Customer Pyramid: A Proven CRM Strategy

(10/6/2004) CRM Project Volume 5

By Jay Curry, Customer Marketing International BV
http://www.crmproject.com/documents.asp?d_ID=2871

Customer marketing is a business method that uses process control techniques to

measure, manage and improve customer performance and customer focus.

Seventy percent of CRM projects fail to deliver positive results. The trade press and analysts
have been repeating this “fact” for a number of years. But is it true? CRMGuru, a CRM portal,
decided to find out. It commissioned a rigorous study of more than 600 CRM implementation
projects and concluded that:

 45 percent of the CRM implementation projects delivered a positive ROI;

 20 percent of the CRM implementation projects were earning profits, with a full payback
and ROI likely; and
 The remaining 35 percent of the CRM implementation projects were not likely to show
any ROI – largely because these failures were self-inflicted, with the companies not
implementing what the study showed to be the critical success factors of CRM.

And what were these critical success factors? There were four found to be statistically relevant:

1. The company must follow customer centric strategies, including the use of customer
satisfaction data, tracking numbers of customers gained or lost and installation of “voice of the
customer” programs. (This factor was clearly the most important.)

2. Intensive training and coaching of front-line managers and staff.

3. The ability to manage change.

4. Establishing measurable goals.

Despite the claims of CRM software suppliers, the choice of a CRM package made no
difference. Highly publicized and heavily promoted packages did not gain any more ROI than
lesser-known competitors.

The conclusion: CEOs must first develop customer centric programs as the highest priority
when considering CRM for their companies. Customer marketing is one of these strategies.

The Short History Of Customer Marketing

I originated customer marketing in 1989 as an American direct marketing consultant based in

Amsterdam. For several years I had been confronted with a lot of confusion – and negative
attitudes – about direct marketing among European CEOs. When invited in 1989 to present a
seminar on direct marketing to a high-level audience, I decided to resolve the issue
completely.

I declared that “direct marketing” was actually “customer marketing,” the process of finding,
making, keeping, and developing customers. And I demonstrated the concept with “customer
pyramids” and a simple 10-step action plan.

Encouraged by the response of the audience, I elaborated the concept in my first book,
Customer Marketing, which was published in the Netherlands, the United Kingdom, Germany,
Spain, Italy, Japan and China.
In 1997 the European Commission, recognizing the innovative character of customer
marketing, funded project ACUMAP – A Customer Marketing Pilot, designed to validate the
method and support the development of software, tools, and training materials that could help
European companies maintain a competitive advantage.

The ACUMAP project was successfully completed in June 1998, which resulted in a validated
method to help companies implement and profit from what is now known as “customer
relationship management.” Since early in 2000, Customer Marketing International BV, based in
Amsterdam, has brought to market the customer marketing method and tools.

The Definition Of Customer Marketing

Customer marketing is a business method that uses process control techniques to measure,
manage, and improve customer performance and customer focus. The customer performance
factors are:

 Customer profitability;
 Customer behavior; and
 Customer satisfaction.

The internal customer focus factors are:

 Organization;
 Communications; and
 Information.

The customer marketing method is represented graphically in a pyramid (see Figure 1). Let’s
look at this in more detail.

The Customer Performance Factors

Customer Value
Operational profit is the result of deducting the losses from unprofitable customers from the
profit generated from profitable customers. It’s as simple as that. Hence the need to maximize
customer profitability, as measured in profit per customer and customer lifetime value.

Customer Behavior

While cost factors play an important role in the profitability of a customer, customer value is,
to a large extent, determined by customer behavior. Customer behavior is usually measured in
terms of revenue – either monetary or volume of product or services ordered over a period of
time. Positive customer behavior means, in the first place, that a customer is a customer – he
buys from you.

A second customer behavior parameter is customer lifetime, or the average length of time as
measured in months or years that the average customer does business with you.

A third and important customer behavior factor is share of customer: the extent to which a
customer meets his needs for the kinds of products or services by doing business with you.

Customer Satisfaction

Happy and satisfied customers behave in a positive manner. They will buy a lot from you and
will give you a large share of their business. Customer satisfaction is derived largely from the
quality and reliability of your products and services. You make good on your explicit and
implied promises.

