CUSTOMER RELATIONSHIP

MANAGEMENT
Module - 1
Customer Orientation – Examples?
Relationship Management

 How to form relationships?

 CRM is a business process that helps in forming

Relationships with customers
Learning about
customers
We have only two sources of
competitive advantage:
1. The ability to learn more
about our customers faster
than the competition.
2. The ability to turn that
learning into action faster
than the competition.
—Jack Welch, former CEO,
General Electric
Learning
relationship and
CRM processes are
important to make
right decisions for
increasing customer
value and firm’s
competitiveness…
…else……..
Walmart – CRM and Data Analytics
used for decision making
1. How local weather deviations are
affecting buying patterns?
2. What new products to stock?
3. Deciding minimum purchase amount
for free shipping?
4. What consumers buy in-store and
online ?
5. What consumers are talking about?
6. In-store placement of products?
7. Gift suggestions for friends
8. Giving value to customers - EVLP
CRM at
Amazon
About 35% sales comes from its
suggestions / recommendation system
BRITISH AIRWAYS – Know Me program

 “High profile, high net worth people want to be

recognized and treated well,” says Simon Talling-
Smith, Executive Vice-President of the Americas
for British Airways.
 British Airways staff have an iPad app that pulls
Google images for VIPs, so that staff will recognize
them as they arrive and give them the royal
“Meet and Greet” treatment.
 It also uses data-mining of passengers’ past
experiences with the airline to provide
customized service to them.
Predictive Analytics - How Retailer Target
Figured Out A Teen Girl Was Pregnant Before
Her Father Did
 Definition (Meaning)

 CRM is the core business strategy that integrates internal processes and functions,
and external networks, to create and deliver value to targeted customers at a profit. It
is grounded on high-quality customer data and enabled by IT. (Francis Buttle, 2004)

 CRM is a comprehensive strategy and process of acquiring, retaining and partnering with
selective customers to create superior value for the company and customers (Sheth and
Parvatiyar, 2000)

 CRM is the application of technology that emphasizes on individuals ot one-to-one

relationships with customers by integrating database knowledge with the long term prospects
of growth and customer loyalty
Traditional Marketing Vs. CRM

 Traditional Marketing focuses on the four P’s for

increasing market share through increase in the number
of customers.
 CRM focuses on using strategies, tools and technology
for promoting the relationship between the seller and
the customer to increase revenue, profitability and
customer satisfaction/delight. The main aim is to
increase share of wallet.
Traditional Marketing v/s CRM
Market Share vs. Share-of-Customer Strategies

Traditional Mktg concentrates on CRM concentrates on share of

Market Share customer wallet

 Products and brands as source of  Customers as source of revenue

company value
 Sells as many products as possible to
 Sells one product at a time to as many one customer at a time
customers as possible  Differentiates customers from each
 Differentiates products from competitors other

 Sells to customers  Collaborates with customers

 Finds a constant stream of new
 Finds a constant stream of new business from established customers
customers
 Makes sure each customer is
 Makes sure each product is profitable, profitable, even if loses money on
even at expense of customer occasional product or transaction
confidence
 Uses interactive communication to
 Uses mass media to build brand and determine needs and communicate
announce products individually
Video

