Management Update: The Evolution of Customer Relationship Marketing

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1 IGG G. Herschel, J. Radcliffe, K. Collins Article 3 December 2003 Management Update: The Evolution of Customer Relationship Marketing The value states of customer relationship marketing are additive, not independent. However, incremental gains in value should not obscure the need for change in the skills and culture necessary to achieve the next state. The value states of customer relationship marketing are additive, not independent. However, incremental gains in value should not obscure the need for change in the skills and culture necessary to achieve the next state. Customer Relationship Marketing s Five Value States The five value states to customer relationship marketing are: Identifying the Right Customer Using the Right Channel Choosing the Right Time Making the Right Offer Building the Right Relationship Each state contains different levels of sophistication, which offers a variety of different ways to generate significant return on investment, or ROI (see Figure 1). At the same time, each state builds on the prior one, enabling an enterprise to leverage the skills and technologies it has already deployed. That creates an ongoing choice for enterprises between gaining further ROI through better execution in their current value states or seeking new dimensions of ROI through investments in the next value state. Figure 1 The Five Value States of Relationship Marketing Gartner Entire contents 2003 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 1st 2nd 3rd 4th 5th Vision Right Customer Right Channel Right Time Right Offer Right Relationship Strategy The focus is on selecting most0likely responders through more complete and deeper customer understanding, then pushing outbound campaigns. The focus is on using a mix of channels to costeffectively reach customers through cascading offers and multistage campaigns. Marketing becomes reactive. Offers are made when the customer initiates a dialogue or triggered based on changes in the customer relationship. Most customers could receive multiple offers; selecting the best one requires a cross-campaign view of all marketing activity. Marketing takes a leading role in the enterprise CRM strategy, helping determine how to deliver differentiated value propositions to different customers. Typical Technologies Data warehousing Datamining Campaign management Prior generation s Cross-channel integration Dialogue marketing applications Intelligent scripting Prior generations Personalization tools Real-time recommendation engines Business rules engines Event-triggered marketing applications Prior generations Cross-campaign optimization systems Prior generations Customer value modeling, planning and pricing tools Text mining for unstructured data CEM tools Embedded CRM Source: Gartner Research CEM CRM customer experience management customer relationship management Understanding the concepts and potential of each value state is critical when making that decision. The transition of enterprises from one state to the next can be a gradual process, with some aspects of marketing remaining in earlier states (for example, customer acquisition activities may be in a different state than customer retention or cross-sell activities). First Value State: Identifying the Right Customer Identifying those customers likely to respond to the enterprise s value propositions is one of the fundamental tasks of marketing. Most campaigns are executed according to a predefined offer and channel. The success of the campaign depends on the accurate selection of the target audience. The main requirement for pursuing an effective strategy (albeit one that many enterprises still do not have) is a feedback mechanism to enable enterprises to track the explicit or implicit responses of customers to their offers. Increasing sophistication and ROI within this state requires better customer understanding, which comes from a comprehensive customer database and better analytic tools. Building a comprehensive view of the customer (including demographic, product, transaction and interaction data) from in-house and third-party providers is the basis of more accurate customer evaluation. Investments in visualization or data-mining tools enable the recognition of previously unrecognized patterns of customer behavior that can be leveraged for better audience targeting. This state is usually retained for some purposes (such as customer acquisition) by all enterprises, but most view the second value state as the minimal state of maturity for organic growth and longterm competitive success. The enterprise has taken the first steps on the customer relationship management (CRM) journey.

3 Successes can be leveraged to demonstrate the value of CRM investment and gain budget approval for ongoing, ROI-driven investment. Second Value State: Using the Right Channel Every channel has unique strengths. Those strengths may enable higher ROI from campaigns that can exploit these differences to deliver messages to customers in the most cost-effective way. For most enterprises, that begins with cascading customers from high-cost to low-cost channels based on potential revenue or value. Channel preferences can be inferred from behavioral analysis or dictated by the customer. Some channels may be good for closing sales of certain products; others serve primarily to reinforce marketing messages and guide customers to closing the sale in other channels. Growing sophistication typically involves more complex tiering of customers for multichannel campaigns (factoring differential response rates across channels with customer value, explicit and implicit customer channel preferences, and the characteristics of the product or service being sold), and more complex customer dialogues for cross-channel campaigns that can leverage synergies between channels. Achievement of the second value state enables the closing of the execution gap between insights generated in marketing and those needed for execution on the front line. Close collaboration between marketing and different channel managers is required, and the capability to allocate channel resources to marketing objectives is crucial. Additional technologies needed for this value state include cross-channel integration, dialogue marketing and intelligent scripting tools. Most enterprises would position themselves as migrating from the first to the second value state; this is the one that most enterprises will remain in until yearend At this stage, enterprises have taken the first step toward closing the execution gap. They are able to demonstrate higher response rates by driving marketing campaigns and offers to more relevant and preferred customer channels. Third Value State: Choosing the Right Time Many offers are not accepted by customers simply because the timing was wrong. Addressing this issue focuses on the two issues of timing: relevance and receptiveness. For an offer to be relevant, enterprises must understand the changing needs of their customers and respond to them. Understanding the customer requires monitoring customer events (transaction and interaction streams) to look for changes in the customer s situation (such as marriage or change of address) or the customer relationship (for example, declining spending or spending in a new category). The other aspect of right timing is making offers to customers when they are most receptive. That is likely to be when they are already interacting with the enterprise (such as during a store visit, Web site visit or call center interaction). This value state requires enterprises to start thinking about the timing of customer events with campaigns and offers.

