Customer Relationship Management- CRM

Customer Relationship Management- CRM Day 1: Introduction to CRM Dr. V Kumar Richard and Susan Lenny Distinguished Chair Professor of Marketing, Executive Director, Center for Excellence in Brand & Customer Management, Director of the Ph.D. Program in Marketing J. Mack Robinson College of Business Georgia State University 1

The 4 Course Concentration Dr. V Kumar drvkumar.com 2

Path to Profitability Operational Excellence Brand Equity Profitability Relationship Marketing 3

Management Dimension Focus Marketing Paradigm Shift Traditional Approach Manage products Focus business on products that are most profitable CLV Based Approach Manage customers Focus business on customers that are most profitable Selling Approach Decision Orientation How many customers can we sell this product to? Marketing decisions based on historic measures or past value of profitability How many products can we sell this customer to? Marketing decisions based on forward-looking measures or the customer lifetime value metric Dr. V Kumar 4 drvkumar.com

Product Centric to Customer Centric Approach- Barriers to Migration Poor coordination of customer-facing activities across product silos Failure to understand customer requirements across product categories Absence of customized products available to customers www.drvkumar.com 5

Breaking the Barriers Which customers would provide revenue in the next planning cycle? What product (s) would a customer purchase given past purchases? When would the customers make their purchase(s)? How much to spend on a given customer? Answers to these questions help managers effectively design communication strategies and target resources to the right customer with the right message at the right time! www.drvkumar.com 6

What is Customer Relationship Management (CRM)? Definition: CRM places the customer as the business point and maximizes the value of customer as an asset to drive organizational excellence and thereby increase customer life-time value and profitability Looking at the market from the Customer s eyes Why CRM? To understand customer s needs even before they know them themselves Decreasing customer churn by increasing customer satisfaction Motivating customers to initiate revenue-generating contracts Increasing the likelihood of the right response Use technology to improve customer service Enable greater customer differentiation Attract customers through more personalized communications 7

CRM Process Essentially four-step process: 1. Identifying customers 2. Differentiating customers in terms of both their needs and value to the company 3. Interact in ways to Improve cost efficiency Increase effectiveness of interaction 4. Customize some aspects of the products or services being provided 8

Components of CRM Strategy Customer-Management Orientation CRM Strategy Implementation Integration and alignment of organizational processes Information capture and alignment of technology 9

Avoid The Four Perils of CRM Implementing CRM before creating a customer strategy Installing CRM technology before creating a customer focused organization Assuming that more CRM technology is better Stalking, not wooing, customers 10

Cornerstones of CRM Managing the customer life cycle Five stages: prospects, first-time buyers, early repeat buyers, core customers and defectors Exploiting the power of databases Use of databases extends beyond acquisition marketing Quantifying customer value Assessing strategies and tactics at the sub-segment and individual levels Three core strategies: customer acquisition, retention and add-on selling Optimizing mix of these is framework for all marketing decisions 11

Customer Database Data from active and inactive customers Basic information: name, address, zip code, and telephone number Demographic information: age, gender, marital status, education, number of people in household, income Psychographic information: values, activities, interests, preference Transaction history: frequency of purchase, amount of spending Other relevant information: inquiries and referrals, satisfaction, loyalty 12

Benefits of Databases Help in making strategic and tactical choices managers face when optimizing acquisition, retention and add-on selling. Use of databases for targeting and analysis Enables a shift from third-degree segmentation (selfselection) to first-degree Captures interaction between firm and customer at each point in time Creates individually tailored offerings based on customer characteristics and behavior Employs observation rather than inference Helps predict future buying behavior Helps to mass customize every element of the marketing mix 13

The Customer Life Cycle 14

The Customer Lifecycle - Where should be we looking? Value Today Acquisition Retention Attrition Measurement/ Forecasting ROI Shopping Basket Measurement Prediction Purchase Sequence Enrichment Customer Loyalty Programs As businesses shift from a product-centric focus to a customer-centric focus, the customer lifecycle has emerged as a framework to describe the stages over time of the relationship between a customer and a business Forecasting Prevention Win back Time 15

