CUSTOMER RELATIONSHIP MANAGEMENT

HOW BUSINESSES MEASURE PROFITS?

AHMER BUTT
June 1 - 7, 2009

INTRODUCTION

There has been a significant shift in business focus, from product sales and profits to customer profitability and customer retention. Because of this shift, there has been a corresponding shift in how businesses measure profits and the investments, which support or even drive these profits.

A standard profit and loss statement shows revenue, expense, and profits. In this type of model, marketing communication costs are an expense. Measuring the expense of marketing communication in the context of customers, promotions, and results provides a model for treating the expense as an investment. Specifically, linking revenue and gross profits to the investment provides a clear picture as to the return, providing ample justification for and an opportunity to improve the return.

Within this framework, an organization can effectively focus efforts on reducing marketing communications costs and improving revenues. Positive results in these areas in turn improve the return on investment (ROI) and the profitability of the business.

In addition, the model points out strategies and tactics, which decrease the cost, associated with marketing and hence improve revenue. It also addresses the business challenges that would arise associated with the change and delineates methods, which counter them, and at the same time makes a huge positive impact on the results.

This paper focuses on the opportunity represented by marketing and specifically marketing communications, in improving customer profitability and retention.

1 CUSTOMER FOCUS

The current industry focus is on developing a customer-centric strategy for improving customer relationship management (CRM). This focus represents a shift from:

Mass to individual.

Acquisition to retention.

Product to customer.

Product function to customer experience.

The reason why this would make sense is that the traditional profit and loss statement recognizes only revenue and expense. Improving profits and profitability in this view involves increasing prices or unit sales, or reducing product cost, marketing expense or overhead.

The annual investment in promotional efforts and advertising is viewed as "Marketing Expense." In a narrow perspective this investment is an expense, and profits could be improved simply by increasing prices or reducing marketing expense.

How can these expenses be reduced without losing customers because "Marketing" is intended to drive purchasing. Measuring success would require relating customers and customer purchases to the expense.

2 ACTION STEPS AND RESOURCES: WHAT CAN BE DONE TODAY?

Exploiting the opportunities provided by the marketing investment model requires a plan, which integrates customer-focused goals and strategies with the infrastructure, required for realizing and maximizing potential returns.

2.1 CUSTOMER-FOCUSED GOALS AND STRATEGIES

Two seemingly inconsistent goals, increasing revenue while reducing cost, can be accomplished through a customer-focused strategy. The strategy takes three logical forms:

Customer maintenance, inducing larger and more frequent purchases.

Retention, maintaining the relationship longer.

Expanding wallet share, capturing more of the customer's purchase activity.

2.2 MAINTENANCE

The fundamental premise in maintaining current customers is activation and continued activation, the ability to increase purchase frequency and purchase value. This requires an understanding of current customer segments and purchase patterns. For example, consider that the first activation statistic identified for a campaign was 1.5 million people who had not purchased in a year, yet they continued to receive the same mailings on the same schedule as active customers, at an annual cost of $6 million.

In this example, the next step would be to develop unique and creative messages and offers, which would appeal to such groups, particularly those who have not purchased. In this case, a reactivation promotion and discount offer turned out to be very successful. It can be just as effective to target the most likely to respond with a higher frequency of promotions. Rotated offers include market basket, cross-sell, and up-sell approaches as attempts to capture higher purchase value and wallet share.

2.3 RETENTION

Retention can provide a significant incremental source of revenue. It is also reasonably easy to identify and quantify, through statistics such as cancellations, account closures or policy non-renewals. To be cost-effective, these actions involve predictive modeling. Behavior patterns must be evaluated for signals indicating loss of interest or interest displaced by a competitor. Timing of response offers must also be evaluated, primarily through testing incrementally shorter periods between promotions. For example, a group of recent account closures could be selected for account resumption, and response correlated with number of days since account closure. Results can be retested periodically.

Further opportunities exist by modifying and taking advantage of when and how communications are directed. Timing opportunities include seasonality, new product introductions, and customer life events ("new movers" is a classic life event category). Other opportunities include promotions based on usage patterns, response and non-response, follow-up, and particularly trigger events.

3 CHALLENGES OF BEING CUSTOMER-CENTRIC

The tactics discussed above represent excellent opportunities for improving customer experience, company profits, and profitability. However, the increase in complexity and demands on resources within the company are significant. The CRM approach results in a much higher volume of communications to smaller customer segments. Managing the planning and delivery of such an increase in the volume of marketing communications, or campaign management, becomes a significant challenge.

4 MEETING CHALLENGES

Improving information access, consistency of communications and tracking performance of an increasingly complex customer marketing process is a daunting challenge. Different organizations have met this challenge through the introduction of specific means, which are discussed below.

