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Customer Relationship Management (CRM): The Defining Business Initiative of the New Millennium

by Jim Berkowitz
This paper outlines how e-commerce has redefined the concept of customer-centricity and takes readers through a mechanism for visualizing and analyzing customer behavior, loyalty, and value.

Abstract

While technology fads come and go, CRM is here to stay. CRM isn't merely a software package from a vendor or a "quick fix" service that a consulting firm "does" to your organization, it's a philosophy; a way to run your business.

CRM can best be defined as "customer-centric business strategies that optimize the long-term value of selected customers." To simplify it even further, CRM is all about getting, growing, and keeping customers.

This paper outlines how e-commerce has redefined the concept of customer-centricity and takes readers through a mechanism for visualizing and analyzing customer behavior, loyalty, and value. Readers will learn how to embark on a CRM initiative, what CRM technologies are available, the importance of building a central customer data repository, and how to implement an Analytic CRM system.

Introduction

While Customer Relationship Management (CRM) seems to currently be the "hot" business topic, it is much more than simply the latest technology fad. In fact, a CRM dialogue has been taking place for more than three decades.

Back in the 1960s, management gurus Peter Drucker and Theodore Levitt began preaching the CRM gospel: The true business of every company is to make customers, keep customers, and maximize customer profitability.

By the early 1990s, Michael Hammer and James Champy were talking about the need for customer-centric business models in their classic book, Reengineering the Corporation, while Don Peppers and Martha Rogers were introducing the concept of "one-to-one marketing." More recently, Patricia Seybold's book, Customer.com, put an e-commerce twist on the CRM dialogue by discussing the importance of becoming "customer-facing" in order to maximize customer retention.

While technology fads come and go, the bottom line is that CRM as a concept is here to stay. CRM isn't merely a software package from a vendor or a "quick fix" service that a consulting firm "does" to your organization. It's a philosophy; a way to run your business.

CRM can best be defined as "customer-centric business strategies that optimize the long-term value of selected customers." To simplify it even further, CRM is all about getting, growing, and keeping customers.

E-Commerce Has Helped Redefine Customer-Centricity

The rapid growth of e-commerce over the past several years, and the tremendous amount of competition within a number of business-to-business and business-to-customer markets, have created an unprecedented business environment, one that requires rapid-fire business development, strategic and technological innovation, and response to customer needs.

Once e-commerce companies discovered that they could capture customer demographic and behavioral information more readily than ever before, their hunger to put this information to use became seemingly insatiable. To meet the demands of this "hot" e-commerce marketplace, hundreds of new enabling CRM technologies have become available in the past several years.

More importantly, all of this e-commerce action has awakened the sleeping CRM giant. For Internet-based businesses, it quickly became very clear that in cyberspace the customer rules. For many non-Internet-based companies, this heightened awareness of the importance of customer-centric processes created an urgency to implement CRM strategies. As a result, today many companies have identified CRM as their primary business initiative.

The Promise of a Successful CRM Initiative

Ten years ago, Bain & Company and Earl Sasser of Harvard Business School analyzed the costs and revenues derived from serving customers and published their results in the September-October 1990, issue of the Harvard Business Review. The bottom line was that because of the high cost of customer acquisition, increasing customer retention rates by 5 percent could increase profits by 25 percent to 95 percent. These numbers startled many executives and established customer loyalty (retention) as the cornerstone for numerous successful CRM initiatives.

More recently, in their book, The Customer Marketing Method: How to Implement and Profit from Customer Relationship Management, Jay and Adam Curry revitalized the concept of the customer pyramid. (See Figure 1.) The customer pyramid paradigm provides a company with a mechanism for segmenting its customer base and, in so doing, to visualize and analyze customer behavior, loyalty, and value within each of those customer segments.

In studying numerous customer pyramids, the Currys showed that if your CRM initiatives focus on implementing customer-centric strategies for getting, growing, and keeping customers, the resulting revenue and profit increases can yield very high returns on your CRM investments.

Moving Forward With a CRM Initiative

Armed with the knowledge of CRM as a set of customer-centric business strategies, how does one begin to create a vision for CRM within an organization? As in any risky venture, the best approach is to develop formal, written strategies and tactical plans that will maximize the potential for success while limiting the exposure to failure.

