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An overview of Customer Relationship Management and Customer Value in Information Technology Industry*

Dr.T.S Devaraja Associate Professor & Head Department of Commerce

Post Graduate Centre Hemagangotri Campus University of Mysore

Hassan-573220 Karnataka State,

India

Tel: Mobile: +91-98807-61877 : +91 – 8172-65100

Fax: +91-8172-240674 Web: http://devaraja.me Email: mail@devaraja.me

Sruthi V K Research Scholar

Department of Commerce Post Graduate Centre Hemagangotri Campus University of Mysore

Hassan-573220 Karnataka State,

India

*The work described in this working paper is the research conducted by the author and research scholar for the purpose of submitting the research paper to the University of Mysore, Mysore, India.

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An overview of Customer Relationship Management and Customer Value in Information Technology Industry

Version 2012

Abstract

Customers are assets that need to be acquired before they can be managed for profit. Customer retention is clearly a most important objective in competitive and mature markets. Customer acquisition is important even where customer retention is justified as the core strategy. Customer acquisition is a first step in building a customer relationship management. Lack of focus during acquisition activities is very likely to result in adverse selection whereby the prospects that are least likely to be profitable are mostly likely to respond to marketing efforts. Customer satisfaction has significant implications for the economic performance of firms. Customer relationship management applications are likely to have an effect on customer satisfaction for at least three reasons. Effective management of the customer relationship is the key to managing customer satisfaction and customer loyalty. Customer retention is a must in relationship marketing. Trust is an essential relationship model building block and has often been defined as a belief that one relationship partner will act in the best interest of the other. Credibility reflects the buyer’s belief that the supplier has sufficient expertise to perform the job effectively and reliably. Affective Commitment in marketing relationships, similarly, as in the employee-organization relationship, originates from identification, common values, attachment, involvement and similarity. A key account can be defined as a customer in a B-2-B market identified by a selling firm as of strategic importance. All customers are not equally profitable or equally important. Key Account Management is one of the most popular and successful approaches used for customer retention and development. KAM is an organizational process that assumes relationships are not static and they evolve over a period of time. Relationship managers analyze their customers and then try to group them into various categories based on the performance and value of the customers to the firms. Customers are segmented into different groups to identify the value placed on long-term relationships with particular customers or customer groups. Most of the firms focus their KAM efforts on customer retention. This brings about stability to the company’s operations.

Keywords: . Customer retention, Customer Acquisition, Customer Relationship Management, Customer Satisfaction, Effective Management, Marketing Relationships.

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1. Introduction

Real customer relationships, those that result in the customer feeling a

genuine sense of loyalty to the firm, are predicated on a series of satisfying

experiences with the company. Relationships are not developed overnight. Until the

customer senses some attachment to the company, no relationship can be said to

exist. What, then, drives customer satisfaction? Surely it is the ongoing creation of

value in the mind of the customer. (Bristol Group, 2004).

Woodruff (in Chi et al., 2004) defined customer value as a customer-

perceived preference for and evaluation of product attributes, attribute

performances, and consequences in terms of the customer's goals and purposes.

According to Chi et al., (2004), there have been limited studies to examine the

differential effects of individual dimensions of customer value on the specific

dimensions of CRM performance. They argued that, investigating key dimensions of

customer value and their effects is very critical and important since the delivery of

superior customer value can involve significant costs for firms. Firms even though

they recognize the fact that superior customer value can lead to higher profits, they

may be bit skeptical since it can lead to profit reduction.

Delivering superior customer value has become an ongoing concern in

building and sustaining competitive advantage by driving customer relationship

management (CRM) performance. Driven by demanding customers, keen

competition and rapid technological change many firms have sought to deliver

superior customer value. Based on this the role of the customer has changed from

that of a mere consumer to a multi-faceted role as consumer, co-operator, co-

producer, co-creator of value and co-developer of knowledge and competencies,

which implies a much more important position of the customer than ever. Hence,

firms are seeking to retain existing customers and attract new customers by

targeted value creation activities (Chi et al., 2004).

Ryals and Payne (2001) affirm that, CRM creates value for the customer.

