Relationships among individuals and organizations are based on exchange. By exchanging products, either material or immaterial, in ways that are rewarding to all the parties that are involved. People decide whether forming a relationship with another individual or group has more benefits than costs.
Depending on what decision they make, they negotiate a system where the other party also receives benefits from the relationship being established. The two parties then carry out transactions from which they both benefit in accordance with their negotiated standards.
This is based on the fact that human beings seek to improve their quality of life and are social animals existing alongside other entities. In this context, both parties improve their respective quality of life through the link they form with each other.
The exchange is at the heart of economic systems. From barter economies, in which certain goods and services are exchanged for other goods and services, to our money-based economies, where goods and services are exchanged for an amount of currency that is ascribed commensurate value to the products in question, transactions that are mutually beneficial for all parties involved is at the backbone of not just economy, but society in general.
People produce goods and services, with the cost to themselves. Other people procure goods and services at a cost to themselves. Because the former benefits from the cost to the latter and vice versa, existing systems are maintained.
The exchanges between two or more parties do not occur in an isolated context. Which is to say, individuals or organizations do not usually view exchanges as an occurrence that does not have further consequences. In order for transactions to continue, there has to be a relationship between the parties involved, and there has to be a sense of obligation.
Parties that have agreed to exchange goods or services or any other kind of exchangeable commodities, such as such as information or moral support, feel a sense of responsibility towards each other. This ensures that they meet the established standards of exchange. If one party provides benefits to the other, then the latter feels obligated to provide benefits in return.
If the responsibility the parties have towards each other is not fully satisfied, then one or more parties may seek to terminate the relationship. Self-interest drives people and exchanges that are not beneficial to the extent that they could be or should behave no reason to continue, should termination be possible.
Social Exchange Theory is a theory of both psychology and economics. It is concerned with how society is based on a series of exchanges being carried out between two or more parties, with all parties involved receiving positive consequences from the transactional relationship.
George Homans defined social exchange theory as the exchange between two or more parties of tangible or intangible activity, with more or fewer rewards and costs being involved. He focused on the behavior of individuals in response to one another. He summarized social exchange in the following propositions.
- Success: Humans are motivated by positive reinforcement. When they receive benefits or rewards as a result of their actions, they are likely to repeat the action.
- Stimulus: People also remember and react to established patterns. If a particular stimulus repeatedly results in positive consequences, a person will tend to respond to it.
- Deprivation-satiation: This is similar to the law of diminishing marginal utility. A benefit becomes less valuable depending on how often a person has received it recently.
These are principles of reinforcement that Homans emphasized. A particular person or group will enter into a transactional relationship depending on how it satisfies these propositions. Peter Blau focused on the utilitarian and economic aspects of social exchange theory.
Both he and Richard Emerson took an interest in how power interacted with the process of social exchange theory. While transactional relationships are mutually beneficial, there is no reason to assume that they exist between parties who hold equal amounts of interpersonal, social, or financial power.
Social exchange theory is driven by the individual’s need to secure their own well-being and their inability to do it in a way that does not require them to rely on other individuals or groups. Self-interest is not something negative. Self-interest motivates all parties involved in a transactional relationship to structure their exchanges in ways that are beneficial to both. Blau, in particular, stressed this.
Exchanges that are interpersonal are more flexible, involve fewer legalities, and are less likely to be ended by any of the parties involved. Specifically, economic exchanges tend to involve more explicit bargaining and self-interest, and the individual is often interacting with a market, and not another individual.
But the basic tenet of mutually negotiated and beneficial relationships based on the exchange of products, in which all parties feel obligated towards each other, remains. In an uneven power dynamic, one party may fail to satisfy its obligation toward another, in which case self-interest will motivate the second party to seek out a more advantageous relationship than the one they currently inhabit.
Social Exchange in Marketing
The exchange is the basis of marketing. Organizations or individuals sell commodities to consumers. The commodities provide the consumer with benefits and the cost of purchasing the commodities provides benefits to the organization or individual that produced them. The commodity being marketed may be a good or a service, or it may be the image of a brand, a political or social message, a charitable cause, and so on.
There are three categories in social exchange theory, namely reciprocity, redistribution, and market exchange. Reciprocity is the process by which value is exchanged for obligations. This is where the aspect of responsibility becomes significant. One party feels that since the other party has provided them with benefits, they must reciprocate in kind and provide commensurate benefits.
Managers in the workplace can rely on reciprocity as a reason to expect high standards of performance from employees, provided the manager provides the employee with benefits to motivate them to reciprocate in the first place. Redistribution has to do commodities being allocated to a general populace through a central authority.