Your CRM plan must define the problems that you are planning to address and develop an initial set of goals and objectives to guide you. Ask yourself and others in your organization these questions: What do we want to accomplish? Why are we doing it? What will success look like? How well do our plans fit with our current organizational structure and operating dynamics? How are we going to monitor and measure the effectiveness of our CRM efforts? What organizational changes might need to be made?

Enabling CRM Technologies

When considering moving forward with the implementation of CRM, many companies still think exclusively of technologies that focus on data collection, query, and reporting. But with the myriad of CRM technologies available today, this thinking can be considered myopic.

CRM technologies can be segregated into three broad, yet distinctive, categories: Operational, Analytic, and Collaborative.

  • Operational CRM software technology focuses on data collection, query, and reporting. For bricks and mortar business-to-business companies, this may include systems for each customer-facing department. For example: campaign and promotions management for the marketing department; lead management, account planning, opportunity management and forecasting for the sales department; and customer help and incident management for the customer service department. In business-to-customer companies Operational CRM may also include point-of-sale, call center, and e-commerce systems.

  • Analytic CRM software technology, also referred to as Business Intelligence (BI) software, transforms Operational CRM data into "actionable" customer information. Analytic CRM tools provide companies with the means to manage their customer-facing processes and help them acquire, grow, and retain customers. Analytic CRM technologies include:

    • Data Warehouse Building and Management tools for consolidating and cleansing customer data from disparate systems located throughout a company.

    • Data Mining software for performing exploratory data analysis and modeling to discover the hidden patterns and associations needed to make predictions about customer behavior.

    • Online Analytical Processing (OLAP) solutions for performing dynamic analyses of the effect the company's actions are having on select customers over time.

Data Mining and OLAP complement each other. Online Analytical Processing (OLAP) technologies help you analyze why things have happened whereas Data Mining attempts to predict what will happen. (See Figure 2.)

  • Collaborative CRM Technologies are all about communicating and sharing information within the company, with business partners and suppliers, and with customers. (See Figure 3.) These technologies are primarily Internet-based (e-CRM) tools which include:

    • Interactive response communications (email, fax, and wireless).
    • Real-time communications (conferencing, instant messaging/chat, and voice over IP).
    • Web content personalization.
    • Information management and sharing using "Enterprise Information Portals" (EIPs). EIPs allow companies to increase collaboration among corporate employees, business partners, suppliers, and customers by integrating and managing dynamic free-form content, Internet services, and enterprise application information.

Constructing a Solid Foundation for Your CRM Initiative

The two strategic pillars that will need to be addressed in order to form a solid foundation for your CRM initiative are organizational issues and information issues.

When embarking on your CRM initiative, the first and most important organizational question that needs to be answered is: Has our company's leadership committed to a customer-centric business philosophy, culture, and strategy?

If the answer is no, or in other words if the CRM initiative is being driven by one or more departmental VPs or managers within your company (marketing, sales, and/or customer service) to the exclusion of others, in the long-run you may be headed for trouble. Implementing the cross-departmental processes that will be needed to drive your company's transformation to customer-centricity can only be led by a CEO or other high-level executive above the departmental fray.

CRM should be about holistically managing the entire customer life cycle. In order for your systems and people to begin operating in a more customer-centric manner, many of your internally focused departmental processes will need to begin to share a common, more highly integrated process flow and information structure.

This process flow and information structure should transform your company into a unified whole that is committed to anticipating customer needs, navigating customers to value, educating customers about solutions that will address their needs, and simplifying the process of doing business with your company. (See Figure 4.)

Information Issues

CRM's promise includes combining information from each customer touchpoint so that all customer-facing personnel have a complete understanding of the organization's relationship with each customer.

Today, this promise can be difficult to keep. The availability of customer data is exploding. However, this data is typically located among many different data systems located throughout a company's various divisions and departments. For example, in many companies, customer sales revenue data (along with product purchase details, order fulfillment status, product returns, and order cancellation information) is located in a financial system that is not integrated with other Operational CRM systems.

In addition, many companies have split their Web businesses and/or activities from the rest of their operations. If the Web is indeed just a tool for providing another customer touchpoint, then combining all of the customer data gathered on the Web with other customer touchpoint data will be critical to the success of your CRM initiative.

Implementing Operational CRM technologies successfully requires special care. Unless they are holistically designed and deployed, these systems can be less customer-centric then you may want. Why? Because although they can easily be set up to improve the effectiveness and efficiency of the people within a given department, they may continue to support departmental informational barriers or create data redundancy and inconsistency.