The customer benefits from product and/or service offers which are targeted to

meet individual needs and from improvements in customer service. There are

number of ways in which customer service can be improved through CRM. This

includes reliability, security, efficiency and communication as well as quality control

and service monitoring. CRM systems also act as an ‘organizational memory’ about

the customer. This can benefit the customer by reducing the amount of repetitive

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form-filling that the customer has to do. The use of CRM to provide added value to

customers can be directly linked to improved profitability and value-based marketing

for the company.

Apart from the value CRM creates for the customer, it can also bring

operational benefits and boost company performance. This in turn, can increase

customer satisfaction and long-term success through longer and closer relationships.

In addition, customer data analysis enables organizations to identify the customers

it does not want to have. Companies have known for a long time that customer

profitability varies and that not all customers are equally desirable.

However, it is only with the advent of powerful systems that they are able to

quantify and track customer profitability and forecast customer lifetime value at the

level of the individual customer. Previously, companies could only say that

customers of a certain type were likely to be more commercially attractive, now they

can pinpoint the individuals who are the most attractive customers. These are the

customers with whom it is vital to retain long-term relationships. One American

retail bank carried out a customer profiling and targeting exercise using data mining

techniques. The impact on direct mail campaigns was dramatic. Campaign costs

fell by one third and response rates doubled the number of new accounts increased

by 33% and the profitability of these new accounts by the same amount. Defection

rates fell by 5% and the lifetime value of these new customers grew by an

estimated 20%. By combining an understanding of customer purchasing drivers and

customer profitability, companies can tailor their offerings to maximize the overall

value of their customer portfolio (www.cranfield.ac.uk, 2004).

Types of Customer Value

Kotler (1997) argued that, customer value can be understood in terms of

product value, service value, employee value and image value. However, this

approach is largely derived from the standpoint of a firm not that of customers or at

least not totally customer based. The broad theoretical framework developed by

Sheth et al., 1999 (in Chi et al., 2004) was somewhat different. In that they

suggested five dimensions of value from the customer's perspective (social,

emotional, functional, epistemic and conditional) as providing the best foundation

for extending the value construct. However, it is worth noting that, not all these

dimensions have equal significance at any time, although they are related in some

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sense. As a result the study posits that, customer value can be better understood in

terms of four key dimensions each of which may play a different role in the

customer perception process and thus contribute differently to the performance of

CRM. The figure 1 illustrates the types of value that a customer can experience.

Figure 1: The integrated framework for customer value and CRM

performance (Chi et al, 2004)

Functional value refers to the utility derived from the perceived quality and

expected performance of the product or service and perceived sacrifice refers to

the loss derived from the product or service due to the increment of its perceived

short-term and long- term costs. Functional value pertaining to the customer’s

acquisition and use of the product is generated by price, convenience, access or

technology. Unfortunately, competitors can most easily duplicate functional value

(Bristol Group, 2004). Customers are becoming more value-oriented and are not

simply influenced by high quality or lower price and value for money represents,

therefore, the simplest and most easily copied form of functional value. Thus,

creating functional value offers a fleeting competitive advantage. (Bristol Group,

2004).

Social Value refers to the social utility derived from the product or service.

Emotional value refers to the utility derived from the affective states that a product

or service generates. Barnes (2004) has noted that, emotional value is much more

lasting form of value which elicits an emotional response from customers. It is less

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easily duplicated by the competition and generally contributes to less emphasis on

price. When a firm employs qualified, friendly and helpful employees, value is

created every time a customer is made to feel welcome, important and valued. The

creation of such emotional value for customers is fundamentally different from the

creation of functional value through price reductions, increased convenience and

technology. Both forms of value are important. However, genuine customer

relationships cannot be formed on the basis of functional value alone. Customer

relationships require an emotional connection with the firm if they are to thrive. The

emotional value is the more lasting, yet the more difficult to create. A reliance on

technology alone will not do it (Barnes, 2004).

2. Customer Acquisition

Customers are assets that need to be acquired before they can be managed

for profit (Levitt, 1986). Customer retention is clearly a most important objective in

competitive and mature markets. However, customer acquisition is still hugely

important to companies in many contexts: for new business start-ups, when

entering new geographic or customer market segments, when launching a new

product, when exploiting new applications for an existing product or service, when

marketing low involvement products and services, when repeat purchases are

infrequent and when switching costs are low. Also, when markets show growth

potential it is strategically important for all players to grow the aggregate market

size rather than protect their own customer base through customer retention

efforts. There are some businesses in which the constant acquisition of new

customers is the only way to survive.

