Chapter objectives

By the end of this chapter, you will be aware of:

1. four major perspectives on CRM: strategic, operational, analytical and collaborative

2. several common misunderstandings about CRM
3. a definition of CRM
4. the six constituencies having an interest in CRM
5. how important CRM issues vary across industries
6. five generic models of CRM.

Introduction
The expression customer relationship management (CRM) has only been
in use since the early 1990s. Since then there have been many attempts
to define the domain of CRM, a number of which appear in Table 1.1. As
a relatively immature business or organizational practice, a consensus
has not yet emerged about what counts as CRM. Even the meaning
of the three-letter acronym CRM is contested. For example, although
most people would understand that CRM means customer relationship
management, others have used the acronym to mean customer
relationship marketing.1
Information technology (IT) companies have tended to use the term
CRM to describe the software applications that automate the marketing,
selling and service functions of businesses. This equates CRM with
technology. Although the market for CRM software is now populated
with many players, it started in 1993 when Tom Siebel founded Siebel
Systems Inc. Use of the term CRM can be traced back to that period.
Forrester, the technology research organization, estimates that worldwide
spending on CRM technologies will reach US$11 billion per annum by
2010.2 Others with a managerial rather than technological emphasis,
claim that CRM is a disciplined approach to developing and maintaining
profitable customer relationships, and that technology may or may not
have a role.
Some of the differences of opinion can be explained by considering
that a number of different types of CRM have been identified: strategic,
operational, analytical and collaborative, as summarized in Table 1.2 and
described below.
4 Customer Relationship Management

CRM is an information industry term for methodologies, software and usually Internet capabilities that
help an enterprise manage customer relationships in an organized way.3
CRM is the process of managing all aspects of interaction a company has with its customers, including
prospecting, sales and service. CRM applications attempt to provide insight into and improve the
company/customer relationship by combining all these views of customer interaction into one picture.4
CRM is an integrated approach to identifying, acquiring and retaining customers. By enabling
organizations to manage and coordinate customer interactions across multiple channels, departments,
lines of business and geographies, CRM helps organizations maximize the value of every customer
interaction and drive superior corporate performance.5
CRM is an integrated information system that is used to plan, schedule and control the pre-sales
and post-sales activities in an organization. CRM embraces all aspects of dealing with prospects and
customers, including the call centre, sales-force, marketing, technical support and field service. The
primary goal of CRM is to improve long-term growth and profitability through a better understanding of
customer behaviour. CRM aims to provide more effective feedback and improved integration to better
gauge the return on investment (ROI) in these areas.6
CRM is a business strategy that maximizes profitability, revenue and customer satisfaction by organizing
around customer segments, fostering behaviour that satisfies customers and implementing customer-
centric processes.7

Table 1.1
Definitions of CRM

Type of CRM Dominant characteristic

Strategic Strategic CRM is a core customer-centric business strategy that aims at winning
and keeping profitable customers
Operational Operational CRM focuses on the automation of customer-facing processes such
as selling, marketing and customer service
Analytical Analytical CRM focuses on the intelligent mining of customer-related data for
strategic or tactical purposes
Collaborative Collaborative CRM applies technology across organizational boundaries with a
view to optimizing company, partner and customer value

Table 1.2 Types of

CRM

Strategic CRM
Strategic CRM is focused upon the development of a customer-centric
business culture. This culture is dedicated to winning and keeping
customers by creating and delivering value better than competitors. The
culture is reflected in leadership behaviours, the design of formal systems
of the company, and the myths and stories that are created within the
firm. In a customer-centric culture you would expect resources to be
allocated where they would best enhance customer value, reward systems
 Introduction to customer relationship management 5

to promote employee behaviours that enhance customer satisfaction

and retention, and customer information to be collected, shared and
applied across the business. You would also expect to find the heroes
of the business to be those who deliver outstanding value or service to
customers. Many businesses claim to be customer-centric, customer-led,
customer-focused or customer-oriented, but few are. Indeed, there can
be very few companies of any size that do not claim that they are on a
mission to satisfy customer requirements profitably.
Customer-centricity competes with other business logics. Philip Kotler
identifies three other major business orientations: product, production,
and selling.8
Product-oriented businesses believe that customers choose products
with the best quality, performance, design or features. These are often
highly innovative and entrepreneurial firms. Many new business start-ups
are product-oriented. In these firms it is common for the customer’s voice
to be missing when important marketing, selling or service decisions are
made. Little or no customer research is conducted. Management makes
assumptions about what customers want. The outcome is that sometimes
products are overspecified or overengineered for the requirements of the
market, and therefore too costly for many customers. However, marketers
have identified a subset of relatively price-insensitive customers whom
they dub ‘innovators’, who are likely to respond positively to company
claims about product excellence. Unfortunately, this is a relatively small
segment, no more than 2.5 per cent of the potential market.9
Production-oriented businesses believe that customers choose low-
price products. Consequently, these businesses strive to keep operating
costs low, and develop low-cost routes to market. This may well be
appropriate in developing economies or in subsistence segments
of developed economies, but the majority of customers have other
requirements. Drivers of BMWs would not be attracted to the brand
if they knew that the company only sourced inputs such as braking
systems from the lowest-cost supplier.
Sales-oriented businesses make the assumption that if they invest
enough in advertising, selling, public relations (PR) and sales promotion,
customers will be persuaded to buy. Very often, a sales orientation follows
a production orientation. The company produces low-cost products and
then has to promote them heavily to shift inventory.
A customer or market-oriented company shares a set of beliefs about
putting the customer first. It collects, disseminates and uses customer
and competitive information to develop better value propositions for
customers. A customer-centric firm is a learning firm that constantly
adapts to customer requirements and competitive conditions. There
is evidence that customer-centricity correlates strongly with business
performance.10
Many managers would argue that customer-centricity must be right
for all companies. However, at different stages of market or economic
development, other orientations may have stronger appeal.
6 Customer Relationship Management

Case 1.1
Strategic CRM at Boise Office Solutions
In 1998 the CEO of Itasca, Illinois-based Boise Office Solutions, decided that the only way to
escape the bruising price competition and razor-thin margins of office supply superstores
such as Staples and Office Depot was to provide greater value through superior customer
service, with the support of a CRM system. Three years and $20 million later, the $3.5 billion
subsidiary of Boise Cascade switched on a CRM system that differentiated them from other
competitors in the office supplies industry. The company can now share customer data
across five business units, 47 distribution centres and three customer service centres. This
has allowed Boise to cross-sell, retain and service accounts much more effectively. One of the
CRM system’s many features is web collaboration which allows representatives to co-browse
and chat with customers online while making recommendations.
Source: Greenguard (2002)11

Operational CRM
Operational CRM automates and improves customer-facing and customer-
supporting business processes. CRM software applications enable the
marketing, selling and service functions to be automated and integrated.
Some of the major applications within operational CRM appear in Table
1.3. Although we cover the technology aspects of operational CRM in
Chapters 14, 15 and 16, it is worth making a few observations at this point.

Marketing automation
Market segmentation
Campaign management
Event-based (trigger) marketing
Sales force automation
Account management
Lead management
Opportunity management
Pipeline management
Contact management
Quotation and proposal generation
Product configuration
Service automation
Case (incident or issue) management
Inbound communications management
Queuing and routing
Service level management

Table 1.3
Operational CRM
 Introduction to customer relationship management 7

Marketing automation
Marketing automation (MA) applies technology to marketing processes.
Campaign management modules allow marketers to use customer-related
data in order to develop, execute and evaluate targeted communications
and offers. Customer targeting for campaigning purposes is, in some
cases, possible at the level of the individual customer, enabling unique
communications to be designed.
In multichannel environments, campaign management is particularly
challenging. Some fashion retailers, for example, have multiple
transactional channels including free-standing stores, department store
concessions, e-tail websites, home shopping catalogues, catalogue stores
and perhaps even a television shopping channel. Some customers may
be unique to a single channel, but most will be multichannel prospects,
if they are not already customers of several channels. Integration of
communication and offer strategies and evaluation of performance
requires a substantial amount of technology-aided coordination across
these channels.
Event-based, or trigger, marketing is the term used to describe
messaging and offer presentation to customers at particular points in time.
An event triggers the communication and offer. Event-based campaigns
can be initiated by customer behaviours or contextual conditions. A call
to a contact centre is an example of a customer-initiated event. When a
credit-card customer calls a contact centre to enquire about the current rate
of interest, this can be taken as indication that the customer is comparing
alternatives and may switch to a different provider. This event may trigger
an offer designed to retain the customer. Examples of contextual events
are the birth of a child or a public holiday. Both of these indicate potential
changes in buyer behaviour, initiating a marketing response. Event-based
marketing also occurs in the business-to-business context. The event may
be a change of personnel on the customer-side, the approaching expiry of
a contract or a request for information (RFI).

Sales-force automation
Sales-force automation (SFA) was the original form of operational
CRM. SFA systems are now widely adopted in business-to-business
environments and are seen as ‘a competitive imperative’12 that offers
‘competitive parity’.13
SFA applies technology to the management of a company’s selling
activities. The selling process can be decomposed into a number of
stages, such as lead generation, lead qualification, needs identification,
development of specifications, proposal generation, proposal presentation,
handling objections and closing the sale. SFA software can be configured so
that it is modelled on the selling process of any industry or organization.
Automation of selling activities is often linked to efforts to improve
and standardize the selling process. This involves the implementation
of a sales methodology. Sales methodologies allow sales team members
and management to adopt a standardized view of the sales cycle and a
common language for discussion of sales issues.
8 Customer Relationship Management

Sales-force automation software enables companies automatically to

assign leads and track opportunities as they progress through the sales
pipeline towards closure. Opportunity management lets users identify
and progress opportunities to sell from lead status through to closure
and beyond, into after-sales support. Opportunity management software
usually contains lead management and sales forecasting applications.
Lead management applications enable users to qualify leads and assign
them to the appropriate salesperson. Sales forecasting functionality
generally use transactional histories and salesperson estimates to produce
estimates of future sales.
Contact management lets users manage their communications
programme with customers. Computerized customer records contain
customer contact histories. Contact management applications often have
features such as automatic customer dialling, the salesperson’s personal
calendar and e-mail functionality. Quotation and proposal generation
allow the salesperson to automate the production of prices and proposals
for customers. The salesperson enters details such as product codes,
volumes, customer name and delivery requirements, and the software
automatically generates a priced quotation.
Product configuration applications enable salespeople, or the
customers themselves, automatically to design and price customized
products, services or solutions to problems. Configurators are useful
when the product is particularly complex, such as in IT solutions.
Configurators are typically based on an ‘if … then’ rules structure. The
general case of this rule is ‘If X is chosen, then Y is required or prohibited
or legitimized or unaffected’. For example, if the customer chooses a
particular feature (say, a particular hard drive for a computer), then this
rules out certain other choices or related features that are technologically
incompatible, too costly or too complex to manufacture.

Case 1.2
Operational CRM (SFA) at Roche
Roche is one of the world’s leading research-based healthcare organizations, active in the
discovery, development and manufacture of pharmaceuticals and diagnostic systems. The
organization has traditionally been product-centric and quite poor in the area of customer
management. Roche’s customers are medical practitioners prescribing products to patients.
Customer information was previously collected through several mutually exclusive sources,
ranging from personal visits to handwritten correspondence, and not integrated into a
database or central filing system, giving incomplete views of the customer. Roche identified
the need to adopt a more customer-centric approach to understand their customers better,
improve services offered to them and to increase sales effectiveness.
Roche implemented a sales-force automation system where all data and interactions with
customers are stored in a central database which can be accessed throughout the organization.
This has resulted in Roche being able to create customer profiles, segment customers and
communicate with existing and potential customers. Since implementation Roche has been
more successful in identifying, winning and retaining customers.
 Introduction to customer relationship management 9

Service automation
Service automation allows companies to manage their service operations,
whether delivered through call centre, contact centre, web or face-to-face.14
CRM software enables companies to handle and coordinate their service-
related inbound and outbound communications across all channels.
Software vendors claim that this enables users to become more efficient
and effective by reducing service costs, improving service quality, lifting
productivity and increasing customer satisfaction.
Service automation differs significantly depending on the product
being serviced. Consumer products are normally serviced through retail
outlets, the web or a call centre as the point of first contact. These contact
channels are often supported by online scripting tools to help diagnose
a problem on first contact. A number of technologies are common in
service automation. Call routing software can be used to direct inbound
calls to the most appropriate handler. Technologies such as interactive
voice response (IVR) enable customers to interact with company
computers. Customers can input to an IVR system after listening to menu
instructions either by telephone keypad (key 1 for option A, key 2 for
option B) or by voice. If first contact problem resolution is not possible,
the service process may then involve authorizing a return of goods, and a
repair cycle involving a third party service provider. This process is used
to service mobile phones and cameras.
Service automation for large capital equipment is quite different. This
normally involves diagnostic and corrective action to be taken in the
field, at the location of the equipment. Examples of this type of service
include industrial air conditioning and refrigeration. In these cases,
service automation may involve providing the service technician with
diagnostics, repair manuals, inventory management and job information
on a laptop. This information is then synchronized at regular intervals to
update the central CRM system.
Many companies use a combination of direct and indirect channels
especially for sales and service functions. When indirect channels are
employed, operational CRM supports this function through partner
relationship management (PRM). This technology allows partners to
communicate with the supplier through a portal, to manage leads, sales
orders, product information and incentives.

Analytical CRM
Analytical CRM is concerned with capturing, storing, extracting,
integrating, processing, interpreting, distributing, using and reporting
customer-related data to enhance both customer and company value.
Analytical CRM builds on the foundation of customer-related
information. Customer-related data may be found in enterprise-wide
repositories: sales data (purchase history), financial data (payment history,
credit score), marketing data (campaign response, loyalty scheme data)
and service data. To these internal data can be added data from external
10 Customer Relationship Management

sources: geodemographic and lifestyle data from business intelligence

organizations, for example. With the application of data mining tools, a
company can then interrogate these data. Intelligent interrogation provides
answers to questions such as: Who are our most valuable customers?
Which customers have the highest propensity to switch to competitors?
Which customers would be most likely to respond to a particular offer?

Case 1.3
Analytical CRM at AXA Seguros e Inversiones (AXA)
Spanish insurer AXA Seguros e Inversiones (AXA) has revenues of over €1.8 billion (US$2.3
billion), two million customers and is a member of global giant The AXA Group.
AXA runs marketing campaigns in Spain for its many products and services. The
company wanted a better understanding of its customers, in order to be able to make more
personalized offers and implement customer loyalty campaigns.
AXA used CRM vendor SAS’s data mining solution to build a predictive policy cancellation
model. The solution creates profiles and predictive models from customer data which
enables more finely targeted campaign management, call centre management, sales-force
automation and other activities involved in customer relationship management.
The model was applied to current and cancelled policies in various offices, to validate it
before deploying it across Spain. Moreover, the model was used to create two control groups
(subdivided into high and low probability) that were not targeted in any way, while other
groups, similarly divided into high and low probability, were targeted by various marketing
actions. The outcome was that the auto insurance policy cancellation rate was cut by up to
nine percentage points in specific targeted segments.
With the customer insight obtained from the model, AXA is now able to design and execute
personalized actions and customer loyalty campaigns tailored to the needs and expectations
of high-value customers.
Source: SAS15

Analytical CRM has become an essential part of many CRM

implementations. Operational CRM struggles to reach full effectiveness
without analytical information about customers. For example, an
understanding of customer value or propensities to buy underpins many
operational CRM decisions, such as:
● Which customers shall we target with this offer?
● What is the relative priority of customers waiting on the line, and
what level of service should be offered?
● Where should I focus my sales effort?

Analytical CRM can lead companies to decide that selling approaches

should differ between customer groups. Higher potential value
customers may be offered face-to-face selling; lower value customers
may be contacted by telesales. Furthermore, the content and style of
customer communications can be tailored, perhaps for a particular
 Introduction to customer relationship management 11

segment, using customer analytics. This enhances the probability that a

given offer will be accepted by the customer.
From the customer’s point of view, analytical CRM can deliver timely,
customized, solutions to the customer’s problems, thereby enhancing
customer satisfaction. From the company’s point of view, analytical
CRM offers the prospect of more powerful cross-selling and up-selling
programmes, and more effective customer retention and customer
acquisition programmes.

Collaborative CRM
Collaborative CRM is the term used to describe the strategic and tactical
alignment of normally separate enterprises in the supply chain for the
more profitable identification, attraction, retention and development
of customers.16 For example, manufacturers of consumer goods and
retailers can align their people, processes and technologies to serve
shoppers more efficiently and effectively. They employ practices such as
co-marketing, category management, collaborative forecasting, joint new
product development and joint market research. Collaborative CRM uses
CRM technologies to communicate and transact across organizational
boundaries. Although traditional technologies such as surface mail, air
mail, telephone and fax enable this to happen, the term is usually applied
to more recent technologies such as electronic data interchange (EDI),
portals, e-business, voice over internet protocol (VoIP), conferencing,
chat rooms, web forums and e-mail. These technologies allow data and
voice communication between companies and their business partners or
customers. Collaborative CRM enables separate organizations to align
their efforts to service customers more effectively. It allows valuable
information to be shared along the supply chain.
Some CRM technology vendors have developed partner relationship
management (PRM) applications that enable companies to manage
complex partner or channel ecosystems and reduce the costs of partner
or channel management. PRM applications are often used to manage
partner promotions. A manufacturer of consumer goods might have a
dozen or more different cooperative advertising programmes running
simultaneously. PRM allows companies to manage the distribution of
funds, plan and control promotions and measure outcomes. Sometimes
the term collaborative CRM is used to describe the application of these
same technologies to internal communications, for example across sales,
marketing and service functions.

Case 1.4
Partner relationship management at Segway
The Segway® Personal Transporter (PT) is the world’s first two-wheeled, self-balancing,
electric transportation device; a product that has gained worldwide attention. Since the
12 Customer Relationship Management

Segway PT first went on sale in 2002, the company has enjoyed 50 per cent annual growth as
commercial and consumer customers adopted it for its versatility, energy efficiency and ease
of use.
Based in Bedford, New Hampshire, Segway has a worldwide distribution network of more
than 250 outlets in 62 countries. About 90 per cent of Segway’s business comes through this
network of dealers and distributors.
The company wanted to deploy an integrated solution that could manage both direct and
indirect sales activities in a cohesive way. The solution was the development of the Segway
Partner Portal, a secure website that allows Segway employees and channel partners to
manage sales processes effectively. The portal has two major functions:

1. Delivering and managing sales leads from the Segway.com website, tradeshows,
advertising campaigns and various other sources.
2. Reporting retail sales for participation in Segway incentive programmes.

Segway has about 120 dealers in North America, more than 75 per cent of which have
already adopted the PRM solution. Each dealership has its own account and login
information, with access to the data that concerns it. Segway’s regional managers can roll up
the data to obtain a comprehensive view of sales and forecasts.
Source: Salesforce.com17

Misunderstandings
about CRM
Given its recent emergence, it isn’t surprising that there are a number
of common misunderstandings about the nature of CRM. These are
described below.

Misunderstanding 1: CRM is database

marketing
Database marketing is concerned with building and exploiting high
quality customer databases for marketing purposes. Companies collect
data from a number of sources. These data are verified, cleaned, integrated
and stored on computers, often in data warehouses or data-marts. They
are then used for marketing purposes such as market segmentation,
targeting, offer development and customer communication.
Whereas most large and medium-sized companies do indeed build and
exploit customer databases, CRM is much wider in scope than database
marketing. A lot of what we have described above as analytical CRM has
the appearance of database marketing. However, database marketing is
less evident in strategic, operational and collaborative CRM.
 Introduction to customer relationship management 13

Misunderstanding 2: CRM is a marketing

process
CRM software applications are used for many marketing activities: market
segmentation, customer acquisition, customer retention and customer
development (cross-selling and up-selling), for example. However,
operational CRM extends into selling and service functions.
The deployment of CRM software to support a company’s mission to
become more customer-centric often means that customer-related data
is shared more widely throughout the enterprise than by the marketing
function alone. Operations management can use customer-related data
to produce customized products and services. People management
(Human Resources) can use customer preference data to help recruit and
train staff for the front-line jobs that interface with customers. Research
and development management can use customer-related data to focus
new product development.
Customer data can not only be used to integrate various internal
departments, but can also be shared across the extended enterprise with
outside suppliers and partners. For example, Tesco, the international
supermarket operation, has a number of collaborative new product
development relationships with key suppliers. Tesco also partners with
Royal Bank of Scotland to offer financial services to Tesco customers. Both
these activities require the sharing of information about Tesco customers
with supplier and partner. Clearly, there is more to CRM than marketing
process.

