Understanding the four key customer relationship stages

Jeremie Bacon wrote this on Feb 28

Although no two customers are exactly alike, each will pass through the same stages of the customer journey that your company creates for them. Understanding where your customers are in that journey is crucial to being able to provide them with the right level of service, profitably manage expectations, and increase the depth and breadth of your commercial relationship.

Account management exists for the purpose of helping companies to nurture their customer relationships but it is primarily a business development activity. As such, everything account managers, and their colleagues in strategic account management roles do is in an attempt to grow wallet share. Given this, it is natural for vendors to seek ways to deepen their customer relationships wherever possible to not only drive the stickiness of the engagement, but to uncover new opportunities for both companies to create and share more value.

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However, even though both the buyer and the seller learn a great deal about each other during the course of the initial sale, when they first start doing business together, odds are good that neither feels completely at ease. It is important for account executives to keep in mind that most of their customers do not see the relationship the same way they do. In fact, more often than not, account managers view their customer relationship as deeper and more advanced than the customer.

I have experienced this first hand more times than I can count. When doing voice of the customer research, I always ask what the vendor thinks of its relationship with its customers and then turn around and ask the customers the same question. The answers are almost always different. To be fair, the difference of opinion is usually not off by an order of magnitude, but not being on the same page with the customer can be a big problem.

Why? Because, as with any relationship, it is very difficult for one party to be closer the the other. Unbalanced relationships become uncomfortable because, even if they don’t talk about it, both parties can sense something is off. If seventeen years of marriage has taught me anything, it is that the only “parts” of any relationship that can be real are the parts that are agreed on by both sides.

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The reason I am bringing this up before launching into an overview of relationship stages is to emphasize how important it is to always maintain an open and objective view of your customer relationships. You can’t develop deep relationships based on superficial interactions. Meaningful customer partnerships take time and effort to create. They take a farmer mentality where you cultivate the ground, plant the seeds, and plan ahead for a future harvest based on where you are today.

Speaking of relationship stages, I like to use four: Exploratory, Basic, Collaborative, and Interconnected. Some literature on key account management refers to a fifth stage where the buyer and seller are completely integrated. I’m not going to address that stage here though because the level of integration referred to for that categorization is exceedingly rare and, unless followed by a merger between the two companies, is generally unappealing and very risky for the vendor.

Of course, it doesn't really matter what name you assign to each relationship stage. The important thing is that you develop a framework for differentiating between the levels of intimacy you will have with different customers at various points in their journey. Clearly defining what each relationship stage means to you and your customer makes it easier to categorize and select your most strategic accounts, a topic we will address in our next piece in this series. For now, let’s take a look at the four primary relationship stages.

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Exploratory Relationships

As you would imagine, the exploratory stage represents the earliest part of the relationship and encompasses activities that take place before a formal business relationship is established. During this phase, both customer and vendor are learning about each other to determine whether or not there is a fit. In addition to figuring out if they want to work together, the vendor should also be endeavoring to determine whether the prospect has the potential to become a key account. If it is determined that the customer could someday qualify as a strategic account, every effort should be made to treat it as one from the outset.

During the exploratory stage, since both companies have a limited history of working together, most of their interactions will be focused on forming subjective and objective opinions of one another. Both will make judgments based on whatever early information and experiences they have. In these early days, each party is also subject to outside influences so it is important that, as the seller, you run a tight, well-supported sales process to make sure you put your best foot forward.

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 At this stage, the seller is also trying to determine the specific needs of the buyer, to gauge the size and scope of the long-term business opportunity, and identify what it can do to persuade the customer to invest in the relationship. Focusing on guiding them smoothly into your customer journey roadmap and creating meaningful value for them over a long period of time is far more important than pushing for near term sales. Getting things right in the exploratory stage is essential to converting the prospect into a customer and helping them move into the basic relationship stage.

