Download Reference Value of Customer Relationships

Reference Value of Customer Relationships
Anne Jalkala, Risto T. Salminen, Lappeenranta University of Technology
Sabrina Helm, Witten/Herdecke University
Abstract
The use of references is an important marketing tool in industrial market settings. The
potential of customers to serve as a reference can be added to supplier-perceived value of a
customer relationship. Value-oriented research in industrial marketing does not take this
component into account, though. Therefore, this paper examines the elements of reference
value and proposes a conceptualization of reference value. We define the concept of reference
value in terms of the desirable effects that references generate within the supplier’s network,
making reference value a multi-faceted phenomenon. Consequently, suppliers can improve
their customers’ value as references by influencing the various value components.
Furthermore, we propose that more attention should be paid to references when measuring the
value of business relationships.
Introduction
The concept of relationship value has been the focus of several marketing studies, and it is
widely acknowledged that customers and customer relationships are important assets to
companies (Gupta, Lehmann, and Stuart, 2004; Hunt, 1997; Srivastava, Shervani, and Fahey,
1998). Customer relationships can be considered as one of the key sources of competitive
advantage as, besides revenues, they can generate new technologies, market access, and
critical information for suppliers (Anderson, Håkansson, and Johanson, 1994; Biggeman and
Buttle, 2005; Walter, 1999; Walter, Ritter, and Gemünden, 2001; Webster and Frederick,
1992; Wilson, 1995). Even relationships of low financial significance may be highly valued
for their knowledge transfer, reputational, or network-access characteristics (Ford and
McDowell, 1999; Walter, Ritter, and Gemünden, 2001). The reference value of customer
relationships is highly acknowledged by business managers, and customer references and
referrals from satisfied customers are generally considered as powerful marketing tools (e.g.
Helm, 2003; Mangold, Miller, and Brockway, 1999; Salminen and Möller, 2006). Especially
in the field of high-technology marketing and in project marketing and systems selling,
references have a significant role as the potential buyer faces high perceived risk. The need
for references is especially high if a relatively unknown firm enters a new high-risk product
field or makes a market entry into a culturally distant market. In some buyer-seller
relationships, the reference value of a relationship can be even more important than the direct
monetary value of the relationship. A supplier might close a deal with a substantially lower
profit margin than average, due to the high perceived reference value of the customer
relationship. The lost profit margin is considered as a cost of new market access gained
through the critical reference (Walter, Ritter, and Gemünden, 2001). References have been
identified to have various tasks in business marketing, such as reducing the perceived risk of a
potential buyer and signalling the supplier’s credibility (Salminen, 1997). Also, the practices
through which references are utilized are diverse. These include reference visits, reference
lists, brochures of customer cases, and “success stories” handed over to the customer with the
offer, as well as communicating about references through the internet (Jalkala and Salminen,
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2006). In existing research, the concept of reference has been used to refer to a customer
relationship which is used to attract new potential customers (e.g. Boles, Barksdale, and Julie,
1997; Huntley, 2006; Salminen 1997; Salminen and Möller, 2006). In recent research on
recommendation intentions, relationship quality has been found to be positively associated
with customer’s willingness to recommend and act as a reference (Huntley, 2006).
Even though the advantages of good customer reference utilization are obvious, the actual
reference value of customer relationships is rather vaguely expressed in the literature. Our
working definition for the concept of reference value is that reference value refers to an
individual customer's willingness and ability to create desired reference effects. We suggest
that examining the reference value construct can help to gain a thorough understanding of the
indirect value of business relationships for industrial suppliers. Thus, the purpose of this study
is to increase the understanding of relationship value in industrial marketing by defining the
elements of reference value and suggesting a conceptualization of the reference value
construct. The research questions are as follows: 1) How is reference value discussed in the
literature on value in business relationships?, 2) What are the dimensions of reference value?,
3) How can reference value be conceptualized? The first question is answered by reviewing
the existing research literature on value in industrial marketing settings and the following
questions by suggesting a conceptualization of reference value based on the literature review
and recent research on references and referrals.
Reference Value in the Industrial Marketing Literature
In the industrial marketing and purchasing literature, the concept of relationship value has
been used to compare the costs and benefits of interaction in business relationships (e.g.
Anderson and Narus, 1998; Möller and Törrönen, 2003; Ulaga, 2003; Wilson and Jantriania,
1994). In this stream of research, value is generally regarded broadly, not only as monetary
value, but as “a trade-off between benefits and sacrifices” (Biong, Wathne, and Parvatiyar,
1997; Flint, Woodruff, and Gardial, 1997; Walter et al., 2001). However, most of the studies
exploring relationship value in buyer-seller relationships focus on the customer’s perspective
of relationship value (e.g. Anderson, Jain, and Chintagunta, 1993; Anderson and Narus, 1998;
Biong, Wathne, and Parvatiyar, 1997; Ulaga, 2001). Therefore, the relationship value
literature often bypasses the reference value of a customer relationship or does not take it into
account extensively. Ford and McDowell (1999) stress the importance of expressing value in
a disaggregated form instead of expressing value in simple financial terms. They
acknowledge the importance of reference value by stating that it is important to evaluate
relationships in terms of their value as a source of new technologies or as a way of gaining
access to new relationships (Ford and McDowell, 1999).
