The CRM value creation process

The CRM value creation process

► Creating customer value is increasingly seen as a key source of

competitive advantage.

► The value creation process is a critical component of CRM as it

translates business and customer strategies into specific
statements of what value is to be delivered to customers and,
consequently, what value is to be delivered to the supplier
organization.
 The CRM value creation process

► The CRM value creation process consists of three key

elements:

1. Determining what value the company can provide its customers

with (the ‘value customer receives’);
2. Determining the value the organization receives from its
customers (the ‘value organization receives’);
3. And, by successfully managing this value exchange, maximizing
the life-time value of desirable customer segments.
 1- The value customer receives
► The value the customer receives from the supplier organization
is the total package of benefits, or added values that
enhance the core product.
► In today’s business environment, the competition exists not
only among produced products but also between ‘what the
organizations add to their factory output in the form of
packaging, services, advertising, customer advice, financing,
delivery arrangements, warehousing, and other things that
people value.
► The value the customer attributes to these benefits is in
proportion to the perceived ability of the offer to solve
whatever customer problem prompted the purchase.
 1- The value customer receives (cont.)
► In the value customer receives, we first review the nature of what
the customer buys by explaining:

a) How the core and augmented offer add value,

b) How relationships add value,
c) How brands add value

And how all the above elements contribute to an enterprise’s value

proposition.

► We then examine the nature of the value proposition and the value
assessment.
A- How the core and augmented offer add
value
► For an effective CRM strategy to be realized an understanding of
exactly what the customer is buying is critical. Customers derive
benefits from the purchase of either goods or services. This is
called ‘the offer’.

► An offer can be visualized as a central core surrounded by a

series of tangible and intangible attributes, features and benefits.
A- How the core and augmented offer add
value (cont.)
► The offer can be viewed at several levels:
● Core or generic: For consumer or industrial products this consists
of the basic physical product.
Ex: The core elements for a camera, consist of the camera body, the
viewer, the winding mechanism, the lens and the other core basic
physical components which make up the camera.
Ex: For a banking service, the core elements might be safety and
transactional utility in the form of deposits and withdrawals.
● Expected: This consists of the generic product together with the
minimal purchase conditions which need to be met.
Ex: When a customer buys a videocassette recorder they expect an
instruction book which explains how to programme it, a warranty for a
reasonable period should it break down and a service network so that
it can be repaired.
A- How the core and augmented offer add
value (cont.)
● Augmented: This is the area that enables one offer to be
differentiated from another.
Ex: IBM’s hardware has a reputation for excellent after sales service.
Because of this high quality service it may be preferred by customers
even though the core product – the hardware – may not be the most
technologically advanced. They differentiate by ‘adding value’ to the
core, in terms of service, reliability and responsiveness.
● Potential: This consists of all potential added features and benefits
that are or may be of utility to some buyers. The potential for
redefinition of the product gives advantages in attracting new users or
enhancing relationships with existing customers. This could make it
difficult or expensive for customers to switch to another supplier.
 A- How the core and augmented offer add
value (cont.)

► Thus a firm’s offer is a complex set of value-based promises and the

offer that is developed by the enterprise often needs to be varied
according to the target market being considered. People buy to solve
problems and they attach value to any offer in proportion to this
perception of its ability to achieve their particular ends.

► This approach joins the company’s traditional view of the product,

seen in the terms of various inputs and processes needed to produce
it and the consumer’s view of the offer, as being a set of solutions
and supporting benefits. Together these elements comprise the total
value offer. (see figure 3.1 based on the personal computer).
B- How relationships add value

► Once a superior offer has been developed, the enterprise

needs to focus on building enduring relationships with
customers. Customers value relationships with trusted suppliers
who make a superior offer. As relationships are an important
dimension of value, considerable efforts need to be expended
on building and enhancing these relationships over time.

► However, experience suggests that most companies direct the

greater part of their marketing activity at winning new
customers. But while businesses need new customers, they
must also ensure that they are directing enough of their
effort at existing customers.
B- How relationships add value (cont.)