But customers who are just “satisfied” are likely to walk away for a slightly more attractive
proposition from your competitor. The major goal of a customer satisfaction program should be
to achieve “preferred supplier” status with as many customers as possible.

The Customer Focus Factors

Customer performance – customer value, customer behavior, and customer satisfaction – is

something that happens outside the company. But customer performance is predominantly
determined by customer focus factors inside the company and has a major impact on customer
performance.

There are three primary and six secondary customer focus factors:

Organization

1. Managers are committed to customer focus, set an example for themselves, and budget
time and money for customer process improvement.

2. Employees possess the necessary customer care skills and experience, have a customer
care attitude, and work in teams with others who have customer contacts.

Communications

3. Contact logistics: Customer communications are well planned, on time, and have no
sloppiness in execution.

4. The most appropriate methods, media and messages are applied to each customer
(segment); communications are interactive and stress customer benefits rather than product
features.

Information
5. Customer data is relevant, complete and up to date.

6. Customer information systems are effective, flexible, and userfriendly.

There is clearly a direct correlation between customer focus and customer performance. All
things being equal, if you can improve your customer focus, you will improve customer
performance.

Putting customer performance and customer focus together brings us to a CRM model. The
model represents the idea that if your internal customer focus is strong, your customers will be
very satisfied.

And if your customers are very satisfied, they will behave very nicely, giving you a large part
of their business, often without any major marketing and sales effort or squeezing every cent
off the price. (“Send me another thousand widgets and the invoice.”) This positive customer
behavior will lead to higher customer value – and therefore more operational profit!

It’s quite a simple concept. But if you can’t measure the factors in the CRM model, you can’t
manage them. There is a whole group of professionals out there measuring your profits – the
accountants. But is anyone measuring customer profitability, customer behavior, customer
satisfaction, and customer focus so that they can be managed and improved?

The answer all too often is: not really. That’s why process control techniques are also needed.

Process Control Techniques

Managing customer performance and customer focus is not really possible without measuring
progress and results. Marketing, sales, and service must be subjected to the same process
control techniques that are often used for production, logistics, and administration: Customer
marketing is carried out on a continuing basis applying the four phases of process control:

Registration

 Customer performance registration: You acquire or integrate from internal sources data
on customer profitability, behavior, and satisfaction.
 Customer focus registration: You undertake a customer focus audit or self-assessment
of your customer information, communications, and organization.

Analysis

 Customer performance analysis: You analyze the profitability, behavior, and satisfaction
of your customers and prospects to identify problems and opportunities.
 Customer focus analysis: You analyze the current status of your customer information,
communications, and organization and identify priorities for improvement.

Planning

 Customer performance planning: You set top-down/bottom-up profitability, revenue

and satisfaction targets for each customer (and prospect) that, when realized, will meet
corporate goals for profitability, revenues, and satisfaction.
 Customer focus planning: You make plans to make measurable improvements in your
customer information, communications and organization.

Realization

 Customer performance realization: You execute customer performance plans.

  Customer focus realization: You execute customer focus plans.

You may well be thinking that customer marketing looks great, in theory. But does it work in
the real world?

Telecom Company Case Study

The customer marketing case study illustrated in Figure 2 was a pilot project at the regional
office of a national telecom company. The pilot region was responsible for marketing and sales
of telephone services to small and medium-size businesses. Because the European Commission
funded the pilot, the results were closely followed and highly documented.

Customer Value

Despite the entrance of competition because of deregulation, traffic revenues in the pilot
region increased by no less than 22 percent. But marketing costs remained about the same as
the previous year, leading to a sharp growth in profits.

Customer Behavior

All of the 7,248 customers in the pilot region were identified and their behavior traced. It was
thus possible to see that the increased turnover was the result of improved customer behavior:
27.7 percent (2,013) of the customers migrated up the pyramid; only 2.1 percent (150) went
down, and 70 percent (5,085) remained in their pyramid position.

Customer Satisfaction

The percentage of highly satisfied customers in the pilot region had doubled after one year of
customer marketing. The pilot region scored substantially higher than the national company.