Endless summer chapter 13 initials

Managing Customer

Relationships ......................................

A Strategic Framework

Don Peppers

Martha Rogers

John Wiley & Sons, Inc.

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Managing Customer

Relationships ......................................

A Strategic Framework

Don Peppers

Martha Rogers

John Wiley & Sons, Inc.

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Copyright © 2004 by Don Peppers and Martha Rogers. All rights reserved.

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Peppers, Don. Managing customer relationships : a strategic framework / Don Peppers, Martha Rogers.

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ISBN 0-471-48590-X (cloth) 1. Customer relations—Management. 2. Consumers’ preferences. 3. Relationship marketing.

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Preface vii

Part One Principles of Managing Customer Relationships 1

Chapter 1 Evolution of Relationships with Customers 3 Roots of Customer Relationship Management 5

The View from Here 11 Philip Kotler

Get, Keep, and Grow Customers in the Twenty-First Century 17 Roger Siboni

What Is a Relationship? 19

The Technology Revolution and the Customer Revolution 23

Chapter 2 The Thinking behind Customer Relationships 35 What Characterizes a Relationship? 35

Thinking about Relationship Theory 38 Julie Edell Britton Josh Rose

CRM: The Customer’s View 51 James G. Barnes

The Nature of Loyalty 56

Part Two IDIC Implementation Process: A Model for Managing Customer Relationships 63

Chapter 3 Customer Relationships: Basic Building Blocks of IDIC and Trust 65 Trust and Relationships Happen in Tandem 66

IDIC: Four Implementation Tasks for Creating and Managing

Customer Relationships 68

How Does Trust Characterize a Learning Relationship? 71

The Trust Equation: Generating Customer Trust 72 Charles H. Green

Becoming the Customer’s Trusted Agent 78

Relationships Require Information, But Information Comes Only

with Trust 81

Contents

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Chapter 4 Identifying Customers 87 Individual Information Requires Customer Recognition 88

What Does “Identify” Mean? 93

The Internet’s Role in Customer Identification: Betting on Amazon 97 Stewart Alsop

Customer Data Revolution 98

Role of Smart Markets in Managing Relationships with Customers 103 Rashi Glazer

Chapter 5 Differentiating Customers: Some Customers Are Worth More Than Others 113 Customer Value Is a Future-Oriented Variable 114

Different Customers Have Different Values 120

Convergys: A Case Study in Using Proxy Variables to Rank

Customers by Their Value 127 Jill Collins

Chapter 6 Differentiating Customers by Their Needs 137 Definitions 138

Differentiating Customers by Need: An Illustration 141

Understanding Needs 145

Using Needs Differentiation to Build Customer Value 147

Differentiating Customers by Their Needs: A Practical Approach 148 Jennifer B. Monahan Nichole Clarke Laura Cococcia William C. Pink Valerie Popeck Sophie Vlessing

Chapter 7 Interacting with Customers: Customer Collaboration Strategy 161 Dialogue Requirements 162

Implicit and Explicit Bargains 164

Succeeding at Interaction Strategy Means Integrating across Touchpoints 169

Integrated Marketing Communications and CRM: Friends or Foes? 172 Don E. Schultz

Customer Interaction and Dialogue Management 179

Complaining Customer as Collaborators 185

Chapter 8 Using the Tools of Interactivity to Build Learning Relationships 191 Customer-Based Software Sampler 192

Using E-Mail to Interact with Customers 196

Using E-Mail to Build Customer Value 196 Derek Scruggs

Evolution of the Customer Interaction Center in the Context of IDIC 203 Elizabeth Rech

Wireless Rules: How New Mobile Technologies Will Transform CRM 208 Fred B. Newell Katherine N. Lemon, PhD

iv CONTENTS

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Chapter 9 Privacy and Customer Feedback 213 Permission Marketing 217

Seth Godin

Privacy Issues for the Information Age 223 Josh W. Stailey Stacey Scruggs

Individual Privacy and Data Protection 228 Larry A. Ponemon, PhD

Privacy in Europe Is a Different World 232

Privacy Pledges Build Enterprise Trust 235

Submitting Data Online 238

Privacy on the Net 241 Esther Dyson

Chapter 10 Using Mass Customization to Build Learning Relationships 255 How Can Customization Be Profitable? 256

You’re Only as Agile as Your Customers Think 263 B. Joseph Pine II

Technology Accelerates Mass Customization 277

Customization of Standardized Products and Services 279

Value Streams 282

Who Will Write the New Business Rules for Personalization? 287 Bruce Kasanoff

Part Three Measuring and Managing to Build Customer Value 297

Chapter 11 Measuring the Success of Customer-Based Initiatives 299 Brand Equity versus Customer Equity 300

Nature of Customer Loyalty: Attitude or Behavior? 301

Economics of Loyalty 302

Customer Profitability Metrics 307

Longitudinal Metrics and Short-Term Gain 309

Measuring Customer Satisfaction 315

Managing Customer Relationships: Metrics Case Study 321 James Goodnight

Chapter 12 Customer Analytics and the Customer-Strategy Enterprise 341 Optimizing Customer Relationships with Advanced Analytics 350

Judy Bayer Ronald S. Swift

Chapter 13 Organizing and Managing the Profitable Customer-Strategy Enterprise 359 Capabilities for Forging Customer Relationships 363

George S. Day

Relationship Governance 370

How to Get There from Here: Transitions to Customer Management 375

CONTENTS v

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The Manager of Portfolios of Customers 380

Stages of Change to Become a Customer-Strategy Enterprise 381 Miriam Washington Kendall

Transition across the Enterprise 386

Managing Employees in the Customer-Strategy Enterprise 397

Overcoming Employee Resistance 397 Marijo Puleo, PhD

Loyalty-Based Management 400 Frederick F. Reichheld

Momentum Building in the Customer-Based Enterprise 407

Chapter 14 Delivery Channel Issues of the Enterprise Focused on Building Customer Value 411 Dealing with Channel Pain 412

Distribution System Management 417

General Motors’ Vauxhall Division: Managing the Customer

Experience across Channels and Touchpoints 420 Patricia B. Seybold

Demand Chain and Distribution 428

Supply Chain Management and Managing Customer Relationships 430 Roger Blackwell Kristina Stephan

Chapter 15 Store of the Future and the Evolution of Retailing 451 Consumer Direct Channel 454

Using Operational Excellence as a Competitive Advantage: Tesco 464 Patricia B. Seybold Ronni T. Marshak

The Online Store and the Role of the Brand in Online Shopping 472 Ravi Dhar Dick R. Wittink

Final Mile to Consumers 479

Logistics Business Models for Success 483

Appendix Where Do We Go From Here? 487 Leadership Behavior of Customer Relationship Managers 488

Managing Customer Relationships: The Technology Adoption Life Cycle 489 Geoffrey A. Moore

Index 498

vi CONTENTS

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Preface

Our goal with this book is to provide a methodical overview of the background,the methodology, and the particulars of managing customer relationships for competitive advantage. We begin with background and history, move through an overview of relationship theory, outline the Identify-Differentiate-Interact- Customize (IDIC) framework, and then address metrics, data management, cus- tomer management and company organization, channel issues, and the store of the future. We end the book with an appendix called “Where Do We Go from Here?,” which contains some very basic tools needed by individuals embarking on a new career in managing customer relationships or—even more difficult— learning to help an existing company make the transition to using customer value as the basis for executive decisions.

Since January 1990, when we met and within five minutes had decided to write a book together, we began to question what would happen to marketing as a result of the fractionalization of communication. It didn’t take us long to realize that the real question that needed to be answered was bigger: What are the implications, for business, of information, interaction, and mass-customization technologies?

The ongoing quest to answer that question, or at least to explore the next logical question, and the next, led us to write our first book, The One to One Future: Building Relationships One Customer at a Time (Currency/Doubleday, 1993). In it, we hypothesized how technology might change the dimensions of competitive strategy. We thought about the quest for share of customer rather than just market share, and the idea of managing customers, not just products and brands. Before long, we had the opportunity to work with some bright pio- neers in industry, who were wrestling through one-to-one and customer man- agement. Based on four years of field experience, we wrote our second book, Enterprise One to One: Tools for Competing in the Interactive Age (Currency/ Doubleday, 1997).

