CUSTOMER RELATIONSHIP MANAGEMENT: CONCEPTS AND TOOLS

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CUSTOMER RELATIONSHIP MANAGEMENTCONCEPTS AND
TOOLS

• Chapter 1
• Making Sense Of
• Customer Relationship Management

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3 levels of CRM

• Strategic CRM
• A top-down perspective on CRM which views CRM as
  a core customer-centric business strategy that
  aims at winning and keeping profitable customers
• Operational CRM
• A perspective on CRM which focuses on major
  automation projects such as service automation,
  sales force automation or marketing automation
• Analytical CRM
• A bottom-up perspective on CRM which focuses on
  the intelligent mining of customer data for
  strategic or tactical purposes

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Strategic CRM

• Strategic CRM is compatible with a customer- or
  market-oriented way of doing business
• However, there are other business orientations
• Product orientation
• Production orientation
• Sales orientation

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Forms of operational CRM

• Marketing automation
• market segmentation
• campaign management
• event-based marketing
• Sales force automation
• opportunity management, including lead management
• contact management
• proposal generation
• product configuration
• Service automation
• contact and call-centre operations
• web-based service
• field service

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Sales methodologies in sales force automation

• SPIN
• RADAR
• TAS
• Complex selling

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SPIN selling methodology

• Situation analysis
• to establish background information
• Problem questions
• about difficulties and dissatisfactions
• Implication questions
• to establish implied need
• Need pay-off questions
• offered to meet the need and solve the problem

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Some decisions influenced by analytical CRM

• Where should I focus my sales effort?
• Which customers shall we target with this offer?
• What is the relative priority of customers
  waiting on the line, and what level of service
  should be offered?

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Analytical CRM at Business Direct
Traditional 5000 15,000 45 0.09 120 5,400 333
.33 2,200 880 35
CRM 1000 3,000 65 6.5 180 11,700 46.15
7,500 3,000 80
Number of catalogues mailed Mailing cost New
customers obtained 1998 Conversion rate new
customers Initial sales per new customer Total
new initial sales revenues Acquisition cost per
customer Average customer sales 98-01 2 year
gross margin (40) 98 customers still active in
01
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Misunderstandings about CRM

• CRM is database marketing
• CRM is a marketing process
• CRM is an IT issue
• CRM is about loyalty schemes
• CRM can be implemented by any company

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What is a relationship?

• A relationship consists of episodes between
  dyadic parties over time
• Episodes are time-bound and nameable
• Examples of episodes
• Placing an order
• Raising a query
• Playing a round of golf
• Each episode is made up of a series of
  interactions
• Business relationships are made up of task and
  social episodes

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A 5-stage model of relationship evolution

• Awareness
• Exploration
• Expansion
• Commitment
• Dissolution

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Two key features of well developed relationships

• Trust
• Commitment

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Trust is focussed
Trust is shown in the other partys ..

• Benevolence. A belief that one party will act in
  the interests of the other.
• Honesty. A belief that the other party will be
  credible.
• Competence. A belief that the other party has the
  necessary expertise.

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Trust changes over time

• Calculus-Based Trust.
• This is present in early stages of the
  relationship and related to economic
  calculations. The outcomes of creating and
  sustaining the new relationship are weighed
  against those of dissolving it
• Knowledge-Based Trust.
• This relies on the individual parties
  interactive history and knowledge of each other,
  allowing each to make predictions about the other
• Identification-Based Trust.
• This happens when mutual understanding is such
  that each can act as substitute for the other in
  interpersonal interaction. This is found in the
  later stages of relationship development.

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Definition of commitment

• Commitment exists when
• an exchange partner believes that an ongoing
  relationship with another is so important as to
  warrant maximum effort to maintaining it that
  is, the committed party believes the relationship
  is worth working on to ensure that it endures
  indefinitely

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Relational consequences of commitment

• Commitment arises from trust, shared values, and
  the belief that partners will be difficult to
  replace.
• Commitment motivates partners to co-operate in
  order to preserve relationship investments.
• Commitment means partners pass over short-term
  alternatives in favour of more stable, long-term
  benefits associated with current partners.
• Where customers have choice, they make
  commitments only to trustworthy vendors, because
  commitment entails vulnerability, leaving them
  open to opportunism.

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Companies want relationships with customers

• Why?
• because companies that manage their customer
  base in order to identify, satisfy and retain
  profitable customers enjoy better business
  results
• reduced customer churn creates
• A larger customer base
• Longer average customer tenure
• Reduced marketing costs to replace defected
  customers
• Better understanding of customer requirements
• More cross-selling opportunities

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Impact of churn on customer numbers
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Impact of tenure on retention
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The customer journey

• Suspect - could the customer fit the target
  market profile?
• Prospect - customer fits the profile and is being
  approached for the first time
• First-time customer - customer makes first
  purchase
• Repeat customer - customer makes additional
  purchases
• Majority customer - customer selects your company
  as supplier of choice
• Loyal customer - customer is resistant to
  switching suppliers strong positive attitude to
  your company
• Advocate - customer generates additional referral
  dollars

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Customers are potential income streams

• A core CRM idea is that a customer should not be
  viewed not as a set of independent transactions
  but as a life-time income stream.