Misunderstanding 3: CRM is an IT issue

Many CRM implementations are seen as IT initiatives, rather than
broader strategic initiatives. True, most CRM implementations require the
deployment of IT solutions. However, this should not be misunderstood.
To say that CRM is about IT is like saying that gardening is about the
spade or that art is about the paintbrush. IT is an enabler, a facilitator.
Improvements come about in the way customers are managed through a
combination of improved processes, the right competencies and attitudes
(people), the right strategies and the right enabling technologies.
The importance of people and processes should not be underestimated.
People develop and implement the processes that are enabled by IT. IT
cannot compensate for bad processes and unskilled people. Successful
CRM implementations involve people designing and implementing
processes that deliver customer and company value. Often, these
processes are IT-enabled. IT is therefore a part of most CRM strategies.
That said, not all CRM initiatives involve IT investments. An
overarching goal of many CRM projects is the development of
relationships with, and retention of, highly valued customers. This may
involve behavioural changes in store employees, education of call centre
staff, and a focus on empathy and reliability from salespeople. IT may
play no role at all.
14 Customer Relationship Management

Misunderstanding 4: CRM is about loyalty

schemes
Loyalty schemes are commonplace in many industries, such as car hire,
airlines, food retail, hotels. Customers accumulate credits, such as airmiles,
from purchases. These are then redeemed at some future point. Most
loyalty schemes require new members to complete an application form
when they join the programme. This demographic information is typically
used, together with purchasing data, to help companies become more
effective at customer communication and offer development. Whereas
some CRM implementations are linked to loyalty schemes not all are.
Loyalty schemes may play two roles in CRM implementations. First,
they generate data that can be used to guide customer acquisition,
retention and development. Secondly, loyalty schemes may serve as an
exit barrier. Customers who have accumulated credits in a scheme may
be reluctant to exit the relationship. The credits accumulated reflect the
value of the investment that the customer has made in the scheme, and
therefore in the relationship.

Misunderstanding 5: CRM can be implemented

by any company
Strategic CRM can, indeed, be implemented in any company. Every
organization can be driven by a desire to be more customer-centric. Chief
executives can establish a vision, mission and set of values that bring the
customer into the heart of the business. CRM technology may play a role
in that transformation. Some companies are certainly more successful
than others. The banking industry has implemented CRM very widely,
yet there are significant differences between the customer satisfaction
ratings and customer retention rates of different banks.
Any company can also try to implement operational CRM. Any
company with a sales force can automate its selling, lead management
and contact management processes. The same is true for marketing and
service processes. CRM technology can be used to support marketing
campaigns, service requests and complaints management.
Analytical CRM is a different matter, as it is based on customer-related
data. At the very least, data are needed to identify which customers are
likely to generate most value in the future, and to identify within the
customer base segments that have different requirements. Only then can
different offers be communicated to each customer group to optimize
company and customer value over the long term. If these data are
missing then analytical CRM cannot be implemented.

Defining CRM
Against this background of four types of CRM and the misunderstandings
about CRM, it is no easy matter to settle on a single definition of CRM.
 Introduction to customer relationship management 15

However, we can identify a number of core CRM attributes, and integrate

them into a definition that underpins the rest of this book.
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-
related data and enabled by information technology.
CRM is a ‘core business strategy’ that aims to ‘create and deliver value
to targeted customers at a profit’. This clearly denotes that CRM is not
just about IT. CRM ‘integrates internal processes and functions’. That
is, it allows departments within businesses to dissolve the silo walls
that separate them. Access to ‘customer-related data’ allows selling,
marketing and service functions to be aware of each other’s interactions
with customers. Furthermore, back-office functions such as operations
and finance can learn from and contribute to customer-related data.
Access to customer-related data allows members of a business’s ‘external
network’ – suppliers, partners, distributors – to align their efforts with
those of the focal company. Underpinning this core business strategy is
IT: software applications and hardware.
Historically, most companies were located close to the markets they
served, and knew their customers intimately. Very often there would
be face-to-face, even day-to-day, interaction with customers where
knowledge of customer requirements and preferences grew. However, as
companies have grown larger they have become more remote from the
customers they serve. The remoteness is not only geographic; it may also
be cultural. Even some of the most widely admired American companies
have not always understood the markets they served. Disney’s
development of a theme park near the French capital, Paris, was not an
initial success because they failed to deliver to the value expectations of
European customers. For example, Disney failed to offer visitors alcohol
onsite. Europeans, however, are accustomed to enjoying a glass or two
of wine with their food.
Geographic and cultural remoteness, together with business owner
and management separation from customer contact, means that many,
even small, companies do not have the intuitive knowledge and
understanding of their customers so often found in micro-businesses, such
as neighbourhood stores and hairdressing salons. This has given rise to
demand for better customer-related data, a cornerstone of effective CRM.
Our definition has a strong for-profit sense. If the not-for-profit
community were to replace the words business, customers and profit
with appropriate equivalents, such as organization, clients and objectives,
it would apply equally well in that context.
In sum, we take the view that CRM is a technology-enabled approach
to management of the customer interface. Most CRM initiatives expect to
have impact on the costs-to-serve and revenues streams from customers.
The use of technology also changes the customer’s experience of
transacting and communicating with a supplier. For that reason, the
customer’s perspective on CRM is an important consideration in this
book. CRM influences customer experience, and that is of fundamental
strategic significance.
16 Customer Relationship Management

CRM constituencies
There are several important constituencies having an interest in CRM:
1. Companies implementing CRM: many companies have implemented
CRM. Early adopters were larger companies in financial services,
telecommunications and manufacturing, in the USA and Europe.
Medium-sized businesses are following. There is still potential
for the CRM message to reach smaller companies, public sector
organizations, other worldwide markets and new business start-ups.
2. Customers and partners of those companies: the customers and
partners of companies that implement CRM are a particularly
important constituency. Because CRM influences customer experience,
it can impact on customer satisfaction ratings and influence loyalty to
the supplier.
3. Vendors of CRM software: vendors of CRM software include names
such as Oracle, SAP, SAS, KANA, Microsoft and StayinFront. There
has been considerable consolidation of the CRM vendor marketplace
in recent years. PeopleSoft and Siebel, two of the pioneering CRM
vendors, are currently owned by Oracle. Vendors sell licenses to
companies, and install CRM software on the customer’s servers either
directly or through system integrators. The client’s people are trained
to use the software.
4. CRM application service providers (ASPs): companies implementing
CRM can also choose to access CRM functionality on a subscription
basis through hosted CRM vendors such as salesforce.com, Entellium,
RightNow and NetSuite. Clients upload their customer data to the
host’s servers and interact with the data using their web browsers.
The ASP vendors deliver and manage applications and other services
from remote sites to multiple users via the Internet. This is also known
as SaaS (Software as a Service). Clients access CRM functionality in
much the same way as they would eBay or Amazon.
5. Vendors of CRM hardware and infrastructure: hardware and
infrastructure vendors provide the technological foundations for CRM
implementations. They supply technologies such as servers, computers,
handheld devices, call centre hardware, and telephony systems.
6. Management consultants: consultancies offer clients a diverse range
of CRM-related capabilities such as strategy, business, application and
technical consulting. Consultants can help companies implementing
CRM in several ways: systems integration, choosing between different
vendors, developing implementation plans and project management
as the implementation is rolled out. Most CRM implementations are
composed of a large number of smaller projects, for example, systems
integration, data quality improvement, market segmentation, process
engineering and culture change. The major consultancies such as
Accenture, McKinsey, Bearing Point, Braxton and CGEY all offer CRM
consultancy. Smaller companies sometimes offer specialized expertise.
Peppers and Rogers provide strategy consulting. DunnHumby is
known for its expertise in data mining for segmentation purposes.
 Introduction to customer relationship management 17

Commercial contexts
of CRM
CRM is practised in a wide variety of commercial contexts, which present
a range of different customer relationship management problems. We’ll
consider four contexts: banks, automobile manufacturers, high-tech
companies and consumer goods manufacturers.

● Banks deal with a large number of individual retail customers. Banks

want CRM for its analytical capability to help them manage customer
defection (churn) rates and to enhance cross-sell performance. Data
mining techniques can be used to identify which customers are likely
to defect, what can be done to win them back, which customers are
hot prospects for cross-sell offers, and how best to communicate those
offers. Banks want to win a greater share of customer spend (share
of wallet) on financial services. In terms of operational CRM, many
banks have been transferring service into contact centres and online
in an effort to reduce costs, in the face of considerable resistance from
some customer segments.
● Automobile manufacturers sell through distributor/dealer networks.
They have little contact with the end-user owner or driver. They use
CRM for its ability to help them develop better and more profitable
relationships with their distribution networks. Being physically
disconnected from drivers, they have built websites that enable them
to interact with these end-users. This has improved their knowledge
of customer requirements. Ultimately, they hope CRM will enable
them to win a greater share of end-user spend across the car purchase,
maintenance and replacement cycle.
● High-tech companies manufacture complex products that are
generally sold by partner organizations. For example, small innovative
software developers have traditionally partnered with companies
such as IBM to obtain distribution and sales. However, companies
like Dell have innovated channels. They go direct-to-customer (DTC).
CRM helps these DTC companies to collect customer information,
segment their customer base, automate their sales processes with
product configurator software and deliver their customer service
online. They have also developed automated relationships with
suppliers, so that they carry no or low levels of inventory, which are
replenished frequently in rapid response to order patterns.
● Consumer goods manufacturers deal with the retail trade. They use
CRM to help them develop profitable relationships with retailers.
CRM helps them understand costs-to-serve and customer profitability.
Key account management practices are applied to strategically
significant customers. IT-enabled purchasing processes deliver
higher levels of accuracy in stock replenishment. Manufacturers
can run CRM-enabled marketing campaigns which are highly cost-
effective.
18 Customer Relationship Management

The not-for-profit context

Most of this chapter has been concerned with CRM in the for-profit
context. However, CRM can also be found in the not-for-profit context.
Some of the basic skills of database development and exploitation, and
customer lifecycle management, are equally relevant to not-for-profit
organizations.
The Salvation Army uses CRM capability to manage donor
relationships, over time, using event-based fundraising. The Army also
knows the value of different donor segments, and works at retaining
their high value donors and at migrating first-time donors up the value
ladder towards regular or long-term donor status.
Universities have deployed CRM to manage their student and alumni
relationships. Today’s students are thought to represent considerable
potential lifetime value to Universities. For example, students who enjoy their
experiences at a graduate school of business may return there for executive
education. They may recommend the institution to their personal networks,
or when they reach an appropriate level of seniority commission the school
to consult or deliver customized training and management development.
Schools as eminent as Harvard Business School have been hugely successful
at fundraising from their alumni networks.

Case 1.5
Not-for-profit CRM at the city of Lynchburg
The city council of Lynchburg, VA, USA, sought to improve the levels of information
and services that it provided to its 69 000 citizens. Named the ‘Citizens First Program’, it
involved the design and implementation of an operational CRM strategy to open the
lines of communication and to automate many services between the city council’s 1100
employees, municipal departments and the citizens of Lynchburg. The project comprised the
establishment of a website to provide citizens with 24/7 access to information concerning the
city’s services and facilities, in addition enabling citizens to make requests for information,
inquiries and complaints. Supporting the website was CRM software and a linked call
centre, providing personalized follow-up and ongoing support.
Since implementation, many benefits have been seen, namely:
● a 50% reduction in time taken to respond to citizen inquiries
● citizens can track the progress of requests for service, inquiries, etc.
● the city council can measure and report on organizational performance
● levels of communication within the city council and between municipal departments have
improved.

Models of CRM
A number of comprehensive CRM models have been developed. We
introduce five of them here.
 Introduction to customer relationship management 19

The IDIC model

The IDIC model was developed by Peppers and Rogers, the consultancy
firm, and has featured in a number of their books.18 The IDIC model
suggests that companies should take four actions in order to build closer
one-to-one relationships with customers:

● identify who your customers are and build a deep understanding of

them
● differentiate your customers to identify which customers have most
value now and which offer most for the future
● interact with customers to ensure that you understand customer
expectations and their relationships with other suppliers or brands
● customize the offer and communications to ensure that the expectations
of customers are met.

External environment

Winback Targeting
Customer experience
t-to-serve
Managing C os
dissatisfaction Conversion
Customer
management
Analysis and planning

Efficiency
Customer proposition

Ac
n

activity Welcoming
tio

qui

Measurement

Value
Reten

sition

development and getting

Customer
to know
management
activity
Retention Delivering
activity the basics
Penetration

People and organisation

Infrastructure
Customer information Technology support Process management

Figure 1.1 The QCi customer management model

The QCi model

The QCi model shown in Figure 1.1 is also a product of a consultancy
firm.19 The model’s authors prefer to describe their model as a customer
management model, omitting the word ‘relationship’. At the heart of the
model they depict a series of activities that companies need to perform
in order to acquire and retain customers. The model features people
performing processes and using technology to assist in those activities.
20 Customer Relationship Management

The CRM value chain

Francis Buttle’s model was the subject of a recent book.20 The model, as
shown in Figure 1.2, consists of five primary stages and four supporting
conditions leading towards the end goal of enhanced customer
profitability. The primary stages of customer portfolio analysis, customer
intimacy, network development, value proposition development and
managing the customer lifecycle are sequenced to ensure that a company,
with the support of its network of suppliers, partners and employees,
creates and delivers value propositions that acquire and retain profitable
customers. The supporting conditions of leadership and culture, data and
IT, people and processes enable the CRM strategy to function effectively
and efficiently.

Customer Customer Network Value Manage

portfolio intimacy development proposition the

Cu
Primary

sto
analysis (SCOPE) development customer
stages

me
lifecycle

r
Leadership and culture

Data and information technology

ity
Supporting

bil
fita
conditions People
Pro
Processes
Figure 1.2
The CRM value
chain

Payne’s five-process model

The fourth comprehensive model was developed by Adrian Payne.21
This model (Figure 1.3) clearly identifies five core processes in CRM:
the strategy development process, the value creation process, the
multichannel integration process, the performance assessment process
and the information management process. The first two represent strategic
CRM; the multichannel integration process represents operational CRM;
the information management process is analytical CRM.

The Gartner competency model

The final comprehensive CRM model comes from Gartner Inc. Gartner
Inc. is a leading IT research and advisory company that employs
some 1200 research analysts and consultants in 75 countries, and has a
significant place in CRM research. Figure 1.4 presents Gartner’s CRM
competency model.
 Introduction to customer relationship management 21

Strategy Value creation Multichannel Integration Performance

development process process process assessment process

Business strategy Value Customer Sales force Shareholder

receives results

Physical
Business vision Employer value

Customer segment lifetime value analysis

Industry and Value proposition
Outlets Customer value
Value assessment

Integrated channel managemnt

competitive Shareholder value
characteristics Cost reduction
Telephony
Cocreation
Performance
Value Organization Direct marketing monitoring
receives Standards
Acquisition Quantitative and

Virtual
Customer strategy economics Electronic commerce qualitative
Retention measurement
Customer choice
economics Results and
and customer
Mobile commerce key performance
characteristics
indicators
Segment granularity

Data repository

Front office Back office

IT systems Analysis tools
applications applications

Information Management Process

Figure 1.3 Payne’s model of CRM22

1. CRM vision: Leadership, Social worth, Value proposition

2. CRM strategy: Objectives, Segments, Effective interaction
3. Valued customer experience 4. Organizational collaboration
Culture and Structure
Understand Requirements Customer Understanding
Monitor Expectations People: Skills, Competencies
Satisfaction vs. Competition Incentives and Compensation
Collaboration and Feedback Employee Communications
Partners and Suppliers

5. CRM processes: Customer life cycle, Knowledge management

6. CRM information: Data, Analysis, One view across channels
7. CRM technology: Applications, Architecture, Infrastructure
8. CRM metrics: Cost to serve, Satisfaction, Loyalty, Social costs
Figure 1.4
Gartner’s CRM
model
22 Customer Relationship Management

The model suggests that companies need competencies in eight

areas for CRM to be successful. These include building a CRM vision,
developing CRM strategies, designing valued customer experiences,
intra and extra-organizational collaboration, managing customer lifecycle
processes, information management, technology implementation and
developing measures indicative of CRM success or failure.

Summary
In this chapter you have learned that the expression CRM has a variety of meanings.
Four types of CRM have been identified: strategic, operational, analytical and
collaborative. There are many misunderstandings about CRM. For example, some people
wrongly equate CRM with loyalty programmes, whereas others think of CRM as an IT
issue. Although CRM is generally thought of as a business practice, it is also applied
in the not-for-profit context. A number of different constituencies have an interest
in CRM, including CRM consultancies, CRM software vendors, CRM application service
providers, CRM hardware and infrastructure vendors, companies that are implementing
CRM and their customers. A number of different models of CRM have been developed.
Finally, we have produced a definition that underpins the rest of this book. We define
CRM as 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-related data and enabled by information
technology.

References
1. Gamble, P., Stone, M. and Woodcock, N. (1999) Customer relationship
marketing: up close and personal. London: Kogan Page; Jain, S.C.
(2005). CRM shifts the paradigm. Journal of Strategic Marketing, Vol.
13, December, pp. 275–291; Evans, M., O’Malley, L. and Patterson,
M. (2004) Exploing direct and customer relationship marketing. London:
Thomson.
2. http://www.forrester.com/Research/Document/Excerpt/0,7211,
43091,00.html. Accessed 13 September 2007.
3. http://whatis.techtarget.com/definition/0,289893,sid9_gci213567,
00.html. Accessed 29 November 2005.
4. http://onlinebusiness.about.com/cs/marketing/g/CRM.htm .
Accessed 29 November 2005.
5. http://www.siebel.com/what-is-crm/software-solutions.shtm .
Accessed 29 November 2005.
6. http://computing-dictionary.thefreedictionary.com/CRM. Accessed
29 November 2005.
7. http://www.destinationcrm.com/articles/default.asp? ArticleID5460.
 Introduction to customer relationship management 23

8. Kotler, P. (2000) Marketing management: the millennium edition.

Englewood Cliffs, NJ: Prentice-Hall International.
9. Rogers, E.M. (1962) Diffusion of innovations. New York: Free Press.
10. Deshpandé, R. (1999) Developing a market orientation. London: Sage.
11. Greenguard, S. (2002) When customer focus is king. Case study:
Boise Office Solutions. Brief article – company profile. http://
findarticles.com/p/articles/mi_m4070/is_2002_June/ai_87430207.
Accessed 20 January 2008.
12. Morgan, A. and Inks, S.A. (2001) Technology and the sales force.
Industrial Marketing Management, Vol. 30(5), 463–472.
13. Engle, R.L. and Barnes, M.L. (2000) Sales force automation usage,
effectiveness, and cost-benefit in Germany, England and the United
States. Journal of Business and Industrial Marketing, Vol. 15(4), 216–242.
14. Contact centres differ from call centres in that they not only handle
phone calls, but also communications in other media such as mail,
fax, e-mail and SMS.
15. http://www.sas.com/success/axaseguros.html. Accessed 20 January
2007.
16. Kracklauer, A.H., Mills, D.Q. and Seifert, D. (eds) (2004) Collaborative
customer relationship management: taking CRM to the next level. Berlin:
Springer-Verlag.
17. http://www.salesforce.com/assets/pdf/casestudies/pdf_cs_
segway.pdf. Accessed 20 January 2008.
18. Peppers, D. and Rogers, M. (1996) The 1-to-1 future: building business
relationships one customer at a time. London: Piatkus; Peppers, D. and
Rogers, M. (1998) Enterprise 1-to-1. London: Piatkus; Peppers, D. and
Rogers, M. (1999) The 1-to-1 fieldbook. London: Piatkus; Peppers, D.
and Rogers, M. (2000) The 1-to-1 manager. London: Piatkus; Peppers,
D. and Rogers, M. (2001) One-to-one B2B: CRM strategies for the
real economy. London: Piatkus; Peppers, D. and Rogers, M. (2004)
Managing customer relationships: a strategic framework. Hoboken, NJ:
John Wiley & Sons; Peppers, D. and Rogers, M. (2005) Return on
customer: creating maximum value from your scarcest resource. New
York: Doubleday.
19. http://qci.co.uk/public_face/; Woodcock, N., Stone, M. and Foss, B.
(2002) The Customer Management Scorecard. London: Kogan Page.
20. Buttle, F. (2004) Customer relationship management: concepts and tools.
Oxford: Elsevier Butterworth-Heinemann.
21. Payne, A. (2005) Handbook of CRM: achieving excellence through
customer management. Oxford: Elsevier Butterworth-Heinemann;
Payne, A. and Frow, P. (2005) A strategic framework for customer
relationship management. Journal of Marketing, Vol. 69, October,
pp. 167–176.
22. Payne, A. (2005) Handbook of CRM: achieving excellence through
customer management. Oxford: Butterworth-Heinemann.
This page intentionally left blank
Chapter 2
Understanding
relationships
This page intentionally left blank
 Chapter objectives
By the end of this chapter, you will understand:

1. how to recognize a relationship

2. attributes of successful relationships
3. the importance of trust and commitment within a relationship
4. why companies and customers are sometimes motivated to establish and maintain
relationships with each other, and sometimes not
5. the meaning and importance of customer lifetime value
6. the five different schools of thought that contribute to our understanding of
relationships and relationship management.