Shoppers Stop case

https://www.youtube.com/watch?v=O
AEH3v_2r2g
Levels of CRM
Strategic
A top–down perspective on CRM which views CRM as a core customer-
centric business strategy that aims at winning and keeping profitable
customers
Example: Honda Australia – “Customers for life”
Operational
A perspective on CRM which focuses on major automation of customer facing
business processes such as service automation, sales force automation or
marketing automation
Example: Adidas – SFA
Analytical
A bottom–up perspective on CRM which focuses on the intelligent mining of
customer data for strategic or tactical purposes.
Example: Walmart – data mining / Shoppers stop – data mining
 Strategic CRM
Centralised Relationship Management department.
Integration of Data - Customer information to be collected,
shared and applied across business.
Resources are allocated where they best enhance customer
value
Reward systems to promote employee behaviour that
enhance customer satisfaction and retention.
It creates a learning firm, that adapts to changing customer
and competitor conditions.
 Operational CRM - Marketing
Automation
It focusses on executing marketing activities of the firm with greater effectiveness and
efficiency. for example marketing automation can help in - campaign management,
event based trigger marketing, real time marketing
 Campaign management – creating campaigns, customer uses multi
channels hence integration of communication and offers, evaluation of
performance
 Shoppers Stop campaign
 Event based, or trigger marketing-can be initiated by customer behaviours
eg call for enquiry or contextual conditions
 Calling for bill details
 Birthday offers for club royal customers
 B-to-B Star and Vodafone
 Real time marketing- eg Google and Amazon use location and search
behaviours example - Next Best offer
 Operational CRM – Sales force
Automation (SFA)
 Sales force automation (SFA) was the original form of operational CRM.
 SFA helps standardize and improve selling process.
 SFA applies technology to company selling activities and selling process
stages.
 Example - Opportunity management software that has lead management
applications and sales forecasting applications. Lead management
applications enable users to qualify leads and assign appropriate salesperson.
 Sales forecasting applications use transactional histories and sales force
estimates to generate future sales estimates.
 Other applications are Contact mgt, quotation and proposal generation,
product configuration applications etc.
 Operational CRM – Service
Automation
 Service automation helps companies to manage their service operations
through multi channels (face to face, call centre, contact centre etc.)
 It enables companies to handle both inbound and outbound communications
across all channels.
 Call routing software (Interactive voice response -IVR).
 Handles customer complaints in social media.
 Crowd source customer service.
 Online diagnosis and trouble shooting.
 B2B service automation on field help technicians with diagnostics, repair
manuals, inventory mgt, job info.
Goals of CRM
Strategic goals of CRM

the acquisition of carefully targeted customers

or market segments
 the retention of strategically significant
customers or market segments (loyalty of
customers)
 the continuous development and delivery of
competitively superior value propositions to
the selected customers
GET….KEEP….GROW
Operational Goals of CRM
1. Converting prospective customers into actual customers
2. Converting unprofitable customers into profitable ones
3. Retain customers
4. Increasing revenue per customer
5. Streamlining order processing and inventory management
6. Providing enhanced customer value and experience and delight by customising offers
7. Terminating unprofitable relationships
8. Increase business opportunities by offering right offer at right time through the right channel
for each consumer
9. Improve communication process with each consumer
10. Reduce marketing, selling and administrative cost-Lower cost of recruiting customers, reduce costs of
sales
11. Better customer service, customer responsiveness, customer value, customer experience leading to
customer satisfaction and customer delight
12. Increased customer profitability- through profitability analysis eg SOW, ABC analysis, RFM ,etc
 CRM Constituencies
CRM implementation involves the following stakeholders
 Companies – early adopters are airlines, hotels, banks and financial services,
telecoms, retail outlets
 Customers and partners of company
 Vendors of CRM systems – Oracle, IBM, SAS, SAP sell licenses and install CRM
software on company servers, train clients employees
 CRM cloud solution providers – allows access to CRM functionality on
subscription basis through hosted CRM vendors example- Salesforce.com
 Social media players
 Vendors of CRM software and hardware supply technology such as servers,
computers, hand held and mobile devices, call centre hardware and
telephony systems
 Management consultant - strategy, business, application, technical
consulting etc .eg systems integration, choosing vendors, developing
implementation plans, project mgt, data quality improvement, process
engineering, culture change.
50 IDIC Model
 IDIC
Identification activities - Define, collect, link, integrate, recognize, store, update,
analyse, make available and secure. Data – Behavioural, attitudinal and
demographic
Differentiate – MVC, SGC, BZ, MGC
Interact
Customize – mass customization, campaigns based on value

https://www.linkedin.com/pulse/20121030131640-17102372-five-types-of-customers-
by-their-value/
Trust, Commitment, Loyalty
as important CRM
dimensions
 What is a Relationship?

 CRM is based on Relationship focus

 A relationship is composed of series of interactive episodes between
dyadic parties over time.
 Interactions to dependence and interdependence
 Two attributes of highly developed relationships are – Trust and
Commitment
 Trust

Trust happens when one party believes in the other party’s:

1. Benevolence- A belief that one party acts in the interests of others
2. Honesty – A belief that the other party’s word is reliable or credible
3. Competence- A belief that the other party has the necessary
expertise to perform as required.

 Only when mutual trust exists, parties are motivated to make

investments in the relationship. These investments ( tangible or
intangible, financial or social etc)act as exit barriers
 When trust is absent, conflict, uncertainty, lack of cooperation
Commitment
When a partner believes that an ongoing relationship with another
is so important as to warrant maximum effort to maintaining it
Commitment means partners forgo short-term alternatives in favour
of long term benefits with current partners

Commitment arises from trust, shared values and the belief that the
partner will be difficult to replace .