The supplier value equation proposed by Blois (2004) suggests that the value of being a
supplier to a particular customer is the difference between the perceived obtained benefits and
the perceived total sacrifices. The components of the total perceived benefits include the
“reputational effects of association with the customer” and “access to market”. In the model
of total relationship value presented by Biggeman and Buttle (2005), reference value can be
integrated as a kind of personal value which takes the form of referrals, and at the level of
strategic value in the form of “gaining access to extended networks”.
Walter, Ritter, and Gemünden (2003) have used the direct and indirect-value dichotomy in
their value model. Reference value is seen as a “market function”, which refers to the
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possibility of acquiring new customers through the reference effect. The model of customer
profitability introduced by Jacobs, Johnston, and Kotchetova (2001) includes two temporal
dimensions plus a third spatial dimension which is conceptualized as an expanding customer
pool caused by “delighted” customers and their referrals. The total customer value consists of
the net present value of future profits from retaining every customer and from the “future
expansion of the customer pool”. They suggest that if a is the number of customers at point in
time 0, r is the “customer’s and market’s ability to communicate the delight experienced by
the customer that will bring new potential customers to the firm”. When (r ≥ 0), the number of
customers can be shown to symbolically grow in the form of geometric series:
a + ar + ar 2 + ... + ar t −1 + ...
With the sum at time t:
st =
a (r t − 1)
r −1
Their model, however, captures only a part of the reference effect as it does not include the
reference value originating from re-established credibility among existing customers, or the
reference value originating from increased credibility among other relevant network actors.
Also, the variable r includes only the “word-of-mouth effect” of delighted customers and does
not take into account the fact that in industrial marketing settings, the referencing
phenomenon usually involves supplier-initiated active utilization of references (Salminen and
Möller, 2006). Additionally, the model assumes homogeneity in customer satisfaction and
loyalty and, thus, does not lend itself to evaluate the reference value of a single customer
relationship. According to Cornelsen and Diller (1998), the word-of-mouth value of a
customer consists of an industry-specific referral rate, the customer’s role as an influencer, the
size and density of the customer’s social network, and his satisfaction with the ongoing
relationship. Their model focuses on the determinants of potential reference value, and thus
does not specify the character of reference value and its dimensions.
Reference Value in the Relationship Marketing Literature
In the field of relationship marketing, measures of customer profitability and related concepts
such as customer equity (Bauer and Hammerschmidt, 2005; Lemon, 2000; Rust, Zeithaml,
and Lemon, 2000) and customer lifetime value (Gupta, Lehmann, and Stuart, 2004; Stahl,
Matzler, and Hinterhuber, 2003) have been used to evaluate the profitability of customer
relationships. These models are aimed at estimating the benefits and costs of a customer
relationship in monetary terms and the value of a customer is often defined as “the expected
sum of discounted future earnings” (Gupta, Lehmann, and Stuart, 2004). Raaij, Vernooij, and
Triest (2003) state that the value of customer relationships which seem to be unprofitable may
lie in their ability to create critically needed references.
Stahl, Matzler, and Hinterhuber (2003) have presented a conceptualization of customer
lifetime valuation that includes not only the customer’s base potential (cash flow from
products and services) and growth potential (cash flow from cross-selling and up-trading) but
also customer’s learning (cash flow from knowledge creation through interaction), and
networking potential (cash flow from new relationships through customer’s word-of-mouth
and referrals). Customers’ referrals have a double effect as they may result in additional sales
and lower costs of acquiring new customers, and they can also increase the effectiveness of
marketing communication. A customer who is regarded as an opinion leader can be a
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particularly valuable source of reputational and network effects (Stahl, Matzler, and
Hinterhuber, 2003).
Conceptualizing Reference Value
The reference value of customer relationships is embedded in relationship value models in the
form of “networking potential” (Stahl, Matzler, and Hinterhuber, 2003), “access to new actors
in a network” (Biggeman and Buttle, 2005), “market function of extending customer base”
(Blois, 2004; Jacobs, Johnston, and Kotchetova, 2001; Raaij, Vernooij, and Triest, 2003;
Walter, Ritter, and Gemünden, 2001), or as a “referral” (Biggeman and Buttle, 2005) or
“reputation effect” (Blois, 2004; Stahl, Matzler, and Hinterhuber, 2003). However, the
diversity in the ways in which reference value has been approached in the existing research
calls for a clearer conceptualization of the reference value construct. Few studies focus on
studying specifically the reference value aspect or its related concepts (Cornelsen and Diller,
1998; Helm, 2003; Jacobs, Johnston, and Kotchetova, 2001).