What is a relationship?
The ‘R’ of CRM stands for ‘relationship’. But what do we really mean
by the expression ‘relationship?’ Certainly, most of us would understand
what it means to be in a personal relationship, but what is a relationship
between a customer and supplier?
At the very least a relationship involves interaction over time. If
there is only a one-off transaction, like buying a vacuum cleaner from a
specialist outlet, most of us wouldn’t call this a relationship. Thinking in
terms of a dyadic relationship, that is a relationship between two parties,
if we take this interaction over time as a critical feature, we can define
the term ‘relationship’ as follows:

A relationship is composed of a series of interactive episodes between

dyadic parties over time.

Let’s be clear about what is meant by ‘interactive episode’. Episodes are

time bound (they have a beginning and an end) and are nameable. Within
a sales representative–customer relationship it is often possible to identify
a number of discrete episodes, such as making a purchase, enquiring
about a product, making a sales call, negotiating terms, dealing with a
complaint, resolving an invoicing dispute and playing a round of golf.
Each episode in turn is composed of a series of interactions. Interaction
consists of action and response to that action. Within each episode, each
participant will act towards, and interact with, the other. The content of
each episode is a range of communicative behaviours including speech,
deeds (actions) and body language.
Some authorities think that it is insufficient, even naïve, to define a
relationship as interaction over time. Jim Barnes, for example, suggests
that there needs to be some emotional content to the interaction.1 This
implies some type of affective connection, attachment or bond.
28 Customer Relationship Management

Similarly, a relationship has been said to exist only when the parties
move from a state of independence to dependence or interdependence.2
When a customer buys an occasional latte from a coffee shop, this is a
transaction not a relationship. If the customer returns repeatedly because
she likes the store’s atmosphere, the way the coffee is prepared or has
taken a shine to the barista, this looks more like a relationship. And
while, in this instance, there is dependence (of the customer on the coffee
shop) there is no interdependence.
This suggests the parties within the dyad may have very different ideas
about whether they are in a relationship. For example, in a professional
procurement context for a multinational organization, corporate buying
staff may think they are being tough and transactional. Their suppliers
may feel that they have built a relationship.
We can conclude from this that a relationship is a social construct.
That is to say, a relationship exists if people believe that a relationship
exists and they act accordingly. It is also apparent that relationships can
be unilateral or reciprocal; either one or both of the parties may believe
they are in a relationship.

Change within relationships

Relationships change over time. Parties become closer or more distant;
interactions become more or less frequent. Because they evolve, they can
vary considerably, both in the number and variety of episodes, and the
interactions that take place within those episodes. Dwyer has identified
five general phases through which customer–supplier relationships can
evolve.3

1. awareness
2. exploration
3. expansion
4. commitment
5. dissolution.

Awareness is when each party comes to the attention of the other as a

possible exchange partner. Exploration is the period of investigation and
testing during which the parties explore each others’ capabilities and
performance. Some trial purchasing takes place. If the trial is unsuccessful
the relationship can be terminated with few costs. The exploration phase
is thought to comprise five subprocesses: attraction, communication
and bargaining, development and exercise of power, development of
norms, and development of expectations. Expansion is the phase in
which there is increasing interdependence. More transactions take place
and trust begins to develop. The commitment phase is characterized
by increased adaptation and mutually understood roles and goals.
Purchasing processes that have become automated are a sure sign of
commitment.
Not all relationships reach the commitment phase. Many are
terminated before that stage. There may be a breach of trust that forces
a partner to reconsider the relationship. Perhaps the requirements of
 Understanding relationships 29

the customer change and the supplier is no longer needed. Relationship

termination can be bilateral or unilateral. Bilateral termination is when
both parties agree to end the relationship. They will probably want to
retrieve whatever assets they invested in the relationship. Unilateral
termination is when one of the parties moves to end the relationship.
Customers may exit relationships for many reasons, such as repeated
service failures or changed product requirements. Suppliers may choose
to exit relationships because of their failure to contribute to sales volume
or profit goals. One option to resolve the problem and continue the
relationship may be to reduce cost-to-serve.
This model of relationship development highlights two attributes of
highly developed relationships: trust and commitment. These attributes
have been the subject of a considerable amount of research.4

Trust
Trust is focused. That is, although there may be a generalized sense of
confidence and security, these feelings are directed. One party may trust
the other party’s:

● benevolence: a belief that one party acts in the interests of the other
● honesty: a belief that the other party’s word is reliable or credible
● competence: a belief that the other party has the necessary expertise
to perform as required.

The development of trust is an investment in relationship building which

has a long-term payoff. Trust emerges as parties share experiences, and
interpret and assess each other’s motives. As they learn more about
each other, risk and doubt are reduced. For these reasons, trust has been
described as the glue that holds a relationship together across time and
experience.5
When mutual trust exists between partners, both are motivated to
make investments in the relationship. These investments, which serve
as exit barriers, may be either tangible (e.g. property) or intangible (e.g.
knowledge). Such investments may or may not be retrievable when the
relationship dissolves.
If trust is absent, conflict and uncertainty rise, while cooperation
falls. Lack of trust clearly provides a shaky foundation for a successful
customer-supplier relationship.
It has been suggested that as relationships evolve over time so does
the character of trust:6

● calculus-based trust: this is present in the early stages of a relationship

and is quite calculative. It is as if one party says: ‘I trust you because
of what I am gaining or expect to gain from the relationship’. The
outcomes of creating and maintaining the new relationship are
weighed against those of dissolving it.
● knowledge-based trust: this relies on the individual parties’ interactive
history and knowledge of each other, allowing each to make accurate
predictions about how the other will act.
30 Customer Relationship Management

● identification-based trust: this happens when mutual understanding

is so deep that each can act as substitute for the other in interpersonal
interaction. This is found in the later stages of relationship development.

Commitment
Commitment is an essential ingredient for successful, long-term, relation-
ships. Morgan and Hunt define relationship commitment as follows:

Commitment is shown by ‘an exchange partner believing that an

ongoing relationship with another is so important as to warrant
maximum effort to maintain it; that is, the committed party believes
the relationship is worth working on to ensure that it endures
indefinitely’. 7

Commitment arises from trust, shared values, and the belief that partners
will be difficult to replace. Commitment motivates partners to cooperate
in order to preserve relationship investments. Commitment means
partners eschew short-term alternatives in favour of more stable, long-
term benefits associated with current partners. Where customers have
choice, they make commitments only to trustworthy partners, because
commitment entails vulnerability, leaving them open to opportunism.
For example, a corporate customer committed to future purchasing of
raw materials from a particular supplier may experience the downside
of opportunistic behaviour if the supplier raises prices.
Evidence of commitment is found in the investments that one party
makes in the other. One party makes investments in the promising
relationship and if the other responds, the relationship evolves and the
partners become increasingly committed to doing business with each
other. Investments can include time, money and the sidelining of current
or alternative relationships. A partner’s commitment to a relationship is
directly represented in the size of the investment in the relationship, since
this represents termination costs. Highly committed relationships have
very high termination costs, since some of these relationship investments
may be irretrievable. In addition, there may be significant costs incurred
in switching to an alternative supplier, such as search costs, learning costs
and psychic costs.

Relationship quality
This discussion of trust and commitment suggests that some relationships
can be thought to be of better quality than others. Research into
relationship quality generally cites trust and commitment as core
attributes of a high quality relationship.8 However, a number of other
attributes have also been identified, including relationship satisfaction,
mutual goals and cooperative norms.
Relationship satisfaction is not the same as commitment. Commitment
to a supplier comes as investments are made in the relationship, and
investments are only made if the committed party is satisfied with
 Understanding relationships 31

their transactional history. In other words, investments are made in

relationships which are satisfactory.9 Mutual goals are present when the
parties share objectives that can only be achieved through joint action
and relationship continuity. Cooperative norms are seen when relational
parties work together constructively and interdependently to resolve
problems.
Given that CRM implementations are often designed to build closer,
more value-laden relationships with customers, it makes sense for
managers to be aware of the quality of the relationships they have with
customers.

Why companies want

relationships with
customers
The fundamental reason for companies wanting to build relationships
with customers is economic. Companies generate better results when
they manage their customer base in order to identify, acquire, satisfy
and retain profitable customers. These are key objectives of many CRM
strategies.
Improving customer retention rates has the effect of increasing the size
of the customer base. Figure 2.1 compares two companies. Company
A has a churn rate (customer defection rate) of 5 per cent per annum;
company B’s churn rate is 10 per cent. Put another way, their respective
customer retention rates are 95 and 90 per cent. Starting from the same
position and acquiring an identical number of new customers each year,
company A’s customer base is 19 per cent larger than company B’s after
four years: 1268 customers compared with 1066 customers.
Churn rates vary considerably. The energy utilities used to enjoy very
low churn levels because of their monopoly positions. However, after

Company A (5% churn) Company B (10% churn)

Total Total
Existing New Existing New
Year customer customer
customers customers customers customers
base base
2001 1000 100 1100 1000 100 1100
2002 1045 100 1145 990 100 1090
2003 1088 100 1188 981 100 1081
2004 1129 100 1229 973 100 1073 Figure 2.1
2005 1168 100 1268 966 100 1066 The effect of
customer retention
on customer
numbers
32 Customer Relationship Management

industry deregulation in the UK, about 25 per cent of utility customers

changed suppliers within the first 24 months. The industry had been
expecting 5–10 per cent churn, and were surprised at the actual levels.
Most switchers were looking for better prices and to achieve a dual-fuel
(gas and electricity) discount.

Case 2.1
Consequences of customer churn at Sprint Nextel
Sprint Nextel, the third largest wireless telecommunications firm in the USA, is downsizing
its workforce by 4000 jobs and closing 125 stores in the first half of 2008. The moves are part
of cost-saving measures prompted by anticipated decreases in the firm’s subscriber base,
revenues and profitability in the fourth quarter of 2007. The firm expects to save $700 to $800
million annually by cutting the jobs.
Sprint Nextel lost 190 000 subscribers and 683 000 ‘post-paid’ customers during the fourth
quarter of 2007. The subscriber losses are being attributed to a slowdown in the growth of
wireless subscriptions in the USA, and continuing customer defection to larger rivals AT&T
Mobile and Verizon Wireless since Sprint bought Nextel Communications for $36 billion in
2005. The firm is also struggling with service quality problems.
On this news, shares of Sprint Nextel fell to their lowest price since October 2002.
Source: http://www.allheadlinenews.com10

There is little merit in growing the customer base aimlessly. The goal
must be to retain existing customers and recruit new customers that have
future profit potential or are important for other strategic purposes.11
Not all customers are of equal importance. Some customers may not be
worth recruiting or retaining at all, for example those who have a high
cost-to-serve, are debtors, late payers or promiscuous in the sense that
they switch frequently between suppliers.
Other things being equal, a larger customer base does deliver better
business performance. Similarly, as customer retention rates rise (or
defection rates fall), so does the average tenure of a customer, as shown
in Figure 2.2. Tenure is the term used to describe the length of time a
customer remains a customer. The impacts of small improvements in
customer retention are hugely magnified at higher levels of retention. For
example, improving the customer retention rate from 75 to 80 per cent
grows average customer tenure from 10 to 12.5 years. Managing tenure
by reducing defection rates can be critical. For example, it can take 13
years for utility customers to break even by recovering the costs of their
initial recruitment.
Managing customer retention and tenure intelligently generates two
key benefits for companies; reduced marketing costs and better customer
insight.
 Understanding relationships 33

Customer retention rate (%) Average customer tenure

50 2 years
67 3 years
75 4 years
80 5 years
90 10 years
92 12.5 years
95 20 years
96 25 years
97 33.3 years
98 50 years
99 100 years Figure 2.2
Retention rate and
average customer
tenure

Reduced marketing costs

Improving customer retention reduces a company’s marketing costs.
Fewer dollars need to be spent replacing churned customers.12 For
example, it has been estimated that it costs an advertising agency at
least 20 times as much to recruit a new client than it does to retain an
existing client. Major agencies can spend up to $4 million on research,
strategic analysis and creative work in pitching for one major client,
with up to four creative teams working on different executions. An
agency might incur these costs several times over as it pitches to several
prospective clients to replace a lost client.13 In addition to reducing the
costs of customer acquisition, cost-to-serve existing customers also tends
to fall over time. Ultimately, as in some business-to-business markets,
the relationship may become fully automated. Some supply-chain
relationships, for example, employ electronic data interchange (EDI) that
fully automates the ordering, inventory and invoicing processes. EDI is
a relationship investment that acts as an exit barrier.

Better customer insight

As customer tenure lengthens, suppliers are able to develop a better
understanding of customer requirements and expectations. Customers
also come to understand what a supplier can do for them. Consequently,
suppliers become better placed to identify and satisfy customer
requirements profitably, selling more product and service to the retained
customer. Over time, as relationships deepen, trust and commitment
between the parties is likely to grow. Under these circumstances, revenue
and profit streams from customers become more secure. One study, for
example, shows that the average online clothing customer spends 67 per
cent more, and grocery customers spend 23 per cent more, in months 31–36
of a relationship than they spend in months 0–6.14 In sum, both the cost and
revenue sides of the profit equation are impacted by customer retention.
34 Customer Relationship Management

Some companies employ a model that has been variously known as

a value ladder15 or value staircase16 to help them understand where
customers are positioned in terms of their tenure with the company.
Customers typically buy from a portfolio of more or less equivalent
offers or suppliers. For example, large and medium-sized businesses
often do business with more than one bank, and consumers may select
a soft drink from a small portfolio of branded carbonated beverages.
When customers climb the ladder, their value to your company grows.
Your share of their portfolio expands. Put another way, your share of
customer spending, or customer wallet, grows. In Table 2.1 we present a
seven-stage customer journey from suspect status to advocate status.

Suspect Does the potential customer fit your target market profile?

Prospect The customer fits the target market profile and is being approached for the
first time.
First-time customer The customer makes a first purchase.
Repeat customer The customer makes additional purchases. Your offer plays a minor role in the
customer’s portfolio.
Majority customer The customer selects your company as supplier of choice. You occupy a
significant place in the customer’s portfolio.
Loyal customer The customer is resistant to switching suppliers and has a strong positive
attitude to your company or offer.
Advocate The customer generates additional referral dollars through positive word-
of-mouth.

Table 2.1 The

customer journey

As in the Dwyer model cited earlier, not every customer progresses

uniformly along the path from ‘never-a-customer ’ to ‘always-a-customer ’.
Some will have a long maturity phase (i.e. loyal customer); others will
have a shorter life, perhaps never shifting from first-time customer to
repeat customer; others still might never convert from prospect to first-
timer. CRM software allows companies to trace where customers are on
this pathway and to allocate resources intelligently to advance suitable
customers along the value trajectory.
Costs and revenues vary from stage to stage of the journey. In the early
stages, a company may invest significant sums in converting a prospect
into a first-time customer. The investment in initiating a relationship
may not be recovered for some time. For example, Reichheld and Sasser
have shown that it takes a credit-card company approaching two years
to recover the costs of customer acquisition.17 Another study shows that
the average online clothing customer takes four purchases (12 months)
to recover the costs of their acquisition, whereas grocery customers
take 18 months to break even.18 In later years, the transactions within
the relationship may become highly routinized and very low cost to
complete, because each party knows and trusts the other.
 Understanding relationships 35

Lifetime value
This leads to the core CRM idea that a customer should not be viewed as
a set of independent transactions, but as a lifetime income stream. In the
automobile industry, for example, it is estimated that a General Motors
retail customer is worth $276 000 over a lifetime of purchasing cars (11 or
more vehicles), parts and service. Fleet operators are worth considerably
more.19 When a GM customer switches to Ford, the revenue streams
from that customer may be lost for ever. This makes customer retention
a strategically important goal for GM.

Case 2.2
Customer lifetime value (CLV) in the banking industry
One in five banking executives does not measure CLV. Couple this with the 22 per cent who
do not measure portfolio or wallet share, and it is easy to see why cross-selling is such a
challenge for financial service providers. Unless a banker knows which of a customer’s
financial needs are being met, it is exceedingly difficult to suggest additional services. A
robust business intelligence system can provide a financial services firm with a 360 degree
view of the customer. Transactions can be consolidated with demographic and psychographic
data, revenue and profit measures, as well as with historical customer service incidents and
queries. With this total picture, the provider can see the customer from multiple perspectives
and craft programmes that will satisfy a broader range of client requirements. Part of this
multifaceted view of the customer is the ability to aggregate multiple customers into a
household perspective. The benefits of this consolidated view are clear and strong. Multiple
financial service needs can be seen in total, investment opportunities can be tied to life
events for cohabiting family members and marketing costs can be driven down by providing
a single, comprehensive marketing message.
Source: IBM20

Lifetime value (LTV), which is also known as customer lifetime value

(CLV), is a measure of a customer’s, or customer segment’s, profit-
generation for a company. LTV can be defined as follows:
Lifetime value is the present day value of all net margins earned
from a relationship with a customer, customer segment or cohort.
LTV can be estimated at the level of the individual customer, customer
segment or cohort. A cohort of customers is a group that has some
characteristic or set of characteristics in common. These might be
customers recruited in a single year or recruited though a single campaign
or channel. This type of analysis is useful, for example, to find out whether
certain channels are more effective or more efficient at recruiting high
value customers. A European motoring organization knows that it costs
an average of $105 to recruit a new member. However, recruitment costs
vary across channels. The organization’s member-get-member (MGM)
referral scheme costs $66, the organization’s direct response TV campaign
costs $300, and door drops cost $210 per newly acquired member. The
36 Customer Relationship Management

MGM scheme is most cost-effective at customer acquisition, but if these

customers churn at a high rate and cost significantly more to serve, they
may in fact be less valuable than customers generated at higher initial
cost. In fact, customers acquired through the MGM referral scheme remain
members longer, buy more and also generate word-of-mouth referrals.
To compute LTV, all historic net margins are compounded up to today’s
value and all future net margins are discounted back to today’s value.
Estimates of LTV potential look only to the future and ignore the past.
The focus on net margins rather than gross margins is because a
customer that appears to be valuable on the basis of the gross margins
generated might seem less profitable once cost-to-serve the customer is
taken into account. Companies that do not have the processes in place to
allocate costs to customers cannot use net margin data. They must work
either with gross margin or sales revenue data.
For most companies, an important strategic objective is to identify and
attract those customers or segments that have the highest LTV potential.
They are unconcerned with the past. What matters is the future.
Research by Reichheld and Sasser indicates why it is important to look
forward to compute LTV.21 Their data suggest that profit margins tend to
accelerate over time, as shown in Figure 2.3. This has four causes.
1. Revenues grow over time as customers buy more. In the credit-
card example in Figure 2.3, users tend to grow their balances over
time as they become more relaxed about using their card for an
increasing range of purchases. Also, a satisfied customer may look
to buy additional categories of product from a preferred supplier. An
insurance company that has a loyal car insurance customer is likely
to experience some success cross-selling other personal lines, for
example home, property and travel insurance.

Profit (loss) per customer over time ($)

Year

0 1 2 3 4 5
Service

Credit card (51) 30 42 44 49 55

Industrial laundry 144 166 192 222 256
Industrial distribution 45 99 121 144 168
Auto servicing 25 35 70 88 88

Figure 2.3
Profit from
customers over time

2. Cost-to-serve is lower for existing customers, because both supplier and

customer understand each other. For example, customers do not make
demands on the company that it cannot satisfy. Similarly companies do
not communicate offers that have little or no value to customers.
 Understanding relationships 37

3. Referrals are generated by existing, satisfied customers through

their unpaid advocacy. Lexus UK, for example, believes that every
delighted customer generates £600 000 of referral business. Word-of-
mouth is recognized as powerfully persuasive because it is regarded
as being independent and unpaid.
4. Higher prices are paid by existing customers than those paid by new
customers. This is partly because they are not offered the discounts
that are often employed to win new customers, and partly because
they are less sensitive to price offers from other potential suppliers
because they are satisfied with their experience.

Computing LTV
The computation of LTV potential is, in principle, very straightforward.
Several pieces of information are required. For an existing customer, you
need to know:
1. what is the probability that the customer will buy products and
services from the company in the future, period-by-period?
2. what will the gross margins on those purchases be, period-by-period?
3. what will the cost of serving the customer be, period-by-period?
For new customers an additional piece of information is needed:

4. what is the cost of acquiring the customer?

Finally, to bring future margins back to today’s value, another question

needs to be answered for both existing and new customers:

5. what discount rate should be applied to future net margins?