Since then we have had the chance to speak at several colleges and universi- ties, where more and more coursework and curricula are addressing electronic media, database marketing, and more importantly, customer relationship man- agement, data analytics, and a host of related topics that serve to prepare busi- ness, management, marketing, information technology (IT), and statistics students for careers in the growing field of competitive advantage through understanding individual customers better, getting the most valuable ones for an enterprise, keeping them longer, and growing them bigger. We have also taught countless seminars and workshops and have worked in depth with con- sultants in the dozen worldwide offices of Peppers and Rogers Group, for clients who themselves have taught us a lot about what it takes to build customer equity. Our third book, The One to One Fieldbook: The Complete Toolkit for

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Implementing a One to One Marketing Program (Currency/Doubleday, 1999), coauthored with Bob Dorf, was a compendium of what we had learned about how to help people understand the basic principles. Our goal was to provide a framework for learning that was based on a methodology that we had tested and proven in a variety of client companies in a variety of industries around the world. That was the beginning of the IDIC approach.

Meanwhile, professors and classrooms across the United States and around the world were beginning to teach one-to-one and customer relationship man- agement (CRM). They sometimes used one of our early books as readings, along with other excellent work that was being published by a group of other early explorers on this and related topics. But the field was too new, and the aca- demic market too small, to justify the work (yet) on an academic textbook or desk reference per se.

In 2000, NCR Teradata donated the funding for the Teradata CRM Center at Fuqua School of Business at Duke University, where Martha is an adjunct pro- fessor and codirects the center. The center’s mission is threefold: to help support rigorous academic research, to provide top-level teaching and curriculum mate- rials, and to bring together academicians and practitioners for mutual learning. One of the first activities of the center was to support the background research and project management of a textbook on managing customer relationships, which we agreed to write. (You can reach the Center, and take advantage of the help it offers professor and students for classroom learning as well as research, at www.teradataduke.org. You can reach us about this book at MCRtext@fuqua .duke.edu .)

However, even though we welcomed the chance to codify and synthesize the learning and thinking about managing customer relationships, we also thought this book should not reflect just our views. Obviously, we know more about our own work (some might say obsession) than about anyone else’s, and this book predictably draws heavily on our own experience from the past 10 years. But we had also been reading excellent work done by others, and so invited many of them to share their views, to include their voices. Nearly everyone generously agreed, and we found that the challenge of coordinating such a large chorus was offset by the benefit of gathering together many of the thoughtful leaders in this emerging field. We thank all of the contributors, as well as the nine anonymous reviewers who pushed us to make the text better in many ways, as well as James Barnes, Mary Jo Bitner, Anthony Davidson, Julie Edell, Susan Geibs, Rashi Glazer, Neil Lichtman, Janis McFaul, Marion Moore, Ralph Oliva, Phil Pfeiffer, and Jag Sheth, who also shared suggestions and support.

At the time of this writing, we believe this is the first book to appear that is designed to help the pedagogy of managing customer relationships, with an emphasis on customer strategies and building customer value. We hope it will be useful to professors and students, and hope that all of you who see this first edition will help improve the textbook in its second edition. Please send your suggestions and comments, as well as citation to your work if we haven’t yet included it, to MCRtext@Fuqua.duke.edu. While we hope this work will teach

viii PREFACE

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our readers, we also implore our readers to teach us. Our goal is to build the most useful learning tool available on the subject of managing customer rela- tionships to build competitive advantage.

HOW TO USE THIS BOOK

The table of contents provides not only a guide to the chapter topics, but also a listing of the contributions and contributors who have shared their insights, find- ings, and ideas.

Each chapter begins with an overview, and closes with a Summary (which is really more about how the chapter ties into the next chapter), Food for Thought (a series of discussion questions), and a Glossary. In addition, chapters include the following elements:

• Glossary terms are printed in boldface the first time they appear in a chap- ter, and their definitions are located at the end of that chapter. All of the glossary terms are included in the index, for a broader reference of usage in the book.

• Sidebars provide supplemental discussions and real-world examples of chapter concepts and ideas.

• Contributed material is indicated by a shaded background, with contributor names and affiliations appearing at the beginning of each section.

We anticipate that this book will be used in one of two ways: Some readers will start at the beginning and read it through to the end. Others will keep it on hand and use it as a reference book. For both readers, we have tried to make sure the index is useful for search by names of people and companies, as well as topics.

If you have suggestions about how readers can use this book, please share those at MCRtext@fuqua.duke.edu.

ACKNOWLEDGMENTS

We started the research and planning for this book in 2001. Our goal was to pro- vide a handbook/textbook for students of the movement to focus companies on customers, and to build the value of an enterprise by building the value of the cus- tomer base. We have made many friends along the way, and had some interesting debates. We can only begin to scratch the surface of all those who have touched this book, and helped to shape it into a tool we hope our readers will find useful.

Thanks to Dr. Julie Edell, who has team-taught the Managing Customer Value course at Duke with Martha for over four years. Special thanks to:

PREFACE ix

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• Peter Heffring and Rick Staelin, the original co-directors with Martha at the Teradata CRM Center at Duke1, who approved funding support for the early stages of research and background work

• Josh Rose, who managed the Center when this project began and proved helpful to this very large project

• Katie Lay and others at the Center, who assisted with background work and graphics.

We are honored to be contributing all royalties and proceeds from the sale of this book to the Center.

This book wouldn’t be what it is without the voices of the many contributors who have shared their viewpoints throughout this book—you’ll see their names listed in the table of Contents. We thank each of you for taking the time to par- ticipate in this project.

The book has been greatly strengthened by the critiques from some of the most knowledgeable minds in this field, who took the time to review the book and share their insights and suggestions with us. This is an enormous undertak- ing and a huge professional favor, and we owe great thanks to Jim Barnes at Memorial University of Newfoundland; Mary Jo Bitner and James Ward at Ari- zona State; Ray Burke at Indiana; Anthony Davidson at NYU; Susan Geib at MSUM; Rashi Glazer at U.C. Berkeley; Jim Karrh at University of Arkansas; Neil Lichtman at NYU; Charlotte Mason at UNC; Janis McFaul at Lawrence Tech; Ralph Oliva at Penn State; Phil Pfeiffer and Marian Moore at U.VA; David Reibstein at Wharton; and Jag Sheth at Emory. Thanks to John Deighton, Jon Anton, Devavrat Purohit, and Preyas Desai for additional contributions, and we also appreciate the support and input from Mary Gros and Corinna Gilbert at Teradata. Thanks to half a dozen anonymous reviewers whose comments also helped to improve the manuscript. And thanks to Maureen Morrin and Eric Greenberg at Rutgers, who has contributed to the Web site supporting this book.

Much of this work has been based on the experiences and learning we have gleaned from our clients and the audiences we have been privileged to encounter in our work with Peppers and Rogers Group. Dozens and dozens of the talented folks who have been PRGers over the past three years have contributed to our thinking—many more than the ones whose bylines appear on some of the con- tributions you will see in the book. Special additional thanks to Elizabeth Stew- art, Tom Shimko, Tom Niehaus, Abby Wheeler, Lisa Hayford-Goodmaster, Lisa Regelman, Marji Chimes, and many others. In the past year, we couldn’t have finished the many details necessary for a book like this without help from Jenny Smith, Judy White, and Jennifer Makris, and we owe special, huge thanks to

x PREFACE

1The Teradata Center for Customer Relationship Management at Duke University (the Center) advances the field of Customer Relationship management (CRM) through research and learning. This multi-million dollar global think tank, based at Duke’s Fuqua School of Business, was estab- lished in January 2001 through a grant from Teradata, a division of NCR. Through this dynamic partnership between the University and Teradata, the Center leverages the intellectual resources of a leading academic institution and corporation to merge theory and practical business experience, thereby creating a world-class center in CRM research and curriculum design.

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Holly Daniels, who has patiently and capably assisted in winding us through the morass of minutiae generated by a project of this scope.

Our editor at John Wiley & Sons, Inc., Sheck Cho, has been an enthusiastic supporter of and guide for the project since Day One. We owe much to his tal- ented production and marketing teams, especially Jennifer Hanley. As always, thanks to our literary agent, Rafe Sagalyn, for his insight and patience.

We thank the many professors and instructors who are teaching the first “Customer Strategy” or “CRM” course at their schools, and who have shared the syllabi for their courses with the Teradata CRM Center at Duke University and thereby helped us shape what we hope will be a useful book for them, their students, and all our readers who need a ready reference as we all continue the journey toward building stronger, more profitable, and more successful organi- zations by focusing on growing the value of every customer.

