Customer Relationship Management
Roger Baran, Christoher Zerres, and Michael Zerres
Notes taken in June, 2010.
There are a number of working definitions for customer relationship management (CRM) - but essentially, they consider the value of an ongoing relationship between a business and a customer that is said to "maximize the customer's value" over time.
CRM originated in the 1990's, as theorists began to consider business operations from a holistic perspective. CRM attempts to consolidate all interactions with customers into a single data-set, similar to the way that all financial transactions are consolidated into an enterprise accounting system, with a goal of having a comprehensive oversight that will lead to more effective and efficient management.
CRM is facilitated by information systems, which have only recently made it feasible to consolidate data from business operations.
Currently, the adoption of CRM is believed to be about 45% of companies in retailing and utilities, 55% of financial services and transportation, and 70% of telecommunications and credit.
The author uses the example of "frequent shopper programs" at grocery retailers, which has been effective in tracking the purchasing habits of customers and is said to have been highly effective in logistics management and the consideration of product mix.
It has also been noticed that customers participate in these programs to obtain the benefit of discounts offered to participants, not because of loyalty to a retailer, and it has not been demonstrated that implementing such a program has had a positive effect on customer loyalty.
It's been noted that "less than half" of managers feel their CRM efforts are achieving corporate objectives and feel the results have been disappointing, but the author asserts that this is because it is still "early in the effort" and indicates that most organizations approach CRM with poorly defined, and in some instances poorly conceived, objectives.
(EN: I'm generally dismissive of those who defend failure with the suggestion that something hasn't had enough time to work, or is being used poorly, but in my own experience as both a customer and a marketer, I would posit that the latter suggestion is not entirely without merit.)
The author notes that, while data is being collected, it is not being effectively used for marketing purposes: customization, mass personalization, and one-to-one marketing have not been effectively implemented, though some companies have been able to use the data for more effective market segmentation.
The author presents an extended example of a "gaming corporation" that tracked the gambling patterns of casino patrons, combined with "over 100" behavioral variables to predict their lifetime value of customers and use individual promotions to attract and retain prime customers. (EN: It stands to note that, while some find the gaming industry distasteful, they have for many years been aggressive in profiling customers to determine their potential value and investing in one-to-one marketing by using "hosts" to manage high value guests and "comps" as promotions and perks to attract and retain customers.)
Field Concerns and Data Collection
The author isolates the data-collection function of CRM as customer data integration (CDI), which consolidates data pertaining to single customers from the myriad of locations where it may exist. The challenges to effective CDI are differences in database, multiple touch points, lack of communications between departments, dissimilarity of the applications that collect data, and inconsistencies in the data collected.
Data generated from a customer may come from a wide array of sources. The purchasing behavior may be observed in multiple locations and channels, marketing data may be collected through surveys, the customer may communicate upstream through a number of channels to communicate before or after the transaction. All of this data must be extracted from operational data stores (the database of a given operational application), it must be verified and cleaned to correct errors in inconsistent data, schematized to a common format, and be housed in a "data warehouse" from which it may be accessed to support business decisions.
An example is provided in which data from multiple sources is examined to determine the number of children in a household. In these sources, the data indicates:
- A "no" response to the question of having children (2000)
- A "yes" response to the same question (2001)
- An indication there is one child under the age of five (2003)
- No data collected about children in the household (2005)
- An indication there are two children in the household (2006)
- An indication that there are two children in the household (2007)
- An indication that there is a boy, age two, and a girl, age seven (2008)
The data appears to be inconsistent, though if you consider the dates of collection, it becomes clear that the household includes a girl born in 2001 and a buy born in 2006 (and if the present year is 2010, their current ages are four and nine).
The example above demonstrates the need to consider data, rather than accepting it at face value, in order to arrive at meaningful and accurate information - but of course, the solution is not always as clear-cut.
The goal of collecting data is to arrive information that is as accurate and granular as possible. In some instances, it may mean that the most recent data is given precedence; in others, "majority rules" may arrive at an accurate conclusions; and in still others, there may be some systems whose data is given greater credibility.
As an aside, the author notes that there may be a legal obstacle to using "old" data for marketing activity (particularly, using contact information collected for one purpose to a different one at a later time), but there are currently no prohibition against using data from older sources to "clean" newer data, nor are all data given the same protection (contact information is a particular concern, but demographic information such as age or gender is not).
Sales Automation
The use of data for sales automation has improved the efficiency and effectiveness of marketing efforts by identifying the qualities of customers who are considered to be most likely to purchase.
As opposed to undertaking great expense to attempt to sell to a broad audience, customer data can be used to direct sales efforts at those who are more likely to be inclined to buy (effectiveness) and not wasted on those who do not have the same inclination (efficiency). (EN: it's also worth noting that refraining from pestering customers with offers that are unappealing also contributes to a better brand experience and long-term customer relationship.)
Again, there are few examples of instances in which it has been used for one-to-one marketing. One such example is the sale of information systems to corporate customers, in which the cost involved in presenting information in advance of sales requires suppliers to be more circumspect in choosing the customers whom they are willing to pitch.
In other instances, customer data is used for market segmentation (such as advertising luxury automobiles only to customers who can afford them), where there is less expense in selling, but les per-sale profit to cover the costs of intensive scrutiny of customers. However, the latter costs are expected to decrease as CRM improves over time.
The author also notes that the first companies to get CRM "right" will have a short-term competitive advantage, but as the practice catches on, other firms will need to implement CRM as a competitive necessity.
(EN: A good point, but consider that the value of relationship marketing is in the nature of a relationship. There is significant first-mover advantage in establishing a relationship with a customer, in that it will be very difficult for latecomers to get customers to sever ties with firms with whom they have had a highly productive relationship.)
