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Customer Relationship
Management
CHAPTER 11
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 11 - 1

Customer Relationship Management
(CRM)
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• A business philosophy and set of strategies, programs,

and systems that focus on identifying and building
loyalty with a retailer’s most valuable customers.

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CRM CCHHAAPPTTEERR 11
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• All customers are not equally profitable, and more or

less profitable customers need to be treated differently

• Retailers now concentrate on providing more value to

their best customers using targeted promotions and
services to increase their share of wallet – the
percentage of the customers’ purchases made from the
retailer

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Definitions CCHHAAPPTTEERR 11
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• “is a business strategy with outcomes

• that optimise profitability, revenue and customer
satisfaction
• by organizing around customer segments,
• fostering customer-satisfying behaviors and
• implementing customer-centric processes.”
• “is a strategy
• used to learn more about customers' needs and behaviors
• in order to develop stronger relationships with them.”

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History of CRM CCHHAAPPTTEERR 11
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B&S RM CIMS CRM e-CRM

Time line

Late 80’s Early 90’s Mid 90’s 2002 - Future

B&S – Buying & Selling

RM – Relationship Marketing
CIMS – Customer Information Management Systems
CRM – Customer Relationship Management
e-CRM- A subset of CRM that focuses on enabling
customer interactions via e-channels (The web, email
and wireless)
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Underpinning Theory CCHHAAPPTTEERR 11
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• Customers have many points of contact with an

organisation
• Retaining customers is far most cost effective than
recruiting new ones
• Some customers are more profitable than others
• The “80/20” rule
• For most firms, 80 percent of profit comes from 20 percent of
customers
• Use of Technology

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Customer Loyalty CCHHAAPPTTEERR 11
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• Committed to purchasing merchandise and services

from a retailer
• Resist efforts of competitors to attract the loyal
customer
• Emotional attachment to retailer
• Personal attention
• Memorable positive experiences
• Brand building communications programs

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Potential Benefits Of CRM CCHHAAPPTTEERR 11
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• Customer retention
• Share of customer or share of wallet
• Cross-selling
• Up-selling

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Potential Costs Of CRM CCHHAAPPTTEERR 11
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• IT infrastructure
• Process change

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Benefits Of CRM For Customers CCHHAAPPTTEERR 11
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• Continuity
• A contact point
• Personalisation

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Can Offering Price Discounts Achieve
Customer Loyalty?
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No!
Retail strategies like these
can be copied by
competitors

These strategies encourage

customers to be always
looking for the best deal
McGraw-Hill Companies, Inc./Gary He, photographer
rather than developing a
relationship with a retailer

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Three phases of CRM CCHHAAPPTTEERR 11
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• Acquiring New Relationships

• You acquire new customers by promoting your
company’s product and service leadership.
• Enhancing Existing Relationships
• You enhance the relationship by encouraging
excellence in cross-selling and up-selling, thereby
deepening and broadening the relationship.
• Retaining Customer Relationships
• Retention focuses on service adaptability –
delivering not what the market wants but what
customers want.

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CRM Process Cycle CCHHAAPPTTEERR 11
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Collecting Customer Data:
Customer Database
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• Transactions – a complete history of purchases

• Purchase date, price paid, SKUs bought, whether or not the
purchase was stimulated by a promotion
• Customer contacts by retailer (touch points) --visits to
web site, inquires to call center, direct mail sent to
customer
• Customer preferences
• Descriptive information about customer
• Demographic and psychographic data
• Customer’s responses to marketing activities
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Collecting Customer Data:
Identifying Information
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Approaches that store-based retailers use:

• Asking for identifying information
• Telephone number, name and address
• Offering frequent shopper cards
• Loyalty programs that identify and provide rewards to
customers who patronize a retailer
• Private label credit card (that has the store’s name on
it)
• Connecting Internet purchasing data with the stores

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Privacy Concerns CCHHAAPPTTEERR 11
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• Control over Collection

• Do customers know what information is
being collected?
• Do customers feel they can decide upon the
amount and type of information collected
by retailers?
• Control over Use
• Do customers know how the information
will be used by the retailer?
Steve Cole/Getty Images

• Will the retailer share the information with

third parties?
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Heighten Privacy Concerns
When Using Electronic Channel
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• Information collected
without the awareness
of customers

• Collecting click stream

data using cookies
Similar to an invisible
person videotaping a
Stockbyte/Punchstock Images
customer as they walk
through a store

