CUSTOMER RELATIONSHIP MANAGEMENT OVERVIEW A product manager, unsurprisingly and appropriately, focuses on selling a product.

Yet both the thrust of this book and the trend in marketing is toward customer-focused activities. The focus thus shift from transaction-based activities to long-term relationship building. All companies face this problem. Providers of frequently purchased products and services, from retail gasoline as well as less frequently purchased durable and industrial goods, have attempted to build higher levels of customer satisfaction through the development of better relationships with their customers. Many of these relationships are intended to increase repeat purchasing rates and therefore increase long-term sales and profits. Some relationships are not long-term in nature however, so it is important for the marketing manager to understand what kind of relationship the customer wishes to have with your company and its brands. What is the impact of high switching rates between products? The cellular industry is an excellent example. Consider the huge expense of getting customers to switch cellular suppliers in the United States. It has been estimated that it costs a cellular company $350$475 in discounts, promotions, and advertising expenditures to sign up each subscriber; each percentage point increase in churn costs enough to reduce the total market value of the cellular companies by $150 million. However, the data illustrate that the amount of money that Verizon, Nextel, Cingalur, and others have spent have largely attracted switchers. ECONOMICS OF LOYALTY A simple example demonstrates the economic power and importance of loyalty. A number of years ago, a passenger flying on a British Airways(BA) flight from London to San Francisco complained about being seated near the smoking rows in the coach section. Although there is no in-flight smoking today, many readers will identify with this travelers complaint; being one or two rows from the smoking area on a 10-hour flight was more than annoying. The coach section was full and the dissatisfied customer was a regular BA customer. A simple solution would have been to move the customer to business class in an unobtrusive way because there were unoccupied seats in that section. Our guess is that such a move would have gained a strongly loyal customer at a very low marginal cost. However, the BA personnel declined to move the passenger, who very loudly indicated that he would never fly BA again. This example illustrates a very important concept: lifetime customer value. Compare the amount of revenue and profits that would be derived from the customer to the small incremental cost of moving him to business class. When you lose a customer for life, you are actually losing the stream of income that would have been produced over the customers lifetime. In addition, how many other potential customers will he tell about it.

ACQUISITION COST Obviously, any new customer involves some incremental costs, called acquisition costs. For example, American express must send a number of direct mail pieces or make telemarketing pitches to obtain new customers. New customers of industrial equipment require more sales calls than existing ones. Thus, acquisition costs represent an initial investment in a customer. BASE PROFIT This is simply the profit margin a company earns from an average customer. The longer a customer is retained, the longer the base profit is earned. REVENUE GROWTH Retained customers often have been found to increase their purchase quantities over time. This is an intuitive finding. Think about a store to which you have become more loyal over a period of time. It is likely that you not only shop there regulary, but that you also buy more items there. Alternatively, you might purchase life or home insurance from the company from which you purchase auto insurance. OPERATING COSTS Existing customer also frequently cost less to serve than new customers. The former have a better knowledge of the companys systems and procedures. For exampl e, if you are a good customer of the direct mail clothing company Lands End, you undoubtedly know how to fill out the form and how to read the product descriptions. REFERRALS Good customers also talk to their friends and neighbours about your company. Additional business comes from favourable word of mouth by satisfied customers. This is a particularly good source of new business for service companies. PRICE PREMIUM Loyal customers are often more price insensitive than customers who need a price inducement to switch or to become a new customer. When was the last time you checked the price of your favourite brand of toothpaste? Such loyal customers are getting significant customer value from using the product or service and are not concerned about price. A FRAMEWORK FOR CUSTOMER RELATIONSHIP MANAGEMENT CRM has come to mean different things to different people. For some managers, CRM means sales force contact software like the products sold by salesforce.com. for others, it means telephone call centers for contact management. Additionally, many focus their attention on loyalty programs such as harrahs Total Rewards program, which provides incentives for players to repeat their visits to their casinos.

