CREATING VALUE THROUGH CUSTOMERS
By Lynette Ryals, Teaching Fellow in Marketing
Customer relationships are vital business assets and
Customer Relationship Management (CRM) is about
managing those relationships. The benefits of CRM to
customers are increased convenience and speed of service
and the benefit to organisations is their ability to develop
profitable customer-focused strategies.
Customer Relationship Management (CRM) is about how
organisations use IT to help manage their relationships with
customers in order to maximise value creation both for the
customer and the company. The objective of CRM is thus to
identify, satisfy and retain the company’s best customers.
Recently, there has been an explosion of interest in CRM,
because it represents a practical way for organisations to
implement relationship marketing.
Relationship marketing
emphasises the benefits of retaining customers, since loyal
customers are known to be more profitable.
A number of
studies by Bain & Co demonstrated that a 5% increase in
customer retention results in an increase in average customer
lifetime value of between 35% and 95%.
Some of the
industries they mention, and the improvement in customer
lifetime value, are software (35%), office building management
(40%), credit card (75%), publishing (85%) and advertising
(95%).
However, to implement relationship marketing
successfully companies have to know a lot more about their
customers. This means establishing two-way communication
between company and customer. Both of these requirements
can be met by CRM.
The role of technology in enabling CRM is critical. In fact,
CRM has also been defined as ‘data driven’ or ‘IT-enabled’
marketing.
IT
systems
are
essential
for
successful
implementation, both to facilitate contacts with customers and
to analyse stored information about customers in order to
develop customer-focused marketing strategies. The market for
CRM software was worth more than US$3.8 billion in 1998
and is growing at 40% per annum.
The key software components of CRM are data warehouses and
the software systems that manage customer interactions. A
data warehouse is a massive database of customer information,
whilst the software used to manage customer interactions
includes web sites, e-commerce and call centre technology.
Data warehouses – the engine of CRM
The development of data warehouses is just one of the
technological advances that has improved the ability of
marketers to tailor marketing strategies to customers. Data
warehouses collect, clean and store customer information for
later analysis. In 1998, a survey by the Economist Intelligence
Unit (EIU) found that 83% of companies interviewed expected
to have a data warehouse by 2002, more than double the
number who considered it relevant in 1996.
So how does a data warehouse differ from a traditional
customer database? Data warehouses are normally dedicated to
‘off line’ analysis and not the day-to-day processing of
transactions.
They contain existing customer transaction
records and may also incorporate information from other
sources, both within and outside the organisation. Once the
data warehouse is built, the next step is to data mine and try to
discover previously unknown patterns. Data mining comprises
a range of data analysis techniques, including cluster analysis
and neural networks. Patterns uncovered in the data can be
used to develop new marketing strategies.
Several food
retailers have found quite unexpected buying patterns that
associate apparently unrelated products and have used this data
to re-arrange their stores so as to improve customer
convenience and increase sales.
A data warehouse can also help a company to get a view of its
entire relationship with a customer. This can be a revelation,
particularly in organisations that are organised along product
lines rather than by customer. One insurance company, for
example, found that the average number of products owned by
customers was less than 1.1. In other words, the cross-selling
rate was almost zero. This company had hesitated to develop
cross-selling campaigns for fear of annoying the customers who
already owned several products but in the light of this analysis,
that policy was reversed.
As the marketing manager later
commented, ‘Almost anything we do to cross-sell has got to be
an improvement on what we do now.’
The data warehouse also allows an organisation to track the
history of its relationship with each customer and thereby
increase its customer responsiveness.
To obtain an overall
view of the entire customer relationship, information for the
data warehouse must be collected from all points at which the
customer has contact with the organisation. The First Direct
example (see box) also demonstrates one way in which
information from the data warehouse can impact on customer
service.
Box 1
Customer responsiveness at First Direct
First Direct bank has a sophisticated data warehouse that
carries the history of its contacts with each of its customers.
One customer telephoned to ask about cashpoint facilities in the
ski resort he would be travelling to for his holiday. On his
return he rang the bank again about another matter and spoke to
a different operator … who immediately asked him if he had
had a good skiing holiday!
Data warehouses, used properly as part of a relationship
marketing strategy, can have powerful results.
One North
American bank trebled in two years the number of its products
sold per household using customer profiling.
At Federal
Express, a campaign targeted at small businesses brought in
65% more revenue than a similar mass marketing effort.
However, the creation of a customer database is merely the
start of a process of managing the customer as a strategic asset.
The customer relationship has to be managed through the
development of customer strategies and appropriate customer
contact.
Customer contact in cyberspace
Developments in IT systems have made customer contact easier
than ever before. Key customer contact systems include the
Internet, call centres, and other direct sales/service channels.
The Internet is widely regarded as the most significant of these.
According to a recent survey, 62% of companies described the
Internet as ‘vital’, a tenfold increase since 1996. The use of
call centres as a means of customer contact has also massively
increased, as has the number of bank ATMs (cashpoint
machines).
These technology applications began as passive means of
making customer contact – they were designed so that
customers could visit the website, or call the call centre, or drop
by the cash point. Increasingly, however, companies are using
their customer contact systems actively to do business.
Customers who used to search the Internet for product
information are increasingly buying directly over the net. Call
centres are switching to outbound calling and selling. ATMs
are being linked to data warehouses so that messages or product
offers can be displayed to customers. Already, about a fifth of
consumers say they would prefer to shop electronically rather
than visit the shops and it has been forecasted that direct
retailing may represent over half the market by 2010.
