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… CRM Concepts

G. SHAINESH
Associate Professor of Marketing
Indian Institute of Management Bangalore
shaineshg@iimb.ernet.in
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… Session Coverage

• Defining CRM

• Transaction vs. Relationship orientation

• Benefits of CRM

• Customer Lifetime Value

• Customer Profitability

• CRM Process

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… Defining CRM

CRM is the ongoing process of

engaging in cooperative and
collaborative activities and programs
with immediate and end user
customers to create and enhance
mutual economic value at reduced
cost.

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… Transaction vs. Relationship Marketing
Transaction Marketing Relationship Marketing
 One off exchanges Focus Ongoing Exchanges
Brand Management Customer Management

Short term focus Time Perspective Long term focus

Mass Communication Primary Personal
Communication Communication
Isolated Market Customer Feedback Ongoing Dialogue
Research Mechanism
Mass Markets or Market Market Size Markets of One
Segments

Market Share Criterion for Success Mind Share (Share of

Customers)
Profitability of Critical Metrics Customer Profitability
transaction Brand Customer Equity 4
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… Benefits of CRM

• Customers are profitable over time

• Customer profitability is skewed
– Customers ARE NOT equal
• Marketing benefits of CRM
– Information, Knowledge  Customised Promotions
– Productivity Gains
– low cost media, improved targeting and higher
conversion rates.

• Service Benefits of CRM

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… Benefits of CRM

• Service Benefits of CRM

– 96% of unhappy customers never bother to complain
– Each dissatisfied customer on an average will tell 14
other people
– Each satisfied customer will tell no more than 6
– 70% of customers who complain will do business with
the company again if it quickly takes care of a service
problem.

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… Relational Benefits - Customers

• Confidence benefits

• Social benefits

• Special treatment benefits

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… Loyalty Stages

• Cognitive loyalty
• Affective loyalty
• Conative loyalty
• Action loyalty

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… Customer Equity

• Value at Acquisition
– revenues (application fee + initial purchase)
– Less costs (marketing +credit check + account set up)
• Annual Value (project for each year of relationship)
– revenues (annual fee + sales + service fees + value of
referrals)
– Less costs (account management + cost of sales + write-
offs)
• Net Present Value
– Determine anticipated customer relationship lifetime
– Select appropriate discount figure
– Sum anticipated annual values (future profits) at chosen
discount rate
• Customer Equity is total sum of NPVs of all current customers

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… Customer Lifetime Value

CLV is the measurement of net profit

over the Life-Time of a Customer

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… CLV – Example

Expected Profit from a New Retention

Customer Rate 60.00%
Year 1 Year 2 Year 3 Year 4
New Customers 1,000
Expected No. of Customers 600 360 216
Average Profit for Each Customer 1,000 1,000 1,000 1,000
Profit 1,000,000 600,000 360,000 216,000
Expected Profit from New
Customers 1,000,000 1,600,000 1,960,000 2,176,000
Average Profit from Each of the
New Customers 1,000 1,600 1,960 2,176
Use Discount rate 1,000,000 480,000 230,400 110,592
Cumulative 1,000,000 1,480,000 1,710,400 1,820,992
Per Customer 1,000 1,480 1,710 1,821
Discount Rate 25.00%

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CustomerLife-timeValue
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7000

6000

5000
NPV

4000

3000

2000

1000

0
0

0
0

5
.6
.5

.5

.6

.7

.7

.8

.8

.9

.9
0

0
RetentionRate

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… Customer Value Segments

Source : Prof. Sudhi Seshadri, IIMB

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… Customer Profits over Time
(Year 1=100)
350 –
300

250

200

150

100

50

0
Year 1 Year 2 Year 3 Year 4 Year 5

Credit card Industrial laundry Industrial distribution Auto servicing

Based on data from Reichheld and Sasser

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… Customers Are Profitable over Time)

Profit from price

premium
Profit from references

Profit from reduced

op. costs
Profit from increased
usage
Base Profit

1 2 3 4 5 6 7
Year Source: Reichheld and Sasser

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Are all Loyal Customers Profitable?

% %
Customers Customers
High Corporate service provider 20%
Profitability Corporate service provider 30%
Grocery retail 15% Grocery retail 36%
Mail-Order Mail-Order
19% 31%
Direct brokerage %18% Direct brokerage % 32%
Customers Customers
Low Corporate service provider 29% Corporate service provider 21%
Profitability
Grocery retail 34% Grocery retail 15%
Mail-Order Mail-Order
29% 21%
Direct brokerage
Short Term Customers 33% Direct brokerage
Long Term Customers 17%
Source; Reinartz, W. and V. Kumar (2002), ‘The Mismanagement of Customer Loyalty’, Harvard Business Review, July.