Customer acquisition is important even where customer retention is justified

as the core strategy. It has been observed that, 25% or more of customers may

need replacing annually (Sellers 1989; Hanan 2003; Buttle 2004). In a business-to-

consumer context, customers may shift out of a targeted demographic or their

personal circumstances may change such that they no longer find value in an

offering. In a business-to-business context, corporate customers may be lost due

to acquisition by another organization with firmly established supplier preferences,

ceasing production of the goods and services for which the input was needed or

ceasing trade. It is clear that, without a well-developed, focused and successful

customer acquisition strategy, customer retention and development is irrelevant.

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Customer acquisition is a first step in building a customer relationship

management. Targeting, acquiring and keeping the “right” customers entails a

consideration of fit with current firm offering future profitability and contribution to

the overall business risk. Many firms do not employ appropriate criteria to identify

profitable customers and their marketing programs are broadly communicated to

potential customers who may or may not be profitable. Consequently, customer

acquisition can be a costly and risky process, especially because new customers may

not represent a good fit for the organization’s value proposition and a phenomenon

that can often occur if acquisition is done outside previously targeted segments.

Customer product fit becomes important because campaigns aimed toward new

customers that change the positioning of a product can alienate existing customers.

Mittal and Kamakura (2001) discuss the nature of the relationship (or fit) of the

customer and the brand finding that, customers with different characteristics have

different satisfaction thresholds and therefore different probabilities of repurchase.

This leads to the more general observation that, customer acquisition influences the

diversity of the customer portfolio, thereby influencing business risk, but this aspect

of CRM is rarely studied in marketing (Johnson and Selnes, 2005).

Lack of focus during acquisition activities is very likely to result in adverse

selection whereby the prospects that are least likely to be profitable are mostly likely

to respond to marketing efforts. Gruca and Lopo (2005) address the problem of

adverse selection by using data from a firm’s CRM system to target prospects likely

to respond and be approved. This approach increases the number of customers who

are approved while reducing the number of “bad” customers. Their analysis is post

facto and the marketing message is not altered, but their results show 30% to 75%

improvements compared to traditional models that take into account either response

likelihood or approval likelihood but not both. This method can be extended to new

customer acquisition and better targeting of costly promotions to migrate customers

to higher levels of lifetime value.

Against this tendency towards a retention emphasis, a number of authors

promote the view that acquisition is important. Dowling (2002) suggests that,

customers have little time, energy or interest in establishing strong brand

relationships. Some customers are frequent brand switchers or portfolio shoppers

and others are simply interested in need fulfillment, rather than continuity.

Goodwin and Ball (2003) indicate that, there may be considerable economic gain

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from focusing on customer acquisition. They compute that a firm having a 16.7%

share of market enjoys 5 times the revenue impact from a 1% increase in

acquisition than from a 1% increase in retention.

3. Customer Satisfaction

Kotler (2000) defined satisfaction as a person’s feelings of pleasure or

disappointment resulting from comparing a product’s perceived performance (or

outcome) in relation to his or her expectations. When customers become satisfied

about the value that is offered and sometimes his or her expectation is met and

exceeded, can generate many benefits for a firm (Bateson and Hoffman, 2002).

According to them, positive word-of-mouth coming from existing and satisfied

customers sometimes can translate into more new customers coming to the firm.

Also, satisfied current customers often buy more products more frequently and are

less likely to defect to competitors than are dissatisfied customers. According to

Bateson and Hoffman (2002) firms that have high degree of customer satisfaction

also seem to have the capacity to shield off competition particularly price

competition.

Kotler (2000) pointed out that, it is important to measure customer

satisfaction regularly through survey to determine customers’ level of satisfaction.

He said, this is because firms may think that they are getting a sense of

customer satisfaction through customer complaints. However, in reality, 95

percent of dissatisfied customers do not make any complain and they just leave. As

a result it is important for firms to make it easy for the customer to complain.

