Customer Relationship Management (CRM) is being adopted in a great many large industries. An IDC study of 300 large companies in Europe and the US showed that 65% were aware of CRM technology, 28% were developing CRM, and 12% had reached the stage where they were actually using it. Direct marketing, which is CRM driven, is huge. 1999 revenue from direct marketing including catalog sales totaled $1.5 Trillion:
To understand what CRM is, it is useful to contrast it with Database Marketing. Database Marketing consists of building a marketing database of customers and prospects. The database contains their names, addresses, demographics, purchases, web activity and promotion history. It is used to analyze customers, and to direct the company’s customer and prospect communications programs. It helps with acquisition and retention. It is typically measured by return on investment and by customer lifetime value. A typical marketing database for a medium sized company may cost about $1 million or less to build.
CRM contains all of the above, but in addition, is usually associated with a massive Corporate Data Warehouse, run by the company IT department. The warehouse contains all of the information available to the company about customers, employees, products, sales, costs, inventory, shipments, and other data sources. Marketing databases can be up and running in 90 days from the decision to create one, until the company is ready to achieve some profitable output. CRM data warehouses usually take a couple of years to build. Little profitable output can be expected until the warehouse is up and running. A data warehouse may cost anywhere from $3 to $25 million to build. The Gartner Group estimates that last year $462 Billion was invested in CRM including all hardware and software. Of this total, more than $24 billion was invested in Ecommerce, according to Frost & Sullivan.
Goals of CRM
CRM was invented because customers differ in their preferences and purchasing habits. If all customers were alike, there would be little need for CRM. Mass marketing and mass communications would work just fine. Typically, the top 20% (or some small percentage) of customers of any enterprise (the Gold Customers) provide 80% (or some large percentage) of the revenue and the profits. The bottom 20% of customers of many enterprises are not only not profitable, they may actually generate losses to the firm. It is useful to know this and to identify who the valuable and the worthless customers are so that you can:
Work to retain the valuable ones
Try to acquire more customers like Gold customers
Get other customers to move up to Gold
Re-price or reconfigure the products and services offered to the worthless customers so as to move them towards profitability (or the exit).
The Goals of CRM
Most companies consciously practicing database marketing subscribe to the concept that “Database marketing only works if the customer benefits from it”. They look towards building a relationship with the customer to improve loyalty and repeat sales. CRM advocates, on the other hand, see CRM as advantageous mainly to the company trying to manipulate the consumers. We queried four of our clients on this question. Here are the results:
A major internet company is instituting a company-wide CRM solution being developed by a “big six” accounting firm. The “solution” was sold to them as an undertaking that will improve the accuracy of information about customers. The information is supposed to be permit them to boost company revenue.
A major consumer electronics company adopted CRM to provide an improved mailing list to drive new sales in the dealer’s market area.
A major computer manufacturer was not interested in CRM at all. They did not understand what CRM could contribute to their operations.
A major automobile manufacturer adopted CRM as “a method we could use to drive relevant communications to our customers.”
As you can see, none of these companies referenced any advantage to the consumer. CRM, to them, was useful because it provided a selling or marketing advantage to the company. It seems to us that without the participation of customers, this approach to CRM is not in concert with growing consumerism which gives power and control to the customers in their relationship with their suppliers.
As practiced by most CRM professionals, CRM has:
A distinctive focus with a well understood definition used universally by CRM experts or authorities.
The capacity to integrate customer information not only into the database but also into relevant communications delivered to the customer in both the digital and the physical world.
A commercial orientation that results in:
Reduced operating costs
Increased propensity to buy
Enhanced image of the customer and the company
Enhanced ability to target
Greater ability to add value to the customer relationship
Managing customer behavior to achieve profitable results
In fact, the uses for CRM can be grouped into two functions: customer acquisition and customer retention.
Using CRM for Customer Acquisition
Many companies do not have a really good idea of who their customers are. One company may assume that most of its customers are women 25 to 35. That may well be true. But CRM can be used to develop a better picture. Once data such as age, income, presence of children, value of home, etc. is appended to the customer records, modeling can be used to determine that there are really five quite different customer segments:
Affluent Women (age 45-65)
Senior Shoppers (age 55+)
Women with children (age 25-45)
Business women (age 25-55)
Young women (age 18-25)
Each group has different life styles and purchasing preferences. Good CRM will develop different messages aimed at each group, with products and offers appropriate to the group being addressed. Creating different messages, different ads, and different media can be expensive. How can you prove that your CRM efforts are paying off?
To do this you have to have a feed back mechanism and controls. Certificates, for example, can be sent out to lists of women presumed to be in each of the five groups. When they come in to redeem their certificates, it is possible to track how successful each offer has been, as compared to women who came in as a result of mass media messages. Lets assume that you spent $160,000 last month on customer acquisition, divided equally between mass marketing and CRM marketing communications. The results might look like this:
Each new customer (in this example) fills out an application card for a plastic card. From the application data, we are able to classify each new customer into the appropriate group. From this example, both mass marketing and CRM produced the same results in terms of the number of customers acquired. However, CRM, because it was carefully targeted, gave us many more affluent shoppers and many more business women. It cost us $125 for each customer acquired through mass marketing. It cost us varying amounts to acquire customers using CRM.
