CUSTOMER RELATIONSHIP MANMAGEMENT

LEARNING ASPECTS

Evaluation of CRM
Schools of thought in CRM
Benefits of CRM
Customerloyalty
Success factors
Service levels
Service level agreements

1. INTRODUCTION

EVALUATION OF CUSTOMER RELATIONSHIP MANAGEMENT

Customer Relationship Management (CRM) is to create a competitive advantage by

being the best at understanding, communicating, delivering, and developing existing
customer relationships, in addition to creating and keeping new customers. It has
emerged as one of the largest management buzzword. Popularised by the business
press and marketed by the aggressive CRM vendors as a panacea for all the ills
facing the firms and managers, it means different things to different people. CRM,
for some, means one to one marketing while for others a call centre. Some call
database marketing as CRM. There are many others who refer to technology
solutions as CRM. If so, what is CRM?
Merchants and traders have been practicing customer relationship for centuries.
Their business was built on trust. They could customize the products and all aspects
of delivery and payment to suit the requirements of their customers. They paid
personal attention to their customers, knew details regarding their customers tastes
and preferences, and had a personal rapport with most of them. In many cases, the
interaction transcended the commercial transaction and involved social interactions.
Even today, this kind of a relationship exists between customers and retailers,
craftsmen, artisans – essentially in markets that are traditional, small and classified
as pre-industries markets.

These relationship oriented practices have changed due to industrial revolution..

Businesses adopted mass production, mass communication and mass distribution to
achieve economics of scale. Manufactures started focusing on manufacturing and
efficient operations to cut costs. Intermediaries like distributors, wholesalers and
retailers took on the responsibilities of warehousing, transportation, distribution and
sale to final customers. This resulted in greater efficiencies and lower costs to
manufacturers but brought in many layers between them and the customers. The
resulting gap reduced direct contacts and had a negative impact on their
relationships.

The post-industrial era saw the re-emergence of relationship practices. Marketing

academicians.

(a) Rapid advances intechnology,

(b) Intensive competition in mostmarkets,
 High

Relationship
Orientation

Low

Pre-Industrial Era Industrial Era Information era

(Relationship (Product Centric) (Relationship
Centric-Small Scale) Centric-Large Scale)

Figure 1.1 The Evolution of Relationship Orientation

(c) Growing importance of the service sector,and

(d) Adoption of total quality managementprograms

Technological Advancement

More information, communication and production technologies have helped

marketers come closer to their customers. Firms operating in diverse sectors ranging
from packaged goods to services started using these technologies to know their
customers, learn more about them, and then build stronger bonds with them through
frequent interactions. Marketers could gain knowledge about customers, which
helped them respond to their needs through manufacturing, delivery, and customer
service. Technology also enabled ordering and product-use related services.
Though the emergence of CRM in recent times coincided with the information age,
one must remember that technology is just an enabler. Technology enabled
marketers overcome several long felt shortcomings of mass marketing. Some of
these included:

- Inefficiencies of mass marketing: 1980s and early 1990s witnessed some of

the most radical business transformations that resulted in cost reductions in
almost all functional departments except marketing. Manufacturing and
related operations costs were reduced through business process
reengineering, human resource costs were reduced through outsourcing,
restructuring and layoffs, financial costs were reduced through financial
reengineering but marketing costs kept increasing due to increased
competition and product parity in virtually everyindustry.

- Lack of fast, effective and interactive models of customer contact, feedback

andinformation.

- Lack of consolidated information about customer interactions, purchase

behavior and futurepotential.

Intensive Competition

In competitive markets, specially the ones that were maturing and witnessing slow
or no growth, marketers found it more profitable to focus on their existing
customers. Studies have shown that it costs up to 10-12 times more to attract a new
customer than to retain an existing customer. Marketers have now started focusing
on the lifetime value of customers. They are moving away from just trying to sell
their products to understanding, customers needs and wants and then satisfying their
needs. This has led to a relationship orientation which creates opportunities to cross
sell products and services over the lifetime of the customer.

Growing Importance of the Service Sector

The service sector contributes to over two-third of the GDP of most advanced
economies. In India, the services sector contributes to over 50 per cent of the
economy. One of the characteristics of the service industries is the direct interaction
between the marketer and the buyer. In services, the provider is usually involved in
the production as well as delivery directly. For example, professional service
providers like a doctor or consultant are directly involved in production as well as
delivery of their services. Similarly, the customers are directly involved in
production in the purchase and consumption of these services. These direct contacts
create opportunities for better understanding, a better appreciation of needs as well
as constraints and emotional bonding all of which facilitate relationship building.
Therefore it should come as no surprise when you see the service firms pioneering
many of the customer relationship initiatives. Firms operating in the financial
services, hospitality business, telecom, and airlines are the early adopters and
extensive users of CRM practices.

