The link between customer profitability in business-to-business markets and the nature of business relationships : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Marketing, Massey University, Wellington campus
Loading...
Date
2012
DOI
Open Access Location
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Massey University
Rights
The Author
Abstract
Empirical studies on customer profitability in business markets have reported
wide profitability variation and a skewed distribution, typically a small number
of very profitable customers and a much larger number that are marginally
profitable or unprofitable. While some studies have attempted to investigate
the contribution of financial factors to this pattern, the contribution to customer
profitability of non-financial factors, such as the nature of business
relationships, has received very little attention. This gap exists despite the wide
acceptance amongst practitioners of the importance of business relationship
development with customers and of business relationships as a field of
academic research. Business relationship development efforts are made with an
expectation that they will result in improved financial results, but academic
research has not established this based on objective financial measures of
customer profitability.
To investigate whether a link exists between business relationships and
customer profitability, it was hypothesised that multiple facets of the business
relationship should be represented and may necessitate adopting constructs
from different theoretical frameworks. Thus the proposed theoretical model
used behavioural and cognitive constructs based on relationship connectors,
environment factors, communication quality, communication quantity, conflict,
customer characteristics and commitment. The customer profitability measures
were based on traditional financial data but were extended to include imputed
costs of other resource usage such as delayed payments, documentation costs
and shipment to multiple destinations. Since the research required matching
customer profitability measured as a financial outcome with the nature of the
business relationship with each customer, data was obtained from a single
participating organisation.
Relevance of the proposed theoretical constructs to the context of the
participating organisation was checked through a qualitative investigation
using in-depth interviews with key informants. The subsequent quantitative
study used an online survey instrument to obtain data from the organisation’s
sales persons on the nature of the relationships with customers. Financial data
for computing individual customer’s profitability was obtained from relevant
company records.
Structural Equation Modelling was used to test and estimate the theorised
relationships between constructs. Confirmatory factor analyses revealed the
need to make some changes to the original model, but the constructs in the
final model demonstrated good discriminant validity. The good fit of the
proposed theoretical model to the actual data confirmed the relevance of
constructs used in the theoretical model to represent the multifaceted nature of
business relationships.
The main finding of this research is that commitment to a business relationship
with customers is adversely affected by customer profitability factors. An
increase of 1 standard deviation in customer profitability variation factors
results in a reduction in commitment levels of 0.28 standard deviation units. In
this study, customer profitability factors are represented by four indicators:
customer profit value, cost of goods, documentation cost and number of
destinations. This construct reflects the relative impact of the revenue and cost
indicators on individual customer profitability.
Commitment plays a central role in linking the constructs representing the
nature of business relationships and customer profitability factors. The
indicators for commitment assessed expectations of continuity in a relationship
and whether expected benefits were realised, and these represent the affective
and calculative dimensions of commitment described in the literature. The
calculative dimension reflects the expectation of economic returns as a result of
commitment to a relationship. Reduction in profits from the customer will
adversely affect the calculative dimension and may account for the negative
value for the link with customer profitability factors. On the other hand, the
affective dimension of commitment reflects the attitudes and beliefs and
generalised regard about the relationship and can be linked to efforts to build
the business relationship. The nature of the business relationship comprises
four constructs; relationship connectors, communication quality,
communication quantity and conflict, and represents facets of how a
relationship is viewed; this may account for its link with commitment.
Environment factors, which include competition and market price fluctuations
for the product categories, represent the main set of factors outside the control
of the firm and have an impact on revenue as well as commitment to the
relationship with customers. The contribution of price changes to revenue and
profitability represents an additional element in determining customer
profitability. In this study, substantial price increases from products sold to the
top decile customers helped offset cost increases and improved the profitability
of these customers.
From a practitioner’s perspective, the main utility of these findings lies in the
importance of integrating customer profitability measures in relationship
development efforts. For a more accurate assessment of returns, customer
profitability measures should go beyond normal accounting data and include
estimates of other resource usage such as documentation costs. Such improved
customer profitability measures can help in differentiating customers based on
objective outcomes and provide a basis for developing customer portfolios
with appropriate relationship development strategies. The differentiation would
also imply that commitment to a business relationship has to be contingent on
obtaining the expected financial return from the business relationship.
Description
Keywords
Customer profitability, Customer relations, Business relationships