Definitions of CRM
CRM is the core business strategy that integrates internal processes and functions, and external
networks, to create and deliver value to targeted customers at a profit. It is grounded on high
quality customer-related data and enabled by information technology. It is a technology-enabled
approach to management of the customer interface which results in impact on the costs-to-serve
and revenues streams from customers. Access to customer-related data (a cornerstone of effective
CRM) allows selling, marketing and service functions to be aware of each other’s interactions with
customers. Also, access to customer-related data allows members of a business’s ‘external
network’ – suppliers, partners, distributors, etc to align their efforts with those of the focal
company. Underpinning this core business strategy is Information Technology: software
applications and hardware.
Types of CRM
Strategic CRM: This focused upon the development of a customer-centric business culture. This
culture is dedicated to winning and keeping customers by creating and delivering value better than
competitors. In a customer-centric culture you would expect resources to be allocated where they
would best enhance customer value, reward systems to promote employee behaviours that
enhance customer satisfaction and retention, and customer information to be collected, shared
and applied across the business. Many businesses claim to be customer-centric, customer-led,
customer-focused or customer-oriented, but few are. Customer-centricity competes with other
business logics e.g. product-oriented, production-oriented and sales-oriented.
Product-oriented: Businesses believe that customers choose products with the best quality,
performance, design or features. These are often highly innovative and entrepreneurial firms.
Many new business start-ups are product-oriented. In these firms it is common for the customer’s
voice to be missing when important marketing, selling or service decisions are made. Little or no
customer research is conducted.
Production-oriented: Businesses believe that customers choose low price products. Consequently,
these businesses strive to keep operating costs low, and develop low-cost routes to market. This
may well be appropriate in developing economies or in subsistence segments of developed
economies, but the majority of customers have other requirements.
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Sales-oriented: Businesses make the assumption that if they invest enough in advertising, selling,
public relations (PR) and sales promotion, customers will be persuaded to buy. Very often, a sales
orientation follows a production orientation. The company produces low-cost products and then
has to promote them heavily to shift inventory.
Operational CRM: This type of CRM focused on the automation, integration and improvement of
customer-facing and customer-supporting business processes. CRM software applications enable
the marketing, selling and service functions to be automated and integrated. For example, salesforce automation (SFA) software can be configured so that it is modelled on the selling process of
any industry or organization. Automation of selling activities is often linked to efforts to improve
and standardize the selling process.
Analytical CRM: This focuses on the intelligent mining of customer-related data for strategic or
tactical purposes. Organisations under CRM arrangement capture, store, extract, integrate,
process, interpret, distribute, use and report customer-related data to enhance both customer and
company value. Analytical CRM builds on the foundation of customer-related information
captured both internally and externally. From the customer’s point of view, analytical CRM can
deliver timely, customized solutions to the customer’s problems, thereby enhancing customer
satisfaction. From the company’s point of view, analytical CRM offers the prospect of more
powerful cross-selling and up-selling programmes, and more effective customer retention and
customer acquisition programmes.
Collaborative CRM: This describes the strategic and tactical alignment of efforts .i.e. (people,
processes and technologies) of normally separate enterprises in the supply chain for the more
profitable identification, attraction, retention and development of customers, partners and the
company. For example, manufacturers of consumer goods and retailers can align their people,
processes and technologies to serve shoppers more efficiently and effectively through comarketing, forecasting, etc.
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Understanding relationships
The ‘R’ of CRM stands for ‘relationship’. But what do we really mean by the expression
‘relationship’, especially between a customer and supplier.
A relationship exists when the parties move from a state of independence to dependence or
interdependence. It also composed of a series of interactive episodes between dyadic parties over
time, but some authorities suggest that there needs to be some emotional content to the
interaction, therefore, they see relationship as a social construct. That is to say, it exists if people
believe that a relationship exists and they act accordingly. Therefore, it is apparent that
relationships can be unilateral or reciprocal; either one or both of the parties may believe they are
in a relationship.
