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A Crash Course in Customer
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Relationship Management
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Management Update

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A NEWSLETTER FROM HARVARD BUSINESS SCHOOL PUBLISHING

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A Crash Course in Customer
Relationship Management
It’s catching on fast, and every manager has to understand it.
But is it right for your company?
RM. 1-to-1. More and more
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marketing experts these days
advocate learning about indi-
vidual buyers and tailoring products or
services to suit their needs, an approach
known generically as customer-focused
marketing. Is it all just hype? The
experience of N.V. Nutsbedrijf West-
land, a Dutch reseller of natural gas,
suggests there’s more to it than that.
At first glance, gas is gas—when cus-
tomers want a commodity, they all
want pretty much the same thing. So
commodity suppliers typically com-
pete on price, with the usual deleterious
effects on margins. But as author and
consultant Don Peppers explains, N.V.
Nutsbedrijf Westland analyzed its cus-
tomer base and discovered that many
clients were greenhouse operators.
“‘Tell us what you need in terms of
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temperature, humidity, and carbon
dioxide levels,’ the company told these
customers, ‘and we’ll provide the
entire indoor environment you require
to run your greenhouses—as long as
you buy the natural gas to operate those
environments from us.’”
No
Of the many different monikers used to
describe such customer-focused
approaches, customer relationship
management (CRM) is probably the
most widespread (see box, page 5).
Despite the hype surrounding it, CRM
really does represent a break with past
marketing strategies.
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The Industrial Revolution ushered in
factory production and advances in
transportation, thereby creating huge
economies of scale. Product-focused
marketing strategies capitalized on
these scale economies, and allowed big
companies to sell mass-produced
This document is authorized for educator review use only by Mallika Srivastava, Symbiosis Institute of Business Management (SIBM) until February 2018. Copying or posting is an
Copyright © 2000 by the President and
infringement
MARKETING
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goods and mass-delivered services to
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ever-larger numbers of people. Over
time, however, competitors’ offerings
in many industries came to resemble
one another. The commoditization of
mass-produced goods and services
made it difficult for a company to dif-
ferentiate its wares and left it vulnera-
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ble to lower-price competition.
With the development of inexpensive,
powerful computing technology, how-
ever, the situation began to change.
Companies were now able to interact
with customers more cheaply and eas-
ily than ever before. They could learn
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more about who their customers were
and what they wanted. Analyzing this
data, marketers realized not only that
some customers are more valuable than
others but also that the most loyal cus-
tomers make a disproportionate contri-
bution to profitability. They also began
learning how to tailor their wares to fit
better with customers’ needs and
wants—particularly the needs and
wants of the most profitable segment.
CRM: the basics
That represents in a nutshell the four-
step process that is the core of CRM.
First, identify your customers. Second,
differentiate them in terms of both their
needs and their value to your company.
Third, interact with them in ways that
improve cost efficiency and the effec-
tiveness of your interaction. As Peppers
and coauthor Martha Rogers write in
their recent book The One to One
Manager, the interactions should pro-
duce “information that can help you
strengthen and deepen your customer
relationships.”
The fourth and final step: customize
some aspect of the products or services
Fellows ofofHarvard
College.
copyright. 3 All rights reserved.
Permissions@hbsp.harvard.edu
you offer that customer. Treat the cus-
tomer differently based on what you
have learned from your interaction.
This helps you establish what Peppers
and Rogers call a “learning relation-
ship.” Does the new offering meet the
customer’s needs better? What would
she change about it? The insights you
gain from this interaction, in turn,
become fodder for your next product or
service customization. Over time, it
becomes easier and cheaper to serve
this customer. Your offerings should
meet her needs better and better, and
the customer should reward you
because she perceives greater value in
the service you provide.
Over time. Those words crystallize the
difference between CRM and tradi-
tional marketing approaches. Tradi-
tional product-focused marketing is
“a zero-sum game,” argues Peppers.
“Customers and the marketers who sell
to them are adversaries. As the mar-
keter, I’m trying to engage in a transac-
tion that produces the most possible
revenue right now. There’s no future to
the relationship—there’s just the cur-
rent transaction.”
CRM, by contrast, recognizes that
keeping customers over the long term is
the road to profitability. Says Seth
Godin, author of Permission Marketing
and founder of Yoyodyne, which cre-
ates online promotions and direct-mail
campaigns: “Instead of trying to find
new customers for the products you’ve
already got, you find new products for
the customers you’ve already got.”
“And once you do that,” he continues,
“everything in the company becomes
different.” Because CRM approaches
marketing in a fundamentally different
way, practitioners have developed dif-
ferent performance measures to track
the success of their initiatives (see box,
“CRM Metrics,” page 4). But the dif-
ferences go deeper than metrics, adds
Peppers. Not only does CRM call for a
different mindset—looking at cus-
tomers as partners with particular prob-
lems you’re trying to help them solve—
or 617.783.7860
 CRM, continued