Dissatisfied customers who usually complain about 54 percent to 70 percent will

continue to do business again with the organisation if their complaints are taken

care off and resolved and may even be 95 percent if the complaint receive quick

response and action (Kotler, 2000).

Customer satisfaction has significant implications for the economic

performance of firms (Bolton et al., 2004). Customer satisfaction has been found to

have a negative impact on customer complaints and a positive impact on customer

loyalty and usage behaviour (Bolton and Ruth, 1998; Fornell, 1992). Increased

customer loyalty may increase usage levels (Bolton et al., 2000), secure future

revenues (Rust et al., 2002) and minimize the likelihood of customer defection

(Anderson and Sullivan, 1993). Customer satisfaction may also reduce costs related

to warranties, complaints, defective goods and field service costs (Fornell, 1992).

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Finally, in a recent study, Anderson et al., (2004) find a strong relationship between

customer satisfaction and Tobin’s q (as a measure of shareholder value) after

controlling for fixed, random and unobservable factors.

Customer relationship management applications are likely to have an effect on

customer satisfaction for at least three reasons. First, CRM applications enable firms

to customize their offerings for each customer. By accumulating information across

customer interactions and processing this information to discover hidden patterns,

CRM applications help firms customize their offerings to suit the individual tastes of

their customers. Customized offerings enhance the perceived quality of products and

services from a customer’s viewpoint. Because perceived quality is a determinant of

customer satisfaction, it follows that CRM applications indirectly affect customer

satisfaction through their effect on perceived quality. Second, in addition to

enhancing the perceived quality of the offering, CRM applications also enable firms to

improve the reliability of consumption experiences by facilitating the timely, accurate

processing of customer orders and requests and the ongoing management of

customer accounts. For example, Piccoli and Applegate (2003) discuss how

Wyndham uses IT tools to deliver a consistent service experience across its various

properties to a customer. Both an improved ability to customize and a reduced

variability of the consumption experience enhance perceived quality, which in turn

positively affects customer satisfaction. Third, CRM applications also help firms

manage customer relationships more effectively across the stages of relationship

initiation, maintenance and termination (Reinartz et al., 2004). In turn, effective

management of the customer relationship is the key to managing customer

satisfaction and customer loyalty.

4. Customer Retention and Loyalty

Customer retention is a must in relationship marketing. If the company is

not able to keep their customers and to build long-term relationships they will

fail with their marketing activities. In order for a company to keep their

customers a research study made by Vavra et al., (1992) shows that, it demands a

high-quality customer service and well-managed strategically delivered formal and

informal communications (McIlroy et al., ref. to Vavra et al., 1998).

McIlroy et al., (ref. to Morris et al., 1998) also state that, customers will not

stay with a company just because of the discounts offered or the loyalty program

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that is available. Companies has to understand their customer perceptions and

expectations and offer the customers what they want, when they want it (just-

in-time), a perfect delivery each and every time with the desired levels of

service that appeal to the consumer. Offering the customer what they want

increases the possibility of customer retention (McIlroy et al., 2000).

Research has indicated that, assessments of quality and satisfaction are

critical in the process by which a consumer develops a positive attitude

towards a particular experience, makes a repeat purchase and develops brand

loyalty.

Bateson and Hoffman (2002) define customer retention as focusing a firm’s

marketing efforts towards the existing customer base. This explains the view that

instead of trying to acquire new customers, firms engulfed in customer retention

efforts must make sure that, existing customers are satisfied so as to create and

maintain long-term relationships. Lovelock et al., (1999) said in business context,

loyalty is used to describe the willingness of a customer to continue patronising a

firm’s goods and services over a long period of time and on a repeated and

preferably exclusive basis and voluntarily recommending the firm’s products to

friends and associates. In their view, customers will continue to be loyal to a

particular firm if they feel and realise that better value is being offered.

While undertaking a study in the field of customer retention and corporate

profitability, Reichheld and Sasser (1990) stated that, role of customers is essential

for corporate performance, so that when relationships with customers endure,

profits rise up. In addition, Sheth and Parvatiyar (1995) showed that, the cost of

retaining current clients is frequently much lower than cost of acquiring new ones.