Some commentators suggest that LTV estimates should not be based

only on future purchasing, but also on word-of-mouth (WOM) influence.
The logic is that a satisfied and retained customer not only buys, but also
influences others to buy. Lee and colleagues show that incorporation of
WOM effects increases LTV estimates significantly.22
Figure 2.4 demonstrates the impact that discount rate has on customer
value. Without discounting future profits, the customer appears to have
an LTV of $235. However, once a 15 per cent discount rate is applied, the
customer’s LTV in today’s dollar is only $127.43. A common practice is to
use the weighted average cost of capital (WACC) as the discount factor.
WACC takes into account the costs of the two sources of capital: debt
and equity. Each usually has a different cost, and therefore the average
cost of capital for a business will reflect the degree to which the business
is funded by the two sources.
Computation of a meaningful LTV estimate requires companies to be
able to forecast customer buying behaviour, product and service costs
and prices, the costs of capital (for determining the discount rate) and
the costs of acquiring and retaining customers. This is very demanding,
especially at the level of the individual customer, but it is a challenge
that analytical CRM implementations often address.
A number of companies have developed models that produce
approximate LTV estimates. US Bancorp, for example, calculates a
38 Customer Relationship Management

1. Undiscounted profit earned 2. Discounted profit earned over 5-years

over 5-years: (15% discount rate)

Year 0 –$50 Year 0 –$50.00

1 +$30 1 +$30 ÷ 1.15 = $26.09
2 +$40 2 +$40 ÷ 1.152 = $30.25
3 +$55 3 +$55 ÷ 1.153 = $36.16
4 +$72 4 +$72 ÷ 1.154 = $41.17
5 +$88 5 +$88 ÷ 1.155 = $43.76
$235 $127.43

The net present value of 5-years profit

earned from this customer is $127.43
Figure 2.4
Impact of discount
rate on lifetime
value

customer profitability metric called customer relationship value (CRV)

in which they use historical product ownership to generate ‘propensity
to buy’ indices. Overhead costs are not factored into the computation.
Within their customer base, they have been able to identify four CRV
segments, each having different value, cost, attrition and risk profiles:

● top tier, 11% of customers

● threshold, next 22%
● fence sitters, next 39%
● value destroyers, bottom 28%.

Each of these segments is treated to different value propositions and

customer management programmes: product offers, lending decisions,
fee waivers, channel options and retention efforts. For situations where
the cost of generating accurate LTV data is thought not to be prohibitive,
Berger and Nasr have developed a number of mathematical models that
can be used in LTV estimation.23

Case 2.3
High lifetime value (LTV) customers at Barclays Bank
Barclays is a leading UK-based bank with global operations. As part of the bank’s CRM
strategy, it undertook customer portfolio analysis to identify which retail segments were
most strategically significant. The analysis found that customers within the 25–35 year age
group, who were professionally employed, who had a mortgage and/or credit-card product
were most strategically significant. These were the bank’s most profitable customers.
The bank also found that this segment represented the highest potential lifetime value (LTV)
for the bank, 12 per cent greater than any other segment. LTV is derived from the bank’s
estimates of future income from fees, interest and other charges over their lifetime as a
customer.
 Understanding relationships 39

Figure 2.5 shows how to compute LTV for a cohort of customers.

In year 0, the company spent $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.

$ $ $
net present
Profit per Customer No. of Total annual
Year value at 15%
customer retention rate (%) customers profit
discount
0 100 100 000 10 000 000
1 50 43.48 60 60 000 2 608 800
2 70 52.93 70 42 000 2 223 062
3 100 65.75 75 31 500 2 071 125
4 140 80.00 80 25 200 2 016 000
5 190 94.53 85 21 420 2 024 776
6 250 108.23 90 19 278 2 086 364
7 320 120.30 92 17 736 2 133 654
8 400 130.72 94 16 672 2 179 346
9 450 127.84 95 15 838 2 024 744
10 500 123.15 96 15 204 1 872 372
Figure 2.5
Computing cohort
value

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. If this is
discounted at 15 per cent, in year 0’s currency each retained customer’s
profit contribution is $43.48. In year 2, the retention rate rises from 60 to
70 per cent, and each of the remaining customers contributes $70 ($52.93
at discounted rate) to profit. You can see from the right hand column
in Figure 2.5 that it takes nearly five years to recover the investment
of acquiring this cohort. The data demonstrate two well-established
phenomena. First, profit per customer rises over time, for reasons set out
earlier in this chapter. Secondly, customer retention rate rises over time.
It is feasible to use data such as these to manage a business for improved
profitability. Several strategies are available:

1. Improve customer retention rate in the early years of the relationship.

This will produce a larger number of customers to generate higher
profits in the later years.
2. Increase the profit earned per customer by:
a. reducing cost-to-serve
b. cross-selling or up-selling additional products and services.
3. Become better at customer acquisition by:
a. using more cost effective recruitment channels
b. better qualification of prospects. Customers who defect early on
perhaps should not have been recruited in the first place.
40 Customer Relationship Management

Don’t leave this discussion of LTV by believing that if you improve

customer retention business performance will automatically improve. It
depends entirely on which customers are retained and how you manage
those relationships.

Why companies do NOT

want relationships with
customers
Despite the financial benefits that can accrue from a relationship,
companies sometimes resist entering into relationships with customers.
In the business-to-business (B2B) context there are a number of reasons
for this resistance.

Loss of control: a mature relationship involves give and take on both

sides of the dyad. In bilateral relationships, suppliers may have to give
up unilateral control over their own business’s resources. For example,
a supplier of engineering services might not want to provide free pre-
sales consultancy for a new project with an established client because
of the high costs involved. However, the relationship partner might
have clear expectations of what activities should be performed and
what resources deployed by both themselves and the other party.
Exit costs: not all relationships survive. It is not necessarily easy or
cost-effective to exit a relationship. Sometimes, investments that
are made in a relationship are not returned when a relationship
breaks down. Relationship investments vary from the insignificant
(e.g. co-branding of promotional literature) to highly significant
(e.g. setting up a new production line to service a particular customer’s
requirements). A company might justifiably be concerned about the
security of a relationship-based investment in new manufacturing
operations.
Resource commitment: relationships require the commitment of
resources such as people, time and money. Companies have to decide
whether it is better to allocate resources to customer management or
some other area of the business, such as operations or research and
development. Once resources are committed, they can become sunk
costs. Sunk costs are unrecoverable past expenditures. These would not
normally be taken into account when deciding whether to continue in a
relationship, because they cannot be recovered whether the relationship
endures or not. However, it is a common instinct to consider them.
Opportunity costs: if resources are committed to one customer, they
cannot be allocated to another. Relationships carry with them high
opportunity costs. If you commit resources to customer A, you may
have to give up the possibility of a relationship with customer B, even
if that does seem to be a better proposition. An engineering consultancy
that commits consultants to pre-sales activities with a current client
 Understanding relationships 41

might incur the opportunity cost of losing more lucrative work

generating new business opportunities from other prospective clients.

Why customers want

relationships with suppliers
B2B context
There are a number of circumstances when a B2B customer might want a
long-term relationship with a supplier:

Product complexity: if the product or its applications are complex, for

example, networking infrastructure.
Product strategic significance: if the product is strategically important
or mission-critical, for example, supply of essential raw materials for a
continuous process manufacturer.
Service requirements: if there are down-stream service requirements,
for example, for machine tools.
Financial risk: if financial risk is high, for example, in buying large items
of capital equipment.
Reciprocity: a financial audit practice may want a close relationship with
a management consultancy, so that each party benefits from referrals
by the other.

B2C context
In a business-to-consumer (B2C) context, relationships may be valued
when the customer experiences benefits over and above those directly
derived from acquiring, consuming or using the product or service. For
example:

Recognition: customers may feel more valued when recognized and

addressed by name, for example at a retail bank branch, or as a
frequent flyer.
Personalization: products or services can be customized. For example,
over time, a hairdresser may come to understand a customer’s
particular preferences or expectations.
Power: relationships with suppliers can be empowering. For example,
some of the usual power asymmetry in relationships between banks
and their customers may be reversed when customers feel that they
have personal relationships with particular bank officers or branches.
Risk reduction: risk takes many forms – performance, physical,
financial, social and psychological. High levels of perceived risk are
uncomfortable for many customers. A relationship can reduce or
even, perhaps, eliminate perceived risk. For example, a customer may
develop a relationship with a service station to reduce the perceived
performance and physical risk attached to having a car serviced. The
42 Customer Relationship Management

relationship provides the assurance that the job has been skilfully
performed and that the car is safe to drive.
Status: customers may feel that their status is enhanced by a relationship
with a supplier, such as an elite health club or a company offering a
platinum credit-card.
Affiliation: people’s social needs can be met through commercially based,
or non-commercially based, relationships. Many people are customers
(members) of professional or community associations, for example.

Customer segments can vary in their desire to have relationships with

suppliers. For example, large corporations have their own treasury
departments and often get little value from a bank relationship; small
private account holders have no need for the additional services that a
relationship provides; small and medium-sized business and high net
worth individuals may have most to gain from a closer relationship with
a bank.
A number of B2C organizations deliver incremental benefits by building
closer relationships with their customers. Casa Buitoni, for example, offers
customers the opportunity to learn more about Italian cuisine through
an online customer club. The Harley Owners Group (HOG) offers a
raft of benefits to Harley Davidson owners, including club outings and
preferential insurance rates. Nestlé’s mother and baby club offers advice
and information to new mothers.

Why customers do NOT

want relationships with
suppliers
While companies generally want long-term relationships with customers
for the economic reasons described above, it is far less clear that customers
universally want relationships with their suppliers. B2B customers cite a
number of concerns.24

Fear of dependency: this is driven by a number of worries. Customers may

be concerned that the supplier might act opportunistically, once they are
in a preferred position, perhaps introducing price rises. They may also
fear the reduction in their flexibility to choose alternative suppliers.
There may also be concerns over a loss of personal authority and control.
Lack of perceived value in the relationship: customers may not believe
that they will enjoy substantial savings in transaction costs, or that
the relationship will help them create a superior competitive position,
generate additional revenue or that there will be any social benefits.
In other words, there is no perceived value above and beyond that
obtained from the product or service.
Lack of confidence in the supplier: customers may choose not to enter
a relationship because they feel the potential partner is unreliable,
 Understanding relationships 43

too small, strategically insignificant, has a poor reputation or is

insufficiently innovative.
Customer lacks relational orientation: not all company cultures are
equally inclined towards relationship building. Some are much more
transactional. For example, some retailers make it a policy to buy
a high proportion of their merchandise through special offers. The
preference for transactional rather than relational business operations
may be reflected in a company’s buying processes and reward systems.
Rapid technological changes: in an industry with rapidly changing
technology, commitment to one supplier might mean that the customer
misses out on new developments available through other suppliers.

In the B2C context, consumers buy hundreds of different convenience,

shopping and speciality products and services. Whereas consumers
might want a relationship with their financial service advisor or their
physician, they can often find no good reason for developing closer
relationships with the manufacturer of their household detergent, snack
foods or toothpaste. However, for consumer products and services that
are personally important, customers can become more involved and
become more emotionally engaged.

Customer satisfaction,
loyalty and business
performance
An important rationale for CRM is that it improves business performance
by enhancing customer satisfaction and driving up customer loyalty, as
shown in Figure 2.6. There is a compelling logic to the model, which has
been dubbed the ‘satisfaction–profit chain’.25 Satisfaction increases because
customer insight allows companies to understand their customers better,

Customer Customer Business

satisfaction loyalty performance

Understand customer Behavioural loyalty Revenue growth

requirements Attitudinal loyalty Share of customer
Meet customer Customer tenure
expectations
Deliver customer value
Figure 2.6
The satisfaction–
profit chain
44 Customer Relationship Management

and create improved customer value propositions and better customer

experiences. As customer satisfaction rises, so does customer intention to
repurchase.26 This in turn influences actual purchasing behaviour, which
has an impact on business performance.
We’ll examine the variables and linkages between them. First we’ll
define the major variables of customer satisfaction, customer loyalty and
business performance.

Customer satisfaction
Customer satisfaction has been the subject of considerable research, and
has been defined and measured in many ways.27 We define customer
satisfaction as follows:

Customer satisfaction is the customer’s fulfilment response to a

customer experience, or some part thereof.

Customer satisfaction is a pleasurable fulfilment response. Dissatisfaction

is an unpleasurable fulfilment response. The ‘experience, or some part
thereof ’ component of the definition suggests that the satisfaction
evaluation can be directed at any or all elements of the customer’s
experience. This can include product, service, process and any other
components of the customer experience.
The most common way of quantifying satisfaction is to compare the
customer’s perception of an experience, or some part of it, with their
expectations. This is known as the expectations–disconfirmation model
of customer satisfaction. This model suggests that if customers perceive
their expectations to be met, they are satisfied. If their expectations are
underperformed, this is negative disconfirmation and they will be
dissatisfied. Positive disconfirmation occurs when perception exceeds
expectation. The customer might be pleasantly surprised or even
delighted. This model assumes that customers have expectations, and
that they are able to judge performance. A customer satisfaction paradox
has been identified by expectations–disconfirmation researchers. At times
customers’ expectations may be met but the customer is still not satisfied.
This happens when the customer’s expectations are low. ‘I expected the
plane to be late. It was. I’m unhappy!’
Many companies research customer requirements and expectations to
find out what is important for customers, and then measure customers’
perceptions of their performance compared to the performance of
competitors.

Customer loyalty
Customer loyalty has also been the subject of considerable research.
There are two major approaches to defining and measuring loyalty, one
based on behaviour, the other on attitude.
Behavioural loyalty is measured by reference to customer purchasing
behaviour. Loyalty is expressed in continued patronage and buying.
There are two behavioural aspects to loyalty. First, is the customer still
active? Secondly, have we maintained our share of customer spending?
 Understanding relationships 45

In portfolio purchasing environments, where customers buy products

and services from a number of more-or-less equal suppliers, the share of
customer spending question is more important.
Many direct marketing companies use RFM measures of behavioural
loyalty. The most loyal are those who have high scores on the three
behavioural variables: recency of purchases (R), frequency of purchases
(F) and monetary value of purchases (M). The variables are measured as
follows:

R  time elapsed since last purchase

F  number of purchases in a given time period
M  monetary value of purchases in a given time period.

Attitudinal loyalty is measured by reference to components of attitude

such as beliefs, feelings and purchasing intention. Those customers
who have a stronger preference for, involvement in, or commitment to a
supplier are the more loyal in attitudinal terms.
Recently, researchers have combined both views into comprehensive
models of customer loyalty. The best known is Dick and Basu’s model,
as shown in Figure 2.7.28 These authors identify four forms of loyalty,
according to relative attitudinal strength and repeat purchase behaviour.
‘Loyals’ are those who have high levels of repeat buying and a strong
relative attitude. ‘Spurious loyals’ have high levels of repeat purchase
but weak relative attitude. Their repeat purchasing can be explained by
inertia, high switching costs or indifference. Latent loyalty exists when a
strong relative attitude is not accompanied by repeat buying. This might
be evidence of weakness in the company’s distribution strategy, the
product or service not being available when and where customers want.
From a practical point of view, the behavioural definition of loyalty
is attractive because sales and profits derive from actions not attitudes.

Repeat purchase
High Low
Strong

Latent
Loyals
loyalty
Relative attitude

Spurious No
loyalty loyalty
Weak

Figure 2.7
Two-dimensional
model of customer
loyalty
46 Customer Relationship Management

However, taking the trouble to understand the causes of weak or negative

attitudes in customers can help companies identify barriers to purchase.
It is equally true that knowledge of strong or positive attitudes can help
companies understand the causes of competitor-resistant commitment.
However, it is not clear from the Dick and Basu model whether attitude
precedes behaviour or behaviour precedes attitude. Researchers generally
accept that causation is circular rather unidirectional. In other words,
attitudes influence behaviour, and behaviour influences attitude.

Business performance
Business performance can be measured in many ways. The recent
trend has been away from simple short-term financial measures such
as quarterly profit or earnings per share. Leading companies are
moving towards a more rounded set of performance indicators, such as
represented by the balanced scorecard.29
The balanced scorecard employs four sets of linked key performance
indicators (KPI): financial, customer, process and learning and growth.
The implied connection between these indicators is that people (learning
and growth) do things (process) for customers (customer) that have
effects on business performance (financial).
Customer-related KPIs that can be used to evaluate business
performance following a CRM implementation include: customer
satisfaction levels, customer retention rates, customer acquisition costs,
number of new customers acquired, average customer tenure, customer
loyalty (behavioural or attitudinal), sales per customer, revenue growth,
market share and share of customer (wallet).
The balanced scorecard is highly adaptable to CRM contexts.
Companies need to ask the following questions. What customer
outcomes drive our financial performance? What process outcomes drive
our customer performance? What learning and growth outcomes drive
our process performance? The satisfaction–profit chain suggests that the
customer outcomes of satisfaction and loyalty are important drivers of
business performance.
Share of customer (share of wallet or SOW) is a popular measure of
CRM performance. If your company makes a strategic CRM decision
to serve a particular market or customer segment, it will be keen to
measure and grow its share of the chosen customers’ spending. As
indicated in Figure 2.8, share of customer focuses on winning a greater
share of targeted customers’ or segments’ spending, rather than market
share.

Researching the
satisfaction–profit chain
We’ll now look at some of the research into the links between customer
satisfaction, loyalty and business performance. Analysis has been done
 Understanding relationships 47

High
CRM
Share of customer spend

Traditional marketing

Low
Few Many Figure 2.8
Number of customers
Share of market
versus share of
customer

on international data, national data, industry data, corporate data and

individual customer data.
The American Customer Satisfaction Index (ACSI) was established in
1994. It has tracked the relationships between customer satisfaction and
a number of antecedents and consequences, including customer loyalty
as measured by customers’ probability of buying at different price points.
The ASCI model appears in Figure 2.9. Data are collected in telephone
interviews with approximately 250 current customers of the larger
companies in a number of industries.30 Results from the multi-industry
study show that there is a strong correlation between customer satisfaction
scores and corporate earnings in the next quarter. According to the ACSI
organization, ‘the reason is that a satisfied customer is more profitable
than a dissatisfied one. If satisfaction declines, customers become more
reluctant to buy unless prices are cut. If satisfaction improves the opposite
is true’. 31 An independent study, using data from the ACSI, has also
found that customer satisfaction had a considerable effect on business
performance, although there was variation across sectors.32

Perceived Customer
quality complaints

Customer
Perceived
satisfaction
value
(ACSI)

Customer Customer
expectations loyalty Figure 2.9
The American
Customer
Satisfaction Index
(ACSI) model33
48 Customer Relationship Management

The European Customer Satisfaction Index, using a somewhat

different model, analyses data from 11 European countries and also
reports a strong relationship between customers’ value perceptions,
satisfaction levels and loyalty.34
At the national level, customer data from the Swedish Customer
Satisfaction Barometer (SCSB) have been correlated with corporate
profit performance since 1989. A lagged relationship has been identified,
indicating that current customer satisfaction levels impact on tomorrow’s
profit performance.35 The SCSB database matches customer-based
measures with traditional financial measures of business performance,
such as productivity and return on investment (ROI). The SCSB is one of
several such national indices.
A number of studies in different industries and companies –
telecommunications, banking, airline and automobile distribution –
support the relationship between customer satisfaction, loyalty and
business performance.

● Telecommunications: one study of the telecoms industry found

that a 10 per cent lift in a customer satisfaction index predicted a 2
per cent increase in customer retention (a behavioural measure of
loyalty) and a 3 per cent increase in revenues. The authors concluded
that customer satisfaction was a lead indicator of customer retention,
revenue and revenue growth.36
● Banking: another study found that customer satisfaction in retail
banking correlated highly with branch profitability. Highly satisfied
customers had balances 20 per cent higher than satisfied customers,
and, as satisfaction levels went up over time, so did account balances.
The reverse was also true, as satisfaction levels fell, so did account
balances.37
● Airlines: a study in the airline industry examined the link between
customer dissatisfaction, operating income, operating revenue and
operating expense. The study identified the drivers of dissatisfaction
as high load factors (i.e. seat occupancy), mishandled baggage and
poor punctuality. The study concluded that as dissatisfaction rose,
operating revenue (an indicator of customer behaviour) and operating
profit both fell, and operating expense rose.38
● Car distribution: a study of Volvo car owners examined the links
between customer satisfaction with three attributes – car purchase,
workshop service and the vehicle itself – and dealer business
performance. The results indicated that a one scale-point increase in
overall customer satisfaction was associated with a 4 per cent increase
in dealer profitability at next car purchase.39
● Multi-industry: using 400 sets of matched corporate-level data obtained
from two databases – the ACSI (see above, which provided customer
satisfaction scores) and Standard and Poors’ Compustat (which
provided business profitability data) – Yeung and colleagues found a
linear relationship between customer satisfaction scores and business
profitability. They rise and fall together in the same time period.40
 Understanding relationships 49

Research into the satisfaction–profit chain has also been performed

at the level of the individual customer. Using data collected from both
customers and exporters in the Norwegian fishing industry, Helgesen
finds support for both steps in the satisfaction–profit chain.41 Satisfaction
is positively associated with behavioural loyalty, which in turn is
positively associated with customer profitability. However, he notes
that ‘the satisfaction level has to pass a certain threshold if it is to have
any influence on customer loyalty’, and that as satisfaction increases it
has a diminishing effect on loyalty. The same effects are observed in the
relationship between loyalty and customer profitability. Furthermore,
only 10 per cent of the variance in each independent variable was
accounted for by the dependent variable.
According to one review, there is ‘growing evidence that the links in
the satisfaction–profit chain are solid’.42 However, the relationships can
be both asymmetrical and non-linear. The asymmetric nature of the
relationships is found by comparing the impact of an increase in one
variable with an equivalent decrease. For example, a one-scale point shift
up in customer satisfaction (say from three to four on a five-point scale)
may not have a comparable impact on customer retention rates as a
one-scale point downward shift (say from three to two on the same five-
point scale). Secondly, links can be nonlinear. Nonlinearity is sometimes
reflected in diminishing returns, at other times in increasing returns. For
example, increasing returns may be obtained in repeat purchase levels
as customers progress up the customer satisfaction scale, as shown in
Figure 2.10. Diminishing returns may set in if customer expectations
are already largely met. Investments in increasing customer satisfaction
at already high levels of performance do not have the same impact as
investments at lower levels of performance.

