Defining CRM:

CRM is a technology-enabled approach to management of the customer interface.

OR
CRM is a business strategy adopted to create and delivers value to targeted customers at a
profit through the use of information technology. CRM allows departments within businesses to
dissolve the silo walls that separate them. Access to customer-related data allows members of a
business’s ‘external network ’– suppliers, partners, distributors – to align their efforts with those of
the focal company. Through CRM, understanding the markets they serve is easy.

CRM constituencies:
There are several important constituencies having an interest in CRM:
1. Companies implementing CRM: many companies have implemented CRM. Early adopters
were larger companies in financial services, telecommunications and manufacturing, in the USA and
Europe.
2. Customers and partners of those companies:
The customers and partners of companies that implement CRM are a particularly important
constituency. Because CRM influences customer experience, it can impact on customer satisfaction
ratings and influence loyalty to the supplier.
3. Vendors of CRM software:
There has been considerable consolidation of the CRM vendor marketplace in recent years. Vendors
of CRM software include names such as Oracle, SAP, SAS, KANA, Microsoft and Stay in Front.
Vendors sell licenses to companies, and install CRM software on the customer’s servers either
directly or through system integrators. The client’s people are trained to use the software.
4. CRM application service providers (ASPs):
Companies implementing CRM can also choose to access CRM functionality on a subscription basis
through hosted CRM vendors such as salesforce.com, Entellium, RightNow and NetSuite. Clients
upload their customer data to the host’s servers and interact with the data using their web
browsers. The ASP vendors deliver and manage applications and other services from remote sites to
multiple users via the Internet. This is also known as SaaS (Software as a Service). Clients access CRM
functionality in much the same way as they would eBay or Amazon.
5. Vendors of CRM hardware and infrastructure:
Hardware and infrastructure vendors provide the technological foundations for CRM
implementations. They supply technologies such as servers, computers, handheld devices, call
centre hardware, and telephony systems.
6. Management consultants:
Consultants can help companies implementing CRM in several ways: systems integration, choosing
between different vendors, developing implementation plans and project management as the
implementation is rolled out. Most CRM implementations are composed of a large number of
smaller projects,
For example, systems integration, data quality improvement, market segmentation, process
engineering and culture change. The major consultancies such as Accenture, McKinsey, Bearing
Point, Braxton and CGEY all offer CRM consultancy.
The IDIC model
The IDIC model was developed by Peppers and Rogers, the consultancy firm, and has
featured in a number of their books. 18
The IDIC model suggests that companies should take four actions in order to build closer
one-to-one relationships with customers:
● identify who your customers are and build a deep understanding of them
● differentiate your customers to identify which customers have most value now and which
offer most for the future
● interact with customers to ensure that you understand customer expectations and their
relationships with other suppliers or brands
● customize the offer and communications to ensure that the expectations of customers are
met.

Why companies want relationships with customers

The fundamental reason is economic.
Better results (when they manage their customer base in order to identify, acquire, satisfy
and retain profitable customers.)
CRM strategies: Improving customer retention rates has the effect of increasing the size of
the customer base.
The goals:
o To retain existing customers
o Recruit new customers that have future profit potential
 Not all customers are of equal importance: (Some customers may not be worth recruiting or
retaining at all)
o Other things being equal, a larger customer base does deliver better business
performance.
o Similarly, as customer retention rates rise (or defection rates fall), so does the
average tenure of a customer,
o Managing customer retention and tenure intelligently generates two key benefits
for companies; reduced marketing costs and better customer insight.

Reduced marketing costs:

Improving customer retention reduces a company’s marketing costs. Fewer dollars need to be spent
replacing churned customers.
Cost-to-serve existing customers also tends to fall over time. Ultimately, as in some business-
to-business markets, the relationship may become fully automated.
Better customer insight:
As customer tenure lengthens, suppliers are able to develop a better understanding of
customer requirements and expectations. Customers also come to understand what a supplier can
do for them. Consequently, suppliers become better placed to identify and satisfy customer
requirements profitably, selling more product and service to the retained customer.
Trust and commitment between the parties is likely to grow.
Revenue and profit streams from customers become more secure.
Your share of their portfolio expands. Put another way, your share of customer spending, or
customer wallet, grows.
 CRM software allows companies to trace where customers are on this pathway and to
allocate resources intelligently to advance suitable customers along the value trajectory.

Lifetime value:
This leads to the core CRM idea that a customer should not be viewed as a set of independent
transactions, but as a lifetime income stream. Lifetime value (LTV), which is also known as customer
lifetime value (CLV), is a measure of a customer’s, or customer segments, profit generation for a
company. Lifetime value is the present day value of all net margins earned from a relationship with a
customer, customer segment or cohort. This has four causes.
1. Revenues grow over time as customers buy more.
2. Cost-to-serve is lower for existing customers, because both supplier and customer
understand each other.
3. Referrals are generated by existing, satisfied customers through their unpaid advocacy.
4. Higher prices are paid by existing customers than those paid by new customers. This is partly
because they are not offered the discounts that are often employed to win new customers,
and partly because they are less sensitive to price offers from other potential suppliers
because they are satisfied with their experience.

Why companies do NOT want relationships with customers:

Despite the fi nancial benefi ts that can accrue from a relationship, companies sometimes resist
entering into relationships with customers. In the business-to-business (B2B) context there are a
number of reasons for this resistance.

Loss of control : a mature relationship involves give and take on both sides of the dyad. In bilateral
relationships, suppliers may have to give up unilateral control over their own business’s resources.
For example, a supplier of engineering services might not want to provide free presales consultancy
for a new project with an established client because of the high costs involved. However, the
relationship partner might have clear expectations of what activities should be performed and what
resources deployed by both themselves and the other party.

