Customer relationship marketing (CRM)
customer relationship marketing
In addition to e-marketing, companies are becoming more skillful in customer relationship
marketing and database marketing.
Customer relationship marketing (CRM) enables companies to provide excellent real-time customer service by developing a relationship with each valued customer through the effective use of individual account information. Based on what they know about each customer, companies can customize market offerings, services, programs, messages, and media. Customer relationship marketing holds that a major driver of company profitability is the aggregate value of the company’s customer base.
Winning companies are more productive in acquiring, keeping, and growing customers. These companies improve the value of their customer base by excelling at the following customer strategies:
Reducing the rate of customer defection.
Increasing the longevity of the customer relationship.
Enhancing the growth potential of each customer through “share-of-wallet, ” crossselling,
¡ Making low-profit customers more profitable or terminating them.
¡ Focusing disproportionate effort on high value customers.
Table 2.3 lists the main differences between mass marketing and one-to-one marketing.
Some of the groundwork for customer relationship marketing was laid by Don
Peppers and Martha Rogers in their book, The One-to-One Future.12 Peppers and Rogers
use a four-step framework for one-to-one marketing:
¡ Identify your prospects and customers. Do not go after everyone.
¡ Differentiate customers in terms of (1) their needs and (2) their value to your company.
As for customer value, companies should spend proportionately more effort on their
most valuable customers (MVCs). Customer value is estimated as the net present value
of all future profits coming from purchases, margin levels, and referrals, less customerspecific
¡ Interact with individual customers to improve your learning about their individual
needs and to build stronger relationships.
¡ Customize products, services, and messages to each customer.
customer databases and database marketing
The important point is to know the customer. And in order to know the customer, the
company must collect information and store it in a customer database and do database
marketing: A customer database is an organized collection of comprehensive
information about individual customers or prospects that is current, accessible, and
actionable for such marketing purposes as lead generation, lead qualification, sale of a
product or service, or maintenance of customer relationships. Database marketing is
the process of building, maintaining, and using customer databases and other databases
(products, suppliers, resellers) for the purpose of contacting, transacting, and
Many companies confuse a customer mailing list with a customer database. A
customer mailing list is simply a set of names, addresses, and telephone numbers. A
customer database contains much more information. Companies accumulate this information
through customer transactions, registration information, telephone queries,
cookie information, and information from every contact with a customer (a touchpoint).
A customer database ideally would contain the consumer’s past purchases, demographics
(age, income, family members, birthdays), psychographics (activities, interests,
and opinions), mediagraphics (preferred media), and other useful information. For
example, the catalog company Fingerhut possesses some 1,400 pieces of information
about each of the 30 million households in its massive customer database. And the
Royal Bank of Canada has individual data on its 9 million customers and is able to
model the lifetime value of individual customers, their potential interest in different
offerings, and their vulnerability to attrition.
A business database ideally would contain past purchases of business customers;
past volumes, prices, and profits; buyer team member names (and their ages, birthdays,
hobbies, and favorite foods); status of current contracts; an estimate of the supplier’s share
of the customer’s business; competitive suppliers; assessment of competitive strengths
and weaknesses in selling and servicing the account; and relevant buying practices, patterns,
and policies. For example, a Latin American unit of the Swiss pharmaceutical firm
54 part one understanding marketing management
Novartis keeps data on 100,000 of Argentina’s farmers, knows their crop protection chemical
purchases, groups them by value, and treats each group differently.
data warehouses and datamining
Savvy companies are capturing information every time a customer comes into contact
with any of its departments. The touch points include a customer purchase, a customerrequested
service call, an online query, or a mail-in rebate card. These data are collected
by the company’s contact center and organized into a data warehouse. Company personnel
can capture, query, and analyze the data. Inferences can be drawn about an individual
customer’s needs and responses. Telemarketers can respond to customer
inquiries based on a total picture of the customer relationship.
Through datamining, marketing statisticians can extract useful information about
individuals, trends, and segments from the mass of data. Datamining involves the use
of sophisticated statistical and mathematical techniques such as cluster analysis, automatic
interaction detection, predictive modeling, and neural networking. A company
that wants to learn the most from its database needs to engage the services of a person
or company skilled in datamining.
USING THE DATABASE In general, companies can use their databases in five ways:
1. To identify prospects. Many companies generate sales leads by advertising their product or service.
The ads generally contain a response feature, such as a business reply card or toll-free phone
number. The database is built from these responses. The company sorts through the database
to identify the best prospects, then contacts them by mail, phone, or personal call in an attempt
to convert them into customers.
2. To decide which customers should receive a particular offer. Companies are interested in selling, upselling,
and cross-selling their products and services. Companies set up criteria describing the
ideal target customer for a particular offer. Then they search their customer databases for those
who most closely resemble the ideal type.