Basic Stage Relationships

The Pareto Principle applies to most things in life and customer relationships are no different. It is, therefore, safe to assume that for most companies, customers in the basic relationship stage are the most numerous. At this stage, the relationship tends to be relatively simple and transactional in nature. For suppliers, providing a quality customer experience that leads to a steady flow of repeat business, or contract renewals is the primary objective.

Having loads of customers in the basic stage isn’t a bad thing. In fact, it is the most appropriate stage for the majority of customers to remain in throughout their entire lifecycle. Companies who build scale and operational efficiencies into their account management and customer service practices can support many highly profitable value harvester and value creator customers in their basic stage portfolio. But, it should be noted that relationships that remain in the basic stage are always at risk on multiple fronts.

This is primarily due to the fact that neither party is - or can afford to be - invested very deeply in the relationship. In most basic relationships, the customer is simply exchanging money for a single product or service from its supplier, who in turn is doing its best to deliver the greatest value while driving maximum profit margins. Because the customer isn't consuming any ancillary services, switching costs are low and barriers to exit are likely non-existent.

Also, because emphasis is placed on efficiency and transactions, it is difficult for both sides to get close enough to each other to develop a deep relationship of trust. As such, it is essential for companies to deliver a differentiated customer experience and continuously remind them of the value their products create.

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Another reason basic stage relationships are always at risk is because customers in this stage are generally focused as much on price as they are on the actual benefits they are getting from the product or service they are buying. When pricing is at the forefront of the relationship and weighs heavily in meetings, negotiations and measurements of success, it results in a natural tendency for both sides to only focus on the short-term.

This behavior also creates a natural disincentive for the vendor to spend too much time or energy on the relationship because it can quickly become unprofitable with even a minor change in the investment of time and resources.

In summary, a basic relationship is one where the overall expected lifetime value of the customer is unlikely to repay the required investment of time and resources needed to drive a deeper, more collaborative engagement. 

Collaborative Stage Relationships

In collaborative relationships more people on both sides have developed a deeper understanding of, and appreciation for, the value to be gained by working together. With this recognition comes an increased commitment to working jointly to extract more value from the relationship.

Collaborative relationships have a generally positive feel about them and both parties are less worried about being disappointed by the other than they are in the basic stage. The door to a lasting and successful relationship that goes beyond transactions is open, but not wide open. In fact, this relationship stage is highly transient.

Collaborative stage customers are still managed using the generalized tools and techniques for basic stage relationships. However, new operational complexities begin to surface due to the added effort being expended by both sides.

Whereas at the basic stage there are typically very few people involved, collaborative relationships involve a wider range of stakeholders from multiple departments at both the customer and vendor organizations. With more people involved, the number of direct interactions between the vendor and customer is also higher, though not necessarily coordinated or regular.

Despite more people being involved with the relationship at some capacity, primary responsibility still resides with the strategic account manager and the original buyer champion. However, without clear lines of communication and well-established guidelines for interaction, activities can feel uncoordinated. For this reason, collaborative relationships tend to be a little messy and need to be managed closely.

Given these complexities, the primary objective for supplier companies during this stage is to determine whether or not the relationship can be taken to a higher level. In collaborative stage relationships, the supplying company is always looking for new opportunities to create value for the customer. The more value they create, the deeper the relationship becomes and the more positive attitude the customer will have toward the seller.

It is also common for customers in this stage of the relationship to begin to identify opportunities to do more business with their suppliers. As the feeling of mutual trust increases, it is not uncommon for customer-side relationship owners to begin bringing some of their internal business problems to their key suppliers to get their advice or assistance.

Because suppliers receive more information and have greater access to their collaborative customers, they can be far more effective in helping to drive valuable solutions for them. This heightened state of intimacy and awareness is a good thing but it is still important that both sides remain cognizant of the amount of time and level of resources there they are committing to one another.

Just because more information is being shared across a broader range of topics doesn’t mean the dollar value of the relationship is growing in lock-step. If not properly monitored, it is easy for account managers to find themselves slipping into a rabbit hole and driving the relationship in unprofitable or unproductive directions.

