profitability through CRM
By RONALD S. SWIFT
June 03 - 09, 2002
The most powerful effect of Customer Relationship
Management is on the bottom line. Unfortunately, many people see CRM
as a technology issue, when in fact it is about economics — profits
and business effectiveness. The right technology is essential, of
course, but only to serve the ultimate end of developing a more
effective business. Otherwise it can wind up, as The Rolling Stones
might have put, "telling me more and more, about some useless
information, supposed to try my imagination" and contributing
little to the bottom line.
CRM must provide answers to real business problems.
The power of information technology is such that it can go on
indefinitely documenting such self-evident bits of demographics
correlated to behavior, as the fact that few senior citizens buy rap
music, when what the company needs to know is why it is losing
customers to competitors. The proper use of CRM begins with
identifying opportunities that can be achieved — even hiring Art
Linkletter for endorsement purposes isn't going to sell rap music to
seniors — and then developing realistic offerings, communications,
interactions, and sales orders.
Decades ago, department store magnate John
Wannamaker made the oft-echoed observation that half the money he
spent on advertising was wasted, but he didn't know which half. That
can be said of many business initiatives, but with modern parallel
analytical databases and CRM, it is finally becoming possible to know
which "half" is the winner and which the loser. These
technologies and a new set of marketing and discovery processes can
bring companies much closer to "one-to-one marketing".
CREATING "MICRO MARKETS"
At Royal Bank in Canada, managers knew that a
certain percentage of their customers and products were unprofitable,
but their systems limited their knowledge of who these customers were
and why their transactions were a drag on profitability. By using
analytical databases and CRM, the bank created
"micro-markets" to differentiate customers and offer
distinct products, rather than offering all customers the same
products at the same prices. Other banks have reduced the interest
rate paid to customers by one-tenth of one per cent without changing
the total amount of deposits, saving millions of dollars each year.
These banks are learning to re-invest high returns
in an integrated "single customer view" info- structure.
Many of these "intelligent" companies are reporting over 40%
conversion rates on their offerings to customers and also an ROI (on
CRM) of over 200% per year and growing exponentially.
Once a customer relationship problem or opportunity
has been defined, such as profiling high value/high risk customers of
long distance services, the process of CRM may involve mining through
data collected from various sources and systems. Data is analyzed for
meaningful patterns about a customer's behaviors to derive valuable
profiles that can be used in a target market campaign to retain them.
These campaigns involve deployment through a customer care system and
the results (both in terms of the campaign and order provisioning)
feed back into the data warehouse or "knowledge repository."
This requires carefully transforming all of the
data from the many technologles touching CRM, such as ordering,
billing, collections, servicing, customer inquiries, product
enhancements, transactions or interactions with the company, all
customer care interactions, and even (in some leadership companies)
recording the denials of offers to customers or prospects.
GENERATING ACTIONABLE LEADS
Effective CRM is driven by an analytical or
business intelligence process, which must be fed with both internal
operational and, increasingly, external data sources. To be
enterprise-enabling, CRM must cut across management functions and
operating activities to generate "actionable leads" to
resolve or reduce such problems as high-value-customer churn. Poor
quality integration of CRM strategies, policies, architecture,
databases, and technology standards, or use of existing operational
platforms can lead to inconsistent results.
CRM solutions must bring a broad range of
actionable analysis and modeling capability based on events or rules
that drive the business. By saving and re-using these analysis steps
as well as their results, managers gain understanding of actions
already taken and those to be taken. Additionally, CRM must have a
cross-channel view to understand the whole customer, which includes
all transactions, interactions, and customer preferences, in other
words, "knowing the customers."
The essential criteria that differentiate lagging companies from
those leading in CRM (e.g., markedng and interactive commerce) are:
• The ability to manage all aspects of a customer
• Regulating frequency and quantity of contacts
(and pre-determining quality)
• Privacy-enabling the integrated customer
database and managing permissions (and storing all opt- ins and
opt-outs on a detailed basis)
• Personalizing offerings and messaging based on
customer transactions, interactions, advice, surveys, queries, and
To successfully achieve
• Be able to modify rules to optimize each
customer communications stream
• Integration and manage across all channels —
right content by touch point
• Capture learning based on all interactions (and
associated analytical models)
• Build two-way interactions to sell, service, or
learn the customer's needs/issues
CRM offers a radical departure from traditional
mass marketing. Instead of one-size-fits-all promotions and customer
approaches, CRM allows for personalization to dramatically build
customer loyalty, achieve operational and servicing goals, and gain a
sustainable competitive advantage.