4.1 CONTROLLING MARKETING PROCESSES THROUGH MARKETING AUTOMATION

Marketing automation is a marriage of business processes with information technology, using data management technology to facilitate and improve marketing strategy planning. Marketing automation provides the components which enable a business to control the entire marketing process, from extraction and integration of relevant customer data from multiple operational data sources, to development of appropriate analytical and summary tables, to management of campaign and campaign response information, and finally to measurement of marketing effectiveness over time.

Marketing automation accomplishes these objectives through data management, predictive analysis, campaign management and response management, including email delivery. Controlling the process allows improvements in productivity and cost management. Sophisticated functionality can be provided while retaining simplicity for an effective time-to-market ratio. This empowers marketers with the ability to devise and execute more effective, and more complex, marketing communications.

Utilizing marketing automation tools lets you successfully plan and deliver increasingly targeted campaigns, in higher volumes, while simultaneously providing significant productivity and information benefits. This is how the customer-centric challenge can be overcome.

4.2 DATA AND ANALYTIC MANAGEMENT

Creating a customer-centric view requires integrating information from multiple locations within the company, with suitable transformations to ensure one consistent view of the customer throughout the company. Software, which manages the extraction, transformation and loading (ETL) process, must not be limited in the scope of what data and platforms can be accessed, particularly where the data could be located on legacy systems, whose replacement cost is far too expensive.

A clean view of customers and customer attributes is necessary for effective targeting. It is essential to enforce consistent standards in the ETL process, particularly through data cleansing and standardization.

As a data warehouse grows its capability as well as complexity increase over time. Use of a tool like SAS, which provide metadata and visual icons on the workbench support the development activities. The Customer specific information resulting for the process leads to segmentation of customers, which leads to historical views of segments over time. Web-based viewing tools create the opportunity for online drill-down analysis based on underlying multi-dimensional online analytical processing (OLAP) tables. New channels, such as the Web and email, drive a requirement for source data marts, expanded contact history, and new summary tables for evaluating results.

Trigger events represent a key opportunity to closely align promotions with customer events such as purchases. For this to be at all possible requires timely integration of customer activities, purchases, and inquiries, into the data warehouse. Integrating customer-driven events also provides the opportunity for more effective and more up-to-date models.

Similarly, integrated response, as well as campaign management information, provides the unique opportunity to differentiate communications between responders, non-responders and the campaigns themselves. In turn, models based on response can be integrated into the campaign environment, further refining the target audience and improving the revenue to cost ratio.

4.3 CAMPAIGN MANAGEMENT

Campaign management captures and improves much of the process of planning, developing and executing campaigns.

Campaign Process Marketing Automation Opportunity
Review campaign time line. Improve campaign planning.
Define campaign and communications. Improve tracking.
Define audience. Improve selection targeting.
Review audience (analysis). Improve productivity
Prioritize. Improve communication.
Split cells. Increase personalization.
Define export template. Improve delivery reliability.
Execute campaign (scheduler). Capitalize on opportunities.
Evaluate results (reporting, analysis). Improve communication timing.

Each step in the campaign process is a marketing automation opportunity, from providing campaign information in one central location, to enabling campaign prioritization, to delivering results in a consistent, easily available form. These capabilities provide fundamental as well as sophisticated functionality required to successfully pursue aggressive communication strategies, which are at the root of effective customer relationship management.

4.4 COST MANAGEMENT

Essential to success is the ability to capture, store, manage, and recall campaign attributes and performance metrics in a database, referred to here as the 'Return on Promotional Investment' database.

This database is the foundation of an organization's ability to differentiate successful and less successful communication efforts. If organized appropriately as a hierarchy, including campaign month and channel, the database will also provide a source for immediate performance variance analysis. The database will not only track specific campaigns, but it will also provide tracking of June performance versus prior year June, telemarketing current year-to-date versus prior year-to date, comparison of channels, creative offers and promotional offers.

If appropriately stored as a multidimensional table, Web-based drill-down functionality can be provided, creating a flexible, easy-to-use tool for marketing analysts to evaluate variances in performance, such as higher response but lower revenue or profits. More of the same benefits can be derived if the business metrics are available in the database.

4.5 REDUCING BUSINESS PLANNING RISK

Improved information availability fundamentally contributes to minimizing business risk. The consolidation of campaign planning and response information provides a resource for more effective business planning. The detail of actual expenses and response information, together with customer segmentation information, can provide a more comprehensive and realistic business plan. This can improve executive understanding of ongoing performance and provides an early warning mechanism.

5 CRM RESULTS

Implementing a CRM strategy which focuses on maximizing customer value and optimizing promotion expense can have a dramatic impact.

Data cleansing - 3% to 5% impact on cost.

Time to market - from weeks to days.

Reduced promotional cost.

Improved response and revenue.

Reduced customer attrition.