In the same way, Reichheld (1993) concluded that, economic benefits of high

loyalty are important and in many industries they explain the cost-effectiveness

differences among companies. Furthermore, there are two ways by which these

improvements can take place: (i) customer retention entails an improvement of

corporate performance by means of repeated purchases and references; (ii)

enhanced organizational performances enable the company to invest more

resources on motivating and improving the relationship with its employees and

this will affect again customer retention.

Kotler (2000) assured that, the most important consideration to attain high

customer loyalty is for firms to deliver high customer value. He continued to

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stress that it has been the practice by firms to devote much attention and effort

on attracting new customers rather than retaining existing ones, adding that

traditionally firms emphasise more on making sales rather building relationships,

on preselling and selling rather than caring for the customer afterwards.

Kotler (2000) states that, the critical factor to attaining customer loyalty is

customer satisfaction because a customer who is highly satisfied will exhibit the

following characteristics:

1. Stays loyal longer;

2. Buys more as the company introduces new products and upgrades existing ones;

3. Talks favourably about the company and its products;

4. Pay less attention to competing brands and advertising, and is less sensitive to

price; and

5. Cost loss to serve than new customers because transactions are routinized.

Bateson and Hoffman (2002) noted that, firms must put in place effective

tactics for retaining customers and subsequently making them loyal. They

mentioned tactics such as maintenance of proper perspective, remembering

customers between calls, building trusting relationships, monitoring the service

delivery process, responding swiftly to customers in need and provision of

discretionary effort. According to them despite that every customer is important,

firms must not retain certain customers if they are no longer profitable, abusive to

the extent of lowering the morale of employees, reputation is so bad that it

tarnishes the image and reputation of the company.

The customer is god (boss). An effective CRM is able to please this god by

placing him at the level that makes your business ‘customer centric’ in the most

practical sense. Customer satisfaction and loyalty occurs since customers find each

company to be more responsive and more in touch with their specific needs. The

topic of loyalty has received increased attention in service industry in recent years.

For an organization, loyal customers are the most profitable types of customers

since they tend to spend more over a long time period. The ‘life time’ value of loyal

customers can be enormous (Reichheld and Sasser, 1990). At the same time costs

can be substantially decreased. Furthermore, loyal customers represent a source of

positive word-of-mouth communication, often resulting in referral business. For a

customer on the other side, loyal to one organization reduces the risk of service

variability, allows for the development of a social rapport with the provider, and the

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customization of services to his/her specification ( Berry, 1995).

As Berry said, Loyalty can be divided into levels based on purchase

frequency, visit frequency, customer recommendations, product recognition and

deal periods. Levels can be represented numerically by classifications such as:

1. Suspect: Person who hasn’t purchased, yet registered as customer;

2. Prospect: Person who hasn’t purchased but inquire about a product with

a higher degree of interest;

3. First time customer: Person who has purchased first time;

4. Repeat customer: Person who has purchased more than once;

5. Client: Person who has purchased numerous times, especially over

different products within those available from the company;

6. Advocate Customer: A client who furthers the relationship by

recommending other customers;

7. Disqualified Prospects: A person whose interest or activity indicates less

than arranged count as a suspect or prospect;

8. Inactive Customer: A person who has no purchase activity over a pre-

determined window of time, which falls outside the window of

measurement indicative of a first time customer or repeat customer;

9. Inactive Client: A person who has no purchase activity over a pre-

determined window of time, which falls outside the window of

measurement indicative of an Advocate or Client.

5. Role of Trust and Commitment in Relationship Marketing

In the last 20 years a significant change has occurred in the way companies in

Business-to-Business markets approach their suppliers and buyers (Morris et al.,

1998; Håkansson and Snehota 1998; Håkansson et al., 2004). Firms are increasingly

looking to have fewer, yet more intense relationships with their partners (Geyskens et

al., 1998). In most exchanges in the business-to-business market, achieving a sale is

not the completion of a single effort but an event taking place within a broader

endeavour to build and maintain a long-term relationship with the customer and

ensure that sales keep coming. Therefore, it is important to understand what

influences the customer’s willingness to remain with the existing supplier. Within this

broader research stream, trust and commitment are two highly interrelated concepts

which stimulate a relational bond between the supplies and the customer (Kumar et

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al., 1994).

