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CRM is about introducing the right product to the right customer at the right time
through the right channel to satisfy the customer’s evolving demands. Ideally, it
should follow the development of each individual customer and develop integrated
multi-segment, multi-stage, and multi-channel CRM decisions in order to maximize
the total customer lifetime profit. However, most existing CRM practice and
academic research focuses on methods to select the most profitable customers for a
scheduled CRM intervention.
Introduction
CRM is about understanding the nature of the exchange between customer and
supplier and managing it appropriately. The exchange contains monetary
considerations between supplier and customer – but also communication. The
challenge to all supplier organizations is to optimize communications between
parties to ensure profitable long-term relationships. CRM is a key focus for many
organizations now as a shift away from customer acquisition toward customer-
retention and churn reduction strategies dictates a need for best practice
CRM processes.
- Jeffrey Peel, CEO of Quadriga Consulting
“The long-term success of the organization and improved value for its shareholders
lies to a very great extent in the company’s ability to develop and sustain genuine
relationships with its customer.” -James G. Barnes
“A view of the customer that asserts that he or she is a valuable asset to be managed.”
–S. Thomas Foster
The need to better understand customer behavior and focus on those customers who
can deliver long-term profits has changed how marketers view the world.
Traditionally, marketers have been trained to acquire customers, either new ones who
have not bought the product category before or those who are currently competitors’
customers. This has required heavy doses of mass advertising and price-oriented
promotions to customers and channel members. Today, the tone of the conversation
has changed from customer acquisition to retention. This requires a different mindset
and a different and new set of tools. A good thought experiment for an executive
audience is to ask them how much they spend and/or focus on acquisition versus
retention activities. While it is difficult to perfectly distinguish the two activities from
each other, the answer is usually that acquisition dominates retention.
The impetus for this interest in CRM came from Reichheld where he showed the
dramatic increase in profits from small increases in customer retention rates. For
example, his studies showed that as little as a 5% increase in retention had impacts as
high as 95% on the net present value delivered by customers (advertising agencies)
with a low of 35% (computer software). Other studies done by consultants such as
McKinsey have shown that repeat customers generate over twice as much gross
income than new customers. The considerable improvements in technology and
innovation in CRM related products have made it much easier to deliver on the
promise of greater profitability from reduced customer “churn.”
For example, Exhibit 1 shows the results from a 1999 McKinsey study on the impact
of improvements in a number of customer-based metrics on the value of Internet
companies. The metrics are divided into three categories: customer attraction,
customer conversion, and customer retention. As can be seen, the greatest leverage
comes from investments in retention. If revenues from repeat customers, the
percentage of customers who repeat purchase, and the customer churn rate each
improves by 10%, the company value was found to increase (theoretically) by 5.8%,
9.5%, and 6.7% respectively.
A problem is that CRM means different things to different people. For some, CRM
means direct e-mails. For others, it is mass customization or developing products that
fit individual customers’ needs. For IT consultants, CRM translates into complicated
technical jargon related to terms like OLAP (on-line analytical processing) and CICs
(customer interaction centers).
6. Privacy issues.
What should be collected for the database? Ideally, the database should contain
information about the following:
3) Descriptive information. This is for segmentation and other data analysis purposes.
4) Response to marketing stimuli. This part of the information file should contain
whether or not the customer responded to a direct marketing initiative, a sales contact,
or any other direct contact.
Traditionally, customer databases have been analyzed with the intent to define
customer segments. A variety of multivariate statistical methods ranging such as
cluster and discriminant analysis have been used to group together customers with
similar behavioral patterns and descriptive data which are then used to develop
different product offerings or direct marketing campaigns.9 Direct marketers have
used such techniques for many years. Their goals are to target the most profitable
prospects for catalogue mailings and to tailor the catalogues to different groups.
More recently, such segmentation approaches have been heavily criticized. Taking a
large number of customers and forming groups or segments presumes a marketing
effort towards an “average” customer in the group. Given the range of marketing tools
available that can reach customers one at a time using personalized messages (what
has been referred to as “1-to-1” marketing), there is less need to consider the usual
market segmentation schemes. Rather, there is increased attention being paid to
understanding each “row” of the database, that is, each customer and what he or she
can deliver to the company in terms of profits.
As a result, a new term, lifetime customer value or LCV, has been introduced into
the lexicon of marketers. The idea is that each row/customer of the database should be
analyzed in terms of current and future profitability to the firm. When a profit figure
can be assigned to each customer, the marketing manager can then decide which
customers to target.
A model of the profitability of a customer based on past and current purchases is the
following:
In words, the profit that a customer has produced for the firm is the sum of the
margins of all the products purchased over time less the cost of reaching that
customer. These costs include any that can be broken out at the individual customer
level such as direct mail, sales calls, etc. Note that mass advertising would not be part
of this formula. It could be assigned to individual customers by computing a per
customer dollar amount but because it is the same for each customer, it would not
affect the rank ordering of the customers in terms of their profitability.
The equation can be used as the basis for LCV calculations by adding forecasts for the
major parameters and discounting back. This obviously requires assumptions about
future purchasing, product and marketing costs, as well as how long the customer can
be expected to remain with the firm. Generally, this will result in a number of
scenarios for each customer depending upon these assumptions.
The equation not only is the basis for LCV, but it can also be used to show where
additional profits can be obtained from customers. Increased profits can result from:
Increasing J, the number of products purchased, by cross-selling;
Increasing P, the price paid, by up-selling or charging higher prices;
Reducing C, product marginal costs;
Reducing MC, the customer acquisition costs.
Other kinds of data analyses besides LCV are appropriate for CRM purposes.