DON PEPPERS AND MARTHA ROGERS, PHD 2004

PREFACE xi

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PA RT

One Principles of Managing Customer Relationships

The Learning Relationship works like this: If you’re my cus-tomer and I get you to talk to me, and I remember what you tell me, then I get smarter and smarter about you. I know some- thing about you my competitors don’t know. So I can do things for you my competitors can’t do, because they don’t know you as well as I do. Before long, you can get something from me you can’t get anywhere else, for any price. At the very least, you’d have to start all over somewhere else, but starting over is more costly than staying with me.

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Evolution of Relationships with Customers

1 Chapter

We have only two sources of competitive advantage:

1. The ability to learn more about our customers faster than the competition. 2. The ability to turn that learning into action faster than the competition.

—Jack Welch, former CEO, General Electric1

The goal of this book is not just to acquaint the reader with the techniques of customer relationship management (CRM). The more ambitious goal of this book is to help the reader understand the essence of customer strategy as a necessary and important element of managing every successful enterprise in the twenty-first century. A firm’s most valuable asset is its customers, and given our new and unfolding technological capabilities to recognize, measure, and manage relationships with each of those customers in order to thrive, a firm must focus on deliberately increasing the value of the customer base. Customer strategy is not a fleeting assignment for the marketing department; rather it is an ongoing business imperative that requires the involvement of the entire enterprise. Organizations need to manage their customer relation- ships effectively to remain competitive in the interactive era. Technological advancements have served as the catalyst for managing customer relation- ships more efficiently.

The dynamics of the customer-enterprise relationship have changed dramati-cally over time. Customers have always been at the heart of an enterprise’s long-term growth strategies, marketing and sales efforts, product development, labor and resource allocation, and overall profitability directives. Historically, enterprises have encouraged the active participation of a sampling of customers in the research and development of their products and services. But until

1Bloomberg News Service, 2000.

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recently, enterprises have been structured and managed around the products and services they create and sell. Driven by assembly-line technology, mass media, and mass distribution, which appeared at the beginning of the twentieth century, the Industrial Age was dominated by businesses that sought to mass- produce products and to gain a competitive advantage by manufacturing a product that was perceived by most customers as better than its closest com- petitor. Product innovation, therefore, was the important key to business suc- cess. To increase its overall market share, the twentieth-century enterprise would use mass marketing and mass advertising to reach the greatest number of potential customers.

As a result, most twentieth-century products and services eventually became highly commoditized. Branding emerged to offset this perception of being like all the competitors; in fact, branding from its beginning was, in a way, an expen- sive substitute for relationships companies could not have with their newly blossomed masses of customers. Facilitated by lots and lots of mass-media advertising, brands have helped add value through familiarity, image, and trust. Historically, brands have played a critical role in helping customers distinguish what they deem to be the best products and services. A primary enterprise goal has been to improve brand awareness of products and services, and to increase brand preference and brand loyalty among consumers. For many consumers, a brand name testifies to the trustworthiness or quality of a product or service. But brand reputation has become less important among shoppers.2 Indeed, consumers are often content as long as they can buy one brand of a consumer- packaged good that they know and respect. Whether shopping in a store, online, or from a catalog, consumers are just as satisfied whether a retailer carries a

trusted store brand or a trusted manufacturer’s brand.3

For many years, enterprises depended on gaining the competitive advantage from the best brands. Brands have been untouchable, immutable, and inflexible parts of the twentieth-century mass-marketing era. But in the interac- tive era of the twenty-first century, enterprises are instead strategizing how to gain sustainable competitive advantage from the information they gather about customers. As a result, enterprises are creating a two-way brand, one that thrives on customer information and interaction. The two- way brand, or branded relationship, transforms itself based on the ongoing dialogue between the enterprise and the customer. The branded relationship is “aware” of the cus- tomer (giving new meaning to the term brand awareness) and constantly changes to suit the needs of that particular individual.

4 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

For many years, enter-prises depended on gaining the competitive advantage from the best brands. Brands have been untouchable, immutable, and inflexible parts of the twentieth-century mass- marketing era. But in the interactive era of the twenty-first century, enter- prises are instead strategiz- ing how to gain sustainable competitive advantage from the information they gather about customers.

2Peppers and Rogers Group, and Institute for the Future, “Forecasting the Consumer Direct Chan- nel: Business Models for Success” (2000), p. 48. 3Ibid., p. 50.

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ROOTS OF CUSTOMER RELATIONSHIP MANAGEMENT

The goal of every enterprise, once you strip away all the activities that keep everybody busy every day, is simply to get, keep, and grow customers. Whether a business focuses its efforts on product innovation, operational efficiency and low price, or customer intimacy,4 that firm must have customers or the enterprise isn’t a business—it’s a hobby. This is true for nonprofits (where the “customers” may be donors or volunteers) as well as for-profits, for firms large and small, for public as well as private enterprise. What does it mean for an enterprise to focus on its customers as the key to competitive advantage? Obviously, it does not mean giving up the product edge, or the operational efficiencies, that have been successful in the past. It does mean using new strategies, nearly always requiring new technologies, to focus on growing the value of the company by deliberately and strategically growing the value of the customer base.

To some executives, customer relationship management (CRM) is a technol- ogy or software solution that helps track data and information about customers to enable better customer service. Others think of CRM, or one-to-one, as an elaborate marketing or customer service discipline. We even recently heard CRM described as “personalized email.”

This book is about much more than setting up a business Web site or redi- recting some of the mass-media budget into the call center database. It’s about increasing the value of the company through specific customer strategies (see Exhibit 1.1).

Enterprises determined to build successful and profitable customer relation- ships understand that the process of becoming an enterprise focused on building

EVOLUTION OF RELATIONSHIPS WITH CUSTOMERS 5

EXHIBIT 1.1 Increasing the Value of the Customer Base

Keep

Get

Grow

■ Acquire profitable customers.

■ Retain profitable customers longer.

■ Win back profitable customers.

■ Eliminate unprofitable customers.

■ Upsell additional products in a solution.

■ Cross-sell other products to customers.

■ Referral and word-of-mouth benefits.

■ Reduce service and operational costs.

4Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (New York; Addison- Wesley, 1995).

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its value by building customer value doesn’t begin with installing technology, but instead begins with:

• A strategy or an ongoing process that helps transform the enterprise from a focus on traditional selling or manufacturing to a customer focus, while increasing revenues and profits • The leadership and commitment necessary to cascade the thinking and decision-making capability throughout the organization that puts customer value and relationships first

The reality is that becoming a customer-strategy enterprise is about using information to gain a competitive advantage and deliver growth and profit. In its most generalized form, CRM can be thought of as a set of business practices designed, simply, to put an enterprise into closer and closer touch with its customers, in order to learn more about each one and to deliver greater and greater value to each one, with the overall goal of making each one more valuable to the firm. It is an enterprisewide approach to understanding and influencing customer behavior through meaningful communications to improve customer acquisition, customer retention, and cus- tomer profitability.5

Defined more precisely, and what makes CRM into a truly different model for doing business and competing in the marketplace, is this: It is an enterprisewide business strategy for achieving customer-specific objectives by tak- ing customer-specific actions. It is enterprisewide because it can’t be assigned to marketing if it is to have any hope of suc- cess. Its objectives are customer-specific because the goal is

to increase the value of each customer. Therefore, the firm will take customer- specific actions for each customer, made possible by new technologies.

In essence, CRM involves treating different customers differently. Today, there is a CRM revolution underway among businesses. It represents an inevitable—lit- erally, irresistible—movement. All businesses will be embracing CRM sooner or later, with varying degrees of enthusiasm and success, for two primary reasons: First, CRM represents the way customers, in all walks of life, in all industries, all over the world, want to be served. Second, it is simply a more efficient way of doing business. We find examples of customer-specific behavior, and business ini- tiatives driven by customer-specific insights, all around us today:

6 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

Enterprises determined tobuild successful and prof- itable customer relationships understand that the process of becoming an enterprise focused on building its value by building customer value doesn’t begin with installing technology, but instead begins with:

• A strategy or an ongoing process that helps trans- form the enterprise from a focus on traditional selling or manufacturing to a cus- tomer focus, while increas- ing revenues and profits

• The leadership and com- mitment necessary to cas- cade the thinking and decision-making capability throughout the organiza- tion that puts customer value and relationships first

An enterprisewide busi-ness strategy for achieving customer-specific objectives by taking customer-specific actions.