Companies will gain the strategic and economic
benefits associated with CRM by integrating their organizational
capabilities — structure, processes, skills, and metrics — into
the added intelligence from CRM technologies to either confirm or
change decision making criteria.
One insurance company has documented a valid
relationship between customers who purchased insurance policies and
employment length. Another financial institution found that their most
profitable customers were those with more than five different
financial products. Airlines are now correlating all mileage data to
the actual financial data to identify their most profitable customers
(rather than those with the most mileage). An entertainment company is
performing cross-market analysis and making personalized offers to
their best customers (and achieving major ROI and frequent visits).
Unless this new information is imbedded in business
processes and used to drive CRM operational sales activities or
selecting campaigns, it remains useless. Without the necessary skills
to transform these new "opportunities" into a business
action (e.g., customer interactions), the mined information adds
little value. To realize the full impact of this new approach to
target marketing, business managers are becoming more computer and CRM
literate, particularly where decision-making authority is moved to the
marketing/sales/services/ product manager level. Many successful
companies bring them into the planning/implementation process.
Marketing processes and techniques are evolving to
take advantage of flexible CRM infrastructure, requiring stronger CRM
analytical skill levels and experience in the marketing organization,
including rewriting job descriptions, adjusting salaries, and other
CRM technologies are "different" than
traditional operational or process automation technologies and
applications. Data warehousing, unlike its operational brethren, is an
approach that provides the capability of "asking any question, at
any time, of any combination of data, with complex correlation,"
offering great potential for finding new knowledge.
Massive parallel processing and data warehousing
offer these new possibilities of bringing customer intimacy,
operational efficiency, and product superiority to new levels. Early
investors in the financial services industry found swift ROIs, often
much higher than for traditional technology investments. Most recouped
their investments in one to four years, but the real issue was not the
break-even point but transforming their competitive approach to their
markets. Once accomplished, these transformations could yield ROIs 50
times greater than normal ROI, on an entirely dlfferent order of
magnitude from such traditional ways of building revenue as
introducing new products or branches.
Gains were registered most quickly in sales and
marketing, with profitability, debt management, distribution, and risk
management following closely behind. The common factor was the speed
with which the organizations were able to react to changes in the
market. Time and again, superior information enabled them to identify
a market, enter, and take market share — all before their
competitors had understood what was happening.
SPEED IS OF THE ESSENCE
Windows of opportunity open and close all the time.
All too often, firms see one, but by the time they've organized an
approach to it, conditions have changed and expensive campaigns
prepared for one set of conditions are launched into another without
success. CRM information engines permit companies to recognize and
move instantly to exploit changes in market conditions. And because
historical information offers a guide to future behavior, companies
can build a high degree of prediction into their operations by
capturing marketing conditions and people's behavior and then
correlating them to actions under specified conditions. Swift access
to essential information also cuts the time needed to develop
applications in response to quickly changing conditions.
Detailed knowledge of each customer's past behavior
can be quickly turned into intelligence about how they will react to
the competing offer. Armed with that knowledge, counter-offers
tailored to the needs of each segment are presented.
Beyond marketing, many financial organizations have
found they have been able to improve their portfolio management as
they discovered behavior occurring after the initial transaction that
significantly changed the complexion of their spread on individual
loans. They were able to quickly restructure and re-price these loans.
An airline saved enormous cash flow and future
aircraft investments by signing a code sharing agreements, based on
their projections of future business (e.g., passenger and cargo) over
the next 330 days.
Ease of access to essential information
substantially boosts productivity, allowing companies to do more with
fewer people. Business intelligence, combined with CRM analytics and
actionable information, provides ongoing accelerated ROI.
Organizations provide many services to their
clients, and strive to introduce new ones, in order to stay
competitive. However, some of these are of little value to customers
and are seldom used. The detailed information in the CRM data
warehouse allows such marginal performers to be quickly identified and
eliminated. One company managed to save $1 million per service.
