CRM is about providing companies with the ability to explore new ways of responding to the realities of the expanding power of today’s customer. While, on the surface of things, much emphasis has been placed on customers’ immediate concerns, such as personalization, superservice, convenient solutions, and product and service customization, today’s customer is in actuality being driven by two very powerful needs. To begin with, today’s customer is value driven. While it is true that customers will continue to search for the best value when they make a purchasing decision, it does not mean that price will be the sole determining fac-tor. In fact the contents of what provides value to the customer can be decomposed into three regions [7].
Economic Value.
◾ Customers receive economic value when they can leverage a product or service to generate additional value beyond the initial cost. This is particularly the case involving business-to-business commerce. Negatively, value can also be acquired when the customer applies the product/service to reduce internally associated costs, the savings of which exceed the original cost of the purchase.
Solution Value.
◾ The acquisition of a product or service can provide benefit to the customer by providing access to certain desired functions or features.
Value in this region is found in the capability of the function/feature to pro-vide a desired level of performance or capability. While such value may in some cases be difficult to quantify, in other cases it may be possible to calcu-late the cost of certain features against alternatives to determine those with the optimum trade-off.
Psychological Value.
◾ There can be no doubt that intangible factors can have a significant impact on customers’ perception of product/service value.
Psychological preferences are often subliminal (e.g., brand loyalty or image), and lead customers to believe they are receiving value beyond direct economic or solution-driven benefits. Normally focused around the concept of brand, customers feel that they receive increased benefits and reduced risk when they buy from a known supplier. Brand becomes increasingly more important as the differentiation between product/service feature, function, and cost erodes through market and technological maturity.
For the supplier, it is critical to move beyond just knowing past raw customer buying behavior data to a position of understanding what are the personal needs, wants, and preferences that constitute value for each customer. Once such a “value profile” has been populated, a meaningful value proposition can then be drafted that will detail how each individual customer’s perception of value can be consis-tently realized.
Second, despite all the hype about the fickleness of the consumer, today’s cus-tomer is more than ever looking to build strong relationships with their suppliers.
In the past, customers often focused their purchasing habits around product and service brands. While today’s consumer will still bypass cheaper generic alternatives to buy Tide or Coca-Cola, increasingly brand loyalty is being transferred from products to the provider. Whether it is Amazon.com, Nordstrom’s, or Federal Express, consumers are now looking to their suppliers as “brands” that they can consistently count on to provide expected value regardless of the actual products or services purchased. This means that businesses must continuously reinvent their
“brand-image” in often radically new ways that makes their customers feel as if they are always getting a superlative level of value, that they are in control of their purchasing experience, that they have confidence in what they buy and who they are buying from. Customers want their suppliers to customize their offerings to fit their individual needs and to feel that their participation in the actual purchase process provides a sense of empowerment as well as partnership.
The risks of ignoring these critical customer expectations can be catastrophic.
In the past, businesses atomized each customer transaction and considered them independent of those executed in the past, the ones to follow, or any other related transaction. Today, customers are very aware of the service, products, and personal experience they receive. A single failure may drive them to an easily accessible com-petitor and today’s social networking enablers make it easy for them to tell their friends and associates about their decision. Unsatisfied customers can be a signifi-cant negative force in today’s Internet-empowered business environment that can destroy trust and abruptly end what once had been a long-lived relationship. The opposite is also true. Companies that let their customers know that by attending to their individualized needs they not only want their customers’ business, but want to establish a trustworthy relationship and will be able to weather the storms of an uncertain economy and the encroachment of global competitors.
While the mission of CRM is to look for new ways to retain existing and woo new customers, from the outset it is critical to note that CRM has an accompa-nying object, and that, in the words of a recent Gartner Group Research Note Tutorial, “is the optimization of profitability. It begins with the premise that not all customers are created equal.” In the past, companies treated their customers as if they were all the same. Each received the same level of service, each were charged the same for the products offered regardless of whether they afforded the company a profit. In reality a small percentage of a firm’s customer base provides most of the profits. This means that anywhere from 70 to 80% of the customer
base either provides little or no profit; as much as 40% actually will cost more to service than the profits received. Today’s best companies know who their profit-able customers are and will focus their businesses on retaining them. At Dell Computer, for example,
not all customers at Dell are created equal, nor are they treated equally. Dell’s data enable it to know the ultimate fact about its largest customers—exactly how profitable they are. The more money a cus-tomer brings in, the better treatment it gets; for instance, someone who buys servers and storage from Dell is more likely to get a special package that includes PCs and portables. Other industries … have also begun to offer better service and process to large accounts, but they don’t like to say so. Dell is willing not only to admit it but also to say that some accounts may not be worth its time [8].
Knowing which customers are profitable and which are not is as important as the ability of an enterprise to tailor its resources and capabilities to respond to the individual needs of each customer. As a yardstick, customer profitability enables companies to differentiate the levels of relationship and accompanying service to be rendered to each customer so that their needs and the corresponding value to the business can both be realized. An interesting way to understand the relation between customer cost and profitability is the use of a metric called the lifetime customer value (LCV). The formula for the metric is as follows: the total sales rev-enue of a customer over the lifetime of their relationship, discounted by interest and inflation rates as appropriate [9]. Companies pursuing intimate customer strategies view LCV as detailing not only the value of a customer to the firm but also the value of the firm to the customer. Instead of focusing on metrics that reveal traditional concerns with sales/share, product profitability, and satisfaction, customer-oriented metrics require marketing teams to concentrate on customer profitability, rate and cost of customer acquisition, profit and growth in customer margins, and cost and success in customer retention.
The bottom line is to identify good customers who will have high LCVs, segre-gate them from mediocre to bad customers, and targeted for much greater attention.
For example, AMR Research, Boston, says that credit card companies and retailers have already begun to utilize CRM technology tools to retain high- and mid-value customers while pushing away the bottom low-value ones. Higher-value companies receive what AMR calls “personalized fulfillment.” This model strives to customize the entire experience of the customer ranging from customer profiles and order gen-eration to fulfillment, logistics, and returns. Conversely, bottom-value customers will increasingly be charged for every service [10]. Cokins [11] feels that the application of activity-based costing profiles, which act like business electrocardiograms, can help identify not only which products, but also which customers are the most profitable.
By generating metrics that provide a measure of the “cost-to-serve,” a customer “profit
and loss” statement can be constructed. Once this data has been attained, marketers then can construct strategies for each customer that result in (1) managing their cost-to-serve to a lower level, (2) reducing their services, or (3) raising prices or shifting the customers’ buying to higher-margin products and service lines.
Extending utilization of CRM activities to the management of the customer out into the supply chain is potentially one of CRM’s strongest functions. In its simplest form, sharing information about customer transactions can assist each channel business node manage the product and information flow along the demand and fulfillment network. For example, call-center or sales force order promising and management is much more effective when accurate information about product/ser-vice availability and delivery can be accurately made based on visibility into trading partner capabilities. By combining the metrics and relationship-building capabilities of CRM and the electronic linkages provided by today’s Internet technologies, the supply chain can become not only more responsive but facilitate continuous product and fulfillment planning. In a wider sense, the information gathered via sales force and marketing surveys, and electronically through billing, customer information systems, and call-center data can provide channel partners with insights into the customer that can assist in product development and process design.