Adoption of total Quality Management (TQM) Programmes

Total quality management programmes help companies offer quality products and
services to customers at the lowest prices. To enable this value proposition,
organizations needed to work closely with their customers, intermediaries as well as
suppliers thus fostering close working relationships with members of the marketing
system. Companies such as Intel, Xerox, and Toyota formed partnering
relationships with suppliers and customers to practiceTQM.

Other developments such as an increase in the number of demanding customers,

increased fragmentation of markets, and generally high level of product quality
forced business to seek sustainable competitive advantages. A competitive
advantage is sustainable only when it is not easily replicated. One such sustainable
competitive advantage is the relationship that a firm develops with its customers.

SCHOOLS OF THOUGHT ON CRM

The relationship marketing is supported by the growing research interest in different

facets of this concept. Researchers in different countries observed this shift in
marketer‘s orientation towards customer relationship and started exploring the
phenomenon. The initial approaches to CRM can be broadly classified as:

1. The Anglo-AustraliaApproach,
2. The Nordic Approach,and
3. The North AmericanApproach.

The Anglo-Australian approach integrated the contemporary theories of quality

management services marketing and customer relationship economics to explain the
emergence of relationship marketing
The Nordic approach views relationship marketing as the confluence of interactive
network theory, services marketing and customer relationship economics. The
interactive network theory of industrial marketing views marketing as an interactive
process in a context where relationship building is an area of primary concern for
marketers.

Quality
Management

Services Customer
Marketing Relationship
Concepts Economics

Relationship
Marketing

Figure 1.2 Anglo-Australian Approach of Relationship Marketing

 Interactive
Network

Customer
Service Relationship
Marketing Economics

Relationship
Marketing

Figure 1.3 Nordic Approach to Relationship Marketing

In contrast, the initial focus of the North American scholars was on the relationship
between the buyer and seller operating within the context of the organizational
environment which facilitated the buyer seller relationship.

Organisational Buyer
Environment

Relationship
Manager

Figure 1.4 North American Approach to Relationship Marketing

One of the broader approaches to CRM emerged from the research conducted by
academics at the Centre for Relationship Marketing and Service Management at the
Cranfield University, U.K. The broadened view of relationship marketing addresses
a total of six key market domains, not just the traditional customer market. It also
advocated for a transition for marketing from a limited functional role to a cross-
functional role and a shift towards marketing activities for customer retention in
addition to the conventional customer retention in addition to the conventional
customer acquisition.

The six markets are as follows

1. Customer markets – existing and prospective customers as well as

intermediaries.
2. Referral markets – existing customers who recommend to other prospects,
and referral sources or ‗multipliers‘ such as doctors who refer patients to a
hospital or a consultant who recommends a specific ITsolution,
3. Influence markets – government, consumer groups, business press and
financialanalysts.
4. Recruitment markets – for attracting the right employees to theorganization,
5. Supplier markets – suppliers of raw materials, components, services, etc.,
and
6. Internal markets - the organization including internal departments andstaff.
 Internal
Markets

Supplier Referral
Markets Markets
Customer
Markets

Recruitment Influence
Markets Markets

Figure 1.5 The Six Markets Framework

DEFINING CRM

The preceding discussions highlight the range of perspectives adopted by

researchers in understanding and explaining relationships. Similarly in marketing
literature, the terms customer relationship management and relationship marketing
have been used interchangeable to reflect a variety of themes and perspectives.

Some of these themes offer a narrow functional marketing perspectives while others
offer a perspective that is broad and somewhat paradigmatic in approach and
orientation. A narrow perspective of customer relationship management is database
marketing emphasizing the promotional aspects of marketing linked to database
efforts, Another view point is to consider CRM only as customer retention in which
a variety of after marketing tactics are used for customer bonding or staying in
touch after the sale is done. A more popular approach with recent application of
information technology is to focus on individual or one to one relationship with
customer that integrates database knowledge with a long-term customer retention
and growth strategy.

Jackson applied the individual account concept in industrial market to suggest

markets CRM to mean, marketing oriented toward strong, lasting relationship with
individual accounts

McKenna offered a more strategic view by putting the customer first and shifting
the role of marketing from manipulating the customer (telling & selling) to genuine
customer involvement (communicating & sharing theknowledge).

