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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, 3350 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 3351 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 3352 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 3353 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 3354 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. 3355 References Anderson, J.C., Håkansson, H., Johanson, J., 1994. Dyadic business relationships within a business network context. Journal of Marketing 58 (4), 1-15. Anderson, J.C., Jain D.C., Chintagunta, P.K., 1993. Customer value assessment in business markets: a state of practice study. Journal of Business-to-Business Marketing 1 (1), 3-29. Anderson, J.C., Narus J.A., 1998. 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