High
Repeat purchase rates

Low
Figure 2.10
1 2 3 4 5 6 7
Non-linear
Not at all satisfied Very satisfied
relationship
Customer satisfaction level
between customer
satisfaction and
repeat purchase
50 Customer Relationship Management

Relationship management
theories
There are five main schools of thought that offer different perspectives on
relationships between customers and suppliers. Although some schools
are quite similar, they generally describe relationships in different terms
and have different implications for relationship management. The
major schools of thought are the Industrial Marketing and Purchasing
(IMP) school, the Nordic school, the Anglo-Australian school, the North
American school, and the Asian (guanxi) school. Each is briefly reviewed
in the following sections. Concepts and themes from these schools have
been incorporated into the preceding discussion.

The Industrial Marketing and Purchasing school

The Industrial Marketing and Purchasing school (IMP) has a dedicated
focus on B2B relationships. The IMP school first emerged in the late
1970s when a number of European researchers began investigating B2B
relationships with the simple goal of describing them accurately. Some
of the major contributors to the IMP school are Malcolm Cunningham,
David Ford, Lars-Erik Gadde, Håkan Håkansson, Ivan Snehota, Peter
Naudé and Peter Turnbull.43
The IMP school argues that B2B transactions occur within the context
of broader, long-term relationships, which are, in turn, situated within a
broader network of relationships. Any single B2B relationship between
supplier and customer is composed of activity links, actor bonds
and resource ties. IMP researchers were among the first to challenge
the view that transaction costs determined which supplier would be
chosen by a customer. IMP researchers identified the important impact
of relationship history on supplier selection. The characteristics of B2B
relationships, from an IMP perspective, are as follows:

● Buyers and sellers are both active participants in transactions,

pursuing solutions to their problems rather than simply reacting to the
other party’s influence.
● Relationships between buyers and sellers are frequently long-term,
are close in nature, and involve a complex pattern of interaction
between and within each company.
● Buyer–seller links often become institutionalized into a set of roles
that each party expects the other to perform, with expectations that
adaptations will be made on an ongoing basis.
● Interactions occur within the context of the relationship’s history
and the broader set of relationships each firm has with other firms –
the firm’s network of relationships. We examine the role of network
members in the achievement of CRM goals in Chapter 10.
● Firms choose whom they interact with and how. The relationships
that firms participate in can be many and diverse, carried out for
different purposes, with different partners, and have different levels
 Understanding relationships 51

of importance. These relationships are conducted within a context of a

much broader network of relationships.
● Relationships are composed of actor bonds, activity links and
resources ties, as now described.

Actor bonds
Actor bonds are defined as follows:

Actor bonds are interpersonal contacts between actors in partner

firms that result in trust, commitment and adaptation between
actors.44

Actor bonds are a product of interpersonal communication and the

subsequent development of trust. Adaptation of relationships over time
is heavily influenced by social bonding.

Activity links
Activity links can be defined as follows:

Activity links are the commercial, technical, financial, administrative

and other connections that are formed between companies in
interaction.

Activities might centre on buying and selling, technical cooperation

or inter-firm projects of many kinds. Activities such as inter-partner
knowledge exchange, the creation of inter-partner IT systems, the
creation of integrated manufacturing systems such as just-in-time
(JIT) and efficient consumer response (ECR), the development of
jointly implemented total quality management (TQM) processes, are
investments that demonstrate commitment.
IMP researchers have focused on two major streams of activity-related
research: the structure and cost effectiveness of activity links, and the
behavioural characteristics that enable relationships to survive. The
reduction of transaction costs is an important motivation for customers
forming links with suppliers. Dyer argues that search costs, contracting
costs, monitoring costs and enforcement costs (the four major types of
transaction cost) can all be reduced through closer B2B relationships.45

Resource ties
Resources are defined as follows:

Resources are the human, financial, legal, physical, managerial,

intellectual and other strengths or weaknesses of an organization.46

Resource ties are formed when these resources are deployed in the
performance of the activities that link supplier and customer. Resources
that are deployed in one B2B relationship may strengthen and deepen
that relationship. However, there may be an opportunity cost. Once
resources (for example, people or money) are committed to one
relationship they might not be available for another relationship.
52 Customer Relationship Management

The Nordic school

The Nordic school emphasizes the role of service in supplier–customer
relationships. The main proponents of the Nordic school are Christian
Grönroos and Evert Gümmesson.47
The Nordic school emerged from research into services marketing
that began in the late 1970s, particularly in Scandinavia. The key idea
advocated by the Nordic school is that service is a significant component
of transactions between suppliers and their customers. Their work
became influential in the development of the field of relationship
marketing, which presents a challenge to the transactional view of
marketing that has been dominant for so long. The Nordic school’s
approach has application in both B2B and B2C environments. Grönroos
has defined relationship marketing as follows:

Relationship marketing is the process of identifying and establishing,

maintaining, enhancing, and, when necessary, terminating
relationships with customers and other stakeholders, at a profit, so
that the objectives of all parties involved are met, where this is done
by a mutual giving and fulfilment of promises.48

Gümmesson goes further, redefining marketing as follows:

Marketing can be defined as ‘interactions, relationships, and

networks’. 49

The Nordic school identifies three major characteristics of commercial

relationships – interaction, dialogue and value – known collectively as
the ‘Triplet of Relationship Marketing’.50

Interaction
The Nordic school suggests that inter-firm exchanges occur in a
broader context of ongoing interactions. This is a significant departure
from traditional notions of marketing where interfirm exchanges are
conceptualized as discrete, unrelated events, almost as if there is no
history. From the Nordic school’s perspective, interactions are service-
dominant. As customers and suppliers interact, each performs services
for the other. Customers supply information; suppliers supply solutions.

Dialogue
Suppliers and customers are in dialogue with each other. Indeed,
communication between partners is essential to the functioning of the
relationship. Traditional marketing thinking has imagined communication
to be one way, from company to customer, but the Nordic school
emphasizes the fact that communication is bilateral.

Value
The concepts of ‘value’, ‘value creation’ and ‘value creation systems’ have
become more important to managers over the past twenty years. The
Nordic school stresses the mutual nature of value. To generate value from
 Understanding relationships 53

customers, companies need to generate customer-perceived value, that is,

create and deliver something that is perceived to be of value to customers.
Value creation therefore requires contributions from both buyer and
seller. From the Nordic school’s perspective, service performance is a key
contributor to customer-perceived value.

The Anglo–Australian school

The Anglo–Australian school takes the view that companies not only
form relationships with customers, but also with a wide range of other
stakeholders including employees, shareholders, suppliers, buyers
and governments. The main proponents of this school are Martin
Christopher, Adrian Payne, Helen Peck and David Ballantyne.51
Stakeholder relationships vary in intensity according to the level
of relationship investment, commitment and longevity. Unlike the
IMP school which takes a descriptive approach, the Anglo–Australian
school takes a more prescriptive approach. Their work sets out to help
managers to improve relationships with stakeholder groups.
The major conceptual contribution of this school is their Six-Markets
Model which has been revised several times (see Figure 2.11). The model
suggests that firms must satisfy six major stakeholder ‘markets’: internal
markets (employees), supplier/alliance markets (including major suppliers,
joint venture partners and the like), recruitment markets (labour markets),
referral markets (word-of-mouth advocates and cross-referral networks)
influence markets (these include governments, regulators, shareholders
and the business press) and customer markets (both intermediaries and
end-users).

Internal
markets

Supplier/
Referral
alliance
markets
markets CUSTOMER
MARKETS

Recruitment Influence
markets markets

Figure 2.11
The six-markets
model52

The school’s researchers have focused on a number of topics: customer

retention, customer loyalty, customer satisfaction, customer relationship
economics and value creation. One of their major findings is that
54 Customer Relationship Management

customer satisfaction and customer retention are drivers of shareholder

value.53

The North American school

The North American school receives less emphasis as a separate
school of relationship management than other schools. Significant
contributors to this school are Jeffery Dyer, Sandy Jap, Shelby Hunt,
Robert Dwyer, Jan Heide, Robert Morgan, and Jagdish Sheth. A major
theme flowing through this school’s work is the connection between
successful inter-firm relationships and excellent business performance.
The school acknowledges that relationships reduce transaction costs,54
and that trust and commitment are two very important attributes of
successful relationships. Indeed, one of the more important theoretical
contributions to come from the North American school is Morgan and
Hunt’s ‘Commitment-Trust Theory of Relationship Marketing’. This
was the first time that trust was explicitly linked to commitment in the
context of customer–supplier relationships. According to the theory, trust
is underpinned by shared values, communication, non-opportunistic
behaviour, low functional conflict and cooperation. Commitment, on
the other hand, is associated not only with high relationship termination
costs, but also with high relationship benefits.55
The North American school tends to view relationships as tools that a
well-run company can manipulate for competitive advantage. They also
focus on dyadic relationships rather than networks, most commonly
buyer–supplier dyads or strategic alliance/joint venture partnerships.

The Asian (Guanxi) school

Guanxi is, essentially, a philosophy for conducting business and other
interpersonal relationships in the Chinese, and broader Asian, context.
Therefore, its effects have a significant impact on how Asian societies
and economies work.
The notion of Guanxi has been known to western economists since at
least 1978. This was the time when the Chinese market began to open
up to the west.56 The foundations of Guanxi are Buddhist and Confucian
teachings regarding the conduct of interpersonal interactions. Guanxi
refers to the informal social bonds and reciprocal obligations between
various actors that result from some common social context, for example
families, friendships and clan memberships. These are special types of
relationships which impose reciprocal obligations to obtain resources
through continual cooperation and exchange of favours.57
Guanxi has become a necessary aspect of Chinese and, indeed, Asian
business due to the lack of codified, enforceable contracts such as those
found in western markets. Guanxi determines who can conduct business
with whom and under what circumstances. Business is conducted within
networks, and rules based on status are invoked. Network members can
only extend invitations to others to become part of their network if the
invitee is a peer or a subordinate.
 Understanding relationships 55

Summary
In this chapter you have learned that there are differing beliefs about what counts as a
relationship. Although interactions over time are an essential feature of relationships,
some believe that a relationship needs to have some emotional content. Although the
character of a relationship can change over time, successful relationships are based
on a foundation of trust and commitment. The primary motivation for companies
trying to develop long-term relationships with customers is the profit motive. There is
strong evidence that long-term relationships with customers yield commercial benefits
as companies strive to enhance customer lifetime value. The satisfaction–profit chain
suggests that customers who are satisfied are more likely to become loyal, and high
levels of customer loyalty are associated with excellent business performance. However,
companies are advised to focus their customer acquisition and retention efforts on
those who have profit-potential or are otherwise strategically significant. Although
companies generally want to develop long-term relationships with customers, there
are good reasons why customers don’t always share the same enthusiasm. Finally, the
chapter closes with a discussion of several schools of management or marketing theory
that shed light on customer relationship management. These are the IMP, Nordic,
Anglo–Australian, North American and Asian (Guanxi) schools of thought.

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channels. Journal of Marketing, Vol. 58(1), pp. 71–86; Heide, J.B. and
John, G. (1990) Alliances in industrial purchasing: the determinants
of joint action in buyer-supplier relationships. Journal of Marketing
Research, Vol. 27(1), pp. 24–36.
55. Morgan, R.M. and Hunt, S.D. (1994) The commitment–trust theory
of relationship marketing. Journal of Marketing, Vol. 58(3), pp. 20–39;
Gao, T., Joseph S.M. and Bird, M.M. (2005) Reducing buyer decision-
making uncertainty in organizational purchasing: can supplier trust,
commitment, and dependence help? Journal of Business Research, Vol.
58(4), pp. 397–406.
56. Ambler, T. (1995) Reflections in China: re-orienting images of
marketing. Marketing Management, Vol. 4(1), pp. 23–30.
57. Davies, H.A., Leung, T.K.P., Luk, S.T.K. and Wong, Y.H. (1995) The
benefits of Guanxi: an exploration of the value of relationships in
developing the Chinese market. Industrial Marketing Management,
Vol. 24, pp. 207–214.
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Chapter 3
Planning and
implementing
customer relationship
management projects
This page intentionally left blank
 Chapter objectives
By the end of this chapter, you will be aware of:

1. five major phases in a CRM implementation

2. a number of tools and processes that can be applied in each phase of an
implementation
3. the importance of project management and change management throughout the
implementation process.

Introduction
In the first chapter you were introduced to strategic, operational,
analytical and collaborative CRM. You also learned that although CRM
projects generally involve technology implementations, people and
processes can also play a large part. Indeed, we said that IT cannot
compensate for bad processes and inept people. Most CRM projects
involve consideration of all three components.
You may have sensed from this discussion that CRM projects can vary
considerably in their scope. An organization-wide CRM project that
automates selling, marketing and service processes might involve process
reengineering, people re-skilling and implementation of a comprehensive
range of technology applications from a CRM suite vendor like SAP.
The project might span several years and cost many millions of dollars.
A small CRM project might involve rolling out an off-the-shelf contact
management system such as GoldMine or SAGE to a sales team. This
might take a couple of months to implement and cost less than a thousand
dollars to complete.

CRM implementation
In this chapter we’ll look at the five major phases of a CRM
implementation, and the processes and tools that can be used within those
phases to ensure that CRM projects deliver what is expected of them.1
Depending on the scope of the project some of these phases, processes
and tools may not be required. The key phases, as shown in Figure 3.1 are:

1. develop the CRM strategy

2. build the CRM project foundations
3. specify needs and select partner
4. implement the project
5. evaluate performance.
64 Customer Relationship Management

1. Develop
CRM strategy

5. Performance 2. Build
evaluation CRM project foundations

4. Project 3. Needs specification

implementation and partner selection

Figure 3.1
CRM project design
and planning
process

Embedded within each of these five key phases are a number of

decision-points and activities, as follows:

1. Develop the CRM strategy:

● situation analysis
● commence CRM education
● develop the CRM vision
● set priorities
● establish goals and objectives
● identify people, process and technology requirements
● develop the business case.
2. Build the CRM project foundations:
● identify stakeholders
● establish governance structures
● identify change management needs
● identify project management needs
● identify critical success factors
● develop risk management plan.
3. Specify needs and select partner:
● process mapping and refinement
● data review and gap analysis
● initial technology needs specification, and research alternative
solutions
● write request for proposals (RFP)
● call for proposals
● revise technology needs identification
● assessment and partner selection.
4. Implement project:
● refine project plan
● identify technology customization needs
● prototype design, test, modify and roll out.
 Planning and implementing customer relationship management projects 65

5. Evaluate performance:
● project outcomes
● business outcomes.

The rest of this chapter will add further detail to the CRM project design
and planning process.

Phase 1: Develop the CRM

strategy
CRM strategy can be defined as follows:

CRM strategy is a high-level plan of action that aligns people,

processes and technology to achieve customer-related goals.

Situation analysis
Development of the CRM strategy starts with a situation analysis. This
analysis sets out to describe, understand and appraise the company’s
current customer strategy. It helps to have an organizing framework
to guide your analysis. The comprehensive models of CRM that are
described in Chapter 1 might be helpful. Another useful framework is
the customer strategy cube. This is a three-dimensional analysis of your
company’s served market segments, market offerings and channels
(routes to market). The situation analysis answers the questions, ‘Where
are we now?’, and ‘Why are we where we are?’ in terms of the three
dimensions of the cube.
Figure 3.2 illustrates the customer strategy cube of a company that
sells four different offerings to five different market segments though
Channels

C
B
A

O4

O3
Offers

O2

O1

1 2 3 4 5
Customers or segments
Figure 3.2
Customer strategy
cube
66 Customer Relationship Management

three different channels. Each block in this cube (there are 60 (5  4  3)

of them) might be a potential business unit that would be subject to a
situation analysis. In fact, most businesses do not operate in all potential
business units of their customer strategy cube. They operate selectively. For
example, AMP sells financial products through a network of independent
and tied financial planners. They do not sell direct to the consumer. Not all
offerings are sold to all market segments through all channels.
The situation analysis examines the three dimensions of the customer
strategy cube independently and jointly. Questions such as the following
are asked.

Customers or segments
Which segments do we target? Which segments do we serve? What
are our customer-related marketing and sales objectives? How much
do we sell to customers? How satisfied are they? What is our market
share? What is our share of customer spending? How effective are
our customer acquisition strategies and tactics? How effective are our
customer retention strategies and tactics? How effective are our customer
development (cross-sell and up-sell) strategies and tactics? What are
the customer touchpoints? What do our customers think about their
experience of doing business with us? Which customer management
processes have most impact on our costs or customer experience? Which
technologies do we use to support our marketing, selling and service
functions, and how well do they operate?

Market offerings
Which products do we offer? What is our branding strategy? How well
known are our offerings? Who do we compete against? What advantages
or disadvantages do we offer vis-à-vis our competitors? How do we
augment and add value to our basic product offer? What benefits do
customers experience from our offerings? How do our prices compare
with our competitors? What are our margins?

Channels
Which channels do we use to distribute to our customers – direct and
indirect? Which channels are most effective? What level of channel
penetration do we have? Which channels are becoming more/less
important? Where do our competitors distribute? What do channel
partners think of their experience of doing business with us? What
margins do channel members earn? Which channel management
processes have most impact on our costs or channel member experience?
The goal of this audit is get a clear insight into the strengths and
weaknesses of the company’s customer strategy. Data can be collected
from executives, managers, customer contact people and, importantly,
customers. Business plans can be studied. One of the outcomes might
be a customer interaction map, as in Figure 3.3, that identifies all
customer touchpoints and the processes that are performed at those
 Planning and implementing customer relationship management projects 67

Replacement
product
Direct
Delivery outlet
Delivery,
Wholesaler Invoice
Delivery Purchase
invoice Price list,
Delivery, Consumer
Invoice
Warehouse Ullage Price list
Retailer Purchase

Withdrawal Sales call,

n
data promotio
Account
Rebate manager
payment
Order
Order Information
Advertising
Direct
mail
Remittance
claim
Sales support,
customer service

Web sities
Accounting Marketing
AP, AR

Figure 3.3 Customer interaction map2

touchpoints. Normally, the interactions that have important impact on

customer experience or your own costs become primary candidates for
reengineering and/or automation. The audit will serve as the start point
for thinking about what you want to achieve from a CRM implementation.

Commence CRM education

CRM, as you have read in Chapter 1, is a term that means different
things to different people. There is considerable misunderstanding
about it. If you are about to embark on a CRM implementation, it is
important that all stakeholders have a clear understanding of what CRM
denotes. Your IT people might think that it is a technology project. Your
marketing people might think it is something to do with a new approach
to market segmentation. Your sales people might think it is about a
new centralized database for customer records. Education has the twin
benefits of allaying any fears that people might have, based on their
misunderstandings, and encouraging participation from people whose
jobs might be impacted. Education enables stakeholders to identify
opportunities to improve their workplace.
There are very few educational programmes available. The Institute
of Direct Marketing offers a suite of introductory study materials,3 the
American Marketing Association publishes a narrow range of tutorial
68 Customer Relationship Management

materials, but the Chartered Institute of Marketing offers nothing.4 Some

of the richest resources are to be found in online CRM communities –
self-help groups organized around a shared interest in CRM. Some of the
better websites are www.customerthink.com (formerly www.crmguru.
com), www.mycustomer.com (formerly www.insightexec.com, and before
that www.crm-forum.com), www.sharedinsights.com, www.eccs.uk.com,
searchcrm.techtarget.com, www.crm2day.com, www.crmdirectory.com
and www.intelligententerprise.com. CRM vendors publish case histories
which can give you a good idea of what is possible. Alternatively, you
could use this book!

