Customer Relationship Management:A Database Approach

Class 1

MARK 7397Spring 2009

James D. HessC.T. Bauer Professor of Marketing Science

375H Melcher Hall jhess@uh.edu713 743-4175

What is Marketing

• “Marketing is an organizational function and a set of processes for

creating, communicating and delivering value to customers and for

managing customer relationships in ways that benefit the

organization and its stakeholders.”

American Marketing Association,2004

What is Customer Relationship Management?

Customer relationship management (CRM) is a business strategy to identify, attract, convert and reward the most profitable customers to induce recurring exchanges with the business.

CRM in a nutshell: from your customers base, identify Angels and do something special for them and identify Devils and terminate the relationship.

American Customer Satisfaction Index

Declining Customer Satisfaction- Example

Household Appliances

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-3.5%

Scheduled Airlines

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-8.4%

Commercial Banks

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.7%

Parcel Delivery

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.5%

Personal Computers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-9.0%

Publishing/ Newspapers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-12.5%

(American Customer Satisfaction Index) with products and services

Source: http://www.theacsi.org, University of Michigan

Customer Satisfaction

• Basic assumption:– Satisfaction leads to loyalty– Loyalty leads to higher $$ spending– Higher $$ spending = greater profits

• Therefore: customer satisfaction is key!

• BUT: can satisfy customers right out of business

• Truth: “barely satisfied customers”

January 11, 2004

Reaping What They Sew By Purva Patel Staff Reporter of THE HOUSTON CHRONICLE

Hamilton Shirt Co. has outfitted Texans for more than 120 years.

But the custom-shirt maker has kept itself under wraps as it caters to an elite clientele of prominent businessmen, national news anchors and the well-heeled. The business advertised for the first time last November, by direct mail to select customers.

"There's a certain mystique about it," said David Lynn, manager for custom sales at Richards of Greenwich, a high-end luxury apparel store in Connecticut. "It's like a secret society."

Operating through both World Wars and numerous economic downturns, the company has survived by avoiding major alterations to the business and relying on brand exclusivity for four generations. Owner Jim Hamilton says he runs the shop the way his father and grandfather did. Shirts sell for $155 to $245 in Houston, and first-time buyers must purchase at least four. Behind the storefront on Richmond, sewing machines turn out about 75 shirts a day.

Bolts of fabric imported from Italian and Swiss mills line one wall, ironing tables another in the 3,100-square-foot factory. Some 20 pattern cutters and seamstresses snip, stitch and press the shirts, much like those who worked for Hamilton 's grandfather. Patterns are still hand-cut, side seams are still stitched with a single-needle sewing machine, and customers still talk to the owner as they did when the company opened, under the name Hamilton Bros.

Even the filing system is the same. Salesmen write out orders, tape on swatches of fabric and store them with patterns in manila envelopes. Hamilton estimates he has 30,000 patterns on file, of which 5,000 are active.

Hamilton hopes to eventually pass the business on to his children, who each own 5 percent of the company. His daughter, Kelly Hamilton , 28, handles marketing, helped develop the company's first brochure and hopes to set up a Web site. David Hamilton recently prompted his father to start taking credit cards and is working on a database for direct-mail efforts. When he looked at the company's alphabetical list of clients (more than 2,000 names long and predominantly male) and saw Frank Abignail at the top, the wheels started turning. Abignail was the recent subject of the hit movie "Catch Me If You Can" starring Leonardo DiCaprio as perhaps America's most famous check forger, who went on to become a famous FBI consultant. Recalls David: "I said, 'Dad, do we still take his checks? Maybe we better switch to credit cards.'“

David Hamilton is looking into developing custom software to encapsulate the company's customer database.

Link Between CRM and Customer Value

• Customer Value: The economic value of the customer relationship to

the firm – expressed on the basis of contribution margin or net profit

• CRM is the practice of analyzing and utilizing marketing databases

and leveraging communication technologies to determine corporate

practices and methods that will maximize the lifetime value of each

individual customer to the firm

Link Between CRM and Database Marketing

Database Marketing

• Customer Databases

– Identify and analyze customer population

– Group based on similarities

– Recommend separate marketing campaigns for different groups

• CRM

– Applies database marketing techniques at customer level

– Develops strong company-to-customer relationships

What should be in a customer database?