5George S. Day, Market-Driven Strategy: Processes for Creating Value (New York: Free Press, 1999); Frederick Newell, The New Rules of Marketing (New York: McGraw-Hill Professional Book Group, 1997); Don Peppers and Martha Rogers, PhD, The One to One Future (New York: Doubleday Books, 1993); Ronald S. Swift, Accelerating Customer Relationships: Using CRM and Relationship Technologies (Upper Saddle River, NJ: Prentice Hall, 2001); Fred Reichheld, The Loyalty Effect (Boston, MA: Harvard Business School Press, 1996).

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• A car-rental customer rents a car without having to complete another reser- vation profile.

• An online customer buys a product without having to reenter his credit card number and address.

• A company saves money by eliminating duplicate mailings. • A firm’s product-development people turn their attention to a new service

or product based on customer feedback captured by the sales force. • An insurance company not only handles a claim for property damage, but

also connects the insured party with a contractor in his area who can bypass the purchasing department and do the repairs directly.

• A supervisor orders more computer components by going to a Web page that displays his firm’s contract terms, his own spending to date, and his departmental authorizations.

Taking customer-specific action, treating different customers differently, building relationships with customers that go on through time to get better and deeper: That’s what this book is about. In the chapters that follow, we will look at lots of examples. The overall business goal of this strategy is to make the enterprise as profitable as possible over time by taking steps to increase the value of the customer base. The enterprise makes itself, its products, and/or its services so satisfying, convenient, or valuable to the customer that he becomes more willing to devote his time and money to this enterprise than to any com- petitor. Building the value of customers increases the value of the demand chain, the stream of business that flows from the customer up through the re- tailer all the way to the manufacturer. A customer-strategy enterprise interacts directly with an individual customer. The customer tells the enterprise about how he would like to be served. Based on this interaction, the enterprise, in turn, modifies its behavior with respect to this particular customer. In essence, the concept implies a specific, one-customer-to-one-enterprise relationship, as is the case when the customer’s input drives the enterprise’s output for that partic- ular customer.6

CRM has become a buzzword of late, and like all new initiatives, suffers when it is poorly understood, improperly applied, and incorrectly measured and man- aged. But by any name, strategies designed to build the value of the customer base by building relationships with one customer at a time are by no means ephemeral trends or fads, any more than computers or interactivity are.

A good example of a business offering that benefits from individual customer relationships can be seen in today’s popular PC banking services, in which a con- sumer spends several hours, usually spread over several sessions, setting up an online account and inputting payee addresses and account numbers, in order to be able to pay his bills electronically each month. If a competitor opens a branch in town offering lower checking fees or higher savings rates, this consumer is unlikely to switch banks. He has invested time and energy in a relationship with

EVOLUTION OF RELATIONSHIPS WITH CUSTOMERS 7

6Don Peppers and Martha Rogers, PhD, One to One B2B (New York: Doubleday Broadway Books, 2001).

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the first bank, and it is simply more convenient to remain loyal to the first bank than to teach the second bank how to serve him in the same way. In this example, it should also be noted that the bank now has increased the value of the customer to the bank, and has simultaneously reduced the cost of serving the customer, as it costs the bank less to serve a customer online than at the teller window or by phone.

The term CRM is also known by other labels, coined by various experts in their respective fields, such as integrated marketing communications (Don Schultz), one-to-one relationship management (Don Peppers and Martha Rogers), real- time marketing (Regis McKenna), customer intimacy (Michael Treacy and Fred Wiersema), and a variety of other terms. Clearly, CRM involves much more than marketing, and it cannot deliver optimum return on investment without integrat- ing individual customer information into every corporate function, from customer service, to production, logistics, and channel management. A formal change in the organizational structure is usually necessary to become an enterprise focused on growing customer value. As this book will show, CRM is both an operational and an analytical process. Operational CRM focuses on the software installations and the changes in process affecting the day-to-day operations of a firm. Analyt- ical CRM focuses on the strategic planning needed to build customer value, as well as the cultural, measurement, and organizational changes required to imple- ment that strategy successfully. 7

FOCUSING ON CUSTOMERS IS NEW TO BUSINESS STRATEGY

The move to a customer-strategy business model has come of age at a critical juncture in business history, when managers are deeply concerned about declin- ing customer loyalty as competitors lure away their customers through lower prices and purchasing incentives. As customer loyalty decreases, profit margins decline, too, because the most frequently used customer acquisition tactic is price-cutting. Enterprises are facing a radically different competitive landscape as the information about their customers is becoming more plentiful and as the customers themselves are demanding more interactions with companies. Thus, a coordinated effort to get, keep, and grow valuable customers has taken on a greater and far more relevant role in forging a successful long-term, profitable business strategy.

If the last quarter of the twentieth century heralded the dawn of a new compet- itive arena, in which commoditized products and services have become less reli- able for business profitability and success, it is the new computer technologies and applications that have arisen that assist companies in managing their interactions

8 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

7META Group defines these terms as follows: Operational CRM is the automation of horizontally integrated business processes involving front-office customer touch points across sales, marketing, and customer service via multiple, interconnected delivery channels; Analytical CRM is the analysis of data created on the operational side of CRM and through other relevant operational data sources for the purposes of business performance management and customer-specific analysis.

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with customers. These technologies have spawned enterprisewide information systems that help to harness information about customers, analyze the informa- tion, and use the data to serve customers better. Technologies such as enterprise resource planning (ERP) systems, supply chain management software (SCM), enterprise application integration software (EAI), data warehousing, sales force automation (SFA), and other enterprise software are helping companies to mass- customize their products and services, literally delivering individually configured products or services to unique customers, in response to their individual feedback and specifications.

The accessibility of the new technologies is motivating enterprises to recon- sider how they develop and manage customer relationships. CEOs of leading enterprises have made the shift to a customer-strategy business model a top business priority for the twenty-first century.8 Technology is making it possible for enterprises to conduct business at an intimate, individual customer level. Indeed, technology is driving the shift. Computers can enable enterprises to remember individual customer needs and estimate the future potential revenue the customer will bring to the enterprise.

EVOLUTION OF RELATIONSHIPS WITH CUSTOMERS 9

SIDEBAR 1.1

Traditional Marketing Redux ....................................................................................................................... Historically, traditional marketing efforts have centered on the “four Ps”—product, price, promotional activity, and place—popularized by marketing expert E. Jerome McCarthya and Philip Kotler. To be fair, these have been enhanced by our greater (and deeper) understanding of consumer behavior, organizational behavior, market research, segmentation, and targeting. In other words, using traditional sampling and aggregate data, a broad understanding of the market has preceded the application of the four Ps, which enterprises have deployed in their marketing strategy to bring uni- form products and services to the mass market for decades.b In essence, the four Ps are all about the “get” part of “get, keep, and grow customers.” These terms have been the focal point for building market share and driving sales of products and ser- vices to consumers. The customer needed to believe that the enterprise’s offerings would be superior in delivering the “four Cs”: customer value, lower costs, better convenience, and better communication.c Marketing strategies have revolved around targeting broadly defined market segments through heavy doses of advertising and promotion.

This approach first began to take shape in the 1950s. Fast-growing living standards and equally fast-rising consumer demand made organizations aware of the effective- ness of a supply-driven marketing strategy. By approaching the market on the strength of the organization’s specific abilities, and creating a product supply in accordance with those abilities, it was possible to control and guide the sales process. Central to the strategic choices taken in the area of marketing were the— now traditional—marketing instruments of product, price, place, and promotion— the same instruments that served as the foundation for Philip Kotler’s theory and the

8“CEO Global Business Study” (A.T. Kearney, 1999).

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Dr. Philip Kotler, who, with Jerome McCarthy, is responsible for our under- standing and practice of traditional marketing, shares his views of the transition to the customer strategies mandated by new technologies.

10 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

SIDEBAR 1.1 (continued) ....................................................................................................................... same instruments that still assume an important role in marketing and customer rela- tions today.

The four Ps all, of course, relate to the aggregate market rather than to individual customers. The market being considered could be a large, mass market, or a smaller, niche market, but the four Ps have helped define how an enterprise should behave toward all the customers within the aggregate market:

• Product is defined in terms of the average customer—what most members of the aggregate market want or need. This is the product brought to market, and it is delivered the same way for every customer in the market. The definition of prod- uct extends to standard variations in size, color, style, and units of sale, as well as customer service and aftermarket service capabilities.

• Place is a distribution system or sales channel. How and where is the product sold? Is it sold in stores? By dealers? Through franchisees? At a single location or through widely dispersed outlets, like fast food and ATMs? Can it be delivered directly to the purchaser?

