Customer relationship management [Second edition] 9780273774952, 9780273774976, 9780273781073, 0273774956, 0273774972

Geared to MBA students and undergraduate students in the later years of their study, as well as those attending courses

2,551 306 62MB

English Pages 413 [436] Year 2013

Report DMCA / Copyright

DOWNLOAD FILE

Polecaj historie

Customer relationship management [Second edition]
 9780273774952, 9780273774976, 9780273781073, 0273774956, 0273774972

Table of contents :
Cover
Cover2
Contents
Preface
Acknowledgements
About the authors
Publisherâ#x80
#x99
s acknowledgements
PART I: Introduction
1: Customerâ#x80
#x93
supplier relationships
1.1: History
1.2: Description of customerâ#x80
#x93
supplier relationships
1.3: The dynamic in relationships
1.4: Networks
1.5: Conclusion
Case study: Collateral trust obligations
QuestIons
References
2: Customer relationship management
2.1: The definition of CRM
2.2: CRM building blocks
2.3: Entrance, applications and success of CRM
2.4: Contents of this book
2.5: Conclusion
Case study: CRM at C. Fun Parks
Questions. Case study: Optimisation of addresses for european footballQuestions
References
7: Data analyses and data mining
7.1: Experiences with data analysis
7.2: The analysis process
7.3: Data mining
7.4: Conclusion
Case study: SNS Bank wins CRM Innovator Award
Questions
References
8: Segmentation and selection
8.1: Segmentation study as input for the formulation of marketing strategy
8.2: Segmentation research used in compiling the list
8.3: Conclusion
Case study: Alpe dâ#x80
#x99
HuZes
Questions
References
9: Retention and cross-sell analyses
9.1: Retention
9.2: Cross-selling. 9.3: ConclusionCase study: Cross-selling within a fully automated convenience store
Questions
References
10: Management reporting: measuring, learning and optimising
10.1: Evaluating the effect of marketing activities on the customer value
10.2: Relating marketing investments to life-time value
10.3: Experiments
10.4: The learning organisation
10.5: Conclusion
Case study: Carglass wins CRM Award
Questions
References
Part IV: Marketing (Managing the exchanges in the relationship)
11: The customer proposition
11.1: Customisation
11.2: Co-creation.

Citation preview

Second Edition

Customer Relationship

Management Ed Peelen Rob Beltman

‘CRM has gone through many changes and developments over the years. But a constant factor is the inspiration Ed Peelen provides by combining solid theoretical knowledge with practical examples and business applications.’ Hans Zijlstra, Head of Customer Insight, Air France-KLM ‘This book recognises the major shortcomings of most CRM books – that is, the focus on the tactical, systems approach to managing customers. This book establishes the need for CRM strategies not only to be developed, but to be consistently used as an aid to long-term organisational profitability.’ Dr John Oliver, Associate Professor, The Media School, Bournemouth University, UK ‘This book inspired me during the defining process … of our CRM implementation at PricewaterhouseCoopers in the Netherlands. The book kept me on track and saved me from operational pitfalls. This CRM “bible” provides vision in establishing the backbone of any company’s CRM programme.’ Gerard Struijf, Chairman PvKO (Platform for Customer-Centric Entrepreneurship), former Senior Manager CRM, PricewaterhouseCoopers, the Netherlands

Most businesses know that how they manage their relationships with their customers is vital to their success. Yet the field of Customer Relationship Management lacks proper academic coverage. Ed Peelen’s Customer Relationship Management is the only comprehensive academic text in English to cover the entire scope of CRM. This fully updated second edition cements its position as essential reading for anyone who wants to understand this continually evolving field. Addressing the strategic, organisational, commercial and technological aspects of CRM, Peelen brings a social psychology perspective, blending theory and practice to aid a full understanding of the subject. The book is geared towards advanced undergraduates and MBA students, but is ideal for anyone taking courses in Customer Relationship Management, Relationship Marketing, Direct Marketing or Database Management.

Rob Beltman is also a partner at ICSB.

www.pearson-books.com

Front cover image: © Getty Images

Ed Peelen is one of the founders and partners of ICSB, a consulting firm in marketing and strategy. He was Professor of Marketing at the Centre for Marketing and Supply Chain Management, and the Executive Management Development Centre at Nyenrode Business University, the Netherlands.

Customer Relationship Management

i

Contents

ii

Contents

Second edition

Customer Relationship Management

Ed Peelen and Rob Beltman

iii

Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First UK edition published 2005 (print) Second edition published 2013 (print and electronic) © Pearson Education Benelux and Ed Peelen 2003 Translated by ABK Translations (print) © Pearson Education Limited 2005 (print) © Pearson Education Limited 2013 (print and electronic) The right of Ed Peelen to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. This edition is translated by Rob Beltman. The translation of Ed Peelen: Customer Relationship Management, 2nd edition is published by arrangement with Pearson Education Benelux BV, Amsterdam. The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6−10 Kirby Street, London EC1N 8TS. The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the author’s and the publishers’ rights and those responsible may be liable in law accordingly. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Pearson Education is not responsible for the content of third-party internet sites. ISBN: 978-0-273-77495-2 (print) 978-0-273-77497-6 (PDF) 978-0-273-78107-3 (eText) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 16 15 14 13 Print edition typeset in 9.5/12.5 pt ITC Charter by 75 Print edition printed and bound in Malaysia NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION

Brief contents Preface Acknowledgements About the authors Publisher’s acknowledgements

Part I Introduction 1 Customer–supplier relationships 2 Customer relationship management

Part II Strategy and organisation 3 CRM as an integral business strategy 4 The relationship-oriented organisation

Part III Intelligence 5 6 7 8 9 10

xiii xv xvi xvii

1 3 32

47 49 67

91

Customer knowledge strategy Customer data management Data analyses and data mining Segmentation and selection Retention and cross-sell analyses Management reporting: measuring, learning and optimising

178

Part IV Marketing (Managing the exchanges in the relationship)

201

11 The customer proposition 12 The relationship policy

Part V Channels 13 Multichannel management 14 Personal selling

93 117 135 147 161

203 229

251 253 277

v

Brief contents

15 The online environment 16 Contact centre management

Part VI CRM systems and their implementation 17 CRM systems 18 Implementation of CRM systems 19 The future Index

vi

296 326

349 351 375 396 405

Contents Preface Acknowledgements About the authors Publisher’s acknowledgements

xiii xv xvi xvii

Part I  Introduction  1 Customer–supplier relationships 1.1 1.2 1.3 1.4 1.5

History Description of customer–supplier relationships The dynamic in relationships Networks Conclusion

Case study: Collateral trust obligations Questions References

 2 Customer relationship management 2.1 2.2 2.3 2.4 2.5

The definition of CRM CRM building blocks Entrance, applications and success of CRM Contents of this book Conclusion

Case study: CRM at C. Fun Parks Questions References

3 4 5 15 19 26 26 28 29 32 33 36 40 41 43 43 45 46

Part II  Strategy and organisation  3 CRM as an integral business strategy 3.1 3.2 3.3 3.4

The nature of the CRM strategy The context of the CRM strategy The results of a successful CRM strategy Conclusion

Case study: Starbucks in the US Questions References

49 50 56 59 63 63 65 65

vii

Contents

 4 The relationship-oriented organisation 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9

The challenge and leadership Mission Culture Structure People Communication and information Systems Where do we stand? Conclusion

Case study: A personal experience: customer focus in healthcare insurance Questions References

67 68 69 71 73 76 78 79 83 85 86 88 88

Part III  Intelligence  5 Customer knowledge strategy 5.1 5.2 5.3 5.4 5.5 5.6 5.7

The value of customer knowledge The utilisation of data as an asset From data to customer knowledge Privacy Personal Data Protection Act Information policy Conclusion

Case study: Customer knowledge at Center Parcs: a life-long holiday! Questions References

 6 Customer data management 6.1 6.2 6.3 6.4 6.5

Customer identification Expanding the size of the customer database Customer profiling Customer data integration Conclusion

Case study: Optimisation of addresses for European football Questions References

 7 Data analyses and data mining 7.1 7.2 7.3 7.4

viii

Experiences with data analysis The analysis process Data mining Conclusion

93 94 98 101 107 108 111 112 113 115 115 117 118 122 124 130 131 132 133 134 135 136 137 141 144

Contents

Case study: SNS Bank wins CRM Innovator Award

144

Questions References

145 146

 8 Segmentation and selection

147

8.1 Segmentation study as input for the formulation of marketing strategy 8.2 Segmentation research used in compiling the list 8.3 Conclusion

148 152 157

Case study: Alpe d’HuZes Questions References

158 159 159

 9 Retention and cross-sell analyses

161

9.1 Retention 9.2 Cross-selling 9.3 Conclusion

162 167 174

Case study: Cross-selling within a fully automated convenience store Questions References

174 176 177

10 Management reporting: measuring, learning and optimising

178

10.1 Evaluating the effect of marketing activities on the customer value 10.2 Relating marketing investments to life-time value 10.3 Experiments 10.4 The learning organisation 10.5 Conclusion

179 185 190 193 196

Case study: Carglass wins CRM Award Questions References

197 199 199

Part IV  Marketing (Managing the exchanges in the relationship) 11 The customer proposition 11.1 11.2 11.3 11.4 11.5 11.6

Customisation Co-creation The long tail: the complete assortment Individualisation of the product offering Individualised pricing policy Conclusion

Case study: Nike+ Questions References

203 204 208 213 216 219 225 225 227 228

ix

Contents

12 The relationship policy

229

12.1 Customer asset management: improvement in the size and quality of the customer database 12.2 Acquisition policy 12.3 Relationship policy by segment 12.4 Relationship policy and life events 12.5 Relationship policy by relationship phase 12.6 Translating the relationship policy into contact moments 12.7 Conclusion

230 232 233 235 240 243 246

Case study: The relationship between a logistics service provider and its new client Questions References

246 249 249

Part V  Channels 13 Multichannel management 13.1 The multichannel challenge 13.2 The key questions underlying a multichannel strategy 13.3 Should the multichannel strategy be adapted? 13.4 What is the right channel combination? 13.5 Translating the channel combination into an integrated multichannel strategy 13.6 The business case for a multichannel strategy 13.7 Building a multichannel organisation 13.8 Performance measurement in the multichannel environment 13.9 Stimulating customers to use the channel mix 13.10 Conclusion

254 257 257 262 266 268 269 271 272 273

Case study: KPN business portal Questions References

273 275 275

14 Personal selling 14.1 14.2 14.3 14.4 14.5 14.6

The role and function of personal sales Customer selection and customer value The sales process Managing the sales process Information technology and sales Conclusion

Case study: Secrets of success for going mobile: Agrifirm wins the CRM Award Questions References

15 The online environment 15.1 The evolution of the web 15.2 Marketing on the social web 15.3 Mobile marketing

x

253

277 278 281 282 285 289 290 291 294 295 296 297 301 309

Contents

15.4 Marketing on the commercial web 15.5 Measuring results 15.6 Conclusion

310 319 321

Case studies: Albert Heijn: where off- and online meet each other; Harry Potter: a magic brand Questions References

321 323 323

16 Contact centre management 16.1 16.2 16.3 16.4 16.5 16.6 16.7

Contact centres described Determining the service level Capacity planning Managing contact satisfaction Key performance indicators Managing the development of contact centres Conclusion

Case study: Zappos Questions References

326 327 329 333 336 341 341 344 345 346 347

Part VI  CRM systems and their implementation 17 CRM systems 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8

An overview of CRM systems The contact centre The internet (web 2.0) Data warehouses and datamarts Campaign management systems Content management system Selecting CRM software package(s) Conclusion

Case study: Canada Post delivers on its CRM strategy Questions References

18 Implementation of CRM systems 18.1 18.2 18.3 18.4 18.5 18.6 18.7

Reasons for disappointing results An initial exploration with CRM and how companies handle this The CRM road map CRM project management A different approach to CRM project management International or cross-division projects (Gentle, 2002) Conclusion

Case study: Shell and CRM: one database for 20 million customers Questions References

351 352 355 358 362 365 368 369 371 371 373 374 375 376 376 378 383 386 388 391 392 394 395

xi

Contents

19 The future

396

19.1 Factors which influence the future of CRM 19.2 The journey continues 19.3 Conclusion

396 399 403

Questions References

403 404 405

Index

Lecturer Resources For password-protected online resources tailored to support the use of this textbook in teaching, please visit www.pearsoned.co.uk/peelen

xii

ON THE WEBSITE

Preface CRM from the start . . . It was 25 years ago when I was first confronted with relationship marketing. The newly founded Lester Wunderman Institute approached me with a request to initiate a study on the subject. Freshly graduated as an economist with a marketing specialisation, this was both a challenge and the beginning of an interesting discussion with marketing specialists. Following the publication of my first article, marketers began to respond. Nobody had ever applied theories and concepts from social psychology to relationships between individual consumers and sellers in the field of marketing. Initial doubts were shortly replaced by enthusiasm, and a demand for relationship marketing took off. From the outset, Gummesson, Grönroos and Håkansson in Scandinavia, Payne in the UK and Berry in Canada all played major innovative roles; thus relationship marketing was born. Over the years, relationship marketing has not attracted universal acclaim in Europe. Some countries have started slowly or late; with others, their interest related directly to the economic climate; meanwhile, others have shown continuous commitment. However, all those who became involved in relationship marketing discovered that the field was more difficult than at first expected. The necessary data were lacking, owing to the fact that the majority of organisations were still more product- and market- than customer-oriented. Acquiring customers had a higher priority than retaining them, and the need to redesign processes was apparent. In the 1990s, people became more aware of the development of the buyer–seller relationship and realised that this relationship had consequences for entire organisations. Customer relationships were no longer just a marketing issue; everybody in the organisation played a direct or indirect role in customer contact. Relationship marketing was implemented in organisations and affected company culture, communication patterns and reward systems. Organisations that had previously been built around factories had to be rebuilt around customers. Conquering markets and achieving market leadership was no longer a company’s primary concern; instead, activities within the organisation had to be orchestrated to ensure they contributed to the development of mutually profitable relationships with the right customers. Improved understanding of the organisational consequences brought both advantages and disadvantages to the discipline. It was good to increase knowledge; however, organisations realised that it was difficult to achieve short-term results with relationship marketing playing an integral role in every aspect of the organisation. In several countries and organisations the initial enthusiasm evaporated. Management ambitions went unrealised and clients complained that, as customers, they were being treated shabbily by companies. Customer satisfaction rates in the US are at an all-time low. When we talk to people about their life as consumers, we do not hear praise for their so-called corporate partners. Instead, we hear about the confusing, stressful, insensitive, and manipulative marketplace in which they feel trapped and victimized . . . Customers cope . . .

xiii

Preface

They tolerate sales clerks who hound them with questions . . . They muddle through the plethora of products that line grocery store shelves . . . Source: Fournier, S., Dobscha, S. and Mick, D.G. (1998) Preventing the premature death of relationship marketing, Harvard Business Review, January–February, 42–52.

In several countries and companies, CRM might have disappeared completely had it not been for the information technology industry which introduced CRM systems with great promises. Ambitions regarding buyer–seller relations soared again and earlier negative experiences seemed to be forgotten within days. The economic climate was prosperous, and visionary people grabbed our attention. Relationship marketing, now named CRM, was once again high on top management agendas. Technology would enable us to communicate at low costs with large numbers of individual customers, educate them, deliver customised solutions to them, engage and bind them. Customers themselves would play a major role in the transformation of product- or market-oriented organisations into customer-oriented ones. Customers would take the lead and would force organisations to build their processes around consumers. This initial unrealistic enthusiasm was not without consequences for the perception of CRM in the period that followed. For years, CRM came to be associated with expensive projects being stopped prematurely. Initial big programmes and projects were replaced by smaller ones with a fixed scope and clear objectives. In many cases, these small steps appeared to profitable and helped organisations to learn how to deal with CRM from strategic, marketing, organisational and IT perspectives. The learning process is still going on; we are improving on a daily basis, but we’re still not there, particularly since the discipline itself continues to evolve as well. In fact, it’s probably evolving faster than ever before, since social media became popular and widespread and started to fuel a process wherein the seller’s domination in many instances of buyer–seller relations is changing. The lead role is partly being taken over by customers, who are in contact with other customers, asking sometimes for an active role in the relationship, new pricing models, customised offerings that fit into their physical and social context. As a consequence bilateral relations have to be seen in the context of social networks.

The promise of this book In today’s world, organisations are in the midst of a transition process, wondering how to build mutually beneficial relations with the right customers, in an environment where roles are changing and media are democratised and open to all. This book helps to find answers by exploring relations in the midst of social networks. It shows what commercial strategy to opt for and how to work on an organisation that focuses on the customer. It supports them in the development of their customer intelligence function and the new customer–service provider interface, where value is exchanged, if so desired in a co-creative way, and where the customer experience is facilitated by integrated channels. All this enabled by processes and technology and monitored through the use of critical performance indicators. The book opens with an introduction to the topic of customer–provider relations amidst social relations in networks. The subject is approached on an academic basis. This is followed by a description of CRM; its meaning and its building blocks. Part II addresses the strategic and organisational aspects of CRM. In Part III we discuss one of the key elements of CRM: customer intelligence. What do we want to know about our customers and how are we going to organise for that? Part IV then covers the marketing aspects of CRM. We discuss the proposition towards customers, the decision to invest in a specific customer relationship and the way to develop this relationship. Part V examines the channels the organisation can use

xiv

Preface

to interact with customers. From the customer perspective we formulate the multichannel strategy and decide how to organise these channels. The internet, including social media, personal selling and contact centres are discussed. The final part of the book addresses CRM systems and their implementation and concludes with a glimpse into the future. Old and new experiences are united in this book. Lessons learned from direct marketers, database managers, project managers, strategists, change masters, internet and social media experts and contact centres are combined. To achieve a thorough discussion of all aspects of CRM, the book blends together theory and practice to convey a full understanding of the subject.

The target audience This book is geared towards MBA students and undergraduate students in the later years of their study, as well as those attending courses on relationship marketing, CRM, customercentricity, database management or business intelligence. It is also appropriate for graduate students in information management attending courses on CRM and participants in specific CRM/database management courses. Students reading this book should have basic knowledge of marketing management.

Pedagogy To help reinforce key learning points, each chapter includes the following; ●

Sections and sub-sections, which break up the main text to help students digest and retain the information.



Tables, figures and other illustrative material to help the reader grasp the essential facts.



Boxes throughout the text with Practitioner’s insights, CRM illustrations and CRM definitions to reinforce concepts.



Case studies, which provide a basis for class discussion or in-depth assessment of a set of issues.



Review questions, which provide a basis for self-assessment by the students or revision topics at the end of the programme.

While the book can be read from cover to cover, it has also been structured so that parts can be read independently from one another. For example, Part III (with the exception of the first and last chapters) on customer intelligence can be omitted from the undergraduate syllabus as this section primarily addresses people with a database management specialisation.

Instructor learning resources Visit www.pearsoned.co.uk/peelen to access an Instructor’s Manual and PowerPoint slides. For further information, please e-mail the author at [email protected] or [email protected].

Acknowledgements I would like to thank many people for their pleasant cooperation and support during the past few years and during the writing of this book. First, I extend thanks to the Pearson publishers for their support.

xv

Preface

I would also like to mention the initiators of this project, HEO-ICT and the insurance company Centraal Beheer Achmea. I also extend thanks to several of my students who wrote their theses on CRM and were a great help. In particular, I thank Wouter Niks, Kees Ekelmans and Leontine Brandt. It was Pieter Vijn who first introduced me to this subject all those years ago. He, as well as Gerard Wolfs, Cees den Hollander, Jeffrey Berend, Frank Slisser, Pauline van Esterik-Plasmeijer, Wojtek Kowalczyk, Wim Kwakernaat and many others have been a great inspiration. This second edition has been realised with the help of Rob Beltman. Since completing his MA at Erasmus University, he has been active in the field of CRM as both a consultant and a lecturer involved in CRM projects on different topics and in a range of industries. He followed a path comparable to mine, and might be a good successor in the discipline. Ed Peelen Rotterdam Spring 2013

About the authors Ed Peelen is a partner and co-founder of ICSB Marketing and Strategy. For over ten years he has been a professor in marketing/CRM at Nyenrode Business University, responsible for the marketing and supply chain department and for executive education for several years. He studied business economics at the Erasmus University of Rotterdam after which he specialised in relationship marketing and direct marketing. He now specialises in customer relationship management, account management and marketing in general. He organises several programmes on these topics at Nyenrode for managers and specialists and is the academic supervisor for several PhD students. He has written some 18 books and numerous managerial and academic journal articles. Professor Peelen has been Chairman of the jury of the CRM Award for ten years, an award presented to the company with the best results in the field of CRM. He is an editorial board member of the Journal of Direct, Data and Digital Marketing Practice. He completed his PhD on relationship marketing in 1989 at the Erasmus University, Rotterdam, and was one of the first to introduce this topic to The Netherlands. Rob Beltman is partner and senior consultant at ICSB Marketing and Strategy. He supports organisations in becoming more customer-centric and market-oriented and developed a specialisation in Customer Relationship Management and Customer Engagement Management. He has worked for companies in, for example, financial, agricultural, logistics and professional services industries, as well as for organisations that have a more social or governmental background and need to become more market-oriented. During the past ten years of his consultancy practice he has written several articles and books on the topic, one of which is based on interviews with chief marketing officers in various organisations. He completed his MA studies in Business Economics at the Erasmus University with a study of Customer Relationship Management.

xvi

Publisher’s acknowledgements We are grateful to the following for permission to reproduce copyright material:

Figures Figure 1.2 from Contemporary Topics in Social Psychology, General Learning Press (Thibaut, J.W., Spence, J.T. and Carson R.C. (eds) 1976); Figure 1.4 from Social media? Get serious! Understanding the functional building blocks of social media, Business Horizons, Vol.54(3), pp. 241–251 (Kietzmann, J.H., Hermkens, K.. McCarthy, I.P. and Silvestre, B.S. 2011), Copyright (2011), reprinted with permission from Elsevier; Figure 1.5 from The role of hubs in the adoption process, Journal of Marketing, Vol.73 (March), pp. 1–13 (Goldenberg, J., Sangman, H., Lehmann, D.R. and Hong, J. 2009), Reproduced with permission of AMERICAN MARKETING ASSOCIATION in the format Republish in a book via Copyright Clearance Center.; Figure 3.2 from Why satisfied customers defect, Harvard Business Review, November/December (Jones, T.O. and Sasser Jr, W. 1995), Reprinted by permission of Harvard Business Review. Copyright © 1995 by the Harvard Business School Publishing Corporation; all rights reserved.; Figures 3.3, 3.4 from The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value, Harvard Business School Publishing (Reichheld, F.F. 1996); Figure 4.3 from Putting the service–profit chain to work, Harvard Business Review, March/April (Heskett, J.L. et al. 1994), Reprinted by permission of Harvard Business Review. Copyright © 1994 by the Harvard Business School Publishing Corporation; all rights reserved.; Figure 4.4 from Strategy Maps: Converting intangible assets into tangible outcomes, Harvard Business Publishing Corporation (Kaplan, R.S. and Norton, D.P. 2004), Copyright © 1994 by the Harvard Business School Publishing Corporation; all rights reserved.; Figure 5.4 adapted from Follow That Customer: Event Driven Marketing, Racom Communications (Bel, E.J.van 2004); Figures 6.1, 6.2 from Mentality: Sociographics in Marketing, Motivaction International BV (Sprangenberg, F. & Liebreghts, L. 1999), © Motivaction International B.V. 1999. www.motivaction.nl. Reproduced with permission; Figures 6.1, 6.2 from Mentality: Sociographics in Marketing, Motivaction International BV (Sprangenberg, F. & Liebreghts, L. 1999); Figure 9.3 from Genetic algorithms and neural networks versus statistical techniques: a case study in marketing, PASE ’95 Workshop Proceedings, Mainz, 31 August (Eiben, G., Slisser, F., Peelen, E., Kowalczyk, W. and Euvermans, T. 1995); Figure 9.4 from Response modeling and target group selection in a business-to-business market, Henry Stewart Conference Proceedings, Amsterdam, 26 January (Eiben, G., Slisser, F., Peelen, E., Kowalczyk, W. and Euvermans, T. 1995); Figure 10.3 from Value Based Knowledge Management, Amsterdam: Addison Wesley Longman (Tissen, R., Andriessen, D. and Deprez, F.L. 1998); Figure 11.6 from www.nikeplus.nike.com; Figure 12.1 from Getting the most out of all your customers, Harvard Business Review, July–August, pp. 117–123 (Thomas, J.S., Reinartz, W. and Kumar, V. 2004); Figure 12.3 from Database Marketing and Customer Connections, Achmea workshop, Zeist (Wang, P. 1998); Figure 12.4 from The social readjustment rating scale, Journal of Psychosomatic Research, Vol.11(2),

xvii

Publisher’s acknowledgements

pp. 213–218 (Holmes, T.H. and Rahe, R.H. 1967), Copyright (1967), reprinted with permission from Elsevier; Figure 12.5 from Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, John Wiley & Sons (Osterwalder, A. and Pigneur, Y. 2010); Figure 12.7 from The Relation Oriented Organisation, Nyenrode University (Peelen, E. 1999); Figure 13.1 from The Multichannel challenge: Integrating experiences for profit, Butterworth-Heinemann/Elsevier (Wilson, H., Street, R. and Bruce, L. 2008) p. 25; Figure 13.2 adapted from The Multichannel challenge: Integrating experiences for profit, Butterworth-Heinemann/Elsevier (Wilson, H., Street, R. and Bruce, L. 2008) p. 27; Figure 15.1 from Mobile, Interfaces, Sensors & Singularity, TedxBrainport 2012 Eindhoven (van Geest, Y, 2012), Reproduced by permission of the author.; Figure 15.2 from Economie van experiences, 3rd., Amsterdam: Pearson Education (Boswijk, A., Peelen, E., and Olthof, S. 2011); Figure 16.2 from Belloni Business Consultancy Contact Centers; Figure 16.4 from Call Center Management on Fast Forward: Succeeding in the New Era of Customer Relationships, ICMI Press (Cleveland, B. 2012), Reproduced with permission from the author; Figure 17.2 from Datawarehousing en daarna, Kluwer BedrijfsInformatie (Jonker, J. 1997).

Tables Table 1.1 from After the sale is over, Harvard Business Review, Sept/Oct (Levitt, T. 1983), Reprinted by permission. Copyright © 1983 by the Harvard Business School Publishing Corporation; all rights reserved; Table 1.3 from Commitment to personal relations, Advances in Personal Relationships, 3, pp. 117–143 (Johnson, M.P. 1991), Reproduced by permission of Michael P. Johnson, Ph.D. Emeritus Professor of Sociology, Women’s Studies, and African and African American Studies, Penn State; Table 3.1 from Inzet customer relationship management de moeite waard, Vrijetijdstudies, Vol 22(4), pp. 47–51 (Rooy, P. de 2004); Table 8.1 adapted from Optimal Database Marketing: Strategy, development and data mining, Sage Publications (Drozdenko, R.G. and Drake, P.D. 2002), © 2002 by Sage Publications, Inc. Reprinted by permission of Sage publications, Inc.; Table 8.3 adapted from Optimal Database Marketing: Strategy, development and data mining, Sage Publications (Drozdenko, R.G. and Drake, P.D. 2002) p. 220, © 2002 by Sage Publications, Inc. Reprinted by permission of Sage publications, Inc.; Table 10.1 from Direct Marketing Management, Prentice-Hall (Roberts, M.L. and Berger, P.D. 1999) Fig. 9, p. 188, Reproduced by permission of Mary Lou Roberts and Paul D. Berger. available for download at www.marylouroberts.info; Table 10.2 from Customer Equity: Building and managing relationships as valuable assets, Harvard Business School Press (R.C. Blattberg, G. Getz and J.S. Thomas 2001) p. 26, Reprinted by permission of Harvard Business School Press. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved; Tables 10.3, 10.4 adapted from Customer Equity: Building and managing relationships as valuable assets, Harvard Business School Press (R.C. Blattberg, G. Getz and J.S. Thomas 2001) p. 28, Reprinted by permission of Harvard Business School Press. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved; Table  10.5 adapted from Customer Equity: Building and managing relationships as valuable assets, Harvard Business School Press (R.C. Blattberg, G. Getz and J.S. Thomas 2001) p. 29, Reprinted by permission of Harvard Business School Press. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved; Table 10.6 adapted from Customer Equity: Building and managing relationships as valuable assets, Harvard

xviii

Publisher’s acknowledgements

Business School Press (R.C. Blattberg, G. Getz and J.S. Thomas 2001), Reprinted by permission of Harvard Business School Press. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved; Tables 10.7, 10.8a, 10.8b from Getting the most out of all your customers, Harvard Business Review, July–August, pp. 163–123 (Thomas, J.S., Reinartz, W. and Kumar, V. 2004); Table 13.1 adapted from The Multichannel Challenge: Integrating experiences for profit, Butterworth-Heinemann/Elsevier (Wilson, H., Street, R. and Bruce, L. 2008) p. 24; Table 15.1 from The future of on-line food retailing (Cost/profit Analysis, Marketing & Logistics), Food Personality, Jan. (Laan, J.W. van der 2000); Tables 16.1, 16.2 from Call Center Management on Fast Forward: Succeeding in the New Era of Customer Relationships, ICMI Press (Cleveland, B. 2012), Reproduced with permission from the author.

Text Case Study on pages 26–28 from Reinventing Financial Services, Pearson Education: Amsterdam (Peverelli, R. and de Feniks, R. 2010); Case Study on pages 63–64 adapted from Starbucks in US: Too Much Coffee Spilling All Over? (RTS0132), IBS (Jain, S. 2009); Case Study on pages 86–87 adapted from Bunt, J. (2012) Klantgerichtheid kan verkeren in klantverlakkerij. Een persoonlijke ervaring uit in de zorgverzekeringsbranche (Unpublished); Case Study on pages 144–145 adapted from Platform voor Klantgericht Ondernemen (2010) Persbericht CRM Award. http://www.pvko.nl/kennisbank/persberichten/friesland-banken-sns-bank-winnen-prijs-voor-klantgericht-ondernemen-crm-awards-2010/; Case Study on pages 174–176 adapted from Using Association Rules for Product Assortment Decisions: A case study, ACM (Brijs, T., Swinnen, G., Vanhoof, K. and Wets, G. 1999); Case Study on pages 345–346 adapted from Zappos Milestone: Customer Service, Footwear News, May (Beaudry, J.E. 2009), Copyright © 2009 Condé Nast. All rights reserved. Reprinted by permission; Case Study on pages 371–73 adapted from Canada Post Delivers on Its CRM Strategy, CS-16-7100, Gartner Inc. (Eisenfeld, B. 2002). In some instances we have been unable to trace the owners of copyright material, and we would appreciate any information that would enable us to do so.

xix

PART I

Introduction What is the true meaning of a relationship? It is a fundamental question to which a book on customer relationship management should provide an answer. Relationships, between customers and suppliers and the people and organisations around them are at the heart of this book. It therefore reflects the more human approach that is nowadays taken to the subject, in comparison to the more technocratic approach that was dominant when customer relationship management (CRM) was put on the management agenda in the 1900s by the IT industry. We will describe the relational approach to CRM that we will adhere to in this book when we further elaborate how organisations can initiate and then expand mutually beneficial relations with their customers. A brief history of the rise and evolution of the topic of CRM will be followed by an analysis of its current state and scope. It covers both strategic, organisational, marketing and IT elements.

Chapter

1

Customer–supplier relationships The emphasis in classical marketing and sales has been on customer acquisition and transactions, not on customer loyalty and building relationships. Customer service was long considered only to be an ‘after sales activity’, not a part of the core of a commercial process. Over the past three decades retaining customers and building relationships with them has gained attention and with that attention, the roles of marketing, sales and service have changed. This evolution will be described in Section 1.1. From there on the concept of relationships will be further defined (Section 1.2); a number of core elements, such as reciprocity and interactions, trust and commitment will be examined. Subsequently, the dynamic pattern customer–supplier relationships tend to follow will be explored (Section 1.3). In this chapter we will address the following questions: ●

When and how did the relationship orientation arise within marketing?



What are the differences between a transaction-based and a relationship-based orientation in marketing?



What is the meaning of customer–supplier relationships?



How can we assess the quality or strength of relationships in terms of interactions, trust and commitment?



How can we describe the dynamic of relationships; the relationship life-cycle?



How are customer–supplier relationships embedded in less dyadic, networked relationships, such as are seen in social networks and communities?

PraCtItIoner’s InsIght It is quite easy for people in an organisation to speak of their relationships with customers, but further inquiry always reveals they give different meanings to it. For one it is the delivery of quality and service, for another it is to listen and to be customer friendly, and for yet another it is commitment. Building a common understanding of buyer–seller relationships is a prerequisite for an organisation to build relationships with their customers.

3

Part I Introduction

1.1

history Within marketing theory and practice, ‘there has been a long-standing and clear tendency . . . to focus on the sale, the single event of a transaction, as the objective of marketing activity and the dependent variable for analysis’ (Webster, 1992). Levitt has illustrated this concept quite clearly (Table 1.1). Apart from indicating the salesman’s strong focus on the transaction, he demonstrates what the consequences are for the feelings of the salesman as well as the buyer during the purchase and use process. It would seem obvious that a better synchronisation of emotions is a pre-condition for both customer and supplier in order to arrive at the development of a long-term relationship. Levitt’s black-and-white depiction is hardly flattering. However, some level of differentiation is appropriate here. First, his example focuses on salesmen and not on marketing or commercial processes in general, and second, one must not forget that the objective of transaction marketing is to make customers happy. The expectation is that this happiness will translate into future repeat purchases. Within transaction marketing, the process between two or more transactions is neither analysed nor influenced. The attention for the relationship and the investments in the relationship is lacking. Over the past two decades, an increasing number of market situations have witnessed a shift in the focus on the transaction to the relational aspects of the exchange (Arndt, 1979). Arndt said that ‘many earlier competitive markets are structured as a result of voluntary, long-term, binding commitments among the organisations involved. In such arrangements transactions are planned and administered instead of being conducted on an ad hoc basis.’ As Bruhn (2003) describes in his book Relationship Marketing, in the literature the origins of relationship marketing are diverse. We basically follow his historical analysis here. Bagozzi (1974, 1975) contributed in the mid-1970s when he defined marketing as an exchange process between buyer and seller, and thereby formed the basis for the subsequent conceptualisation of relationship marketing. Accepting the view that a customer relationship comprises various exchange processes, the question arises as to how the relationship changes over time. In this regard, one recognises several relationship phases that first came under discussion in the early 1980s (Dwyer et al., 1987; Peelen, 1989). The possibility of delineating phases within a relationship makes it necessary to design relationship marketing explicitly. In the early 1980s this was seen for the first time in the field of service marketing (Berry, 1983). It is in the field of service that significant contributions have been made to relationship marketing: the so-called Nordic school, with founders Evert Gummesson and Christian Grönroos, was the first explicitly to define relationship marketing and contrast it with transaction table 1.1 The transaction orientation Stage of the sale

Salesman

Buyer

Before transaction Romance During transaction After transaction A long time afterwards . . . Next transaction

‘Real hope’ ‘Hot and heavy’ ‘Fantasy – bed’ ‘Looks elsewhere for next sale’ ‘Indifferent’ ‘How about a new one?’

‘Vague need’ ‘Teasing and hopeful’ ‘Fantasy – bored’ ‘You don’t care’ ‘Can’t this be made better?’ ‘Really?’

Source: Levitt (1983). Reprinted by permission of Harvard Business Review. From ‘After the sale is over’ by Theodore Levitt, September/October 1983. Copyright © 1983 by the Harvard Business School Publishing Corporation; all rights reserved.

4

Chapter 1 Customer–supplier relationships

marketing, its marketing instruments and organisation. Zeithaml et al. (1990) constructed ServQual, a method to measure the (thus) so far intangible subject of service. Around 1990, the International Marketing and Purchasing Group with, among others, Håkansson (1983) designed a conceptual model for relationship marketing in business-tobusiness markets. The interaction and networking between buyers and sellers became the subject of research of this international group. At the beginning of the 1990s, as Bruhn (2003) notes, an after-effect of analyses and discussion on customer relationships was that customer retention and lifetime values entered the stage of marketing research (Reichheld, 1995). Relationship marketing, with its origin in the service industry and business-to-business markets, was in this period also applied to the consumer markets for branded goods (Fournier et al., 1998). The 1990s were further characterised by studies into the effects of relationship marketing on retention and customer value, even leading to the recognition of customers as investments with a clear net present value (Reichheld, 1995). Relationship marketing became more and more relevant in business-to-consumer markets (Fournier et al., 1998). A more comprehensive set of relationship constructs, such as trust and commitment (Morgan and Hunt, 1994), were developed to complement the long existing concept of satisfaction. The issue of service recovery and its impact on relationship termination were increasingly considered (Boshoff, 1997).

1.2

Description of customer–supplier relationships general The word ‘relationship’ conjures up thoughts of the feelings that two people have for one another: mutual attraction and respect, consideration, dependency and the like. These are aspects which will only appear if certain conditions are met. Relationships, after all, ‘imply some sort of intermittent interaction between two or more persons, involving interchanges over an extended period of time’ (Hinde, 1979). Poeisz and van Raaij (1993) describe this in more detail as follows: ●

Interactions must take place between at least two parties; characteristic of interactions is that the activities of one of the parties influence those of the other, and vice versa.



A certain degree of continuity must be present in a relationship since interactions from the past influence present and future interactions; relationships will also have to extend over a longer period of time.



The effects of interactions are dependent upon the actual events and the subjective approach to these events.

Within the field of psychology, a distinction is made between primary and secondary relationships (Tolboom, 1996). The first type of relationship involves basic long-term interpersonal relationships which are based primarily on emotional bonds and the feeling of mutual obligation towards one another. Primary relationships, such as the love relationship between two people, are, unlike secondary relationships, rather diffuse and comprise many roles, behaviours and situations. Normally they are not limited by strict rules governing contact, and the people involved generally know one another extremely well. In primary

5

Part I Introduction

relationships, one person cannot automatically be replaced by another. Secondary relationships, such as those between customer and supplier, are by contrast relatively short-term interpersonal relationships with a limited degree of social interaction, fairly clear rules of etiquette and reasonably well-defined social roles. In contrast with primary relationships, deep emotional involvement rarely occurs; the various players may be more easily replaced in general. The transitional area between secondary and primary relationships is rather large.

Customer–supplier relationships The relationships between customer and supplier may be present at a variety of levels and in various compositions (Peelen et al., 1996; Rowe and Barnes, 1998); they may be secondary in nature, but may also lie somewhere in the transitional area between secondary and primary relationships. An example of a primary relationship is the bond a customer has with the local bakery shop; this is the place where Bob gets fresh bread from John every morning, bread which represents a guarantee that his day will get off to a good start. The two men have got to know and value one another over the years and are involved with one another. This differs from the relationship between the cashier at the supermarket and the customer. Even if the customer shops there regularly and has been buying groceries there for quite some time, it is highly likely that the supplier and the customer do not know one another by name and that their conversation is limited. A variety of supplemental classifications have been created to further clarify the differences between the parties involved in customer–supplier relationships. These classifications indicate (see Figure 1.1; including Payne, 1995; Peelen et al., 1989; Schijns, 1998): ●

whether or not a transaction has already been completed: from prospect to customer;



if a long-term orientation is present which extends further than that one transaction: from customer to client;



to what degree the relationship is felt by both parties: from supporter to ambassador;



to what degree both parties take an active position in the relationship: from ambassador to partner.

Figure 1.1 Pyramid of relationships

6

Chapter 1 Customer–supplier relationships

Alternatively the categories describe to what degree the following are present (Tolboom, 1996): ●

Cooperation or competition: competition occurs in a relationship if a customer plays a number of suppliers off against one another and ultimately chooses the one with the best offer. Cooperation may be considered to be present if both work together well to achieve that result which is best for both parties: for example, while setting an appointment the customer takes the supplier’s schedule into account as well.



Equal or unequal distribution of power: although a balanced distribution of power is a characteristic of a close relationship, it is not something we will encounter often. An unequal distribution of power is often seen in knowledge- and skill-oriented services where the customer’s fate depends upon the expertise of the service provider. An imbalance of power also frequently exists between producers and distributors because one of them is dependent on the other for a substantial portion of its turnover, and for which other alternatives do not exist. It is not unusual for a large supermarket chain to be responsible for some 30 per cent of the turnover of a brand-name manufacturer within a certain national market.



Dependence or independence: this involves an aspect of relationships that is inversely proportional to the balance of power; the powerful party is the independent one, and the other party is the dependent one.



A task or social–emotional orientation: are the interactions between both of them heavily task-oriented, such as in the case of the supermarket, or is there room for social interaction, such as in the case involving the local baker?



A formal or informal form of contact: the contact between a customer and their solicitor will be much more formal than the contact with their hairdresser.

In analysing the quality of the relationship, attention is also drawn to aspects such as commitment, fairness, loyalty and trust (Dwyer et al., 1987; Moorman et al., 1993; Peelen, 1989). Some relationships are continued because there are no better alternatives available and because terminating the relationship would invite a great number of problems (for example, Jackson, 1985; Peelen, 1989). In these types of relationship it is the negative rather than the positive considerations which result in continuity. Take, for example, a company which has made an investment in a certain operating system for its computers and feels obligated to equip newly purchased computers with this system as well and to choose application software which will run on this particular operating system. Other situations may be characterised by more positive aspects which bind both parties to one another. The car dealer is a representative of your favourite make of car, takes extremely good care of your car, makes sure that you feel special and is always available. What keeps two parties together may differ from one relationship to another and even within relationships themselves. As the examples above demonstrate, the bond may be for financial, personal as well as structural reasons. A profile is shown in Table 1.2 for the two most extreme types of relationship; many of the aspects mentioned above were used in the creation of the profile for the weak and close relationships. Although customer–supplier relationships may be described on the basis of a multitude of aspects, there seems to be general agreement on the central role assigned to interactions and reciprocity, commitment and trust in the formation of relationships (Morgan and Hunt, 1994).

7

Part I Introduction

table 1.2 Profile of close and weak customer–supplier relationships Lacking/weak relationships

Close relationships

Concrete agreements have been made regarding reciprocation. Agreements have a short-term horizon.

There are few agreements concerning reciprocation.

Initiative for interaction is taken primarily by one party. A limited number of topics are raised for discussion. Topics are treated in a limited degree of depth. Both parties present themselves as separate individuals/ entities to the outside world. Each of the parties pursues its own interests. Intentions regarding the continuation of the relationship are present to a limited degree. There are few barriers to ending this relationship and to starting another one. The parties consider, and may experiment with, alternative partners.

Of the few agreements that do exist, many have a longterm horizon. The initiative for interaction is distributed evenly among the parties. A multitude of topics are raised for discussion. Topics are treated in a high degree of depth. Both parties present themselves as one entity to the outside world. Each of the parties pursues its own interests and takes the other’s satisfaction/fate to heart. The intention exists to continue the relationship in the long term, in spite of changes in the environment. There are many barriers to ending this relationship and starting a new one. With respect to alternative partners, the adage ‘look but do not buy’ applies.

Source: Peelen et al. (1996).

Without a reciprocal basis, there is no relationship. The meaning of commitment and trust were also recently demonstrated empirically in Garbarino and Johnson’s study (1999). They determined that the intention to continue a relationship in close relationships is dependent upon commitment and trust. In situations of a more transactional nature, it appears that it is particularly customers’ general contentedness with the organisation and its products and services that determines whether repeat purchases will be made.

Interactions and reciprocity According to social exchange theories, reciprocity forms the basis for relationships. The views on reciprocity have been around for quite some time. In 1925, Mauss had already suggested that three rules apply in a primitive society: giving, receiving and giving again (cited in Peelen, 1989). Something must be received for which something is given in return which then creates the obligation to give something again. It is referred to as a ‘calculated return’ in association with reciprocity. A positive gift is returned with another positive gift; a negative gift is returned with a negative one. This last theory describes a negative form of reciprocity. Receiving something creates the obligation to give something, and a never-ending cycle is thus begun, even in a negative respect. Generally speaking, reciprocity assumes the following:

8



A moral norm exists to give something back when something is received.



A precise return is not desirable. Exchanges do not need to be in balance immediately as long as an equilibrium is created in the long run.



Reciprocity occurs in all cultures; it is universal.



Reciprocity makes interaction possible because the norm of return applies; people are willing to take a chance with someone because of the valid norm.

Chapter 1 Customer–supplier relationships ●

According to anthropologists, the goal of reciprocity is the survival of the group, but according to an individual psychological explanation, the goal is to better oneself in an economic sense.

All sorts of things may be exchanged in relationships. On the basis of an extensive empirical study, Foa and Foa (1976) suggest that an adult is capable of distinguishing between six ‘resources’: love, services, status, information, goods and money. There are two dimensions by which these ‘resources’ may be specified: 1 The personal aspect of the resources: if the value of a resource is dependent upon the person providing it, then there is a personal aspect involved. This is the case with love, for example. People do not receive love from a stranger or an enemy. The opposite of this occurs with money: individuals are usually indifferent with respect to the person who makes the money available. 2 The tangibility of the resources: goods are characterised as the most concrete type of resource – they are tangible. Status and information consist of verbal or non-verbal behaviour and have the least amount of tangibility. In addition to resources, Foa and Foa also differentiate between costs. The costs of resources vary. The giving of love does not have to entail costs; it may even imply benefits. By providing information, people do not become poorer in terms of information. The handing over of goods on the other hand leads to a direct loss of the resource concerned. The personal nature of resources and tangibility of resources are offset against one another in Figure 1.2. The exchange relationship is typified by the types of resources which are exchanged (Hinde, 1979). Loose relationships with little commitment will generally be characterised by the exchange of few personal resources, whereas in close relationships, in addition to resources found under the diagonal, more personal objects are also exchanged.

Figure 1.2 Objects of exchange Source: Foa and Foa (1976).

9

Part I Introduction

Bales’ interaction process analysis In 1950, Bales had already developed an observation method to analyse interactions in small groups which could also be applied to the interactions between customer and supplier. Bales identified a number of categories into which interactions may be divided: ●



Task area, which basically encompasses the functional interactions. For example, the orientation on and selection of a supplier. Also the transaction, delivery, possible conflicts with the supplier and interactions during the after-sales service are within the task area. Interactions generally consist of asking questions, giving answers, expressing opinions and offering of proposals. Social emotional area, which are interactions where expression is given to the emotions. Interactions show tension, surprise, sadness, anger and so on. These emotions bring parties together and create a sense of closeness, or drive them apart.

A successful interaction process will be characterised by some form of symmetry. Questions will be followed by answers. Expressions of emotions will evoke an appropriate response from the other party. The tendency is to respond empathically and do everything to come up with a mutually acceptable solution for negative emotions that might have arisen. The initiative to interact comes from both parties; both are proactive, there is not one constant active-passive dynamic. The deeper a relationship becomes, the more vaguely both parties draw the boundaries of ‘appropriate interactions’. There are less written rules and it even becomes possible to transfer the relationship to other domains, for instance the private domain (see Figure 1.2) in which private resources are exchanged. Source: Bales (1950).

Interactions and emotions What is a relationship without emotion and without the ability to truly affect one another? Emotions are reactions to stimuli that are comprised of physiological excitement, which induces the evaluation of a stimulus, a facial expression and a subjective experience. We are often unaware of emotional reactions: we do not ‘sense’ the emotion, because the biggest part of our emotional life is subconscious. Obviously, we are pretty sure we ‘feel afraid’ when we go on a rollercoaster ride, but not all stimuli are as strong and omnipresent. A sales clerk’s gentle smile does not consciously make the customer ‘feel’ appreciated. However, emotions that are present below what we would call a conscious threshold do influence what we observe and the way we respond; they are at the heart of the concept of selective perception. The emotional reactions of which we are aware are just the tip of the iceberg. Frijda (1986) calls them ‘the peaked cliffs that stand out from the deep and continuous flow of our emotional reactions’. Emotions occur in many different ways and there are many subtle nuances. However, seven basic emotions can be described:

10



surprise: what we feel when confronted with something ‘mysterious’ and we are not immediately sure whether it is positive or negative;



fear: one of our main human emotions, leading to either fight or flight;

Chapter 1 Customer–supplier relationships ●

anger: which presents itself when expectations are not met, relating to our instinct to fight;



sorrow: involving a sense of helplessness, avoidance and passivity or brooding;



loathing: the sense that something has to be kept at a distance or rejected. Response to a repulsive source;



contempt: the object of contempt is perceived as beneath the person feeling the contempt. It is a less physical reaction than loathing;



happiness: a positive emotion essential not only to general wellbeing, but also to a person’s chances of survival.

People rarely experience a solitary (basic) emotion, but rather a mix of almost simultaneous emotions. A surprise which appears to be something positive can lead to happiness or even delight. The pallet of emotions expands when one explores it, for instance, happiness can take several forms, such as delight, ecstasy or optimism. Emotions influence our physical and mental behaviour. They influence the amount of attention we pay to something, our drive for results, our openness to stimuli and our decision-taking behaviour. When we are happy, we open up, we show more interest, we want to be rewarded for our efforts, are willing to take more risks and quicker decisions. Negative emotions, such as loathing, tend to make us avoid punishment, show little interest, even active disinterest, and are also likely to lead to faster decision making, just to get clear of or avoid the negative situation.

trust The exchange of resources, and the emotional response this solicits, will influence the trust in the relationship. Trust is essential if a relationship is to develop, and has been defined by Moorman et al. (1993) as ‘a willingness to rely on an exchange partner in whom one has confidence’. Or, as Morgan and Hunt (1994) describe it: ‘the perception of confidence in the exchange partner’s reliability and integrity’. One can conclude from these descriptions that trust is associated with qualities such as honesty, fairness, responsibility, helpfulness and involvement. Of these characteristics, honesty in particular is essential if trust is to exist. Without honesty, there is no confidence, no integrity. ‘The honesty of a partner can be defined as the conviction that the partner is trustworthy, keeps his promises, has the courage to admit to limitations and convey bad news’ (Geyskens and Steenkamp, 1997). Trust also originates in the competency and the courtesy of a person or organisation. One gains competency when skill and expertise are present, along with the ability and the opportunity to make use of these. This person’s or organisation’s courtesy must lead to these competencies being employed to protect the customer’s interests. The supplier is prepared to provide assistance and places long-term customer interest above its own short-term interests (Geyskens and Steenkamp, 1997). Three distinct levels of trust can be identified. Keeping one’s commitments is fundamental to the lowest of these levels (Crosby et al., 1990). Legal contracts are complied with. One rung higher is concerned not with specific behaviour, but with the partner’s characteristics, for example, motivation and ability. The third level is where one finds general, allencompassing standards such as integrity.

11

Part I Introduction

Trust is, in all likelihood, also a multidimensional concept; there is little evidence to indicate that it is a one-dimensional idea. It would also be incorrect to say that suspicion is the opposite of trust. Trust in someone else generally leads to overcoming feelings of insecurity and doubt. People are ready to take more risks; for example, one is prepared to invest more in a relationship. People trust that, in the event of problems arising, the customer will discuss these with the supplier, so that a solution may be found in a constructive manner. Trust also leads to goodwill, which causes people to act in a more tolerant manner if a transaction does not live up to their expectations. Trust makes it possible for a higher level of commitment to be attained in a relationship.

Commitment Commitment is not a means to an end. It is the ultimate goal one can set for mutually beneficial relations. Commitment is defined as ‘an enduring desire to maintain a valued relationship’ (Morgan and Hunt, 1994; Moorman et al., 1993). Within this framework of commitment, the objective is to continue the relationship, producing outcomes which are as mutually beneficial as possible (Peelen, 1989). Johnson (1991) is critical of the way in which many people treat the concept. Many go beyond the future orientation in their measurements, while others measure only one of the forms of commitment. In order to address these points, Johnson identifies three different forms of commitment, namely personal, moral and structural. Personal commitment is demonstrated by the desire someone displays to continue a relationship. The satisfied customer at a car dealership will want to continue their relationship with that company. In the case of moral commitment, people feel a sense of obligation; they feel that they ought to continue the relationship. The small, independent baker finds it difficult just to stay in business, and people feel that after all these years, they really shouldn’t buy their bread elsewhere, even if it is better or cheaper somewhere else. The structural form involves the perception that ‘there is no escaping it’. Investments have been made in that operating system and it cannot be done away with without having to make substantial investments in new software, training programmes and undergoing a difficult transitional period. Clear differences can be seen between these three forms. Some of them are experienced as limiting freedom of movement; others are based on a voluntary choice. Some result from personal choice, others are imposed. The features of these three forms are outlined in Table 1.3. Of the three forms, personal commitment is the only one which is felt both internally and originates from a personal choice. The choice may be seen as an attitude held by someone with regard to the relationship and/or the partner. The influence of the continuation of the relationship on a person’s self-image also influences personal commitment. One is, after all, a respected customer of a dealer which represents a well-known brand. Moral commitment has the character of self-imposed limitations which arise from a person’s value system and a sense of responsibility felt towards the partner. The last type of commitment involves table 1.3 Characteristics of the three forms of commitment Choice/limitation External/internal Source: Johnson (1991).

12

Structural

Moral

Personal

Limitation External

Limitation Internal

Choice Internal

Chapter 1 Customer–supplier relationships

CrM definitions Loyalty Should we talk about loyalty or commitment at this point? Is there any difference between the two concepts? A comparison of definitions may automatically produce differences; however, you might ask yourself whether the discrepancies are purely semantic in nature or whether they also have an actual meaning. After thorough preparation, Oliver (1996) formulated the following definition: Loyalty is a deeply held commitment to rebuy or repatronise a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behaviour.

With this definition, he also removes any doubt that this could possibly involve different concepts. Oliver restricts the definition’s application to the area of brands.

structural commitment; it is created as a result of investments in relationships which may no longer be reversed, barriers to ending a relationship, the availability of acceptable alternatives to the relationship and the reaction from the social environment to putting an end to the relationship. Interaction exists between the three forms of commitment. An increase or decrease in one of the forms has an effect on one of the other two: a lessening of personal commitment does not occur without affecting structural commitment, for example. If the customer of the

CrM definitions In another system of classification, which has received both a great deal of attention and a substantial following, three components are identified (Tolboom, 1996): 1 instrumental or calculative commitment, which is based on a calculation in which costs and revenues are weighed against one another. Through a certain input in the relationship, such as investments, the committed party demonstrates that it plans to remain in the relationship. In many cases, having provided this input would make leaving the relationship too costly because the input is often difficult or even impossible to retrieve completely; 2 attitudinal or affective commitment, which represents the affective attachment of parties in a relationship and indicates the degree to which goals and values are shared by the parties in the relationship; 3 a temporal component, one that reflects the intention to remain in a valued relationship in the future. If we compare the two classification types, it appears that there are major similarities to be found between structural and instrumental or calculative commitment. The attitudinal or affective component is furthermore comparable to personal commitment and may even measure moral commitment, dependent on the manner in which it is put into practice. The question remains whether or not it is preferable in conceptual terms to split attitudinal commitment into a personal and a moral component.

13

Part I Introduction

CrM illustration the ultimate question In 2005, Frederick Reichheld published a book with the challenging title The Ultimate Question. The ultimate question an organisation could or should ask its customer is ‘How likely are you to recommend me to friends or colleagues?’ Customers can indicate their answer on a scale of 0 to 10. Customers who are quite confident in stating they would recommend and give a 9 or 10 are called ‘promoters’. Customers giving scores of either 7 or 8 are considered ‘passives’. Those giving scores lower than 6 are called ‘detractors’. Based on the responses Reichheld calculates what has become world-renowned as the Net Promoter Score or NPS. The calculation simply involves subtracting the percentage of detractors from the percentage of promoters. The services industry as a whole seems to have an average score of 12, meaning promoters exceed detractors. Highest scores reported are around 80. But don’t think negative scores are impossible. For many organisations the number of detractors well exceeds the number of promoters, leading to scores as low as –50. The Net Promoter Score is reported to correlate with firm growth and profitability and is therefore a forward indicator of organisational success. Research covering some 50 organisations in different industries showed that the organisational growth rate doubles when the net promoter score increases by 12 points. The reason being that the promoters tend to remain as customers and help bring in new customers through word-of-mouth, while the organisation has fewer disgruntled customers, who are likely to stop buying products or services and spread negative reports. The approach Reichheld takes seems both logical and practical. Limiting oneself to one single and ultimate question, the execution of customer surveys becomes child’s play. Respondents are more likely to participate in the survey and the chances of getting a representative sample of customers increase. The meaning of the

NPS and value of the metric is further enhanced by just asking one follow-up question, which is ‘Why’? The reason for a respondent giving a certain score can provide insight into the way passives can be turned into promoters, as well as bringing to light particular issues which cause customers to become detractors. Asking for recommendation is quite appropriate in these days of social networking and communities, where relationships are no longer one-to-one between supplier and customers, but customers are also actively and openly communicating with other customers; and one true test of a valuable relationship is also shown by the likelihood that a recommendation will be forthcoming. Does the customer trust the supplier enough to give a ‘personal guarantee’ that a friend or colleague will also be satisfied with the offering or services? Is there sufficient commitment for them to do so? Despite all the apparent benefits, the approach Reichheld propagates is also heavily criticised. Some of the main criticisms are (among others researched by Keiningham et al., 2007): ●







the variable: Reichheld’s complete disregard for the role of satisfaction is taking it one step too far; the question: some argue that a likelihood to recommend constitutes rather a poor basis for actual recommendation behaviour; the scale: the scale seems to have been chosen somewhat arbitrarily, especially the cut-off points between the different groups. It is also not as culturally neutral as the 5- or 7-point Likert scale often used for satisfaction measurement; the correlation between growth rate and NPS score: the predictive power has not proven to exceed that of customer satisfaction scores (see Chapter 3).

Sources: Keiningham et al. (2007), Reichheld (2003, 2005).

operating system concerned is no longer satisfied, they will leap at the first viable opportunity to get rid of the system and the supplier. Even any existing structural commitment will not be able to prevent the customer from making the switch to another supplier. The history of IBM, among other companies, has proved this concept. Commitment will not have to be determined for only one of the two parties in the relationship, or in this case, the customer. Commitment on the part of the other party, the

14

Chapter 1 Customer–supplier relationships

supplier, also deserves attention. After all, disproportional commitment, which occurs when one individual in the relationship is more committed than the other, can undermine the relationship and make the more committed party vulnerable to opportunism. If a retailer is looking for an advantage in the short term and the product manufacturer operates under the assumption of a long-term horizon, the latter can find themselves at a disadvantage. The manufacturer invests in the retailer, thereby giving them an advantage, in the hope of ultimately benefitting from this in the future. More often than not, the retailer cannot think this far ahead. As discussed earlier, commitment is a psychological concept. Any pressure felt to continue or terminate the relationship (see also Johnson’s classification) is also psychological in nature. After all, it is the manner in which the individual feels pressurised by others in deciding whether or not to continue a relationship. None the less, commitment is experienced within a social context (Johnson, 1991). The impact of this context on commitment should not be underestimated. The decision to end a relationship, such as a marriage for example, can be heavily influenced by the social environment or the norms and values which dominate this environment. A supplier who maintains a relationship with a customer who is engaged in objectionable activities abroad, for example, can also count on being criticised by society.

Conclusion In order to realise a close relationship between customer and supplier, mutual trust will need to grow so that more can be invested in the relationship and more personal ‘resources’ can be exchanged. The ways in which both parties invest effort in the relationship can have positive consequences for commitment; structural as well as personal and moral commitment may increase.

1.3

the dynamic in relationships How do relationships begin and grow? Trust and commitment cannot be forced; they must develop. Marketers will have to understand how this happens and the manner in which they can influence the process. Following Foa and Foa’s (1976) insights on ‘resources’ to be exchanged, we may conclude at any rate that at the start of the relationship, the emphasis must lie on the exchange of goods and certain services for money. Very few personal resources are exchanged at the outset. A relationship which is initially characterised by a discretionary aspect and a focus on transactions and cross-selling will have to develop into a long-term partnership in which the supplier functions as a ‘total solution provider’ for the customer. A service provider who, for example, is capable of analysing the transactions completed with the customer in the past, and the confidence to do so, can lay the foundations for a consultational relationship: what was the point of the purchase, what did you hope to achieve and how can you gain additional benefits from this supplier? As a result, a bond of trust may be created in which the exchange of personal information becomes something that occurs naturally. The mutual respect (status) can continue to grow. The exchange of more

15

Part I Introduction

personal and non-concrete resources can increase the value of the customer–supplier relationship for both parties. Parties engaged in a relationship should possess certain capabilities necessary to allow the relationship to expand and develop. In order to increase the level of intimacy, the personal exchange of resources, trust and commitment, both customer and supplier must have a capacity to empathise – to see the world through someone else’s eyes. A supplier can place themselves within the customer’s frame of reference, and at the same time make the customer aware of the fact that they understand them. A necessary condition for this to occur is that both parties must supply information openly and honestly and must be prepared to ‘expose’ themselves (self-disclosure), which in turn requires that both parties are willing to put themselves in a vulnerable position. Customer and supplier will have to accept and have a positive attitude towards one another. In terms of the negotiations to be conducted and transactions to be completed, empathy is a difficult aspect for marketers and salespeople. The marketer and the salesperson benefit from showing their products and organisation and putting their best foot forward. They are good at seducing, but less adept at presenting their vulnerable side, listening and putting themselves in the other person’s position. The development of the relationship may be detailed further on the basis of insights into relationships originating from the field of social psychology. Dwyer et al. (1987) identify five phases in a relationship. During the first phase, both parties become aware of each other. Both parties position themselves and take actions designed to demonstrate their appeal to the other party. From the moment that bilateral interactions occur, the second phase begins, that of exploration or sounding out. This phase begins with attraction. Attraction may develop because both parties think that they aspire to the same goals or it may originate from the perceived personality: they are honest or capable. Or it may simply involve physical attractiveness! It is acceptable to be seen in public with them. The potential of the resources to be exchanged or those already exchanged can increase the mutual appeal: the supplier’s products are good and the customer has a great deal to spend. The capacity for empathy plays a much larger role during this second phase. More interaction takes place and negotiations will be conducted. The fact that one or both parties are prepared to negotiate indicates a mutual interest. If the relationship is to survive this phase, it is important for information to be exchanged and the reciprocity in the relationship to be monitored: both parties are evaluating the situation on a regular basis and determining whether the relationship is satisfying and fair. After all, the future orientation is still limited and any arrangement would be easy enough to terminate at this stage. During these interactions, norms and role and expectation patterns can become complicated for the relationship. In the growth phase, the third phase, the interaction processes from the previous phase are continued. Both parties continue to attract the other, negotiations will continue to take place, norms and expectations will be outlined in more detail, and the parties will also reevaluate the situation at intervals. However, in comparison with the previous phase, more risks are now taken; activities are performed to test out the relationship. The mutual dependency increases and more resources are exchanged. In the fourth phase of the commitment or saturation, the relationship reaches its maximum level of commitment, mutual dependency, trust and respect. Many resources are

16

Chapter 1 Customer–supplier relationships

exchanged, including those of a personal and less concrete nature. Potential problems are discussed fairly and openly, and a constructive solution is sought. The social and non-social environments also contribute to the stability of the relationship. The final phase is that of the decline. Directness and a focus on others may indicate that the continuity of the relationship is at issue. The causes of an eventual break may lie with differences in expectations and individual characteristics of the partners, such as differing needs for freedom or renewal. External influences may also make their effects felt. After introducing adjustments, Peelen (1989) put Dwyer and colleagues’ model, which was based on theory, into practice in consumer markets. A relationship life-cycle has been constructed which describes the pattern in which the purchases and the commitment in the relationship change over time under the influence of interactions. Although no explicit focus is placed on trust in the study, the measurement of commitment is not based fully on the insights of Johnson, and the first phase of Dwyer and associates has not been mapped out, the cycle does offer useful concepts which can be used in interpreting relationship management. At the same time, one needs to bear in mind that the relationship life-cycle describes the development of an average relationship (within a segment). Deviations from this outlined path of development will occur; not all consumers will follow the exact same path and changes in the development path will also occur in future. None the less, the cycle offers a practical handle for organisations which would like to develop relationships with customers in a standardised manner. The course of the customer–supplier relationship will first have to be examined before a plan can be devised for the relationship. In the relationship life-cycle (Figure 1.3), the boundaries between the phases indicate moments in the relationship at which a change in the (development) of the behaviour occurs. These key moments exist during the transition from the first to the second phase involved in the first purchase. The growth phase is, in turn, completed at the moment the increase in purchases changes course, moving from progressive to regressive. Finally, the decline phase begins as the number of purchases begins to drop.

Figure 1.3 The relationship life-cycle Source: Peelen et al. (1996).

17

Part I Introduction

analysis of the course of the relationship During the exploratory phase, the customer sees the promises made during communication fulfilled for the first time. The first introduction makes an important impression on the relationship. The level of satisfaction during the exploratory phase is still relatively low; the customers have little or no experience of the products and services of the supplier. The appeal of the supplier depends on the experiences that customers have had with alternative suppliers and the differences between the alternative suppliers. The switching costs are still quite low at this stage. The growth phase (three months to two years) is characterised by a sharp rise in the number of purchases. Customers would like to get to know the supplier’s products and services. The advantages of the supplier’s offering are now discovered. The satisfaction with the goods and services increases. The supplier is now examined more for its performance than for its reputation or image. None the less, the commitment in this phase drops slightly, depending on the policy pursued. Doubt and the first confrontation with the actual value-for-money ratio can have a negative impact on commitment. The likelihood is relatively high that the relationship will be terminated during or just after the growth phase. If a supplier has invested in the relationship, there is a risk that this investment has not yet paid for itself. The saturation phase (usually after more than two years) is characterised by the highest number of purchases from suppliers and the highest degree of commitment. Not many changes are occurring in either behaviour or purchases at this stage. The relationship has taken shape. During this phase, the supplier’s ideal customers are discovered. Satisfaction increases in all respects when compared with the growth phase. Trust grows. During the last two or more years, goodwill has been built up. The appeal of the relationship improves during this phase as well, and the switching costs increase slightly now that the customer has become accustomed to the supplier’s methods and offering. The decline phase begins as soon as the number of transactions starts to decrease. Customers may enter the decline phase at any time: after the exploratory, growth or saturation phase. There are various reasons for the deterioration of the relationship. The most common relate to the type of customer and the reduction in the need for the products and services provided by the supplier. There are so-called economy buyers who prefer not to commit and are constantly in search of the supplier with the best value-for-money ratio. Customers who have terminated the relationship after the saturation phase usually no longer have a need for the products. Recent research has shown that the effect of satisfaction on the continuity of a relationship is limited. Better results are obtained when the general feeling of satisfaction is more intense. The impact of satisfaction on loyalty is some 60 per cent lower when the sense of satisfaction is not very strong. Most vulnerable are customers who are not very strongly satisfied, have been customers for a prolonged period, are responsible for a relatively large share of a supplier’s revenue and have previous positive experiences with the supplier. The results are quite similar for business-to-business markets and consumer markets (Chandrashekaran et al., 2007).

Challenge for marketers Marketers who seek to develop a long-term, mutually profitable relationship with a customer will have to gain insight into the dynamic of the relationship. They will need to recognise when a specific relationship deviates from a desired pattern and they will

18

Chapter 1 Customer–supplier relationships

need to be able to anticipate critical moments early in the relationship. They will also need to learn how to influence the relationship as effectively and efficiently as possible, to ensure optimal development. Regardless, every effort has to be made to prevent customers from ending the relationship as early as the growth phase. This is all the more necessary since the odds are high that the investments which have been made in the customer will not yet have paid for themselves. Chapters 3 and 10 examine these topics in greater depth.

1.4

networks The relationship between two people, also known as the dyad, is considered the most elementary form of social relationship. However, in reality, we find more complex relationships between groups of people and the position that each individual occupies with respect to the others. This position is defined within sociology as that individual’s social position. In concrete terms, a social position may be defined as the position which a person occupies in a complex of people interacting with one another. Some positions are reserved for only one person within society (queen, prime minister). Other positions may be held by several people simultaneously (police officer, teacher, nurse). Organisations as such may constitute one legal identity, but are from a sociological point of view more a biosystem, a more or less coherent group of people, cooperating in a structured way to reach shared goals. These systems do not operate in isolation, but in their turn engage in and build relationships with other stakeholders, ranging from shareholders, suppliers, distributors and other partners. Customers, who develop a relationship with an organisation, actually build a relationship with the people who represent it. They form their impression based on the interactions with employees or distributors and the way the organisation as a whole is represented in the media and by others who have experience of them. Salespeople, more than people in marketing or service for that matter, are an important and distinct group who form a bridge between the customer and the organisation. They often reach out to the customer and it is their role to bring both parties together. In doing so, they can often experience role-related stress, ambiguity in objectives and intentions. Are they representing customers and their needs and wants or are they representing an organisation and its offering? It is a conflict that also arises in many service departments, where call agents may want to help disgruntled customers, but are operating within boundaries of an organisational structure they themselves are supposed to represent. Dissociative behaviour, where agents actually start ‘complaining alongside the customer’ about poor organisational performance is not uncommon. Thinking only about the organisational side of the networked-economy would be wrong. Consumers too are involved in interactions with others, in other social structures. Recently, attention paid to the social structure in which consumers act has increased substantially, and the remainder of this chapter will consider this aspect of consumer– supplier relationships. The possibility of forming communities on the internet is a driving force for this (see the section overleaf where social networks among consumers are discussed). Social media bridge distances and time and bring people together and thus also customers and suppliers. In practice, the term social network is used somewhat loosely to refer to a group of users or customers and suppliers who interact with one

19

Part I Introduction

another, without the need to analyse the connection within the social structure. Does it involve an open or closed network, in other words: how is the admission of new individuals arranged? Does the supplier represent the centre (‘central ego’) of the community? Does the supplier have a special position as a result of which they can exercise a high degree of control over what takes place in the network? Or does the social network consist of a collection of individuals with a high degree of social cohesion which has developed because the individuals find one another attractive? The supplier may be one of them; they might even stand outside the community and have very little influence on it. Certain behaviour will probably even be punished because it does not fit the norms and value patterns or the goals of the community.

social networks among consumers socialisation Being social refers to people’s tendency to want to belong to or form groups. It is a basic human trait (Bouwmans et al., 2007). Contact may arise around defined interests, products or other people. The relationships may be shallow at first. It is about an exchange of identity, to acknowledge who we are. In this arena, it is not yet important what we have to say or what we have to offer or contribute to a network. As the interactions between people in the network intensify, the relationships become deeper. Groups or communities can form because people share similar interests or experiences. They can have a clear scope, but that is not always necessary. The sense of ‘belonging’ and ‘comradeship’ can be evoked. Entering the community is often done from the outskirts of the community, the peripheral zones. The new entrants need to ‘work themselves a way to acceptance’. The sense of belonging is kept alive through communication, actively contributing and referring to prior experiences within the community. We can make good use of several scientific traditions in sociology while studying socialisation. There are two groups and within these groups two more or less opposite approaches. The first group considers socialisation from the social structure perspective. The systems are larger than the individual, who is a part of the system. In order to understand the behaviour of individuals, one needs to understand institutions, roles, norms and history. Adherence to a political party or a certain religion is an example of this approach. The behaviour of the individual is explained through the system of which they are a part. The ‘opposite’ approach is the ‘situated experience’. Intentions and behaviour are context-determined. The situation drives the way we interact with each other, the way we adapt and try to give meaning to our lives. Culture and history are important drivers of socialisation in this approach. Celebrating New Year’s Eve at Trafalgar Square in London is a special gathering for people. Bonfires, or spontaneous celebrations when a football team wins a championship are other good examples. There are also theories that deal with social identity and social practices. The first family of theories is concerned mainly with the social shaping of an individual and the complex relationships they develop with others and with the group. The identity portrays how one sees oneself. Self-analysis plays an important part in this. Social practices theory focuses on explaining how groups coordinate activities. What means and mechanisms do they employ? Are there typical ways to greet, deal with conflicts, search for approval for decisions and behaviours?

20

Chapter 1 Customer–supplier relationships

socialisation on the worldwide web We cannot ignore the impact of information and communication technology on socialisation. Less than a century ago, communication options were still confined to verbal exchanges of information to a restricted group of people, owing to the limitations of communication devices. Those channels that did have greater reach, broadcasting media such as the radio and television, have long been ‘undemocratic’ in the sense that they were controlled by institutions, not by individuals. However, with the internet, people can literally, as YouTube stresses, broadcast themselves. Over the past decade, a worldwide computer network that was regarded as a technological network for information distribution, has transformed into a social network connecting grandparents with their grandchildren and fans of Lady Gaga to their idol and to each other. Socialisation can easily be facilitated and stimulated online. People can either build their identity and profile from the ground up or just go online ‘as they are’. They can engage in all kinds of new behaviour sparking new types of communities (e.g. massive multiplayer online role playing games) or transfer ‘old behaviour’ to the web and find a photography community of more than 1 million members instead of the local village community of 20. Social media employ mobile- and web-based technologies and offer ample opportunities to create highly interactive platforms on which individuals can share, co-create, discuss and modify their user-generated content. Kietzmann et al. (2011) have designed a honeycomb

SHARING The extent to which users exchange, distribute and receive content

PRESENCE

PRESENCE

The extent to which users know if others are available

Creating and managing the reality, intimacy and immediacy of the context

IDENTITY The extent to which users reveal themselves

CONVERSATIONS The extent to which users communicate with each other

GROUPS The extent to which users are ordered or form communities

RELATIONSHIPS

SHARING

The extent to which users relate to each other

Content management system and social graph

REPUTATION The extent to which users know the social standing of others and content

Social media functionality

IDENTITY Data privacy control, and tools for user self-promotion

CONVERSATIONS Conversation velocity, and the risks of starting and joining

GROUPS Membership rules and protocols

RELATIONSHIPS Managing the structural and flow properties in a network of relationships

REPUTATION Monitoring the strength, passion, sentiment, and reach of users and brands

Implications of the functionality

Figure 1.4 The honeycomb of social media Source: Kietzmann et al. (2011).

21

Part I Introduction

framework of seven social media blocks (see Figure 1.4); each addressing a specific facet of the socialisation process on the web: 1 Identity: The extent to which users reveal their identity and disclose information such as name, age, gender, profession, location and other sorts of information that users can use in some way. The presentation of a user’s identity also happens consciously or subconsciously in conversation when one exposes subjective information, such as feelings, thoughts, likes and dislikes (Kaplan and Haenlein, 2010). 2 Conversations: The communication between users in the social network, which do not necessarily have to be linear or dyadic conversations. 3 Sharing: People exchange, distribute and receive content, in many cases about the objects that mediate ties between people. Without these objects, a network is nothing more than the connections between the people. 4 Presence: The extent to which users can know if other users are ‘accessible’. It includes knowing where the user is in the virtual and/or the real world, and whether they are currently available. 5 Relationships: A form of association that leads users to engage in conversation, share objects of sociality, meet up, or simply just list each other as a friend or fan. In several cases these relationships are formal, regulated and structured; on other platforms, such as Twitter and YouTube, relationships hardly matter and actual identities are not valued. 6 Reputation: To what extent can you identify your own and others’ standing? Is the centre of the community and the more or less formalised leadership identifiable? It is not only a matter of trust, but also of status. This is something that information technologies are not yet good at determining, due to the highly qualitative nature of the criteria. 7 Groups: This is a functionality offered in many social networks; users can form their own (sub) groups or communities to interact on a smaller scale with the true ‘in-crowd’. Within groups different interaction patterns can arise, because members share a passion or an interest. Depending on the degree to which each of these building blocks is addressed, the social network will be either loose, supporting socialisation only to a small extent, leaving much room for expression and exploration, or more closed.

social network analysis Social networks have always existed and studies into the workings of particular social structures, such as tribes, are quite common in sociology. With the digitisation of social interaction, however, huge possibilities arise for extensive analysis of social networks. Under the banner of Social Network Analysis (SNA), many studies are conducted into the role of different actors within a network. It is the relationships between the actors which are the subject of the studies, rather than the individual traits or characteristics of individual actors. Studies are often conducted to gain insight into the social structures within a network, group or community and the relationship patterns that develop between actors. SNA sees applied sociology, social psychology and anthropology come together. Starting as early as the 1950s, this field of studies is working to establish a common terminology and a proprietary set of methods to research networks.

22

Chapter 1 Customer–supplier relationships

The word ‘sociogram’ has been introduced as a visual representation of a social network using certain hubs (‘nodes’), representing the actors and connectors (‘links’) that reflect a relationship. The sociogram can be either one-, two- or three-dimensional. Over the past two decades, SNA has been given a huge boost due to online social network analysis. A classic study in this field is the Burt and Coleman study (cited in Granovetter, 1973) into the value of ‘weak ties’. Their study into the opportunities for people looking for a job showed that there are more chances to obtain the ‘golden job tip’ through someone from the outskirts of the network than from someone nearby. In the nearby section, one is more likely to find people ‘like us’ who have similar ideas, thoughts and connections. Therefore they are least likely to give new information on a possible job opening. This in no way reduces the value of the ‘nearby network’, which through mutual trust and commitment often offers an easy basis for common activities. There is no need for negotiation or legal protection, since a social contract already exists. One of the interesting aspects on which SNA studies focus is the distance between actors, the people in the network. Measuring the average distance between people in the network is interesting. Milgram developed an experiment, where a select sample of respondents was asked to send a letter to one person, named Sharon, a broker. They were, however, not allowed to send the letter directly to her. They should send it to someone with whom they were on a first-name basis, who could subsequently send it to someone they thought might know Sharon. The procedure would be repeated until someone had been reached who knew Sharon personally and was able to reach her. It turned out that in the United States one person is separated from any other average person by no more than six other people. Along with this average, the shortest and longest distance was also measured. As well as distance, we can also analyse the critical social hubs, the ‘centres of gravity’ in a network, to which most traffic in the network is drawn. Many networks have multiple centres of gravity or multiple focal points, around which groups of actors unite. If one looks at the frequency of contact between actors and the cohesion or closeness in the network, different conclusions can be drawn. For an analysis of closeness, one might assess how many connections need to be deleted from any single person’s network in order to break up the network. So far we have looked at SNA from an ‘as is’ point of view. But networks expand and contract, which is obviously also of interest. Does the network expand randomly, or deliberately? Any one person can add people to the network, but geographical or social boundaries might direct the growth and boost or limit it. Watts and Strogatz (1998) developed a model that makes the creation of a new relationship dependent upon the number of ‘reciprocal friends’ that any two actors within the network have. The higher the number, the higher the chance these people can connect others to the network and increase the number of relationships and actors in the network. In relation to this, Barabási (2002) proved that the chance of new contacts entering the network increases if someone’s personal network has more aspects (see Figure 1.5). As we stated earlier in this chapter, networks or groups are not isolated entities, but are often interconnected. The relationship between two or more networks – the relationship with affiliated networks – is also an area of interest in SNA studies. The common connections between two networks can provide a good indication of closeness of the network interrelatedness. If only two people support such a connection, we call it a bridge. They have a powerful role as guardians of the bridge, since they can ‘broker’ the relationship and exercise control.

23

Part I Introduction

B047

B072

B114 B082

B129

B046

B063 B103

B157

B065

B084

B128 B120 B027

B156

B144

B153

B029

B161

B009 B149

B138

B007

B015 B109

B045

B115 B054

B021

B058

B038

B105 B118

B016

B034

B080

B150

B148

B001

B073

B094

B099

B058 B057

B013

B154

B108 B140

B101

B125 B019

B085

B018

B087 B033

B012

B068 B097

B050

B062

B066

B010 B074

B123 B102

B142

B059 B086

B030

B037

B159

B042 B096

B145

B121

B002

B032

Figure 1.5 Graphical illustration of a social network Source: Goldenberg et al. (2009).

So far, the SNA studies have not paid much attention to the cognitive dimensions, for instance, the value of the development of a common language, common experiences or common responses. However, research being done in the field of marketing and social networks does tend to pay more attention to it.

empirical insights from marketing Research into the influence of social networks on bilateral relationships between customers and suppliers is still in its early stages (Casalo et al., 2008; McAlexander et al., 2002). Attention is being focused on: 1 Interaction patterns: how do conversations spread and develop through a network, both in the quantitative and qualitative sense? 2 Group formation: the possible meaning of group formation as a consequence of social identification, exercise of social pressure, commitment and sense of belonging to the organisation.

24

Chapter 1 Customer–supplier relationships

In more practice-oriented studies the aspect of ‘listening’ receives much attention, with organisations ‘trawling the web’ searching for communication relating to their products, brands or activities.