Berry, in a broader term stressed that attracting new customers should be viewed
only as intermediate step in the marketing process. Developing closer relationships
with this customers and turning them into loyal is an equally important aspect of
marketing. Thus, he defined relationship marketing as attracting, maintaining, and,
enhancing customer relationships.

By focusing on the value of interaction in marketing and its consequent impact on a

customer relationships, a broader perspective espouses that customer relationship
should be the dominant paradigm of marketing. As Gronroos stated: Marketing is to
establish, maintain and enhance relationship with customers and other partners, at a
profit, so that the objectives of the parties involved are met. This is achieved by a
mutual exchange and fulfillment of promises. The implication of Gronroos
definition is that customer relationships is should be devoted to building and
enhancing such relationship. Similarly, Morgan and Hunt suggested that
relationship marketing refers to all marketing activities directed towards
establishing, developing and maintaining successful relationships.

Figure 1.1 Shift in focus.

Traditional Marketing Focus Provider

Parity

Product Price Customer

Consideration
and
Potential
Promotion Place Purchase

Customer Experience Focus Customer

Differential
Marketing Sales
Interactions Interactions Customer
Satisfaction
Loyalty,
Service Support and
Interactions Interactions Value
BENEFITS OF CRM

Customers are Profitable over a period of time

Studies by the US-based Bain and Company have shown that a customer becomes
more profitable with time because the initial acquisition cost exceeds gross margin
while the retention costs are much lower. When an organization retains the
customer, it gets a larger share of the customers wallet at a higher profit-one percent
increase in sale to existing customer increase profits by 17 per cent while the same
amount of sale to new customer increased profit by only 3 per cent. This huge
different is explained by the fact that for most companies the cost of acquiring the
customer is very high. It costs six to eight times more to sell to a new customer than
to sell to an existing one. The same study also highlighted that a company can boost
its profit up 85 per cent by increasing its annual customer retention by only 5 per
cent.

Similarly, studies have shown that the probability of selling a product to a prospect
is 15 per cent while it is 50 per cent to a existing customer. Thus, the time, the effort
and the costs of selling are much lower for an existing customer.

Customer probability is Skewed

An analysis of the revenue and profit contribution of customer base of banks in the
US, Europe and Australia showed the following:
 - The top 20 per cent of the customers contribute to 150 per cent of the profits
while the bottom 20 per cent drain 50 per cent of the profits and the rest 60
per cent just breakeven.

Experiences of Indian organizations are on similar lines. In a large public sector

Banks, the top 23 per cent of the customers contribute to 77 per cent of the
revenues. Similarly, the top 27 per cent customers of a leading cellular phone
service provider contributes to 75 per cent of therevenues.

The implication of such a skew in customer profitability and revenue contribution

are startling for organizations, which use to conventionally treat ‗all customers are
equal‘. Competitors have to just lure these top customers and the organization
would face serious problems. It also highlights the fact that one has to adopt
different strategies for different customergroups:

- Programmes have to be developed to retain and build stronger bonds with

the top ‗gold standard‘ customers so that they do not get‗poached‘

- Activity-Based Costing analysis has to be done with the middle groupof

‗potentials‘ so that the cost of serving this customers are reduced. In
addition, cross-selling and up selling should be done to increase the
profitability of these customers.

- An analysis of the bottom growth has to be done to identify those customers

who can be shifted to the ‗potential‘ group. For the remaining, the cost of
servicehastoreducebyencouragingthemtouselowercostchannels.In
 extreme cases, some of these customers will be encouraged to defect to
competitors. Outsourcing of loss making customers to specialized low
overhead agencies is an emerging trend.

Marketing Benefits of CRM

CRM will gradually reduce organization‘s dependence on periodic surveys togather

data. Collection of data related to buying and consumption behavior will be an
ongoing process. In many cases, the transaction data is automatically collected
some times real time as in the e-commerce transaction. This rich repository of
customer information and knowledge updated through regular interactions and
actual customer transactions and purchase behavior will help marketers to develop
and market customer centric productssuccessfully.

Customized promotions-based customer preferences and purchase patterns will

substantially reduce the wasteful expenditure of mass communication and even
direct mailing. As a customized promotion are more focused and are based on a
deeper insight of existing customers, they have a greater chance of conversion to
sales.

Service Benefits of CRM

Research findings conducted across industries as a part of a Technical Assistance
Research Project (TARP) indicate that:

- 95 per cent of the customers do not bother to complain, the just take their
business else where.
 - Most loyal customers take time to complain. This enables the product /
service provider to improve and ensure that such mistake do notrecur.

