& HARVARD Management Update A Crash Course in Customer Relationship Management& HARVARD anagement Update MELE Harvard Management Update Subscriptions Harvard Management Update Custom Reprints Permissions For a print or electronic catalog of our publications, please contact us: TEE Harvard Management Update Subscription Services Ce PO. Box 257 Shrub Oak, NY 10588-0257 ‘Telephone: (800) 668-6705 Fax: (914) 962-1338 American Express, MasterCard, Visa aevepted. Billing available. Please inquire about our custom service and quantity discounts, We will print your company’s logo on the ccover of reprints oF colleetions in black and white oF two-color, The process is easy, cost ellective, and quick. ‘Telephone: (617) 783-7626 or Fax: (617) 783-7685 For permission 1 copy or republish please write or call Permissions Department Harvard Business Schoo! Publishing Box 230+ 660 Harvard Way Boston, MA 02163 ‘Telephone: (617) 783-7587 Harvard Business Schoo! Publishing, Customer Service, Box 230-5 60 Harvard Way Boston, MA 02163 ‘Telephone: U.S. and Canada (800) 668-6705 ‘Outside U.S. and Canada: (617) 783-7474 Fax: (617) 783-7555, Tntemet Address: www. hbsp.harvard.ed HARVARD MANAGEMENT UPDATE « HARVARD MANAGEMENT COMMUNICATION LETTER = BALANCED SCORECARD REPORT. HARVARD BUSINESS REVIEW » HBS CASES = HBS PRESS » HBS VIDEOS AND INTERACTIVE MEDIABL vanccinc 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. I-to-1. More and more marketing experts these days advocate learning about indi- vidual buyers and tailoring products or services to suit theirneeds, an approach known generically as customer-focused marketing. Is it all just hype? Th experience of N.V. Nuisbedrijf West- nd, a Dutch reseller of natural gas, suggests there’s more to it than that. At fist glance, gas is gas—wwhen cus- tomers want a commodity. they all want pretty much the same thing. So commodity supplicss typically com pete on price, with the usual deleterious effcets on margins. But as author and consultant Don Peppers explains, N.V. Nutsbedriff Westland analyzed its cus- tomer ase and discovered that muny clients were greenhouse operators ell us what you need in terms of temperature, humidity, and earhon dioxide levels, the company told these customers, ‘and we'll provide the entire indoor environment you require to run your ercenhouses—as long. as You buy the natural as 10 operate those environments from us Of the many different monikers used to deseribe 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, ‘The Industrial Revolution ushered in factory production and advances transportation, thereby creating huge economies of seale, Product-focused marketing strategies capitalized on these seale economies, and allowed hig companies to sell mass-produced 00d and massdelivered services to ever-larger numbers of people. Over ne, however. competitors’ offerings in many industries came to resemble fone another, The commoditization of mass-produced goods and services ‘made it difficult for a company (0 dh feremtiate its wares and lef it vulnera- ble to lower-price competition. With the development of inexpensive, powerful computing technology, how ever, the sittiation began to change. Companies were now able to interact with customers more cheaply and eas ily than ever before. They could learn mote 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 eus- tomers make a disproportionate eontri- bution to profitability. They also began learning how 6 tailor their wares to fit better with customers’ needs und 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, idemuify your customers. Second, differentiate vhem in terms of both needs and their value to your company. ‘Third, interact with them in ways that improve cost elficiency and the effee- tiveness of yourinteraction. As Peppers aand coauthor Martha Rogers write in their recent book The One 1 One Manager, the interactions should pro- duce “information that can help you then and deepen your customer relationships, The Fourth and final step: some aspect of the products or services Copyighe © 2900 by te Presiden nd Fellows of Harvard Colege. Alright reserve. you offer that customer, Treat the cus tomer differently based on what you have Iearned from your interaction, This helps you establish what Peppers and Rogers call a “Iearning selation- ship.” Does the new ollering 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 etter, and the customer should reward you because she perceives greater value in the service you provide. Over time. Those words erystallize the difference between CRM and tradi- tional marketing approaches, Tradi- tional product-Focused marketing is "a reto-sum game,” argues Peppers. “Customers and the marketers who sell to them are adversaries. As the mar koter, I'm trying to engage in a trans 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 comirast, 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 ere= ales online promotions and direct-mail campaigns: “Instead of trying to find new customers Tor the products you've already got, you find new products for the customers you've already got.” you do that," he continues, if in the company becomes different.” Because CRM approaches ‘marketing in a fundamentally different ‘way, practitioners have developed dit ferent performance measures to track the success oftheir initiatives (see box "CRM Metrics,” page 4). But the dil- Terences 0 deeper than metrics, adds Peppers. Not ony does CRM call for a different mindset—looking at cus tomers as partners with particular prob~ lems you're trying to help them solve—cm, continued CRM metrics The lifetime value of the customer. Some customers fe 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 visits times the average amount of money spent per visil, Deduct your costs of acquiring and serviging that customer, Add in the value of accounts this customer refers to you, and discount the sum appropriately for the time period you're analyzing. (Detailed calculations can be found in the CD-ROM Service Success, avail- able [rom Harvard Business Schoo! Publishing.) The ‘underlying principle: customers are more valuable than what they spend in any given time period—and some ‘customers are much more valuable, Share of customer. This is one ofthe key measues for companies practicing CRM. It asks what the strategie for potential value of « particular customer is over and above thal customer's current estimated lifetime valuc. In other