Chapter 1: CRM, Database Marketing and Customer Value

www.drvkumar.com Copyright Dr. V. Kumar, 2005

Customer Relationship Management

A Databased Approach

V. Kumar

Werner J. Reinartz

Instructor’s Presentation Slides


Chapter One

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


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


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


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


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


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


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


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


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


Relevance of CRM

• 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


Time Scarcity and Value Consciousness- Example

51.3

42.5

55

45

30

35

40

45

50

55

60

Se

co

nd

s

UK Worldwide

1998 1999

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

Household Appliances

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-3.5%

Scheduled Airlines

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-8.4%

Commercial Banks

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.7%

Parcel Delivery

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.5%

Personal Computers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-9.0%

Publishing/ Newspapers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-12.5%

(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


Decreasing Customer Loyalty- Example

30.2 30.7

14.1

21.1

0

5

10

15

20

25

30

35

1 2 3 4+

% o

f c

on

su

me

rs

1996

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


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)


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


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


Changes with respect toMarketing 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


Implications of Changesin Business Environment

• 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


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


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


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

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