Achieving Excellence through Customer Management

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Customer Relationship Management is a holistic strategic approach to managing customer relationships to increase shareholder value, and this major Handbook of CRM gives complete coverage of the key concepts in this vital field. It is about achieving a total understanding of the concepts that underlie successful CRM rather than the plethora of systems that can be used to implement it. Based on recent knowledge, it is underpinned by:

* Clear and comprehensive explanations of the key concepts in the field * Vignettes and full cases from major businesses internationally * Definitive references and notes to further sources of information on every aspect of CRM * Templates and audit advice for assessing your own CRM needs and targets The most lucid, comprehensive and important overview of the subject and an invaluable tool in enabling the connection of the major principles to the real world of business. * A definitive, heavily researched, comprehensive overview * Key concepts allied to action templates * Written by one of the first major marketing thinkers in the field and based on Cranfield Business School’s internationally acknowledged leadership in the field.

A strategic framework for CRM

Customer Relationship Management, or CRM, is increasingly found at the top of corporate agendas. Companies large and small across a variety of sectors are embracing CRM as a major element of corporate strategy for two important reasons: new technologies now enable companies to target chosen market segments, micro-segments or individual customers more precisely and new marketing thinking has recognized the limitations of traditional marketing and the potential of more customer-focused, process-based strategies.

CRM, also more recently called ‘customer management’, is a business approach that seeks to create, develop and enhance relationships with carefully targeted customers in order to improve customer value and corporate profitability and thereby maximize shareholder value. CRM is often associated with utilizing information technology to implement relationship marketing strategies.

As such, CRM unites the potential of new technologies and new marketing thinking to deliver profitable, long-term relationships. Although the term CRM is relatively new, the principles behind it are not unfamiliar. Organizations have for a long time practised some form of customer relationship management.

What sets present-day CRM apart is that organizations can manage one-to-one relationships with their customers – all one thousand or one million of them. In effect, CRM represents a renewed perspective of managing customer relationships based on relationship marketing principles; the key difference being that today these principles are applied in the context of unprecedented technological innovation and market transformation.

The marketplace of the twenty-first century bears little resemblance to bygone eras characterized by relatively stable customer bases and solid market niches. Nowadays, customers represent a moving target and even the most established market leaders can be ousted quickly from their dominant positions. The urgent need to find alternative routes to competitive advantage has been driven by profound changes in the business environment, including:

the growth and diversity of competition; the development and availability of new technology; the escalating expectations and empowerment of the individual; the advent of a global operating environment; and the erosion of conventional timeframes in this electronic-enabled era. These changes have reinforced the adoption of wider business horizons and more customer-oriented perspectives.

Companies have realized that it is no longer simply enough to offer excellent products: ease of duplication and market saturation can quickly dispel initial indications of a winning formula. Today’s key differentiator is exceptional service provided on a consistent and distinctive basis. Service is more difficult to imitate than a product because service requires customer input and involvement. Competitive advantage can, therefore, be gained by leveraging the knowledge of customers’ expectations, preferences and behaviour. This involves creating an ongoing dialogue with customers and exploiting the information and insights obtained at every customer touchpoint.

The key principles of relationship marketing

Figure 1.1 suggests three distinguishing characteristics of relationship marketing. The first is an emphasis on customer retention and extending the ‘lifetime value’ of customers through strategies that focus on retaining targeted customers. The second is a recognition that companies need to develop relationships with a number of stakeholders, or ‘market domains’, if they are to achieve long-term success in the final marketplace. The third feature of relationship marketing is that marketing is seen as a pan-company or cross-functional responsibility and not solely the concern of the marketing department.

An emphasis on retention of profitable customers

Maximizing the lifetime value of a customer is a fundamental goal of relationship marketing. In this context, we define the lifetime value of a customer as the future flow of net profit, discounted back to the present, that can be attributed to a specific customer.

Adopting the principle of maximizing customer lifetime value forces the organization to recognize that not all customers are equally profitable and that it must devise strategies to enhance the profitability of those customers it seeks to target. Loyal customers are an intangible asset that adds value to the balance sheet.

They represent the goodwill earned by the brand. Domino’s Pizza chain in the USA, for example, estimates that a customer who purchases one pizza for $5 may represent a net worth of approximately $5000 over the 10-year life of a Domino franchise. Similarly, the Ford Motor Company has calculated that a loyal Ford customer is worth $142 000 over their lifetime. Loyal and repeat customers not only contribute revenue by returning, again and again, to purchase from the same company or brand but act as advocates, referring new customers and reducing acquisition costs.

