CUSTOMER RELATIONSHIP

MANAGEMENT

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Customer Differentiation

vs. Product Differentiation

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Research by Professors Cooper and Kaplan at the

Harvard Business School has shown that in a large

number of companies 20 percent of customers

account for 225 percent of profits.

But the trouble is that most companies do not know

which customers make up the 20 percent and which

make up the 80 percent.

Customer Relationship Management (CRM) is an

enterprise approach to understanding and influencing

customer behavior through meaningful communications

in order to improve customer acquisition, customer

retention, customer loyalty, and customer profitability

A Customer Relationship Management (CRM) System

provides the technology to do so.

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What is CRM?

What does CRM do?

Earlier, pieces of customer data were often fragmented in

isolated systems serving finance, distribution, sales, service, and

marketing

CRM systems capture and integrate customer data from all over

the organization, consolidating the data, analyzing the data, and

then distributing the results to various touch point across the

enterprise.

Well designed CRM systems can provide a single enterprise view

of customers that can be used for improving both sales and

customer service

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Enterprise Strategy Map

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Database

Marketing 1 to 1

learning

relationship

Mass

Marketing

Interacting

Tailoring Standard

products

Tailored

products

Individual

interaction

Interaction through

Mass Media

Mass

Customization

Customer Relationship

Management (CRM)

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Traditional Marketing CRM

Goal: Expand customer base,

increase market share by

mass marketing

Goal: Establish a profitable,

long-term, one-to-one

relationship with customers;

understanding their needs,

preferences, expectations

Product oriented view Customer oriented view

Mass marketing / mass

production

Mass customization, one-to-one

marketing

Standardization of customer

needs

Customer-supplier relationship

Transactional relationship Relational approach

Share of the Market

vs. Share of the Customer

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Customers Reached

Nee

ds

Sat

isfi

ed

Customers Reached

Nee

ds

Sat

isfi

ed

Four implementation tasks for creating

and managing customer relationships

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IDIC

Identify

Differentiate

Interact

Customize

Relationships are individualistic, not with markets or groups of people Must be able to identify your customers individually

and recognize them when interacting with them You need to know how much customer

identification does a company already have (what info do you need.

Difficult to do, can be almost impossible if channels of communication involve intermediaries

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Identify

Some customers are worth more than others 80/20 rule

Want to better understand customer ‘needs’ vs. demographics

-Understand why they buy rather than what they buy

Want to better understand the value of that customer to the enterprise

1. Knowing value of customer to the enterprise allows prioritization

2. Lifetime value (LTV) … net present value of the stream of expected future contributions from the customer.

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Differentiate

Goal of interaction is ‘to get more information directly from a customer in order to serve him in a way no competitor can who doesn’t have the information’

Want to turn the interaction into a collaboration in which the enterprise and customer work together to make transactions beneficial to both parties … a learning relationship

Important issue in the interaction is privacy. Research has indicated that individuals are willing to provide information

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Interact

Customize

Use knowledge of customer to figure out what he/she

needs

Key term is ‘mass customization’

Can be product based

Or service based on standard products

Use of information technologies key

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How does technology play a role?

Enabler ….

Managing all touch points with the customer to develop

knowledge so that the ‘relationship’ part of the

interaction becomes meaningful.

Note, technology is only an enabler, people and

organizational design play critical roles in CRM success

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CRM Technologies

CRM systems are integrated with other enterprise information

systems including ERP, SCM, PLM, EIS etc.

Once data are gathered in a Data Warehouse for a CRM effort,

Data Mining and OLAP/BI tools are utilized to analyze them

Predictive modeling through Data Mining can identify range

of products and services that best suit particular customers

Using Data Mining tools integrated with GIS , one can establish

customer’s geographical preferences

Revenue (management) optimization software automates

the process of calculating the prices businesses need to charge for

maximum profits

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CRM Market

Gartner predicts CRM will be a $ 36.5 Bn by the end of

2017.

CRM also leads all enterprise software categories in

projected growth, showing a 15.1% CAGR from 2012 to

2017

Gartner forecasts shows CRM eclipsing ERP in worldwide

market size in 2017.

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CRM in India

In Gartner's view, the Indian CRM market size is about 15% of the

overall Asia Pacific (APAC) market, the second largest in the

region, after Australia.

Between 2009 and 2014, CRM in India is projected to grow at a

compound annual growth rate (CAGR) of 16% to 19%.

The Top 5 CRM Systems in India

Oracle, including its Oracle Siebel, PeopleSoft and Oracle On

Demand products

SAP CRM

Microsoft Dynamics CRM

Salesforce.com

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CRM Software

Customer Relationship Management Software provide tools

for:

1. Sales Force Automation

2. Customer Service

3. Marketing

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Sales Force Automation Module

SFA modules in CRM systems help sales staff increase their

productivity by focusing on the most profitable customers

CRM systems provide sales prospect and contact

information, product information, product configuration

capabilities and sales quote generation capabilities.

Such software can assemble information about a particular

customer’s past purchases to help the salesperson make

personalized recommendations.

CRM software enables customer and prospect information

to be shared easily among sales, marketing and delivery

departments

CRM software also has capability for sales forecasting,

territory management and team selling

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Customer Service Module

Customer Service modules in CRM systems provide

information and tools to make call centers, help desks and

customer support staff more efficient.

They have capabilities for assigning and managing

customer service requests.

CRM systems may include Web based self-service

capabilities by creating a company web site and providing

inquiring customers personalized support information as

well as the option to contact customer service staff by

phone for additional assistance

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Marketing Module

CRM systems support direct marketing campaigns by

providing capabilities for capturing prospect and customer

data.