Marketers are interested in what products are often purchased together, often referred
to as market basket analysis. Complementary products can then be displayed on the
same physical page in a hard-copy catalogue or virtual page on a Web site.
A new kind of analysis born from the Internet is clickstream analysis. In this kind
of data analysis, patterns of mouse “clicks” are examined from cyberstore visits and
purchases in order to better understand and predict customer behavior. The goal is to
increase “conversion” rates, the percentage of browsing customers to actual buyers.
Research issues include the following:
How can we modify the model to incorporate data from Web clickstream and
log file data?
Are there new market segmentation and analysis tools that can do a better job?
Customer Selection
Given the construction and analysis of the customer information contained in the
database, the next step is to consider which customers to target with the firm’s
marketing programs. The results from the analysis could be of various types. If
segmentation-type analyses are performed on purchasing or related behavior, the
customers in the most desired segments (e.g., highest purchasing rates, greatest brand
loyalty) would normally be selected first. Other segments could also be chosen
depending upon additional factors.
For example, if the customers in the heaviest purchasing segment already purchase at
a rate that implies further purchasing is unlikely, a second tier with more potential
would also be attractive. The descriptor variables for these segments (e.g., age,
industry type) provide information for deploying the marketing tools. In addition,
these variables could be matched with commercially-available databases of names to
find additional customers matching the profiles of those chosen from the database.
If individual customer-based profitability is also available through LCV or similar
analysis, it would seem to be a simple task to determine on which customers to focus.
The marketing manager can use a number of criteria such as simply choosing those
customers that are profitable (or projected to be) or imposing an ROI hurdle. The goal
is to use the customer profitability analysis to separate customers that will provide the
most long-term profits from those that are currently hurting profits. This allows the
manager to “fire” customers that are too costly to serve relative to the revenues being
produced.
While this may seem contrary to being customer-oriented, the basis of the time-
honored “marketing concept,” in fact, there is nothing that says that marketing and
profits are contradictions in terms. The 80/20 rule often holds in approximation: most
of a company’s profits are derived from a small percentage of their customers.
For example:
AT&T offers different levels of customer service depending upon a
customer’s profitability in their long-distance telephone business. For highly
profitable customers, they offer “hot towel,” personalized service. For less
profitable customers, you get automated, menu-driven service.
On what basis should these customer selection decisions be made? One approach
would be to take the current profitability based on the above equation. An obvious
problem is that by not accounting for a customer’s possible growth in purchasing, you
could be eliminating a potentially important customer. Customers with high LCV
could be chosen; this does a better job incorporating potential purchases. However,
these are difficult to predict and you could include a large number of unprofitable
customers in the selected group. No matter what criterion is employed, de-selected
customers need to be chosen with care. Once driven away or ignored, unhappy
customers can spread negative word-of-mouth quickly, particularly in today’s Internet
age.
Mass marketing approaches such as television, radio, or print advertising are useful
for generating awareness and achieving other communications objectives, but they are
poorly-suited for CRM due to their impersonal nature. More conventional approaches
for targeting selected customers include a portfolio of direct marketing methods such
as telemarketing, direct mail, and, when the nature of the product is suitable, direct
sales. Writers such as Peppers and Rogers14 have urged companies to begin to
dialogue with their customers through these targeted approaches rather than talking
“at” customers with mass media.
In particular, the new mantra, “1-to-1” marketing, has come to mean using the
Internet to facilitate individual relationship building with customers. An extremely
popular form of Internet-based direct marketing is the use of personalized e-mails.
When this form of direct marketing first appeared, customers considered it no
different than “junk” mail that they receive at home and treated it as such with quick
hits on the delete button on the keyboard. However, sparked by Godin’s call for
“permission”-based programs whereby customers must first “opt-in” or agree to
receive messages from a company, direct e-mail has become a very popular and
effective method for targeting customers for CRM purposes. Companies such as Kana
and Digital Impact can send very sophisticated e-mails including video, audio, and
web pages. Targeted e-mails have become so popular that Jupiter Media Matrix
projects that over 50 billion of them will be sent in 2001.
A study by Forrester Research shows why this is so. Exhibit 4 demonstrates that e-
mail is a very cost-effective approach to customer retention. Through lower cost per
1,000 names by using the company’s own database (the “house” list) and greater
Click through rates than those afforded by banner advertisements and e-mails sent to
lists rented from suppliers, companies can reduce their cost per sale dramatically.
Some examples are the following:
Southwest Airlines’s e-mail-based Click ‘n Save program has 2.7 million
subscribers. Every Tuesday, the airline sends out e-mails to this database of loyal
users containing special fare offers.
The Phoenix Suns basketball team sends streaming video messages from its
players promoting new ticket packages and pointing them to the team’s Web site.
The main criticisms of targeted e-mails have focused on the privacy issue which will
be discussed below. Some research issues are the following:
How do should we allocate resources over acquisition, retention, and greater
purchasing?
What is the optimal allocation of resources over the different targeting tools?
Online vs. offline?
Relationship Programs
Because customers have more choices today and the targeted customers are most
valuable to the company, customer service must receive a high priority within the
company. In a general sense, any contact or “touch points” that a customer has with a
firm is a customer service encounter and has the potential to gain repeat business and
help CRM or have the opposite effect. Programs designed to enhance customer
service are normally of two types. Reactive service is where the customer has a
problem (product failure, question about a bill, product return) and contacts the
company to solve it. Most companies today have established infrastructures to deal
with reactive service situations through 800 telephone numbers, faxback systems, e-
mail addresses, and a variety of other solutions. Proactive service is a different
matter; this is a situation where the manager has decided not to wait for customers to
contact the firm but to rather be aggressive in establishing a dialogue with customers
prior to complaining or other behavior sparking a reactive solution. This is more a
matter of good account management where the sales force or other people dealing
with specific customers are trained to reach out and anticipate customers’ needs.
