Chapter 14: Customer Relationship Management
marketing research, segments its markets
Customer Relationship Management
Overview
● Product Manager – focuses on selling a product.
● Internet – allow for tailored relations at the
individual-customer level.
● The focus thus shifts from
○ transaction-based activities (get the
sale/customer acquisition) to;
○ long-term relationship building (satisfy
the customer/customer retention).
A study conducted by the Boston Consulting Group
in 1999 showed that Internet companies spent 33
percent of their resources on building awareness,
55 percent on customer acquisition, and only 12
percent on retention.
This is particularly noteworthy given that one of the main
advantages the Internet brings to marketing is customer
retention through improved relationship building.
● customer acquisition – or the ways marketing is
normally used to obtain customers.
○ Companies spend considerable sums
acquiring customers; how much does
your company or ones that you know
spend on retaining customers?
● Customer Relationship Management or CRM
for short is often used in the context of
relationships that are long-term in nature.
● However, a true CRM strategy develops
programs that match the kind of relationship
the customer wants with the company whether
it is relational or transactional.
● CRM is a throwback to old-fashioned country
store-type retailing where the store owner knew
his or her customers by name and knew their
shopping habits well enough to make product
recommendations. Today, we often use
technology to accomplish this goal.
Different Perspectives on the Buyer–Seller
Relationship:
Panel A
● the seller figures out to make the sale to the
buyer, but the relationship between the two is
at a distance because the seller has done little
to try to understand the buyer's motivations and
needs.
● The salesperson has used his or her creativity
or personality to make the sale, not an
understanding of the customer.
Panel B
● the company selling the product or service
has done a better job understanding the
customer by getting "into" the buyer,
determining enough about his or her needs to
make the sale.
● This is the more traditional marketing concept of
customer orientation.
● A panel B company spends money on
appropriately, and has developed a marketing
strategy on the basis that the value proposition
fairly represents what its target segment wants.
While both panel A and B relationships are necessary
to be successful, neither concept is sufficient in
today's globally competitive environment.
Both can be characterized by the following:
1. For the seller, the sale is the end of the
process;
2. For the buyer, it's the beginning.
Panel C
● Illustrates the new model of relationship
marketing.
● Here, the buyer and seller have become
interdependent.
● Each party to the relationship depends on the
other in some way. The sale, therefore, is no
longer the end of the process.
The Economics of Loyalty
• Loyalty economics has traditionally been
defined as evaluating how much a customer is
worth to a brand over time.
• Whether a marketer looks at store visits, social
media likes or proclaimed brand love, the center
of the equation has been the retailer. What is this
customer giving the brand and what is he or she
worth?
Sample Problem:
A simple example demonstrates the economic power and
importance of loyalty. A number of years ago, a
passenger flying on a British Airways (BA) flight from
London to San Francisco complained about being seated
near the smoking rows in the coach section. Although
there is no in-flight smoking today, many readers will
identify with this traveler's complaint; being one or two
rows from the smoking area on a 10-hour flight was more
than annoying. The coach section was full and the
dissatisfied customer was (or at least claimed to be) a
regular BA customer.
Solution:
A simple solution would have been to move the customer
to business class in an unobtrusive way (so other
passengers do not get the same idea) because there
were unoccupied seats in that section. Our guess is that
such a move would have gained a strongly loyal customer
at a very low marginal cost (for business class food).
However, the BA personnel declined to move the
passenger, who very loudly indicated that he would never
fly BA again.
Lifetime Customer Value
● When you lose a customer for life, (you are
actually losing the (discounted) stream of income
that would have been produced over the
customer's lifetime. In addition. how many other
potential customers will he tell about it?
● Lifetime Customer Value is the total amount of
money a customer is expected to spend with
your business, or on your products, during the
lifetime of an average business relationship.
● Clearly, no company is going to have a 100
percent loyalty rate.
● Other customers do not want to feel any kind of
obligation to purchase from the same vendor.
● Loyal customers are more profitable because
they stimulate revenue growth, are less
expensive to serve, refer new customers to the
company, and are often willing to pay a price
premium.
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Acquisition Cost
● Any new customer involves some
incremental costs, called acquisition costs.
● For example, American Express must send a
number of direct mail pieces or make
telemarketing pitches to obtain new customers.
New customers of industrial equipment require
more sales calls than existing ones.
● Thus, acquisition costs represent an initial
investment in a customer.
Base Profit
● The profit margin a company earns from an
average customer.
● The longer a customer is retained, the longer the
base profit is earned.
Revenue Growth
● Retained customers often have been found to
increase their purchase quantities over time.
○ This is an intuitive finding. Think about a
store to which you have become more
