Customer Relationship Management A Databased Approach

V. Kumar Werner J. Reinartz Instructors Presentation Slides

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Chapter One

CRM, Database Marketing and Customer Value

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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

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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

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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

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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

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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

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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

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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

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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

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

CRM is a response to these changes

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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

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Time Scarcity and Value ConsciousnessExample

Average waiting time (in seconds) after which calls are abandoned by customers
60 55 55 50 45 45 40 35 30 UK Worldwide 42.5 1998 1999 51.3

Seconds

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.

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Declining Customer Satisfaction- Example

Scheduled Airlines
Household Appliances

Commercial Banks
0

P arcel Delivery
0

P ersonal Computers
0 85 80 75 70 65

Publishing/ Newspapers

85

85

80

80

75

75

70

70

65

65

60

-8.4%
60

-3.5%
60
6 8 2000 2002

(American Customer Satisfaction Index) with products and services Source: http://www.theacsi.org, University of Michigan www.drvkumar.com Copyright Dr. V. Kumar, 2005

8 20 02 0 02 0

85

85

85

80

80

80

75

75

75

70

70

70

65

65

65

-2.7%
8 2000 2002

60

-2.5%
60

-9.0%
6 8 20 20 00 02

60

-12.5%
6 8 20 02 0 02 0

8 20 20 00 02

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

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Decreasing Customer Loyalty- Example

Number of different financial service providers that respondents are associated with
35 30.2 30 % of consume s 25 20 15 10 5 0 14.1 21.1 30.

1996

4+

Number of financial service providers

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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

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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)

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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

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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

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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

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Implications of Changes in Business Environment

Greater demand for learning about

Customer preferences Product and service customization

Foc s on c sto er-centric instead of prod ct-centric strategies

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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

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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

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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

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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 relationshipbased and customer-centric CRMs goal is to optimize the current and future value of the customers for the company

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