Customer Relationship Management A Databased Approach V. Kumar Werner J. Reinartz Instructor’s Presentation Slides

Chapter One CRM, Database Marketing and Customer Value

CRM, Database Marketing

and Customer Value

Overview Topics discussed: Marketing concept Link between CRM and Database Marketing CRM and Customer value Conceptualizations of CRM Relevance of CRM Data based Customer Value Management

Topics discussed:

Marketing concept

Link between CRM and Database Marketing

CRM and Customer value

Conceptualizations of CRM

Relevance of CRM

Data based Customer Value Management

Marketing-definition “Marketing is an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.” American Marketing Association,2004

“Marketing is an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.”

American Marketing Association,2004

Link Between CRM and Database Marketing Database Marketing Customer Databases Identify and analyze customer population Group based on similarities Recommend separate marketing campaigns for different groups CRM Applies database marketing techniques at customer level Develops strong company-to-customer relationships DB CRM

Database Marketing

Customer Databases

Identify and analyze customer population

Group based on similarities

Recommend separate marketing campaigns for different groups

CRM

Applies database marketing techniques at customer level

Develops strong company-to-customer relationships

CRM Capture customer data and interact with the customer simultaneously Develop specific strategies for interaction with each customer Better relationships with profitable customers Locating and enticing new customers that will be profitable Finding appropriate strategies to deal with unprofitable customers, including termination of relationships

Capture customer data and interact with the

customer simultaneously

Develop specific strategies for interaction with each customer

Better relationships with profitable customers

Locating and enticing new customers that will be profitable

Finding appropriate strategies to deal with unprofitable customers, including termination of relationships

Link Between CRM and Customer Value Customer Value: The economic value of the customer relationship to the firm – expressed on the basis of contribution margin or net profit CRM is the practice of analyzing and utilizing marketing databases and leveraging communication technologies to determine corporate practices and methods that will maximize the lifetime value of each individual customer to the firm

Customer Value: The economic value of the customer relationship to the firm – expressed on the basis of contribution margin or net profit

CRM is the practice of analyzing and utilizing marketing databases and leveraging communication technologies to determine corporate practices and methods that will maximize the lifetime value of each individual customer to the firm

Using Customer Value for Marketing Decisions Benefits Decrease in Costs Maximization of Revenues Improvement in Profits and ROI Acquisition and Retention of Profitable Customers Reactivation of Dormant Customers

Benefits

Decrease in Costs

Maximization of Revenues

Improvement in Profits and ROI

Acquisition and Retention of Profitable Customers

Reactivation of Dormant Customers

Conceptualizations of CRM Functional level: focuses on technology Sales force automation in the sales function Campaign management in the marketing function Customer facing front-end level: focuses on total customer experience To build a single-view of customers across contact channels To distribute customer intelligence to all customer-facing functions Strategy level: focuses on customer satisfaction Frees CRM from technology underpinnings Describes CRM as a process to implement customer centricity in the market and build shareholder value Knowledge about customers affects the entire organization

Functional level: focuses on technology

Sales force automation in the sales function

Campaign management in the marketing function

Customer facing front-end level: focuses on total customer experience

To build a single-view of customers across contact channels

To distribute customer intelligence to all customer-facing functions

Strategy level: focuses on customer satisfaction

Frees CRM from technology underpinnings

Describes CRM as a process to implement customer centricity in the

market and build shareholder value

Knowledge about customers affects the entire organization

Components of CRM from a Business Strategy Perspective Strategic process Spans multiple organizational functions Continuous effort towards becoming customer-centric Selection Resource allocation based on economic value of customer Interactions Exchange of information and goods between customer and firm evolves as a function of past exchanges C R M

Strategic process

Spans multiple organizational functions

Continuous effort towards becoming customer-centric

Selection

Resource allocation based on economic value of customer

Interactions

Exchange of information and goods between customer and firm evolves as a function of past exchanges

