Analytical CRM Powers Profitable Relationships: Creating Success by Letting Customers Guide

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Article published in DM Review Magazine

February 2002 Issue

By Ron Swift

In the turbulent sea that is today's business environment, customer relationships, like the shoreline,
are lashed by waves and are continuously changed and shaped. Similarly, constant waves of
customer interaction sweep over your business touchpoints, leaving broad expanses of granular
data. As the shoreline changes by the day or hour, businesses can now predict the tides of customer
needs and the business' destiny.

You must find ways to mine the data, learn from it, use it - because all of the marketing and revenue
opportunities your business will ever need reside in those turbulent waves and countless grains of
sand.

Analytical CRM is helping companies navigate this tumultuous sea to create more enduring and
profitable customer relationships by identifying opportunities to dialogue with individuals.
Analytical CRM

CRM analytics include segmentation studies, customer migration analysis, cross-sell/up-sell

analysis, new customer models, customer contact optimization, merchandising analysis, customer
attrition and churn models, credit risk scoring, lifetime value (LTV) modeling and much more.
Analytical CRM - focused on creating and communicating rich, relevant personal content to
customers - is completely different from its fraternal twin, operational CRM. Operational CRM
refers mainly to touchpoint- focused interaction systems.

Analytical CRM is a source of tremendous power. For example, most marketers promote to
customers based on their current value. However, customer value changes. Do you want to predict
how your specific customers will move? How about modifying that movement in a mutually
satisfying direction? Customer migration analysis can help you communicate and market to your
customers in ways that move them up the value chain. You can also use CRM analytics to:
Segment your customers by business value. Next, model them to predict their migration into a
spectrum of value segments. Then, simulate and predict customer buying behavior based on a
variety of promotion strategies.
Perform a marketing-influencers analysis to identify which customers can be influenced in their
value migration - then communicate to them in ways that move them in the right direction.
Make accurate assessments of each customer's affinity to a message, product or service.
Learn how frequently you should contact each customer - and which channel you should use for
specific messages.
Perform very detailed analyses - market- basket analysis, product structure analysis, cross-product
correlation analysis, multiple campaign response models, customer growth models, churn and
attrition models, and customer lifetime value models - to spot profit opportunities.
That is only a sample of what you can do with integrated CRM analytics. That's why analytics has
become a driving force for new profitability opportunities. With all of the hype around analytics,
you might think that this is a new phenomenon; however, customer analytics have been around for
decades. Be careful not to assume that your previous statistical analysis programs and models are
performing the CRM functions recommended. A careful review of "how" you perform the analysis
may uncover limitations.

Companies around the globe have used data warehousing technology to analyze and understand
their customers better since the 1980s. In 1997, IDC coined the term "analytical applications"
indicating that the technology had advanced to automate what companies had been doing for years.

Today, the smorgasbord of CRM analytical applications is enormous. Vendors are racing to the
marketplace with new analytical features and functionality at a breakneck pace. However, wise
marketing teams will adapt CRM technology - including analytical tools - at a steady, manageable
pace that is in line with a solid customer relationship strategy.

Because there are so many analytical application choices, it is important to choose applications and
models that will pay dividends in both the short and long term. You want to find technologies that
will grow and evolve with your business. To accommodate the multiple analytic tools that you will
need to execute your strategy, you will need an integrated knowledge base.
A Credible View of Your Customers

An integrated knowledge base, especially important in CRM, is similar to the retention of all of the
experiences and interactions that you have had with someone throughout your life. For example,
you have good and bad memories, good and bad experiences and knowledge, and good and bad
feelings (evaluations) related to the experiences you have shared over time. Having this knowledge
and being able to act on it in a timely manner is what makes businesses most successful.

Some companies limit their potential when they implement departmental-level databases that are
not coordinated or integrated at the enterprise level. This means that each analytical application is
using a separate customer knowledge base to arrive at conclusions about each customer. That leads
to an incomplete picture of the customer relationship and sometimes drives corresponding
miscommunications. Occasionally this results in irrelevant or intrusive customer messages. Can you
afford to risk the relationship and corresponding business value? You can prevent this with an
integrated "info-structure" using a scalable enterprise data warehouse as the basis for business
intelligence. The return on investment can be very high.

Hundreds of companies around the world have implemented this strategy and the evolving
enterprise data warehousing approach. Increasing focus on CRM has caused companies with
existing enterprise data warehouses to advance into more mature stages of information management
by adding the customer view to their enterprise data warehouses built around detailed knowledge to
provide a new single view of the customer or a single view of the truth.

