RELATIONSHIP MARKETING

Steve Weingrod

THE ECONOMY IS BOOMING. Unemployment is at record-low levels. Many music categories are experiencing healthy growth. Yet many music retailers are wondering: Is there a future for any store? How can I compete? Will Superstores put me out of business? Am I missing out on discounts or special promotions that the big stores receive? What is really going on in the world of retailing?

Many trends are taking place in the world around us, and it's often hard to tell how they will affect retail businesses; however, one thing is certain: Retailers with the most loyal customers are the retailers who are most likely to prosper. A loyal customer is one who, when contemplating a purchase in a specific category, will think first (and maybe only) about a particular store. If that store is yours, you have a loyal customer.

Making customers loyal is difficult, at best. Customers seem to be getting more demanding. Most of us make purchase calculations based on four components: price, service, convenience, and selection. Most merchants, large and small, try to provide all that while still making a profit. It's very hard to do.

Let's turn the tables and be consumers. Many people are feeling that as consumers they are treated as commodities. This is due, in part, to the de-personalization of marketing practices. Recent market research shows that important segments of the population (including consumers who purchase the products and services that you sell) value personalized interaction between themselves and product and service providers in categories where there are certain core personal values at stake. This does not include categories of impersonal commodities like toothpaste or gasoline that are simply a means to an end. But it can include music. Why? Music can mean personal expression, education for children, vanity, escape from a pressured lifestyle, etc. This provides music merchants with the opportunity to shape the nature of the of a customer's evaluation of the price-service-convenience-selection calculation.

It takes the building of personalized relationships with individuals to turn those prospects into loyal customers. The specific marketing practice needed to effectively and profitably build a base of loyal customers is called Relationship Marketing. In the world of Relationship Marketing, success is measured by 'share of customer,' not 'share of market.'

Relationship Marketing requires a database for implementation, so it can also be known as database marketing. But databases are impersonal software applications that allow you to build loyal customer relationships. Relationship Marketing refers to the end, not the means.

Relationship Marketing requires learning about the interests and needs of individual customers, then communicating with customers based on those needs and interests. When Relationship Marketing principles are applied properly, both the customer and the retailer gain. For the customer the benefits are enhanced trust, the assurance that the retailer understands his or her needs amid the likelihood that the retailer will recommend and provide the product and service that fits those needs.

Relationship Marketing is like other relationships in that it takes input and commitment from both parties to be successful. You learn about your customers, and they learn about you. It takes listening and providing opportunities for customers to tell you meaningful things about their needs. That builds trust. Once customers begin to let you know about their needs, you can provide specific marketing information targeted to those interests. That proves you understand. Your recommendations will be taken seriously. At that point the customers are so invested in the relationship that they are unlikely to start over with a competitor. You now have the opportunity to develop loyal customers who will not only think first and foremost about your establishment, but they will also tell their friends and relatives about how refreshing it is to deal with you. Your customers can become your advocates.

Achieving loyal customer 'nirvana' is not easy. It takes time, hard work, and a willingness to change thinking within the staff and management of any enterprise. And the scariest part may be that it takes a shifting of resources into unfamiliar areas. Typically, merchants who utilize Relationship Marketing shift marketing dollars from their general advertising budget to targeted direct-marketing communications.

Let's look at examples of three successful Relationship Marketing programs outside the music industry. Personal core values become more important with each case study.

Car Rentals

Car rental is a business that involves little or no personal core values yet offers a dramatic case study. Here is a rather amazing driving fact in the car rental business: 0.2% of car rental customers represent 25% of total car rental revenue. That disproportionately small number of customers means that if you had a stadium filled with a representative sample of 40,000 car rental customers, just 80 of them would make up 25% of the car rental business.

They are mainly frequent-flyer travelers who are constantly on the road and usually rent at airports. They mainly want convenience and quick access to reservations and cars. The smart car rental companies have marketing programs specifically aimed at those 80 super-premium customers and the next few levels of travelers.

If you rent enough from National, you can be an Emerald Aisle Club member. When you join, National 'learns' everything it needs to know about your needs and maintains that information in its database. It not only has your name, address, and phone numbers, it has your driver's license number, your credit card, the type of extra insurance you want to purchase with your rental, the type of car you like, and more. Emerald Aisle members can call a special 800 number to reserve a rental. You only have to tell them which airport you will be at and when you will be there. They will tell you if there are cars available. Cars are almost always there when you want one.

