Customer Bonding

One of the many positive customer retention strategiesOpens in new window is customer bonding. Business-to-business (B2B) researchers have identified many different forms of bond between customers and suppliers.

These include interpersonal bonds, technology bonds (as in electronic data interchange – EDI), legal bonds and process bonds. These different forms can be split into two major categories: social and structural.

A.     Social bonds

Social bonds are found in positive interpersonal relationships between people.

Successful interpersonal relationships may take time to evolve as uncertainty and distance are reduced. As the number of episodes linking customer and supplier grows, there is greater opportunity for social bonds to develop.

Suppliers should understand that if they act opportunistically or fail to align themselves to customer preferences, trustOpens in new window and confidence will be eroded.

For example, small and medium-sized businesses generally prefer to do business with similar-sized companies, and Japanese companies prefer to do business with other Japanese companies. Geographic bonds emerge when companies in a trading area cooperate to support each other.

Social relationships between buyer and seller can be single-level or multi-level. A single-level relationship might exist between the supplier’s account manager and the customer’s procurement officer.

The more layers there are between the dyad, the more resistant the relationship is to breakdown. For example, technical, quality and operations people talk to their equivalents on the other side.

Social bonds characterized by trust generally precede the development of structural bonds. Mutual investments in business relationships serve as structural bonds. These structural bonds can be formally recognized in an alliance or joint ventures having legal status. Companies are unlikely to commit resources if there is a low level of trust in the partner’s integrity and competence.

B.     Structural bonds

Structural bonds are established when companies and customers commit resources to a relationship. Generally, these resources yield mutual benefits for the participants. For example, a joint customer-supplier quality team can work on improving quality compliance, benefiting both companies.

• For example, investments made in training a customer's operatives are non-returnable.
• On the other hand, a chilled-products manufacturer that has installed refrigerated space at a distributor's warehouse may be able to dismantle and retrieve it when the relationship breaks down.

A key feature of structural bonding is investment in adaptations to suit the other party.

Suppliers can adapt any element of the offer — product, process, price and inventory levels, for example — to suit the customer. Customers on the other hand also make adaptations. For example, they can adapt their manufacturing processes to accommodate a supplier's product or technology.

Power imbalances in relationshps can produce asymmetric adaptations. A major multi-outlet retailer might force adaptation from small suppliers while making no concessions itself. For example, it could insist on a reduction in product costs, or co-branding of point-of-sale material, or even attempt to coerce the supplier not to supply competitors.

Different types of structural bond can be identified. All are characterized by an investment of one or both parties in the other:

• Financial bonds: where the seller offers a financial inducement to retain the customer. Insurance companies form financial bonds with customers by offering no-claims discounts, tenure related discounts and multi-policy discounts.
• Legal bonds: when there is a contract or common ownership linking the relational partners.
• Equity bonds: where both parties invest in order to develop an offer for customers, e.g. the owners of airports invest in the shells of the duty-free retail outlets; the retailer invests in the internal fixtures and fittings.
• Knowledge-based bonds: when each party grows to know and understand the other’s processes and structures, strengths and weaknesses.
• Technological bonds: when the technologies of the relational partners are aligned, e.g. with EDI, Just-in-Time logistics and manufacturing.

• Process bonds: when processes of the two organizations are aligned, e.g. the quality assurance program on the supplier side and the quality inspection program on the customer side.
  
  Some suppliers manage inventory levels for their customers, ensuring inventory levels are optimized. This is known as Vendor Managed Inventory (VMI)Opens in new window. The chemicals company, Solvay InteroxOpens in new window, uses telemetry systems to perform VMI for its customers.
• Values-based bonds. Some companies are renowned for their strong values, e.g. the Body ShopOpens in new window is opposed to testing cosmetics on animals, and it will not source products from suppliers who do so.
• Geographic bonds: when companies in a trading area—street, city region or country—create a buyer-seller referral network that supports all members of their group. In the UK, retailers in the town of Royal Leamington Spa have combated out-of-town developments by creating a loyalty program, known as Spa'kle, in which customers can collect and redeem loyalty credits at any member store.
• Project bonds: when the partners are engaged in some special activity outside of their normal commercial arrangements, e.g. a new product development project. There may be an exchange of resources to enable the desired outcome to be achieved, e.g. an exchange of engineers and technologists between the companies.

• Multi-product bonds: when a customer buys several products from a supplier, the bond is more difficult to break. There are economies for customers when they deal with fewwer suppliers.
  
  When a relationship with a supplier of several products is dissolved, the customer may incur significant money, transaction and psychic costs in identifying one or more replacements. Further, the level of perceived risk attached to a new relationship may become uncomfortable.

If the account manager and procurement officer do not grow to trust each other, they may fall out, but this is unlikely to bring down a joint venture.