Return on Relationships (RoR): What is the formula? ~via @ExceliaGroup

Networkization of societies has contributed to an exponential increase in the number of relationships, both, face-to-face and virtual. This relationships abundance has made people and businesses think how they can build and maintain value-added relationships? How can they decide the intensity and closeness of relationships? The tendency has led to developments in the concept of Return on Relationships (RoR).

Return on relationships (RoR) is defined as “the value accrued by a person or a brand due to establishment, maintenance and nurturing a relationship” (Gummesson, 2004; https://kalicube.pro/entity/return-on-relationship/). The definition lays the framework for constituent parts of the concept oriented broadly around interactions and corresponding value over time.

The constituent parts of RoR

While broadly RoR is made up of mainly two components i.e. interaction over time and value, there are a number of elements that embody the spirit of these two components providing more elaborate structure of RoR. We discuss some of these constituent elements below.  

1) Mutual value: The mutual value is central to achieving a high RoR. Mutual value underlines the importance of having reciprocal benefits for parties involved in the relationship (Grönroos & Helle, 2012). However, it is not necessary that mutual value will be equal at all times for parties in the relationship and could decrease and increase over a period of time, but there should always be a sense of its existence.

A basic example could be when a customer purchases a product or service, s/he expects product / service does what it is supposed to do and performs at the advertised level of quality. On the other hand, the seller of the product / service expects to get the payment or anything else in return as per terms of transaction. If this transaction is made in good faith and as per terms of trade, it is likely that the relationship will flourish; customer will do further transactions and in return seller will continue providing quality products / services, resulting in a RoR achieved by both parties.

2. Meaningful nature of interaction: The achieving of RoR is underpinned by the meaningful nature of interaction among the parties involved in the relationship (Gummesson, 2004). A meaningful relationship is one where both parties have a reason to be part of relationship. However, the nature of relationship at times could be quite explicit or intense or it could be implicit, passive or unclear. In such circumstances, the outcome of RoR could vary depending on the intensity and effort that goes into the relationship and the level of meaningfulness attached by the parties to the relationship.

3. Perception of value and time relevance: The perception of value associated with the relationship will determine the realization of RoR (Grönroos & Helle, 2012). The differences in value perception could destabilize the relationship and effect RoR.

Further, RoR will also be affected by appropriateness of time. For one party, relationships could be highly meaningful and valuable at a certain point in time and for the other it may not be so much. Such a scenario will affect the perception of value and realization of RoR. In hindsight, if the RoR remains low for an extended period of time for one of the parties, then it will have an impact on the longevity and continuity of relationship.

4) Interpersonal skills: It is argued that relationships are also affected by the interpersonal skills possessed by the parties in the relationships. If the parties do not have interpersonal skills and meaningfully interact, sooner or later the parties will start having lower value perception resulting in lower RoR. Interpersonal skills is not just limited to useful person to person relationships, but also involves relationships among businesses and people. The customer experience journey with the business is considered to have an influence on the perceived value of RoR, as it will determine the interaction effectiveness between business and people (Witell et al., 2020).

5) Marriage of convenience or the context of events: Sometimes relationships are also formed due to events outside the control of parties involved in the relationship. These ‘marriage of convenience’ type of relationships are also meant to create some level of RoR. If the 'marriage of convenience' linkage provide useful value to parties in the relationships, RoR can be realized.

The RoR formula

Given the conceptual constituents of RoR, the formula for RoR takes into account mutual value that the parties involved in the relationship create. Grönroos and Helle, (2012) provide one such formula in the context of a customer and supplier relationship which reads as:

In the above equation, RoR = Reciprocal return on relationship

JPG  = Joint productivity gain, which is defined as JPG = ( ( ∆ EEc - ∆ IEc ) - ∆ IEs )

( ∆ EEc - ∆ IEc ) = is the change in customer's value-in-use.

∆ EEc = (Customer revenue Proposed - Customer revenue Current).

∆ IEc = (Customer costs Proposed - Customer costs Current).

∆ IEs = (Supplier costs Proposed — Supplier costs Current).