CRM and Customer Privacy
The desire for consumer privacy has "potentially devastating" consequences to CRM, as consumers and protection agencies are currently exerting considerable pressure upon legislators to prevent companies from leveraging the benefits of CRM. Particular areas of concern have been in financial services, health care, and any protect that is intended for children.
The concern over liability has led responsible companies to be extremely cautious in their use of customer data, even to the degree of appointing a C-level executive dedicated to the task (Chief Privacy Officer), and considerable effort has been expended on considering the ethical use of customer data and establishing policies and procedures.
(EN: It stands to note that consumer protection groups and regulators often focus on the lowest common denominator: the unethical behavior of some is used to place constraints on those whose behavior is entirely ethical, which is a dysfunction of politics and culture, but nonetheless a "real" issue with which businesses must contend.)
The primary cause of concern seems to pertain to sales promotion: instances in which a company proactively contacts a customer with an unsolicited offer. In this regard, the customer's (reasonable) demands are that a company with whom they have entrusted their personal information should not contact them without permission, and that a company should not provide that information to others that might do the same.
Even an organization that seeks to market ethically may run afoul of these demands in instances where there are multiple touch-points within an organization that are not adequately orchestrated (such that the consumer receives an e-mail, a letter, and a phone call about the same product). The solution to this problem is self-evident.
It's also noted that, in obtaining permission to market customers, companies favor the opt-out approach to the opt-in, as they perceive that customers are unlikely to take action to volunteer to receive marketing messages, but likely to neglect to take action to prevent the same. Hence, opt-out provides a company with a larger audience for its future marketing efforts.
The opt-out approach, while not yet illegal, is problematic. Especially in instances where the ability to opt-out is not readily noticeable, or when the customer has the sense (correctly or otherwise) that opting out will cause difficulty with the present transaction.
Effective CRM Communication
The core purpose of CRM is to improve communication to customers, by considering the customer's previous behavior and information known about them from other sources, in determining future messaging.
Tailoring communications to customers is not a new practice. The author points to the example of direct marketing, which considers the previous responses of a customer in deciding whether the include them in future mailings, or even in magazines, where the advertisements and editorial content may be customized according to each subscriber's demographics. It is extremely common in the retail sector, in which a service representative may be assigned to serve particular customers.
In considering whether to communicate an offer to a customer, one must evaluate their likelihood to respond favorably (and in some instances, to take no offense) to an offer. This means considering factors such as the customer's buying cycle, their tastes and preferences, and their response to previous communications.
To be successful, a CRM effort must begin with a clear objective: to retain a customer, to increase the purchase quantity, or to increase their purchase frequency.
To that end, four "keys" to successful CRM communications are:
- To develop communication with the customer in mind (ultimately, the motivation of the customer depends on their interests, not the interests of the merchant)
- To develop simple rather than complex communications (based on the direct correlation of the present offer to previous behavior or qualities)
- To make data collection transparent to customers (to avoid the negative reaction of customers who have an expectation of pricacy)
- To provide the customer value in addition to the offer carried within the communication.
(EN: The fourth item is not clearly described, though I think it may pertain to marketing tactics where the customer is provided information that has intrinsic value, which can be an effective tactic, but is not a requirement.)
Obtaining Organizational Support
It is increasingly difficult to obtain organizational support for CRM. A recent study suggests that only 35% of executives are satisfied with the results of their present efforts; the cost and time investment is significant; and CRM initiatives do not have sufficient visibility within an organization to garner the interest and support of senior management.
These obstacles may be difficult to overcome until CRM has established a track-record of success that has been made highly visible, so the situation is very much in the nature of Catch-22.
To overcome the problems, the author recommends a more cautious and circumspect approach to defining strategy and objectives for CRM, primarily bring them inline with the company objectives (a company that is primarily interested in gaining new customers, rather than increasing revenue from existing ones, will likely not be very interested in CRM).
The author suggests that a covert and piecemeal approach to leveraging CRM, starting small with the intention of using success to generate greater interest, is unlikely to succeed. To be effective, CRM must be implemented on the enterprise level, leverage information from all data systems, and the activities of all employees who have customer contact be orchestrated.
Lessons Learned
The author lists a few "key lessons" learned from early adopters of CRM:
- Use your customer database effectively. Progressive Insurance and GEICO have become expert at analyzing existing customer data to better tailor their policy offerings to narrowly defined market segments.
- Identify the value of market segments. Capital One has determined the lifetime value of a customer, and has had considerable success in encouraging their existing customers to increase their charge volumes, which has been more cost-effective than pursing new customers.
- Build customer relationships. The author cites a noted failure (Safeway grocery stores) in focusing on the use of CRM to promote short-term sales rather than to develop a long-term relationship with their customers.
- Favor your best customers. United and American Airlines identify their most profitable customers by providing "elite" classes within their frequent-flyer program and offering additional perks to safeguard their most profitable customers against competitors, thereby significantly reducing churn rates.
The Future of CRM
CRM is a relatively new practice, having been conceived only slightly over a decade ago, so it is expected that it will continue to evolve.
At the present time, the glimmer of novelty has faded, such that executives demand to have CRM (Without knowing what it means) has faded, and there are fewer vendors hawking CRM solutions to fill this demand. In the end, this may have a positive effect, in that those who remain interested in CRM are likely to take a more sober and calculated approach.
Ultimately, the author feels that the future of CRM is "bright." Those companies that are willing to invest time and budget into getting it "right" will reap the rewards, and the marketplace can be expected to follow their lead - though not in the mindless pursuit of a novel fad, but with meticulous and sober business judgment that will yield appreciable results in their marketing efforts.