Similarly, better understanding of the fees for services points to
ways to fine-tune fee structures to generate more income.
The first question asked about a new product launch
is: "Did it succeed?" The sooner that question is answered,
the sooner companies can make their next moves. Those moves can range
from stepping up product deliveries to meet unanticipated demand,
fine-tuning marketing to correct for weaknesses, or even cutting
losses in a timely — and economical — fashion. Equally important
is swift knowledge of where business is coming from. "Are we
simply cannibalizing our other products? Are we cutting into
competitors' markets? If so, which competitors?" This kind of
knowledge helps direct the CRM campaigns to address one's own and the
Organizations like banks and airlines know that
most of their customers are, at best, only marginally profitable and
that a disproportionate share of their profits come from a relative
handful of customers. Identifying and catering to them with loyalty
programs makes retention a vital task. Additionally, among the firm's
other customers are those with the potential to generate more profits
who can also be singled out for special attention. Superior attention
to customers' needs keeps them happy, minimizes defections, and even
ensures that those who do defect will be receptive to appeals to
Recently, our team has developed several approaches
to predicting benefits, or ROI, on CRM investments. Some of this
applied learning and out-of-the-box thinking uses a methodology for
determining ROI from normative information about the business.
An example of ROI can be an increase in customer
retention and/or an increase in customer net present value (NPV). NPV
also provides an initial financial view leading to determination of
Lifetime Value (LTV). The highest level of customer profitability is
achieved from the "loyal customer," who is retained for long
periods, and also the customer who brings more and more business (e.g.
product volume increases, up-sales ordering, version reordering,
cross-selling orders, new product buying, or referrals).
SIX BASIC BUSINESS ASSUMPTIONS
Figure I shows the six basic business assumptions
for initially determining NPV. There are numerous methods to
accomplish this task, but this is an easy method we use in my CRM
Workshops. Non- Financial managers can easily see the affects of CRM
and changes to their investments in marketing to their customers.
Begin with the "base example" in column
A, showing the company's volume of customers, followed by statistics
on the annual revenues, cost of acquisition or marketing and
administrative costs, the volume of churn, years of retention, and the
estimate of margin on sales. These facts must be known. Ultimately,
the most important calculation is about each individual customer
profitability, so that each customer has a "known factor" of
profitability, and subsequently a projection or determination of Life
Time Value (LTV).
In column B there is a reduction of churn from 24%
to 20% resulting in additional NPV of $4 million. In column C, there
is the original churn rate of 24%, but a reduction in average
acquisition cost by 10% to $450 per customer, and this itself achieves
an even bigger result of $15 million. Is it worth more to the company
to save money on mailings, collateral, contacts, sales calls,
telemarketing, and advertising, or in reducing churn by 4%? Or is
there another important factor that may be higher on the scale of
impact and ROI?
In Column D, we again use the original 24% churn,
but reduce the acquisition costs (as was done in column C), and also
increase the effectiveness of marketing and contacting customers by
$220/customer per year. This revenue increase lifts the NPV another
$36 million from column C calculations, or $51 million increase over
the base in Column A.
In Column E, we maintain the benefits of Columns C
and D, and emphasize retention. By adding one year to a customer
relationship, the NPV doubles to $177 million.
In Column F, we maintain the benefits of Columns C.
D, and E, and now reduce the churn by 25% to the level of an actual
18% churn per year, with a result of $233 million NPV.
Clearly, churn is a most important factor, but
length of relationship or retention creates a greater magnitude of
benefit. Focusing on retention may be the most rewarding of all of the
CRM activities over the short and long term.
Generally, the values presented here can be
achieved through actionable information and people using that
information to interact with customers on a timely and meaningful
Similarly, by using "behavior scoring" to
develop propensity buying models, companies can drive use of their
most profitable products. In one case, cross-sell ratios tripled. In
another, a bank discovered how to increase loans without increasing
Anyone who has ever wondered how they wound up on a
mailing list understands the futility of most direct mail campaigns.
By correlating customers to products, marketers can cut the quantity
and cost of mailings, and increase response and upsell rates.