CRM metrics The technological

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The lifetime value of the customer. Some customers
underpinnings of CRM

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are worth more to your company than others, and this
calculation helps you determine just how much more.
The basics: multiply a customer’s expected number of CRM techniques have always been around, but accord-
visits times the average amount of money spent per ing to Don Peppers three specific technologies have
visit. Deduct your costs of acquiring and servicing that made it possible (and economical) for companies to
apply the tools to millions of customers at a time. The

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customer. Add in the value of accounts this customer
refers to you, and discount the sum appropriately for three:
the time period you’re analyzing. (Detailed calculations
Database technology—not simply storage
can be found in the CD-ROM Service Success, avail-
capacity, but also the ability to analyze and
able from Harvard Business School Publishing.) The
map large amounts of data.
underlying principle: customers are more valuable than
what they spend in any given time period—and some Interactivity—Web sites, call centers, and any
customers are much more valuable. other means by which a company can interact

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with its customers.
Share of customer. This is one of the key measures for Mass customization technology, or
companies practicing CRM. It asks what the strategic computerized standardization, enabling a company
or potential value of a particular customer is over and to break products or services into modules or
above that customer’s current estimated lifetime value. templates. For example, American Airlines allows
In other words, what’s the opportunity for increasing its two million registered “AAdvantage” members
the lifetime value by offering the customer more than to create personal travel profiles, then markets
you offer now? To calculate share of customer, just
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customized travel packages to them.
divide: if the current estimated lifetime value is $1,000
and estimated potential lifetime value is $10,000, your Together, these technologies make it possible for a com-
share of customer is 10%. Unfortunately, says Seth pany to engage in the core activities of CRM. Explains
Godin, “most companies have no idea of the lifetime Peppers: “I now know who you are and what you want.
value of their customers, nor do they have a very clear You and I interact. Then I mass customize, tailoring the
idea of how much it costs them to acquire new ones.” product or service I offer to meet your needs.”
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Who Needs CRM?

differentiated

Companies in quadrants II, III, or IV represent

Highly

No

the best short-term candidates for implement-

III IV ing CRM because their customers have highly
CUSTOMER VALUATIONS

Airlines Pharmacies differentiated needs, highly differentiated val-

Packaged goods mfrs. Computer systems cos. uations, or both. An airline is an example of a
quadrant III company. Air travelers’ needs are
essentially the same, but for most airlines, a
very small percentage of customers (business
I II
travelers) account for most of the company’s
Gas stations Bookstores
profits. A computer company like Dell is an
example of a quadrant IV company. Needs are
Do Uniform

highly differentiated—each customer wants a

CUSTOMER NEED
different configuration for his computer sys-
Uniform Highly tem. But so are valuations—a corporate client
differentiated
looking for thousands of workstations is obvi-
ously going to be worth more than an individ-
Source: adapted from the “Checkpoint Tool” on the Web site of the Peppers and Rogers Group (www.1to1.com) ual looking to buy a computer for the home.

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 CRM, continued

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Which buzzword do you prefer?