These companies have also added analytical CRM to the enterprise data warehouse knowledge
infrastructure. This raises the company's marketing IQ and return on investment (ROI) with tools
that analyze and interpret detailed data while also providing the power of predictive analysis - to
deliver higher, "actionable" intelligence where statistical insight is enhanced with analytical
foresight.

When companies build high-velocity customer- centric knowledge hubs, there is competitive
advantage and profitable revenue growth. The key is an integrated common foundation that enables
a consistent customer view, analysis and action across the enterprise. Further, the ROI for effective
CRM projects has been exponential, surpassing typical financial investment expectations of 30 to
80 percent tenfold.

In addition to monetary paybacks, results achieved may also include more positive organizational
and customer behaviors, improvements in channel operations and achievements, or the enhanced
ability to drive value through fast market entry with a new product or service. Adopters of CRM
with a basis of a customer- centric enterprise-wide knowledge repository (data warehouse) can be
assured of more insight about their customers, but also action-driven or event-driven effectiveness
and efficiency of their marketing and customer communication processes.
A Holistic Customer View

It is critical that this knowledge cover all channels and customer touchpoints so that the information
base is complete and delivers a holistic and integrated view of each customer. In fact, a holistic
view should include: all customer transactions, all interactions, all customer denials, all service
history, new characteristics and profiles, interactive survey data, clickstream/browsing behavior
(from tracking systems), cross and direct references, external and internal demographics,
psychographics and, in fact, all available and useful data surrounding each customer. This may also
include data from outside your business.

Based on this holistic customer view, different departments - marketing, sales, production,
operations, delivery, service and finance - can conduct business sharing the same view of each
customer. As a result, each individual customer experience with the company is consistent - and
mutually satisfying. Therefore, relationships can be shaped more effectively.

Certainly, a holistic view of the customer ensures that predictive analysis and modeling efforts are
consistent and more accurate - driving more efficiency and effectiveness in marketing and customer
communications. This, in turn, can drive higher customer response rates to messages and offers -
spiraling upward to more revenue and greater share of the customer.

From a marketing and customer communication perspective, an integrated customer-centric data

warehouse is a clear business advantage. This alone delivers a holistic view of your customers. Data
warehousing professionals as well as marketers understand that a central source of enterprise
information boosts the effectiveness of your business operations while delivering cost efficiencies.
That's why so many companies are now turning to customer-centric data warehouses and using
CRM as a profitability driver.

Yet there's more to this story. As Paul Harvey would say: "Page Two!"
More Successful CRM

To truly excel at CRM, you need up-to- the-minute information about the needs, values and wants
of your customers. The world's most sophisticated tool can be rendered less effective if the data
cannot be loaded and accessed in a timely manner and at frequent refresh rates. Leadership
companies gather all the disparate data from many touchpoints and external sources and bring it
together in a common, centralized repository - in a form that is available and ready to be analyzed.
This helps ensure that the business has a consistent and accurate picture of every customer - and can
align its resources according to the highest priorities.

Therefore, with the right CRM info-structure - a customer- driven data warehouse - you can truly
know (rather than just hope) that you are delivering the customer insight and foresight your
marketers need to generate positive business results and competitive advantage.
Creating a CRM Process
Once the detailed customer data warehouse is in place, you will need a disciplined process to create
and manage those incoming waves of fresh intelligence. You will need a process to manage the
enormous quantities of data - and to build more timely and relevant customer communications.

A four-step process illustrates the CRM intelligence management cycle: collection (of data),
analysis (plus modeling), action (with personalization and optimization) and effective
measurements. Of course, your company will need the best technology tools to support and manage
the process for maximum business value.

Figure 1: CRM Intelligence Management Cycle

Collection: Once you have an enterprise-class customer data warehouse foundation in place, it will
evolve and grow. The organization must evaluate and put in place a robust infrastructure of all the
customer data throughout the enterprise. This means collecting all customer interaction data as well
as transactions to manage the complete depth and breadth of the customer relationship. The
organization also needs to collect key operational and financial data such as channel capacity and
profitability drivers (activity-based costs, transfer prices, etc.) in order to analyze the company's
ability to meet customer demands and understand the financial implications of current and future
behavior. You should also be prepared to selectively append customer data profiles to shed further
light on each customer and make various operational decisions, including credit authorization. The
importance of this step to your success in the rest of the process cannot be overemphasized.