Customer-Centric Marketing Initiatives and the Customer Lifecycle Stage Customer Acquisition Customer Development Customer Retention Marketing Initiatives Reduce acquisition costs through more targeted acquisition campaigns Profile valuable (and not-so-valuable) customers to try to increase the acquisition of high LTV customers Increase the usage of current products or services Sell additional (cross-sell) products or services Sell higher margin (up-sell) products or services Personalize communications and offers for the specific customer Market-basket analysis to identify opportunities for cross-promotion or store layout Extend the duration of the relationship by reducing voluntary attrition of valued customers Make unprofitable customers profitable by increasing fees or reducing service-perhaps encouraging some to attrite 16

Customer Data and the Customer Lifecycle Finding new customers Response list - made up of people who've responded to direct mail from catalogs, card decks, internet sites, magazines, trade shows and professional journals Compiled list - a list of people who share a particular attribute. Compiled mailing and telemarketing lists are made up of names and addresses derived from telephone books, directories, public records, etc 17

Customer Data and the Customer Lifecycle (Contd.) Data captured by transactional systems: - A bank automatically captures a record of deposits and withdrawals - An airline knows how often, to which destinations and under which fare structure its customers travel - Phone companies can determine how many calls a customer makes, to which countries, states or numbers, and how long the calls last 18

Customer Data and the Customer Lifecycle (Contd.) Data customers may volunteer: - The Four Seasons hotels conscientiously record customer requests and preferences in their database e.g. If a customer requests a foam, rather than feather, pillow that will be noted in the database and will be available the next time that customer makes a reservation at a Four Seasons property 19

Customer Data and the Customer Lifecycle (Contd.) Data uncovered through analysis: - Your favorite supermarket potentially knows about your lifestyle, habits and preferences Examples, Do you regularly purchase dog food or supplies? Do you prefer prepared take-out items? Or do you prefer to stockpile frozen entrees? 20

Customer Data and the Customer Lifecycle (Contd.) Customer Lifecycle Stage Customer Data Prospects Purchased data: Demographics (age, income, marital status, household size) Geodemographic data (e.g., PRIZM cluster profiles) Campaign History data (e.g., the number of times and means of contacting prospects) Responders Varies but often includes name, address, phone number, and product category interests. May also include financial or credit information, household size, education, employment status, product ownership or other relevant information 21

Customer Data and the Customer Lifecycle (Contd.) Customer Lifecycle Stage New Customers Customer Data Amount of purchase Goods or services purchased Payment type (cash, check, credit card) Source of customer (direct mail, saw ad, referral) Retained or Repeat Customers Product Usage History Payment History Responses to marketing campaigns Channel preferences Former Customers Reason for termination 22

Customers Progress Through Lifecycle Stages Universe of Customers ProspectsResponders New Customers Retained or Repeat Customers High Potential High Value Low Value Former Customers Winback 23

How Do You Determine When A Customer Becomes A Former Customer? Situations: 1. The regular catalog customer who doesn t make a purchase for several years 2. The credit card customer who stops using the card, but doesn t close the account Are they still customers or are they former customers? To really hold on to your customers, you need to build loyalty 24

Is Loyalty Profitable? Does winning loyalty lead to greater profits for a firm? Dr. V Kumar drvkumar.com 25

Loyalty & Profitability Can this romance last? 26

The Answer The answer to this questions is not an emphatic yes, as otherwise believed by so many of our business executives To get strong returns on relationship efforts, companies need a clearer understanding of the link between loyalty and profits 27

Questions that Need to be Addressed When does it pay to go after loyalty? How do you link loyalty to profitability? How do we compute the future profitability of a customer? How do you measure customer lifetime value? How do you optimally allocate marketing resources to maximize this customer value? How do you maximize the return on marketing investments? 28

Elements of Loyalty 29

Elements of Loyalty (Contd.) Engagement through channels of contact like phone, face-to-face contact, e-mail, the web, contact centers, fax and catalogs Enablement through the use of the business s products or services Empowerment through the cultivation of the feeling that customers develop about themselves as a result of interacting with a company through its people, products, processes or services 30

Declining Customer Satisfaction 78 Gasoline Stations 69 Newspapers 76 68 67 74 66 72 65 70 64 63 68 66-6.66% 62 61-5.88% 64 2000 2002 2004 2006 (American Customer Satisfaction Index) with products and services Source: http://www.theacsi.org, University of Michigan 31 60 2000 2002 2004 2006 2008