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Customer life-time value

• The total present day value of a customer is the
  sum of
• all past net margins compounded to todays value,
  and
• all future net margins discounted to todays
  value
• The potential value of a customer is
• all future net margins discounted to todays
  value

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When do companies not want relationships?

• When they fear loss of control. Relationships are
  bi-lateral arrangements, which involve giving up
  unilateral control over resources.
• When they do not want to commit resources.
  Relationships require the commitment of resources
  such as people, time and money.
• When opportunity costs are high. If resources are
  committed to one customer, they cannot be used
  for another

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The satisfaction-profit chain
Customer loyalty
Business performance
Customer satisfaction
Understand customer requirements Meet customer
expectations Deliver customer value
Revenue growth Share of customer Customer tenure
Attitudinal loyalty Behavioral loyalty
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Two dimensions of customer loyalty

• Behavioral loyalty
• Is the customer active?
• What is our share of customer spend
• RFM variables
• Recency
• Frequency
• Monetary value

• Attitudinal loyalty
• Beliefs
• Commitment
• Preference
• Intention to buy

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RFM

• R time elapsed since last purchase
• F number of purchases in a given time period
• M monetary value of purchases in a given time
  period

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Dick and Basus model of customer loyalty
true loyalty
latent loyalty
strong
Relative attitude
spurious loyalty
No loyalty
weak
high
low
Repeat purchase
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Business performance measures
Finance Return on investment Earnings per
share Economic value added
Customer Customer satisfaction Customer
retention Customer acquisition Customer
loyalty Customer tenure Sales per
customer Revenue growth Market share Share of
customer spend
Internal Quality conformance Manufacturing
cost Cycle times Speed to market Inventory
management Customer information system
downtime OTIFNE performance
Learning and growth Employee satisfaction Employee
retention Employees cross-trained Employee
productivity
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Share of market vs. share of customer
high
CRM
share of customer spend
Traditional marketing
low
few
many
Number of customers
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Returns from investments in customer satisfaction
High
repeat purchase rates
Low
1
2
3
4
5
6
7
not at all satisfied
customer satisfaction level
very satisfied
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Business customers want relationships when ..

• the product or its applications are complex, for
  example, networking infrastructure
• the product is strategically important or
  mission-critical, for example, core raw materials
  supply for a manufacturer
• there are down-stream service requirements, for
  example, for machine tools
• financial risk is high, for example, in buying
  large pieces of capital equipment
• reciprocity is expected. A financial audit
  practice may want a close relationship with a
  management consultancy, so that each party may
  benefit from referrals by the other.

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Consumer benefits from supplier relationships

• recognition
• personalisation
• power
• risk reduction
• status
• affiliation

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The CRM ecosystem

• Companies that implement CRM
• Customers of companies that implement CRM
• Partners of companies that implement CRM
• Vendors of CRM software, for example Siebel,
  PeopleSoft, Pivotal, Oracle, SalesLogix and
  Salesforce.com
• vendors of CRM hardware and infrastructure
• consultancies offering strategy, business, CRM
  application and technical consulting

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Computing ROI on CRM 1

• What counts as an investment in CRM?
• IT costs
• Software licenses
• Infrastructure and hardware
• Process costs
• Process reengineering
• Project management costs
• Change management costs
• People costs
• Recruitment
• Training
• Redeployment

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Computing ROI on CRM 2

• What counts as a return on CRM?
• Hard measures
• Cost reductions
• Reduced customer acquisition costs
• Reduced costs to serve
• Revenue increases
• Greater share of customer spend
• Cross-sell improvements
• Up-sell improvements
• Soft measures
• Customer satisfaction
• Customer retention
• Customer tenure
• Employee satisfaction and retention

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Computing ROI on CRM 3

• Over what period should ROI be measured?
• Strategic CRM
• Long-term
• 3 to 5 years
• Operational CRM
• Medium term
• 1 to 3 years
• Analytical CRM
• Short-term
• Less than 1 year
• Perhaps even days for single CRM-enabled campaigns

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CRM challenges across contexts

• Banks and telecommunications companies
• Enhanced retention and cross-sell
• Auto manufacturers
• More profitable relationships with distributors
• Better understanding of end-users
• FMCG manufacturers
• Better understanding of cost-to-serve and retail
  account profitability
• Retailers
• Enhanced basket value

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Definition 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 data and enabled by information
  technology.