•Transactions – complete purchase history with details such as price paid, SKU, delivery date…•Customer Contacts – sales calls, service requests…•Descriptive Information – segmentation data•Response to Marketing Stimuli – responses to direct marketing initiative, sales contact…

$50

Customer A

Year 1 Year 2

$50

Customer B

$75

Customer C

$50

Customer D

$50

Customer E

Customer Histories(gross contributions)

Monthly sales calls were made at cost of $10/call.

Customer Valuation

$/Call

Number of Customers

Call on

ContributionMargin

ServiceCost per Call

Angels Devils

Customer Behaviors

The Mismanagement of Customer Loyalty

Win loyalty, therefore, and profits will follow as night follows day.

The top 16 retailers in Europe collectively spent more than $1 billion in 2000 on loyalty programs.

Half of U.S. high-tech corporate service provider’s customers who made regular purchases for at least two years-- and were therefore designated as "loyal"-- barely generated a profit. Conversely, about half of the most profitable customers were blow-ins, buying a great deal of high-margin products in a short time before completely disappearing.

Studied high-tech corporate service provider, a large U.S. mall-order company, a French retail food business, and a German direct brokerage house: 16,000 individual and corporate customers over a four-year period.

Correlation coefficients between loyalty and profits 0.45 grocery retailer

0.30 corporate service provider0.29 direct brokerage firm0.20 mail-order company.

Myths of Customer Loyalty

Myth 1: It costs less to serve loyal customers.

Myth 2: Loyal customers pay higher prices for the same bundle of goods.

Myth 3: Loyal customers market the company

Knowing When to Lose a Customer

Which Customers Are Really Profitable?

High profitability

percent ofcustomers

corporate service provider 20%

grocery retail 15%

mail-order 19%

direct brokerage 18%

percent ofcustomers

corporate service provider 30%

grocery retail 36%

mail-order 31%

direct brokerage 32%

Low profitability

percent ofcustomers

corporate service provider 29%

grocery retail 34%

mail-order 29%

direct brokerage 33%

percent ofcustomers

corporate service provider 21%

grocery retail 15%

mail-order 21%

direct brokerage 17%

Short-TermCustomers

Long-TermCustomers

Choosing a Loyalty Strategy

High profitability

Butterflies • good fit between company's offerings and customers' needs• high profit potentialActions: • aim to achieve transactional satisfaction, not attitudinal loyalty• milk the accounts only as long as they are active• key challenge is to cease investing soon enough

True Friends • good fit between company's offerings and customers' needs• highest profit potentialActions: • communicate consistently but not too often• build both attitudinal and behavioral loyalty• delight these customers to nurture, defend, and retain them

Low profitability

Strangers • little fit between company's offerings and customers' needs• lowest profit potentialActions: • make no investment in these relationships• make profit on every transaction

Barnacles • limited fit between company's offerings and customers' needs• low profit potentialActions: • measure both the size and share of wallet• if share of wallet is low, focus on up- and cross-selling• if size of wallet is small, impose strict cost controls

Short-TermCustomers

Long-TermCustomers

CRM

RelationshipInitiation

RelationshipMaintenance

RelationshipTermination

Acquiringcustomers

Retainingand

growingcustomer base

“Firing”customers

(A) (B) (C)

CRM (A)

RelationshipInitiation

ProspectEvaluation

AcquisitionManagement

RecoveryManagement

CRM (B)

RelationshipMaintenance

CustomerEvaluation

RetentionManagement

Up-CrossSelling

Management

ReferralManagement

CRM (C)

RelationshipTermination

CustomerEvaluation

ExitManagement

Summary

• From a strategic perspective, CRM is the process of selecting the

customers a firm can most profitably serve and shaping the

interactions between a company and these individual customers

• Assessing Customer Value is critical to CRM

• Rapid changes are taking place in the environment in which firms

operate with respect to customers, market places, technology, and

marketing functions

• These changes have driven the marketplace to become relationship-based and customer-centric

• CRM’s goal is to optimize the current and future value of the customers for the company