Thursday, January 31, 2008

Analysis of The Relationship Economy Model

Businesses that capitalize on and thrive in The Relationship Economy will not use a business model that resembles that of a traditional business. The businesses that have been retrofitted for The Relationship Economy will have the basic building blocks of traditional business models, addressing their Infrastructure, Offering, Customers, and Finances, but there will be some highly unusual additions. When you think about a Relationship Economy business, think hybrid.

The Relationship Economy Business Model

Recent news from eBay indicates they are attempting to appease sellers by lowering the upfront listing fee and increasing the back-end fee for sellers. Their "success-based" model is meant to increase listings, but according to Betsy Schiffman (2008), it will do little more than enrage its merchant base. Schiffman suggests that it isn't just the fee structure that has sellers complaining: eBay also changed its feedback system so that sellers cannot give a negative or neutral rating to buyers.

Ironically, eBay's business model has been one of the most successful in the online business movement. (Somewhat) average business people can minimize risk and overhead while avoiding the time and geographical constraints that can plague traditional businesses. They often benefit from social interactions (both in their online endeavors and in the frequent face-to-face seller conferences that eBay offers). The eBay-powered businesses often enjoy a large number of bidders, and benefit from networked markets.

Networked markets benefit from the effect that causes a business' products and services to have potential value beyond that of traditional markets. This phenomenon, often referred to as
network effect, grows exponentially based on the number of additional customers who have and use the products or services. The term was coined by Robert Metcalfe, the founder of Ethernet, the most widely installed computer local area network (LAN) protocol. But eBay, and other businesses intent on surviving The Relationship Economy, must master yet another model.

The customer loyalty model is useful for those companies that, like eBay, deal with a multitude of customers and collaborators who engage in conversation around and about the products or services they are purchasing and using. Businesses who use the customer loyalty model find that cost of customer acquisition only occurs at the beginning of a relationship, while the cost of maintaining (and retaining) that customer declines. These customers are generally loyal, satisfied, less price sensitive, and are less inclined to switch providers. This loyalty manifests itself in customer advocacy, where customers openly share their convictions about the company with others. These customers refer their friends and acquaintances to the company and vice versa, often promoting a company better than the marketing department could ever dream about.

How do businesses build relationships?

Relationship building for businesses seems almost counter intuitive. Back in the day, Customer Relationship Management was the practice of leaving the house, stopping for a cup of coffee at the local diner on the way to work, taking a break to visit with your neighbors who happened to be long-time customers, and generally engaging others in conversations about anything and everything.

Over time, businesses realized that in order to make those who held the purse strings happy, they had to generate revenue beyond what they had generated before. This first led to cutting out all nonessential and unproductive activity. Go figure -- taking the time to talk to others was one of the first activities to go. Think about the last time you engaged in conversation with:

  • the store owner of a place you visit at least once a month

  • your barber or hair stylist

  • the person who delivers your newspaper (I know, you don't talk to digital people)

  • your bank teller or your financial adviser

  • your business associates
I'm talking about real conversations here - beyond 2-3 word phrases and in more depth than a peripheral dialog on the weather forecast. The habits of the business world have carried over into our lives, and causing us to be very antisocial.

So what kind of conversations are we having with those we engage in business? We let them set the rules and make the initial approach. They use traditional business relationship techniques, sending us information they "know" we want, about stuff they "know" we need. We throw printed matter in the recycling bin, wear out our computer mouse (and left-button finger) hitting the delete button, and still they persist. Every once in a while we will actually speak with a human representative of the company, but it's usually after we have become very annoyed because we did not get what we expected for our money (and then had the privilege of listening to old, stale elevator music for 20-30 minutes).

Jay Deragon recently addressed these issues in his question: Ever try and reach someone with influence at a Fortune 500 Company? He noted that those that have any authority to make changes to improve customer relations are insulated from the customer. Even worse, companies that are growing will find it beneficial to outsource customer care (to people who may have less experience with the company and its products or services than the newest customer) If they really want to build our trust, they'll install a Customer Relationship Management (CRM) system to manage the details of our lives.

That's not a relationship!

So if we get the point, and we have the technology available, how do we get started?

Larry Weber (2007) provides us with Seven Steps to Build Your Own Customer Community.
  1. Observe.
    – See what’s going on without you, who is talking and what they are saying
    – Map (locate) your customers

  2. Recruit.
    – Drive traffic to your business locations -- online and offline. Lose the strategy of "build and they’ll come."
    – Develop innovative (and sincere) ways to send out invitations
    – Find and devote time to building your community & make connections to other communities

  3. Evaluate platforms (conduits to others).
    – Reputation aggregator
    – Enlist someone in your organization to Blog – make the material regular, relevant and connected to not only your company's mission but also to the needs of your customers (in other words, allow comments).
    – Participate in E-communities (those developed for folks with a common interest) & Social networks (those used by members to make and develop connections)

  4. Engage.
    – Your content and conversations should be engaging, meaning you are engaged in the discussion (not like when talking to someone who interrupts your favorite television show). By seriously demonstrating your commitment to customers, you will develop committed customers.

  5. Measure.
    – Frequently check the level of community involvement you have, compared to the level you hoped to have.

  6. Promote.
    – Everywhere you (and your customers) go, you should be there. Learn how to talk about your business (face-to-face or online) in such a way that people don't get the feeling that's all you think about, but they should realize that you are passionate about it.

  7. Improve.
    – Improving your "strategy" requires (gulp) listening to users - both customers and prospects, and actually evaluating (not summarily dismissing) the suggestions they make.
    – As you come up with new innovations, test them. If they aren't accomplishing what you had hoped, re-evaluate, tweak, fine-tune, or replace them.
In many cases, the only way to get new business is to find the unhappy customers of a competitor. Hopefully you can avoid being on the losing end of this transaction!

What do you think?


Schiffman, B. (2008, January 30). Ebay Sellers Riled Up About New Fees, Rules. Wired Blog Network. Available at

Weber, L. (2007). Marketing to the Social Web: How Digital Customer Communities Build Your Business. Hoboken, New Jersey: John Wiley & Sons

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