Marketing of High-Technology Products and Innovations Jakki J. Mohr

Marketing of High-Technology Products and Innovations

Chapter 3: Relationship Marketing: Partnerships and Alliances

Chapter Outline 

Partnerships    

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Types of Partnerships Reasons to Partner Risks in Partnering Keys to Success

Relationship Marketing   

Customer Equity Customer Acquisition Customer Retention © Mohr, Sengupta, Slater 2005

Types of Partnerships Complementors

Suppliers

Focal Firm

Distribution

Competitors

© Mohr, Sengupta, Slater 2005

Customers

Types of Partnerships (cont.) 

Vertical partnerships: with members at other levels of the supply chain 

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Suppliers Distribution channel members Customers

Horizontal partnerships: with members at the same level of the supply chain 

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“Complementors:” makers of jointly-used products Competitors—”competition” © Mohr, Sengupta, Slater 2005

Antitrust Laws Related to Competitive Collaboration 

National Cooperative Research Act (1984) 

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Eased traditional antitrust laws to allow competitors to form relationships to jointly pursue research and development projects.

National Cooperative Production Amendment (1993) 

Expanded the 1984 Act to allow joint

production

© Mohr, Sengupta, Slater 2005

Example of Competitive Collaboration: Sematech 

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The semiconductor manufacturing technology consortium of US semiconductor manufacturers and the US government http://www.sematech.org/

© Mohr, Sengupta, Slater 2005

Reasons to Partner        

Access resources and skills Gain cost efficiencies Speed time-to-market Access new markets Define industry standards Develop innovations and new products Develop complementary products Gain market clout © Mohr, Sengupta, Slater 2005

The Product Life Cycle, Innovation, and the Role of Alliances High

Product Innovation

Rate of Major Innovation

Process Innovation Low

Stage of Product Life Cycle Emergence Growth

Maturity

Decline

Alliance Types Standards Licensing Technology

Licensing R&D Marketing

Manufacturing Attacker Marketing Incumbent Process R&D

© Mohr, Sengupta, Slater 2005

Risks in Partnering   

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Outright failure of relationships Loss of autonomy and control Loss of proprietary information to partner Potential legal issues and antitrust problems Failure to achieve alliance objectives

Residual allocation when success Responsibility delineation when failure © Mohr, Sengupta, Slater 2005

Factors Contributing to Partnership Success 

Joint (bilateral) interdependence 

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Caution warranted with partners of unequal size

Governance Structure (next slide) Joint Commitment (credible, safeguarding) Trust in the partner’s motives and intents Effective Communication Compatible Corporate Cultures Integrative conflict resolution and negotiation win/lose bargaining)

© Mohr, Sengupta, Slater 2005

(vs. “hard,”

Factors Contributing to Partnership Success (Cont.) 

Effective structure to govern the alliance 

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Unilateral: one party has authority to make decisions Bilateral: governance based on mutual expectations regarding behaviors and activities

© Mohr, Sengupta, Slater 2005

More on Governance 

Match type of governance to degree of risk: 

High risk (arising from uncertainty or investments dedicated to the relationship) warrants either: 

Escape clause

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“Credible commitments” and safeguards that

create mutual dependence -orNarrow terms and conditions that keep the firms only loosely-coupled Bilateral governance based on commitment, trust, and communication © Mohr, Sengupta, Slater 2005

Relationship Marketing 

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“The formation of long-term relationships with customers and other business partners, which yield mutually-satisfying, win/win results.”

Why relied upon so heavily?   

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Time to market cycle is short Development costs/risks are high Faster and more cost efficient to pursue projects jointly than alone Synergy! © Mohr, Sengupta, Slater 2005

Relationship Marketing Building strong and lasting relationships is hard work and difficult to sustain. But I believe that in a world where the customer has so many options, even in narrow product-market segments, a personal relationship is the only way to retain customer loyalty. Regis McKenna

© Mohr, Sengupta, Slater 2005

Customer Relationship Marketing 

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Forming long-term relationships with customers that provide mutuallybeneficial solutions Cheaper to keep current customers coming back than to prospect for new ones. May require sacrificing short-term profits for long-term gains. © Mohr, Sengupta, Slater 2005