1. Constructing a customer database. 2. Analyzing the database. 3. Based on the analysis, selecting customers to target. 4. Targeting the selected customers. 5. Developing relationship programs with the customers in the target group. 6. Considering privacy issues. 7. Measuring the impact of the CRM program. CREATING THE DATABASE The core of a CRM program is a customer database, sometimes referred to as a customer information file or CIF. The CIF is the repository of information about the customer and serves as the basis for identifying and targeting both current and potential customers. The basic idea behind a CRM program is to assess the value to the firm of each customer in the CIF and then develop relationship programs that will be customized in both content and intensity depending upon that value. 1. Purchase history. Like descriptors, the customers purchase history is considered to be a basic part of the CIF. This information should be as detailed as possible, including products bought, the channels utilized, and prices paid. 2. Contact history. Part of a customers history with you is any recordable contact they have had through, say, customer service. For example, any time a customer calls you with questions about your product or service. 3. Response information. Particularly valuable is information about how customers have responded to prior direct marketing activities, promotional offers or other traceable marketing activity. CUSTOMER SELECTION The customer profitability analysis just described can be used to separate the customers who will provide long-term value to the firm from those that are likely to be unprofitable. The venerable 80-20 rule in marketing often applies in that 80 percent of the companys profits are provided by 20 percent of its customers. As a result of analyses such as these, the marketing manager has relevant information to help select which customers to keep or fire. Criteria include Current profitability Future profitability(LCV) Similarity of the customers profile to other customers who are currently profitable.

CUSTOMER TARGETING Once the customers that you wish to target have been selected, conventional direct marketing approaches are then used to keep them. In the context of CRM, these direct marketing channels are often referred to as 1-to-1 marketing. Special promotions, prices, perks, products, and other offers are made through telemarketing, direct mail, and personal sales calls. RELATIONSHIP MARKETING PROGRAMS Given the preceding discussion concerning customer targeting, it is important to describe marketing programs beyond discounts and other special perks that are part of the normal arsenal of product managers. CUSTOMER SATISFACTION Clearly, one of the requirements of customer loyalty is satisfaction. Satisfied customers are much more likely to repurchase and become good customers than dissatisfied customers. Many studies have shown a positive relationship between satisfaction, loyalty, and profitability. Spurred by the quality movement of the 1980s, the introduction of several very public competitions such as the Malcolm baldrige Award for quality, and well-publicized satisfaction surveys such as the one done by J.D. power for automobiles, many companies around the world are investing substantial sums in measuring customer satisfaction and exploring its impact on their businesses. As a result, this has become a big business for research firms. By one estimate, up to one-third of all revenues generated by U.S. marketing research firms are from customer satisfaction surveys and analyses. CUSTOMER SERVICE An important component of customer satisfaction is customer service. All products, whether manufactured or services, have a service component. Automobiles and computers must be repaired. Customers have questions about how to set up a VCR. Machinists need technical advice about how to operate a new lathe. The quality of these encounters can make or break a relationship with a customer. Companies that market services know that the level of customer service delivered is equivalent to product quality. However, many companies in manufacturing businesses underestimate how important these service encounters are to customer loyalty. Although equally important that the company provides helpful responses to questions and does not leave them waiting on the telephone to speak to a representative. LOYALTY PROGRAMS One of the major trends in marketing is the ubiquity of loyalty programs or, in general, frequency marketing. These are programs like Harrahs Total Rewards program, that encourage repeat purchasing through a formal program enrolment process and the

distribution of benefits. The best example of such programs are the frequent-flier programs offered by every major airline in the world. Cracker Barrel, a restaurant chain with a county flavour, has its cracker barrel old country store neighbourhood program where you earn on neighbourhood point for every dollar spent at its stores. The retailer per 1 imports has a preferred card program with three levels of benefits: basic and platinum. Hallmarks gold crown card program is targeted to customers of their gold crown retail stores. Customers receive points for money spent and greeting card purchases, which are redeemable for certificates of different monetary value. A small Spanish grocery chain, plus, differentiates itself from other grocery chains through its loyalty card program.

