The Marketing Exchange

Exchange is a fundamental and universal aspect of human behaviour.

Why exchange is the frame

Marketing scholars agree that exchange is the basic framework for understanding the market. Bagozzi (1975) stated that marketing is the process of creating and resolving exchange relationships. Organisations and individuals need social and economic exchange to satisfy their needs — which means marketing takes place in social relationships as readily as economic ones: between retailers, between ultimate consumers, or inside a family.

Relationship has become an inevitable feature of business. Firms increasingly emphasise the relationships they hold with suppliers and customers, and demand that those relationships meet high standards. Competitive pressure makes developing and maintaining them necessary rather than optional.

Because the marketplace changes quickly, firms have had to move their strategy from simple market-based transactions toward long-lasting relationships. The advantages of relational exchange are concrete:

• reduced uncertainty in transactions
• reduced transaction costs
• synergy from combining complementary operations
• lower customer turnover and higher satisfaction, which lowers service costs and raises the effectiveness of selling expenditure

Relationship marketing

Relational exchange became a focal point for business strategy over recent decades, partly because the boundaries between markets and industries began to blur.

Berry (1983) was among the first to introduce relationship marketing as a modern concept, defining it as “attracting, maintaining and… enhancing customer relationship.”

Grönroos (1994) redefined it as:

To identify and establish, maintain and enhance and, when necessary, terminate relationships with customers and other stakeholders, at a profit, so that the objectives of all parties involved are met; and this is done by mutual exchange and fulfilment of promises.

Berry and Parasuraman (1991) framed it for services as “attracting, developing, and retaining customer relationships,” and identified three levels:

1. Price level. Encourage repurchase through price allowances. Relatively easy — and relatively easy to copy.
2. Social bonding. A more permanent hold, built through social setting: greeting cards, special gifts, holiday trips.
3. Structural relationship. The third and deepest level, tying buyer and seller together in a mutually beneficial arrangement.

How relationships develop

Dwyer, Schurr and Oh (1987) gave an early and widely cited conceptualisation of relationship marketing. Drawing from social psychology and the literature on marriage and family, they proposed that relationships evolve through five stages:

awareness → exploration → expansion → commitment → dissolution

Morgan and Hunt (1994) supported this by categorising a focal firm’s relational exchanges into four types:

1. Supplier partnerships — between the focal firm and its goods or services suppliers.
2. Lateral relationships — partnerships with institutions at the same level: alliances with competitors, with non-profits, joint R&D with government.
3. Buyer partnerships — long-term exchanges with ultimate customers, and working partnerships with channel members or intermediary customers.
4. Internal partnerships — with functional departments, employees, and business units.

The exchange model

In ancient and primitive societies, exchanges occurred naturally, often without either party being aware of the structures behind them. Polanyi et al. (1957) classified those economies into three allocative processes:

• Reciprocity — deference or obligation exchanged for value received. People act on the belief that one should help another who has helped, or will help, them.
• Redistribution — goods collected in one hand and allocated “by virtue of custom, law or ad hoc central decision.”
• Market exchange — “price-making” encounters where the seller tries to get as much as possible and the buyer tries to give as little as possible.

The modern notion has evolved in two directions: economic exchange and social exchange.

Economic exchange

The economic model rests on utilitarian principles: individuals are guided by self-interest and only self-interest. External constraints — norms, laws, social conventions — are regarded as artificial, inhibiting the “free” pursuit of self-aggrandisement which is itself seen as the mechanism producing social order. Its most developed expression is the Western conception of economic man and the free enterprise system.

A competitive system is an elaborate mechanism for unconscious coordination through a system of prices and markets, a communication device for pooling the knowledge and actions of millions of diverse individuals. Without a central intelligence it solves one of the most complex problems imaginable, involving thousands of unknown variables and relations. Nobody designed it. It just evolved, and like human nature, it is changing; but it does meet the first test of any social organisation — it can survive. Samuelson, 1970

Economists from Adam Smith to Samuelson have described — and advocated — a market system based on exchange, guided by an ubiquitous “invisible hand.” Economic exchanges are limited to buying and selling material goods and services: transactions transferring tangible entities between two parties. Actors are assumed to maximise satisfaction; the firm is a profit maximiser, the individual a utility maximiser; and in their transactions individuals are assumed rational, informed, and aware of all alternatives.

Social exchange

Homans (1958) and Blau (1964) were two of the earliest theorists to formally represent the interaction of individuals from an exchange perspective. Both maintain that social relationships can be viewed against a background of exchange, whereby individuals offer and accept — or reject — material as well as non-material entities.

In this model people interact so as to achieve a profit: rewards minus costs. For Blau, social exchange is limited to “actions that are contingent on rewarding reactions from others and that cease when these expected reactions are not forthcoming.” For Homans (1974), all sources of rewards and costs matter, not merely those expected or received from the person in the interaction. Both conceptualise rewards as desired physical objects, psychological pleasure, or social gain; costs as noxious objects and social or psychological punishments.

Only Homans developed a formal set of propositions, attempting a deductive theoretical system built on Skinner’s behaviourism, reducing social behaviour to individual exchange: “The institutions, organisations, and societies that sociologists study can always be analysed, without residue, into the behaviour of individual men.”

The social exchange model appeals to marketers because it represents both economic man and social man in a single framework. Alderson (1965) and Kotler (1972) proposed exchange as the basis of marketing, though neither developed a general theory from it.