Helm (2003) has studied the value of customers’ referrals in services marketing settings by
evaluating three different models measuring the monetary value of customer referrals. She
defines referral value as “the individual customer’s contribution to the service provider’s
goals due to his/her referral behaviour”. Thus, referral value is seen as something which
results through positive word-of-mouth generated by the customer. However, in industrial
marketing settings, the referencing phenomenon involves also supplier-initiated active
utilization of references. Substantial reference value may be generated, for example, through
reference lists, press releases, reference visits, and success stories on the supplier’s web site
(Jalkala and Salminen, 2006; Salminen and Möller, 2006). Compared to referral value which
seems to refer to the “word-of-mouth effect” of a single customer, the concept of reference
value can be regarded as a more comprehensive concept. Thus, reference value includes
referral value generated by a customer as well as the value originating from the reputational
effect of having good customer references. Having large and prestigious customers on the
supplier’s reference list may have a valuable reference effect, even though the customer is not
actively promoting the supplier through positive word-of-mouth. The “referral value” and
“word-of-mouth value” concepts are applicable in the consumer marketing setting, but do not
seem to capture the whole referencing phenomenon in industrial marketing settings.
It has been identified in previous value-related research that the different functions that
customer relationships fulfil contribute to the value perceived by the supplier (Walter, Ritter,
and Gemünden, 2001). According to Helm (2003), referrals do not represent a value
themselves, but instead, they only become of worth when leading to other positive effects.
Similar reasoning can be applied to industrial references, as they are anticipated to shape the
behaviour of actors in the supplier’s network in a positive way. Thus, we suggest that the
reference value can be conceptualized in terms of the realized desirable effects that references
have on the actors in the supplier’s network. The previous research has identified several
types of these desired effects that references have in terms of various actors in the supplier’s
network: They are used to create credibility and reduce the perceived risk of a potential
buyer, to re-establish credibility among existing customers (Salminen, 1997) and
maintain/reawaken sleeping relationships (Hadjikhani, 1996). Recent studies have shown that
giving referrals can serve as an enforcement to remain loyal to the supplier (Helm, Eggert,
and Garnefeld, 2007). References can have desirable effects even with respect to competitors,
such as establishing insecurity and inducing competitors to withdraw from competitive
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bidding, or even shutting competing products or technologies out of an industry (GomezArias and Montermoso, 2007). References have also effects in terms of the other relevant
actors of the supplier’s network. Especially in project marketing and/or systems selling, it is
important to generate credibility also among many actors of the project “milieu” (Cova,
Mazet, and Salle, 1996). These actors may include consultants, financiers, engineering
offices, governmental organizations, etc. (Skaates and Tikkanen, 2003). Thus, at least four
actor groups: 1) potential customers; 2) existing customers; 3) competitors; and 4) other
relevant network actors, can be identified as being possible targets of reference effects. The
suggested elements of reference value in terms of the identified target groups and desired
reference effects are depicted in Figure 1.
REFERENCE
VALUE
Existing customers
Other network actors
• Re-establish credibility
• Maintain/reawaken
sleeping relationships
• Increase loyalty to the
supplier
(Consultants, financiers,
engineering offices,
governmental organizations)
• Establish credibility
• Convince of the supplier’s
performance capability
Potential customers
Competitors
• Establish credibility
• Reduce perceived risk
• Establish insecurity
• Make competitors
withdraw from
competitive bidding
Figure 1. Elements of Reference Value
Conclusions
We have reviewed the existing literature on reference value and suggested a conceptualization
of the reference value construct in industrial marketing settings based on the desired effects of
references. In the existing research, reference value is considered as an important aspect of
customer relationships, but the meaning and character of reference value is not specified. In
the existing value models, reputation, referral function as well as access to markets and to
other actors of the network, are elements associated with the concept of reference value.
It is suggested here that reference value can be conceptualized in terms of the desired effects
that references create among existing and potential customers, competitors, and other relevant
network actors. Thus, reference value can be defined as the individual customer’s ability and
willingness to create desired reference effects in the supplier’s actor network. It is also
proposed that those customer relationships characterized by high reference value have a high
potential to create desired effects in the supplier’s network of actors. Examining the elements
of reference value leads to a better understanding of the value different customer relationships
have for an industrial supplier. In order to estimate the reference value, models evaluating the
reference potential of a customer relationship should be developed. Models conceptualizing
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reference value can lead to a more efficient reference management. However, the way Helm
(2003) criticized the models estimating the monetary value of customer referrals, also the
methods for measuring reference value and its determinants need to be assessed critically. An
incomplete understanding of the underlying referencing phenomenon may mislead and imply
wrong conclusions about the supplier’s relationship portfolio.
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