4 More customer interaction data must be captured and monitored on an ongoing basis. That capability requires tighter integration between marketing and sales for execution on event-driven lead generation. Delivery channels such as the call center must be able to allocate resources across service and sales goals or they will be overwhelmed with too many leads. Additional technologies included in this phase include personalization and profiling tools, real-time recommendation and business rules engines, and event-triggering tools. In 2004, many enterprises will begin limited experimentation with offers and campaigns in this state. Leading enterprises will continue to make significant investments in this state that began in Enterprises are able to increase relevancy by making offers when customers are most likely to accept, increasing conversion rates and further driving the return on marketing investments. Fourth Value State: Making the Right Offer Identifying the right customer for an offer is not the same thing as identifying the right offer for a customer. This value state is the one in which enterprises begin to become more customer-centric and focused on customer and enterprise needs. Recognizing that not every offer can be made to a customer (because of constraints such as customer fatigue from overcontact, marketing budget or channel bandwidth) is a significant evolutionary step in modern marketing organizations. As enterprises become more sophisticated in the third value state, they begin generating more potential customer offers. Determining the offers that will yield the best value over a period of time based on constraints drives enterprises to the fourth value state. The right offer for a customer cannot be determined in isolation it is dependent on reconciling it with the right offer for other customers. An offer for a customer may preclude not only other offers to the same customer, but also making that offer to other customers. This value state requires the enterprise to realize that bombarding customers with offers does not necessarily lead to great response rates and revenue, and may have the opposite effect. Enterprises must finally realize that driving returns on marketing investments is as dependent on what they stop doing as what they choose to do. To achieve this value state requires high-level sponsorship by product managers who can make appropriate trade-offs between products and offers. This is the state that only a few leading enterprises, primarily in financial services, are now adopting. It typically requires a lot of political restructuring within enterprises across product areas, and as such is unlikely to receive widespread adoption, even within leading enterprises, before The enterprise no longer pushes products, but instead it promotes offers that are likely to be accepted by the customer and bring the best value to the enterprise. Contact constraints limit enterprises from overcontacting customers, preventing customer fatigue. Resource constraints prevent overburdening staff with too many mediocre leads, freeing up time to act on only the most-relevant customer offers. The customer experience and the experience of sales staff improve.

5 Fifth Value State: Building the Right Relationship The customer relationship depends on much more than the marketing messages a customer receives. During the fifth value stage, marketing becomes more deeply embedded in the overall enterprise value proposition, including important elements such as customer service and fulfillment. Because its role is the development and communication of the value proposition to the customer, marketing must drive the creation and delivery of differentiated value propositions for different customer segments and individual customers. Incorporation of customer value enables the provision of differentiated service levels to different customers and customer segments. Enterprises may also establish customer loyalty programs or migrate customers to premium offerings based on customer value. Effectively managing the customer life cycle based on customer value becomes important. Customer value modeling, planning and pricing tools are critical to create a more integrated customer experience that transcends sales and service delivery and delivers a valued customer experience. Marketing must also understand the customer experience to fine-tune the customer initiatives. That requires ongoing monitoring and measuring of the customer experience through customer experience management tools. Text mining of unstructured data will be critical to this capability. Enterprises are able to create and deliver value propositions to customers that build satisfaction and loyalty among different customer segments. Ultimately, these will bring longer-term benefits for the enterprise and the customer. Bottom Line Improvement in customer relationship marketing is possible by deepening capabilities within the current value state, or by moving to the next state. To be successful, marketing must sell new concepts to senior and executive management, and clearly define the value proposition for the enterprise. Begin with pilots to establish the value proposition of each state to achieve buy-in. Skipping generations is possible from a technological perspective, but that is likely to cause significant organizational disruption, because each value state requires fundamental changes in marketing s view of its role, metrics and key processes. Written by Edward Younker, Research Products Analytical sources: Gareth Herschel, John Radcliffe and Kimberly Collins, Gartner Research For related Inside Gartner articles, see: Management Update: Use CRM Best Practices to Achieve an Edge, (IGG ) Management Update: Use Six Building Blocks and CRM to Achieve Customer Loyalty, (IGG )

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