• Price refers not only to the ultimate retail price a product brings, but also to intermediate prices, beginning with wholesale; and it takes account of the availability of credit to a customer and the prevailing interest rate. The price is set at a level designed to “clear the market,” assuming that everyone will pay the same price—which is only fair, because everyone will get the same prod- uct. And even though different customers within a market actually have differ- ent levels of desire for the same product, the market price will be the same for everybody.

• Promotion has also worked in a fundamentally nonaddressable, noninteractive way. The various customers in a market are all passive recipients of the promo- tional message, whether it is delivered through mass media or interpersonally, through salespeople. Marketers have traditionally recognized the trade-off between the cost of delivering a message and the benefit of personalizing it to a recipient. A sales call can cost $300 or even more, but at least it allows for the personalization of the promotion process. The cost per thousand (CPM) to reach an audience through mass media is far lower, but requires that the same mes- sage be sent to everyone. Ultimately, the way a product is promoted is designed to differentiate it from all the other, competitive products. Except for different messages aimed at different segments of the market, promotion doesn’t change by customer, but by product.

aE. Jerome McCarthy, Basic Marketing: A Managerial Approach, 1st ed. (Homewood, IL: Irwin, 1958). bPhilip Kotler, Marketing Management: Analysis, Planning, Implementation, and Control, 9th ed. (Upper Saddle River, NJ: Prentice Hall, 1997), pp. 92-93. cPhilip Kotler, Kotler on Marketing (New York: Free Press, 1999), pp. 116–120.

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THE VIEW FROM HERE

Philip Kotler S. C. Johnson Distinguished Professor of International Marketing, Kellogg School of Management, Northwestern University

When I first started writing about marketing 36 years ago, the Industrial Age was in its prime. Manufacturers churned out products on massive assembly lines, stored them in huge warehouses where they patiently waited for retailers to order and shelve so that customers could buy them. Market leaders enjoyed great mar- ket shares from their carefully crafted mass-production, mass-distribution, and mass-advertising campaigns.

What the Industrial Age taught us is that if an enterprise wanted to make money it needed to be efficient at large-scale manufacturing and distribution. The enterprise needed to manufacture millions of standard products and distrib- ute them in the same way to all of their customers. Mass producers relied on numerous intermediaries to finance, distribute, stock, and sell the goods to ever expanding geographical markets. But in the process, producers grew increas- ingly removed from any direct contact with end users.

Producers tried to make up for what they didn’t know about end users by using a barrage of marketing research methods, primarily customer panels, fo- cus groups, and large scale customer surveys. The aim was not to learn about individual customers but about large customer segments such as women ages 30 to 55. The exception occurred in business-to-business marketing where each salesperson knew each customer and prospect as individuals. Well-trained sales- people were cognizant of each customer’s buying habits, preferences, and pecu- liarities. Even here, however, much of this information was never codified. When a salesperson retired or quit, the company lost a great deal of specific cus- tomer information. Only more recently, with sales automation software and loy- alty building programs, are business-to-business enterprises capturing detailed information about each customer on the company’s mainframe computer.

As for the consumer market, interest in knowing consumers as individuals lagged behind the B to B marketplace. The exception occurred with direct mailers and catalog marketers who collected and analyzed data on individual customers. Direct marketers purchased mailing lists and kept records of their transactions with individual customers. The individual customer’s stream of transactions pro- vided clues as to other items that might interest that customer. And in the case of consumer appliances, the company could at least know when a customer might be ready to replace an older appliance with a new one if the price was right.

GETTING BETTER AT CONSUMER MARKETING

With the passage of time, direct marketers became increasingly sophisticated. They supplemented mail contact with the adroit use of the telephone and tele- marketing. The growing use of credit cards and customers’ willingness to give

EVOLUTION OF RELATIONSHIPS WITH CUSTOMER 11

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their credit card numbers to merchants greatly stimulated direct marketing. The emergence of fax machines further facilitated the exchange of informa- tion and the placing of orders. Today, the Internet and e-mail provide the ulti- mate facilitation of direct marketing. Customers can view products visually and verbally order them easily, receive confirmation, and know when the goods will arrive.

But whether a company was ready for customer relationship management (CRM) depended on more than conducting numerous transactions with individ- ual customers. Companies needed to build comprehensive customer databases. Companies had been maintaining product databases, salesforce databases, and dealer databases. Now they needed to build, maintain, mine, and manage a cus- tomer database that could be used by company personnel in sales, marketing, credit, accounting, and other company functions.

As customer database marketing grew, several different names came to describe it, including individualized marketing, customer intimacy, technology- enabled marketing, dialogue marketing, interactive marketing, permission mar- keting, and one-to-one marketing.

Modern technology makes it possible for enterprises to learn more about individual customers, remember those needs, and shape the company’s offer- ings, services, messages and interactions to each valued customer. The new technologies make mass-customization (otherwise an oxymoron) possible.

At the same time, technology is only a partial factor in helping companies do genuine one-to-one marketing. The following quotes about customer relation- ship management (CRM) make this point vividly:

• “CRM is not a software package. It’s not a database. It’s not a call center or a Web site. It’s not a loyalty program, a customer service program, a cus- tomer acquisition program or a win-back program. CRM is an entire phi- losophy.” (Steve Silver)

• “A CRM program is typically 45 percent dependent on the right executive leadership, 40 percent on project management implementation and 15 per- cent on technology.” (Edmund Thompson, Gartner Group)

Where in the Industrial Age, companies focused on winning market share and new customers, more of today’s companies are focusing on customer share, namely increasing their business with each existing customer. These companies are focusing on customer retention, customer loyalty, and customer satisfaction as the key management objectives.

CRM is more than just an outgrowth of direct marketing and the advent of new technology. It requires new skills, systems, processes, and employee mind- sets. As the Interactive Age progresses, mass marketing must give way to new principles for targeting, attracting, winning, serving, and satisfying markets. As advertising costs have risen and mass media has lost some effectiveness, mass- marketing is now more costly and more wasteful. Companies are better pre- pared to identify meaningful segments and niches and address the individual customers within the targeted groups. They are becoming aware, however, that

12 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

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EVOLUTION OF RELATIONSHIPS WITH CUSTOMER 13

many customers are uncomfortable about their loss of privacy and the increase in solicitations by mail, phone, and e-mail. Ultimately, companies will have to move from an “invasive” approach to prospects and customers to a “permis- sions” approach.

The full potential of CRM is only beginning to be realized. The goal now is not just to offer excellent products and services but to get, keep, and grow the best customers. The objective is to focus more on customer retention and growth rather than pursue all types of customers at great expense only to lose them.

MANAGING CUSTOMER RELATIONSHIPS IS A DIFFERENT TYPE OF COMPETITION

A lot can be understood about how traditional, market-driven competition is dif- ferent from today’s customer-driven competition by examining Exhibit 1.2. The direction of success for a traditional aggregate-market enterprise (i.e., a tradi- tional company that sees its customers in markets of aggregate groups) is to acquire more customers (widen the horizontal bar), whereas the direction of suc- cess for the customer-driven enterprise is to keep customers longer and grow them bigger (lengthen the vertical bar). The width of the horizontal bar can be thought of as an enterprise’s market share—the proportion of customers who have their needs satisfied by the enterprise, or the percentage of total products in

EXHIBIT 1.2 Market Share versus Share of Customer

Traditional Marketing Diminishing Returns

1 to

1 ®

St ra

te gi

es

Customer Needs Satisfied

Customers Reached

Increasing Returns

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an industry sold by this particular firm. But the customer-value enterprise focuses on share of customer—the percentage of this customer’s business that a partic- ular firm gets—represented by the height of the vertical bar. Think of it this way: Kellogg’s can either sell as many boxes of cornflakes as possible to whomever will buy them, even though sometimes cornflakes will cannibalize raisin bran sales, or Kellogg’s can concentrate on making sure its products are on Mrs. Smith’s breakfast table every day for the rest of her life, and thus represent a steady or growing percentage of that breakfast table’s offerings. Ford can try to sell as many Tauruses as possible, for any price, to anyone who will buy; or it can, by knowing Mrs. Smith better, make sure all the cars in Mrs. Smith’s garage are Ford brands, including the used car she buys for her teenaged son, and that Mrs. Smith uses Ford financing and credit cards, and gets her service, mainte- nance and repairs at Ford dealerships—throughout her driving lifetime.