Interaction patterns There is considerable attention being paid to what drives people in networks to respond to a stimulus. It has become clear that current topics (real-time) and topics that evoke strong emotions, especially positive emotions, are more likely to generate a response. Kozinets et al. (2010) researched the behaviour of consumers as co-creators. Messages change in terms of meaning because consumers add a certain layer of personal evaluation that can only be fully understood by knowing the person’s background. It goes to show that word-ofmouth communication is part of a complex cultural process. The influence of conversations on purchases has been researched by Watts and Dodds (2007).They have concentrated on the influence of opinion leaders. One becomes an opinion leader when one forms a social hub, owing to the number of ties one has with others in the network, but also when one is knowledgeable, convincing and/or charismatic. The innovative opinion leaders can speed up adoption processes, while followers take care of the further spreading of ‘the word’ to a larger crowd.

group formation Group formation is an area of great interest to marketers. A branded community can make an organisation less vulnerable to competition because community members may oppose themselves to competitor brands (Thompson and Sinha, 2008). Through social identification with the community there is prejudice against others who are not members of the community, leading to negative evaluations of ‘rival groups’ or competing brands. It is possible to create responses or reactions to competitor initiatives that limit the chance of group members buying the competing products or services. It may even be acceptable to the group members that their supplier is running (slightly) behind on market introductions of product innovations. Response to competitor initiatives is negative; even positive improvements in their products will not result in an increase in the likelihood that their products will be purchased by group members ('oppositional loyalty'). They will remain loyal to the brand even when it is not ‘winning’ in its market or market segment. A precondition for such loyalty is, of course, a worthy adversary or rival brand. What would Apple be without Microsoft, IBM or Dell? What would Intel be without rival AMD? Recent research by Thompson and Sinha (2008) shows that such oppositional loyalty is not guaranteed by product usage (alone). They show that usage of a certain product or service might be ‘forced’ by contextual factors (employer choice instead of user choice) or they may, through intensive usage, also have discovered drawbacks and become more open to competitor products. It is not impossible for one person to be member of several branded communities. Another factor of interest in research of communities is social identification, or the degree to which an individual identifies themselves with the group. In larger groups the individual group members seem to identify themselves more intensively with the group. In smaller communities, where members know each other rather better, there seems to be room for more multidimensional personal relationships (Dholakia, et al., 2004). In larger communities people participate to fulfil specific needs, whereas in smaller communities more abstract goals, such as having a good time or catching up with friends, prevail. The size of the group may also be determined by the topic, which when extremely specialised, commonly creates a rather small community with extremely high levels of interaction between members.

25

Part I Introduction

Experience in social interaction also plays an important role in community involvement. The members with more experience in the group exhibit higher levels of commitment than ‘fresh’ members, though this may also be due to the investment in terms of time over a prolonged period. However, communities are generally best oriented towards current, loyal customers than new ones, who are often not committed enough to build the community from the ground up. Community members can gather at certain events, such as Jeep organises for its customers. Those branded events are platforms where members can discover similar passions, shared rituals and common moral values. And of course, if it is brand relevant, even a certain degree of exclusivity (McAlexander et al., 2002). It is a type of bonding activity that can create relationships that were probably less apparent or even non-existent before. There is a strong social context for the experience that can lead to more profound, long-lasting relationships that can develop into personal friendships. Marketers can use such events as a way to introduce even more introverted members to the core of the community and make them feel they belong. It is also a way of introducing rituals or traditions, to stimulate existing ones and enable ‘storytelling’ around the brand.

1.5

Conclusion Managing customer relations begins with giving thought to the meaning of relationships between customers and suppliers. It asks for attention to topics such as interactions, emotions, trust, mutual commitment and relationship development. Insights into these bilateral relationships have to be seen in the broader perspectives of social networks in which people interact. They can strengthen or hinder the development of the bilateral relations. An understanding of how social networks and groups within them, interfere in the development of bilateral relations becomes more important from the perspective of consumers, who, through the rise of social media, have reached a position from which they can participate on diverse platforms in networks with other consumers.

Case stuDY Collateral trust obligations Management of expectations The financial crisis was not a perfect storm, but the logical consequence of unrealistic expectations. While between 1980 and 2007 the gross world product increased by 240 per cent, world stock markets exploded with an increase of 2.173 per cent in the same time frame. That is a factor 10 between substance and hope. One would expect that banks would warn their clients against a naive belief in an automatic and out-of-proportion increase of wealth. The contrary happened: banks themselves pushed up the standard expectations of what fair returns were, thus seducing their clients instead of warning them. In 2008–9, the gap between fantasy and reality became clear for most people. Worldwide, on television, in thousands of YouTube videos and especially by many comedians, it was explained – comprehensible for everybody – how dirty loans became tripleA products. Many banks seem to trust that people forget quickly and that greed for yet

26



Chapter 1 Customer–supplier relationships

Case study (continued) more money quickly returns, leading to a recipe for new disappointments on the customer side. Trust occurs only when calculated expectations and reality come together over a longer period of time. The concept should be managing expectations and sense of proportion rather than stretching goals.

Customer protection Financial experts Paul Krugman, Nouriel Roubini and Robert Shiller all agree: they demand more transparency in order to restore trust in the financial system, especially when assessing the value of a product. But transparency, unfortunately, decreases profitability and banks won’t be eager to meet this demand. The financial experts also demand independent rating agencies and even voluntary self-regulation for financial consultants, which is also a delicate issue, because the system depends on new product launches and the regrouping of investments. Independent rating agencies would only be in the way. A Hippocratic Oath on integrity and transparency of consulting seems unlikely. This would require banks and financial service providers, whose advice is fully designed to make the sale, to take an oath that could lead to bypassing their own sales targets. So where does that leave the banks? Monitoring systems seem to be unsatisfactory to banks and clients because they are far too general in the complex financial world, with its equally complex products. Several financial institutions have installed and tested customer advisory panels, but their activities cannot be evaluated yet. Therefore, the key to protecting customers is language. Just look at any extract of regular product names: absolute return investments, advanced payment guarantees, asset-backed securities, sophisticated alternative investment vehicles. These names are as well-trimmed, glammed-up and inflated as the slick stock photos of well-cast models. Banks should go back to using comprehensible, clear-cut language, since there will be no such thing as a simple financial product in this complex world . . .

Customer mindset The big business of popularising capital market started with the invention and cultivation of the money class by Merrill Lynch, as New York Times columnist Joseph Nocera stated in 1994. However, since 2003, sociologists and market researchers have detected a strong expanding segment of so-called value-class citizens – people who think values are at least as important as money. This value class invests as strategic consumers, ecologically correct or in compliance with the Sharia, for instance. They invest directly, by-passing institutions and trust collaborative processes and borrowing peer-to-peer platforms. The cultural chasm between the technocratic, success-maximising and highly individualistic society of the 1980s and 1990s and the new participative, collaborative culture of the digital, socialised generation born after 1980 is tremendous. The time needed to obtain and absorb information has changed dramatically, multitasking is standard; the expectations on being up-to-date and real-time are high. User-generated content is an indication of pluralism and the inter-subjective protection of information and opinions whose main medium is the internet, for both interactivity and transactions. Currently, at a socio-cultural level, banks are out of touch with the guiding principles of the younger generation, which creates trust issues. Banks have to get involved in the culture and processes of this generation to prevent them from creating their own way of banking on the internet. As Bill Gates foretold, banking is essential. Banks are not.

➨ 27

Part I Introduction

Case study (continued) Questions 1 What are the major causes for the decrease in trust by consumers in banks? 2 Several ways have been presented that can contribute to restoring trust in banks. Sum them up, characterise them and evaluate in what way they help to regain (some) trust. 3 A generation is presented that has different values and ways of acting. It is stated that for banks to regain their trust a different approach is needed. Look for banks which have discovered ways to restore trust in this segment. Explain how they act. Source: Deekeling; in: Peverelli and de Feniks (2010).

QuestIons 1 Describe a close customer–supplier relationship in your own words and indicate how this differs from a transactional relationship. 2 What is the relationship between trust and commitment? Give an example to explain your answer. 3 Analyse a relationship you have with a supplier or service provider as a customer. Choose a company with which you have a relatively close relationship. Describe the trust and the commitment on the part of both parties in the relationship, and explain how these have grown. 4 What causes differences to arise in the relationship life-cycle between customers of the same company? Explain your answer. 5 What should you know about a customer in order to be capable of and desirous of developing a long-term relationship with them? 6 Indicate how a marketer would be able to improve the relationship for each phase in the relationship life-cycle. Explain your answer. Describe the social structure in a virtual community of your choice. Under what circumstances would the development of long-term customer–supplier relationships not be advisable? Explain your answer. 7 A characteristic of professional services is that an expert, such as a doctor or lawyer, helps customers in exchange for payment. (a) How would you typify the balance of power in these relationships? (b) What role does the capacity for empathy play in these relationships? (c) Under what circumstances can mutual commitment exist in these types of relationships? 8 Different aspects of socialisation on the web can be distinguished, as described in the honeycomb of social media. Specify which aspects are supported by different platforms, such as Twitter, YouTube, LinkedIn and Facebook. 9 Analyse the influence of social networks on the development of trust and commitment in bilateral relationships between customers and organisations. Illustrate your answer for a company of your choice in the service industry. 10 Under what circumstances do you not recommend the development of a long-lasting relationship between a customer and an organisation? Explain your answer.

28

Chapter 1 Customer–supplier relationships

references Arndt, J. (1979) Toward a concept of domesticated markets, Journal of Marketing, 43, Autumn, 69–75. Bagozzi, R.P. (1974) Marketing as an organized behavioral system of exchange, Journal of Marketing, 38, October, 77–81. Bagozzi, R.P. (1975) Marketing as exchange, Journal of Marketing, 39, 3, 32–9. Bales, R.F. (1950) Interaction Process Analysis, Chicago, IL: University of Chicago Press. Barabási, A.L. (2002) Linked: The science of networks, Cambridge: Perseus Publishing. Berry, L.L. (1983) Relationship marketing, in Berry, L.T., Shostak, G.L. and Upah, G.D. Emerging Perspectives on Services Marketing, AMA: Chicago, IL, 25–8. Berry, L.L. (1995) Relationship marketing of services: growing interest, emerging perspectives, Journal of the Academy of Marketing Science, 23, 4, 236–45. Boshoff, C. (1997) An experimental study of service recovery options, International Journal of Service Industry Management, 8, 2, 110–30. Bruhn, M. (2003) Relationship Marketing: Management of customer relationships, Pearson Education: Harlow. Casalo, L.V., Flavian, C. and Guinaliu, M. (2008) Fundaments of trust in the development of virtual communities, Management Research News, 31, 5, 324–38. Chandrashekaran, K.R., Tax, S.S. and Grewal, R. (2007) Satisfaction strength and customer loyalty, Journal of Marketing Research, 44, 1, 153–63. Crosby, L.A., Evans, K.R. and Cowles, D. (1990) Relationship quality in services selling: an interpersonal influence perspective, Journal of Marketing, 54, 68–81. Deekeling, E. (2010) Collateral trust obligations, in Peverelli, R. and de Feniks, R., Reinventing Financial Services, Pearson Education: Amsterdam. de Jager, H. and Mok, A.L. (1994) Grondbeginselen der Sociologie: gezichtspunten en begrippen, Stenfert Kroese: Houten. Dholakia, U.M., Bagozzi, R.P. and Pearo, L.K. (2004) A social influence model of consumer participation in network and small-group based virtual communities, International Journal of Research in Marketing, 21, 241–63. Dwyer, F.R., Schurr, P.H. and Oh, S. (1987) Developing buyer–seller relationships, Journal of Marketing, 51, April, 11–27. Foa, U.G. and Foa, E.B. (1976) Resource theory of social exchange, in Thibaut, J.W., Spence, J.T. and Carson R.C. (eds) Contemporary Topics in Social Psychology, Morristown, NJ: General Learning Press. Fournier, S., Dobscha, S. and Mick, D.G. (1998) Preventing the premature death of relationship marketing, Harvard Business Review, January–February, 42–52. Garbarino, E. and Johnson, M.S. (1999) The different roles of satisfaction, trust, and commitment in customer relationships, Journal of Marketing, 63, April, 70–87. Geyskens, I. and Steenkamp, J.E.B.M. (1997) De rol van vertrouwen bij het opbouwen van langetermijn-relaties in de dienstensector, MAB, April, 164–70. Granovetter, M.S. (1973) The strength of weak ties, American Journal of Sociology, 78, 6, 1360–80. Grönroos, C. (1990) Relationship approach to marketing in service contexts: the marketing and organizational behavior interface, Journal of Business Research, 20, 1, 3–11. Grönroos, C. (1994) From marketing mix to relationship marketing: towards a paradigm shift in marketing, Management Decisions, 32, 2, 4–20. Grönroos, C. (2000) Service Management and Marketing: A customer relationship management approach, 2nd edn, Chichester: John Wiley & Sons.

29

Part I Introduction Gummesson, E. (1987) The new marketing: developing long-term interactive relationships, Long Range Planning, 20, 4, 10–20. Gummesson, E. (1994) Making relationship marketing operational, International Journal of Service Industry Management, 5, 5, 5–20. Gummesson, E. (1996) Relationship marketing and imaginary organizations: a synthesis, European Journal of Marketing, 30, 2, 31–44. Gummesson, E. (1999) Total Relationship Marketing: Rethinking marketing management: from 4ps to 30Rs, Oxford: Butterworth-Heinemann. Håkansson, H. (ed.) (1983) International Marketing and Purchasing of Industrial Goods: An interaction approach, Chichester: John Wiley & Sons. Hinde, R.A. (1979) Towards Understanding Relationships, London: Academic Press. Jackson, B.B. (1985) Build customer relationships that last, Harvard Business Review, November. Johnson, M.P. (1991) Commitment to personal relations, Advances in Personal Relationships, 3, 117–43. Goldenberg, J., Sangman, H., Lehmann, D.R. and Hong, J. (2009) The role of hubs in the adoption process, Journal of Marketing, 73, March, 1–13. Kaplan, A.M. and Haenlein, M. (2010) Users of the world, unite! The challenges and opportunities of social media, Business Horizons, 53, 1, January–February, 59–68. Keiningham, T.L., Cooil, B., Andreassen, T.W. and Aksoy, L. (2007) A longitudinal examination of net promoter and firm revenue growth, Journal of Marketing, 71, July, 39–51. Kietzmann, J.H., Hermkens, K. McCarthy, I.P. and Silvestre, B.S. (2011) Social media? Get serious! Understanding the functional building blocks of social media, Business Horizons, 54, 241–51. Kozinets, R.V., de Valck, K., Wojnicki, A.C. and Wilner, S.J.S. (2010) Networked narratives: understanding word-of-mouth marketing in online communities, Journal of Marketing, 74, March, 71–89. Lans, R. van der, van Bruggen, G., Eliashberg, J. and Wierenga, B. (2009) A viral model for predicting the spread of electronic word of mouth, Journal of Marketing Science, 29, 2, 348–65. Levitt, T. (1983) The Marketing Imagination, New York: The Free Press. McAlexander, J.H., Schouten, J.W. and Koenig, H.F. (2002) Building brand community, Journal of Marketing, 66, January, 38–54. Merton, R.K. (1957) Social Theory and Social Structure, Glencoe, IL: Free Press. Morgan, R.M. and Hunt, S.D. (1994) The commitment–trust theory of relationship marketing, Journal of Marketing, 58, July, 20–38. Morgan, N.A. and Rego, L.L. (2006) The value of different customer satisfaction and loyalty metrics in predicting business performance, Marketing Science, 25, 5, 426–39. Moorman, C., Deshpandé, R. and Zaltman, G. (1993) Factors affecting trust in market research relationships, Journal of Marketing, 57, January, 81–101. Oliver, R.L. (1996) Satisfaction: A behavioral perspective on the consumer, New York: McGraw-Hill. Payne, A. (ed.) (1995) Advances in Relationship Marketing, London: Kogan Page. Payne, A. and Frow, P. (2005) A strategic framework for customer relationship management, Journal of Marketing, 69, 10, 167–76. Peelen, E. (1989) Relaties tussen consument en aanbieder, een basis voor herhalingsaankopen, Alblasserdam: Haveka. Peelen, E., Ekelmans, C.F.W. and Vijn, P. (1989) Direct marketing for establishing relationships between buyers and sellers, Journal of Direct Marketing, 3, 1, 7–15. Peelen, E. et al. (1996) Thema dossier Relatiemarketing, Platform ’95, Amsterdam. Peelen, E., van Montfort, K., Beltman, R. and Klerkx, A. (2009) An empirical study into the foundations of CRM Success, Journal of Strategic Marketing, 17, 6, 453–71.

30

Chapter 1 Customer–supplier relationships Poeisz, T.B.C. and van Raaij, W.F. (1993) A psychological approach to relationship quality in industrial markets, Papers on Economic Psychology, 117, Erasmus University: Rotterdam. Reichheld, F.F. (1995) The Loyalty Effect, Boston, MA: The Free Press. Reichheld, F.F. (2003) The one number you need to grow, Harvard Business Review,12, 46–54. Reichheld, F.F. (2005) The Ultimate Question, Boston, MA: Harvard Business School Press. Roos, I. and Strandvik, T. (1997) Diagnosing the termination of a customer relationship, Proceedings on the New and Evolving Paradigms: The emerging future of marketing, AMA Conference, Dublin, 12–15 June, 617–31. Rokkan, A.I., Heide, J.B. and Wathne, K.H. (2003) Specific investments in marketing relationships: expropriation and bonding effects, Journal of Marketing, 40, 5, 210–24. Rowe, W. G. and Barnes, J.G. (1998) Relationship marketing and sustained competitive advantage, Journal of Market-Focused Management, 2, 3, 281–97. Schijns, J. (1998) Het meten en managen van klant-organisatie relaties, PhD thesis, University of Maastricht, Maastricht. Shahana, S. and Lerman, D. (2007) Why are you telling me this? An examination into negative consumer reviews on the web, Journal of Interactive Marketing, 21, 4, 76–94. Thompson, S.A. and Sinha, R.K. (2008) Brand communities and new product adoption: the influence and limits of oppositional loyalty, Journal of Marketing, 72, 6, 65–80. Tolboom, M. (1996) in Peelen, E. et al., Thema dossier Relatiemarketing, Platform ’95, Amsterdam. Toubia, O., Stephen, A.T. and Freud, A. (2010) Identifying active members in viral campaigns. Available at http://sites.google.com/a/andrewstephen.net/andrew/researc/papers/Toubia_ Stephen_Freud_viralmarketing_nov2010.pdf. Watts, D.J. (2004) The ‘new’ science of networks, Annual Review of Sociology, 30, 243–70. Watts, D.J. and Dodds, P.S. (2007) Influentials, networks, and public opinion formation, Journal of Consumer Research, 34, 4, 441–58. Watts, D.J. and Strogatz, S.H. (1998) Collective dynamics of 'small-world' networks, Nature, 393, 4 June 1998, 440–2. Webster, F.E. Jr (1992) The changing role of marketing in the corporation, Journal of Marketing, 56, October, 1–17. Williamson, O.E. (1979) Transaction cost economics: the governance of contractual relations, Journal of Law and Economics, 22, 2, 233–61. Zeithaml, V.A. (1988) Consumer perceptions of price, quality and value: A means–end model and synthesis of evidence, Journal of Marketing, 52, 2, 2–22. Zeithaml, V.A., Parasuraman, A. and Berry, L.L. (1990) Delivering Quality Service: Balancing customer perceptions and expectations, New York: The Free Press.

31

Chapter

2

Customer relationship management It has been shown in several studies that developing relations between customers and organisations is mutually beneficial. None the less, it appears to be difficult for organisations to engage in meaningful relationships with customers. The implications are far-reaching. A great deal of experience has been gained when it comes to the formulation and implementation of customer relationship strategies, but we still have a long way to go. The learning curve has proved steep and we might not even be halfway to where we probably want to or need to be. Acknowledging this provides reason enough to examine all aspects of customer relationship management (CRM) in greater depth and to share the experiences and research results we have obtained. In this chapter we will address the following questions: ●

What is the meaning of CRM?



What is CRM as a business strategy?



What are the elements of CRM?



What influences the success of CRM?

PraCtitioner’s insight Although it is already more than two decades since CRM began to attract attention, mainly due to the efforts of the IT industry to push the concept forward, it did not lose much of its relevance. Now, in the second decade of the twenty-first century, we are discovering that achieving success with CRM remains difficult, even though the need for more structured and cross-functional relationship management is now undisputed. But we are getting impatient for CRM to deliver on its promise in all aspects, and it’s necessary. The number of products keeps growing; there are more product varieties in the marketplace every year and it is becoming increasingly difficult for customers to choose. The number of messages organisations push out to their customers is also increasing as the number of media through which customers are bombarded rapidly expands. No wonder customers increasingly ‘optout’ when the opportunity arises. Too many messages are plain spam: irrelevant for the individual customer at that particular time. These developments are not new. We have seen it coming for many years, but customers seem to have taken control in recent years. On the internet they are quite able to link up

32



Chapter 2 Customer relationship management

Practitioner’s insight (continued) with other customers. They can reach out to others, who have no commercial interest, have a certain level of experience and are considered more trustworthy, with their questions about products or services. Their own experiences are happily and easily shared, both positive as well as negative. In the orientation stages of purchase decisions for durable consumer goods, social references are already more influential than information provided by the organisation itself. Organisations will have to take their transformation from an internally or productoriented to a more customer-oriented organisation seriously. They will have to rediscover their relevance to customers, and do so in an authentic way, not just by adjusting their communication concept. Knowledge of the individual customer is a prerequisite to achieving this goal and reversing the traditional product-push approach. In order to answer the call for engagement, an organisation will have to interact and leave room for customers to co-create. The value is not shown in the finished product, but in the customer, in their experience, in the relationship and in the actual usage. It’s about how an organisation helps customers to satisfy their needs, show themselves as individuals and helps them explore and expand their horizons. An organisation should seek its rewards in what one would call fair profits and not in one-sided short-term profits. By ‘satisfying’ customers in such a way that they are sure to recommend the organisation to others, an organisation builds its only true capital: a valuable base of customers. Sources: Peppers and Rogers (2008), Prahalad and Krishnan (2008), Reichheld (2005).

The ways in which organisations can develop meaningful relationships with the right customers is the main topic of this book. How an organisation should adapt its strategy, organisation, marketing approach and IT in order to make this work, are subjects covered in different sections of the book. It’s the broad scope of CRM.

2.1

the definition of CrM In spite of the progress being made in CRM, there is still some confusion about its meaning and implications. In order to illustrate the differences in views, we will present two extreme and two ‘standard’ definitions. One of these definitions originates from the Meta Group, which, in 2000, defined CRM as ‘the automation of horizontally integrated business processes involving front office customer contact points (marketing, sales, service and support) via multiple, interconnected delivery channels’ (Agrawal, 2003). In this description, CRM is positioned in the ‘IT corner’. Technology facilitates or makes customer contact possible between employees from different departments via the internet, telephone and the ‘face-to-face’ channel. On the internet, technology essentially replaces people, and a human–machine interaction arises. In telephone and face-to-face contact, IT plays a more supportive role and ensures that the supplier’s employees are in a better position to help the customer. According to this definition, a company is engaged in CRM if it ensures, for example, that customers are recognised during contact via the internet, by telephone or personal contact. A customer who orders a book on the internet from an online bookstore may afterwards contact this supplier by telephone to obtain additional information. The operator can check the

33

Part I Introduction

computer system and see that this purchase has been completed, as well as having access to additional information on the delivery, the product, payment, etc. The customer does not need to provide their entire contact history; the dialogue may proceed without obstacles because the delivery channels have been connected with one another – perhaps even in ‘real time’. An entirely different definition suggests that CRM is ‘a process that addresses all aspects of identifying customers, creating customer knowledge, building customer relationships, and shaping their perceptions of the organisation and its products’ (Payne and Frow, 2005). The role of technology is not even mentioned in this definition. CRM is still referred to as a process, or rather a sequence of activities; however, this definition does not specifically state that IT is necessary to perform these activities. At the same time, this definition requires that more attention be paid to the customer and the goal one hopes to achieve vis-à-vis the customer. We would like to get to know the customer and develop a relationship with them: we are not only interested in closing a deal. We feel it is important that the customer’s and supplier’s interest in one another covers a longer period of time than simply the moment of the transaction, and that this interest also goes deeper than the purchase and sale. At any rate, we consider it important for the customer to get an impression of the company as a whole and the products it manufactures and for the supplier to get to know the customer more as a person rather than just as a buyer. With this definition, we examine in more detail the reasons why the online bookstore should implement the ‘interconnected delivery channels’. It is important here for the communication travelling through the various channels to be recorded in databases, thus allowing us to identify customers and get to know them. We can analyse how customers differ from one another. This essentially involves insights which may be used in order to better cater to customers’ wishes. Customers may be given buying recommendations; a certain book by a certain author will be recommended because it appears that many customers with a similar profile were also interested in that particular title. The customer may even look up information to find what the other customers thought about that title, receive additional background information on the writer, and so forth. Furthermore, should they prefer to be spared from receiving these types of recommendations, they may always notify the supplier of this fact; the bookstore will not contact them without permission. Through this individualised and proactive approach, customers are afforded a different impression of the organisation. The image created is that they are recognised as a customer and thus respected, and, most importantly, that they will receive special attention and care. The Gartner group’s definition from 2004 goes a step further. This research agency describes CRM as ‘an IT enabled business strategy, the outcomes of which optimise profitability, revenue and customer satisfaction by organising around customer segments, fostering customer-satisfying behaviours and implementing customer-centric processes’. In comparison with the previous definition, CRM is not postulated as a process but instead as a business strategy. The intention that organisations have in mind for CRM is made explicit: on the one hand, the goal is to increase revenue and profit, on the other, it is to improve customer satisfaction. The road which must be travelled in order to achieve this goal is also considered. In doing so, the achievement of maximum customer satisfaction must not occur at the expense of efficiency, and the deployment of technology and people must go hand-in-hand. If we are to project this definition onto our example, we will have to delve deeper into the reasons for building the network of channels and what we hope to achieve by doing so. Let’s say that the online bookstore would like to expand its availability for customers. The bookstore is interested in creating a delivery channel that is available 24/7. Customers can contact it from the comfort of their own homes, or from any other location. Customers will

34

Chapter 2 Customer relationship management

be recognised and they are given the opportunity to help themselves in an efficient manner. Or they will be served personally by qualified and motivated personnel who are available to communicate with the customer and also make optimum use of the technology. The underlying strategy of the bookstore is to develop a long-term, mutually profitable relationship with the customer. The goal is to encourage the customer to make their future purchases from this store and to reduce the share of purchases being made from the competition. The fact that individual customer knowledge is being accumulated will make it more difficult for the competition to be able to offer a similar proposal. A sweeping definition of CRM is the one provided at the turn of the century by Regis McKenna, who has adapted the concept of ‘real-time marketing’ for these purposes. He recognises that CRM targets the building of an infrastructure which may be used to develop longterm customer–supplier relationships. However, at the same time, he emphasises that as a result of this infrastructure, the walls between company and customer are torn down. Whereas it was once impossible to enter the other’s domain at one’s own convenience, nowadays this is a great deal easier. On the one hand, customers are able to look into the records to determine whether a specific product is in stock, track the status of the delivery and read other buyers’ opinions of the product. They may be involved as a ‘lead user’ in the development of new products and share confidential information. They obtain access to areas of the company which were previously hidden and which could, at the very most, only be entered or accessed under supervision and by appointment. Viewed from the other side, it becomes much easier for suppliers to gather information from customers and to contact them. In other words, customer and supplier activities are integrated. The privacy of both parties may easily be violated and both will have to consider carefully what is and what is not desirable in this area. On the other hand, at the same time it will be possible to cater to one another’s wishes quickly, in ‘real time’. Regis McKenna was way ahead of his time. His call for transparency and another division of roles between consumers and organisations has only gained in strength; we even call for more! With the rise in social media, it appears that marketing needs to be democratised. The power has been taken away from those people in marketing departments who carefully plan the way they want brands to be presented to individuals and communities that create, share and consume blogs, tweets, Facebook entries, films, pictures and so forth (Kietzmann et al., 2011). The time in which organisations were active suppliers and consumers were passive recipients is over. The challenge we face in CRM is to work with our customers. Within several existing and emerging social networks, the interaction with customers will have to lead to more bilateral relationships with customers. It has led to the term ‘social CRM’. It is a philosophy and a business strategy, supported by technology platforms, processes and social characteristics designed to engage the customer in a collaborative conversation in order to provide mutually beneficial value in a trusted and transparent business environment. It's the company's response to the customer's ownership of the conversation. In this book, we subscribe to Gartner’s definition. However, at the same time we realise that the bilateral relations we aim for between customers and organisations are embedded in social networks. It is in the interaction with the people in these networks that we have to earn the commitment in the relationship. This asks for transparency, trustworthiness, benevolence and new ways of engaging customers, doing things together, prompt response and anticipation of each other’s actions. Organisations have to look for new ways to win customers; they might have to refrain from persuasive behaviour, loosen control and rely on their values and appealing or attractive ideas and the power these have in social conversations. They have to formulate a vision and strategy at the very outset which points the way for the

35

Part I Introduction

entire CRM programme. This way, investments in systems, databases, strategy and organisational adjustments which ultimately fail to be profitable may be prevented. In short, it is preferable for CRM to be regarded as a business strategy from the start, one that is aimed towards developing mutually profitable customer–supplier relationships being embedded in social networks, and which is based on an IT infrastructure to be developed, one that enables well-defined processes and places capable personnel in a position to function optimally.

2.2

CrM building blocks Business strategy Companies that concentrate on the stimulation of sales become proficient in the art of ‘seduction’ (Levitt, 1983). They have a certain means of communication, a short-term horizon and a limited interest in the customer. They measure their success by their sales and the number of completed transactions. Market share represents a very important criterion for success. On the other hand, organisations striving for a relationship have a longer-term horizon, ‘tell’ and ‘listen’ more than they ‘sell’ and ‘send’, and have a broader and deeper interest in the right customers. Their interest in individual customers does not end the moment the transaction is completed. On the contrary, the purchase only marks the beginning of the relationship in which trust and commitment must develop. The supplier has also traced out the contours of a policy necessary to further develop this relationship with the customers. Building relationships requires a business strategy and definitely demands more than a functional strategy. It affects the organisation as a whole: marketing, IT, service, logistics, finance, production and development, HR, management, etc. The CRM strategy describes how consumers and the organisation can find one another and how they can develop the desired relationship. It specifies the extent to which both will adapt their behaviour towards each other and want to intensify the relationship. Is it the supplier’s aim to think of more or less customised solutions that will make the customers more successful? Or is the aim rather to lower the efforts customers need to make by being accessible, offering self-service, giving them automated personal advice based upon their past behaviour and by being reliable? It’s a different type of relationship altogether, warranting an investment in different capabilities and key-enablers. The strategy has to answer the question whether or not third parties need to be involved in order to realise these ambitions and how this leads to a strong relationship between the organisation and its customers. The CRM strategy provides direction to the organisation as a whole, to marketing and to IT. It thereby helps to make sure the fit between the business strategy, commercial processes and enabling technology is optimal.

Customer-centric organisation Customer relationship management is not without serious consequences for the organisation. To be, or to become, a customer-centric organisation has implications for leadership, culture, employees, internal communication, processes and control. A customer-centric organisation is organised around customers, not around functional processes. By that we mean marketing, sales and after-sales service, each with different objectives ranging from, for example, increasing gross margin, market share and turnover and reducing the costs. They are often not aligned. They could and should be aligned around the interaction with customers. The

36

Chapter 2 Customer relationship management

interactions determine what has to be done and therefore customer-facing employees need to have the right mindset and competencies and must be in a position to decide on and do what is needed. They have to be part of a team that is formed around a common set of values, norms and a clear mission. They have to be able to use the set of processes, facilities and infrastructure in order to operate as professionals. The performance indicators that the organisation uses to close the loop on the Plan-Do-Check-Act cycle have to calculate measures that are critical for CRM success and have to reward employees for the right customer-oriented behaviour.

the individual value proposition A customer-centric organisation does not deliver standardised products and services. Why else would it collect customer knowledge and engage in dialogues? The goal must be to deliver an individualised value proposition, realising that the consumer’s experience of using a product, or in particular a service is essential. The context of the experience has to be taken into account, that is to say not only the place or space (physical context) in which an experience takes place, but also the role of other people (social context). The value of a pacemaker lies not in the product itself, but in the confidence with which one goes, for instance, to the theatre, knowing that there is an emergency service readily available 24/7 should the pacemaker show signs of failure. No matter where, no matter at what time, the customer knows that the supplier is a partner in their life, not just during an operational procedure. The customer-centric organisation should, ideally, want to come to a fitting solution through a process of co-creation with some or all of its customers. They are no longer limited to the role of buyer, but are partners who assist in the process of mutual value creation. This requires an acknowledgement from the organisation that some areas of ‘solution creation’ lie outside its own domain and it often gives rise to new partnerships in value creating networks. It is about forging a network of organisations and allowing customers access to them, making it possible to cost-effectively create tailor-made solutions (Prahalad and Krishnan, 2008). The individualisation of the value proposition has two sides to it. On the one hand it is about the value customers are experiencing, while on the other hand it is also about the price they pay. The price, the value flowing back to the organisation, is also more individualised and context-specific. New pricing models reward customers for their role in the value creation process and are more about fair value pricing than margin optimisation.

Customer knowledge It seems one of the most logical starting points of CRM: know your customer. Knowledge of the individual customer is essential in order to develop a relationship and to design a customised offering. Existing customers, as well as prospective customers, must be identifiable; it has to be possible to determine who someone is. Is that John, Peter or Pauline on the other side of the proverbial counter? At the same time, the customer’s profile must also be known. Preferably in terms that are understood by people in direct contact with customers. The information should give them a true-to-life idea about the person with whom they are dealing, even if they are meeting that customer or talking to them for the first time. Obviously this encompasses functional knowledge: What has the customer purchased? How do they prefer to communicate? etc. While this type of knowledge is helpful, it provides no impression about, for example, the type of life they lead and what kind of experience is truly meaningful for them. Without such knowledge, it would be unthinkable to attempt to build a relationship with the customer. It has to be about more than just the regular bits and bytes of organisational tracking and tracing!

37

Part I Introduction

Companies must develop the competency or capability to develop such individual customer knowledge for, if needed, a large number of customers. Databases and data warehouses will have to be filled with correct and current data which will be transformed by analyses into individual customer information. Individual customer data will have to be supplemented by the outcomes of anonymous (qualitative) market research so that a more complete image of the customer may be created. In the expansion of the customer information, economic considerations and manageability factors will have to play an important role. Although it is actually quite interesting to gather as much data and obtain as much customer information as possible, one must not lose sight of the ultimate goal. The aim is still to develop relationships that are mutually profitable. The information must result in companies being better able to help customers on time, in a more targeted manner, and with more appropriate solutions. Data that do not contribute to the achievement of this goal are not worth registering and storing.

Communication The relationship strategy has to be translated into a framework for customer–supplier contact. What are the ‘moments of truth’ for the organisation, when the customer is really making decisions on whether to purchase or whether to continue the relationship? It is not a simple task. If you think of yourself as a consumer and try and relate to suppliers, you will find most interactions are quite ‘poor’. They consist of the most basic functional remarks and are hardly spontaneous. The moments that truly offer potential for dialogue and relationship building tend to end up being a disappointment. Suddenly it seems hard to process your request, to simply register and react to a complaint, because it would require a non-standard procedure and/or systems won’t allow for it. Many organisations don’t really have any experience with true customer dialogue. The situation gets more complicated when they realise that much of the relevant conversation is taking place outside the organisation’s sphere of control, with competitors and independent intermediaries (such as comparison websites). There is also a social network in which people portray themselves, give their opinions and/or help each other. They cannot participate in those places in their role of marketer or salesperson. In building a network of channels through which the dialogue with customers takes form, it is not only the quality of the interaction that requires attention. There is the matter of increasing reach and reducing costs at the same time. It seems to only be possible to reach more people at lower costs and with higher quality if low-cost channels are used more intensively. Replacing expensive channels, which tend to be the most service-intensive and personal, will inevitably affect customer relationships. But the internet is spurring a range of options that are not rich in terms of content and quality as well as cheap. Adapting the channels used to facilitate the interaction and relationship between customers and organisations is a delicate process that requires careful planning and well-monitored execution.

Processes and systems In many situations, achieving successful CRM is to a great extent dependent on IT. The system must make it possible to realise the strategy, to support cooperation within the organisation, to customise the offering, to develop and exploit customer knowledge effectively and efficiently and to permit dialogue. It is only in situations in which relationships must be maintained with a small number of customers, the organisation is small and manageable, and each of the customers represents

38

Chapter 2 Customer relationship management

sufficient value to justify an individual approach that CRM may be realised without an elaborate IT system. This involves idyllic situations in which guild masters still know their customers personally and maintain relationships with them, both professionally and socially, through face-to-face contact. They still make each product to measure and with craftsmanship. As soon as relationships need to be maintained with a larger group of customers, a proportion of whom represent a low value to the supplier, the use of IT becomes inevitable, if only because some modern-day customers prefer to communicate with the supplier through modern means. The construction of an appropriate IT system presents a real challenge. First, many companies find themselves confronted with what is known as a ‘legacy’ problem: part of their computer system is outdated and, above all, developed to fulfil a goal other than that of implementing the CRM strategy. The system may have been designed to maintain product administrations: for example, who is carrying which type of insurance, who has paid and who must receive an allowance as a result of submitted and approved expense reports. These are systems in which customers are difficult to identify. It is not easy to determine which different members of a household have purchased which different products over the years. In order to establish this, an extensive search will have to be undertaken. The results of this ‘query’ can, however, be problematic; there is quite a significant probability that customers are registered in a variety of ways and that it is not known which persons should be considered to be part of a certain household. Among other things, systems which are developed specifically for the creation of CRM strategy involve the internet (websites, social networks, mobile applications), call centres and sales information systems for account managers and sales personnel. These systems have often been developed independently of one another and it is a challenge now to link them together. Linking is the only way to integrate channels, which is necessary in order for customer and supplier to conduct an on-going dialogue with one another free from the constraints of place and time. This dialogue will only be satisfying if the front office is linked to the back office. The front office, with its channels of communication, must be linked to the product administration in the back office: for example, in order to be able to supply product information, to take out insurance policies or distribute allowances. Systems which vary in age and do not dovetail well with one another must be linked. In many cases, this cannot be done without installing a service-oriented architecture (SOA). It is a middle layer upon which many applications are easily linked together. By placing the data management outside the applications and organising it in a centralised way, customers can be identified correctly and all data from different applications can be used to generate a more complete customer view. The middle layer is like a glue bonding many different point-specific applications. It is also a buffer, increasing the stability and security of the system as a whole. It is easier to prevent fraud and guarantee up-time, doing so by preventing many users from having direct access to data that they do not specifically need in their process and which is critical to organisational success. The integration of the front and rear sections is a ‘moment of truth’ for many companies. Previously, one had people to fall back on as the link between the front and back offices. If a customer asked a question which deviated from the norm, the employee involved was able to come up with a solution thanks to their ability to improvise. However, system integration has reduced the role of the human element in this respect. Processes involved in acquisition, ordering, payment, remittance, complaints, information queries, etc. will have to be described perfectly and give the customer what they want. The process descriptions form the input for the IT systems to be developed; these are the processes which are automated and supported by the CRM systems.

39

Part I Introduction

2.3

entrance, applications and success of CrM The term ‘CRM’ appeared in the literature for the first time some 20 years ago. It began with software suppliers who brought the concept to life through marketing efforts designed to stimulate demand for their technological solutions. In terms of its actual content, CRM obviously involves a much older principle. As long as companies have been in existence, customer– supplier relationships have been the goal of at least some of them. The old guild masters knew their customers and made sure that they received customised products. They engaged in CRM in an authentic manner. Perhaps it was due to the industrial revolution that the distance between producer and consumer grew and the interest in CRM within consumer markets dissipated, but during those times there were always small-scale, specialised companies which continued to maintain close relationships with their customers. Prime examples include the fresh bakery, the butcher, the handyman, the hairdresser, the garage, the doctor and so forth. The attention paid to individual customer–supplier relationships began to increase in the late 1980s and early 1990s. The concept of relationship marketing began to gain in popularity and was advanced as an alternative to transaction marketing. The awareness grew that marketing literature had dedicated a great deal of attention in previous years to the stimulation of sales transactions and less to the development of customer–supplier relationships (Arndt, 1979). At the same time, analysis showed that a large number of cooperative relationships between customer and supplier are of a long-term nature. Knowledge of the dynamic in relationships and the manner in which parties influence one another in a relationship could thus often be more effective than the simple stimulation of sales alone. In several European countries, relationship marketing was none the less incapable of holding companies’ attention. Too many companies encountered problems in the implementation of relationship marketing. Individual knowledge of customers was lacking and the costs of a differentiated customer approach were perceived to be too high. In addition, there was doubt on the part of management regarding the yield produced by relationship marketing. Retaining customers and developing a relationship with them does not yield its first actual return until some point in the future, and the acquisition of a customer must be viewed as an investment. It was precisely during a period in which the economy experienced a downturn that people were less willing to listen to or invest in this type of strategy. However, once the economy began to rally again in the mid-1990s, relationship marketing was given a second chance. Calculations of customer values had been made and demonstrated that retaining customers was more profitable than simply attracting them. The calculations performed by Frederick F. Reichheld (1996) in particular resounded well, paving the way for relationship marketing. At the same time, during this period of revitalisation, the realisation had sunk in that relationship marketing would have far-reaching organisational consequences. The pursuit of developing individual customer–supplier relationships requires customer-oriented rather than product-oriented enterprises. The position of the so-called customer managers would improve whereas that of product managers would be more likely to erode. Managers and employees would have to be judged on the basis of standards other than those used in the past. The crux of the matter was no longer selling as many newly developed products as possible, but retaining customers and increasing customer satisfaction. The current IT applications for CRM also emerged at the same time that relationship marketing resurged. Solutions for call centres, internet and websites, e-commerce, the data warehouse, campaign management and so forth all developed and spread throughout the market.

40

Chapter 2 Customer relationship management

Experiences with these systems were not always positive. According to various sources, the number of successful CRM ‘projects’ is estimated at just over 30 per cent (Hoekstra, 2001). This is not entirely surprising, given the fact that CRM was frequently seen as an IT project and many organisations had expectations that were far too high. The consequences for organisations were often unclear and there was no ‘roadmap’ that highlighted the phased roll-out of a CRM strategy across the organisation. There were hardly any business cases demonstrating the return on specific CRM investments in terms of financial results or contributions to the strategic objectives of the organisation. Nowadays we have gained many insights into the gradual way in which organisations can facilitate changes and develop towards a more customer-centric organisation, assuming it fits their strategy (Rigby and Ledingham, 2004). It is beginning to sink in that CRM is more than the sum of several innovative ICT projects; we now realise that it’s a strategy which involves the entire business. Product-oriented organisations will have to transform themselves into customer-oriented organisations. They will have to invest in an infrastructure that facilitates communication with customers through a broad range of channels. They will have to learn to engage in dialogue with customers who themselves have access to and operate within social networks. Individual customer knowledge must be accumulated, managed and put to use around a marketing strategy devoted to long-term relationships rather than short-term transactions. It requires the development and delivery of product-service bundles that really help customers and prove their meaning by creating remarkable customer experiences. CRM is very broad, almost all-encompassing. We will have to exercise great patience and belief before it can be considered completely realised. We realise that the economic decline that has hit the global economy since 2008 is the result of a certain ‘way of doing business’ in banking, government, corporate environments and society as a whole. We have reached a turning point, where we can and must refrain from making the same mistakes again, in marketing as well as in business in general. Postponing investments in CRM, despite seeming logical in times of loss, need for cost control and shrinkage can be dangerous. The criticism voiced by consumers, consumer organisations and society as a whole against profit maximisation and shareholder value creation cannot be ignored. Customers are more aware than ever of organisations’ ‘fake’ commitment to their needs and wants, and have begun to loathe the way they are bombarded with product introductions and commercial messages, while services are cut back. The era when customers took that kind of behaviour for granted is past.

2.4

Contents of this book We know that developing relationships with the right customers is mutually beneficial to supplier and customer, none the less, we are still searching for the right way to do so. This is where CRM comes in. The objective of this book is to contribute and facilitate the gaining of insight into CRM, so that a CRM strategy is chosen more appropriately and implemented more efficiently and successfully. With this aim in mind, the rest of the book is divided into four parts. Part II begins in Chapter 3 with a description of CRM strategy. A classic element in the discussion derives from Treacy and Wiersema’s (1996) study, in which they distinguish between operational excellence, product leadership and customer intimacy.

41

Part I Introduction

The conditions under which each of these value disciplines may be chosen and the advantages associated with them are also examined. Chapter 4 discusses the organisational consequences of CRM. The customer-centric organisation and its corresponding culture are also studied. An analysis is performed demonstrating how ‘customer ownership’ may be established and how the deployment of resources for customers may be orchestrated within the organisation. Part III covers one of the key elements of CRM: customer intelligence. The leading question in Chapter 6 is: What do we want to know about individual customers and how much are we willing to invest in acquiring this knowledge? Chapter 7 focuses on the customer databases and warehouses; the database architecture that is needed to store, analyse and provide data. These data are used in analysis; some of the basic analyses are described in Chapters 8 and 9, where segmentation, selection, retention and cross-sell analyses will be examined. Chapter 10 considers the issue of management reporting. Part IV deals with managing exchanges in the relationship. Building a relationship requires an exchange of resources, which can be goods, money and/or information. In Chapter 11 we will see how organisations can design individualised propositions; and in Chapter 12 we explore how they can differentiate between different relations and how they can develop a relationship over a period of time. Communication is the central topic of Part V. We focus on the way we can reach customers efficiently and engage them in a meaningful dialogue, aimed at improving the customer experience and the relationship. Chapter 13 starts with an overview; we discuss how we translate the CRM strategy towards a communication strategy for the channels and social networks. In the following chapters the different media will be addressed, ranging from internet and social media (Chapter 15), to the contact centre (Chapter 16). Personal selling will be covered in detail in Chapter 14. Part VI deals with the implementation of the CRM strategy. Chapter 17 considers what the different CRM systems are, and how we choose a CRM supplier. In Chapter 18 we discuss the implementation of CRM. The book concludes in Chapter 19 with a glance into the future. How will the rise of new communication infrastructures fundamentally change the traditional role-division between suppliers and customers? Will we succeed in making adapting technology to people rather than vice versa? How will relationships develop as the traditional boundaries between producer and consumer fade and co-creation becomes more embedded in our economic structure? How will we deal with channels that move relationships beyond the boundaries and control of any single organisation? How will we address and resolve issues around privacy and information ownership? We will present the vision of leading experts to determine a dominant direction for the development of CRM. It’s an illusion to suppose that we are even close to formulating and implementing CRM in any definitive shape or form. It is an on-going process. A journey, rather than a destination! The development of this book is shown schematically in Figure 2.1. The logical order of things is respected in the sense that we would first like to determine what we want to achieve through CRM before considering how to make it happen. The build-up also takes into account the way different functional disciplines within an organisation address CRM. There is one function that you will encounter on several levels of Figure 2.1. The CRM manager is responsible for winning top management support and commitment, formulating the CRM strategy, formulating and implementing the various CRM programmes and projects, and monitoring results – ultimately achieving CRM success.

42

Chapter 2 Customer relationship management

CRM Strategy Customer-centric organisation Individualised proposition

Customer intelligence

Cross-channel communication

CRM systems and implementation

Figure 2.1 CRM building blocks

2.5

Conclusion At the end of the 1990s, CRM ended up high on the agenda of many a top manager, thanks, among other things, to the marketing efforts of software companies. Their IT systems enable companies to interact with large groups of customers on an individual basis and at relatively low cost. As a result, companies can accumulate individual customer knowledge which they can then use in offering customised solutions and in developing mutually profitable relationships. On the one hand, these solutions improve the operational excellence of organisations’ front offices, and on the other, they offer the potential to develop a relationship with customers. To date, companies’ experiences with CRM are somewhat disappointing, and this may be for a variety of reasons. Too many CRM initiatives are still dominated by technology, and the strategic and organisational aspects of CRM tend to fall by the wayside. Insufficient attention is focused on the interpretation of the marketing strategy: Who are the right customers and what do they want? How do we conduct a meaningful dialogue with them, and offer them what they want? And how do we develop a relationship with them? On the other hand, too much energy is invested in the creation of the communication infrastructure and the orchestration of the dialogue with the aid of IT. The objective of this book is to expand and deepen insight into CRM so that, for the right companies, CRM will expand and blossom to become a system of ‘doing the right things right’.

Case stuDY CrM at C. Fun Parks Background C. Fun Parks is a concept that was developed by Theodore Brook in 1985. The aim was to give people a short break, to take away their worries and give them a safe place to visit, where everything is provided for their comfort and entertainment, and also their family and/or friends, and all close to home!

➨ 43

Part I Introduction

Case study (continued) From 1985 onwards Brook experienced a great demand for his service proposition. In only a few years he was able to open more than thirty of these resorts in the Netherlands, Belgium, Germany and France. The first resorts were company owned, managed and operated. But soon Brook found that his resources were limited and this hindered a rapid expansion; the launch of a franchising concept provided a solution. At present, 85 per cent of the resorts are owned and managed by franchisees. Twice a year there is a meeting between the franchisees and the franchise organisation. During the last franchisee meeting, Brook was asked to develop and present a CRM plan. The franchise organisation was, in the franchisees’ opinion, lacking a clear CRM vision and strategy, and invested in a rather ad hoc way in CRM systems.

the franchising concept Characteristic of C. Fun Parks is the resort’s main building that houses the reception, a restaurant, a (tropical) swimming pool, a bar, a terrace, a game hall and a convenience store. Apart from the central building, the resorts contain several bungalows, with accommodation available for four to sixteen people. Guests can choose between several service packages. The budget pack does not include bed sheets, towels, cleaning, welcome food and beverage package, etc., whereas the premium pack will provide these services. Also, in the park, several activities are organised for guests, ranging from horse riding, bingo and soccer games to nature walks. Outside the park, there are ample opportunities for enjoying a short holiday. The park provides guests with information so that they can enjoy and explore the local environment. Franchisees have little decision-making freedom over the park. The park’s general manager also has to follow and pass a professional hospitality management programme and a special quality management system has to be implemented in his/her organisation. Furthermore, s/he will have to participate in the joint marketing programme.

Franchisee performance About 70 per cent of the franchisees have been able to increase customer satisfaction rates over the past five years. However, the improvements in profitability and sales show a less satisfying trend over the past three years. Of course the market has changed, but even if the franchisees take account of external events, they state they ‘need more’. Occupancy rates have dropped to 85 per cent; this, although still acceptable, has been higher in the past. Furthermore, guests often delay their choice of a short break, leaving the decision as to whether to book a holiday until the last minute. French guests are known for their impulsive behaviour; a substantial percentage do not reserve a bungalow, and arrive at reception asking for a place to sleep. During guests’ stay, the spending pattern has also shown a negative trend: they spend less during their stay in the restaurant, in the convenience store, on organised activities, on services, etc. Not all the facilities are particularly profitable either. Although it might not be desirable to hold each facility accountable, there is a need to exploit the tropical swimming pool, for instance, in a more economic way.

CrM on the agenda Although relations with headquarters and Theodore Brook are quite good, during the last meeting franchisees expressed concerns. They particularly expressed concerns about the

44



Chapter 2 Customer relationship management

Case study (continued) effective use of CRM. Brook has been investing rather large amounts of money in CRM projects that have been delayed or even cancelled. Franchisees wanted him to hire an external expert to make an independent analysis and to provide recommendations for CRM. Also, they want this expert to consider, as part of CRM, the feasibility and functionality of a loyalty programme to improve customer retention rates and spending. Brook wants to follow up this request. Imagine he has selected you and invites you to present your ideas on this project. What is your initial analysis of the situation? How should they approach the project and seek to improve CRM at C. Fun Parks? As input for your preparations, C. Fun Parks has provided the following information on the CRM projects.

CRM Project I Let’s say Brook has hired Siebel to implement a CRM system for the internet (web) channel and the call centre. Siebel (Oracle) is a well-known CRM system; by selecting this service provider, Brook sought to reduce risk. At the core of this project were several processes (lead generation, converting leads into sales, information provision, market research, after sales service). The real-time registration and accessibility of the communication history for different channels made it possible to serve prospects and customers any place and any time. Problems have arisen with the integration of this front office application with back office systems for administration, billing, invoicing and reservations. Up until now the systems have operated separately.

CRM Project II The success of CRM depends to a large extent on the quality of the data and the customer profile. To date, several parks have been recording the identity of the guests in their own way; they did not want to rely on headquarter’s databases. However, the local databases don’t only differ in structure, but also in the quality of the registered data. The result is that many (e-)mailings are returned, wasted and result in time-consuming phone calls to call centre agents. Profiling attempts to seek to know more about each individual customer have been initiated, but have not yet resulted in an increase in sales, spending, retention or satisfaction rates.

Question 1 As a CRM consultant, make the desired analysis and come up with recommendations. Use the content of this chapter to prepare your report.

Questions 1 Give a description of CRM in your own words. 2 In your opinion, is a discounter capable of implementing a successful CRM strategy? Provide an example to explain your answer. 3 What are the core elements of CRM?

45

Part I Introduction

4 Choose one of your service providers and reconstruct the dialogue you have conducted with this organisation. How could the content of this dialogue be improved so that you would become more loyal to this service provider? 5 Why is CRM more than simply an IT project? 6 Why do 70 per cent of the CRM projects fail, according to companies’ perceptions? 7 Are there causes which may be cited for the failures of relationship marketing (at the end of the 1980s and beginning of the 1990s) which differ from the failure of CRM projects in the past two to three years? Explain your answer. 8 How would you explain the resurgence of CRM in the past three years? 9 What were the causes of relationship marketing’s loss of popularity in the mid-1990s? 10 What are the differences within a CRM implementation project between a mail-order company and a company that supplies electronic products in the consumer and the business markets?

references Agrawal, M.L. (2003) Customer relationship management (CRM) and corporate renaissance, Journal of Service Research, 3, 2, 149–72. Arndt, J. (1979) Toward a concept of domesticated markets, Journal of Marketing, 32, Autumn, 69–75. Asseldonk, T.G.M. van (1998) Mass Individualisation: Business strategies applying networked order to create economic value in heterogeneous and unpredictable markets, Veldhoven: TVA Management. Hoekstra, J.C. (2001) Direct Marketing, 2nd edn, Groningen: Wolters-Noordhoff. Kietzmann, J.H., Hermkens, K., McCarthy, I.P. and Silvestre, B.S. (2011) Social media? Get serious! Understanding the functional building blocks of social media, Business Horizons, 54, 241–51. Levitt, T. (1983) The Marketing Imagination, New York: The Free Press. McKenna, R. (1995) Real-time marketing, Harvard Business Review, July–August, 87–95. Payne, A. and Frow, P. (2005) A strategic framework for customer relationship management, Journal of Marketing, 69, October, 167–76. Peelen, E. (1999) The Relation Oriented Organisation, Nyenrode University: Beukelen. Peppers, D. and Rogers, M. (2008) Rules to Break and Laws to Follow: How your business can beat the crisis of short-termism, Hoboken, NJ: John Wiley & Sons. Prahalad, C.K. and Krishnan, M.S. (2008) The New Age of Innovation: Driving co-created value through global networks, New York: McGraw-Hill. Reichheld, F.F. (1996) The Loyalty Effect, New York: The Free Press. Reichheld, F.F. (2005) The Ultimate Question, Boston, MA: Harvard Business School Press. Rigby, D.K. and Ledingham, D. (2004) CRM done right, Harvard Business Review, 82, 118–28. Treacy, M. and Wiersema, F. (1996) The Discipline of Market Leaders, New York: HarperCollins. Wiering, C. (2004) KLM viert CRM triomfen in moeilijke marktomstandigheden, Tijdschrift voor Marketing, April, 48–50.

46

PART II

Strategy and organisation The second part of this book covers two of CRM’s critical building blocks: the strategy and the organisation. It shows to what extent an organisation in the long run is customercentric. Is its strategy focused on building mutually profitable relations with the right customers? Are customers being perceived as key assets, as the major reason for existence of the organisation? And from an organisational perspective, are all activities centred around customers? Are customers the starting point of the structuring of the organisation? The strategy and organisation will set the objectives, direction and, the organisational setting that will steer and facilitate customer intelligence and marketing and the other CRM building blocks.

Chapter

3

CRM as an integral business strategy Strategy is a topic that can be approached in different ways (De Wit and Meyer, 2004). It can imply the discussion of the ‘organisational purpose’: what is the company’s raison d’être? Why do we exist; how do we contribute to our stakeholders? But at the same time it can be a coherent, unambiguous and integral pattern of decisions, the outcome of the analysis of opportunities and threats in the business domain and the wider environment and the competencies of the organisation. These decisions address not only what the organisation aims for, but also how it wants to achieve its goals. In the context of CRM strategy we cannot bypass Treacy and Wiersema (1996). In their study they identified what they call three value disciplines of the successful market leaders. Each of the value disciplines contains a set of answers to the strategic questions we introduced above; they address how companies can define a value proposition in relation to the customers they choose to serve (what) and explain how organisations have to be modelled (how) to realise this proposition successfully. The appropriateness of a value discipline (comprising a logical set of answers to the strategic questions) depends on the context: what type of organisation are we dealing with and what are the characteristics of the environment? In this chapter we will first discuss the three value disciplines (Section 3.1) and then the context (Section 3.2). Attention will also be focused on the results which may be obtained by implementing a CRM strategy (Section 3.3). In this chapter we will address the following questions: ●

How do we formulate the CRM strategy?



What are the three value disciplines (strategies) according to Treacy and Wiersema?



How do we characterise the CRM strategy (defensive or offensive)?



How can we relate the CRM strategy to the internal and external environments?



What can be achieved by implementing a successful CRM strategy?

49

Part II Strategy and organisation

PRACTiTionER’S inSiGHT Putting the customer first when formulating a CRM strategy is quite a challenge for many strategists and leaders. What is the urgency to do so? Is there a problem in the way we currently approach and deal with customers? Are there any complaints? Are we losing customers? Sometimes, however, the relevancy is hard to specify. We have to be more customer-centred, we have to improve our value to customers. Leaders communicating this message in an organisation can be confronted with lifted eyebrows from people working in front offices doing their best to please customers. Are we not doing almost everything we can? What do you mean by ‘We have to be more customer-centric’? Understanding the urgency and the relevancy is key to the success of a CRM strategy. It helps to get the buy-in, the support for the strategy in the organisation, and to ensure it will contribute to sustainable success.

3.1

The nature of the CRM strategy In terms of content, a strategy should provide the answer to the question ‘How does the organisation expect to achieve a competitive advantage?’ How does the organisation deliver more value to customers and other stakeholders than its rivals? Which competencies does this require and do these competencies offer a solid perspective for survival and success? In order to gain an insight into CRM strategy, it is useful to first explore the work of Treacy and Wiersema (1996), who researched market leaders in a variety of industries and discerned three ‘value disciplines’, namely: 1 operational excellence; 2 product leadership; 3 customer intimacy. The value disciplines describe what makes organisations distinctive in their markets, why customers prefer them over other companies and what is required in terms of competencies and key resources in order to realise this position. The description of the three disciplines that follows correspond to those found in Treacy and Wiersema’s book (see References section at the end of the chapter). Later in this chapter, we will reflect on these disciplines within the context of CRM.

operational excellence Companies that employ an operational excellence strategy attempt to find a combination of price, quality and ease of purchase that none of their competitors is capable of matching. They do not spend a great deal of time on innovation or one-to-one relationships with customers. They offer their customers a guaranteed low price and problem-free service. The products are of a good quality. Examples of this type of company are McDonald’s, Dell Computers and easyJet, but also Ford at the time that it introduced the classic Model T Ford and the US supermarket chain Wal-Mart. The business model behind this value proposition focuses on achieving cost leadership. Products are purchased at low prices and in large volumes. The information systems follow

50

Chapter 3 CRM as an integral business strategy

the flow of goods closely and remove inefficiencies. Activities within the value chain are closely aligned with one another. Production is standardised and automated, if possible. The staff maintains a high level of productivity and management steers activities tightly and in a centralised manner. Everyone knows the execution plan and the ‘commands’. When an order is issued, everyone knows what they must do. Strict norms are applied. The accommodation is austere and the overhead costs are low. Characteristic of the company culture are the concepts that efficiency is rewarded and waste is despised. The team is what counts, not the individual. The heroes within this type of organisation are those people who fit in with the group, who climb higher within the company and upon whom one can depend.

Product leadership Organisations which aim for product leadership constantly work hard to implement innovation and renewal. These companies want to amaze customers, push limits and discover the unknown. Product leaders surprise customers with the newest and best products. Examples of this type of company include Bang & Olufsen, Mercedes, Swatch, Nike, Apple and small tour operators that specialise in a specific country. This type of company must be creative, inspired and must have many ideas. However, as Thomas Edison, the inventor of the electric light bulb once said: ‘Genius is 1 per cent inspiration and 99 per cent perspiration.’ What is important here is to recognise the good ideas and to expand upon these ideas so that truly new products may be developed as a result. An inspirational vision of a new product is indispensable in order to be able to do this. Apple, for example, set itself the goal of pushing the limits of people’s creative powers by developing computers. Clear rules are also helpful. The success achieved by product leaders is dependent upon the success they are able to realise in the market, and this can be risky as it involves new products and services which have not yet been accepted by customers. By managing a portfolio of new ideas, they must be able to counterbalance the failure of certain innovations. In order to maintain the role of innovator continuously, they must be able to foresee the obsolescence of innovations; companies such as Intel are already hard at work on the successor to a product generation before that generation is even launched on the market. New product ideas must be developed quickly, and the products manufactured and introduced to the market. Decisions are made quickly at companies like this; there is not enough time to analyse situations and determine all of the things that could go wrong. It is permissible to make mistakes. These companies dare to take risks and are constantly in search of new triumphs. It is important to be able to react quickly and to work on shortening design cycles. Product leaders attempt to avoid every type of bureaucracy and to do what they can to allow talent to blossom. The highest form of acknowledgement for talented people is to be chosen for the next, even more challenging project. The product leaders are proud of their inventions, their brainchildren, and will never compromise when it comes to price. In order to maintain this culture, it is more important for new employees to be like-minded than for them to be experienced in the particular industry.

Customer intimacy The customer intimacy strategy is characterised by the fact that companies build up a relationship with customers. It is not so much the market that becomes the centre of attention, but the individual wishes of customers that count. A great deal of attention is focused on

51

Part II Strategy and organisation

the development of the desired customer base: Whom do we want and whom do we not want as our customers? The company is built up based on the knowledge of the individual customers and their preferences. Products and services are continually adapted to customers’ wishes, without asking excessively high prices for doing so. The company positions itself as a partner for its customers, and takes their problems off their hands, offering them total solutions or helping them to perform better, as the case may be (‘to help build your customer’s business’). The company takes responsibility for the results its customers achieve. Customers do not have to be acquired repeatedly via expensive campaigns. Transactions are subordinate in importance to relationships. A company which employs a customer intimacy strategy looks at the ‘life-time value’ of a customer, not only at the profit or loss of transactions. Examples of companies that implement this type of strategy are private bankers, or a hotel chain such as Ritz Carlton.

CRM illustration According to Lester Wunderman, CRM is also an ‘unreal specification’: The consumer is not interested mainly in relationships with suppliers. He wants a good product for a reasonable price and he wants service. And let’s be honest here: suppliers aren’t really after a relationship. We want the consumer to buy our products and services.

In order to align supply and demand with one another as accurately as possible and to be of optimum service to the consumer, we need information and data from him . . . The term ‘relationship’ also quickly creates an association with invading someone’s private life. Source: Wunderman (2003).

The business model for these organisations has been designed to be able to supply products and services from a broader perspective. With their range of products and services, they are sharply attuned to the customer’s needs, even if it means that they must act as a middleman between the customer and other suppliers of products and services. They will seldom supply the newest products and services; more often it is the reliable and tried-and-tested solutions that they offer. Customers are seen as the raison d’être for these types of organisations. A thorough knowledge of the customer as a person, user and buyer is essential in consumer markets. In business-to-business marketing, however, it is the knowledge of the customer’s company and the processes involved within it that counts. It involves the insights which must be capitalised on. Account managers or customer managers play an important role in these efforts; they are the lynchpins of the organisation, the people who are in close contact with the customers. These individuals are long-term planners. Sometimes it even seems as though there are hardly any boundaries between them and the customer. They are rewarded for retaining and satisfying customers and increasing the turnover per customer. People who are in direct contact with the customer have a relatively high degree of freedom to capitalise on the customer’s wishes. The decision-making authority is delegated to the people who are closest to the customer.

Conclusion Obviously, the value discipline which fits in best with the CRM strategy is the customer intimacy discipline. The distinctive feature of this discipline is that the company wants to get to know the customer and develop a long-term, mutually profitable relationship with the

52

Chapter 3 CRM as an integral business strategy

customer. The company wants to provide the customer with customisation. The customer constitutes the most important reason for the organisation’s existence, and forms the starting point used in formulating the organisational objectives and the determination of the business model for the organisation. It is, even within the context of CRM, highly ambitious. To state that any of the other two value disciplines cannot be combined with a CRM strategy would be simply untrue. Choosing one discipline never allows a company to totally disregard the other two. A minimum level has still to be reached. A product leader has to be at least operationally excellent to the level of most competitors for it to be seen as a reliable organisation, offering state of the art products and services at a realistic price. Furthermore, even the most innovative player in the marketplace will have to adapt their strategy and behaviour to customers, in order to be guaranteed a certain repeat patronage. The core value discipline clearly focuses on the way the organisation wants to deliver value to customers and stakeholders. However, it does not state at what level the other two disciplines will need to function in order for the primary value discipline to be distinctive. It is clear that a product leader can strive to retain current customers, to build mutually beneficial relationships with them and to customise the way they interact with them, even taking it as far as co-creating products with them. The same holds for an operationally excellent organisation. A no-frills airline such as easyJet keeps track of its customers and builds customer knowledge; based upon their travelling behaviour with the company they approach customers with relevant offers at relevant times. With the progress of CRM technology, it is easier for organisations to invest in CRM technology, no matter what their value discipline is. It will allow them to gain more customer insights and to act on these in their interactions with customers. Thus while they will score higher on customer intimacy, we also expect more from them. Threefold, that is: in efficiently managing customers across several touchpoints for operational excellence; in innovating in co-creative processes to become or remain a product leader; and in knowing individual customers and providing tailor-made value as is the intention of the customer intimacy value discipline. It is, however, quite clear that the secondary disciplines will have lower ambition levels, although this does not reduce the need for a CRM strategy. It should, at the very least, describe the nature of the relations the organisation wants to establish with specific customers, as well as what this will mean in terms of mutual benefits and how this can be realised. When Treacy and Wiersema undertook their study, they recommended that the three value disciplines described above should not be combined. It is difficult to excel in every area, all the more so because excellence in all three of the dimensions would create conflicts between them. The tight organisation and centralisation inherent in operationally excellent companies conflict with the ‘looser’ organisational characteristics of product leaders and companies that strive for customer intimacy. Each of the three strategies has a specific culture, and these cultures are difficult to reconcile. Even a company such as Amazon. com has its critics, who feel that it misjudged the situation; combining the individual customer approach with a complete product line and low cost and pricing levels is difficult when company performance is expected to be positive. In order to achieve a ‘state of the art’ individual customer approach, a great deal of effort will have to be put into the development of technology and the recording and analysis of customer data. Maintaining a full line implies keeping a substantial inventory and incurring high logistics costs. It appears that the investments and the costs involved in customer intimacy and product leadership are difficult to recover. Charging higher prices for the personal service and the options is difficult

53

Part II Strategy and organisation

in a market in which the competition is only one click away. The increase in purchase volume is also insufficient to justify the high level of effort in both areas. Amazon.com has also adjusted its ambitions in this regard. Fifteen years later, we are, however, confronted with an increasing number of successful combinations of more than one value discipline. One of the first to appear was Toyota. They introduced the Lexus as an alternative to BMW and Mercedes, offering the same quality, but priced much lower and with more after-sales service. Toyota was able to take advantage of the operational excellence in the Toyota factories, but in the meantime could develop the product leadership and customer intimacy discipline. Hagel et al. (1999) referred to this as ‘unbundling the organisation’, arguing that it is possible to adopt more than one value discipline for as long as the organisation is split into three distinct units. One part would concentrate on innovation and be a product leader, the second would manufacture, transport and maintain operational excellence, while the third would be customer-oriented and adhere to customer intimacy. Also by initiating and building partnerships with other organisations, companies can combine the three value disciplines. A network in which one or two organisations with operational excellence make the product, while new inventions are externally bought and brought to the customer by someone with a customer intimacy discipline allows for the best of all worlds. The pacemaker example cited in Chapter 1 illustrates this approach: the company that produced pacemakers entered into partnerships with telecom operators and local rescue teams to provide consumers with the feeling of safety and to give them the confidence to broaden their horizons once more. Furthermore, over time, companies can elect to follow a growth path. In the early stage of the implementation of CRM systems, companies tend to work on operational excellence. They focus their energy on redesigning the back office. Information on products and services can be retrieved and transactions processed online. Information on the completion of the individual transactions can be retrieved. Customers can view their transaction and communication history in no time. In short, the back office has become accessible for customers in a problem-free manner. The front office can also be developed further and integrated with the back office without problems. The functionality of the internet can increase further; orders can now also be placed and customers have access to and can view their own personal situation. Within the call centre, this also allows for a better response to individual customer queries. Companies which pursue this path will first have to justify investments in CRM from a cost-reduction standpoint. At the same time, a situation is created in which convenience for customers is increased. As was indicated in the example at the beginning of this chapter, an attempt is made to unburden those in the call centre by allowing customers to register their purchases themselves, look up the answers to their questions and so forth. It is only once a state of operational excellence is achieved that the time is considered to be ripe for customer intimacy. The opportunities offered by the infrastructure created may be further developed and utilised by expanding knowledge of the individual customer and using it in contact with the customer. By keeping track of communication and transactions, the supplier increases its insight into the customer. The supplier can truly benefit from the customer knowledge it acquires during its interactions with the customer, and in a relatively inexpensive way; it can supply more customisation, bid farewell to the transaction orientation, and focus on increasing the value of individual customers. The intensity of the relationship with customers may be increased step by step (see the pyramid in Figure 1.1) until the desired level has been reached.

54

Chapter 3 CRM as an integral business strategy

CRM illustration Pieter de Rooy conducted research into CRM in the leisure industry (see Table 3.1). The outcomes portray how organisations believe they deal with CRM themselves. The growth path comprises four stages. The first stage is product-focused, with little to no customer databases and no CRM strategy. The second stage focuses on the database and analytical CRM (see Part III).

The utilisation of databases is still limited and there is hardly any strategic attention placed on CRM. The third level shows relatively high levels of attention placed on operational aspects of CRM. The organisation is quite customer focused. The fourth level shows a strong strategic focus on CRM, with a multitude of CRM applications and a strongly customer-focused organisation.

Table 3.1 Maturity stages in CRM for different types of companies in the leisure industry CRM-stage

Description of stage

Organisation type

Product of market orientation

Little to no database No CRM strategy or implementation

Musical venue, cinema

Database possessors

Fairly complete database with little usage No strategic reflection on CRM Several operational applications of customer data

Camping Travel agent Tour operators Some theatres

Operational focus

Complete database Some strategic uses for CRM Some to many operational applications, Organisation is fairly customerfocused

Hotel Professional football organisation, Congress organiser, Events organiser Some theatres

Strategic focus resulting in a customer-focused organisation

Complete database, Strong strategic deployment of CRM, Multitude of CRM applications in place Strongly customer-focused organisation

Source: de Rooy (2004).

An offensive versus a defensive strategy Strategies can be categorised in numerous ways. Choosing to distinguish between the defensive and the offensive can prove interesting within this framework. An offensive strategy focuses on the conquest of market share, the acquisition of new customers and ridding oneself quickly of any competition. It is a strategy that has been typical in marketing for many years. The defensive strategy, on the other hand, focuses on maintaining and defending one’s position. Barriers are thrown up to keep the competition at bay. Of the three strategies identified by Treacy and Wiersema, the customer intimacy strategy is the defensive strategy which focuses on customer retention and the other two are viewed as the offensive strategies. In the case of operational excellence as well as that of product leadership, the organisation strives to expand its customer base (see Figure 3.1). The differences between the strategies have consequences for the standards by which the success of the strategy is measured. In an offensive strategy, the market share represents an important criterion for success, whereas with the defensive strategy, ratios such as customer churn, sales per customer and customer satisfaction play a more important role. In some cases, the value of a customer is calculated in terms of the total number of purchases made

55

Part II Strategy and organisation

Figure 3.1 Offensive versus defensive strategies Table 3.2 Success criteria for an offensive and a defensive strategy (in a saturated market; market share versus commitment) Objective Market conditions Primary focus Success measured by

Market share strategy

Strategy commitment

Customer switching Saturated market, little growth Competition Market share relative to competition

Customer commitment Saturated market, little growth Customers Customer retention Turnover/customer profitability

in the period they have been buying from the supplier. This is referred to as the ‘life-time value’ of a customer (see Chapter 10). Both strategies are set out against one another in Table 3.2 to illustrate a situation of a saturated market with little growth.

3.2

The context of the CRM strategy To what degree an organisation strives to develop relationships with the right customers, depends on the context. Is the organisation more capable than others of actually developing individual relations with customers and does this match with opportunities in the relevant market and the external environment?

internal In order to develop a CRM strategy, an organisation must first meet certain pre-conditions. The situation must be avoided in which a company ultimately chooses to implement a CRM strategy based on negative considerations: for example, if it encounters problems with the quality of its products, their positioning or the logistics, and/or feels the competition breathing down its neck. In effect, the company is not sufficiently capable of translating its customers’ wishes into products and services. As a result, customer loyalty is decreasing and switching behaviour develops. The option to implement customer intimacy seems like

56

Chapter 3 CRM as an integral business strategy

a solution. In reality, the symptom of customer churn is being treated instead of the actual business problems. The fact that a CRM strategy has the effect of increasing customer expectations is overlooked. By paying attention to individual customers and wanting to develop a relationship with them, those customers will feel special and expect a special delivery performance. However, this is precisely where the company’s problems lie. The end result is that now more than ever the company is forced to face facts. The situation described here is not a hypothetical one; whether it involves supermarkets, financial institutions, airlines or car manufacturers, if one looks, one will find examples in a multitude of industry sectors. The arguments at the heart of the choice to implement a CRM strategy must be positive. The consequences of the strategy for the organisation will have to be examined thoroughly (see Chapter 4). Clarification will have to be given of what the company hopes to achieve and the business model behind the strategy will have to be established. The organisation must be able to see the reasons for its existence in the customer. The company’s success will be dependent on the development of relationships with the right customers. The CRM system will have to be able to be fully developed for the purpose of achieving this goal. The company will have to be built up around the right customers. Those people who work closely with the customer will be the ‘heroes’ of the organisation and must be allowed a great deal of freedom and authority. Even involving the competition’s products is one possibility, if customers specifically request this. In short, CRM not only involves the marketing or the IT function within a company, but has a way of becoming interwoven in all the departments within the organisation.

External A CRM strategy must also be in tune with the market and the broader external environment, as described under the next three sub-headings.

Customers The intended customers will have to appreciate a relationship with the supplier; it is insufficient for the supplier alone to have an interest in a long-term bond with the customer. Certainly not all customers will experience this need; there are countless suppliers with whom they do business and at best, it is only a small, select group with whom they would like to build a relationship. To do this, they will have to become involved with the supplier and its solutions. Furthermore, the personality of the customer or the culture of the purchasing company will have to be taken into consideration. Some customers do not place any value whatsoever on the development of a relationship with a supplier. Within the scope of a CRM strategy, customers will also have to accept a differentiated marketing approach. Good customers will be better served and rewarded. As long as the customer refuses to accept this, a CRM system in which a distinction is made between customers cannot be implemented. It appears that this differentiation presents more of a problem in consumer markets than in business-to-business markets, where this is a much more accepted way of doing business (Peelen et al., 1996).

Competition The success of a CRM strategy also depends on the competition encountered in the market. In essence, a supplier that operates in a market in which it has a monopoly will have to expend less effort to increase customer loyalty than it would if it were active in a market in

57

Part II Strategy and organisation

which it is up against heavy competition. In the United States, the local telephone companies have a monopoly on the regional services they provide; it is only in the long-distance telephone services market that they have competition. Car manufacturers, on the other hand, must compete with a large number of other producers to win the favour of the customer. A great deal is required before customer satisfaction translates into loyalty (see Figure 3.2). Their expectations will have to be exceeded to a very high degree. Suppliers will have to consider whether this will ultimately be worth their while or whether a more offensive strategy is preferable.

Distribution Companies that employ intermediaries to serve their customers need to find the opportunity within a CRM strategy to strengthen their ties with customers. A certain degree of alienation can occur between the supplier and the final customer, particularly if the intermediaries occupy a powerful position. A CRM system, and usually also a CRM strategy, can offer a solution in this situation. By recording individual customer data and communicating with final customers via the internet, telephone and perhaps even personal contact, a relationship may

Figure 3.2 The influence of competition on earning customer loyalty Source: Jones and Sasser (1995). Reprinted by permission of Harvard Business Review. From ‘Why satisfied customers defect’ by Jones, T.O. and Sasser Jr, W., November/December 1995. Copyright © 1995 by the Harvard Business School Publishing Corporation; all rights reserved.

58

Chapter 3 CRM as an integral business strategy

be developed. These companies will remain reliant on the intermediary for the initiation and completion of transactions, as the intermediary is better able to perform these tasks. This is a situation that we encounter in the insurance industry, for example, and also in the car industry where importers may contact owners of a particular brand directly. In all of these cases we are confronted with potential channel conflicts because the intermediaries feel threatened by the actions of suppliers. The suppliers approach the final customer directly and could lower the compensation for the middleman or even start selling directly to customers. The final design of the CRM strategy will have to take these risks into account, and whether and how CRM may be employed to the benefit of all the parties involved will have to be considered (see Chapter 4).

3.3

The results of a successful CRM strategy The relationship between customer and supplier will have to protect the supplier from any action taken by the competition. The bond between customer and supplier will have to lead to a situation in which customers will not succumb to the temptation offered by other suppliers. The supplier should be able to make a mistake without the continuity of the relationship becoming an issue. The customer will be convinced of the supplier’s will and ability to satisfy him and will characterise this incident as a one-off and as one without long-term consequences. The customer will even expect that the supplier will adapt to changing circumstances and still be able to qualify as the best partner. Rowe and Barnes (1998) expect that only close, positive, two-sided relationships in which both partners respect and are committed to one another have the potential to lead to a long-term competitive advantage. The development of this type of relationship is a very complex phenomenon which is difficult for the competition to imitate and one that will, in all likelihood, be quite rare (Rowe and Barnes, 1998). If the company utilises its skill to develop these relationships in the proper manner, it will not only have the power to create a long-term competitive advantage, but will also actually accomplish this. In other cases, CRM is expected to contribute to reaching a level equal to that of the competition, obtaining a temporary head start on the competition, or reducing the distance the company lags behind the competition. These cases also involve an improvement in position which can have a positive effect on the financial performance of the organisation. The theory that customer–supplier relationships can actually lead to an improvement in financial results has been demonstrated in various studies. We can attach value to the study of Fornell and colleagues that have shown that for US organisations the investments in customer satisfaction lead to higher market values and lower risk ratings. In other words, organisations with satisfied customers prove to be a high-worth, low-risk investment (Fornell et al., 2006). Normally investors should be willing to settle for higher-risk profiles if returns are higher. Investments in customer satisfaction are so far not giving rise to changes in stock market values. It seems as though stock markets have a hard time processing this information (Fornell et al., 2006). Reichheld (2005) proposes that the long-term sustainable growth rate of an organisation is influenced by the intensity with which customers are likely to recommend it to others. In order to measure the recommendation intentions of customers, he has developed the Net Promoter Score, which can be calculated by subtracting the percentage of Detractors from

59

Part II Strategy and organisation

the percentage of Promoters (see Chapter 1, CRM illustration ‘The ultimate question’, paragraph 1). For future profitable expansion or growth, fair profits are a prerequisite. These are profits gained through increase of revenue and margin based on propositions that increase customer success and turn them into fans or ambassadors of an organisation. So-called unfair profits are profits that are a result of cost-cutting on service levels or revenue increase through aggressive sales techniques. They have a short-term impact and an adverse relationship with long-term growth. These tactics discourage customers from repurchasing and inspire negative word-of-mouth publicity, decreasing the odds that other potential customers in an existing customer’s social network will purchase from this organisation. Reichheld has seen his findings verified in academic studies. While the results are hardly flattering for the model that Reichheld proposes, they are not without use for CRM; most proof of CRM success is based on studies into customer satisfaction. Morgan and Rego (2006) have researched correlations between corporate performance on the one hand and average customer satisfaction (on a 0–10 scale) on the other, the percentage of customers that is highly satisfied (on a scale of 0 to 10; customers rating 7 or higher), the percentage of complaining customers and the Net Promoter Score. They made use of the ACSI database, where data are collected on more than 50,000 US corporations from over 40 different industries, representing some 40 per cent of the total gross national product (GNP) of the United States. It turns out that both market factors and the organisation itself influence corporate performance. Significant differences occur: there are markets where it is hard to make a difference as an organisation and there are others where organisations can easily set themselves apart. The net promoter score that Reichheld introduced shows no significant correlation with either revenue growth or profitability of an organisation. It seems that the recommendation intention is, quite contrary to what Reichheld claims, not the best indicator for sustainable growth. The significance of the NPS is exaggerated. One can attach more value to the intention to perform repeat purchases, which accounts for over 15 per cent of variations in market share and up to 4 per cent of shareholder value for the organisation. Also, average customer satisfaction rates higher as an indicator than the net promoter score and is equal to the repeat purchase intention in terms of predicting market share variations. It explains almost 5 per cent of the variation in net present value of operations. Customer complaints have an adverse effect on corporate performance. Complaints however are not shown to have an effect on average customer satisfaction in general (Morgan and Rego, 2006). Research performed in Sweden equally disproves Reichheld’s claim that the net promoter score is a better predictor of future growth than satisfaction. Research was conducting using the NCSB databank, a database containing data on 21 Swedish organisations (and over 15,500 interviews) including customer satisfaction, likeliness to recommend and intention for repeat purchases. The research indicates that a 1 per cent increase in customer satisfaction can lead to an improvement of the return on investment (ROI) with 2.37 per cent, while a 1 per cent decline in satisfaction accounts for a negative development of ROI with 5 per cent. On a five year basis a 1 per cent increase in satisfaction leads to an ROI increase of as much as 11.4 per cent (Keiningham et al., 2007). Another US study shows that the net promotor score proved a better indicator only in one out of the three markets researched, namely life insurance. In the computer market and airline industry, satisfaction was a better indicator of future growth (Cooil et al., 2007).

