Customer Relationship Management: a Framework Essay Example

tone of the conversation has changed from customer acquisition to retention. This requires a different mindset and 2 different and new sets 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 two activities from each other, the answer is usually that acquisition dominates retention. The impetus for this interest in CRM came from Reichheld4 where he showed the dramatic increase in profits from small increases in customer retention rates. For example, his studies showed that as little as a 5% increase in retention had impacts as high as 95% on the net present value delivered by customers (advertising agencies) with a low of 35% (computer software).

Other studies done by consultants such as McKinsey have shown that repeat customers generate over twice as much gross income than 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 “churn. ” For example, Exhibit 1 shows the results from a 1999 McKinsey study on the impact of improvements in several customer-based metrics on the 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 3 technical jargon related to terms like OLAP (on-line analytical processing) and CICs (customer interaction centers). A major purpose of this paper is to provide a managerially useful, end-to-end view of the CRM process from a marketing perspective. The basic perspective taken is that of the customer, not the company.

In other words, what do managers need to know about their customers and how is that information used to develop a complete CRM perspective? The basic model is shown in Exhibit 2 and contains a set of 7 basic components:

1.  A database of customer activity.
2. Analyses of the database.
3. Given the analyses, decisions about which customers to target.
4. Tools for targeting the customers
5. How to build relationships with the targeted customers.
6. Privacy issues.
7. Metrics for measuring the success of the CRM program. In addition, academics are interested in the CRM space for its research potential. Implications for new research areas will be discussed throughout the paper organized by the components of the CRM framework.

Finally, at the end of the paper, we will discuss several future directions for CRM.

Creating a Customer Database A necessary first step to a complete CRM solution is the construction of a customer database or information file. 5 This is the foundation for any customer 4 relationship management activity. For Web-based businesses, this 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 details (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-initiated contact.
• Descriptive information. This is for segmentation and other data analysis purposes.

Response to marketing stimuli. This part of the information file should contain whether or not the customer responded to a direct marketing initiative, a sales contact, or any other direct contact.

• The data should also be 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 of the product involves the kind of customer-company interaction that naturally leads to better data collection. For example, banks have been at the forefront of CRM activities for several years. Telecom-related industries (long-distance, wireless, cable services) similarly have a large amount of customer information.