Transaction vs. Relationship Buyers

Actually, you need a lot more proof because the response to discounted sales is usually quite misleading. As Paul Wang, associate professor of integrated marketing communications at Northwestern University, points out, there are, in general, two types of customers: transaction buyers and relationship buyers. A transaction buyer is someone who is interested only in price. These buyers have no loyalty and will leave you for a penny’s difference in price. They have all the catalogs and know all the competitors’ prices. They spend hours researching products before they buy. They can afford to wait. They take pride in getting the best deal.

The other type of buyers are relationship buyers. These are people who look for a supplier they can trust. They seek friendly companies with reliable products — people who recognize them, remember them, do favors for them, who build a relationship with them. Once they find such a supplier, they tend to give them all their business. They know they can save a buck here or there by shopping around, but they find the process wastes too much of their time and emotional energy. Relationship buyers, if properly cultivated, will stay with you for a lifetime.

The Truth About Discount Pricing

Brian Woolf, president of the Retail Strategy Center and author of Customer Specific Marketing, said this: “For years, retailers have argued that having regularly advertised, deeply discounted prices brings price-oriented customers into their stores but that over time, these customers convert into regular, profitable customers. Research at the Retail Strategy Center shows that this widely held belief is a myth. A handful of these customers do convert into ‘good’ regular customers, but the majority actually defect within 12 months of their first shopping visit. I have yet to find a retailer anywhere in the world whose investment in this type of shopper has yielded an attractive return on investment.”

Research from consulting firm Oliver Wyman Group has shown that for hotels, gas stations and drug or food stores, only 15% to 30% of customers are price-sensitive. The other 70% to 85% are loyal customers who provide most of the profits.

In this illustration, each company has a base of relationship buyers. When their products are on sale, they also attract a small additional group of transaction buyers. But when their competitors’ products are on sale, this same group of transaction-oriented customers jumps ship to take advantage of the discounts. In a few days, they move on when they hear of another price advantage somewhere else. Meanwhile, of course, the management of each company is telling itself that its customers are all very price-sensitive, and it has the sales figures to prove it!

Transaction buyers give you very little profit. Since they only buy discounted items, the margin on their sales is much lower than the margin on relationship buyers’ sales. In fact, you may find that your relationship buyers are subsidizing the sales to your transaction buyers. For example, you provide special express lanes for people who buy fewer than 10 items. Your regular customers with a loaded shopping cart have to wait in long lines.

What is wrong with assuming price sensitivity? By having discount sales, you gradually convert your relationship buyers into transaction buyers. Instead of thinking about recognition, service, helpfulness and relationships, you gradually train them to think only of your product’s price. You train them to check the prices of competitors’ offerings and to use the Internet for further comparison shopping. You ruin perfectly good relationship buyers by the way you treat them.

Why Customers Leave

Why do customers leave your company, anyway? There are only four possible reasons: 1) They die, or are no longer buying in your category. 2) They are unhappy with the price. 3) They are unhappy with the product. 4) They are unhappy with the way they are treated.

Management teams always focus on reason No. 2. “If we just cut our price below Company X, and let everyone know it, our customers would never leave,” they reason. But research in a wide variety of industries shows that reason No. 4 is the most common factor driving customer churn. Why is this so? Because what binds relationship buyers to your company is not the price alone, it is the totality of the relationship, which includes: recognition, service, information, helpfulness, friendly employees, brand identity, and product quality and price.

Five Ideas to Help Reduce Churn

Relationship buyers stop buying when you stop loving them and stop treating them as they want to be treated. How can you hang on to relationship buyers?

• Know who they are. Keep track of them in a database. Let your employees at every branch, or on the telephone, know who your gold customers are. Be sure they are treated as gold.

• Communicate with them. Find special ways to build a relationship with them. Thank them for their business.

• Use your best customer service people with them. Some banks segment their customers by profitability. When the phone rings from a profitable customer, their automatic call distributor uses number identification technology to shift these calls to a specially selected “gold” customer service team.

• Build equity in the process. Provide rewards for volume business and length of service. Make it expensive to leave.

• Don’t stress price. If your neighbor helps you carry a heavy item of furniture upstairs in your house, you would never think of offering him money. You will supply a beer or a cup of coffee and conversation. This is what your relationship buyers want. They want to be treated like a good neighbor — a good friend.   