An emphasis on multiple markets

Relationship marketing focuses marketing action on multiple stakeholder markets. The six markets stakeholder model3 provides a useful A strategic framework for CRM 9 HCRM-Ch01.qxd 9/16/05 10:46 Page 9 framework for reviewing the role of an extended set of stakeholders.

The model identifies six key groups, or market domains, that contribute to an organization’s effectiveness in the marketplace. They are customer markets, influencer (including shareholder) markets, recruitment markets, referral markets, internal markets, and supplier/ alliance markets. Each market domain is made up of a number of key participants.

Customer markets, for example, may include wholesalers, intermediaries, and consumers, while influencer markets may comprise financial and investor groups, unions, industry and regulatory bodies, business press and media, user and evaluator groups, environmental groups, political and government agencies, and competitors. Relationship marketing recognizes that multiple market domains can directly or indirectly affect a business’s ability to win and keep profitable customers.

An emphasis on a cross-functional approach to marketing

For a long time marketing strategies have been developed within functionally based marketing departments. As a result, the marketing strategies developed often do not take into account their organization-wide implications. The problem is that they are functionally focused not market focused. They typically seek to optimize the use of inputs and hence are budget-driven, rather than seek to optimize around outputs and hence be market-driven.

Rarely do they consider the interrelationship of different shareholders? To succeed in managing multiple stakeholders effectively, marketing must be cross-functional. David Packard, the co-founder of Hewlett-Packard, is reported to have said that ‘marketing is too important to be left to the marketing department’.

His comment could be interpreted in a number of ways, but we understand it as a call to bring marketing out of its functional silo and extend the concept and the philosophy of marketing across the business enterprise. In practice, a cross-functional approach to marketing requires an organizational culture and climate that encourages collaboration and cooperation. Everyone within the business must understand that they perform a role in serving customers, be they internal or external customers.

Deploying IT to maximize the value of information

The development of customer relationships is enabled by the deliberate exploitation of customer information. The investment that CRM requires in terms of IT infrastructure is often substantial and has to be justified in terms of both cost savings and profit generation.

Many organizations that have already adopted enterprise resource planning (ERP) to improve internal efficiencies are now turning to CRM better to respond to individual customer’s needs. Whereas ERP employs customer and other information to reduce costs by improving internal efficiencies in back-office processes related to manufacturing and finance, CRM emphasizes the use of customer information to enhance revenue by increasing external effectiveness in front office activities including sales, marketing and customer 14 Handbook of CRM:

Achieving Excellence in Customer Management HCRM-Ch01.qxd 9/16/05 10:46 Page 14 service and support. However, a firm’s ability to exploit the value of information relies heavily on the existence of a supportive IT environment.

A CRM system has two major IT components: a data repository that enables the organization to collect a complete set of information on customers (used with a set of analytical tools to develop a better understanding of customers in terms of past and likely future behavior); and a set of applications that enable value-adding interactions with customers, often across different channels, in order to meet their needs. Technological innovations such as clever screen prompt, which advise customer service representatives of a customer’s profile and appropriate call center tactics can be used to increase cross-selling and upselling, provided that staff is suitably trained, equipped and motivated. By using IT to listen to and learn from customers, companies can create opportunities for securing a greater share of wallet as well as market share.

Balancing the value trade-off

Crucially, CRM highlights the trade-off between delivering and extracting customer value. The overall value creation process can be considered in terms of three key components. These are: determining what value the company can deliver to its customers (the value the customer receives); determining what value the organization can extract from its customers (the value the organization receives); and, by managing this value exchange, maximizing the lifetime value of desirable customers and customer segments. Relationships are built on the creation and delivery of superior customer value on a sustained basis.

This is why the identification of what constitutes customer value in specific markets and segments is so important. Creating an appropriate balance between the value delivered to customers and the value received in return and recognizing how this may need to change for different customer segments, is an essential element of CRM.

Giving the customer too much by way of value, at realizable market prices, may cost the organization too much and satisfactory profit margins may not be sustained. Conversely, taking too much value from the customer through reductions in product quality or customer service levels is likely to result in customer defections. Furthermore, the economic value of different customer segments will vary and this needs to be taken into account.