Although the tasks for growing market share are different from those for building share of customer, the two strategies are not antithetical. A company can simultaneously focus on getting new customers as well as growing the value of and keeping the customers it already has.9

Customer-strategy enterprises are required to interact with a customer and use that customer’s feedback from this interaction to deliver a customized product or service. Market-driven efforts can be strategically effective and even more effi- cient at meeting individual customer needs when a customer-specific philosophy is conducted on top of it. The customer-driven process is time-dependent and evo- lutionary, as the product or service is continuously fine-tuned and the customer is increasingly differentiated from other customers. The aggregate-market enterprise competes by differentiating products, whereas the customer-driven enterprise competes by differentiating customers. The traditional, aggregate-market enter- prise attempts to establish an actual product differentiation (by launching new products or modifying or extending established product lines) or a perceived one (with advertising and PR). The customer-driven enterprise caters to one customer at a time and relies on differentiating each customer from all the others.

The principles of a customer-focused business model differ in many ways from mass marketing. For one thing, the traditional marketing company, no matter how friendly, ultimately sees customers as adversaries, and vice versa. The company and the customer play a zero-sum game: If the customer gets a discount, the company loses profit margin. Their interests have traditionally been at odds: The customer wants to buy as much product as possible for the lowest price, while the company wants to sell the least product possible for the highest price. If an enterprise and a customer have no relationship prior to a purchase, and they have no relationship following it, then their entire interac- tion is centered on a single, solitary transaction and the profitability of that transaction. Thus, in a transaction-based, product-centric business model, buyer and seller are adversaries, no matter how much the seller may try not to

14 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

9See George S. Day, Market-Driven Strategy: Processes for Creating Value (New York: Free Press, 1999), for a useful discussion of the difference between “market-driven” and “market- driving” strategies.

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act the part. In this business model, practically the only assurance a customer has that he can trust the product and service being sold to him is the general reputation of the brand itself.10

By contrast, the customer-based enterprise aligns customer collaboration with profitability. Compare the behaviors that result from both sides if each transaction occurs in the context of a longer-term relationship. For starters, a one-to-one enterprise would likely be willing to fix a problem raised by a single transaction at a loss if the relationship with the customer was profitable long term (see Exhibit 1.3).

The central purpose of managing customer relationships is for the enterprise to focus on increasing the overall value of its customer base—and customer retention is critical to its success. Increasing the value of the customer base, whether through cross-selling (getting customers to buy other prod- ucts and services), upselling (getting customers to buy more expensive offerings), or customer referrals, will lead to a more profitable enterprise. The enterprise also reduces the cost of serving its customers by making it more convenient for them to buy from the enterprise.

TECHNOLOGY ACCELERATES—IT IS NOT THE SAME AS— BUILDING CUSTOMER VALUE

The interactive era has accelerated the adoption and facilitation of this highly interactive collaboration between the customer and the company. In addition, technological advancements have contributed to an enterprise’s capability to capture the feedback of its customer, then customize some aspect of its products

EVOLUTION OF RELATIONSHIPS WITH CUSTOMERS 15

EXHIBIT 1.3 A Comparison of Market-Share and Share-of-Customer Strategies

MARKET- SHARE STRATEGY SHARE-OF-CUSTOMER STRATEGY

Product (or brand) managers sell one Customer manager sells as many products product at a time to as many customers as possible to one customer at a time. as possible. Differentiate products from competitors. Differentiate customers from each other. Sell to customers. Collaborate with customers. Find a constant stream of new customers. Find a constant stream of new business

from established customers. Use mass media to build brand and Use interactive communication to announce products. determine individual needs and

communicate with each individual.

The central purpose ofmanaging customer rela- tionships is for the enterprise to focus on increasing the overall value of its customer base—and customer retention is critical to its success.

10Don Peppers and Martha Rogers, PhD, The One to One Manager (New York: Doubleday, 1999).

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or services to suit the customer’s individual needs. Enterprises require a highly sophisticated level of integrated activity to enable this customization and per- sonalized customer interaction to occur. To effectuate customer-focused busi- ness relationships, an enterprise must integrate the disparate information systems, databases, businesses units, customer touch points, and many other facets of its business to ensure that all employees who interact with customers have real-time access to current customer information. The objective is to opti- mize each customer interaction and ensure that the dialogue is seamless—that each conversation picks up from where the last one ended.

Many software companies have developed enterprise point solutions and suites of software applications that, when deployed, elevate an enterprise’s capabilities to transform itself to a customer-driven model. (You’ll find more about technology in Chapter 8.) And while one-to- one customer relationships are enabled by technology, executives at firms with strong customer relationships and burgeoning customer equity believe that the enabling

technology should be viewed as the means to an end, not the end itself. Man- aging customer relationships is an ongoing business process, not merely a technology. But technology has provided the catalyst for customer relation- ship management to manifest itself within the enterprise. Computer databases help companies remember and keep track of individual interactions with their customers. Within seconds, customer service representatives can retrieve entire histories of customer transactions and make adjustments to customer records. Technology has made possible the mass customization of products and services, enabling businesses to treat different customers differently, in a cost-efficient way. (You’ll find more about mass customization in Chapter 10.) Technology empowers enterprises and their customer contact personnel, marketing and sales functions, and managers by equipping them with sub- stantially more intelligence about their customers.

Implementing an effective customer strategy can be challenging and costly because of the sophisticated technology and skill set needed by relationship managers to execute the customer-driven business model. A business model focused on building customer value often requires the coordinated delivery

of products and services aligned with enterprise financial objectives that meet customer value requirements. While enterprises are experimenting with a wide array of technol- ogy and software solutions from different vendors to sat- isfy their customer-driven needs, they are learning that they cannot depend on technology alone to do the job. Before it can be implemented successfully, managing customer rela- tionships individually requires committed leadership from the upper management of the enterprise and wholehearted participation throughout the enterprise. Roger Siboni reit- erates that in the next contribution, which reminds us that while customer strategies are driven by new technological

16 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

The foundation for anenterprise focused on building its value by build- ing the value of the cus- tomer base is unique: Establish relationships with customers on an individual basis, then use the informa- tion gathered to treat differ- ent customers differently, and increase the value of each one to the firm.

Within seconds, cus-tomer service repre- sentatives can retrieve entire histories of customer trans- actions and make adjust- ments to customer records.

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capabilities, the technology alone does not make a company customer-centric. While the payoff can be great, the need to build the strategy to get, keep, and grow customers is even more important than the technology required to imple- ment that strategy.

The foundation for an enterprise focused on building its value by building the value of the customer base is unique: Establish relationships with customers on an individual basis, then use the information gathered to treat different cus- tomers differently, and increase the value of each one to the firm. The overarch- ing theme of such an enterprise is that the customer is the most valuable asset the company has, and that’s why the primary goals are to get, keep, and grow profitable customers.

GET, KEEP, AND GROW CUSTOMERS IN THE TWENTY-FIRST CENTURY

Roger Siboni Chairman of the Board, E.piphany

Let’s start by assuming that every enterprise in the Fortune 500 has in place an ERP system to manage its back office, and some front-office software to man- age its customer-facing processes. How do those systems help an enterprise increase its capability to get, keep, and grow its best customers? The short answer is, they do not. ERP and traditional CRM systems only manage the processes, they do not focus on the customer. But why is it so important to begin focusing on the customer now? If you look at the potential return from focusing on these areas, the answer is obvious.

Getting customers is all about making the sales and marketing process not only more efficient, but also more effective. The Fortune 500 spends approximately $700 billion every year on sales and marketing, yet most of these companies do not have a single view of who those customers are, individually. Achieving even a 10 percent increase in sales and marketing effectiveness by focusing on the right customer at the right time would generate a return of $70 billion.