Arthur Middleton Hughes is Vice President/Solutions Architect at KnowledgeBase Marketing in Fort Lauderdale, Fla., which maintains databases, provides prospect names and conducts data processing, analytics and marketing strategy for clients. Hughes is the author of Strategic Database Marketing, 3rd ed. (McGraw-Hill 2006). He can be reached at arthur.hughes@kbm1.com or at (954) 767-4558.

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T R E N D S

Next-generation artisans will fuel economy 

The next decade will see a re-emergence of artisans as a powerful economic force, according to a new study by the Institute for the Future, sponsored by Intuit. Like their medieval, pre-industrial predecessors, these next-generation artisans will be valued for their craftsmanship, knowledge and savvy mercantilism. However, advances in technology and the reaches of globalization will give them greater opportunities to succeed.

The study forecasts that there will be increasing opportunities for small business to flourish in niches left untouched by the global giants, and large corporations will increasingly tap small business for collaboration. Small businesses will reclaim manufacturing, fueling small-scale and specialized production. Tools such as computer-aided design and desktop manufacturing systems will transform the manufacturing process and change the very nature of producing goods. With the ability to access world-class, large-scale infrastructure and new “plug-and-play” open-source hardware technologies, small businesses will expand their reach and address industries formerly served only by big business.

Furthermore, the next wave of globalization will be driven by small business. Almost half of U.S. small businesses are expected to be involved in global trade by 2018. As the costs associated with doing business globally decrease, artisans will make no distinction between domestic and international commerce. Online and offline social networks will help remove soft trade barriers, such as language and cultural differences. These networks will introduce small businesses to new markets and facilitate cross-border trade.  

Source: Intuit Future of Small Business Report, February 2008 

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N E W S

Overcoming the credit crunch 

As banks tighten lending standards for business loans, many small business owners are feeling the crunch. However, though it may take a little more work, funding options are still out there.

First, consider approaching smaller banks. In a 2007 survey by Greenwich Associates, a financial market research firm in Greenwich, Conn., small business owners ranked community banks on average as more willing to lend and offering better terms on loans than large and regional banks. Because small banks know their area and customers better, they are more likely to look beyond the numbers on an application and give businesses with less-than-perfect balance sheets or credit histories a better shot at a loan.

A second option for business owners looking for small loans is to consider one of the new social lending websites. With some variations, the sites match people who want money with those willing to lend it, usually at more favorable interest rates than those of many banks. Some of these sites include online lending pioneer Prosper, as well as Zopa, Lending Club, Virgin Money and GlobeFunder. Zopa connects borrowers with credit unions. Lending Club started as a Facebook application and now is available in all 50 states. Virgin Money formalizes loans between family and friends. And newcomer GlobeFunder launched in January.

Source: BusinessWeek SmallBiz, February-March 2008 

New tax breaks for small businesses 

In addition to putting more cash in customers’ pockets, the recent economic stimulus bill included significant tax breaks for small businesses.

The key addition affecting small businesses is an expansion of “bonus depreciation,” which allows investments in tangible property, computer software or improvements to leased property to be more speedily depreciated. Businesses of all sizes will be allowed to depreciate in this tax year 50% of the cost of an asset put into use in 2008.

Another provision will increase the level of “Section 179” deductions. Businesses with up to $800,000 in annual qualifying equipment purchases can deduct investments in any tangible business purchases (not including buildings, but including computer software) of up to $250,000, instead of depreciating them. These caps are increases from the $500,000 annual revenue maximum and $125,000 deduction limit under current law.

“From a small-business perspective, we’re very happy with the final product,” says National Federation of Independent Business tax counsel Bill Rys. The new expensing rules, he says, “apply broadly, so we think it’ll help all different sectors of small business owners.”  

Source: CNNMoney.com, February 14, 2008 

‘Heavy clickers’ distort online advertising 

The people clicking on your banner ads may not be the target audience you’re seeking, according to a new Starcom USA study. The study revealed that so-called “heavy clickers” are typically between the ages of 25 and 44, with a household income of under $40,000. They represent only 6% of the online population, but account for 50% of all display ad clicks.

Heavy clickers spend about four times more time online than non-heavy clickers and are likely to frequent auction, gambling and career services sites. They do shop online, but they aren’t necessarily brand loyal and often don’t even pay attention to the brand they are buying.

This suggests that advertisers hoping to increase brand awareness with an online campaign which is optimized for high click-through rates may not have that effect. Furthermore, click-through rates may not be an accurate metric for measuring brand awareness.

Of course, the click can continue to be a relevant metric for direct response advertising campaigns, but this study demonstrates that click performance is the wrong measure for the effectiveness of brand-building campaigns.  