Better visibility into results and customers

The customer centric data warehouse which results as an implementation of a CRM system provides rapid access to information and increases the performance of current marketing campaigns as well as their analysis and customer scoring for future campaigns. This lets marketers build on their previous success and results in increased return on campaigns and reducing expenses.

6 MEASURABLE ROI: WHY CRM INVESTMENTS MAKE SENSE?

The foregoing capabilities are available today through such marketing automation suites as "SAS Marketing Automation". Such far-reaching capability requires an investment, and the following discussion demonstrates how important it is to make this investment, based on the significant potential return.

6.1 ANALYTICAL MODELS

The process of analysis involves segmentation or differentiation of the customer population into groups with some commonality. One dimension common to these groups is their propensity to respond to promotions. Based on previous promotions and response information, predictive models may be able to identify customers more likely to respond to a promotion.

Analysis can also support the differentiation process itself, in being able to identify potential churners or recipients more likely to respond to an up-sell or other offer. The key here is that without the application of analytics, a campaign would have to be directed at all or most customers, and may be unlikely to be profitable with that broad a distribution.

Hence, analytics provide an opportunity for both cost reduction and new campaign opportunities.

6.2 CAMPAIGN MANAGEMENT

Campaign management provides many benefits as described earlier. The following list summarizes most of these benefits as they would apply to investment justification. Most of these opportunities increase response by sending the right message to the right person at the right time using the right media. Other capabilities provide the ability to increase the number of campaigns by managing:

More frequent communications to smaller groups.

More effective choice of communication channel, improving response.

More complex communication timing based on scheduling and automated delivery, including trigger-event scheduling and delivery based on response or non-response

All of the above should contribute to a more effective, and longer, relationship with the customer. Thus, campaign management should provide increased revenue through higher purchase frequency, higher purchase value, increased volume of campaigns and lower cost relative to purchase.

It is perhaps worth noting that business growth can be initiated through improved response: as response and customer lifetime value improve, so too does the return on the initial customer acquisition investment, thereby justifying an increased outlay in new customer promotions.

6.3 PRODUCTIVITY

The keyword in marketing automation is obviously automation. While automation of communication delivery provides an opportunity in and of itself, it also facilitates the planning and execution process, removing manual, time-consuming actions and maximizing the productivity of key analysts and managers.

In data management, warehouse administration and automated ETL processes maximize the reliability, availability and timeliness of information. This is the information which drives the analytical and campaign management processes.

Automating the process of analysis and model development is very challenging, as much of the activity takes place in the mind of the analyst as he or she develops samples of the customer database, analyzes variable distributions and tests a variety of modeling approaches.

SAS recognizes the key steps in the process (Sample, Explore, Modify, Model and Assess) as well as the underlying actions. SAS captures these processes in the form of icons, which can be applied to an analytical workbench or palette. While eliminating the need to write code altogether, the environment is still very flexible, allowing user-developed processes to be easily incorporated in a model.

Improving the productivity of modelers and analysts provides more time to improve existing selection models as well as pursue additional models which are the root of new campaign opportunities. Such models can transform otherwise unprofitable opportunities into profitable ones.

Automating the reporting process, including Web delivery as well as reformatting data storage for OLAP capabilities, provides the opportunity for these individuals to pursue new campaign opportunities and amount of time spent on campaign performance analysis and segmentation analysis is reduced.

Productivity also means the same amount of work in less time, which translates twofold: improved time to market means faster recognition of the revenue stream. It also means that more opportunities can be pursued in the same time frame with the same resources.

6.4 REDUCED BUSINESS RISK

Integration of information improves the budgeting process, performance reporting, and the organization's ability to respond to changing economic situations. Another view of the same process is provided by the link between productivity and improved access to business-relevant information: reduction of business risk.

However, the same information and processes which have been discussed here in the context of more effective and profitable marketing in turn can be exploited to provide better understanding of the business itself, thereby reducing risk.

7 CONCLUSION

This paper demonstrates that the comparatively recent shift in business focus, from product focus to customer focus, represents a significant opportunity for businesses to improve profits and profitability. To capitalize on this opportunity requires adopting a financial model which relates customer profits to the marketing investment. Adopting such a model and performance metrics empowers the business to identify and further exploit positive promotional opportunities.

In so doing, a dramatic increase in communication complexity will arise, a complexity which will require improvements in the data management as well as the analytic and campaign management infrastructures. Improving the infrastructure by adopting efficient marketing automation strategies creates an opportunity for improving customer knowledge, managing more frequent and more complex campaigns, and significantly increasing productivity.

The boost in sophisticated functionality and productivity will translate directly to an increased frequency of campaigns, campaigns which are more customer focused and which increase the likelihood of higher response, profits and profitability. The resulting improved information will further enhance business planning, improving the likelihood of achieving plan goals and resulting in a corresponding reduction in business risk. These factors make investment in CRM-enabling capabilities a distinct business opportunity.