Keeping customers addresses the biggest challenge in business today: manag- ing customer attrition. Some people believe this is simply a question of increas- ing loyalty in order to decrease turnover rates. But the challenge is far greater than that. Keeping customers is also about knowing which are the right cus- tomers to keep, because some customers are best when they’re someone else’s problem. Fundamentally, this is a question of profitability. If an airline customer flies 100,000 miles a year, mostly in business class, he is probably a very prof- itable customer for the airline and should receive royal treatment every time he calls on the phone, shows up at the airport, clicks on the Web site, or gets on the plane. The cost of that customer taking half of his business to a competitive air- line is probably 10 times the cost of a leisure traveler shopping elsewhere. At the same time, a low-fee credit card customer who shops very modestly and carries

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a zero balance most of the year is costing the credit card company money every time he gets a bill or contacts the call center. When that customer calls to com- plain about a late charge, it might be the most profitable business tactic just to let the customer walk away. But how can you tell which customers are profitable and which ones might be converted into profitable customers? The Fortune 500 generates more than $2 trillion in annual profits. If answering the customer prof- itability question could generate a mere 5 percent increase in corporate profits, this would amount to more than $100 billion a year.11

Finally, growing customers is about increasing every customer’s lifetime value to a company. The two ways to grow customers are to increase their lifetime, and increase the amount of revenue generated from every customer interaction dur- ing that lifetime. The first part is straightforward—understanding a customer and effectively anticipating and responding to that customer’s needs is the fastest way to increase loyalty and make sure that customer is around for a long time. The second part—increasing the sales yield per every contact—involves predicting a customer’s needs and reacting in real time to his actions with personalized, rele- vant offers. Every customer interaction is an opportunity to build on that rela- tionship and grow that customer’s value. It has been estimated that a customer who phones into a call center with a general service or support question and has a favorable experience is three times more likely to purchase additional products or services at that moment than someone who randomly walks into a store or vis- its a Web site. The Fortune 500 generates more than $6 trillion of revenue every year. Achieving just a 5 percent increase in corporate revenues would add some $300 billion of incremental revenue every year.

No matter how you analyze the numbers, it’s clear that the potential benefits of CRM are to be measured in the hundreds of billions of dollars. It is an incredibly leveraged business strategy with enormous potential for generating business revenue and profit. The technology of modern CRM is finally being delivered to fulfill its promise. Gone are the days when enterprises were will- ing to spend money on the traditional CRM solutions that plagued the market in the past.

At its inception, CRM focused on automating processes and trying to drive efficiencies into the call center or the sales force with a heavy client/server and inflexible architecture. These solutions are costly to deploy, costly to maintain, and have a low rate of adoption.

Modern CRM software has challenged the early CRM software vendors by redefining the space around a differentiated CRM solution that is based on an intelligent, open architecture that operates across multiple channels in real time. Modern CRM software provides the flexibility to meet the needs of the organization’s business processes at the department or individual level. Modern CRM software is driven by an embedded recognition of the customer, followed by immediate, real-time action to meet the needs of the customer. Modern CRM software embraces a pure Web architecture that leverages existing investments,

18 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

11Frederick F. Reichheld, The Loyalty Effect: The Hidden Force behind Growth, Profits, and Last- ing Value (Boston: Harvard Business School, Inc., 1996).

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delivers rapid return on investment (ROI), a low total cost of ownership, and a higher adoption rate.

The benefits that modern CRM software delivers over early CRM software are clear to any business user or CIO.

The leading enterprises will move quickly to implement modern CRM tech- nologies and customer strategies to lock in customer value; then they will retain those customers through understanding their preferences and being relevant to their lives.

WHAT IS A RELATIONSHIP?

What does it mean for an enterprise and a customer to have a relationship with each other? Do customers have relationships with enterprises that do not know them? Can the enterprise be said to have a relationship with a customer it does not know? Is it possible for a customer to have a relationship with a brand? Per- haps what is thought to be a customer’s relationship with a brand is more accu- rately described as the customer’s attitude or predisposition toward the brand. Experts have studied the nature of relationships in business for many years, and there are many different perspectives on the fundamental purpose of relation- ships in business strategies. (You’ll find two in-depth discussions on the nature of relationship in the next chapter.)

This book is about managing customer relationships more effectively in the new era of interactivity, which is governed by a more individualized approach. The critical business objective can no longer be limited to acquiring the most customers and gaining the greatest market share for a product or service. Instead, to be successful in the era of interactivity, when it is possible to deal individually with separate customers, the business objective must include estab- lishing meaningful and profitable relationships at least with the most valuable customers, and making the overall customer base more valuable. Technological advances during the last quarter of the twentieth century have mandated this shift in philosophy.

In short, the enterprise strives to get a customer, keep that customer for a life- time, and grow the value of the customer to the enterprise. Relationships are the crux of the customer-strategy enterprise. Relationships between customers and enterprises provide the framework for everything else connected to the customer-value business model. The exchange between a customer and the enterprise becomes mutually beneficial, as customers give information in return for personalized service that meets their individual needs. This interaction forms the basis of the Learning Relationship, an intimate, collaborative dia- logue between the enterprise and the customer that grows smarter and smarter with each successive interaction.12

12B. Joseph Pine II, Don Peppers, and Martha Rogers, PhD, “Do You Want to Keep Your Cus- tomers Forever?” Harvard Business Review (March–April 1995).

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LEARNING RELATIONSHIPS: THE CRUX OF MANAGING CUSTOMER RELATIONSHIPS

The basic strategy behind Learning Relationships is that the enterprise give a customer the opportunity to teach the company what he wants, remember it, give it back to him, and keep his business. The more the customer teaches the company, the better the company can provide exactly what the customer wants and the more the customer has invested in the relationship. Ergo, the customer will more likely choose to continue dealing with the enterprise rather than spend the extra time and effort required to establish a similar relationship elsewhere.13

The Learning Relationship works like this: If you’re my customer and I get you to talk to me, I remember what you tell me, and I get smarter and smarter about you. I know something about you that my competitors don’t know. So I can do things for you my competitors can’t do, because they don’t know you as well as I do. Before long, you can get something from me you can’t get any- where else, for any price. At the very least, you’d have to start all over some- where else, but starting over is more costly than staying with me.

Even if a competitor were to establish exactly the same capabilities, a cus- tomer already involved in a Learning Relationship with an enterprise would have to spend time and energy—sometimes a lot of time and energy—teaching the competitor what the current enterprise already knows. This creates a signif- icant switching cost for the customer, as the value of what the enterprise is pro- viding continues to increase, partly as the result of the customer’s own time and effort. The result is that the customer becomes more loyal to the enterprise, because it is simply in the customer’s own interest to do so. It is more worth- while for the customer to remain loyal than to switch. As the relationship pro- gresses, the customer’s convenience increases, and the enterprise becomes more

20 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

SIDEBAR 1.2

Who Is the Customer? ....................................................................................................................... Throughout this book, we refer to customers in a generic way. To some, the term will conjure up the mental image of shoppers. To others, those shoppers are end users or consumers, and the customers are downstream businesses in the distribution chain— the companies that buy from producers and either sell directly to end users or manu- facture their own product. In this book, customer refers to the constituents of an organization, whether it’s a business-to-business (B2B) customer (which could mean the purchasing agent or user at the customer company, or the entire customer com- pany) or an end-user consumer—or, for that matter, a hotel patron, a hospital patient, a charitable contributor, a voter, a university student or alum, a blood donor, a theme park guest, and so on. That means the competition is anything a customer might choose that would preclude choosing the organization that is trying to build a rela- tionship with that customer.

13Ibid.

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valuable to the customer, allowing the enterprise to protect its profit margin with the customer, often while reducing the cost of serving that customer.

Learning Relationships provide the basis for a completely new arena of com- petition, separate and distinct from traditional, product-based competition. An enterprise cannot prevent its competitor from offering a product or service that is perceived to be as good as its own offering. Once a competitor offers a simi- lar product or service, the enterprise’s own offering is reduced to commodity status. But enterprises that engage in collaborative Learning Relationships with individual customers gain a distinct competitive advantage, because they know something about one customer that a competitor does not know. In a Learning Relationship, the enterprise learns about an individual customer through his transactions and interactions during the process of doing business. The cus- tomer, in turn, learns about the enterprise through his successive purchase expe- riences and other interactions. Thus, in addition to an increase in customer loyalty, two other benefits come from Learning Relationships:

1. The customer learns more about his own preferences from each experi- ence and from the firm’s feedback, and is therefore able to shop, purchase, and handle some aspect of his life more efficiently and effectively than was possible prior to this relationship.

2. The enterprise learns more about its own strengths and weaknesses from each interaction and from the customer’s feedback, and is therefore able to market, communicate, and handle some aspect of its own tactics or strategy more efficiently and effectively than was possible prior to the relationship.14

Cultivating Learning Relationships depends on an enterprise’s capability to elicit and manage useful infor- mation about customers. Customers, whether they are consumers or other enterprises, do not want more choices. Customers simply prefer getting exactly what they want— when, where, and how they want it. Technology now makes it possible for companies to give it to them. Inter- active and database technology permits enterprises to col- lect large amounts of data on individual customer’s needs and to use that data to customize products and services for each customer.15

When it comes to customers, businesses are shifting their focus from product sales transactions to relationship equity. Most soon recognize that they simply do not know the full extent of their profitability by customer.16 Not all customers are equal. Some are not worth the time or financial investment of establishing

EVOLUTION OF RELATIONSHIPS WITH CUSTOMERS 21

Customers, whether theyare consumers or other enterprises, do not want more choices. Customers simply prefer getting exactly what they want— when, where, and how they want it.