A strategic framework for CRM 15 HCRM-Ch01.qxd 9/16/05 10:46 Page 15 In a sense, optimizing the value trade-off means marrying the aforementioned principles of relationship marketing with current marketing trends. For example, grocery shoppers are increasingly turning to the convenience of the Internet for their weekly shopping.

More sophisticated e-shoppers are demanding online options that will allow them to compare prices among similar products, select items based on the nutritional information provided by manufacturers and check out new products. The experience of a Danish food retailer, ISO, is a testament to the value of exploring changes in the food shopping habits of customers.

The ISO supermarket chain in Denmark operates in a country where e-commerce is strong. Exploiting this trend, ISO offers customers the option of shopping using the Palm Computing platform.

Customers can create their electronic grocery lists by scanning the bar codes on products in their larder, refrigerator and medicine chest using their PalmPilot handheld device. Bar codes can also be accessed by printing them from the ISO web site. The electronically generated order can then be transmitted to ISO directly from the PalmPilot or via uploading the order to a PC for transmission.

Picking, packing and home delivery within four hours can be arranged at a small additional charge. Alternatively, customers can collect their orders, all ready and waiting, from their local ISO store at a designated time and date. ISO has benefited from this innovative practice in two ways. Their research suggests that ISO’s e-shoppers are a highly profitable customer segment, buying larger orders more frequently and with less price sensitivity than the average purchaser.

In addition, ISO has captured detailed information on this highly lucrative market segment that can be used to manage customer relationships and future profitability more effectively.

Developing ‘one-to-one’ marketing

A key foundation of marketing strategy is the identification of appropriate target markets or segments. In consumer markets, these segments may be determined by factors such as age, sex or lifestyle, while in business-to-business (B2B) markets segmentation criteria include industrial sector, size of the company and so on. As markets become increasingly competitive and consumers and organizations seek increasingly specific solutions to their needs, markets fragment into ever smaller segments. Don Peppers and Martha Rogers point out, however, that when The ISO supermarket chain in Denmark operates in a country where e-commerce is strong.

Exploiting this trend, ISO offers customers the option of shopping using the Palm Computing platform. Customers can create their electronic grocery lists by scanning the bar codes on products in their larder, refrigerator and medicine chest using their PalmPilot handheld device. Bar codes can also be accessed by printing them from the ISO web site.

The electronically generated order can then be transmitted to ISO directly from the PalmPilot or via uploading the order to a PC for transmission. Picking, packing and home delivery within four hours can be arranged at a small additional charge. Alternatively, customers can collect their orders, all ready and waiting, from their local ISO store at a designated time and date. ISO has benefited from this innovative practice in two ways.

Their research suggests that ISO’s e-shoppers are a highly profitable customer segment, buying larger orders more frequently and with less price sensitivity than the average purchaser. In addition, ISO has captured detailed information on this highly lucrative market segment that can be used to manage customer relationships and future profitability more effectively. 16 Handbook of CRM:

Achieving Excellence in Customer Management HCRM-Ch01.qxd 9/16/05 10:46 Page 16 segmentation reaches the level of individual customers, the very nature of marketing changes. ‘Segments’ have no memories, do not interact, complain, or refer other segments – but individual customers do all those things, and a one-to-one marketer will try to harness those activities in order to develop continuing relationships with customers.4 One-to-one marketing is a form of marketing in which dialogue occurs directly between a company and individual customers or groups of customers with similar needs.

Many B2B organizations with large customers practice one-to-one marketing through key account management strategies. Smaller customers may be dealt with in a more impersonal way through call center or mail-order strategies. In business-to-consumer (B2C) markets the cost of dealing with customers on a one-to-one basis is frequently prohibitive and other means of facilitating dialogue must be found.

The Internet has proven to be a powerful tool for involving both B2C and B2B customers in the marketing process, enabling a one-to-one dialogue rather than relying on mass communications. The unique capabilities of the Internet allow marketers to capture the anonymous behavior necessary to be able to answer the question, ‘What does each customer want?’ CRM systems and processes enable a company to commit to memory each relevant customer encounter and to recall all past encounters with that customer at every future association. In effect, the capture of customer data, the interpretation of data analyses and the dissemination of resultant customer knowledge become a natural and automatic function of the organization. How well CRM fulfills this role depends very much on how CRM is defined and adopted within the organization concerned.

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