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… Loyalty Strategy

Butterflies
• Good fit between offerings & True Friends
High customer needs Good fit between offerings &
Profitability • high profit potential customer needs
Actions : Highest profit potential
• Transactional satisfaction Actions :
•Milk the accounts as long as they Communicate consistently but
are active not too often
•Strangers
Key challenge - cease investing Build both attitudinal &
Barnacles
behavioral loyalty
soon enough
•Little fit between offerings & •Limited fit between offerings &
Low customer needs customer needs
Profitability •Lowest profit potential •Low profit potential
Actions : Actions :
•Make no investment in these •Measure both size & share of
relationships wallet
•Make profit on every transaction •If share of wallet is low, focus on
Short Term Customers X &Long
Up selling
Term Customers
•If size of wallet is small, impose
strict
Source; Reinartz, W. and V. Kumar (2002), ‘The Mismanagement of Customer controls
Loyalty’, Harvard Business Review, July.

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Guests and Contributions - Hilton
% Guests % % Net
Revenue Profits
Diamond + Gold Hilton 1 6 28
HHonors Members
Silver Hilton HHonors Members 2 5 18

Blue Hilton HHonors Members 6 7 10

Nonmember Business travelers 25 21 6

Convention & Resort Travelers 66 61 49

Bell et al (2002) ‘Seven barriers to Customer Equity Management’, Journal of Service

Research, August, 77-85 18
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… Customer Differences

Customers differ mainly on four accounts

• Revenue Differences
– Discounting and credit terms
• Cost Differences
– packing, distribution, after-sale service, specification
– Delivery schedule (just-in-time)
• Distribution Channel Differences
– industrial customers vis-à-vis individual customers
• Service Level Differences
– on-site service, full service, etc.

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… Profitable Customers

• Who are profitable customers?

– Are all large customers profitable?
– Are all small customers unprofitable?
• Are there loss making customers for the same
product?
– Where do we incur loss? Is there any way to cut cost or
increase price?
• A customer may be less profitable today but may
be a major profitable customer in the future
– e.g. Overseas customers
– Is customer budgeting useful?

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Characteristics of high cost and hidden profit

High cost to serve customers Low cost to serve customers

•Order custom products •Order standard products

•Small Order quantities •High order quantities

•Unpredictable order arrivals
•Customized delivery
•Change delivery requirements
•Manual Processing
•Large pre-sale and post-sale support
•Require Company to hold inventory
•Pay slowly (high account receivables)
•Predictable order arrivals
•Standard delivery
•No Change in delivery requirements
•Electronic Processing
•Little to no pre-sale and post-sale support
•Replenish as produced
•Pay on time

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… Options for Managing Customers
Customers above the
cost-plus diagonal are
Types of Customers more profitable
Profits
High
Passive Costly to Service,
−Product is Crucial But pay top dollar
−Good Supplier Match

Net Margin
Realized
Price Sensitive and few Aggressive
special demands Leverage their buying power
Low price and lots of
customised service and features

Low

Low High
Cost to serve Losses

Profitability depends on whether and how much the net

product margins recover the customer specific costs
Source: Shapiro, Rangan, Moriarty and Ross, " Managing Customers for Profits (Not Just Sales)", Harvard Business Review, September - October 1987.

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Managers follow strategic ABM principles by...

• protecting existing highly profitable customers

• re-pricing expensive services, based on cost-to-serve
• discounting, if necessary to gain business with low cost-to-serve
customers
• negotiating win-win relationships that lower cost to serve with
cooperative customers
• being patient with currently unprofitable customers that provide
other non-quantified benefits to the company
• attempt to capture high profit customers from competitors

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… CRM Programs
Customer Types
Business to Business
Mass Markets Distributors
Program Types
Program Types Markets

•Continuous Special Sourcing

Continuity •After-Marketing
•Loyalty Programs Replenishment Arrangements
Marketing •ECR Programs
•Cross-selling

•Key Account
One - to - One •Permission Customer Business
Marketing Development •Global Account
Marketing
•Personalization Programs

•Affinity •Logistics •Strategic Partnering

Partnering/
Partnering Partnering •Co-Design
Co-Marketing
•Co-Branding •Joint Marketing •Co-Development
Source : Sheth & Parvatiyar, 24
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… A Model of Relationship Based Buying

Cost Benefit
Factors
Search Costs
Risk Reduction Customer Loyalty
Switching Costs Relationship Increased Buying
Value-added Based Willingness to pay
Benefits Buying more
Socio-Cultural
•Trust Goodwill
Factors
•Commitment (customer equity)
Early Socialization
Reciprocity
Networks
Friendships
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… Perceived Risk & Switching Costs

