Customer Relationship Management VSF Customer Relationship Management Concepts and Tools Francis Buttle AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO Elsevier Butterworth-Heinemann Linacre House, Jordan Hill, Oxford OX2 8DP 200 Wheeler Road, Burlington, MA 01803 First published 2004 Copyright © 2004 Professor Francis Buttle except Chapter 3 (© 2004 John Turnbull). 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Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publisher Permissions may be sought directly from Elsevier’s Science and Technology Rights Department in Oxford, UK: phone: (+44) (0) 1865 843830; fax: (+44) (0) 1865 853333; e-mail: [email protected]. You may also complete your request on-line via the Elsevier homepage (www.elsevier.com), by selecting ‘Customer Support’ and then ‘Obtaining Permissions’ British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data A catalogue record for this book is available from the Library of Congress ISBN 0 7506 5502 X For information on all Elsevier Butterworth-Heinemann publications visit our website at: www.bh.com Composition by Genesis Typesetting Limited, Rochester, Kent Printed and bound in Italy Contents Foreword ix Preface xi Acknowledgements xv About the authors xvii 1 Making sense of customer relationship management 1 Chapter objectives 3 Introduction 3 Strategic CRM 4 Operational CRM 5 Analytical CRM 9 Misunderstandings about CRM 11 What is a relationship? 13 Why companies want relationships with customers 16 Customer satisfaction, loyalty and business performance 20 But, do customers want relationships with companies? 26 CRM constituencies 27 Why do companies implement CRM? 28 Contexts of CRM 32 Defining CRM 34 Summary 34 References 35 2 The customer relationship management value chain 37 Chapter objectives 39 Introduction 39 The goal of CRM 39 The primary stages of the CRM value chain 40 The supporting conditions of the CRM value chain 42 Summary 55 References 55 3 Information technology for customer relationship management 57 Chapter objectives 59 Origins of CRM technology 59 The CRM marketplace 63 vi Contents CRM architecture 68 CRM applications 84 Technology for the CRM value chain 94 Summary 96 References 96 4 Customer portfolio analysis 97 Chapter objectives 99 What is a portfolio? 99 What is a customer? 100 Market segmentation 101 Data mining for market segmentation 109 Customer portfolio analysis tools 113 Sales forecasting 118 Customer portfolio toolkit 121 Activity-based costing 124 Lifetime value 127 Strategically significant customers 131 Customer portfolio strategies 132 Summary 134 References 135 5 Customer intimacy 137 Chapter objectives 139 Introduction 139 Building a customer database 140 Data integration 158 Data warehousing 160 Data marts 161 Data mining 161 Privacy issues 164 Summary 167 References 167 6 Creating and managing networks 169 Chapter objectives 171 Introduction 171 What is a network? 173 Principles of network management 173 Not all relationships are alike 177 Activity links, resource ties and actor bonds 177 From dyad to network 179 Network position 181 Network management and CRM 182 The SCOPE of CRM 183 Supplier relationships 184 Trends in customer–supplier relationships 190 Not all customers want relationships with suppliers 198 Contents vii Owner/investor relationships 198 Partner relationships 201 Summary 221 References 221 7 Creating value for customers 225 Chapter objectives 227 Introduction 227 Understanding value 227 Sources of customer value 232 Customization 233 Value from products 237 Value from service 241 Value from processes 249 Value from people 252 Value from physical evidence 253 Value from customer communication 254 Value from channels 257 Customer experience 259 Summary 264 References 264 8 Managing the customer lifecycle: customer acquisition 267 Chapter objectives 269 Introduction 269 What is a new customer? 271 Customer value estimates 274 Prospecting 275 Key performance indicators of customer acquisition programmes 288 Using customer data to guide customer acquisition 289 Making the right offer 290 Summary 291 References 292 9 Managing the customer lifecycle: customer retention and development 295 Chapter objectives 297 Introduction 297 What is customer retention? 298 Economics of customer retention 301 Which customers to retain? 302 Strategies for customer retention 303 Context makes a difference 318 Key performance indicators of customer retention programmes 319 The role of research 320 Strategies for customer development 321 Strategies for sacking customers 323 Summary 325 References 325 viii Contents 10 Organizing for customer relationship management 329 Chapter objectives 331 Introduction 331 Strategic goals of CRM 332 Conventional customer management structures 332 Network and virtual organizations 337 Person-to-person contacts 339 Key account management 340 Team selling 345 Summary 346 References 346 Index 349 Foreword Customer relationship management (CRM) is no longer something that only leading-edge enterprises use to gain competitive advantage. It is now a necessity for survival. Customer relationship management is a complex and difficult way of doing business. Much as some would like us to believe, CRM is not just about installing software or automating customer touchpoints. It is about the reinvention of our enterprises around the customer. It is about becoming and remaining customer-centric. As such, it can be fraught with perils. So what is an enterprise to do? Should we say that CRM is too difficult and turn back to our old, product- centric way of doing things? The reality is that we cannot. Customer relationship management is here to stay because customers, both consumers and business entities, now expect suppliers to be customer- centric. Customers expect to be able to deal with enterprises when they want, where they want and how they want. Enterprises are expected to remember past interactions and to build on those interactions in the future. Customers know that they hold the ultimate trump card, their loyalty. Enterprises that do not re-engineer their business processes to become more customer-centric risk the mass defection of their customers and, with them, their associated revenues. Therefore, CRM is no longer a competitive differentiator; rather, it is a business necessity of the twenty- first century. Customer relationship management has had some bad publicity of late. High levels of CRM failure have been reported. Does this mean that CRM is a business necessity with a high risk of failure? That would be an alarming combination. Today, we are finding that companies are increasingly asking tough, but correct, questions and looking for the associated answers before they embark on CRM. Gartner’s clients work on issues such as business justification, customer acceptance, process redesign, and training and compensation issues. All reflect a greater maturity about CRM as enterprises try to avoid the mistakes of their predecessors. Gartner predicts that in the next few years, enterprises will consider CRM critical to corporate strategy, but will be considerably more x Foreword pragmatic. The days when CRM fever started to break out in boardrooms across the world seem a ‘technology lifetime’ ago. The new new economy is a lot like the old economy before the old new economy distorted all of the expectations. The good news about a slower economy is that we have breathing room to absorb the technologies and applications that have poured out of high-technology enterprises during the past several years. We also have a mandate to do more with less, which has introduced a healthy pragmatism. Regardless of who you ask in management about the role of data for marketing, sales and service, there is a consensus that data are highly valued. However, identifying, extracting and transforming data into actionable information is an ongoing challenge. Enterprises need to go beyond basic measurement and reporting to enhance their ability to leverage more valuable insights. Analytical CRM is an enabler of such customer insight. Companies are demanding more return from their investments in operational CRM applications such as sales-force automation, marketing automation and service automation. Enterprises need to be careful about their choice of software vendors. Many companies have bought over- specified CRM suites, rather than the applications that are best suited to their particular needs. This is changing. Enterprises are beginning to seek support for specific functions such as incentive compensation, partner relationship management and e-commerce-related applications. Cus- tomer relationship management software