Highly committed relationships have very high termination costs as

some of the investments may be irretrievable. Entails high
investments and switching costs (search costs, learning costs
,psychic costs )
Why companies want relationship with
customers (WHY RETENTION?)
 Economic Reason - Cost of acquisition is usually high (Advertisements, sales
promotions, agent commission etc)
 In many industries, break even takes a long time based on the cost of
acquisition
 Intuitively…Increasing retention rate increases customer base
 As customer retention rate increase (or churn rate falls) so does average
tenure of customer
 Customers who are retained for longer time usually spend more, buy more
profitable products, and have least cost to serve
 Retained customers also spread positive word of mouth and drive referral
purchases
Retention rate & average customer tenure
Customer retention Rate Average Customer Tenure
(%) (Yrs)
50 2
67 3
75 4
80 5
90 10
92 12.5
95 20
96 25
97 33.33
98 50
99 100
WHY COS WANT RELATIONSHIPS WITH CUSTOMERS ?-
effect of customer retention on customer nos.
Year Company A (5% Churn) Company B (10% Churn)

Total Total
Existing New Customer Existing New Customer
Customers Customers Base Customers Customers Base
1 1000 100 1100 1000 100 1100
2 1045 100 1145 990 100 1090
3 1088 100 1188 981 100 1081
4 1129 100 1229 973 100 1073
5 1168 100 1268 966 100 1066

Both Companies A & B start from the same position and acquiring an
identical number of new customers each year, Company A's customer
base is 19% larger than Co. B's after 4 years: 1268 customers compared
to 1066 customers.
 Customer Satisfaction, Loyalty and
Business Growth

Customer Customer Business

Satisfaction Loyalty Performance

•Understand •Behavioural •Revenue

Customer Loyalty growth
requirements •Attitudinal
•Meet Loyalty •Share of
customer customer
expectation •Customer
•Deliver tenure
customer
value and
experience
Customer Loyalty
Customer Loyalty can be described as the tendency of a customer
to choose voluntarily a particular supplier repetitively for his
requirements
Two approaches –
1)Behavioral Loyalty- Based on actual customer purchases –
Recency, Frequency and Monetary Value (RFM), Share of
Wallet etc.
2)Attitudinal Loyalty –Based on customer’s Beliefs, feelings
towards the brand and intention to purchase.

Ideal is purchase (behavioral loyalty) backed by favorable attitude

towards the brand (attitudinal loyalty ) and emotional engagement
and not just purchase due to inertia/indifference .
Also both share a circular relationship
12 Attitudinal Loyalty Vs Behavioral
Loyalty
High Repeat Purchase Low

Strong Loyals Latent Loyalty

Relative Attitude

Weak Spurious Loyalty No Loyalty

The customer journey: revisiting the ladder
of customer loyalty
SUSPECT Does the potential customer fit your target market profile

The customer fits the target market profile and is being

PROSPECT approached for the first time
FIRST-TIME
CUSTOMER The customer makes a first purchase

REPEAT The customer makes additional purchases. Your offer plays

CUSTOMER a minor role in the customer's portfolio

MAJORITY The customer selects your company as supplier of choice .

CUSTOMER You occupy a significant place in the customer's portfolio

LOYAL The customer is resistant to switching suppliers , and has a

CUSTOMER strong positive attitude to your company or offer
The customer generates additional referral dollars or
ADVOCATE rupees through positive Word of Mouth
General Motors

 Estimated that a retail

customer is worth $2,76,000
over a lifetime (11 or more
vehicles)
 Fleet operators worth even
more
 If a GM customer shifts to
Ford or Toyota….
 Even more significant for the
top 20% of the customers
 Customer Lifetime Value
 A customer’s LTV is the net present value of the expected future
stream of financial contributions from the customer/customer group.

 Future stream - The purchase of a product, payment for a service,

remittance of a subscription fee, a product exchange or upgrade, a
warranty claim etc..
 LTV is sum of the NPVs of all such future events attributed to a
particular customer’s actions.
 The focus on net margins rather than gross margins (accounting for
expenses like acquisition expenses, cost-to-serve)
 While calculating LTV, firms must consider *current and **potential
values
Benefits of Lifetime value analysis:
 Establish the ‘TRUE VALUE’ of a company’s customer base
 Compare the performance of customers recruited through different media
or offers
 Identify and compare different customer segments / cohorts
 Help an enterprise determine how much it can afford to spend to acquire a
new customer (advertising, sales calls, referral money, free samples / offers
etc.)
 Decide how much to spend on servicing customers
 Decide how much it would be worth to retain an existing customer
(retention offers)
Economically correct way to evaluate investments on the customer
compared to simply counting immediate sales
Link between marketing and CLV
Digibank referral offer: How to decide on
How much to spend on consumers?
 Calculating CLV

 Current and future potential

 Estimates of LTV look to the future (potential value) because….

