CREATING VALUE THROUGH CUSTOMERS By Lynette Ryals, Teaching Fellow in Marketing Customer relationships are vital business assets and Customer Relationship Management (CRM) is about managing those relationships. The benefits of CRM to customers are increased convenience and speed of service and the benefit to organisations is their ability to develop profitable customer-focused strategies. Customer Relationship Management (CRM) is about how organisations use IT to help manage their relationships with customers in order to maximise value creation both for the customer and the company. The objective of CRM is thus to identify, satisfy and retain the company’s best customers. Recently, there has been an explosion of interest in CRM, because it represents a practical way for organisations to implement relationship marketing. Relationship marketing emphasises the benefits of retaining customers, since loyal customers are known to be more profitable. A number of studies by Bain & Co demonstrated that a 5% increase in customer retention results in an increase in average customer lifetime value of between 35% and 95%. Some of the industries they mention, and the improvement in customer lifetime value, are software (35%), office building management (40%), credit card (75%), publishing (85%) and advertising (95%). However, to implement relationship marketing successfully companies have to know a lot more about their customers. This means establishing two-way communication between company and customer. Both of these requirements can be met by CRM. The role of technology in enabling CRM is critical. In fact, CRM has also been defined as ‘data driven’ or ‘IT-enabled’ marketing. IT systems are essential for successful implementation, both to facilitate contacts with customers and to analyse stored information about customers in order to develop customer-focused marketing strategies. The market for CRM software was worth more than US$3.8 billion in 1998 and is growing at 40% per annum. The key software components of CRM are data warehouses and the software systems that manage customer interactions. A data warehouse is a massive database of customer information, whilst the software used to manage customer interactions includes web sites, e-commerce and call centre technology. Data warehouses – the engine of CRM The development of data warehouses is just one of the technological advances that has improved the ability of marketers to tailor marketing strategies to customers. Data warehouses collect, clean and store customer information for later analysis. In 1998, a survey by the Economist Intelligence Unit (EIU) found that 83% of companies interviewed expected to have a data warehouse by 2002, more than double the number who considered it relevant in 1996. So how does a data warehouse differ from a traditional customer database? Data warehouses are normally dedicated to ‘off line’ analysis and not the day-to-day processing of transactions. They contain existing customer transaction records and may also incorporate information from other sources, both within and outside the organisation. Once the data warehouse is built, the next step is to data mine and try to discover previously unknown patterns. Data mining comprises a range of data analysis techniques, including cluster analysis and neural networks. Patterns uncovered in the data can be used to develop new marketing strategies. Several food retailers have found quite unexpected buying patterns that associate apparently unrelated products and have used this data to re-arrange their stores so as to improve customer convenience and increase sales. A data warehouse can also help a company to get a view of its entire relationship with a customer. This can be a revelation, particularly in organisations that are organised along product lines rather than by customer. One insurance company, for example, found that the average number of products owned by customers was less than 1.1. In other words, the cross-selling rate was almost zero. This company had hesitated to develop cross-selling campaigns for fear of annoying the customers who already owned several products but in the light of this analysis, that policy was reversed. As the marketing manager later commented, ‘Almost anything we do to cross-sell has got to be an improvement on what we do now.’ The data warehouse also allows an organisation to track the history of its relationship with each customer and thereby increase its customer responsiveness. To obtain an overall view of the entire customer relationship, information for the data warehouse must be collected from all points at which the customer has contact with the organisation. The First Direct example (see box) also demonstrates one way in which information from the data warehouse can impact on customer service. Box 1 Customer responsiveness at First Direct First Direct bank has a sophisticated data warehouse that carries the history of its contacts with each of its customers. One customer telephoned to ask about cashpoint facilities in the ski resort he would be travelling to for his holiday. On his return he rang the bank again about another matter and spoke to a different operator … who immediately asked him if he had had a good skiing holiday! Data warehouses, used properly as part of a relationship marketing strategy, can have powerful results. One North American bank trebled in two years the number of its products sold per household using customer profiling. At Federal Express, a campaign targeted at small businesses brought in 65% more revenue than a similar mass marketing effort. However, the creation of a customer database is merely the start of a process of managing the customer as a strategic asset. The customer relationship has to be managed through the development of customer strategies and appropriate customer contact. Customer contact in cyberspace Developments in IT systems have made customer contact easier than ever before. Key customer contact systems include the Internet, call centres, and other direct sales/service channels. The Internet is widely regarded as the most significant of these. According to a recent survey, 62% of companies described the Internet as ‘vital’, a tenfold increase since 1996. The use of call centres as a means of customer contact has also massively increased, as has the number of bank ATMs (cashpoint machines). These technology applications began as passive means of making customer contact – they were designed so that customers could visit the website, or call the call centre, or drop by the cash point. Increasingly, however, companies are using their customer contact systems actively to do business. Customers who used to search the Internet for product information are increasingly buying directly over the net. Call centres are switching to outbound calling and selling. ATMs are being linked to data warehouses so that messages or product offers can be displayed to customers. Already, about a fifth of consumers say they would prefer to shop electronically rather than visit the shops and it has been forecasted that direct retailing may represent over half the market by 2010. Box 2 Customers like using web sites to buy because they are convenient. Companies win, too, because it is cheaper for them to acquire and service customers