Case in Point: Effects of Channel Blurring in U.S. Grocery Retail Industry As non-grocery retailers move into food sales 1% 1% Other Warehouse Clubs consumers are visiting traditional grocery stores less 31% 39% Gasoline Stations 12% 12% Grocery Stores 56% 48% Source: The Food Institue (2004) Shopping Trips per Year in the Grocery Channel 2003 2008* *projected 2001 2002 2003 2008 32

Loyalty Differences Across Various Industry Sectors 33

Loyalty and Spending 34

What Does the Customer Gain? 35

Path to Increased Profitability - A Differentiated & Sustainable Strategy INNOVATION Product Service Better ACQUISITION New Customer Winback Richer EXPERIENCE Higher SATISFACTION Reinvested Profits Stronger LOYALTY Higher PROFITS Enhanced REVENUES CROSS- SELLING Improved RETENTION 36

Satisfaction-Loyalty-Profit Chain Product Performance Service Performance Customer Satisfaction Retention /Loyalty Revenue /Profit Employee Performance Source: Strengthening the satisfaction-profit chain, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107 Dr. V Kumar drvkumar.com 37

The Link Between Satisfaction And Retention Source: Strengthening the satisfaction-profit chain, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 114 38

The Link Between Satisfaction And Retention (contd.) Link between satisfaction and retention is asymmetric: Dissatisfaction has a greater impact on retention than satisfaction Even if the level of satisfaction is high, retention is not guaranteed If customers are dissatisfied, other products become more enticing The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes The flat part of the curve in the middle has also been called the zone of indifference Factors like the aggressiveness of competition, degree of switching cost, and the level of perceived risk influence the shape of the curve and the position of the elbows 39

The Link Between Satisfaction And Retention (contd.) Source: Why satisfied customers defect, Jones, Thomas O, Sasser, W Earl Jr. Harvard Business Review. Boston: Nov/Dec 1995. Vol. 73, Iss. 6 The figure shows the variability in the relationship between satisfaction and retention across industries. Loyalty was measured as the customer s stated intent to repurchase. 40

Understanding the Antecedents of Customer Loyalty 41

The Antecedents to Customer Loyalty Satisfaction Loyalty Dr. V Kumar drvkumar.com 42

Customer Perspective Measurements Customer Satisfaction While measuring the customer satisfaction, it is important to understand its antecedents and consequences Antecedents help us understand what are the important factors that drives the customer satisfaction Consequences help us to understand the importance of our effort to improve customer satisfaction in terms of the benefits gained from it Antecedents Customer Satisfaction Consequences 43

Intended by provider Formed by customer Antecedents of Customer Satisfaction Pre-Consumption During Consumption Post-Consumption (-) Expectations Service Quality (-) (+) Experience (+) Customer Satisfaction (+) 44

Antecedents to Customer Satisfaction (Contd.) Attributes leading to Service Quality Reliability How dependable and accurate are the support services Assurance How knowledgeable and professional are the support staff? Service Quality Responsiveness How convenient, available, and prompt are the support services? Empathy How well do support staff understand the needs of users? 45

Antecedents of Customer Satisfaction (Contd.) Components of Customer Expectations Convenience Availability of Information Availability of Options Customer Expectations Competitive Prices Communication 46

Antecedents of Customer Satisfaction (Contd.) Customer Experience Sources of Customer Experience Duration of Customer Experience Do we deliberately create Customer Experience? How do we address the gaps in Customer Experience? Do s & Don'ts of Customer Experience 47

Case Study Perdu Creating rich customer experience in not-so-easy scenarios 48

Imagine marketing Victoria s Secret without Tyra Banks or Gisele Bundchen 49

Presenting Perdu, the Saudi Arabia based Lingerie Super-store KEY CHALLENGE: To create shopping experience through innovative means, thereby overcoming severe constraints of the Arabic society 50

How Did Perdu Achieve This? (1) Used words and poetry in a sensual manner instead of images of super-models Contemporary classy interiors helped enhance the shopping experience 51

How Did Perdu Achieve This? (2) Installed special headless and legless mannequins giving the slightest hint of curves Covered the full glass store-front with light cloth to protect shopping women s privacy from intrusive eyes outside Trained male salespeople to maintain a distance of 6 feet from female shoppers Obtained special permit from the Saudi Government to let women work alongside men in the stores 52

Result Highly successful fashion-forward store in the heart of conservative, orthodox Arabic society. 53

Consequences of Customer Satisfaction Business Level Factors Trust Perceived Value Individual Level Factors Purchase Size Inertia Convenience Satisfaction Loyalty 54