CRM's "Holy Grail"-A Central Customer Data Repository

Just as the spreadsheet was the "killer app" for the personal computer, Analytic CRM is the "killer app" for CRM. Creating, institutionalizing, and leveraging a customer-centric knowledge base, which contains actionable information and delivers this information to decision makers within a user-friendly and intuitive environment, should be the focal point for an organization's CRM plans.

For most companies, combining all of their customer data into a central repository will be just the beginning of the process. The disparate departmental systems in many cases store incomplete, inconsistent, and/or duplicate information. Gaining a complete and consistent view of the behavior, loyalty, and value of each customer will require some serious data cleansing.

For example, in many business-to-business companies, even the definition of who the customer is can be inconsistent within a company's various operating departments. Accounting may set up each unique billing location as a separate customer. Meanwhile, the sales department may consider each subsidiary, division, or department that can make independent buying decisions as separate customers. At the same time, the customer service organization may consider each authorized support contact to be a separate customer.

Data warehouse building and management software will provide the means to truly begin to construct CRM's "Holy Grail," a centrally managed and cleansed customer data repository. Because this repository will represent "a single version of the truth," it will make data query and analysis easier and more manageable for non-technical personnel. Most importantly, the repository will allow companies to gain a more holistic view of their customers.

Implementing Analytic CRM Systems

Today, CRM is no longer just the gathering of information; it's the accurate analysis of the information that gives businesses the opportunity to improve their customer relationships and maximize their bottom lines. This is the primary role of online analytical processing (OLAP). Online analytical processing software helps a company maximize the profits from its customer base by focusing on:

  • What is done, when, and how;
  • To whom; and
  • Its affect on the behavior, loyalty, and value of your customers. (See Figure 5.)

Being able to monitor the effect various actions have on specific customer segments will, in itself, allow a company to implement more customer-centric strategies.

Performing a CRM Data Audit

Many Operational CRM solutions for marketing, sales, and customer service organizations have been rolled out without a clear understanding of how the data that is being collected will ultimately be used for customer-centric decision-making. As a result, without further customization, many of these systems will not provide the information needed for your Analytic CRM system. Therefore, designing and deploying Analytic CRM systems before implementing Operational CRM can significantly improve the success of your organization's overall CRM efforts.

To begin implementing an Analytic CRM system, you should identify the specific source data that will be needed for performing desired OLAP and Data Mining analyses. After your data needs have been defined, conducting a data audit will allow you to determine the current availability of this information.

Start with What You Have

Once the CRM data audit has been completed, you will know exactly where you stand. From a data availability standpoint, the picture may be rosy or bleak. Either way, the best approach to Analytic CRM is to begin with what you have.

Every company has valuable customer data in its existing systems, particularly within its accounting/ERP systems. Starting with the data that's currently available will allow you to begin building your central customer data repository and to move forward with the implementation of an Analytic CRM system.

However, building the customer data repository should not become
a project in itself. The value in the repository will come from the analyses that it will allow to be produced. Therefore, prioritize your Analytic CRM objectives and place the data needed for the first set of analyses into the repository. As you continue to implement more OLAP and data mining analyses, over time you will grow the information that is stored in the customer data repository.

Building Your Customer Pyramids

Analytic CRM begins with the customer segmentation process. But first, we must define the word "customer." Customers are quite simply any group of people or organizations whose purchasing behavior can be influenced by your company. For many companies, that may include multiple types of customers, including distributors, retailers, and end-user customers. Each type of customer should be segregated into a separate customer group. This can be accomplished by building a customer pyramid. (See Figure 6.)

Building customer pyramids will allow you to analyze and continuously monitor the answers to the following questions:

  • Who are our largest and most profitable customers?
  • How are our marketing and sales resources being spread between acquiring new customers and retaining or growing existing customers?
  • Which of our customers are in danger of becoming, or have recently become, inactive?
  • Who are the customers that have the greatest potential for growth?
  • Specifically, how many accounts must be retained and/or moved up in the pyramid in order to meet our revenue and profit targets?

Building customer pyramids requires defining a set of business rules. The first set of rules should define each of your separate customer pyramids. These rules should segregate different customer types (e.g., distributors, retailers, and consumers), as well as different customer groups (e.g., by division, region, and sales representative).

