The Evolution of Relationship Marketing

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The Evolution of Relationship Marketing
Jagdish N. Sheth, Ph.D.
Charles H. Kellstadt Professor of Marketing
Goizueta Business School
Emory University, Atlanta, GA 30322
Phone: (404) 727-0871 (O) & (404) 325-0313 (H)
Fax: (404) 727-0868 (O) & (404) 325-0091 (H)
EMail: [email protected]
Atul Parvatiyar, Ph.D.
Assistant Professor of Marketing
Goizueta Business School
Emory University, Atlanata, Ga 30322
Phone: (404) 727-6693 & (404) 931-1951
Fax: (404) 727-0868 (O) & (404) 931-1952
Email: [email protected]
Final Draft for the International Business Review
Special Issue on Relationship Marketing

Relationship Marketing is emerging as a new phenomenon however, relationship
oriented marketing practices date back to the pre-Industrial era. In this article, we trace
the history of marketing practices and illustrate how the advent of mass production, the
emergence of middlemen, and the separation of the producer from the consumer in the
Industrial era led to a transactional focus of marketing. Now, due to technological
advances, direct marketing is staging a comeback, leading to a relationship orientation.
The authors contend that with the evolution of Relationship Marketing, the hitherto
prominent exchange paradigm of marketing will be insufficient to explain the growing
marketing phenomena of collaborative involvement of customers in the production
process. An alternate paradigm of marketing needs to be developed that is more process
rather than outcome oriented, and emphasizes value creation rather than value distribution.

Although marketing practices can be traced back as far as 7000 B.C. (Carratu
1987), marketing thought as a distinct discipline was borne out of economics around the
beginning of this century. As the discipline gained momentum, and developed through the
first three quarters of the twentieth century, the primary focus was on transactions and
exchanges. However, the development of marketing as a field of study and practice is
undergoing a reconceptualization in its orientation from transactions to relationships
(Kotler 1990; Webster 1992). The emphasis on relationships as opposed to transaction
based exchanges is very likely to redefine the domain of marketing (Sheth, Gardener and
Garett 1988). Indeed, the emergence of a relationship marketing school of thought is
imminent given the growing interest of marketing scholars in the relational paradigm.
In this paper, we observe, that the paradigm shift from transactions to relationships
is associated with the return of direct marketing both in business-to-business and business-
to-consumer markets. As in the pre-industrial era (characterized by direct marketing
practices of agricultural and artifact producers) once again direct marketing, albeit in a
different form, is becoming popular, and consequently so is the relationship orientation of
marketers. When producers and consumers directly deal with each other, there is a
greater potential for emotional bonding that transcends economic exchange. They can
understand and appreciate each others’ needs and constraints better, are more inclined to
cooperate with one another, and thus, become more relationship oriented. This is in
contrast to the exchange orientation of the middlemen (sellers and buyers). To the
middlemen, especially the wholesalers, the economics of transactions are more important,
and therefore, they are less emotionally attached to products. Indeed, many middlemen do
not physically see, feel, touch products but simply act as agents and take title to the goods
for financing and risk sharing.
The separation of the producers from the users was a natural outgrowth of the
industrial era. On the one hand, mass production forced producers to sell through

middlemen, and on the other, industrial organizations, due to specialization of corporate
functions, created specialist purchasing departments and buyer professionals, thus
separating the users from the producers. However, today’s technological advancements
that permit producers to interact directly with large numbers of users (for example, Levi’s
making custom directly for the users), and because of a variety of organizational
development processes, such as empowerment and total quality programs, direct interface
between producers and users has returned in both consumer and industrial markets,
leading to a greater relational orientation among marketers. Academic researchers are
reflecting these trends in marketing practice, and searching for a new paradigm of the
discipline that can better describe and explain it.
As with each new shift in the focus of marketing, there are advocates and critics of
the relationship focus in marketing. However, in the same way as Kotler (1972, p. 46)
observed about other shifts in marketing, we believe that the emergence of a relationship
focus will provide a “refreshed and expanded self concept” to marketing. Our optimism
stems from at least four observations: (i) relationship marketing has caught the fancy of
scholars in many parts of the world, including North America, Europe, Australia and Asia,
as is evident from the participation in some of the recent conferences held on this subject
(Sheth and Parvatiyar 1994); (ii) its scope is wide enough to cover the entire spectrum of
marketing’s subdisciplines, including channels, business-to-business marketing, services
marketing, marketing research, customer behavior, marketing communication, marketing
strategy, international marketing and direct marketing; (iii) like other sciences, marketing
is an evolving discipline, and has developed a system of extension, revision and updating
its fundamental knowledge (Bass 1993); and (iv) scholars who at one time were leading
proponents of the exchange paradigm, such as Bagozzi (1974), Kotler (1972), and Hunt
(1983), are now intrigued by the relational aspects of marketing (Bagozzi 1994; Kotler
1994; Morgan and Hunt 1994).