Indeed, the data warehouse is invaluable in both
customer and channel management. Changing the structure of the
channels without losing business has always been a tough nut to crack.
Customers tend to resist change, and they must be managed with care.
Detailed customer information allows planners understand who stays and
who goes when changes are made and when customers can use an
alternative location or when they would be driven to competitors.
MATURATION THROUGH THE STAGES OF GROWTH
Once the CRM process has been initiated, developing
and integrating the customer knowledge info-structure is required to
support the new value-chain environment. Many business process
re-engineering efforts have failed to achieve their goals mainly
because they did not have the information for the new process or the
info-structure to support the decisions and actions within the new
processes. As suggested in the book Accelerating Customer
Relationships (Prentice Hall PTR, 2000), CRM implementation goes
through a five-stage process. In the entry or learning phase, the
company adopts and learns to work with the basic information and does
reporting and some analysis. In the mature stages, you learned to
tailor these applications to the specific needs and preferences of
your customers — both active and potential customers. When it
reached the active decision level (which is a world-class use of data
warehousing), the knowledge system became fully integrated using the
most effective designs, components, inventions, and previous
investments in software and relationship technology into automatic
responses to real-time events. In the most mature stages, a company
uses the data warehouse as an "active" resource and drives
ongoing interactive analytics to drive CRM.
CASES OF CRM REALITY
CRM is many times driven thought leadership and
effective transformation of information and processes to support the
enhanced methods of marketing, sales, communication, fulfillment,
delivery, and servicing of customers. Naturally, these essential
support characteristics are supported by software and analytical
techniques, but let us not be confused by the introduction of spiffy
sales force automation systems or new levels of electronic
communication facilities for customers.
Successful implementations of CRM (and the
associated workflow activities) require managerial decision-making
information and measurements to support on-going refinement of the
processes, the tasks, the messages, the techniques, the scripts, the
brochures, the mailings, the interactive experiences, and
THE LOWE'S COMPANY
The Lowe's Company has excelled in its
implementation of a data warehouse with CRM analytical models and
tools to move from pure product management in their stores to more
effective customer-focused marketing and communications. Lowe's has
embraced customer "event-driven" marketing, increased the
amount purchased per customer visit, and increased traffic of
new-store openings (they open a new store about every five days).
Lowe's has estimated its initial payback/ROI to be about 265% with an
incremental margin on the CRM marketing programs of nearly $40
million. In December 2000, the National Council of Database Marketing
named Lowe's the outstanding firm in the United States currently
performing CRM and new marketing/sales programs.
NATIONAL AUSTRALIA BANK
National Australia Bank (NAB) has been a leader in
quietly developing highly sophisticated analytical software and
modeling techniques to internally generate hundreds of thousands of
"leads" and to communicate customer opportunities to
thousands of its bankers. The "relationship optimization"
CRM "LEADS" System provides the ability to maximize customer
lifetime value and the ability to coordinate all customer access
channels. NAB provides enabling information to: 1)
cross-sell "relevant" products and services to customers; 2)
provide a single, consistent view of customers throughout the
see all communications, contact, and interaction history across all
channels within the bank, 4)
integrate front-end systems to simplify contact for users; 5)
provide a consistent message, brand, and experience to customers
across all channels; 6)
drive higher retention rates, while 7)
reducing marketing costs by only targeting those customers with a
propensity to buy.
In addition, a massive number of new deposits and
investments has been achieved for several years from its prospects and
customers, gaining advantage on its competitors through insightful and
timely contacting and providing knowledge of what benefit would be
achieved. The combination of all of these CRM processes and enablers
has resulted in an increase in profitability of 19.8% during year
PelePhone, an Israeli mobile telephone company, has
achieved remarkable results in five areas of concern to its yearly
profitability and customer value. In less than one year, PelePhone
reduced its churn rate significantly, developed new offerings for
individual high value customers, utilized segmentation (and profiling)
to enhance the marketing to select customers, reduced and resolved
complaints and some dissatisfaction within certain areas of the
customer relationships, and increased its sales force productivity.
Federal Express (FEDEX) is now using a
sophisticated data warehouse to capture all of the transactions and
customer requirements throughout the Federal Express worldwide system.