60

Chapter 3 CRM as an integral business strategy

A 1 per cent increase in the satisfaction as measured by the ACSI index leads to an increase of corporate value of 1.016 per cent. One might expect investments in CRM to result in an increase in stock market value, revenue and profitability. These are the common thoughts underpinning CRM, because it is more lucrative to sell to current customers than to sell to new customers. Loyal customers will prove more profitable over time, because they do not require large acquisition bonuses and aggressive promotions in order to be lured in and tend to focus less on formal aspects of the relationship, such as price. Not all markets will obey these rules, however. For a US service provider in the high-tech industry a weaker relationship between loyalty and profitability has been found. Only half of the customers who purchased regularly over a period of two years were profitable. The most profitable customers were the so-called ‘blow-ins’ or ‘passers-by’, who bought many high margin products over a short period of time, before disappearing again. Their intention to repeat purchases was and is very small (Reinartz and Kumar, 2002). Investing in loyal customers while disregarding transactional custodianship would, for this organisation, have had very negative consequences. The basic premise behind relationship marketing is that it pays to retain customers. Reducing customer churn by 5 per cent has a huge impact on the profitability of an organisation. Figure 3.3 illustrates the results for several industries and shows that the benefits are not equal in all industries or market situations.

Figure 3.3 Influence of a 5 per cent reduction in customer churn on customer profitability Source: Reichheld (1996). Reprinted by permission of Harvard Business School Press. From The Loyalty Effect by F.F. Reichheld, Boston, MA 1996. Copyright © 1996 by the Harvard Business School Publishing Corporation; all rights reserved.

61

Part II Strategy and organisation

Gupta and others (2004) have found similar results in academic research. They proved a 1 per cent increase in the retention rate equals an increase in stock market value of 5 per cent. The effect of customer retention on stock market value is five times greater than that of a 1 per cent change in an organisation’s capital costs. An organisation that puts efforts into reducing churn, thereby building loyalty, is only just beginning to adopt CRM; the ambition level will most likely increase if the organisation further develops the relationship with customers. The increase in profitability is ideally related to the fact that serving loyal customers entails fewer costs than serving new customers. Repeat customers also tend to buy more, buy more often, pay a price premium for customised products or services and function as an ambassador in terms of bringing in new customers. Figure 3.4 shows how these effects contribute to customer profitability and are a representation of the results found by Reichheld in 1996 among customers of his employer, consultancy agency Bain Co. These results again have been critically evaluated in academic research. Reinartz and Kumar (2002) studied a service provider in the high-tech industry, a mail order company, a supermarket organisation and a broker. They found no proof to corroborate the thinking that it is cheaper to serve loyal customers on the basis of familiarity with the organisation. For the service provider in a high-tech industry, they even found evidence to the contrary. Loyal customers seemed to know their worth to the organisation and were more demanding, actually increasing the cost to serve. Likewise, the effect of the price premium does not occur. There seems to be an aversion to organisations abusing customer loyalty to increase prices. In three out of four examples, Reinartz and Kumar found loyal customers pay anywhere from 5–9 per cent less. Only the broker uses a ‘same price for everyone’ model. A weak correlation was found between the relationship duration and the likeliness to recommend. It seems that every organisation will have to work out for itself how investments in customer loyalty and relationship development translate into financial results and better corporate performance.

Figure 3.4 Effects of customer loyalty on customer profitability Source: Reichheld (1996). Reprinted by permission of Harvard Business School Press. From The Loyalty Effect by F.F. Reichheld, Boston, MA 1996. Copyright © 1996 by the Harvard Business School Publishing Corporation; all rights reserved.

62

Chapter 3 CRM as an integral business strategy

3.4

Conclusion The introduction of a CRM system on its own is not a sufficient condition for the implementation of a CRM strategy. Organisations which deploy these systems to get to know customers, communicate with them and build long-term, mutually profitable relationships are implementing a customer intimacy value strategy. A company whose objective in implementing a CRM system is to lower costs or increase productivity and convenience for customers has opted for operational excellence. Customer intimacy can certainly not be applied successfully in all situations. It places demands on the organisation. The company will need to have its ‘house in order’ – the brand must be recognisable and distinctive, the quality of the products good and the logistics system reliable. There cannot be any negative considerations underlying the choice to implement a CRM strategy, only (primarily) positive ones. Moreover, the consequences of a CRM strategy must be analysed from an organisation-wide point of view and the external opportunities it offers must be recognised. The right customers value a relationship with the supplier and accept the different methods the supplier uses in its approach to customers. The competition and the distribution are such that they do not undermine the success of the CRM strategy. It is only in these types of environments that the CRM strategy can lead to positive financial results because customer churn is reduced and the customer life-time value is increased. After all, it is only in those extreme cases in which actual long-term, mutually profitable relationships are allowed to blossom that CRM can lead to a long-term competitive advantage.

CASE STuDY Starbucks in the uS In 2008, Starbucks, with over 15,000 stores in 43 countries and serving 50 million customers a week, was the world’s leading retailer, roaster and brand of specialty coffees. During the 1990s and thereafter, the company expanded rapidly – especially in the US. However, trouble started brewing at Starbucks in 2006 and come 2008, it threatened to spill over. With sales of $9.4 billion and its growth targets and expansion into Asia being on track, it would seem that all was well. In fact, Starbucks was facing its first serious crisis in many years – its share price had fallen by more than 40 per cent for the first time since it listed. The question is what are Schultz’s [the CEO’s] priorities and how should he go about addressing them? Starbucks was originally positioned as a ‘third’ place between work and home where one could come, listen to music, relax and drink great coffee. The baristas were expected to be friendly and to know customers’ names and their favourite drink on their next visit. The need to be pleasant and friendly with customers was emphasised. The company had a strong employee culture. Schultz acknowledged that he built the brand with his people, not consumers. Schultz’s objective became to make Starbucks a national company with a presence in every major city. The company accelerated its store openings at the end of the 1980s and in

➨ 63

Part II Strategy and organisation

Case study (continued) the 1990s it could count thousands of stores. All through the years the company invested heavily in these stores, as they refrained from franchising. Finding the right location was therefore crucial. An error in judgement on a new store would cost the company at least $500,000 and even more for a flagship store. The company also started a mail order business. It dates from the mid-1970s and allowed mail order buyers to obtain Starbucks’ products. These buyers appeared to be the most loyal customers. Areas where they found concentrations of mail order buyers appeared to be the best locations for (new) Starbucks’ stores. Starbucks also formed a number of partnerships to serve a broader customer base. It set up the North American Coffee Partnership with Pepsi to manufacture and distribute coffee drinks. The first product, Mazagran – a cold, carbonated coffee beverage – was a failure. However, the next product – bottled Frappuccino – was an instant hit and heralded Starbucks’entry into the supermarket and the ready-to-drink beverage business. Furthermore, the company initiated partnerships with bookstore chain Barnes and Noble and Chapters Inc., food and beverage company Kraft Foods, hotel chains Host Marriott International and Hyatt International and also got the United Airlines and Horizon Air accounts. In addition, it experimented with drive-through windows in locations where speed and convenience were important, with kiosks in supermarkets, lobbies and other public places. The company started to use FlavorLock bags to retain the freshness of the coffee. It made the expansion strategy feasible, according to Schultz. Starbucks came to be known for its dark roast specialty coffees and also leveraged the brand to build complementary products and service. They produced a successful line of music CDs, as a result of an extremely popular in-house music programme. They further acquired their own music label, Hear Music and launched Hear Music Coffeehouses. The downturn began in 2006. An article was published in Business Week: ‘The coffee quality has been declining, especially as stores went from brewing coffee to pushing buttons on machines. The atmosphere of the stores has become all-too familiar.’ Store sales declined in 2005 by 9 per cent and in 2006 by 7 per cent. The introduction of a warm breakfast to boost sales did not help. In the meantime, prices for food commodities reached an all-time high in the US. Consumers were no longer willing to spend so much on a cup of coffee at Starbucks. In February 2007, Consumer Reports, a trade magazine, rated McDonald’s filter coffee as better not just in flavour but also in price. Starbucks’ share, which had been on a constant upswing ever since the company went public, also slumped. The share price plummeted by 42 per cent – making it one of the worst performers on the Nasdaq stock exchange in 2008.

Questions 1 Treacy and Wiersema distinguish between three value disciplines, i.e. operational excellence, customer intimacy and product leadership. Which value discipline(s) has Starbucks applied in recent years? Give arguments. 2 Would you characterise Starbucks’ strategy as a defensive or offensive strategy? Give arguments for your choice. 3 What are your recommendations for Starbucks in the US if you want to build a sustainable company that is expanding in line with shareholders’ expectations? Source: Shanul Jain, in: de Wit and Meyer (2010). © IBS Case Development Centre

64

Chapter 3 CRM as an integral business strategy

QuESTionS 1 Under which market circumstances is it unwise to aim for customer intimacy? Give two examples. 2 Why does the combination of the product leadership, customer intimacy and operational excellence lead to problems? Explain your answer by providing an example. 3 Think of five examples of companies which implement customer intimacy. Explain your answer. 4 In your opinion, is it possible for the manufacturer of a low-involvement product such as biscuits or crackers to implement the customer intimacy value discipline? Explain your answer. 5 Why is the customer intimacy value discipline considered to be a defensive strategy? Explain your answer. 6 Is it possible to combine the deployment of a customer intimacy strategy and the maintenance of an indirect system of distribution? Explain your answer. If your answer is yes, provide an example. 7 Can you explain why investments in customer satisfaction lead to a higher return on investment as well a reduction in risk? 8 What explanation do you have for the fact that the ‘blow-ins’ of a service provider in the high-tech industry contribute more to profitability than loyal customers do? 9 Reichheld has studied the effects of reducing customer churn on customer profitability in a variety of markets (see Figure 3.3). A substantial difference may be observed between the life insurance market and that for software products. In your opinion, what is a possible explanation for this? Explain your answer.

References Ambler, T. (2005) Maximizing profitability and return on investment: A short clarification on Reinartz, Thomas and Kumar, Journal of Marketing, 69, 10, 153–4. Anderson, E.W., Fornell, C. and Mazvancheryl, S.K.(2004) Customer satisfaction and shareholder value, Journal of Marketing, 68, 10, 172–85. Chandrashekaran, M., Rotte, K., Tax, S.S. and Grewal, R. (2007) Satisfaction strength and customer loyalty, Journal of Marketing Research, 44, 2, 153–63. Cooil, B., Keiningham, T.L., Aksoy, L. and Hsu, M. (2007) A longitudinal analysis of customer satisfaction and share of wallet: investigating the moderating effect of customer characteristics, Journal of Marketing, 71, 1, 67–83. Fornell, C., Mithas, S., Morgeson III, F.V. and Krishnan, M.S. (2006) Customer satisfaction and stock prices: high returns, low risk, Journal of Marketing, 70, 1, 3–14. Gruca, T.S. and Rego, L.L. (2005) Customer satisfaction, cash flow and shareholder value, Journal of Marketing, 69, 7, 115–30. Gupta, S., Lehmann, D.R. and Stuart, J.A. (2004) Valuing Ccustomers, Journalof Marketing Research, 41, 2, 7–18. Gustafsson, A., Johnson, M.D. and Roos, I. (2005) The effects of customer satisfaction, relationship commitment dimensions, and triggers on customer retention, Journal of Marketing, 69, 10, 210–18.

65

Part II Strategy and organisation Haenlein, M., Kaplan, A.M. and Schoder, D. (2006) Valuing the real option of abandoning unprofitable customers when calculating customer lifetime value, Journal of Marketing, 70, 7, 5–20. Homburg, C., Koschate, N. and Hoyer, W.D. (2005) Do satisfied customers really pay more? A study of the relationship between customer satisfaction and willingness to pay, Journal of Marketing, 69, 4, 84–96. Jain, S. (2009) Starbucks in US: too much coffee all spilling over?, in Wit, B. de and Meijer, R. (2010) Strategy, Process, Content and Context, 4th edn, North Way: South-Western Cengage Learning. Johnson, M.D., Herrmann, A. and Huber, F. (2006) The evolution of loyalty intentions, Journal of Marketing, 70, 4, 122–32. Jones, T.O. and Sasser Jr,W. (1995) Why satisfied customers defect, Harvard Business Review, November–December, 88–100. Keiningham, T.L., Cooil, B., Andreassen, T.W. and Aksoy, L. (2007) A longitudinal examination of net promoter and firm revenue growth, Journal of Marketing, 71, July, 39–51. Leuthesser, L. and Koli, A.K. (1995) Long-term manufacturer–supplier relationships: do they pay off for supplier firms?, Journal of Marketing, 59, January, 1–16. Morgan, N. and Rego, L.L. (2006) The value of different customer satisfaction and loyalty metrics in predicting business performance, Marketing Science, 25, 5, 426–39. Palmatier, R.W., Gopalakrishna, S. and Houston, M.B. (2006) Returns on business-to-business relationship marketing investments: strategies for leveraging profits, MarketingScience, 25, 5, 477–93. Peelen, Ed et al. (1996) Thema dossier Relatiemarketing, Platform ’95, Amsterdam. Reichheld, F.F. (1996) The Loyalty Effect, New York: The Free Press,. Reichheld, F.F. (2003) The one number you need to grow, Harvard Business Review, 12, 46–54. Reichheld, Frederik F. (2005) The Ultimate Question, Boston, MA: Harvard Business School Press. Reinartz, W. and Kumar, V. (2002) The mismanagement of customer loyalty, Harvard Business Review, 7, 86–92. Rooy, P. de (2004) Inzet customer relationship management de moeite waard, Vrijetijdstudies, 22, 4, 47–51. Rowe, W.G. and Barnes, J.G. (1998) Relationship marketing and sustained competitive advantage, Journal of Market-Focused Management, 2, 3, 281–97. Treacy, M. and Wiersema, F. (1996) The Discipline of Market Leaders, New York: HarperCollins. Wit, B. de and Meyer, R. (2004) Strategy, Process, Content, Context, rev. edn, St Paul, MN: West Publishing Company. Wunderman, L. (2003) Direct marketing is geen tactiek om een economische dip te overbruggen, Insight, 3, 3, 24–5.

66

Chapter

4

The relationship-oriented organisation The ultimate goal of organisations striving for sustainable relationships with the right customers is that collaborating with these customers should energise and motivate their employees. Customers provide the inspiration to further improve performance. The opposite situation, an example of which is illustrated in the ‘Practitioner’s insight’ box overleaf, should be prevented. Customers who are not worth the investment of time and effort should possibly be referred to a competitor. To foster a mutually beneficial relationship that enables employees to become inspired by the right customers, an organisation needs to invest in its mission, culture, staff, structure and control systems. It needs to create an organisational environment that fosters and rewards this quest for customer satisfaction and relationship building. Many an organisation has failed to achieve the customer focus targets they set for themselves. In order to improve their performance in this area, the organisation as a whole will need to undergo several changes, maybe even a complete transformation process. The changes are demanding and entail some risk. Old habits are being broken down, while the new ones are still being developed and require constant fine-tuning. Strong, enduring and committed leadership is needed to guide an organisation through the change process. In this chapter we will address the challenges faced and the type of leadership required, as well as the sense of mission, the culture, the staff, structure and control mechanisms that together help shape a coherent and meaningful relationship-oriented organisation. In this chapter we will address the following questions: ●

What are the requirements for an organisation to successfully realise a CRM strategy in terms of leadership, culture, structure, systems, communication, human capital and control mechanisms?



To what degree do we appear to be capable of successfully creating relationshiporiented organisations?

67

Part II Strategy and organisation

PRACTITIOneR’s InsIGHT Service manager John Smith: Customers are great, as long as they don’t bother you. They interrupt the business process and keep you from your work. They contact you for every little trifle and expect an immediate solution from you while they’re not even capable of remembering their customer number and giving it to you. They’ve forgotten how to be grateful, yet seem to have become all the more skilled at negotiating. When it comes to doing something in return, they suddenly speak a different language. The arguments they use in the after-sales period contrast sharply with the subjects they offer up during price negotiations. During the sales process, you hear constantly that there are ten other companies out there just like you, but when it comes to service, they remind you of your commitment to the relationship. They remember everything if it works to their advantage, yet when it benefits them to forget something, they will do it in a heartbeat . . .

And you want to set up a relationship-oriented organisation?

4.1

The challenge and leadership Transforming the organisation from a product orientation to a customer or relationship orientation entails demanding changes. An organisation consists of a group of people who are jointly competent in a certain field or activity. If we choose to simplify the situation and use a metaphor, a football team works well. Not only does the team specialise in playing the game of football, it has a certain style, a way of playing together. The transformation we seek can be compared to not just changing the style, but to changing the game altogether. We are making the team play hockey. The game is different, the rules have changed. What constituted good play in one game is foul play in the other. Other competencies are required, the pitch has changed and the stadium is completely different in terms of size and atmosphere. When we project these changes onto organisations, we see system changes occur. Processes have to be fine-tuned to meet customer demand. Departments and units will have to be created around these customer-oriented processes rather than around a particular internal specialism or a means of production. The control mechanisms need to contain performance measures that steer the organisation towards increased customer satisfaction and long-term relationships, instead of rewarding improved efficiency. Old habits will have to be abandoned and new behaviour, requiring new competencies, needs to be embraced. The corporate culture will have to change as the customer-oriented mission outlines values, ambitions, habits and essential characteristics of the organisation that are different from those it had before. The odds of success in such a full-blown transformation, if executed head-on, are fairly small. We have used a metaphor to help illustrate the immense challenges we face, but would not recommend asking the football team to become a hockey team in a day. A more gradual approach seems appropriate, although obviously many of the structures, competencies and basic understandings of ‘the rules of the game’ are already instilled in the organisation and its employees.

68

Chapter 4 The relationship-oriented organisation

During the transformation, however, leadership is of the essence. One or more leaders will have to develop a vision, create support, break down resistance, energise and inspire people and set in motion activities that direct the organisation towards a new future. These leaders will require the assistance of advocates, the so-called ‘champions’, key figures in the organisation who help set it on the path towards realising the vision. Formulating a roadmap can be complex, especially if the terrain is uncharted and both the road to travel and the ultimate goal are yet to be fully explored. Research into the success and failure of CRM (among others by Peelen et al., 2006) shows that leadership is one of the most important drivers of success. The odds of a CRM initiative succeeding if top management does not show long-term commitment to a vision, are slight. This in turn raises the question of what constitutes successful leadership? How much knowledge of CRM is really required in leadership? Should leaders be aware of the systems, the processes, the people, the marketing approach, etc.? Should they be able to clearly communicate, motivate people, move projects forward and remove resistance? Should they be capable of winning the trust of owners and shareholders in order to embark on the journey towards a more customer-oriented organisation? If the answer to all these questions is a confident ‘yes’, the number of suitable candidates will be limited. In real life, several senior managers will be delegated the responsibility of leading and/or managing the transition because of their particular skills in one or more of the areas listed above. These leaders will need to keep a sharp eye on the horizon and a clear focus on the ultimate goal.

4.2

Mission The starting point for a relationship-oriented organisation is the cultivation and optimisation of commitment between the customer and supplier during their long-term interactions (Peelen et al., 1996). Commitment reflects the both parties’ intention to continue the relationship in the future, regardless of any changes which may occur. First and foremost, the foundation for these future plans is the concept of trust. Trust is based on the conviction that the other party will fulfil its promises. It indicates the degree to which the other party strives to meet objectives which complement its own ambitions; or the degree to which the other has a reputation to uphold, meaning it cannot afford to act in an untrustworthy manner; or that it would consider it immoral to operate unreliably. Second, commitment increases along with customer satisfaction, which occurs when expectations are met or exceeded. Third, commitment is influenced by the attractiveness of the relationship: how attracted is the customer by any alternatives to this relationship that may exist. Finally, ‘switching’ costs play a role. They indicate how many problems a customer will encounter in ending the current relationship and starting a new one. This striving for customer commitment stands in sharp contrast to the ‘traditional’ organisational approach in which a transaction orientation tends to dominate and the focus is on groups of homogeneous customers rather than on individual relationships. The ‘traditional’ organisation tends to expend considerable effort on acquiring new, predominantly ‘floating’ customers. New products, interesting offers and appealing brands are important weapons in the battle to win the customer’s favour. The relationship-oriented organisation adopts a longer time horizon. Their primary interest lies not in the profit made on an individual transaction, but in the so-called lifetime value of the customer. Their goal is to increase the net present value of the profit contribution

69

Part II Strategy and organisation

Figure 4.1 The Ashridge mission model

made by a relationship. This may be accompanied by the absorption of an additional loss during the initial transactions. Efforts are made to win the relationship for the company. The company makes a point of learning more about the needs and desires of the individual customers, and examines the uncertainties experienced within the relationship. Knowledge is accumulated in this regard, and action is taken based upon this knowledge. The preference is for working with customers to develop and supply customised solutions; either party may take the initiative and there is never only one party that always takes the lead. Communication with customers takes place on an individual level. One-way traffic is kept to a minimum; two-way interaction with customers has clear priority. Based on the Ashridge model (see Figure 4.1) the crucial characteristics of the relationship-oriented organisation may be expressed within a mission as follows:

70



The objective: the organisation’s primary reason for existence is to serve the customer; the idea behind this being that if the relationship with the customer is cultivated, the secondary goals of the organisation will ‘automatically’ be realised.



The strategy: with an awareness of the company’s own identity, the brand image and the group with whom a relationship is desired, the company can work on deepening and broadening the relationship; the primary focus is not on the products or transactions but on the relationship.



The code of conduct: this involves the manner in which relationships are approached; people should be putting themselves in the other person’s position (empathising), creating trust, profiling themselves as attractive, open and sincere, lending substance to the relationship and increasing commitment.



The values: in relationship marketing these may be formulated as: ‘the company likes customers’, ‘the company takes the customer’s situation seriously’.

Chapter 4 The relationship-oriented organisation

The mission is crucial to the success of the relationship-oriented organisation. The chances of a relationship-oriented company succeeding are slender if top management (Peelen et al., 1996): ●

focuses too much attention on the short term and the costs;



is composed of ‘number crunchers’;



does not dare to take enough risks;



displays too much reactive behaviour;



does not have enough entrepreneurial spirit;



does not have enough vision.

In such circumstances, marketers will have to demonstrate short-term success. They are capable of seeing the importance of CRM, but are forced to engage in ‘efficiency marketing’ or to focus on short-term goals. There is less opportunity to focus on a consistent policy. A mission in and of itself does not provide enough guidance for the relationshiporiented organisation. Primarily, there must be what is known as a ‘sense of mission’ present within the company. It is only after the people within the organisation feel committed to the mission that it will come to underpin their thoughts and actions within the organisation. Everyone is expected to make an effort to cultivate commitment with respect to customers from certain convictions, values and with a specific goal in mind. The customer will recognise the relationship with the people who work for the company. The relationship must not be limited to the one contact person with whom the customer often deals and who shields the customer from the rest of the company – that person potentially prevents the customer from communicating with internal or task-oriented people. Companies who opt for this solution run the risk that customers will commit not to the organisation but rather to the contact person. If this person leaves the company to work for the competition, there is a chance that a number of customers will follow. Employees will only commit to the mission if their individual values coincide with those of the organisation as a whole. Achieving this type of match is difficult because neither organisations nor people formulate their values and goals explicitly. In most cases, these must be derived from behaviour. In the mission planning process, the manner in which a ‘sense of mission’ is obtained must be taken into consideration. In addition to the goals, strategies, values and codes of conduct of those designing the mission plan, focus must also be placed on the values of other involved members of the organisation. During the mission planning process, strategy formulation, human resources and organisational issues converge. Ultimately, a mission will have to be identified for which the majority of the people in the organisation feel it is worth striving. Behaviour that is symbolic of the value system and central to the implementation of the strategy will have to be identified.

4.3

Culture One of the most vital aspects in a relationship-oriented organisation involves the culture. The culture consists of the beliefs, norms and values which are adhered to by the people within an organisation and which have repercussions on their behaviour. In particular, it is behaviour

71

Part II Strategy and organisation

that determines whether an organisation is relationship-oriented. The simple fact of whether the personnel in an organisation refer to customers as ‘accounts’ or ‘clients’ can provide a fairly good indication of the company’s relationship orientation. The way in which employees get along with one another can be equally indicative. Usually the way in which customers are approached reflects the organisation’s internal etiquette (Horovitz and Panak, 1992).

The relationship-oriented culture The culture of a relationship-oriented organisation is characterised by the fact that it understands customers: its employees can place themselves within their customer’s world and empathise with them. During brainstorming sessions with marketers, the culture within a relationship-oriented organisation has been further classified based on the following statements: ●

People dare to show their true selves. There is openness and insight into who they are. People have the courage to put themselves in a vulnerable position. They dare to show character. They make it clear that they like people.



People with ‘well-developed right brain hemispheres’ are deployed. It is not only the rational types who are allowed to decide what will happen within the organisation; they are not equipped with sufficient emotional intelligence to empathise with others.



Overtures are made in the proper manner. A sufficient level of empathy is shown with others; they are creative and display individual and surprising behaviour.



People come across as sincere. If not, customers could get the impression that they are being manipulated in a relationship by a marketer. They prevent the customer from perceiving attention from the supplier as being purely for show or, even worse, from thinking that the company is using false intentions to play upon their personal feelings, that the only goal is to realise a transaction. Customers are left with a feeling that they have been abused and the supplier can forget any hopes it might have had for a relationship.

Interest Employees who subscribe to the norms and values which apply within the company may become emotionally involved in the organisation and are prepared to make extra efforts in the interest of the relationships (Horovitz and Panak, 1992). In addition to employees, customers may also become involved in the corporate culture. A company with a strong, uniform culture can also adapt more quickly. The employees within an organisation are similar in certain respects and hold some of the same beliefs. Faced with certain challenges and problems, they will demonstrate a preference for similar actions and solutions, independently of one another, thereby allowing more relaxed procedures and the delegation of responsibility and decision-making authority. The organisation may become ‘flatter’ and in a position to make decisions and take action more quickly. A strong culture influences the behaviour within organisations. A situation arises where: ‘That is just the way things are done here, there is no alternative.’

Creating a corporate culture It has been firmly established that a corporate culture influences actions and therefore the company’s relationship orientation. However, there are often still question marks surrounding the feasibility of creating a corporate culture. After all, it is extremely difficult to force

72

Chapter 4 The relationship-oriented organisation

employees within a company to accept fundamental norms and values. Moreover, these tenets are not often described in precise terms, nor it is clear how they may serve as guidelines for action taken in a variety of concrete situations. Additionally, we often encounter more than one group culture within organisations. The norms and values of the managers, for example, differ from those of the factory employees; while the two will have many overlapping areas, there will be other areas that conflict. It appears that the corporate culture is more impressionable than was originally thought. However, this requires a thorough approach and a long-term horizon. According to Horovitz and Panak (1992), it is important to:

4.4



describe the common values and norms;



position those persons who spread the culture and who are seen as an example by others, in appropriate positions within the organisation;



communicate more intensely internally regarding the values and norms, and translate these into concrete actions;



deploy symbols and other information carriers in the dissemination of the philosophy; examples include clothing, a mascot, a pin, a mirror in which the personnel can see themselves before they meet with customers, or a card on which the organisation’s philosophy is printed;



apply this to human resource management. Which persons will be appointed or fired? How does the company advertise to acquire new employees? How are they trained and educated further? How is behaviour that fits within the culture rewarded and other behaviour discouraged?



take measurements. It is highly advisable to measure concrete performance with regard to relationship orientation so that no ambiguity arises with respect to the improvements which still need to be made.

structure Organising around customer contacts Creating the space necessary to cultivate relationships with customers requires company activities to be organised around customer contacts. Organising activities based on functions or products leads to a situation in which customers’ needs are met neither quickly nor accurately enough. After all, a customer’s request will have to be submitted to persons other than the contact person for approval, and assistance will have to be obtained from other departments to fulfil the request. It is typical of these other departments that their objectives do not run exactly parallel with the interests of the individual customer concerned at that particular moment. One oft-quoted example is that of IBM providing supplier’s credit to customers. When the company was still functionally organised, this process took several days. The application had to go from one department to the next before a final answer could be given. Now that a so-called process organisation has been set up, the processing speed has been significantly accelerated. One person, who has all the relevant information at their disposal and who works at one location, is responsible for making the decision regarding the application. The potential for interacting with the customer and supplying customisation has also now increased. In the former situation, this would have led to an unacceptable extension of the processing period and reduced efficiency.

73

Part II Strategy and organisation

This example involving IBM concerns a partial process, one which is part of a larger whole, namely that of the approval and completion of a transaction. Or, even more allencompassing: the relationship with the customer. In a relationship-oriented organisation, it is desirable for activities which ensue from the management of a relationship to be classified in succession under an organisational unit which bears responsibility for the relationship. Herein lies what is known as ‘customer ownership’.

Organisational forms Customer management can be organised in a variety of ways. In many consumer markets, this is even ‘outsourced’ to retailers who are responsible for the sale and delivery of products. Direct contact with the supplier is minimised. The margin on the product does not allow for extensive communication and the supplier does not have the capacity required to handle the amount of customer contact involved. The question also remains whether the consumers consider this type of contact desirable with these sorts of ‘low involvement’ products. It is only in those situations in which the consumers’ involvement with suppliers is high, where the ‘life-time value’ of the customers (see Chapter 10) permits this and opportunities arise which lend the relationship meaning, that it is useful to facilitate direct contact between consumer and producer. Organisations which take customer management into their own hands often find the customer pyramid useful (see Figure 4.2). The pyramid makes a distinction between larger and smaller customers. At the top of the pyramid, we find a small number of large customers, the ‘A’ customers, who represent a substantial portion of sales. At the bottom, we find the small ‘C’ customers, who, separately and collectively, contribute relatively little to sales. The intermediate group can be designated the ‘B’ customers. The group of ‘A’ customers may have reached such large proportions that they exceed the capacities of an individual account manager. The sales from this type of customer are so high that contact must be maintained with too many people at too many different locations, and customisation must be provided as well. The decision may be made to set up an account team that manages the relationship with these customers. Some team members may originate from the business units which must develop and/or supply parts of the products for the customer, others may handle logistics or service, for example.

Figure 4.2 The customer pyramid

74

Chapter 4 The relationship-oriented organisation

One person may even have to assume responsibility for coordinating the entire relationship (Workman et al., 1998). The choice of the person with final responsibility represents a complex issue for many organisations. If we hire someone from the ‘business’ to take responsibility for a product line, then we can guarantee that we are hiring someone who can ‘get things done’ within the company. This is particularly the case when the person comes from the organisational unit which must supply the largest portion of the products to the customer. At the same time, there is a risk that the interests of the other supplying departments will not receive their fair share of attention and will thus no longer be asked to provide the best integrated solution to customer problems. If, however, an account manager is appointed who is not from within the supplying organisational units, then the risk exists that they will not be able to count on enough support from these units. They will be too demanding and will thus represent a customer who is perceived as being unattractive. It seems that there is no single optimum solution and that in all cases the success of the chosen configuration depends upon the willingness of those involved to do their best to ensure the overall success of the customer as well as that of their own organisation. In putting together the account team, it is also advisable to take the qualities of the individual team members into consideration. The individuals collectively form a team which has the competency to develop the relevant relationship with the ‘A’ customer to ensure that it is a long-term, mutually profitable one. There must be sufficient qualities present within the team to ensure (Verra, 1994): ●

the relations within one’s own organisation as well as those with the customer;



the acquisition of new orders;



the negotiation of the deal;



entrepreneurship;



control over the quality of delivery;



management of the project.

The team composition can also be modified at a later stage of the relationship. A subject such as project management can be much more important in the beginning than it is later on; after all, the order has yet to be received. The products or services must be supplied or provided in accordance with pre-determined specifications. Later, once everything is running relatively smoothly, it can be worth paying more attention to entrepreneurship and relationship management. The best new sales opportunities are to be found in existing customers with whom good relationships are maintained. In many cases, ‘B’ customers, those characterised by smaller proportions and less complexity than ‘A’ customers, can be managed by an individual account or customer manager. This individual has one or a limited number of customers for which they are responsible. The numerous ‘C’ customers with small sales potential who spend very little on their purchases from the supplier may, for example, be assigned to a customer group manager, customer service or a help desk. The possibilities for supplying customisation to this type of customer are limited; the development of new products and services is usually geared towards the top customers. It is, however, essential to develop a customer-oriented approach within the relevant department and to motivate and develop the ‘front-line’ employees so that the relationship with these customers can also be developed in an appropriate manner. The employees will have to identify with the mission and the norms and values of the relationship organisation. They will have to feel a bond with the company and must be able

75

Part II Strategy and organisation

to take pride in their contribution to the organisation’s success. Investment will have to be made in their skills and attitude so that they are both willing and able to meet the challenges offered by the customer. They will need to be stimulated to present themselves as a leader in performing their tasks, so that the customer’s interests can be properly promoted. They will have to be offered prospects for future growth in the organisation.

The role of CRM systems in the various organisational forms The role of the CRM system will vary for each of the three types of customer. The largest will be that designed to serve the ‘C’ customers. This category involves a large number of customers for whom a large portion of the customer history and profile will be maintained exclusively in databases. There are very few people who know the customers on an individual basis and can form a mental picture of these people. To a great extent, communication with the customers will also take place through IT- supported channels. Suggestions will be made by computer systems to indicate the course which the development of the relationship might follow. CRM systems will play a less prominent role with larger customers. They assist the account team primarily in the efficient and timely identification of the players on both the customer’s as well as the supplier’s side, and the communication between the two. A network of communication channels can also be developed to ensure a more efficient and simple exchange of messages than was previously possible. A larger portion of the customer profile will also have to be developed outside the automated CRM system, in people’s minds. Decisions involving relationship development will also be less automated – they remain principally a human task.

4.5

People It is people who develop relationships, not the IT applications. People with social skills are indispensable in relationship-oriented organisations. Anyone who needs to maintain contact with customers, even if only now and again, will have to be sufficiently competent in this area. This involves the agents in the call centre, the representatives and the service staff, as well as the people in the administration department. All of these individuals need to be capable of communicating with customers on product information, invoices, purchases, complaints, etc., and must be able to get a proper feel for the relationship. It goes without saying that it is asking too much for everyone to have the same level of competency in this area in addition to proficiency in their ‘own area of expertise’; however, the all-too-familiar situation must be prevented in which non-commercial personnel communicate too much from their own point of view and their corresponding tasks with customers who are experiencing a problem with the supplier. Important aspects of social competency are (Peelen et al., 1996): ●

the capacity for empathy;



the ability to create congruence;



the ability to use an unconditionally positive approach to the other person.

Empathy can be described as the ability to see the world from the customer’s eyes, from moment to moment. The person capable of empathy is thus able to place themselves within the customer’s frame of reference and can also make it clear to the other person that they are aware of what is involved when they find themselves in a similar situation. This person demonstrates to the customer that they are sympathetic to the customer’s problems.

76

Chapter 4 The relationship-oriented organisation

Empathy requires primarily that time be invested in the other person. In addition, people must possess certain skills, some of which can be learned during so-called sensitivity training courses, listening campaigns, role-playing exercises and in-depth debriefings at meetings with customers. During these types of session, an evaluation is performed, together with the customer, on the manner in which people have behaved during a project. One of the goals is to increase the sensitivity of the people involved to the customers’ needs. Congruence is related to openness, transparency and sincerity. It means that one party will profile itself as being realistic with respect to the other party. In other words, a professional façade is not what is wanted here. Adopting an open attitude often serves as an example to the other party: openness encourages openness. Congruence tends to benefit from an honest and open exchange of information without politics and hidden agendas. Investing in the exchange of information leads to the creation of trust and commitment and makes it possible for partners to gain a better idea of one another’s needs and expectations. By communicating more frequently, being open to positive as well as negative assessment, being prepared to express both positive and negative aspects, and being honest about limitations and capabilities, congruence is given the room it needs to grow. From a social-psychological standpoint, it has been posited that it is important to be able to maintain an unconditionally positive attitude towards someone because it indicates that one accepts the other person. Within a commercial setting, this implies that one is supposed to value the customer, regardless of their behaviour and value to the organisation. This can mean that an unequal situation is temporarily accepted. If the other person underperforms temporarily, it is advisable to accept this. That person has either encountered problems along the way or has been compelled to behave as they have. Social competencies will not only be of use in the relationship with customers, but will also prove useful internally. On an internal level, relationships between people and departments often fall short of the mark. There is room for improvement in the collegial atmosphere between people, there is insufficient goodwill between colleagues, and the communication between departments does not flow smoothly. Furthermore, it is precisely in those organisations with limited job descriptions and decision-making hierarchies that the teamwork between departments and people is essential in order to be able to cultivate any type of relationship at all. In general, there is also a great deal of room for improvement in this area when it comes to customers. The quotation in the box below, which was taken from brainstorming sessions with marketers, illustrates this.

CRM illustration Even commercially oriented people within companies have a fear of investing in the relationship from time to time: ‘We get cold feet. We are actively engaged in the pursuit of new customers. Only, every now and then we take a blunderbuss approach, and we don’t know what will be left over if we take closer aim.’ Improving communication will require many modifications including:



Product specialists will have to become customer specialists. They will have to offer an emotional product. In order to be successful, you will have to possess other qualities.



Emotion and intuition will have to play a larger role. Hitting the right nerve will also become more of a question of experimenting and ‘learning by doing’. Source: Peelen et al. (1996).

77

Part II Strategy and organisation

4.6

Communication and information From the illustration above, it appears that the quality of a relationship-oriented organisation depends to a large extent on the quality of mutual communication. Are we capable of conducting a dialogue with one another? Do people have the social skills (see Section 4.5) to ‘carry on a good conversation’ content-wise, or will it end at a well-intended attempt to tempt (a boost to sales)? In addition, are we sharing the information that we need in order to be able to cultivate relationships – both internally and externally? Does the service employee communicate the information they have just gleaned during customer contact to the customer manager so that the customer manager can take past events into consideration during subsequent contact with the customer? Does the call centre agent know what type of question the customer once asked the organisation in an e-mail? The quality of the communication between the parties is influenced by the structure and division of labour. If duties and positions are organised on the basis of contact with customers (see Section 4.2), there is a better chance of conducting a meaningful dialogue with them. The areas common to both parties seem relatively large. If the front-office employee is exclusively responsible for creating invoices, however, then this would not be the case to such a great extent. None the less, in many situations the contact between a customer and the organisation will not go via one person. IT systems can play a role in this, but will never be able to replace a person. People will have to relinquish the information so that the system can retain and distribute it. They will have to invest time and effort in doing this and will have to get past certain barriers. People will have to abandon the idea that sharing information can potentially detract from their head start on their colleagues and thus damage their own career. Investments in IT and data will have to be organised so that they make a real contribution to customer information. Many databases are filled with enormous amounts of data, yet are capable of producing only a limited amount of useful customer information. Many of the actions of people who have contact with customers are not even based on these data. Substantial investments in systems and data are thus not always completely justifiable. This topic will be discussed in depth in Chapter 5.

CRM illustration Brainstorming sessions with marketers have shown the following to be desirable: 1 Redesigning the marketing information function within the organisation, this time from the customer’s point of view. 2 Attaching more importance to qualitative information so that we can learn more about the customer’s social world. 3 Attaching more importance to other sources of information:

78



spending more time with customers;



communicating more with employees who are in contact with customers;



conducting more qualitative market research.

4 Approaching and using quantitative data more intelligently: a number of people believe that by looking at the data from a different angle, more information can be extracted from the data files. It has been proposed that 20 per cent of the consumers, who may represent 80 per cent of sales, are the most sympathetic towards you. The trick is to pick up on the signals these customers are transmitting. The customer database will also have to be segmented much further. Source: Peelen et al. (1996).

Chapter 4 The relationship-oriented organisation

4.7

systems Even organisations with a relationship-oriented mission and culture, a customer-oriented method of organising and people with social skills communicating expert information can fail during the development of relationships. A great deal depends on the manner in which these employees are steered. Are they rewarded for increasing turnover and achieving shortterm results or do they also receive incentives as the customer life-time value (see Chapter 10) increases? Theoretically, the customer’s value, both current and potential, is established and serves as a starting point in measuring, guiding and evaluating employee performance. An organisation in which, for example, account managers are assessed primarily on the basis of the quarterly turnover they achieve will encounter problems in the development of long-term, mutually profitable relationships. The account manager is driven by ‘the system’ to exhibit sales-oriented behaviour; they will focus on products and customers with whom sales success may be achieved in a relatively short period of time and with relatively little effort. Their interest in customers who have just made a purchase will be low, while these are precisely the types of customers who are in urgent need of attention. Completing the transaction can be a rather risky event for these customers; they may be in doubt about whether their decision to purchase was the right one. They need affirmation of their purchase decision and would probably like support in putting the product into use. An account manager who is not available to assist the customer at that point can arouse the suspicion in customers that the manager has lost interest in them now that they have ‘hauled in the loot’ (Levitt, 1983).

service–profit chain Although the customer life-time value is the ultimate standard by which ‘customer owners’ must be steered, it is also advisable to measure and evaluate their activities using other criteria as well. After all, an aeroplane is not only steered on the basis of altitude. Several other gauges are welcome on the dashboard to chart the course and determine whether or not the pilot is on course. The ‘service–profit chain’ (Heskett et al., 1994, 2008), originating from analyses of successful service organisations, connects ‘hard’ values with ‘soft’ performance indicators (Figure 4.3). The hard criteria, financial in nature, are related to the profit that is earned on customers. The soft criteria indicate which factors influence the results: how satisfied and committed are the customers? What is the employee satisfaction level? What is the quality of the internal service? A specific example would be the information systems with which the front-office personnel must work. The level of satisfaction with the system can influence not only the rate of personnel turnover but also employee productivity. Experienced staff are more efficient and produce higher quality service which in turn results in an increased level of customer satisfaction and customer retention. Ultimately, this will lead to the achievement of better financial results. There is also an interaction at work between the factors mentioned; satisfied employees are in a better position to satisfy customers and vice versa: an employee is more easily cheered by a happy than by a complaining customer. The ‘service–profit chain’ model helps managers to make sound decisions on investments so that a higher level of service (and thus customer commitment and satisfaction) will be achieved (Waalewijn et al., 1999). The investments in the work environment and the competencies of the people affect the level of employee satisfaction and can provide a positive impulse to the manner in which customer

79

Part II Strategy and organisation

Figure 4.3 The service–profit chain Source: Heskett et al. (1994). Reprinted by permission of Harvard Business Review. From ‘Putting the service–profit chain to work’ by J.L. Heskett et al., March/April 1994. Copyright © 1994 by the Harvard Business School Publishing Corporation; all rights reserved.

and employee can influence one another. Someone who is properly equipped to perform their duties will derive more satisfaction from this than someone who must continuously improvise. They have the knowledge and the skills and can use professional tools to satisfy the customer and develop a relationship with them. The employee can rely on the organisation; they know that it will fulfil the promises it makes to its customers.

Balanced scorecard The model of the service–profit chain may be adapted to fit that of the balanced scorecard, which originated from the criticism of the traditional financial systems within companies (Kaplan and Norton, 1996, 2004). The conclusion Kaplan and Norton drew is that financial reports often focus too much on the past and not enough on the future. In budgets which are focused on the future, too much emphasis is placed on the short term and risk avoidance. Very little attention is paid to the question of whether strategic objectives are being met as a result of the expenditures involved. There is also a lack of awareness of the ‘soft’ factors (see above), which ultimately determine the organisation’s success. The result is that the financial management system of the organisation is treated separately from the strategic planning system. If people are not prepared for it, the risk exists that strategic plans will inadvertently suffer if they are included in the financial system. Since its introduction in 1996, the balanced scorecard has been very positively received within the business community; by 2004, it had been applied within a substantial portion of businesses worldwide. The balanced scorecard offers the possibility of fitting the service– profit chain model within the organisation’s management system. Strategic objectives direct

80

Chapter 4 The relationship-oriented organisation

CRM illustration The situation sketched by Kaplan and Norton is not foreign to marketers, as is evidenced by the following quotations: If you have a budget, you often tend to invest that to ‘boost volume’, when you actually should try to use it to make a long-term sale. The concept of thinking in terms of ‘life-time value’ has not yet met with broad acceptance. The transaction value is still the centre of attention. A customer is

still evaluated based on the one car he may buy, not on the three or four cars of the same brand he may buy over the course of time. Even though we try to speak the ‘bookkeeper’s’ language with a term such as ‘life-time values’, it appears as though he disapproves of the outcome of the calculations. There seems to be an aversion to the time horizon (‘life-time’) and the insecurity which exists on the level of the future yield. Source: Peelen et al. (1996).

the formulation and target setting of hard and soft criteria. Within the balanced scorecard, four different perspectives are identified, namely: 1 Satisfaction of the shareholder, to be measured in financial terms. An indication will have to be given to show how the current and potential customer value ultimately contributes to an increased satisfaction on the part of shareholders. 2 Customer satisfaction and loyalty. 3 Internal processes. The performance indicators for the internal perspective measure how (in terms of results and quality) the organisation identifies, serves and retains the right customers. 4 Learning and growing. By learning and growing, the organisation’s areas for improvement come up for discussion. An indication is provided on how the organisation and its employees may improve their competencies (Kaplan and Norton, 1996, 2004). In comparison with the profit chain, the shareholder’s satisfaction is measured as well as the customer’s, but explicit determination of the employee’s satisfaction is lacking. However, the quality of the processes is addressed. In the model, the performance of the internal processes aimed at identifying, attracting, serving and retaining customers is measured. As such, activities are defined and measured that have to result in the satisfaction and loyalty of the customers. Within the perspective of ‘learning and growing’, the competencies to be developed are examined in more depth as are the aspects of personnel and the information system. To decide which indicators to include in the balanced scorecard we need to derive the critical success factors from the strategy. The criteria which are crucial to the success of the strategy need to be identified and measured. Concrete indicators and norm scores are to be formulated for these criteria on the basis of the four perspectives (see Figure 4.4; Kaplan and Norton, 1996). It is extremely important to involve the employees concerned in the completion of the balanced scorecard. After all, one of the most important objectives of the card is to communicate strategic plans and translate these into actions by those involved in the organisation. It is a challenge to put into words the vague, abstract terms which are used to formulate the strategies which are relevant to the daily tasks of people in the company. Thus, an attempt is made to overcome the situation where strategic ambitions do not get any further than the boardroom and will never be translated to daily operations.

81

Part II Strategy and organisation

Figure 4.4 From strategy to critical success factors Source: Kaplan, R.S. and Norton, D.P. (2004) Strategy Maps: Converting intangible assets into tangible outcomes, Harvard Business Publishing Corporation, Boston, MA. Copyright © 1994 by the Harvard Business School Publishing Corporation; all rights reserved.

Being able to determine the optimum scores and the relationship between indicators from the different perspectives is a learning process. The influence of a certain marketing activity on customer satisfaction and financial results will have to be established by trial and error. Lessons learned from practice will have to be remembered, disseminated and utilised in the process of perfecting the system of measurement and policy in the future.

CRM illustration A Japanese restaurant whose strategy is to get nonAsian people, who regularly dine out interested in and committed to Japanese cuisine will have to fill out its balanced scorecard through a process of experimentation (John Klug, 1998). Many people from this target group dine at restaurants serving foreign food; however, they seem to avoid the Japanese restaurant because its prices are too high and the level of familiarity and appeal of this type of Asian cuisine is still too low. The restaurant implements the marketing strategy of serving a Japanese meal which is wellenough adapted to the local taste preferences for an average price and in oriental, comfortable surroundings. Regular customers are recognised and receive a hospitable welcome. Aspects which determine the success of this type of restaurant from the perspective of the process include accessibility, average table occupancy and use of space, guest turnover time, drink consumption per guest, productivity of the kitchen and

82

the serving staff, the optimum bar capacity, customer satisfaction with price, the meal and the staging, sales and profitability. The restaurant will have to achieve a certain score for each of these aspects in order not only to acquire and bind customers but also to be able to satisfy shareholders. A solution will have to be found for the eternal field of tension that exists between increasing profits, managing costs and customer management. The restaurant’s success actually depends on two factors: the maintenance of an average price level as well as cost level, and the development of a steadily expanding, regular clientele. If one of the aspects on the balanced scorecard receives a score that is too low, then it has unavoidable consequences for the other aspects; the success of the formula depends on the quality of the balance achieved. A turnover time which is too short has consequences for the aspect of customer satisfaction, but at the same time, the maintenance of a competitive



Chapter 4 The relationship-oriented organisation

CRM illustration (continued)

Figure 4.5 Balanced scorecard for a Japanese restaurant price level will be at risk if one group of guests keeps a table occupied the entire evening. This is certainly the case when the restaurant with an average price level has chosen an expensive top location to increase its accessibility and thus the likelihood of good table

4.8

occupancy. The restaurant will have to determine the optimal scores for the distinct critical success factors by experimenting and studying the relationships between the various indicators. The balanced scorecard for this restaurant is illustrated in Figure 4.5.

Where do we stand? Where do we stand with the development of a relationship-oriented organisation? Is it an unattainable, utopian ideal? Or is it an ideal which, if recognised as such, can provide guidance and direction to the development of an organisation? Or is it the type of organisation that, in the right situation, must grow? The answer to all three of these questions is yes, depending on the circumstances. It seems that many organisations are far removed from

83

Part II Strategy and organisation

the relationship-oriented type of company we have outlined here. In a variety of situations, striving to achieve such a company may not even be desirable. Either the gap between the ideal and reality is too large or the organisation’s strategy is not geared towards the development of long-term, mutually profitable customer–supplier relationships (see Chapter 3). Under some circumstances, and here we are referring to the third question, the relationshiporiented organisation is both desirable and achievable. The company focuses on customers who may be identified individually; who truly want a relationship; and who spend a sufficient amount on the supplier’s products or services to justify the latter’s relationshiporiented efforts. The supplier has also ‘got its act together’, and has reached a certain stage of operational excellence. It is capable of fulfilling the promises it has made to customers. Many companies encounter formidable problems when they create relationship marketing programmes. Fournier and colleagues (1998) conducted interviews in the United States with a variety of marketers. The outcomes of these conversations prompted an article entitled ‘Preventing the premature death of relationship marketing’, which contained the following message: Customer intimacy strategy is at the centre of attention; managers and academics believe in it. On a daily basis, companies tell stories about a new and better approach to customer orientation. It does, in fact, seem as though the potential for developing meaningful relationships with customers is greater than ever owing, not least, to new, increasingly efficient methods of gauging and capitalising on customer needs and preferences. Anyone who looks a bit further, however, will frequently see a different picture, particularly in consumer markets. The relationship between companies and consumers is difficult, to put it mildly. Anyone who asks consumers about their relationship with their so-called corporate partners will hear tales of a confusing, stressful, insensitive manipulative market in which consumers feel trapped and victimised. Companies are content to think that they know more than ever about their customers and can therefore satisfy every demand. Consumers, however, do not share this optimism. They tolerate the salespeople, clutching their list of questions for consumers, no matter how small the purchase. They struggle through the over-abundance of products in the range, doing their best to deal with the overkill of possibilities while juggling the flow of requests to participate in loyalty programmes. Customer satisfaction figures have hardly reached a peak; if anything, they are just starting to climb back up from an all-time low. Complaints, boycotts and other expressions of dissatisfaction from consumers abound. At the start of the twenty-first century, the message seems finally to be sinking in. Organisations have changed their goals. During one of the many marketing seminars on the subject of customer relationships, this brief and powerful statement was made: ‘[in the year 2002] it has become the goal of corporations to offer only that which the system can deliver and not promise anything more’. The underlying conviction, which is well founded, is that customers will have more appreciation for an organisation that delivers on its promise. It is, however, a disappointing conclusion that organisations have become the victim of their own rigid systems and both employee and customer satisfaction is limited by the technocratic manner in which we have approached organisations as a system. Ten years later, in the year 2012, many organisations have, none the less, made significant progress. The potential to meet customer requirements is increasing through the continuous progression in communication channels, databases, customer-oriented processes and the integration of IT systems. One-to-one marketing, where a supplier really is able to foster an individual relationship with any one customer, is closer than ever to becoming a reality.

84

Chapter 4 The relationship-oriented organisation

However, shaping a customer- or relationship-oriented organisation remains a formidable challenge. Many customer strategies evaporate during the implementation of customer processes, especially in a complex IT landscape; they are also postponed due to the poor economic climate. In part, organisations are also adapting their way of thinking about customer relationships. The focus is no longer on long-term, sustainable relationships. These are deemed less desirable and efforts to build them have so far not delivered on promise, seeming to have an adverse effect on costs. There is rarely much room for introspection in these processes, but realising that one’s approach to CRM might have been excessively geared towards organisational, rather than mutual benefits, might help. The approach may have been interpreted as insincere by customers, resulting in a lack of commitment to, or enthusiasm for, relationships with corporate partners. Without trust, the desired results never came. At the same time, however, those claiming that a relationship orientation will increase costs are forgetting about the inefficiencies and waste incurred every time an existing customer is treated as if they were a stranger to the organisation. On the other hand, it makes sense that a transformation process should stop at the stage when no clear ‘road ahead’ has been determined and it is unclear whether the road already travelled is leading towards the desired destination. People lose faith and disconnect from the movement. They find themselves faced with the desire to become more customer-oriented, but restricted by systems or reward structures that demand higher productivity and lower costs. Quantity is rewarded over quality, and selectiveness and differentiation compete with the efficiencies found in standardisation. In failing to provide reliable customer data, systems are not supporting the right people. Too many initiatives take place in isolation, leading to a complex and uncontrollable internal environment. Employees are faced with dilemmas they cannot solve without executive backing. In addition to which, when control starts to slip, management frequently reaches out to triedand-tested structures and toolsets, killing off any transformational movement before it has come up to speed. In describing the sluggish, painful nature of transformation processes we are not trying to demotivate organisations or move them away from their idealistic goal to become more customer-focused. We do, however, want to point out the conflicts that arise in many areas of the business and that will realistically have to be addressed in order to be successful. Success, however, remains a very real option, as is demonstrated in several instances throughout this book, starting with the case study overleaf.

4.9

Conclusion Actually putting to work a strategy directed at the development of sustainable, mutually beneficial customer relationships is a demanding process, often requiring the redirection of several aspects of the business, which are traditionally more product-oriented, towards a customer orientation. It puts pressure on leadership to develop a vision and mission which reflect its ambitions. The culture, organisational structure, intra-company communication and control mechanisms need to be adapted to that mission. The ambition level may vary according to the degree to which an organisation wishes or needs to invest itself in customer–supplier relationships, given the type of product or service they provide and the needs to which they intend to cater.

85

Part II Strategy and organisation

Even with modest ambitions, the challenge can prove to be great. The difference between the current situation and an ideal, customer-oriented organisation can be so vast, that a more realistic framework needs to be developed. CRM is a long-term strategy, so there is definitely time to develop it, depending on market circumstances and competitor achievements. In order to prevent the ‘premature death’ of relationship marketing, an approach must be chosen that balances idealistic progress with realistic timescales and investment levels, setting attainable goals and measuring the impact on corporate performance.

CAse sTudy A personal experience: customer focus in healthcare insurance A sizeable achievement from healthcare insurers? It seems a remarkable achievement that smaller healthcare insurance funds, each with their own circle of loyal customers, have made the transition to becoming a limited number of large healthcare insurers. The old healthcare insurers were relatively small, bureaucratic institutions doing their utmost to provide healthcare, while limiting risk to those participating in the insurance funds. Nowadays, they are modern corporations competing energetically for customers. Their smaller-scale predecessors had trouble managing the ever-increasing costs of operating an insurance organisation. Now they are profit- and medically oriented, legally proficient corporations, capable of managing their costs down to the last penny. They claim to be the guardians not only of healthcare costs, but also of the quality of healthcare and even the quality of life of their customers. They are thus acting as market-makers, actively managing the efficiency and efficacy of healthcare providers in the medical and paramedical sectors. Their medical advisors collaborate closely with top legal teams to ensure that healthcare meets the stringent contract terms of the insurance policy and that only responsible and adequate care is being reimbursed through the insurers. Astute business managers use widely accepted management models and techniques to guide the organisation. Convinced of the importance of their role as modern healthcare providers in today’s society, they have to deal with the difficult issue of patients and healthcare providers who refuse to become cost conscious, believing that ‘anything should be possible and everything should be reimbursed’. They operate on a broad scale and therefore make reliable partners for the government in relieving the stress of a growing financial problem. The goal appears to be to operate the insurance company profitably by controlling the ever-increasing costs of healthcare, and in the process help healthcare providers work more efficiently and effectively, giving customers the impression that insurers are doing whatever they can to help them, without losing sight of the terms and conditions of the insurance policies. The most forward-looking and ambitious healthcare insurers claim the customer is at the heart of their strategy and that they are doing all they can to be customer-oriented, within the limitations of their system, that is. But one personal experience shows that reality can be different . . .

Customer orientation seems extremely voluntary by nature Unfortunately we were too trustful and our expectations have not been met. We had counted on the fact that our healthcare insurer would do their utmost to help an insured customer who encounters a medical emergency abroad. But in our hour of need, we were left in the lurch, despite our many phone calls for help and assistance . . .

➨ 86

Chapter 4 The relationship-oriented organisation

Case study (continued) After four weeks of medical and paramedical care and attention in Reha Graal-Müritz we came home only to discover, much to our astonishment, a pile of letters sent to our old address with some dismaying content:

Letter dated 16 July 2008 and signed by VGZ: You are asking for a reimbursement for care in the the REHA zentrum (NOT an insured healthcare type) in Graal Müritz, Germany. Your policy conditions state the terms and conditions under which you are entitled to reimbursements. This means you are not entitled to reimbursement for all types of care, not even if your doctor deems the care necessary or if the care is beneficial to your recovery.

Dishonest practices of VGZ remained unjudged It was both painful and distressful after a period of time to consistently experience that even the most relevant information, presented carefully, convincingly and in great detail, disproving the insurer’s arguments, was completely ignored, not even warranting a response. Essential information was never taken into account and claims that had been disproven have repeatedly resurfaced in the correspondence, even towards governing bodies. Incidentally, the governing bodies have been immersed in a complex legal case without appearing to even so much as look at, let alone take into account, the serious complaints that bring to light unauthorised practices by VGZ. Despite many hearings, it is abundantly clear no one is listening to the customers who feel victimised.

Customer focus and the marketing concept Customer focus seems to be effective only if it is supported by a strong belief in the beneficial workings of the marketing concept. The case outlined above proves that the marketing and sales function of the health insurer believes that catering to the needs and wants of the target market works and that the organisation as such is capable of building a competitive advantage that it can convey through communication. They are able to get the support of the organisation, including the Board of Directors, in claiming customer advocacy and defending the best interest of their customers. However, the implementation phase shows different interests are at stake. After customer acquisition has taken place, it seems as though insured patients must be treated by healthcare providers with the utmost efficiency and effectiveness. This requires seeking a medically responsible treatment to which the patient is agreeable. The terms and conditions in policies are intended to avoid excessive healthcare claims. These should be avoided based on objective medical data, not on cost-cutting goals that could lead to a refusal to grant reimbursements for care that was both appropriate and required.

Questions 1 Are there fundamental causes at the root of the treatment of the patient who wrote this letter? In other words: is this an isolated incident, or is this example indicative of a more general problem? Elaborate on your answer. 2 In the introduction to this case study, the changes taking place in the healthcare insurance industry are described. The responsibility that healthcare insurers take for quality affordable healthcare is growing. It requires change from the organisations and the entire industry. What do you feel is required within an organisation in order to be able to take on this responsibility? Source: Bunt (2012).

87

Part II Strategy and organisation

QuesTIOns 1 What types of demand does customer intimacy place on the organisation? Provide a description of the relationship-oriented organisation. 2 Gather the mission statements of a number of companies and evaluate to what degree these do justice to the objective of creating a relationship-oriented organisation. Justify your answer. 3 Drawing up a mission statement is simple compared with implementing one. Think of a number of concrete measures to promote the internalisation of the mission statement. The internalisation indicates to what degree the employees in the company identify with the aspects included in the mission. 4 In practice, CRM is cited as having the following important advantage: ‘thanks to CRM, we are able to institutionalise the relationship with customers’. What do you suppose is meant by this? Provide an example to explain your answer. 5 To what extent is the organisation of a supermarket equipped to implement a customer intimacy strategy? Explain your answer. 6 Formerly state-owned companies are sometimes characterised by an insufficiently customeroriented culture. (a) Name an example of this type of company and describe how this is the case. (b) Formulate two recommendations for the short term and two for the long term necessary in order to stimulate a more customer-oriented culture. 7 What is your opinion of the idea of a customer ‘taking a seat’ on the supplier’s account team? Name three aspects on which your opinion depends and explain them further. 8 Within a relationship-oriented organisation, everyone must have a current, correct, complete and consistent image of the individual customers. Reality often tends to deviate from this ideal, in spite of the implementation of supportive CRM systems. Name four possible causes of this and explain your answers. 9 In this chapter, an example was provided of a Japanese restaurant which hoped to win and bind customers to its formula. (a) Formulate the specific critical success factors for this company from the four perspectives of the balanced scorecard. (b) Specify which indicators you would like to include in the balanced scorecard for each perspective. 10 In the article ‘Preventing the premature death of relationship marketing’, the premature demise of the customer intimacy strategy is portrayed. What will have to be done to prevent this from happening?

References Bunt, J. (2012) Klantgerichtheid kan verkeren in klantverlakkerij. Een persoonlijke ervaring uit in de zorgverzekeringsbranche. Unpublished. Fournier, S., Dobscha, S. and Mick, D.G. (1998) Preventing the premature death of relationship marketing, Harvard Business Review, January–February, 42–52.

88

Chapter 4 The relationship-oriented organisation Heskett, J.L., Sasser, W.E. and Wheeler, J. (2008) Ownership Quotient: Putting the service profit chain to work for unbeatable competitive advantage, Boston, MA: Harvard Business School Press. Heskett, J.L., Jones, T.O., Loveman, G.W., Sasser, Jr, W.E. and Schlesinger, L.A. (1994) Putting the service–profit chain to work, Harvard Business Review, March–April, 164–74. Horovitz, J. and Panak, M.J. (1992) Total Customer Satisfaction: Lessons from 50 European companies with top quality service, London: Pitman Publishing. Jones, T.O. and Sasser, Jr, W.E. (1995) Why satisfied customers defect, Harvard Business Review, November–December, 88–99. Kaplan, R.S. and Norton, D.P. (1996) The Balanced Score Card: Translating strategy into action, Boston, MA: Harvard Business School Press. Kaplan, R.S. and Norton, D.P. (2004) Strategy Maps: Converting intangible assets into tangible outcomes, Boston, MA: Harvard Business Publishing Corporation. Klug, J. (1998) Benhana of Tokyo, Boston, MA: Harvard Business School Press. Levitt, T. (1983) The Marketing Imagination, New York: The Free Press. Payne, A. and Frow, P. (2005) A strategic framework for customer relationship management, Journal of Marketing, 69, October, 167–76. Peelen, E., Montfort, K. van, Beltman, R. and Klerkx, A. (2009) An empirical study into the foundations of CRM success, Journal of Strategic Marketing, 17, 6, 453–71. Peelen, E. et al. (1996) Thema dossier Relatiemarketing, Platform ’95, Amsterdam. Platform voor Klantgericht Ondernemen (2009) Persbericht CRM Award, Amersfoort. Verra, G.J. (1994) Account management: filosofie, instrumenten en implementatie, Deventer: Kluwer. Waalewijn, P., Peelen, E. and Wijnia, S. (1999) The Marketing Balanced Scorecard, Deventer: Kluwer. Workman, J.P. Jr, Homburg, C. and Gruner, K. (1998) Marketing organisation: an integrative framework of dimensions and determinants, Journal of Marketing, 68, July, 21–41.

89

PART III

Intelligence The third part of this book examines one of the key areas of CRM, namely how to build customer knowledge. Understanding individual customers and the way they respond to an organisation’s marketing stimuli is one of the cornerstones of success for organisations wanting to build relationships with their customers. It can be considered one of CRM’s unique contributions to the relationship marketing legacy. CRM has spurred the creation of databases and data warehouses with relevant customer data that can be analysed and used in marketing. It helps organisations to deal efficiently with large numbers of, or particularly complex, customer relations – something completely unthinkable before the advent of CRM. In this part we will discuss: 1 Customer knowledge strategy. Our investments have to be aligned with our CRM strategy and should offer us a fair chance of positive returns, so to what extent do we want to invest in customer knowledge? How can data from databases be used to help us create customer knowledge and insights? In the process, how can we protect customers’ privacy and avoid violating written and unwritten rules on customer data usage? 2 Customer data management. Customer data are absolutely fundamental to customer analytics. As Sherlock Holmes so eloquently put it: ‘Data, data, data! I cannot make bricks without clay!’ If marketing goals are to be realised, data need to be available to guide organisational efforts and must possess the appropriate intrinsic qualities to do so. 3 Segmentation and selection analyses. One key area in which customer knowledge can provide insight is segmentation, the basis for differentiation between customers. How can customers be divided into homogeneous groups and profiled so that the entire organisation knows what they desire and how to cater to their needs? 4 Retention and cross-sell analyses. What aspects of data collection warrant special attention in making available basic CRM performance analytics, such as retention and crosssell analysis? 5 Management reporting. How can these data help in understanding the key performance indicators (KPIs) that link marketing investments to the life-time value of customers and the value of the entire customer base? What can be learnt about the relationship between these marketing activities and their outcomes, in order to optimise the return on marketing?

Chapter

5

Customer knowledge strategy Within the field of information management, distinctions have always been made between data, information and knowledge. Data are details: the date on which a prospect became a customer, the value of the last purchase, the term within which payment was made and the customer’s address. Data become information as soon as a user assigns a meaning to them. The data say something about the identity and profile of the customer; as a result, it becomes possible to create an image of the customer. Information becomes knowledge as soon as action is taken on the basis of this information; because the customer’s profile is known, we know when we should offer them which products or services. It is important to avoid falling into the trap of focusing too singularly on the collection, maintenance and analysis of the data. This includes resisting the temptation to invest large amounts of time and money in developing a ‘crystal ball’ which subsequently fails to yield results. It is important is to keep sight of the ultimate goal: knowledge. This involves using the information to develop a relationship with customers, which in turn requires creative utilisation of information sources. This chapter begins by examining the definition and financial aspects of data quality: how much cost is incurred and how much income generated by investments in data quality (Section 5.1)? We then approach customer data as an important asset from which we must see a return (Section 5.2). The focus shifts thereafter to the actual development of the customer profile (Section 5.3): how can we identify the customer? What do we want to know about them? Finally, the important issues of privacy and legislation will be discussed (Sections 5.4 and 5.5): the expansion of customer knowledge is only possible as long as the customer agrees to it! In this chapter we will address the following questions: ●

How much should an organisation invest in customer knowledge and in which customer knowledge elements in particular?



How can we organise data management (in various stages of maturity) in a way that this valuable asset is both structurally maintained and profitably exploited?



How can we transform data into customer knowledge (developing the desired customer profile)?



How to formulate an information policy. How can we respect customers’ privacy while using customer data to create value for the customer as well as for the company supplying the products or services?

93

Part III Intelligence

PRACTITIONeR’S INSIGHT Has the computer become the modern-day version of the gypsy fortune-teller’s crystal ball? Might the consumer’s true make-up be found in the computer and seen on our screen? Can we somehow use the information we find there to shine a light into our customers’ heads and gain an understanding of how, individually, they value their relationship with us? Can we tap into their thinking processes and see how they arrive at decisions and why they adopt certain behaviours? If this were the case, we would never have to leave our offices again. Personal contact with customers would cease to be necessary. The implicit knowledge found in the heads of front-office personnel would not add anything of importance to the information which could be gleaned from the computer system. The technology appears to be perfect and can, to a great extent, replace people. This may describe the future, but it certainly does not portray present-day reality; it does not even depict the reality in companies with an exemplary database management department. Rather, the challenge today is to amalgamate information on customers which originates from different sources. Market research, databases and the experiences of front-office personnel must be combined in order to produce an accurate, up-to-date and consistent image of the customer, an image whose value is recognised and cherished by everyone within the company. This is the root of success.

5.1

The value of customer knowledge Spending money on data quality Improving data quality costs money. Relevant customer data need to be gathered and their quality needs to be managed. Information on the identity and profile of former, current and prospective customers has to be collected and registered. Data have to be compiled from different sources and, if necessary, bought from external data suppliers who will supply single-use data. Data need to be retrieved from one’s own back-office systems on, for example, transactions, payment history and identity. We have to keep track of which topics were discussed, when and with whom, during front-office communication with customers. Investment is needed in software designed to compile and manage these data. We have to ensure that data do not become obsolete. The inevitable mistakes which creep in when data are collected from so many sources have to be identified and corrected. Hardware and networks must be adapted to meet the demands of these database applications, while ensuring the safety and speed of the other operational applications. Call-centre agents, for example, must still be able to input an order quickly and verify delivery. One can conclude from this description that the set-up and maintenance of a customer database require spending and investment. In deciding whether to set up this type of database, there is a significant risk that a number of the activities mentioned above will be overlooked and thus the cost of necessary investment will be underestimated. When it comes to CRM programmes, which also include the development of the ‘multichannel’ environment and the integration of the front and back offices, there is a particular tendency to underestimate the cost of the hardware systems required to manage the data. During the realisation of the project, the company will then be faced with budget overruns and/or concessions

94

Chapter 5 Customer knowledge strategy

to be made in quality, which ultimately endanger the financial success of the entire CRM programme. There have been cases of companies with millions of customers that found they had to reserve as much budget for the system hardware as for the database itself. If we become aware of which expenses must be incurred in order to collect, register and keep data current, it will also become clear that we only have to invest in those data which ultimately contribute to the customer profile we would like to create and which will come to form the basis of our actions. It is all too easy to record ‘everything we come across’, only eventually to realise that much of it is of little value. Keeping these types of files up to date involves a great deal of work and expense.

The waste resulting from poor quality In order to convince those members of management charged with making decisions on investments in data of the importance of data quality, it can be interesting to present them with the expenses that result from the lack of quality in data. These costs are easier to demonstrate with a higher degree of certainty than the future profits which may be earned from ‘good quality data’ and can thus be used as an argument when convincing managers of the importance of quality.

Identification errors In calculating waste, we limit ourselves initially to the identification aspect: are we able to address, write to or otherwise contact the person or organisation using the correct name, address, telephone number and e-mail address? Incorrect identification can lead to the following waste (Mergen, 2003; Peelen and Redeman, 2006): ●

Returned mail items. In addition to the fact that production and mailing expenses have been wasted, the post room incurs expense in ‘handling’ the returns and the database manager will have to correct errors in the database.



Mail duplication. More than one of an item sent to the same address because certain customer information is duplicated in the database.



E-mail that is returned or sent twice. Although the waste is less substantial than that experienced with physical mail items, corrections will still have to be made to the database.



Incoming telephone calls which cannot be processed sufficiently. The data necessary to be of service to the customer either cannot be found quickly enough or are missing entirely. The caller must wait a long time or will only get an answer to their question in a subsequent conversation which must be effected at either their or the supplier’s own initiative. This requires the agent to spend additional time on the telephone and can even lead to additional expense for the telephone call.



Salespersons, account managers and service engineers who visit the customer at the wrong time, at the wrong location or after having made preparations from inaccurate data. Their time and travel expenses have been wasted.



Invoicing errors. Customers either do not receive an invoice or have received an incorrect invoice for goods/services provided. Errors are either not reported, for example if they are to the customer’s advantage, or require rectification. Sales are lost and/or corrective expenses result.

The consequences of errors can extend even further than the direct waste mentioned above. In the long run, the effectiveness of communication and the level of service are

95

Part III Intelligence

affected. The likelihood increases that the customer’s perception of post and e-mail will deteriorate to the level of junk mail and the telephone will be reduced to a bureaucratic ‘pillar-to-post’ facility. Opportunities to use the wasted time effectively are missed; the salesperson, the service engineer and the account manager could have acquired a new customer or pleased an existing one during that lost time. Customer satisfaction and commitment suffer. Errors can provoke irritation on the customer’s part. In general, the most damage is done when errors are made in the gender or name of a customer (AGB Interact, 1995).

Profile errors In addition to identification, errors may also be made in the profile. These will result in similar waste, albeit on a larger scale. The communication will be less focused; the organisation will be less able to form a full or accurate picture of the customer and, as a result, less able to communicate effectively. The message will be less powerful and may ultimately reach people and businesses which do not belong to the central target group. Calculating the cost of this waste produces a strong argument in favour of investing in data quality. After all, the figures involved can be quite substantial. Preventive investments to correct errors in identification and develop better profiles suddenly seem more attractive. Thus, procedures geared towards improving quality stand a better chance of being implemented. Investments in tools are within reach so that the database can be cleaned up, for instance, people and companies which appear more than once in the database are identified; steps are taken to ensure that the proper description is maintained for these subjects and duplicated information is removed. Comparisons can be made with other databases in which up-to-date data on identities and profiles may be maintained.

CRM illustration A survey of 20,000 Dutch organisations (Peelen and Redeman, 2006) into data quality waste in the Netherlands alone has shown that the cost of poorquality relationship data incurred each year by organisations (with ten or more employees) equates to €400 million. In calculating the damages, only directly quantifiable losses were taken into account, such as returned mail (individual items, bills and shipments). Indirect costs and opportunity costs were not taken into account. It requires no great stretch of the imagination to see that poorly maintained prospect databases will result in poor lead management; poor customer contact records in more time being spent on finding contact details; and incorrect billing addresses in higher capital requirements due to delayed payments. None of these aspects, however, was taken into account in the survey. The poor quality of prospect management was mentioned in particular during the investigative phase of the

96

research project, thus the largest possible cost factor is, as yet, unaccounted for. The figures produced were conservative; it would not have been hard to use the data to prove a case for a significantly higher amount. Most organisations, some 85 per cent of the total group of 20,000, ‘think their database to be reasonably up to date’. There is not much variation between the different sectors, although the financial sector’s performance was significantly better, with customer identification being a core element of any transactional process. It cannot be ignored that, in a banking relationship, the customers themselves see the benefit in the bank having their personal data correct. In general, the leisure and hospitality sector performed less well in terms of customer data quality. It is, oddly, a sector which, despite priding itself on its customer orientation, operates with very little actual data. Source: Peelen and Redeman (2006).

Chapter 5 Customer knowledge strategy

The earnings stemming from data quality Influence on the effectiveness of acquisition activities First, high-quality data increases the effectiveness of acquisition. The response rate to efforts increases: the right customer is approached with the right offer at the right time. Not only does the likelihood of completing a transaction increase, but also that of attracting the right customer. For example, an investment fund capable of identifying customers who are willing to run an above-average risk is more likely to be successful by issuing a communication on a new emerging market fund. The response rate rises and customers are acquired who are satisfied with the product. A sudden fluctuation in the rate of the fund will not lead to dissatisfaction and customer churn. The clientele is prepared for this. Direct marketing (DM) experiences have shown that the quality of the database – the so-called list – has the most influence on the response achieved by a certain DM campaign (Roberts and Berger, 1989). The effect of this is nearly as substantial as that of the offer, the message and the incentive combined (see Figure 5.1). The quality of the offer, its communicative packaging and the promotion’s allure to incite the prospect to take action have, collectively, just as much influence on the response as the composition of the list.

Figure 5.1 The impact of the list, the offer, the communication and the incentive on the response

97

Part III Intelligence

Influence on the customer value Data quality will have repercussions not only on customer acquisition but also on customer retention and relationship development. The development of a relationship depends on the data that companies hold on the customer. Besides, it is difficult to build a bond with a stranger. It is, however, hard to demonstrate a direct connection between data quality and a customer’s life-time value (see Figure 3.4). The question is whether data can offer prospects for future success in changing markets. The potential for retention and development of the relationship depends on many more factors than data quality alone. At the same time, in performing calculations, people will find themselves confronted with the situation in which investments in data will produce a future, rather than an immediate, return. As a result, management’s approval for investments in data quality will depend not only on the outcome of rate of return calculations in many cases, but also in the ‘faith’ that they have acquired in the value of data and customer knowledge. This can require ‘evangelising’ on the part of the people who are involved in the development and management of databases. They must be able to spread the word on the importance of the data quality, even if it involves an activity with which they have less affinity.

5.2

The utilisation of data as an asset Utilising data Data are resources in which a great many investments are made and must continue to be made by relationship-oriented organisations. They are assets which must be exploited. First, it is important for organisations to make the right investments, or in other words, record the proper data. Second, the value of these resources only becomes apparent at the moment they are put to use. It is only then that data are converted to information and knowledge. Incorrect handling of data can lead to only a portion of data’s potential value being realised or, worse, a situation in which the data value is nullified. Given how often the value and purpose of investing in customer databases come under discussion, the management and exploitation of these data deserve a great deal of attention. Historically, organisations are accustomed to managing physical resources. Data possess entirely different qualities and their management differs considerably from that of physical resources such as machines. Typical problems faced by organisations that invest in and utilise data are shown in the box below.

Typical problems within organisations involving investments in and utilisation of data Strategy ●

● ● ●

98

There is no connection between the company’s and strategic business unit’s strategy and the data and information strategy. The company does not know which data are the most important. The data necessary to implement the strategy are not available. The influence of new sources of information or data are not incorporated into the formulation of the strategy.



Chapter 5 Customer knowledge strategy

Knowledge of data resources ●

● ●

There is insufficient knowledge within the company of available data and the manner in which they may be converted into useful information. Employees cannot find the information they are seeking. Information chains, which run from data creation to use, are insufficiently identified and managed.

Access ● ●

Employees do not have access to the data they are seeking, even if they are aware of their existence. Data are not being shared.

Quantity ●

There are too many data that have little or no value.



There is a great deal of unmanaged redundancy in the data.



Superfluous data are not deleted but continue to require attention.



Commonly used terms, such as customer or profit, have many different meanings.

Quality ●

Data values are inaccurate, out of date and/or inconsistent, leading to additional expense, complications in the decision-making process and a decline in the quality of operational management.

Need for new data ● ● ●

New data are not gathered at the speed desired by the organisation. Reliable sources of data appear difficult to find. Data structures are difficult to adapt.

Use ● ● ●

The use made of the data is ineffective. Decision-making is insufficiently based on facts. New market opportunities are not adequately identified.

Security ●

Data are exposed to unauthorised use, theft, viruses, loss and unintentional destruction.

Privacy ● ●

The concept within businesses of handling data in a confidential manner is poorly understood. There is poor understanding of legitimate and illegitimate use of customer and employee data.

Organisation ● ● ●

Management responsibilities with regard to data are poorly defined. Organisations’ bases for policy with regard to data and information are ‘brutal’. There are no procedures in place for dealing with data issues within the organisations.

Source: Levitin and Redman (1998).

99

Part III Intelligence

The organisation of data management Building customer knowledge is seen as a prerequisite for relationship building. It should be our goal to organise knowledge management in such a way that it is developed and applied as a strategic differentiator that drives organisational success. It is one of the key principles of CRM that ‘because we know our customers and understand them better, we are able to improve the value we create in our relationship with them’. The means or resources, in this case the data and the tools to analyse them (Figure 5.2), should become an integral part of marketing decision making (from lead generation to transaction to after-sales and relationship building). The application of customer knowledge management will have to be embedded within the strategic scope of the organisation. The strategy should drive the way knowledge management is implemented, and vice versa. Knowledge management should result in the right input being available for strategy formulation. Ultimately, embedding knowledge management is crucial for the effect customer analysis will have on organisational performance (Davenport et al., 2010). Peelen et al. (2009) have empirically validated four different categories of customer intelligence within a group of organisations they researched. Each category has a specific way of fulfilling a role in the organisation: ●

Market research driven organisations. These organisations focus mainly on customer satisfaction. Customer data that are generated are applied for internal decision making. The results that are achieved are not clearly linked back to the role of customer intelligence. They use limited datasets and a narrow array of tools and techniques or analytical software.