Box 2
Customers like using web sites to buy because they are
convenient. Companies win, too, because it is cheaper for them
to acquire and service customers via a web site than by
traditional means. Federal Express, for instance, reduced its
costs by US$100,000 per day – and improved perceived
customer service – by allowing customers to track their parcels
through the company’s web site, rather than through its call
centres.
The ability to communicate and do business directly with
customers can be very valuable, but it does impose certain
requirements for responsiveness on the company.
The
capabilities offered by the data warehouse and by direct
customer contact systems only create value for customers and
the company if the management is able to use technology to
develop and deliver marketing strategies.
This need for
customer focus has implications for organisation structure.
Organisational implications
The development of CRM as a business discipline is beginning
to drive change in most leading organisations.
These
companies are tending to use a cross-functional process
approach, rather than the traditional approach to managing
customers which divides up responsibility for various aspects
of the relationship with the customer between different
departments.
This process approach is an important
characteristic of CRM. A 1998 survey by the EIU found that
half those companies questioned expected to be organised
around customer groups by 2002.
To manage the whole customer relationship, marketing and IT
departments will have to work more closely together; the key to
successful CRM implementation is an integrated approach.
Participation is required from people from marketing, quality
management
operations,
market
research
and
financial
accounting, as well as information technology. Organisations
may therefore have to restructure in order to maximise the
return on their customer information. Research carried out by
Cranfield indicated that establishing a joint IT and marketing
department was a critical success factor in the implementation
of CRM amongst UK banks and insurance companies.
The payback from CRM
Who benefits from CRM? Technology offers the opportunity
to capture information and understand the impact of marketing
on purchase behaviour. The customer information file enables
better matching of marketing offers to prospects, as well as
tracking the effectiveness of marketing programmes as the
basis for future planning.
CRM also creates value for the customer.
The customer
benefits from product and/or service offers which are targeted
to meet individual needs and from improvements in customer
service.
Value for the Customer
There are a number of ways in which customer service can be
improved through CRM.
This includes reliability, security,
efficiency, and communication as well as quality control and
service
monitoring.
CRM
systems
also
act
as
an
‘organisational memory’ about the customer. This can benefit
the customer by reducing the amount of repetitive form-filling
that the customer has to do. Customer preferences can also be
kept on record, making placing an order quicker and easier for
the customer.
Box 3
Ritz-Carlton is an example of such an organisation that makes
use of its data warehouse to provide exceptional customer
service. The hotel chain provides each staff member with a
‘guest preference pad’ for recording every preference gleaned
from conversations with customers and by observation of their
behaviour. Every day, these preferences are entered on to a
worldwide database. Let’s say the customer calls room service
in one of their hotels in Mexico and ask for an ice-cube in her
drink. Months later, if she orders a drink in a Spanish RitzCarlton, they will ask her if she would like an ice-cube.
The use of CRM to provide added value to customers can be
directly linked to improved profitability and value-based
marketing for the company.
Value for the company
CRM systems can bring operational benefits and boost
company performance; this, in turn, can increase customer
satisfaction and long-term success through longer and closer
relationships.
In addition, customer data analysis enables organisations to
identify the customers it does not want to have. The 80:20 rule
suggests that 80% of profits are generated by 20% of
customers. Some retail banks have found that the picture is
even more extreme, with 10% of their current account
customers bringing in 100% of their profits. In other words, on
average, the other 90% are loss-making.
Companies have known for a long time that customer
profitability varies and that not all customers are equally
desirable. However, it is only with the advent of powerful
databases that they are able to quantify and track customer
profitability, and forecast customer lifetime value at the level of
the individual customer. Previously, companies could only say
that customers of a certain type were likely to be more
commercially attractive; now they can pinpoint the individuals
who are the most attractive customers. These are the customers
with whom it is vital to retain long-term relationships. One
American retail bank carried out a customer profiling and
targeting exercise using data mining techniques. The impact on
direct mail campaigns was dramatic. Campaign costs fell by
one third and response rates doubled, the number of new
accounts increased by 33% and the profitability of these new
accounts by the same amount. Defection rates fell by 5% and
the lifetime value of these new customers grew by an estimated
20%.
By combining an understanding of customer purchasing drivers
and customer profitability, companies can tailor their offerings
to maximise the overall value of their customer portfolio.
Box 4
Value creating at Taco Bell
Taco Bell used data mining techniques to identify its most
attractive customers. It found that 30% of its customer base
accounted for more than 70% of volume and, by focusing its
marketing campaigns on these customers, increased sales from
US$1.6 billion to US$4.5 billion over six years.
Profits
increased by more than 300% over the same period.
Dell Computers is the arch-exponent of customer data
management to improve service and grow market share. Using
telephone selling and service, Dell captures consumer profiles,
their purchase histories, product needs and feedback and future
purchasing plans to target its marketing and product
development more effectively. As a result, Dell’s US market
share has risen from 1% in 1990 to 9% in 1997.
Buzz, not buzz-word
The underlying premise of CRM is that share of loyal
customers rather than share of market maximises profitability.
The overall objective is to develop tailored solutions for loyal
and profitable customers.
All the signs are that CRM won’t ‘go away’.
In the US,
organisations are already investing millions of dollars in CRM
systems. A recent survey undertaken in the US by Exchange
Applications found that many CEOs are making CRM a
priority. These business leaders believe that the benefits their
companies will obtain from better customer information and the
ability to provide better service levels to their customers will
translate into substantially higher profits in the future.
Cranfield School of Management is currently carrying out a
survey into CRM. If you are a manager working in an
organisation that has implemented CRM, please fill out our
survey at http://www.cranfield.ac.uk/som/crm. Immediate
feedback, plus a summary of results, will be available.