How do We Measure Customer Loyalty? 55

Traditional Customer Loyalty Measures RFM Approach Use of past customer information to evaluate and predict customer value and behavior based on Recency, Frequency and Monetary value Past Customer Value (PCV) Approach Based on the extrapolation of a customer s past transactions into the customer s future value. It assumes that the past profitability of the customer indicates future profitability Share of Wallet Approach Based on the proportion of amount spent by the customer on a given company s products/services versus total amount spent on similar products / services in a given time period (say one year) 56

Traditional Customer Loyalty Measures RFM approach Definition: Use of past customer information to evaluate and predict customer value and behavior based on Recency, Frequency and Monetary value. Recency of Purchase(R): How long since this customer last placed order with you? Frequency of Purchase(F): How often does the customer buy from you? Monetary Value of Purchase(M): How much does the customer spend on a typical transaction? 57

Evaluation of Customer Loyalty by RFM Let s consider a hypothetical example Three customers have a purchase history calculated over a 12- month period Numerical points are assigned to each transaction according to a historically derived R/F/M formula Recency of purchase, frequency of purchase and monetary value of purchase are given weights of 50, 20 and 30 percent respectively Assume that current time period is November for the purpose of calculation 58

Evaluation of Customer Loyalty by RFM (contd.) Customer Purchases Recency (Months) Assigned Points Weighted Points September 2 20 100 JOHN July 4 10 50 February 9 3 15 SMITH May 6 5 25 September 2 20 100 MAGS July 4 10 50 May 6 5 25 February 9 3 15 Points for Recency : 20 if within past 2 months; 10 if within past 4 months; 05 if within past 6 months; 03 if within past 9 months; 01 if within past 12 months; Relative weight = 5 59

Evaluation of Customer Loyalty by RFM (contd.) Customer Purchases Frequency Points for Frequency: Assigned Points 03 points for each purchase within 12 months. Maximum assigned points = 15 points. Relative weight = 2 Weighted Points September 1 3 6 JOHN July 1 3 6 February 1 3 6 SMITH May 2 6 12 September 1 3 6 MAGS July 1 3 6 May 2 6 12 February 1 3 6 60

Evaluation of Customer Loyalty by RFM (contd.) Customer Purchases Monetary Assigned Points Weighted Points September $40 4 12 JOHN July $120 12 36 February $60 6 18 SMITH May $400 25 75 September $90 9 27 MAGS July $70 7 21 May $80 8 24 February $40 4 12 Monetary Value : 10 percent of the $ Volume of Purchase with 12 months; Maximum = 25 points; Relative weight = 3 61

Evaluation of Customer Loyalty by RFM (contd.) Customer Purchases Total Weighted Points Cumulative Points September 118 118 JOHN July 92 210 February 39 249 SMITH May 112 112 September 133 133 MAGS July 77 210 May 61 271 February 33 304 62

Evaluation of Customer Loyalty by RFM (Contd.) Resulting cumulative scores-249 for John, 112 for Smith and 304 for Mags-indicate a potential preference for Mags While John seems a good prospect, mailing to Smith might be a misdirected marketing effort 63

Traditional Customer Loyalty Measures the Past Customer Value (PCV) Approach Based on the total contribution (towards profits) provided by the customer until now Assumes past performance of the customer indicates level of future profitability Since products/services are bought at different points in time during the customer s tenure, all transactions have to be adjusted for the time value of money 64

Computation of Customer Profitability Past Customer Value Evaluation Of Customer Loyalty By PCV Approach n n 1 GC in *(1 r) n Where i r n GC in = number representing the customer = applicable discount rate (Normally assumed as 15% per annum or 1.25% per month) = number of time periods prior to current period when purchase was made = Gross Contribution of transaction of i th customer in the n th time period 65

Evaluation Of Customer Loyalty By PCV Approach (contd.) Spending Pattern of a Customer Jan Feb March April May $ Amount 800 50 50 30 20 GC 240 15 15 9 6 Gross Contribution (GC) Purchase Amount 0.3 Past Customer Value Scoring 6(1 0.0125) 9(1 15(1 4 0.0125) 2 0.0125) 240(1 15(1 5 0.0125) 3 0.0125) 302.01486 66

RFM and PCV Calculation in Class Dr. V Kumar drvkumar.com 67