Customer relationship management (CRM) is probably
the most common phrase used to describe the shift from
product-focused marketing to a customer-focused
approach. Its drawback, says author and consultant Don
Peppers, is that “it’s a computer-specific term” referring to
a kind of software and is often understood as purely a tech-
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difference this way: “There’s a continuum that runs from
strangers to friends to customers to loyal customers to for-
mer customers. One-to-one marketing is focused on turn-
ing customers into loyal customers, and on preventing them
from becoming former customers. The big idea behind per-
mission marketing is that this continuum begins before the

nological system. Genuine CRM, Peppers continues, is a
business process: “to do it right, you have to integrate the
front office with the back-office functions.”
But one-to-one marketing, the term made popular by
Peppers and colleague Martha Rogers, has been found
wanting by other experts. James L. Heskett of Harvard
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person spends the first dollar. It’s silly to ask strangers to
become customers without spending the time to teach
them, to gain their trust, and to have a mutually beneficial
dialogue instead of a narcissistic monologue.”
Other experts apply their own terms to the phenomenon:
customer intimacy (Fred Wiersema), real-time market-

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Business School believes that “many of the companies who ing (Regis McKenna), continuous relationship manage-
say they practice one-to-one marketing are in practice act- ment (McKinsey & Co.), technology-enabled market-
ing as if they know what’s best for their customers.” Heskett ing (Gartner Group), and enterprise relationship
prefers the term permission marketing, coined by Seth management. To a certain extent, Peppers acknowledges,
Godin, former vice president of direct marketing for Yahoo! all these labels represent “consultants’ branded versions of
and founder of Yoyodyne, because it “implies a partnership toasted oats.”
between the customer and provider.” Godin describes the
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it also requires far greater coordination planning, lower inventories, and more and telecom companies, remarks, “I am
of business functions than in the tradi- efficient logistics.” less sure that it pays for many other
tional, “siloed” mass-marketing para- companies to collect great amounts of
digm. For CRM to be successful, pro- Other kinds of businesses may not ben- fresh data for the first time in order to
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duction, information technology, and
channel-management functions all
need to be integrated. In short, a com-
mitment to CRM entails an enterprise-
wide shift in competitive strategy.
Can everyone use it?
Some companies are better positioned
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efit. “Businesses where the consumer is
not in contact with the marketer,” aren’t
logical candidates for CRM, says
Godin. (An example: pre-deregulation
utilities.) Neither are “businesses where
the lifetime value of customers is low.
Businesses with huge churn. Or busi-
nesses where location is critical to suc-
move into mass customization.”
Concludes Godin: “There are tons of
businesses where CRM doesn’t matter
so much, but I challenge the idea of a
‘commodity business.’ There’s no such
thing.” That’s what N.V. Nutsbedrijf
Westland has discovered; so may a host

than others to adopt CRM. The best cess.” Kotler, after mentioning financial of other unlikely candidates.
bets? “Financial companies and
telecommunications companies,”
responds Philip Kotler, professor of
international marketing at the Kellogg RESOURCES
Graduate School of Management at
Northwestern, “because they accumu- Customers.com: How to Create a Profitable Permission Marketing: Turning Strangers
late lots of data on each customer’s Business Strategy for the Internet into Friends, and Friends into Customers
buying patterns in the course of their and Beyond by Seth Godin
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business.” James L. Heskett, UPS
Foundation Professor of Business
Logistics, emeritus, at Harvard Busi-
ness School, believes that the quickest
impact of CRM will be seen in busi-
ness-to-business marketing, “mainly
because of the payoff [in] productivity,
speed, supply chain integration, better
by Patricia B. Seybold with Ronni T. Marshak
1998 • Times Books/Random House
The One to One Manager: Real-World
Lessons in Customer Relationship
Management
by Don Peppers and Martha Rogers, Ph.D.
1999 • Currency/Doubleday
1999 • Simon & Schuster
The Service Profit Chain: How Leading
Companies Link Profit and Growth to
Loyalty, Satisfaction, and Value
by James L. Heskett, W. Earl Sasser, Jr., and
Leonard A. Schlesinger
1997 • The Free Press

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