Change within relationships.
Relationships change over time. Parties become closer or more distant; interactions become more
or less frequent because they evolve and therefore, it can vary considerably. The five general
phases through which customer–supplier relationships can evolve are: Awareness- when each
party comes to the attention of the other as a possible exchange partner. Exploration is the period
of investigation and testing during which the parties explore each other’s capabilities and
performance. Some trial purchasing takes place. If the trial is unsuccessful the relationship can be
terminated with few costs. The exploration phase is thought to comprise five sub-processes:
attraction, communication and bargaining, development and exercise of power, development of
norms, and development of expectations. Expansion is the phase in which there is increasing
interdependence. More transactions take place and trust begins to develop. The commitment
phase is characterized by increased adaptation and mutually understood roles and goals.
Processes that have become automated are a sure sign of commitment. Not all relationships reach
the commitment phase. Many are terminated before that stage. There may be a breach of trust
that forces a partner to reconsider the relationship and also the termination can be bilateral or
unilateral. And this is, the dissolution phase.
Trust: It is a core attribute of highly developed relationships. Trust is focused on any of the party’s
belief for the benevolence, honesty and competence of the other party. The development of trust
is an investment in relationship building which has a long-term payoff. Trust emerges as parties
share experiences, and interpret and assess each other’s motives. As they learn more about each
other, risk and doubt are reduced. For these reasons, trust has been described as the glue that
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holds a relationship together across time and experience. When mutual trust exists between
partners, both are motivated to make investments in the relationship. These investments, which
serve as exit barriers, may be either tangible (e.g. property) or intangible (e.g. knowledge). If trust
is absent, conflict and uncertainty rise, while cooperation falls. Lack of trust clearly provides a
shaky foundation for a successful customer-supplier relationship. In the same vein, It has been
suggested that as relationships evolve over time so does the character of trust as explained below:
(a) calculus-based trust: this is present in the early stages of a relationship and is quite calculative.
It is as if one party says: ‘I trust you because of what I am gaining or expect to gain from the
relationship’.
(b) knowledge-based trust: this relies on the individual parties’ interactive history and knowledge
of each other, allowing each to make accurate predictions about how the other will act.
(c) identification-based trust: this happens when mutual understanding is so deep that each can
act as substitute for the other in interpersonal interaction. This is found in the later stages of
relationship development.
Why companies want relationships with customers
The fundamental reason for companies wanting to build relationships with customers is economic.
Companies generate better results when they manage their customer base in order to identify,
acquire, satisfy and retain profitable customers. These are key objectives of many CRM strategies.
Managing customer retention and tenure intelligently generates benefits for companies;
Reduced marketing costs: Improving customer retention reduces a company’s marketing costs.
Fewer dollars need to be spent replacing churned customers. For example, it has been estimated
that it costs an advertising agency at least 20 times as much to recruit a new client than it does to
retain an existing client. In addition to reducing the costs of customer acquisition, cost-to-serve
existing customers also tends to fall over time.
Better customer insight: As customer tenure lengthens, suppliers are able to develop a better
understanding of customer requirements and expectations. Customers also come to understand
what a supplier can do for them. Consequently, suppliers become better placed to identify and
satisfy customer requirements profitably, selling more product and service to the retained
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customer. Under these circumstances, revenue and profit streams from customers become more
secured throughout the customer journey, as shown below:
The customer journey
Enhanced referrals business: These are made possible by existing, satisfied customers through
their unpaid advocacy. Lexus UK, for example, believes that every delighted customer generates
£600 000 of referral business. Word-of mouth is recognized as powerfully persuasive because it is
regarded as being independent and unpaid.
Support higher prices: it has been established that higher prices are paid by existing customers
than those paid by new customers. This is partly because they are not offered the discounts that
are often employed to win new customers, and partly because they are less sensitive to price offers
from other potential suppliers because they are satisfied with their experience.
