A Framework for Customer Relationship Management

The World Wide Web is the opportunity afforded companies to choose how they interact with their customers. The Web allows companies to build better relationships with customers than has been previously possible in the offline world. By combining the abilities to respond directly to customer requests and to provide the customer with a highly interactive, customized experience, companies have a greater ability today to establish, nurture, and sustain long-term customer relationships than ever before. These online capabilities complement personal interactions provided through salespeople, customer service representatives, and call centers. At the same time, companies can choose to exploit the low cost of Web customer service to reduce their service costs and offer lower-quality service by permitting only electronic contaa.

The flexibility of Web-based interactions thus permits firms to choose to whom they wish to offer services and at what quality level.
Indeed, this revolution in customer relationship management (CRM)’ has been referred to as the new “mantra” of marketing.^ Companies such as Siebel, E.piphany, Oracle, Broadvision, Net Perceptions, Kana, and others have developed CRM products that do everything from track customer behavior on the Web to predicting their future moves to sending direa e-mail communications.

This has created a worldwide market for CRM products and services of $34 billion in 1999, a market that is forecasted by IDC to grow to $125 billion by 2004.

The need to better understand customer behavior and the interest of many managers to focus on those customers who can deliver long-term profits has changed how marketers view the world. Traditionally, marketers have been trained to acquire customers, either new ones who have not bought the product before or those who are currently competitors’ customers. This has required heavy doses of mass advertising and price-oriented promotions to customers and channel members. Today, particularly tor the company’s “best” customers, the tone of the conversation has changed from customer acquisition to retention.

This requires a different mindset and a different and new set of tools. A good thought experiment for an executive audience is to ask them how much they spend and/or focus on acquisition versus retention activities. While it is difficult to perfectly distinguish the iwo activities from each other, the answer is usually that acquisition dominates retention.

The impetus for this interest in CRM came from Reichheld, who demonstrated dramatic increase in profits from small increases in customer retention rates.” His studies showed that as little as a 5% increase in retention had impacts as high as 95% on ihe net present value delivered by customers. Other studies done by consultants such as McKinsey have shown that repeat customers generate over twice as much gross income as new customers. The considerable improvements in technology and innovation in CRM-related products have made it much easier to deliver on the promise of greater profitability from reduced customer “chum.”

For example. Exhibit 1 shows the results from a 1999 McKinsey study on the simulated impaa of improvements in a number of customer-based metrics on the market value of Internet companies. The metrics are divided into three categories: customer attraction, customer conversion, and customer retention.
As can be seen, the greatest leverage comes from investments in retention. If revenues from repeat customers, the percentage of customers who repeat purchase, and the customer churn rate each improves by 10%, the company value was found to increase (theoretically) by 5.8%, 9.5%, and 6.7% respectively.

A problem is that CRM means different things to different people. For some, CRM means direct e-mails. For others, it is mass customization or developing products that fit individual customers’ needs. For IT consultants, CRM translates into complicated technical jargon related to terms such as OLAP (online analytical processing) and CICs (customer interaaion centers).

What do managers need to know about their customers and how is that information used to develop a complete CRM perspeaive? Exhibit 2 shows the basic modeL which contains a set of 7 basic components:
• a database of customer aaivity,
• analyses of the database,
• given the analyses, decisions about which customers to target,
• tools for targeting the customers,
• how to buiid relationships with the targeted customers,
• privacy issues, and
• metrics for measuring the success of the CRM program.

EXHIBIT 2. Customer Relationship
Management Model
Create a Database
Analysis
Customer Selection

Customer Targeting
Relationship Marketing
Privacy Issues
Metrics

Creating a Customer Database

A necessary first step to a complete CRM solution is the construction of a customer database or information file.’ This is the foundation for any customer relationship management aaivity. For Web-based businesses, constructing a database should be a relatively straightforward task, as the customer transaction and contact information is accumulated as a natural part of the interaction with customers. For existing companies that have not previously collected much customer information, the task will involve seeking historical customer contact data from internal sources such as accounting and customer service.
What should be collected for the database? Ideally, the database should contain information about the following:
• Transactions—This should include a complete purchase history with accompanying deLails (price paid, SKU, delivery date).
• Customer Contacts—Today, there is an increasing number of customer contact points from multiple channels and contexts. This should not only include sales calls and service requests, but any customer- or company-initialed contact.
• Descriptive Information—This is for segmentation and other data analysis purposes.
• Response to Marketing Stimuli—This part of the information file should conlain whether or not the customer responded to a direct markeiing initiative, a sales contact, or any other direa contact.
The daia should also be represented over time.
Companies have traditionally used a variety of methods to construct their databases. Durable goods manufacturers utilize information from warranty cards for basic descriptive information. Unfortunately, response rates to warranty cards are in the 20-30% range leaving big gaps in the databases. Service businesses are normally in better shape since the nature ol ihe product involves the kind of customer-company interaaion that naturally leads to better data collection. For example, banks have been in the forefront of CRM aaivities for a number of years. Telecom-related industries (long distance, wireless, cable services) similarly have a large amount of customer information.”
The following are illustrations of some corporate database-building efforts:
• The networking company 3Com created a worldwide customer database from 50 “legacy” databases scattered throughout their global operations.
They built customer records from e-mails, direct mail, telemarketing, and other customer contacts, with descriptive information by department, division, and location.
• Thomson Holidays, the British tour company developed a Preferred Agents Scheme to enlist the assistance of travel agents in building the database. They collect customer descriptive information and data on trips taken. This enables them to calculate the profit on a per customer trip basis.
• Taylor Made, the golf equipment manufacturer, has a database of over 1.5 million golfers with their names, addresses, e-mail addresses, birthdays, lypes of courses played, and vacations taken.
Companies such as Procter & Gamble and Unilever ihal sell frequently purchased consumer products have greater problems constructing databases due to a lack of systematic information about their millions of customers and the fact that they use intermediaries (i.e., supermarkets, drug stores) that prohibit direct contact. The challenge is to create opportunities for customer inieraction and, therefore, data collection. This can be from running contests to encouraging customer visits to Web sites. Waldenbooks offers a 10% discount on purchases if customers provide information to the company and become Preferred Readers.

Exhibit 3 gives a general framework for considering the problems in database construction.’ Firms in the upper left-hand quadrant have many direct customer interactions (banks, retail) and therefore have a relatively easy job construaing a database. Firms in the lower right-hand quadrant have the most difficult job because the interact less frequently with customers and those interactions are indirect (through channels) in nature. Auto and furniture manufacturers are examples here. The other two boxes represent intermediate situations.

The point of this framework is that unless you are in the high-direct box, you have to work harder to build a database. The Thomson Holidays example above provides a good illustration of company that uses channel incentives lo take a low frequency product and still obtain customer information. Kellogg has developed a creative solution to the problem through its “Eat and Eam” program where children find a 15-digit code inside cereal boxes and then go to the company’s Web site, enter some personal information, and become eligible for free toys. The task for companies is then to move towards the upper left-hand quadrant through increased customer contaa and “event” marketing.

EXHIBIT 3. Getting More Customer Interaction

High

Interaction

Frequency

Low

Customer

Direct

Banks

Telecom

Retail

Personal

Computers

Internet

Infrastructure

Interaction

Indirect

Airlines

Packaged GocxJs

Drugs

Furniture

Autos

to a lack of

by Russell S. Winer