Han et al., (1993) found that both buyers and sellers in business-to-business

markets see trust as the most important factor of a good relationship. Companies

began to realise that, in order to be competitive in the market one has to be a

trusted co-operator (Morgan and Hunt, 1994). The need for trust arises in any

supplier-client marketing relationship characterized by a high degree of risk,

uncertainty and/or a lack of knowledge or information on the part of the interacting

party (Mayer et al., 1995). This need for trust is particularly important in service

industries, where risk and uncertainty are increased to the extent that then client is

unable to examine a service before purchase (Parasuraman et al., 1985).

Besides trust, researchers recognise commitment as a central ingredient of

establishing and maintaining long-term relationships (Dwyer et al., 1987; Geyskens

et al., 1996; Gundlach et al., 1995; de Ruyter and Wetzels, 1999; Håkansson and

Snehota, 1995; Kim and Frazier 1997b; Rylander et al., 1997; Tellefsen and Thomas

2005). Commitment is also one of the most common dependent variables used in

buyer-seller relationship studies (Wilson, 1995). While researchers agree on the

importance of this construct, there are differences in its conceptualisation. Most

proposed relationship models in marketing have conceptualised and operationalised

commitment as a global construct. However, researchers observing relationships in

organisational and social psychology have pointed out three distinct motivations

(affective, calculative/continuance and normative) that underlie the desire for

continuity and over the last decade some researchers (Kumar et al., 1994; de Ruyter

and Wetzels 1999; Gounaris 2005; Bansal et al., 2004; Kim and Frazier 1997) have

transferred this framework to marketing relationships. Geyskens et al., (1996)

pointed out that, using the general expression ‘commitment’ to describe any of the

three very different components creates confusion in the interpretation of theories,

models and empirical findings related to commitment.

Trust is an essential relationship model building block and has often been

defined as a belief that one relationship partner will act in the best interest of the

other (Wilson, 1995). It has also been referred to as the key element of successful

relationship development (Goodman and Dion, 2001). Geyskens et al., (1998) on the

basis of a meta-analysis of studies about trust pointed out that most studies in

marketing build on interpersonal research and define trust as ‘the extent to which a

firm believes that its exchange partner is honest and/or benevolent’ or some variant

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thereof. Two definitions of trust very often cited are those by Moorman et al., (1992)

and Morgan and Hunt (1994). Moorman et al., (1992) define trust as a willingness to

rely on an exchange partner in whom one has confidence’. According to Morgan and

Hunt (1994), trust exists ‘when one party has confidence in an exchange’s partner

reliability and integrity.’ Their definition is similar to that proposed by Moorman et al.,

(1992) except that, Morgan and Hunt leave out ‘willingness’ because they believe it

does not add value to the definition. Doney and Cannon (1997) built on social

psychology literature and similarly defined trust as the ‘perceived credibility and

benevolence of a target of trust’. This study adopts the definition of Moorman et al.,

(1992) who studied trust in relationships between suppliers and buyers of marketing

research services. An important aspect of their definition is the concept of trust as a

belief, feeling or expectation about an exchange partner, which can be judged from

the partner’s expertise, reliability and intentions. This definition reflects two

components of trust: credibility and benevolence.

Credibility reflects the buyer’s belief that the supplier has sufficient expertise

to perform the job effectively and reliably. Benevolence reflects the extent of the

buyer’s belief that the seller’s intentions and motives are beneficial to the buyer

even when new conditions arise about which a commitment was not made

(Ganesan, 1994). Geyskens et al., (1998) also pointed out trust in the partner’s

honesty, which is one firm’s belief that its partner is reliable, stands by its word,

fulfils its promises and is sincere.

Commitment implies the importance of the relationship to the relationship

partners and their desire to maintain the relationship in the future (Wilson, 1995).

Dwyer et al., (1987) defined it as ‘an implicit or explicit pledge of relational continuity

between exchange partners’. Moorman et al., (1992) similarly proposed it is ‘an

enduring desire to maintain a valued relationship’. What is common to the different

definitions of commitment is that commitment is characterised by a disincentive to

replace relationship partners.