Components of CRM from a Business Strategy Perspective (contd.) Customers End-users and intermediaries such as distributors and retailers Greater fine-tuning of segmentation strategies to eventually target individual customers with customized product offerings Optimizing current and future value of customer Maximizing customer equity by maximizing profits over a series of transactions Caution: Managing fairness in the exchange process is important to sustain mutually profitable relationships

Customers

End-users and intermediaries such as distributors and retailers

Greater fine-tuning of segmentation strategies to eventually target individual customers with customized product offerings

Optimizing current and future value of customer

Maximizing customer equity by maximizing profits over a series of transactions

Caution: Managing fairness in the exchange process is important to sustain mutually profitable relationships

Relevance of CRM Firms are facing changes with respect to: Consumers Marketplaces Technology Marketing functions CRM is a response to these changes

Firms are facing changes with respect to:

Consumers

Marketplaces

Technology

Marketing functions

CRM is a response to these changes

Changes with respect to Consumers Growing consumer diversity- due to demographic and behavioral trends Ageing of the population in developed countries- “de-youthing” Increased diversity in ethnicity of population Increasing individualization Time scarcity Activities compete for customers’ time Value consciousness and intolerance for low service levels Rise in customer expectations Decline in consumer satisfaction level

Growing consumer diversity- due to demographic and behavioral trends

Ageing of the population in developed countries- “de-youthing”

Increased diversity in ethnicity of population

Increasing individualization

Time scarcity

Activities compete for customers’ time

Value consciousness and intolerance for low service levels

Rise in customer expectations

Decline in consumer satisfaction level

Time Scarcity and Value Consciousness- Example Average waiting time (in seconds) after which calls are abandoned by customers Source: : Merchants International Call Center Report Figure shows that customers are less and less satisfied with the treatment they get from corporate call centers. The average time after which calls are abandoned fell by about 19% in just one year.

Declining Customer Satisfaction- Example (American Customer Satisfaction Index) with products and services Source : http://www.theacsi.org, University of Michigan

Changes with respect to Consumers (contd.) Information availability and technological aptitude Customers more knowledgeable in making purchase decisions More comparisons across providers and transactions Decrease in loyalty Diversification of holdings across service providers even within same household Consequences Marketers should be wary of placing heavy time demands on consumers The major challenge facing companies has become meeting consumer demands rather than cost reduction

Information availability and technological aptitude

Customers more knowledgeable in making purchase decisions

More comparisons across providers and transactions

Decrease in loyalty

Diversification of holdings across service providers even within same household

Consequences

Marketers should be wary of placing heavy time demands on consumers

The major challenge facing companies has become meeting consumer demands rather than cost reduction

Decreasing Customer Loyalty- Example Number of financial service providers Source : Unidex Report Number of different financial service providers that respondents are associated with

Changes with respect to the Marketplace More intense competition between firms for customers Fragmentation of markets Diminishing product-quality differentiation Consequences Value added to customers by offering customized product and service propositions To maintain market share, need to realign business strategy to become customer-centric

More intense competition between firms for customers

Fragmentation of markets

Diminishing product-quality

differentiation

Consequences

Value added to customers by offering customized product and service propositions

To maintain market share, need to realign business strategy to become customer-centric

Product Parity of Grocery Private Label (US) More switching to private-label products with decrease in disposable income . Switching back to national brands with economy picking up and decreased unemployment. This link broken today. ( Source: Information Resources, Sloan Management Review, BCG Analysis)

More switching to private-label products with decrease in disposable income . Switching back to national brands with economy picking up and decreased unemployment. This link broken today. ( Source: Information Resources, Sloan Management Review, BCG Analysis)

Changes with respect to Data Storage Technology Better technology, cheaper and larger storage units Huge increase in demand for data storage Increased popularity of data warehouses Consequences Better information about customer behavior and attitudes Better prediction of customer buying behavior Too much data can lead to misapplication and wrong analysis