Using business intelligence and customer-focused analytical techniques
this world-class leader continues to exceed most customer's
expectations and also provide services before its competitors.
3M has merged numerous decision support and query
systems into one enterprise data warehouse for making decisions on
products, publications, services, resource allocations, and customer
fulfillment. 3M now globally delivers "one face, one voice"
through online Web access for over 10,000 3M customers, channel
partners, markets, and supply chains across 50 business units. This
info- structure of knowledge allows internal and external managers to
analyze over 50,000 products. This process and business intelligence
drives the initial efforts toward automating Customer Relationship
Management while accelerating the corporation's profitability and
customer satisfaction levels.
Continental Airlines is now using CRM Analytical
software and a sophisticated data warehousing and knowledge
info-structure to determine customer profitability, aircraft resource
utilization, appropriate and competitive pricing, enhanced marketing
activities, and customer satisfaction improvement. The use of these
CRM processes and advanced decision support technology has created a
new base of knowledge for the management team to succeed in competing
and also in retaining highly valuable customers.
Sam's Club (a division of WalMart stores) has been
utilizing CRM analytical solutions to retain and grow its customers,
which were originally thought to be mostly residential families. Sam's
has developed its business and its stores to support small, medium,
and large business with products and supplies, along with the home
Sam's, which is traditionally a customer-seeking
end point for discounts, has developed outbound marketing
communications that have increased its business by billions of dollars
yearly, as well as generating high profitability, through
"knowing its customers" and meeting customers' changing
needs. This is another company that has quietly initiated CRM
processes and outbound customer communications to pass its competition
and also develop new customer relationships (through member
Harrah's Entertainment (Memphis/Las Vegas)
increases customer loyalty and retention across its 20 nationwide
facilities. Harrah's uses a CRM data warehouse as its "marketing
workbench" to track approximately 20 million guests visiting any
of Harrah's casinos, restaurants, hotels, or entertainment locations.
Harrah's award winning data warehouse, award winning "Total Gold
Customer Loyalty Program," and unique patented WIN network drive
• analyze customer preferences
• predict likelihood to visit
• predict desired services and rewards
• identify cross-sell opportunities
• maximize relationship value
• manage promotions and mailings tailored to individual preferences
• maintain information on personalized offers and collect positive
and negative responses
• drive marketing campaigns that have effectively generated over 20%
customer growth in profitability
• focus its customer investments in the most profitable customers
While the rest of the casino and entertainment
industry has suffered declining valuations of their stock/equity
value, Harrah's has increased the value to the stakeholders,
stockholders, and customers.
Data warehousing and CRM do not implement
themselves, however. Organizations that do not use proven
methodologies, develop the strategic objectives to manage (or measure)
profitability, or develop a culture that embraces CRM risk frustration
and failure. Experienced consultants clearly make a difference.
Success, on the other hand, compounds itself. Companies in many
industries, including banking, insurance, communications,
manufacturing, airlines and retail stores, and governments as well,
have achieved high rates of ROI by implementing CRM through a
customer-centric data warehouse. The value of CRM only increases with
age, as relationship technologies are refined and set to work on an
ever-growing volume of highly detailed historical customer transaction
and behavioral data.
The lesson of the early experiences of
sophisticated CRM operations is simple: those who do not master the
art of detailed information will be mastered by those who do. Those
who understand the info- structure requirements and really implement
the single view of the customer will succeed.
The successes of tomorrow are generated by
accelerating customer relationships today. The future successes are
achieved through thoughtful action and re-investments in knowledgeable
processes, people, tools, ideas, actions, and customer information.
FOR MORE INFORMATION
Ronald S. Swift's book, Accelerating Customer
Relationships, is highly regarded by university academicians,
management consultants, and industry gurus. During the book's first
six months in print, it achieved high ratings from readers on
www.amazon.com and was favorably reviewed by many business
publications. Over 25 case studies are included in this hallmark book.
Figure 1 —
Customer Value in Net Present Value (NPV) from CRM actions
Examples of CRM & Retention Value
Add 1 Year
affect customer net present value
Total number of
voluntary churn rate
revenue per customer
lifetime - years
Net Present Value (NPV)