Fragmentised analytics organisations. On a business unit or departmental level these organisations are quite astute in their use of customer intelligence. They are still very much customer-satisfaction-oriented, but also make use of segmentation models in analytics. They can be found mostly in commodity markets, where intelligence hardly finds its way into product differentiation.



Database marketing-oriented organisations. These companies have an analytical focus on customer segmentation and customer satisfaction. The (personalised) support of customer contact is at the core of their analytical capabilities, including the ability to differentiate service concepts in relation to customer groups. They have a fairly complete set of tools, techniques and supporting software to underpin their analytical capabilities.

Vision& Strategy

Organisation

Means

Use

Performance

Figure 5.2 Growth stages in database management

100

Chapter 5 Customer knowledge strategy ●

Analytics-driven organisations. Operating from a broad set of goals and targets (including customer satisfaction), these organisations have top management commitment and a fact-based corporate culture. Customer intelligence is used both in internal decision-making processes and in supporting customer touch-points in the broadest sense possible. Data governance has their attention and a wide array of software, tools and techniques are deployed.

The degree of maturity in terms of customer analytics is different for each of the four categories. They have been named in order of maturity, with the first being the least mature. The latter group use customer knowledge as a strategic asset and deploy it in strategic decision making in relation to segmentation, product development and pricing. They use customer intelligence across the entire organisation, not just within one or two departments or functional units. Research indicates that the organisations in the later phases of the maturity model have also existed for longer. It seems hard to jump a phase or to start out as a relatively young organisation in the third or fourth phase, suggesting it is a growth path. How far one needs to grow in order for optimal returns on customer analytics to be delivered, depends on the customer relationship strategy.

5.3

From data to customer knowledge What data would we ultimately want from the customer? What profile would we like to see from the customer? How do we want to profile the customer and use this information in marketing? These are the questions we must ask in order to design the policy that is geared towards the development and utilisation of data as an important organisational asset. In answering these questions, the data are frequently used as a basis for reasoning. Different data are examined to determine whether they are useful for marketing purposes, while the other point of view, whereby the desired customer profile and relationship marketing policy are used as a basis for reasoning, can lead to acting in a more goal-oriented fashion. There is an ultimate goal which functions as a guideline in defining the data which are gathered through a variety of sources. Pursuing this approach requires that database managers and marketers are able to formulate their ultimate goal. Organisations which would like to develop intensive relationships with customers will not only have to form an image of the customer as a buyer, but also as a user and a person or an organisation in their own context (see Figure 5.3). If we only focus on the collection of data about the buyer, we are implicitly implementing product leadership or operational excellence (see the CRM illustration box overleaf, ‘Customer knowledge: the story behind the data’). It seems to us that it is the transactions and not the relationships that count. At the same time, we must realise that the collection of data about the customer as user and person and/or organisation entails higher costs. This normally involves not those data which are made available by the financial back-office systems, but those which are collected separately or which must be gleaned via third parties. Data which are less objectively measurable are also involved to a certain degree; a person’s personality and values are abstract and imperceptible. Although they have stable characteristics, measuring and keeping track of these types of data represents quite a challenge.

101

Part III Intelligence

CRM illustration Customer knowledge: the story behind the data Interview with Gerard Wolfs after he won the title of Direct Marketing Man of the Year 2001 It is still the old direct marketing, the way I learned it while working for my first employer, Reader’s Digest. Those old principles are still adhered to. Even if we adorn new systems with multichannels, data warehouses and campaign management systems, we still continue to work according to the old traditions. With cross-selling, we try to find those customers whom we have the best chance of convincing to purchase a new product. Apparently we are not interested in why they would be interested in doing this. Quite simply, they now have a few characteristics in common with people who also bought this combination of products in the past, and the implicit thought is that this will apparently also be the case in the present. The best part is that we feel that this procedure fits in with customer relationship management; aiming to create long-term relationships between customer and service provider. We will have to listen to customers much more. Listening begins with registration, and we do, in fact, do this. However, what we neglect to do is interpret that which we have heard. What is the story behind the event? We explain so little. We take action immediately. From the data, it appears that the ‘member get member’ campaign has resulted in the acquisition of high-quality customers. Therefore, we should start stimulating more people to acquire customers via an incentive. We overlook what the motive was for the

customer to introduce another one; was it someone he knew that he wanted to help by putting him in contact with you? We are not aware that the ambassador then later asked his friend if he was satisfied with you as service provider and that he saw to it that his ‘customer’ had the proper expectations of you. We are not fully aware of how this behind-the-scenes process is disrupted by sending incentives, and that there is a risk that the customer will lose the quality stamp that he has earned as canvasser. If we were to examine the story behind the event more often, we would start to see things differently. Other things become important. Is it now ultimately the customer’s purchase that is important or the time he is willing to spend on you? Time indicates whether or not the customer considers you to be important and is involved with you – whether he likes you or not. You have more interest in the person behind the event, and this is ultimately what it’s all about, right? If you would like to develop a bond with a customer, you must be interested in the story behind the event and/or the person! How can you achieve customer intimacy otherwise? Subjective aspects will have to play a more important role; not only hard data! More emotional intelligence will have to be involved; an optimum balance will have to be created between EQ and IQ. Source: Tijdschrift voor Marketing (Magazine for Marketing) (2001). © Adformatie Groep.

We will also have to realise that these types of data have less to do with behaviour and more to do with the characteristics of the customer. It is difficult to demonstrate that a connection exists between these data and the response to communication. None the less, communication may contribute to the ‘customisation’ of customer contact and relationship management. It provides us with a better customer profile that can assist us in being of better service to the customer. One practical solution to this problem is to combine data from different sources. Traditionally, databases’ strength lies in their ability to supply behavioural data about the buyer and, in terms of market research, their suitability is to provide data on the customer as user, person and/or organisation. The information obtained during personal contact with the customers serves to further improve the profile. An important point which must be considered in the merging of different sources of information is that market research, as opposed to databases and customer contact, usually

102

Chapter 5 Customer knowledge strategy

Figure 5.3 The use of different sources of information to create a complete customer profile

produces anonymous, aggregated customer information. A method must be devised to link customer profiles reliably from both quantitative and qualitative market research to individual customers. A number of hard behavioural criteria must provide insight into the qualitative profile that corresponds to an individual customer. A technique such as cluster analysis may be employed for this purpose. For example, Robeco Direct, a financial services company based in the Netherlands, successfully applied this method to describe the profile of its customers in the various segments in greater detail (Wolfs, 2003). Within the database, cluster analysis was used to identify different segments on the basis of hard (behavioural) criteria. Through qualitative research, extensive profiles of prospects, customers and former customers were created as person, investor and buyer of Robeco services for each segment.1 Using cameras, respondents recorded photographs of images that were important to them. They then provided an explanation of these images during extensive sessions; they indicated what was important to them and the roles played by money and investment in their lives. Particular emphasis was placed on long-term characteristics which are not very susceptible to change. The resulting customer profiles proved very useful in the creation and implementation of marketing strategies for each customer segment. For example, it is now known what motivates the so-called dignitary: which values he pursues. His investment profile and corresponding investment and communication behaviour are known and can be capitalised on. The company does not bother him with product introductions which do not interest him, and he is addressed in a manner and with communications that appeal to him.

1

Comparative research has shown that the database and the qualitative study both led to the same segmentation.

103

Part III Intelligence

CRM illustration Personas In 2004, Alan Cooper introduced the persona as a tool and presented research which has since been widely adopted in website and interaction design and technology applications. It attracted widespread attention and, as its popularity increased, was soon being used in other contexts as well. Currently it is also used in new product development, and of course in CRM. It is a useful way to bring a customer to life, to make a realistic character sketch of a typical consumer. A persona is a fictional, detailed archetype of an actual consumer, representing one segment of customers with homogeneous characteristics. The archetype can be given a name, a face, and can be carefully described

in terms of needs, goals and tasks and behaviour. The profile can also be enriched with quotes. The whole point of personas is to bring a customer segment to life and, rather than making it the result of a cluster analysis using advanced statistical techniques, making it human and personal again. With personas one can increase empathy levels across an organisation; one can place oneself in the shoes of that particular customer. The risk, however, as with many a marketing fad, is the gimmicky way in which marketers reuse and overuse personas. Sources: Blomkvist (2003); Cooper (2004); Gruding and Pruitt (2002).

Depending on the CRM strategy we are faced with, the dilemma is not only to know the customer, but also to understand the context or the environment in which that customer operates. Human behaviour is often context-driven; what someone with a certain preference or a certain profile of needs and wants ends up doing is determined by the context in which that person is placed. Someone who is not likely to travel anytime soon, due to contextual factors, would not require travel insurance. Not even if their inclination is to be risk-averse and always be insured. If something happens in the context of the customer, we refer to it as an event. Van Bel (2004) defines an event as the occurrence of something leading to a change in the situation and needs of a customer. The birth of a son or daughter, marriage, reaching a certain age, purchasing a car or a house, getting a raise in salary or promotion, being fired or moving to another city are all events, occurrences that drive the need for insurance products, for instance. Van Bel distinguishes four categories of events, based on the temporal basis by which they occur and their predictability (Figure 5.4). For instance, the expiry of a contract within two months from now can be considered an event taking place shortly and with considerable certainty. The chance of someone moving about two years from now is relatively uncertain and unpredictable (even knowing that someone in The Netherlands moves house on average once every seven years, does not improve predictability). On an individual household level, this statistic (the average) will prove wrong in some 90 per cent of cases. Obtaining information leading to the timely identification of an event, offers great opportunity. It becomes possible to make the customer the right offer at the right time. The response to such promotions is reported to be above 20 per cent (van Bel, 2004). As the predictability declines, it becomes harder to make the right offer at the right time. Sometimes external parties are able to provide data that helps in timely identification, but there are many cases in which these data are missing or arrive too late to allow the organisation to anticipate appropriately.

104

Unfortunate purchase Complaint Making twice as many phone calls as normal

Financial crisis Moving to other house Health

Ending of a contract Ending of a warranty

Retirement

High

Predictability

Low

Chapter 5 Customer knowledge strategy

Short-term

Long-term Time

Figure 5.4 Types of event Source: Adapted from van Bel (2004).

It is important that a relationship with the customers exists in which the event is noticed and registered. Customers may even proactively indicate that the event is about to take place, if they see a benefit or relevance of it or feel comfortable enough to disclose the information in the context of the relationship. Acting upon such an event in real time requires the organisation to be both sensitive and empathetic as well as flexible in its customer response. We should not neglect the many ways in which the internet supports our ability to identify events taking place. Internet users leave hints or a trail of clues leading to insights into their current interests and forthcoming events. What websites were visited? What content was consulted for how long and which forms were filled out? It goes almost without saying that privacy needs to be respected and that if any personal data are being collected and used, such practice would require prior consent. Even while analysing behaviour on the organisation’s own website, privacy considerations still apply. Customers do not waive their right to privacy the moment they enter a website any more than they do when entering a shopping mall or department store. We must not forget that even the most relevant offering, or maybe especially a very relevant offering, may result in the customer feeling harassed and intruded upon. Big Brother is watching you! While irrelevant messages will probably be viewed as spam and ignored, undesired, albeit relevant, messages may well provoke a strong negative reaction towards the sender. Acquiring the ability to determine which data are useful and can actually be used in customer dialogues, is a gradual process. It demands a culture in which one is willing to experiment and learn. It differs from ‘trying out’ in the sense that it is a deliberate effort directed at gaining insight into the matter, rather than implementing changes for the sake of ‘trying something else’. Best practices will have to be developed and the added value in the customer dialogue will need to be tested and proven for each new type of data. It requires an inquisitive nature and the ability to try out different approaches on different, carefully selected groups. The most challenging aspect is that an organisation is testing and

105

Part III Intelligence

experimenting with real-life customers. One does not want to damage the relationship and experiments should be treated with the upmost care and consideration. It is also crucial to evaluate the impact on both the long- and short-term developments in customer relationships. In one example, an online bookstore in the Netherlands (Managementboek.nl) tested three different inserts to send out with the book the customer had just ordered. One was a note just saying ‘thank you’, another was ‘other customers bought’ containing tips from other customers who had ordered the same book, and the third was a money-off voucher for a subsequent purchase. By evaluating the effort carefully, they found the insert with the highest immediate return was the ‘other customers bought’ insert, but the highest long-term return was achieved with the ‘thank you’ insert. The voucher was slightly more effective in increasing sales, but had a lower effect on total revenue. They could only truly discover things like this because they approached the campaign as ‘one interaction in a continuous relationship’, leading to multiple measurements over time and not just a direct response analysis.

Which data? To sum up, as can be seen in Figure 5.3, it appears that on an individual level data are usually collected in databases on the following topics (among others Hoekstra, 2001; Peelen, 1999; Tapp, 2001):

106



Identification of the customer or prospect. The most basic data include the name, address, city, telephone number and e-mail address.



Segment. To which segment does the customer belong? Being able to categorise a customer in a certain sub-group is crucial in order to be able to provide them with a differentiated offering.



Communication channel preferences. It is also important at an early stage to determine the nature of the customer’s communication channel preference. What is their opinion of certain channels? In which situations and at which times will they show a preference for a certain channel?



Transaction history and customer value. Which products or services has the customer purchased from the organisation in the past? How much have they spent in the past year? What was the size of the last purchase? How recently was this made? How can the customer’s payment behaviour be characterised? When will the guarantee period end? There are additional summarising criteria which may be used to describe the transaction history, examples include the Recency Frequency Monetary Value scores (see Chapter 8), life-time values, share of wallets and customer contribution margins (see Chapter 10). Direct marketing practice has taught us that historical buying behaviour is one of the best predictors of future purchase behaviour.



Communication history. Recording communication which has taken place is important in order to be able to conduct an on-going dialogue in which repetition can be avoided. With whom has there been contact in sales and in the contact centre, on what and when? What pages have been visited on the website, when, for how long? A communication summary can offer points of reference in determining the method which might be used to achieve increased depth in the conversation so that more personal data can be exchanged.



Complaint history. Have there been any complaints in the past? How did the company deal with them and how did the consumer respond?

Chapter 5 Customer knowledge strategy

5.4



Events. What are meaningful moments in the lives of customers?; how do these induce the customers to undertake a transaction? Being able to obtain data on these events can open up new possibilities: an offer may be made to the prospect at precisely the right time. Some of this type of data may be procured from third-party organisations.



Satisfaction. How satisfied is the consumer in general, with specific contacts? How likely is it that the consumer will recommend the organisation or the brand?

Privacy Customer data represent a valuable asset for organisations interested in implementing a customer intimacy strategy. However, it must be realised that this value is dependent on obtaining the customer’s permission; to what extent will they allow the supplier to get to know them better? Once the information is used in an undesirable manner, the value of the asset becomes an issue. By invoking privacy legislation, customers can force the supplier to remove their data from its databases and prohibit it from making further use of that data. This privacy issue is an important consideration in database management. As increasing amounts of customer data are being recorded in suppliers’ databases, there are growing fears that customers will resist this activity on privacy grounds. It could be said that suppliers who collect and record personal data on their customers without prior permission have thus entered the ‘physical and mental space’ of their customers. There is a risk that customers will not recognise the need for this intrusion: why does someone need information on their personal situation in order to supply a product? There will certainly also be customers who are worried about the abuse of personal data by this, or even another organisation to which the data might be sold or rented. Owing to the rapid expansion of the internet, it is extremely easy to distribute data rapidly; physical or geographical distances have little or no impact any more. Customers can also see the suppliers’ ‘hunger for information’ as an unwelcome invasion of their personal environment by a relative stranger with questionable objectives and interests.

CRM illustration Google has introduced facial recognition technology with great care. Compare it to Facebook, who attracted a massive amount of negative press in June 2011 when it presented its own version of that technology. Google was more fortunate. It revealed a technology that allows for the easy identification of friends who are identifiable on pictures placed on the social platform Google+. Almost nobody noticed straight away. The difference is that Facebook introduced the feature to all its users without asking their permission prior to launch. Google has made their tool optional. This is, incidentally, somewhat misleading for the public. Even an optional tool, once it reaches a certain

degree of adoption, will sufficiently alter the standard to have a significant impact on the life of even customers who ‘opted out’. Someone who deliberately does not own a car still is faced with the fact that modern-day society is geared towards car owners and suffers the negative impact that cars have on the environment. In much the same way, internet users who opt out of Google+ facial recognition may not be out of harm’s way when it comes to the use of the technology by others, such as dictators looking to identify protesters or a popular bar trying to influence composition of its clientele. Source: Morozov (2011).

107

Part III Intelligence

Hagel and Rayport (1997) believe that the objection to recording personal customer data is less related to the fundamental need to protect one’s privacy. In their eyes, customers are generally prepared to act pragmatically. Situations have been known to exist in which customers are prepared to pay premium prices to suppliers who exercise caution in using their personal information and who use it to their customers’ benefit. Customers provide this information willingly. There are also cases in which customers receive payment for information they provide. In their analysis of the privacy issue, Hagel and Rayport make little distinction between individuals. Privacy, on the other hand, is a personal topic; everyone can have different notions of privacy. The boundary between what is and what is not acceptable is different for every customer (Woudstra, 1999). Some will operate pragmatically, but others may approach it purely as a matter of principle. For a supplier, it is important that it takes the different views of its customers into consideration.

5.5

Personal Data Protection Act2 When determining appropriate behaviour when collecting, registering, processing, distributing and using customer data, one needs to give careful consideration to the Personal Data Protection Act. In most Western developed countries there are national acts that constitute a legal background for all data activities involving personal data. It is often a basis for further acts that regulate the use of data in channels, such as the telephone (including SMS), internet and direct mail or e-mail. The national acts and laws are often a validation of the European guidelines and standards. Following the European guidelines the Personal Data Protection Act is meant to guarantee the privacy of all civilians and a small number of legal entities that are suggested to be closely linked to the owner as individual. Freelancers or companies operating under sole proprietorship are thus also protected by this Act. The definition of personal data is limited to name, address, telephone numbers and IP address. Among one of the general legal principles is the responsibility of the organisation to process data in a reasonable, careful, honest and lawful way in order to prevent errors. An organisation needs to take fitting action to guard against loss, theft and any and all forms of unlawful processing. The use of data above and beyond the purpose and requirements for which the data were collected for should be prevented. The accuracy and truthfulness of data needs to be safeguarded. They will need to be stored in such a way that identification of individuals beyond the indicated purpose is not possible. Processing data is only permitted under the supervision and authority of the person or department responsible for personal data.3 People involved in data processing are obliged to respect privacy and are held to secrecy as to the personal data they acquire knowledge of during data processing, except in cases in which the law requires

2 3

108

Based upon Singewald (2011). It makes sense to formally include this aspect in the function description of all employees of an organisation, as well as in the code of ethics.

Chapter 5 Customer knowledge strategy

them to report specific data. External agencies, such as call centres, database managers, data entry agencies and fulfilment houses who are requested to process data, are subject to the instructions of the person or entity responsible for personal data protection. Consultancies, over which the contractor has no full authority, are not an external data processor in the proper sense of the word and are acting on their own authority. Contracts with third parties must always stipulate the responsibility for personal data protection very carefully. The law states that no authorisation for personal data processing is required when it is directly required for the execution of a (sales) agreement or the taking of required precontractual steps at the request of the person involved. This includes, for instance, sending brochures to people. Also, data processing can be undertaken when it serves the legitimate purpose of the organisation that is responsible for the data, as long as neither the fundamental rights nor the freedom of the individual are being violated. In most other cases, all data processing involving data of a natural person or legal entity that is treated as if it were a natural person would require the explicit permission of the person involved. The permission should leave no room for misconceptions or misinterpretations as to the extent to which the data may be processed. It is best to clarify what data processing is not allowed and in that sense wrongful and subject to penalties. The permission does not necessarily have to be given in writing, but may also be acquired in any other way that is legally binding. Registrations in contact centres or e-mail confirmations are also permitted. The organisation has a legal obligation to inform the person, mostly the customer, when they acquire personal data. The illustration box below highlights how this might work. The time at which notice needs to be given is the time of (initial) registration of the data or the time of receipt of personal data by the responsible entity from a third party. The duty to inform is nullified when it is impossible to comply or if it requires efforts that cannot be reasonably be expected to be made by the responsible entity. This may be the case

CRM illustration ‘Prior to accepting your application and in order to be able to process the agreement, XXX Inc. is requesting your personal data. We may use this information to inform you about relevant services of XXX Inc. and its legal subsidiaries. If you would prefer not to receive this information, you may indicate this in writing. Please send your objection to XXX Inc. P.O. Box 1234 . . .’ This example shows that the duty to inform is being met. The entity responsible for data collection and processing is named, and the purpose of processing explained. The right to refuse access for any further use is also covered.

If the data are not being collected directly from the person involved, but through a third party, the entity responsible for the data processing will inform the person whose data is being processed of the following: ●

identity of the entity responsible for data processing;



purpose of the data processing;



circumstances and conditions that ensure a proper and careful processing of the personal data;



information about the right to refuse and object to the data processing.

109

Part III Intelligence

when data are being collected with the sole purpose of blocking or verifying transactions, ‘de-duplication’ of addresses with suppression lists (blacklists of people not wanting to be approached) or removal of addresses which are outside the target group. One could say that this is the processing of personal data with the goal of not approaching the customers, thus approaching them just to inform about the data that was acquired with the purpose of not approaching them, would be quite ludicrous. The person who is registered has the right to get access and inspect their personal data registration. The request must be granted and answered in full within four weeks of the day of receipt. The fees that an organisation may charge for such requests are €0.23 per page with a maximum charge of €4.50. If such a request is made, the person will also be informed about the reasoning behind the use of certain personal data, e.g. how it affects the tariffs or promotional offerings a customer receives.4 If data are being processed with the goal of developing a relationship between the person and the responsible entity, with the purpose of soliciting means for commercial goals or charities, the person involved can always refuse registration.

CRM illustration ‘If you would prefer not to receive this information, you may indicate this in writing. Please send your objection to XXX Inc. P.O. Box 1234 . . .’ The responsible entity should then proceed immediately to avoid all further data processing actions and activities. Once a year, the responsible entity should reiterate the right to refuse to the registered person, but this can be done in combination with promotional offers or through advertising campaigns. In case of non-conformity there is a right to claim damages incurred, as well as the right to pursue the matter under the law. The Personal Data Protection Act does not make a separate distinction for special data, such as religious, political or sexual preferences, health or ethnic background. There is still, however, a need for explicit permission to process such data. Silent or implied consent is not deemed acceptable; the person involved must actively agree to registration in writing or otherwise. The person involved must have been informed fully and clearly about the consequences of such registration. They must not be surprised by the use of this information in customer interaction or any other sense. There is a duty to report any and all processing of personal data. The report made must contain the name of the responsible entity, the processor, the purposes of processing the data, a description of the data and the way in which it is handled, the receiving parties, the security policy and any use in an international context. Companies may be exempt from registration under the following conditions: ●

repetitive and straightforward activities, such as the payroll or accounting procedures;



when the data are only kept for a short period of time before deletion.

Exemption from registration is only an exemption from registration with the relevant authorities. The other terms and conditions, rights and duties of the Personal Data Protection Act are upheld. The administrative fine for not registering when registration was due differs from one EU member state to the next. Criminal law may also be applied and lead to financial sanctions or even imprisonment.

4

A person as such can ask to see the cross-sell or retention models an organisation makes use of.

110

Chapter 5 Customer knowledge strategy

Communication laws and rulings The law and appropriate rulings in terms of communication channels is rapidly expanding. When taking this into account, we must focus especially on the breadth of application: which channels are specifically concerned? We must prevent more communication options being closed down than strictly necessary. Before one really notices, the ability to reach customers is completely destroyed. In general terms, it is easiest to describe the permission rulings as to communication channels by the words opt-out and opt-in. Opt-out gives the person involved the right to refuse to having been contacted through a certain channel (post-fact), while opt-in requires permission first. The following situation holds for consumer markets:

The right of objection and the various channels of communication ●

Addressed e-mail

opt-out



Telephone (voice)

opt-out



Fax

opt-in



Automatic telephone calls without human intervention

opt-in



Unaddressed e-mail

opt-out



E-mail: customers

mostly opt-in

opt-out = right to block by data subject themselves opt-in = prior permission needed from data subject to send messages

Electronic messages are messages that can be stored in computer networks or on peripheral devices. It is a category comprising e-mail, SMS and MMS. The main rule is that prior consent (opt-in) is always needed in order to use digital contract data. An exception to that rule is when electronic contact details were acquired during the sales process. The use of such data is allowed to promote similar products and services from the same organisation, as long as every communication points out the right to refuse. Every message should include the true identity of the sending party, including an address and phone number to allow customers to execute their right to refuse. The relevant law in business-to-business markets is increasingly geared towards the consumer law. Prior to sending e-mails and faxes, consent is also required. People not interested in further offers through the telephone or regular direct mail gave the option to register with a central database. This database should be consulted at any time by the sender of information. Failure to comply with the centralised registration preference can incur significant fines in several EU countries.

5.6

Information policy In today’s information society, the possibilities for collecting, recording, processing, distributing and utilising data continue to increase. It is becoming important for companies to formulate a vision on these topics in which consumers, the competition, legislation, the

111

Part III Intelligence

value of data as a resource, morality and the possibilities offered by IT are all taken into consideration. According to Godin (1998), translating this vision into a marketing concept leads to the formulation of ‘permission marketing’. A central theme in permission marketing is the asking of permission from the consumer: permission to ask them to focus on a commercial message and to disclose more about themselves so that the supplier can customise their offering (Godin, 1998). Although the name emphasises a topic that merits a great deal of attention within marketing, it would be an exaggeration to refer to this as a new form of marketing. Within marketing, which focuses on the exchange of resources, information is actually recognised as one of the potential resources for exchange. According to the existing marketing concept, a supplier must exchange information with customers on a voluntary basis and during these exchange processes, must strive for customer satisfaction and the perpetuation and development of the relationship. The fact is that the two-sided exchange of information is, in many cases, a subject which receives insufficient attention within (relationship) marketing policy which focuses primarily on the exchange of goods and services for money. Information ends up in a ‘no-man’s land’ where there is little if any protection. As a result, data are not always obtained through voluntary exchange; it almost seems as if they are stolen and used without permission. These are methods which have no place in the existing marketing concept. The recording of data on the quality of the customer–supplier relationship and the stage in which it is located is a point of particular interest for database managers. Commitment and trust, which grow as more personal and less concrete resources are exchanged (see Chapter 1), are abstract concepts, the measurement of which requires a great deal of work. More questions will have to be asked of customers in order to be able to make a ‘rough’ estimate. Customers could perceive this measurement as a nuisance. At the same time, many costs will have to be incurred in order to be able to gather the data. As people come to realise that measurements must be repeated on a regular basis in order to be able to keep the information up to date, they will become increasingly aware of the cost aspect. The challenge for database managers consists in devising a way to gather regular, reliable information on the quality of the customer–supplier relationship at a relatively low cost and in an accessible manner. A model that is capable of translating currently available behavioural data that comes in on a frequent basis into measures of commitment and trust on the part of the customer would be an excellent solution.

5.7

Conclusion Customer data which are developed into useable customer information constitutes one of the most important building blocks of CRM. Without customer knowledge, the relationship policy will lack substance, customisation of the offering will be difficult and focused communication based on customer profiles impossible. Investments in this type of data are usually a lot higher than management anticipates. Increasing the ability to gain insight into these investments and the consequences of a lack of data quality are effective for making management aware of the scope and relevance of data quality. Making the business case for the importance of data quality is probably better served by this type of argument than one which sings the praises of the future profits to be earned from data quality.

112

Chapter 5 Customer knowledge strategy

As a first point, developing customer information requires a professional organisation. Database management is not an activity which can be done on the side. Nor is it a function which is the exclusive preserve of specialists in a cost centre. In order to guarantee that marketers and those working in the front office will act upon the customer information which has been made available, it is recommended that customer intelligence be organised using an integrated team. With the support of professional staff, these teams can further enrich the customer information and utilise it profitably in decision making and marketing operations. It is possible within a learning organisation to work on the construction of the desired customer profile and matching marketing policy. Various information sources can be combined in order to complete this picture. Furthermore, the utilisation of data requires a well-devised privacy policy. Customers will have to consent to the supplier getting to know them; they will have to see the benefit of this as well. If they cannot see the advantage in this, then the value of this extremely important business asset will shrink rapidly.

CASe STUDY Customer knowledge at Center Parcs: a life-long holiday! Introduction Center Parcs is a holiday resort with locations in several European countries, for example the UK, Germany, France and the Netherlands. Customer relationship management is one of its successes. The secret being: ‘it is not about the value the customer represents to us but about the value he or she wants’. Richard Verhoeff, director of e-commerce at Center Parcs: None of our customers is the same. The market and the customer do not exist for us. All that our guests have in common is the money and the time they spend with us. It is our challenge to get to know them better . . . It was the objective of our yield management system to optimise cottage rental, but nowadays we also want to actively offer services at different contact moments. Experience tells us that guests who participate in more activities are more likely to return. But before you can do this, you will have to answer questions such as: Who are our guests? When do they come? What do they want? In other words: we need customer profiles. Of course, segmentation is nothing new. In most cases customer groups are distinct and differ in the value they represent for the organisation (customer value). Customer relationship management then simply means retaining the good customers and stimulating them to increase their expenditure, while in the meantime the bad customers can leave.

Profiling customers BPK Acxiom, a database and CRM consulting firm, approached it from a different perspective and began by analysing the emotional and functional values (somewhere to sleep; a roof over your head etc.) of a stay at Center Parcs. These values change with the life-cycle of a customer. He comes as a little child with his parents, when he is older he brings his girlfriend, and again later his family. Each of these roles asks for a different approach. Also, the value of the attractions differs for each customer, depending on his life-cycle, the time of his stay and the people that accompany him. Verhoeff: ‘The swimming pool on a Saturday morning serves a completely different function from that on a Sunday afternoon, when there are a lot of small children around.’

113



Part III Intelligence

Case study (continued) To clarify this, BPK Acxiom developed life scenarios. Peter Severens, director at BPK Acxiom: ‘We write life stories. What are the motives that drive people? Where do they come from? What are the events in their life and in specific situations? And what goods and services are consumed during these events? We map people’s life-cycles and store them in the database.’ The scenarios have been tested and refined in panel research together with a market research agency, named Signicom. It resulted in the definition of a number of customer groups and a customer-value pyramid per customer group. The value pyramid contains suggestions for product development and communication. The tone-of-voice, the actual proposition and the sales arguments match the values and preferences of the segment.

CRM software CRM software plays an important role during the implementation of this customer group project. Center Parcs uses the forecasting software developed by DataDistilleries (now owned by SPSS) in direct and telemarketing processes. People who seem most likely to book during a specific period are selected from the database. However, sales staff also benefit from the software. Marcel Holsheimer, founder of DataDistilleries: ‘Our software helps to predict the interests of a person during a contact moment.’ Specific phone scripts and offerings can be formulated. Verhoeff: ‘Some customer groups appreciate it if you give them a discount right from the start, others first ask for an explanation of your products and services and only let you know at the end if a discount is required.’ Although the customer groups and formats help, one should never forget that it remains people’s business. In predicting what will interest Center Parcs’ customers, DataDistilleries benefit from an enormous database with customer data that have been collected over the years. As early as 1984, Center Parcs started to store relationship and transaction data. However, through the years the organisation has been reactive in its use of these data. Erna ter Weele from BPK Acxiom: ‘Currently, changes are focusing on improving customer insight and exploiting this information in actions.’ Since DataDistilleries’ software is user friendly, marketers no longer have to rely on IT specialists and can act faster. Verhoeff: ‘Time to market is very important. If you notice the occupancy rate of your park is not optimal for a particular weekend, you only have a few days to do something about it.’

Results Although Center Parcs is pleased with the results to date, Verhoeff is convinced the system has greater potential. ‘An additional positive result of €3 million is a beginning. We have 3.2 million customers a year and if they spend an additional 2 per cent, revenue will increase by several tens of millions. By making more active use of the call centre in outbound actions, by stimulating cross-selling in the call centre, via the internet and during contact moments in the park itself, revenues have to grow.’

Questions 1 Consider the way Center Parcs and its consulting and research firms profile its customers. Apply the method, described by Peter Severens, to yourself or someone who has visited a holiday park in the past. What kind of customer profile can you construct? 2 Outline two advantages and two disadvantages of applying this customer profiling approach. 3 In what ways can Center Parcs differentiate its marketing for different customer groups? Source: Theo Loth (2003) Een leven lang er tussen uit, Adformatie, March, 11, 13, 36–7.

114

Chapter 5 Customer knowledge strategy

QUeSTIONS 1 You are a customer intelligence manager and would like the approval of senior management for investment in improving data quality. You have ten minutes to present your argument to the board. Outline the essence of this argument. 2 Specify the wastes that occur as a result of a lack of data quality. 3 Why is it so difficult to base the value of data quality on potential future customer transactions? 4 The data which are received by companies via e-mail and the internet on the identity of customers apparently have a relatively low level of reliability. (a) What could be the underlying reasons for this? Name three and explain your answers. (b) What can a company do to guarantee the quality of these data? 5 Choose an organisation of which you are a customer. (a) Describe yourself as a customer and provide concrete information on which data must be registered in order to be able to describe you as a customer. (b) Indicate which data may best be obtained from market research and which may best be registered on an individual level. Explain your answer. 6 The maturity of the customer intelligence function can be characterised by an evolutionary path. It appears in practice that every success, and the step to the next maturity level, is followed by a crisis. Can you give a possible explanation for this, in your opinion? 7 According to the European privacy legislation, you, as customer, are permitted to ask a company which details of your data it is retaining in its database. Approach a company of which you are a customer and ask for these registered data. Describe the mechanics of this process and provide your reaction to the data that had been recorded. 8 Why does the nature of the privacy issue change in the knowledge and network economy? Support your answer by providing two examples.

References AGB Interact (1995) De kwaliteit van de tenaamstelling, Dongen: AGB Interact. Bel, E.J.van (2004) Event Driven Marketing, Amsterdam: Kluwer. Blomkvist, S. (2003) Persona – an overview, Uppsala: Information Technology, Human Computer Interaction. Cooper, A. (2004) The Inmates Are Running the Asylum, US: Sams. Davenport, T.H. and Harris, J.G. (2007) Competing on Analytics, Boston, MA: Harvard Business School Press. Davenport, T.H., Harris, J.G. and Morison, R. (2010) Analytics at Work: Smart decisions, better results, Boston, MA: Harvard Business School Press. Godin, S. (1998) Permission Marketing, New York: The Free Press. Gruding, J. and Pruitt, J. (2002) Personas, participatory design and product development: an infrastructure for engagement, Proceedings of the Participation and Design Conference, 144–61, Redmond, OH: PDC.

115

Part III Intelligence Hagel III, J. and Rayport, J.F. (1997) The coming battle for customer information, Harvard Business Review, January–February, 53–65. Hendriks, M. (2011) Personas in action: linking event participation motivation to charitable giving and sports, PhD thesis, Rotterdam School of Management: The Hague. Hoekstra, J.C. (2001) Direct Marketing, 2nd edn, Groningen: Wolters-Noordhoff. Jayachandran, S., Sharma, S., Kaufman, P. and Raman, P. (2005) The role of relationship information processes and technology in customer relationship management, Journal of Marketing, 69, October, 177–92. Kelly, S. (2006) Customer Intelligence: From data to dialogue, Chichester: John Wiley & Sons. Levitin, A.V. and Redman, T.C. (1998) Data as a resource: properties, implications and prescriptions, Sloan Management Review, Autumn, 89–101. Loth, T., 2003, Een leven lang er tussen uit, Adformatie, 11, 13, 36–7. Mergen, N. (2003) Het beste systeem faalt als de kwaliteit van de relatiegegevens niet deugt, de ROI van goede relatiegegevens, De Kern van uw zaak, Breukelen: Nyenrode University/Human Inference. Morozov, V. (2011) NRC Handelsblad, 31 December, 2. Peelen, E., Overveld, P. van and Vink, J. (2009) Inzet customer intelligence leidt tot minder klant verloop en efficiëntere cross selling, RSLT¸1, 1–8. Peelen, E. and Redeman, E. (2006) Slechte kwaliteit relatiegegevens kost bedrijfsleven jaarlijks € 400 miljoen, Memo, Breukelen: Nyenrode University/Human Inference. Peelen, E. and Mergen, N. (2003) Klantendata: de resources van de 21ste eeuw, Customer Base, 9 (Yearbook), 12–15. Peppers, D., Rogers, M. and Dorf, R. (1999) Is your company ready for one-to-one marketing?, Harvard Business Review, January–February, 151–60. Roberts, M.L. and Berger, P.D. (1989) Direct Marketing, Englewood Cliffs, NJ: Prentice-Hall. Singewald, A. (2011) Personal Communication, Breukelen: Nyenrode University/Human Inference. Tapp, A. (2001) Principles of Direct and Database Marketing, 2nd edn, Harlow: Pearson Education. Wilson, H., Street, R. and Bruce, L. (2008) The Multichannel Challenge: Integrating customer experiences for profit, Amsterdam: Butterworth-Heinemann/Elsevier. Wolfs, G. (2003) Kwaliteit van data en het kennen van de klant, Masterclass Relationship Dataquality, Breukelen: Nyenrode University/Human Inference. Woudstra, B. (1999) Interactieve Marketing: Hoe verken je de grenzen van wat je van de consument mag weten?, Amsterdam: University of Amsterdam.

116

Chapter

6

Customer data management This chapter describes how an accurate, complete, current and unique customer profile can be developed in databases. We will first discuss the identification of customers in the customer databases and then focus on the manner in which the customer profiles can be further enriched to benefit marketing activities. In this chapter we will address the following questions: ●

How can we measure and control for the quality of relationship data used to identify customers?



How can we profile customers?



What types of databases are there (structured and relational)?



Which characteristics may be used to describe customers?



How can we measure these characteristics?



How can we maintain the customer profile?



What types of external and internal sources (lists) are there to expand the database qualitatively and quantitatively?

PraCtitioner’s insight Sometimes one must look at the databases and data warehouses of suppliers in amazement. Even if you have never bought or ordered something from some of them, your name still appears in their databases and they know a thing or two about you. For others, you are a regular customer, yet it appears that your information is not registered properly. You cannot even identify yourself with certainty. They know your account number or invoice number, but have not yet discovered the person behind the numbers. However, with the truly professional companies, you will find a real and complete customer profile of yourself. They have succeeded in harvesting all the relevant data from all sorts of databases, both inside and outside the company, and have compiled them all into one data warehouse. They are successful in building this database and keeping it up to date. It is easily and quickly accessible so that front-office employees at different locations and in different employment positions can be of real assistance to you.

117

Part III Intelligence

6.1

Customer identification Relationship data used to identify a customer include: (a) the basic data consisting of name, address, sex and company name; (b) supplementary data on the date of birth or incorporation date, nationality or industry, telephone number, legal form, company registration number. Within consumer markets it must be decided whether ‘the customer’ should be defined on an individual or on a household level. In business-to-business markets the relationship should be defined either on a holding level, a division, business unit or departmental level or the level of the individual contact person. And often on all levels, while maintaining the hierarchy and overview of who ‘the customer’ is. Typical of these customer data is that they are used by the entire organisation and therefore form part of the infrastructure of the company. The exchange of customer data takes place between nearly every one of the processes in the value chain. Data may develop in a process or change when: ●

the service department determines that the customer has moved;



the accounts department announces that the customer is on stop and may not receive any further shipments;



the distribution department receives a returned package owing to its having been delivered to the wrong address;



the marketing department receives mailings returned with the notification ‘person no longer works here’;



the invoice does not arrive;



a customer is also a supplier.

Data are input into the system from a reply slip that comes in as a result of a direct response advertisement, a mailing or a telephone call from a customer to the call centre or via the internet. Changes are made and the data are used for commercial purposes (mailings, call centre, by account managers, analyses), service (the service engineer) and in production systems (insurance policy documents, account statements, order confirmations, invoices, etc.). Data for existing customers may be completed using external sources or large groups of new customers may be imported. Sometimes databases are merged to form an entirely new database. Different departments and different people use the database in their own way and with their own goal in mind. In this type of environment, the quality of the customer data must be monitored to prevent deterioration, thereby lowering the company’s profitability. For these reasons, it is advisable to set up a central database. From the outset, the priority may lie with the preservation and monitoring of quality. People will not be able to make changes on their own initiative and time will be set aside for updating the identification data. One person or a number of people within the organisation will be dedicated to managing the quality of this data in a professional way. Using access codes and other facilities, others will only experience the advantages of this system.

118

Chapter 6 Customer data management

Data quality defined If we talk about quality in general terms, it can be defined as something which gives us a good feeling (Mergen, 2003). However, this feeling is difficult to define in concrete terms since it covers so many different aspects. A feeling offers few solid bases on which to measure and manage quality. In order to gain a better understanding of quality, it can be defined from different points of view. We will mention several here under the following sub-headings.

From a technical point of view In general, quality is specified from a technical point of view through the use of standards and norms which must be satisfied by a production process and the product to be manufactured. Examples related to data would be specifications for the number of positions that the name may contain, the number of fields in the database being filled, etc.

Practical value: from a customer point of view Value perception and needs are criteria that the customer applies to determine quality. What does the customer want and what is it worth to them? Just as in the value of objects, relationship data also have two aspects to take into account: financial value and emotional value. In terms of the recipient, we could envisage an existing or prospective customer, or someone from within the organisation, let’s say a helpdesk manager receiving a listing of all unresolved requests or an agent in the call centre attempting to assist a customer. The value perception and needs of the (internal) manager or agent will be different from those of the customer or prospect (external). A very basic need for anyone is to have relationship data being used, written and pronounced appropriately. The administrative identity of a person is comprised of a name, address, gender and date of birth. The context in which these data are being put to use will increase or decrease the customer’s expectations. The printed address on an invoice or the name on the credit card may be shortened, but this must be done appropriately ‘J.P.T. COLLINGWOOD-HEATHERTON’ should not be abbreviated to ‘J.P.T. COL-HEATHERTON’. In a personal mailing, inviting the customer to a special relationship event, for instance, this would be considered a disappointing way to approach the customer. We would expect an account manager to address the customer politely with ‘Good afternoon, Mr Heatherton’. Or, depending on the depth of the relationship ‘Good afternoon, James’. It leaves much less room for error and stresses the need for good data quality. A minor error can provoke negative emotions in a heartbeat. To make matters even more complex, each medium for which data is processed has its own technical requirements and set of standards. Apparently, the recipient accepts that. The need for quality is directly linked to the expectation attached to the intended use of the information. For paying bills, it may be more formal and impersonal. For an internal overview of payments due, the names of customers may be limited to 25 characters, using initials instead of full names and only printed at draft quality. As long as the amounts are correct and the due-dates are included. The matter is, of course, that down-scaling information quality is so much easier than up-scaling it whenever required.

119

Part III Intelligence

Practical value: from the supplier’s point of view The quality of relationship data becomes apparent to the supplier from the response it receives to a marketing campaign. Is it a person or an organisation that is doing the buying, are they profitable and do they wish to develop a relationship with the supplier? In other words, what is the commercial value of the name, address, city, etc.?

intrinsic quality Quality Customer Database = Current * Complete * Correct * Unique ●

Current: to what extent does the database represent current reality?



Complete: the completeness of data concerns the availability of a value as well as the completeness thereof. When the customer database is designed, each item of data must be examined to determine to what extent it is necessary, highly desirable, or just ‘would be nice to include’. The last category is not essential for the business process especially if it turns out later that this field is hardly ever filled in or maintained.



Correct: the data are correct and, if applicable, meet the standard or are valid within a collection of possible values. Correct means not making keying-in errors, and exercising caution by not guessing that ‘Carl Donaldson’ spells his first name with a ‘K’ and by not assuming that the customer’s name is ‘John Maclaughlan’.



Unique: in principle, each customer should only appear once in the customer database.

In some studies, the issue of data accessibility is added to this list. In doing this, we indicate to what extent those using the customer data are able to retrieve it within the time-span allowed for this activity. It is particularly important for agents in the contact centre to be able to access the database quickly so that they can conclude the customer contact in a satisfactory manner. With databases maintained in a normal manner, duplication of entries can be expected to lie between 10 and 20 per cent. Duplication occurs when there are several sources of customer data that are recorded independently without being properly matched to current data. With databases involving individuals, the household can present problems. For instance, several people in the same household can have the same initials and surname; in this situation, data such as date of birth and sex can have a high distinguishing value. However, the chance is just as great that parents and children with different surnames

Control addresses assist in preventing fraud Control addresses were previously used primarily to determine whether or not a mailing had arrived at its intended destination. These days, control addresses play a major role in the detection of fraudulent use of databases. Almost every company has valuable databases at its disposal and should treat these with extreme care. Many companies feel it will suffice to use a selection of its own staff members to conduct a check. However, if legal steps are taken due to improper use, the court is not really interested in ‘internal inspectors’. For this reason, direct mail experts emphasise that it is also important to include external control addresses. Source: Direct Marketing (2002).

120

Chapter 6 Customer data management

comprise one household. It is then difficult to estimate whether there is one family or more at that address. With organisations (companies, government bodies and so forth), not only the name, but also the addresses can create problems. Companies often have more than one branch and maintain separate postal, delivery and invoicing addresses.

Measures geared towards improving the quality of identification data Since customer identification data are used throughout the organisation, managing their quality is an even more serious challenge. Several measures can be taken to manage the quality of relationship data and to overcome situations where Mrs Fortmann is addressed as Mrs Voortman or where her name one day is spelled Fortmann, and the next Fortman or Vortmann or Voortman. To further resolve the identification problem, a customer is ‘designated’ a customer number, key words, matchcodes or a combination of postcode and house number. By assigning a unique customer number, it seems that the problem of identifying customers is solved. However, these data are error-sensitive, not always available and usually not customer friendly owing to their length. For example, customers cannot normally remember them, making identification difficult if they call. Key words may provide a solution if there are many customers with the same name and are therefore difficult to differentiate. The problem with this is that the person who chooses the key word is a different person from the one who later looks up the customer. Matchcodes can be used for the same purpose. In order to pick out the correct Jones from the other 600 in the database, a matchcode can be used which consists of a combination of a number of letters from the name, the street name and city name, for example. However, the method is impractical, has no search code and is errorsensitive. A building may be identified in the Netherlands by the postcode and the house number; however, this does not necessarily apply to the household and/or the individual customer, who may even reside at several addresses. Problems also occur with this type of code if the customers relocate. In order to find a solution to the identification problem, lessons can be learned from the ways in which people tend to search and compare. For example, how do the police describe a fugitive? It is well-known that they use people’s physical features that distinguish them from others and together make a person unique: height, sex, hair colour, moustache, glasses, etc. Some of these features may change, and are therefore not reliable as identifiers; nevertheless, their misallocation does not prevent a correct identification. Even if the moustache has been shaved off, the suspect can still be identified in the crowd. The challenge now is to develop an intelligent system that makes it possible to identify our customer in databases on the basis of administrative, rather than physical, characteristics. The system must be able to deal with the fact that there are many Joneses and to determine whether Philips refers to the name of the holding company, the surname of the family or the name of the company divisions or branches. Companies may develop these types of system themselves, but there are also standard applications available on the market. They make use of reference files, such as postcode tables including the most recent changes in address, or intelligent rules to identify someone correctly based on combinations of data. The demands placed on the system vary from one application to another. Speed plays a more important role in the contact centre, whereas for speech technology applications (voice processing), the aspect of reliability will take more immediate priority.

121

Part III Intelligence

In addition to being used for finding customer data, these types of intelligent systems are also useful in verifying new customer data which has been entered. For example, it can be verified online whether someone who has logged on as a new customer really is a new customer and not someone who already appears in the database. The quality of the filling-in of customer data is also monitored; has the person placed their postcode in the right box on the internet form and is the prefix in the right place? In this way, duplication and errors can be prevented. These systems can also play a role in comparing databases. Potential and certain duplications are pointed out. By the time the databases are merged, this will already have been taken into consideration. The application possibilities mentioned here are preventive in nature; they prevent database pollution at source. When the system is deployed to de-duplicate a database, the quality check takes place later, and it is the remedying of errors that is key. Systems in and by themselves will not provide the solution for the data quality problems organisations are facing. They are instruments that can assist in making sure new data is entered timely, completely, correctly and uniquely and that regular maintenance takes place on the database itself. Ultimately, however, decisions will need to be made regarding the distribution, control and ownership of relationship data across the organisation. In terms of control and management of information resources, a central database architecture is needed to register customer data. The department charged with managing this database should authorise access to the data resources and ensure that those authorised have learned the procedures and apply them, in order not to pollute the central database. The department should also take care that appropriate tools are used across the organisation to distribute data back and forth between the central database and decentralised systems and applications. The department needs to set standards for data quality and measure and manage the database according to these standards. A budget needs to be allocated to invest in customer data management and, based on business cases (in which projections are made of the expected financial benefits from investments in data quality), such investments are able to prove their worth to the organisation. The database manager is not necessarily also the owner of the data. It can be quite interesting in terms of organisational dynamics to appoint ownership to the business, the users of customer data (e.g. marketing and sales people). This way they are responsible for the data they collect and the way in which they use it. Data quality becomes a matter of importance, which it would otherwise not be.

6.2

expanding the size of the customer database The database containing customer data may be expanded in different ways to allow for the inclusion of more people and/or organisations. In evaluating the quality of the alternatives, we can examine the intrinsic relationship data quality as well as the commercial value represented by these customers: are they good potential customers?

response to external lists The growth may come from the responses to lists (with names, addresses, cities, e-mail addresses and/or telephone numbers) which have been rented or purchased from third parties. A common construction is one in which these external lists may only be used once for a

122

Chapter 6 Customer data management

marketing action and that the response to this may be incorporated into one’s own database. These lists are designed with another objective in mind than that for which the organisation plans to use them. The quality of the data has never before proven itself in this situation so that the response which will be produced by a marketing action is as yet unknown. In general, this quality will be lower than that of the internal database, the so-called house list. These types of external list may be sold or rented out directly by the company that has created them, but there are also intermediaries – ‘list brokers’ – which may be contracted for this purpose. The price of a name–address–city list depends on the degree of selectiveness involved: how many characteristics were used to select the name–address–city list? Another factor which plays a role is the results achieved by others in marketing activities using these lists and its influence is based on the scarcity of addresses in a certain market.

response via own channels As the number of channels through which direct communication with prospects and customers may take place increases, the importance of external lists tends to decrease. A period in which customer data was scarce seems to have come to an end. A new era has begun in which the challenge is more one of dealing with information overload and growth. An important and relatively new source of contact is social media. Visitors to social media platforms are able to log on with their social profiles and become part of a community. Customers identify themselves on the Facebook page of a brand community. The profile data of the Facebook friends then becomes accessible to the brand. However, it is currently not allowed (neither by law nor the web’s own etiquette) and not practical (in terms of the quality of the profile data) to transfer any of the profile data to internal relationship databases. First, it is not uncommon to assume a different identity online. The identity cannot be validated with certainty and digital identity theft is becoming increasingly common. Even if the digital identity on social platforms matches internal records, the data in profiles tends to be either incomplete or outdated to a large degree. If one chooses to get more customer data through the use of social or digital platforms, it is best to find an alluring reason to register with the branded website and make sure it pays to provide quality information. One may require validation of the registration with a confirmation e-mail or be entered into a contest with the e-mail address. If validation procedures are not used, one runs the risk of having a lot of customers register with names such as Mickey Mouse or e-mail addresses such as [email protected]. The value of relationships to the organisation may differ. Some have shown an intrinsic interest in the brand or specific products and services, while others respond only to incentives or games and competitions or were passers-by who happened to have identified themselves. From a marketing point of view, setting these groups apart by their potential value can be interesting. The common view seems to be that an extra e-mail address on the newsletter list costs nothing, but if data quality maintenance costs are allocated, one will quickly see that these data also represent investments and managing them by value makes sense. This starts right at the beginning: what do you collect information for and from whom? The website is an easy source of customer data if it requires some form of registration. The easiest way to do this is to offer special services to registered users, such as unlimited downloads, but it may also help to require registration before allowing someone to be assisted via the internet or telephone. The quality of the data that come in through these channels varies. A relatively high number of people do not fill internet forms out correctly.

123

Part III Intelligence

Prefixes end up in the wrong field, errors in dates of birth and telephone numbers often go uncorrected. The likelihood that inaccuracies occur is often high in situations which require that certain fields be filled in because the registration will otherwise be rejected. And so the strange situation occurs that organisations that are very focused on getting the required amount of customer data (and focus on completeness of records) tend to end up with more bad data (incorrect entries and incompleteness within fields). It’s a ‘Catch-22’ situation. In call centres, the name, address, city and the like will be filled in by the agent who bases this information on what he hears. In the event of doubt, he will have to ask how something is spelled. He will have to prevent a situation from occurring in which certain fields are either not filled in or are filled in incorrectly because he considers it time-consuming, or he feels the question is too intimate, too likely to annoy the customer and/or risks lowering the chance of a sale. Reply slips and forms to be filled in that are returned as a result of a direct response advertisement display errors. Among these registrations there is sure to be a form filled in by a Mr Bear who lives on Zoo Lane in Animal City. The commercial value of these customer data is influenced by the marketing action that lies at the basis of the registration. Does a prospect or customer provide their data because they registered spontaneously or because an acquaintance recommended doing business with the supplier? Or are they responding to an interesting offer seen in Newspaper A, B, C or Magazine X, Y, Z? Or is there a risk that a ‘surfing adventure’ on the internet ends with the filling in of the supplier’s registration form? In general, the commercial value of the name–address–city lists in the last two examples is lower than in the first two. Also, those who become customers through a member-get-member campaign appear to represent a high above-average value. For one reason or another, those people who are doing the recommending feel responsible for their friend’s or acquaintance’s satisfaction with the supplier. They do not want to be blamed, or have to hear ‘What have you done to me this time?’ It is important to keep track of what the quality and commercial value are of the customer data that come in through the various channels. In future, the organisation will benefit from this experience by making use of those channels and campaigns that have already proven their worth.

6.3

Customer profiling Within the scope of CRM, further profiling of the customer is desirable; we want to know more than their relationship data. For a more complete customer profile, it is necessary to be able to describe the customer as ‘buyer’, ‘user’ and ‘person’ or ‘organisation’ in their personal context (see Chapter 5). The nature of the data on these topics can differ from the relationship data. A distinction can be made between fixed and variable data. The actual value of the variables in the latter category will change over time or even in real-time, as is the case for the total customer turnover, for example. This is not the case with the fixed data, such as the name field or other identification data. Data can be the result of a simple measurement on a nominal, interval or ratio scale, but can also be the product of some calculations. The cumulative turnover of a customer to date is an example of the latter, as is the calculation of value the customer represents through its life as a customer of a company (see Chapter 10 on Customer Lifetime Value). A segment indicator can be based on a simple

124

Chapter 6 Customer data management

CrM illustration The measurement of product purchases and ownership is relatively clear. Which product does someone use or own and when was it purchased? Has the guarantee period expired? Has damage already been repaired? Insight into the ownership of products made by the competition is also welcome. Telephone contacts are generally kept track of quite extensively. A record is kept of the times and subjects of each conversation, who the supplier’s contact person was, which agreements were made on the possible continuation of the contact, and on whose initiative the contact originated. These data are indispensable in maintaining the dialogue. The data may be reduced, for example as is done with transaction data, for the development of the customer profile. Communication via the internet presents another challenge. Logfiles containing clickstream data can take on enormous proportions and place a huge burden on the storage and computer processing capacity. It is recommended that several relevant data be distilled from these raw files. The ready availability of these data can have positive effects on turnover and customer development. It provides the supplier with the opportunity to profit from the specific demand and opportunities that arise. The time that is allotted for

this is shorter on the internet than in a mailing programme, for example. The data can also be used to make the websites perform more effectively. In comparison with many of the data mentioned above, satisfaction data do not measure behaviour but instead gauge an attitude which cannot be observed visually. We must often infer how the customer feels about the supplier from the evaluation they give. The degree of satisfaction is often expressed in a score on an interval scale. Characteristics of this scale are that it contains a minimum and a maximum value, for example zero and seven, and that the space between the two scores provides no information on the differences in the level of satisfaction. The result is that data on satisfaction, which are difficult enough to obtain, are less reliable than transaction data, for example. It is therefore not surprising that behavioural characteristics appear to be a better predictor of future behaviour than similar attitude data (see also Chapter 3). It is only extremely low or high scores that appear to possess a predictive value. In cases where the supplier fails to take action, complaints and dissatisfaction point to the imminent departure of the customer, and a very high degree of satisfaction corresponds to the continuation of the relationship.

question that is answered by a customer, but might also be based on a complex formula, taking into account the transaction history, communication history, postal code, etc. We usually choose not to keep all of the ‘raw’ data, but instead to revise them so that a better and more easily maintained customer profile develops, as is explained in the CRM illustration above. Decisions about which data will or will not have to be gathered and maintained should not be made on an ad hoc basis. Some organisations intend to store all data that they encounter during every customer interaction. This is hardly practical and puts the organisation at risk of drowning in its data resources, which in turn remain un(der)utilised and yield less return on investment. An ideal customer profile (for each segment) will have to form the foundation, one which is indispensable to being able to implement the planned relationship policy and communications. It should not provide the customer-facing employees with pages and pages of reading material, but with just the knowledge, or rather insights, they require to serve the customer appropriately.

Maintenance Data become outdated and lose their value. It is not always easy to indicate when this occurs. Some data never change, such as date of birth. For other types of data, this is more difficult. For example, should a customer who, five years ago, indicated their desire no longer to

125

Part III Intelligence

receive commercial messages from the supplier still receive no e-mails? Is someone who has not made any purchases for 13 months still to be considered a customer? And will a buyer be refused if he paid a bill too late 15 years ago and was labelled a delinquent payer? Is an address still correct that was input into the system 12 years ago? Standards will have to be set. The demands which are placed on the currency of the identification data will naturally be higher than those which are applied to the additional customer characteristics. In some cases, the ‘sell-by date’ is linked to a fixed period of time; in other cases, this may be flexible. If it is necessary to the continuation of a relationship that the customer gives their current address details to the supplier, then it is not necessary for a fixed time interval to be applied. This is the case, for instance, with a bank where a person maintains a current account. The method used in the event of obsolescence will also have to be determined: will action be taken to gather the data once again or will an ‘empty field’ be accepted?

Data sources Various sources are available in order to further enrich the customer profile, such as: ●

Internal: – the contact database (or datamart) of the contact centre in which the communication history is maintained; – the product databases in which the product ownership is registered; – the transaction database in which the purchase, delivery, invoicing and payment information is recorded; – the sales information system; – the marketing database which keeps track of the mailings which have been sent, customers’ potential product interests, customers’ willingness to receive information from the supplier, and answers to questions which have been asked in questionnaires.



External: – social networks; what has the customer communicated through social networks, such as Twitter, Facebook, LinkedIn, or YouTube that is related to the organisation? What role does a person play in the branded community and how influential are they in social networks? – there are service providers that set up databases containing characteristics of individuals and legal entities; data from these databases can be rented or purchased for the purposes of enriching one’s own customer database.

internal sources Companies that have developed a complete and extensive CRM system are usually able to draw on a variety of sources in order to supplement customer profiles in a so-called marketing data warehouse (see Chapter 18). Various operational systems are active for the processing of transactions and for production. Databases are linked to these systems from which data may be retrieved for the data warehouse. An extensive database will have to be maintained separately in the contact centre which contains data on the contact history. Sales staff will also have to work regularly with the company’s own sales information system. It will be possible to retrieve and process data from these files for recording in a marketing data warehouse.

126

Chapter 6 Customer data management

In general, the value of these internal data is much higher than that of data that have been obtained externally.

external sources A variety of companies can provide assistance with the enrichment of the customer profile. Without going into all of them in-depth, we can discuss a number of them which differ from one another in the manner in which they can make a contribution.

Customer values Initiatives from marketing research firms are known (such as those made by Claritas and GfK) which, through large-scale random sampling surveys, take measurements among consumers to determine which brands and products they own, or which purchases they expect to make. This provides perspective not only when it comes to attracting new customers, but also in the calculation of penetration percentages and even ‘shares of wallet’. If, for example, it is known which insurance an individual has with different companies, a calculation can be performed to show what the share of wallet is for a specific organisation. The same can be done for the coffee-makers that different catering companies have installed or the CRM software which has been implemented by certain companies. And, with the aid of a ‘charibarometer’ which indicates the amount and types of charity organisations to which someone donates money, potential and share-of-wallet calculations can be performed.

Postcode segmentation Experian and Acxiom are examples of organisations that are capable of creating a profile sketch of the household living at a certain address on the sole basis of the postcode. An indication may be given of: ●

type of house involved: flat, terraced house, semi-detached home, villa, farm; whether it is owned or rented by its inhabitants; construction date; quality of the neighbourhood, etc.;



location: city or countryside;



composition of the household: young or old single person, two-person household, household with children;



household income;



possible employment situation: who is currently employed in the household, still works or has reached the age of retirement?

The data involve the profile that is measured within a certain postcode area in a number of observations. If a varied profile is encountered within a zone, the reliability of the measurement may decrease. This may be the case in the centres of large cities. By performing additional measurements and applying adjustments in the area zones, an attempt is made to improve the quality.

End value segmentation Obtaining insight into the customer as a person (see top right of Figure 5.3) and not only as a buyer and user, seems to be a challenge that is hard to meet. One market research firm that attempts to provide insight into this field is Motivaction. A tool known as a

127

Part III Intelligence

Figure 6.1 Socioconsult compass Source: Motivaction. © Motivaction International B.V. 1999 www.motivaction.nl.

‘socioconsult’ compass is used to measure stable characteristics that lie at the basis of individual behaviour (see Figure 6.1). The score shown on the compass determines the course someone will follow.

CrM illustration geographic information systems: how does gis work with internal and external databases? An example . . . Banks usually maintain a database that is composed of POS (point-of-sale) data obtained from payments, PIN transactions, private label credit cards, CRM applications and postcode information, among

other sources. These data are also referred to as internal data sets. Next, sales transactions can be linked to the branch number where the purchase was made, for example. With the aid of GIS software, this information

➨ 128

Chapter 6 Customer data management

CrM illustration (continued) is coded. The customers are also localised, which provides insight into customer profiles and spending patterns, among other things, per branch and on the basis of postcodes and regions (external data sets). By using geographic information, a marketer may obtain information on the current situation faster and in a more organised manner enabling targeted campaigns to be initiated. A picture of the aspect of time and the yield of each activity may be obtained straight away, which allows the result to be adjusted. Customer profiles may also be linked to external data sets with lifestyle information, for example, and clusters to determine the purchase behaviour of a specific target

group on the basis of demography, the so-called search for lookalikes. Every department of a bank or company can learn a great deal about its customers through the use of database queries. Once the purchase behaviour of customers has been mapped out, their addresses and income levels can be determined. The locations where the highest concentration of customers lives must be where a company aims its marketing activities. At the same time, the company may determine how prepared a customer is to drive to a certain branch. Source: Zoeten (2002).

On the basis of the answers from respondents in surveys conducted by Motivaction, a number of segments were identified. These are shown in Figure 6.2. Recently, a new group was identified: the hedonistic post-materialists. Their social environments differ in terms of the answers they provide to the questions which lie at the basis of the socioconsult compass. Significant differences between the consumption behaviours displayed

Figure 6.2 Social environments in Europe Source: Motivaction. © Motivaction International B.V. 1999 www.motivaction.nl.

129

Part III Intelligence

by the various groups have also been observed. These not only involve magazine and newspaper subscriptions and insurance behaviour, but also the purchase of products such as rice.

the use of external databases In order to make a decision about whether to rent or purchase an external database, the following aspects must first be considered: ●

To what extent can data be used in consumer markets to enrich suppliers’ individual customer profiles, helping these companies in their marketing efforts to the individual? Within the framework of the new European Personal Data Protection Act, permission will have to be obtained from the consumer to do this.



What is the intrinsic quality of the data involved? In other words, how current, complete, correct and accurate are the data?



For which persons and companies are the data available? If, for example, the external data are based on a random sampling, there is the chance that these have been gathered for only a (small) portion of the customers. Models will have to be developed in order to estimate how other customers score with regard to the characteristics. It goes without saying that inaccuracies occur as a result.



To what extent can the databases be linked? Can the identity of the people and organisations be determined unambiguously in both databases so that proper matching is achieved? Postcode databases do not allow unambiguous identification, which can lead to a certain loss of quality.



What price will be charged for the databases and what conditions are placed on the use or possession of the data?

It is advisable to test the commercial value of these databases in marketing activities. On the basis of the (increase in the) response that is realised as a result of the databases, it may be determined whether or not it is worth incurring the expenses that are associated with the use of the eternal data. It is worth mentioning that the data from these external databases may also be used in the acquisition of new customers. If the profile for the current customer database is determined on the basis of the external data, then a search can be performed within that database for so-called lookalikes. These are people or organisations that possess the same characteristics, appear in the third party’s database, yet are not current customers. Based on their profile, an above-average chance of response to acquisition efforts can be expected. By combining data, interesting opportunities may present themselves. By relating local data to data on income and ownership, for example, prospects or suspects (potential prospects) can be identified. Someone who runs a household alone in the centre of a city in a rented residence and has a high income level will probably spend a great deal on cultural activities (visits to museums and the theatre, etc.).

6.4

Customer data integration We have seen that customer data have many different sources. Depending on the architecture, the place where these data are stored can vary. In most cases it is unwise to place them all in one central database. Users in different departments can and often will have specific

130

Chapter 6 Customer data management

requirements regarding storage and accessibility, which make them prefer to keep the data in their own environment, close to the application in actual customer-facing processes. In the meantime, for marketing purposes it is important to have a database that offers a more complete view of the customer on all aspects relevant to the strategy. Ultimately we prefer the so called 360-degree view of a customer; we have an up-to-date, complete view of the customer in all their interactions with the organisation through all channels. There is an understanding of the client as a buyer, a user, a human being or an organisation in a specific context. Customer Data Integration (CDI) is needed to bring all these data together and to manage their quality and their usage throughout the organisation in planning and in operations. Relationship data play a crucial role in this. They help us identify customers in all databases; a variety of relationship data can be used with regard to name, address, city, year of birth, incorporation date, registration number in the commercial register and the like. From there on, it is possible to work out how the data will need to be exchanged between the databases. That is to say if there is a coherent set of data definitions. If ‘name’ in one database includes the full name (James van Beek), in the other just the family name (van Beek) and in yet another database the family name without the prefix (Beek) or in another format (Beek, van), data cannot easily be synchronised across systems. Often, the question is whether there will be a central place, a data warehouse, where the data will be brought. Or is there a more ingenious design, where some databases are feeders and others are receivers? In a contact centre an agent will, for example, fill in orders and check whether the relationship data are still correct. This is the source of new data, a feeder. The receiver in this might be production planning, but the same contact centre agent can also be one. Decisions have to be made about the frequency of updates; will it be done ‘real-time’ or is it to be done overnight or periodically? In the most advanced setting there is a continuous feed and receive relationship between the master data and the different databases. Critical in customer data integration is the management of the quality of the data. Changes and additions being received from, for example, a contact centre or the website, should only be accepted in the central database when the completeness, correctness, uniqueness and currency of the data has been checked, approved and/or corrected. This might take some time and can be one of the reasons to decide not to continuously maintain relationships between the master data and local databases. In this circumstance, preventing hard to identify and therefore hard to solve pollution of the master data is more important than having real-time actual master data available in the channels. With the increase in interrelatedness, the complexity of the system grows and the need to invest in more central databases becomes important (see also Chapter 18).

6.5

Conclusion The foundation of customer data is formed by the data which may be used to identify customers. It is the description, expressed in administrative characteristics with which the customers may be picked out in a crowd, as it were. The quality of these data must be controlled: are they current, complete, correct and unique? Various methods and (intelligent) systems can be employed and organisational measures can be implemented to manage the quality.

131

Part III Intelligence

The relevant master data may be further supplemented by other data from internal and external sources in order to enrich the customer profile. It must be determined which characteristics – fixed and variable – need to be recorded and which indicators can be used to measure these. In addition to concentrating on the initial design, efforts must also be made to maintain the databases properly.

Case stuDy optimisation of addresses for european football The organisation of the European Football Championships applied strict guidelines during the sale of tickets to the international public in 2008. Each individual was allowed to buy only one ticket for themselves and one for a guest, and the personal data of both were to be registered. To avoid tickets falling into the hands of hooligans and unofficial traders, Human Inference was asked for assistance. ‘We knew beforehand people would try to get hold of more than one ticket,’ said Jos de Kruif, ticketing sales manager. The simple de-duplication tool the organisation used to identify those people in the database produced a list of suspicious cases. Customer service, however, kept on facing weird requests. What EURO 2008 wanted then was first validation and standardisation of the names and addresses in the database. The tickets would be sent to customers shortly before the game. Therefore it was of utmost importance for the personalised tickets to be distributed to the right addresses and the right persons. Names were set in a standard format with a program named HIquality Name and it was the function of HIquality Name to apply capitals in the proper way. Many names were corrected. Hundreds of names were rejected because the family name was missing or a company name was mentioned. Controlling and standardising the addresses was done with the help of HIquality Address. HIquality Address compared the filled-in address with the most similar address in the postcode databases of a specific country. An error margin was incorporated and all prevented addresses with minor differences were printed on a list. For countries without available postcode databases other solutions were invented. Many of the addresses were standardised in the format the organisation desired. There were numerous reasons for adjusting the addresses – see Table 6.1. To de-duplicate the database, the Football Championship organisation applied HIquality Identify. Experience shows that most fraudulent people only make minor adjustments in their personal data; the system HIquality Identify assesses this similarity between records. The database for sold tickets contained, before analysis, approximately 400,000 records. The de-duplication exercise produced 9 per cent potential duplicate names and addresses. From a safety control perspective this was a significant filtering outcome. The same names with different first letters were found many times. First and last names were inverted or the names were represented with and without the maiden name, a neighbour’s house number was given, rather than their own and their own slightly adjusted birth date was given. To prevent organised fraud, not only individual records were compared but also groups of records. In case person 1 resembles person 4, person 2 matches person 4 and person 5 shows similarities with person 1, the group relations were presented. In this way a street in Reykjavik was identified where several persons together had requested 60 tickets. There were three sources of personal data: the internet, a data-entry agency and the organisation’s own office. Since all three sources had their own database characters, diacritics were presented in varying ways. After importing the data in an SQL file the ö

132



Chapter 6 Customer data management

Case study (continued) table 6.1 Errors during standardisation and validation of names and addresses Name errors

Address errors

Name is not the name of a private person Name and sex are contradictory Two persons with the same name Part of the name is left out Unknown double-barrelled surname Unclear interpretation which results in different ways of writing a name Family name missing Maiden name was left out; sex unknown Unknown element

Address can be standardised, but was abbreviated Alpha section of postcode was incorrect or missing Foreign address Incorrect address Incorrect street name Incorrect or missing street number Industry park Unique address missing No unique standardisation possible Address does not make sense City and postcode do not match

became a ™ or “ “ and Å became a ;. Although this complicated data comparison, it turned out that several people ordered tickets through multiple channels. Hooligans formed a special risk category during the analysis. Using specialised technology, people who most likely were preventing correct identification by using variations on their names were traced. The German, English, Belgium and Dutch football associations provided databases with names of hooligans who were no longer allowed to enter a stadium. Fifty hooligans were identified this way. De Kruif: ‘to avoid criticism afterwards we had to do everything to get these people out of our databases!’ Each of these 50 hooligans had ordered one or more tickets and all of them were cancelled. The resulting data set was used by the Football Championship organisation to accept and fulfil orders. The list with minor errors was processed manually. This also holds for people who potentially ordered more than two tickets for a match. Many of them probably would not have known they were only allowed to book two tickets or made an unintended error. They were not necessarily cheats. The organisation in total refused 1,100 orders. In the end, only those people in Reykjavik can tell you whether they acted in bad faith. This is also the case for the 48-year-old man from a little village in the country who lives with his 47-year-old brother at the same address . . .

Questions 1 Identify the data quality issues in this case. 2 How do you evaluate the way EURO 2008 addressed these quality issues? 3 How can you estimate the financial value of (a lack of) data quality in this case? Source: Memo (2000) 13, 3, September, 3–5, updated 2008.

Questions 1 Why are the data used to identify the customer considered to fall under the infrastructure of a company? What consequences does this have for the manner in which this database is maintained?

133

Part III Intelligence

2 The quality of the customer data may be approached from a variety of angles. It is said that the intrinsic quality approach is superior. Can you explain this in more detail? 3 Unjustifiably, efforts to improve the intrinsic data quality are sometimes equated with de-duplication. What is the difference between the two? 4 Which measures would you recommend a company such as a holiday park use to manage the intrinsic quality of the data which allows it to identify its customers? 5 The experience in direct marketing is that behavioural traits better predict the response to a direct marketing campaign than characteristics which are related to attitudes (including satisfaction), lifestyles and end values. What is your explanation for this? Suggest four reasons. 6 The commercial value (quality from the point of view of the supplier as user) of external lists (name–address–city lists) is usually lower than that of internal lists. What explanation would you offer for this phenomenon? 7 It is a challenge for marketers to construct a customer profile with a minimum of indicators and/or criteria which none the less provides a rich profile. (a) Formulate 15 criteria for a company of your choosing with which the customer profile may be developed within the framework of the relationship policy. (b) Indicate the source from which these data are likely to be collected. 8 Logfiles with data on clickstreams and internet behaviour bring new challenges with them. Describe these challenges and indicate how a company may best deal with them. 9 Motivaction is a market research firm that provides data with which the customer may be further profiled as a person, instead of as a buyer and user. Name three advantages and three disadvantages associated with these data. Answer the question from the point of view of a company of your choosing. 10 How does the European Personal Data Protection Act influence how external data may be used (see also Chapter 5)?

references AGB Interact (1995) De kwaliteit van de tenaamstelling, Dongen: AGB Interact. Direct Marketing (2002) Controle-adressen helpen tegen fraude, Direct Marketing, 9, 5. Garvin, D. (1984) What does product quality really mean?, Sloan Management Review, Autumn, 25–43. Memo (2000) Optimalisatie adressen EURO 2000, Memo, tijdschrift over de kwaliteit van relatiegegevens, 13, 3, September, 3–5. Mergen, N. (2003) Het beste systeem faalt als de kwaliteit van de relatiegegevens niet deugt, de ROI van goede relatiegegevens, De Kern van uw zaak, Breukelen: Human Inference. Peelen, E. and Mergen, N. (2003) Klantendata: de resources van de 21ste eeuw, Customer Base, 9, Yearbook, 12–15. Redman, T.C. (2001) Data Quality: The field guide, Boston, MA: Digital Press. Zoeten, F. de (2002) Gebruik van geodata en kaarten maken complexe bedrijfsomgeving inzichtelijk, Beyond, Mapping, Marketing and Data Warehousing, September, 11–13.

134

Chapter

7

Data analyses and data mining If we are to achieve greater maturity in the area of customer intelligence and determine how this can contribute to marketing strategy and operations, further insight into the analytical process is required. One cannot love what one does not know. By gaining knowledge of analytical processes, we gain insight into how it can benefit us and where we should direct our efforts to allow it to do so. This chapter serves to familiarise the users, the ones who should apply the results of data analyses and data mining, with: ●

the possibilities offered by (statistical and) data-mining techniques, so that they learn how to derive the maximum amount of profit from this resource; and



to initiate them into the analysis process in which a role is also set aside for them.

Before going into data analysis in depth, Section 7.1 examines the experiences others have had with data analysis. The analysis process is then discussed further in Section 7.2. Section 7.3 focuses on data mining, describing current techniques with certain potential from the artificial intelligence sector. The next two chapters will focus on the application of the techniques involved in the analysis of segmentation (Chapter 8), retention and cross-sell issues (Chapter 9). In this chapter we will address the following questions: ●

How can data mining (and statistical) techniques be used to enrich the customer profile?



What are the experiences with data analyses?



How should the analysis process be designed? A thorough formulation of the problem, careful preparation of the analysis question, how the data are prepared in the database for analysis, the analysis itself, the report.



What is the significance of data mining?



What are data-mining techniques?

Practitioner’s insight In 2009, Overdijk et al. published the results of their research into the customer intelligence activities of various Dutch organisations. The research demonstrated that it pays to invest in the development of customer intelligence. It translates back into a better market performance when organisations prove capable of basing their strategy on customer analysis

135



Part III Intelligence

Practitioner’s insight (continued) and are able to make full use of customer knowledge in marketing operations. It means analysis is not done on an ad hoc basis and that results are shared across the organisation and are not at risk of ‘ending up in the bottom drawer’. Customer knowledge extends far beyond basic profiles, attitudes and average customer behaviour. The insights, reports and forecasts are an integral part of sometimes even individual customer activities across several channels. Top management shows commitment to and support for this specialist activity, allowing it to mature, and invest in the quality of data, the quality of research questions, the available toolset of techniques and systems and the presentation of outcomes.

7.1

experiences with data analysis Many organisations are quite pleased when their operational CRM systems work. One may deduce from this that the expectations with regard to the quality of the data analysis should not be set too high. The focus is on the implementation of the systems; satisfaction reigns once the system is stable and operational. The time is simply not available to set up a data warehouse for marketing objectives. Ideas must still take shape with regard to the analyses to be performed for this purpose and it is only those organisations that have a history with direct marketing or database marketing that have gained the necessary experience with the recording and analysis of customer data. However, every leap forward brings with it disadvantages; data analyses for a transaction-oriented organisation operating in a singlechannel environment differ from those for a company with a CRM strategy already in place. It is no longer just the prediction of a response or conversion to an individual mailing or outbound telemarketing campaign that matters. The campaign will have to be looked at within the context of the entire relationship marketing policy. Research is needed into the effects of both incoming as well as outbound communication through different channels on transactions and customer values. More in-depth knowledge of the customer behind the buyer should be developed. It seems that opportunities to benefit from this increased need for information exist in abundance. The growth in data within many companies is, after all, quite substantial. Data become available via the internet, call centre, sales information systems, surveys and backoffice systems (see Chapter 1 in particular). As the databases grow in size, so do the possibilities for analysis. Using data mining techniques, purposeful, visible connections may be sought between selected variables in an exploratory manner. It is not necessary to indicate beforehand which relationships are expected between which variables. Patterns in data are recognised which are unrecognisable to the naked eye. Several years ago, data mining seemed to be a magic term. If we no longer have to specify beforehand which relationships are expected between variables, and no demands are placed – such as with a normal distribution – on the application of the techniques, modelling seems to become a simple and not very time-consuming activity. The promise of exposing hidden patterns has caused pound signs to flash before many an eye. Reality, however, seems to have caught up with the ideals and dreams. The results achieved with data mining have turned out to be disappointing. In various tests in which

136

Chapter 7 Data analyses and data mining

data mining was compared with classical statistical techniques, early data-mining techniques scored no better than the classical, older yet more trustworthy techniques. In themselves, these first experiences were positive in the 1990s and did not give cause to renounce data mining entirely. On the contrary: it proved that data mining is not as simple as was originally thought. The impression that the data could be entered into the computer without too much bother and that the results would just be there for the taking, appeared to be incorrect. The old maxim ‘rubbish in, rubbish out’ also appears to hold true with respect to data mining. Careful data management and thorough preparation of the analysis question remain indispensable. Professional experience with the techniques is a condition for turning quality input into quality output. This way, data mining does not have to be implemented in situations in which statistical techniques may also be sufficient and insight and experience with the extensive palette of data-mining techniques is desirable in order to obtain good results. Finally, the interpretation of the end results requires a skilled eye. Over the course of the analysis project, different disciplines make contributions. To leave the entire project in the hands of a data analyst will not produce the desired results. An optimum degree of teamwork is necessary between the database manager, the data analyst and the marketer. Those who gather the data or use them will have to assist those who enrich them. Language barriers and differences in interests between the three specialists will have to be overcome. The cooperation between them should not be thought of as a waste of time. On the contrary, acting as a team should give them energy and represent a reason to give priority to their collaboration.

7.2

the analysis process Successful data analysis requires progressing through the different stages in the analysis process in a responsible manner (see Figure 7.1 for a description of the phases which follow the formulation of the problem).