Computing Customer Equity 

Profit stream from customer acquisition costs

© Mohr, Sengupta, Slater 2005

Computing Customer Equity 60 50 40

Profit from Referrals

30 20

Profit from Increased Purchases

10 0 -10 -20

Base Profit Year 1

Year 2

Year 3

Year 4

Year 5 Acquisition Cost

-30 -40 -50 © Mohr, Sengupta, Slater 2005

Customer Acquisition Strategies High Retention Profit Potential

Low

Full Throttle

Pay as You Go

Selective

Restructure/ Divest

Short

Long

Acquisition Investment Recovery Time © Mohr, Sengupta, Slater 2005

Aspects of Cost to Serve 

Acquisition Costs

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Production Costs

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Distribution Costs

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Service Costs Why do some customers cost more to serve than others? © Mohr, Sengupta, Slater 2005

Customer Acquisition Rules 

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Acquire any customer as long as the discounted future value of the customer exceeds the acquisition costs for that customer. When you broaden the acquisition effort, be prepared for lower response rates. The greater its profits from retention, the greater a firm's customer acquisition investment should be. The higher the percentage of the initial acquisition investment that a firm recovers in the first period, the greater its acquisition investment should be. © Mohr, Sengupta, Slater 2005

Developing and Maintaining Relationships: Acquiring Customers  

Segment the market by value perceptions Target segments that appreciate value  

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Generate awareness Pricing 

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Segment attractiveness Competitive position ( & capability assessment) (promotion & communication)

Skimming or penetration

Trial Post-purchase service © Mohr, Sengupta, Slater 2005

Switching Costs 

Arising from: 

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investments in equipment, procedures, or people that make it costly or risky for a customer to switch to another firm’s products. perceived risk of making a bad choice

Other factors related to switching costs: 

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Platform considerations (inter-operability) Vendor Considerations (the lock-in effect)

© Mohr, Sengupta, Slater 2005

Customer Relationship and Retention Strategies 

Is Customer Loyalty Profitable? 

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Claim 1: It costs less to serve loyal customers.

Claim 2: Loyal customers pay higher prices for the same bundle of benefits. Claim 3: Loyal customers market the

As opinion company. leaders & benchmarks

© Mohr, Sengupta, Slater 2005

Which Customers Are Really Profitable? Transaction High Profit

Low Profit

Relationship

Service provider Grocery retail Mail-order Brokerage

20% 15% 19% 18%

Service provider Grocery retail Mail-order Brokerage

30% 36% 31% 32%

Service provider Grocery retail Mail-order Brokerage

29% 34% 29% 33%

Service provider Grocery retail Mail-order Brokerage

21% 15% 21% 17%

© Mohr, Sengupta, Slater 2005

Loyalty Strategies Transaction

High Profit

Low Profit

Butterflies: Good fit High profit potential Transaction satisfaction Milk active accounts Cease investing Strangers: Little fit Lowest profit potential Make no investment Max transaction profit

Relationship True Friends: Good fit Best profit potential Consistent communication Attitudinal & behavioral loyalty Delight customers Barnacles: Limited fit Low profit potential Measure size and share of wallet Low share, up- and cross-sell Small wallet, strict cost control

© Mohr, Sengupta, Slater 2005

Relationship Marketers 

Perform a long-term business planning

IBM plans function for their customers. businesses for her IT  Help customers define their businesses, their users

markets, and their product-service needs.

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MS provides anything for her users

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Maintain high-level, multi-function access in customer companies. Sell systems of products and services. Draw on the full complement of company functions and services for support. © Mohr, Sengupta, Slater 2005

Appendix: Inter-firm Learning 

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Issue: Must learn to have effective partnership, but too much information sharing can dilute source of competitive advantage Types of knowledge: 

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Explicit (migratory) Tacit (embedded)

© Mohr, Sengupta, Slater 2005

Managing the Paradox 

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Want closest partnership possible to enhance learning Want loosely-coupled partnership to prevent unintended transfers of information Use caution! Cross-licensing agreements © Mohr, Sengupta, Slater 2005