Customer Relationship Management (CRM) is now such an established approach to marketing that it feels like sacrilege to criticize it. Every marketing campaign claims to be based on its precepts and every marketing director claims to understand how to turn it to a brand's advantage. Patricia Czech discusses the importance of providing an enhanced personalized dialogue for our most valuable customers.
What started as a simple concept has become a daunting, highly technical exercise. In the beginning, we urged brand owners to understand the perspective of their customers, to step into their shoes so that they could iron out problematic or inconsistent points of contact. By looking through the other end of the telescope, companies could gain new insight into how to sell their products and services, and this epiphany would naturally lead to the ultimate reward — loyal customers.
However, good service and customer knowledge require data and systems. Systems gather and store huge amounts of customer data to allow recognition of every customer at all points of contact, to enable superb service levels in all channels, and to help integrate e-commerce with bricks and mortar. Discussions about CRM have become entangled in the capabilities of various software products and with the need to re-orient companies from a product focus to a customer focus. The implicit promise is “With CRM, you can have one-to-one relationships with all of your customers all of the time.”
Have we lost our way? Do these systems really demonstrate “understanding your customer?” Where's the route to greater loyalty and increased profits? The challenge for exponents is that CRM is not free; enterprise-wide systems are costly to introduce and maintain. Company reorganization — and the consequential culture change — is expensive both in actual cost and in loss of sales focus during the changeover. Set-up costs of individualized communication, whether by traditional mail or on the Internet, are substantial. These costs can easily outweigh the benefits and decrease profit.
Although database marketers have made reasonable profits over the years, there's no guarantee that this will continue. We shouldn't ignore the lessons that we've learned simply because the growth in computing power gives us new tools. We need a way to move forward that combines past experience with new techniques.
CUSTOMER VALUE FOCUS
It's almost as though we've forgotten what we set out to do. Marketing means increasing profits — and that requires selling more. The way to do this is to concentrate on customers and their values, not on the organization or its software. Never lose sight of exactly how much individual customers are worth to you, since this will ultimately influence your overall profitability.
It's vital to benchmark initiatives and strategies against a “Customer Value Focus.” This term encapsulates two concepts: The value that a customer brings to your agency's “brand” and the customer's value system that's reflected in some way by this brand. The Pareto Rule (80-20) applies here: Your elite customers still generate the bulk of your profits.
The CEO of one major U.S. bank announced a few years ago that 10% of his customers generated all the profit from his bank. Among the remainder, there were a few major loss-makers, who mostly covered their costs but added nothing to profit. Applying this principle to your business, “elite” customers will repay the costs of increased recognition, service, and individual promotion many times over. But for the others, you need to sell as much product as you can as inexpensively as possible (a “traditional” product-focused strategy). The major problem with the Pareto Rule is that the way in which it's usually applied is one-dimensional. In reality, three groups of customers are critical to your long-term success:
- Your most profitable current customers. Increase their loyalty to you, lengthen the time they stay with you, and gain a larger share of their wallets;
- Newer customers with the potential to be highly profitable. Nurture this group with your best service to ensure that as many of them as possible stay with you until you realize their full profit potential. Profit in the future is good, but how far away is that?; and
- Customers who have been the most profitable in the past. Although these people no longer have the ability to spend large amounts on your products and services, they're probably your best advocates. Give them the best possible service — otherwise you risk loosing their advocacy.
Increased loyalty among high value customers, actual or potential, has a significant effect on profitability. Higher loyalty reduces the proportion of income that you must derive from recruiting new customers. Such customer recruitment is costly in terms of initial promotion and the amount of business generated — it will do little more than cover costs.
Among your customers who don't fall into one of these three groups, stick with a product-based sales strategy. You might want to reduce the costs of serving these customers, particularly by shifting service from mail and phone response to the Internet. In fact, a product-focused strategy will allow you to identify a few more potential good customers.