Develop the CRM vision

Your CRM vision is a high-level statement of how CRM will change
your business as it relates to customers. The software-as-a-service (SaaS)
company, salesforce.com, provides a number of examples of CRM
visions.5

● We will work with our members in a trust-based relationship to

represent their interests and to satisfy their needs for high value,
security and peace of mind in motoring, travel and home.
● Nurturing relationships one cup at a time. Deliver a customer
experience that consistently develops enthusiastically satisfied
customers in every market in which we do business.
● Build and maintain long-term relationships with valuable customers
by creating personalized experiences across all touchpoints and by
anticipating customer needs and providing customized offers.
● Nothing is more important than making every user successful. (This
is salesforce.com’s own CRM vision.)

The CRM vision gives shape and direction to your CRM strategy. The
CRM vision might be senior management’s perspective, based on what
they learned from the education process, or it could be the product of a
wider visioning process that engages more members of your company,
perhaps even customers and partners. The vision will eventually guide
the development of measurable CRM outcomes.

Set priorities
CRM projects vary in their scope and can touch on one or more
customer-facing parts of your business – sales, marketing or service.
Clear priorities for action, normally focused on cost reduction or
enhanced customer experience, might fall out of the situation analysis,
but more time and debate is often necessary. Priority might be given to
projects which produce quick wins, fast returns or are low-cost. Longer-
term priorities might prove more difficult to implement. For example,
you may want to prioritize a new segmentation of customers based on
their potential profitability. An impediment to that outcome would be
your company’s inability to trace costs of selling, marketing and service
to customers. You may need to prioritize the implementation of an
activity-based costing system before performing the new segmentation.
 Planning and implementing customer relationship management projects 69

Establish goals and objectives

Goals and objectives emerge from the visioning and prioritizing processes.
Although the terms ‘goals’ and ‘objectives’ tend to be used synonymously,
we use the word ‘goal’ to refer to a qualitative outcome and ‘objective’
to refer to a measurable outcome. For example, a CRM goal might be to
acquire new customers. A related CRM objective could be to generate 200
additional leads by the fourth quarter of the next financial year.
Figure 3.4 reports data from Gartner Inc.6 Their research shows that
CRM goals generally cluster into three broad areas: enhancing customer
satisfaction or loyalty, growing revenues or reducing costs. The bars in
the chart show the percentage of respondents to their survey reporting
each CRM goal. It is clear from this information that CRM strategies
often pursue several goals. Among the most frequently cited goals are
increased customer satisfaction and retention, reflecting the satisfaction–
profit chain introduced in Chapter 2.

Increase customer satisfaction

Enhance cross/up-sell opportunities
Increase customer retention
Increase customer loyalty
Loyalty,
Increase sales revenues
satisfaction
Increase profit per customer
Acquire new customers
Increase marketing campaign response rates Revenue
enhancement
Increase acquisition of new customers
Reduce costs of sales
Improve lead quality and conversion
Increase profit margins
Cost reduction
Increase partner loyalty
Reduce cost of marketing
Other
0 20 40 60 80
Figure 3.4
Strategic goals for
CRM

Measurable objectives created at this time will later serve to evaluate

the performance of the CRM implementation.

Identify people, process and technology

requirements
The next step is to begin the process of identifying the people, process
and technology requirements for the goals and objectives to be achieved.
You’ll return to these matters repeatedly as the project unfolds, but at
this stage you need a general idea of the changes that are necessary so
that you can begin to identify costs and construct a business case. If your
goal is to enhance cross-selling opportunities you might need to invest
70 Customer Relationship Management

in training sales people to ask the right questions, engineering a new

opportunity management process and acquiring sales-force automation
software.

Develop the business case

The business case is built around the costs and benefits of the CRM
implementation and answers the question: ‘Why should we invest in
this CRM project?’ The business case looks at both costs and revenues.
CRM implementations can generate additional revenues in a number
of ways:

● conversion of more leads from suspect to prospect to opportunity

● more cross-selling and up-selling
● more accurate product pricing
● higher levels of customer satisfaction and retention
● higher levels of word-of-mouth influence
● more leads and/or sales from marketing campaigns
● incremental sales from more effective selling processes.

Costs can be reduced by:

● improved lead generation and qualification

● lower costs of customer acquisition
● more efficient account management
● less waste in marketing campaigns
● reduced customer service costs
● more efficient front-office processes.

However, these benefits need to be assessed against the costs of the

CRM implementation. The costs of a CRM project may extend well
beyond the costs of CRM software. Additional costs may be incurred
from systems integration, infrastructure costs, new desktop, laptop or
handheld devices, software configuration, data modelling, beta-testing,
helpdesk support, change management, project management, process
reengineering, software upgrades, training and consultancy services, let
alone the opportunity costs of diverting your own staff members from
their routine work. For a simple CRM project IT costs may represent one
quarter of the total project cost; for a complex project IT costs may be as
low as one tenth of the total project cost.
Some business cases are able to ignore technology costs. Many
companies using enterprise software from Oracle and SAP are already
paying for CRM modules in their inclusive licence fees. A licensed SAP
user, for example, might be using enterprise software only for back-
office functions. However, the licence fee permits the company to use the
enterprise suite’s CRM modules. No additional licence costs are incurred
though there may be substantial customization and implementation
costs associated with switching on the unused CRM modules. Other
companies that elect to deploy CRM through the SaaS approach, rather
than installing software on their own hardware, treat CRM software as an
 Planning and implementing customer relationship management projects 71

operating expense. They simply treat software costs, based on a per-user

monthly fee, as an operational expense that can be allocated to marketing,
sales or service budgets.
Many of these costs and benefits are measurable, but there are also
likely to be some important strategic benefits that are much harder to
value, for example, development of a customer-centric way of doing
business, better customer experience, improved responsiveness to
changes in the market or competitive environments, more information
sharing between business silos, improved customer service, more
harmonious relationships with customers and the development of an
information-based competitive advantage.
The business case should span a period equivalent to the economic life
of the proposed solution. This is particularly important when comparing
different implementation models such as on-premise CRM and SaaS
(software–as–a–service). While the upfront costs of these two approaches
are vastly different, the total cost of ownership can even out over a 3–4
year period.
The result of this analysis may be summarized in a range of statistics
including total cost of ownership, payback period, internal rate of return
and net present value, as shown in Figure 3.5.

CRM Business Case Prepared by: Customer Connect Australia

Benefit - Cost Summary Year 1 Year 2 Year 3 Year 4 Year 5

Total Bottom Line Benefits Per Year $150,000 $2,500,000 $2,900,000 $3,100,000 $3,100,000
Cumulative Benefits, Present Value $150,000 $2,500,000 $4,950,000 $7,100,000 $9,100,000
Weighted Average Total Costs Per Year $1,500,000 $1,100,000 $90,000 $250,000 $110,000
Cumulative Costs, Present Value $1,500,000 $2,550,000 $2,600,000 $2,800,000 $2,900,000
Net Cash Flow $750,000 $700,000 $1,400,000 $1,450,000 $1,500,000
Cumulative Net Present Value Cash Flow $750,000 $25,000 $1,100,000 $2,200,000 $3,100,000

Internal Rate of Return 129%

Net Present Value, 5 Years $3,100,000
Return on Investment, Present Value, 5 Years 107%
Payback Period, Years 2.0

Cumulative Net Present Value Cash Flow

$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
$500,000 Year 1 Year 2 Year 3 Year 4 Year 5

$1,000,000

Figure 3.5 Business case summary data7

72 Customer Relationship Management

Phase 2: Build CRM project

foundations
Having created the CRM strategy the next phase involves building the
foundations for the CRM implementation.

Identify stakeholders
The first step is to identify stakeholders. Stakeholders include any
party that will be impacted by the change – this could include senior
management, users of any new system, marketing staff, salespeople,
customer service agents, channel partners, customers and IT specialists.
Their participation in the CRM project may be required at some future
point. Research suggests that the early involvement of parties affected by
change helps pre-empt later problems of resistance. Vendor experience
indicates that the early involvement and participation of senior
management is likely to promote a more successful implementation.
System users are important stakeholders. The importance of involving
system users in the implementation of new technologies is reinforced
by research conducted by Fred Davis and others. Davis found that
intention to use a new technology is predicted by the perceived ease-of-
use of the technology and the perceived usefulness of the technology.
This is expressed in the Technology Acceptance Model which has been
subjected to considerable testing and validation since Davis’s initial
work.8 Early engagement of user stakeholders can help ensure that the
technology is perceived as both easy-to-use and useful by users.

Perceived
usefulness

External Attitude to Intention to

variables Actual use
use use

Perceived
ease of use
Figure 3.6
The Technology
Acceptance Model

Establish governance structures

CRM projects are designed and implemented by people. Governance
structures (see Figure 3.6) need to be put in place to ensure that project
roles and responsibilities are properly defined and allocated.
 Planning and implementing customer relationship management projects 73

The programme director (PD) plays an important role in this structure.

Ultimately, the PD has responsibility for ensuing that the project
deliverables are achieved and that project costs are controlled. In larger
projects the PD will be a full-time appointment. The PD has a boundary-
spanning role – one foot is in the CRM steering committee, the other is
in the programme team. Another key member of the steering committee
is the executive sponsor. This is typically a board level senior executive
who commits real time to the project and ensures that resources are
made available. The steering committee makes policy decisions about
the CRM implementation – for example, which technology to buy, which
consultants to hire – and ensures that the implementation stays on track
and within budget. Other senior executives may sit on the steering
committee to ensure that the project remains business-focused and does
not slide into becoming an IT-dominated project.
The programme team is composed of representatives from the major
stakeholders (shown in Figure 3.7 as ‘Lead’ roles). They have the
responsibility of implementing the project successfully. The Leads may
have their own advisory groups that ensure that stakeholder needs
and concerns are known and brought to the programme team. More
importantly, the Leads are responsible for ensuring that the right people
are brought in for specific project activities. For example, if the selling
process is being reviewed, the sales Lead would ensure the participation
of highly regarded sales representative and sales managers. CRM

CEO Exec sponsor

CRM consultant
Sales exec Marketing exec Program director
External resources
Steering committee

Systems
IS lead
implementer

Key users Sales lead

Key users Marketing lead

Customer
advocate

Key users Support lead

Program
team
Figure 3.7
Governance
structure9
74 Customer Relationship Management

implementations can impose considerable demands on your company’s

own internal IT resources which might be called on to perform several
project-related roles. The lead developer role ensures that the CRM
software is customized to meet the needs of users. The database
developer role ensures that customer-related data held in disparate
databases is made available to end-users in the form required for
operational and analytical CRM applications. The front-end developer
role ensures that the user interface is easy to understand and use.
It is not uncommon for CRM projects to import resources and talents
to help deliver the project. This governance structure will have a CRM
consultant working with the steering committee. It is unlikely that
an inhouse steering committee will have sufficient experience of CRM
project implementation. An experienced consultant can help the steering
committee overcome problems as the project progresses. A systems
implementer is also shown in this governance structure as an important
external resource. For an installed CRM system, vendors generally
supply technical help to ensure that the system is properly implemented.
The implementer has a boundary-spanning role, being an employee of
the vendor but working onsite as the client’s advocate.
A systems integrator may also be needed to align disparate systems into
a coherent whole to support the project objectives. Systems integration
can be defined as follows:
Systems integration is the practice of aligning and combining
system components such as people, processes, technology and data
for the achievement of defined outcomes.
Very often desired CRM outcomes are impeded by the poor
interoperability of IT systems. For example, the IT system that supports
web operations may be incompatible with the IT system that supports
the call centre. The result is that there may be two different databases
containing important customer-related information. A systems integrator
might be needed to programme the interface that links the two systems.
Finally, the governance chart shows that the voice of the customer has
to be heard in the project team. Customers of companies that implement
CRM are important stakeholders, because their experience of doing
business will change. Some CRM projects fail to deliver optimal outcomes
because the project team fails to ask ‘What would the customer think?’

Identify change management needs

Even small CRM projects can prove challenging in terms of change
management. A sales-force automation project might involve centralizing
data that is presently kept on individual representatives’ computers
and making that information available to everyone in the team.
Representatives will need to learn to share. In a distributed sales-force,
these representatives may not have even met each other. If they also
have to change their selling methodology, record keeping and reporting
habits, there might be some worries, if not outright resistance.
According to consultants Booz Allen & Hamilton, ‘Leadership teams
that fail to plan for the human side of change often find themselves
 Planning and implementing customer relationship management projects 75

wondering why their best-laid plans go awry’.10 They describe change

both in terms of top-down leadership and bottom-up buy-in, as does
John Kotter whose eight-step approach to managing change is widely
cited and deployed.11 The eight steps are as follows:

1. create a sense of urgency so people begin to feel ‘we must do

something’
2. put together a guiding team to drive the change effort
3. get the vision right, and build supporting strategies
4. communicate for buy-in
5. empower action by removing organizational barriers to change
6. produce short-term wins to diffuse cynicism, pessimism and scepticism
7. don’t let up, but keep driving change and promoting the vision
8. make change stick by reshaping organizational culture.

Kotter emphasizes that successful change management programmes

adopt a see–feel–change approach. To bring about change it is necessary
not only to get people to see the need for change, but also to feel so
emotionally engaged that they want to change. He stresses the importance
of emotional engagement with the programme’s vision and strategies.

Organizational culture
The idea of organizational culture has been around for many years. In
everyday language, organizational culture is what is being described
when someone answers the question ‘what is it like working here?’ More
formally, organizational culture can be defined as:

A pattern of shared values and beliefs that help individuals

understand organizational functioning and thus provide them with
the norms for behavior in the organization.12

Essentially, organizational culture is understood to comprise widely

shared and strongly held values. These values are reflected in patterns
of individual and interpersonal behavior, including the behavior of
the business leaders, and expressed in the norms, symbols, rituals and
formal systems of the organization.
A number of studies indicate that organizational culture affects business
performance.13 Recent research has also shown that organizational culture
is a predictor of CRM success.14 Adhocracy, one of four organizational
cultures identified in the Competing Values model (Figure 3.8), shows the
strongest association with CRM success. Adhocracies are highly flexible,
entrepreneurial, externally-oriented organizations. Their core values are
creativity and risk-taking.
Cameron and Quinn have developed a process for companies wishing
to change their culture, as indicated by the Competing Values model.15
They suggest that cultural change may involve adjustment to the
organization’s structure, symbols, systems, staff, strategy, style of leaders
and skills of managers, but emphasize that individual behavioural change
is the key to culture change.
76 Customer Relationship Management

Flexibility and discretion

External focus and differentiation

Internal focus and integration
Clan Adhocracy

Hierarchy Market

Figure 3.8
The Competing Stability and control
Values model of
organizational
culture16

Buy-in
As noted by John Kotter, buy-in operates at an emotional or intellectual
(rational) level. Intellectual buy-in is where people know what has
to be changed and understand the justification for the change. New
technologies are adopted more quickly when users believe that the
system will be easy to use. Emotional buy-in is where there is genuine
heartfelt enthusiasm, even excitement, about the change. The matrix in
Figure 3.9 shows the possibility of four employee segments, reflecting
the presence or absence of emotional and rational buy-in. Champions
are emotionally and rationally committed. Weak links are neither
emotionally nor rationally committed. Bystanders understand the
changes being introduced, but feel no emotional buy-in to the change.
Loose cannons are fired up with enthusiasm, but really don’t understand
what they have to do to contribute to the change. All these segments will
be found in major change projects such as a CRM implementation.

Yes Bystanders Champions

Intellectual buy-in

Loose
No Weak links
cannons

No Yes
Emotional buy-in

Figure 3.9
The buy-in matrix
 Planning and implementing customer relationship management projects 77

The CRM project needs to be marketed to each of these groups

in different ways. The programme team’s challenges are to stir-up
bystanders to become passionate about the project’s goals, and to educate
loose cannons on the reasoning behind CRM. Weak links can be truly
problematic if they are in customer-facing roles or impact on customer
experience. It has been said that it takes many years to win a customer’s
confidence and trust, but only one incident to break it. If efforts to win
them over fail, weak links may need to be reassigned to jobs where there
is no customer impact.

Identify project management needs

CRM implementations can place considerable demands on project
management skills. A CRM project plan spells out the steps that will get
you from where you are now (customer strategy situation analysis) to
where you want to be (CRM vision, goals and objectives), on time and
within budget. The CRM programme director generally performs the
project management role, but sometimes it is outsourced to a consultant.
A project plan sets out the tasks to be performed, the order in which
they are to be executed, the time each will take, the resources required
to perform the tasks (including people and money) and the deliverables
from each task. Tools such as Gantt charts (see Figure 3.10), critical path
analysis (CPA), programme evaluation and review techniques (PERT)

Figure 3.10 Project Gantt chart17

78 Customer Relationship Management

or network diagrams are useful tools for project managers. Some tasks
will be performed in parallel, some in sequence. As the project rolls
forward there will be periodic ‘milestone’ reviews to ensure that it is on
time and on budget. A CRM project that has the goal of improving the
productivity of marketing campaigns might be made up of a number
of tasks or mini-projects, each with its own deliverable, including the
following: market segmentation project, database development project,
creation of a new campaign management process, management reports
project, technology search and selection project, and a staff training
project.

Identify critical success factors

Critical success factors (CSFs) are the ‘must haves’ that underpin project
success. Critical success factors can be defined as follows:

CSFs are attributes and variables that can significantly impact

business outcomes.

CRM consultants and vendors offer a range of opinions on CSFs,

mentioning the following: a clear customer strategy that defines your
company’s offers, markets and channels; an organizational culture that
promotes coordination and information-sharing across business units; an
agreed definition of what counts as CRM success; executive sponsorship
of the CRM programme’s objectives; availability and use of pertinent,
accurate, timely and useable customer-related information; a clear
focus on people and process issues, not only technology; starting small
with quick wins that are then promoted within the company as success
stories; focus on automating processes that have major implications for
costs or customer experience; engagement of all stakeholders, including
end-users and customers, in programme planning and roll-out.
There have been very few independent studies of CRM CSFs. Luis
Mendoza and his colleagues conducted a qualitative study of CSFs that
involved a panel of eight expert judges identifying 13 CSFs and 55 associated
metrics covering people, process and technology aspects of CRM strategy.18
The CSFs and their alignment with people, process and technology appear in
Table 3.1, the most important being highlighted in bold.
Da Silva and Rahimi19 conducted a single CRM case study test of
three CSF models that had originally been developed in the context of
enterprise resource planning (ERP) implementations. They found that
CRM CSFs could be categorized as strategic and tactical. Strategic CSFs
are encountered at the beginning of the project, while tactical CSFs
become important later. Strategic CSFs include a clear CRM philosophy
(we prefer the term ‘vision’), top management commitment and project
management expertise. Tactical CSFs include trouble-shooting skills,
good communications and software configuration.
Croteau and Li conducted an empirical assessment of CRM CSFs in
57 large Canadian organizations.20 Focusing only on the technology
element – therefore ignoring people and process issues – they collected
data about CRM’s impacts on customer satisfaction, retention, loyalty
 Planning and implementing customer relationship management projects 79

Critical success factor People Process Technology

1. Senior management commitment X

2. Creation of a multidisciplinary team X X
3. Objectives definition X
4. Interdepartmental integration X X
5. Communication of the CRM strategy to staff X X
6. Staff commitment X
7. Customer information management X
8. Customer service X X
9. Sales automation X X
10. Marketing automation X X
11. Support for operational management X X X
12. Customer contact management X X
13. Information systems integration X

(Note: more important CSF’s are bold typeface) Table 3.1 Critical
success factors for
successful CRM
strategies

and market share, and looked for associations with a number of

predefined critical success factors. They conclude that the CSF most
strongly associated with CRM success is an accurate and well-developed
knowledge management system. This has to be supported by a suitable
IT infrastructure which can capture, manage and deliver real time
customer, product and service information in order to improve customer
response and decision-making at all customer touchpoints. They also
found that another important CSF is top management support.

Develop a risk management plan

It has been claimed that a large number of CRM projects, perhaps as
many as two-thirds, fail.21 Of course, there can be many potential causes
of failure, ranging from inadequate project management to resistance
of end-users to the adoption of new technologies. At this stage, you’ll
be trying to identify the major risks to achieving the desired outcomes.
Once identified, you can begin to put risk mitigation strategies and
contingency plans in place. As you’d expect, some risks reflect an
absence of the CSFs identified above. Gartner names a number of
common causes of CRM failure: management that has little customer
understanding or involvement; rewards and incentives that are tied
to old, non-customer objectives; organizational culture that is not
customer-focused; limited or no input from the customers; thinking
that technology is the solution; lack of specifically designed, mutually
reinforcing processes; poor-quality customer data and information; little
coordination between departmental initiatives and projects; creation
of the CRM team happening last, and the team lacks business staff; no
measures or monitoring of benefits and lack of testing.22
80 Customer Relationship Management

Risk mitigation strategies are your responses to these risks. Let’s take
the risk of management having little or no customer understanding. How
might you respond to this? There are a number of things you could do –
management could work in the front-line serving customers (McDonalds’
executives do this), listen in to call centre interactions for at least one hour
a week or mystery shop your own and competitor organizations.

