Go to a neighborhood restaurant every single Saturday night and spend big and you’ll get the deluxe treatment. You’ll be greeted by name, led to a good table right away and served a drink or two on the house. But if you take to demanding items not on the menu, sending plates back to the kitchen and arguing about the check, you’ll soon be lucky to get a glass of water — at your table by the restrooms. Smart business owners quickly learn that the biggest profits can come from a small group of free-spending, easy-to-satisfy patrons, and that cheapskates who tie up the staff should not be encouraged to return. But how can this knowledge be adapted to a big corporation that offers thousands of products to millions of customers who can come into contact with the company in many different ways – in person, by phone or on the Internet? To hear some proponents talk about it, all a company needs is to buy and install a Customer Relationship Management system, a sophisticated approach to tailoring service to individual customers – and to gathering valuable data at the same time. CRM has boomed over the past five years, thanks to computers and the Internet, and many experts expect sales of multi-million dollar CRM systems to soar at rates of 30% or more each year. “Everybody is scrambling to integrate all their customer contact points,” says Wharton marketing professor
“At their base, these are big, integrated infrastructure systems,” says Noah F. Gans, a professor of operations and information management at Wharton. “They will collect data on every single customer action, anywhere that a customer might come into contact with the company… In each of these channels they will have some sort of hardware and software that is going to, at some level, manage the process of employees of the company interacting with the customers.”
A recent report by Jupiter Media Metrix, the New York Internet tracking company, says 74% of the businesses polled expected to spend more on CRM equipment and software this year than they did in 2000, with most boosting spending 25% to 50%. Jupiter says this reflects a growing realization that, especially in a less-robust economy, it is cheaper to keep existing customers happy than to attract new ones.
While CRM can undoubtedly be valuable, says Peter S. Fader, a marketing professor at Wharton, it is also something of a fad. “Everyone is sort of flocking to it but not necessarily getting anything out of it,” he notes. Many companies, he predicts, will fail to make the cultural and organizational changes needed to make CRM work, or will use the resulting data unwisely. Distinguishing profitable customers from unprofitable ones seems appealing, for instance, but it can be counterproductive if the company uses the knowledge to drive away small customers who might have become big ones in the future.
“Focusing too closely at the individual level is a mistake,” Fader says. The trick, which not many companies have yet mastered, “is to find the right level of aggregation” – to categorize customers in groups that are neither too big nor too small.
A large corporation may spend tens of millions of dollars on a CRM system. Among the big CRM suppliers are Oracle, Siebel Systems and IBM, and dozens of other companies specialize in components such as telephone call center technology, database software and Internet systems. Because the whole idea is to customize each system to a specific company’s needs, there is no universal definition of CRM, which has both business-to-business and business-to-consumer applications.
Call your local bank about your checking account and you may discover the person on the phone is looking at a screen that summarizes your previous calls and displays information about your mortgage and credit card as well. That’s CRM. Log on to Amazon.com and you may find a personalized list of suggested books that have appealed to readers with buying habits like yours. CRM again.
Currently, the financial services industry has the best CRM efforts, with companies like Capital One, Fidelity and Vanguard Group among the best examples, Day says. Lands’ End and many other catalogue companies also are among the best CRM implementers, since data mining has long been at the heart of their business, adds Fader. Traditional bricks-and-mortar retailers are less successful, since they have little tradition of gathering information during customer transactions, he says.
Generally, CRM is seen as a system for funneling to one place information that otherwise would be dispersed in a big company, where one hand may not know what the other 10 hands are doing. This means collecting information from phone centers and Internet sites, from contacts by sales people or the customers’ visits to various retail and wholesale operations – from any “touch-point.”
Ideally, the information is analyzed to gain insight into each customer’s needs and behavior, and then it is used to improve the customer’s dealings with the company. This can be as simple as freeing the customer from having to repeat his mailing address every time he places an order, to something like being able to instantly tell the customer the status of a shipment. The analysis might guide sales efforts, so that the customer receives mailings, calls, e-mails or Website advertising tailored to his likes.
Using the data collected during the customer’s various contacts, the company “will try to make inferences about what you want,” Gans says. The bank that holds your mortgage and checking account may learn at some point that you have children and may then try to sell you a college savings product.
Customers are also analyzed in aggregate to get a clearer picture of the market for the company’s products or services. The most profitable customers may receive first class treatment, while others ride coach. As a preferred customer, you may quickly get a human being when you phone, while the less-desired customer must wrestle with a phone tree.
A bank customer with only $100 on deposit who habitually phones during the bank employee’s busiest time, might be deemed too costly, Gans says. But the same customer making just as many calls during slow hours might be worth keeping. A good CRM system can differentiate between the two, but only if it has data on employees’ workloads and the cost of providing various services.
Gans is looking at how companies can use CRM to allocate resources such as Internet servers. If a company has a mixture of fast and slow servers, it would be best to route preferred customers to the fast ones, since there’s more value in keeping these people satisfied, he points out.
For a company to implement a CRM program successfully, it must have more than hardware and software – it must have a corporate culture that emphasizes customer satisfaction, Day explains. Typically, a successful company searches for the long-term value in each customer rather than simply tallying one-time transactions, he says.
A company installing a CRM system must have the capability of collecting and pulling together vast amounts of information about its customers and their transactions. Many companies find this the most difficult part of the program, he says. Sales people, for instance, have traditionally guarded their turf, refusing to share information on customers they have cultivated.
Finally, successful companies must have organizational structures and incentive plans that serve the CRM effort rather than undermining it. Pay and bonuses, for example, should be tied to customer satisfaction rather than mere sales quotas, Day says. The company must have a way of measuring customer satisfaction. That can be done directly with surveys, or indirectly with proxy measures, such as the rate of on-time deliveries. “If your incentives are really oriented toward retaining customers as opposed to capturing them, then you have a very different culture,” Day points out.
Among the toughest challenges for companies turning to CRM is figuring how customers will change over time, says Fader. A company may invest heavily in satisfying a big, profitable customer, but other factors could cause the customer’s needs to change and his purchases to decline nonetheless.
Many companies, he cautions, are embracing the idea of “firing customers”, or getting rid of the least profitable ones. But typically, most customers are only marginally profitable at any one time. Yet they provide the pool from which the most profitable customers emerge, though often only temporarily. Shrinking the pool can rob the company of future business.
Fader is also concerned that many companies install CRM systems and think that’s it. But to make them work, the systems require constant tinkering and experimentation. “Most companies are not experimenting on a systematic basis,” he says.
For any company, the goal is to have a CRM system that makes customers feel the service is better than the competitors,’ Day says. As many companies become aware of this, installing CRM systems becomes something of an arms race. “The technology is diffusing pretty rapidly,” he says. “It’s getting a lot easier to move data around. And yet, what I foresee is that a very few companies will gain an advantage from it. The rest will get stuck in the Red Queen syndrome – you run faster and faster just to stay in place.”