via a web site than by traditional means. Federal Express, for instance, reduced its costs by US$100,000 per day – and improved perceived customer service – by allowing customers to track their parcels through the company’s web site, rather than through its call centres. The ability to communicate and do business directly with customers can be very valuable, but it does impose certain requirements for responsiveness on the company. The capabilities offered by the data warehouse and by direct customer contact systems only create value for customers and the company if the management is able to use technology to develop and deliver marketing strategies. This need for customer focus has implications for organisation structure. Organisational implications The development of CRM as a business discipline is beginning to drive change in most leading organisations. These companies are tending to use a cross-functional process approach, rather than the traditional approach to managing customers which divides up responsibility for various aspects of the relationship with the customer between different departments. This process approach is an important characteristic of CRM. A 1998 survey by the EIU found that half those companies questioned expected to be organised around customer groups by 2002. To manage the whole customer relationship, marketing and IT departments will have to work more closely together; the key to successful CRM implementation is an integrated approach. Participation is required from people from marketing, quality management operations, market research and financial accounting, as well as information technology. Organisations may therefore have to restructure in order to maximise the return on their customer information. Research carried out by Cranfield indicated that establishing a joint IT and marketing department was a critical success factor in the implementation of CRM amongst UK banks and insurance companies. The payback from CRM Who benefits from CRM? Technology offers the opportunity to capture information and understand the impact of marketing on purchase behaviour. The customer information file enables better matching of marketing offers to prospects, as well as tracking the effectiveness of marketing programmes as the basis for future planning. CRM also creates value for the customer. The customer benefits from product and/or service offers which are targeted to meet individual needs and from improvements in customer service. Value for the Customer There are a number of ways in which customer service can be improved through CRM. This includes reliability, security, efficiency, and communication as well as quality control and service monitoring. CRM systems also act as an ‘organisational memory’ about the customer. This can benefit the customer by reducing the amount of repetitive form-filling that the customer has to do. Customer preferences can also be kept on record, making placing an order quicker and easier for the customer. Box 3 Ritz-Carlton is an example of such an organisation that makes use of its data warehouse to provide exceptional customer service. The hotel chain provides each staff member with a ‘guest preference pad’ for recording every preference gleaned from conversations with customers and by observation of their behaviour. Every day, these preferences are entered on to a worldwide database. Let’s say the customer calls room service in one of their hotels in Mexico and ask for an ice-cube in her drink. Months later, if she orders a drink in a Spanish Ritz- Carlton, they will ask her if she would like an ice-cube. The use of CRM to provide added value to customers can be directly linked to improved profitability and value-based marketing for the company. Value for the company CRM systems can bring operational benefits and boost company performance; this, in turn, can increase customer satisfaction and long-term success through longer and closer relationships. In addition, customer data analysis enables organisations to identify the customers it does not want to have. The 80:20 rule suggests that 80% of profits are generated by 20% of customers. Some retail banks have found that the picture is even more extreme, with 10% of their current account customers bringing in 100% of their profits. In other words, on average, the other 90% are loss-making. Companies have known for a long time that customer profitability varies and that not all customers are equally desirable. However, it is only with the advent of powerful databases that they are able to quantify and track customer profitability, and forecast customer lifetime value at the level of the individual customer. Previously, companies could only say that customers of a certain type were likely to be more commercially attractive; now they can pinpoint the individuals who are the most attractive customers. These are the customers with whom it is vital to retain long-term relationships. One American retail bank carried out a customer profiling and targeting exercise using data mining techniques. The impact on direct mail campaigns was dramatic. Campaign costs fell by one third and response rates doubled, the number of new accounts increased by 33% and the profitability of these new accounts by the same amount. Defection rates fell by 5% and the lifetime value of these new customers grew by an estimated 20%. By combining an understanding of customer purchasing drivers and customer profitability, companies can tailor their offerings to maximise the overall value of their customer portfolio. Box 4 Value creating at Taco Bell Taco Bell used data mining techniques to identify its most attractive customers. It found that 30% of its customer base accounted for more than 70% of volume and, by focusing its marketing campaigns on these customers, increased sales from US$1.6 billion to US$4.5 billion over six years. Profits increased by more than 300% over the same period. Dell Computers is the arch-exponent of customer data management to improve service and grow market share. Using telephone selling and service, Dell captures consumer profiles, their purchase histories, product needs and feedback and future purchasing plans to target its marketing and product development more effectively. As a result, Dell’s US market share has risen from 1% in 1990 to 9% in 1997. Buzz, not buzz-word The underlying premise of CRM is that share of loyal customers rather than share of market maximises profitability. The overall objective is to develop tailored solutions for loyal and profitable customers. All the signs are that CRM won’t ‘go away’. In the US, organisations are already investing millions of dollars in CRM systems. A recent survey undertaken in the US by Exchange Applications found that many CEOs are making CRM a priority. These business leaders believe that the benefits their companies will obtain from better customer information and the ability to provide better service levels to their customers will translate into substantially higher profits in the future. Cranfield School of Management is currently carrying out a survey into CRM. If you are a manager working in an organisation that has implemented CRM, please fill out our survey at http://www.cranfield.ac.uk/som/crm. Immediate feedback, plus a summary of results, will be available.