Better technology, cheaper and larger storage units

Huge increase in demand for data storage

Increased popularity of data warehouses

Consequences

Better information about customer behavior and attitudes

Better prediction of customer buying behavior

Too much data can lead to misapplication and wrong analysis

Changes with respect to Marketing Function Media dilution and multiplication of channels Proliferation of communication media focused on the customer Direct-to-consumer channels - email, telephone Interactive media - internet, interactive TV etc Reduced need for techniques focused on price alone due to Availability of new data collection and communication tools Marketing processes such as loyalty programs

Media dilution and multiplication of channels

Proliferation of communication media focused on the customer

Direct-to-consumer channels - email, telephone

Interactive media - internet, interactive TV etc

Reduced need for techniques focused on price alone due to

Availability of new data collection and communication tools

Marketing processes such as loyalty programs

Changes with respect to Marketing Function (contd.) Decreasing market efficiency and effectiveness due to Focus on acquisition, price and short-term transactions Proliferation of new contact channels Increased or flat cost of contact Decreased customer response Reduced value for advertising in any medium Consequences Pressure on the marketing function Marketing in danger of being restricted to advertising and media planning

Decreasing market efficiency and effectiveness due to

Focus on acquisition, price and short-term transactions

Proliferation of new contact channels

Increased or flat cost of contact

Decreased customer response

Reduced value for advertising in any medium

Consequences

Pressure on the marketing function

Marketing in danger of being restricted to advertising and media planning

Implications of Changes in Business Environment Greater demand for learning about Customer preferences Product and service customization Focus on customer-centric instead of product-centric strategies

Greater demand for learning about

Customer preferences

Product and service customization

Focus on customer-centric instead of product-centric strategies

Data Based Customer Value Management To satisfy increasing customer heterogeneity To address concerns of marketing accountability To put available data to use To use customer profitability as the key objective function

To satisfy increasing customer heterogeneity

To address concerns of marketing accountability

To put available data to use

To use customer profitability as the key objective function

Benefits of Data Based Customer Value Management Approach Integrate and consolidate customer information Provide consolidated information across all channels to assist in timely and relevant communication with customers Manage customer cases Personalize the service and products offered to each customer to meet expectations Automatically and manually generate new sales opportunities Provide flexibility to adapt campaigns to take changes in customer behavior or information into account

Integrate and consolidate customer information

Provide consolidated information across all channels to assist in timely and relevant communication with customers

Manage customer cases

Personalize the service and products offered to each customer to meet expectations

Automatically and manually generate new sales opportunities

Provide flexibility to adapt campaigns to take changes in customer behavior or information into account

Benefits of Data Based Customer Value Management approach (contd.) Yield faster and more accurate follow-up on sales leads, referrals and customer enquiries Manage all business processes by introducing a central point of control ensuring all business processes are executed in accordance with correct and effective business rules Give top managers a detailed and accurate picture of all sales and marketing activities Instantly react to a changing business environment

Yield faster and more accurate follow-up on sales leads, referrals and customer enquiries

Manage all business processes by introducing a central point of control ensuring all business processes are executed in accordance with correct and effective business rules

Give top managers a detailed and accurate picture of all sales and marketing activities

Instantly react to a changing business environment

Summary From a strategic perspective, CRM is the process of selecting the customers a firm can most profitably serve and shaping the interactions between a company and these individual customers Assessing Customer Value is critical to CRM Rapid changes are taking place in the environment in which firms operate with respect to customers, market places, technology, and marketing functions These changes have driven the marketplace to become relationship-based and customer-centric CRM’s goal is to optimize the current and future value of the customers for the company

From a strategic perspective, CRM is the process of selecting the customers a firm can most profitably serve and shaping the interactions between a company and these individual customers

Assessing Customer Value is critical to CRM

Rapid changes are taking place in the environment in which firms operate with respect to customers, market places, technology, and marketing functions

These changes have driven the marketplace to become relationship-based and customer-centric

CRM’s goal is to optimize the current and future value of the customers for the company