Levels of Relationship Strategies for Bonding Customer Relationship

Leonard Berry and A. Parasuraman² developed a framework for understanding bonding for cus­tomer relationship management (CRM). The framework suggests that relationship marketing can occur at different levels. Each successive level of strategy results in sustained competitive advantage and bonds the customer closer to the firm. The four levels of relationship strategies for bonding customer relationships are:

Level 1—Financial Bonds: (a) Volume and frequency rewards, (b) Bundling and cross­selling and (c) Stable pricing.

Level 2—Social Bonds: (a) Continuous relationships, (b) Personal relationships and (c) Social bonds among customers.

Level 3—Customization Bonds: (a) Customer intimacy, (b) Mass customization and (c) Anticipation/innovation.

Level 4—Structural Bonds: (a) Shared processes and equipment, (b) Joint investments and (c) Integrated information systems.

1. Level 1-Financial Bonds

Financial bonds tie customers primarily through financial incentives. Financial incentives do not generally provide long-term advantages to a firm. This is because unless these are combined with another type of bond, they do not differentiate the firm from its competitors in the long run. The various forms of financial bonds are discussed below:

Volume and frequency rewards: These are lower prices for larger volumes or for customers who have been patronizing the firm over time. For example, frequent flyer programmes, rewards programmes of hotels and credit cards.

Bundle and cross-selling: Many airlines in the case of frequent flyer programmes link their reward programmess with hotel chains, auto rental and credit card usage. Thus, customers enjoy even greater financial benefits in exchange for their loyalty. McDonald’s has success­fully used bundling strategies to create value for the customers.

Stable pricing: In order to retain customers, firms offer loyal customers the assurance of stable prices or at least lower price increases than those paid by new customers. For exam­ple, the option of earning a higher interest rate given to ICICI Bond holders whose bonds were getting redeemed if they invest the redemption amount in a fixed deposit.

One of the biggest disadvantages of financial bonds is that they can be easily imitated. Also, it attracts a lot of price sensitive customers who switch to a cheaper option at the first opportunity. Thus, financial bonds are the weakest bonds.

2. Level 2-Social Bonds

Level 2 strategies bind customers to the firm by offering more than financial incentives. Mar­keters try to retain customers by tailoring solutions to the changing needs of customers. The various forms of social bonds are discussed below:

Continuous relationships: These are provided to customers when companies have stable long standing dealers who bring in local market knowledge and maintain close relationships with customers. Recognizing the value of continuous relationships in building loyalty, Cat­erpillar Corporation (which is one of the world’s largest manufacturers of mining, construc­tion and agriculture heavy equipment) credits much of its noted success to its strong dealer network and product support services offered throughout the world accountants, etc.) and their clients as well as among personal service providers (counselors, hairdressers, healthcare providers) and their clients.

Personal relationships: There is a focus on building deep personal relationships with customers. These are common among professional service providers (lawyers, teachers, accountants, etc.) and their clients as well as among personal service providers (counselors, hairdressers, healthcare providers) and their clients.

Social bonds alone are much more difficult for competitors to imitate. In combination with financial incentives, social bonding strategies may be very effective. Social bonds are relatively more difficult to break and hence enduring.

3. Level 3-Customization Bonds

Level 3 strategies involve more than social ties and financial incentives. An intimate knowl­edge of customers and their needs developed through a learning relationship is very useful in retaining valuable customers. The various forms of customization bonds are discussed below:

Customer intimacy: This suggest that the customer is actively sharing information during interactions and contributing in the marketer’s endeavour to customize products, services or any aspect of the marketing mix. This enables the organization to learn new things about the customer and add to the organization’s knowledge of the customer. Marriott Hotels knows the likes, dislikes and special habits of its over five million customers. This informa­tion comes from the data entered by the employees when the customer stays at any of the Marriott hotels.

Mass customization: This refers to the use of flexible processes and organizational structures to produce varied and often individually customized products and services at the price of standardized, mass-produced alternatives. At its special outlets, Levis gives the option of buying jeans made to customer specifications. Customer can give measurements. These measurements will be passed to the factory that will make customized jeans to be delivered within a week.³

Anticipation/innovation: This brings in an element of pleasant surprise—the wow factor! The ability to customize, in combination with customer intimacy, can be used to antici­pate customer needs and innovative solutions can be recommended to meet these needs. Amazon.com uses collaborative filtering techniques to anticipate customer needs. Ama­zon’s collaborative filtering technique uses the knowledge gained by the purchase behaviour of customers with similar profiles and requirements to even anticipate the needs of a pros­pect who registers for using the service and in the process shares information.

Customization bonds are also difficult to break as the customer would need to start from scratch and teach the new potential provider even if the provider has the capability to meet the customer’s requirements.

4. Level 4-Structural Bonds

Structural bonds are created by providing services to the client that are frequently designed right into the service delivery system for that client. The various forms of structural bonds are (a) shared processes and equipment, (b) joint investments and (c) integrated information systems.

Shared processes and equipment, joint investments and integrated information systems can be seen in the partnership between Walmart and Procter & Gamble.

Federal Express ties its customers with its Power Ships—free computers at client sites to store addresses and shipping data, print mailing labels and help track packages. The client saves time and can keep track of daily shipping records.

Structural bonds are the strongest bonds and hence the most difficult to break. As the organization moves from level 1 to level 4, they will observe the following:

• As one moves from level 1 to level 4, the bonds become stronger. Structural bonds are stronger than customization bonds and customization bonds are stronger than social bonds and financial bonds.
• As the bonds become stronger, customer loyalty increases and the opportunities and scope for reaping the benefits of relationship marketing increases.

Source: Poornima M. Charantimath (2017), Total Quality Management, Pearson; 3rd edition.