The Failure of CRM Mathematics

In a previous article, I discussed why so many CRM projects have failed. I listed the four assumptions underlying CRM and discussed three of them. This article covers the fourth assumption: that CRM has a positive return on investment. Why is this seldom true?

Let’s start with some basic principles. Customers do respond to communications, offers, and promotions. For the communications to work the seller has to have some sort of established business. He has a product or service to sell, and a working distribution channel. For CRM to be used, he has to have a revenue stream (otherwise, where would he get the money to build his warehouse?).

The reason for using CRM is to make incremental increases in the current level of sales beyond what is being made now with mass marketing, retail stores, catalogs and database marketing.  Somehow, the marketer assumes, if he just knew more about the decision making process in the customer’s mind, he could increase the sales level (to customers and prospects) by as much as 5% or 10%.  Let’s say that he is selling some product or service for \$150. It could be rental cars, small appliances or carpets. He contacts 20 million customers per year, with sales of \$90 million. His current marketing methods involve mass marketing, and direct marketing to customer segments, including a loyalty program.  We will assume that of the \$150, his net profits per sale are 10%, after deducting all costs including marketing.

We will assume a modest CRM warehouse containing data on 14 million prospects and past customers and 6 million current customers. Let us assume that we can build it for \$10 million including the software for access, with annual maintenance costs of \$1.5 million that includes the cost for the staff, NCOA and appended external data. Amortized over three years, the warehouse will cost us \$5.5 million per year.

Building Warehouse

\$10,000,000
Amortize over 3 years \$4,000,000
Annual maintenance \$1,500,000
Annual Cost \$5,500,000

Let’s compare this to the cost of database marketing in the same situation. It costs far less:

Database Costs

Database Build \$1,500,000
3 year Amortize \$600,000
Annual Maintenance \$1,000,000
Annual Cost \$1,600,000

Cost of communications

To these CRM or Database costs, we must add the cost of communications with customers and prospects. After all, if we are going to make the right offer to the right customer at the right time, we have to communicate the offer to them personally, or what is the warehouse for?  Let’s assume that our firm has been collecting emails to keep the cost of communications down. They have emails on half of all their customers.

Communications

CRM Database

Quantity

Rate Year Annual Cost Annual Cost
DB/Warehouse \$5,500,000 \$1,600,000
Mail Communications 3,000,000 \$0.60 2 \$3,600,000 \$3,600,000
Email Communications 3,000,000 \$0.04 4 \$480,000 \$480,000
CRM/Database Costs \$9,580,000 \$5,680,000

So with these costs in hand, what will be the result of using CRM or Database Marketing?

Without CRM Database
Or DBM With CRM Marketing

Customers

6,000,000 6,000,000 6,000,000
Annual Sales \$150 \$165 \$165
Sales \$900,000,000 \$990,000,000 \$990,000,000
Profit per sale 10% 10% 10%
Profit \$90,000,000 \$99,000,000 \$99,000,000
CRM/DB Cost \$0 \$9,580,000 \$5,680,000
Net Profit \$90,000,000 \$89,420,000 \$93,320,000

Using CRM or Database Marketing we have managed to increase the average sale per customer by 10% to \$165.00. We may have done this by getting some customers to place larger orders, by getting some to place more orders, or by reducing the attrition rate, or a combination of these and other methods. Sales have increased by \$90 million with increased gross profits of \$9 million. Unfortunately, when we factor in the cost of CRM, net profits have gone down by \$580,000. That is what virtually all companies installing CRM have discovered. Note that these figures assume that CRM is working – that it is increasing sales by 10%. But, in many cases, for reasons shown earlier, the CRM has no such valuable benefit. In the majority of companies, it makes only a very small improvement in the sales rate!

There is a fundamental disconnect between the goals of CRM and the results. If you have invested the millions and have a wonderful data warehouse and analytic software, then what? How do the data warehouse and software increase the retention rate?   Somehow, you are supposed to take the software and change customer behavior.  The CRM Forum (www.crm-forum.com) lists three reasons why CRM usually fails:

• Problems in organizational change and internal politics
• Lack of the right skills and enterprise-wide understanding of the initiatives
• Poor initiative planning.

Unfortunately, many CRM analysts write a type of dense prose that is almost impossible for normal people to understand. Take this example from a Gartner Group report on the CRM Forum:

“Enterprises struggling with lack of coordination across departments should consider the needs of individual groups and work on a top-down/bottom-up strategy. Because department-level CRM deployments may be more cost-effectively supported by a Tier 2 system integrator with domain-specific skill sets and software relationships, the enterprise should identify a master list of approved smaller service providers to work on individual projects”

It really should not be so complicated. The goal of CRM is to select the right prospects and to get customers to be more loyal and buy more. A warehouse is of only marginal help in doing this. The goals can be achieved by coming up with products, services, tactics, strategies and communications that the customers will like and respond to. The CRM warehouse and software do none of these things. The goal can be realized by building a database, determining customer segments and designing a marketing program for each segment, using personal data from the database for each communication.

Many marketers are doing database marketing and calling it CRM. They don’t have a multi million dollar warehouse. They are marketing to segments and making money doing it. That is great! But it is not CRM.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

VN:F [1.8.6_1065]

Arthur Middleton Hughes has published over 200 articles on Database and E-mail Marketing. Click Here to read them.

Featured Books

Strategic Database Marketing 4th Edition: from Arthur Hughes.

Successful E-mail Marketing Strategies: from Hunting to Farming (RACOM 2009) by Arthur Middleton Hughes and Arthur Sweetser.

This new book takes readers through a step by step approach to implementing database marketing essentials to improve e-mails marketing returns intelligently. This is the book that the trade press has been raving about.

The two Arthurs make it easy to see the difference between primitive “Hunting” and customer-centric “Farming”. This is a game-changing attitudinal shift. If you want your e-mail marketing to succeed, learn how to farm.—Stephanie Miller, VP Return Path Click here to download free the exhibits from this new book.

Strategic Database Marketing: from Arthur Hughes.

Customer Churn Reduction and Retention for Telecoms: Models for All Marketers: from Arthur Middleton Hughes.

Arthur Middleton Hughes has just published a new book of Marketing Strategy for Telecoms including Landline and Wireless Telcos, Cable TV, Satellite TV, BPL, IPTV, VoIP and WiMAX.