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Collaborative relationships can be difficult because account managers lose some of the efficiency and control they had with basic stage customers. On top of that, they have not gained the benefits of pure transparency and joint-planning activities that result from interconnected relationships. In this stage, vendors invest large amounts of time and money while over-allocating resources to their customer relationships. As such, losing money on some of them is inevitable, and entirely acceptable. But not indefinitely.

Collaboration without a firm commitment to a larger relationship is unsustainably expensive for both sides. The point of making the investment is to sort out the absolute biggest and best customers from the rest and move them into the interconnected stage of relationships as efficiently as possible. Because the probability of losing money on collaborative relationships is so great, those that don’t qualify for advancement should be carefully managed back into the basic stage as quickly as possible without doing permanent damage.

Interconnected Relationships

Interconnected relationships are true partnerships in which both organizations coordinate on activities across a broader range of functions. The actions of both sides are still chiefly quarterbacked by single relationship managers who work closely with each other to ensure a successful partnership, but there is also direct and frequent contact between multiple functional departments at both companies.

Although not inextricably tied together, for interconnected companies, separation would be painful and time consuming. The organizations spend significant time together, creating strategic plans, coordinating on growth initiatives, product development priorities, and oftentimes, joint marketing efforts. They have reached a point in their relationship where they both openly acknowledge the importance of each to the other. Companies at the interconnected stage share a unique feeling of trust that is the product of working closely together through good times and bad.

One of the interesting side benefits associated with this relationship stage is that both companies are often able to unearth mutual cost reductions. This might seem counter intuitive at first. After all, both sides are allocating lots of time to the relationship and the buyer is likely spending a large sum of money with the supplier. Despite the significant investment each side is making, it is true that it is possible to save money.

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The reasons are simple: first, in interconnected relationships there is enough transparency that both sides can identify inefficiencies in their business and service models and then work together to fix them. These activities invariably lead to direct, and indirect cost savings. The second reason is due to the fact that both companies are able to look at the relationship through a long-term lens.

When neither side is overly focused on the short-term costs of working together it is easier to take a proactive approach to building a bigger relationship over time. Similarly, if both companies can see how their patience will pay larger dividends down the road it is easier for individual departments and senior executives to get behind the near-term investment of time and money.

Ultimately, a company’s interconnected relationships constitute its biggest and best strategic customers. These are the 20% of business relationships that drive 80% of profits and a disproportionate share of long-term growth potential. Importantly, within the tier of interconnected relationships, there is a further classification that can be made: the distinction of key accounts relative to all others.

Although there are clear distinctions in the way that key relationships need to be managed relative to others due to their size and scale, they still fit neatly into the interconnected relationship bucket. However, while companies can build capacity to support a healthy number of interconnected customers, no company can support a huge number of key customers. In fact, as I’ve written before, for a mature business, the number is probably somewhere between 15 and 30. Young companies probably can’t support more than 5 key accounts. 

No relationship is ever perfect

Relationship management is a tough job that takes great effort to do well. And sadly, even very close relationships do not last indefinitely. Interestingly, most companies assume that product and price are the primary reasons that relationships break down. As it happens, changes in key personnel, mismanagement of expectations, alterations in business strategy, bad market conditions, or the slow deterioration of the partnership due to under-management are usually the culprit. Since these risks can become reality at any time and muddy the waters it's essential that supplier companies remain vigilant in their efforts.

Taking a hard look at each of your customer relationships and associating them with the proper relationship stage is one way to ensure your company’s success. Once you understand your current position in the relationship hierarchy you can proactively decide how far you can - or even want to - take it. Armed with that knowledge, it is much easier to move each relationship forward (or backward as the case may be) and match your account management strategy to the stage you have reached. This also paves the way to successfully categorizing your customers and selecting your strategic accounts, a topic we will discuss in our next article on key account management.

Do you think you know which relationship stage each of your customers is in today? Need a little help figuring out where they belong? Use our easy template to help figure it out!

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