Problem formulation The first and most important phase involves the formulation of the research question. It has already been indicated in the introduction to this chapter that an extensive range of questions is available. Given the fact that analysis capacity is very limited in many organisations, it is only the essential and feasible questions which should be addressed. It should come as no surprise that a marketer is primarily interested in a model that points out customers at the time they are going to start familiarising themselves with the market in order to purchase products and services that the company supplies. When is a certain person going to move and thus be ‘in the market’ for a mortgage? When will the car need to be replaced? Discussion about the relevance of this question is not necessary; however, the feasibility of this analysis problem does deserve attention. Should current data on relevant events such as a move and the maintenance costs of cars become available from external sources, then the outlook for creating a stable model with high predictive power is promising. Should these data be lacking, creating such a model will become more difficult. It must be determined whether the data can still be obtained elsewhere or whether it is wiser to reserve the analysis capacity for other problems.

137

Part III Intelligence

Figure 7.1 Phases in the analysis process Source: Slisser (2000).

The types of formulations of questions which are relevant within the CRM strategy framework are summarised in Table 7.1. The ultimate goal of the analysis questions in the first three rows is to make selections from among the organisations and/or people to whom an offer will be made. This is represented by the four main areas of focus which lie at the foundation of the relationship policy, as is illustrated in Figure 12.6 on page 241. In the final row, table 7.1 Summary of the types of analysis questions within the framework of a CRM strategy Nature of analysis question

Objective of analysis

Segmentation and selections

To divide the customer database into homogeneous customer groups To draw up lists of the name–address–city information for persons and organisations to be approached for a marketing campaign Analyses geared towards the determination of the quality of different lists Retention Retention analysis, focused on the early identification of customers with a heightened probability of terminating the relationship Relationship development Cross-sell analysis, geared towards offering a product(s) from a product category from which customers have not yet made purchases Deep-selling analysis whose goal is to increase the sales in a certain product category Up-selling analysis by which more premium products are sold Response-analyses of marketing campaigns, databases/lists: which campaigns or databases/lists score the highest?

Acquisition analyses and selections Customer analyses and selections

Analyses to determine the effectiveness of the customer approach

138

Chapter 7 Data analyses and data mining

the effectiveness of the marketing action or campaign is the central theme. Which approach and which lists can be used to encourage prospects to make the most profitable (on a longterm basis) purchases? In order to arrive at the actual creation of a model, further description of the question is desirable. An exploratory analysis of the problem area can be enlightening. Descriptive statistical techniques, such as frequency and cross-tables, and the graphic illustrations derived from these, usually provide helpful solutions. They provide insight into the economic importance of a retention analysis, for example, or provide insight into the turnover and profit share of single customers in proportion to that of customers who have purchased more than one product. The exploration helps in the formulation of the final research question within which framework the dependent variable(s) and independent variables will ultimately have to be defined. It will be determined how, for example, cross-selling and retention are measured and which independent variables must be included in the model (see also Chapter 12).

Preparations Before performing the final analysis, a random sample can be pulled from the database. The advantage of taking a random sample is that less of the system’s storage and analysis capacity is used. The random sampling provides insight into the quality of the intended data. How can data be cleaned up so that erroneous data can be corrected and duplication eliminated? Are metadata available? A simple definition of metadata is structured data about data; metadata ensure consistency in the data, that variables in the database are defined in the same way. For example, when a product is referred to within an organisation, everyone is talking about the same thing. The way to measure specific features can also be examined. For example, the purchases made by a member of a book club can be quantified in a number of ways. Is the most recent purchase the one that is to be studied, or the total number of orders per year; the amount involved in the last or all of the purchases; the changes in the purchase patterns as compared with a previous period; the purchases made by an individual or the household, etc.? In exploratory analyses, the most relevant variables can be selected. In classifying models, these are the variables that distinguish the best; in other words, they make a distinction between groups. Variables which have the greatest power of prediction are those which are preferred in probabilistic models. Cases can be collected from the data set with measurements of the relevant variables in order to compile the final analysis database. Particular attention should be paid to the distribution among the scores for the independent variable. A random representative sampling, in which each case has the same probability of being included in the final database, is not automatically the preferred one. In order to be able to model the exit behaviour of customers, for example, a ‘substantial number of ex-customers’ must be included in the final database. A segmentation analysis also requires representatives from the different segments which are encountered. Stratified random sampling may be chosen to perform this, so that for each stratum or layer (segment), a fixed number of observations are collected at random. In some situations, the final conclusion will be that it is not possible to compile a high quality analysis database. A cross-sell analysis performed on a database of an organisation which had not taken any cross-selling initiatives in the past will obviously provide very little to go on. Continuing the analysis process in this case would be pointless.

139

Part III Intelligence

The final analysis database may be divided up into a training and a validation set. The first training set can be used to develop the model. The validation set is used to test the reliability of the developed model. To do this, the data from the validation set are plugged into the model. The outcomes from the model are compared with the actual scores for the independent variable, which are also available in the validation set. The compilation of the final analysis database is a time-consuming activity and one which can easily occupy half of the total time spent on the entire analysis project. If this preliminary segment must be run through for each selection or effectiveness analysis, a large portion of the analysis capacity would then be ‘lost’. There is a great deal to be gained if a final data set can be constructed which can be used for different types of analyses. Financial institutions, for example, have this type of final data set at their disposal which includes some 60 to 100 variables used in the compilation of lists. This aids them in making quick selections of people and organisations to be approached with a certain offering, which may vary from product A through to product Z. In principle, they are capable of responding quickly to the market and providing input to the campaign management system that is responsible for the operational management of the promotions and campaigns (see Chapter 18).

Final analysis using statistical techniques or data-mining techniques There are a variety of techniques available for performing the final analysis. Within the category of statistical as well as data-mining techniques, there are many alternatives available. They vary from regression, cluster and discriminant analyses to neural networks, genetic algorithms, decision trees and case-based reasoning. Different variations exist for each of the techniques separately. Experience and insight into the techniques is desirable in order to arrive at a reasoned choice and application of this choice. The most experience has been gained using statistical techniques. Insight exists regarding their reliability and applicability. Their disadvantage is that the dependent and independent variables, as well as the relationships between them, must be specified beforehand. Linear relationships and an independent result variable such as the response or the segment are usually assumed. Additionally, various techniques assume a certain distribution among the scores for the variables. Skewed distributions with many non-respondents and few respondents may hinder the application of these types of techniques, or require a (logistical) calculation of the raw data materials. In situations in which it is possible to satisfy these conditions, the statistical techniques are still preferable to data-mining techniques. Data-mining techniques may prove their worth in situations in which: ●

it is not known beforehand what relationships exist between the variables;



non-linear relationships exist between the variables. Section 7.3 discusses several of these techniques in more detail.

Visualisation The final step in the analysis process involves the reporting and visualisation of the outcomes. Setting aside time for this last step in the project requires discipline, but is definitely rewarding. After all, research outcomes that are not easy to communicate will never be accepted by management. The outcomes of some data-mining techniques, such as neural networks, provide very little insight. It is those results that must be visualised. Simple

140

Chapter 7 Data analyses and data mining

figures must specify what effect changes in several relevant variables have on the ultimate dependent variable. What is the effect on the response of lowering the introductory price, for example? What is the effect on the response of expanding the mailing list by an extra 10 per cent of the prospects from the data set?

internet data and the analysis process The internet offers a very broad array of possibilities for collecting behavioural data on customers. Where have they been? What have they seen? What have they communicated? Many organisations collect very little information relating to online behaviour and if they do, they don’t gain much insight from their information. They hardly look beyond visiting history. Who they were, what they were looking for, what they saw, what they have done with the information they collected on the website . . . it all remains a mystery to most organisations. It is quite a challenge to use the worldwide information network that the internet represents to gain more data and extract more knowledge and insights than is currently being done. The outcome of the research should not, as is currently the case, just be used in finding website improvements, but must be shared throughout the organisation. The general customer view (the 360-degree view) should also be composed of online data and the insights should lead to adaptation of the relationship strategy, the customisation strategy and cross-channel communication. Searching and processing data on the internet is referred to as webmining (Lau et al., 2005). We can make a distinction between three types of webmining: web-structure mining, web-usage mining and web-content mining. Web-structure mining places websites and the pages or items they contain in a network of connected websites. The hyperlinks that are made between the main subject of analysis and other websites are shown. Web-usage mining focuses on browsing behaviour. Large encrypted datafiles containing IP addresses and visiting histories must be processed before being analysed using statistical and data-mining tools. The logfiles that are being analysed are made for web management purposes and not necessarily prepared for the purpose of web-usage mining. With specialised websiteanalysis tools the clickpaths through a website can be identified on a visitor-level. One can determine which are the website’s commonest points of entry and exit, how long the visitors stay and how often they return. This data can in turn be stored in different databases, such as profile databases that are often attached to websites. Web-content mining is all about discovering useful content on the worldwide web. In a topical list a user of these analysis tools specifies the search terms that are relevant. Webcrawlers then proceed to search in designated locations (communities, blogs) or just across the web. The outcome can be used to scan competitor information or discover new possibilities for linking with other websites or identifying new communities and blogs.

7.3

Data mining The increase in the quantity of data and the decrease in the available analysis time have led to a growing need for an inductive method which will assist in finding useful relationships between (selected) data. Data mining is just such a method. Narrowly defined, data mining is ‘the automated discovery of interesting, non-obvious patterns hidden in a database that

141

Part III Intelligence

have a high potential for contributing to the bottom line’ (Peacock, 1998). Those relationships which exercise influence on the strategy and operations of the organisation and are ultimately capable of contributing to the realisation of their objectives are interesting ones. In data mining, one makes use primarily of so-called machine learning and adaptive techniques which require less involvement from people than do static techniques. The origin of many of these techniques lies in artificial intelligence. These include neural networks, association rules, evolutionary computation and decision trees. The box below contains a description of the techniques.

Data-mining techniques neural networks Artificial neural networks attempt to imitate biological neural systems. These biological systems consist of neurons simply linked closely together. If a neuron receives a number of stimuli and the sum of these stimulations exceeds a certain threshold value, the neuron fires off a stimulus to connected neurons. These neurons will in turn supply input to other neurons so that a network is created consisting of several layers of interconnected neurons. For example, if a person places his hand on a hot furnace, he will receive many stimuli that exceed these threshold values and fire off stimuli to the related neurons. Pain is felt, the hand is removed, an exclamation of pain is expressed, and so forth. The simplest artificial neural network is characterised by one input and one output layer. However, it is possible to apply additional layers. The layers between the input and the output are referred to as hidden levels; unlike the input and output layers, there are no values given from which the scores of these intermediate neurons or nodes can be derived. In order to determine the final model, the weights and values of the nodes at the hidden levels will have to be calculated. This occurs during the training of the model. During the training or learning, the weights in the model will be adjusted so that the input values correspond with the desired output values. In an iterative process, which is executed entirely by the ‘machine’, or which is performed under human supervision, a model is formulated that fits. Different methods are available to run through this adaptive exercise. This adaptive nature of neural networks is one of the advantages of data-mining techniques. When statistical techniques are used and the outcomes are unsatisfactory, a new model will have to be developed; a neural network model adjusts itself. Another advantage of neural networks is that no knowledge is required beforehand of the expected relationships between variables.

evolutionary computation Evolutionary computation (EC) is a collection of algorithms based on biological evolutionary processes: how do people and animals choose a partner, reproduce, evolve and increase their chances of survival (survival of the fittest)? EC is really optimisation program routines, guided by the principles of natural evolution. They are search procedures based on the concepts of natural selection and genetics. EC is used for the optimisation, prediction, classification and design of decision rules. You could consider a type of analysis that can identify which buyer will survive. Or, put differently, what customer types will you find in the ideal database? With EC one can divide the population into groups and it can then be determined to which group each individual member belongs: the group of continuing buyers, or the drop-outs? One can also ask questions such as: Who is about to change from a light to a heavy user? Who is likely to multiply (bring along new customers through word-of-mouth)?

142



Chapter 7 Data analyses and data mining

The algorithms are particularly useful in the analysis of problems into which very little insight can be gained. As long as the number of variables and the size of the data collection remain limited, the analyses can be relatively easily performed on a PC, although the expertise of an analyst may be necessary in order to obtain an appropriate final model.

association rules With association rules, pronouncements may be made on the relationships between the characteristics of a group of known individuals and one or more aspects of their behaviour. An example of a rule is: household with three or more people, living within a five-minute walking range of the store are frequent customers of that store. Rules can be helpful in cross-sell analyses (see Chapter 9). One reason rules are popular is that each rule seems to represent an independent insight into the database. New rules can be added to an existing rule set without disturbing existing ones.

Decision trees Decision trees are popular in many areas of marketing and can also be used to analyse web-based data. The advantages of decision trees are found in their ability to generate understandable business rules. Decision trees split a database into classes that differ as much as possible in their relation to a selected output. They indicate, for instance, what the probability is that a household will terminate the relationship if no transactions have taken place for six months and the household’s income falls within the range from A to B. See, for example, CHAID and CART in Chapter 8.

case-based reasoning With case-based reasoning, a new problem situation is sought among previously occurring cases with similar characteristics with a positive or beneficial outcome. Case-based reasoning maintains an institutional memory of prior problems so that when a new one comes in, old solutions are retrieved and matched to answer similar new problems. It is a simple, yet powerful method of indexing, which is more akin to remembering than to learning. To determine the location for a new store, successful stores will be sought along with the characteristics of their location. The decor, composition of the product range, service, pricing and promotion of these stores will all be adopted by the new store. The basic concept is that of association. The advantage of case-based reasoning is that abstract concepts can be made concrete. The method is intuitive and simple for managers to understand. Additionally, it may work with qualitative and discontinuous variables, and the calculations it makes are simple. One disadvantage may be that the outcomes are based on the past, when an optimal solution for the problem had not yet been found. Sources: Mena (1999), Peacock (1998), Venugopal and Baets (1994).

In addition to the narrow definition of data mining given above, broader descriptions are also found in the literature (Peacock, 1998). As well as exploration, various broad descriptions include the confirmation and testing of relationships found among data-mining techniques. Classical and Bayesian statistical techniques can also be used here. In the broadest sense of the word, data mining is described as the discovery of knowledge in databases (Peacock, 1998).

143

Part III Intelligence

The user-friendliness of data-mining software is ever-increasing as is its active application across organisations. Models are finding their way to the front-office, where analytical models are, consciously or not, used by contact centre agents in their daily routine. They are assisting the agent in asking the right questions, proposing the right offers or taking the appropriate action in order to retain the customer. Campaign managers might find it very beneficial to use data mining in drawing up lists of prospective customers. Marketers use data mining in segmentation analysis, web managers in optimising their website performance. The uses are quite limitless.

7.4

conclusion One of the challenges presented by CRM is to make explicit the implicit customer knowledge found in the minds of the contact persons, so that it can be recorded, distributed and used for a larger group of customers. Current experiences with data analysis are still somewhat pathetic. The data-mining techniques which have been launched have not yet produced the kinds of results which were originally expected of them, and statistical techniques are laborious, place many demands on the data material and cannot handle all the issues. On the other hand, it is encouraging that a portion of these results can be explained as stemming from unskilled and careless use of the techniques. If the data analyst, database manager and marketer, acting as a constructive collaborative group, carefully run through the analysis process, some of the potential disappointment can be avoided. The topic can be properly formulated and the final data set compiled in a well-thought-out way; there are suitable, advanced techniques which can be employed and the outcomes can be clearly reported. The analysis contributes to the expansion of explicit knowledge about customers and this knowledge can be capitalised on in marketing.

case stuDY sns Bank wins crM innovator award In 2010 the Dutch SNS Bank is a part of SNS Reaal and is one of the ‘Top 5’ banks in the Netherlands. The 3,300 employees of SNS Bank are connected to their customers via the internet, the telephone and the SNS retail banking stores. The target audience of the brand are self-conscious consumers and SME-clients. Promoting their ability to be self-supporting and autonomous is at the core of SNS’s strategy. SNS Bank has presented itself as a candidate for the CRM Innovator Award based on a project called Inbound Marketing. They believe they are sufficiently innovative in this domain to serve as an example to other organisations in the Netherlands. The jury has had to evaluate the candidate and assess whether or not the project sets an example that is indeed beyond current levels of customer-centred entrepreneurship. Obviously, the jury pays careful attention to the overall vision and strategy from which this project originated. The Inbound Marketing project comprises a combination of database marketing and behavioural targeting, by which the content on the website is adapted to the individual customer’s profile and real-time click behaviour. The project aims to develop the internet as a valuable contact channel, integrate it with other channels and using the inbound (customerinitiated) contacts for service and sales.

➨ 144

Chapter 7 Data analyses and data mining

case study (continued) SNS Bank believes firmly that customer satisfaction will be positively influenced by the correct identification and the recognition of their needs and preferences, especially if directly used for relevant offers and service messages. The main idea is to help customers find solutions and services, instead of finding customers for the products of SNS Bank. The importance of online distribution in the value chain is constantly increasing. This channel is by its very nature customer-controlled, but SNS can help direct the customer by tuning in to their current needs with clickpaths and making use of the knowledge the bank has in its databases. If they also make products and services simpler, they can then further enhance the self-sufficiency of customers. Shifting service and buying processes to the internet is an important step in this direction. The project, therefore, is a perfect fit with the corporate strategy and vision on customer relationships. The results that the project has produced are very respectable. There are fewer service requests through retail banking stores and the contact centre. There are fewer complaints and the service and buying processes are more efficient. There are higher conversion ratios and general online sales. In the first year already, investments in the project more than broke even. SNS Bank is uniting the two worlds of e-commerce and database marketing by using click behaviour and registering it in real-time in a data warehouse. Applying real-time scoring of opportunities means that a customer is presented with the most relevant offer or message at all times. The shift that has been made to inbound marketing is fitting within a strategy that optimises the support given to customers at their time of need, not whenever the organisation seeks to sell something. The ability to deliver on promise in the short term is extremely important inowadays, maybe even more important than having big ideas and bold strategies for the longer term. The ability to ‘feel’ what customers want and where the market is going is a crucial success factor, especially in retail banking in this day and age. This case is a perfect example and worthy of the CRM Innovator Award 2010. The jury congratulates SNS Bank on their achievement.

Questions 1 What makes the customer analytics applications of SNS Bank special, or at least special enough to have been a CRM Innovator Award candidate? 2 Will it be of any added value to further automate the analysis that is made? Please illustrate and justify your answer. 3 Would the inbound marketing application also be applicable in the contact centre? Provide arguments to support your answer. Source: Platform voor Klantgericht Ondernemen (2010).

Questions 1 The traditional shopkeeper who still maintains personal contact with their customers is considered to have more (implicit) knowledge of their customers than the CRM manager with expensive software and databases at their disposal. (a) Do you agree with this statement? Substantiate your answer. (b) In what areas does the (implicit) customer knowledge fall short? Give an explanation. (c) Why is it that the CRM manager appears to lag behind the classic shopkeeper?

145

Part III Intelligence

2 How can the collaboration between data analysts, database managers (insofar as these do not also take on the task of analysis themselves) and marketers be improved? Suggest a number of creative measures. 3 Name four typical analysis topics within the framework of a CRM policy to be implemented. 4 Describe the analysis process involved in setting up a retention analysis. 5 Which phases in the analysis process in particular require the marketer’s contribution? 6 Indicate in what way a tour operator might measure the booking behaviour of its customers. 7 What is the purpose of the distinction made between a training and a validation set? 8 What is the difference between statistical and data-mining techniques? When might the latter be advantageous? 9 Explain how neural networks work. 10 What limitations will the marketer continue to encounter, even in an organisation with professional analysis capacity, in expanding customer knowledge through data analysis? Explain your answer.

references Bejou, D., Wray, B. and Ingram, T.N. (1996) Determinants of relationship quality: An artificial neural network analysis, Journal of Business Research, 36, 137–43. Drozdenko, R.G. and Drake, P.D. (2002) Optimal Database Marketing: Strategy, development and data mining, Thousand Oaks, CA: Sage Publications. Eiben, G., Slisser, F. and Peelen, E. and Euvermans, T. (1995) Modeling customer satisfaction in the market for mutual funds investment companies with neural networks and genetic programming, Proceedings ESOMAR Conference, The Hague, 17–20 September. Kumar, V. and Reinatz, W.J. (2006) Customer Relationship Management: A databased approach, Hoboken, NJ: John Wiley & Sons. Lau, K.-N., Lee, K.-H. and Ho, Y. (2005) Text mining for the hotel industry, Cornell Hotel and Restaurant Administration Quarterly, 46, 3, 344–62. Mena, J. (1999) Data Mining Your Website, Boston, MA: Digital Press. Newing, R. (2004) Reaping the benefits of customer insight, FT.com site, 8 June. Peacock, P.R. (1998) Data mining in marketing: Part 1, Marketing Management, 6, 4, Winter, 1–14. Peelen, E., Overveld, P. van and Vink, J. (2009) Inzet Customer Intelligence leidt tot minder klant verloop en efficiëntere cross selling, RLST, 1, 1–8. Platform voor Klantgericht Ondernemen (2010) Persbericht CRM Award. Slisser, F. (2000) Data Mining, Almere: Visor. Venugopal, V. and Baets, W. (1994) Neural networks and statistical techniques in marketing research: A conceptual comparison, Marketing Intelligence and Planning, 12, 7, 30–8. Zahavi, J. and Levin, N. (1997) Applying neural computing to target marketing, Journal of Direct Marketing, 11, 4, Autumn, 76–92.

146

Chapter

8

Segmentation and selection Segmentation is the division of customers into various, distinct, homogeneous groups who it can be desirable to approach in a specific way. Those within the group react in the same manner to marketing stimuli provided by the supplier. Customers within a segment have communication or purchasing behaviour and/or needs and wants in common. Differences exist between the groups. In this chapter, we first discuss the strategic aspects of segmentation (Section 8.1). We then consider briefly how we can divide the market into segments, how we can describe the customers in the segments, and how the research outcomes may be used in the strategic marketing policy. Segmenting not only has strategic objectives, but also plays a role in the selection of people and organisations we would like to approach with a particular marketing campaign. Section 8.2 studies these tactical segmentation analyses in more depth. The topic of selection will also be examined: Who will be approached in which segment during a marketing campaign? In this chapter we will address the following questions: ●

How can we define segmentation?



What are segmentation criteria?



Segmentation for the benefit of strategic marketing issues: – How to divide the market into segments. – How to profile the segments. – How to develop the marketing service concepts per (group of) segment(s).



Segmentation for the benefit of tactical marketing issues: the selection of people and organisations for marketing campaigns: – How to divide the market into segments using the RFM technique, CHAID and CART. – How to make selections on the basis of response gain charts.



What are the research techniques?

147

Part III Intelligence

Practitioner’S inSight Every customer is unique. Although one-to-one marketing does justice to this fact, for many, the concept is not (yet) realisable. On many fronts, organisations seem to be experiencing problems in approaching each customer separately.1 The reasons for this are that the capacity and customer insight necessary to do this are lacking, and the benefits do not appear to be able to justify the costs. The result is that companies must fall back on segmentation which distinguishes between groups of homogeneous customers. The organisation must decide how many and which groups to identify, and how to get to know them and whether to approach them with a standard or customised offering.

8.1

Segmentation study as input for the formulation of marketing strategy Segmentation criteria Segmentation criteria are used to divide up the market. These are the indicators used as the basis to identify or assign the groups. It is important to note that the customer groups have not yet been profiled at this point; they may not yet be described as buyer, user and individual or organisation (see Chapter 5). In consumer markets, the following are used as criteria (for example, by Kotler and Keller, 2008): ●

geographical characteristics such as postcode;



demographic characteristics such as age or sex;



socioeconomic data such as income, social class or education;



behaviour such as purchase or communication behaviour;



psychographic characteristics such as lifestyle and the set of norms and values;



buying motives and purchase considerations.

The work of Bonoma and Shapiro (1983) has attracted a considerable amount of interest in business-to-business markets. The authors distinguish five categories of segmentation criteria: ●

demographic factors, including industrial classification, company size and location;



operating variables, such as technology, user status, customer capabilities, which indicate whether a customer requires a great deal of or very little support;



purchasing approaches, which describe how purchasing is organised, the dominant position within a company, the nature of the relationships that are maintained with suppliers and the purchasing criteria and conditions;

1

148

With the exception of situations in which personal account management is applied, as this is justified by the customer’s spending level.

Chapter 8 Segmentation and selection ●

situational factors, which involve the urgency, the specific application and the order size;



personal characteristics, the values and norms of the employees working for the prospect or customer, their general loyalty and attitude to risk.

At the top of this list are the criteria that describe the exterior of the market; this involves data which can be easily obtained. The further down the list we travel, the more we zoom in on the interior of organisations, until finally we reach the last level and the people with whom we come into contact in the organisation. Bruhn (2003) supplemented these criteria within the framework of relationship marketing. He makes a distinction between the normal segmentation criteria mentioned above, which he characterises as exogenous, and endogenous criteria such as customer value, customer satisfaction, recommendation behaviour and the likelihood of retaining the customer. The organisation cannot use policy to influence the first category, but can do so with the second category, for instance, it can influence customer satisfaction.

Segmentation technique Markets can be segmented in a large number of ways. Choices must be made regarding the number of and the specific segmentation criteria to be used. Do we divide the market according to age categories, light and heavy users etc.? If we list all the possibilities, it soon becomes clear that the number of alternative ways in which a market can be categorised is, or at least appears to be, infinite. The guidelines which must be satisfied by workable and good segmentation solutions offer the only solid ground we have to go on in this segmentation process and are: ●

measurable: the size, purchasing power and characteristics of the segment can be measured;



substantial: the segments are large and profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing programme;



accessible: the segments (and individual prospects and customers) can be reached and served effectively;



differentiable: the segments are conceptually distinguishable and respond differently to different marketing stimuli;



actionable: effective programmes can be formulated for attracting and serving the segments (Kotler and Keller, 2008).

In addition, a segmentation solution is bound by the requirement that it is stable – few changes occur within the category over time. The migration of customers from one segment to another is limited. In spite of these guidelines, there are still numerous segmentation solutions possible. Within the framework of dividing the market up into segments and choosing the target groups which the supplier would like to service with a specific offering, there are various methods and techniques which have been developed and which may be of assistance. Cluster and discriminant analyses are often used in market research. Cluster and discriminant analyses complement one another during the segmentation process. The goal of cluster analysis is to classify subjects as customers in relatively

149

Part III Intelligence

Figure 8.1 Cluster solution

homogeneous groups, or clusters. Each customer can be placed in only one group, and there is no overlap between the clusters. The first, and probably most important, step in a cluster analysis is to determine the segmentation variables. Insight is required into which variables can function as such. Figure 8.1 illustrates a cluster solution with two segmentation variables. There are various methods available for assigning the subjects to the groups. The most common is the K-means cluster analysis, in which the researcher specifies beforehand the number of groups to be distinguished. Imagine that a solution using two segments must be formulated in advance. Identifying additional segments would mean that the requirement that segments be substantial and actionable would no longer be met. The computer then draws two observations from the data set, completely at random, in which the first represents group A and the second group B. Next, individual subjects are assigned to the group which is ‘closest’ to them in terms of distance. After this initial cluster solution has been formulated, an iterative process begins. The average scores for the segmentation criteria are calculated for the two groups. A new group classification is then formed on the basis of the cluster averages, and objects are allocated to the clusters for which the distance to the cluster average is the smallest. Should a new round fail to show signs of a solution or an improved solution, then the procedure stops. The determination of the number of segments to be distinguished is arbitrary. Expectations regarding the number of clusters and requirements for the minimum segment size can offer something to go on; expectations regarding the solution can also provide guidance. In general, the recommendation is to condense the analyses for a different number of clusters. The solution that appeals most intuitively is usually the best one. Several cluster techniques more advanced than the K-means analysis have been developed which also offer a solution to this problem.

150

Chapter 8 Segmentation and selection

table 8.1 Classification results Predicted group membership (with discriminant analysis) Group membership (according to cluster analysis)

Number of cases

Segment A

Segment B

Segment A

108

Segment B

90

85 78.7% 25 27.8%

23 21.3% 65 72.2%

Percentage of correctly classified cases: 75.76% Source: Drozdenko and Drake (2002).

Performing a K-means cluster analysis requires the researcher to make (arbitrary) decisions. For this reason, outcomes should be viewed with caution. In order to test the solution, different methods can be used, for example, the data set can be split in two and a cluster solution calculated for each half. If there are few differences between both solutions, then this is a sign that the outcome is reliable. Discriminant analysis can also offer a good means of testing the cluster solution. This is a more solid technique. Executing the technique requires advance knowledge of the groups to which the individual subjects belong. It must be known beforehand whether the customer should be included in segment a, b, . . . , n. In addition, the scores for the (segmentation) variables form the input. Discriminant analysis is then used to develop a model used to allocate the observations to the classes. If, using the model, the customers are assigned to the groups in the same way as occurred with the cluster analysis, the solution can be considered reliable. A table such as that shown in Table 8.1 can be drawn up to gain further insight into the similarities in classification. For further information on cluster and discriminant analyses, see Malhotra and Birks (2003).

Profiling a segment Easily obtainable variables which produce reliable measurements and do not vary much are used to identify the customer in the segmentation process. They only provide a limited insight into the customer as buyer/user and as organisation or person. As such, further profiling may be desirable for the realisation of a CRM strategy. External and internal sources can supply data to enrich the profile (see Chapter 9). Postcodes, the profile of the household, the geographical environment, income and social class are all expanded upon. Results from questionnaires dealing with values, needs, satisfaction and buying intentions for example, can also help. Where these types of profiling data are not available for everyone in the database, extrapolation becomes more challenging. Is there a characteristic known for everyone in the database that correlates with the specific profiles so that the profile can also be determined for customers for whom these data are not directly available? Qualitative research can also result in enrichment, given the fact that it provides a great deal of general insight. Personas (see Chapter 5) can be constructed to get a real-life image of an archetypal customer who is representative of a segment. Sometimes only a few in-depth interviews form the basis for these profiles, making their validity in terms of

151

Part III Intelligence

representativeness low. However, the value of working with personas is not about getting statistically relevant results. They are valuable when the persona are convincing and rich in information, allowing marketers and other employees to see the world ‘through the eyes of the customer’ and to elaborate on the available data. Marketers can imagine what the customer would do in hypothetical situations – their potential response – based on which they can further refine their marketing efforts. Persona users should be aware that there is rarely a customer in the segment who will exactly match the archetypal description. Working with several persona archetypes, however, encourages speculation about the different drivers of customer needs and wants and highlights the variety that exists therein.

Developing marketing service concepts for each segment Segmentation is a research process that aids in the formulation of marketing strategy. The goal of segmentation is to approach customer groups in a differentiated manner so that they become more satisfied and loyal and spend more with the supplier. Within the scope of CRM, this is referred to as designing marketing service concepts for each segment (see Chapter 12). The product range, service, price and communication are determined for each of the distinct (combinations of) customer groups. Times and events are determined which offer the best opportunities to make contact, to provide feedback, take advantage of crosssell possibilities and provide service. A service concept can improve if the segmentation research provides clear insight into the customer profile: Who is the person or organisation behind the buyer and what motivates them?

8.2

Segmentation research used in compiling the list The objective of tactical segmentation research is to provide input for the selection question: Whom do we want to approach for a certain marketing campaign activity? Three techniques used in direct marketing have attracted a great deal of attention. The Recency Frequency Monetary Value (RFM) method was developed first, however, the more recent CHAID and CART techniques are more popular methods within this same subdiscipline of marketing. Each is discussed below, following which we focus on compiling the ultimate list: Which segments will be approached?

rFM Direct marketers find that behavioural segmentation produces the most useful results. Behaviour observed in the past appears to be a better predictor of future behaviour than pronouncements made by customers regarding their purchasing intentions and attitudes (Spiller and Baier, 2005). Reasoning and plans seem to be less reliable than historical behaviour in estimating the likelihood of response to a specific marketing campaign at a certain time. It has also been shown that customers who spend the most over a certain period are not necessarily the likeliest to respond to a new marketing campaign. Consequently, the Recency Frequency Monetary Value model was developed to identify the most attractive prospects. Focusing on the frequency and the most recent transaction date in addition to the annual amount spent, produces better selections and higher response percentages.

152

Chapter 8 Segmentation and selection

In the RFM model, an index is calculated on the basis of scores customers receive for three aspects. The determination of the score model is left more or less open: ●

Last purchase date: a score of 20 will be assigned, for example, if the last transaction occurred less than three months ago; if the last purchase took place between three and six months ago, the score is 10; if the transaction was made between six and nine months ago, the score is 3; and if it has been more than twelve months since a purchase was made, the score is 1.



Purchase frequency: the score for the purchase frequency might be calculated by multiplying the number of purchases made in the last two to four years by four; a maximum score of 20 may be set, for example.



Amount spent: the score may be equal to 10 per cent of the sum of the purchase amounts from the last two years, with a maximum of 20 for instance.

In order to calculate the index value, the separate scores must be weighted for their importance. Recency is usually the most important and monetary value the least. The weights assigned might be 5 for last purchase date, 3 for frequency and 2 for amount spent. The calculation for the RFM score is illustrated in Table 8.2. As well as the RFM points that are scored from individual transactions, the cumulative RFM score is presented, which is calculated from all the purchases the customer makes in a year. The RFM approach has advantages and disadvantages. The advantages have already been discussed. First, behaviour from the past is an accurate predictor of the response to marketing campaigns. In addition, the technique employs data that are maintained in the most basic of databases, namely transaction data. The disadvantage is that the ‘best buyers’ are repeatedly selected for a promotion, thereby creating the risk that these individuals will experience excessive ‘mail’ pressure. The strong transaction orientation that lies at the basis of the technique is the reason for this.

chaiD and cart chaiD CHAID stands for Chi-squared Automated Interaction Detection. A CHAID analysis produces a tree diagram, such as that shown in Figure 8.2. At the top of the diagram, the response to the marketing campaign(s) is shown for the entire customer database. The organisation here has 240,000 customers of which an average of 4.36 per cent responds to a marketing campaign activity (Peelen, 2002). On the level below this, these customers are split according to the most discriminating significant segmentation criterion. In the example shown, this appears to be the travel time from the customer to the service provider; the better customers – 80,000 in number – live closer than those who tend to produce less of a response. Customers who do not have to travel more than 30 minutes respond 1.28 times better to marketing campaigns than the average customer in the database. On the level below, the next most distinctive segmentation is illustrated for the separate segments. Customers with a short travel time may best be divided up according to length of membership, and customers with a longer travel time according to ‘folder share’ (which indicates which portion of the products purchased had appeared in the folder). It is striking that in the less attractive segments on the first level, there are still identifiable sub-segments which none the less produce an above-average response to marketing campaign(s). An index of 105 was reached.

153

154 2 months 8 months 13 months 12 months

Recency

20 5 1 3

Recency score 100 25 5 15

Weighted score 3 3 3 2

Frequency

4 4 4 8

Frequency score 12 12 12 24

Weighted score

20 points if the last purchase was made less than 3 months ago 10 points if the last purchase was made between 3 and 6 months ago 5 points if the last purchase was made between 6 and 9 months ago 3 points if the last purchase was made between 9 and 12 months ago 1 point if the last purchase was made more than 12 months ago The number of purchases made in the last 24 months multiplied by 4 points (maximum: 20 points) Gross amount spent in the past 24 months * 10% (maximum: 20 points) Recency = 5; frequency = 3; monetary = 2

#1 #2 #3 #1

Purchase

Source: Baier (1983). © McGraw-Hill Education (USA).

Frequency score Monetary value Weights

Given Recency score

A A A B

Customer

table 8.2 RFM calculation

3 10 5 20

Monetary score

118 57 27 79

Total weighted score

118 175 202 79

Cumulative score

Chapter 8 Segmentation and selection

Figure 8.2 CHAID analysis Source: Peelen (2002).

A CHAID analysis creates a categorisation within each group until further significant division is no longer possible. If a marketer is able to choose from a large number of different segmentation variables, the decision tree can be quite sizeable. The software is normally unable to process more than 40 variables, with a maximum of 15 classes per variable. CHAID can produce better results than RFM analysis. The response to a marketing campaign that is obtained from the best 25–50 per cent of the respondents from the database, according to CHAID, may be higher than the response from the best 25–50 per cent indicated by RFM (Magidson, 1988).

cart CART, or Classification and Regression Trees, is a technique that is often compared with CHAID (Thrasher, 1991). Unlike CHAID, CART is not limited by the number of variables and classes that can be included. With CART, a binary decision tree is constructed (repeatedly with two branches). In order to construct this, CART first splits the data set into two groups for each variable; segment A is separated from segment B. The segmentation variables are then examined to determine which of these will serve best to split the group in two; this is the sub-division which is applied to the second level of the decision tree (see Figure 8.3). After that, segments A and B are further divided up separately on the level below this using the same logic. The lowest level in the decision tree is reached when a further division is no longer useful because the size of the segments has become too small. Unlike CHAID, CART is capable of working with a ratio scale. With CHAID, variables which are measured on a ratio scale will be converted to an interval scale (with classes such as 1–100; 101–200; 201–500 etc.). Balancing out this disadvantage, the advantage offered by CHAID is that more than two segments can be identified for each level, whereas CART always splits the database in two.

155

Part III Intelligence

Figure 8.3 CART analysis R = response; is a buyer; NR = non-response, not a buyer Circle = decision point; square = final station; Y = yes; N = no Source: Thrasher (1991). Elsevier Science Ltd (UK).

response gain chart and composing the list Which people included in the data set will be approached for a marketing campaign? The objective of segmentation is to divide up the customer database into homogeneous groups, but it stops short of selecting the prospective recipients in a campaign. Will someone with an RFM score of 150 (see Table 8.2) still be approached? Will customers from segments from the CHAID analysis with a response index under 125 receive an offer? In short, the socalled list must still be compiled. A response gain chart may help in this regard. Table 8.3 shows a response gain chart for an RFM analysis. In order to produce the chart, the customer database is split into, for example, ten sections of equal size. The top 10 per cent comprises the customers with the highest RFM score, under these, the next 10 per cent and so forth. Next, data on the response to the current marketing campaign are gathered for the different segments. Data on the response to past campaigns may be used, but the outcomes from a test may also prove useful. Unlike the historical data, the test results relate specifically to the marketing campaign(s) still to be launched and will thus – except for the random sampling error – provide a more accurate picture. The next step is to determine, for each partition in the database, how many percentage points higher or lower the response is in relation to the total response percentage. Cumulative percentages can also be calculated for the first 10, 20, . . . , 90 per cent of the database (see the last two columns in Table 8.3). It is the marketer’s task to determine the cut-off point: Which portion of the database will continue to be approached with campaigns and which will not? The decision on the

156

Chapter 8 Segmentation and selection

table 8.3 Response gain chart Cumulative RFM score 255 208–255 194–208 178–194 155–178 128–155 108–128 96–108 75–96 75

Percentage data set

Response percentage

Response gain1

Cumulative response %

Cumulative gain

9.98% 10.02% 10.00% 10.05% 10.01% 9.94% 10.04% 10.00% 9.98% 9.98% 100.00%

7.48 6.38 5.53 5.14 4.72 4.42 3.19 2.38 2.00 1.29 4.25

76 50 30 21 11 4 25 44 53 70 0

7.48 6.93 6.46 6.13 5.85 5.61 5.26 4.90 4.58 4.25 4.25

76 63 52 44 38 32 24 15 8 0 0

1

Response gain or the response’s number of percentage points higher or lower in this percentile as compared with that of the entire data set. Source: Adapted from Drozdenko and Drake (2002).

composition of the list targeted for a campaign is neither isolated nor independent, but instead must be made within the context of the relationship policy. Ten per cent might be approached, even if the response percentage is low and the campaign is not profitable (a response gain chart can be created to determine this). For example, the relationship is currently in the growth phase and the realisation of a repeat purchase is crucial in order to increase the probability of customer retention. The effect of the campaign is not profitable on a transaction basis, whereas its impact on the life-time value is profitable.

8.3

conclusion Segmentation is a research process in which the market is divided up into homogeneous customer groups that respond in the same way to marketing stimuli from the supplier. The greatest challenge in segmentation is to find the most effective categorisation from the vast choice of possibilities available. With strategic marketing problems, the effectiveness of the solution depends on the whether there are marketing service concepts that can be developed for each (group of) segment(s) which will enable the organisation to develop profitable, long-term relationships with customer groups. Good profiling of the customers in a segment is essential to this, so that insight can be gained into the person or organisation behind the buyer as well as their motives. Segmentation research’s contribution to the formulation of tactical marketing policy consists of the supply of lists or selections of people and organisations which could be approached with a promotional activity within the scope of a campaign. This involves the selection of the people and organisations most likely to respond. Three techniques have been developed within the direct marketing field – RFM, CART and CHAID – which can be employed to divide the customer and/or prospects database into groups. The response gain chart can then be used to determine which of these groups will be selected for the promotion. It is important to avoid viewing the selection in isolation, but rather to view it within the broader context of relationship policy and maximisation of the life-time value.

157

Part III Intelligence

caSe StuDy alpe d’huZes Each year on Alpe d’Huez a charity sporting event is hosted. Thousands of people form teams and climb up and down the famous mountain, following a route which is a wellknown stage in the Tour de France cycle race; they do so to raise money for cancer research. The event is named Alpe d’HuZes. The change to the name is a pun, intended at the number of times one is challenged to climb the famous mountain: ‘Zes’ is Dutch for six. A study has been done on the participants’ motivation; four clusters were formed of people with different underlying attitudes, values, beliefs, assumptions, intentions, goals and motives. Personas were formulated for them. They were useful for the organisation in selecting and dealing with the teams. The average size of a team was five people and the majority of the bikers were first time participants. They climbed Alpe d’Huez on average 4.4 times; each time raising more money. The four clusters can be described as follows, based upon their motivation: 1 Health Junkies. This group was labelled ‘Health Junkies’ because of the underlying motive that contributing to the cause and participating in this sporting event was mainly found in health and a healthy lifestyle, the thrill and entertainment of the event and the challenging aspect of contending with nature. The strong relation to personal wellbeing and health as a driver to engage in financially supporting a good cause is possibly due to either personal experience of the illness or knowing someone who lost the battle against cancer. The entertainment provided by the event was important to this cluster. Being with friends, peer-pressure and personal challenge, along with a sense of brotherhood influenced their decision as well as giving back to the community and participating in nonprofit activities in general. Their motivation to participate was not found in the aim to inspire patients, support families or raise national awareness. Health Junkies were not in particular convinced by their company to take part in the event, nor were they striving to compete with others or improve their own cycling records. 2 Legends. This group has earned its name ‘Legends’ from the physical and emotional strength shown by its members. This strength has enabled them not only to beat cancer, but also to come back and challenge themselves and others in this competition. Because of their personal experience with the illness, they feel capable of and appreciate the support the organisation gives them in order to change the way cancer is addressed and strive for national awareness. This group most likely became more aware of their own wellbeing and aim for a healthy lifestyle since they have survived a battle with cancer. 3 Caretakers. Caretakers consisted of participants who were mainly driven by humanity emphasising the importance of easing of emotional burden and the possibilities to help and inspire others. They did not seek for social engagement or empowerment in order to change the way cancer is addressed. Weak links to the cause and the illness could explain the lack of motivation found in fundraising. 4 Promoters. This group consists of fanatics and/or activists wanting to inspire those fighting against cancer. Their noble goals and pursuit of significant change in the community and the way in which cancer is addressed serve as the base for their identification with the organisation and the event.

158



Chapter 8 Segmentation and selection

case study (continued) Along with the sympathy they express on national and global levels by caring about the community, they demonstrate humaneness in their motivation to help patients and families, wishing to inspire those who are struggling by taking part in the event rather than other constructs of the event such as leisure, entertainment, health, nature or sports driving their engagement.

Questions 1 How can personas help the Alpe d’HuZes organisation in selecting segments, and designing propositions and service concepts aimed at increasing the amount of sponsor money raised? 2 The four cluster descriptions only cover the motivation of the participants. How can the participant profiles be extended so we get a ‘real-life’ view of them? 3 How can organisations use these insights into personas to enrich the participant profile in the database? Source: Hendriks (2011).

QueStionS 1

Select a market and describe the path you would like to take to arrive at segmentation for strategic marketing objectives.

2

What differences in segmentation arise between the business and the consumer markets? Explain your answer.

3

How can results from qualitative research be used to enrich the profile of individual customers?

4

Three techniques have been mentioned frequently for the purposes of compiling the list for a marketing campaign. (a) What are the disadvantages associated with segmentation created on the basis of an RFM analysis in the context of a CRM strategy? (b) Do these same disadvantages apply to the CART and CHAID analyses? If so, why?

5

Describe how a response gain chart can be used to make a selection of people and organisations which are to be approached with a marketing activity within the scope of a campaign.

references Baier, M. (1983) Elements of Direct Marketing, New York: McGraw-Hill. Bonoma, T.V. and Shapiro, B.P. (1983) Segmenting the Industrial Market, Lexington, MA: Lexington Books. Bruhn, M. (2003) Relationship Marketing, Harlow: Pearson Education.

159

Part III Intelligence Drozdenko, R.G. and Drake, P.D. (2002) Optimal Database Marketing: Strategy, development and data mining, Thousand Oaks, CA: Sage Publications. Hendriks, M. (2011) Personas in action: Linking event participation motivation to charitable giving and sports, PhD thesis, Rotterdam School of Management: The Hague. Kotler, P. and Keller, K. (2008) Marketing Management, 13th edn, Englewood Cliffs, NJ: Prentice Hall. Magidson, J. (1988) Improved statistical techniques for response modeling, Journal of Direct Marketing, 2, 4, 6–17. Malhotra, N.K. and Birks, D.F. (2003) Marketing Research, 3rd edn, Harlow: FT Prentice Hall. Peelen, E. (2002) CHAID Analysis for a Discounter, Rotterdam: ICSB. Spiller, L. and Baier, M. (2005) Contemporary Direct Marketing, Upper Saddle River, NJ: Pearson Education. Thrasher, R.P. (1991) CART: a recent advance in tree-structured list segmentation methodology, Journal of Direct Marketing, 5, 1, 35–47.

160

Chapter

9

Retention and cross-sell analyses This chapter will examine both retention and cross-sell analyses in further detail. In Section 9.1, the retention question is raised: which customers run an increased risk of ending the relationship and may be retained for the organisation if they are approached? Crossselling will then be discussed: which customers should be stimulated to buy another product (Section 9.2)? Attention will be placed on the definition of the analysis problem, the compilation of the set of variables and data, exploratory analyses, model development and the outcomes of the research and the interpretation of results. The techniques will be discussed only briefly. For further information on these techniques, we recommend that the reader consult the reference list at the end of the chapter. We will examine these two example questions fairly closely, even if we do focus primarily on the user and the client commissioning the analyses. We consider it important to expand the insight into these analyses so that we are in a position to: ●

formulate the right question or assignment;



support the researcher during the process of selecting the variables, for example; and



interpret the results.

In this chapter we will address the following questions: ●

How can you illustrate two popular CRM selection analyses with the objective of becoming familiar with the application of data-mining techniques to the resolution of similar analysis problems?



How to evaluate a retention analysis.



How to evaluate a cross-sell analysis.

PRactitioneR’s insight Two analyses which enjoy great popularity within CRM policy are retention and crosssell analyses. The most significant gains can usually be realised as a result of the first type of analysis – closing the back door costs less than luring prospects to the luxuriously designed front entrance. Furthermore, a retention analysis produces more than a cross-sell or deep-sell exercise. By retaining a customer for the organisation, the entire remaining life-time value is ‘secured’. Although the yield from cross-selling is generally lower than

161



Part III Intelligence

Practitioner’s insight (continued) PRactitioneR’s insight that gained from customer retention, the advantages of this technique must not be underestimated. With cross-selling, the direct benefits consist of the transaction profit and the indirect advantages include the boost the transaction can give to the relationship. Crosspurchasing permits a supplier to reduce the likelihood of the customer ending the relationship prematurely during the growth phase, before the supplier has had the chance to earn back its investment in the customer. It gives the customer the opportunity to discover the advantages its supplier has to offer and to ease the transition to the saturation phase.

9.1

Retention Retention, in a marketing sense, means holding on to customers. If a company becomes aware in time of those customers who demonstrate an increased likelihood of ending the relationship, then it can take action to prevent this. In order to be able to determine this likelihood or probability, companies must arrive at definitions of former and current customers. Does someone become a departing customer at the moment they no longer buy a certain product; a consumer, for example, stops buying fresh meat at a particular supermarket but continues to shop for a variety of packaged goods? Or is another level of aggregation used whereby a customer is referred to as having left if they do not execute any transactions with the supplier involved over a period of a year, for example? At the product or organisational level, the choice depends on the size of the outflow and the position of the responsible manager within the company: what are they responsible for – the product or the customer?

exploratory analysis In order to determine the importance of the retention analysis, several exploratory economic analyses can be performed to gain insight into the flows of money that are leaving the organisation. Figure 9.1 illustrates the level of cash outflow for a financial institution’s investment product over a period of four years. A specification is also provided for the withdrawal’s destination: will the capital be invested elsewhere, saved, or will it even be appropriated outside the company? In certain markets, the external destination for the departing customers is known, allowing the creation of an origin and destination matrix. In the car industry, for example, this is the case because of the requirement for owners to register their vehicles. In Figure 9.2, the diagonals indicate which customers remain loyal to their brand. The origin of the current customers for a particular brand is shown in the columns, and the rows indicate the other brand to which a specific brand has lost its customers.

Which variables should be included in the final model? An important step in the analysis process is the selection of the variables to be included (Mena, 1999). For many companies, ensuring that they have available the sorts of data that will be reliable predictors of the possible defection of a customer is a challenge. If the

162

Chapter 9 Retention and cross-sell analyses

Figure 9.1 Outflow analysis

Figure 9.2 Origin and destination matrix

163

Part III Intelligence

customer and the organisation do not interact intensively and the company only has static customer information on names, address, lifestyle etc. available in the database it becomes harder to find data that trigger the potential customer defection. During the relationship it soon becomes important to think about the collection of data that will predict churn. Not only is the data’s availability of crucial importance, their quality also plays a role. Feeding all the available data into the models without sufficient preparation is unlikely to produce a stable model with good predictive power. Within the scope of the retention analysis, an investment company will introduce the amount of capital invested as a variable. It will focus on the different ways in which this information can be measured. This level may be gauged at the moment that someone becomes a customer, at the time the level reached its peak, on the last day of the year, on the last day of the previous month, and so forth. Apart from the amount itself, the changes in the amount can also be measured. The differences can be expressed in absolute terms or as percentages. The difference between the current amount invested and the maximum amount invested can also be expressed in absolute terms, but an index number is likely to have better predictive powers when used in a model. In addition to the rise and fall, the speed with which positive or negative developments have occurred may also be measured. For example, how much time passed between the high and low points? There is a strong focus within organisations on the ways in which the level of investment can be measured, allowing all sorts of other variables which influence customer retention to fall by the wayside. These include: ●

investment behaviour: how often does an investor modify their portfolio?



number of different products that the customer purchases;



financial climate;



earned rate of return;



customer satisfaction;



customer’s investment objectives; and



communication behaviour.

These variables can also be measured in a variety of ways. In an exploratory analysis, those variables which discriminate the most between ‘stayers’ and ‘quitters’ will have to be removed. They will be used to develop the final model. Figure 9.3 contains an information gain chart for some 220 variables. The score on the y-axis indicates to what degree the variable (the attribute) correlates with departure.

Model development One of the challenges involved in performing a retention analysis is the compilation of a qualitatively good data set. The share of former customers as a percentage of the sample must be determined. If a random sample is taken from the current customer database, the share represented by former customers will probably be relatively small. Very little relevant empirical material is then available for use in developing the model. If, on the other hand, a data set of exclusively former customers is created, it remains uncertain in what sense former customers differ from customers who have decided to continue the relationship. In short, a 50:50 split between former and current customers in the data set to be compiled would seem the ideal distribution since it overcomes the objections to the previously mentioned random sample draws.

164

Chapter 9 Retention and cross-sell analyses

Figure 9.3 Information gain chart Source: Eiben et al. (1995a).

In order to be able to evaluate the predictive power of the model to be developed, it is advisable to split the data set into a training set and a validation set. The first is used to develop the model and the second to test its reliability. The developed model will be filled in for the customers in the validation set; the prediction obtained in the process regarding ‘staying’ or ‘leaving’ will be compared with the actual behaviour that has been recorded in the validation set. The decision may also be made to develop more than one prediction model. Customers from different segments do vary. For example, one investor might see a disappointing return as reason enough to accept his losses and seek refuge in savings, whereas another might see it as a reason to invest even more. Furthermore, there are considerable differences between active and non-active customers. Both may be loyal or disloyal, yet the chance of customers departing from the active group will have to be deduced from characteristics other than those used for the less active customers. There are no behaviour variables available for the latter group and, as such, dynamic data are lacking and the model will have to be based on static characteristics. In this retention study a technique1 is used by which ‘stayers’ and ‘quitters’ can be distinguished from one another. Figure 9.4 contains an illustration showing how the two groups can be separated successfully on the basis of the date of their last cash withdrawal and the

1

Rough data modelling was used in this example.

165

Part III Intelligence

Figure 9.4 An analysis outcome Source: Eiben et al. (1995b).

number of funds that they hold. In this imaginary situation, it appears that quitters (shown as squares) are distinct from stayers (the circles) through having: ●

withdrawn money from their account after a certain date;



purchased less than a certain amount of investment products.

It is the researcher’s and client’s task to determine how the lines in the figure will be drawn. Is the intention to classify correctly as many observations as possible, or is it important to prevent a certain type of misclassification? It is perhaps better to be safe than sorry and to minimise the number of times that a potential ‘quitter’ is characterised as such. This optimisation objective will have to be formulated in advance. The analysis itself will produce countless classifications like this one. A combination of classifications will have to be compiled which collectively gives the best prediction of the customer’s likelihood of leaving. These outcomes may be recorded in business rules and used in CRM systems (see Chapter 17).

cRM illustration churn alert It sounds fascinating. How is T-Mobile able to predict what a customer will do a few months from now? Sander van den Berg, database marketing analyst at T-Mobile explains: ‘Our gift for prediction rests on two pillars: the decision model created using Omega and the independent variables. We have designated

166

no less than 300 variables which collectively describe customer behaviour. Naturally there are also obvious variables, such as the duration of a contract. But there are also fewer obvious variables such as decreasing call behaviour. Also, text messaging traffic provides an indication, as does roaming. The movement from



Chapter 9 Retention and cross-sell analyses

cRM illustration (continued) phone to phone says something about the customer’s mobility. You must have this information available historically in order to be able to perform trend analyses. The advanced model with the quantity of variables guarantees that decisions will be of extremely high quality.’ Van den Berg does not exclude the possibility that the number of determining variables may be reduced. ‘In the beginning, it is better to have too many than too few. With the aid of the so-called Business Monitoring functionality of Omega, we can monitor the model and the systems. This way, we are able to determine whether the variables chosen have a true significance.’ T-Mobile has completed the first project involving private individuals with a subscription. Now, T-Mobile say: ‘We can predict the expected return on new customers and decide whether they are profitable enough

9.2

for us to take on. The credit scoring functionality of KiQ plays an important role in this regard. If they are already customers, then predictive datamining allows us to spot when they will leave far in advance. Through integration with campaign management, you can then choose whether they should be approached via telesales and direct marketing, and if so, what will be used to do this. Besides, no two customers are alike. Sometimes you might prefer to let a customer go if they don’t fit the profile. You might do this, for example, if they rarely call or are difficult about payments. The integration of the system must lead in the short term to a “churn alert” appearing on the contact centre agent’s screen if someone from the churn risk group checks in, so that the agent can make an appropriate offer.’ Source: Loth (2002).

cross-selling Cross-selling is the sale of products to current customers who are already purchasing one or more products from the supplying company ( Peelen and Kowalczyk, 1999 ). During the growth phase of a relationship, engaging in cross-selling is of considerable importance in guaranteeing the continuity and further development of the relationship (see Figure 12.7). Within CRM the interest in cross-selling arises from two different points of view: ●

the product: focused on the compilation of a list of existing customers that qualify on the basis of their product history for the offering of a certain product; and



the client: when customers contact the organisation, it must be possible to establish on an individual level which products have the best chance of being cross-sold.

Cross-selling is possible in a number of ways. For the development of the cross-sell model, the appropriate form must be determined. Different forms can be identified as shown under the following two headings.

cross-selling over time ●

a customer who buys more than one of the same product during a contact (two life insurance policies);



a customer who buys two or more different products during a contact (home contents and liability insurance policies);



a customer who buys a second or third product at a later time.

167

Part III Intelligence

cross-selling within the product range ●

a customer who buys another product within the same product category (for example, a different type of property insurance might be purchased within the product group property insurance);



a customer who expands the products they buy from the organisation by buying a product from another category (for example, a property insurance product is supplemented by a life insurance product).

Cross-selling must be distinguished from deep-selling, in which the goal is the sale of a product from the same category, for example encouraging the customer to take out a vehicle insurance policy that offers extra cover. The cross-sell model can be developed in business-to-consumer markets for an individual or a household and in business-to-business markets for a company, the division, the business unit or the branch. The preferred level will have to be determined. In choosing, it must be taken into consideration that there are more cross-sell possibilities available at the higher levels of aggregation than at the lower ones. In order to determine the cross-sell opportunities from the product point of view, models will have to be developed for the individual product categories in which: ●

the dependent variable relates to a different product category each time; and



the independent variables relate to the transaction that occurred prior to that for the product being studied (at another time and for another product), the number of products that the customer acquires from the organisation and the customer profile (see the box below).

If one umbrella model is developed for all of the product categories, then predictions for the product categories with a low turnover and sales volume will be more inaccurate than those for the more current categories. A variety of techniques can be used in order to determine the business rules. Examples are probabilistic models which indicate the probability that the relevant cross-sell will occur, or the rule extraction algorithm technique (REAT). The output of REAT consists of ‘if/then’ rules (business rules); if someone satisfies the following conditions (such as product possession and customer profile), then the cross-sell probability for product category Y is a certain percentage.

selection of the variables to be included in the analysis customer profile ● ●

Description of the household on the basis of the number of customers living at the specific house number + postcode.



Since when has the person been a customer?



What is the sex of the customer?



What is the customer’s date of birth?



What is the customer’s source of income?

● ●

168

Identification of customer on the basis of house number and postcode.

Does the customer rent or own their home? What is the customer’s origin?



Chapter 9 Retention and cross-sell analyses

Relationship client–supplier ● ●

Who is the customer’s current contact? What is the contact history with the customer?

Product history ●

How many products does the customer purchase?



What quantity of product X does the customer purchase?





For individual product categories: what is the number of articles purchased, the turnover, the date on which the product in question was last purchased? On the individual product level: the same data as for the categories.

If more than one product is purchased at one time, it is possible that a choice must be made in the analyses for one of these products. The choice then falls on the more expensive product. When creating the model, it is advisable to exercise caution with regard to the use of data on customer contact. One would actually expect a significant correlation between the purchase of a product and contact taking place. One cannot, however, deduce from this that the cross-sell probability will increase if contact can be established.

Verification of data quality Before performing the final analyses, the data quality should be verified. For instance, inconsistencies can arise when adding up the individual products to arrive at category totals, e.g., the sum of the individual products does not add up to the total number of products sold. Data may also be incomplete; the products may have been purchased, but there is no known date of purchase, the transaction amount is missing and so forth.

exploratory analyses economic significance of cross-selling In order to obtain an indication of the economic significance of cross-selling at an early stage, it can be determined how many products the current customers are purchasing (as shown in Figure 9.5). Calculations can be performed to determine which portion of turnover and profit contribution can be accounted for by customers who might be deemed the ‘heavy users’. Determining the average time between two transactions (Figure 9.6) is just as interesting, as it provides an indication of the length of time required before a result might be expected from a cross-sell campaign.

cross-tables Cross-tables can also be used to obtain a first impression of the commonest combinations of product categories. However, cross-tables do not indicate the sequence in which the products were purchased from the supplier. A chain specifying this sequence can be constructed for all the most frequently purchased products. They are grouped according to the most recently purchased product or the product at the end of the chain. The percentages indicate the relationship between the number of customers who have purchased the three products concerned in the sequence specified, and the number of customers who have purchased the first product in the chain.

169

Part III Intelligence

Figure 9.5 Contribution to turnover made by customers purchasing one or more insurance products in the past year

the final analysis Vis-à-vis the product Now the cross-sell probability for the most recently purchased product can be determined with regard to all the possible combinations of variables such as the customer profiles and product history.2 There are possibly thousands of business rules that can be created, which

2

The rule extraction algorithm was used to do this in this example.

170

Chapter 9 Retention and cross-sell analyses

Figure 9.6 Cross-selling; the time between two purchase moments

indicate the probability that customers with a certain product history and a certain profile possess the product (the dependent variable). By compiling a list of the people to be approached for the cross-sell of another product category, a choice will have to be made from among these thousands of business rules. In making a selection, two aspects should be kept in mind: ●

How high is the cross-sell probability for the product category for a given customer profile and product history?



What is the coverage? What percentage of customers in the customer database are typified by the customer profile and product history? If the cross-sell probability is high, it is possible that only a few customers in the total database possess these qualities (profile and product history).

A graph can be used to determine how well each calculation rule scores in terms of crosssell probability as well as coverage (see Figure 9.7 for an example). The business rules that form the outermost line are the optimal rules (they form the so-called Pareto optimum) and are preferred to rules that fall under this line.

cross-sell probabilities from the customer’s point of view based on probabilistic models To determine the probability that an article will be purchased from a different product category by an individual customer who has contact with an organisation, a Bayesian probabilistic analysis can be performed. In this analysis, the probability of purchase Ps of the separate

171

Part III Intelligence

Figure 9.7 Pareto optimal business rules

product categories is made dependent upon conditions c1, . . . , cn involving the customer profile and the product history (Ps c1, . . . , cn). Customer A is k years old, lives in city y and has already bought product c; therefore the probability that they buy a product from product category x is z. It can also be determined which of the various product categories have the highest probability of a cross-sell; this category can be brought to the customer’s attention during contact with them.

interpretation of the cross-sell probabilities from the models Reasons why the cross-sell probabilities from the model could produce an overestimation The cross-sell ‘probabilities’ that the model provides could result in an overestimation for the following reasons. The cross-sell probabilities indicate the chance that a customer who has bought one specific product has also purchased another product over the course of time. What is not specified, however, is the length of time that has transpired between the two transactions, what contact has been made during this interim period, how the customer’s situation has changed and what changes have been made to the supplier’s offering. What is clear, however, is that between the time of the cross-sell product purchase and the product purchased prior to that, it is possible that more has happened than simply the one-time offer which is now being considered within the scope of the cross-sell activity. It is perhaps also more accurate to use the term penetration probabilities than cross-sell probabilities.

Reasons why the cross-sell probabilities from the model could produce an underestimation There are various reasons why the probabilities from the model could result in an underestimation. The model is based on cross-purchase patterns which, having occurred in the past, reflect the marketing policy implemented in the past. If the organisation now focuses

172

Chapter 9 Retention and cross-sell analyses

more on cross-selling than it had done previously, the cross-sell probabilities can increase. There are other paths chosen than those historically selected, and there are new successful cross-sell options to be discovered. The stability of the proposed solution will have to be verified over the course of time. A simple test to determine whether the business rules are still satisfactory is to build a crosstable showing the frequencies (percentage-wise) with which product combinations occur. A comparison between this table and a previous table will show whether important shifts have occurred over a short period of time.

Utilising the research outcomes in designing policy Knowledge of the cross-sell (penetration) probabilities can be used in CRM policy by discussing the successful cross-sell patterns encountered with marketers in order to discover an explanation for the patterns found; after all, they reflect the method of (certain) marketers or agents. Marketers and agents can then exchange their successful experiences with one another. Insight can be gained into the manner in which effective cross-selling can be realised within marketing, in other words, which arguments are necessary to encourage customers to cross-purchase. In addition, a brainstorming session can be used to discuss the cross-sell patterns which were not encountered, but which could none the less be opportune. These new cross-sell paths can be tested out in the future. There are two ways in which cross-sell activities may take place: 1 By drawing customers’ attention to another product from the range during customer contact: ●



if the ‘probability’ exceeds a minimum level to be determined later, it may be considered worthwhile to guide the customer’s attention during the contact to the product with the best cross-sell probability; the ultimate decision to cross-sell will depend, apart from the minimum level, on the context and content of the conversation (for example, if a customer’s call concerns a complaint or the purchase of another product, it would not be wise to make the crosssell offer).

2 By approaching existing customers with other products from the range (or by using another form of direct marketing communication for products): ●







on the basis of the customer profile and the product history, the ‘probability’ that a customer segment reacts to the product offering is determined using the rule extraction algorithm technique; customer segments are ranked on the basis of these ‘probabilities’; the segments with the highest ‘probability’ are at the top, those with the lowest are at the bottom; an initial list can be compiled on the basis of a trade-off between these ‘probabilities’, the costs of approach and the margin on product sales; a test can be used to determine whether or not these probabilities need to be adjusted; the possibility that the cross-sell probabilities from the study are actually penetration probabilities must be taken into consideration.

173

Part III Intelligence

9.3

conclusion There is limited analysis capacity within companies, so to achieve a maximum return from this resource, only the most crucial questions should be researched. Within the scope of making selections – that is, who should be selected for a certain offer – two main points deserve attention: 1 The retention analysis designed to identify customers with an increased probability of ending the relationship. Approaching these customers must lead to a reduction in the probability of their departure. 2 The cross-sell analysis designed to determine the probability of the purchase of another product from a different product category. Knowledge of these probabilities gives the agent in the contact centre the opportunity to determine whether a calling customer should be offered another product. The marketer can use this knowledge to determine which customers should be approached for a cross-sell effort. The success of this can be crucial to the maintenance and development of the relationship during the growth phase. The following are indispensable to the success of the analyses: ●

careful formulation of the problem;



exploratory analysis of the problem area;



thorough compilation of the variables and the data set;



analysis that uses the most suitable techniques; and



sensible interpretation of the research results.

This is not exclusively the task of the researcher; the contributions from the marketer and the client are also vital.

case stUDY cross-selling within a fully automated convenience store Background In the past, retailers saw their job as one of buying products and putting them out for sale to the public. If the products were sold, more were ordered. If they did not sell, they were disposed of . . . It has been described as a product-oriented business, where talented merchants could tell by the look and feel of an item whether or not it was a winner. In order to be successful, retailing today can no longer be just a product-oriented business . . . It has to become customer-oriented and a full understanding of all the customer’s purchasing behaviour as revealed through his or her sales transactions will become crucial, i.e. market basket analysis. Currently, the gradual availability of cheaper and better information technology has, in many retail organisations, resulted in an abundance of sales data. Wal-Mart, the American supermarket, stores about 20 million sales transactions per day. This explosive growth of data leads to a situation in which retailers today find it increasingly difficult to obtain the right information, since traditional methods of data analysis cannot deal effectively with such huge volumes of data. This is where knowledge discovery in databases (KDD) comes into play.

174



Chapter 9 Retention and cross-sell analyses

case study (continued) Today, among the most popular techniques in KDD is the extraction of association rules from large databases . . . The rules describe the underlying purchase patterns in the data, such as, for instance, bread/cheese (support = 20 per cent; confidence = 75 per cent). Informally, support of an association rule indicates how frequently that rule occurs, i.e.how frequently is the purchase of bread followed up by the purchase of cheese? The higher the support of the rule, the more prevalent it is. ‘Confidence is a measure of the reliability of an association rule.’

optimal assortments Determining the ideal product assortment has been (and still is) the dream of every retailer . . . It is known that the optimal product assortment should meet two important criteria. Firstly, the assortment should be qualitatively consistent with the store’s image. A store’s image distinguishes the retailer from its competition and is projected through its design, layout, services and, of course, its products. Therefore, retailers often distinguish between basic products and added products. Basic products are products that should not be deleted from the assortment because they are the foundation of the retailer’s store formula . . . In contrast, added products are chosen by the retailer to confirm the store’s image even more and should be selected so as to maximise cross-sales potential within basic products. Indeed, retailers are interested in adding items whose sales will not be made at the expense of currently stocked items but may help increase the sales of other items. For the convenience store, examples may include cigarette lighters, coffee whitener or tea warmers. This means that added products should be selected by the model based on their purchase affinity with basic products. Secondly, because retailing organisations are profit-seeking companies, the product assortment should be quantitatively appealing in terms of the profitability it generates for the retailer . . .

Product selection based on ‘frequent item sets’ According to the problem situation described above, a model must be constructed that is able to select a hitlist of products, i.e. a selection of a user-defined number of products, from the assortment which yields the maximum overall profit, taking into account the background knowledge of the retailer. A simple solution to this problem, which is often used . . . is to calculate the total profit contribution generated per product and then select those products, in addition to the basic products that have already been selected by the retailer, that contribute the most to the overall profitability. We call this the productspecific profitability heuristic. Although easy to calculate, it does not take cross-selling effects of products into account. In contrast, the PROFSET model, introduced in this study, implicitly takes into account cross-selling effects by using ‘frequent item sets’ (purchase combinations such as bread/cheese that occur quite frequently, i.e. more often than X).’

the empirical study The empirical study is based on a data set of 27,148 sales transactions acquired from a fullyautomated convenience store over a period of 5.5 months . . . The concept is closely related to that of a vending machine. The product assortment of the store under study consists of 206 different items . . . The average sales transaction contains only 1.4 different items because in convenience stores customers typically do not purchase many items during a single shopping visit. As the objective function in the PROFSET method requires frequent item sets as input, frequent item sets and association rules were discovered from the database. An absolute support of 10 was chosen. This means that no item or set of items will be considered frequent if it

175



Part III Intelligence

case study (continued) does not appear in at least 10 sales transactions . . . It could be argued that the choice for this support parameter is rather subjective. This is partly true; however, domain knowledge from the retailer can often indicate what level of support may be considered as relevant. In order to make the comparison between PROFSET and the product-specific profitability heuristic straightforward, we chose not to specify basic products in the model. Consequently, the model will be able to fully exploit cross-sales potential between items in the assortment without any restrictions – the PROFSET method also enables assessment of the sensitivity of product assortment decisions and, as a result, allows for identification of the impact of such decisions on the total profitability of the hitlist. In the final list, not all product combinations with high cross-selling potential are necessarily included. The profit contribution of the sales combination must be sufficiently high for the items to be included in the list. For instance, the item set {toothpaste, toothbrush} has an interest of 2,468 over 1 (extremely high) and, according to the association rules, they are always bought together. However, the support count of the item set is equal to 11 (slightly above 10). As a consequence, the total profit contribution of this item set is insufficient to influence the product selection process. The impact on total profitability caused by product assortment decisions can easily be assessed by means of sensitivity analysis. When, for instance, product i is deleted from the optimal set, and it is replaced by the best product i′ outside the hitlist, its impact on profitability can easily be observed. While most product replacements have only minor profit implications (2 per cent), some products represent major profit drivers that should not be deleted from the hitlist.

conclusion Results indicated that the study is able to identify cross-selling effects implicitly by using frequent item sets, instead of having to estimate cross-selling parameters explicitly (as is often done in product selection and shelf-space allocation models). The study also showed that a sensitivity analysis helps a retailer to quantitatively assess the profitability impact of product assortment decisions.

Questions 1 Summarise in your own words how the optimal assortment with regard to cross-selling has been defined in this study. What are the crucial elements in this study and why? 2 What are the strengths and weaknesses of this study? Explain your answer. Source: Brijs et al. (1999).

QUestions 1 Banks have very few customers who end the relationship. People are generally not quick to close a current account. Does this mean that a retention analysis for a bank is of little use? Or do you see potential for a (variation on a) retention analysis? Explain your answer. 2 The quality of the retention model to be developed is, to a great extent, dependent upon the variables to be included. In your opinion, which considerations play a role in the creation of these types of variables and the final set of variables?

176

Chapter 9 Retention and cross-sell analyses

3 Why is it important when performing a retention analysis to include just as many ‘quitters’ as ‘stayers’ in the data set? Explain your answer. 4 Why should the retention model developed for active customers be different from that for passive customers? 5 How can the outcomes of a retention analysis be used in a marketing campaign? 6 Give a description of deep-selling. 7 Under what circumstances will deep-selling produce a more economically desirable result than cross-selling? Explain your answer. 8 Will a deep-sell analysis proceed according to the same pattern as the cross-sell analysis outlined, or do you expect differences? Substantiate your answer. 9 Why will only the business rules found on the drawn curve in a Pareto analysis be used to select the people to be approached for a cross-sell activity? 10 What limitations are associated with the outcomes of a cross-sell analysis made using historical data?

References Brijs, T., Swinnen, G., Vanhoof, K. and Wets, G. (1999) Using Association Rules for Product Assortment Decisions: A case study, San Diego, CA: ACM. Eiben, G., Slisser, F., Peelen, E., Kowalczyk, W. and Euvermans, T. (1995a) Genetic algorithms and neural networks versus statistical techniques: a case study in marketing, PASE ’95 Workshop Proceedings, Mainz, 31 August. Eiben, G., Slisser, F., Peelen, E., Kowalczyk, W. and Euvermans, T. (1995b) Response modeling and target group selection in a business-to-business market, Henry Stewart Conference Proceedings, Amsterdam, 26 January. Loth, T. (2002) T-mode kent de toekomst, minder weglopers dankzij credit scoring en predictive datamining, Beyond, Mapping, Marketing and Datamining, November, 10–11. Mena, J. (1999) Data Mining your Website, Boston, MA: Digital Press. Peelen, E. and Kowalczyk, W. (1999) Cross-selling at an Insurance Company, Almere: Visor.

177

Chapter

10

Management reporting: measuring, learning and optimising A significant part of analytical CRM is providing feedback to marketing management, allowing them to optimise the CRM activities. We can only be accountable for marketing expenditure if the measurements and analysis of the results is conducted reliably. In other words: it needs to be clear what the impact of our marketing efforts has been on the customer life-time value of the entire customer base. But determining the returns or results is not all there is to it. We are most interested in developing methods and techniques that allow us to not only measure, but also optimise results. What is the influence of targeting a specific customer group on: ●

the choice of communication channel;



fine-tuning and personalising a message; and/or



individualising the proposition?

What happens when we shift budgets from one area to the other, let’s say from acquisition to retention or from retention to generating cross-sales. We want to learn and bring the collective experience within the organisation together so that the organisation can be more effective in generating a higher return on marketing investment than its competitors. When it comes to determining and optimising the return on marketing investments, section 10.1 deals with the topic of defining and calculating customer life-time value. In section 10.2 we look at the dynamic determination of life-time value and then proceed to determine the influence of marketing decisions and investments on customer life-time value. In 10.3 we consider how marketers can conduct experiments and test for the impact of marketing actions on results. In 10.4, the final section of this chapter, we look at how collective expertise can be built up and utilised in learning organisations. In this chapter we will address the following:

178



Marketing performance



Customer valuation: the life-time value



Linking marketing investments to the development of the life-time value



How organisations can learn how their marketing activities correlate with life-time value and other financial outcomes

Chapter 10 Management reporting: measuring, learning and optimising

PractitionEr’s insight Selecting the relationships that are to be approached with a cross-sell or retention campaign is actually all about preparing your next marketing action. You have to take a longitudinal approach and carefully select the prospect or relationship. It is no different in selection than it is in communication: precision is key for the customer-focused marketer. The goal is to serve a customer optimally. In mass marketing a more general approach is taken towards selections, but opportunities to differentiate are much more abundant to the customer-focused marketer. The direct response option and feedback loop are there in dialogue marketing. A mass marketer will have to treat customers as a number or statistic and figure out what the average response is going to be. The results of campaigns are hard to quantify. In micro-marketing, marketing on the more individual customer level, there is communication and interaction, which allows for fine-tuning of responses. Accountability is far greater and actions that are not contributing or even counterproductive can be eliminated from the marketing mix. One can focus on those actions that are generating positive customer responses.

10.1

Evaluating the effect of marketing activities on the customer value Definition The life-time value of all customers is a good indicator of the total value of a firm. After deducting the net present value1 of the total spending on overhead for the period for which the calculation is made, the remaining amount tends to accurately reflect the value of the organisation (Gupta et al., 2004). The goal of optimising the life-time value of a customer is consequently a goal that benefits the entire organisation. It is a measurement unit that, apart from the problems in accurate measurement, would be preferable to profit or revenue optimisation. In our everyday business, however, reality is somewhat different. Accountants accept only the hard financial measurements of current-day profit and revenue, rather than future-oriented metrics such as customer life-time value. Revenue (or turnover) and profit are related to the occupancy rates of the organisation: is the sales team, the production crew, the logistical department currently busy enough? Are the machines working to capacity? Turnover and profit are therefore a well-accepted standard of current performance, but not, as far as studies show, a good indicator of future organisational performance. The life-time value is the net present value1 of the future contribution by a customer to the overhead and the profit of a company. The customer makes a contribution to the result if the income from transactions exceeds the expenses incurred in completing them and maintaining the relationship (Hoekstra and Huizingh, 1997). From a theoretical viewpoint, the most accurate calculation of the contribution is obtained when all of the customer-specific incomes and expenses are allocated to each customer (see Table 10.1). Not only the expenses incurred in completing a transaction, but also those involved in acquisition and relationship management are allocated so that the most complete insight possible can be gained into the customer’s profit contribution. However, 1

The net present value is a future amount of money (being the difference between yearly cash in flows and outflows) that has been discounted to reflect its current value, as if it existed today.

179

Part III Intelligence

table 10.1 Allocation of income and expenses to one customer Customer turnover Discounts granted (-) Shipping costs passed on to customer (+) Supplier’s credit (+) Gross turnover Turnover from returns (-) Net order sales Costs of goods/services sold (-) Administrative order processing costs (-) Physical order processing costs (-) Administrative and physical costs of processing returns (-) Bad debt expenses (-) Costs of acquisition and relationship management (-) Customer’s contribution to overhead and the profit of the organisation Source: Roberts and Berger (1999).

this is not practicable in most situations. Incomes may generally be attributed to a certain customer, but this is more difficult when it comes to expenses. Companies usually have no insight into the actual expenses that are incurred for a specific customer. Calculations of standard costs should give an indication of the expenses that are incurred when efficient methods are used to acquire, serve and manage the relationship, etc. Depending upon the degree to which reliable cost estimates may be prepared, the decision may be made to allocate either more or fewer expenses to the customer or to choose to categorise them under the overhead costs. If insight into the costs of relationship management is lacking, it may be wise to include only the transaction costs in the life-time value calculation. In this regard, reliability is more important than thoroughness. In order to arrive at the actual calculation of the financial customer value, the customer will have to be identified. This can be more difficult in practice than it seems, perhaps as a result of working with intermediaries, direct customer contact is lacking or perhaps because there is no central registration of customer identification data. In principle, someone is a customer as soon as the first transaction has been completed. The customer value calculation will then have to incorporate all transactions performed during the time the person is officially a customer. The expenses will have to be determined during the period from acquisition up to and including departure. This can involve actual realised cash flows (person is already a customer) as well as results to be obtained in the future which will have to be predicted (more transactions will be completed). The following simplifications are made for practical reasons: ●

The customer value calculation does not take place on an individual customer level but on a segment level.



The time period to which the calculation applies is restricted. The calculation includes the expected income and expenses for only the first two or three years.

Example In order to illustrate the customer value calculation, we will follow Blattberg and colleagues in their book Customer Equity (2001). They describe the situation of Buford Electronics, a company that sells $350 million worth of electronic components annually in the United

180

Chapter 10 Management reporting: measuring, learning and optimising

States to a variety of customers. Within the framework of the acquisition and relationship management policies to be implemented, customers are segmented into groups of small and large customers. Companies that spend less than $3,000 per year are categorised as small customers, whereas the larger companies spend on average between $25,000 and $100,000. In Table 10.2, in which the acquisition is described, it appears that the acquisition of large customers requires more effort than the acquisition of smaller clients. The greater amount of money spent by the larger customers cannot compare with the additional efforts necessary to acquire the initial sale. By the end of the year, there is still no profit being earned in the large customer segment. In order to determine life-time value, in addition to this first year, attention must also be focused on the other years during which customers place orders with Buford. Historical data which relate to the years which have passed since the company first became a customer can also be used. What was the churn in the segment, how much did the customers who remained customers spend and what expenses were incurred (Table 10.3)? The calculation will have to be based in part on the prediction of future behaviour (Table 10.4). Buford eventually decided only to perform an estimate for the coming five years and not to apply differentiation to the customer performance per year. The years following 2017 were not included in the calculation of life-time value; the future is considered to be too uncertain for this. Buford wished to prevent a situation from occurring in which an excessively high current customer value calculation stimulates too much investment in relationship development. These basic data are then used to calculate the customer contribution for the segment for the large and small customers. These calculations are shown in Tables 10.5 and 10.6. What is striking is that the ultimate average life-time value per customer is smaller for the large customers than it is for the smaller ones. They appear to be less loyal, demand lower prices and better service. The additional effort that Buford must expend for these customers seems disproportionate to the higher amount received.

table 10.2 Acquisition of customers Small customers ($3,000 per year) Starting situation Conversion ratio Costs per sales visit Number of sales visits per prospect Turnover per customer during the first year Margin on sales per customer – first year Number of prospects approached Financial results Sales expense per prospect Costs to acquire a customer Net contribution from the acquired customer Contribution as a percentage of the acquisition expense Number of customers acquired Initial investment in expansion of customer database Net contribution newly acquired customers

15% $20 2 $1,200 $360 40,000 $40 $267 $93 13.5% 6,000 $1,600,000 $560,000

Large customers ($25,000–$100,000 per year) 5% $100 9 $44,000 $8,500 8,000 $900 $18,000 ($9,500) 47% 400 $7,200,000 ($3,800,000)

Source: Blattberg et al. (2001) p. 26. Reprinted by permission of Harvard Business School Press. From Customer Equity: Building and managing relationships as valuable assets by R.C. Blattberg, G. Getz and J.S. Thomas. Boston, MA 2001, p. 26. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved.