► The customer ladder of loyalty, identifies the different stages of

relationship development. The ladder is relevant for all groups
within a channel chain referred to direct buyers, intermediaries as
well as final consumers.
► The first task is to move a new ‘Prospect’ up to the first rung to a
‘Buyer’. The next objective is to turn the new purchaser into a
‘Client’ who purchases regularly and then a ‘Supporter’ of the
company and its products. The next step is to create ‘Advocates’
who provide powerful word-of-mouth endorsement for a company.
In a business-to-business context an advocate may ultimately
develop into a ‘Partner’ who is closely linked in a trusting and
strategic relationship with the supplier.
B- How relationships add value (cont.)
 C- How brands add value
► We discussed previously how the core and augmented product offer
adds value. A brand adds to this offer in ways that differentiate it from
other similar products, ways that are important and of value to the
customer. What distinguishes a brand from an unbranded product and
gives it value to the customer is the total of customers’ perceptions
about both product performance and their complete experience with
the brand.
► Brand differences are related to attributes or benefits of the product
itself or to non-product related means.
► Originally the role of a brand was to enable a customer to identify the
manufacturer of a product. Over time the concept of a brand
broadened to include further meaning: symbols, images, feelings and
relationships. Brands add value to the company because they add value
to the customer. (+ paper)
 The value proposition
► Having examined how product and service offers, relationships and
brands can be utilized in order to create customer value, we now turn
our attention to how these components of customer value can be
utilized in a formal statement of value, or value proposition.

► A value proposition defines the relationship between what a supplier

offers and what a customer purchases by identifying how the supplier
satisfies the customers’ needs across different customer activities
(e.g. acquiring, using and disposing of a product).

► Specifically, it defines the relationship between the performance

attributes of a product or service, the fulfilment of needs and the
total cost. The aim of all businesses is to create a value proposition
for customers, be it implicit or explicit, which is superior to and more
profitable than those of their competitors. The value proposition
should be assessed to identify any gaps.
2- The value the organization receives

► The value the supplier organization receives from the customer

has the greatest association with the term ‘customer value’.
Fundamental to the concept of customer value are two key
elements.
a) Determining how existing and potential customer profitability
varies across different customer segments.
b) Understanding the economics of customer acquisition and
customer retention and opportunities for cross-selling, upselling
and building customer advocacy. How these elements contribute
to increasing customer lifetime value is integral to this view of
value creation.
A- Customer profitability

► Companies need to understand the existing profitability of their key

customer segments and initiate action to realize the potential
profitability of those segments and consequently improve customer
lifetime value.

► The 80/20 rule, or ‘Pareto Law’, suggests that 80 percent of the total
sales volume of a business is typically generated by just 20 percent of
its customers.
B- Customer acquisition and customer
retention
► The role and relative importance of customer acquisition varies
considerably according to a company’s specific situation. For example, a
new market entrant will be mainly focused on customer acquisition, while
an established enterprise will be more concerned with customer
retention.
The customer acquisition process is typically concerned with issues such as:
● acquiring customers at a lower cost
● acquiring more customers
● acquiring more attractive customers, and
● acquiring customers utilizing new channels.
► The starting point in understanding customer value from the perspective
of the supplier organization is to determine the existing customer
acquisition costs within the major channels used by the company and to
identify how these costs vary within different customer segments.
B- Customer acquisition and customer
retention (cont.)
A framework for customer retention improvement.
Step 1: measurement of customer retention
► The measurement of retention rates for existing customers is the first step in
improving customer loyalty and profitability. It involves two major tasks –
measurement of customer retention rates and profitability analysis by
segment.
Step 2: identification of causes of defection and key service issues
► This step involves the identification of the underlying causes of customer
defection. Traditional marketing research into customer satisfaction does not
always provide accurate answers as to why customers abandon one supplier
for another.
Step 3: corrective action to improve retention
► The final step in the process of enhancing customer retention involves taking
remedial action. At this point, plans to improve retention become highly
specific to the organization concerned and any actions taken will be
particular to the given context.
 3- Max. lifetime value
► We define customer lifetime value (CLV) as the net present value
of the future profit flows over the lifetime of the customer
relationship. This represents the entire expected profit flow over a
customer’s lifetime including the elements outlined above
including cross-selling, upselling, advocacy and, where relevant,
reference effects.
► The CLV should be calculated at the level of segmentation
granularity appropriate to that business. Care should be taken to
be sensibly conservative when making future estimates.
► Customer lifetime value is difficult to measure because of the
difficulties in putting quantification on future events.