Researchers have used a ‘more is better’ approach when studying

commitment in marketing relationships (Fullerton, 2003) and have focused on the

common construct of commitment assuming that, it is better for a company to have

more committed buyers. This approach works if commitment is defined as a

construct directed at the identification and attachment that bonds a customer to the

company (Morgan and Hunt, 1994). However, marketing academics and practitioners

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now realise that, commitment is a complex multidimensional construct that includes

numerous components. On the basis of findings from the context of interpersonal

relationships and organizational behaviour, Kumar et al., (1994) noted that,

(attitudinal) commitment consists of different components that have different

influences on marketing relationships. These components are: affective commitment,

calculative/continuance commitment and normative commitment. All these

components of commitment pertain to psychological states but they originate from

different motivations for maintaining a relationship (Geyskens et al., 1996). Allen and

Meyer (1990) suggested that, one should understand affective

calculative/continuance and normative commitment as components and not types of

commitment because the different levels of each can be present in the relationship

between the employee and the organisation.

Affective Commitment in marketing relationships, similarly, as in the

employee-organization relationship, originates from identification, common values,

attachment, involvement and similarity (Bansal et al., 2004; Fullerton, 2003;

Geyskens et al., 1996; Gruen et al., 2000). Affectively committed customers also

continue the relationship because they like the provider and enjoy working with it

(Geyskens et al., 1996). On the other hand, calculative commitment stems from the

perceived structural constraints that bind a company to its partners and reflects

some kind of negative motivation for continuing relationship (Geyskens et al., 1996).

It presents some kind of constraining force that develops in the presence of high

switching costs or a perceived lack of alternative providers and binds the customer to

the company out of need (Bansal et al., 2004; Fullerton, 2003). Normative

commitment reflects a force that binds a customer to the provider due to a perceived

obligation (Bansal et al., 2004). Hackett et al., (1994) pointed out that, this attitude

develops on the basis of the internalisation of normative pressures that are used

before or after entering the relationship. People who act morally feel they ‘have to’

act in a certain way because this is their obligation or duty (Etzioni, 1998). Kumar et

al., (1994) stated that, a normatively committed firm continues the relationship

because it feels it should do so due to moral imperatives.

6. Key Account Management

A key account can be defined as a customer in a B-2-B market identified by a

selling firm as of strategic importance (Millman, 1997). All customers are not equally

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profitable or equally important. In fact, some sellers and vendors consider some

customers as key accounts not because of their profitability, which may be low, but

because of other issues such as prestige or reference value or because they permit

access to new markets and technologies. All key accounts are considered to be of

strategic importance by the seller. However, with respect to the other variables they

may vary widely.

Key Account Management (KAM) is one of the most popular and successful

approaches used for customer retention and development. It has been recognized as

an important part of the CRM in B-2-B marketing. Key Account Management is a

strategic planning approach that goes further than traditional selling activity. It is

about building symbiotic relationships within both the seller and buyer companies for

mutual benefit. These relationships take time, effort and money to develop, so they

must be selected carefully. If managed right, they can offer significant business

opportunities and save costs for both sides.

Key Account Management is about knowing and understanding the customer

and their business needs so firms can help them sustain and grow their business and

simultaneously firms own. By focusing extra effort on most valuable customers, with

customized services, support and even products firms can build a loyal and

referential customer who views business success as a contributory factor to their

own. Firm’s revenue from your key customers will be under less threat from

competitors and cost savings will accrue - there is less marketing expenditure in

developing existing customers than finding new ones.

7. KAM Model:

KAM is an organizational process that assumes relationships are not static and

they evolve over a period of time. Each interaction is a consequence of relationship

that exists between the customers and the supplier. The interaction in turn,

influences the relationship and its growth. Millman and Wilson (1994) have

developed a six-stage model which is a useful tool for examining sources of

competitive advantage characterizing managerial behavior. The six stages of the

model are:

i. Pre-KAM: In this stage, the firm identifies those accounts that have the

potential of moving towards key account status. This is important so that the

17

firm does not waste time and money in those accounts that do not hold this

potential.

ii. Early-KAM: In this stage, the firm explores opportunities for closer

collaboration with its customers by examining the motives, behavior, culture,

strengths and weaknesses of the customers.

iii. Mid-KAM: As a relationship of the firm with customers deepens, the level of

trust and the range of problems that are addressed increases. The number of

contacts between the employees of the firm and the customer also increase to

a much higher level.

iv. Partnership KAM: This represents a mature stage of key account development.