A variety of systems leveraging the Web assist both kinds of service. Charles Schwab
has established MySchwab which allows customers to create personal Web pages
linking them to all Schwab services including stock quotes, trading, retirement
planning analyses. In this way, the company empowers the customer to deliver their
own service. Other Web-based services such as LivePerson, HumanClick, and net
Customer are bolt-on products that when added to a company’s Web site, provide
customers with the ability to interact with service representatives in real time.
Companies like Kmart are investing large amounts of money into kiosks that provide
information on product availability, order status, and a variety of other service-related
topics.
Loyalty/Frequency Programs
A number of Web-based companies providing incentives for repeat visits to Web sites
include MyPoints and Netcentives. Although these have not been wildly successful, it
is clear that the price orientation of many Web shoppers creates the need for programs
that can generate loyal behavior.
Customization
The notion of mass customization goes beyond 1-to-1 marketing as it implies the
creation of products and services for individual customers, not simply communicating
to them. Dell Computer popularized the concept with its build-to-order Web site.
Other companies such as Levi Strauss, Nike, and Mattel have developed processes
and systems for creating customized products according to customers’ tastes.
One of the major uses of the Web for both online and offline businesses is to build a
network of customers for exchanging product-related information and to create
relationships between the customers and the company or brand. These networks and
relationships are called communities. The goal is to take a prospective relationship
with a product and turn it into something more personal. In this way, the manager can
build an environment which makes it more difficult for the customer to leave the
“family” of other people who also purchase from the company.
For example, the software company Adobe builds community by devoting a section
of its Web site to users and developers. They exchange tips and other information
which binds them more to the company and its brands. By giving the customers the
impression that they own this section of the site and being open to the community
about product information, Adobe creates a more personal relationship with its
customers.
Some research issues in the area of building relationship programs are the following:
What are the key drivers of satisfaction when a company has both an on-line
and off-line presence?
Is there a difference between “proactive” (the company contacts the customer)
and “reactive” (the customer contacts the company) customer service?
What loyalty program strategies are effective differentiators?
How to mass customize? Methods for determining what kinds of product
options customers want and how to manufacture them.
Privacy Issues
The CRM system described in this report depends upon a database of customer
information and analysis of that data for more effective targeting of marketing
communications and relationship-building activities. There is an obvious tradeoff
between the ability of companies to better deliver customized products and services
and the amount of information necessary to enable this delivery. Particularly with the
popularity of the Internet, many consumers and advocacy groups are concerned about
the amount of personal information that is contained in databases and how it is being
used.
Thus, the privacy issue extends all the way through the hierarchy of steps outlined in
Exhibit 1. This is not a new issue. Direct marketers have mined databases for many
years using analyses based on census tract data, motor vehicle records, magazine
subscriptions, credit card transactions, and many other sources of information.
However, with the “in your face” nature of unwanted direct e-mails and the increasing
amount of information that is being collected surreptitiously as people browse the
Web through nefarious “cookies,” these concerns have received more prominence.25
The defining moment in Web privacy occurred in 1999 when the Web ad serving
company Doubleclick announced that it was acquiring the direct marketing data base
company, Abacus Direct, with intentions to cross-reference Web browsing and buying
behavior with real names and addresses.
These issues are only going to become thornier as the proliferation of wireless devices
means more information about customers becoming available over time.
Some possible research topics in the privacy area are the following:
Are there ways to build privacy “screens” into current Internet systems (e.g.,
Microsoft’s P3P technology)?
How important in privacy to consumers? How does this vary globally?
What are the components of privacy?
How can a company build “trust” into its Web site?
Metrics
The increased attention paid to CRM means that the traditional metrics used by
managers to measure the success of their products and services in the marketplace
have to be updated. Financial and market-based indicators like profitability, market
share, and profit margins have been and will continue to be important. However, in a
CRM world, increased emphasis is being placed on developing measures that are
customer-centric and give the manager a better idea of how her CRM policies and
programs are working.
Some of these CRM-based measures, both Web and non-Web based are the
following:
Customer acquisition costs
Conversion rates (from lookers to buyers)
Retention/churn rates
Same customer sales rates
Loyalty measures.
Customer share or share of requirements (the share of a customer’s purchases
in a category devoted to a brand).
All of these measures imply doing a better job acquiring and processing internal data
to focus on how the company is performing at the customer level. The Future of CRM
With the increased penetration of CRM philosophies in organizations and the
concomitant rise in spending on people and products to implement them, it is clear we
will see improvements in how companies work to establish long-term relationships
with their customers. However, there is a big difference between spending money on
these people and products and making it all work: implementation of CRM practices
is still far short of ideal. Everyone has his or her own stories about poor customer
service and emails sent to companies without hearing a response. Despite several
years of experience,
Web-based companies still did not fulfill many Christmas orders in 2000 and
customers continue to have difficulties returning unwanted or defective products.
We can expect that the technologies and methodologies employed to implement the
steps shown in Exhibit 1 will improve as they usually do. More companies are
recognizing the importance of creating databases and getting creative at capturing
customer information. Real-time analyses of customer behavior on the Web for better
customer selection and targeting is already here (e.g., Net Perceptions) which permits
companies to anticipate what customers are likely to buy. Companies will learn how
to develop better communities around their brands giving customers more incentives
to identify themselves with those brands and exhibit higher levels of loyalty.