181

Part III Intelligence

table 10.3 Customer performance from the first transaction to the present (2002) Year Small customers 2008 2009 2010 2011 2012 Large customers 2008 2009 2010 2011 2012

Sales margin ($)

Gross (%)

Margin service expense ($)

Marketing and percentage ($)

Retention (%)

1,200 1,700 2,300 2,500 2,500

30 35 35 40 40

360 59 805 1,000 1,000

267 75 75 50 50

75 80 85 85

44,000 52,000 70,000 85,000 85,000

19 24 26 27 27

8,500 12,480 18,200 22,950 22,950

18,000 1,000 1,000 400 400

40 55 65 65

Source: Adapted from Blattberg et al. (2001) p. 28. Reprinted by permission of Harvard Business School Press. From Customer Equity: Building and managing relationships as valuable assets by R.C. Blattberg, G. Getz and J.S. Thomas. Boston, MA 2001, p. 28. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved.

table 10.4 Expected customer performance from 2013 to 2017 Year

Sales ($)

Small customers 2013 2,500 2014 2,500 2015 2,500 2016 2,500 2017 2,500 Large customers 2013 65,000 2014 65,000 2015 65,000 2016 65,000 2017 65,000

Gross margin (%)

Margin ($)

Marketing and service expense ($)

Retention percentage (%)

40 40 40 40 40

1,000 1,000 1,000 1,000 1,000

50 50 50 50 50

85 85 85 85 85

27 27 27 27 27

17,550 17,550 17,550 17,550 17,550

400 400 400 400 400

65 65 65 65 65

Source: Adapted from Blattberg et al. (2001) p. 28. Reprinted by permission of Harvard Business School Press. From Customer Equity: Building and managing relationships as valuable assets by R.C. Blattberg, G. Getz and J.S. Thomas. Boston, MA 2001, p. 28. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved.

Limitations The life-time value is characterised by limitations. It is a calculation of the economic value of a customer (group) to be used by the supplier. The non-economic aspects are neglected and the value that the customer assigns to the supplier is completely ignored. None the less, it involves aspects which are relevant within the framework of a CRM strategy. Organisations that strive for long-term, mutually profitable customer–supplier relationships should not reason exclusively on the basis of themselves and their financial aspects. Should they do this anyway, the chance that the relationship will outgrow the transactional phase will not increase substantially (see Chapter 1). They will also discover that customers with a certain life-time value can be extremely heterogeneous; there may be significant differences between them as buyer, user and as individual or organisation. Consequently, the input that the economic customer value gives to the marketing decision making and operations is limited as a result.

182

183

1,200 1,700 2,300 2,500 2,500 2,500 2,500 2,500 2,500 2,500

Year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

30 35 35 40 40 40 40 40 40 40

Gross margin (%) 360 595 805 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Margin ($)

Source: Adapted from Blattberg et al. (2001) p. 29.

Turnover ($) 267 75 75 50 50 50 50 50 50 50

Marketing and service costs ($)

Small accounts: first transaction in 2008 Cost of money: 20% Number of acquired customers: 6,000 Customer value contribution first year: $560,000 Customer value contribution in the nine following years: $9,026,823 Total segment customer value: $9,586,823 Average customer value: $1,598

93 520 730 950 950 950 950 950 950 950

Customer value contribution/account ($)

table 10.5 Customer value contribution calculation: small accounts

93 433 507 550 458 382 318 265 221 184

Discounted value contribution/customer ($)

– 75 80 85 85 85 85 85 85 85

Retention percentage (%)

6,000 4,500 3,600 3,060 2,601 2,211 1,879 1,597 1,358 1,154

Number of accounts in year

560,000 1,950,000 1,825,000 1,682,292 1,191,623 844,066 597,880 423,499 299,978 212,485

Yearly discounted customer value contribution

184

44,000 52,000 70,000 85,000 85,000 85,000 85,000 85,000 85,000 85,000

Year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

19 24 26 27 27 27 27 27 27 27

Gross margin (%)

Source: Adapted from Blattberg et al. (2001).

Turnover ($) 8,500 1,248 1,820 2,295 2,295 2,295 2,295 2,295 2,295 2,295

Margin ($) 18,000 1,000 1,000 400 400 400 400 400 400 400

Marketing and service costs ($)

Large accounts: first transaction in 2008 Cost of money: 20% Number of acquired customers: 400 Customer value contribution first year: ($3,800) Customer value contribution in the nine following years: $4,188,108 Total segment customer value: $388,108 Average customer value: $970.27

−9,500 11,480 17,200 22,550 22,550 22,550 22,550 22,550 22,550 22,550

Value contribution/ account ($)

table 10.6 Customer value contribution calculation: large accounts

−9,500 9,567 11,944 13,050 10,875 9,062 7,552 6,293 5,244 4,370

Discounted value contribution/ customer ($)

– 40 55 65 65 65 65 65 65 65

Retention percentage (%)

400 160 88 57 37 24 16 10 7 4

Number of accounts in year

−3,800,000 1,530,667 1,051,111 746,447 404,325 219,010 118,630 64,258 34,806 18,853

Yearly discounted customer value contribution

Chapter 10 Management reporting: measuring, learning and optimising

Figure 10.1 Two-sided customer valuation

The measurement of the non-economic customer value and the supplier value can be recommended, yet will not be easily performed. It is difficult enough for an organisation to allocate the expenses incurred to individual customers; for consumer households that do not keep records, this will be nearly impossible. As for non-economic quantities, it holds true that they are difficult to quantify. In spite of these implementation problems, there are initiatives that can place this customer value calculation in a broader perspective. The company Loyalty Profiles, for example, attempts to deduce the value that customers assign to a supplier from the type of goods and services purchased, the purchase frequency, the most recent purchase date and the amount spent. A customer from a certain segment with the corresponding needs-and-wants pattern, who has not yet purchased the crucial goods and services specific to that segment, would most likely not describe that particular supplier as strategic. The non-economic customer value is thus deduced from the pattern in which the relationship develops. Does the turnover demonstrate a pattern that is characteristic of the segment? Is the cross-buying or the cross-selling path developing as expected? Can it be inferred from the development that both parties appreciate one another? Value determination from the perspective of the customer and the supplier can be illustrated graphically. This has been done in Figure 10.1 for three different customer segments. In the cube, A occupies the least attractive position, whereas B occupies the most attractive position.

10.2

relating marketing investments to life-time value The application of life-time value as a tool to measure and manage the organisation as a whole is still limited. Organisations deem it too risky to adopt a metric based on estimations of future revenues and costs (or expenditure) and to have that metric serve as the basis for decisions on the allocation of marketing resources (Venkatesan and Kumar, 2004). One explanation for this might be the lack of familiarity with the connection between marketing activities and the life-time value. There is lack of insight into the impact of certain marketing efforts on retention, repeat purchasing and such customer spending factors, making trust in lifetime value as a metric also low. Traditional experience-based rules and conventional wisdom

185

Part III Intelligence

that is widely available in the area of direct marketing, for instance, is not yet well developed for CRM. At the same time, the old rules of direct marketing hardly apply in the multichannel environment in which customer relationships need to be built and maintained nowadays. The direct marketing rules were developed at a time when transactional value was optimised, not customer value. Furthermore, only a small number of organisation-directed channels were used as opposed to the multitude of customer-initiated contacts we experience nowadays. Several studies have found that a lack of insight into the relationship between marketing expenditure and life-time value has led to less than optimal results (see among others Venkatesan and Kumar, 2004, Thomas et al., 2004a, Thomas et al., 2004b). There is a set of organisations who clearly overspend on attracting, developing and maintaining customer relationships while others underspend or allocate too few resources. Table 10.7 shows that a company in the pharmaceutical industry could increase its customer life-time value by as much as 35 per cent to the optimum level by increasing expenditure on direct marketing by 30 per cent. However, the mail order company and the business-to-business supplier would do best to cut back on their budget for direct marketing. By overspending they can still acquire customers or retain them, but not profitably. This may be caused by the high level of activity attracting short-stay customers (hit-and-run) for whom the acquisition costs exceed the total profit during the short relationship. It may also mean that retention efforts are being made for customers who are hardly profitable as-is and therefore become loyal loss-generators, which is an unattractive prospect for future value creation.

optimal allocation of resources to relationship marketing activities In order to allocate the budget optimally, the answer to two questions needs to be given: ●

What is the optimal balance between acquisition and retention?



How should one allocate resource to the optimisation of the relationship over time?

acquisition versus retention Table 10.8a shows that the optimal results are achieved when prior to and during the relationship €10 is spent on acquisition and €60 on retention. We suspect that in many organisations, the expenditure is just the opposite! Table 10.8b shows the effect of retention expenditure on the duration of the relationship. The optimum level is €70. It would be very interesting for an organisation to determine these optimum levels in their own situation, because they form a basis for calculating the return on marketing investments. The increase in customer value can easily be divided by the increase in marketing expenditure (on both acquisition and retention) to show the marginal effect of the investment. table 10.7 The relationship between customer value and direct marketing expenditure

Type of organisation Business-to-business Pharmaceutical sector Mail order company Source: Thomas et al. (2004b).

186

How much more or less should be spent on direct marketing?

How much would the long term profitability (customer value) increase if the optimum amount was spent on direct marketing?

-68.3% +31.4%

41.52% 35.8%

-30.7%

28.9%

Chapter 10 Management reporting: measuring, learning and optimising

table 10.8a Average customer value (as a result of acquisition and retention expenditure) retention expenditure (euro per customer) Acquisition expenditure (euro per customer) 1 5 10 15 20

40

50

60

70

80

1,423 1,437 1,443 1,437 1,418

1,543 1,557 1,563 1,557 1,538

1,583 1,597 1,603 1,597 1,578

1,542 1,557 1,563 1,557 1,538

1,423 1,437 1,443 1,437 1,418

Source: Thomas et al. (2004b).

table 10.8b The average duration of the relationship in weeks (as a function of retention expenditure) Retention expenditure (euro per customer) Expected duration of the relationship (weeks)

40

50

60

70

80

122

135

142

143

138

Source: Thomas et al. (2004b).

allocating resources to different phases in the relationship Ideally, there would be a good understanding of the impact marketing investments have on life-time value. What is the added value of a welcome-call to new customers? Are we prolonging the duration of the relationship and the life-time value? How much effort is required to have a customer purchase a second product or service within a two-year period? What is the impact of that second purchase on life-time value and what differences are there between types of transactions and customer segments? What is the ideal second purchase for segment A and what for segment B? Decision trees are always helpful when trying to evaluate alternatives such as these. It is quite easy to view the interactions as a path of successive decisions, each with a pay-out in terms of a life-time value development. The total path should lead to the optimum in long-term, multi-decision, life-time value development. Figure 10.2 shows such a decision tree. The model starts at the initial contact A. The chance of following it up with contact B or D is respectively 9 and 15 per cent; B and D could represent the purchase of two distinct products or services. Later on, more specific interactions and follow-up on contacts B and D develop more distinct paths, each with a different payout in terms of customer value. The model can be expanded on by: ●

Attaching the value of the interaction (the revenue minus cost of each interaction) to the nodes, indicated with letters.



The calculation of the life-time value at the end of the decision tree to demonstrate the optimal path.

In a life-time value calculation we do not take into account the future options that cannot be foreseen with our present knowledge and that can have a positive influence on lifetime value. Customers with a low chance of repeat purchases and low general spending are therefore likely to be underestimated in the life-time value model. They tend to drop off the radar and we focus too little attention on developing the relationship with them into something more (Haeinlein et al., 2006).

187

Part III Intelligence

7%

A

9% 15%

B

D

F

18%

G

4%

G

8%

6%

F

11%

F

F

24% B t

Figure 10.2 Decision tree describing the interactions in a relationship

optimal implementation and execution of crM Gaining insight into the way to achieve optimum life-time value is about more than just allocating the right budget. Ultimately, the organisation will require a complete model, encompassing life-time value and revenue, costs and profit margin contributions as result variables. The explanatory variables cover the entire scope of CRM and measure strategy, organisation of efforts, marketing activities and IT support. The description of those variables should limit itself to factors relevant to the execution of the CRM strategy. These are the so-called critical success factors. It should be clear that these factors are different for a construction business operating in the B-to-B market and providing turnkey solutions for customers from those for a hotel chain with a range of 4- and 5-star hotels across the US, Europe and Asia. In the end, the balanced scorecard that we referred to earlier (see Section 4.7) will be constructed as an important means of control and with the intention of communicating the CRM strategy and monitoring and optimising its realisation. This balanced scorecard can be constructed on many different levels of aggregation. The level of the organisation, the business unit, the department, but also the market, customer group or channel. It is very important that the levels are managed and that they are linked in such a way that all scorecards lead to the end result. We will indicate the areas relevant for measurement on the organisational or business unit level. The result variables have already been addressed, so we won’t deal with them in great detail. To achieve the desired results, a position in the marketplace must be constructed. Critical success factors in this domain are linked to the answer to these questions: ●

How many customers does the organisation need?



What is the optimum share of wallet and what is required to reach this optimum?



What level of customer-to-customer recommendations is desired?



What is the appropriate level of customer specific costs that should be made while attracting, developing and maintaining the relationship?



How much commitment, trust and satisfaction are required to achieve the desired results?

On the level of processes, the scorecard can describe the value creation in marketing. At the beginning of the chain is customer knowledge. It enables the determination of the individualised value proposition. Once we know what we would like to offer it is also clear

188

Chapter 10 Management reporting: measuring, learning and optimising

with which customers the organisation would like to build a relationship. The relationship strategy can be given shape and form and be translated into a multichannel policy. Critical success factors in the area of customer knowledge are: ●

knowing the customer to a level that is useful in shaping the proposition, relationship strategy and communication;



exploiting the customer knowledge in marketing; and



the return on customer knowledge.

An obvious prerequisite is the ability to identify the right customers with whom to build relationships. When it comes to the value proposition, the critical success factors are: ●

the power to differentiate the proposition from the competition;



the degree to which valuable customer experiences are created;



the willingness of customers to pay a price premium for the value proposition; and



the control of costs and of complexity. Critical factors for the success of the relationship strategy are:



the volume and quality of the customer base and the division of resources across acquisition, development and retention;



the effectiveness and efficiency of the continuous chain of interactions that lead to the development and maintenance of a relationship. A bank that has developed a direct mail campaign for a savings account and launched it just before the summer break will have to look at the results from a broader perspective, not in isolation. The high response that may have been generated with an incentive is not enough to call the campaign a success. Side-effects need to be taken into account. Is the action cannibalising other products and leading to withdrawals across other accounts with the bank? Or is the campaign leading to more cash from holiday allowances being transferred to the bank than to other banks and is that a one-time effect, or will it have consequences for the following years? Is there a lasting increase in the share of wallet and a sustainable increase in life-time value? How does that increase relate to marketing investments that have been done? These questions need to be answered some time (even a year or more) after the campaign has been terminated, to evaluate campaign return on investment.

crM illustration Important side-effects can be seen in the following cases: ●

Welcome-calls; new customers are welcomed and asked if all is well. The investment in the new relationship is made. The effect will not be a direct transaction, but rather a lasting impression that the supplier is committed. It will influence the interactions the customer and supplier have over a prolonged period of time.



Cross-sell activities in the early stages of a relationship; the legitimacy of this kind of actions can be found in the effect on retention and prolonging the duration of the relationship. Careful attention needs to be paid to relevancy, however. If it is just about ‘chasing down new customers as fresh sales opportunities’, lasting damage can be done to the relationship.



‘Member-get-member’-actions; the return on investment is being achieved on the transactions

189



Part III Intelligence

crM illustration (continued) that the customers brought in by other members are going to realise. ●

Actions aimed at rewarding loyal customers; although it is often the expression of appreciation for past purchases, the effect intended is, of course, prolonged patronage and even further stimulation of future purchases.



Service contacts that take place on the initiative of the customer or service provider may have the same effect as reward actions.



The treatment of complaints. The damage to relationships can be limited if the complaint is treated in a satisfactory way, but one should not overestimate the relationship building potential: it is not the ‘golden opportunity’ many customer service gurus claim it to be. Often there remains some damage to the relationship as a consequence of the root cause of the complaint.

The multichannel strategy describes the interaction between the customer and the organisation across different channels. Critical success factors are related to: ●

quality of contact and the satisfaction of customers therewith;



channel integration and possibility to construct a dialogue, relating to channel strategy, the technical infrastructure (network and databases);



campaigns within the context of the dialogue and their conversion/return on investment;



successful utilisation of commercial opportunities that present themselves in contact; and



cost per contact, cost control.

A precondition for success is the accessibility of the organisation. In Part IV of this book, which deals with operational CRM, we investigate further each of the communication channels; each chapter will be closed off with an overview of performance indicators for the channel discussed. In the ultimate dimension of the scorecard, learning and growing, it is all about growth in customer orientation and ICT support thereof. Is the organisation able to transform itself and be organised around customers rather than products? Are IT systems keeping up with the changes in customer contact opportunities and supporting the business through solid networks, database architecture and CRM applications? A more complete review of this topic has been given in Chapter 4.

10.3

Experiments Knowing which factors are crucial to CRM success in the specific organisational context is already quite a feat. It is even more important, however, to understand the interrelations between success factors. Measuring marketing efforts and learning from these measurements is achieved by experimenting and testing. It is a more formalised way of learning, requiring time, dedication and a certain volume in terms of the customer base. Experiments come in different shapes and sizes. In the classical experiment, people are exposed to a stimulus in a manipulated environment, and their response to this is measured.

190

Chapter 10 Management reporting: measuring, learning and optimising

Given the fact that one or more groups of people are confronted with different stimuli in an identical environment, the difference in responses may be attributed to the differences between the stimuli. Two groups are often used. While the first group, or experimental group, is exposed to the stimulus, the second, or control, group is deprived of this stimulus. In choosing an experimental setting, a balance must be found between internal and external validity. The internal validity is determined by: ●

The degree to which the manipulation requirements are being satisfied. Can differences in response be attributed solely to the stimulus and not to other disruptive factors?



The degree to which a time sequence may be recognised. Does the response measurement follow the stimulus?



The distinguishing capacity and the stability of the measuring instruments. Do the instruments determine the effect of the stimuli in a reliable way?

The external validity concentrates less on explaining the results obtained and more on the significance of the outcomes in practice. Is the outcome of the study of any practical use in solving policy problems? Does the research provide an answer to the question of how customers should be approached? The external validity depends on: ●

the reality content of the experimental situation; and



the degree of representativeness of the random sample, the stimuli and the response variables.

Take an experiment in a laboratory, for example. The internal validity will be positive. The researcher determines the application of the stimuli. Environmental influences that can disrupt the connection between the stimulus and the response are kept out of the study. If the research involves a study of the effects of a communication message, it may be decided to measure the unaided awareness of claims contained in the message. To do this, an instrument is used which measures the response to the stimulus in detail. The instrument is reliable if the respondent could not previously have familiarised themselves with the claims made by the supplier. The unaided awareness is then the result of the communication activity. The stability of the measuring instrument will depend on whether changes have occurred in the measured outcome in the absence of an external cause. The external validity may, however, suffer in the laboratory situation. A person’s familiarity with the contents of a communication message can be measured, but the marketer’s actual interest might be in the response (purchasing, information requests, etc.). The conclusions from the experiment will have to be translated to the actual situation. In the reality of the customer–supplier relationship, the application of the stimuli also cannot be enforced. The customer is not obliged to absorb the communication message. After all, a longer period of time will pass between the confrontation with the stimulus and the occurrence of the response. During this time, the customer may be confronted with all sorts of other stimuli. The environment is dynamic and influences the ultimate response. In short, in conducting research, the proper balance must be found between internal and external validity. Meeting the validity requirements to a lesser degree can be a practical solution. This appears to be particularly acceptable when the timeframe between stimulus and response is short in practice. The importance of the external validity increases if people are confronted with a complex problem in reality. The significance of extremely valid internal measuring instruments will be limited for this type of problem. For each situation, a consideration of internal and external validity requirements will have to be

191

Part III Intelligence

made. Various experimental settings have been developed, each with its advantages and disadvantages.

alternative experimental settings The experimental settings differ in terms of: ●

whether they use a control group;



whether they include a null measurement prior to the application of the stimulus;



whether a manipulation takes place (forced stimulus application);



the number of experimental groups that are used.

There are experiments in which a control group is not used and where the response is measured before and/or after confrontation. Experimental settings also differ from one another in terms of the number of measurements that are performed per group. If a control group is not used, a measurement before and after exposure to the stimulus provides insight into the effect of the stimulus. If a control group is used, insight into the effect of the stimulus can be obtained by comparing the response in the experimental group with that observed in the control group. The significance of the measurement to the application of the stimulus here lies with the increase in the comparability of the control group with the experimental group. An equal starting position is conducive to good comparability. The experimental settings also differ in the degree to which the stimulus application is manipulated. Experimental settings exist in which staged exposure exists; there are also pilots in which the customer decides themselves which elements they would like to be exposed to in the communication message. Experimental set-ups can be designed to work with multiple control and/or experimental groups. The experimental and/or control groups can be exposed to different stimuli and the aim of the experiment is to compare the effects of several alternative stimuli. The number of

crM definition Examples of experimental settings Each of the following four settings may take place with or without staged exposure. Experimental setting 3 is the most common in CRM. Setting 1 Setting 2 Setting 3

Setting 4

EX: EX: EX1: EX2: Exn: C: EX: C1: C2: C3:

S E1 S1 S2 Sn E1 E1

E1 S E1 E1 E1 E1 S S

Key: E2

E2 E2 E1 E1

S

Stimulus

E

Effect measurement

O

Observation

C

Control group

R

Staged exposure to stimuli

EX

Experimental group

The addition of 1, 2, 3, . . . to the symbol indicates with E, for example, the first, second, third, . . . effect measurement.

192

Chapter 10 Management reporting: measuring, learning and optimising

groups can also be increased in order to perform a more accurate variance analysis. Two control groups can be identified. Two effectiveness measurements can be performed on one control group, both before and after the time at which the stimulus is applied to the experimental group, while in the other control group, only one measurement is taken. The difference in response between the two control groups sheds light on the influence a stimulus has on the chance of response. The measurement, which was most likely performed during a telephone survey, can actually increase the respondent’s awareness of the stimulus. Through voluntary exposure, the probability thus increases that the respondent will remember the stimulus. In order to increase the likelihood that reliable and significant judgements can be made about the differences in outcomes between the groups, the random sample size will have to be adequate. An estimate can be made using the following formula: R(1 - R)C2 E2 Here R is the expected response percentage to the marketing campaign expressed as a decimal, N is the random sample size, C is the confidence level and E is the allowed margin of error. The confidence level is the number of times that a correct indication was given that marketing campaign A led to a higher response rate than campaign B, for example. Assuming a normal distribution of the results, a confidence level of 95 per cent applies to a C value of 1.96. The accepted margin of error E (or the desired degree of accuracy) indicates the number of percentage points by which a chance of response could be incorrectly estimated. It indicates the acceptable range within which the answer lies. Tests such as the t and the chi-squared test can then be used to determine whether the outcomes between the groups differ significantly. Variation analysis can also be used. For a further explanation of this topic, please refer to statistics reference books. Within the field of CRM, numerous opportunities exist to conduct experiments – in this case tests – which have high external validity. Because direct feedback to campaigns is gathered within CRM, the response can be measured without it being necessary to carry out additional procedures. Mailings can be sent in various shapes and sizes. Scripts can be tried out in call centres. Different layouts and constructions can be tested for the website. The effect of different incentives on response and transactions can be gauged. At the same time, the internal validity can be monitored. Thanks to the customer characteristics recorded in the databases, it can be seen whether or not the groups are identical and representative of the population. Control groups can be used to isolate the influence of situational factors. The validity, however, comes into play when it comes to determining the indirect effects of marketing activities on life-time value, for example, or the degree of retention which must manifest itself in the longer term. In the interim, many situational effects occur which make it difficult to attribute any changes in activity to the experiment. N =

10.4

the learning organisation Acquiring insight into the effects of marketing through experimentation is time consuming. At the same time, even more questions arise. The number of channels has grown. It is no longer simply the effectiveness of a mailing that matters, but the dialogue that is conducted through the different channels that is important. Does this dialogue teach us something about the customers, and is this knowledge used effectively in the development of a relationship? It is not

193

Part III Intelligence

only the direct effects that attract attention, but also the indirect results that first appear over the long term. Furthermore, the time left to gather the answers is shorter. In the real-time market mentioned in the introduction, short response times are a precondition for success. In short, a pressing need asserts itself not only to respond but also to accumulate knowledge in another way and to distribute it across the marketing performance. The need arises for a learning organisation in which know-how is broadened and deepened in all of its aspects (see the box below). Learning is the process in which knowledge is created from the experience gained. A characteristic of learning organisations is that they focus on the whole, rather than on the components of a problem or issue that screams for an immediate solution (Senge, 1990). If, for example, the number of long-term customers falls under a certain minimum, this can prompt additional acquisition efforts, which will have a negative influence on the quality of the inflow. Prospects who became customers were offered numerous incentives which weighed heavily in their decision to become customers. As a result, their interest in the organisation’s core proposal becomes relatively limited. This is temporarily compensated for by the additional advantages that the incentives offer, but as soon as these have ‘worn off’, the chance that the relationship will be terminated increases. The organisation ends up in a position in which the outflow grows and the number of customers drops even further. The inclination is there to become more active and aggressive in acquisition efforts and thus to become caught in a downward spiral. Time after time the outflow increases and more effort is required to maintain the customer database at its current level. The only solution is to break out of the cycle, and to find this solution, the limited view which has been taken of the problems has to be replaced by a total overview. Learning remains the work of individuals. Everyone within the organisation performs and thus gains experience. This applies to the agents in the contact centre, to the service repairperson in contact with the customer, to the account manager, the marketer and the database manager. The dedication to expand upon these experiences and explain them forms the basis for a learning organisation. Although the motivation and inspiration to learn must come from the individual, it is the task of management to encourage the learning process and not to punish it. Agents in the call centre who are paid exclusively to be productive are not given the time to reflect. They are unable to convert their numerous experiences into knowledge, or share these with others both inside and outside their department. Learning is the development of mental models, the construction of an image of reality. It requires us to bring the hidden image of reality to the surface, and to hold it up to the light, examining it rigorously. It will have to be opened up for discussion by individuals.

Know-. . . Know-how: a specific skill or procedure; knowing how to entice a customer. Know-who: the ability to point out an individual who can aid in the execution of a specific task. Know-what: structured patterns and knowledge, based directly on facts, data and figures. Know-why: a deeper insight into the underlying reasons and motives; knowledge in a broader context. Know-when: a feeling for timing and rhythm. Know-where: a feeling for location; what is the best place for a banner? Source: Zuiderduin (2002).

194

Chapter 10 Management reporting: measuring, learning and optimising

The images of others should not be renounced beforehand. The perception, for example, that customers will not accept a paid service number may be discussed further. It can appear possible that customers object to this because it demonstrates the one-sidedness of the customer–supplier relationship. If a sale can be made, the supplier is available and friendly, but if it is held to its previous promises, there is no response. If this impression can be removed, the path to a paid service number is open. Then, it is the gateway to a serious and committed supplier who is ready and willing to help. A shared vision can be developed from these discussions. A common answer to the underlying question of why we do things this way, can be formulated. Knowledge is obtained for the objective that is pursued. Meaning is given to the work that is performed; it represents the incentive to learn more, to acquire and to distribute knowledge and to excel. The service employees are not there to minimise costs and keep customers away. The goal of the salesman is not to maximise turnover, and the objective of the financial department is not limited to the reduction of working capital. Everyone has the same goal; to achieve success, together with the customer. Team learning is thus necessary to turn these collectively developed visions and knowledge into actions. Teams must be able to act collectively and learn from experience. This requires a dialogue in which assumptions are removed so that the free exchange of information and meanings becomes possible. The slow agent in the call centre who continues to try to find out the underlying reasons motivating customers to make contact should not be painted as the black sheep who fails to achieve his productivity goals and who should not be taken seriously. In all likelihood, they are the person who knows the most. In an open dialogue, their experiences could be converted into collective knowledge of the customer and the effectiveness of the way the customer is managed.

Knowledge management Knowledge management (see Figure 10.3) can play a role in the focused creation, distribution and use of vital knowledge. Knowledge management should, however, not be identified with the systems – a mistake that is often made. The tool can never take the place of the product, nor are CRM systems fully capable of giving shape to CRM. The track record of knowledge management systems is perhaps even worse than that of CRM. Major investments are made in systems and the filling of them with data, and hopefully knowledge. However, often the use of this is lacking. A dynamic link between the users of the system is absent. In order to realise this link, those involved will have to discover its relevance and value in daily operations (see Figure 10.1). The system must be built around people and the activities within the company. At the time a question appears, the system must be able to respond to this and provide knowledge that immediately proves its use. Someone in the contact centre can look up the contact history and respond to the caller’s question. Supplementary information is also available. The advantages and disadvantages of a product are described, an old mailing can be retrieved, and so forth. In addition to embedding it in the operational processes, the development of a successful knowledge management system also requires a connection to the strategic processes. After all, control over knowledge development must come from a common vision and strategy. From here, it must be indicated whether more knowledge is necessary for the effectiveness of the website, the segmentation and profiling, the relationship strategy and so forth. Knowledge is developed on the basis of people’s experiences. As a result, the quality of a knowledge management system is determined by the people who must work with it. Although

➨ 195

Part III Intelligence

Knowledge management (continued) the system will have to manage itself to a great extent by recording knowledge and making it available, its development can be influenced by selecting specific people for specific learning projects (teams). They are held responsible for the development, recording and the distribution of knowledge in areas such as fitting the internet into the multichannel environment, crossselling, personalisation, segmentation, etc. The information will have to be used to improve the operations. Account managers, marketers, agents from the call centre and database analysts develop and use a cross-sell engine, for example, and on the basis of their experiences with this tool, knowledge of it will be expanded and recorded. Those involved from different channels experiment with different forms of personalisation and share the results. A crossfunctional project team that tackles the efforts to reduce customer churn gains experience with different retention analyses and campaigns and ensures that these are recorded and made available. These teams can count on participation and support from management.

Figure 10.3 Knowledge management Source: Tissen et al.(1998) .

10.5

conclusion Along with its predecessors, direct marketing and database marketing, an elaborate foundation of experience has been constructed through tests and experiments. Marketing activities induce individual responses from customers and prospects, which hopefully will more than make up for the expenses incurred.

196

Chapter 10 Management reporting: measuring, learning and optimising

It needs to be clear in which segments certain campaigns yield the best results. Insights are being gained into the communication channels, the incentives, the proposition, the selection and expected effects. As long as the variations in marketing are limited and the direct response or direct transaction is the effect sought after, the lessons learned through direct marketing and database marketing are valid. However, when life-time value becomes the goal and the complexity increases, also because more channels are introduced, the old lessons may have to be forgotten rather than remembered. Customer value will need to be measured. The impact of the size and allocation of marketing budgets needs to be understood. The effect of marketing activities on long-term, lifetime value developments needs to be discovered. Although experiments and tests permit effective insight, they require time, and time is not always available. There is a clear need for organisations to speed up their learning process with less formal and less time-consuming methods. It requires effort from everyone involved to share knowledge and collectively learn more quickly from experience to create a common understanding of the reality. The meaning of certain actions or interactions needs to be understood so as to gain inspiration to further develop and exploit knowledge. Knowledge management systems can be helpful, but it ultimately remains a human task.

casE stuDy carglass wins crM award Carglass won the Dutch CRM Award 2009 for a way of working that has been in place for many years at the company. ‘With our company, CRM is not a programme that the marketing department is executing; it’s a mentality that has become an integral part of the DNA of our organisation’ (Hulsebos and Van Beek, 2010). Carglass is a dominant player in the European market for car windscreen repair and replacement. It’s a low-interest service that an average customer might require only once every five years. To ensure that the customer chooses Carglass again after five years, the company has developed its entire business model around the goal of achieving 100 per cent customer satisfaction. Carglass’s strategy to distinguish itself from the competition in a very crowded marketplace is ‘superior service’. Because windscreen repairs are generally a moment of discomfort, Carglass tries their best to resolve the problem quickly and efficiently. Striving for 100 per cent customer satisfaction has been translated back to every part of the organisation. Customer satisfaction is used to direct efforts to improve in every area, from top management to the repairmen and office assistants. Carglass makes a considerable effort to ensure that all their employees focus on the needs of the customer. It starts at the door, in the recruitment policy. The most important aspect is attitude. The service orientation is crucial, according to Hulsebos. It is also an important aspect in all training programmes. But the most tangible element to direct efforts is the customer feedback system. All employee bonuses are linked to the degree to which the customers are satisfied and would recommend the company to others. On a yearly basis, Carglass assists some 500,000 people with windscreen repairs, ranging from chips and cracks to broken windscreens. Some 60 per cent of those people are willing to leave an e-mail address to be approached the following day for a customer

197



Part III Intelligence

case study (continued) satisfaction survey over the web. Some 55 per cent of these actually do fill out the questionnaire, leading to some 125,000 customers responding on a yearly basis, just over 2,400 per week on average. Hulsebos: ‘Filling out the questionnaire takes some seven minutes, so it’s not just getting feedback, we also have over 1 million minutes of free advertising/attention during the year.’ Because of the amount of feedback received, not only can Carglass measure the averages for customer satisfaction nationwide, but also by location, mechanic and contact agent. ‘We gain insight into customer friendliness on an employee level . . . ’ The reports are generated in real-time, as soon as the customer finishes a questionnaire. ‘If a customer is dissatisfied, the manager at that location can get back to them the same day, as well as giving feedback to the employee. Incidentally, they also do this when the customer is really satisfied. And we keep a keen eye on which best scoring locations are doing better than the rest. It’s part of our goal to get the rest to the best’, says Hulsebos. The questionnaire consists of closed questions and one open question: Are there any remarks or observations and suggestions you could make to us in order to improve our service? ‘The tips you get on that level are sometimes remarkably easy to deploy and effective.’ The information obtained by Carglass is also shared with business partners, mostly the insurance companies, who can get access to their own customers’ satisfaction reports and download the feedback. The business part of the relationship that Carglass needs to cater to is the trust that car hire and insurance companies have in the care that is taken over their customers when they ‘direct’ them to a Carglass location. They often pick up the bill for the repairs. One could say that reducing such costs is key to the business partners, but Carglass has managed to achieve a level of mutual understanding where benefits are shared: Carglass’ efficient operations are cost-effective, while the investment made in customer satisfaction means that customers feel well-assisted, both by the insurer or car hire company and by Carglass. Relevant feedback is shared and partners can opt to have specific questions included in the surveys directed towards their customers. The business partners may even propose commercial offerings to their own customers during the contact with Carglass, meaning the contact is no longer a cost factor, but a commercial contact point. Investing in customer enthusiasm pays off, that much is clear from this example. By raising the bar every time and making no concessions to the quality of the job to be done, Carglass has been able to increase the lead on the competition in this cutthroat market. Both profits and customer satisfaction have increased significantly over recent years.

Questions 1 What convinces you most that CRM is more than just a well-managed measuring and improvement system at Carglass? 2 Name the advantages and possible downsides of the way in which Carglass is collecting customer feedback, analysing it and using it in their efforts to improve customer focus in the organisation. 3 What elements would drive the business case for Carglass? Give an outline of the way customer focus improves Carglass’ financial performance. Illustrate your answer. Sources: Hulsebos and van Beek (2010). Press release Platform voor Klantgericht Ondernemen (2009).

198

Chapter 10 Management reporting: measuring, learning and optimising

QuEstions 1 What does the height of the discount rate for interest depend on? 2 Why is it difficult to attribute internal expenses to individual customers? 3 Life-time value is often calculated per so-called year-echelon (per segment). What would be the explanation for this? 4 What criticism can you give to Buford’s customer value calculation? 5 Develop an overview for an imaginary company in which you highlight the essential relationships between life-time value at one end and marketing activities and expenses at the other. 6 In experiments, different relationship policies can be tested. Think of five experiments you would consider and highlight what knowledge or insight they help you build. 7 Statement: in experiments it is recommended that only parts of the marketing approach be changed, because the effects can otherwise not be attributed to the stimuli. (a) Do you agree or disagree with this statement? Justify your answer. (b) Discuss the effect of selecting only a limited number of stimuli on the internal and external validity of the experiment. 8 In an organisational context, there are several factors that often hinder learning. Name and illustrate five of these. 9 Determine what the ideal learning organisation would look like for an organisation with a CRM strategy and CRM system. 10 Management teams can be created (Figure 10.3) which are responsible for the development and distribution of knowledge throughout several areas. Formulate ten such teams for an organisation with a CRM-strategy and CRM-system. Indicate whether you would select team leaders from the operations or from the management team. Give reasons for your choices.

references Beltman, R., Peelen, E. and Waalewijn, P. (2000) CRM, de klant centraal, Alphen aan den Rijn: Samsom. Blattberg, R.C., Gatz, G. and Thomas, J.S. (2001) Customer Equity: Building and managing relationships as valuable assets, Boston, MA: Harvard Business School Press. Eilander, E. (2004) Proteq Direct: testing e-mail marketing is effective, Tijdschrift voor Marketing, April, 32–5. Gupta, S., Lehmann, D.R. and Stuart, J.A. (2004) Valuing customers, Journal of Marketing Research, 41, February, 7–18. Haenlein, M., Kaplan, A.M. and Schoder, D. (2006) Valuing the real option of abandoning unprofitable customers when calculating customer lifetime value, Journal of Marketing, 70, July, 5–20. Hoekstra, J. and Huizingh, E. (1997) Lifetime Value Measurement Methods, Working paper, Groningen: RU Groningen.

199

Part III Intelligence Hulsebos, M. and Beek, R. van (2010) Bij Carglass is de klant adviseur, Marketing RSLT, 1, 13. Malhotra, N.K. and Birks, D.F. (2003) Marketing Research, 3rd edn, Harlow: FT Prentice Hall. Roberts, M.L. and Berger, P.D. (1999) Direct Marketing Management, Englewood Cliffs, NJ: Prentice-Hall. Senge, P.M. (1990) The Fifth Discipline: The art and practice of the learning organisation, New York: Currency and Doubleday. Thomas, J.S., Blattberg, R.C. and Fox, E.J. (2004a) Recapturing lost customers, Journal of Marketing Research, 41, February, 31–45. Thomas, J.S., Reinartz, W. and Kumar, V. (2004b) Getting the most out of all your customers, Harvard Business Review, July–August, 116–23. Tissen, R., Andriessen, D. and Deprez, F.L. (1998) Value Based Knowledge Management, Amsterdam: Addison Wesley Longman. Venkatesan, R. and Kumar, V. (2004) A customer lifetime value framework for customer selection and resource allocation strategy, Journal of Marketing, 68, October, 106–25. Zuiderduin, J. (2003) De effecten van marketingacties, Amsterdam/Tilburg: TIAS/Postbank. Zwan, A. van der and Verhulp, J. (1980) Marktanalyse en bedrijfsstatistiek, Leiden: Stenfert Kroese.

200

Part IV

Marketing (Managing the exchanges in the relationship) Building relationships requires an active exchange of resources such as goods, services and information (Foa and Foa, 1976). In this fourth part we address how an organisation, for and together with customers, can create individualised proposals that meet customer needs by applying co-creation (a synonym for collaboration), mass individualisation and by introducing a complete assortment – every conceivable option (by focusing on the long tail). However, as well as containing an offering that has value for the customer, value propositions also have a price, a flow of value back to the organisation. Here, we explore in what ways an organisation can formulate and implement an individualised pricing policy. Exchanging resources is the key element of building buyer–seller relationships. In order to be successful, the organisation has to set priorities. One cannot pay equal attention to all customers, or risk becoming the old mass marketing organisation again, one that just caters to average customers in an average way. The aim is to grow mutually the value of the relationship to the company and the value of the company and its offering to customers. To decide which customers in a customer base deserve what type of attention, we also focus on relationship policy. The topic of how much to invest in the acquisition, retention and growth of particular customers is covered when we discuss customer asset management. The discussion of relationship life-cycle management helps to identify the crucial moments in a relationship, those which deserve particular interest and effort to safeguard and expand customer value in both directions: the value of, as well as to, the customer.

11

Chapter

The customer proposition In this chapter we explore further the different ways in which organisations can play into individual customer preferences in the process of value creation. Once it is clear that the organisation strives for optimisation of mutual value creation in the relationship with its customers, the expectations are that the needs and wants of customers are being catered to. In the first section we explore how we can co-create value following the methods outlined by Prahalad and Krishnan (2008) and Prahalad and Ramaswamy (2004). We then move on to consider the widely varied and fully comprehensive range of options that it is now possible to offer in many digital marketplaces due to the ‘long tail’1. Thereafter we examine a third way of shaping the offering for customers, which is popular and has had some success in recent years, namely the individualised value proposition. This chapter concludes with a review of the sacrifice that customers make when engaging in the relationship: they pay a price. It is the flip-side of value creation and can be individualised to about the same degree as the value proposition. In this chapter we will address the following: ●

The unique personal customer experience (by means of co-creation, the ‘long tail’, mass individualisation)



Individualised pricing (price structures, price sensitivity, revenue management)

PracTiTioner’s insighT In many markets, it is becoming increasingly difficult for an organisation to distinguish itself from the competition solely on the basis of products and services. Access to the resources required to make and market such offerings is no longer restricted to a small group of privileged organisations. In order to compete successfully, a change of perspective is required. Competitors are less important than individual customers. Rather than competing against

1

See Figure 11.2 on page 214. The left-hand side of the curve represents a few items which are sold in large quantities. The right-hand side of the curve represents a large number of items that are sold only occasionally. This side of the sales curve is known as the ‘long tail’. These products rarely sell, but are a crucial part of the assortment that attracts interested customers.

203



Part IV Marketing

Practitioner’s insight (continued) PracTiTioner’s insighT each other, organisations should compete for customers, a shift in approach towards which organisations have now been striving for some two decades. The search began with mass individualisation, which is a tough marriage between two quite contradictory approaches. Customers can compose their own personalised proposition using a range of mass-produced building blocks (also called the ‘Lego-lisation’ of products): turning all products and services into smaller blocks and parts or features that can be manoeuvred or added to depending on the customers’ needs. However, managing the complexity is difficult and has led to inefficiencies and unreliability. Innovative researchers and companies have sought ways to simplify the entire process, but according to Prahalad and his colleagues, they have been looking in the wrong direction. As they see it: How can organisations realise experience in collaboration with customers, since the value lies not in the offering, but in the experience the customer has when using or applying it. Sources: van Asseldonk (1998), Boswijk et al. (2011), Gilmore and Pine (1997), Prahalad and Krishnan (2008).

11.1

customisation Customers base the value that an organisation holds for them on the personal, unique experiences with the products, services, information and solutions provided (Prahalad and Krishnan, 2008). The value of the organisation is not intrinsic to the organisation, but rather resides within the customer. Value is what the customer experiences. In the business-tobusiness market a tyre manufacturer would be wrong to believe that the value they provide resides in the tyres they deliver. Based on the effect of the load, an individual driver’s attitude, maintenance and the way the driver monitors the tyre pressure, insights can be gained into how the life of the tyre can be extended. Services such as driver training, maintenance tips and suggestions for load balancing or route planning will help reduce the cost price of tyres to the organisation and contribute to the competitiveness of the transport company. The pricing model should fit the added value from the supplier. The tyres could be paid for per kilometre, instead of per piece (see Section 11.5). Likewise, one can reason that a supplier of pacemakers should not believe the value resides in the product. The value of a lifesaving product of such technical perfection can be increased by viewing it in the context of the ‘customer’, the end-user. If there were a pacemaker that was able automatically to send out an alarm signal when anomalies occur, which was then passed through to the nearest emergency service, that pacemaker could contribute to the user’s confidence, allowing them to go out to the theatre again or visit the opera. Such devices give a new meaning to life, something which is of far greater value than other pacemakers that focus solely on keeping the heart beating. Facilitating the creation of such unique experiences opens up the perspective for a prolonged relationship. The transactional character can be pushed into the background to make way for something more individual, a closer relationship where the objects exchanged (products, services and information) are more personalised (Foa and Foa, 1976). The customer will find the supplier less replaceable and the organisation can build individual customer knowledge and prove itself worthy of a customer’s trust. For the tyre supplier, this may mean more data are collected to help optimise the life of the tyre, for the

204

Chapter 11 the customer proposition

pacemaker supplier and heart specialist, it can mean that cardiac failure becomes increasingly preventable. No organisation is extensive enough to be able to offer a customer this experience using only its own resources. There is little likelihood of finding an organisation capable of achieving economies of scale, expertise, efficiency while remaining local, flexible and personal in their customer approach. The challenge, therefore, is to offer access to the resources necessary for satisfying customer needs, rather than owning and exploiting these resources oneself. The time of vertical integration in which, to a large extent, companies made their own final products and did not rely much on suppliers is over. There is an increased focus on core competencies which has resulted in the removal of non-core activities, thus reducing the extent of diversification within the company. In the meantime, customers ask for more than just the product; they want solutions to their problems and want a bundle of products and services, customised to their situation. This requires cooperation with complementary organisations in networks. It’s not about what the organisation itself can do, but how it can mobilise a network of value-creating partners to cater to their customers’ needs. In the service process the company must be willing to hand over the reins to specialist service providers. For instance, in the example of the tyre manufacturer or supplier, driver training might best be given by specialist partners. The same might not be true for maintenance tips, but suggestions for improvements in route planning could again be trusted to a network partner. The network must be flexible enough to adapt to the needs of the customer and the market. Control mechanisms should be geared towards this. Making these kinds of meaningful customer experiences happen requires taking a different perspective on the relationship between customers and service providers (see Section 2.1, The definition of CRM). Technology is a primary factor that can play an important role in facilitating the interface between customer and organisation. This is very clear in the case of Apple. With iPod and iTunes they have been able to realise a model that facilitates a personalised music experience. The iPod, a product that consists mostly of third-party supplied components, has the capacity to store and play many thousands of songs, which are efficiently made available through a network infrastructure. Personalised playlists, which can be created for every minute of the day, every activity and every mood, can make listening to music the ultimate individual experience. The way the device is operated is based on digital technology, while also very intuitive. The physical buttons have been reduced to the bare minimum. Software interprets and transfers on-screen commands, making software updates to change the interface, improve usability and adapt the device to individual user preferences easy to install. Second, much importance is attached to the way a customer is being involved in the process of value creation (Boswijk et al., 2011). Several relevant ways to realise this, are (Weber, 2011):

1. Mass individualisation This is a way to get customers to design their own personalised product or services within relatively strict boundaries. The customisation has to take place within the range of options provided by the manufacturer. There is a certain degree of flexibility in product features. The customer can compose the end product or service by making a series of choices on standard components, as with Dell computers. In some cases, the personalisation can involve just one or two components. The buyer of a pair of Nike sports shoes can have a personalised image or text printed on the sports shoe. By following the choices that are made by customers, the supplier can learn about their preferences. They can use this knowledge and create a

205

Part IV Marketing

substantial and maybe even quite sustainable competitive advantage. The largest part of the products, however, remains pre-conceived and mass individualisation is very often limited to the ultimate product design.

2. co-creation This is a form of open innovation (Weber, 2011). The word itself hints at the creative contribution of more than one person or entity. At a given time in the creative process there are multiple partners contributing to the creation of something through an innovative network or platform. The network is a sociocultural system wherein learning and experimentation take place. The focus is on the end-user and the place or context in which they live and experience the product and/or services. The needs and desires of the end-user are the starting point, not the technology, the patent, the factory or ready-made building blocks.

3. User-generated content (Ugc) This is content that has been created by end-users, customers or, in the true sense of the word, amateurs. Publishing on the internet is now so widely accessible that users really can, as YouTube puts it ‘broadcast themselves’. The first form of UGC was Usenet in 1980. It was a discussion platform where users would debate different topics and contribute their thoughts and opinions (Weber, 2011). The degree to which websites are filled with UGC varies. Amazon.com has its user reviews and evaluations, but Wikipedia and YouTube are (almost) exclusively user-generated. The rise in popularity of social media, such as Facebook, YouTube and Twitter has lent huge momentum to the UGC revolution. The production and selective distribution of user-generated content has been possible for quite some time, but with social platforms it really becomes a form of broadcasting, as opposed to ‘narrowcasting’. Often only a small group of customers actively contribute; with the generic motivators being fame, self-expression and prestige. The quality of UGC remains a constant topic of debate. Wikipedia came under the spotlight when it was compared to the classic Encyclopaedia Britannica, the results of this comparison showing that Wikipedia contained more ‘errors’ in a given set of articles than did the classic encyclopaedia. However, Wikipedia countered by stating that whereas it was only a matter of hours before those errors were corrected, the encyclopaedia would take some years to correct given its printed format.

4. crowd sourcing Crowd sourcing is a way to enable customers to contribute to the innovation process by engaging the masses, the crowd, non-professional bystanders, to get involved in carrying out some of the company’s tasks or roles. It is closely linked to open source and UGC, but the difference lies in the profit-target companies set out to achieve with it. Crowd sourcing is used to allow online communities to generate ideas by asking questions getting them to react on postings or to vote on ideas they believe are promising. There are different ways to get a crowd to contribute. A competition or sweepstake being one option – the best idea gets the prize. Some develop an idea, many more vote to select the best idea. It is also possible to organise an open forum discussion where the topic may be pre-determined or may arise out of engaging the crowd in a discussion. A joint development process may also be facilitated, such as constructing the ideal design for a house or setting up a website together. The crowd may also be made up of buyers and sellers, in cases where money is being raised for

206

Chapter 11 the customer proposition

a project, for instance. This is also referred to as crowd-funding and there are some promising initiatives in the music industry that have seen artists meet with customers to co-finance and even co-compose an album release.

5. User innovation This is something seen mostly in situations where the current solutions seem unsatisfactory and customers show high commitment to a specific solution. The first heart-lung machine, for instance, was prototyped by a user who actually tried it out on himself. Most of the important innovations in extreme sports are based on users – take for example, snowboarding, windsurfing or skating. In addition, innovations in the chemical and oil industries are also commonly user-driven: production processes for gasses and plastics are often designed for proprietary use before being licensed and offered on the open market.

6. Lead users These are users who have needs or wants that are apparent months or years before they become apparent across the board. By catering to the needs of lead users, one can be prepared for the marketplace of the future. It is in the best interest of lead users to get a welldesigned solution to their problem in order to be able to retain their lead. When cooperating with a supplier, the main challenge is to get to the right level of knowledge transfer. A manufacturer of perfumes, colourants and flavour enhancers can choose to develop new ‘food ingredients’ together with innovative lead customers. It may lead to products that are generically able to enhance the nutritional value of foods or reduce the amount of fat used in foods. The components will probably lead to innovative combinations in the final products, enhancing textures, flavour and appearance or permitting easier cooking of the food products. The lead users may make an agreement with the manufacturer to the effect that the components are delivered exclusively to the lead users for a specified period of time, after which, they can be made more widely available to the marketplace. Customers who coinvest in the development are given an edge, but the company retains the right to introduce the innovation to the entire market.

7. open source software This software allows the general public to freely adapt, use and distribute a software program. The improvements or enhancements made benefit everyone. Many a volunteer will contribute to the creation of an improved product. They can determine themselves how long they will be working on the product, on which features and when. They are mostly motivated by dissatisfaction with current software, but the need to learn, to interact with a group of peers and to earn recognition also drives open source contributions. Design and development are placed outside the organisation, as is property. It’s a community-owned product, free for all. One of the best-known examples is Linux software, which is up against traditional competition such as Microsoft or IBM. The tablet and smartphone markets are also seeing a battle between open source and proprietary software, with Android challenging Apple. We will spend more time below discussing the first two ways of individualised value creation co-creation (11.2) and mass-individualisation (11.4). The former, because of its huge potential, the latter because it is the most classical and probably to date most used. However, we do not want to miss out on the opportunities offered by the long-tail and the ever-increasing range of options from which customers can choose (11.3).

207

Part IV Marketing

11.2

co-creation Co-creation has social advantages because people from different backgrounds are being brought together. However, the biggest advantage that can be achieved is when co-created products or services are distributed freely among users. The ‘inventors’ can get recognition for their work and derive status from it. Their social identity is enhanced. Also in businessto-business markets, co-creation is a way to direct the innovation process that leads to innovative propositions that actually are worthwhile for the organisation (Ramaswamy and Gouillart, 2010). Many organisations find it advantageous to engage the customer in the development process. They can save costs and reduce the time-to-market. Risks of failure due to low market acceptance are reduced and the need for expensive last-minute adaptations to customer needs is also reduced, since the potential users have already been brought on board in the early stages. Despite these advantages, the day-to-day reality is that a limited role is being given to or played by customers. In consumer markets, the customers are often still involved through market research, but are little more than informants to an organisation (Weber, 2011). In less than 30 per cent of cases is a customer treated as an expert during a development stage and in only 6 per cent of cases are they treated as partners. In business-to-business markets the percentages are somewhat higher: 46 per cent are treated as experts and 11 per cent as development partners. In 7 per cent of cases, products or services are even developed by customers, rather than by the organisation itself. There is a distinction to be made between products and services. Involving customers in service innovation is easier, since service delivery already requires direct contact and the distance between the service provider and customer is thus reduced. None the less, research has abundantly proven that organisations who involve users in an active role during the innovation process are more successful than organisations that do not. In addition, more often than not, users are also willing to participate actively.

The principles of co-creation The argument that potential users should not be involved in development processes because they have no idea what they need, seems weak. Even in radical innovation, customer participation can be invaluable. The quality of their contribution is not dependent upon expert knowledge or even explicit knowledge, but on the ability of unlocking knowledge within a group of developers. Even insights that are not yet fully understood by the users themselves will be shared in a co-creation process. This is partly what makes it far more effective than a survey. The challenge for an organisation is to shift not only the traditional boundary between organisation and customer, but also the traditional boundaries of its products and services and market definition. It is about solutions and meaningful customer experiences, in specific situations that the customers identify. The success of co-creation is dependent on several factors, which are based on the principles for designing co-creative experiences by Prahalad and Ramaswamy (2004), which became known as the DART principles (Dialogue, Access, Risk and Transparency).

1. Dialogue Really engaging in dialogue goes well beyond speaking and listening. It involves interactivity; commitment; dedication of attention and resources; caring for each other’s interests; and having a genuine intention to act. A common language is important in dialogues, and it

208

Chapter 11 the customer proposition

is not uncommon that the customer’s language is not that of an organisation and its professional researchers and developers. It is about finding a language level that permits a meaningful exchange of experiences and hidden needs and wants. This means a rational layer of jargon, ‘safe’ wording and ‘commonalities’ needs to be bypassed. It helps to work with metaphors, scenario’s projective techniques and videos to get customers and organisations talking about user situations. The barriers between the world of the customer and that of the supplier are coming down and we are more able to project what we would like to see or what we experience onto the situation.

2. access Our access to each other’s world is often hindered. The manufacturer’s domain is not accessible to the consumer and vice versa. It is a private property that is unfamiliar to the other party and where there is no real inclination to allow the other to roam freely. Opening up each other’s world permits faster, more efficient and better solutions to problems, as well as more engaging and meaningful experiences. Several developments have contributed to the rise of a more transparent world. Internet technology is making time and distance less relevant and bring people closer together. Organisations are more open and are telling customers how much stock they have or where an order is within their logistical or financial system. The gates are slowly being opened – the house is becoming increasingly built of glass rather than bricks. With the increased ability to store data in public places (on the internet or other network storages), where we are no longer determines our options. Music can be listened on the internet; photos are available from Picasa on mobile devices or computers and tablets. Cloud computing is making storage universal, rendering the factor ‘place’ almost irrelevant for access to information resources. Consumers are also able to force organisations to open up, requiring access to their own personal accounts (MyWatercompany or MyBank). Having access to end users may seem like the norm for many organisations, but it should not be viewed as a commodity, as users are increasingly managing their own access. They close off certain contact options and are getting choosier regarding which organisations they allow access to their world. While they do not want to receive phone calls, or spammessages in their inbox, their willingness to participate in market research is soaring, although if the customer feels the company is only looking out for itself, commitment is low. Customers are increasingly motivated and better equipped than ever to collaborate, but it requires a change in attitude from organisations to truly be able to ‘call upon the troops’. Attention needs to be paid to the preconditions and the circumstances under which customers can be called on to co-create; and the process itself will also need to create value for the customer. What’s in it for them? Whose interests are being served? Is it an economic or a social advantage whereby they create a network, boost a reputation, enhance their identity and/or have fun in the process? Recognition in social networks may allow participants to get more support and draw more attention to themselves within a customer community or within an organisational context. Other benefits, such as a prize or other incentive, may give an extra boost to participation, but cannot be the predominant reason to participate. In the co-creation process, it is best to have people with intrinsic motivation, who see the relevance of their participation. According to Weber (2011) incentives are best related to the productivity of participation rather than to the participation itself. Participant motivation may deteriorate during co-creation processes, for which reason alone it might be interesting to work with different groups during different stages of the co-creation in different scenarios.

209

Part IV Marketing

3. risks Involving customers and others in a co-creative process inevitably involves certain risks, making risk assessment an important issue in co-creative relationships. What dangers are customers exposing themselves to and who should take responsibility for them? We are used to stressing only the positive aspects of marketing propositions and communications, but in this situation, it is essential that all risk is honestly and freely addressed. It is one of the core principles of the co-creative process. Take for example, the development of a new model of car. There is already an element of risk involved when customers are asked to circuit test and provide feedback on a model that has been fully tested and approved; there is even greater risk attached to preproduction tests on a prototype vehicle that has not yet passed any official crash tests at all. Risk evaluation also means assessing the risk the organisation is incurring. How will the confidentiality of information be safeguarded and what about intellectual property rights? How do we deal with situations in which the use of the end product is very different from that previously envisaged? LEGO had communities that developed software for the operating system Mindstorm Robotics. In tweaking the original operating system to their liking, they developed it into something far better than that which LEGO itself had originally produced. But who was responsible for the product? How about the patent rights? It is quite a complex legal problem that they have at hand there.

4. Transparency Transparency is another precondition for co-creation success. While consumers are generally well motivated to participate if they see the co-creation process as being mutually beneficial, they lose that motivation if they feel that the process will only benefit the company. One of the reasons for this is if it is insufficiently clear what is being done with their contributions. Doubts can be raised as to whether the customer is being taken seriously and whether their input matters. It helps to provide clear feedback on the process itself, who is involved and how committed the organisation and its management is to the outcome of the process. By determining beforehand where the ownership of the outcome lies and what benefits there are for the contribution of customers, many problems can be prevented. Also it is helpful to provide feedback on the successes that are being achieved. This relates back to the broader need for the process to be accountable in terms of input and output. Does the effort being put in really balance with the progress and results?

giving form and shape to these principles Weber (2011) has used these principles among others to construct a series of rules and a sequencing of steps to guide the co-creation process.

a precise question Successful co-creation starts with formulating one central question to the appropriate level of detail. What is the key question to which an answer needs to be found? Real-life cases have shown that a wide-ranging question does not provide sufficient guidance to produce a constructive end result, as IBM found out the hard way with their Innovation Jam (see the CRM illustration on page 212). An overload of ideas and suggestions made timely processing hard. The vague outline produced vague responses, making it hard to distinguish between good and bad ideas. It is best to ask a focused question that relates to an everyday issue encountered by a customer in their social or physical world.

210

Chapter 11 the customer proposition

Proper phasing The second aspect requiring attention is the phasing of the innovation process. The classic distinction between idea generation, selection, feasibility study, prototyping, testing, adjusting, producing and launching the innovation on the market remains a reliable guideline. However, it is useful to bear in mind that each phase will have its own central question.

involving the right people Again, this is relevant for all phases; an organisation needs to decide who ‘the right people’ are in each phase. During the idea generation phase, it can be interesting to include a number of people from a wide variety of backgrounds. However, as soon as it comes to prototyping and testing, the number of people involved will need to be more limited and their background more classically oriented towards the requisite expert knowledge. It is not a good idea to work with the same group of people throughout the entire process. It is hard enough to keep everybody motivated over a prolonged period of time, without trying to involve them in areas that do not appeal to their particular knowledge or skills and interest.

choosing the right format The way in which customers or users are involved in the innovation process also changes over time and at every phase. Organisations have to decide which format will yield the best information from the co-creation sessions with customers or other third parties. They might start with crowdsourcing for generating and selecting ideas in large groups, but later shift to the lead-user method for more precise testing of features and prototypes.

Motivating properly To motivate properly, it is best to acquire some insight into why people participate in the first place. If status is important, than introducing a competition in which the winning idea is selected might motivate the participants. Motivating participants who seek recognition by including them in further product development may be helpful. Allowing lead users to adapt product prototypes to their specific needs is another good incentive. There are multiple incentives the organisation can offer at different stages. They should match the motivational drivers of the participants, but also clearly be geared towards the goals of the specific phase in the innovation process. As a general rule, quantity should not be rewarded when the goal is quality.

Deploying appropriate techniques The use of specific instruments and/or techniques can determine the success of a co-creation project. They help people to develop creative ideas and arrive at solutions, using appropriate standards to evaluate them. Techniques can be devised which improve the quality of listening and channel participants’ energy and input. Such techniques apply focus! The challenge is to expand on known practices in market research and product development. Such techniques are often of the passive engagement kind – ones with a very clear question–response dynamic; their goal being to allow the interaction between participants to flow more freely. Online techniques can be very helpful in this area, but again it is not enough simply to transfer old behaviour to new channels. We need to seek out opportunities to simulate reality, to have people actually compose products and to involve the ‘wisdom of the crowd’. Apparently, many of the methods that exist have been developed, tried and proven in the IT industry, with the development of software and IT systems spurring their creation. Consider, for example, beta testing, which involves users in testing unfinished products in ‘real-life situations’.

211

Part IV Marketing

The design industry is another source of techniques useful in co-creation. Designers typically focus on the human–object interface, on functionality and on the individual; they use images to try to evoke emotional responses. There is an understanding of the context of the interaction between person and object and of people’s aspirations. Designers try and place themselves in the context of the customer and imagine the role the objects play in their life, taking a holistic view of the function of a design product in its day-to-day use. There is a degree of experience which incorporates contrasting views from different designers and customers and even familiarity with the conflict of insights, interests and opinions during multifaceted design processes involving different parties. The systems approach is also a useful source of techniques. It starts out with the pinpointing of stakeholders and aligning them as a system or a constellation. The relationships between people, or objects and people for that matter, can be seen from the way they position themselves in the system. All these methods are radically different from classical product development techniques, where product functionality and technology are the main focus. The techniques we are aiming for demonstrate an interest in stakeholders: their identity, their experience, their social and physical context and emotions.

Providing feedback Continuous feedback on how participants’ input is being processed and used is important. An understanding of how the participants’ input has helped the organisation is desirable, because it shows there is both a purpose and progress. Ignoring the actual input and just heeding the outcome would be detrimental to the co-creation process in later stages. Whatever participants’ motivation or drive, the least they expect is to be taken seriously as contributors. Feedback should be an integral part of the process at each stage.

areas of application Co-creation can take place in many different phases of constructing a new value proposition. The box below gives three illustrations. Please bear in mind that frequently, the goal is not an individualised value proposition. The result of the co-creation process may very well be a mass-produced product. However, the value will still have been created by making use of customer relationships, and the product itself will be viewed quite differently by those customers involved in the co-creation process as well as the community with whom they share their experiences.

crM illustration Three examples of co-creation (in the phases of idea development, production and marketing) Procter & Gamble has set a goal to have 50 per cent of its new ideas originate from outside the organisation. Their Connect+ develop programme focuses on attracting ‘ready-to-go’ innovations. Third parties

can register and file ideas if they meet certain criteria. There is a filter. The new idea must fulfil an unmet customer need, offer an advantage in use, have proven itself in practical situations and be based

➨ 212

Chapter 11 the customer proposition

crM illustration (continued)

Figure 11.1 Fiat Source: http://www.nextconceptcars.com/worldwide-news/fiat-500-ferrari-edition/.

on tried-and-tested technology. There must also be a packaging solution. Collaboration benefits both parties. The registrant gains access to a major manufacturing capacity and market reach, while Procter & Gamble speed up their innovation process and time to market. IBM started their Innovation Jam in 2006. They posted several key technologies online and allowed some 150,000 participants to brainstorm the use of the technologies during the first round of co-creation. In the second round, several of the uses were developed further, with participants collaborating jointly on business plans. The initiative was repeated in 2008. Processing the number of ideas submitted by the crowd and formulating questions that are specific enough to spark ideas presents a massive challenge.

11.3

Fiat invited the general public to contribute to the latest design stage of the new Fiat 500. With a campaign stating ‘500 Wants You’, participants were allowed access to the design 500 days prior to launch and invited to input their ideas and preferences. A website was created to allow visitors to the design days to share stories and pictures relating to the 500. In the online lab they could configure a car and add accessories, as well as being able to propose new design options. A competition was organised for professionals, students and amateurs. Over 3.5 million visitors have participated. It spurred the creation of a Fiat 500 online community and proved to be a very successful pre-introduction initiative in boosting the launch of the finalised product. Source: Weber (2011).

The long tail: the complete assortment In this section we explore yet another way of offering customers a value proposition that fits their particular preferences. The long tail (Anderson, 2006) is a distribution strategy that focuses on products and services in the tail of distribution. By the tail, we mean products with little sales volume due to their very particular nature. They are many in number, but small in volume. Traditional retailers won’t give them a second look, because they

213

Part IV Marketing

$1m

$750k Turnover

top 20% $500k

$250k the long tail $0 0 Frequency (number of times product is purchased)

Figure 11.2 the long tail Source: Anderson (2006). Copyright Hyperion Books and The Random House Group (UK).

like stores to have as few product references as possible with a high turnover. However, the long tail has proven to fuel the future of such e-commerce companies as Amazon.com and iTunes. It appeared to only apply to online music and book sales, but what holds true for them also seems to work in favour of eBay, Google and many others. Online, the classic 20 ÷ 80 rule, by which 20 of the assortment is good for 80 per cent of the volume and margin, does not hold true. If anything, it’s probably more the other way around; 80 per cent of the volume and maybe an even larger share of profits come from the long tail of the assortment. Offline, the costs of the store location, the showroom or kiosk are a determining factor for assortments. The limited number of square metres means the assortment will also have to be limited. It would seem only logical that high turnover articles are given priority over slow moving goods that serve a very particular audience. Adding store space seems rational only when marginal revenue increases outweigh cost increases, which is hardly ever the case for long tail articles. There comes a point when expanding store space is no longer worthwhile. Investments in location, stock and employees are not being compensated by increased turnover. The typical optimum assortment for an offline music store is reported to be around 25,000 items. Take into account that most stores have such diverse categories as games (per platform), Blu-ray discs, DVDs, CDs and SACDs and it becomes clear the assortment per category cannot be very wide. In the online world the space barrier ceases to be an issue. There is a significantly different cost structure. Assortments can take on huge proportions and offer customers the opportunity to buy virtually anything. Many online stores have more than 1 million references and stores such as Amazon over 4 million! Not all products are equally ‘great’. There may be some ‘junk’ in the back of the store. But that holds true for every mass distribution infrastructure. We listen to ‘junk’ on the radio too and sometimes are confronted with terrible television shows. Furthermore, the unlimited and ever-expanding nature of the assortment attracts buyers. With the help of search engines they quickly find their way to specific platforms and to the special interest product they looked for, which is another difference with the offline world. One can ask Google any random question about some film from

214

Chapter 11 the customer proposition

1977 starring a particular actor and it will find the product in the Internet Movie Database (IMDb) or on Amazon. Try this somewhere in the middle of a shopping arcade and see whether you are escorted to the relevant shop or the nearest exit. E-commerce companies are very efficient in serving niche markets. They expand their assortment at hardly any cost. They generally hold no stock, but rather rely on centralised facilities or decentralised stock that may even be the private collection of another user, if second-hand products are involved. They are not faced with issues such as working capital and stock risks. They only incur distribution costs once the products are sold and those distribution costs are dependent on the size of the order, not on the number of days a product has been held in stock. The long tail originates from the underground economy that thrived when many music lovers turned their backs on the traditional music industry because of its high margins on artists’ distribution and the conservative stance on copyrights. It spurred the illegal downloading and burning of CDs and file-sharing through networks such as Napster and later Kazaa and other download and trading places. Over 10 million users exchange music files on a daily basis. It is a form of social behaviour that has extended far beyond the music industry. At the moment we can identify three clear drivers behind the long tail. The first is the democratisation of production. It is within almost anybody’s reach to produce a film, music or texts and place them on the web. There are even opportunities to collaborate in the creation of a final product. Sites such as Wikipedia offer a platform for the creation of a product which is actually never really final, but offers everyone the chance to collaborate and create, not just an exclusive group of insiders. The motives people display in their sharing and creative behaviour encourage us to re-evaluate our view on what a market is and what the roles of producer and consumer are in the classical sense. Contributors are not motivated by money, but by honest commitment to the topic or a desire for recognition. It’s a massive incentive to expand the range, because Wikipedia is able to get articles on topics that no encyclopaedia could have achieved by traditional means. Furthermore, when we talk about democratisation of production, we also need to consider the reproduction or rebirth of older goods. Many people have an attic, garage or basement full of second-hand articles that are no longer in production, but that does not mean they are not ‘in demand’. Such items can range from extraordinary, exclusive ‘collectibles’ to quirky objects with wide-spread appeal. The second driver is distribution. Organisations such as Amazon, eBay and iTunes have an aggregator function in terms of collecting items in the virtual store space. They take care of distribution, but allow many others to open up a store on their platform and distribute their products through the large megastore front. The benefit to Amazon, eBay and others is that it enlarges their assortment and increases their relevance as a trading platform. The third driver is filtering that enables supply and demand to dovetail; they contribute to the finding side of searching. Consider Google, blogs, comparison shopping sites, bestseller lists, peer reviews, etc. These allow us quick access to relevant content and offers. While traditional marketing communications are no longer trusted, trust in peer reviews and recommendations is increasing. The information age, according to some, is becoming the ‘recommendation age’, where browsing is no longer topic- or content-driven, but driven by recommendations made through social contact, which guide individuals to unfamiliar corners of the online world. Although any marketer will clearly know that a customer is always looking for a solution to a problem or to fulfil a need, instead of a complete assortment, the long tail offers opportunities to meet specific and very individual customer needs.

215

Part IV Marketing

11.4

individualisation of the product offering Supplying customisation places considerable demands on our production systems. One feature of our economic society is that a great many products are manufactured by largescale production systems. Typical aspects of these production facilities are that they are expensive to purchase and inflexible, yet the variable production costs are low. Supplying customisation places pressure on these systems. In order to be able to provide the customer with a heterogeneous offering, many series must be run, incurring high management costs. Extensive planning is indispensable and stocks of final products are necessary in order to be able to satisfy customer demand quickly and reliably. The result is that the economies of scale decrease perceptibly due to the smaller size of each production run and the fact that the management costs are increasing. Not only does a less desirable financial situation arise, but, in operational terms, the complexity will also result in a decrease in the system’s reliability. In order to overcome this impasse, Gilmore and Pine first proposed the solution of mass customisation and mass individualisation in the 1990s.

Mass customisation according to gilmore and Pine2 The basic idea behind mass customisation is the same as that behind the production of variants within a mass production system; however, there are important differences. Instead of the customer choosing one product variant, each customer provides unique information so that the product may be tailored to their specific needs. The production process must be very flexible in order to satisfy these needs. No stock of finished product is kept, nor is this possible if the product must be truly individualised. It requires the organisation to react immediately and quickly to, or if possible anticipate, customer wishes. The lack of inventory has advantages (low stock costs) and disadvantages (customers must wait). The technological differences between mass series production and mass customisation are considerable, yet gradual: mass customisation brings with it richer flows of information and places stricter demands on process flexibility. There are four separate approaches to supplying customisation which are named cosmetic, transparent, collaborative and adaptive (see Figure 11.3). The categorisation is based on the manner in which customers make their wishes explicit to suppliers. It is not often that one of these approaches will always be the only correct one for every similar situation; the trick is to compile the right mix under the right circumstances, whether it involves a product, process or business unit.

cosmetic customisation The first way to implement mass customisation is to make a simple adjustment in the product’s exterior (representation). This is also referred to as cosmetic customisation, and requires no further adaptation of the product itself, only the product’s representation. The company presents a standard product in a variety of ways to different customers. This approach is suitable if customers use the product in the same way and the only differences that exist involve the way in which the product is presented. The packaging and the display 2

216

Based on the adaptation of the original article from Gilmore and Pine (1997) published in the Harvard Business Review by Marion de Graaf for the Marketing Guide ‘De Klant centraal’.

Chapter 11 the customer proposition

Figure 11.3 Forms of mass customisation

of the product may be different, and the promotion may also differ. Planters packages its peanuts in different sizes for different retailers. Representation includes packaging, sales materials, terms and conditions, the product’s name, the prescribed usage and the location.

Transparent customisation When the company adapts the product but not the representation, it is practising transparent customisation. In this case, the product’s adaptation is made invisible by giving all the different customised products the same appearance. Transparent customisation is supplied by companies who provide individual customers with unique products and services, without explicitly informing them that these products and services have been produced especially for them. This approach is suitable when the customer’s wishes are predictable or easily inferred, or when customers do not wish to repeat their preferences every time. Companies observe customers’ behaviour without getting directly involved and then gear their range of variations on a standard product inconspicuously yet precisely to customers’ needs. Take ChemStation, for example, which, after a long period of observation, is able to supply customers with precisely the right soap at the right time. Customers thus never have to remember what it was that they used and when they needed to order it.

collaborative customisation Collaborative customisation involves adapting the product and its representation. In this case, each adapted product can be recognised by differences in its external features. Companies that focus on the collaborative variant maintain a dialogue with individual customers in order to assist them in formulating their needs. A product offering is then created that fulfils these needs and then the products are made to order. This approach is suitable for companies whose customers do not find it easy to convey what they want. Paris Miki, a retailer of spectacles, developed a digital system that advises customers in their choice of a frame. The costs are lower because fewer complete products need to be kept in stock.

adaptive customisation The opposite of this last approach is adaptive customisation, in which neither the product nor the representation is adapted. A company with an adaptive customisation strategy offers one standard product that is designed such that users themselves can adapt it to suit their

217

Part IV Marketing

own needs. The adaptive approach is useful for companies with customers who are looking for a product that serves different purposes under different circumstances. An example of this is the lighting system designed by the Lutron Electronics Company. Customers can choose pre-programmed types of lighting. For example, you would require one type of light for reading and another for a romantic dinner. The customer has the option of adapting the functionality and capacity of the product during use.

choosing the right strategy Which of the four strategies should be chosen? Companies that are forced to further adapt a product to individual customer preferences can opt for the collaborative approach. This avoids having to make post-production adaptations. Moreover, inventory costs are minimised because it is no longer necessary to keep finished product in stock. With an adaptive approach to customisation, companies are not supplying a tailored product offering, but instead create standard products which can easily be tailored or adapted by the customer themselves. Take, for example, Lutron’s customers: every situation will be different. The form, the layout and the location of the windows differs from room to room. Additionally, the weather and the seasons mean that the light coming from outside varies. People who use the room influence the light available and place their demands in terms of this light. After the one-off programming of Lutron’s lighting system, customers can choose one of the settings quickly and effortlessly and at any given moment. In this way, the suppliers are transferring the control over products or services to the customers. The cosmetic approach to mass customisation is suitable when the standard products satisfy the majority of customers and it is only the form of the product that needs to be adapted to their individual wishes. This takes place towards the end of the value chain. Wellexecuted cosmetic mass customisation replaces the non-cohesive and inefficient responses to questions from customers with a cost-effective competency by which every customer is offered precisely the product that they desire. In the transparent approach, companies satisfy the needs of separate customers unbeknownst to them. The product is changed, but in such a way that the customers are not even aware that the product they are buying is a customised one. The company follows the behaviour of individual customers over time and observes predictable preferences. This method requires that the company has the luxury of time at its disposal in order to expand its customer knowledge and be able to supply individual preferences in an increasingly precise manner. Sometimes a combination of strategies is desirable. One example is Datavision Technologies Corporation, a San Francisco-based producer of sales material.3 It effectively combines three of the approaches, namely the collaborative, the cosmetic and the transparent approaches. The company gathers data from various different sources in order to produce its customised image materials for the sale of different products. The videotapes that each customer receives are based on a detailed profile of their desires and previous purchase behaviour. The system links every element of the customer profile to a specific video, voiceover, melody, image form, graphics and other image segments. It then automatically compiles the script and presentation modules. In this way, customised videotapes are produced which are then packaged in customised packaging. Datavision’s interaction with its customers to discover which aspects of the product are most important to them results in a form of collaborative customisation. The production of the videotapes is a form 3

218

The company is no longer active.

Chapter 11 the customer proposition

of transparent customisation. Datavision uses the cosmetic approach when the customer’s name appears on the videotape label and during the introduction on the tape. The combination of the three approaches results in an effective and relevant marketing message.

an aside Successful examples of mass customisation do exist. Just look at Nike, Suit Supply (mass customised suits), Smart (the car), Gillette razorblades, ready-made-meals and so on. It seems that mass customisation is particularly valuable when product attributes or components are visibly different. Examples are: ●

consumer durables, such as cars;



digital products and services, such as software, music, literature;



online services, such as entertainment and news services;



luxury goods that meet complex individual tasks, such as cosmetics and clothing;



retailing, because of their closeness to the customer, being able to mass customise service and build learning relationships.

However, we will repeat the conclusion arrived at by Prahalad and Krishnan (2008), namely that mass individualisation is failing because it still places the product and services of an organisation first, rather than the customer experience. Providing customers access to the resources that help them create unique and personal experiences is truly meaningful and can contribute to long-lasting relationships.

11.5

individualised pricing policy Distinct from supplying a customised product, whether or not in the form of an experience, is the individualisation of the pricing policy. Customers differ from one another in the value that they assign to a supplier’s products. Dependent on the time and the situation, even individual customers will not always have the same valuation for the proposition. None the less, a company deciding always to charge everyone the same average price implies that it is prepared to accept a lower level of profit. It would then seem that while individual customers experience the advantages of customer relationship management, the supplier does not quite dare to derive the maximum profit from it, and allows a price premium (see Figure 3.4, page 62) to be lost. To prevent this, it is recommended that the potential for an individualised pricing policy be explored. Below, we discuss experiences of such a policy which have been acquired on the internet, in multichannel environments and in yield and revenue management.

Possibilities for implementing a precision pricing policy offered by e-commerce E-commerce stimulates experimentation with other pricing models and the internet has brought previously unavailable pricing models within reach. For example, a customer used to have to pay prior to gaining possession of the product, whereas the internet, on the other hand, charges customers for the use of the product. A publisher no longer has to ask for payment for the sale of the book, but instead can charge the customer only for the pages they

219

Part IV Marketing

read. It used to be customary for the price to remain the same for a certain period of time, now this can be varied more easily. Furthermore, it was the supplier who set the price, not the customer. It was also not customary to give certain products or services away free of charge in order to ‘lock in the customer’ as a paying user of follow-up services. Although many of these price-setting methods are presented as innovations, it often appears that they have already been tried out in another market situation or even long in the past. An example of this can be seen with Stephen King, who tried to sell one of his books on the internet, chapter by chapter, and gave the first chapter away free. It seems he was preceded by Charles Dickens who was forced by poverty to sell his work in instalments – had he waited until the book was finished, he would have risked starvation. In the commodity markets, auctions have proven successful for years in bringing groups of customers and suppliers together, and thanks to the emergence of standards (such as uniform product codes), this has also become possible in other markets. Without sensory perception, the appropriate quality for a specific product on the internet can be determined on the basis of a uniform product code. Whether the alternative price structures are new or not does not detract from their potential to lend substance to a precision pricing policy in which the price is adjusted to that which individual customers or segments are prepared to pay at a certain point in time. By implementing a precision pricing policy, the current system of pricing with all sorts of possibilities for offering discounts requires adjustment. The suspicion that a precision pricing policy will lead to an even less manageable jumble of price agreements than that which we currently encounter in any given company is also unjustified. On the contrary, the precision pricing policy will have to be computerised to a great extent, and consequently will have to be clearly and comprehensively laid out. In addition, the policy will have to be able to be explained to customers in a transparent environment.

crM definitions Pricing structures Bundling and unbundling: ●





a subscription as a form of bundling: a decision is made to purchase multiple products over time; combining various products in one package in order to stimulate cross-selling or deep selling as a form of bundling; pay-per-view and payment per transaction as a form of unbundling; payment is made for each component.