In the context of these developments, the purpose of this paper is to trace the
evolution of relationship marketing and to identify its antecedents. We plan to
demonstrate that while relationship focus in the post-industrial era is a clear paradigm shift
from the exchange focus of the industrial era, it is really a rebirth of marketing practices of
the pre-industrial age when the producers and users were also sellers and buyers and
engaged in market behaviors that reduced the uncertainty of future supply and demand
assurances which could not be otherwise guaranteed due to the unpredictability of
weather, raw materials, and customers’ buying power. Our approach mirrors the activities
recommended by Savitt (1980) as the appropriate methodology for conducting historical
Relationship marketing attempts to involve and integrate customers, suppliers and
other infrastructural partners into a firm's developmental and marketing activities
(McKenna 1991; Shani and Chalasani 1991). Such involvement results in close
interactive relationships with suppliers, customers or other value chain partners of the
firm. Interactive relationships between marketing actors are inherent as compared to the
arm's length relationships implied under the transactional orientation (Parvatiyar, Sheth
and Whittington 1992). An integrative relationship assumes overlap in the plans and
processes of the interacting parties and suggests close economic, emotional and structural
bonds among them. It reflects interdependence rather than independence of choice among
the parties; and it emphasizes cooperation rather than competition and consequent conflict
among the marketing actors. Thus, development of relationship marketing points to a
significant shift in the axioms of marketing: competition and conflict to mutual
cooperation, and choice independence to mutual interdependence, as illustrated in figure

Insert figure 1 here
One axiom of transactional marketing is the belief that competition and self-
interest are the drivers of value creation. Through competition, buyers can be offered a
choice, and this choice of suppliers motivates marketers to create a higher value offering
for their self-interest. This axiom of competition is now challenged by the proponents of
relationship marketing who believe that mutual cooperation, as opposed to competition
and conflict, leads to higher value creation (Morgan and Hunt 1994). In fact, some social
psychologists have gone so far as to suggest that competition is inherently destructive and
mutual cooperation inherently more productive (Kohn 1986).
The second axiom of transactions marketing is the belief that independence of
choice among marketing actors creates a more efficient system for creating and
distributing marketing value. Maintaining an ‘arm’s length relationship’ is considered vital
for marketing efficiency. Industrial organizations and government policy makers believe
that independence of marketing actors provide each actor freedom to choose his/her
transactional partners on the basis of preserving their own self-interests at each decision
point. This results in the efficiency of lowest cost purchases through bargaining and
bidding. However, this belief is also challenged recently in economics (Williamson 1975).
It argues that every transaction involves transaction costs in search, negotiation and other
associated activities, which add to, rather than reduce the cost, and thus lead to
inefficiencies instead of efficiencies for the firms engaged in exchange transactions.
Relationship marketers, therefore, believe that interdependencies reduce transaction costs
and generate higher quality while keeping governance costs lower than exchange
marketing (Heide and John 1992; Williamson 1985). In short, better quality at a lower
cost is achieved through interdependence and partnering among the value chain actors.

The purpose of relationship marketing is, therefore, to enhance marketing
productivity by achieving efficiency and effectiveness (Sheth and Sisodia 1995). Several
relationship marketing practices can help achieve efficiency, such as customer retention,
efficient consumer response (ECR), and the sharing of resources between marketing
partners. Each of these activities have the potential to reduce operating costs of the
marketer. Similarly, greater marketing effectiveness can be achieved because it attempts
to involve customers in the early stages of marketing program development, facilitating
the future marketing efforts of the company. Also, through individualized marketing and
adoption of mass customization processes, relationship marketers can better address the
needs of each selected customer, making marketing more effective.
To what extent the above purpose of relationship marketing a totally new
phenomenon? and, haven't these objectives always been important in marketing? If yes,
how is relationship marketing different than exchange marketing? We will try to address
these questions by first agreeing that marketing has indeed always been concerned with
retaining profitable customers and with facilitating future marketing activities. However,
marketing practices that were adopted to achieve these objectives have changed over a
period of time. The reasons for this change can be attributed to the prevailing context and
conditions of each time period and its influence on the marketing thought. We examine, in
the subsequent sections of this paper, the causes of marketing practices during the pre-
industrial, industrial and post-industrial eras.
As is widely known, the discipline of marketing grew out of economics, and the
growth was motivated by lack of interest among the economists in the details of market
behavior, especially those related to the functions of the middlemen (Bartels 1976;
Houston, Gassenheimer and Maskulka 1992; Hunt and Goolsby 1988). It coincided with
the growth in the number of middlemen and the importance of distribution during the