To compare the value to the company of these customers acquired by two different methods, we can compute the lifetime value of customers acquired by each method:
While we spent equal amounts on both mass marketing and CRM last month ($80,000) the CRM acquisition yielded customers worth twice as much as those acquired through mass marketing. The conclusion you might reach from these tables is that perhaps mass marketing is most appropriate for reaching young women and women with children. CRM (in this example) works best with affluent women, senior shoppers and business women. If the CRM were directed exclusively to these three groups, the additional LTV acquired could have been even higher. The return on investment looks like this:
So, the way to measure CRM effectiveness in acquisition can be summed up in this way:
Find a control group to measure it against (in this case mass marketing)
Create segments of your existing customers and determine their lifetime value. Learn about their lifestyles, purchase patterns and preferences.
Find prospect groups that match the profile of your customer groups.
Develop customized communications for each of the prospect groups.
Measure the results of your acquisition test, comparing your control group with your test groups, to determine the return on investment.
Using CRM to influence Retention
Most companies are using CRM exclusively for acquisition. This is too bad because there is a real payoff in using CRM for customer retention. This is because the return on investment for retention is usually several times greater than an equal amount of money spent on acquisition. The most common use for CRM in retention is the creation of segments based on lifestyle and purchasing habits. One method might be:
Day Time Shoppers
Cross Shoppers (members of two or more groups).
Good CRM develops a different communications method for each segment.
The cross shoppers may, in fact, be the most profitable of the entire group. A typical cross shopper may use both the Internet and also be a Weekend Shopper.
Messages sent to Catalog Shoppers to encourage them to come in to the store may be a waste of your money and their time.
It may be useful to advertise a “members only” evening opening only to the Evening Shoppers.
Another method of segmentation might be to combine the above categories with lifetime value and demographics to produce these groups:
What can you do with these categories? One major chain created categories similar to this based on their customer behavior. Using CRM, they allocated their marketing budget separately to each group. Here is what might happen if a $2 million marketing budget were spent equally amongst all customers. Let us assume that they used the money to craft personalized communications, created a very helpful web site, and improved their customer service. Overall, the result of their efforts might be a 12% increase in lifetime value. Here is the way it might look:
In this example, we are assuming that $2 million dollars worth of customer communications during a year will increase lifetime value by 12% from $306 million to $343 million. This is an increase in LTV of $37 million, a return on investment of 18.5 to 1. Suppose, however, that the CRM were directed in a much more targeted fashion. We will spend a lot of money on our Gold Customers and our Business Professionals. We will spend nothing at all on our Sale Shoppers, and very little on the Occasional Shoppers. What will happen to lifetime value in this situation? Here is a possible outcome:
The total marketing budget is unchanged at $2 million, but the revised CRM program is directed at the most profitable segments. The result is an increase of lifetime value of $146 million, instead of $37 million, a ROI of 73 to 1. What can we conclude from this analysis?
CRM can be quite useful when directed at customer retention
Segmenting customers into meaningful groups and applying differing marketing strategies to each group can be highly profitable.
The measure of CRM when used with retention is change in lifetime value, and return on investment.
The Benefits of CRM
We can sum up the benefits of CRM as creating efficiencies by:
Identifying actionable customer segments
Reduction of marketing expenses by concentrating on a limited group of customers (a segment) at any one time
The Cost of CRM
The Costs of CRM can be broken down into various categories:
In this example, we have a CRM management staff administering a customer and prospect database of about 4 million households with appropriate software and hardware. The CRM portion of the data warehouse is $4 million per year. We are sending out two communications to our customers and prospects per year at a cost of $0.50. The total CRM cost per household per year is $2.60. How can we evaluate this cost? Lets compare the lifetime value of a control group of customers with those which receive our CRM marketing tactics. Here is a possible result:
One questionable item in the above calculations is the data warehouse itself. It is possible to conduct CRM with a marketing database alone without the warehouse. What would happen to these numbers without the warehouse? The cost per household drops to $1.60 and the ROI increases to 12.4. Is this possible?
The assessment of whether a enterprise undertaking CRM is accomplishing the tasks with such things as benchmark, return-on-investment scenarios and well as the new metrics for whether or not the CRM system is improving the overall customer value.
In general there is a shortage of expertise in the growing customer relationship management. The dot.com companies are saturated with data about consumer behavior
Two very experienced marketers were hired recently by the California Automobile Association. They turned down a $22 million dollar warehouse, spending instead only $1.2 million for a marketing database. They achieved spectacular results similar to those shown above. It may take many years before most corporations realize that a warehouse may not be required for CRM. In the mean time they will continue to build their warehouses and, hopefully, get some good out of them.
There are several key strategies that will need to present if your company is going to meet the challenges of the CRM future.
Companies will need to heighten their focus on customers and shifting their attention from attracting new customers to cultivating their current customers and prospects, retaining the profitable ones and spending less corporate resources on the unprofitable one.
To grow revenues, must work harder to discern the to discern the differences between segments of customers and to customize offerings based on the relative value of different customer to the enterprise. (Enterprise) is all customer information shared equally with all divisions and sister companies)
Having a clear customer relationship strategy will be increasingly critical. This strategy will determine which customers the organization plans to attract, retain and cultivate. And what balance of technology and process is necessary to drive the customer relationship farer.
Companies must re-engineer the process in order to accommodate this new consumerism. Provide for customers to deliver feedback and then have the ability to not only remember the feedback but also be able to take action. Re-engineer in order to eliminate the internal barriers that often obstruct the relationship building activities.
Creating a set of metrics that a company can use to determine if their customer relationship management program is working and that the cost of implementing such a program has positive ROI. Thus these measurements will be instrumental in identifying customer segments that are most profitable.
Finally, staffing and empowering the frontline is critical to success. While technology is reducing costs it must be enabling the customer to have interaction with the corporation. Corporations must empower their employees