Clearly, the financial benefits arising from a relationship will be of prime importance to the RM manager. The concern here is more with performance than with diagnosis – most of the financial measures serve as an indicator of the contribution made by a specific relationship to corporate financial objectives. Measures of relationship performance differ from traditional financial performance indicators in terms of their long-term focus, and their concern with indirect relationship benefits.
Since the justification for RM centres on long-term gain, care should be taken in setting the timescale against which relationship returns are assessed. Building relationships often requires a significant investment in the early stages, which is recouped as the relationship matures. Care should therefore be taken to assess income and costs of a relationship over its entire life cycle, rather than at a particular point in time.
A number of the financial benefits of RM derive from indirect sources. Increases in income arise from cross-selling and referral business, whilst costs may be reduced by savings on promotional spending and the ability to plan and develop products and processes with greater certainty. Although many of these savings are very difficult to quantify, the organization should seek to encompass as many as possible in its financial measures, in order to recognize the financial benefits of RM as fully as possible.
Measuring financial performance
A selection of the following measures may be used:
• Profitability. This is also described as Return on Relationship (ROR). Given that in some retail sectors, as many as 80 per cent of customers may be unprofitable (Shaw and Reed, 1999), it is worth measuring relationships in money terms, by monitoring net profit from each relationship. It should be stressed, however, that profitability is a performance indicator rather than a diagnostic tool.
• Income. Current income is clearly important, and must be monitored by the RM manager to ensure cash flow constraints are met. In terms of more overall performance, however, broader measures are more appropriate.
• Cross-purchasing. Income from cross-selling may be overlooked if different parts of the organization monitor income from individual goods or services separately. Care should be taken to monitor all income from a particular customer as a whole.
• Referral. The tendency of loyal customers to generate new business through word-of-mouth is a frequently-cited benefit of RM. In order to assess the value of a particular relationship, therefore, the supplier should have a system for gauging the amount of business generated by its customers. Data collection should not only record if a new customer heard of the supplier through word-of-mouth, but also identify which customer is responsible for the referral. In practice, such a system is more likely to be feasible only in business-to-business markets.
• Customer lifetime value. The relationship between the income generated and costs incurred by servicing a particular customer will vary over the life of the relationship. Attempts should therefore be made to assess the total net income arising from a particular customer over the relationship life cycle.
• Servicing cost. On the other side of the profitability equation lie the costs of servicing a particular customer. Some customers are habitually more expensive to satisfy than others, for example because they have special requirements or require an unusually high level of service support. In the latter case, it is often difficult to trace the cost of staff time to an individual customer. Shaw and Reed (1999) recommend the use of Activity-Based Costing (ABC) to establish servicing costs. ABC is an accounting technique whereby staff keep a record of time spent on a particular activity, for example in dealing with a complaint from a particular customer. The time log can then be used to determine the cost of servicing a particular account.