∆Cc = Cost of customer’s relational investment

∆Cs = Cost of supplier’s relational investment

Simply put the RoR formula looks into the value change from current to a proposed state once parties form a relationship. It also takes into account relational investment by both customers and suppliers (Grönroos & Helle, 2012). The above RoR formula seems to provide a basic framework to extrapolate it to other contexts that may vary from a customer-supplier contexts such as social media based relationships.

 Beyond the formula: The conceptual progress

Having reviewed the foundation and measure of RoR concept, it is imperative to examine the correspondence between relationship intensity (triggered by interactions) and accumulated time period to see how these two dimensions contribute towards RoR and what other things emerge from this correspondence. As such, we have proposed a two-dimensional conceptual diagram that encapsulates the progress of RoR overtime. The conceptual diagram draws upon the explanation of elements and triggers of RoR as discussed in some of the earlier studies (e.g. Grönroos & Helle, 2012; Gummesson, 2004; Witell et al., 2020). We argue that the relationship intensity progresses in four stages over time as explained below. It is important to note that the Time dimension signifies accrued time, which means leap from one stage to the next stage is based on accrued interactions at the past stages.

Exploratory: The relationship among the parties at the early stages of development is exploratory with both parties seeking to achieve some benefits out of the interaction. It could be a customer interacting with a supplier or some other form of business or personal relationship. Both parties will seek to determine if it will be beneficial to build a relationship and based on their early interaction will form some level of judgement. The time used by the parties at this stage of interaction is termed here as ‘early benefits’ period as both parties weigh their options and try to achieve benefits from their early interactions. A simple example is purchasing a product or a service (e.g. mobile phone) from a certain manufacturer / provider and the interaction that ensues.

Mature: Once the parties in the relationship have positive experience at the exploratory stage, their relationship intensity is expected to grow and solidifies leading to maturity of relationship. At this stage, it is expected that both parties clearly see the value in relationship and are realizing consistent profit out of their relationship. The time period at this stage, thus, is characterized by consistency in relationship and achievement of value by all parties in the relationship. A simple example could be of a loyal and returning customer.

Growing: As the relationship becomes mature it goes to the next level where parties in the relationship consider forming a long-term relationship. Thus, there will be diversity in the nature of transactions as well as volume of transactions will grow. The time period is thus characterized by long-term benefit perception and efforts by parties to realize the benefits. A simple example could be buying a variety of products / services from the same provider or its partners on an on going basis. Buying shares of a company with positive product / service experience could also fall under this category.

Boundary re-defining: The last stage in our conceptual model is the ‘boundary re-defining’ stage which is basically about expanding relationship into new horizons; for new ventures and propositions. All the parties will be super excited and enthusiastic to redefine the boundary of the relationships. The time period at this stage is characterized by starting a new cycle of relationships and hence has been termed as a new era driving period. In some cases, it could be considered as exploratory too. A simple example of this type could be when customers becoming business partners or co-creators.

Conclusion:

The expanded use of social media and other digital technologies have necessitated re-conceptualization and redefining of the concept of value of relationship. In this regard, RoR is a useful concept that captures the joint gains realized by parties in a relationship. Just like a return on investment (RoI) concept, RoR is also measurable by formula (Grönroos & Helle, 2012, see the examples of use of formula in the referenced paper). While providing an overview of the concept and its measure, we have extended the concept by proposing a new conceptual model of RoR which encapsulates the increase in RoR due to interaction or relationship intensity overtime. Needless to mention that the proposed conceptual diagram can be further extended and tested by collecting some empirical data.

References

Grönroos, C., & Helle, P. (2012). Return on relationships: conceptual understanding and measurement of mutual gains from relational business engagements. Journal of Business & Industrial Marketing.

Gummesson, E. (2004). Return on relationships (ROR): the value of relationship marketing and CRM in business-to-business contexts. Journal of business & industrial marketing.

Witell, L., Kowalkowski, C., Perks, H., Raddats, C., Schwabe, M., Benedettini, O., & Burton, J. (2020). Characterizing customer experience management in business markets. Journal of Business Research, 116, 420-430.

Originally posted at https://www.excelia-group.com/