words, what's the opportunity for increasing the lifetime value by offering the customer more tha you offer now? To calculate share of customer, just divides if the current estimated lifetime value is $1,000 and estimated potential lifetime value is $10,000, your Share of customer is 10%. Unfortunately, says Seth Godin, “most companies have no idea of the lifetime value of their customers, nor do they have a very clear ca of how much il costs them to acquire new ones.” 2 £ i 5 2 “Highly Airines Packaged goods ms. 2 Gasstations, | i eeal (CUSTOMER NEED Urilorm ~ Sane fon es nn tlt es as Gg va The technological underpinnings of CRM CRM techniques have always heen around, but accord ing to Don Peppers three specilic technologies have made it possible (and economical) fer companies to, apply the tools to millions of customers at a time, The three: Database technology—not simply storage capacity, but also the ability to analyze and map large amounts of data Interactivity —Web sites. call centers, and any ‘other means by which a company can interact vith its customers. Mass customization technology, or computerized standardization, cnabling a company to break products or services into modules or templates. For example, American Airlines allows its two million registered “AAdvantage” members tocreate personal travel profiles, then markets ‘customized travel packages to ther. ‘Together, these technologies make it possible for a com- pany to engage in the core activities of CRM. Explains, Peppers: “I now know who you are and what you want ‘You and | interact, Then I mass customize. tailoring the product or service Laffer meet your needs.” Who Needs CRM? Pharmacies ‘Computer systems cos. Bookstores | Soe ing en ‘Companies in quadrants Il I, or IV represent | _ the best short-term candidates for implement ing CRM because their custoriers have highly | ditereniated nods, hihly differentiated val tuations, of both, An airline isan example of a {quadrant III company. Air travelers’ needs are ‘essentially the same, but for most airlines, a very small percentage of customers (business travelers) account for most of the company's profits. A computer company like Dell is an ‘example of a quadrant IV company, Needs are highly differentiated—each customer wants a different configuration for his computer sys- tom, But so are valuations —a corporate client looking for thousands of workstations is obvi- ‘ously going to be worth more than an individ- tual looking (0 buy a computer for the home. HARVARD MANAGEMENT UPDATE @_MARCH 2000Which buzzword do you prefer? Customer relationship management (CRM) is probably the most common phrase used to deseribe the shift from | product-focused marketing to a customer-focused | approach. ts drawback, says author and consultant Don | Peppers is that “i's a computer-specifc tem” referring to akind of software and is often understood as purely tech | nological system. Genuine CRM. Peppers continues, is @ 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 hy 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 Joyal customers, and on preventing them. from becoming former customers, The big idea behind pes mission marketing is that this continuum begins before the person spends the first dollar. 1s silly to ask strangers to become customers without spending the time to teach them, to gain their tust, and to have a mutually beneficial dialogue instead of a narcissistic monologu. Peppers and colleague Martha Rog: wanting by other experts. James L. Heskett of Harvard many of the companies who say they practice one-to-one marketing are in practice aet- Sbest for their customers. prefers the term permission marketing, coined by Seth former vice president of direct marketing for Yahoo! and founder of Yoyedye, because “implies a parmership Business Schoo! believes th ingasi they know whai | Godin, between the customer and provider also requires far greater coordination ‘of business functions than in the tradi~ tional, *silocd™ mass-marketing pari ddigm. For CRM to be successful, pro- duction, information technology. and channel-management functions all need (0 be integrated, In short, a com= ‘mitment 1o CRM entails an enterprise ‘wide shift in competitive strategy. Can everyone use it? Some companies are better positioned than others 10 adopt CRM. The best bets? “Financial companies and (clecommunications companies,” responds Philip Kotler, professor of international marketing at the Kelloge Graduate Sehool of Management at Northwestern, “because they accumu Jate lots of data on cach customer's buying patterns in the course of their 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 scen in busi- ness-to-business marketing, “mainly cause of the payor! [in] productivit speed, supply chain integration, better hhas been found ment (McKi Heskett toasted oats planning, lower inventories, and more ellicient logistics.” Other kinds of businesses may not ben- clit. “Businesses where the consumer is not in contact with the marketer,” area’t logical candidates for CRM, says Godin, (An example: pre-derogatation utilities.) Neither are “businesses where the lifetime value of customers is low. Businesses with huge churn, Or busi nesses where location is eritigal to stie= ess.” Koller, afier mentioning financial Other experts apply their own terms to the phenomenon customer intimacy (Fred Wicrsema), real-time market- ing (Regis McKenna), continuous relationship manage- cy & Co,), technology-enabled market- ing (Gurtner Group), and enterprise relationship ‘management. Toa ceriain extent, Peppers acknowledges, all these labels represent “consullants’ branded versions of and telecom companies, remarks, “Tam less sure that it pays for many other companies to collect great amounts of fresh data for the first time in order 10 ‘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, Nutsbedrijt Westland has discovered: so may a host oF other unlikely candidates, | Customers.com: How to Create a Profitable Permission Marketing: Turning Strangers Business Strategy forthe Internet | ‘and Beyond by Patrica 8. Seybold wth Ronn. Marshak 19 Ts ans Ra ae | air mes tte | Management ee 19 cae Hanvano MANAGEMENT UPoATE @®_manch 2000 Into Friends, and Friends ito Customers by Seth Godin 1999-Siou4 smite The Service Profit Chain: How Leading ‘Companies Link Profit and Growth to Loyalty, Satisfaction, and Value by James Lesher W. 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