Constrained in Relational
High Buying
Relationship

Switching Costs

Transactional Vulnerable
Low Exchange Exchange

Low High
Perceived Risk of Alternatives
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Determinants of Trust & Commitment in
… Business Relationships

Determinants for the Determinants for the

Customer Supplier
Switching costs Supplier specific
Partner specific investments
investments Customer avoidance of
Mutually shared goals opportunistic behavior
Communication and Single source policy
product support Data sharing and
Supplier avoidance of nurturing
opportunistic behavior

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… Six Markets Framework of CRM

Internal Markets

Supplier Markets Customer Markets Referral Markets

Recruitment Markets Influence Markets

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Goal of CRM

Enhancing

Retaining

Satisfying

Attracting

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… Customer Satisfaction – Loyalty

Apostle
100

Zone of Affection
80
Loyalty (Retention)

Near Apostle
60 Zone of Indifference

40 Zone of Defection

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Terrorist 0
1 2 3 4 5
Very Neither Very
dissatisfied Dissatisfied satisfied Satisfied Satisfied
nor dissatisfied
Satisfaction
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… The Wheel of Loyalty

1. Build a
3. Reduce Churn Foundation
Drivers for Loyalty
 Conduct churn diagnostic
 Segment the market
 Address key churn drivers
 Be selective in acquisition
Enabled through:
 Implement complaint
handling & service  Use effective tiering of
 Frontline staff service.
 Account managers
recovery Customer
 Increase switching  Deliver quality service.
 Membership
programs costs
Loyalty
 CRM
Systems
2. Create Loyalty
Bonds
 Build higher level  Deepen the
bonds relationship
 Give loyalty rewards

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… Portfolio of Assignments

Major, State-of-the-art challenges for the firm’s

principals that give the firm high visibility

Demanding client assignments offering a

“Pacesetters” learning experience for the firm’s most
experienced associates

Significant Projects Routine client projects shared

among principals and associates

“Bread and Butter” Projects

Entry-level tasks for new
associates or for research
assistants & paraprofessionals
Analytical Work on Project Data

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… Customer Pyramid
Good Relationship
Customers
Which segment sees high value in our
offer, spends more with us over time,
Platinum costs less to maintain, and spreads
positive word-of-mouth?

Gold

Which segment costs us in time,

Iron
effort and money, yet does not
provide the return we want? Which
segment is difficult to do business
Lead with?

Poor Relationship
Customers

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The CRM Process

Learning about Customers Customization of the

1. Knowledge Acquisition Marketing Mix
2. Customer 1. Product / Services
Differentiation 2. Communications
3. Channels
4. Price

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… CRM Applications

• Process of building and maintaining customer

relationship
• Offers a “unified customer interface” to understand,
segment, interact & customize offerings
• Applications:
– Data collection
– Data analysis
– Sales force automation
– Marketing automation
– Service & Support automation

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… Summary

• Defining CRM

• Transaction vs. Relationship orientation

• Benefits of CRM

• Customer Lifetime Value

• Customer Profitability

• CRM Process

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Thank You
More Questions?

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… Customer Value Analysis

Understandin Effective
g Customer Design &
Needs Quality
Control
Superior
Low ‘Cost of
Marketing Quality in
Quality’ &
Communicati areas that
overall cost
ons matter to
leadership
customers
Market
Perceived
Quality
Exceptional
Customer
Value

Business
Results

Adapted from :Bradley Gale ‘Managing Customer

Value’ Free Press 38
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How customers select among
… competing suppliers

• Customers buy on value

• Value = Quality relative to price
• Quality includes all non-price
attributes – Product & Customer
service
• Quality, price and value are relative

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… Customer Value Map

Higher Fair-value Line

Worse Customer
Value
1.0
Relative Price
Better Customer
value
Lower Inferior 1.0 Superior
Market Perceived Quality
Ratio

Adapted from :Bradley Gale ‘Managing Customer

Value’ Free Press 40
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… Customer Value Profile

Served Market
___
Selection Criteria Importa Performance Scores (Self & Leading
(Quality non- nce Competitors) (1-10, 10 is best)
price Weights A B C D E
attributes) 1.______ ______ ______ ______ ______ ______
1. ______________ 2.______ ______ ______ ______ ______ ______
2. ______________ 3.______ ______ ______ ______ ______ ______
3. ______________ 4.______ ______ ______ ______ ______ ______
4. ______________ 5.______ ______ ______ ______ ______ ______
5. ______________ 6.______ ______ ______ ______ ______ ______
Sum
6. ______________
=100
Price Satisfaction score
(perceived transaction price)
Weight on1-10
quality (non-price)
Weight on price - = 100
attributes - +
Price Competitiveness score (A /
others)
Relative Price Ratio = 1 / PCS

Adapted from :Bradley Gale ‘Managing Customer 41