Discounts and additional compensation: ● order size, ordering method (via the internet, the store, the representative), payment method (cash, cheque or credit card), delivery (urgent, collection, home delivery), quality of the customer (new customer, gold, silver, bronze customer) set the supplemental price or the discount. Fixed versus dynamic pricing: ● ●

220

bids during auctions as an example of dynamic pricing; pricing for which the level is determined by the availability (yield management or revenue management).



Chapter 11 the customer proposition

crM definitions (continued) Accepting pricing or setting pricing: ● does the client accept the price or are they determining it? Price tailoring: ● one-by-one price setting (in bilateral negotiations) versus a price that applies to many (the market price).

Within the framework of the adjustments to be implemented in the pricing structure, it will have to be determined which elements of the value proposition will be grouped together and for which a price will be requested, and which will be broken down into their constituent parts. At the same time, it can be interesting to consider once again which prices or discounts will be linked to the times of purchase or delivery. Prices for the possession of products may be replaced by rates for their use. Payment may be asked for complementary services involving product use. Volume discounts may be made dependent on the product or service package that customers purchase. In many cases, it will not be the completely new pricing structures or models that count, but an enrichment of the existing system that is important, one with a view to ‘what the individual customer is prepared to pay in a specific situation’. Possibilities for precision pricing are available (thanks to IT) because: ●

We have better means of testing at our disposal. On the internet, it is relatively simple to adjust prices to certain times and/or for certain visitors to the websites. In addition, the response to price modifications can be measured electronically, so the effects of price changes on demand can be determined. As a result, the price elasticity of certain customer groups at certain times can be measured more accurately than was previously the case. This knowledge can be useful in the further design of the pricing policy.



We can easily adjust prices on the internet. There is no longer any need to publish and distribute price lists, or brochures and catalogues with price indications. In the ideal situation, making a simple adjustment to the relevant detail in the database will suffice.



We can create customer profiles. We can determine the preferences and wishes of individual customers or customer segments and the price they are prepared to pay.



We are able to tailor the price determination to the available capacity and goods in stock. Thus price setting can be linked to an objective of optimising capacity utilisation.

It goes without saying that there are risks associated with the implementation of a precision pricing policy. With pay-per-view pricing, the supplier must be prepared for a considerable drop in turnover. The purchase volume will decrease, and customers are usually reluctant to pay a high unit price, while their price sensitivity will increase because they are charged for the duration of the usage time. Furthermore, charging a higher price to loyal customers does not always lead to better financial results, as Amazon.com found out first-hand. Amazon’s thinking was that loyal customers would be treated to more service by Amazon.com than other customers and would be charged a price premium for this; the organisation had an extensive profile of these customers at its disposal and could use this information to offer them even more valuable customised offerings. Once these ‘good’ customers got wind of this, they were quite displeased, not surprisingly. As a loyal customer, one expects a price advantage, not a disadvantage.

221

Part IV Marketing

Factors that influence price sensitivity ●

Who will foot the bill for the purchase costs?



What is the purchase price as a component of the total costs to be incurred?



Is the buyer the end user?



To what extent does the price function as an indicator of quality and can the quality be determined separately from the price?



How easy is it for people to shop?



Is there a time constraint?



Does the product lend itself easily to comparison?



Can customers switch easily between suppliers?

● ●

Are the product differences marginal? Is the long-term relationship with the customer important?

Source: Nagle and Holden (2001).

In short, suppliers must never lose sight of customers’ acceptance of a differentiated or discriminating pricing policy. The price differences will have to be considered understandable and even desirable from the customers’ standpoint. Someone pays a higher price because they are being helped at the last minute and being given priority over others. Someone may also experience a price advantage, but in exchange for this, they are excluded from certain additional services, provided with less certainty in terms of the time of delivery, or receive lower quality.

revenue management Revenue management is the skill of maximising yield by differentiating the price and by allocating parts of the available production capacity across the various price classes. It has its origins in the US airline industry of the 1980s. Owing to privatisation and mounting competition, companies saw prices and margins shrinking time and time again. In order to emerge from the downward spiral of falling prices, the system of revenue management (still named yield management at the time) was developed. The development of a revenue management system requires a great deal of information. In order to be able to determine the maximum feasible price at a certain point in time, data are necessary on the historical booking patterns, current booking information and accurate predictions on the bookings to be expected per price class for a specific flight. For an airline company with an average of 1,500 flights per day and 220 seats distributed among eight booking classes for each flight, 330,000 seats must be divided among 12,000 price classes (buckets). The planning for these seats begins 330 days before departure and is monitored and adjusted at different times. In total, this amounts to optimising 3.96 million price classes and 110 million seats. Nevertheless, through the application of revenue management, different North American airline companies were able to achieve an increase in revenues of 5 to 10 per cent (Peelen and Smelt, 1994). Outside the airline industry, revenue management has since been applied to the service sector in which companies are confronted with similar capacity problems; examples include (container) shipping companies, car rental companies and hotels. Of relevance here is the fact that

222

Chapter 11 the customer proposition

the service sector cannot create inventory: production and consumption of the service take place simultaneously. In general, it holds true that revenue management can be applied effectively if: ●

the supplier works with a relatively fixed capacity that cannot be increased in the very short term;



the inventory is transient; unused units will be lost permanently during production;



the fixed costs are high;



the cost of modifying capacity is high;



the sale and service costs for customers are minimal;



the demand can be segmented into groups with homogeneous preferences in terms of price and level of quality;



customers accept price differentiation;



the service can be sold in advance or reserved and/or the demand fluctuates sharply.

The principle of revenue management The effects of revenue management can be clarified through the use of the Marshallian demand curve from microeconomic theory, which shows the relationship between sales and price. When companies implement an equilibrium price, they miss out on income that customers were prepared to pay. There are those customers for whom the product or service represents more value than the price paid for them. This consumer surplus can, to a great extent, be skimmed off through the introduction of multiple price classes. Instead of working with an average price, a differentiated pricing policy is implemented (see Figure 11.4). Additionally, by offering discounts, the price sensitive segment of the market can be addressed, one which would otherwise be unreachable, and thus a higher capacity utilisation is realised. The result is that by introducing a differentiated pricing policy, a company is capable of generating higher turnover, capacity utilisation and revenue. The achievement of this is dependent upon the manner in which the stocks or capacity are sold during this time.

Figure 11.4 revenue management with a fixed capacity

223

Part IV Marketing

Formulating a revenue policy The revenue policy (allocating capacity to segments and determining prices per segment) is designed in a process involving a number of steps (Figure 11.5). The first step involves dividing the market up into homogeneous sub-markets which have differing preferences regarding service and price. During this process of segmentation, special attention must be paid to avoiding what is referred to as ‘dilution’. Dilution occurs when the segments are not separated by distinct boundaries, and customers who are in fact prepared to pay more, none the less find a way to pay lower prices. In the airline industry, for example, there is a condition imposed that in order to qualify for a low price, the traveller must stay over a minimum of a weekend. A price will have to be set for each segment taking into consideration the service package offered, the cost structure, the prices set by the competition, and the perceived value. The range within which the price can be allowed to vary can also be indicated. In determining the number of prices, it must be remembered that the degree of complexity increases rapidly, as the airline example has already illustrated. In predicting the demand for each price class and for the total market, standard statistical techniques such as time series analysis and regression analysis can be used. On the basis of historical data, these techniques are used to estimate the demand for the service at a specific time and in a specific situation. Predictions can be made about the demand in various price classes or segments. In all likelihood, the most important step in the process is the allocation of capacity to the different price classes. The demand predictions serve here as a starting point. Various allocation algorithms are used to distribute the capacity among the price classes. The most commonly applied method is the threshold curve method. Using this technique, the minimum and maximum booking curves are constructed with the aid of historical data. The minimum booking curve determines the threshold under which the number of reservations or transactions (preferably) should not fall. In order to prevent this lower limit from being reached, the price must be lowered. An example of this is the last minute flights. The progress of the maximum bookings curve is determined by the maximum capacity that we are willing to assign to a certain price class. Customers who are interested in qualifying for the service will fall under a higher price class.

Figure 11.5 Step-by-step plan for revenue management

224

Chapter 11 the customer proposition

11.6

conclusion The value of the proposition is not found in the product or services, but rather in the customer. It is all about establishing how we can help customers satisfy their needs, explore then exceed their boundaries and, in doing so, solve their problems. Over the past two decades, catering to individual customer needs while maintaining economies of scale, scope and experience has presented a challenge. According to the latest understanding, the best opportunities arise when we grant customers access to our resources and allow them to participate in the creation of value, enabling them to co-create rather than just purchase. They can gain access to virtually unlimited choice and find the unique niche product or service they seek, as well as help other customers towards a similar experience. They can become a co-producer and mass-individualise products through a modular process that combines industrial-scale production with adaptation to customer needs. A customised product offering requires individualised pricing that is tailored to how much a customer is prepared to pay for this offering. Thanks to e-commerce, there has been renewed interest in pricing policies. The fear that the internet would lead to market transparency and price reduction has proven to be unfounded. The internet should be seen instead as offering opportunities for pricing policies, since it opens the door to creating precision pricing which can be implemented thanks to knowledge of individual customers, the market and available capacity. Adapting existing pricing structures and pricing policies to values that individual customers experience in the supplier’s offering provides better prospects for good financial results. In doing so, however, we must not lose sight of the risks involved in a precision pricing policy.

case sTUDY nike+ After Apple introduced the iPod in 2001, Nike employees began noticing more and more runners with white earplugs. They were listening to their favourite tunes on the iPod as they ran. A brand alliance was in the making, initiated by lead users, and the idea of combining the miniature audio device with a running shoe was born. In 2006, the product went to market. Nike launched Nike+, a partnership with Apple that went way beyond a mere personalised music experience. It was about engaging runners in a community concept. Nike+ consists of a simple sensor in the running shoe that communicates wirelessly with a receiver on the iPod Touch and iPhone. While the runner listens to music, the sensor registers the running time, distance and speed. If, for instance, personal best times are bettered, the audio device can give a signal, such as a voice message with congratulations from Lance Armstrong! When you have finished training, log into Nike+ (nikeplus.com) and upload your data, review your performance, analyse it and share it with others. You can set individual goals, monitor progress and challenge other runners. Nike+ is not just about gadgets and websites, it’s an engagement platform. Imagine Youtou, a fictional character, a woman training for a half marathon in London who aims to beat 90 minutes. If you look at her current performance, this is quite an ambitious target, but using the platform, she can follow her own running performance and the way it develops. Proud of her times achieved running through the park, she is now challenging her children to beat her. She can look at her route on Google maps and see where she has been performing at what speed. She can share this knowledge with others, along with detailed

225



Part IV Marketing

case study (continued)

Figure 11.6 the Nike+ coach screen Source: www.nikerunning.nike.com/nikeos/p/nikeplus/en_GB.

information about the route. She can look at the routes others are running and apply ratings to them. The music that she listens to while running can be shared with others. She can upload her ‘playlist’. Others’ musical choices might inspire her and help her find the perfect balance between musical and running rhythms. Through Nike+ Youtou can join local running clubs – it’s an offline experience too. They might organise training sessions that she can join. Or she can register for other competitions, whether sponsored by Nike or not. Nike is organising a running event through the streets of New York on Valentine’s Day. Will she go? She can decide to interact with a coach or get tips from athletes whom she admires. She can discuss her performance and goals, or even get help dealing with injuries. How to deal with that sore knee or sprained ankle? More generally, she can participate in discussions on blogs and discussion boards on related topics, share personal stories, ask questions about clothing, shoes, etc. Nike+ significantly enriches Youtou’s running experience, and she is doing it all by herself. She decides how she wants to run, interact with others, share and use the different services. Others are helping her and so is Nike, from time to time. This platform allows Nike to become involved in rich and fruitful conversations with the runners. They gain deep insights into running experiences and access to real-life data. They know average running times, general musical preferences, the power songs that carry the runners that bit further. Many new ideas are generated through this platform as new propositions arise out of runners’ ideas and suggestions. Nike are discovering how they can engage different runners in deep relationships and even how they can help create relationships between runners. The relationships and all the experiences facilitated partly by this platform are all ‘sticking’ to the brand.

226



Chapter 11 the customer proposition

case study (continued) People visit the Nike+ platform an average of three times per week. In 2009, more than 150 million miles of running routes were uploaded by 1.3 million runners, who between them burned 14 billion calories as they ran. Nike’s market share increased from 57 per cent to 61 per cent in the running shoes sector. Marketing costs fell owing to the effect of free word-of-mouth advertising. The risks of product development are shared with partners such as Apple and are reduced because the platform provides good testing facilities. All in all, Nike has left the traditional, product-oriented way of working behind and has focused on the value found in the customer, in their running experience. They understand the runners and their needs; they connect with them and recognise that these are not ‘individual customer experiences’ but experiences that occur in a social context. The starting point is Nike+, not the running shoes. The product comes second to the experience. New sources of sustainable growth have been found. Re-engineering the organisation around this concept was not easy, but it was done. Nike accepts that it no longer has control over all communications on their own branded platform. It’s user-run, quite literally. The talents and skills of the runners are speeding up the innovation process and raising it to another level.

Questions 1 To what degree is Nike contributing to the creation of meaningful experiences? What do you feel is positive? What would you criticise? 2 Think of one or two strategic partnerships that Nike could forge to add an extra dimension to the running experience? 3 What revenue model(s) could Nike develop for Nike+? How do you evaluate the current model? 4 To what degree has a transition occurred from a supply chain- or product-driven organisation to an organisation putting the individual customer experience first? 5 How do you evaluate the results Nike has achieved so far? Source: www.nike.com (NikeiD).

QUesTions 1 Krishnan and Prahalad state that striving for mass customisation does not offer a prospect for future lasting competitive advantage. It is characteristic of these organisations to compete against others and narrow their scope to the existing market rather than exploring opportunities to improve the value for customers. Interesting technological and social developments are being left un-catered to and therefore opportunities to improve value creation for customers are left unused. Please illustrate this statement with two examples. 2 The unique personal customer experience takes place in surroundings where consumers are not alone, but with others. The social and physical context has a huge influence on the product or service experience. Illustrate this with one example. 3 In order to realise the ‘long tail’, in many cases one needs to activate and facilitate the second-hand market. Please indicate why this is important and what the consequences are for the marketplace as a whole. 4 What are the different forms of mass customisation identified by Gilmore and Pine? Think of your own example for each form.

227

Part IV Marketing

5 What limits the applicability of mass customisation? 6 How does IT make it possible to implement a precision pricing policy? 7 Formulate the outlines of a precision pricing policy for a four-star hotel in your country’s capital designed to accommodate business guests as well as tourists from all over the world. Explain your answer. 8 Why is the application of revenue management necessarily and by nature connected to the existence of capacity restrictions? 9 Which recommendations would you give to Amazon.com to help it realise a price premium programme for loyal customers? 10 Create a pricing structure for a publisher of loose-leaf magazines which has chosen to offer its content via various channels. Remember that the publisher previously sold its magazines exclusively on a subscription basis.

references Anderson, C. (2006) The Long Tail: Why the future of business is selling less of more, New York: Hyperion. Asseldonk, T.G.M. van (1998) Mass Individualisation: Business strategies applying networked order to create economic value in heterogeneous and unpredictable markets, Veldhoven: TVA Management. Boswijk, A., Peelen, E. and Olthof, S. (2011) Economie van experiences, 3rd edn, Benelux, Amsterdam: Pearson Education. Dellaert, B.G.C. and Stremersch, S. (2005) Marketing mass-customized products: striking a balance between utility and complexity, Journal of Marketing Research, May, 219–27. Foa, U.G. and Foa, E.B. (1976) Resource theory of social exchange, in Thibaut, J.W., Spence, J.T. and Carson R.C. (eds) Contemporary Topics in Social Psychology, Morristown, NJ: General Learning Press. Gilmore, J.H. and Pine, B.J. II (1997) The four faces of mass customization, Harvard Business Review, January–February, 91–101. Lampel, J. and Mintzberg, H. (1996) Customizing customization, Sloan Management Review, Autumn, 21–9. Nagle, T. and Holden, R.K. (2001) The Strategy and Tactics of Pricing, 3rd edn, Englewood Cliffs, NJ: Prentice Hall. Peelen, E. and Smelt, P.A.W. (1994) Als produktie en consumptie samenvallen: yield management, Tijdschrift voor Marketing, May, 30–4. Peppers, D., Rogers, M. and Dorf, R. (1999) Is your company ready for one-to-one marketing?, Harvard Business Review, January–February, 151–60. Pine, B.J., James H. Gilmore, J.H. and Pine, J.B. II (1999) The Experience Economy: Work is theatre and every business a stage, Boston, MA: Harvard Business School Press. Prahalad, C.K. and Krishnan, M.S. (2008) The New Age of Innovation: Driving co-created value through global networks, New York: McGraw-Hill. Prahalad, C.K. and Ramaswamy, V. (2004) The customer as a collaborator, Harvard Business Review, February, 8–12. Ramaswamy, V. and Gouillart, F. (2010) The Power of Co-creation, New York: The Free Press. Schmitt, B.H. (1999) Experiential Marketing: How to get customers to sense, feel, think, act and relate to your company and brands, New York: The Free Press. Weber, M. (2011) Customer involved open innovations, PhD dissertation, Technische Universiteit Eindhoven, Eindhoven.

228

Chapter

12

The relationship policy With whom should we build a relationship in order to increase the value of the customer base? Furthermore, how can we manage this during different stages of the relationship lifecycle? These are the questions addressed in this chapter. We begin on the aggregated level of the customer database, and deal in Section 12.1 with the improvement in the quality and size of the customer database. We will describe how an organisation can allocate its resources between the acquisition, growth and retention of customers in specific segments (Sections 12.2 and 12.3). The next step will address the following question: how can organisations intensify a relationship by playing a role during important events in people’s lives, by being there at moments that really matter? (Section 12.4). From there on we will discuss what policy organisations can formulate to develop relations with customers in the desired direction (Section 12.5) and how this policy can be translated into a contact policy (Section 12.6). In this chapter we will address the following questions: ●

How can we increase the value of the customer database (the topic of customer asset management)?



What can we do to stimulate the planned and desired development of relationships through the different phases of the relationship, from acquisition through to retention?



How can we translate a relationship policy into a contact policy?

PracTiTioner’s insighT Hello John! How’s your golf game coming along? Hi Miriam, how are the children? I think it’s truly amazing how you’ve been able to combine your career with raising a family. Hi Jenny! Has your cat fully recovered from his operation? Hi there, Frank! Happy belated birthday! When were you planning on taking your early retirement? Hello, Europe! How are you doing? Thanks to CRM, the number of friendships in Europe has increased a thousand-fold. Doubts seem to have disappeared. Supplying organisations can maintain relationships with over 300 million residents of the European Union – and do so without ever speaking to them personally or giving them the name of a regular contact person. And without even taking a minute to stop and consider whether or not these customers would even want to have a relationship with the supplier.

229

Part IV Marketing

12.1

customer asset management: improvement in the size and quality of the customer database Who do I want for a customer? What are the differences between relationships and what does this imply for my relationship policy? These questions relate to customer asset management and lie at the root of the developing a relationship marketing policy. For a supplier, it is important to create a plan wherein the objective is to increase the quality and quantity of the customer database. To that extent it is important to have a consistent and integrated acquisition, development and retention policy (Thomas et al., 2004, 2005). Treating these areas as separate domains would lead to less than ideal results. An organisation that focuses on attracting customers using enthusiastic offers to increase the effectiveness of the acquisition may have to concede that the retention costs of the customers are also very high or the relationship development potential very limited. Customers with low maintenance or development costs can be quite attractive, even though they may have cost a lot in acquisition. The organisation should not get stuck with a less than optimal customer base made up of a limited number of ‘ideal customers’ with a high life-time value. In order to prevent this, it can be useful to construct an overview as shown in Figure 12.1. Four customer groups with different levels of acquisition and retention costs exist. For each group it is clear what percentage of the total customer base they represent and how they contribute to the profitability of the organisation in the long-term. This understanding can enable the creation of an integrated policy to attract and retain more ‘ideal customers’ while keeping a keen eye on the balance between acquisition, development and retention.

High Retention costs Low

Customers with high retention costs

Royal customers

25% of the clients €€€€€€€ 15% of the profit

28% of the clients €€€€€€€€€€ 25% of the profit

Occasional customers

Customers with low retention costs

32% of the clients €€€€€€€€ 20% of the profit

15% of the clients €€€€€€€€€€€€€€€ 40% of the profit

Low

Acquisition costs

Figure 12.1 An integrated acquisition and retention policy Source: Thomas et al. (2004).

230

High

Chapter 12 The relationship policy

In terms of the customer pyramid (see Figure 12.2), a policy needs to be developed that aims to increase the number of top customers. Non-profitable customers will have to be discouraged from making purchases from the supplier in the future or will have to be approached on a transaction basis: each order placed must ultimately produce a positive result. At the same time, a balance needs to be found between customer acquisition and relationship development. After all, growth in the number of new customers is vital to ensure the future of the organisation. To reduce the non-committal aspect of acquisition and relationship management, it is recommended that the supplier formulate concrete objectives and allocate part of the budget for various activities (see Figure 12.3). Which results does the organisation hope to achieve with existing customers in segments A, B, C or D? Does it want to maintain the relationship, develop it further or possibly even end it? What is the return on investment (ROI) or life-time value (LTV) that the supplier expects to see as a result of its activities? How does it then plan to acquire customers in a targeted manner? Companies segment within the customer database on the basis of customer characteristics and the behaviour. It is harder to make these distinctions with non-customers. It may be possible to link certain externally available indicators to the different customer groups, by which prospects may also be grouped into segments. Thus insight can also be acquired into the potential profitability

Average yearly turnover that each customer represents

€ 250,000 + …#

In-flow: no. of customers

…#

Out-flow: no. of customers

…# … ex

Out-flow: no. of customers

…#

In-flow: no. of customers

…# … …#

ex

€ 50,000–€ 250,000

…#

…# …#

In-flow: no. of customers

Out-flow: no. of customers …#

…# In-flow: no. of customers

…#

€ 5,000–€ 50,000

…# …#

Out-flow: no. of customers € 0–€ 5,000

Figure 12.2 Customer pyramid in relation to acquisition and retention policy

231

Part IV Marketing

Figure 12.3 Relationship planning and customer profitability Source: Wang (1998).

of the different non-customers. The different acquisition methods and the intended conversion results can be specified for the different categories of prospects on the basis of previous experience. An indication may also be given of whether or not active efforts should be made to acquire customers within the relevant segment or whether the company should simply rely on the growth which arises from customers who ‘report’ to the company, whether or not this is the result of actual customer recommendation. It will certainly not be possible to segment all the non-customers according to a method employed by the supplier. However, there may be interesting future customers to be found among these prospects. In order to be able to formulate a profitable acquisition policy one needs to have an indication of the potential value of a targeted consumer group. Knowing how much they spend in the category, helps one decide whether it is worth investing in the acquisition of consumers in this group.

12.2

acquisition policy Improving the size and quality of the customer base starts with acquisition. Even if retention and relationship development are often much cheaper and more profitable than acquisition (see Chapter 3) it remains a fact that without acquisition, there would be no customers, never mind any relationships to build with them. There are numerous methods of customer acquisition, which are very well covered in the marketing literature (see, for example,

232

Chapter 12 The relationship policy

Kotler and Keller, 2008). When dealing with CRM, it is important to note that at the start of the acquisition process, there are no individual customer data to act upon, making a welldirected marketing effort difficult. In this situation, it is more logical to use social networks, the internet and mass media. Where profit margins permit, good quality external data is available and reasonable conversion percentages can be expected. Communication systems such as direct mail, telephone or even personal sales may be economically viable. In other cases, the use of advertising, exhibitions and trade shows, television or radio commercials or outdoor advertising and sponsoring seems more appropriate. The potential of using online efforts to generate traffic are discussed in greater depth later in this book (see Chapter 15). Should the organisation want to expand their customer base in a particular direction, selectivity in the choice of advertising media is key. Obviously, a communication concept needs to be developed that appeals to the target audience, but this can be harder to fine tune than you would imagine. Commercials have a tendency to attract a ‘would-be’ crowd, who recognise themselves as prospects for a product or service not actually intended for them. It is quite common in banking that people view themselves as an attractive private banking prospect well before they actually are; and a group can be attracted to a brand because of its status, despite not being the target group at all. The Lacoste brand is renowned for having a considerable following among young people who fall outside the core group. Such situations can damage the brand image and may require the organisation to actively pursue de-marketing activities to maintain the quality of the customer base. During the acquisition stage of the relationship it is very important that the expectations that are set are also met. Appealing to a prospective customer by pretending to be better than you are, is reflective of 'hit and run' strategies, and consequently most undesirable in CRM. The development of a long-term relationship requires the organisation to be open and honest from the outset. Obviously, the organisation should endeavour not to mess up the ‘first date’, and so will try and show itself in the best possible light, but it should never lie about the benefits. Positive 'word-of-mouth' references and communication through viral marketing will often help in setting appropriate expectations for new customers. The relationships that are brought on board by existing customers often show realistic expectations about the products and services and, not unimportantly, they often share the life-time value potential of the customer who brought them on board and develop a similar level of commitment.

12.3

relationship policy by segment The relationship policy will need to be developed further for each of the customer segments. For each of the groups A to D mentioned earlier, a service concept can be developed to meet their needs (see Table 12.1). It specifies the value proposition in terms of customisation and pricing, and also deals with the way in which the company strives to communicate with the segment (see Chapter 11). We will illustrate this approach for two segments in the travel industry. The first segment consists of young people who prefer to arrange their own holiday. They want to explore their boundaries, sporting activities are popular, as are making new friends and socialising generally. The second group is formed of people who value security and control and prefer to have their affairs taken care of. They tend to be somewhat older, often requiring nothing more than the present company, so no outsiders. They visit the places

233

Part IV Marketing

Table 12.1 Service profiles

Values that they seek in the holiday Consequences

Activities that are sought after Services required Purchasing decision Promotion sensitivity

Adventurous young

Certainty seekers

Adventure, explore boundaries, meet people Being your own boss, not really knowing what tomorrow will bring Sports, travel, spontaneous social gatherings Transportation and accommodation Shortly before leaving High

Relaxation, being together, enjoying comfort Well-arranged holiday, being well-informed, no surprises

Walking, enjoying the outdoors, cultural events Transportation, accommodation, excursions, luxury Long time in advance Low

they know, prepare for their holidays quite carefully and seek some level of comfort or luxury during their stay. The travel organisation can develop a marketing policy that is attuned to the specific needs of each of these groups (and others). The idea is to become each customer group’s ideal travel partner, by making their requirements a central component of the holiday experience. The younger group, for instance, will not want an ‘all-inclusive’ deal. They are more likely to consider last minute bookings and price offerings, which allow them to explore destinations. The other group will be less price sensitive, have a greater need for information on the destination (if they’re not returning to last year’s destination) and show more interest in holidays where everything is taken care of, including knowing which room number they will be in before even arriving on site. This example shows that an organisation with an undifferentiated approach to the marketplace would miss out on most opportunities. The proposition, the incentive and the timing might be off. In the most unfortunate situation, the adventurous young are approached too early on and the certainty seekers too late. In catering to the average market need, a travel agent may propose a complete sports and fun package that has to be prebooked. The young will find the travel agency too dull and predictable, while the certainty seekers find the offer too active and unpredictable. The proposed holiday may be too expensive for one and perceived as too cheap for the other. In each segment there will be ‘gold’, ‘silver’ and ‘bronze’ customers.The value of the customer is not a one-on-one match with the value to the customer, thus selectivity within each segment is required. However, in a general sense, a travel agent could say that they are able to serve a certain type of customer more profitably than another. The segment of certainty seekers may be more attractive owing to their tendency to pre-book, and because they are not very price sensitive and seek luxury. One needs to bear in mind that what makes the young less profitable is not the customer type or their needs, but the service concept chosen by the organisation. If the travel agent is able to gear a service concept to the needs of the young, they will find it requires less personal interaction, less preparation; fewer service requests are being made and, owing to their late booking behaviour, they are ideal in terms of revenue management, because they can be approached late on. Remember that the extra booking capacity that would otherwise go unused requires a different kind of cost calculation. From this point of view, the young might prove very profitable prospects indeed.

234

Chapter 12 The relationship policy

Financial data are crucial in steering the service concepts in the right direction. The actual and potential customer life-time value can be used to decide whether more or less customers within a certain segment should be approached and whether to focus more on retention of one group than the other. This should lead to decisions on whether or not a free brochure or catalogue is sent out to certain customer groups, whether they are offered a price promotion or service promotion etc.

12.4

relationship policy and life events By taking events in customers’ lives into account, the relationship policy can be further finetuned. We start by considering what is going on in the life of a customer, what are the critical meaningful periods, when do important changes take place and how can we be relevant then? We are not talking about a new segmentation that would go back to demographics and treat the young differently from older people, but rather about how a relationship policy per customer segment can be formulated around the customer’s life-cycle. As an insurer, we might notice a customer purchasing travel insurance through our website. It is the start of a customer relationship, but what has brought this on? Is the customer a student who just graduated and is leaving to travel around Australia for a couple of months, or the mother of a young family who is going to fly abroad for the first time with a new-born child? The value of our proposition is altered by the place it takes in the lives of customers. In our relationship policy, we may want to focus on these events in particular, as they provide unique occasions to provide value. There are also moments when an existing relationship can be at risk. An event such as moving house coincides with many changes of suppliers. A customer will need to find a new supermarket to shop at, maybe contact a new energy supplier, buy petrol from a different petrol station and possibly even change banks because of the mortgage offer that they chose. It is a moment of opportunity, but also a moment of risk. The most transactionoriented organisations deal with these processes as an administrative ordeal – they change the customer’s address without giving it a second glance. However, there are some service providers who are able to see it as an opportunity. The customer is in an active mode, having to make choices that might otherwise be put off. One Dutch energy supplier takes note of the address change, then has contact centre agents enquire whether the new house will need security services (which the company also provides) and whether the use of solar panels is an option, given the new location. They also try to forecast energy costs based on the size of the new house and its heating system. These actions will make the customer feel they are being taken seriously and understood, especially if there is scope for a sincere and individual approach from the contact centre agent. If the reason for moving house is the fact that a partner has lost their job, is deceased or a couple is getting divorced, empathy must be shown and cross-sell attempts should be ceased.

The impact of life events Which life events actually offer opportunities for the organisation to provide value, depends greatly on the value proposition. In general, however, it is possible to assess which life events have the highest impact on a customer’s life. One tool to assess impact is the Social Readjustment Rating Scale (Holmes and Rahe, 1967), which highlights the impact life

235

Part IV Marketing

events have on the psychosocial balance of individuals (see Figure 12.4). It is used as a diagnostic tool in clinical psychology and explains changes in the behaviour, attitude and convictions of customers. After the occurrence of the most influential of life events, customers are likely to value things differently, have different attitudes towards what they believe is important and may show behaviour that is not consistent with their historical pattern. If we are to try honestly to help in their life events, we should refrain from taking advantage of the most vulnerable moments in the customer’s life. It is the reason many organisations focus on the positive events, such marriage, becoming a parent or being promoted. However, the true test of relationships is to see who is there when times are tough, and as we can see from the likes of organisations such as Carglass or ANWB, the Dutch Breakdown Assistance organisation, or even SOS international, an emergency assistance centre, helping people pays off. Their customer satisfaction scores are in the high 8s and 9s on a 10-point scale. The customers they have helped are likely to refer to the experience positively and remain a customer for a prolonged period of time.

context If someone gets fired from their job, the financial compensation and the way it is used to keep life going and maybe start a new career can offer ample opportunity for a bank to provide valuable advice. It might be a classic win–win situation, but is the bank considered a partner in that hour of need? And what would it take to become that partner? First, it requires looking at this moment as a sequence. The life event does not take place at a single point in time, but is a flow or an experience within which there are different stages (Peelen and Nieuwendijk, 2010).

stage 1: general dissatisfaction with a current situation (positive or negative) Customers may be feeling the need for a change, moving on to a new phase in their life, relationship or work. They may feel that it might be time to start a family. or that they are bored in their current job or maybe not good at it. Maybe their parents’ health situation is declining to a degree that something has to happen. It is a stage that may or may not have occurred consciously, but shows signs that something is bound to happen.

stage 2: resistance to the change itself In many situations the barrier to actually instituting or actively seeking change is high. The choice is postponed or the change is avoided. Frustration can rise to a point where one is dissatisfied with the status quo and with the change that is occurring or about to occur. One does not want to put parents in a nursing home, feels unprepared for parenthood or does not want to quit a job without having other opportunities lined up. The customer is often unable to see past the change. It feels literally like being faced with a mountain to climb. It is a period of coping and postponing.

stage 3: acceptance It has sunk in that change is happening none the less, be it actively pursued or passively undergone. While there is some degree of acceptance of the situation, there is also a feeling of confusion and a general sense of loss of control. The customer is not yet ‘in charge’. More energy is being put into moving forward than into leaning backward, but many questions remain unanswered.

236

Chapter 12 The relationship policy

Life event Death of spouse (significant other) Divorce Marital separation Jail term Death of close family member Personal injury or illness Marriage Fired at work Marital reconciliation Retirement Change in health of family member Pregnancy Sex difficulties Gain new family member Business readjustment Change in financial state Death of a close friend Change to different line of work Change in number of arguments with spouse Mortgage or loan for major purchase (home, etc.) Foreclosure of mortgage or loan Change in responsibilities at work Son or daughter leaving home Trouble with in-laws Outstanding personal achievement Spouse begins or stops work Begin or end school Change in living conditions Revision of personal habits Trouble with boss Change in work hours or conditions Change in residence Change in schools Change in recreation Change in church activities Change in social activities Mortgage or loan for lesser purchase (car, tv, etc.) Change in sleeping habits Change in number of family get-togethers Change in eating habits Vacation Christmas Minor violations of the law

Mean value 100 73 65 63 63 53 50 47 45 45 44 40 39 39 39 38 37 36 35 31 30 29 29 29 28 26 26 25 24 23 20 20 20 19 19 18 17 16 15 15 13 12 11

Figure 12.4 Events causing stress, prioritised Source: Holmes and Rahe (1967).

stage 4: Making future-oriented choices After a destabilising period, there is a need for new balance, to which end choices need to be made. Very often social, emotional and financial stability have to be found by adapting one’s ambitions. With a new career, family life will have to be readjusted, or vice versa.

237

Part IV Marketing

The primary focus in Stage 3 was on the area in which the change occurred; now the focus is on the surrounding aspects that create restrictions or possibilities.

stage 5: optimisation A new balance has been found and there is now room for looking back at the whole life event. There is closure; lessons have been learned about what truly matters and what kinds of attitudes and behaviours are appropriate in the new situation. This leads to different choices in even the most peripheral areas. Even if the insurance policy or the choice of internet service provider was not an issue in the life event, it is now being affected by the lessons learned.

empathy with the customer Once these stages have been understood in a general sense, the organisation has to start considering what in the customer’s feelings, thoughts and actions may be relevant to the value that they might provide. To this extent, there needs to be an element of contextual understanding. A good model to use at this stage is the Empathy Map (see Figure 12.5) devised by Osterwalder and Pigneur (2010). The map is designed to induce a certain level of customer focus by encouraging an organisation to consider the world through the eyes and ears of the customer, taking their state of mind and physical context into account. It creates a more complete understanding of the emotional, physical and social experience that the customer is undergoing. Through these insights, an understanding can be created of the pains (What problems are the customer facing? What issues are they encountering?) and the gains (What benefits are being sought? What is valued positively at this stage?) involved?

crM illustration Let’s imagine the empathy map is used to portray the way a 45-year-old man who has just been fired is experiencing this life event, and let’s consider the opportunities for a financial services provider. The stages of dissatisfaction (not liking the job; the way the organisation is being run; the business environment), resistance (they won’t fire me; I’ll fight it; I won’t take this lying down) and acceptance (I’ll go; I don’t want to work here anymore; it’s time to move on) have taken place. With the help of a lawyer, a settlement has been reached with the employer. What is going through the man’s mind? His new career, probably – maybe even starting up a business. But how to balance this new reality with family life, which has been disrupted of late, because so much time and energy has gone into fighting the employer and reaching a settlement? The family needs some time together. They’ll use part of the settlement to travel and take time to think. There needs to be peace and balance. Most discussion with the spouse will occur at the kitchen table or over a glass of wine while they’re on

238

holiday. They’ll talk about how long they can go without a salary; whether starting up on his own might be feasible. On his return, the man will probably have to take steps towards his new future. He’ll visit the chamber of commerce and look into starting up his own business. This short story provides information about what is being said to whom, what is being felt and thought, and the physical and emotional context of the event during that stage. But where’s the bank? It’s obviously not a partner here. The lawyer will be (or rather, have been) a partner; the travel agent will know that the customer is going away; people tend to talk about these events a lot; and the chamber of commerce seems like the place to go upon returning. Also the spouse may have done some looking around to evaluate the options, or even have contacted the bank to find out about mortgage payments in light of the termination of her husband’s contract. He was too busy fighting the employer to think about that. These organisations and people can be approached by the bank to operate in the value network focused on serving this new businessman.

Chapter 12 The relationship policy

What does she

THINK AND FEEL?

what really counts major preoccupations worries & aspirations

What does she

What does she

HEAR?

SEE?

what friends say what boss says what influencers say

environment friends what the market offers

What does she

SAY AND DO?

attitude in public appearance behavior toward others

PAIN

fears frustrations obstacles

GAIN

wants/needs measures of success obstacles

Figure 12.5 Customer empathy map Source: Osterwalder and Pigneur (2010).

Linking life events to the relationship policy Life events are moments of truth. They offer unique possibilities to prove value to customers, either positively or in their hour of need. While they can be very beneficial to relationship development, creating moments where customers are acquired, where relationships are developed or deepened, they can also be detrimental. Life events can be disruptive and cause premature termination of relationships or alter a customer’s behaviour to the extent that either their value to the organisation is changed indefinitely or that the value they expect from the organisation is altered. In other words: it has to be re-evaluated if the customer remains part of the same customer segment after the life event. For these reasons the life events should earn a place within the relationship policy of the organisation. An organisation that wants to focus on the opportunities to (continue to) provide value in the customer’s life, will identify the following aspects for each segment: ●

life events that provide opportunities to expand the relationship and increase the value the organisation is providing;

239

Part IV Marketing ●

life events that are potentially harmful to the relationship, leading to defection;



for each event named above, the stages at which the organisation may provide value, based on the empathy maps of the customer segments;



the value network of partners required to become relevant to customers in the appropriate stages.

Also, events can be key moments for acquisition, or welcoming a customer relevantly and appropriately. It must be clear that the likelihood of occurrence is not the same for all customer groups or segments that an organisation has identified. Also, the impact of the life event is not the same. Banks are now starting to set up ‘divorce desks’ where customers can get advice about issues relating to this negative life event. For high-income banking customers the desk will require a different kind of attention from that which they give to the average medium- to high-income household with a mortgage. Private banking customers tend to have prenuptial agreements, for instance, so the financial impact is different. The emotional impact of divorce may depend much more on whether a person is more conservative and traditional, or adventurous and entrepreneurial. The divorce desk enables the bank to take care of financial aspects of the life event, provide emotional counsel in cooperation with partner institutions, assist in other areas of the life event, such as finding a new housing solution etc. What it does mostly, however, is allow the bank to be relevant at a time when it is easy to lose touch with the customer, only later to discover the relationship altered or irreparably damaged.

12.5

relationship policy by relationship phase Insights into segments and life events will help to realise close relationships with the right customers. But relationships are not static; they have to develop in interactions. The relationship life-cycle indicates the pattern the relationship will follow in its development. Figure 1.3 on page 17 illustrates an average relationship life-cycle which is encountered in many markets. The corresponding policy is outlined in Figure 12.6 (Peelen, 1989) with the blue labels representing aspects that are of crucial importance. During the exploratory phase, the relationship starts out positively. The supplier has positioned itself as an attractive company in order to acquire the customer, and this has raised certain expectations. The relationship is still quite fragile; a common history has not yet been created for them to fall back on. The goal of the relationship policy in this phase is to reinforce the relationship and to increase commitment. Customers must be led as quickly as possible from the exploratory to the saturation phase. It is also desirable to increase the volume of transactions so as to produce a return on the investments which have been made in the relationship. During this exploratory phase, the two-way exchange of information is an indispensable element in a policy of which the priority is the development of a long-lasting relationship. This involves information that is necessary to stimulate follow-up transactions and the purchase of products and services which have not previously been purchased (cross-selling). At the same time, the customer’s satisfaction with the supplier will have to be followed closely; it is precisely in this early stage of the relationship that it is important to be able to spot negative developments quickly and to take action.

240

Chapter 12 The relationship policy

Figure 12.6 Relationship policy per phase Source: Peelen (1989).

Typical of the growth phase is that the commitment aspect can sometimes undergo negative development, which in turn can endanger the continuity of the relationship. Analysis of numerous customer databases has shown that customer churn is high among customers who have not yet developed a long-term relationship with the supplier. Those customers for whom the costs of acquisition have not yet been covered display a heightened risk of leaving before they have even become profitable. Besides, the ability to identify with the supplier loses some of its value. Doubts may arise regarding the appeal and uniqueness of this supplier. Barriers which stand in the way of the termination of this relationship and the start of a new one are perceived to be lower than they were previously. The goal of the relationship policy during the growth phase is thus to increase commitment and to continue the positive growth trend seen in the turnover. Those activities that demonstrate and emphasise the uniqueness and appeal of the supplier are valuable. The same applies to cross-selling activities; experience teaches us, in fact, that customers who purchase more than one type of product or service from a supplier are less likely to show signs of terminating the relationship. The customer experiences the advantages the other party has to offer and, besides, the switching costs can increase; after all, more than one replacement may have to be found for a supplier who fulfils several needs. Opportunities to exceed the expectations of the customer will have to be seized. By leaving an indelible impression, the relationship can suddenly find itself sailing on calm waters. There, the service system generally offers good prospects. A characteristic of services is that it is difficult for customers to evaluate accurately the level of quality that they can expect from competition of which they have no experience. After all, service is intangible and quality can only be assessed on the basis of experience. Furthermore, it appears that many customers have a conservative attitude on average, because they estimate the level of service of the organisation with which they have experience to be higher than that of an unknown competitor. However, it may be that service alone is insufficient and an experience will also have to be created. This can, in fact, be the case in markets in which all of the suppliers compete on the basis of service. In order to leave a lasting, personal impression on the customer, the supplier will have to expend even more effort. It will have to orchestrate the consumption situation, stimulate the customer’s senses and arouse emotions (see Chapter 11).

241

Part IV Marketing

It is in the saturation or maturity phase that a supplier encounters its most profitable and loyal customers. The investments in the customer have already been recovered, the chance of the relationship being terminated is low and the level of spending by the customer is relatively high. Each party knows what it can expect from the other. Trust has been built up; in the past, both parties have proven to be reliable. If one of the two makes a mistake, this does not lead to immediate termination of the collaboration. The belief exists that the other party has not knowingly or intentionally ‘dropped the ball’ and is prepared to repair the damage. The challenge in this phase consists in breaking out of routines or preventing similar habit patterns from forming in an early stage. At the same time, the parties must continue to express their mutual appreciation for the relationship. The decline phase signifies a possible end to the relationship. It may begin shortly after the beginning of the relationship or later on. Turnover decreases and commitment lessens. The objective of the relationship policy in this phase is to determine the causes of the change. To the extent that it is desirable and possible, a solution may be suggested. However, in many situations, the cause may be external; the need for the supplier’s services has disappeared. A person may no longer have their car, and for this reason no longer requires their breakdown cover. It is a fait accompli and there is not much that can be done about it. Decline can also occur when the quality of the service is the cause for the deterioration of the relationship. By contacting the customer and ‘righting the wrong’, the supplier may, in many cases, steer the development of the relationship back in a positive direction once again. Research has even shown that these customers can ultimately become the supplier’s most loyal ambassadors. The personal attention and the involvement on the part of the supplier in this situation have surpassed the customer’s initial expectations. During this phase, the supplier must exercise care in dealing with price shoppers who place many demands on the organisation, are difficult to please and who do not strive for any type of long-term relationship whatsoever. Efforts and the investments that accompany them will rarely prove to be profitable with this type of customer. One finds this type of customer less frequently among the customers who only threaten to leave the supplier after having been customers for many years. One of the goals of relationship policy is also to develop a bond that leads to positive word-of-mouth advertising by a firm’s customers. They become so-called ambassadors or promoters, who find their opposite in the firm’s ‘detractors’ or ‘terrorists’. The latter being a group a company can easily do without (Reichheld, 2006). They spread negative feedback about the organisation and actively dissuade others to have dealings with the organisation.

crM illustration nPs at work: lessons from Philips Some six years ago, Philips started a project that focused on introducing outside-in thinking. A more market-oriented approach in which the customer was to become the key player had to be adopted. Geert van Kuyck, chief marketing officer at Philips played his part. ‘I am the voice of the customer within our company’, and NPS is his tool.

242

‘Companies with a high churn rate will find it impossible to keep on acquiring enough customers at one end while losing them on the other. With many organisations the research that is done into customer satisfaction is a soft metric. Despite all their efforts, not many organisations are able to evaluate whether they have a healthy customer base. Until recently,



Chapter 12 The relationship policy

crM illustration (continued) this was also true for Philips. And it is unacceptable, because a solid and healthy customer base is the basis of all growth in your organisation and therefore creates shareholder value.’ Clear correlation.‘Within Philips we are now trying to discover whether or not the NPS is a good predictor for our growth generating potential. And we have seen that for products with a bad NPS, the revenue declined clearly over the next periods. At a normal NPS the revenue stayed quite stable, whereas our “best in class” product innovations thrived – a strong correlation indeed. And of course we evaluated our NPS within our customer base with that of competitors. For areas where our NPS is more than 5 points lower than the competitors’ NPS, we are showing declining revenue. If we are 5 points up against our competition, we show a minimum of 6 per cent increase in revenue on average. Growth or decline of 1 per cent is too marginal for us to call it growth. We expect 7 to 8 per cent and that seems within reach if we focus on increasing our customers’ loyalty.’ Cutting customer costs. Philips started measuring the NPS at the beginning of 2006 and found that promoters are a positive influence on the business. The Health care division in particular saw that effect. Van Kuyck: ‘Radiology is a small market where everybody knows everybody. If you get a bad reputation through word-of-mouth, the next 5 years are going to be incredibly tough if not impossible. Reputations, good or bad, spread quickly. Philips is currently rolling out the metric as the official performance indicator throughout the organisation. If you are to introduce

12.6

customer performance as a key performance indicator (KPI) you have to make sure the “accountability” towards general managers is clear. You cannot expect to assess people’s performance without having achieved that. Today still, a lot of managers are achieving their financial targets by cutting back on customer costs. They are not investing in relationships by reducing sales visits or promotional offers, not investing enough in service and after sales. They might keep that up for two to three years and then find out the options are depleted. I notice it straightaway when a company is cutting customer costs. The contracts with outsourcing parties are based on costs per call. That means cheaper is better, with a decline in service as an inevitable consequence. We have learned a great deal about that within Philips.’ Customer insight. The main question is actually: What wins over the customer? Is it the after sales service, or the right pre-sales marketing communication? Is it product quality or is price still an important factor? ‘It varies per business,’ says van Kuyck, ‘but ultimately it is a lot less about the product than we might have thought . . . The customer’s experience is determined mostly by our delivery, billing, service and “service recovery”. A mistake or error in the product is quickly forgiven and forgotten as long as we handle it well and solve the issue quickly. Especially when a company is performing above expectations and the customer feels they are getting full attention, they are willing to cooperate and reward you’ van Kuyck states. Source: Lute (2009).

Translating the relationship policy into contact moments In order to realise relationship policy, a communication plan must be outlined. An ad hoc communication policy or a product-driven communication policy is useless. The situation in which product introductions or promotional activities prompted by the competition determine the timing of contact is undesirable. A great deal of thought must be given to communication, and events organised by the supplier, the customer and the market will have to be assigned a position within the framework of the planned relationship development (Peelen, 1989). During the exploratory phase, both parties will have to get to know each other (Dwyer et al., 1987). The supplier does not yet know what type of potential the customer represents, and in which segment they must be categorised. A differentiated approach is thus

243

Part IV Marketing

still difficult in this phase. It is also undesirable to invest too much in communication efforts because it is unclear what the ultimate value of the relationship will be. Companies that offer a welcome packet or make a welcome ‘call’ have positive experiences. A portion of this type of activity may be a questionnaire or interview during which questions are asked about the other wishes and/or purchase plans of the customer, in addition to enquiries about their satisfaction with the product or service. In general, these types of initiatives meet with a positive response, and a substantial portion of the customer base lends its cooperation in their execution. The result is that important information is gathered which allows the customer to be placed in a segment and indications are obtained about the ways in which the customer can be encouraged to make follow-up purchases. Communication geared towards the realisation of subsequent transactions is a crucial component of the relationship. It is recommended that communication calendars are developed which can be used to note when the customer should be approached and with what particular information. Concrete goals can then be linked to the achievement of a specific result during a certain period. In addition to the cross-selling possibilities which arise during customer contact in the exploratory phase, the outcomes of the cross-selling analyses can also be used to companies’ advantage. These may indicate what the chances are of the customer considering the purchase of the product concerned within a certain period, and whether or not approaching them is worth the effort. Customers who have made more transactions in later phases of the relationship prove their value to the supplier. It is financially justifiable to adjust and shape the relationship from a transactional one into a relational one. A policy focused on cross-selling can make room for a policy that targets the creation of a partnership. Suppliers can open the dialogue to accomplish this; in order to ‘break the ice’, it may be beneficial for them to take the lead and provide customer-specific information. For example, Robeco Direct, a Dutch financial services company, sends its valuable customers a personal annual report. In this report, the customer will find information on the stock market and on their investment portfolio in particular, as well as, if possible, their risk profile. In effect, the organisation is surprising its customers with this information service, but in a positive way. The information provided actually raises new questions, which will induce some customers to contact Robeco Direct. An open and substantial dialogue is thus started with these customers that marks the point that a transaction-oriented relationship is moulded into a relationship-oriented one. The customer discloses confidential information and allows the other to provide advice. The level of trust grows; each dares to place more of their fate in the other’s hands. It is important to seek contact with customers who threaten to end the relationship or those who have already done this. Simply demonstrating interest can provide an important reason for customers to adjust their image of the supplier. Even a portion of the customers who have already left may be persuaded during an exit interview to give the supplier another chance. It goes without saying that an organisation cannot succeed in developing an efficient and meaningful dialogue with all of its customers in each of the different segments. Repeated efforts to start up communication can fail to produce results. The supplier remains the one who takes the initiative. In order to prevent this from becoming a source of irritation, it might be a good idea to ‘park’ these customers and leave them alone (Figure 12.7). After all, communication efforts with this group do not lead to conversion and increased profits.

244

Chapter 12 The relationship policy

Figure 12.7 Relationship policy by segment: from cross-selling to total solution provider Source: Peelen (1999).

communication pressure and initiative Reasons to communicate with customers can originate from a variety of sources. The company may be introducing new products, or might have created a special promotion, or perhaps it would like to inform the customer about specific developments in the industry. An insurance company has a new form of savings account, or would like to provide customers who are insured via their employer with an extra special offer, or inform them about the consequences of upcoming legislative changes for their pension fund. Events can also occur involving the customer which may make it interesting to establish contact. Returning to the insurance company example, perhaps there is a new addition to the family, the customer is planning to move, change jobs and/or there has been an incident involving damage. Insight into events involving the customer which are either imminent or have already taken place is important for the relationship policy. These are the moments during which purchase opportunities occur. In creating the contact plan, the supplier, depending on the stage in the relationship, will have to determine which occasions can or should be acted upon and which should not. Situations will have to be prevented in which good customers are approached too often or customers in the ‘car park’ remain spared from information completely while there are, in fact, customers among them who would be profitable on a transaction basis. Companies will also have to aim for a situation in which the initiative for contact does not lie solely with the either the customer or the supplier; a certain degree of equilibrium is preferable. Finally, the company will often find that it is difficult to obtain reliable information on imminent events involving its customers. It is difficult to make contact at exactly the right time with the customer; we are often too early or too late. The challenge facing the marketer is to increase their familiarity with the supplier so that the marketer’s company is automatically the one the customer approaches when the need arises.

245

Part IV Marketing

influence of marketing communication on relationship development Although a communication plan is required in the design and implementation of the relationship policy, care must be taken to ensure that the importance of this plan is not overestimated. The commercial communication between customer and supplier often constitutes only a small part of the total communication regarding the purchase, use and ultimate discarding of the product by the customer. To a certain extent, contact occurs via the company; however, information can also be obtained in other ways such as via the press, independent experts and family and friends in the customer’s environment. Policies incorporating the positive influences inherent in these independent flows of communication are not employed often enough and can be very efficient. Studies (for example, Verbeke et al., 1995) have shown, for instance, that customers who are acquired via a ‘member-get-member’ promotion can represent a relatively high value to the company. The chance that they will stay and develop into profitable customers is above average. Communities in which customers help one another and the supplier can have an equally significant impact on customer retention and relationship development.

12.7

conclusion A solid relationship policy starts with a plan for improving the quality and quantity of the customer base. By indicating the direction in which an organisation wishes to develop the customer base, it shows it is paying attention to the kind of relationship it wants with different kinds of customers. Acquisition efforts will have to be made to match the intended direction of growth. The service profile needs to be clear for each segment, so that the right value proposition, communication profile and pricing strategy are set by default. That isn’t to say there can be no room for customisation within the individual customer relationship, but the service concept outlines the basic principles and guidelines for relationship building with the segment as a whole. Based on an overview of the actual and potential customer life-time value, decisions are made on where to invest and maybe also where to withdraw. This policy in turn will need to give rise to a specific contact ‘strategy’ or policy.

case sTuDY The relationship between a logistics service provider and its new client introduction and assignment What follows is a description of the relationship between a logistics service provider and its client, a manufacturer of consumer electronics. The subject is the client’s outsourcing of the physical distribution activities for all its products and deliveries in northern Europe. Our question to you is to analyse how the commitment and profitability of the relation evolves over time. Based upon this analysis you are asked to formulate objectives for this relationship and to think of recommendations to realise these targets. You can use the matrix provided.

➨ 246

Chapter 12 The relationship policy

case study (continued) The development of the relationship Negotiations Before signing a contract the following subjects have been studied and negotiated: takeover of client’s warehouse employees; duration of the contract; how both parties plan to integrate their information systems and how information will be exchanged; solutions for returns logistics (deliveries that have been rejected; damaged products being returned for repair; old products to be used in recycling); warehouse allocation; which part and how much of the warehouse will be allocated to the client; choice between a public warehouse (where products of other companies are stored and handled as well) and a dedicated warehouse (only the client’s products); selection of the transportation companies that will bring the products to the warehouse and from the warehouse to the customers. service level agreements (reliability percentages, throughput times, minimal order sizes, penalties); transition from the old to the new warehouse; price and tariff structure.

Negotiation outcomes The ultimate results of the negotiations are: A combination of a public and dedicated warehouse (the dedicated area is for the returns logistics and the repairs department). The client will close down and sell her own warehouse; the client’s warehouse employees will be employed in the logistics service provider’s warehouse as far as possible. The information systems of both companies will be connected. So far it seems the logistics service provider’s warehousing and transport system can be linked to the order entry, order acceptance, order planning and invoicing module of the client. In Germany, the client currently works together with a logistics service provider that competed with this service provider; both companies tried to become the logistics service provider for the client in Germany. However, the German counterpart failed; within three months the products have to be brought over from their warehouse to the new site of the logistics service provider; this implies that the logistics service provider’s warehouse has to be up and running within three months. The initial length of the contract is three years. Some 8,000 square metres are allocated to the client. Transport companies have been selected for distribution (delivery to customers) and for delivery to warehouse. Zero tolerance; rush orders have to be delivered within 12 hours; other orders within 36 hours; there is no minimal order size and there is no penalty.

➨ 247

Part IV Marketing

case study (continued) Price: there is no open cost calculation; a separate price will be charged for storage, handling-in and handling-out and transportation; investments in handling equipment, rebuilding of the warehouse and information systems will be paid for in part by the client.

The preparation phase (the first three months) For the first three months until the transition of the stock, all is going well. Only working with the German competitor can be characterised as time-consuming. The consequence, though, is that the German goods cannot be moved on time to the new warehouse in Benelux. Work has started to link the information systems; however, the IT manager responsible for this process at the logistics service provider resigned.

The start-up period (three months after the contract has been signed) Delivering the German markets is problematical. The information systems do not exchange data properly. The client is also making some mistakes; it appears they need much more space in the public warehouse than anticipated and allowed for in the contract. Furthermore, they could play a more active role in the transition phase; it would help the logistics service provider to move the goods from the competitor’s warehouse to their own.

The rescue period (the next six months) Absolutely everything possible is being done to resolve the problems!

The stabilisation period (until contract renewal) Finally everything is running smoothly. The perception grows with the client that handlingin, storing and handling-out goods is a relatively easy job that actually anybody can do.

Contract renewal The customer is looking for cheaper solutions. The logistics service provider hopes to extend the contract as part of the investment in this client has not yet been recovered. Signing of contract preparations Analyse: commitment (satisfaction, attractiveness, switching costs, long-term orientation), profit contribution Conclusion and objectives Recommendations: deliver superior value, price, lock-in effect etc.

248

 

Start-up

Rescue

Stabilisation

Contract renewal

Chapter 12 The relationship policy

QuesTions 1

Why is it so important for the first requirement in designing the relationship policy to be the improvement of the size and quality of the customer database? Explain your answer.

2

In Figure 12.3 a distinction is made between customers and non-customers. It is suggested that certain indicators can be used to segment non-customers in the same way as customers for whom an extensive profile has been developed. (a) Provide an example to illustrate this method. (b) Indicate which risks are associated with this method.

3

What criticisms can you offer for categorising customers into groups according to their current and/or potential profit contribution?

4

Some companies do not categorise into customer groups but instead make a distinction between groups on the basis of the effects that can be achieved within them. In this way, the potential profitable non-customers (see Figure 12.3) will be identified as a target group where the penetration and ‘share of wallet’ must be increased. According to these companies, the advantage of this method lies in the fact that a more accurate indication is provided of what one hopes to achieve within a certain target group, and which means are necessary to achieve this. How would you evaluate this method? Explain your answer.

5

Chapter 5 examines customer knowledge. Distinctions are made in that chapter between the customer as buyer, user and person or organisation. Can you see the possibilities of dividing the customer database into type of person or organisation? Can this categorisation replace one that focuses on profit contribution? Explain your answer.

6

Creating a distinction between the communication and service levels of so-called gold, silver and bronze customers can lead to irritation among customers. How can this be prevented? In your opinion, how should a company handle this situation?

7

What type of possible relationship exists between the quality of the customer database and the existence of a low point in the relationship during the growth phase?

8

What is an easy method for determining what stage a specific relationship is in?

9

Devise methods that a specific organisation may use to surprise, appreciate, inform and activate customers within the framework of the relationship policy.

references Alberts, P. and Buitendijk, N. (1995) Relationship Management: Tips, Amsterdam: REM. Dwyer, F. R., Schurr, P.H. and Oh, S. (1987) Developing buyer–seller relationships, Journal of Marketing, 51, April, 11–27. Holmes, T.H. and Rahe, R.H. (1967) The social readjustment rating scale, Journal of Psychosomatic Research, 11, 2, 213–18. Kotler, P. and Keller, K. (2008) Marketing Management, 13th edn, Englewood Cliffs, NJ: Prentice Hall. Lute, E. (2009) NPS in de praktijk: de lessen van Philips, Tijdschrift voor Marketing, January, 43, 1, 25–7.

249

Part IV Marketing Mithas, S., Krishnan, M.S. and Fornell, C. (2005) Why do customer relationship management applications affect customer satisfaction?, Journal of Marketing, 69, October, 201–9. Osterwalder, A. and Pigneur, Y. (2010) Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, New York: John Wiley & Sons. Peelen, E. (1989) Relaties tussen consument en aanbieder, een basis voor herhalingsaankopen, Alblasserdam: Haveka. Peelen, E. (1999) The Relation Oriented Organisation, Breukelen: Nyenrode University. Peelen, E. and Nieuwendijk, B. (2010) Life Events, ICSB, Rotterdam. Reichheld, F.F. (2006) The Ultimate Question: Driving good profits and true good, Boston, MA:Harvard Business School Publishing. Reinartz, W., Thomas, J.S. and Kumar, V. (2005) Balancing acquisition and retention resources to maximize customer profitability, Journal of Marketing, 69, January, 63–79. Schijns, J. (1998) Het meten en managen van klant-organisatie relaties, PhD thesis, University of Maastricht, Maastricht. Thomas, J.S., Reinartz, W. and Kumar, V. (2004) Getting the most out of all your customers, Harvard Business Review, July–August, 117–23. Verbeke, W., Peelen, E. and Brand, R. (1995) Consumers engaged in a member-gets-member campaign: an agency perspective, Journal of Marketing Communications, Winter, 175–92. Wang, P. (1998) Database Marketing and Customer Connections, Achmea workshop, Zeist. Yim, C. K. (B.) and Kannan, P.K. (1998) Consumer behavior loyalty: a segmentation model and analysis, Journal of Business Research, 44, 75–92.

250

PART V

Channels This part discusses the topic of communication channels, beginning with Chapter 13 which describes how the organisation can deal with a multitude of different channels. Which multichannel strategy can be formulated, organised and implemented? After that, we deal with one of the channels, personal sales, in greater detail in Chapter 14. This is the channel where face-to-face contact takes place and CRM is at its most ‘up close and personal’. At what moment in the relationship and how should we use this valuable, but costly, channel? When do we want to support and maybe even replace it with other, cheaper channels? We will also discuss how personal interaction with customers can be further enhanced with CRM support systems. Chapter 15 directs our attention to the internet and social networks. It is a topic currently dominating multichannel management as a whole. The developments in social networks are recent and are creating turmoil and disruption. They influence communication with the entire external surroundings of an organisation, making CRM about more than just the customer–organisation relationship. Chapter 16 deals with the contact centre. It is a major ‘hub’ from and to which many contacts with customers are directed. It is even possible to see it as an ‘enterprise relationship centre’, but in many cases there are challenges to overcome in order to make that transformation happen.

Chapter

13

Multichannel management One of the toughest challenges in CRM today is multichannel management, including managing such complex and dynamic channels as social media and the internet. How can we increase profit margins and revenue generated through customer contact, while at the same time improving our accessibility, offering a better customer experience and reducing the costs of our channel infrastructure? In this chapter we will be following the contributions made by Wilson, Street and Bruce in 2008. We first define the nature of the challenge we are facing (Section 13.1) and subsequently deal with the core questions that we need to ask ourselves when innovating our multichannel environment (Section 13.2). Each of these questions is subsequently discussed in Sections 13.3 to 13.10. In this chapter we will address the following questions: ●

What are the key questions underlying a multichannel strategy?



When is an adaptation of the multichannel strategy desired?



What is the right combination of channels?



How can we integrate the channels?



How can we formulate a business case for multichannel strategy?



How can we build a multichannel organisation?



How can we measure performance in the multichannel environment?



How can we stimulate customers to use the desired channels?

PraCtitioner’s insight Multichannel management is one of the areas within CRM that is attracting a lot of attention and is rapidly developing. Owing to innovations in the channel environment, organisations are regularly confronted with new challenges while they are still implementing the solutions to yesterday’s challenges. Customers may be offered travel insurance which they can accept and pay for using their mobile phone just as they arrive abroad. It could be useful to have agents in the contact centre browse a website in real time alongside the customer, or change the role of the store from a point of sales to an experience hub for the brand. The possibilities seem infinite and dynamic. At the same time we know

253



Part V Channels

Practitioner’s insight (continued) that consumers are not entirely satisfied with the current channel experiences. Different channels can be experienced in very different ways and the way they support the customer’s buying process, information or service requests is not always ideal. Employees within organisations are not always in control because they lack necessary information or are not empowered to act. Certain channels are cluttered, because they are cheap and easy to use, but do not provide the best experience. The channel experience will differ to some extent depending on channel limitations, but some differences can and should be managed. The bank cannot offer the same experience via an ATM that it can in the branch office, but they have discovered that it can also be used as a communication channel. All too often the differences in channel experiences are also caused by different organisational units being responsible for different channels and having targets or performance indicators that hinder a seamless customer experience, rather than helping it become reality.

13.1

the multichannel challenge Channels have always had the power to transform markets and even economies (Wilson et al., 2008). They provide consumers with access to organisations and can significantly affect the revenues and cost structure of an organisation. The railway has connected the west coast to the east coast of the United States, helping to overcome geographical barriers such as mountains and rivers. The telegraph made rapid connections possible for transmitting information, increasing information exchange and reducing the delay between sender and receiver. These may seem like old examples, but current-day innovations in communication still have a similar impact on our markets and economies, as we see price differentiation decrease, and new businesses and industries emerge. Hundreds of years ago, as the demand for goods such as textiles and shoes began to grow, people started to wonder about fashions ‘at the other end of that train line’ and wanted to wear them. Arguably, the internet revolution has spurred new business in a similar way. The internet is only now beginning to adapt itself to its users, the consumers and businesses that want to use it to communicate and exchange information. The first decades of the internet were about machines being connected to machines. Now we are seeing hardware and software reduced to supporting roles as it becomes more about people connecting with people. Despite the importance that channels represent to organisations, they are often approached on a tactical rather than a strategic level. The lack of strategic direction is leading to disruption of customer experiences and lack of orchestration between channels. We are noticing that contact centres are not always well connected to personal sales and retailoutlets and that the web is often not connected to other channels. In the meantime, the number of channels is growing and the technologies that enable even more ways of communicating are seeing the light of day. Think about the speed with which we have seen the following channels develop: web, e-mail, mobile (data and voice), text (SMS and MMS), kiosks and multifunctional ATMs, interactive speech technology. The offering of services from third parties makes the adoption of channels easier for organisations. If they cannot facilitate a channel themselves, they can outsource it to a third party, who will invest in infrastructure and development in their stead.

254

Chapter 13 Multichannel management

At the same time, the efficiency and effectiveness of mass media are declining. It is becoming difficult and expensive to reach a large target audience with a single senderinitiated message. The mass media channels are cluttered with advertising, fragmented and easily avoided by customers who are getting increasingly annoyed with the constant commercial bombardments from advertisers. The channels which we refer to as ‘below the line’ and which are the topic of this chapter, have to start playing the part that mass media used to play. They can be directed with greater precision and can be more customer-initiated, alleviating many of the issues related to mass media. What’s more: with digital contact maturing and internet and mobile penetration having reached levels of 90 per cent and above in developed Western economies, they also offer volume at a fraction of the costs of below-the-line communications in the 1980s or 1990s. It is interesting to note that consumers seem to adapt more quickly than businesses. It’s a sign of the reversal of roles in supply chains. They embrace new channels and exploit new opportunities quickly. It is crucial that organisations should keep pace with their customers. This is true for retail outlets, but it is just as valid when talking about contact centres or websites. Online, some 75 per cent of shopping carts are still abandoned before reaching the checkout procedure, because the website’s accessibility and usability is less than optimal. Consumers are less likely to follow the procedure or process that the organisations have set out for them. They are hard-pressed for time, impatient and get frustrated quite quickly when they feel they are being treated like numbers when cancelling a subscription, reporting a complaint or enquiring about a bill. They fight back and, in doing so, expose an organisation’s poor service performance to a wider audience. Many organisations are therefore working on their multichannel strategy. One might wonder whether a negative option motivation (‘we don’t want to get slated in public’) is the best motivator for organisations. In the area of social media, for instance, it seems to lead to management by strict rules and regulations. Employees are restricted in what they are allowed to do and new channels are approached very carefully, maybe too carefully and, in particular, too defensively. The true goal of the CRM multichannel strategy should be to work out which channel mix creates the most value for the customer and the organisation, by offering brand relevant experiences through multiple touch points that combine effectiveness in achieving relationship goals while being as cost effective as possible.

CrM illustration Where are you? It’s the most frequently asked question over the mobile phone today . . . ‘Where are you?’. In many stories we tell each other; location is a decisive factor. We are fascinated with the locations that other people are in, but our own location is also becoming more and more important. The question ‘Where am I going?’ is increasingly important in our communication and information needs. Google understands this perfectly and is facilitating these questions with location-based services such as Google Earth and Google Maps. Organisations are free to link their database with Google Earth and display their sites

and stores. The entire system is open to a point where businesses and customers can easily contribute their own ‘content’ on the Google Earth and Google Maps platforms. Panoramio.com lets you link your own photograph collection to Google Earth. If it contains GPS data, a feature present in a lot of modern-day cameras and, of course, mobile phones, the photograph is immediately linked to a location. You can now know exactly where the picture was taken! Trippermap.com is a comparable service, but links the photographs from the Flickr website to Google Earth.

255



Part V Channels

CrM illustration (continued) Organisations and brands are following users and at the same time trying to create applications that link their brand to Google Earth as a platform. Because facilitating your brand communication through such platforms is becoming more important than advertising. Helping works better than shouting. TomTom has linked up with a real estate agent named Era to create a ‘open house route’. Via www.era.nl/navigator a person interested in buying a house can mark the houses that they would like to visit and transfer the optimal route to their TomTom navigation device. Discovery Channel has made a large part of its video material available through Google Earth by linking it to the location of the shoot (http://tinyurl.com/29:95o).

If you are navigating maps of a certain area, you are offered a glance at the location from Discovery Channel footage. Some time ago, 2006 to be exact, Nike partnered with Apple to create Nike+. The shoe contains a sensor that sends signals to an iPod, allowing a user to download the information and link it to Google Earth and look at the route they have run. Through the functionality, called Map It!, they can review different routes they have run, calculate distances and share and compare the route with others. (See also the Chapter 11 Case study on Nike+.) Source: Fellinger (2008).

When trying to formulate a multichannel strategy, it may seem as though choices have to be made between channels. This is not true. Maybe this was so back in the days when organisations had the privilege of being able to decide whether to approach their market through intermediaries or go direct. However, in the meantime a lot of customers, especially in consumer markets, have begun to make their own choices and are using multiple channels at different times for many different purposes. As a consequence, the multichannel strategy is more about how to combine the different channels. It is a new perspective on multichannel management that was introduced by Wilson and colleagues (2008). When formulating a strategy it seems only natural that attention be paid to end users and customers. There is some concern that customers always prefer the expensive, personal channels, but that is not true. In many aspects, customers prefer efficient, self-service channels that do not require them to explain things or share information. Convenience is an important driver of customer channel choices. The challenge is to use knowledge gained on the individual customers to produce a perfect combination of channels. Which channels best fit a certain type of contact? What differences should we apply between customer segments and customer types? Which opportunities to learn and to collect information should be seized and how do we work together with partners? According to Wilson, Street and Bruce (2008), aspects which play an important role in the formulation of a multichannel strategy are:

256



How do we translate our relationship strategy into channel combinations?



How do we distinguish between segments?



How do we manage the increased costs that are inevitable when opening up more channels?



How do we manage the complexity that is bound to increase when multiple interconnected channels are used?



How do we decide which channels to integrate?



How do we measure and manage the performance of integrated channels?

Chapter 13 Multichannel management

13.2

the key questions underlying a multichannel strategy how to benefit from multichannels What are the right questions to ask when formulating a multichannel strategy? In many real-life situations, the tactical approach towards channels is preventing organisations from focusing on the right questions. There is too much attention paid to costs and too little paid to the unique, differentiated position an organisation can achieve in its market through strategic channel management (see Table 13.1). Wilson and colleagues (2008) have developed an innovation wheel that helps to answer the right core questions (see Figure 13.1). It starts with identifying the change required in the current situation. It then guides the organisation towards realising this change. In the process, attention should be paid to the topics of finding the right combination of channels, anchoring the choices in the strategy and in the organisation, financial accountability and performance measurement. table 13.1 Wrong suppositions underlying the channel questions Question

Existingsupposition

What is the right channel for my product/market?

Supposes that there is one optimal solution, whereas one should search for the creative multichannel mix that is differentiating for the competition, organisations offering similar products in the same market Supposes that costs are the only criterion of choice and that channels are a single department or cost centre within the organisation Supposes the organisation has identical goals, positioning and opportunities and that the ‘me-too’ strategy is optimal Supposes that costs are the issue rather than the value that is being created in customer contact

How do I increase the share of lowcost channels in my channel mix? How can I copy the success of organisation X in my channels? How can I reduce the cost of personal sales and/or the contact centre? Source: Wilson et al.(2008).

13.3

should the multichannel strategy be adapted? Whether or not change in the existing channel mix is actually desired depends on three aspects (Wilson et al., 2008) (see Figure 13.2): 1 costs; 2 accessibility of the organisation; 3 customer experience that is offered (or rather, created). The criteria are strategically relevant in judging whether or not the current channel combination is working or needs to be adapted. The cost level is often one of the primary reasons, if not the primary reason, to reconsider the current channel situation. If the airline industry is to serve as an example, the no-frills airlines have been able to significantly lower the costs of serving a customer. The entire customer process from first orientation to booking and checking in, flying and disembarking

257

Part V Channels

II What is the right channel combination for each of the customer groups? 13.4

I Is an adaptation of the multichannel strategy desired? 13.3

VII How do I stimulate consumers to use the desired channels? 13.9

III How do I translate the channel combination into an integrated multichannel strategy? 13.5

VI How do I measure V performance in the multichannel Building the environment? multichannel organisation: 13.8 How do I organise for a successful implementation of this strategy? 13.7

IV How do I formulate a business case for this multichannel strategy? 13.6

Figure 13.1 The innovation wheel of the multichannel strategy Source: Wilson et al. (2008).

Accessibility Can you reach all potential customers in their variety with your proposition?

Costs The costs to serve the relation during all contacts

Customer experience How do customers experience the contacts with you during their relation with you?

Figure 13.2 Three strategic criteria to use when assessing current channel combinations Source: Wilson et al. (2008).

258

Chapter 13 Multichannel management

has been simplified and is directed through alternative, cheap channels. The cost advantage is such that traditional airlines were finding it impossible to compete without making changes of their own. They too started offering online booking systems, reduced fees paid to intermediaries and increased self-service as standard across the entire boarding and flight process. Competitive pressure is not the only reason costs are relevant. It may also be a part of the vision on the future of customer interactions. For years, banks have been investing in and encouraging customer use of cheaper contact channels. A large number of branch offices have been replaced by internet banking, ATMs and websites, although many banks are now discovering that they need to keep a certain number of branch offices open if they wish to be perceived as personal and trustworthy. Because people tend not to visit these branches so often, costs per contact are high, and actions are being formulated to drive more people back to the branch offices again. The customer experience is on many a manager’s agenda. Improving the way customers experience their contact with the organisation is seen as a way of improving the revenue and profit potential. Often, the goal of experience-oriented projects is to increase customer satisfaction while at the same time lowering costs. It seems contradictory, but it often is not. Resolving customer complaints or answering their questions during the first contact can prevent many extra costs being generated by repeat contact, in addition to which, customers feel that they received good service. A better integration of channels also often achieves both goals. When consumers have visited a website and have a question, it may help to have an application that allows the contact centre to see which page the question originates from. They can get real-time insights into the clickstream of the web visitor and help them through the process, which makes the contact both more efficient and effective. The customer will feel that the organisation has made an exceptional effort to provide service, while in fact it was in everyone’s best interest. Boswijk et al.’s (2011) model of the ‘customer journey’ (Figure 13.3) might help to provide a clearer idea of the current customer experience. The customer journey describes the sequence of contacts that a customer has with an organisation; the term ‘touch points’ refers to the moments when contact takes place. Imagine a concert, when the touch points occur during orientation, booking, preparing for the event, travelling to the event, experiencing the event itself and the period shortly after. The ‘touch points’ will not all take place within the same channel. On their way to the concert, people may be informed over the radio, the telephone (text messages from friends), the billboards alongside the road etc. The main goal is to have the touch points create a logic unity that has a clear branded identity, which is consistent in terms of content, and that they are tuned in to each other in terms of creating a continuous flow. When displaying the customer journey it is important to gain insight into the way the customer experiences this journey. Experiences consist of many different kinds of information. Sensory impressions evoke certain emotions. The total sequence of emotions leads to a particular experience. Imagine it’s a rollercoaster ride that combines moments of thrill, anxiety, anticipation, stress, fear, joy and relaxation. An experience that moves a customer is about touching and moving customers more than it is about reaching them and gaining access. They will need to feel that they matter, that they were taken seriously, that they were appreciated and have been surprised and given a valuable experience. The goal is to include moments in the customer journey that are unique, personal and memorable to customers and that contribute to their commitment. Just as in a stage play, there is a need for one or

259

Part V Channels

Organiser

Orientation

Buy ticket

Prepare

Going to Participate event

Going back

Afterwards

Facebook

Online Ticket box

Website

Transportation

Key

Transport

Downloads

Comparison sites

Programme

Grouping together

Memorabilia

Website

Grouping together (with help of social media)

Performance

Website

Buying/downloading information/ content

Eating, drinking

Accommodation

Website

Billboards

Community

Group coordination

Radio (updates)

Merchandise, accessories

After party

YouTube

Friends, family

Free gadget from sponsor

YouTube, Twitter

Family, friends

Magazines, brochures, other mass media

Twitter, sms Haircut, dressing

Facilities Billboards, routing

Magazine, media Social media

Transportation

Safety Twitter

Figure 13.3 Customer journey Source: Boswijk et al. (2011).

several peaks or climaxes in the experience towards which a person carefully builds. After those peaks the tension must be released again and relaxation must take place, otherwise the audience would leave the theatre upset and confused about ‘how it ended’. Loose ends are a let-down in most cases. According to Kahneman (2011), it is the amplitude, the difference between highs and lows in the customer journey that actually influences the degree to which an experience is memorable. It is even more important than the climax, the ultimate experience itself. It seems as though it is no bad thing to let customers puzzle a bit, or have them experience some confusion or distress and actually make an effort. It increases their eventual appreciation! Another point that Kahneman stresses: people remember the end point of the journey. The last song of the concert is often most significant when it comes to marking the ‘eternal memory’. So it seems like a good idea to save at least some, if not the best, for last. A nice example is IKEA, with their low-priced, self-service ice-cream cones right after you have passed the checkout, they make a final impression that stresses the values ‘cheap’, ‘for the family’ and ‘self-service’, which are the core of their brand essence. The experience chain stretches out across the entire relationship with the customer. In Figure 13.3 it is concentrated around the visit to an event, just a part of the relationship between the company and the customer. The experience can start during the early stages of orientation, when the desire to participate in the event is kindled and it is realised that

260

Chapter 13 Multichannel management

this is a social activity in which the customer is engaging. Connecting the customer to others who are equally interested in participating has value at that stage. One of the key insights should be that the value that is provided lies not in the ticket itself, nor even in the show, but rather in the experience the customer is likely to have. Helping the potential customer get in touch with other would-be visitors is actually doing a lot to increase the anticipated value of the experience and thus increasing the value of a ticket in the process. If the value of the experience is taken as the ‘exchange’ that is being made in the relationship, the communication won’t stop after the ticket has been bought. The period after buying the ticket is an ideal time to help the customer prepare for the highlight that is coming up. Anticipation may increase the experience itself, so everything possible should be done to improve the value of the experience. The customer must get to know the show, must be able to gain information about the background, the origin, any points worth noting. In the preparation, value can be created by providing (inside) information, assisting in the preparation by booking services (transportation, overnight stay, food arrangements) and even selling items such as clothing or memorabilia upfront. During the show the customer has room to interact, to get involved and participate. After the show the customer is not forgotten, but ‘escorted home’ with tokens of gratitude or memorabilia and of course another look a few days later on the website, sharing experiences with friends and looking forward to the next event! The experience chain is supported by many channels. In Figure 13.3 the channels are illustrated by phase. The social media are used in the front end of the experience chain to make sure people find each other, are able to meet up, exchange ideas and tips. However, this is also a way to ensure that the value proposition takes its place within a larger context and crowd. During the event they can use these media to share videos, messages and opinions. Different social media take on different roles over time. At the start, Facebook might be more important, whereas Twitter is likely to be more widely used during the event. In the period following, YouTube comes to the fore for watching shared videos. Other media, such as billboards, SMS messages from the organiser, free publicity, commercials on mass media and websites or blogs can all support the entire experience. One will find expressions that match the up-swing or down-turn of the ‘tension curve’. They can be highly generic (it is also a mass event, in a sense) or very personalised. The event itself takes place in physical world, with friends, people who are less wellknown and a generally like-minded crowd. The division of spaces with a good ambience and the right activities is very important, alongside the obligatory good performance that the artists need to deliver. They make the ‘story’ complete. The accessibility of organisations is the third strategic criterion. Organisations must take care to be accessible to different types of relevant customers and cater to their basic communication needs. They must be equipped to handle the volume of contacts and not just offer theoretic accessibility. Long waiting times in the contact centre, delays in e-mail response or a long queue in the store or at the service desk are all signs of poor accessibility. In organising the accessibility a certain number of dilemmas might arise. What to do, for instance, when an elderly group has trouble dealing with a certain channel and prefers to collect cash from the branch office of a bank instead of using an ATM? What if the website of the concert organiser cannot handle the volume of online purchases immediately after tickets go on sale? It is a very real challenge to balance channel, without allowing waiting times to get out of hand. If they do, people get irritated and leave . . . possibly to return at a later time, but most likely to be disgruntled. Remember, however, not every part of the

261

Part V Channels

experience is a highlight. The ideal situation might just be achieved by making the waiting time just long enough for it to seem like an effort, but not so long that people start to feel disgruntled. In evaluating the suitability of the current channel strategy and infrastructure, we can add two other aspects to the mix. The first is that the efficiency and effectiveness of mass media, both of which are declining, might be a reason to none the less shift more focus to the below-the-line channels, even if the current mix seems to be sufficiently balanced in terms of cost, experience and accessibility. The second aspect to take into account is the change in customer behaviour over time, which is happening at an ever-increasing pace. One might try and assess suitability more from the point of view of lead users or younger customers, who will determine the required multichannel strategy of the future. Nevertheless, it may also pay to experiment with new channels and beat the competition, just as forward-thinking banks did with mobile payment services, rather than getting complacent by having assessed the current situation as ‘suitable’. Reviewing all the factors, it seems almost as if no organisation in the world can ever rest when it comes to the development of channel strategy and infrastructure. And indeed, that might well be the case. Nobody wants to become the next local record store or bookshop.