Why companies do NOT want relationships with customers
Despite the financial benefits that can accrue from a relationship, companies sometimes resist
entering into relationships with customers for the following reasons:
Loss of control: a mature relationship involves give and take on both sides of the dyad. In bilateral
relationships, suppliers may have to give up unilateral control over their own business’s resources.
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For example, a supplier of engineering services might not want to provide free pre-sales
consultancy for a new project with an established client because of the high costs involved.
Exit costs: not all relationships survive. It is not necessarily easy or cost-effective to exit a
relationship. Sometimes, investments that are made in a relationship are not returned when a
relationship breaks down.
Resource commitment: relationships require the commitment of resources such as people, time
and money. Companies have to decide whether it is better to allocate resources to customer
management or some other area of the business, such as operations or research and development.
Once resources are committed, they can become sunk costs. Sunk costs are unrecoverable past
expenditures.
Opportunity costs: if resources are committed to one customer, they cannot be allocated to
another. Relationships carry with them high opportunity costs.
Why customers want relationships with suppliers
There are a number of circumstances when a B2B customer might want a long-term relationship
with a supplier:
Product complexity: if the product or its applications are complex, for example, networking
infrastructure, electricity transformer, etc.
Product strategic significance: if the product is strategically important or mission-critical, for
example, supply of essential raw materials for a continuous process manufacturer.
Service requirements: if there are down-stream service requirements, for example, machine tools.
Financial risk: if financial risk is high, for example, in buying large items of capital equipment.
Reciprocity: a financial audit practice may want a close relationship with a management
consultancy, so that each party benefits from referrals by the other.
In a business-to-consumer (B2C) context, relationships may be valued when the customer
experiences benefits over and above those directly derived from acquiring, consuming or using the
product or service. For example:
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Recognition: customers may feel more valued when recognized and addressed by name, for
example at a retail bank branch, or as a frequent flyer.
Personalization: products or services can be customized. For example, over time, a hairdresser
may come to understand a customer’s particular preferences or expectations.
Power: relationships with suppliers can be empowering. For example, some of the usual power
asymmetry in relationships between banks and their customers may be reversed when customers
feel that they have personal relationships with particular bank officers or branches.
Risk reduction: risk takes many forms – performance, physical, financial, social and psychological.
High levels of perceived risk are uncomfortable for many customers. A relationship can reduce or
even, perhaps, eliminate perceived risk. For example, a customer may develop a relationship with
a service station to reduce the perceived performance and physical risk attached to having a car
serviced. The relationship provides the assurance that the job has been skilfully performed and
that the car is safe to drive.
Status: customers may feel that their status is enhanced by a relationship with a supplier, such as
an elite health club or a company offering a platinum credit-card.
Why customers do NOT want relationships with suppliers
While companies generally want long-term relationships with customers for the economic reasons
described above, it is far less clear that customers universally want relationships with their
suppliers. B2B customers cite a number of concerns.
Fear of dependency: this is driven by a number of worries. Customers may be concerned that the
supplier might act opportunistically, once they are in a preferred position, perhaps introducing
price rises. They may also fear the reduction in their flexibility to choose alternative suppliers.
There may also be concerns over a loss of personal authority and control.
Lack of perceived value in the relationship: customers may not believe that they will enjoy
substantial savings in transaction costs, or that the relationship will help them create a superior
competitive position, generate additional revenue or that there will be any social benefits. In other
words, there is no perceived value above and beyond that obtained from the product or service.
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Lack of confidence in the supplier: customers may choose not to enter a relationship because
they feel the potential partner is unreliable, too small, strategically insignificant, has a poor
reputation or is insufficiently innovative.
Customer lacks relational orientation: not all company cultures are equally inclined towards
relationship building. Some are much more transactional. For example, some retailers make it a
policy to buy a high proportion of their merchandise through special offers. The preference for
transactional rather than relational business operations may be reflected in a company’s buying
processes and reward systems.
Rapid technological changes: in an industry with rapidly changing technology, commitment to one
supplier might mean that the customer misses out on new developments available through other
suppliers.