Technology is changing the way these programs can operate. Most of them currently involve a special-purpose membership card or a co-branded visa or master card. Frequency or loyalty programs can have several problems Making the reward too high. Restaurant chain chart houses program, the Aloha club, offered free around-the-world trips to any member who ate in all 65 chart house restaurants. Ubiquity. There are so many programs that customers are rebelling against carrying all the cards. You should target your best customers with these programs and provide a compelling reason for joining. Lack of inspiration. Many programs are simply copies of other programs. To be successful, the program must have a differential advantage over competitors program. Lack of communication with customers. Loyalty programs need to have a significant communication component to retain customer satisfaction.

In general, loyalty programs seem to work best when The program supports and is consistent with the brands value proposition. The program adds value to the product or service. Lifetime customer value is high.

MASS CUSTOMIZATION Customer retention and loyalty are also being affected by a marketing process called mass customization. This is a process whereby a company takes a product or service that is widely marketed and perhaps offered in many different configurations and develops a system

for customizing it to each customers specifications. This imparts a feeling that the product was made especially for the customer, an important affective component of a buyer-seller relationship. Perhaps the most well-known example of a choice board is Dells online ordering system. A customer has over 25 attributes from which to choose and multiple options within each attribute. There are four different approaches to mass customization: Collaborative customizers talk to individual customers to help determine their needs, identify the exact product meeting those needs, and then make the customized product for them. Adaptive customizers offer one standard but customizable product that is designed so users can later it to their own specifications. This would be appropriate when customers want the product to perform differently on different occasions. Cosmetic customizers present a standard product differently to different customers. An example world be a company that sells a product to different retail chains, each of which wants its own packaging, sizes, and other features. Transparent customizers provide each customer with unique products or services without telling them that the products have been customized for them, this is most useful when customers do not want to restate their needs repeatedly.

A version of mass customization that is used to customize websites is called personalization. Every time you visit a website, information about you is collected by that site and can be ultimately used to target specific messages. COMMUNITY BUILDING A challenge for marketing mangers is to create a sense of affinity to their companies and brands in their customers. Even customers that are brand loyal do not necessarily feel a sense of belonging to the brand, a more emotional, dedicated sense of a relationship in the human sense. McAlexander, Schouten, and Koenig: A forum for exchange of common interests. A sense of place with codes of behaviour. The development of congenial and stimulating dialogues leading to relationships based on trust. Encouragement for active participation by more than an exclusive few.

Such online communities offer real opportunities for enhancing the brand and creating longterm relationships because of the increased involvement offered. Customers for not feel simply like they are buying a product. OTHER IDEAS The notion of building relationships with customers is often thought of as the job of the sales force or other personnel related to marketing from the customers perspective, the concept of customer service does not necessarily imply marketing in many cases it may simply be the need to communicate with the company, to personalize it. A good source of information about how to improve customer loyalty is to examine customers who defect. Marketing research studies often focus on your customers or potential customers, rarely are ex-customers analyzed. However, there may be more to learn from customers who have been lost than those who are loyal because the former can provide a number of ideas on how to improve the product or service. PRIVACY ISSUES Because of the importance of detailed customer information to an effective CRM strategy, the issue of privacy again looms important. The issue of privacy is particularly important in online communities. Not only do you have to register to join, but man of the communities host chat rooms where product users communicate with each other creating personal contact. METRICS Traditional metrics for measuring the effectiveness of marketing programs are market share, sales volume, ROI, and similar aggregate measures. However, the whole concept of CRM is based on the idea of 1-to-1 customer relationship. Customer acquisition costs. If an e-commerce site, site customer conversion rates, that is, the percentage of visitors who are converted into customers. Customer retention rates. Customer profitability. Same customer sales by period.

While this is not an exhaustive list, the point is that marketing managers must move from a world where market share, volume, and profits are the only important measures to the CRM world where measures based on customer activity are crucial to understanding the impact of relationship programs on the customer base.