The process of exchange is less direct, as in democratic socialist economies. However, benefits still accrue to the producer of commodities as well as the consumer. Products are marketed to consumers through the intermediary of a central authority, but the actual exchange still takes place between producer and consumer.
Market exchanges are found in capitalist societies, where there is a system of “price-making” encounters, which involve a consumer attempting to reduce the cost they have to pay and a producer attempting to increase the number of benefits they will receive. In market exchange, there is a buyer paying a monetary cost in order to receive the commodity being marketed to them, the monetary cost serving as the benefit received by the other party in the transactional relationship, that is, the producer.
Social exchange theory is important in the context of relationships between an organization and its stakeholders, which includes employees as well as consumers. The organization has an obligation towards stakeholders, who provide the organization with benefits like labor and income, and an obligation to stakeholders who bear the cost of negative externalities as well.
Any action on the part of the organization affects stakeholders with whom it is in a transactional relationship and the organization may find stakeholders terminating the relationship if their self-interest is not being served.
Organizations that fail to provide consumers with the benefits that were implicitly negotiated and agreed upon, such as a particular standard of quality from the goods and services produced by the organization, will find that the consumers, seeking rewards from a transactional relationship rather than an excess of costs, have ended their relationship with the organization and have formed a relationship with a rival organization which provides them with a fair amount of benefits in exchange for their expenditure. Relationship marketing focused on customer satisfaction is connected to this.
Rather than prioritizing immediate monetary gain, trying to develop strategies that will satisfy both the customer and the organization in a mutually advantageous relationship is a more successful venture in the long run, given that profits will increase if consumers are satisfied with what the organization providing them with in exchange for their money. Transactional relationships are extended and maintained when both parties fulfill their obligations to each other and satisfying the consumer is among the obligations of the organization.
According to Caryl Rusbult, investments stabilize relationships, which are generally based on exchange. If a consumer is emotionally invested in a brand, they will be less likely to turn to a rival brand even when the former brand begins to fail to satisfy its obligations to the consumer.
An organization, in turn, through the collection of information about an individual consumer, makes the consumer an investment. Effort and cost go into identifying the needs and wants of the consumer. If the consumer is dissatisfied and chooses to end the transaction with the organization, the organization loses the investment. This will motivate the organization to secure its own interests by devoting additional resources to preserving its relationship with the consumer.
Firms set up business-to-business relational exchanges after observing the benefits to be received from entering transactional relationships with other firms.
Depending on which other firm offers an optimum cost-benefit ratio and meets the standards of the first firm as to the rewards it fairly deserves in exchange for its expenditure, a relationship based on an exchange is set up between the firms.
Employees feel as though they are obligated to provide their employer with commensurate benefits in exchange for the financial gain that is ensured by the fact of their employment. Employers and managers are in a two-way relationship based on exchange and mutual benefit.
If the employees are satisfied, the organization profits from the effort they are motivated to put in. On the other hand, failure on the part of the organization to set up a reciprocal relationship with its employees results in the employees leaving the organist ion.
Variables Involved in Theory
There are certain factors that determine how relationships are based on exchange and how they influence their surroundings.
- Positive reinforcement: As human beings are driven by self-interest, social exchange is strongly influenced by the number of benefits one particular party stands to gain from a transactional relationship. If consumers receive a high standard of quality from the goods and services that they spend their money on, then they will be motivated to keep purchasing those goods and services. They will see that they feel a reasonable amount of satisfactory joy in relation to the amount that they have expended in order to procure the commodity that is satisfying them. Employees will work harder if employed by organizations that make satisfying them a primary concern, and the employer, in turn, will be satisfied by the amount of work the employee is putting in.
- Evaluation and comparison: Before entering into transactional relationships, a party carries out an analysis of whether the benefits are going to be worth the cost, and if other parties that they are not currently linked with are going to provide a greater amount of benefits in exchange for a smaller amount of costs. An individual or organization evaluates the available alternatives and the potential advantages to be gained from each of them. If the primary option for entering into a transactional relationship is not the best option, subjectively speaking, the individual or organization will select a different option.
- Any capitalist economy where producers enter into mutually beneficial relationships with consumers based on the exchange of goods and services from the producer and monetary expense from the consumer is an example of social exchange. The producer promises a certain level of quality that the consumer can expect from the commodity being exchanged, and the consumer decides if the cost charged by the producer is worth the benefits to be gained from purchasing the commodity.
- The relationship between employer and employee, where the employer must provide benefits to the employee in the form of an agreeable working environment and adequate wages and the employee must reciprocate with a certain standard of performance, is another example of social exchange.