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Customer’s Decision to
Offer Information
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Protecting Customer Privacy:
Differences between U.S. and EU
United States
• Limited protection in specific
areas
• Credit reporting
• Video rentals
• Banking
• Medical records
• Opt out: Consumers must
explicitly tell retailers not to use
their personal information
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European Union
• Stringent consumer privacy laws
• Information only can be collected for
specific purposes
• Purpose must be disclosed to customer
• Information can only be used for
specific purpose
• Information cannot be exported to
countries with less stringent regulations
• Opt in: Consumers own their personal
information, and retailers must get
consumers to explicitly agree to share
this personal information
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FTC Guideline for Fair Information
Practices
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• Notice and awareness

comprehensive statement about information
storage, manipulation, and dissemination
• Choice/consent
Opt-in and opt-out options
• Access/participation
Customer able to confirm accuracy
• Integrity/security
Controls for theft and tampering
• Enforcement/redress
Mechanism to insure compliance

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Analyzing Customer Data
and Identifying Target Customers
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Analyze the customer database and

convert the data into information
that will help retailers develop
programs for building customer
loyalty
Data Mining – technique used to
identify patterns in data
• Market Basket Analysis
• Identifying Market Segments
• Identifying Best Customers
Ryan McVay/Getty Images

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Market Basket Analysis CCHHAAPPTTEERR 11
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Data analysis focusing upon the

composition of the customer’s market
basket – what items are bought
during a single shopping occasion

Uses:
• Adjacencies for displaying
merchandise
• Joint promotions
• Bananas in the cereal aisle as well as in the
produce section
• Beer with baby dippers
• Tissues with cold medicine Burke/Triolo Productions/Getty Images

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Identifying Best Customers CCHHAAPPTTEERR 11
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• Estimating Lifetime Value (LTV)

• The expected contribution from the customer
to the retailer’s profits over his or her entire
relationship with the retailer

• Use past behaviors to forecast future

purchases, the gross margin from these
purchases, and the costs associated with
serving the customers

• Classifying Customers by recency,

frequency, and monetary value of
purchases (RFM Analysis)
(c) Brand X Pictures/PunchStock

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Customer Pyramid CCHHAAPPTTEERR 11
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Platinum
Best
Most loyal
Least price sensitive

80-20 rule:
80% of sales or profits come from
20% of the customers

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Customer Pyramid CCHHAAPPTTEERR 11
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Gold
Next best
Not as loyal

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Customer Pyramid CCHHAAPPTTEERR 11
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Iron
Doesn’t deserve
as much attention

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Customer Pyramid CCHHAAPPTTEERR 11
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Lead
Have negative LTV value
“Lead out”

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Customer Types CCHHAAPPTTEERR 11
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• Platinum Heavy, reliable users, not price-sensitive, try new

products, loyal
• Gold Large users who push for price breaks, shop around
and not so loyal
• Iron Low volume or intermittent users; cost to serve them is
quite high
• Lead Demanding, want special attention but don’t buy much
and show no loyalty

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RFM Analysis CCHHAAPPTTEERR 11
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Used by catalog retailers and direct marketers

Recency: how recently customers have made a purchase
Frequency: how frequently they make purchases
Monetary: how much they have bought

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Developing CRM Programs CCHHAAPPTTEERR 11
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Retaining Best
Customers

Converting Good
Customers into
Best Customers
Getting Rid of
Unprofitable
Customers

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Customer Retention CCHHAAPPTTEERR 11
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• Frequent Shopper
Programs
• Special Customer
Services
• Personalization
• 1-to1 Retailing
• Community

Royalty-Free/CORBIS

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Converting Good Customers
into Best Customers
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• Customer alchemy: converting iron and gold customers

into platinum customers
• Add-on selling as a way to achieve customer alchemy
• Involves offering and selling more products and services to
existing customers and increasing the retailer’s share of wallet
with these customers
• The Oprah Winfrey Show to Shopping Buddy
sell books, movies, and TV
specials (Harpo Productions),
a cable channel (Oxygen Media),
a Web site (http://www.oprah.com),
magazine (O)
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Dealing with Unprofitable Customers CCHHAAPPTTEERR 11
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• Offer less costly

approaches for dealing
with these customers

• Charge customers for

extra services
demanded

Don Farrall/Getty Images

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Implementing CRM Programs CCHHAAPPTTEERR 11
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• More than CRM management, computer systems, and

communication about the importance of customers.
• In addition…..
• Close coordination between departments –
Marketing, MIS, Operations, HR
• Shift in orientation
• Product Centric

• Customer Centric
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