loyal over a period of time. It is likely that
you not only shop there regularly, but that
you also buy more items there.
○ Alternatively, you might purchase life or
home insurance from the company from
which you purchase auto insurance.
Operating Costs
• Existing customers also frequently cost less to
serve than new customers. The former have a
better knowledge of the company’s systems and
procedures.
Referrals
• Good customers also talk to their friends and
neighbors about your company. Additional
business comes from favorable word of mouth by
satisfied customers.
Price Premium
• Loyal customers are often more price insensitive
than customers who need a price inducement to
switch or to become a new customer.
A Framework for Customer Relationship
Management
• CRM has come to mean different things to
different people. For some managers, CRM
means sales force contact software like the
products sold by salesforce.com.
• For others, it means telephone call centers for
contact management. Additionally, many focus
their attention on loyalty programs such as
Harrah’s Total Rewards program, which provides
incentives for players to repeat their visits to their
casinos.
Creating the Database
• The core of a CRM program is a customer
database, sometimes referred to as a customer
information file or CIF (Glazer, 1999). The CIF is
the repository of information about the customer
and serves as the basis for identifying and
targeting both current and potential customers.
The basic idea behind a CRM program is to
assess the value to the firm of each customer in
the CIF and then develop relationship programs
that will be customized in both content and
intensity depending upon that value.
Analyzing the Database
• Many types of analyses can be performed on a
CIF once it has been assembled. The general
name given to such analysis is data mining.
People with significant statistical skills use
computer software and large computer resources
to troll through the CIF to find segments,
purchasing patterns, trends, and other useful
outputs. 4 Large companies like Siebel Systems,
Oracle, e. Piphany, and others provide such
software to its corporate customers.
Customer Selection
• The customer profitability analysis just described
can be used to separate the customers who will
provide long-term value to the firm from those that
are likely to be unprofitable. There is nothing in
the “rules” of marketing indicating that every
customer must be served; marketing is not
supposed to be inconsistent with making a profit.
Thus, a major benefit of the LCV and profitability
analyses previously described is to permit the
marketing manager to make informed decisions
about (1) which customers to keep, and (2) for
those kept, how much money to spend keeping
them.
Customer Targeting
• Once the customers that you wish to target have
been selected, conventional direct marketing
approaches are then used to keep them.
Relationship Marketing Programs
• Given the preceding discussion concerning
customer targeting, it is important to describe
marketing programs beyond discounts and other
special perks that are part of normal arsenal of
product managers.
Customer Satisfaction
• Clearly, one of the requirements of customer
loyalty is satisfaction. Satisfied customers are
much more likely to repurchase and become
good customers than dissatisfied customer.
Customer Service
• An important component of customer satisfaction
is customer service. All products, whether
manufactured or services, have a service
component Loyalty Programs One of the major
trends in marketing is the ubiquity of loyalty
programs or, in general, frequency marketing.
Loyalty Program
• One of the major trends in marketing is the
ubiquity of loyalty programs or, in general,
frequency marketing.
Mass Customization
• Customer retention and loyalty are also being
affected by a marketing process called mass
customization.
• This is a process whereby a company takes a
product or service that is widely marketed and
perhaps offered in many different configurations
and develops a system for customizing (or nearly
customizing) it to each customer’s specifications.
Community Building
• Marketing managers must create a sense of
affinity to their companies and brands in their
customers.
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 • This can be done by creating a community of
customers who share information between
themselves and the company about their
experiences with the product or service.
• High-tech products have formed user groups for
years where groups give the company feedback
and give each other tips on how to better use the
product.
• Community building is usually high on the list of
goals for the construction and enhancement of a
website for all kinds of products and services due
to the ease of interacting.
• Successful communities on the Internet offer
participants the following: newsletter, discussion
board, user-to-user information, and so on.

Other Ideas
• Concept of building relationships with customers
is often seen as the job of the sales force or other
personnel related to marketing.
• Southwestern Bell Telephone Company
launched the Volunteer Ambassador program in
1995 to establish relationships with designated
customers.
• Ex-customers can provide ideas on how to
improve the product or service based on actual
performance levels they deemed too low to
continue as a customer.

Privacy Issues
• online communities should post links to the
company’s privacy policies and be certified by
TRUST to build user confidence in joining and
using the Web. This is important for effective
CRM strategies.

Metrics
• Marketing managers must shift from traditional
metrics such as market share, sales volume, ROI
to customer-level measures such as customer-
acquisition costs, customer conversion rates,
customer retention rates, customer profitability,
and same customer sales by period.