industrial era. The first courses offered on the subject area of marketing at University of
Michigan in 1902 and at The Ohio State University in 1906, therefore, focused on the
inter-relationships among marketing institutions and among various divisions of the firm in
performing the distributive task (See Bartels 1976, pp. 22-23).
Unlike mainstream economists of the late nineteenth century, who were
preoccupied with public policy and economic effects of market institutions, early
marketing thinkers had operational interests (Bartels 1976). Most of this centered around
efficiency of marketing channels and the services performed by them in transporting and
transforming the goods from the producers to the consumers (Shaw 1912; Weld 1916,
1917). The process of marketing was thought to generate additional forms of utility
including time, place and possession utilities to the consumer (Macklin 1924).
Thus, marketing as a discipline got organized around the institutional school of
thought, and its main concerns centered around the functions performed by wholesalers
and retailers as marketing institutions (Sheth, Gardener and Garrett 1988). The founders
of the institutional marketing justified the need for independent middlemen role on the
grounds of specialization and division of labor, although both producers and consumers
believed that the middlemen received higher margins than what they deserved. Thus,
middlemen were perceived as adding no value and creating economic inefficiencies by
having location monopolies. Weld (1916) addressed this issue of marketing efficiency,
ìWhen the statement is made that there are too many middlemen, it may mean one of the two
things: either that the process of subdivision already described has gone too far so that there are too
successive steps, or there are too many of each class, such as too many country buyers, too many
wholesalers, or too many retailers.
The discussion in the preceding paragraphs bears directly on the question as to whether there are
many successive steps, and this is what most people mean when they glibly state that there are
many middlemen. It was pointed out that such subdivision is merely an example of the well-
known doctrine of division of labor, and that the economies result from specialization by functions....
Those who have really made firsthand studies of the marketing system in an impartial and unprejudiced
realize that on the whole the system of marketing that has developed is efficient, rather than
ìextremely cumbersome and wasteful,î and that there are very good practical reasons for the form

organization that has developed. It is necessary to realize these fundamental facts before the
reader can
approach a study of the marketing problem with a sane point of view.î (pp. 21-22)
Other authors of that period belonging to the institutional school of marketing
thought, such as Butler (1923), Breyer (1934), Converse and Huegy (1940), and Alderson
(1954) also espoused the value and functions of middlemen in achieving marketing
efficiency. They utilized economic theories to design effective and efficient institutional
frameworks. Because of their grounding in economic theory, institutional marketing
thinkers viewed the phenomena of value determination as fundamentally linked to
exchange (Duddy and Revzan 1947). Alderson (1954) elaborated on this institutional
thinking by placing the intermediaries at the center of exchange and marketing:
ìThe justification for the middleman rests on specialized skill in a variety of activities and
in various aspects of sorting. The principle of the discrepancy of assortments explains
why the successive stages in marketing are so commonly operated as independent agencies. While
assume for certain purposes that exchange is costless, transactions occupy time and
utilize resources in the real world. Intermediary traders are said to create time, place and possession
utility because
transactions can be carried out at lower cost through them than through direct exchange.
In our modern economy, the distribution network makes possible specialized mass production on the
hand and the satisfaction of the differentiated tastes of consumers on the other.î (pp. 13-14)
Although the institutional thought of marketing was later modified by the
organizational dynamics viewpoint, and marketing thinking was influenced by other social
sciences, such as psychology, sociology and anthropology, exchange remained and still
remains the central tenet of marketing (Alderson 1965; Bagozzi 1974, 1978, 1979;
Houston 1994; Kotler 1972). Formal marketing theory developed around the idea of
exchange and exchange relationships, placing considerable emphasis on outcomes,
experiences and actions related to transactions (Bagozzi 1979).
Recently several scholars have begun to question the exchange paradigm, and its
ability to explain the growing phenomena of relational engagement of firms (e.g. Grönroos
1990; Sheth, Gardener and Garrett 1988, Webster 1992). In the recent past, researchers
have tried to develop frameworks for relational engagement of buyers and sellers, often

contrasting it with the exchange mode inherent in transactions (Arndt 1979; Ganesan
1994; Lyons, Krachenberg, and Henke 1990).
Business practice exhorts both customer and supplier firms to seek close,
collaborative relationships with each other (Copulsky and Wolf 1990; Goldberg 1988;
Katz 1988). This change in focus from value exchanges to value-creation relationships
have led companies to develop a more integrative approach in marketing, one in which
other firms are not always competitors and rivals but, are considered partners in providing
value to the consumer. This has resulted in the growth of many partnering relationships
such as business alliances and cooperative marketing ventures (Anderson and Narus
1990; Johnston and Lawrence 1988). Close, cooperative and interdependent
relationships are seen to be of greater value than purely transactions based relationship
(Kalwani and Narayandas 1995).
However, the relationship orientation of marketing is not an entirely a new phenomena. If
we look back to the practice of marketing before the 1900s, we find that relationship
orientation to marketing was quite prevalent. Although history of marketing thought
dates back to only the early 1900s (Bartels 1962), marketing practices existed in history,
even to pre-history (Nevett and Nevett 1987; Pryor 1977; Walle 1987). During the
agricultural era, the concept of ìdomesticated marketsî and relationship orientation were
equally prevalent. In short, current popularity of relationship marketing is a reincarnation
of the marketing practices of the pre-industrial era in which producers and consumers
interacted directly with each other and developed emotional and structural bonds in their
economic market behaviors.
Orientation Of Marketing Practice In The Pre-Industrial Era
Pre-industrial society was largely based on agricultural economy and the trade of
art and artifacts. During the agricultural days, most farmers sold their produce directly in
the bazaars. Similarly, artisans sold their arts and artifacts at these markets. Consumers