 2004)

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(Baumeister et al. 2001; Palmatier et al. 2006; Fehr and Gächter 2000, Offerman 2002)

Perceived unfairness

Interfirm performance

Unfairness Aggravates the Negative Effect of Other Damaging Activities

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Conflict

Opportunism

Interfirm cooperation

Interfirm flexibility

Relationship Damaging

Factors

_

+

+

+_

_

Relationship Capabilities

(Samaha, Palmatier, and Dant 2011)[493 customers over three years]

See Poisoning Relationships:

Perceived

Unfairness in Channels of

Distribution

Perceived unfairness

Interfirm performance

Strategies to Suppress Conflict and Opportunism can Worsen Unfairness

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Conflict

Opportunism

Interfirm cooperation

Interfirm flexibility

Contractutilization

Relationship Damaging

Factors

_

++

+

+_

_

_

_

Relationship Capabilities

Model supported except for

conflict x contract on

cooperation

(Samaha, Palmatier, and Dant 2011)[493 customers over three years]

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Effects on Cooperation

Low Unfairness High Unfairness

Sta

nd

ard

Dev

iati

on

s a

wa

y f

rom

Mea

n C

oo

per

ati

on

Low Conflict

High Conflict

Low Opportunism

High Opportunism

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Effects on Flexibility

Low Unfairness High Unfairness

Sta

nd

ard

Dev

iati

on

s a

wa

y f

rom

Mea

n F

lex

ibil

ity

Low Conflict

High Conflict

Low Opportunism

High Opportunism

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High Conflict and Opportunism Have Minimal Effect in Absence of Unfairness

(Samaha, Palmatier, and Dant 2011)

However, Firms Often Expose Themselves to the Toxic Effects of Unfairness

• Lost customer analysis shows that customers often leave due to the emotional push from unfairness (overcome exit barriers)

• Loyalty, reward, and relationship programs are often the culprit– Program participation tops 1.8 billion; average US

household subscribes to 14 different programs– But, often fail to meet financial expectations

• Benefits to target customers can be overcome/offset by damage to bystanders– Some programs are only available to new

customers

(Henderson, Beck, and Palmatier 2011; Steinhoff and Palmatier 2013)

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You Must Evaluate Loyalty Programs’ Effects Across the Complete Customer Portfolio

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Gratitude

Status

Unfairness

Loyalty-Influencing Mechanisms

Target Loyalty

Bystander Loyalty

Customer Loyalty

Loyalty Program

Visibility Rule Clarity Exclusivity

Managerial Levers

62% of Sales Lift Comes from Gratitude and 68% of Drop Comes from Unfairness

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Customers Across Multiple US Airlines

-10

-5

0

5

10

15

Inc

rem

en

tal S

ale

s (

%)

PriorityBoarding

FreeServicesPriority

Check-In

Loyalty Program Rewards

Ta

rge

t

Ta

rge

t

Ta

rge

t

Bysta

nd

er

Bysta

nd

er

Bysta

nd

er

Gratitude

Status

UnfairnessSee Understanding the Effectiveness of Loyalty Programs for overview

Data Policies Can Impact Customer Relationships

• 146,000 customers affected

• Has Low Transparency + Low Control = $1.3 billion stock value loss

• If High transparency + high control = $63 million loss

• $1.2 billion saving

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A Strong Privacy Policy Can Save Your CompanyMillions, HBR 2018; by Martin, Borah, Palmatier

Firm Strategies to Deal with Changing Privacy Landscape

• Defensive strategies Data minimization (SAP; 80% never used)

Data pooling

Quick and transparent recovery (use apologies)

Inoculate firm from data breaches (transparency/control)

• Offensive strategies Use privacy as a proactive marketing strategy (brand,

relationship)

Build relationships so share data from reciprocity

Use loyalty programs and rewards so customer self-select sharing

Avoid selling data to third party, use targeted advertising only when not perceived as stalking or personal violation

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Thank You

Rob PalmatierUniversity of Washington