One way that some companies are developing an improved focus on CRM is through
the establishment or consideration of splitting the marketing manager job into two
parts: one for acquisition and one for retention. The kinds of skills that are need for
the two tasks are quite different. People skilled in acquisition have experience in the
usual tactical aspects of marketing: advertising, sales, etc. However, the skills for
retention can be quite different as the job requires a better understanding of the
underpinnings of satisfaction and loyalty for the particular product category. In
addition, time being a critical scarce resource makes it difficult to do an excellent job
on both acquisition and retention. As a result, some companies have appointed a chief
customer officer (CCO) whose job focuses only on customer interactions.
The “bottom line” is that companies that are not taking a customer-centric view of
their business operations are going to be passed by those that view relationship-
activities as the key to long-term profitability.
Exhibit 1
Impact of 10% Improvement in Indicator on the Current Value of E-Commerce Firms
Metric Definition Value If Improved 10% to Incr.in
Value
Attraction
Retention
Repeat-cust. Increase in revenue 21.0% 31.0% 5.8%
Revenue from repeat
Momentum customers, 1Q-2Q
Repeat-cust. % of customers who 30.2% 40.2% 9.5%
Conversion become repeat
Customers
Customer % of customers 55.3% 65.3% 6.7%
Churn rate repeating, 1st
Half of 1999
Source: McKinsey & Co. (1999)
Exhibit 2
Customer Relationship Management Model
Customer Interaction
Banks Banks
Direct
Telecom Telecom
Indirect
Retail Retail
High
Personal Computers
Furniture
Interaction Internet
Frequency Autos
Infrastructure
Low
Exhibit 4
E-mail Generates the Lowest Retention Costs
Cost per
1,000
Purchase date
Cost per sale
Customer Acquisition Customer Retention
PROGRAMS
SATISFAC-
TION
REWARDS COMMUNITY
PROGRAMS BUILDING
EMERGENCE OF CRM
Another force driving the adoption of CRM has been the total quality movement.
When companies embraced the Total Quality Management (TQM) philosophy to
improve quality and reduce costs, it became necessary to involve suppliers and
customers in implementing the program at all levels of the value chain. This created
the need for closer working relationships with customers, suppliers, and other
members of the marketing infrastructure. Thus, several companies, such as Motorola,
IBM, General Motors, Xerox, Ford, and Toyota, formed partnering relationships
with suppliers and customers to practice TQM. Other programs such as "just-in-time"
(JIT) supply and "materials-resource planning" (MRP) have also made use of
interdependent relationships between suppliers and customers .
With the advent of digital technology and complex products, the systems selling
approach has become common. This approach has emphasized the integration of
parts, supplies, and the sale of services along with the individual capital equipment.
Customers have liked the idea of systems integration and sellers have been able to sell
augmented products and services to customers. Then, the popularity of system
integration began to extend to consumer packaged goods as well as to services. At the
same time some companies started to insist upon new purchasing approaches, such as
national contracts and master purchasing agreements, forcing major vendors to
develop key account management programs. These measures created intimacy and
cooperation in the buyer-seller relationship. Instead of purchasing a product or
service, customers were more interested in buying a relationship with a vendor. The
key (or national) account management program designates account managers and
account teams that assess the customer’s needs and then husband the selling
company’s resources for the customer’s benefit.
Also, customer expectations have been changing rapidly over the last two decades.
Fueled by new technology and the growing availability of advanced product features
and services, customer expectations are changing almost on a daily basis. Consumers
are less willing to make compromises or trade-offs in product and service quality. In a
world of ever changing customer expectations, building cooperative and collaborative
relationships with customers seems to be the most prudent way to keep track of their
changing expectations and appropriately influencing them. Finally, many large
internationally oriented companies are today trying to become global by integrating
their worldwide operations. To achieve this they are seeking cooperative and
collaborative solutions for global operations from their vendors instead of merely
engaging in transactional activities with them. Such customers' needs make it
imperative for marketers interested in the business of companies that are global to
adopt CRM programs, particularly global account management programs. Global
account management (GAM) is conceptually similar to national account management
programs except that they have to be global in scope and thus more complex.
Managing customer relationships around the world calls for external and internal
partnering activities, including partnering across a firm’s worldwide organization.
A CRM Process Framework
The formation process of CRM refers to the decisions regarding initiation of relational
activities for a firm with respect to a specific group of customers or to an individual
customer with whom the company wishes to engage in a cooperative or collaborative
relationship. Hence, it is important that a company be able to identify and differentiate
individual customers. In the formation process, there are three important decision
areas: defining the purpose (or objectives) of engaging in CRM; selecting parties (or
customer partners) for appropriate CRM programs; and developing programs (or
relational activity schemes) for relationship engagement with the customer.
The Purpose of CRM and Its Operational Goals. The overall purpose of CRM is to
improve marketing productivity and to enhance mutual value for the parties involved
in the relationship. Improving marketing productivity and creating mutual values can
be achieved by increasing marketing efficiencies and/or enhancing marketing
effectiveness. By seeking and achieving such operational goals as lower distribution
costs, streamlining order processing and inventory management, reducing the burden
of excessive customer acquisition costs, and by considering the economics of
customer retention, firms can achieve greater marketing efficiencies. They can also
enhance marketing effectiveness by carefully selecting customers for their various
programs, by individualizing and personalizing their market offerings to anticipate
and serve the emerging needs of individual customers, by building customer loyalty
and commitment; by partnering to enter new markets and develop new products, and
by redefining the competitive playing field for their company. Thus, stating the
objectives and defining the purpose of CRM in a company helps clarify the nature of
the CRM programs and activities that ought to be performed by the partners.
Defining the purpose also makes identifying the relationship partners with the
necessary expectations and capabilities to fulfill mutual goals an easier task.