In the B2C context, consumers buy hundreds of different convenience, shopping and speciality
products and services. Whereas consumers might want a relationship with their financial service
advisor or their physician, they can often find no good reason for developing closer relationships
with the manufacturer of their household detergent, snack foods or toothpaste. However, for
consumer products and services that are personally important, customers can become more
involved and become more emotionally engaged.
Developing, managing and using customer-related databases
The importance of developing an intimate knowledge and understanding of customers is essential
to achieving CRM success. Hence, the significance organisations attached to the possession of
customer-related databases. Companies typically do not have a single customer database; instead,
they have a number of customer-related databases, which can be put to many advantages.
Customer-related databases are the foundation for the execution of CRM strategy. Proficiency at
acquiring, enhancing, storing, distributing and using customer-related data is critical to CRM
performance.
Developing a customer related database
Most databases share a common structure of files, records and fields (also called tables, rows and
columns). The modern customer-related database therefore resembles a spreadsheet. There are
six major steps in building a customer-related database, as shown below.
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There are six major steps in building a customer-related database:
1. Define the database functions
Databases support the four forms of CRM in these forms; Strategic CRM, which focuses on winning
and keeping profitable customers, relies on customer-related data to identify which customers to
target, win and keep. Operational CRM, which focuses on the automation of customer-facing
processes such as selling, marketing and customer service, needs customer-related data to be able
to deliver excellent service. Analytical CRM mines customer-related data for strategic or tactical
purposes. Collaborative CRM involves the sharing of customer related data with organizational
partners, with a view to enhancing company, partner and customer value.
2. Define the information requirements. The people best placed to answer the question ‘what
information is needed?’ are those who interact or communicate with customers for sales,
marketing and service purposes, and those who have to make strategic CRM decisions. In order to
do this successfully, most CRM customer information software has predefined fields in different
modules, whether for sales, marketing or service applications. For example, in a sales application,
a number of fields (columns) of information about customers are common: contact data, contact
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history, transactional history, current pipeline, future opportunities, products and communication
preferences.
3. Identify the information sources - Information for customer-related databases can be sourced
internally or externally. Prior to building the database it is necessary to audit the company to find
out what data are available. Internal data e.g. sales, finance etc are the foundation of most CRM
programs. External data can be used to enhance the internal data and these can be imported from
a number of sources including market research companies and marketing database companies.
External data can be classified into three groups:
Compiled list data – These are individual level data assembled by list bureaux or list vendors. They
build their lists from a variety of personal, household and business sources.
Census data – Census data are obtained from government census records. In different parts of the
world, different information is available. Some censuses are unreliable; others do not make much
data available for non- governmental use.
Modeled data- These are generated by third parties from data that they assemble from a variety
of sources. You buy processed, rather than raw, data from these sources. Often they have
performed clustering routines on the data.
Customer-related data are either secondary or primary - Secondary data are data that have already
been collected, perhaps for a purpose that is very different from your CRM requirement. Primary
data are that collected for the first time, either for CRM or other purposes. Collection method for
primary data is expensive e.g. Competition entries, Subscriptions, Registrations, etc.
4. Select the database technology and hardware platform
Customer-related data can be stored in a database in a number of different ways, namely:
1. Hierarchical
2. Network
3. Relational.
Relational databases are now the standard architecture for CRM applications. They store data in
two dimensional tables comprised of rows and columns. Relational databases have one or more
fields that provide a unique form of identification for each record. This is called the primary key.
For sales databases, each customer is generally assigned a unique number which appears in the
first column. Therefore, each row has a unique number. The choice of hardware platform is
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influenced by several conditions: The size of the databases, existing technology and, the number
and location of users.
Relational database management system (RDBMS) is a software programme that allows users to
create, update and administer a relational database. e.g. Oracle, Microsoft’s SQL server. Most
RDBMS products use SQL to access, update and query the database.
