What Is The Difference Between a Relational And Transactional Business?

Published on:

May 3, 2019

Two people sat at a computer working closely together.

Post Summary:

  1. The relational business focuses on building relationships with people over time
  2. The relational business can help to boost your bottom line while creating customers for life and creating a community around your company
  3. All parties benefit, ranging from employees and customers to suppliers and the local community
  4. To truly make the most of the relational business, you need to take it on board as a mind-set and roll it out across your entire company.

A very brief history of business

Long ago outside a cave somewhere near Stonehenge, Olga and Nathan would swap 3 pigs for 3 sheep at each full moon. On this fateful day, Nathan didn't have any sheep, Olga was very unhappy. Now either because Olga was very big or Nathan very hungry, Nathan knew he had to think quick. There on the ground he saw 3 beautiful stones, so he promised Olga he'd swap those three stones for 3 sheep at the next full moon.

Rather than leave with nothing, Olga agreed. 5 days later Gus showed up with those very same stones. He'd exchanged them for 10 chickens, knowing they were worth 3 sheep. Nathan was out of sheep, so he settled for one rather well-bred cow. After a while, everybody was doing it, it got complicated, so everybody chiselled who had what stones on one of the Stonehenge walls. Each local tribe had its own stone. In the centre, Ant, the smartest of them all, had the job of counting the entries and keeping guard.

Everybody agreed the whole stone thing was a much better idea than lugging animals around, and a load more convenient. And so transactional business was born, bartering was no more.

And so it was for thousands of years, trading was always transactional. But then the internet happened, and life got complicated. A simple transaction wasn't good enough anymore, people wanted a connection, a relationship, money alone wasn't enough. People working in these transactional businesses also felt lost, there was no meaning, just lots of politics, crazy decisions and unrealistic transactional targets.

Now relationships mattered more than the money, to everybody, even the bosses were fed up with all the stress. The money was a given, the relationship not so.  And so the Relational Business was born.

What is a transactional business?

The transactional approach is what characterises the majority of modern business and relies on thinking of the customer journey as a series of ongoing transactions. The focus tends to be more on making sales than on actually providing any value, and it’s what led to the era of mass marketing in which we’re exposed to around 5,000 advertisements every day.

For years, we assumed that the transactional approach was the best approach to take, in part because we focused so heavily on metrics like income and returns on investment (ROIs). There’s a place for these metrics, of course, but when we focus too heavily on hem, we start to forget that there are real people on the end of those numbers.

What is a relational business?

In a transactional business everybody is part of a well-oiled clock, each function a different cog all nicely engaged, each with a specific purpose. In the relational business, the staff is the spring or battery.  Only when the spring is properly fitted and wound or battery charged will the clock function at all.

Relational Businesses focus on meaning, a purpose, they connect with the human problem they are solving, this makes them rewarding places to work, buy from and partner with.

When we create a relational business we start to think more in terms of relationships, getting to know not just our customers, but suppliers and partners too, and providing the tools they need to make their businesses a success – even if that’s ultimately to provide expertise and advice for free and empowering customers to help themselves. In a relational business, we recognise our success is just as much about our staff, suppliers and partners as it is our customers.

The idea behind the relational business is to build long-term relationships with people over time, often through the use of tools like CRM software. Done badly, the relational business comes across as clunky and inauthentic, but done well it can transform your entire business. This is evidenced by a recent study which found that purchase decisions are “constructed from economic fundamentals, but also through social interaction.”

Effective employee recruitment

Effective staff recruitment is central to creating a profitable business and even more so in a relational business. One bad apple will upset the cart for everybody.  Your business is run by a team, not a collection of individuals, so effective recruitment and team building is an important skill to have within the relational business.

According to Wikipedia, one model of team effectiveness can be defined by three criteria:

  1. Output
  2. Social Processes
  3. Leaning

Bruce Tuckman in 1965 said there were four phases to team development:

  1. Forming
  2. Storming
  3. Norming
  4. Performing

The stage names are quite self-explanatory, and anyone who has worked in a business or a team of some kind will recognise them. And so we can also see that without effective employee recruitment achieving Stage 4, a high performing team and business will be hard.

Employee engagement in a relational business.

Staff in a relational business are fully engaged every day. They know they have responsibilities to their team, colleagues and peers, more than their managers, who are there in support. With effective staff recruitment, your staff's intrinsic motivators are in sync with their own lives. If they are in a customer service role, then a positive, helpful, disposition will mean they find their work rewarding. If they are impatient, creative and goal oriented, it won't be.