Furthermore, it helps in the evaluation of the CRM performance. The results achieved
can be compared to the objectives. These objectives can be specified as financial
goals, marketing goals, strategic goals, operational goals, and organizational goals.
Similarly, in the mass-market context, consumers expect to fulfill their goals related
to efficiencies and effectiveness in their purchase and consumption behaviour.
Consumers are motivated to engage in relational behavior because of the
psychological and sociological benefits associated with reduction in choice decisions.
In addition, to their natural inclination to reduce choices, consumers are motivated to
seek the rewards and associated benefits offered by CRM programs.
Relational Parties and Partners. Customer partner selection (or parties with whom to
engage in cooperative or collaborative relationships) is another important decision in
the relationship formation stage. Even though a company may serve all customer
types, few have the necessary resources and commitment to establish CRM programs
for all. Therefore, in the initial phase, companies have to decide on which customer
types and specific customers or customer groups to focus their CRM efforts on.
Subsequently, when a company gains experience and achieves successful results, the
scope of CRM activities can be expanded to include other customers in the program
or to include additional programs.
Although partner selection is an important decision in achieving CRM goals, not all
companies have a formalized process of selecting customer partners. Some select
customer partners by following the intuitive judgments of their senior managers and
select other partners from those customers who demand to be selected. On the other
hand, other companies do have formalized processes of selecting relational partners
through the use of extensive research and the evaluation of chosen criteria. The
criteria for partner selection vary according to company goals and policies. They can
range from a single criterion such as the revenue potential of the customer to multiple
criteria that include variables such as customer commitment, resourcefulness,
management values, technological and market leadership, national and global
presence, strategic value, and complementary business processes. When several
criteria are applied and a complex model developed, it is necessary to test its validity
based on strategic fit and the distinctive competitive advantage to the firm.
A careful review of the literature and the observation of corporate practices suggest
that there are several types of CRM programs. Broadly specified, they fall into the
following three categories: continuity marketing, one-to-one marketing, and
partnering programs. Each one of these can take different forms depending on
whether they are meant for end-consumers, distributor customers, or business-
tobusiness customers. Obviously, marketing practitioners in search of new creative
ideas are able to develop many variations and combinations of CRM programs to
build mutually beneficial relationships with their customers.
However, the essence of CRM programs is customer selectivity. It has now become
common knowledge that the value of all customers is not equal. The 80/20 rule
prevails whereby we have learned that 20 percent of customers generate more than 80
percent of revenues for most companies, and it is not uncommon to find that an even
lower percentage of customers can generate more than 80 to 90 percent of the
revenues. Under such circumstances, it is not prudent for a company to allocate equal
resources to all customers. Customer segmentation and program differentiation is
needed in order to match revenue potential with service offerings. Those with
higher revenue potential deserve a greater allocation of costs and service. Otherwise,
competitors will seize the opportunity by offering better service and a greater
allocation of resources for the high-end customers. At the lower-end, attempts should
be made to achieve cost savings through the reallocation of efforts based on less-
expensive resources.
Average Revenue/Customer
Average Cost/
Customer
Proportionate
Relationship
Competitor
Response
Prevalent Practice
Opportunity
Zone
Functional Support
Degree of
Integration
Loyalty
Marketing
Major Account
Relationship
Key Account
Relationship
Strategic
Partnering
Database and
eCRM Program
Once a CRM program is developed and rolled out, the program as well as the
individual relationships must be managed and governed. For massmarket customers,
the degree to which there is symmetry or asymmetry in the primary responsibility for
whether the customer or the program sponsoring company will be managing the
relationship varies with the size of the market. However, for programs directed at
distributors and business customers the management of the relationship would require
the involvement of both parties. The degree to which these governance
responsibilities are shared or managed independently will depend on the perception of
the norms of the governance processes among the relational partners given the nature
of their CRM program and the purpose of engaging in the relationship. Not all
relationships are or should be managed alike. In fact, several studies suggest
appropriate governance norms for different hybrid relationships.
Several human resources decisions are also important in creating the right
organization and climate for managing relationship marketing. Training employees to
interact with customers, to work in teams, and manage relationship expectations is
important. So is the issue of creating the right motivation through incentives, rewards,
and compensation systems towards building stronger relationship bonds and customer
commitment. Although institutionalizing the relationship is desirable for the long-
term benefit of the company, personal relationships are nevertheless formed and have
an impact on the institutional relationship. Thus needed is proper training and
motivation of employees to professionally handle customer relationships.
Finally, proper monitoring processes are needed to safeguard against failure and
manage conflicts in relationships. Monitoring processes include periodic evaluation of
goals and results, initiating changes in the relationship structure, design, or the
governance process if needed, and creating a system for discussing problems and
resolving conflicts. Good monitoring procedures help avoid relationship
destabilization and the creation of power asymmetries. They also help keep CRM
programs on track given proper alignment of goals, results, and resources.
One of the most interesting aspects of CRM development is the multitude of customer
interfaces that a company has to manage in today’s world. Until recently, a
company’s direct interface with customers, if any, was primarily through sales people
or service agents. In today’s business environment, most companies interface with
their customers through a variety of channels including sales people, service
personnel, call centers, Internet websites, marketing departments, fulfillment houses,
market and business development agents, and so forth. For large customers, it also
includes cross-functional teams that may include personnel from various functional
departments. Although each of these units could operate independently, they still need
to share information about individual customers and their interactions with the
company on a real-time basis. For example, a customer who just placed an order on
the Internet and subsequently calls the call center for order verification expects the
call center staff to know the details of his or her order history. Similarly, a customer
approached by a sales person unaware of the fact that the customer had recently
complained about dissatisfactory customer service is not likely to be treated kindly by
the customer. On the other hand, if the salesperson was aware of the problem
encountered by the customer, the complaint, and the action already initiated to resolve
the complaint, the salesperson would be in a relatively good position to handle the
situation well. Therefore, effective CRM implementation requires a front-line
information system that shares relevant customer information across all interface
units. Relational databases, data warehousing, and data mining tools are thus very
valuable for CRM systems and solutions.