5. Populate the database - After the successful execution of above activities, the next step is to
obtain the data and enter it onto the database. CRM applications need data that are appropriately
accurate. We use the ‘appropriately’ because the level of accuracy depends upon the function of
the database. The main steps to ensure that the database is populated with appropriately accurate
data are as follows:
(a) Source the data - organizations must develop explicit processes to obtain information from
customers, such as on initial sign-up or when concluding a service call. Organizations cannot rely
on customer goodwill; data must be collected whenever interaction occurs.
(b) Verify the data - this task is conducted to ensure that the data has been entered exactly as
found in the original source. This can be a very labour intensive process since it generally involves
keying the data in twice with the computer programmed to flag mismatches. An alternative is to
check visually that the data entered match the data at the primary source.
(c) Validate the data - this is concerned with checking the accuracy of the data that are entered.
There are a number of common inaccuracies, many associated with name and address fields:
misspelt names, incorrect titles, inappropriate salutations. A number of processes can improve
data accuracy, e.g. range validation, missing values, check against external sources.
(d) De-duplicate the data (de duping) – this is when customers’ details appear more than once on
a database. The de-duping process should avoid two types of error:
(i)
Removing a record that should be retained
(ii)
Retaining a record that should be removed.
(e) Merge and purge is a process that is performed when two or more databases are merged. This
might happen when external and internal database merged, when two internal databases are
merged or when two external lists are merged. There can be significant costs savings for marketing
campaigns when duplications are purged from the combined lists.
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6. Maintain the database- Customer databases need to be updated to keep them useful. It does
not take long for databases to degrade. Companies can maintain data integrity in the following
ways:
a. Ensure that data from all new transactions, campaigns and communications is inserted into
the database immediately
b. Regularly de-duplicate databases
c. Audit a subset of the files every year
d. Purge customers who have been inactive for a certain period of time
e. Drip-feed the database. Every time there is a customer contact there is an opportunity to add
new or verify existing data
f. Get customers to update their own records
g. Remove customers’ records when they request this
h. Insert decoy records.
CUSTOMIZATION
CRM aims to build mutually beneficial relationships with customers at segment, cohort or
individual level. A fundamental approach to achieving this goal is to customize the value
proposition in order to attract and retain targeted customers. CRM aims to fit the offer to the
requirements of the customer; it is not a one-size-fits-all approach. Customization has both cost
and revenue implications. It may make strategic sense because it generates competitive advantage
and is appealing to customers, but there may be serious reservations because of the costs of
customization. Companies need to ask whether investment in customization will generate a return
higher than they could achieve through other strategies carrying a similar amount of risk.
Customization may mean the loss of economies of scale, thus increasing unit costs. There may also
be additional technology costs.
Types of Customisation
(a) Mass customisation
(b) Craft customisation
A distinction can be made between ‘craft customization’ and ‘mass customization’. The latter
implies that an organization can communicate with target audiences at a mass or segment level,
but is also able to offer customized value propositions for individual customers. Craft
customization involves customized offers, but not at a mass market level.
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Mass customization is the use of flexible processes and organizational structures to create varied,
and even individually tailored, value propositions, with neither a cost nor a lead time penalty. This
is not the same as offering customers more choice, customers certainly want their needs to be
met; they do not necessarily want choice. A number of different types of mass customization have
been identified as follows: match to order’. This simply involves finding a match, from a range of
standard products, to a particular customer’s requirements. At the other extreme is ‘engineer to
order’, which involves the co-design, in a joint enterprise between customer and supplier, of a
unique solution to that customer’s problem.
Different forms of mass customization.
Mass customization is widespread in-service industries serving end consumers. This is largely
because of the inseparability of service production and consumption. The interaction between
consumers and service producers during the service encounter lets customers influence both the
service delivery process and the outcome. Mass customization is also becoming more common in
manufacturing companies.
Different forms of mass customization
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Key issues for CRM strategists are these:
1. Do customers want customized products and services?
2. What degree of customization is desired?
3. Are customers willing to pay a premium for customization?
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