- A typical dissatisfied customer will tell an average of 14 others about a bad

experience while she will tell only six about a satisfying experience with an
organization.

- 70 per cent of customers who complain will do business with a company

again if it quickly takes care of a serviceproblem.

ENABLES FOR THE GROWTH OF CRM

The tremendous growth of interest and investment in CRM across the globe can be
attributed to the following macro – environmental factors:

(a) Emergence to serviceeconomy,

(b) Emergence of marketeconomy
(c) Global orientation of businesses,and
(d) Aging population of the economically advancedeconomies.

Emergence of Service Economy

The emergence of service economy is a global phenomenon. In the US, the service
sector accounts for over 75 per cent of GNP and employees 80 per cent of the work
force. The service sector contribute to 60 – 70 per cent of the GDP of economically
advanced nations of Western Europe, Canada and Japan. Theincreasing
contribution of service sector is not limited to develop countries. Developing
economies like China, Indonesia and Thailand employ about 40 per cent of the
work force in the service sector. In the year 2001, the service sector contributed to
48 per cent of GDP in India, 54 per cent in Philippines and 33 per cent in China.
The average annual growth rate of the services during the decade of 1990s was 8
per cent in India, 9 per cent in China and 4.1 per cent in Philippines (Statistical
Outline of India, 2002 –2003).

Advanced countries progressed from agriculture to industrial and then to post –

industrial economies. The shift from manufacturing to services was spread over a
few decades of the last century. However, in developing countries, the growth is
lead by all three sectors of the economy in varyingproportions.

The growing importance of services resulted in greater customer orientation as

services are characterized by simultaneity / inseparability. It implies that the
production and consumption of services are inseparable. In services, one needs to be
closed to customers to deliver the service offering. The factory is where the
customer is and services offered in real time. The customer perceives the production
process as part of service consumption, not just the outcome of production process
as in traditional marketing of physical goods. Therefore, it is not surprising that
service businesses like hotels, airlines, banking, financial services, telecom and
retailing where the early adopters ofCRM.
Emergence of Market Economy

In addition to the shift towards service, there is a global emergence of the market
economy. The power is more to the market as compare to the controlled economy.
Market regulation was in place all over the world including the US, Europe, USSR,
China and India. The 1990s witnessed acceleration in the deregulation of many
large industries including banking, telecommunications, broadcasting and airlines
across the world. As a result, market – orientation firms operating intensely
competitive market now takes decision that was once controlled by the government.
The focus have shifted from capacity creation under controlto the markets. Market
– oriented economy necessitated a customer focus and boosted the importance of
CRM.

Global Orientation of Businesses

National boundaries are giving way to either a borderless world or atleast a regional
world resulting in the emergence of trading blocks like North American Free Trade
Agreement (NAFTA), European Union and the Association of South – East Asian
Nations (ASEAN). The abolishment of the General Agreement on Tariffs and Trade
(GATT). And the emergence of World Trade Organization (WTO) helped create a
global orientation for business establishment. Increasing international trade became
the growth engine for the global economy. Liberalisation of markets and trade
proved to be a far stronger growth engine. It has eased the entry into foreign
markets. Firms need stronger customer – orientation to be able to tab opportunities
in new markets while defending themselves in their home markets.
Aging Population in Economically Developed Countries

The economically advanced nations are witnessing an aging of their

population. In 2000, 12.6 per cent of the US population was 65 years of
age or older. The comparative figures for Sweden and Japan were 17.2 per
cent and 17 per cent of their respective population (Sheth and Mittal,
2004). This trend is visible in most part of Europe, except in Ireland
(Leeflang and Raij, 1995). Aging of population has been attributed to the
combined effects of a slow down in birth rate and an increased in life
expectancy. While an aging population creates new opportunities for
wellness, financial wellbeing, safety and security and recreation (Sheth and
Mittal, 2004), it has also slowed the markets for traditional goods and
services designed for a younger population. Therefore, in these markets,
growth is being achieved by increasing the ‗share of wallet‘ and not
through ‗growth of markets‘ driven by a growing population. Marketers
are now forced to develop a deep understanding of their existing customers
and meet their ever changing needs through suitable products and services.
Indeed, most large companies, especially the services sector, wants to
become One-Stop-Shop for thecustomers.

After identifying and discussing the factors responsible for the growth of
CRM across the globe, we now evaluate the reasons as to why managing
customer relationship has become critical for business.