Phase 3: Needs specification

and partner selection
Having built the CRM project foundations, the next phase involves
specifying needs and selecting suitable partners.

Process mapping and refinement

The first task of Phase 3 is to identify business processes that need
attention – making them more effective or efficient or flagging them as
candidates for automation. Business processes can be defined as follows:

A business process is set of activities performed by people and/or

technology in order to achieve a desired outcome.

Put more simply, business processes are how things get done by your
company. Processes can be classified in several ways: vertical and
horizontal; front and back-office; primary and secondary.
Vertical processes are those that are located entirely within a business
function. For example, the customer acquisition process might reside
totally within the marketing department.
Horizontal processes are cross-functional. New product development
processes are typically horizontal and span sales, marketing, finance and
research and development functions.
Front-office (or front-stage) processes are those that customers
encounter. The complaints handling process is an example.
Back-office (or back-stage) processes are invisible to customers, for
example, the procurement process. Many processes straddle both front
and back-offices: the order-fulfilment process (see Figure 3.11) is an
example. The order taking part of that process sits in the front-office. The
production scheduling part is back-office.
A distinction is also made between primary and secondary processes.
Primary processes have major cost implications for companies or, given
their impact on customer experience, major revenue implications. The
logistics process in courier organizations – from picking up a package,
through moving the package, to delivering the package – constitutes
about 90 per cent of the cost base of the business, and is therefore a
primary process. Customers may have a different perspective on what is
important. They typically do not care about back-office processes. They
care about the processes that touch them. In the insurance industry these
 Planning and implementing customer relationship management projects 81

are the claims process, the policy renewal process and the new policy
purchase process. In the courier business they are the pick-up, delivery
and tracking processes.
Secondary processes have minor implications for costs or revenues, or
little impact on customer experience.
Strategic CRM aims to build an organization that is designed to create
and deliver customer value consistently better than its competitors.
Designing processes that create value for customers is clearly vital to
this outcome. 3M’s mission is ‘to solve unsolved problems innovatively’.
It does this in part through new product development processes that are
designed to identify good ideas and bring them to the market quickly.23
For 3 M, the innovation process is a primary process that enables the
company to differentiate itself from its competitors.
Operational CRM involves the automation of the company’s selling,
marketing and service processes, and generally requires the support of
analytical CRM. Figure 3.12 shows the campaign management process
for a particular customer offer made by First Direct, a UK-based
telephone bank. It shows that the propensity of a customer to open a
high interest savings account is determined by a scoring process that
considers both demographic and transactional data. The propensity

Finance Sales Logistics

Order received

Review order
Order input
Back orders
No Yes
Credit check Credit OK?

No Yes Autorise pick

Release orders?
Print pick slip
Pick
Confirm shipment

Yes No
Invoice released Goods despatched?

Yes
Export order?
Raise export invoice
No
Yes No
EDI order? Invoice sent

Electronic invoice sent Manual invoice sent

Figure 3.11 Order fulfilment process

82 Customer Relationship Management

Customer phones in

Check scores

Buy product
No interest Offer product to Open account on
high scores phone
2
Send application
form
7 42
Out bound phone
follow-up
7
Check account
Mail follow-up
balance

Figure 3.12
Campaign Do nothing (Numbers are days)
management
process for high
interest savings
account

modelling process is an illustration of analytical CRM. If a target score

is reached an offer is made, either by the customer service agent during
a phone call or at a later time by mail. This automation of the selling
process is an example of operational CRM.
Flowcharting, which is also known as blueprinting and process
mapping, is a tool that can be used to make processes visible. The
flowchart sets out the steps involved in performing the process. It may
also identify the people (or roles) that contribute to the process, and the
standards by which the process is measured, such as time, accuracy or
cost. Processes always have customers, who may be either internal or
external to a company. Customers receive process outputs. Figure 3.11
shows the order fulfilment process for an exporter. The flowchart shows
that the process is cross-functional and is completed by a number of
internal supplier–customer relationships in series.
Software such as Microsoft Visio, ABC Flowcharter and ConceptDraw
is readily available to help generate process flowcharts. Major vendors
and consultants may use their own proprietary applications. Oracle,
for example uses Oracle Designer which allows them to model
processes and generate the associated software code. Flowcharts can
be used to identify fail points where a process frequently breaks down,
redundancies and duplications. They can also be used for induction and
training of new people and for illustrating internal customer–supplier
relationships. Processes can be rated according to the degree to which
they can be improved. It has been suggested, for example, that processes
be rated according to the criteria in Table 3.2.
 Planning and implementing customer relationship management projects 83

Process rating

Best practice The process is substantially defect-free and contributes to CRM performance.
(superiority) Process is superior to comparable competitors and other benchmarks
Parity A good process which largely contributes to CRM performance
Stability An average process which meets expectations with no major problems, but which
presents opportunities for improvement
Recoverability The process has identified weaknesses which are being addressed
Criticality An ineffective and/or inefficient process in need of immediate remedial attention

Table 3.2 Evaluating

processes24

Data review and gap analysis

Having identified processes that require attention, the next step is to
review the data requirements for the CRM implementation and to
identify shortfalls.
Strategic CRM uses customer-related data to identify which customers to
target for acquisition, retention and development, and what to offer them.
Operational CRM uses customer-related data in the everyday running
of the business, for example in handling billing queries in the contact
centre or mounting campaigns in the marketing department. Analytical
CRM uses customer-related data to answer questions such as ‘who are
our most profitable customers’ and ‘which customers are most likely to
churn’?. Collaborative CRM uses customer-related data to enable channel
partners to target their communications more precisely. The fundamental
issue companies have to ask is: what customer-related data do we need for
strategic, operational, analytical and collaborative CRM purposes?
Members of the programme team should be well placed to answer the
question ‘what information is needed?’ For example, the programme
team’s marketing lead would be expected to appreciate the information
needs of direct marketers running event-based campaigns. Typically,
these marketers want to know response rates to previous mailings broken
down by customer group, the content of those offers, sales achieved by the
mailings and the number of items returned unopened. They would also
want to know the names and addresses of selected targets, their preferred
method of communication (mail? e-mail? phone?), their preferred form of
salutation (first name? Mr? Ms?) and the offers that have been successful
in the past. In a globalized business world, it is important to respect
cultural connections.
At this stage of planning the CRM project, you are identifying the
data that is needed for CRM purposes and creating an inventory of data
that is available for these purposes. The gap between what is available
and what is needed may be quite significant. A useful distinction can
be made between ‘need-to-know’ and ‘like-to-know’ that is, between
information needed for CRM purposes and information that might
be useful at some future point. Given the costs of developing and
84 Customer Relationship Management

maintaining customer-related databases, companies need to be rigorous

in screening data requirements.

Initial technology needs specification and

research alternative solutions
Earlier in this process you began to consider technology requirements.
Now you can return to this question with a clearer focus on the process
and data issues. There are a huge number of software applications that
fall under the heading of CRM. They are shown in Figure 3.13. You need
to decide what applications will deliver your CRM vision and meet
the business case requirements. You can learn about these applications
by visiting vendor websites, joining online communities such as www.
customerthink.com, or attending physical or virtual (online) exhibitions.
There is more coverage on IT issues in Chapters 13–16 of this book.
Chapter 13 presents an overview of IT for CRM, and Chapters 14, 15

Segmentation Sales force automation

Campaign management Lead management
E-marketing Sales configuration
Lead management Marketing Sales Order management
Loyalty management Pricing management
Marketing resource management Sales compensation
Enterprise marketing management Sales performance management
Marketing performance management
Partner marketing
Community management
Service analytics
Data mining
Desktop productivity
Performance management
Dashboards/KPIs Contact center/Call center
Analytics CRM Workforce optimization
Personal productivity
Application • E-Learning
Customer value analysis Mind Map
Sales, Service, Web • Workforce management
Field service analytics • Q/A, Monitoring
In-line, Event driven Self-Service/E-Service
• Knowledge management
• E-Mail response
Field force optimization Customer
Wireless mobility • Surveys
service
Parts planning Unified communications
Field service
Contract/Warranty Trouble ticketing/Case
Remote monitoring management
Fleet management Enterprise feedback
Dispatch and repair management

Customer data integration: CDI

Web storefront Information/ Product information
Catalog, Pricing E-Commerce infrastructure management: PIM
Inventory Business process management
Sales partner management Master data management: MDM
Enterprise information management

Figure 3.13 CRM applications (Source: Gartner Inc)

 Planning and implementing customer relationship management projects 85

and 16 review sales-force automation, marketing automation and service

automation respectively.
A decision has to be made about whether to build, buy or rent the
CRM applications that are chosen. Your options are to build your CRM
applications from scratch, to buy an on-premise site licence or pay a
monthly per-user charge for an on-demand solution. If you opt to build
from scratch you may find that some open source modules provide
much or all of what you need. Open source software is peer-reviewed
software that gives CRM application developers the opportunity to view
and evaluate source code. Open source advocates suggest that being able
to modify source code leads to improved software with fewer bugs, and
that free distribution leads to more developers working to improve the
software. The second alternative is to license CRM applications. Yearly
licence fees typically vary according to the number of users. Licence fees
give you the right to use the CRM software, but additional costs may
be incurred for CRM application support and maintenance, training,
customization, integration, IT infrastructure and end-user support. The
final alternative is to pay a monthly per-user cost for an on-demand
solution which generally includes implementation, maintenance,
training, support and application management services delivered
directly by the application vendor. Most companies opt for either hosted
(on-demand) or installed (on-premise) solutions.

Hosted or on-premise CRM

One important decision is how to access CRM functionality. CRM
software is distributed in two ways. It can be installed on your
company’s own servers or it can be accessed from another party’s servers
via the Internet. The former is known as on-premise, offline or installed
CRM, an option that has been the preferred mode for many large-scale
enterprises and early adopters. The alternative is known as hosted or
online CRM, web-service, the ASP (Application Service Provider) model
or the Software-as-a-Service (SaaS) model.
The hosted option is becoming more popular as CRM solutions
are adopted by mid-market and smaller enterprises. Some larger
organizations are also opting for online CRM solutions particularly for
tactical or departmental-level issues, and many enterprises are using a
hybrid mix of hosted and on-premise solutions, which is feasible when
the underlying data model is the same.25
SaaS vendors deliver and manage applications and other services from
remote sites to multiple users via the Internet. The software is installed
on the ASP’s servers or those of their partners. For example, Siebel’s
hosting partner is IBM. Access is on a pay-as-you-go or subscription
basis. Some vendors offer a variety of options for their software. Oracle
sells both on-premise and hosted versions of siebel CRM. Stayinfront
sells on-premise owner-operated, on-premise hosted (whereby the
software is on your site but managed by Stayinfront) and off-site hosted
versions. Some vendors offer a ‘peppercorn’ arrangement whereby, after
several years of rental, the software can be purchased for a token sum.
In the early days, hosted CRM applications offered much less
functionality than their on-premise competitors. Currently, the gap is
86 Customer Relationship Management

closing. Some SaaS vendors are providing advanced functionality for

competitive intelligence, pricing, content management, data warehousing
and analytics, and workflow design.26
There are a number of players in hosted CRM, some of whom are
shown in Table 3.3.

Hosted CRM vendor url

Salesforce.com http://www.salesforce.com/
Siebel Systems http://www.crmondemand.com/
Red CRM http://redcrm.com/
Sugar CRM http://www.sugarcrm.com
Entellium CRM Solutions http://www.entellium.com/
SalesLogix http://www.saleslogix.com/home/default.php3
Soffront Software Inc. http://www.soffront.com/
RightNow Technologies http://www.rightnow.com/
NetSuite http://www.netsuite.com/portal/products/crm_plus/main.shtml
Oracle http://www.oracle.com/ondemand/ebso.html
Aplicor Inc. http://www.aplicor.com/

Table 3.3 Hosted

CRM vendors

It is widely claimed that there are significant cost advantages to the

hosted model. Costs are fixed and known. Companies pay a per-user
monthly fee. If you have 50 users, and the monthly fee is $100 per user,
you can expect annual user fees of $60 000. Upgrades are performed by the
vendor away from the users’ premises. On-premise implementations, in
contrast, can impose significant burdens on in-house IT staff and budgets.
There can be upfront investments in IT hardware and infrastructure,
software purchase and customization, and training. Implementation costs
can be significant. User support and software upgrade costs are additional
to initial software licence costs. Essentially, the hosted model converts
capital expenditure and fixed costs into variable costs. Hosted CRM costs
have fallen to US$50 per user per month, and are expected to fall further
as the growth in the market attracts new vendors.
One analysis has compared the total costs of ownership (TCO) of
installed and hosted sales-force automation, using a hypothetical 500-
user installation.27 The TCO of the installed solution was eight times
that of the hosted solution in year one (Table 3.4); in subsequent years
the relative costs appear to even out, largely because the hosted solution
requires clients to pay monthly or annual subscription fees based on the
number of users.
Additional research by the Meta Group indicates that hosted CRM has
a cost advantage in the first three years, but thereafter the annual charges
incurred make on-premise solutions a more attractive proposition. They
conclude:
‘for a typical mid-market on-premises CRM application, total first
year costs are nearly 50 per cent more than for a typical first year
hosted application. However, a different picture emerges when costs
 Planning and implementing customer relationship management projects 87

Cost item On-premise CRM Hosted CRM

Number of users 500 500

Application licence/subscription $1 250 000 $750 000
Implementation and customization $6 250 000 $187 000
Training $150 000 $75 000
IT infrastructure/hardware $500 000 $0
IT personnel $500 000 $0
Support/upgrade costs $225 000 $0
Year one expenditure $8 875 000 $1 012 500
Table 3.4 Hosted
Sources: Triple Tree; Software & Information Industry Association (SIAA); salesforce.com; Yankee Group. versus installed
Table originally appeared in eMarketer 2005. CRM – first year
costs for a 500-user
deployment

are projected over a few years … When long term costs are analysed,
hosted products approach an equivalent total cost of ownership
(TCO) to that of on-premise products in approximately three years.
Beyond this time, a hosted TCO will exceed an on-premise TCO’.28
A contrary analysis, conducted by the Yankee Group, estimated that
the TCO of an on-premise solution is almost 60 per cent higher over a
five year period.29 These conflicting results point to the need for CRM
adopters to conduct their own TCO analysis.
You will also need to consider hardware issues. What types of
hardware are required by sales, service and marketing users? Perhaps
salespeople need a personal digital assistant (PDA) for easy portability,
whereas marketing people will be satisfied with a desktop computer.
Mobile road warriors in remote locations may require both a laptop in
their home office and a PDA on the road. Table 3.5 offers a comparison
of PDA and laptop attributes.
You now need to finalize your thinking about systems integration. For
example, you might want your CRM system to ‘talk to’ or share data
with back-end systems for finance, inventory management and order
processing. You might want it to integrate with other third-party systems
that provide added functionality for sales, marketing and service staff.
For example, your marketing people might want integration with a
mapping system, while salespeople might want integration with a global
positioning system.

Write request for proposals (RFP)

Before calling for proposals you need to write a detailed RFP. This
document becomes the standard against which vendors’ proposals are
evaluated. It summarizes your thinking about the CRM programme and
invites interested parties to respond in a structured way. Typical contents
of the RFP include:

1. Instructions to respondents
2. Company background
88 Customer Relationship Management

Attribute Laptop PDA

Content Full Narrow

Size XXXX X
Portability Moderate High
Start time Moderate Fast
Speed of input Fast Slow
Dialogue barrier Yes No
Stickiness Moderate High
Walk and use No Yes
Presentations Excellent Good
Replacement cost High Moderate
Synchronization Good Excellent

Table 3.5 (Source: Customer Connect Australia)

Comparing laptops
and PDAs

3. The CRM vision and strategy

4. Strategic, operational, analytical and collaborative CRM requirements
5. Process issues:
a. customer interaction mapping
b. process re-engineering.
6. Technology issues:
a. delivery model – SaaS, on-premise, blended
b. functionality required – sales, marketing and service
c. management reports required
d. hardware requirements and performance measures
e. architectural issues
f. systems integration issues
g. customization requirements
h. upgrades and service requirements.
7. People issues:
a. project management services
b. change management services
c. management and staff training.
8. Costing issues – TCO targets
9. Implementation issues – pilot, training, support, roll-out, timeline
10. Contractual issues
11. Criteria for assessing proposals
12. Timeline for responding to proposals.

Call for proposals

The next step is to invite potential partners to respond to the RFP. You’ll
see from the RFP contents that CRM projects sometimes require input
from several process, people and technology partners. On the technology
side, if your company is already paying for CRM modules as part of its
enterprise IT system, you’ll certainly want to add this technology vendor
to the list of those invited to respond. Between three and six potential
technology vendors are typically invited.
 Planning and implementing customer relationship management projects 89

Revised technology needs identification

Proposals from technology vendors will sometimes identify
opportunities for improved CRM performance that you may not have
considered. Perhaps there is some functionality or an issue that you had
not considered. For example, you might not have considered the need
to provide implementation support to sales representatives in the field.
A vendor who indicates that they’ll be able to help representatives learn
the new technology in remote locations might be very attractive.

Assessment and partner selection

The next stage is to assess the proposals and select one or more partners.
This task is generally performed by an evaluation team formed for this
purpose and reporting to the steering committee. Assessment is made
easier if you have a structured RFP and scoring system. There are two
types of scoring system – unweighted and weighted. An unweighted
system simply treats each assessment variable as equally important. A
weighted system acknowledges that some variables are more important
than others. These are accorded more significance in the scoring process.
Evaluation and selection should involve more than just the written
vendor proposals. Short-listed vendors should be invited to demonstrate
their solutions in relevant scenaries. Vendors may be required to provide
proof-of-concept for technical solutions such as e-mail integration or
mobile synchronization. Finally, preferred vendors should be subject to
reference checks. The results of all these inputs are then scored to support
the final decision.

Phase 4: Project
implementation
By now, you have developed the CRM strategy, built the CRM project
foundations, specified your needs and selected one or more partners. It
is now implementation time!

Refine project plan

The first step of Phase 4 requires you to cooperate with your selected
partners in refining the project plan. Remember, this was originally
defined without consideration of the needs and availability of your
partners. You may find that your partner’s consultants are already
committed to other projects and that you’ll have to wait. Your partners
will be able to help you set new milestones and refine the budget.

Identify technology customization needs

It is very common that off-the-shelf technology fails to meet all the
requirements of users. Some vendors have industry-specific versions
of their CRM software. Oracle, for example, offers a range of CRM suites
for banking, retail, public sector and other verticals. Even so, some
90 Customer Relationship Management

customization is often required. The lead developer, database developer and

front-end developer, in partnership with vendors, can perform these roles.
Customization needs are typically specified using a gap analysis
approach. The required business process is supplied to the vendor, who
(after some preparation) presents how this process is supported in the
software. Any gaps are highlighted for subsequent analysis and action. This
continues until all business processes have been examined. The resultant
gap register is then assessed, priorities are established and customization
of their software and/or modification of the business process begins.
Customization raises problems of ownership of Intellectual Property
that both vendors and clients will want to reslove. Vendors have invested
millions, perhaps billions, of dollars to create, code, test and protect their
product. The view of most software companies is that they will maintain
the rights to any customized code and the right to incorporate it into
future releases of the software. It is not unusual for a client’s legal team
to contest this position.

Prototype design, test, modify and roll-out

The output of this customization process will be a prototype that can be
tested by users on a duplicated set, or a dummy set, of customer-related
data. End-user tests will show whether further customization is required.
Final adjustments to marketing, selling and service processes are made
at this stage, and further training needs are identified and met. After a
final review, a roll-out programme is implemented. In larger companies
this often is a phased roll-out. For example, a new sales-force automation
system might be rolled out first to the ‘champions’, those identified earlier
as buying in both emotionally and rationally. A new service automation
solution might be rolled out to newly acquired customers first, before the
existing customer base is imported. The idea is to iron out any problems
before company-wide adoption.

Phase 5: Evaluate
performance
The final phase of the CRM project involves an evaluation of its
performance. How well has it performed? Two sets of variables can be
measured: project outcomes and business outcomes. Project outcomes
focus on whether the project has been delivered on time and to budget.
Your evaluation of the business outcomes requires you to return to the
project objectives, your definition of CRM success and the business case,
and ask whether the desired results have been achieved.
If your single goal was to enhance customer retention rates, with
a measurable lift from 70 to 80 per cent, and this is accomplished then
your CRM project has been successful. Congratulations! However, most
projects have multiple objectives and it is common for some objectives
to be achieved while others are not. Lead conversion by the sales team
might rise, but lead generation by campaign managers might fall
 Planning and implementing customer relationship management projects 91

short of objectives. A critical issue concerns the timing of any business

performance evaluation. It can take users several months to become
familiar with new processes and competent in using new technology.
Periodic measures of business outcomes can be taken over time, to ensure
that the programme outcomes are achieved. Ongoing training, timed to
coincide with software upgrades, can enhance business outcomes.