Source: BizReport.com, February 13, 2008 

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T I P S

• Can a recession have a silver lining? As many companies cut back on marketing expenses, vendors in the marketing industry may be more willing to cut deals. For example, you may be able to negotiate discounts on printing and advertising. Also, pay-per-click costs on search engines should drop as fewer advertisers are willing to bid up keywords. Studies have shown that investing in marketing through a recession results in greater profits in the long run, but few companies heed this advice. Make their loss your gain.

Source: www.betterforbusiness.com

• Service with a very big smile gets results. Researchers from Bowling Green and Penn State universities followed encounters between customers and employees in coffee shops, scoring employees’ “smile strength” on a scale from “absent” to “maximal” during transactions, and found that the bigger the smile, the more likely customers were to view that person as competent and the encounter as satisfying. But requiring employees to smile can backfire, and ample research suggests that customers know, and don’t appreciate, a fake when they see one. Rather than mandating smiles, the study recommends simply hiring happy people.

Source: Harvard Business Review, 60 Harvard Way, Boston, MA 02163

• Sell more by turning your prospects into heroes. Even in a business-to-business sale, you need to show your buyers what’s in it for them personally. How do they personally gain? Will they look good to their boss? Will they save time and effort? Will they make their customers or employees happy? There’s an important difference between “Your company will save over $50,000 a year with our product” and “You will save your company over $50,000 a year with our product.” People want to be heroes. Make it so.

Source: www.salesdog.com

• Draw more prospects to your trade show booth by sending teaser gifts before the show. Researchers at Georgia Southern University found that companies that sent formal invitations with a gift to attendees prior to an event drew larger crowds than those that sent only invitations or invitations with redeemable coupons. Further, the study said that 76% of trade show attendees retained a favorable impression of a company that sent them a promotional product. There are myriad gifts to choose from, ranging from mouse pads that cost a few cents to T-shirts and flash drives for a few dollars.

Source: Inc. Magazine, 7 World Trade Center, New York, NY 10007

• Make it easy to get compliments from customers. Companies often have highly developed systems for handling customer complaints, but is there a way for them to offer praise? Often, when they experience a job well done, they say thanks and that’s the end of it — no follow-up, no word of mouth, no one ever knows. Companies need to open the door to positive feedback. If you don’t ask for it, you’re not going to get it. Try these ideas: Post customer comments on an “Employee Thank You” wall — put slips of paper, pencils and thumbtacks next to it. Let customers vote on “Employee of the Month.” Add a prominent feedback form on your site. Reword your post-purchase surveys to explicitly ask for free-form feedback — you’re not going to get praise from a multiple-choice question. And, be sure customers know the names of their helpers.

Source: www.damniwish.com

• Supercharge your public relations campaign by adding video, audio and photos. Traditional media such as newspapers have discovered that adding these items to their websites boosts online traffic — in some cases more than their posted stories. In response, many of these “old media” publications are requesting new media formats. Build an arsenal of still images, audio and video on your own online newsroom. Make sure it is easy to use and the content is formatted for easy download and reuse.

Source: www.bnet.com

• Redesigning your website? Keep these ideas in mind. First, refocus 80% of your homepage on a single primary audience. You may have multiple audiences, but trying to be everything to everyone will result in a site that isn’t anything to anyone. Second, the horrible truth is that many visitors don’t open windows all the way to see your entire homepage. Therefore, move your most useful links to the top. Next, use your old site’s search reports (assuming you have search on your site) to discover the best words to use on your navigation menu. Finally, keep your site down to three columns or less. Studies have shown that fewer columns equal higher response rates.

Source: www.chiefmarketer.com

• Be careful when instituting a telecommuting program. New research reveals that the more telecommuters there are at a company, the less satisfied the office-based workers are with their jobs, and the more likely they are to quit. To avoid problems, develop methods to ensure more face-to-face contact between telecommuters and office workers, and provide office workers more autonomy in their jobs.

Source: www.bizjournals.com

• Don’t have time for a blog, but still want to create an online presence for your company? Leave comments on established blogs instead. Here’s how: Pick keywords related to your area of expertise and enter them into Nichebot.com to see which similar words pop up most often in online searches. Use the results at Google Blog Search or Technorati to create a list of relevant blogs. Begin commenting on those blogs when you have something to add to the conversation. Keep track of your comments and how others respond with Co-Comment.com. Be sure to leave a link to an online profile about who you are to bolster your credibility. The ultimate value of commenting is that you establish a network of bloggers who know you. If and when you decide to blog, you will have instant street credibility and active readers.