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How to
Measure CRM Success |
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Customer Relationship Management (CRM) is being adopted in a great many large industries. An IDC study of 300 large companies in Europe and the US showed that 65% were aware of CRM technology, 28% were developing CRM, and 12% had reached the stage where they were actually using it. Direct marketing, which is CRM driven, is huge. 1999 revenue from direct marketing including catalog sales totaled $1.5 Trillion:
To understand what CRM is, it is useful to contrast it with Database Marketing. Database Marketing consists of building a marketing database of customers and prospects. The database contains their names, addresses, demographics, purchases, web activity and promotion history. It is used to analyze customers, and to direct the company’s customer and prospect communications programs. It helps with acquisition and retention. It is typically measured by return on investment and by customer lifetime value. A typical marketing database for a medium sized company may cost about $1 million or less to build. CRM contains all of the above, but in addition, is usually associated with a massive Corporate Data Warehouse, run by the company IT department. The warehouse contains all of the information available to the company about customers, employees, products, sales, costs, inventory, shipments, and other data sources. Marketing databases can be up and running in 90 days from the decision to create one, until the company is ready to achieve some profitable output. CRM data warehouses usually take a couple of years to build. Little profitable output can be expected until the warehouse is up and running. A data warehouse may cost anywhere from $3 to $25 million to build. The Gartner Group estimates that last year $462 Billion was invested in CRM including all hardware and software. Of this total, more than $24 billion was invested in Ecommerce, according to Frost & Sullivan. Goals of CRM CRM was invented because customers differ in their preferences and purchasing habits. If all customers were alike, there would be little need for CRM. Mass marketing and mass communications would work just fine. Typically, the top 20% (or some small percentage) of customers of any enterprise (the Gold Customers) provide 80% (or some large percentage) of the revenue and the profits. The bottom 20% of customers of many enterprises are not only not profitable, they may actually generate losses to the firm. It is useful to know this and to identify who the valuable and the worthless customers are so that you can:
The Goals of CRM Most companies consciously practicing database marketing subscribe to the concept that “Database marketing only works if the customer benefits from it”. They look towards building a relationship with the customer to improve loyalty and repeat sales. CRM advocates, on the other hand, see CRM as advantageous mainly to the company trying to manipulate the consumers. We queried four of our clients on this question. Here are the results:
As you can see, none of these companies referenced any advantage to the consumer. CRM, to them, was useful because it provided a selling or marketing advantage to the company. It seems to us that without the participation of customers, this approach to CRM is not in concert with growing consumerism which gives power and control to the customers in their relationship with their suppliers. As practiced by most CRM professionals, CRM has:
In fact, the uses for CRM can be grouped into two functions: customer acquisition and customer retention. Using CRM for Customer Acquisition Many companies do not have a really good idea of who their customers are. One company may assume that most of its customers are women 25 to 35. That may well be true. But CRM can be used to develop a better picture. Once data such as age, income, presence of children, value of home, etc. is appended to the customer records, modeling can be used to determine that there are really five quite different customer segments: Affluent Women (age 45-65) Senior Shoppers (age 55+) Women with children (age 25-45) Business women (age 25-55) Young women (age 18-25)
Each group has different life styles and purchasing preferences. Good CRM will develop different messages aimed at each group, with products and offers appropriate to the group being addressed. Creating different messages, different ads, and different media can be expensive. How can you prove that your CRM efforts are paying off? To do this you have to have a feed back mechanism and controls. Certificates, for example, can be sent out to lists of women presumed to be in each of the five groups. When they come in to redeem their certificates, it is possible to track how successful each offer has been, as compared to women who came in as a result of mass media messages. Lets assume that you spent $160,000 last month on customer acquisition, divided equally between mass marketing and CRM marketing communications. The results might look like this:
Each new customer (in this example) fills out an application card for a plastic card. From the application data, we are able to classify each new customer into the appropriate group. From this example, both mass marketing and CRM produced the same results in terms of the number of customers acquired. However, CRM, because it was carefully targeted, gave us many more affluent shoppers and many more business women. It cost us $125 for each customer acquired through mass marketing. It cost us varying amounts to acquire customers using CRM. To compare the value to the company of these customers acquired by two different methods, we can compute the lifetime value of customers acquired by each method:
While we spent equal amounts on both mass marketing and CRM last month ($80,000) the CRM acquisition yielded customers worth twice as much as those acquired through mass marketing. The conclusion you might reach from these tables is that perhaps mass marketing is most appropriate for reaching young women and women with children. CRM (in this example) works best with affluent women, senior shoppers and business women. If the CRM were directed exclusively to these three groups, the additional LTV acquired could have been even higher. The return on investment looks like this:
So, the way to measure CRM effectiveness in acquisition can be summed up in this way:
Using CRM to influence Retention Most companies are using CRM exclusively for acquisition. This is too bad because there is a real payoff in using CRM for customer retention. This is because the return on investment for retention is usually several times greater than an equal amount of money spent on acquisition. The most common use for CRM in retention is the creation of segments based on lifestyle and purchasing habits. One method might be: Day Time Shoppers Evening Shoppers Weekend Shoppers Internet Shoppers Catalog Shoppers Cross Shoppers (members of two or more groups). Good CRM develops a different communications method for each segment.
Another method of segmentation might be to combine the above categories with lifetime value and demographics to produce these groups: Gold Customers Business Professionals Regular customers Sale Shoppers Occasional Shoppers What can you do with these categories? One major chain created categories similar to this based on their customer behavior. Using CRM, they allocated their marketing budget separately to each group. Here is what might happen if a $2 million marketing budget were spent equally amongst all customers. Let us assume that they used the money to craft personalized communications, created a very helpful web site, and improved their customer service. Overall, the result of their efforts might be a 12% increase in lifetime value. Here is the way it might look:
In this example, we are assuming that $2 million dollars worth of customer communications during a year will increase lifetime value by 12% from $306 million to $343 million. This is an increase in LTV of $37 million, a return on investment of 18.5 to 1. Suppose, however, that the CRM were directed in a much more targeted fashion. We will spend a lot of money on our Gold Customers and our Business Professionals. We will spend nothing at all on our Sale Shoppers, and very little on the Occasional Shoppers. What will happen to lifetime value in this situation? Here is a possible outcome:
The total marketing budget is unchanged at $2 million, but the revised CRM program is directed at the most profitable segments. The result is an increase of lifetime value of $146 million, instead of $37 million, a ROI of 73 to 1. What can we conclude from this analysis?
The Benefits of CRM We can sum up the benefits of CRM as creating efficiencies by:
The Cost of CRM The Costs of CRM can be broken down into various categories:
In this example, we have a CRM management staff administering a customer and prospect database of about 4 million households with appropriate software and hardware. The CRM portion of the data warehouse is $4 million per year. We are sending out two communications to our customers and prospects per year at a cost of $0.50. The total CRM cost per household per year is $2.60. How can we evaluate this cost? Lets compare the lifetime value of a control group of customers with those which receive our CRM marketing tactics. Here is a possible result:
One questionable item in the above calculations is the data warehouse itself. It is possible to conduct CRM with a marketing database alone without the warehouse. What would happen to these numbers without the warehouse? The cost per household drops to $1.60 and the ROI increases to 12.4. Is this possible? The assessment of whether a enterprise undertaking CRM is accomplishing the tasks with such things as benchmark, return-on-investment scenarios and well as the new metrics for whether or not the CRM system is improving the overall customer value. In general there is a shortage of expertise in the growing customer relationship management. The dot.com companies are saturated with data about consumer behavior
Two very experienced marketers were hired recently by the California Automobile Association. They turned down a $22 million dollar warehouse, spending instead only $1.2 million for a marketing database. They achieved spectacular results similar to those shown above. It may take many years before most corporations realize that a warehouse may not be required for CRM. In the mean time they will continue to build their warehouses and, hopefully, get some good out of them. There are several key strategies that will need to present if your company is going to meet the challenges of the CRM future.
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