Customer Relationship management

Overview

• CRM is a business philosophy and a set of strategies, programs, and systems that focuses on identifying, and building loyalty with a retailers most valued customers

• Retailers can use CRM programs for increasing profitability by building relationships with their better customers

• Goal- develop a base of loyal customers who patronize the retailer frequently

Overview

• From using mass advertising retailers are shifting their focus to provide more value for their customers by using targeted products and services to increase the “share of wallet”(% age of customers purchases made from the retailer) from thee customers

• This perspective is supported by research that it costs 3-6 times more to sell products to new customers than to existing customers

Customer loyalty- objective of CRM• It is having the customers to make repeat visits to the retailer and

being satisfied with their experiences• Customer loyalty to a retailer means that customers are

committed to purchasing merchandise and services from the retailer and will resist the activities of competitors attempting to attract their patronage

• They have a bond with the retailer which goes beyond positive feelings for the retailer

• Have an emotional connect• Their reasons for loyalty go beyond the normal retail attributes• Emotional connections develop when customers receive personal

attention

Overview of the CRM process

Collecting customer data

Analyzing customer data and identifying

target customers

Developing CRM programs

Implementing CRM programs

Learning

Action

Step 1: Collecting Customer data- constructing a customer database

•Shd contain transactions, customer contacts, customer preferences descriptive information • Response to marketing activities

Customer database

• Customer identification is difficult• Ask customers for identifying information, offer frequent purchase cards, connect internet purchase data with stores

Identifying information

• Consumers are concerned about retailers violating their privacy when they collect information: depends upon control over personal info and knowledge about collection and personal information• place cookies which identify the info the next time consumer visits the website

Privacy & CRM

Frequent shopper programs- loyalty programs

• Are programs which identify and provide rewards to customers who patronize the retailer

• When customer enroll for such programs they provide detailed info about themselves and their household- issued a card with an identifying number

• Customers are offered an incentive to use the card when they make purchases from the retailer

• offer 2 benefits- provide demographic and other info when they sign up and are motivated to identify themselves at each transaction. Motivated by the rewards offered at each visits and amount purchased at each visit

Frequent shopper programs- loyalty programs

• Drawbacks: customer might forget to bring it or decide not to show it- use of phone no

• Use of ILC- interactive loyalty cards- optical scanner- use of kiosks

• Fingerprint scans

Step 2: Analyzing data and identifying target customers

• The next step- to analyze the customer database and convert the data into information that will help retailers develop programs for building customer loyalty

• Data mining – used to identify the patterns of data.• Market basket analysis: specific type of data

analysis that focuses on the composition of the basket, bundle of products purchased by a household during a single shopping occasion. Eg Tissues near cold medicines

Identifying market segments

• Identifying segments- group of customers who have similar needs, purchase similar merchandise and respond in a similar manner to marketing activities

• Identifying best customers: retailers can develop a score or a number indicating how valuable customers are to the firm. This score can be used to target the customers

Life time Value (LTV)

• A measure to score each customer is called lifetime customer value. LTV is the expected contribution from the customer to the retailers profits over his or her entire relationship with the retailer.

• To estimate LTV retailers use past behavior, gross margins, costs of service. Eg a customer who buys apparel only when it is on sale will have low LTV than a customer who typically pays the full price and buys the same amount

• Customer pyramid: most customers differ in their LTV. Follow the 80-20 rule, 80% of sales come from 20% of customers

The Customer Pyramid Platinum

Gold

Iron

Lead

Least profitable

Most profitable

The Customer Pyramid

• top 25% of LTVs• Not concerned about price but place more value on customer service

Platinum

• The next 25% after platinum segment• More price sensitive, buy significant amount from retailer, not as loyal as platinum, may buy from competitorsGold• Modest LTV- Iron – not much deserved attention by the retailer• Lead: Cost company money, often demand attention, but don’t buy much

Iron & Lead

RFM Analysis• An RFM (Recency, Frequency ,Monetary) analysis is often used by catalog

retailers and direct marketers is a scheme for segmenting customers according to how recently they have made a purchase, how frequently they make a purchase, and how much they have bought

• Use this type of analysis to determine which customer group should be sent catalogs. From each RFM group they will determine the % age of customers in each group who made a purchase from the last catalog sent to them

• Customers who have made a small infrequent purchases – first time customers

• Objective of such CRM program is to convert them into early repeat customers and eventually into high value customers

• CRM programs directed towards high RFM value- look for maintaining loyalty, increase retention and increase the share of wallet

Step 3: Developing CRM programs

• After segmentation – next step is to develop programs for different customer segments

• Programs retailers use for- Retaining the best customers- Converting good customers into high LTV

customers- Getting rid of unprofitable customers

Customer retention

• To retain the best customers retailers use the foll programs

- Frequent shopper programs- Special customer services- Personalization- Community

Frequent shopper programs• Used to build a customer database by identifying customers by their transactions and

encourage repeat purchases and customer loyalty• Retailers provide incentives to encourage customers to enroll and use the card• Incentives- in form of discounts on purchases or points on every rupee spent• Nature of rewards can be - tiered: according to volume of purchase to motivate the customers to increase the

level of purchases- offer choices: other than points for all customers who don’t value the same rewards.

Eg Tesco- offers discounts on entertainment, vacations etc- Link frequent shopper programs to charitable causes- Disadvantages:1. Expensive2. Difficult to make corrections in program system3. Not clear if such programs increase customer spend4. Difficult to gain competitive advantage as it can be easily replicated by competitors

• Special customer services : provide high quality customer service to build and maintain loyalty

Personalization• Different customers in each segment will require different

strategies• Availability of various data analysis tools, retailers offer unique

benefits and different target messages to individual customers • 1 to 1 retailing: developing retail programs for small groups or

individuals. Usually practiced by local retailers.• Internet allows personalization Eg Amazon• Rewards and benefits are based on information obtained by the

retailers• Positive feedback cycle for CRM program : Increasing repeat

purchases- increases data- personalized benefits- increases purchases

Community

• To develop a sense of community amongst customers

• Internet allows opportunity for customers to exchange information using bulletin boards

• Eg sporting goods retailer posts info on local sporting website

Converting good customers into best customers

• Increase the sales made to customers is referred to as customer alchemy- converting iron and lead to platinum customers

• Alchemy involves offering and selling more products and services to existing customers and increasing the share of wallet

• Use database analysis for cross selling and add on selling

• Add on selling: Oprah Winfrey – books movies

Dealing with unprofitable customers

• At bottom tier – customers have negative LTV• Retailers lose money when they make sale to

them• Catalog retailers- customers buy 2-4 items and

keep only one of them• Cost of processing is more than profit• Charge customers for services they are abusing• need to develop a lower cost approach

Step 4: Implementing CRM programs

• Needs appointing a CRM manager• Computer and technology for data analysis• Close coordination by different functions