The challenge is to develop an integrated CRM platform that collects relevant data
input at each customer interface and simultaneously provides knowledge output about
the strategy and tactics suitable to win customer business and loyalty. For example, if
call center personnel cannot identify and differentiate a high value customer and do
not know what to upsell or cross-sell to this customer, it could mean a tremendous
opportunity lost. Although most CRM software solutions based on relational
databases are helping share customer information, they still do not provide knowledge
output to the front-line personnel. As shown in figure 4, the CRM solutions platform
needs to be based on interactive technology and processes. It should assist the
company in developing and enhancing customer interactions and one-to-one
marketing through the application of suitable intelligent agents that help develop the
front-line relationship with customers. Such a system would identify appropriate data
inputs at each customer interaction site and use analytical platforms to generate
appropriate knowledge output for front-line staff during customer interactions. In
addition, implementation tools to support interactive solutions for customer
profitability analysis, customer segmentation, demand generation, account planning,
opportunity management, contact management, integrated marketing
communications, customer care strategies, customer problem solving, virtual team
management of large global accounts, and measuring CRM performance would be the
next level of solutions sought by most enterprises.
In the past three decades, there have been at least three successes and three failures in
the journey from domain to discipline. The three successes are consumer behavior,
marketing strategy, and services marketing. The three that have failed to become
distinct disciplines even though domain knowledge exits are international marketing,
social marketing, and business marketing. By analyzing and understanding why they
failed or succeeded in becoming disciplines of marketing, we arrived at the following
insights aimed at ensuring that customer relationship management and relationship
marketing becomes a distinct discipline in marketing.
Delimit the Domain. The concept of relationship and relational behavior is universal.
It is a part of physical, animal, plant, and human sciences. Therefore, every discipline
has applications and implications related to relational behavior. Indeed, it is so
universal that the most widely used statistical technique is correlation, or the
relationship between two or more phenomena, whether bivariate or multivariate in
nature. Therefore, it is not only easy but also tempting to extend the concept of
relationship beyond marketing and beyond business, but then it would lose its identity
and uniqueness. This is analogous to consumer behavior, which is only one subset
domain among all human behaviors—that is, the behavior and the roles people
manifest as consumers in contrast to the roles of producers, middlemen, citizens, or
family members. In short, relationship marketing must be limited to the discipline of
marketing, which is focused on understanding and managing customers and their
buying, paying, and consuming behaviors.
What is needed is a definition that will articulate the uniqueness of the concept, one
stating CRM's own distinct properties, similar to what has been done related to
services marketing. There are at least three aspects unique to CRM and relationship
marketing. First, it relates to a one-to-one relationship between the marketer and the
customer. In other words, relationships cannot be pursued in the aggregate; they must
be handled at the individual-entity level. Second, it occurs as an interactive process
and not as a transactional exchange. This is a fundamental distinction because
marketing is founded on the principle of exchange and transactions. CRM, however,
is all about interaction and activities; it involves co-production and co-consumption in
which time, location, and identity boundaries between the supplier and the customers
blur into one extended supply-and-demand chain of management. At the same time,
each member in the value chain is a distinct and independent organization with its
own capital and management, and, therefore, there is a virtually integrated network of
organizations and not a traditional vertically integrated organization.
The third, and equally important, unique aspect of customer relationship management
is that it is a value-added activity through mutual interdependence and collaboration
between suppliers and customers. Just as hardware and software create a symbiotic
value addition, where one without the other is less useful to users and consumers,
customer relationship management adds value through collaborative and partnering
mindsets and the resulting behaviors of the suppliers and customers. This is very
obvious in services industries where the user must cooperate and collaborate with the
provider whether it is a doctor, an accountant, a lawyer, or a teacher. It is also
becoming more the case with automated services such as automatic teller machines,
telephone answering systems, and gasoline pumps. Finally, with electronic ordering
and Internet commerce, it is also becoming prevalent for traditional product offerings,
especially in business-to-business marketing.
Build Respectable Databases. Perhaps the single biggest lesson we can learn from
marketing strategy is the access to PIMS databases with measures of financial
performance. We believe that customer relationship management needs to access
similar data from corporations and service bureaus. It was the availability of
household panel data on more than 200 consumer products that led to quantitative
performance measures of brand loyalty in consumer behavior. Today, it is the
availability of scanner data through IRI and A.C. Nielsen that is propelling scientific
research on brand equity. A CRM database that represents a general barometer of
customer relationships would be very valuable for academic research as well as for
companies and societal agencies interested in monitoring the progress of how
companies are doing with respect to their relationship with their most important
stakeholder. Develop Performance Metrics. It is equally important that we develop
some standardized metrics to measure CRM’s performance as well as antecedents
that are likely to be its determinants. For example, SERVQUAL, a standardized
instrument to measure service quality, is now utilized across national boundaries,
similar to the Myers-Briggs personality test or the 360- degree feedback for
management performance.