The theorists

The types of exchange

Restricted exchange

Two-party reciprocal relationships, written A ↔ B, where ”↔” means “gives to and receives from.” Most references to exchange in the marketing literature have implicitly dealt with this form — customer–salesman, wholesaler–retailer, and other dyads. Restricted exchanges exhibit two characteristics:

• A strong attempt to maintain equality, especially in repeatable social exchange acts. Attempts to gain advantage at the other’s expense are minimised, and breaching the rule of equality quickly produces emotional reactions.
• A quid pro quo mentality. Time intervals in mutual reciprocity are cut short, and there is an attempt to balance activities and exchanged items.

That restricted marketing exchanges must involve something of value for something of value sits at the heart of Luck’s criticism of broadening the marketing concept. There are important exceptions.

Generalised exchange

Univocal, reciprocal relationships among at least three actors. Univocal reciprocity occurs when the reciprocations involve at least three actors who do not benefit each other directly but only indirectly — written A → B → C → A, where ”→” means “gives to.” Each actor gives to one party and receives from another. It fails the usual quid pro quo test and is still plainly a marketing exchange.

Complex exchange

A system of mutual relationships between at least three parties. Each actor is involved in at least one direct exchange while the whole system is organised by an interconnecting web of relationships. Complex chain and complex circular exchanges involve predominantly conscious systems of social and economic relationships — an overt coordination of activities and expectations that Alderson called an organised behavioural system.

The invisible hand

Generalised and complex exchanges also occur in relatively unconscious systems. A modern economy experiences covert coordination of activities through the exchanges that happen when many individuals, groups and firms pursue their own self-interest. This is what Adam Smith meant by the invisible hand.

The media of exchange

The media of exchange are the vehicles with which people communicate to, and influence, others in satisfying their needs: money, persuasion, punishment, power, inducement, and the activation of normative or ethical commitments. Products and services are media of exchange too.

Marketing is not solely concerned with influence, whether that is manufacturers influencing consumers or consumers influencing manufacturers. It is also concerned with meeting existing needs and anticipating future ones — activities that do not necessarily entail persuasion at all.

Wilkinson studied five bases of power in the distribution channel — reward, coercive, legitimate, referent and expert — and tested those relationships between firms.

Marketing exchanges carry one of three classes of meaning:

Where the model breaks down

Present conceptualisations of exchange are promising, but their shortcomings hinder the development of marketing thought.

As a theory

Two issues must be resolved before the social exchange model can be considered adequate.

First, it is a tautology. Under the theory, exchange behaviour occurs when it is profitable to the parties, and the profitability of what was transferred is ultimately measured by the occurrence of the exchange. To escape that circularity, either “exchange” and “profit” must be better defined and distinguished, or an underlying mechanism governing exchange must be proposed — it must be possible to conceptualise and measure things of positive or negative value separately from the behaviours they eventually produce.

Second, reductionism. Can social behaviour be represented by reducing it to the psychology of the individual, and can that reduction be based on behaviourism? Homans and Blau both assume so. If society exhibits a reality of its own — sui generis, as Durkheim (1933) suggested — then social exchange theory must accommodate that fact.

As a description of reality

The model represents an idealised set of conditions. Its fundamental assumption is that a transaction occurs only under mutual satisfaction, a benefit traded for a benefit. Most marketing exchanges are of this sort. Many are not:

• Fraud, deception, defective products, false or misleading advertising, and transactions involving injury are all exchanges.
• Marketing exchanges often contain conflict, persuasion or coercion, which may not lead to mutual satisfaction at all.
• Prestige, power and disparities in resources may be critical to explaining marketing behaviour — and the model does not directly account for them.

It also misrepresents processes in the wider social system. It fails to explain pressures toward public consumption and social responsibility. The costs of pollution and environmental degradation are not represented; unemployment, poverty and alienation remain an enigma within the free enterprise system.

Finally, the model must come to grips with inequitable relationships between producers and consumers. The largest disparity is the uneven distribution of resources and access to information. The large producer nearly always has the advantage: it can hire salespeople, advertise, run market research, and employ a host of auxiliary services. The consumer is relatively unsophisticated by comparison, with influence, power and resources that are infinitesimal next to the corporation’s. Information is power, and only recently have consumers begun to chip away at the imbalance.

Beyond exchange: the exchange system

Exchange occurs under the impetus of two broad classes of force (Bagozzi, 1974).

Endogenous — causes internal to the exchange itself. The actors may use persuasion or social influence to obtain a desired response.

Exogenous — variables outside it. Social norms, legal restrictions, situational contingencies, and the availability of alternative sources of satisfaction all shape the outcome.

An exchange system can therefore be defined as a set of social actors, their relationships to each other, and the endogenous and exogenous variables affecting their behaviour in those relationships. Social actors are salespeople, retailers, consumers, advertisers and other entities found in marketing. Relationships are the connections between them.

Actors influence an outcome by using power: offering inducements, mediating negative reinforcers, persuading the other party that compliance is in their own interest, or employing normative sanctions. The outcome may also turn on the actors’ perceived credibility, trustworthiness and similarity — or on forces independent of them entirely: scarcity of desired rewards, the availability of alternatives, the social structure and prevailing institutional relationships.

The task for marketers is to model the salient endogenous and exogenous variables, and their relations to exchange behaviour. Viewing marketing as an exchange system is what makes those variables identifiable — a necessary prerequisite for any specification of theory.