Within each group or pyramid, the following additional business rules should be defined:

  • Customers versus non-customers: "Customers" are people or organizations that have made purchases from your company in the past, whereas "non-customers" have never made any purchases.

  • Active versus inactive customers: This business rule usually involves defining some period of time in which the most recent purchase was made. For example, a company may decide that for a customer to be considered "active," a purchase must have been made within the past six months. If this rule is not met, then the customer will be classified as "inactive."

  • Large, medium, and small customers: These rules segregate your active (and your inactive customers) into subsets based on their value to your company. In many companies this segregation rule will be based on actual or potential revenue, combined with a percentage of the total customers to include within each segment. For example, once you have begun sorting the customers by revenue or profit, the segmentation rules may define the largest 1 percent of the active customers to be included in the "Top" segment; the next 4 percent in the "Large" segment; the next 15 percent into the "Medium" segment; and the remaining 80 percent into the "Small" segment. Depending on your industry or company, value may be based on other factors. For example, within the banking industry, customer value segregation rules may be based on the number of different services that a customer is actively using.

In addition to this segregation process, the customer pyramids should contain appropriate general and industry-specific demographic data about each person or organization in the pyramid. This data will facilitate the data mining process and will allow companies to truly understand to whom their actions are being targeted to, as well as the behavior that their actions are causing in the various customer subsets.

Tracking Movement within the Customer Pyramid

To maximize the value of customer pyramid analyses, the classification of customers within the pyramid must provide for dynamic as well as static analyses. In other words, it should provide the means to track the movement of companies within the pyramid.

For example, you should be able to identify how many organizations moved up in the pyramid (from "prospects" to "customers," from "small" to "large," from "inactive" to "active," etc.) and how many moved down the pyramid over user-selected time frames (this week, month, quarter, or year). In addition, you may wish to analyze customer pyramid movements within selected time frames compared with the same time frame from the previous year or years. Finally, the analyses should provide the means (based on the defined business rules) to isolate customers who are in danger of sliding down the pyramid so that specific actions can be taken to prevent this from occurring.

Developing CRM Metrics and Benchmarks

Today, although many organizations are beginning to implement Analytic CRM systems, there does not seem to be a clear definition as to what types of analyses this area encompasses. Certainly, the definition of Analytic CRM will be different from one industry and type of company to the next. More troublesome, however, is that since a business cannot survive without its customers, an argument can be made that the analysis of any key part of a company's operations can be considered CRM.

This view, however, only seems to cloud and confuse the entire definition of the Analytic CRM space. Therefore, even though this is not about being right or wrong, for the sake of clarity let's assume that customer-centric Analytic CRM needs to have the customer at its core.

As an example, an analysis of sales by product (or product category) is not CRM, whereas an analysis of sales by customer segment by product would be considered Analytic CRM. With this definition in hand, Figure 7 outlines some of the important analyses and metrics that can be analyzed over time using the customer pyramid paradigm.

But remember: the best overall strategy for CRM Analytics is to start with what you have.

REFERENCES

Curry, Jay with Adam Curry. The Customer Marketing Method: How to Implement and Profit from Customer Relationship Management, New York: The Free Press, 2000.

Hammer, Michael and James Champy. Reengineering the Corporation: A Manifesto for Business Revolution, New York: Harper Business, 1994.

Reichheld, Frederick F, and W. Earl Sasser, Jr. "Zero Defections: Quality Comes to Services." Harvard Business Review, Vol. 68, No. 5 (September-October 1990), 105-111.

Seybold, Patricia and Ronni Marshak. Customer.com: How to Create a Profitable Business Strategy for the Internet & Beyond, New York: Time Books, 1998.

Jim Berkowitz -

Jim Berkowitz, as Showcase Corporation's Global Practice Leader for CRM, is involved in the design, development, and delivery of Showcase's CRM product and service offerings. As an SFA and CRM consulting pioneer for the past 15 years, Berkowitz has assisted more than 300 companies with the implementation of enterprisewide sales force automation and CRM solutions. Mr. Berkowitz started his career as a CPA and PC Technology specialist with Arthur Andersen & Co. in Boston. Most recently he was the director of consulting services for a leading operational CRM solution provider. Mr. Berkowitz holds a BSBA from Boston University and in MBA in Accounting from Babson College.