Revenues grow Higher prices

over time paid by existing
Cost to serve Referrals customers
lower for existing generated
customers

 One industry in which potential value can be an important differentiator is the

airline business*.
HARVARD BUSINESS REVIEW – Articles
on CLV
https://hbr.org/2014/07/how-valuable-
are-your-customers

https://hbr.org/2017/04/what-most-
companies-miss-about-customer-lifetime-
value?referral=03758&cm_vc=rr_item_pa
ge.top_right
Computing CLV – Things you need to know while calculating

For existing customers For new customers

• What is the probability that the customer
will buy products and services from the
• (Additional) What is the cost of acquiring
company in the future, period-by-period?
the customer?

• What will the gross margins on those

purchases be, period-by-period?

To bring future margins

• What will the cost of serving the customer back to today’s value
be, period-by-period?
• What discount rate should be applied to
future net margins?

• Probably the most straightforward way to estimate a customer’s potential value is

to look at the range of LTVs for similar customers and then to make the arbitrary
assumption that in an ideal world it should at least be possible to turn lower- LTV
customers into higher-LTV customers.
Calculating CLV: CLV computation for
• In year 0, the company spent
cohort of customers $10 million in marketing
campaigns to generate new
customers

• The result was 100 000 new

customers added to the
customer base at an acquisition
cost of $100 per customer.

• In year 1 the company lost 40

per cent of these new
customers, but the remaining 60
per cent each generated $50
contribution to profit………

• It takes nearly five years to

recover the investment
of acquiring this cohort

• profit per customer rises over

time

• Customer retention rate rises

over time
Drawbacks in calculating CLV

 Word of mouth referral

 CRV
 In telecommunication, it was found that those with highest personal CLV
did not have the highest CRV.
 It was those with mid-level CLV that had the highest CRV
A simple way to calculate CLV/LTV
 (r/1+ i-r )is referred to as the margin
multiple, and is determined by both
the customer retention rate ( r ) and
the discount rate ( i ).
 For most companies the retention
rate is in the region of 60 to 90 per
cent.
 The discount rate is applied to bring
future margins back to today’s value
 If you have a customer retention rate
of 90 per cent and your discount rate
is 12 per cent and your customer
generates $100 margin in a year, the
LTV of the customer is about $400 (or
$409 to be precise; i.e. 4.09 times
$100).
Find the Answer

The Average revenue per customer of a e-

commerce store is 1550 and the average cost is
1375. The retention rate is 75% each year. The
discount rate applied is 10% .
What is the margin multiple
Calculate CLV.
Using Margin Multiples
Assessing the Value of a Loyal
Customer
Must not assume that loyal customers are always more profitable than those
making one-time transactions
Costs
Not all types of services incur heavy promotional expenditures to
attract a new customer
Walk-in traffic more important at times

Revenue
Large customers may expect price discounts in return for loyalty
Revenues don’t necessarily increase with time for all types of
customers
When companies don’t want relationships
with customers
 Exit costs high (Heavy investments to serve)
 Resource commitment expected. Eg. from franchisee, dealers
 Opportunity cost (low cost airlines, discount retailers)
 Company may not have customer orientation – Nationalized banks, post office etc.
 Why customers want relationship with
suppliers
 Reduces perceived risks – performance ,physical, financial, social, psychological
 Product complexity – Electronic goods
 Product strategic significance (school/college)
 After sales service
 Benefits of recognition, personalization, power, status (gold card), affiliation (club)
 When customers don’t want
relationship with suppliers
 Fear of dependency and opportunism such as locked contract
 Lack of perceived value
 Loss of confidence in supplier
 Customer lacks relationship orientation (shopping for discounts)
 Rapid technology changes ,loss of flexibility
 Customers may want relationship with say financial advisor or doctor But
may not see good reason for relationship with FMCG company
Discussion

 https://www.businessinsider.in/business/telecom/news/reliance-jio-beats-
vodafone-idea-but-falls-well-short-of-airtels-revenue-growth-in-the-
september-quarter/articleshow/78955325.cms