Summary
In this chapter, you’ve learned about the five major phases of a CRM implementation,
and the processes and tools that are used to ensure that CRM projects deliver what is
expected of them. The key phases are:
1. Develop the CRM strategy
2. Build the CRM project foundations
3. Specify needs and select partner
4. Implement project
5. Evaluate performance.
CRM projects vary in scope, duration and cost, but it is always important to be clear
about what business outcomes are desired and to measure the performance of the CRM
implementation accordingly.

References
1. The content in this section is drawn from a number of sources.
Important contributions are made by John Turnbull, Managing
Director of Customer Connect (www.customerconnect.com.au) and
Gartner Inc. (www.gartner.com).
2. Copyright©2008. Customer Connect Australia. Used with
permission.
3. See http://www.theidm.com/index.cfm?fuseActioncontentDispla
y.&chn3&tpc149. Accessed 25 June 2007.
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25 June 2007.
5. http://blogs.salesforce.com/ask_wendy/files/how_to_create_
your_crm_vision_5.16.05.PDF. Accessed 26 June 2007.
6. www.gartner.com.
7. Copyright©2008. Customer Connect Australia. Used with
permission.
8 Davis, F.D. (1989). Perceived usefulness, ease of use and user
acceptance of information technology. MIS Quarterly, Vol. 13(3), pp.
319–339.
9. Copyright©2008. Customer Connect Australia. Used with
permission.
92 Customer Relationship Management

10. http://www.boozallen.de/media/file/guiding_principles.pdf .
Accessed 27 June 2007.
11. Kotter, J.P. and Cohen, D.S. (2002) The heart of change: real-life stories of
how people change their organizations. Boston, MA: Harvard Business
School Press.
12. Deshpandé, R. and Webster, F.E. Jr. (1989) Organizational culture and
marketing: defining the research agenda. Journal of Marketing, Vol. 53,
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13. Deshpandé, R., Farley, J.U. and Webster, F.E. Jr. (1993) Corporate
culture, customer orientation, and innovativeness in Japanese firms:
a quadrad analysis. Journal of Marketing, Vol. 57, pp. 23–37, January.
14. Iriana, R. and Buttle, F. (in press). The impacts of organizational
culture on customer relationship management outcomes. International
Journal of Research in Marketing.
15. Cameron, K.S. and Quinn, R.E. (1999) Diagnosing and changing
organisational culture. Reading, MA: Addison Wesley.
16. Cameron, K.S. and Quinn, R.E. (1999) Diagnosing and changing
organisational culture. Reading, MA: Addison Wesley.
17. Copyright©2008. SeedCode LLC. Used with permission.
18. Mendoza, L.E., Marius, A., Perez, M. and Griman, A.C. (2007)
Critical success factors for a CRM strategy. Information and Software
Technology, Vol. 49, pp. 913–945.
19. Da Silva, R.V. and Rahimi, I.D. (2007) A critical success factor model
for CRM implementation. International Journal of Electronic Customer
Relationship Management, Vol. 1(1), pp. 3–15.
20. Croteau, A.-M. and Li, P. (2003) Critical success factors of CRM
technological initiatives. Canadian Journal of Administrative Sciences,
Vol. 20(1), pp. 21–34.
21. Buttle, F. and Ang, L. (2004) ROI on CRM: a customer journey approach.
http://www.crm2day.com/library/EpFlupuEZVRmkpZCHM.php;
Davids, M. (1999) How to avoid the 10 biggest mistakes in CRM.
Journal of Business Strategy, November–December, pp. 22–26.
22. www.gartner.com
23. Treacy, M. and Wiersema, F. (1995) The discipline of market leaders.
London: Harper Collins.
24. Adapted from Jones, P.A. and Williams, T. (1995) Business
improvement made simple. Northampton: Aegis Publishing.
25. A data model is an abstract description of how data is organized in
an information system or database.
26. For a review of hosted CRM, refer to Buttle, F. (2006) Hosted CRM:
literature review and research questions. Macquarie Graduate School
of Management, working paper 2006–1.
27. eMarketer. (2005) CRM Spending and Trends. http://www.emarketer.
com/Report.aspx?crm_aug05. Accessed 21 August 2005.
28. Meta Group. (2004) Hosted CRM: the real cost. http://www.
metagroup.com/us/displayArticle.do?oid47816. Accessed 11
November 2005.
29. Kane, R. (2004) The top 10 myths of hosted CRM. http://www.aplicor.
com/4%20Company/10%20Myths%20of%20Hosted%20CRM%
20Whitepaper.pdf. Accessed 20 October 2005.
Chapter 4
Developing,
managing and using
customer-related
databases
This page intentionally left blank
 Chapter objectives
By the end of this chapter, you will understand:

1. the central role of customer-related databases to the successful delivery of CRM

outcomes
2. the importance of high quality data to CRM performance
3. the issues that need to be considered in developing a customer-related database
4. what data integration contributes to CRM performance
5. the purpose of a data warehouse and data mart
6. how data access can be obtained by CRM users
7. the data protection and privacy issues that concern public policy makers.

Introduction
In this chapter we discuss the importance of developing an intimate
knowledge and understanding of customers. This is essential to achieving
CRM success. Strategic CRM, which focuses on winning and keeping
profitable customers, relies on customer-related data to identify which
customers to target, win and keep. Operational CRM, which focuses on
the automation of customer-facing processes such as selling, marketing
and customer service, needs customer-related data to be able to deliver
excellent service, run successful marketing campaigns and track sales
opportunities. Analytical CRM mines customer-related data for strategic
or tactical purposes. Collaborative CRM involves the sharing of customer-
related data with organizational partners, with a view to enhancing
company, partner and customer value. Customer-related databases are the
foundation for the execution of CRM strategy. Proficiency at acquiring,
enhancing, storing, distributing and using customer-related data is critical
to CRM performance.

What is a customer-related
database?
You may have already noted that this chapter is not about customer
databases. Rather, it is about customer-related databases. Why?
Companies typically do not have a single customer database; instead, they
have a number of customer-related databases. Large organizations, such
as financial services companies, can have 20 or more customer systems,
each with a separate database. These databases capture customer-related
data from a number of different perspectives. Customer-related databases
96 Customer Relationship Management

might be maintained in a number of functional areas – sales, marketing,

service, logistics and accounts – each serving different operational
purposes. Respectively, these databases might record quite different
customer-related data – opportunities, campaigns, enquiries, deliveries
and billing. Customer-related data might also be maintained by different
channel managers – company-owned retail stores, third-party retail outlets
and online retail, for example. Similarly, different product managers might
maintain their own customer-related data. Customer-related data can have
a current, past or future perspective, focusing upon current opportunities,
historic sales or potential opportunities. Customer-related data might be
about individual customers, customer cohorts, customer segments, market
segments or entire markets. They might also contain product information,
competitor information, regulatory data or anything else pertinent to the
development and maintenance of customer relationships.

Developing a customer-
related database
Most databases share a common structure of files, records and fields (also
called tables, rows and columns). Files (tables) hold information on a
single topic such as customers, products, transactions or service requests.
Each file (table) contains a number of records (rows). Each record (row)
contains a number of elements of data. These elements are arranged in
common sets of fields (columns) across the table. The modern customer-
related database therefore resembles a spreadsheet. There are six major
steps in building a customer-related database, as shown in Figure 4.1.1

1. Define the database functions

2. Define the information requirements

3. Identify the information sources

4. Select the database technology and hardware platform

5. Populate the database

6. Maintain the database

Figure 4.1
Building a customer-
related database
 Developing, managing and using customer-related databases 97

Define the database functions

Databases support the four forms of CRM – strategic, operational,
analytical and collaborative.
Strategic CRM needs data about markets, market offerings, customers,
channels, competitors, performance and potential to be able to identify
which customers to target for customer acquisition, retention and
development, and what to offer them. Collaborative CRM implementations
generally use the operational and analytical data as described below,
so that partners in distribution channels can align their efforts to serve
end-customers.
Customer-related data is necessary for both operational and analytical
CRM purposes.
Operational CRM uses customer-related data to help in the everyday
running of the business. For example:

● a telecoms customer service representative (CSR) needs to access a

customer record when she receives a telephone query
● a hotel receptionist needs access to a guest’s history so that she can
reserve the preferred type of room – smoking or non-smoking, standard
or de-luxe
● a salesperson needs to check a customer’s payment history to find out
whether the account has reached the maximum credit limit.

Analytical CRM uses customer-related data to support the marketing,

sales and service decisions that aim to enhance the value created for and
from customers. For example:

● the telecoms company might want to target a retention offer to

customers who are signalling an intention to switch to a different
supplier
● the hotel company might want to promote a weekend break to
customers who have indicated their complete delight in previous
customer satisfaction surveys
● a sales manager might want to compute his sales representatives’
customer profitability, given the level of service that is being provided.

Customer-related data are typically organized into two subsets,

reflecting these operational and analytical purposes. Operational
data resides in an OLTP (online transaction processing) database,
and analytical data resides in an OLAP (online analytical processing)
database. The information in the OLAP database is normally a
summarized, restructured, extract of the OLTP database, sufficient to
perform the analytical tasks. The analytical database might also draw in
data from a number of internal and external sources. OLTP data needs to
be very accurate and up to date. When a customer calls a contact centre
to enquire about an invoice, it is no use the CSR telling the customer
what the average invoice is for a customer in her postcode. The customer
wants personal, accurate, contemporary, information. OLAP databases
can perform well with less current data.
98 Customer Relationship Management

Define the information requirements

The people best placed to answer the question ‘what information is
needed?’ are those who interact or communicate with customers for
sales, marketing and service purposes, and those who have to make
strategic CRM decisions.
A direct marketer who is planning an e-mail campaign might want
to know open and click-through rates, and click-to-open rates (CTOR)
for previous e-campaigns, broken down by target market, offer and
execution. She would also want to know e-mail addresses, e-mail
preferences (html or plain text), and preferred salutation (first name?
Mr? Ms?). Operational and analytical needs like these help define the
contents of customer-related databases.
Senior managers reviewing your company’s strategic CRM decisions
will require a completely different set of information. They may want to
know the following. How is the market segmented? Who are our current
customers? What do they buy? Who else do they buy from? What are
our customers’ requirements, expectations and preferences across all
components of the value proposition, including product, service, channel
and communication?
With the advent of packaged CRM applications, much of the database
design work has been done by the software vendors. The availability of
industry-specific CRM applications, with their corresponding industry-
specific data models, allows for a much closer fit with a company’s
data needs. Where there is a good fit out of the box, the database
design process for both operational and analytical CRM applications
becomes one of implementing exceptions that have been overlooked by
the generic industry model. Some CRM vendors have also built in the
extract, transform and load processes to move information from OLTP
to OLAP databases although it is highly likely that a client will need to
modify and customize the standard processes.

Customer information fields

Most CRM software has predefined fields in different modules, whether
for sales, marketing or service applications. For example, in a sales
application, a number of fields (columns) of information about customers
are common: contact data, contact history, transactional history, current
pipeline, future opportunities, products and communication preferences.

Contact data
Who is the main contact (name) and who else (other names) is involved
in buying decisions? What are their roles? Who are the decision-makers,
buyers, influencers, initiators and gatekeepers? What are the customer’s
invoice addresses, delivery addresses, phone numbers, fax numbers,
e-mail addresses, street addresses and postal addresses?

Contact history
Who has communicated with the customer, when, about what, in which
medium and with what outcome?
 Developing, managing and using customer-related databases 99

Transactional history
What has the customer bought and when? What has been offered to the
customer, but not been purchased?

Current pipeline
What opportunities are currently in the sales pipeline? What is the
value of each opportunity? What is the probability of closing? Is there a
10 per cent, 20 per cent … 90 per cent chance of making a sale? Some
CRM applications enable sales people to allocate red, amber or green
signals to opportunities according to the probability of success.

Opportunities
Whereas ‘transactional history’ looks backwards, ‘opportunity’ looks
forwards. This is where opportunities that have not yet been opened or
discussed are recorded.

Products
What products does the customer have? When were these products
purchased, and when are they due for renewal? Have there been any
service issues related to these products in the past?

Communication preferences
What is the preferred medium of communication – mail, telephone, e-
mail, face-to-face, etc.? If it is e-mail, is plain text or html preferred?
What is the preferred salutation? And the preferred contact time and
location? Customers may prefer you to contact them by phone for some
communications (e.g. an urgent product recall), by mail for others (e.g.
invoicing), by e-mail (e.g. for advice about special offers) and face-to-
face for other reasons (e.g. news about new products). These preferences
can change over time. When a customer’s preferences are used during
customer communications, it is evidence that the company is responsive
to customer expectations. Many companies allow customers to opt in to,
or out of, different forms of communication. Customers may prefer to
adjust their own preferences. Amazon.com, for example, allows customers
to opt to receive e-mail about six different types of content: terms and
conditions of shopping at Amazon; new products; research surveys;
magazine subscription renewal notices; information about and from
Amazon’s partners and special offers.

Identify the information sources

Information for customer-related databases can be sourced internally
or externally. Prior to building the database it is necessary to audit
the company to find out what data are available. Internal data are
the foundation of most CRM programmes, though the amount of
information available about customers depends on the degree of contact
that the company has with the customer. Some companies sell through
partners, agents and distributors and have little knowledge about the
demand chain beyond their immediate contact.
100 Customer Relationship Management

Internal data can be found in various functional areas.

● Marketing might have data on market size, market segmentation,
customer profiles, customer acquisition channels, marketing campaign
records, product registrations and requests for product information.
● Sales might have records on customer purchasing history including
recency, frequency and monetary value, buyers’ names and contact
details, account number, SIC code, important buying criteria, terms
of trade such as discounts and payment period, potential customers
(prospects), responses to proposals, competitor products and pricing,
and customer requirements and preferences.
● Customer service might have records of service histories, service
requirements, customer satisfaction levels, customer complaints,
resolved and unresolved issues, enquiries, and loyalty programme
membership and status.
● Finance may have data on credit ratings, accounts receivable and
payment histories.
● Your webmaster may have click-stream data.

Enhancing the data

External data can be used to enhance the internal data and can be
imported from a number of sources including market research companies
and marketing database companies. The business intelligence company
Claritas, for example, offers clients access to their Behaviourbank and
Lifestyle Selector databases. These databases are populated with data
obtained from many millions of returned questionnaires. Experian,
another intelligence company, provides geodemographic data to its
clients. External data can be classified into three groups:2

1. compiled list data

2. census data
3. modelled data.

Compiled list data

Compiled list data are individual level data assembled by list bureaux or
list vendors. They build their lists from a variety of personal, household
and business sources. They might use local or council tax records,
questionnaire response data, warranty card registrations or businesses’
published annual reports. Lists can be purchased outright or rented
for a period of time and a defined number of uses. Once the list or its
permitted use has expired, it must be removed from the database.
If you were a retailer thinking of diversifying from leisurewear into
dancewear and had little relevant customer data of your own, you might
be interested in buying or renting data from an external source. Data
could have been compiled by the bureau or vendor from a variety of
sources, such as:

● memberships of dance schools

● student enrolments on dance courses at school and college
● recent purchasers of dance equipment
 Developing, managing and using customer-related databases 101

● lifestyle questionnaire respondents who cite dance as an interest

● subscribers to dance magazines
● purchasers of tickets for dance and musical theatre.

Census data
Census data are obtained from government census records. In different
parts of the world, different information is available. Some censuses
are unreliable; others do not make much data available for non-
governmental use.
In the USA, where the census is conducted every ten years, you cannot
obtain census data at the household level, but you can at a more aggregated
geodemographic level, such as zip code, census tract and block group.
Census tracts are subdivisions of counties. Block groups are subdivisions
of census tracts, the boundaries of which are generally streets. In the USA
there are about 225 000 block groups, with an average of over 1000 persons
per group. Census data available at geodemographic level includes:

● median income
● average household size
● average home value
● average monthly mortgage
● percentage ethnic breakdown
● marital status
● percentage college educated.

For the UK census there are 155 000 enumeration districts, each
comprising about 150 households and ten postcodes. The enumeration
district is the basis for much geodemographic data.
Individual-level data are better predictors of behaviour than aggregated
geodemographic data. However, in the absence of individual-level data,
census data may be the only option for enhancing your internal data. For
example, a car reseller could use census data about median income and
average household size to predict who might be prospects for a purchase
promotion.

Modelled data
Modelled data are generated by third parties from data that they
assemble from a variety of sources. You buy processed, rather than
raw, data from these sources. Often they have performed clustering
routines on the data. For example, Claritas has developed a customer
classification scheme called PRIZM. In Great Britain, PRIZM describes
the lifestyles of people living in a particular postcode. Every postcode is
assigned to one of 72 different clusters on the basis of their responses to
a variety of lifestyle and demographic questions. Eighty per cent of the
data used in the clustering process is less than three years old.
Figure 4.2 provides the PRIZM profile of residents of one postcode
in the London suburb of Twickenham. They are assigned to PRIZM
code A101, which applies to about one-third of one per cent of
households in the country. The figure profiles their occupational status,
living accommodation, car ownership, vacation choices and media
consumption.
102 Customer Relationship Management

Young professionals Lifestyle: A (A–D)

Rented accommodation Income quintile: 1 (1–5)
Above average car ownership Cluster type: 1 (1–72)
Take foreign holidays 0.34% of GB households
Read the quality press Income rank: 5 (1–72)
Assigned to PRIZM code A101 Age rank: 28 (1–72)

Figure 4.2
PRIZM analysis of
TW9 1UU, England

If you want to use external data to enhance your internal data, you’ll
need to send a copy of the data that you want to enhance to the external
data source. The source will match its files to yours using an algorithm
that recognizes equivalence between the files (often using names and
addresses). The source then attaches the relevant data to your files and
returns them to you.

Secondary and primary data

Customer-related data are either secondary or primary. Secondary data
are data that have already been collected, perhaps for a purpose that
is very different from your CRM requirement. Primary data are that
collected for the first time, either for CRM or other purposes.
Primary data collection through traditional means, such as surveys,
can be very expensive. Companies have, therefore, had to find relatively
low cost ways to generate primary customer data for CRM applications.
Among the data-building schemes that have been used are the following:
● Competition entries: customers are invited to enter competitions of
skill or lotteries. They surrender personal data on the entry forms.
● Subscriptions: customers may be invited to subscribe to a newsletter
or magazine, again surrendering personal details
● Registrations: customers are invited to register their purchase. This
may be so that they can be advised on product updates.
● Loyalty programmes: many companies run loyalty programmes. These
enable companies to link purchasing behaviour to individual customers
and segments. When joining a programme, customers complete
application forms providing the company with personal, demographic
and even lifestyle data.

Select the database

technology and hardware
platform
Customer-related data can be stored in a database in a number of
different ways.
 Developing, managing and using customer-related databases 103

1. hierarchical
2. network
3. relational.

Hierarchical and network databases were the most common form

between the 1960s and 1980s. The hierarchical database is the oldest
form and not well suited to most CRM applications. You can imagine
the hierarchical model as an organization chart or family tree, in which
a child can have only one parent, but a parent can have many children.
The only way to get access to the lower levels is to start at the top and
work downwards. When data is stored in hierarchical format, you may
end up working through several layers of higher-level data before getting
to the data you need. Product databases are generally hierarchical. A
major product category will be subdivided repeatedly until all forms of
the product have their own record.
To extend the family tree metaphor, the network database allows
children to have one, none or more than one parent. Before the network
database had the chance to become popular, the relational database
superseded it, eventually becoming an ANSI standard in 1971.3

Relational databases
Relational databases are now the standard architecture for CRM
applications (see Figure 4.3). Relational databases store data in two
dimensional tables comprised of rows and columns. Relational databases
have one or more fields that provide a unique form of identification for
each record. This is called the primary key. For sales databases, each
customer is generally assigned a unique number which appears in the
first column. Therefore, each row has a unique number. Companies also
have other databases for marketing, service, inventory, payments and
so on. The customer’s unique identifying number enables linkages to be
made between the various databases.
Let’s imagine you are a customer of an online retailer. You buy
a book and supply the retailer with your name, address, preferred
delivery choice and credit-card details. A record is created for you on
the ‘Customer ’ database, with a unique identifying number. An ‘Orders
received’ database records your purchase and preferred delivery choice.
An ‘Inventory’ database records that there has been a reduction in
the stock of the item you ordered. This may trigger a re-ordering
process when inventory reaches a critical level. A ‘Payment’ database
records your payment by credit-card. There will be one-to-many
linkages between your customer record and these other databases.
With the advent of enterprise suites from vendors such as Oracle
and SAP, all of these databases may reside in the one system and be
preintegrated. The choice of hardware platform is influenced by several
conditions:

1. The size of the databases. Even standard desktop PCs are capable
of storing huge amounts of customer data. However, they are not
designed for this data to be shared easily between several users.