Analysis: As data is being collected, the business must have the tools and resources to analyze it to
gain insight in these areas:
Customer behavior and preferences in order to uncover ways to better serve each customer. The
more complete the view of each customer, the better the relationship dialogue you'll be able to
conduct. This will provide the capability to enact customer- based strategies that meet customer
needs within organizational abilities and constraints.
Operational factors such as channel capacity and design, sales effectiveness across Web, kiosk,
direct and indirect channel effectiveness.
Financial factors such as customer profitability, cost allocation, consumption of resources to
sell/service the customer, etc., in order to determine the key opportunities for improving
profitability, whether those be customer-related activities or operational activities.

To accomplish this, you will need a set of analysis and modeling tools. Analysis tools provide
marketing users the ability to evaluate customer profiles and behavior, and identify communication
opportunities. Often, these tools will also evaluate customer responses and event behavior.
Modeling is more complicated and is simplified by new tools that help your marketing team
identify and predict meaningful and profitable customer communication opportunities. Once your
customer models have been identified and built, you will have the intelligence to take effective
action.

Action: Once you understand your customer relationships, you need to put that intelligence to work
for your business. Once analysis has been conducted, a course of action will be determined. At this
point, your business needs customer communication tools to plan and execute communications
based on analytical intelligence. All customer communications are not alike. You will want the
ability to plan and automate all types of customer communications - from prospecting to multistep
dialogues - over time.
Each customer is different. To be successful, your company will need to relate to customers in
personal ways - ways they have told you/shown you (by their past behavior) that they want to be
treated. This process is commonly referred to in CRM practice as personalization. There are tools
that enable this functionality. Look for the ability to personalize based on the holistic customer
view. Remember that no personalization is sometimes better than trying to personalize based on an
inadequate picture of your customer.

With multiple communication opportunities with each customer, there is a high potential for too
many or conflicting communications which can hinder the relationship. Optimization capabilities
can prioritize communications across all channels and ensure that you communicate effectively with
each of your customers. Optimization should be based on the priority of the message and the
availability of resources to act within a particular time window. Once leads are selected, they should
be filtered and prioritized according to your company's business rules. Putting people into action
using the leads drives much more action than just sending out letters, flyers, e-mails or offers.

Finally, you will have to manage all your customer interactions to ensure a consistent customer
experience. Remember to include all touchpoints such as direct mail, kiosks, POS, call center, Web,
e-mail, ATM, store/branch and sales contacts. Optimization will reduce the conflicts that may occur
in channels.
Measure (Results)

In order to ensure it is creating business value and practicing intelligent CRM, the organization
must measure the effectiveness and impact of its CRM activities. Performance can be evaluated in a
number of ways. For example, you might start by comparing year-over-year business performance
improvement numbers in these terms:
Marketing campaign gross margin and revenue,
Campaign costs,
Revenue and gross margin from targeted customers,
Percent change in CRM-related revenue and costs year to year,
Total customers in database showing real profitability, and
Revenue and gross margins on each customer in the database.

Some CRM software products on the market will help you capture CRM ROI by campaign,
measuring costs and revenues on a per-contact or per-campaign basis. I strongly suggest that you
establish a solid foundation for measuring your CRM performance. If you need help, there are
experienced CRM service consultants that can help you. Real estimation and process evaluation of
ROI is essential for success. As your organization evolves, this measurement phase enables
adaptive learning where marketers can assess what is working and what is not and make changes to
refine the intelligence-management process.
Continuous Learning

Someone once said that insanity is doing the same thing over and over and expecting a different
result. Get the right analytical foundation in place, and you're ready for analytical CRM that works -
that feeds intelligence to your operational systems and helps you build relationships that meet your
strategic business objectives. Use the feedback in your data warehouse to continually learn from the
interactions and positive/negative results.

The real value of analytical CRM is its ability to identify a customer at a point of need. That's where
all marketing opportunities begin! When the point of need can be more accurately identified
through analytics and relevant personalized communications delivered through the right channel,
then customer relationships can be enhanced leading to increased marketing success and customer
loyalty.
Thus, with analytical CRM, an enterprise-class data warehouse and a disciplined knowledge
creation process, you can expect favorable winds to propel your business to new destinations -
places that your customers and shareholders will appreciate in the years ahead. The waves of loyal
customers generating increased profits will define new winds of opportunities along your dynamic
competitive shoreline.
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