The supplier is often viewed as an external sources of the customer and the

sharing of sensitive commercial information becomes commonplace.

v. Synergistic KAM: At this advanced stage, the key account management goes

beyond the partnership level and the two organizations tend to see each other

as parts of large entity creating joint value in the marketplace.

vi. Uncoupling KAM: This is the final stage wherein the partnership comes to an

end. Partnerships that are ill conceived or that have outlived their usefulness

and served their purpose should not be allowed to continue beyond a certain

point.

8. Using KAM for Customer Segmentation

Generally, relationship managers analyze their customers and then try to

group them into various categories based on the performance and value of the

customers to the firms. Many mangers attempt to segment customers on the basis of

their profitability. The trickiest part in this kind of analysis is cost allocation and

defining the costs that should be included in the analysis at different level of

aggregation. Instead of spreading out the total costs across all the customers, it is

essential to infer the real costs of servicing each customer. Each customer requires

different levels of service, promotion mix, sales strategies, customization etc. what

the organization requires is a means of capturing the incremental costs over and

beyond routine order processing and service support. For example, customization

may be particularly expensive to achieve, however, a marketing manager in his

eagerness to get a customer account may promise very high levels of customization

without actually knowing the costs of implementing the customization. This means

18

that initially could have been profitable now contributes very less to the kitty of the

firm. This happens primarily due to the inability of the firm to capture key costs.

Other information that marketing managers may find useful with respect to accounts

and its management include:

i. Growth in profits as compared to growth in sales.

ii. The characteristics of the key account.

iii. Cost of servicing each customer vis-à-vis his/her contribution.

iv. The impact of losing a key account on the bottom line of the firm etc.

9. KAM as a Customer Retention Strategy

Customers are segmented into different groups to identify the value placed on

long-term relationships with particular customers or customer groups. This is from

the perspective of the customers and this exercise allows the setting up of KAM

systems and the tailoring of customer retention strategies. One problem that firms

often face in formulating customer development/retention plans is the dichotomy in

opinion that arises owing to different perspectives. This arises from the fact that, the

marketing and purchase functions place different emphasis on the various aspects of

the relationship with the customers and consequently might lose sight of the

marketing/purchase interface. Another important aspect of KAM system is the

receptivity that sellers and buyers display towards such systems. Both partners may

not wish to get close to each other or may be ready to do so at different rates. The

potential of mismatch between the objective and aspirations of buyers and sellers

may prove important, especially in developing long-term relationships. While a seller

may see a new account as a prospective long-term customer, the buyer may view it

as a one-time purchase or use it to obtain more competitive quotes from other

sellers. It is better to obtain a deep understanding of the customer behavior and use

receptivity to KAM strategies as a major segmentation variable. Each segment

(account) may require a different allocation of resources to the relational mix as a

part of the account plan.

10. KAM as a Growth and Development Strategy

Most of the firms focus their KAM efforts on customer retention. This brings

about stability to the company’s operations. However, as a response to the

medium/long term structural change in the business environment, this strategy is not

19

sufficient. The more important thing to do in such a condition is to be able to

capitalize upon the potential of key accounts and use it to increase the share of

profitable customers. A firm may fail to use KAM as a growth and development

strategy if it does not have the diagnostic tools to gain an in depth knowledge of the

customer’s business and how they add value to the firm. An essential feature of a

successful KAM is to combine customer retention with building customer share.

11. Conclusion

Customer relationship management (CRM) has become a number one focus as

today’s competitive markets are getting more saturated and aggressive. The

marketing model is changing from the product-centered stage to the customer-

centered stage. Customers are demanding a different relationship with suppliers than

the traditional sales model. The objective of any business is to amaze customers by

anticipating and fulfilling their unarticulated needs. This can be done by

implementing CRM.

The goal of this chapter was to provide an overview of the literature in the

areas covering the research. First CRM history, functions, benefits, implementation

and evaluation were reviewed, followed by Customer value, Customer Acquisition

and Customer Retention, Finally Role of Commitment and trust in Managing

relationship and Key account management were discussed. Under literature review, a

number of theories were discussed which will eventually function as basis for the

development of conceptual framework in the following chapter.

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