Relationship capital is among the most important types of intangible capital that a business can cultivate because it encompasses the relationships between a business and other entities. It’s also one of the only types of capital that doesn’t have a monetary value but is indispensable to a company’s success.
Understanding the value or relationship capital and how it can enhance everyday work can dramatically alter the course of a business towards its vision. In this post, we’ll learn how to define, measure, and build relationship capital.
Importance of Relationship Capital
A company’s relationship with its customers, partners, suppliers, stakeholders, and community is priceless. No matter how many estimates or calculations one carries out, you simply cannot put a number on a relationship. The benefits are too numerous, too abstract to be equated to money, but nevertheless, remain invaluable.
For one, relationships foster exchange, whether of knowledge or value. Of course, this may be monetary, but other times it can be experiential, like the feeling of serving a community, or educational, like the wisdom of learning a new skill from a mentor. These exchanges lead to more in-depth problem solving, a greater propensity to collaborate, and richer brand creation.
To understand how important it is to maintain relationship capital, consider the dilemma of focusing on customer acquisition vs customer retention. While it may take significant time and money investment to capture new customers, it only takes a few gestures of goodwill to build on an existing customer relationship and develop loyal “brand ambassadors”.
Internal and External Relationship Capital
Relationship capital can be split up into two subtypes: internal and external. Internal relationship capital centers around individuals and groups within the company, such as employees, managers, and other internal stakeholders. External relationship capital refers to individuals or groups outside of the company, including suppliers, customers, shareholders, and other external stakeholders. The first group is considered a part of the organization, whereas the second group supports the organization’s activities.
Evert Gummesson, Professor Emeritus of Service Marketing and Management at the Stockholm Business School, further divided these two subtypes into what he calls the “30 R’s”, or the 30 types of business relationships:
Classic Market Relationships
- Supplier and customer
- The customer – supplier – competitor triangle
- Network – distribution channels
Special Market Relationships
- Full-time marketers and part-time marketers
- Customer and service provider
- Many-headed customer and many-headed supplier
- Relationship to the customer’s customer
- Close versus distant relationship
- Dissatisfied customer
- Monopoly relationship: customer or supplier as prisoner
- Customer as “member”
- Electronic relationship
- Parasocial relationships, with symbols and objects
- Noncommercial relationship
- The green relationship
- The law-based relationship
- The criminal network
- Personal and social networks
- Mega marketing – the real “customer” is not always found in the marketplace
- Alliances change the market mechanism
- The knowledge relationship
- Mega alliances change the basic conditions for marketing
- Mass media relationship
- Market mechanisms are brought inside the company
- Internal customer relationships
- Quality providing a relationship between operations management and marketing
- Internal marketing – relationships with the employee market
- Two-dimensional matrix relationship
- Relationship to external providers of marketing services
- Owner and financier relationship
Note that these 30 types of relationships have been categorized into classic market relationships, special market relationships (founded on a specific quality or trait, such as law-based or distance-based), mega relationships (which involve a vast amount of entities or alliances), and nano relationships (below market relationships, typically internal operations).
Yet another method does not necessarily measure the relationships but rather organizes them according to 6 markets, receiving the appropriate title of the 6 markets model. The model is broken down as follows:
- Customer Market: Buyers, intermediaries, final customers, and distributors or retailers.
- Influence Market: Stakeholders and third-parties that share feedback and reviews regarding a company’s products and services.
- Referral Market: Any individual or group that refers the product or service to others after buying and using it themselves.
- Supplier Market: Partners that help provide the raw materials for converting into finished products.
- Employee/Recruitment Market: Department within a company that ensures the best people are hired for the team.
- Internal Market: Any customer or employee within the organization.
If a company hopes to thrive, it must adequately evaluate and nourish each of these markets, or risk witnessing a chain reaction of catastrophic events.
No matter the type or extent of the relationship, the same values apply throughout. Both parties must hold a certain degree of credibility, authenticity, and integrity to successfully carry out their respective roles. Consider the relationship of a customer as a “member”. The customer must be in good standing with the company to be allowed to reap the benefits of membership. The company must be dedicated to providing the best product or service as promised to the customer. Only when both the customer and company exhibit this sense of trust, can the relationship be successful in its goals.
How to Measure Relationship Capital
Though relationship capital is qualitative and subjective, there are still methods to gauge the strength of a particular relationship.
MyNextAdvice founder and CEO, Ray McHale, developed his own metric which he dubbed as the Strength of Relationship Index™, also known as the StoRI Score™. McHale developed this index as a result of his dissatisfaction with existing surveys and satisfaction ratings. The index is calculated “as a percentage (the higher the result the stronger the client relationship) using a client’s responses to a set of survey questions that measure a range of factors that predict things like client satisfaction, retention, and advocacy (likelihood to refer).” The index takes into account both behavioral intentions (based on experiences and attitudes) and actual behaviors. This provides more valuable information on how the relationship may impact a business’s performance.
Another method involves something known as the “value scorecard”, developed by the National Physical Laboratory. The value scorecard is able to look at the overall objectives of a project, the various relationships within it, and allows stakeholders with the ability to look objectively at the progress. It can be broken down into the following elements:
- Determining the strategic objectives driving the investment in a program
- Identifying the key stakeholders in the program and establishing what they value
- Defining value windows through which the program can be viewed from the different perspectives that are relevant to those key stakeholders
- Establishing indicators, measures and metrics that describe performance towards those objectives
The value scorecard is a more robust approach to measuring value as it relates to stakeholders, not just in terms of financial performance. This means that traditional metrics alone aren’t enough, other value assurance processes are necessary as evidence-based metrics.
As you develop your own way of measuring the strengths and weaknesses of a relationship, consider these factors that can be found in almost every method: age of relationship and activity level. The first factor is crucial as time remains an indispensable metric for gauging trust, loyalty, and authenticity. Only time can tell whether certain relationships are worth investing in or not. The second factor, activity level, is a measure of energy and effort. Relationships are only worth it when both parties stand to benefit. If one party or individual is not giving the same level of energy or acting as much as the other, then the relationship becomes one-sided and effectively useless.
How to Build Relationship Capital
Create trust. They say that trust is the foundation of a relationship, and it rings true even in business. Without trust, parties can ignore, deceive, mislead or fear each other leading to squandered opportunities for collaboration. Establish trust early on— be empathetic and see situations and challenges from the other’s point of view, and you’ll have a better idea of how to speak to one another. Build on this trust and respect by continually delivering on promises on time, every time.
Discover growth opportunities. According to a 2016 ClearCompany study, opportunities for career growth were among the top three non-financial motivators, with 87% of millennials saying that it was important for them. Any relationship that allows individuals to learn and build experience is a relationship that will continue to be fruitful in the future.
Foster team-building opportunities. Relationships work best when the individuals view it as a cooperative rather than a competitive challenge. Creating events, opportunities, mechanisms, practices, and tools that foster team building will serve to strengthen any relationship.
Communicate clearly and frequently. Nearly every problem in business can be solved, or at the very least mitigated, through communication. Too often noise, distractions, and unclear messaging can jeopardize a project, and in turn, the fabric of a relationship. Establish check-ins, deadlines, and channels for straightforward, honest communication and parties will be better equipped at tackling small problems before they become too big.
There’s a saying that goes “It’s not what you know, it’s who you know.” The adage is especially true in business, where one’s connections can give one significant advantage over peers or competitors. Like economic capital, relationship capital takes time and investment. But unlike economic capital, it simply cannot be pinned to a monetary amount. Nourish your relationships with genuine value, and the returns will be worth far more than any financial figure.