Publish in Top Journals. The Medium is the message. Therefore, it is very important
for an emerging discipline’s researchers to publish in first-tier journals of the main
discipline. These journals provide source credibility and legitimacy. Unfortunately, it
is also not easy to get published in first-tier journals, especially if the emerging
discipline is part of a paradigm shift. Resistance to changing or challenging a
discipline’s law-like generalizations is pervasive, and it takes strong editorial
leadership or a revolt by a journal’s readership to encourage innovation. However,
there are two alternatives to publishing in mainstream first-tier journals. The first is to
create a new journal devoted to the emerging discipline, but the success of this
strategy depends to a large extent on the new journal gaining the same academic
reputation as the traditional journals in the discipline. This is precisely what happened
in consumer behavior with the successful creation of the Journal of Consumer
Research and, more recently, with Marketing Science for modeling scholars.
The second alternative is to publish a seminal book on the topic. Indeed, there are
numerous examples of this in all disciplines. Books and monographs have often made
greater impacts on disciplines than the journals probably because of their wider reach
and distribution. Most journals have very limited circulation when compared to
books. That is what happened with the publication of Howard and Sheth’s The Theory
of Buyer Behavior (1969) and with Michael Porter’s Competitive Strategy (1980).
More recently, even such popular professional books on management as In Search
of Excellence (Peters & Waterman, 1982) and Reengineering the Corporation
(Hammer & Champy, 1993) have had a significant impact on business disciplines.
Encourage Respected Scholars. We must learn from the consumer behavior discipline
in marketing as well as from finance and accounting disciplines about this reality.
Finance became even more respectable when well-trained and well-known
economists got interested in finance. Similarly, rural sociology became more
respectable when top sociologists began to focus on that area, which led to seminal
theories such as the diffusion of innovation. Similarly, both behavioral concepts and
psychometric methodology enhanced accounting making it a discipline and not just
a double-entry system of practice. In addition, consumer behavior became
respectable when psychologists, modelers, and economists began to focus their time
and talent on the issue. CRM and relationship marketing need a similar infusion of
respected marketing scholars, especially those who can add conceptual and
methodological rigor to the domain. Since CRM and relationship marketing are very
popular, at least in practice, we believe that it is likely to attract respected scholars.
Develop Explanatory Theory. No domain has ever become a discipline without some
explanatory theory, or at least the development of some constructs. Fortunately,
relationship marketing and CRM have had a good start in this direction. A number of
constructs including trust, commitment, and long-term orientation have emerged as
the building blocks of a theory. Also, even if we cannot develop a theory, it is
important that we develop at least some law-like generalizations comparable to
product life cycle, diffusion of innovation, and PIMS research. However, no matter
what we do, it is important that we make sure that the constructs and the law-like
generalizations are unique and distinct to CRM and relationship marketing. In this
regard, trust and commitment may not be unique because even for a one-time
transaction, such as buying a home, there must be a minimum level of trust and
commitment between the seller and the buyer. On the other hand, the concept of
collaboration is unique because it is not characteristic of other types of marketing
relationships.
The differentiation of service implies that different customers receive a different level
of service and a different product from the organisation, depending on the value to the
organisation and their specific needs. This requires the organisation to identify the top
(or most significant) customers and adapt service accordingly. Identification of these
top customers takes place using sales figures or by calculating the CLV associated
with each customer. As the organisation is aware of the value of their customers,
service levels can be adjusted accordingly. The hypothesis regarding this aspect is
formulated as follows:
H2: Differentiating between the services offered to new and existing clients increases
the level of customer service.
Step 3: Interaction with customers
This step refers to the importance of interacting with the customer in relationship
building efforts through a variety of communication tools and technologies. This is
necessary as the relationship can only develop and be sustained if there is
communication with the customers regarding their needs, perceptions and desires.
This involves developing methods of communication proactively with customers
regarding the organisation’s products and attempting to initiate dialogue with
customers. Use can be made of technology, but this is not essential. The customers
with whom communication takes place are not necessarily all the customers, but only
those that the organisation regards as being strategically significant. This interaction
with the organisation increases the expectations of the customers regarding the service
received as well as the quality of the relationship. The hypothesis regarding this
aspect is formulated as follows:
H3: The level of customer service is increased if there is an active interaction with
potential and existing clients.
RESEARCH DESIGN
Research objectives
The survey was conducted among clients in a leading retail bank in South Africa. The
primary research objective was to determine how the implementing of a CRM
programme could optimise the relationship between a leading bank and its clients, and
thereby to gain competitive advantage in the marketplace. Hypotheses linked to each
step was formulated.
Statistical analysis
The statistical treatment of the study included the determination of the association
between the steps in the CRM model and the customer service offered by the
organisation. Use was made of Pearson’s coefficient to determine the level of
association between the steps in the implementation process as discussed earlier and
customer service. The level of association as measured by Pearson’s co-efficient falls
between -1.0 and +1.0, which indicates the strength and direction of association
between the two variables. The Rules of Thumb proposed by Burns & Bush suggests
that “moderate” ends at ±0.60, and “strong” starts at ± 0.61.
It is also necessary to determine a score (p-value) to evaluate the probability that the
correlation (r) falls within a desired significance level. The lower the p-value, the
stronger the evidence against the null hypothesis, hence the acceptance of the
alternative hypothesis.
VARIABLE
Variable one (independent variable)
Variable two (dependent variable)
Pearson value (r) p-value
Differentiation Customer service 0.5952 0.00
With a Pearson value (r) of 0.5952, the correlation is moderately positive as the r
value of 0.5952 is less than 0.6. The association between differentiation and customer
service is statistically significant because of the p-value of 0.00, resulting in the
acceptance of the alternative hypothesis. The strength of this association is seen in the
p-value of 0.00 obtained and depicted above.
H3: The level of customer service is increased if there is an active interaction with
potential and existing clients.