Exit costs: not all relationships survive. It is not necessarily easy or cost-effective to exit a
relationship. Sometimes, investments that are made in a relationship are not returned when a
relationship breaks down. Relationship investments vary from the insignifi cant (e.g. co-branding of
promotional literature) to highly signifi cant (e.g. setting up a new production line to service a
particular customer’s requirements). A company might justifi ably be concerned about the security
of a relationship-based investment in new manufacturing operations.

Resource commitment: relationships require the commitment of resources such as people, time and
money. Companies have to decide whether it is better to allocate resources to customer
management or some other area of the business, such as operations or research and development.
Once resources are committed, they can become sunk costs. Sunk costs are unrecoverable past
expenditures. These would not normally be taken into account when deciding whether to continue
in a relationship, because they cannot be recovered whether the relationship endures or not.
However, it is a common instinct to consider them.
Opportunity costs: if resources are committed to one customer, they cannot be allocated to
another. Relationships carry with them high opportunity costs. If you commit resources to customer
A, you may have to give up the possibility of a relationship with customer B, even if that does seem
to be a better proposition. An engineering consultancy that commits consultants to pre-sales
activities with a current client might incur the opportunity cost of losing more lucrative work
generating new business opportunities from other prospective clients.

Why customers want relationships with suppliers

B2B context
There are a number of circumstances when a B2B customer might want a long-term relationship
with a supplier:
Product complexity: if the product or its applications are complex, for example, networking
infrastructure.
Product strategic signifi cance : if the product is strategically important or mission-critical, for
example, supply of essential raw materials for a continuous process manufacturer.
Service requirements: if there are down-stream service requirements, for example, for machine
tools.
Financial risk: if fi nancial risk is high, for example, in buying large items of capital equipment.
Reciprocity : a fi nancial audit practice may want a close relationship with a management
consultancy, so that each party benefi ts from referrals by the other.

B2C context
In a business-to-consumer (B2C) context, relationships may be valued when the customer
experiences benefi ts over and above those directly derived from acquiring, consuming or using the
product or service. For example
Recognition: customers may feel more valued when recognized and addressed by name, for
example at a retail bank branch, or as a frequent fl yer.
Personalization: products or services can be customized. For example, over time, a hairdresser may
come to understand a customer’s particular preferences or expectations.
Power: relationships with suppliers can be empowering. For example, some of the usual power
asymmetry in relationships between banks and their customers may be reversed when customers
feel that they have personal relationships with particular bank offi cers or branches.
Risk reduction : risk takes many forms – performance, physical, fi nancial, social and psychological.
High levels of perceived risk are uncomfortable for many customers. A relationship can reduce or
even, perhaps, eliminate perceived risk. For example, a customer may develop a relationship with a
service station to reduce the perceived performance and physical risk attached to having a car
serviced. The relationship provides the assurance that the job has been skilfully performed and that
the car is safe to drive.
Status : customers may feel that their status is enhanced by a relationship with a supplier, such as an
elite health club or a company offering a platinum credit-card.
Affiliation : people’s social needs can be met through commercially based, or non-commercially
based, relationships. Many people are customers (members) of professional or community
associations, for example. Customer segments can vary in their desire to have relationships with
suppliers. For example, large corporations have their own treasury departments and often get little
value from a bank relationship; small private account holders have no need for the additional
services that a relationship provides; small and medium-sized business and high net worth
individuals may have most to gain from a closer relationship with a bank. A number of B2C
organizations deliver incremental benefi ts by building closer relationships with their customers.
Casa Buitoni, for example, offers customers the opportunity to learn more about Italian cuisine
through an online customer club. The Harley Owners Group (HOG) offers a raft of benefi ts to Harley
Davidson owners, including club outings and preferential insurance rates. Nestlé’s mother and baby
club offers advice and information to new mothers.

Why customers do NOT want relationships with suppliers

While companies generally want long-term relationships with customers for the economic reasons
described above, it is far less clear that customers universally want relationships with their suppliers.
B2B customers cite a number of concerns. 24
Fear of dependency: this is driven by a number of worries. Customers may be concerned that the
supplier might act opportunistically, once they are in a preferred position, perhaps introducing price
rises. They may also fear the reduction in their fl exibility to choose alternative suppliers. There may
also be concerns over a loss of personal authority and control.
Lack of perceived value in the relationship : customers may not believe that they will enjoy
substantial savings in transaction costs, or that the relationship will help them create a superior
competitive position, generate additional revenue or that there will be any social benefi ts. In other
words, there is no perceived value above and beyond that obtained from the product or service.

Lack of confi dence in the supplier: customers may choose not to enter a relationship because they
feel the potential partner is unreliable, too small, strategically insignifi cant, has a poor reputation or
is insuffi ciently innovative.
Customer lacks relational orientation: not all company cultures are equally inclined towards
relationship building. Some are much more transactional. For example, some retailers make it a
policy to buy a high proportion of their merchandise through special offers. The preference for
transactional rather than relational business operations may be refl ected in a company’s buying
processes and reward systems.

Rapid technological changes : in an industry with rapidly changing technology, commitment to one
supplier might mean that the customer misses out on new developments available through other
suppliers. In the B2C context, consumers buy hundreds of different convenience, shopping and
speciality products and services. Whereas consumers might want a relationship with their fi nancial
service advisor or their physician, they can often fi nd no good reason for developing closer
relationships with the manufacturer of their household detergent, snack foods or toothpaste.
However, for consumer products and services that are personally important, customers can become
more involved and become more emotionally engaged.