When you arrive at the airport, you skip the line at the counter, you skip the paperwork; you go fight to the Emerald Aisle and take any car that is available. You drive right up to the exit booth, give the attendant your Emerald Car number, and fide out with a pleasant 'thank you.' You probably saved at least 20 or 30 minutes. For travelers maximizing their time on the road. this can be critical. You could have found a lower price for the same type of car elsewhere, but your time is more important that the small 'premium' paid for this type of service.

This is a great deal for frequent flyers and for National. Emerald Aisle customers gain with needed convenience. National gains profitability by charging a premium for this service. National has a lock on some of the top 80.

Blue Jeans 

Let's move from car rentals to an item of women's clothing, the ubiquitous pair of blue jeans. Here, core personal values play a role. Since bodies come in many shapes and sizes, it's impossible to manufacture enough sizes to fit most everyone. And, sexism aside, women typically care more about how jeans fit than do men. Levi figured out it could produce a limited number of custom-fit jeans on a mass assembly line if it could get exact measurements. It partnered with some upscale department stores that offered custom-fit jeans to their customers. They cost more, but the added value of a great fit is worth it to a certain segment of the jeans-buying public. Measurements were taken at the store and provided to Levi. About two weeks later the custom jeans arrived at the store for customer pickup. The customer got what she wanted. Levi (and the store) developed a loyal customer who had provided some very personal information. It is unlikely she would go elsewhere for jeans. In fact, these customers typically purchase significantly more jeans than the average female jeans buyer does.

Bookselling

Our final example comes from a business that is closer to home: the world of bookselling. This industry has received a fair amount of attention from this magazine in recent months. Purchasing a book is often a statement of one's core personal values.

Book sales at locally owned independent booksellers represent less than 20% of the overall book market. The rest are sold at major chains (like Barnes & Noble), chain discount stores (like Wal-Mart), mail-order catalogs, and now via the Internet. All this is taking place at the same time that book sales are flat. The ranks of independents are rapidly shrinking. And like the retail music trades, were it not for their tenacity and love of product sold, many more independent booksellers still in business would probably have closed their doors in the past few years.

Some independents, however, are now successfully competing by implementing a Relationship Marketing program. One such operation is a four-store regional chain in a medium market of 1.5 million. In the two years since implementing a Relationship Marketing program, this business has raised its gross margin by three to four percent. Those additional profit dollars have dropped to the bottom line, and the business is making an acceptable profit for the first time in several years.

Independent booksellers have a far higher level of service than chains and can not win by competing on price and discounting. This store chose to develop loyal customers based on promoting service and focusing on core values that could transcend the four-way calculation. In this case, those values can most easily be described as 'community support, involvement, and commitment.'

Two years ago the store had a mailing list of 30,000 customers. The only information captured was name and address. Store staff did not know who their frequent buyers were and who signed up but shopped only once. The marketing budget was structured to spend the identical amount communicating with each person on the list, regardless of how often they bought.

A different type of marketing program was implemented that allowed the store to track purchases. This program is called 'Give Back.' Customers 'join' buy providing their name, address, and phone number (this becomes their ID number in the data base). No card is issued. All information is gathered at the point of sale. Give Back members designate one local charity (from a list of 20), and the store donates 1% of each member's purchases to the charity they choose. Several charities are now receiving over $5,000 per year from this program.

With over 25,000 members and growing, the Give Back program is now the store's marketing engine. Ten newsletters are mailed per year to Give Back members. Using the database, the staff identifies the top buyers and thanks them for their patronage with a $5-off coupon good on any purchase. Customers who become new members are mailed a similar coupon within 60 days of joining. For author visits, post cards are sent to members who have purchased books by that author or in the author's category (cooking, gardening, etc.). The quantifiable results are extremely positive. Give Back members account for about 17% of all store transactions, yet they represent approximately one-third of the store's overall sales. This means that Give Back members purchase about twice as much as nonmembers. Further, based on the books they purchase, Give Back members are far less discount-driven than non-members are. While database limitations can not track individual customer profitability, it is likely that Give Back member purchases now provide roughly 40% of the store's overall gross profit.

As a result of this program, the business has been able to maintain its overall volume and reduce discounting (primarily by lowering discounts at storewide sales events). With tight control on operational expenses, the gross margin has dramatically improved. Many more marketing programs are on the drawing board, including prospecting for new customers.

The retail music trade has the critical characteristics that make it a perfect fit for Relationship Marketing. The products and services sold have core-personal value interest to your customers. Customers want to be listened to and understood. Retailers need to engender trust that promotes word-of-mouth advertising. Service and warranty are important factors. Many items are in high price ranges and are expected to last a long time. In addition, your potential market has a limited number of prospective customers whose demographic profiles are relatively narrow and easily defined.

In the next issue we will explore how Relationship Marketing with a database makes dollars and sense.