CUSTOMER RELATIONSHIP: BRAND VALUES THAT RESONATE WITH A CUSTOMER'S OWN VALUES
Why do customers become loyal to your “brand”? The first steps to loyalty start with a second purchase. Customers buy your brand for the first time because they perceive that its values resonate in some way with their own. They buy once to try it out. If your product is better for them than a competitor's, they'll buy from you again.
This resonance combines price, service levels, product innovation, immediacy of delivery, campaign incentive, and other items that each individual thinks is suitable to them. It's important to remember that for many high-value customers, service implies efficiency, not dialogue.
The customer relationship focuses on their trust in the product and the resonance between their own values and that of the brand. Does such a relationship need management? It certainly needs nurturing, to ensure that you maintain brand values or make only minor changes to them to reflect new situations — hardly something that requires a software or organizational change.
In this environment, increasing loyalty and sales requires evolution, not revolution. You need to monitor and research the views of your most valued customers. Meeting their needs with your brand will have a far greater effect on profit than allowing your views to be clouded by what the majority of customers want — the 90% who do little more than cover their costs.
Reader's Digest provides a good example. The magazine's proven marketing strategy focuses on the Prize Draw promotions (the ones filled with all those unnecessary pieces of paper). Over the years, testing showed that the core audience, the people who purchased repeatedly, responded well and enjoyed receiving these promotions. But research also showed that non-customers didn't like them at all, and that many more people would buy for the first time from a simpler promotion.
The Digest's response? For years, it mailed the full Prize Draw promotion to everyone. This lost some initial response, but ensured that those people who did buy were similar to the best customers. The Prize Draw promotion was part of the Digest brand, and they took great care to maintain it so they could increase loyalty among their best customers, even to the extent of reducing the intake of new customers each year.
They've recently changed their recruitment packs. But this has more to do with changes in their loyal customer audience, who are getting older, than with short-term customer recruitment benefits.
Loyalty research, like higher service levels, needs to focus on the people who have demonstrated the greatest affinity to your brand by repeat purchasing and becoming one your most profitable customers. This research needs to be ongoing: even among the most loyal, customers' attitudes and values will change with time.
What form should research take? You'll need to understand how to over-achieve against brand values, raising customer satisfaction scores from “satisfied” to “very satisfied.” This will not only ensure that the best customers remain loyal to your brand, but will also make them advocates among their peers.
SYSTEMS AND ORGANIZATION IMPLICATIONS
Concentrating improved service, recognition, and communication on your best customers will change your systems and organizational needs. Although maintaining a single customer database remains critical in order to be able to provide segmentation, most of your other systems should focus on only a relatively small proportion of customers. Keep marketing to your other customers using existing infrastructure and product-based systems. This means that investment in both new systems and enterprise re-engineering can be relatively low, ensuring a positive ROI within an acceptable timeframe.
You'll need segmentation tools and data to recognize different groups of customers within the database. To recognize future potential, you might need additional external data that show current customers' life stages and project how these might change.
Finally, you can use campaign management software to identify trigger points at which promotions become relevant, to use statistical inferences to select people most likely to be in buying mode, and to tailor campaign fulfillment to the individual customer.
Critics might say that I've ignored the impact of e-commerce. In many sectors, the Internet is making a revolutionary change by providing low service costs and attractive consumer offers. In some sectors, particularly business-to-business markets and commodity markets for products that require only electronic distribution, the price advantage of e-commerce might be enough to eliminate existing distribution channels. In my view, however, for the near future, most other markets will probably use the Web to enhance brand perception and as a sales channel based on existing brand values. In either case, the strategy of building loyalty among your best customers will be a good one.
Since there's little evidence that customers want a relationship with a supplier, the term “CRM” was always dubious. We should stop the concept from becoming synonymous with pushing software, organization, and e-commerce to the breaking point. It's sensible to provide brand recognition for all customers, but profitable only if we reserve an enhanced personalized dialogue for our most valuable customers. So far, we've been in danger of letting the capability of IT systems dictate the strategy, rather than assessing the actual benefits of these systems to a brand's profitability. You need to take control back and ensure that CRM takes its proper place as a selective high precision tool, rather than an indiscriminate product of overdeveloped database software.