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Customer Relationship Management

Basic Assumptions for this paradigm:

1. There is a lifetime-profitability correlation

2. Profits increase over time

3. Serving long-term customers is less costly

4. Long-life customers pay higher prices

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Price Premium

Referrals

Cost Savings

Revenue Growth

Base Profit

Acquisition CostYears

1 2 3 4 5 6 7

Graphical representation of consumer/profit development

PROFIT

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Some explanations

• Acquisition costs: depending on the category, it could be quite substantial. In fast growing businesses, firms are willing to spend upfront in hope of future recovery. Cellphones are prime examples. Average acquisition cost in the US: $ 300. However high churn rates may not justify this. (There is a market segmentation reason)

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Further explanations

• Base profit: the average margin

• Revenue growth: retained customers might buy more from the company (partly because of cross-selling partly, because of they are happy)

• Operating costs: it is less costly to serve loyal customers

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More explanations

• Referrals: satisfied customers make recommendations (however if you force them they become suspicious)

• Price premium: loyalty makes blind and customers are willing to pay higher prices (though it could just be inertia)

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Discussion

• If the basic assumptions hold, firms should pursue loyalty building strategies

• Loyalty strongly depends on customer satisfaction

• However, if the basic assumptions do not hold, caution is advised

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The Customer Satisfaction Branch

• Customer Satisfaction is usually approached based on the expectancy-disconfirmation theory:

Looking at the match of expectations and experience

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Customer satisfaction

• Is a multidimensional construct based and measured on many dimensions.

• Usual dimensions:

response, info exchange personal service,price, availability, attributes

• Need for own measures: customersat.com

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Customer satisfaction measures

• Behaviour (based on data)

• Surveys

• Lost customer analysis

• Mystery shopping

• Benchmarking for competitors

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The impact of market segmentation

• Not all customers are equal, therefore pursuing loyalty in general, is not a good strategy

• Even highly satisfied customers switch

• There could be some free-riding

• Membership (contract) and non-membership business can be different

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Low Lifetime Revenue High

Long

Lifetime Length

Short

Lifetime Profit: 51 Mailing cost: .128 Ave.Price: 47.7

Lifetime Profit 289 Mailing Cost: .063 Ave.Price: $ 58.4

Lifetime Profit: 51 Mailing Cost: .142 Ave Price: 47.8

Lifetime Profit 258 Mailing Cost .065 Ave. Price: $ 63.5

Source:Reinartz & Kumar

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Interpretation

• This is a non-contractual business

• In this business (direct marketing) rewarding long lifetime with the company is counterproductive

• It might be different in contractual relations

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Industry approaches

• Industries might follow different approaches to customization such as one-to-one, mass customization etc.

• Measurement is more and more possible, though industry specific

• Could be very important in B2B

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Some examples

• High-value customers receive better treatment

• Can use more services

• Receive more rewards

• Low value customers are treated badly

• « Customer apartheid ? »

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Customer relationship management as an application

• CRM is about identifying, winning, retaining and expanding customer relationships; in the most profitable way, across the complete spectrum of point to contact with the customer. It includes, sales force, call-center, the Internet

• A technology enabled dialogue

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The Dell model

• Dell captures more customer value in its model than its competitors through differentiation in customer knowledge and therefore better problem solving

• This leads to higher selling prices

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When is CRM a good tool ?

• In businesses with complexity and high value. This is where the customer value can be driven by differentiation and tailorability to the customer

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Beyond CRM...

Consumers are co-producers, not just users We can manage consumer by marketing

and HR tools Customer Efficiency

Management

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Simple profit model: satisfied employees

Firm Employees Customer

Satisfied employees Satisfied employees make customers happy

Satisfied customers increase company profit

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A more rational profit model: based on a process view

Firm Employees Customers

Company systems allow employees to provide consistently better services

Well supported employees provide consistently better services

Satisfied customers improve their relationship with the firm

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The efficient customer profit model

Firm

Employees

Customer

Company systems support employees and customers to become

more efficient

Well supported employees provide better services

Satisfied customers have better relationship with the company and with other customers, as well.

Efficient customers use company systems better and create better serv ices