By noting response rates, a company can improve its targeting precision over time. Following
a sale, it can set up an automatic sequence of activities: One week later, send a thankyou
note; five weeks later, send a new offer; ten weeks later (if customer has not responded),
phone the customer and offer a special discount.
3. To deepen customer loyalty. Companies can build interest and enthusiasm by remembering customer
preferences; by sending appropriate gifts, discount coupons, and interesting reading
material. Here are some examples:
To reactivate customer purchases. Companies can install automatic mailing programs (automatic
marketing) that send out birthday or anniversary cards, Christmas shopping reminders, or
off-season promotions. The database can help the company make attractive or timely offers.
5. To avoid serious customer mistakes. A major bank confessed to a number of mistakes that it had
made by not using its customer database well. In one case, the bank charged a customer a
penalty for late payment on his mortgage, failing to note that he headed a company that was a
major depositor in this bank. He quit the bank. In a second case, two different staff members of
the bank phoned the same mortgage customer offering a home equity loan at different prices.
Neither knew that the other had made the call. In a third case, a bank gave a premium customer
only standard service in another country.
THE DOWNSIDE OF DATABASE MARKETING Having described the good news
about database marketing, we also have to describe the bad news. Three problems can
deter a firm from effectively using CRM. The first is that building and maintaining a
customer database requires a large investment in computer hardware, database software,
analytical programs, communication links, and skilled personnel. It is difficult to
collect the right data, especially to capture all the occasions of company interaction with
individual customers. Building a customer database would not be worthwhile in the
following cases: (1) where the product is a once in a-lifetime purchase (e.g., a grand
piano), (2) where customers show little loyalty to a brand (i.e., there is lots of customer
churn), (3) where the unit sale is very small (e.g., a candy bar), and (4) where the cost of
gathering information is too high.
The second problem is the difficulty of getting everyone in the company to be
customer-oriented and to use the available information. Employees find it far easier to carry
on traditional transaction marketing than to practice customer relationship marketing.
The third problem is that not all customers want a relationship with the company, and
they may resent knowing that the company has collected that much personal information
about them. Marketers must be concerned about customer attitudes toward privacy and
security. American Express, long regarded as a leader on privacy issues, does not sell
information on specific customer transactions. However, American Express found itself
the target of consumer outrage when it announced a partnership with KnowledgeBase
Marketing, Inc. that would have made data on 175 million Americans available to any
merchant who accepts American Express cards. American Express killed the partnership.
AOL, also targeted by privacy advocates, junked a plan to sell subscribers’ telephone
numbers. Online companies would be smart to explain their privacy policies, and give
consumers the right not to have their information stored in a database.
European countries do not look favorably upon database marketing. The European
Union just passed a law handicapping the growth of database marketing in its 15 member
countries. Europeans are more protective of their private information than are U.S. citizens.
It turns out that database marketing is not for everyone. Database marketing is
most frequently used by business marketers and service providers (hotels, banks,
and airlines) that normally and easily collect a lot of customer data. It is used less
often by packaged-goods retailers and consumer packaged-goods companies,
though some companies (Kraft, Quaker Oats, Ralston Purina, and Nabisco) have
built databases for certain brands.
At CNA Insurance, five programmers worked for nine months loading five years of
claims data into a computer, only to discover that the data had been miscoded. Even if
coded correctly, the data must be updated continuously because people move, drop out,
or change their interests. Deloitte Consulting reported in 1999 that 70 percent of firms
found little or no improvement through CRM implementation. The reasons are many:
The system was poorly designed, it became too expensive, users didn’t make much use
of it or report much benefit, and collaborators ignored the system. All this points to the
need for each company to determine how much to invest in building and using database
marketing to conduct its customer relationships.
New technological advances and new market forces are
creating a new economy. Companies and marketers
need to add new tools and practices if they hope to be
2. Four specific drivers of the new economy are digitalization
and connectivity, disintermediation and reintermediation,
customization and customerization, and industry convergence.
Digitalization in particular has introduced exciting
new capabilities for consumers and for businesses.
3. The new economy is shifting several old economy business
practices toward organizing by customer segments (instead
of only by products), focusing on customer lifetime value
(instead of only transactions), focusing on stakeholders
(and not only shareholders), getting everyone to do the
marketing, building brands through behavior (not just
advertising), focusing on customer retention (as much as
customer acquisition), measuring customer satisfaction,
and underpromising and overdelivering.
4. Companies face many questions in adopting e-marketing.
Three of them are knowing how to design an attractive Web
site, knowing how to advertise on the Web, and knowing
how to build a sound revenue and profit model for their
5. Companies are also becoming skilled in Customer Relationship
Management (CRM), which focuses on meeting the individual
needs of valued customers. The skill requires building a customer
database and doing datamining to detect trends, segments,
and individual needs.