Marketing modules would also include tools for analyzing

marketing and customer data for identifying profitable and

unprofitable customers, designing products and services and

identifying opportunities for cross selling, up selling and

bundling.

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Operational And Analytical CRM

Operational CRM: Customer facing applications such as

tools for sales force automation, call centre and customer

service support, and marketing automation.

Analytical CRM: Applications that analyse customer data

generated by operational CRM applications to provide

information for improving business performance management.

An important output of analytical CRM is the customer

lifetime value (CLTV).

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Analytical CRM

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Operational Vs Analytical CRM

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RFM Method

(Recency, Frequency, Monetary Value )

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Marketing Problem:

A firm has sent e-mail to 30,000 of its existing customers, announcing a promotion of $100. 458 of them responded (1.52% of the customers)

Is there any relation between the responding customers and their historical purchasing behaviours?

RFM Method

(Recency, Frequency, Monetary Value )

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• Recency

– When was the last customer interaction?

• Frequency

– How frequent was the customer in its

interactions with the business?

• Monetary value of the interactions

RFM Method:

Recency Coding

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30,000 customers are sorted in descending order with respect to their most recent purchases

Sorted data is divided into 5 equal groups, each of them containing 6,000 people

Recency codes are assigned: Top group has code 5, bottom group has code 1

RFM Method:

Recency Coding

3.1

2

1.5

0.62

0.38

0.00

1.00

2.00

3.00

4.00

Re

sp

on

se

%

5 4 3 2 1

Recency code R

Recency Results

According to analysis based on customer recency, the group having the highest recency group has also the highest response rate

Remark:

(3.10% + 2.00% + 1.50% + 0.62% + 0.38) / 5= 1.52% which is the response rate

Strict Rule: Ones who have purchased recently are much more willing to buy new products than others purchasing in the past

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RFM Method:

Frequency Coding

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Sort the 30,000 customers with respect to frequency metrics.

Frequency metrics: Average number of purchases made by

customer in a time period t

Sort customers in descending order with respect to their

purchase frequency.

Assign them to 5 groups, top %20 in the first frequency

group.

Assign frequency codes such that the top group has code 5 and

the bottom group has code 1.

RFM Method:

Frequency Coding

2.8

2.1

1.3

0.80.9

0

0.5

1

1.5

2

2.5

3

Re

sp

on

se

%

5 4 3 2 1

Frequency code F

Frequency Results

It is observed that highest

response rate is from the

customers having highest

frequency

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RFM Method:

Monetary Value Coding

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The same process as recency and frequency coding

Sorting is done with respect to monetary value metric

Monetary value metric is the average amount purchased in

a time period t

At the end of the monetary value coding, assign monetary

value codes M = 1,...,5 to groups according to their groups.

RFM Method:

Monetary Value Coding

2.1

1.8

1.4

1.21.1

0

0.5

1

1.5

2

2.5

Re

sp

on

se

%

5 4 3 2 1

Monetary value code M

Frequency Results

It is observed that

highest response rate is

from the customers

having highest

monetary value

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RFM Method:

Putting the Codes Together

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At the end of the monetary coding firm obtain R F M

metrics for customers. Each customer belongs to one of 125

possible combinations of the RFM values:

R

F

M

1 2 3 4 5

21 22 23 24 25

231 232 233 234 235

Database

RFM Method:

STEPS

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Create 3 digits RFM codes cells

RFM values are used to define group of customers that

marketing campaign should target or should avoid

Used for identifying customers having high probability to

respond to campaigns:

555’s response rate > 552’s > 543’s >541....

Increase the response rate

Increase profitability

CRM Benefits

Lower costs of acquiring new customers

No need to acquire so many customers to maintain a steady

business volume

Reduced sales costs. Existing customers are generally more

responsive

Higher customer profitability through segmentation and targeting

products and services

Increased customer retention and loyalty. Customers stay longer,

buy more, and contact you more

Improved customer service

Evaluation of customer profitability leads to identifying the most

profitable classes of customers

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Details that underlie the Benefits

It costs 6 to10 time more to generate revenue from a new

customer than from existing one.

A 5 percent increase in the retention rate can increase

company profits by 60 to 100 percent.

Mass mailings are wasteful. 98% of promotional coupons are

discarded.

Servicing a customer through a call center is six times more

expensive than via the Internet.

Loyal customers who refer another one generate business at

little or no cost

Referred customers generally stay longer, use more products,

and become profitable customers faster. 37

CRM at Work: Amazon

One of the leaders in implementing customer relationship

management programs on the Web

Unique CRM program increased customer acquisition and

retention

In 1999 Amazon acquired 11 million new customers, nearly

tripling its number of customers from 1998

Greatest success in customer retention: Repeat customers

during the year accounted for 71% of all sales

Success attributed to the attempt to learn about

customers and their needs and then using this

information to offer value-added features

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CRM problems and Issues Most problems and issues with CRM are due to organizational

issues.

One third of all CRM projects generate great results, one third

create minor improvements, and the final third produces nothing

CRM experts believe that 80 percent of the benefits of CRM

come from new business processes, while only 20 percent

are due to the technology.

According to an InfoWorld-CTO Network Survey CRM problems

are due to

Difficult integration (39%)

High cost/low ROI (27%)

Resistance from staff or customers (24%)

Solutions do not meet needs (5%)

Others (5%)

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Measuring CRM Success

Common parameters used for measuring CRM Success are:

Reduced expenses/costs of doing business

Improved external customer satisfaction

Improved internal customer satisfaction

Reduced sales cycle

Increased productivity

Increased Sales, etc

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