Statistical null hypothesis: Ho: r = 0
Statistical alternative hypothesis: Ha: r ≠ 0
VARIABLE
Variable one (independent variable)
Variable two (dependent variable)
Pearson value (r) p-value
Interaction Customer service 0.598 0.00
With a Pearson value (r) of 0.598, the correlation is moderately positive as the r value
of 0.598 is less than 0.6. The association between interaction and customer service is
statistically significant because of the pvalue of 0.00, resulting in the acceptance of
the alternative hypothesis. This association is also a strong one due to the p-value of
0.00 obtained and depicted above.
H4: The level of customer service is increased if customised service is offered
according to each individual client’s needs.
Statistical null hypothesis: Ho: r = 0
Statistical alternative hypothesis: Ha: r ≠ 0
VARIABLE
Variable one (independent variable)
Variable two (dependent variable) Pearson value (r) p-value
Customised service Customer service 0.5912 0.00
With a Pearson value (r) of 0.5912, the correlation is moderately positive as the r
value of 0.5912 is less than 0.6. The association between customised service and
customer service is statistically significant because of the p-value of 0.00, resulting in
the acceptance of the alternative hypothesis. This also shows a positive relationship
between these two factors, and the strength of the relationship is seen in the p-value
obtained.
Workflow of CRM
Privacy Concerns
The recognition of privacy has increased in today’s society, and companies should
handle personal information with extreme care. “Adequately addressing privacy
concerns will be a top business priority,” Scott Nelson, vice president and research
area director for Gartner, has said, continuing that: “This is going to require
rethinking of how information is gathered, how customers can access and control that
data and how enterprises can safeguard it from parties that might want it but
shouldn’t have it.”
Although personalization and customization are the key features of CRM, companies
need to balance these attributes with privacy.
On November 8, 2004 the Wall Street Journal gave an account of the new customer
approach of Best Buy Co., Inc., the top company in the United States in the
consumer-electronics retail industry. This account said that it “estimates that as many
as 100 million of its customer visits each year are undesirable,” and Brad Anderson,
CEO of the company “wants to be rid of these customers.”These figures were true
and derived from actual data; nevertheless the company should have given careful
consideration to the effect of these kinds of sentiments being disclosed in public. The
week after this article appeared, the Wall Street Journal published letters from angry
consumers, and Dell, one of the Best Buy’s main competitors, ran an advertisement in
The New York Times, which said “At Dell, We Love All Customers. Even the Ones
Best Buy Doesn’t.”In this case, Best Buy did not infringe on the law, but they
certainly made privacy advocates nervous.
Japan
In Japan, CRM has gradually become accepted, and software has been sold mainly to
large companies. As of now, the market size for CRM in Japan is still small, only
about 1/20 as large as in the United States. But, in 2006, Microsoft entered the
market, aiming at small and medium-sized companies.Thus, the market will be
expanding before too long. Total revenues have already increased dramatically and
are expected to continue to do so for the foreseeable future.
Conclusions
The domain of customer relationship management extends into many areas of
marketing and strategic decisions. Its recent prominence is facilitated by the
convergence of several other paradigms of marketing and by corporate initiatives that
have developed around the theme of cooperation and the collaboration of
organizational units and their stakeholders, including customers. CRM refers to a
conceptually broad phenomenon of business activity, and if the phenomenon of
cooperation and collaboration with customers becomes the dominant paradigm of
marketing practice and research, CRM has the potential to emerge as the predominant
perspective of marketing. From the corporate implementation point of view, CRM
should not be misunderstood to simply mean a software solution implementation
project. Building relationships with customers is a fundamental business of every
enterprise, and it requires a holistic strategy and process to make it successful.
From an academic standpoint an important question is whether CRM or relationship
marketing will become a well-respected, freestanding, and distinct discipline in
marketing. Our belief is that it certainly has the potential, and we wish that it would
happen because marketing will benefit enormously from it. The lessons learned from
previous efforts, both successful and unsuccessful, of various marketing domains that
have tried to become disciplines provide a good road map of how to develop CRM
and relationship marketing into a distinct discipline. As an intervention strategy, it
would be highly desirable for relationship marketing and CRM scholars to organize
their own association and their own scholarly journal.
The issue of CRM and customer service are vital in the developing environment as
customer expectations increase. This is especially the case in developing countries
where changes in customer expectations are linked to increasing educational standards
and literacy. This study has indicated that the implementation of a one-to-one
marketing of financial services in emerging markets do not differ from the way in
which it would be implemented among customers in other economies. This requires
organisation in developing environments to pay attention to the issues of customer
needs and differentiation in order to building long term customer relationships.
Limitations of the study include the fact that this was an exploratory study that has
been conducted within the South African context, and specifically the financial
services sector. The degree to which the finding can be generalised is also limited in
scope. Further, the question of the existence of the halo effect in the findings can be
raised. The halo effect refers to the bias that is introduced by carrying over a general
impression from one area to another. This means that the responses received in one
area relating to customer service are carried over into other areas in investigation.
It is however proposed that future research could be conducted to determine whether
these findings are consistent with other financial institutions in South Africa and
whether similar findings would be obtained in another industry, such as the insurance
industry.
Is CRM a Panacea?
All companies putting CRM to practical use? The answer is “No.” In fact, there is one
exceptional case for implementing CRM. The essential qualification for
implementing CRM is a high “frequency of customers’ purchases.” Without frequent
interaction, it is difficult for company to maintain a dialogue with its customers in
order to persuade them to buy more of its products. For instance, a construction
company that builds large bridges that have useful lives of 100 years or more does not
need to implement CRM.
Closing Remarks
CRM is not a system, but a philosophy. If it is utilized it with care and attention, it
will have a positive effect on a number of organizations.
BIBLIOGRAPHY
www.google.ac.in
www.wikipedia.com
www.amazon.com