How to improve your business organisational structure

In a relational business, the managers support and encourage their staff to come up with new ways of working, new ways to solve customer service experience issues. We turn the traditional organisational model upside down.

The staff can assume responsibility for tasks when agreed with colleagues. They work as a team in coordination with other teams within the business and where issues occur, they address them, themselves with the management only being involved if asked to provide support, advice or guidance. This reduces the need for meetings and makes the organisation very agile and responsive without the need for decision making going up and down a hierarchy.

How to build a customer-centric culture in a relational business

Creating a customer-centric culture is easier with a relational business. Customer centricity in a transactional business looks mainly at the coordination of data, processes, systems and tools to provide a seamless customer journey and effective touchpoints.

By doing this with a relational business, you put employees, the staff at the centre of the business, not customers. Relational businesses are employee-centric, and this makes creating a customer-centric culture easier as the staff are keyed into the needs of the customer, not the organisation, managers, data and admin. They use the systems creatively to solve customer experience issues, rather than completing a form or check sheet as requested.

The fundamental purpose of a relational business

Transactional businesses will see their purpose in terms of profit, sales, customers,  orders, shareholder value. They may mention value, but generally they'll say that in response to creating a vision or mission statement. It's not a natural place for them. Their original core purpose has got lost in the midst of time, as the focus moved to the sales funnel and cash-flow, both essential, but their roots have got lost.

Relational businesses focus on alignment with their markets needs, desires, wants, feelings first, before sales and orders. They recognise the value they create comes from how they make people feel, the memories they create before, during and after the business they do together, not just the deal.  Because they think like this, the sales come more easily, they are less likely to need to compete on price and will avoid boom and bust sales cycles.

Effective sales, marketing and service delivery in a relational business

The idea of moving from transactional to relational models isn’t a new one, but most of the people who talk about it seem to focus specifically on sales and marketing. I agree that they’re a good starting point, but if we want to harness the true strength of the relational business than we need to take it on board as an ethos and philosophy and roll it out across the entire company.

So sales and marketing are just the beginning, and the name of the game is to build relationships across every single touchpoint, from sales and marketing to customer service, packaging and distribution. At the same time, building these relationships takes time and it quickly becomes complicated at scale. That’s where tools like customer relationship management (CRM) systems come in, and they can be a useful asset, as long as you don’t allow the technology to takeaway the human touch.

The difference between a relational and transactional business is benefits

There are plenty of benefits to the relational business, and it’s not just about the bottom line. It works great for products with lengthier buying cycles and helps you to create customers for life and not just for a single transaction, but it also helps to build a community around your company. As word of mouth continues to spread, you’ll become the go-to company in your industry. It’s like they say: “People do business with people they like.”

In the real estate industry, for example, the transactional approach focusses on selling a house. The relational business relies on selling a home, and the ultimate success metric is how many people go on to stay in those properties for the rest of their lives. By building those relationships and getting to know customers on an individual level, you make sure that if they do have to move, you’re the first people that they turn to. And when their friends and family are looking for real estate help, you’ll be the company that they recommend.

Another key advantage of the relational business is that all parties benefit, from the employer and the employees to the suppliers and customer. Even the local area can benefit through CSR programs and green initiatives. And this leads to happier employees too, because they’re more likely to feel passionate about their job if they feel like they’re making a positive difference to the world.

Conclusion

The transactional approach isn’t dead, but it is becoming less relevant as consumer expectations continue to evolve. That’s why more and more companies will be switching to a relational business approach.

I’ve witnessed this transformation from a transactional to a relational business approach first-hand, both through my own company and through my clients. Just the other day, I heard from a real estate client who had a viewing and who credits his ability to make the sale with the initial conversation where he started to build a relationship. Before we worked together, they weren’t doing that and they were just taking down contact details. I hear stories like this every day, and they make the work that I do worthwhile.

To truly make the most of the relational business, you need to take it on board as a mind-set and roll it out across your entire company. The good news is that the benefits that relational thinking has to offer are applicable to every industry and every company on the planet. So stop thinking in transactions and start to think in relationships.

We can help you transform into a relational business through our unique combination of people, project, business and change management - all provided in our business improvement programme. Find out more.

About Paul Freudenberg

Paul Freudenberg is a business productivity coach and consultant with a focus on operational excellence delivering improved profitability and business performance, and Founder of Awardaroo in 2005. Paul has set the mission of Awardaroo to help raise UK Business Productivity from one of the lowest in the G7 to one of the highest by 2030. Connect on LinkedIn

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