14Katherine Lemon, Don Peppers, and Martha Rogers, PhD, “Managing the Customer Lifetime Value: The Role of Learning Relationships,” working paper. 15B. Joseph Pine II, Don Peppers, and Martha Rogers, PhD, “Do You Want to Keep Your Cus- tomers Forever?” Harvard Business Review (March–April 1995), pp. 103–114. 16Ian Gordon, Relationship Marketing (New York: John Wiley & Sons, Inc., 1998).

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Learning Relationships, nor are all customers willing to devote the effort required to sustain such a relationship. Enterprises need to decide early on which cus- tomers they want to have relationships with, which they do not, and what type of relationships to nurture. (See Chapter 5 on customer value differentiation.) But the advantages to the enterprise of growing Learning Relationships with valuable and potentially valuable customers are immense. Because much of what is sold to the customer may be customized to his precise needs, the enterprise can potentially charge a premium (as the customer may be less price-sensitive to customized products and services) and increase its profit margin. 17 The product or service is worth more to the customer because he has helped shape and mold it to his own specifications. The product or service, in essence, has become decommoditized, and is now uniquely valuable to this particular customer.

Managing customer relationships effectively is a practice not limited to prod- uct and services. When establishing interactive Learning Relationships with valuable customers, customer-strategy enterprises remember a customer’s spe- cific needs for the basic product, but also the goods, services, and communica- tions that surround the product, such as how the customer would prefer to be invoiced or how the product should be packaged. Even an enterprise that sells a commodity-like product or service can think of it as a bundle of ancillary ser- vices, delivery times, invoicing schedules, personalized reminders and updates, and other features that are rarely commodities. The key is for the enterprise to focus on customizing to each individual customer’s needs.

When a customer teaches an enterprise what he wants or how he wants it, the customer and the enterprise are, in essence, collaborating on the sale of the product. The more the customer teaches the enterprise, the less likely the cus- tomer will want to leave. The key is to design products, services, and communi- cations that customers value, and on which a customer and a marketer will have to collaborate for the customer to receive the product, service, or benefit.

Enterprises that build Learning Relationships clear a wider path to customer profitability than companies that focus on price-driven transactions. They move from a “make to fore- cast” business model to a “make to order” model, as Dell Computer did when it created a company that reduced inven- tory levels by creating each computer after it was paid for. By focusing on gathering information about individual cus- tomers and using that information to customize communica-

tions, products, and services, enterprises can more accurately predict inventory and production levels. Fewer orders may be lost because mass customization can build the products on demand, and thus make products that cannot be stocked ad infinitum available to a given customer. (We will discuss customization further in Chapter 10.) Inventoryless distribution from a build-to-order business model can

22 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

Enterprises that buildLearning Relationships clear a wider path to cus- tomer profitability than companies that focus on price-driven transactions.

17B. Joseph Pine II, Don Peppers, and Martha Rogers, PhD, “Do You Want to Keep Your Cus- tomers Forever?” in James H. Gilmore, and B. Joseph Pine II, eds., Markets of One: Creating Customer-Unique Value through Mass Customization (New York: Harvard Business School Pub- lishing, 2000).

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prevent shortages caused in distribution channels, as well as reduce inventory carrying costs. The result is fewer “opportunity” losses. Furthermore, efficient mass customization operations can ship built-to-order custom products faster than competitors that have to customize products.18

Learning Relationships have less to do with creating a fond- ness on the part of a customer for a particular product or brand, and more to do with a company’s capability to remember and deliver based on prior interactions with a customer. An enter- prise that engages in a Learning Relationship creates a bond of value for the customer, a reason for an individual customer to want never to deal with a competitor again, provided that the enterprise continues to deliver a product and service quality at a fair price and to remember and act on the customer’s prefer- ences and tastes.19 Learning Relationships may also be based on an inherent trust between a customer and an enterprise. For

example, a customer might divulge his credit card number to an organization, which records it and remembers it for future transactions. The customer trusts that the enterprise will keep his credit card number confidential. The enterprise makes it easier and faster for him to buy from it because he no longer has to repeat his credit card number each time he makes a purchase. (In the next chapter, we’ll learn more about the link between attitude and behavior in relationships.)

THE TECHNOLOGY REVOLUTION AND THE CUSTOMER REVOLUTION

During the last century, as enterprises sought to acquire as many customers as they possibly could, the local proprietor’s influence over customer purchases decreased. Store owners or managers became little more than order takers, stocking their shelves with the goods that consumers would see advertised in the local newspaper or on television and radio. Mass-media advertising became a more effective way to publicize a product and generate transactions for a wide audience. But, now, technology has made it possible, and therefore competi- tively necessary, for enterprises to behave, once again, like small-town propri- etors, and deal with their customers individually, one customer at a time.

CUSTOMERS HAVE CHANGED, TOO

The technological revolution has spawned another revolution, one led by the customers themselves, who now demand products just the way they want them,

EVOLUTION OF RELATIONSHIPS WITH CUSTOMERS 23

18David M. Anderson, Agile Product Development for Mass Customization (New York: McGraw Hill Professional Book Group, 1997). 19B. Joseph Pine II, Don Peppers, and Martha Rogers, PhD, “Do You Want to Keep Your Cus- tomers Forever?” Harvard Business Review (March–April 1995), pp. 103–114.

Learning Relationshipshave less to do with cre- ating a fondness on the part of a customer for a particu- lar product or brand, and more to do with a com- pany’s capability to remem- ber and deliver based on prior interactions with a customer.

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24 PRINCIPLES OF MANAGING CUSTOMER RELATIONSHIPS

SIDEBAR 1.3

Initial Assessment: Where Is a Firm on the Customer Strategy Map? ....................................................................................................................... Recognizing that two families of technology have mandated the competitive approach of building customer value by building customer relationships, we can map any organization—large or small, public or private, profit or nonprofit—by the level of its capabilities in the arenas of interacting with customers and tailoring for them. A com- pany would be rated high on the interactivity dimension if it knows the names of its individual customers, if it can send different messages to different customers, and can remember the feedback from each one. A low rating would go to a company that doesn’t know its customers’ identities, or does but continues to send the same mes- sage the same way to everybody. On the tailoring dimension, a firm would rate highly if it mass-customizes in lot sizes of one; it would rate low if it sells the same thing pretty much the same way to everybody. Based on its rating in these two dimensions, a company can be pinpointed on the Enterprise Strategy Map (see Exhibit A)

Quadrant I: Traditional Mass Marketing. Companies that compete primarily on cost efficiencies based on economies of scale and low price. Companies in this quadrant are doomed to commoditization and price competition.

Quadrant II: Niche Marketing. Companies that focus on target markets, or niches, and produce goods and services designed for those defined customer groups. This more strategic and targeted method of mass marketing still offers the same thing the same way to everyone, but in a small, relatively homogeneous group.

EXHIBIT A Enterprise Strategy Map

Ability to interact with customers

individually

Customers addressed only in

mass media

Standard products

Tailored products

Interacting

Tailoring

I

III IV

II

Database Marketing

I

III IV

III

III IV

III

III IV

II

1 to 1 Learning Relationships

Mass Marketing

Niche Marketing

Source: Don Peppers and Martha Rogers, PhD, Enterprise One to One (New York: Doubleday/Currency, 1997).

and flawless customer service. Enterprises are realizing that they really know little or nothing about their individual customers and so are mobilizing to cap- ture a clearer understanding of each customer’s needs. Customers, meanwhile, want to be treated less like numbers and more like the individuals they are, with distinct, individual requirements and preferences. They are actively communi- cating these demands back to the enterprise. Where they would once bargain with a business, they now tell managers of brand retail chains what they are pre- pared to pay, and specify how they want products designed, styled, assembled, delivered, and maintained. When it comes to ordering, consumers want to be treated with respect. The capability of an enterprise to remember customers and their logistical information not only makes ordering easier for the customers, but also lets them know that they are important. Computer applications that enable options such as “one-click,” or express, ordering on the Web are creating the expectation that good online providers take the time to get to know cus- tomers as individuals so they can provide this higher level of service.20

The customer revolution is part of the reason enterprises are committing themselves to keep and grow their most valuable customers. Today’s consumers and businesses have become more sophisticated about shopping for their needs across multiple channels. The online channel, in particular, enables shoppers to