13.4

What is the right channel combination? Answering this key question on the optimal channel combination (see Figure 13.1) is divided into sub-questions again (Wilson et al., 2008): 1 the range of channels and which channels to use in which ‘touch points’; 2 the degree of differentiation; and 3 the controllability. What range of channels will the organisation offer to customers in different segments? The insights in this area are developing. At the peak of the dotcom-hype it was thought that the online world was competing with the offline environment. Now there is a more realistic perspective that they are complementary and it’s wise to offer a mixed approach. Obviously, costs increase as a result, because the result will be a more complex channel structure, but both accessibility and the customer experience are increased and a careful ‘best-of-both-worlds’ approach becomes possible. The fact that mixed propositions are more common doesn’t mean that single channel propositions are no longer viable. For start-ups it may prove a very good strategy to become dominant and stay reliable through their growth phase. It was only after sticking to a web-only strategy with minor telephone support for a very long time that Dell Computer Company also started selling through other channels in their expansion strategy. Pure online players such as Amazon.com or its Dutch equivalent Bol.com are also proving that single channel approaches can reach a large part of the market. After the range of channels has been determined, the organisation should specify which channels are to facilitate which ‘touch points’ during the ‘customer journey’. Which channel choices are made when it comes to orientation, selection, buying, delivery and after sales processes? A simple solution might be the main channel approach: the organisation selects one main channel of entry into the customer journey. It’s like a gateway

262

Chapter 13 Multichannel management

approach. All contacts might initially be directed to the internet, unless it is proven that more support or interaction is needed. It’s a cost-efficient solution, which limits the number of channel combinations because there is a clear point of entry. However, a strategy of forcing customers in a certain direction is not without risk. It may lead to losing a part of the market, losing revenue and deterioration of the customer experience for a segment of the customers, who may ‘cope’, but not feel that they are being served appropriately. Multichannel options where channels are available from the very start are generally considered more popular. Customer insight is a very valuable asset when making decisions about the range and combination of channels to use. What do customers require? What are their ‘natural preferences’ or ‘instinctive behaviours’? There are several factors influencing these preferences, as research by Peelen et al. (2000) has shown: ●

Personality characteristics. Three dimensions in particular play a part in channel preferences: – Conservative or open-minded. Conservative people value certainty, trusted shapes and forms and frameworks. They are quite sceptical about new channels. Open-minded consumers are just the opposite and want to experiment. – Passive or active. Some people are passive and have a strong tendency to conform to or greatly value the opinions of others. They are more likely to trust and follow advice from others; they are relation-oriented. Others are more active and have a need for control; they want to make their own decisions and reject direct advice from others. – Instrumental or social. The instrumentals are about results, they are efficient and targeted. They are more individual. They do not derive certainty from a hunch, but from objective aspects. Social consumers derive energy from contact with others. They prefer human contact and face-to-face is preferred over telephone contact. Efficiency is not their primary goal. Feeling good about the interaction is important.



The ‘top-of mind awareness’ of a channel is a second trait determining channel choice with users. It is dependent upon situational factors, such as availability, knowledge and experience with channels.



Risk perceptions of the product or service (high-risk perceptions lead to a broader search and orientation in the desire to find alternatives);



Intrinsic interest from the consumer in a good or service leads to more intensive search and orientation behaviour within channels and a general tendency to use more channels.



Subjective experience of ‘time’ tends to make consumers who feel pushed for time instrumental and targeted, with a preference for efficient channels.



Actual trust, knowledge and experience with channels can be influential in consumer choices.



Typical feel/see/smell products are less likely to be bought through digital channels, whereas catalogue goods that can be bought by specifications, or commodities, where product variations are low, are more suited to remote shopping.



For perfume, clothing and cars, digital channels tend to provide pre-purchase information and lead to store locations, more than they function as purchasing channels. This may change for repeat purchases when people know what they want. The threshold for

263

Part V Channels

buying online can also be lowered if the customer knows that they can return the product free of charge if they do not like it. Returning to the second of the detailed questions that Wilson and colleagues (2008) have found important in selecting the right channel combination: What degree of differentiation do we want to apply to the way we serve customers? We know that not all customers are equal – they differ in their needs and wants. Furthermore, they do not behave the same way when interacting with us as when dealing with organisations, but to what degree are we willing to facilitate different service concepts and different channel combinations for different customers? In the banking sector we can see that a very personal approach is taken towards private banking. However, there are also private banking customers who clearly don’t appreciate too much personal attention and are fond of their privacy. They do want the attention, the advice and the service privileges, but not through a personal account manager. They might want to use the internet and the contact centre, which are very appropriate for administrative transactions and quick, time-critical questions. Figure 13.4 contains an example in which the differentiation is shown between three different segments – gold, silver and bronze. It highlights the way channels are used and the quality of communication that is demanded. In determining the level of differentiation, an organisation may have to make difficult choices. Customers may view differentiation as discrimination. They may perceive the differentiation as unfair, without valid reason, viewing it as another person getting better treatment than them. The party feeling ‘disadvantaged’ might see it as a reason not to continue the relationship. It can also lead to reluctance in organisations to actually apply differentiation when it is valid. There are many organisations, especially in government and public services, who believe differentiation is never an option. To them it is sometimes best to say that the most unfair thing to do is not to treat different customers differently! The problems can be prevented if a clear basis of customer requirements serves as the basis for differentiation. If a customer groups prefers price over service offerings and extra features, they will have either to accept that basis of differentiation, or be willing to change their price preference. The trade-off is more difficult when the preferences of customers do not coincide with those of the organisation. In the business-to-business segment of the telecom market, both large and small customers require ease of use for replenishment of parts and accessories or repeat purchases. They want to be able to get parts from local wholesale stores and be able to book transactions through online portals, while retaining, in the process, all the benefits of being a large customer. The telecom provider would prefer to cater to large accounts directly and bypass the wholesaler. Contacts outside the sphere of direct influence are undesirable and mean that the telecom provider is at risk of losing a customer or at least not noticing interesting developments in time to act upon them. It is a challenge to find solutions in this field. We know as much as this: forcing customers to adopt a channel that is not their preferred choice is ineffective at best and counterproductive at worst. The challenge is to seduce customers by making the service level in the desired channel so much more attractive, that they are willing to make the shift. We arrive now at the third factor that influences the choice of a channel mix, namely controllability. Can the organisation handle it to the extent that it is still reinforcing the customer experience, manageable in terms of costs and accessible in terms of performance?

264

Chapter 13 Multichannel management

Figure 13.4 Differentiation in the multichannel mix

If accessibility or the quality of the customer experience is soaring, it may be best to limit the range of channels and the degree of differentiation. In the Practitioner’s insight box at the start of this chapter, we discussed the level of importance which marketers attach to this aspect. Multiple plans that are presented to increase the channel range, simply never get implemented because the organisation can’t handle it.

265

Part V Channels

CrM illustration ‘Although not many new multichannel developments have seen the light of day, there are some developments worth noting. Mobile applications are finally breaking through, according to new research done by Cendris.’ In this research, organisations were asked to indicate which channels they used in their customer contact out of a range of 10 channels. In 2004, the average was 4.9 channels across the board, for all respondents. They expected the number to increase to something around 5.2 in 2006. In 2008, the average number turned out to be 4.8. But again in 2008, expectations for 2012 and onward are soaring! Forrester research is showing an increasing interest in channels, but also some reluctance with marketers to invest in new channels. As long as new channels don’t have good metrics, the original enthusiasm is somewhat cooled. Another explanation may be found in recent research done by Cendris. They looked at the degree of channel integration. Although, just as in the research done in 2004, the results show integration still leaves

13.5

something to be desired, there is some improvement. Half the respondents still indicate that the channels in their organisation are not properly linked together. In 2004 it was 52 per cent and the 2008 figures showed no significant improvement. A customer is not recognised in every channel, nor treated consistently. so there is no total view of the customer. Furthermore, 56 per cent of the marketers indicated that channels were being evaluated separately. Channel marketers were looking at the revenue generated by the channel for which they were responsible, without taking into account ‘cross-over effects’ towards other channels. It is very possible that their reward schemes were not providing incentives to take a broader stance in the matter. They were not being held accountable for the effects that channels have on each other. Mobile telecommunications is mostly applied for relationship management purposes; direct relationship maintenance. Source: Schijns (2008).

translating the channel combination into an integrated multichannel strategy The next key question (see Figure 13.1) is how to give the optimal channel combination shape and form in a multichannel strategy? If a multichannel strategy is to work out well, different channels will need to be combined at the right place at the right time. If the account manager does not know about complaints a customer has voiced through a contact centre agent, the effect will be the opposite of what the organisation is trying to achieve by providing multiple channels. If a promotional offer is being sent out to a customer who has just cancelled, it may provide an awkward situation. If it is sent to a customer who just ordered, it will cost money and potentially damage the relationship (why didn’t my account manager give me the benefit of this offer?). The challenge is to define the required connections and to determine the required quality of the connection (Wilson et al., 2008). When it comes to making this decision, the starting point is the formulation of strategies per customer group. The marketing goals in terms of projected retention, cross-sales, recommendation behaviour and channel goals as well as cost-to-serve, desired customer experience and turnover should be specified per customer group. Many decisions relating to channel integration are made so much easier with these starting points clearly identified.

266

Chapter 13 Multichannel management

Subsequently the segments and propositions need to be combined: which goods and services are designed for multiple customer groups and which are specifically geared towards only one? The matching of the profiles to goods, services and channels allows for a good overview of requirements. Is it really necessary to develop this channel for all customer groups? And if so, what is the highest service level we need to accommodate and which is the lowest? What volumes are we expecting and what are the targets in terms of costs, customer experience and accessibility? Attention can be paid to different buying situations, such as simple purchases or straight re-purchases versus complex sales. ING is a well-known retail bank and uses the ‘click, call, face’ policy. As product complexity increases, the need for advice is growing and the potential for the bank to add value is also growing. These are the products for which they would like to shift the balance. Simple products online, more complex products through telephone interaction (‘call me now’ functionality on the website, for instance) and the most complex products and services through visits to the branch office or house calls by account managers. In the orientation, selection and purchasing phase, composing the channel mix is somewhat easier than in the aftersales phase. Handling complaints, for instance, is a troublesome area. One airline company researched this area (Boshof, 1997). They identified several service problems and types of customers. Is the complaint about a suitcase that did not reach its destination, an overbooked flight, a delay, bad seating arrangements or unfriendliness of the crew? Each of the problems requires a different solution. In some cases it is best to apologise, while in others a solution needs to be found and apologies are worth nothing. They might even anger the customer for as long as the situation is not resolved. Customers may vary in the degree to which they are sensitive to a certain complaint resolutions. The most important customers, frequent flyers in the highest tariff classes, find it unacceptable if the airline tries to offer financial compensation. The occasional flyer might see this very differently. Of course, it is most efficient if these complaints can be resolved immediately, in personal interaction with the customer. However, very often other channels will also be utilised. The thought that an organisation should direct customers to appropriate complaint channels, is unfounded. The traditional way of thinking is that customers should formalise their complaint in writing, even though other channels may be cheaper and more convenient, while at the same time quicker in leading to a solution and cheaper for the organisation. Why annoy a complaining customer even further by forcing them into a channel when other options may again be preferable in terms of costs, experience and accessibility? It may be practical, just to get an overview, to draw the paths typical customer groups use in each phase from orientation to after sales in one diagram (see Figure 13.5; the lines indicate the customer types or groups). These diagrams can be compared to the actual routing, where it is clear a portion of customers will always deviate, but the dominant channels should be about right for each customer group. The thickness of the line may indicate the percentage of customers within the group following the path. By bringing together the customers, propositions and channels during several customer contact moments (‘touch points’) in the relationship, we must take into account that preferences are likely to change over time. It is best to gear the multichannel organisation towards dominant channels, as well as towards flexibility. Of course, designing the strategy is only part of the job. The integral multichannel strategy should be put to the test in real-life, by trying out different channel variations in tests and experiments to ensure that assumptions made in the design are correct.

267

Part V Channels

Figure 13.5 Contact processes across different channels

13.6

the business case for a multichannel strategy The fourth step that is outlined in the innovation wheel for multichannel strategy is drafting the business case (see Figure 13.1). It needs to be shown that the proposed changes are worthwhile and profitable from a financial point of view. Time and resources are always limited, so priorities must be set. Which channel choices are proving to deliver the best balance between value to the customer and value of the customer? A further ranking of options can be achieved by assessing both effort and impact. The top of the list might include the quick wins, which require little effort and show the greatest impact. They are able to enthuse and invigorate for the tougher challenges yet to come. The more structural projects showing high returns in terms of customer value and value to the organisation, the so-called ‘mustwin battles’, can be found a little bit further down. Projects with high effort and little return, the ‘uphill battles’ are placed at the bottom of the list. Obviously, the business case requires solid insight into the hard data and numbers. What are the costs of the different channels? What part is fixed and what is variable? What are the ‘cliffs’ beyond which points extra investments in capacity need to be made or infrastructures become so underutilised they start incurring extra costs. Cost-comparisons need to be made between direct mail, personal sales visits, websites, e-mail and the contact centre. Furthermore, there needs to be a good understanding of how customers behave on different channels and how channel usage varies in the relationship with the customer. It may give interesting insights to assess this per ‘initial channel’. Customers who have been acquired through expensive channels such as personal and direct sales, may stay longer and spend more, but also be more likely to keep using that channel, making them more costly to serve across the entire relationship life-cycle. Customers who ordered through the web

268

Chapter 13 Multichannel management

might be acquired cheaply, but easily lost. There is no real sense of relationship and bonding. They cost little, but are hardly profitable. With the prices of ‘search engine marketing’ and banner advertisements on high traffic websites soaring, they may actually be bleeders or loss generators. Insight into the channel activity does exist within many organisations, but they find it hard to allocate the costs of channel usage to individual customers over the entire duration of the relationship. If this insight is lacking, the focus may best be placed on a more aggregate level; the customer group, for instance. The calculation might take place for all customers having been acquired through personal sales channels. It becomes most interesting to assess how one can expand the value of the customer base (see Chapter 12). Do we need to improve retention in particular groups and is a certain channel decision likely to deliver that retention? The investment in a personal sales visit is easily warranted if it is shown that the churn rate after such a visit is significantly lower. Beware of self-fulfilling prophecies though; it’s not hard to believe the customers who defected might not have had a sales visit because of a lack of interest and a growing intention to shop elsewhere. Another question that is valid, is ‘Do we need more customers and can we get them through active recommendation behaviour from current customer groups?’ It often leads to high-quality acquisition, but the potential to get customers to recommend is channel-dependent. The potential might be limited and personal visits may be necessary. Maybe selective use for only the most promising of customer groups is possible, while the other contacts can be shifted to other channels. It is a matter of constantly matching the cost to serve to the value of customer groups against the potential to create increased revenue through either cross-selling, new customer acquisition or prolonging of the relationship. The analysis we mentioned can be done for:

13.7



customer groups;



programmes aimed at intelligent channel combinations;



performance upgrades to individual channels (such as using the contact centre for sales instead of just service); and



planned shifts towards channels other than the current ones.

Building a multichannel organisation Because they are require cross-functional coordination, multichannel organisations can encounter some quite complex issues. One could argue that this is also the case for Enterprise Resource Planning (ERP) projects that span several functional departments. However, any errors made in aligning the organisation around CRM are highly noticeable to customers; the front office is far more ‘exposed’ than the back office. Multichannel organisations require long-term investments, rather than ones that pay out immediately. They require careful planning and control. Because of this, channel innovations are in need of some form of central coordination. In order to be able to sell, deliver and service customers and build relationships with them, the product managers, channel managers’ segment or customer managers, service managers and marketing intelligence specialists need to work together. Jointly they create value and

269

Part V Channels

manage relationships with customers across channels. If there is no clear sense of direction or central coordination, the activities will most likely not be aligned and therefore at least less efficient, though most likely less effective as well. There will be scope to allow one channel manager’s or service manager’s particular interest to prevail over the total outcome. The service manager might get room to let costs and operational issues take the upper hand and not pay attention to the developments in value for top customers. Product management may be tempted to approach customer groups who are not within the segment manager’s scope for certain products, because extra sales should be achieved. Contact centres might push the tricky questions through to the second line a bit faster to increase the first line’s ‘firsttime-fix’ ratio, but at the same time the total cost to serve are increasing and customers are receiving less service, being patched through unnecessarily. One solution could be to appoint a coordinating channel manager who serves the interests of all parties involved. It might be a so-called formula-manager, responsible for the integrated way a channel-customer value proposition is helping the organisation position itself in the market. The precondition is clearly that this person has authority, legitimacy, resources and control. Lack thereof will make the formula manager feel like a human pinball and will lead to half-hearted choices, compromise between conflicting interests instead of alignment and a very mediocre outcome overall. The resources and means that can be given to the formula manager are: ●

Budgets: allocated to serve the special needs of customer groups, so that the pain of increasing service levels for one group is not felt in the budget of the channel that is concerned, but is facilitated. Budgets for product introductions, change stimulation programmes etc. might also be considered.



Quarterly or yearly planning: managing the organisation by financial goals and projects could be coordinated through the formula manager, who has the authority to approve or reject the plans.



Service level agreements: these specify the performance the formula manager expects from the channels, from the product managers and customer group managers. They specify which levels must be met for any given period and may include bonuses or penalties.

The coordination can also be allocated to one of the departments. For larger customers, it seems appropriate to let the account manager be the coordinator. For smaller segments it could be the segment manager. In product-oriented organisations the control is often placed in the hands of one general manager responsible for all products or value propositions, a chief marketing officer or commercial director. Finally, there are situations where there are several formula managers. They might be responsible for the direct banking formula, the private banking formula, the sustainable banking formula etc. One can imagine that a mechanism to coordinate the coordinators then becomes necessary, but in real life the formula managers tend to understand each other’s challenges and are quite able to manage the coordination as long as the strategic conflicts are clearly solved at a higher level. The organisation of multichannel management is not without its risks. As things stand, it is well-known how revenues are allocated and what costs are incurred. Working in a new setting might make an organisation lose sight, or their understanding, of this aspect. At the same time, their success depends on it. The risks that are most apparently affecting the leakage of value lie in employees (and their sense of direction), ICT (and the way it supports the channel integration) and organisation (control issues and suboptimal behaviour).

270

Chapter 13 Multichannel management

13.8

Performance measurement in the multichannel environment The sixth question that is asked concerning the innovation wheel (Figure 13.1) relates to how to measure performance as far as channel changes go. In a general sense, the topic of performance management is attracting a lot of attention. In the case of the multichannel strategy this may be even more so. The complexity of the matter requires careful monitoring. A sharp eye should be kept on whether a carefully crafted channel combination is delivering the desired outcome in the channel results and the overall marketing strategy (Wilson et al., 2008). It is important to measure all critical aspects of multichannel management on an operational level for segments, customer contacts and channels. In developing the performance measurement standards, the customer and the desired experience chain should be the starting point and not, as is often the case, the channels (Arikan, 2008). The objects to measure are: ●

How many people are being reached?



How are customers and prospects experiencing the ‘touch points’?



What revenue and margins are achieved at what costs?

It would be ideal if revenue could be traced back to the source. It would enable a thorough analysis of causes and effects back through the ‘funnel’ of the experience that was created. The results would be attributed not to one channel, but to the combination of channels. Winning combinations would be identified which could then be enhanced. It is also vital to determine the performance of channels at critical points of transfer, the so-called ‘ cross-over points’. Which leads are transferred successfully from web to phone? What was the conversion from the mail-campaign to online booking requests? How many are actually converted to sales? Where do we lose customers in the cross-over between channels? Obviously, managing these interrelations requires having a good overview beforehand and having planned its measurement. Tracking codes and tracers need to be included in communication with customers, in order that an organisation can ‘follow’ the customer. What was the point of entry? Which communication campaigns were responsible for a first visit? It is never something one can say with absolute certainty. As an organisation, you have but a limited view of what happens in the customer’s real life. While you believe the point of entry was the website, the real reason was a neighbour pointing out the offer. In situations where tracking and tracing cannot be achieved, we can rely on less accurate measures. A list of addresses and names of people who visited a trade show exhibition might contain the new customer’s name. Is it safe to assume this was the point of entry? We believe so, but we could also check it. There could be the measurement of a group of customers who appear on the trade show list measured against ones who don’t (see Chapter 10), from which conclusions can be drawn about whether the trade show has contributed to the sales value of these customers. Eventually the critical performance measurements that relate to how customers are communicated with (reached, touched and converted from prospect to customer to lasting relationship), will also be translated to the individual channels. These are internal indicators that allow channel managers to direct their efforts and reduce churn and costs while improving accessibility and experience scores.

271

Part V Channels

The next step is to link the measures to a reward scheme for employees. The way in which behaviour is stimulated must be made to reflect the importance of multichannel management. In order to find optimal points, there must be some insight into the costs of increasing the call duration versus the effect on revenue or experience. We must learn to understand the meaning of certain key metrics, so that we can not only read their value, but also use them to steer the organisation in the right direction. It’s like the RPM meter on the dashboard of a car: you can read the information on it, but if you are not able to make sense of it in terms of knowing what it tells you about shifting gear, the chances are the engine will get damaged. In a practical situation, let’s suppose a breakdown company decides to make speed their most critical performance indicator. It must be possible to assess the consequences of that choice. For instance, the mechanics will be saving time at the roadside by deciding to tow the car rather than fix it on the spot. Although this allows them to attend another incident more quickly, overall the customer experience is not enhanced and satisfaction will suffer. The customer’s need is to continue their journey and, if at all possible, by using their own vehicle. The goal of all reward schemes should be to prevent unhealthy competition between channels at all costs. Measures that reward cooperation are required. The contact centre should not be tempted to try and close the deal themselves if there are better chances of doing so through the personal sales channels. Likewise, it is not a good idea to reward sales only for visits or the number of orders written. It leads to visits being made that could have been handled with a phone call and orders being written that sometimes lead to costs in fulfilment, because the agreements that were made cannot be met.

13.9

stimulating customers to use the channel mix How do we stimulate customers to use the channel mix in the way we ‘designed’ it? It’s the final key question to answer (see Figure 13.1). The success of the multichannel strategy derives from actual customer behaviour. Is the desired customer experience being created at the expected costs and are we able to manage the accessibility of the organisation through all its channels? An organisation aiming to change the way it interfaces and communicates with customers should ideally start thinking about advantage and perceived value, before thinking about rules and control. It searches for the benefits for the customers and tries to seduce, then persuade and maybe finally direct customers to other channels. There are means to do so. The more attractive ones combine ease of use with a small bonus. The first banks wanting to introduce mobile banking worked with mobile telephone operators to create great promotional offerings, thus introducing customers to the possibilities in a positive way. It’s a better option than suppressing other channels or increasing fees for channel usage. These may be good dissuaders to use channels, but ultimately they are more about strong-arming a customer into making a channel change. If there is no benefit on the other side, if the customer is not led to greener pastures, so to speak, the change will most likely be short-lived and not likely to enhance the experience. Forcing channel changes might seem like an effective strategy. The costs of old channels can be reduced by increasing fees. Many a contact centre has seen a shift from a toll-free number to a paid number, in order to persuade customers to use the website more often. In many cases, the customers calling the paid number were welcomed with a message stating

272

Chapter 13 Multichannel management

that ‘everything they wanted to know, find out or do, was also available online through www.do-it-all-by-yourself.com’. For the most part, this is annoying for people who have made a conscious channel choice and even more so because the message is now being delivered in the time a customer is paying for. The option of completely closing off a channel is very direct, but the organisation must be prepared to lose contact with a number of its customers, who will prefer not to have contact rather than switch channels. Furthermore, it may lose customers to competitors who are willing to serve the customer through their channel of choice.

13.10

Conclusion The biggest challenges in CRM might be the channels. There are many forces working together to create change within an organisation. Technology is progressing, consumers are quicker to adopt than ever before, even leading businesses in the process. Mass communication channels are both losing impact and volume. They are less effective and less efficient and are giving way to below-the-line media. The area of digital communications is very lively, with the internet and social media taking a greater share of advertising spending every year, but progress made in multichannel management remains limited. The range of channels used to communicate with customers is not expanding and channel integration leaves something to be desired, that much customers and businesses will agree on. To make the change happen, the multichannel question must be placed within the right strategic context. It should be about finding the right combination of channels during different stages of the relationship with different customers. Asking the right key questions is a first step to solving the puzzle. Is the current combination of channels ideal from the point of view of costs, experience and accessibility? Is it delivering the desired financial performance? What changes are desirable and how can these changes be implemented across touch points? What degree of differentiation is required and is it controllable? Is the business case positive? Are results measured appropriately? The final question is maybe the toughest one of all: how do we get customers to use a new and improved multichannel infrastructure? If all is well, the design principle of ‘don’t force, but seduce’ has been used, but even then behaviour is unlikely to change overnight, whereas a channel infrastructure will be geared towards a certain level of load balancing between channels. A new balance will need to be found every time, or an organisation faces the risk of losing business opportunities, creating excessive costs or even worse, losing customers.

Case stuDY KPn business portal KPN, a Dutch telecom provider, had introduced a first draft of a business portal for small and medium-sized enterprises (SMEs). ‘We always put so much energy into our products and pricing, but it was hard for customers to really get in touch with us. With the portal we tried to address this issue and give the customer control over the relationship.’

➨ 273

Part V Channels

Case study (continued) Theo de Vries is the director of transaction sales at KPN sales. About a year and a half ago he decide to move forward on the idea of a business portal to allow for more direct customer contact. ‘We served the market in a traditional way. Our account managers were making visits to our customers’ offices and we communicated by telephone and e-mail or post. But our counterparts on the customer side were increasingly young people, used to Skype, MSN and e-commerce. They did not want an account manager to come by on appointment, they wanted to be in touch whenever it suited them.’ This gave KPN reason enough to invest in a business portal. Prior to its development, KPN visited companies such as Wehkamp (an online retailer and former mail order company), Dell (an online computer retailer), and SNS Direct (a bank with a predominantly online proposition). The lessons learned were ‘that the presales and aftersales process are highly suited for automation, but the sales process itself, the actual transaction, is quite personal. Customers want to see the salesman, but not necessarily face-to-face.’

Direct sales The targets for the project were determined. As is appropriate for a sales organisation, the main target was increased revenue, but satisfaction was also part of the performance goals. The management Top 100 is on the table in Theo’s office. KPN is doing ‘quite well’; almost all its customers seem satisfied but nobody is really excited about the way they are being served. KPN is number 19 on the list of 100 best-scoring companies. The third goal they were aiming at was efficiency. De Vries: ‘In contrast with other ICT companies we approach the market directly. With 1,100 sales employees we aim to serve 35,000 customers. In 2001, we had some 4,500 employees in sales-related functions. We have redefined the scope of our activities and achieved higher sales efficiency. We do not want to achieve that efficiency at the expense of personal contact, so we decided to further automate standard tasks and partly allow customers to perform them themselves. Think of something such as managing personal account information. That is something customers can do quite well. When they move offices, they can register that directly into our systems.’ From a technology point of view it was an ‘no-brainer’ for KPN that Unified Communications would be their main platform in customer communications. Unified Communications is a service that KPN sells to customers, so it’s really about taking your own medicine. It works in a Skype-like way, but more advanced. You can see the people from your network who are online and their status (available, busy, not present). It is possible to contact people in different ways, via chat, telephone, video-calling or videoconferencing. You can also look at documents together, surf to websites that you can co-browse and demonstrate.

Questions 1 In what areas did KPN achieve the improvement of costs, accessibility, customer experiences and financial performance? 2 In whose hands do you believe the directorship, the coordination, of multichannels for the SME market is placed? 3 KPN also uses indirect channels to sell its products and services to the SME market. What complications do you foresee in multichannel management? 4 How can the productivity of the sales people be increased even further in your opinion? Source: Hulsebos (2008).

274

Chapter 13 Multichannel management

Questions 1 Many companies develop channels in isolation. They set them apart from all other channels. The internet is very often a separate department. What might be the reasons that companies do this? Name at least four and give reasons. 2 What might be the reasons organisations are very careful to adjust their multichannel environment? Name at least three and explain them. 3 When determining the current multichannel strategy, one can anticipate future requirements by looking at lead users or younger customers. Take a random organisation that you know and look at how it should adapt its channel mix to reflect the behaviour and customer experience requirements of young people. 4 The challenge in many multichannel innovation programmes is to combine goals that appear to conflict. Lowering costs while improving accessibility and increasing the customer experience. Think of four examples or ways to achieve this. Briefly explain each. 5 Explain what is meant by the ‘click, call, face’ model. 6 What makes it difficult to organise the efficient and effective use of channels to combine a seamless customer experience, accessibility and good financial performance? 7 What channel conflicts can you think of between telephone, the internet and the direct sales channel? 8 What performance indicators would you use in a multichannel environment where the contact centre is responsible for lead generation, sales and customer service, where the internet supports all phases of the customer buying cycle and the sales function is used purely to generate leads and ‘close the deal’ (and not for relationship building or after sales activities)? What problems do you see occurring? 9 Stimulating customers to use desired channels is a part of what we call the navigation issue. It is a matter that requires optimisation and is actually referred to as a pinball-machine. The customer is the ball and the goal is to score as many points as possible. How do you evaluate this analogy and what are the benefits and drawbacks of viewing it this way? 10 In what way does a mail-order house attempt to generate new business through the utilisation of multichannels? Conduct a small-scale study and describe and evaluate which new IT-supported channels a certain mail order firm has chosen to develop over the past five to ten years.

references Arikan, A. (2008) Multichannel marketing, metrics and methods for on and offline success, Indianapolis, IN: Wiley. Biswas, D. (2004) Economics of information in the web economy, towards a new theory?, Journal of Business Research, 57, 724–33. Boshoff, C. (1997) An experimental study of service recovery options, International Journal of Service Industry Management, 8, 2, 110–30. Boswijk, A., Peelen, E. and Olthof, S. (2011) Economy of Experiences, Bilthoven: European Centre for the Experience Economy.

275

Part V Channels Fellinger, S. (2008) Fellingers Favorieten, Tijdschrift voor Marketing, November, 42, 11, 8. Godin, S. (1998) Permission Marketing, New York: The Free Press. Harris, L.C., Goode, M.M.H. (2004) The four levels of loyalty and the pivotal role of trust: a study of online service dynamics, Journal of Retailing, 80, 139–58. Hulsebos, M. (2008) KPN’s nieuwe manier van klantcommunicatie: de klant heeft de regie, Tijdschrift voor Marketing, 42, 1, 34–6. Kahneman, D. (2011) Thinking Fast and Slow, New York: Farrar, Straus and Giroux. Klootwijk Emis, J. and Maatje, E. (2001) Channel Preferences in Europe, Woerden: Berens Business Press. Peelen, E., Swaluw, A. van der, Hutten, W., Slisser, F. and Vries, E. de (2000) Multichannels, de inpassing van ICT ondersteunde kanalen in het contactproces met consumenten, The Hague: KPN Telecommerce. Plasmeijer, P. (1999) Zoekgedrag op internet, PhD dissertation, Erasmus University, Rotterdam. Schijns, J. (2008) Multichannelonderzoek: mobile marketing gaat nu echt doorbreken, Tijdschrift voor Marketing, November, 42, 11, 62–4. Verhoef, P., Doffer, A., Wilde, E. de, Vollering, M. and Togt, C van der (2002) De multichannelende consument, Rotterdam: Erasmus Universiteit,, Leusden: Marketresponse and VODW Marketing. Wilson, H., Street, R. and Bruce, L. (2008) The Multichannel challenge: Integrating experiences for profit, Amsterdam: Butterworth-Heinemann/Elsevier.

276

Chapter

14

Personal selling This chapter focuses on personal selling as a channel. In Section 14.1 we discuss the type of sales and the basis for selling. There are three generic types of sales process we distinguish here: transactional selling, consultative selling and strategic selling. In the broader context of the channel environment, we address the role of personal sales and the sales agent in each of these types. Section 14.2 addresses the types of customers and customer needs an organisation wants to service with personal sales. The sales organisation and infrastructure are discussed in terms of the type of customers they serve. In Section 14.3 we highlight sales processes for different purchasing situations and in Section 14.4 we examine the subject of measurement and management. Section 14.5 discusses the role of support technology. In this chapter we will address the following: ●

The sales concept: the creation of value rather than the communication of value



Three purchasing situations and three distinctly different sales situations to create added value



The sales process, the sales system and the management thereof



Sales information systems

Practitioner’s insight In the past, if you had asked a CEO about the top priorities for a sales force, he’d have cited topics such as training, rewards and sales force automation. Currently, the role and function of the sales force itself would be top priorities. The very deployment of sales people in the field is subject to debate as other ways to ‘close the deal’ emerge. Call centre agents, including internal sales clerks, are becoming more commercial and are engaging in direct outbound and inbound sales. E-commerce activities are expanding and in business-to-business markets the integration of logistical and ordering systems are enabling automated purchasing. However, the critical evaluation of the role of the sales agent in the sales process can also be customer-triggered. Are they experiencing the value of sales visits, or do they consider it a burden and an interruption of their work? Purchasing is professionalising itself as a strategic discipline and streamlining the processes also means re-evaluating the time allocated to different suppliers. Tolerance for sales agents who are just out to communicate the value of the offering is declining. They are looking for sales agents who create value, bringing

277



Part V Channels

Practitioner’s insight (continued) mutually beneficial ideas to the table. There must be a willingness to listen rather than talk and to provide solutions rather than a fixed offering. The relationship itself, ‘knowing each other’, is no longer enough to close the deal. The role of personal sales in consumer markets is far more limited, but is also facing some of the same changes. Consumers are well-informed and more outspoken than before. The sales agent can no longer just present the offering, because the generic information will be familiar to the customer and therefore of no additional value. Sales agents who are driven by the margin on their products and the commission they receive will quickly be caught out. If the sales agent fails to add any additional value whatsoever, customers’ preference quickly shifts towards self-service. Door-to-door sales practices, an ancient relic from the times of travelling salesmen, are tolerated less and less; they feel intrusive and are regarded with distrust. We will not even consider door-to-door as a channel for customer relationship management in this chapter. It is a hard-sales tactic from the past.

14.1

the role and function of personal sales The value that personal sales have to the customer will differ from one purchasing situation to the other (Bunn, 1993). Very often we refer to Kraljic’s (1983) categorisation, which determines purchasing situations by two variables: 1 the importance of the supplier and its products; and 2 the availability of alternatives. If the product or the supplier is important and there are not many substitutes available, the customer will be more likely to engage in a mutual relationship (see top right-hand corner of Figure 14.1). The purchasing partner will strive to achieve partnership and secure supply. The sales agent can provide great added value. If, on the other hand, the product is very important,

High

Strategic sales

Consultative sales

Strategic/financial importance supplier

Leverage

Partner

Transactional sales Standard

Control risk

Low Low

Risk availability

Figure 14.1 Purchasing situations and sales approach Source: DeVincentis and Rackham (1998).

278

High

Chapter 14 Personal selling

in terms of purchasing volume or value, but there are many alternatives available, the purchaser will try to create leverage and not spend all his money in one place. Sales agents will try and differentiate their offering and escape the commodity trap. Price cannot be the only differentiator. If the sales agent is unsuccessful, the purchaser will opt for ease of ordering and lowest transaction costs as long as quality is perceived to be equal. In the situation where a product is not especially important in terms of volume or value, but scarce because there is only one supplier, the customer may be dependent on the supplier to give advice. The bottom left-hand corner of Figure 14.1 depicts a situation in which sales agents find it extremely hard to demonstrate added value: their product is an unimportant commodity that can be purchased anywhere, anytime, thus there is no incentive for the customer to pursue any type of relationship. The best form of loyalty in these cases is inertia loyalty, which leads the customer to repeat purchases out of habit. The sales agent can be an order writer, deploying hard sales techniques focused on bringing in order volumes. No true buyer–seller relationship develops. Ultimately, we distinguish between three types of sales approaches that match the purchasing situations described above. We can subdivide them into two categories: transactional sales and complex sales (see Figure 14.1; also see Marshall et al., 2002).

transactional sales ●

Transactional sales. The customer attaches value only to the product or service purchased; extras are not required. The customer is aware of what is purchased and how it should be used. Their only interest is in getting a good price for the goods or service purchased. The sales process itself may create value by focusing on safety, efficiency and ease of ordering.

the ‘complex sale’ ●

Consultative sales. There is more than just the bare product and service that matter in this purchasing situation. The customer may be in doubt as to which product or service to buy or how to use it once it has been bought. There is a need for ‘selection or application assistance’ or in other words ‘consulting’. The sales process adds value by identifying customer requirements correctly and proposing a solution, whether out of a fixed product or service range or made to order. The sales agent may surprise the customer with insights and solutions that show genuine involvement and ingenuity. The sales agent may be relevant even in the after sales phase by pointing out application tips and maybe reconfiguring the solution following new insights. Consulting skills take the upper hand over product knowledge and transactional skills.



Strategic sales. These are seen mainly in business-to-business markets. The customer is not just interested in the product or the product selection and adoption, but also in the skills or competencies of the organisation. The goal of the customer is to use the supplier to lift their organisation to a higher level. The supplier could perform tasks that are essential to the business model of its customer or deliver resources that are critical to business continuity. In any case the supplier is used to achieve higher organisational performance levels and is considered a partner that should be involved in many aspects of the business, not just purchasing.

The role of the sales agent is different for the three types of sales approach (see Marshall, et al., 2002; Rackham and DeVincentis, 1998). In transactional sales, the role appears to be limited. Customers can be quoted saying ‘Never mind the sales talk, just give me a proper quote.’ It is perfectly feasible to substitute personal sales with other channels. If sales agents are to provide value, they need a capacity to ‘close the deal’, based on product knowledge

279

Part V Channels

and sales skills. Their success depends a great deal on their ability to ‘gain access’, often using tactics that equate to the traditional ‘foot in the door’. The customer is the prey and the sales agent a hunter. They are opponents, the customer has the power and there is no equal relationship. Buyer considerations relate predominantly to the product itself, the conditions (subject of negotiations) and ease of ordering. In consultative selling, personal sales are more important and other skills come into play. Customer knowledge, both in terms of knowledge of the needs and wants as well as usage criteria, becomes essential in the sales process. The consulting itself becomes valuable, sometimes even more so than the product or service that is sold. The sales agent becomes the purchaser’s partner, helping him to buy, rather than selling the appropriate product or service. In strategic sales, the role of the sales agent becomes less important and comes second to the strategic relationship the buyer and supplier have forged. It is not about the purchasing and sales relationship, but about a strategic collaboration that cannot exist without top management commitment to the partnership. Neither a single sales professional nor an entire sales team can unite and integrate two organisations. The responsibilities will span other departments, such as Finance, IT, Logistics etc., over which sales has little or no control. Favour is an important aspect of sales processes according to sales agents (DeVincentis and Rackham, 1998). Everybody knows the sales agent’s opinion that a customer must view the sales agent favourably: they must want to buy from you. Customers also indicate that they hardly ever buy from a person they do not like. However, the opposite does not necessarily have to be true. Customers hardly ever sign a contract with a sales agent that they like, without ultimately achieving value through the deal themselves. A positive relationship does not make up for shortcomings in the price or the value proposition. It seems to be a necessary precondition for business, but not sufficient as a sales argument. In transactional sales situations, the relationship may not make all that much difference. It is different in consultative sales. The success is defined by being able to uncover hidden needs or requirements and tailoring the offering to the customer. A good relationship opens doors that would otherwise remain shut, but the transaction is still dependent upon the value delivered in the consulting phase, not by relationship quality alone. The situation gets more complex in strategic sales, because the relationship is likely to involve many actors, not just the individual sales agent. The matter of ‘favour’ is less important because the partnership is forged and choice is often not an issue in the transactional process (buying and selling) but is a factor in collaboration and realising mutual benefits in the partnership. The role of trust also differs across the three situations (DeVincentis and Rackham, 1998). In a transactional setting, trust plays a marginal role, since the degree of risk is limited. The product can be purchased elsewhere quite easily and the costs incurred by faulty sales processes seem low. In consultative sales processes, there needs to be a degree of trust for the buyer to share insights into requirements and usage with the sales agent. There must be a willingness to share and describe issues. In much the same manner, the sales agent must be willing to not only stress product or service benefits, but also disclose drawbacks, show vulnerability and highlight risks. In strategic sales, trust is the foundation for the partnership, but it is much more trust on an institutional level than on a personal level. The role of the sales agent becomes less crucial, as the relationship is not one-on-one. It is quite typical that most organisations deal with more than one type of sales situation. Even one customer may present a combination of questions, some very transactional, others more consultative or strategic. In this case, the best solution is to approach each sales situation appropriately and not adopt what DeVincentis and Rackham term ‘a middle of the road’ solution

280

Chapter 14 Personal selling

Consultative

No-man’s-land

Transactional Enterprise

Most salesforces are in no-man’s-land Too expensive to succeed transactionally Too lacking in resources and skills to succeed consultatively Too misaligned and understaffed to succeed in enterprise relationships

Figure 14.2 Three sales approaches and the requirements placed on the sales organisation Source: DeVincentis and Rackham (1998).

that nobody has asked for. It would make the sales organisation too expensive for transactional sales and most likely lack the true skills for consultative sales. The strategic sales situation would lack important connections with other people higher in the organisation or in other departments, both within the customer’s organisation as well as in the supplier’s organisation.

14.2

customer selection and customer value The ‘engineering of the sales force’ is a matter very closely related to the (desired) build-up of the customer base. Which customers is the organisation striving to serve and how many thereof? Who are strategic customers? When do customers qualify for a strategic or consultative sales approach? Answering these questions should clarify the investments that an organisation wishes to make in prospects and customers on different levels of the customer pyramid, as we discussed earlier (see Chapters 2 and 12). The bottom of the value pyramid contains customers who should be catered to efficiently and in whom the organisation will not invest heavily. Transactional profits are to be realised and service costs should be contained. The top of the pyramid contains customers who might qualify for consultative sales. They are worth time and effort, given their value to the organisation. The strategic sales approach should be warranted not just from the perspective of the customer, but also from the financial perspective of the organisation and its strategic direction. The number of strategic relationships will always be limited, given the amount of time and effort that are invested in them. For it to be mutually profitable there needs to be an equal interest in helping each other progress and an equal allocation of resources from different departments of both the customer and supplier organisations. The subject of ‘labelling’ customers is interesting in sales. There is a general tendency to use current revenue generation as the basis for working out customer strategy. This is unsurprising, since most sales organisations reward their agents based on current revenues. Revenue is, however, a poor reflection of the purchasing situation and the ability of the sales agent to truly add value in the sales process. When there is a true ‘leverage’ situation, where the customer is using the supplier to keep other suppliers on their toes, it might be wrong to consider the relationship ‘strategic’. The customer will not allocate resources to the relationship and will not go beyond a consultative or even transactional relationship. That relationship may generate high volumes,

281

Part V Channels

but allocating more personal sales time and effort to it does nothing except make the relationship less profitable. Ultimately, strategic relationships are not determined by quantity, but by the quality of the relationship. Not by revenue, but by margin. Not by volume, but by added value. In sales there is always a need to allocate customers to different sales agents or sales teams (Zoltners and Lorimer, 2000). It is always a precarious topic that requires careful consideration by sales managers. It has a direct impact on the sales bonuses and the status of sales agents. At the same time, sales agents need to be deployed in areas that fit their skills and match the requirements of the organisation. A sales agent who excels in transactional sales would probably underperform in situations where a consultative sales approach is required. A cautious approach towards alterations in the allocation of accounts to sales agents or teams is always required, because they lead to discussions that may even go on to frustrate the buyer– supplier relationship. It is not unheard of for sales agents to play on customer ownership with the ultimate threat of moving to the competition and ‘taking customers with them’. Chances of that occurring are far higher in transactional sales and consultative sales situations than in strategic sales teams, where the sales agent will only be one member of the account team. Many an allocation is still based on geographical location of customers and type of product or customer segment. The geographical division is mostly appropriate in transactional sales situations, where agents need not specialise in certain types of products or customers. The focus is on efficient sales visiting and maintaining ‘sales pressure’ in an area. The minimisation of the distance between sales visits and the regional commitment of a sales agent can make the personal contact less expensive. Many organisations struggle these days because, especially in transactional sales, the personal visit is substituted by the use of other channels. This means fewer accounts in any given area are visited and the distances between visits increase, while ‘sales pressure’ drops. In more complex purchasing situations it is best to allocate sales agents who are aware of the specific needs and challenges of customers. Allocations by sector or by product/service type are more frequent and more appropriate. Combinations of both types of allocation (geographic and sector/product) are not uncommon.

14.3

the sales process Until recently, sales success was considered to depend solely on the sales agent. In some organisations, this is still the case. To a certain extent, sales is a profession that can be learned. However, the ability to sell, like entrepreneurship, was also seen as ‘part of a person’s DNA’ – either you had it or you did not. As a result, organisations were very dependent on their top sales agents. They became the ‘prima donnas’, the ‘top dogs’. They were traditionally hard to manage and control. Their processes were vague; their methods were ‘tricks of the trade’ – well-kept secrets shared only with their protégées. It was not uncommon in this situation to see top sales people leave to join the competitor and take the majority of ‘their’ customers with them, because the relationship with the sales agent was stronger than that with the organisation. Inevitably, this created an urge to increase the control and manageability of the sales force. The magic ‘black box’ of sales had to be opened. This led to a clear definition of sales processes, outlining the steps in the process of turning cold prospects into warm customer relationships. Lead generation, transactions, after sales activities and relationship building became scripted processes. This increased transparency is increasing control and allowing sales managers to direct their sales force better. The reliability of sales forecasts is improving as sales funnels are becoming clearer. The

282

Chapter 14 Personal selling

success of top sales people can be analysed and others can learn from best practices. These are ample justifications for the increased popularity of ‘sales process management’ (Belz and Bussmann, 2002), which is the key topic of this section. Research into the success factors explaining the results achieved by top sales agents confirm the importance of ‘sales process management’. The most successful sales agents are best characterised as capable process managers (Belz and Bussmann, 2002). They allocate their resources and time across several processes, making sure that: ●

not only is the ‘pipeline’ or sales funnel filled with enough leads and prospects, but it is also of sufficient quality to reach future sales targets;



sufficient time is being allocated to lead follow-up and deal-closing. They don’t just sow, they harvest as well!



furthermore, sales processes offer meaningful decision moments to increase the value creation in sales for both customers and organisations. A precondition is that the sales process matches the customers’ buying process. This seems somewhat self-evident, but not in business practice (Weele, 2002). When both processes are not synchronised and ‘mirrored’, it is highly likely that a product-push approach rather than a customeroriented approach will result. This in turn increases the likelihood that: – time and resources are allocated to leads that offer insufficient prospects of a successful transaction or relationship; – insufficient or incorrect insights are being gained into the customers’ demands; – a proposition is formulated that fails to meet customer requirements; – costly and time-consuming repairs have to be made in the sales process; – the sales process is terminated prematurely or finalised in a less than optimal manner for both customers and suppliers.

We have referred to the sales process several times now as a funnel or pipeline. This is often the way it is depicted by sales process management. The broad entrance to the funnel or pipeline shows leads and prospects that are being ‘fed into sales processes’. The much narrower exit shows transactions that have been realised. Conversion rates indicate the transition of relationships from one phase in the sales process to another. The challenge in sales process management is to increase the conversion rates to an optimal point, where the conversion time is just right and the right leads are successfully being guided through the funnel to the point of transaction. It is an optimisation, not a maximisation issue. The results must be compared to the effort expended and the investments made. Sales should be careful with the progression of leads to prospects and forcing transactions: there isn’t an infinite supply of leads and sometimes it is better to terminate a sales process than to force matters, thus keeping open the option for future revival of the relationship. The sales funnel can be constructed for several planning cycles. Sales and contribution prognoses can be made and compared to sales targets to identify issues. If sales are not keeping up with targets, an analysis can be made as to which part of the funnel should be improved upon to achieve which effect. Is the sales professional not getting enough leads to visit? Is the attention paid to ‘deal-closing’ too high, thus reducing the inflow of new leads and prospects? Should extra attention be paid to ‘harvesting’ and should ‘quick decision bonuses’ be used to speed up conversion? Should the sales agent be induced to ask for the order more quickly? Obviously, the sales process is different for the three types of sales approaches described earlier. Table 14.1 describes how the sales process can add value in each of the situations.

283

Part V Channels

crM illustration seven characteristics of a good sales process 1 It reflects the buying process of the customer 2 It is auto-correcting and self-learning

5 It contributes to increased performance of the average sales agent

3 It creates customer value in the process

6 It is saleable

4 It leads to efficiency improvements and optimal allocation of resources

7 It measures and establishes milestones objectively. Source: DeVincentis and Rackham (1998).

They are different processes by nature, each offering their own risks and complexity that have to be managed specifically. In a transactional setting we can see the possibilities to add value are marginal. It is appropriate to consider the replacement of personal sales in the sales process by ‘impersonal’ channels, such as the internet or telephone. These offer some degree of personalisation, without incurring all the costs of face-to-face contact. By offering self-service options, costs can be decreased and convenience increased. The success of the sales process is mostly determined by the capability of the sales agent to ‘open the door’. The sales process itself will be more standardised, straightforward and span a short period of time. It seems hard to imagine situations in which a process-based approach towards sales is not profitable (DeVincentis and Rackham, 1998). However, the deployment of a process-based approach in consultative sales is more difficult. The reason for this is still very much subject of debate. The fact that it requires tailoring to a customer’s needs is not an insurmountable barrier. A standard process of problem recognition to solution construction and implementation can be followed, even if the contents of each step require tailored customer responses. Arguments that table 14.1 Creation of added value in sales processes Sales process Purchasing process

Transactional

Consultative

Strategic

Need recognition

Needs are defined; little possibility to add value

Supplier can influence the strategic agenda

Evaluate options

Alternatives are understood; few possibilities to add value

Solution composition

Little consideration; few possibilities to add value

Purchasing

Sales agent can make the purchase easy and efficient, optimise conditions and reduce barriers Customer knows the product; few possibilities to add value

Sales agent can add value in the early stages of the sales process by defining appropriate solutions that meet customer requirements Sales agent can design and provide tailored solutions and inform customers about possibilities in markets Sales agent can provide buyer with advice and alleviate worries Sales agent can check up on purchasing configuration and maybe consult on matching products Sales agent can consult on usage issues and solve problems

Implementation

Sources: DeVincentis and Rackham (1998); Min (2005).

284

Supplier can provide insight into potential gains and shortcomings Supplier can contribute resources to explore the pros and cons of an intensive relationship Supplier can determine conditions, targets and governance of the ‘joint activities’ as an equal partner Supplier can invest resources to solve issues in the short term

Chapter 14 Personal selling

bonus and reward schemes are leading to a lack of true consulting may be hindering the sales performance itself, but do not explain the difficulties encountered in adopting a process-based approach. Another explanation that is being brought to the table, which is the fact that consultative sales require multidisciplinary involvement, is also not sufficient and ultimately also untrue. There is no need for cross-functional involvement as consultative selling requires the sales agent to provide value during customer interaction and it is the customer–sales agent interface that is most dominant in determining success. The relationship with marketing, customer service representatives and product specialists is less important to the added value experienced. The problem is much rather the fact that current process descriptions are not offering any clear boundary for the sales process and setting milestones that are to be achieved (DeVincentis and Rackham, 1998). The consultative sales cycle may take months or even years, during which time the organisation has little or no idea what is really going on and what progress is being made. The process remains a black box, because phases are not clearly limited to certain timeframes or activities and milestones are not made ‘SMART’. The challenge is to develop the processes on an individual basis, with the aim being to break the process down into clear phases that together make up a constructive consultative process. At the end of each phase, a clear objective must be reached. The process can be synchronised with the customer’s buying or decision-making process. Every step of the sales process should also provide clear added value to the customer. The first step may be the creation of a team of individuals that will determine basic customer requirements. The second step could be a technical test of a product that the prospect will allow to take place and maybe even facilitate. The commitment from the prospect is clear and a positive test result will move the process to the next phase. Any doubt can be removed and the third phase may involve a detailed quote and contract signing. The fourth phase would be the implementation stage. Each phase is an event that takes place because the prospect has agreed to it and sees added value in it. The prospect is allowing the sales agent or sales team to come one step closer. In the case of strategic sales, it’s not the sales team, but the organisations becoming closer. The boundaries and distinction between functions, hierarchical levels and organisations will fade and are ultimately removed (see Goedkoop, 2004). The goal is to have one organisation’s resources deployed to create the required leverage for the other organisation’s success. It is not about the relationship between two organisations, but about direct relationships between different functions of two organisations. The walls between the buyer and supplier processes are broken down and will slowly disappear. This leads to efficiency gains, as well as boosting effectiveness as strategic goals become more aligned.

14.4

Managing the sales process the sales process and performance measures There are few processes within an organisation that have the same success rate as the sales processes (DeVincentis and Rackham, 1998). It would be unimaginable to see the production processes only reach a success rate of about 10 per cent in terms of good product output. In sales, that percentage is not uncommon, in fact it is very real possibility, leading to all the expenses and costs of failed order closing being charged back to the 10 per cent successful sales. Improving the conversion rates and lowering the costs of sales are hence an attractive prospect for sales managers. Figure 14.4 highlights an example of a typical sales funnel.

285

Part V Channels

Organisation

Consultative selling

Function A Function B

Accountmanager

Buyer

Purchasing manager

Function A Function B

Function A

Strategic selling

Function B

Function C

Figure 14.3 Strategic sales

The analysis of the sales funnel may shed more light on the situation at hand (Belz and Bussmann, 2002). Figure 14.4 shows a transactional setting. Important performance measurements are: ●

sales time: how much sales time agents are taking to complete a transaction; the time spent on suspects, leads and prospects who do not buy will have to be allocated to the customers who do buy.



cycle time: time that passes by from first contact with the suspect to the final contract phase.



conversion: in the example given there is a need for 30 leads in order to close a single deal. It is interesting to see what part of the funnel is especially showing ‘leakage’ and what the causes might be. It is not always clear cut that it is that one phase. Sometimes the root cause lies in overenthusiastic prospecting, resulting in low quality leads that cannot be converted successfully.



percentage of perfect orders: orders fulfilled completely and on time. This measures whether or not the sales agents are selling what the organisation can deliver.

In operationalising these measurements, we must be careful to ensure that they reflect what the customer wants and expects. It is pointless measuring fulfilment according to factory delivery targets if the customer has not asked for this target time nor considers it desirable. Another measurement would be the resources allocated to the sales system as a whole. Every investment in the sales system, especially in the transactional situation, will need to

286

Chapter 14 Personal selling

Alaska on market segments: Creating value Total Cost of Ownership

Telemarketing Lead info enrichment

Marketing database 225.000 -KvK -Comp profile -Comp database

Tool/letter/etc.

Profiling by marketing

Script

Marketing pull activities

Marketing supplies leads: Suspect

Telemarketing call

30 Lead

1/5

Quotation generator

Training

Tool

1st visit

2nd visit, if desired

1/2

Quotation

6

3

Prospect

Hot Prospect

Order

1/3

1

Sales Lead Time 10 weeks

Figure 14.4 A sales funnel

lead to increased ease of ordering (convenience) for customers or improvements in sales efficiency, lowering sales costs per order. Consultative sales involves other performance measures and costs are less of an issue, since there is added value in the process itself. The risks of underinvesting need to be managed; the company must allocate the right amount of attention to the prospect, in order to progress in the sales process. Sales should no longer be regarded as a cost factor, and be directed not only by the value extracted from the customer, but also by value provided to the customer. The measures used should reflect the appropriate need identification, quality of solutions provided, the negotiation of contracts and the implementation of solutions. In situations where a team of salespeople works together to consult customers, the individual sales targets should be substituted by team targets to prevent sub-optimisation. Using customer satisfaction as a measurement for success is flawed in this situation. It measures perceived value, not the value actually delivered. When considering harder metrics, such as concrete costs savings on the customer’s end, the reduction of total costs of ownership, or maybe even the increased business success on the revenue side, we are looking for measures that show tangible added value creation. In strategic sales, the measurements should make sure the resource allocation and investments made by both strategic partners are in balance. They also need to be in balance with their respective returns on the partnership. The short- and long-term benefits of the partnership need to be taken into account. It is recommended that evaluation milestones in the strategic sales process be set, where assessments of the division of risks, costs and revenues can be addressed.

instruments to improve sales performance In general we consider the following instruments to be available to sales managers in order to improve conversion in the sales funnel (DeVincentis and Rackham, 1998): ●

planning;



training and support (e.g. Figure 14.4 tools and scripts);



rewards system.

287

Part V Channels

A planning issue will arise if the sales agent has not taken care to the best of their ability to balance the quantity and quality of potential customers along the different phases of the sales process. If the sales agent has sown more than they can reap, for instance, leading to a large number of suspects and prospects who cannot be given the appropriate attention or follow-up. The consequence is that the sales cycle becomes longer and drop-out rates increase. Another sales agent, hard pressed for results this quarter, is spending all their time closing deals with hot prospects and depleting that category, not promoting any suspects to leads and leads to prospects. The next quarter, the sales will drop as the funnel ‘dries up’. Good planning also takes into account the quality, not just the quantity of sales contacts. The division of potential customers over segments should be monitored, so that the sales agents focus not just on the transactional customers, with whom they can quickly close the deal and to whom they can sell easily, but also on more complex sales, where sales cycles are longer and more demanding. The conversion and cycle time can be improved by training and providing sales support with instruments such as product presentations, scripts for call centres, templates for drafting proposals, expert systems to help in consulting etc. In transactional sales, the training efforts can be limited and support comes mainly from systems that help promote efficiency and automate a great deal of planning and scheduling. In complex sales, the investments in the knowledge and competencies of the sales agent need to be high. It is about building consulting skills as well as the ability to draft account plans, building cross-functional relationships and promoting strategic thinking. Since training-based knowledge and skills are unlikely to directly translate into new work-floor behaviour, coaching and assistance on the job are required. It is possible to support sales by removing certain types of activities that can be performed by others. Is lead generation really the responsibility of the sales department, or should marketing be held accountable and made responsible for that? In the latter case, it is recommended that clear agreements on the quality and quantity of leads to be generated be established. The advantage being that sales has more time available for ‘real sales’ instead of having to look for contacts. The third instrument is the rewards system. It can improve conversion and cycle time by offering appropriate incentives to sales agents. Sales people tend to be very target-oriented and are highly motivated by incentives and bonuses. None the less, the influence the rewards system has is overrated (Capon, 2001; DeVincentis and Rackham, 1998; Nuhaan and Dunnen, 2000). The reality is that by adjusting the rewards system, organisations can encourage sales people to work harder. The evidence that this leads to ‘smarter sales’ is very scarce. It is hard to change a routine, something that has become part of ‘a way of working’ using incentive systems. A more comprehensive change programme is required to achieve the desired changes to the sales process and achieve better value creation, shorter cycle times, higher conversion rations and better planning of sales processes. It must become clear which segments are of strategic importance and what sales approach is required to match those customers’ buying approach and reach the organisation’s financial goals. A shift from transactional to consultative selling will not happen by changing the rewards system in and by itself. The skill set of the sales people will need to be assessed and the allocation of sales people and teams will have to be reassessed. Training and support are crucial. Nevertheless the rewards system is an important ‘leverage’ available to an organisation to steer and promote desired behaviour. It does, however, require the appropriate measures to be used and fraud or negative side effects to be controlled. If activities are measured, for instance the number of visits effected, the risk of manipulation and of low-quality number-hunting are

288

Chapter 14 Personal selling

high. If results are measured, the sales agent has no choice but to discover an optimal path to that result, which will often prove to be the path fitting the customer’s buying approach. The measurement needs to take into account improvements in performance and not reward a base performance that requires little or no additional efforts. Appreciation should be shown for performance enhancement, both in terms of efficiency and effectiveness. It should be clear that sales agents should focus on the important, not just the urgent issues in sales processes. A more long-term perspective on sales results should prevail. In the bestconstructed rewards systems, sales agents see how they can influence the results through their own actions and it is recommended that sales people should be on board during the construction of rewards systems and alterations to it. It is important they know what is rewarded, but even more important they understand why and share that intrinsic motivation.

14.5

information technology and sales Information technology plays its part in all three sales situations we discuss in this chapter. Its main functional advantages are: ●

It informs sales people in the organisation who visits which customer, when and about what; if the organisation has allocated sales agents by product (group), it is quite possible several sales agents share the same account. They can align their efforts and activities, prevent mistakes or ensure they do not visit the customer all at once or within a short timeframe. They can also prevent direct competition with their own colleagues, which can happen if alternative products or formulas can cater to approximately the same need. Imagine a consulting firm offering interim services from a separate business unit. You do not want the consultant and the interim manager battling for the same project with the same customer.



Sales people gain insights into the contact history and transaction history of customers; thus they are able to prepare their sales visits effectively.



New sales people can be brought up to speed more quickly; they grasp the nature of the relationship and the agreements made with customers.

None the less, many sales people regard information technology as anything but positive. They fear an administrative burden when sales information needs to be registered. They anticipate having to do deskwork that will keep them from field sales activities. Another argument, never voiced too loudly, but always present, is the fear of ‘big brother’. The organisation can look over the sales agent’s shoulder and check up on their work. It feels like a loss of autonomy and the exposure of what they cherish as their ‘trick of the trade’. Another element contributing to these negative attitudes, especially in transactional sales situations, is that information technology leads to a loss of jobs. There is a fear of redundancy when computers are able to take over certain sales activities. Although this is not unimaginable, the basic reaction reflects a defensive attitude that is hardly businesslike and is unbecoming to any organisation that wants to provide value to customers and the business. Are there no other opportunities for the sales people to provide value than to perform tasks that could be automated? The reservations that many sales people have about information systems are to some degree justified. At the same time, we need to realise that no sales organisation can really function well without sales information systems at this point in time. Personal sales is just

289

Part V Channels

crM illustration improving sales productivity with information systems Putting the user first offers better perspectives for a successful introduction of sales information systems. By focusing on functionalities that match the sales activities and that improve the attitude towards the technology, the chances of adoption are increased and information sharing between sales agents and sales management will improve. Functions that match sales activities will be used more often. They allow for easy consultation of a contact history and for gaining insights into customer segments, using planning tools and product knowledge support. It is often difficult to integrate complaint management as a function. This feature hinders adoption and promotes a bad attitude towards the system.

The information is not to be shared across the organisation. Sales people tend to keep issues in the customer relationship to themselves. Differences in attitude towards technology occur between organisations, markets and sales people. The difference between the transactional sales person and the consultative salesperson are still dominant. The first group will be interested in the transactional data, while the second will really want to gain insight from the existing knowledge and use it to preconfigure an offering. They are more positive towards support given by customer profiling and product knowledge support. Source: Rigopoulus et al. (2009).

one of the channels through which customers engage in contact with the organisation and not even the only channel through which deals are being closed. The sales force has a direct interest in being involved in the broader use of information technology. It enables their lead generation, keeps them informed of customer activities across other channels, improves their efficiency and may also make the results of sales efforts more accountable. If they remain too reluctant to adopt information technology, other channels will dominate the choices made and personal sales is at risk of being left behind. If they are proactive, they can build a systems environment that integrates and safeguards the role of personal sales and that supports face-to-face contact in an optimal manner. It may also prevent management from selecting and applying a system for the wrong motives – a need for control over the sales force. A proactive attitude will lead to a sales information system that determines which information is relevant in sales processes and should be registered, thus avoiding the ‘register all data’ pitfall. Sales can look to limit the effort and search for infrastructure solutions that are more real-time and mobile, just like the sales force itself. They can complete registrations on the go, instead of spending their last part of a busy day completing visitation reports. In short: they can make sure technology supports the business by embracing it and fine-tuning it to the requirements of the sales force.

14.6

conclusion In many market situations, personal sales is a very important channel to initiate and build the commercial one-to-one relationship with prospects and customers. The challenge is to fit personal sales into a strategy where more different channels are used to stimulate the relationship development and boost sales. Personal sales is often regarded as costly. The costs, however, only become a factor when the sales process itself is straightforwardly transactional and little value is added by the sales agent. In these cases the sales agent may well

290

Chapter 14 Personal selling

feel threatened, especially since sales is becoming more professional. It is no longer ‘undefinable and mysterious’ and sales agents are no longer independent and in control. Sales is becoming focused on its role in creating value, not just communicating it or extracting it. The three different purchase situations we considered offer different potential to do so. The transactional, consultative and strategic sales approaches need to match the customer’s buying approach and make sense from the point of view of the organisation. The type of customers an organisation wants to cater to needs to be considered and a sales approach needs to be selected accordingly. The allocation of sales agents or sales teams needs to take the added value into account and look at skills and knowledge, not just geographic spread and contact pressure. The sales process can be specified for each of the sales approaches, even though the degree to which activities are specified will vary. Results per step in the sales process should be described and measured to allow continuous improvement. Sales process management should look for balance in terms of quality and quantity in each phase of the sales funnel and realise it is about optimisation, not maximisation of throughput. Instruments such as better planning, training, support materials and rewards systems can be deployed to improve sales process performance. The proactive adoption of information technology will help sales into the twenty-first century as a relevant and effective channel in customer relationship management. It will retain its value in the total channel mix and even experience boosts in efficiency and effectiveness, albeit in another role or function and generally less autonomous than sales in the old days.

case study secrets of success for going mobile: agrifirm wins the crM award Background Agrifirm is a cooperative in which more than 17,000 Dutch farmers and horticulturalists have combined their purchasing power. Agrifirm offers their customers maximum purchasing advantage on high quality products such as animal feed, seeds, fertilisers and pesticides. Agrifirm is the result of several mergers, the first of which occurred in 2002 when ACM in Meppel and Cavo-Latuco in Utrecht decided to join forces. The customer is at the heart of the business of Agrifirm (e.g. ‘how can we help our member farmers to increase their return per acre’). The organisation is not the supplier of commodity ‘ingredients’, but a meaningful and irreplaceable partner to farmers in several sub-sectors of the agricultural sector. Agrifirm’s dedication to its customers is reflected in the way they provide consult with their customers. It helps determine which additives or base ingredients a farmer should use to increase output. The feed mix is detailed according to the farmer’s preferences, and consultation takes place on the nature of the cattle and the quality and quantity of other feed products that a farmer is using, even if these are non-Agrifirm products. Agrifirm shares data on best practices, takes local circumstances (diseases, heavy rainfall or draught) into account and applies the knowledge in their consulting with customers. In 2005, a reorganisation took place. The goal was to obtain an organisation that could better meet the organisational goal: increasing customer success. At the same time Agrifirm was faced with the challenge of remaining competitive in a shrinking market and

291



Part V Channels

case study (continued) maintaining market leadership. As a part of its transformation, the sales organisation has matured. A CRM system was introduced that was first deployed in the internal sales department, before expanding the use to the field sales representatives. A sales organisation that was dependent on individual insights from independent experts has been transformed to a sales department that is managed on relevant market, customer and sales data.

the crM system The business environment in which Agrifirm operates is dominated by emotional values as well as business values. It is important to take this into account when automating the sales process. The CRM system now supports the information sharing capability across the organisation’s commercial processes. The information exchange was made more efficient and allows for anticipation of specific conditions involving individual customers or prospects. Improved information provision allows more accurate control over commercial activities. The segments that are most interesting and offer prospects that Agrifirm can add value for, can now be identified. Customers who are likely to defect or shift purchasing volumes elsewhere can be identified and the relationship can be restored.

the internal sales department first The internal sales department is responsible for all information requests and internal order taking. They have no face-to face-contact, but need to be aware of customer backgrounds none the less. They have functioned as front runners in CRM implementation and use the system as their central tool. In close cooperation with the data warehouse and knowledge base they are able to answer customer questions about products, deliveries, bills, complaints, prices, customer information and so on. All customer contact is logged and shared with the field sales organisation. They offer a chance to get all relevant customer data at a single glance and really make the work of the field sales representatives easier. The internal sales department is now able to proactively get in touch with customers for several parts of customer relationship management, alleviating the tasks that have to be performed by field sales.

crM and field sales To support sales Agrifirm has some 150 field sales representatives who visit customers across The Netherlands. They are general representatives, consultants and specialists. In the ‘pre-CRM era’ the representatives decided whom to visit based on handwritten listings of top-customers or pioneer-customers. The entrepreneurial spirit of the sales person and his commercial skill were the only requirements for turning prospects into customers. Nowadays, following implementation of CRM, insights gained from the system drive the efforts of representatives. The sales manager has worked with the representatives to segment the customer base and establish priorities. The estimation of the nature of the relationship and the commercial opportunities now drive the visits. The CRM system is being kept up-to-date with sales efforts made and the results they yielded. The data (originating from visiting reports) are used by sales managers to guide the sales representatives to higher efficiency and effectiveness and develop support tools. Individual targets are set that encompass the visits that are to be made, the number of leads to bring in, consults or quotes to send out, etc. The reigning corporate culture has been overthrown by the implementation of CRM. It is most noticeable in three areas:

292



Chapter 14 Personal selling

case study (continued) (a) being increasingly information-driven in all sales operations; (b) gaining insights into the visits, the frequency, the efficiency of customer and prospect contact; (c) field sales becoming responsible for the maintenance of customer information required to start up other processes (e.g. internal sales). Inevitably, resistance to the new approach and against the CRM system itself has occurred. The company dealt with it in a straightforward and down-to-earth manner. There were clear targets for feeding and using the system and strong leadership assured it worked! It helps that the advantages were clear from the start as the internal sales department had loaded valuable information into the system by adopting it early on. The field sales people got instant insight into markets and customers that they otherwise would not have had. Sales managers saw clear advantages in being able to control and improve the sales process. Individual sales reps saw benefits too. They received accurate information on turnover from their accounts. On a weekly basis, alerts were received informing them about order status for prospects and customers. They list customers who should have ordered last week based on their ordering profile, but didn’t. The sales reps are able to monitor and take action if required. The consulting programmes that the advisors run on their laptop computers, which help to optimise feed mixtures or plant protection and fertilising schemes, provide support for the sales force. The field sales has the support tools required to help customers, but is itself charged with determining which sales approach to use for which customer. On a monthly basis the sales representatives receive an overview of their customer visits (KPI report) that is compared to a norm-report that Agrifirm has established to achieve target revenues and profits. Coaching is provided to improve in designated areas. Field sales has been trained to work with information, use it appropriately and report it back into the CRM system. It has become a fixed part of sales training.

new channels As a direct result of the CRM approach to provide more added value to customers in the sales process, the introduction of several internet applications took place. The customer can find information that is relevant and required to manage their business more successfully. For instance: ●

mineral administration (minas online): information as to the quantities of minerals delivered (phosphor and kali), which is required to determine the legal room left for new deliveries;



billing online: easily downloadable electronic bills that can be fed into management systems or accounting software that the entrepreneur is using;



crop registration (tracking & tracing, HACCP): the farmer can register and monitor everything related to crop development: choice of crop varieties, size of crop deployment, fertilisation schemes, crop care programmes deployed, etc.



feed online: insight in real time into deliveries made;



GBM-online (GBM = Dutch abbreviation for crop protection products): insight into the products used and their components, which is important in HACCP processes, monitoring health hazards and food safety.

293



Part V Channels

case study (continued) These internet applications are an essential building block in the commercial processes of the organisation. The field sales reps use the applications to provide consultation and customers use them to gain information, look up things that they otherwise would have had to call for or wait until the next visit. The sales organisation and the customer are both using the applications to boost their performance.

conclusion The CRM system has been very satisfactorily deployed, with considerable success in the business. Some 300 employees are using it actively. They are members of internal sales and field sales teams from across several divisions. Even departments that do not have regular customer contact, such as the credit administration and R&D, are seeing the potential uses of the system and are enthusiastic about it. Undeniably, the CRM system is transforming the sales process and having implications even beyond the commercial functions of Agrifirm.

Questions 1 Describe the transformation the sales department of Agrifirm has gone through since the introduction of CRM. 2 What causes are there for resistance of sales agents towards CRM implementation? Please describe and explain these causes. 3 What are the benefits that sales people at Agrifirm can enjoy through CRM? 4 What ultimately decides whether or not the CRM approach gets adopted by sales agents and consultants of Agrifirm? Source: Ed Peelen, CRM Award, in: Wil Wurtz e.a. (red.), CRM in Nederland, CRM Association NL, Amsterdam, pp. 22–30 and 68–78.

Questions 1 Sales people often claim the deal gets closed because they have been able to create a personal preference or favour with the customer. Are they wrong or can this statement be correct? Please justify your answer. 2 Why is there a risk of transactional selling in leverage purchasing situations? 3 What are the main differences between the transactional, consultative and strategic sales approach? Illustrate each approach with one example. 4 What difficulties can be encountered if an organisation choses to develop a more consultative sales approach as a counter-reaction to increased commoditisation of its products? Use an example to illustrate your answer. 5 Figure 14.2 states that most sales organisations are in a sort of no-man’s land. What explanation can you provide? 6 Under which circumstances might the explicit detailing of sales processes become detrimental to sales success? 7 What are the main differences in performance measures that are used for each of the three sales approaches?

294

Chapter 14 Personal selling

8 Rewards systems are an instrument to steer sales performance into a desired reaction. Explain how rewards systems can lead sales people to display anything but the desired behaviour. Use an example to illustrate your answer. 9 What would it take to make sales play a proactive role in the development, deployment and usage of sales information systems? 10 Indicate whether you agree or disagree with the following statement: In transactional sales situations the personal sales agents will be obsolete ten years from now. Please explain your answer.

references Arnold, D., Birkinshaw, J. and Toulan, O. (2001) Can selling be globalized? The pitfalls of global account management, California Management Review, 44, 1, Autumn, 8–20. Belz, C. and Bussmann, W. (2002) Performance Selling: Successful salesmen create customer values, St Gallen: Thexis Publishing. Bund Jackson, B. (1985) Winning and Keeping Industrial Customers, New York: Lexington Books. Bunn, M. D. (1993) Taxonomy of buying decisions, Journal of Marketing, 57, 38–56. Capon, N. (2001) Key Account Management and Planning, New York: The Free Press. DeVincentis, J. and Rackham, N. (1998) Breadth of a salesman, The McKinsey Quarterly, 4, 32–43. Dixon, A.L., Spiro, R.L. and Jamil, M. (2001) Successful and unsuccessful sales calls: measuring salesperson attributions and behavioral intentions, Journal of Marketing, 65, July, 64–78. Goedkoop, M.F. (2004) Corporate account management, generating corporate value, PhD dissertation, Erasmus Universiteit, Rotterdam. Heiman, S.E. and Sanchez, D. (2004) The New Strategic Selling, London: Kogan Page. Honeycutt, E.D., Ford, J.B. and Simintiras, A.C. (2003) Sales Management: A global perspective, London: Routledge. Kraljic, P. (1983) Purchasing must become supply management, Harvard Business Review, September/ October, 109–17. Marshall, G.W., Goebel, D.J. and Moncrief, W.C. (2002) Hiring for success at the buyer–seller interface, Journal of Business Research, 56, 247–55. Nuhaan, L. and Dunnen, P. den (2000) Sales-balanced Scorecard, Alphen aan den Rijn: Samson. Piercy, N.F. and Lana, N. (2009) Strategic Customer Management, Oxford: Oxford University Press. Porter, S.S., Wiener, J.L. and Frankwick, G.L. (2002) The moderating effect of selling situation on the adaptive selling strategy–selling effectiveness relationship, Journal of Business Research, 56, 275–81. Rackham, N. and DeVincentis, J. (1998) Rethinking the Salesforce: Redefining selling to create and capture customer value, New York: McGraw-Hill. Rigopoulos, K., Peelen, E. and Bruggen, G. van (2009) Het verbeteren van de sales productiviteit met informatiesystemen, SalesExpert, 5, 1, 30–3. Storbacka, K., Sivula, P. and Kaario, K. (2001) Create Value with Strategic Accounts, Helsinki: Kauppakaari. Weele, Arjan J. van (2002) Purchasing and Supply Chain Management: Analysis, planning and practice, 3rd edn, London: Thomson Learning. Zoltners, A.A. and Lorimer, S.E. (2000) Sales territory alignment: an overlooked productivity tool, Journal of Personal Selling & Sales Management, 20, 3, 139–50.

295

Chapter

15

The online environment The central theme of this chapter is how CRM strategists can develop an on- and offline environment that supports the creation of long-term customer relationships. In Section 15.1 we focus on the development of the internet into a social network and the way it affects the relationships between organisations and customers. Subsequently, we will deal with the way it affects marketing and how one can develop relevant presences in the non-commercial context of the social web. In Section 15.3 we discuss the mobile revolution, taking the internet to wireless devices that are minicomputers or even products connected to the internet. Websites are an important virtual channel for many organisations and in Section 15.4 we look at their role and function in the multichannel environment. It has its place as a support platform for orientation, purchasing, after sales and just socialising. We conclude the chapter with an analysis of performance measures that can be used to assess our performance on the web. In this chapter we will address the following: ●

The evolution of the web and the influence it has had on marketing



Marketing in the social web



Mobile marketing



Marketing in the commercial web



Measuring online performance in terms of CRM contributions

PracTiTioner’s insighT The web is constantly and rapidly evolving. Bandwidth has increased, as has the capacity of processors, search functionalities have developed over time, user interfaces have improved, so the technological outlook for using the internet is very bright. It all seems as if there is no limit to the development of the virtual domain. Furthermore, everybody in modern society has discovered the internet in one way or the other and is using it, either extensively or only occasionally. The time in which organisations and institutions produced content is long gone. Consumers, individual users, are the ones creating content now. It has become very easy to do so, with modern-day devices. It seems, or so many say, that the internet is finally becoming what it was meant to become: a collection of spaces where people start up all kinds of activities and connect as human beings. Mobile technology is integrating

296



Chapter 15 The online environment

Practitioner’s insight (continued) PracTiTioner’s insighT the internet in our everyday lives. It is no longer a parallel universe that we can refer to as a ‘second life’. It is significantly more often a part of real life. Organisations have to try and keep up. They are not yet much at ease in the virtual domain and need to re-evaluate their classical role patterns and power hierarchies. Up until now, the internet has often been adopted, but not very well integrated. The true impact of this virtual domain is only now becoming clear to many organisations.

15.1

The evolution of the web At the very start of the worldwide web, it was a ‘read-only’ medium. It has been designed as a part of the internet infrastructure, that was easily accessible and contained ‘webpages’ preceded by the prefix www and closed with a country identifier (.nl, .fr and .it for instance). In the 1990s it was best compared to phonebooks and actually the term ‘directories’, which is still used for websites that bundle other website addresses, was already in use at that time. Despite all the hyperlinks that existed, it was still scarcely productive to use the web itself as a commercial medium (Mika, 2007). Technological developments ended this passive use of the internet as bandwidth increases make it possible to distribute ever more bits and bytes. Films, sounds, animations and such became easier to up- and download. The processing capacity of computers increased and the user friendliness of interfaces was improved. It was no longer all text-based, but became more graphically advanced. The web was becoming increasingly used for communication purposes as web-forms and e-mail grew in popularity. The web was still very much about interactive brochures, giving websites the name ‘brochure ware’. However, technology continues to develop and the possibilities to create and share content are expanding. Web platforms are becoming available. Geocities and, later on, platforms such as Wordpress and Facebook allowed people to share their content, ideas, videos, status, mood or whatever they want to share with the click of a button. It later came to be called web 2.0, a ‘buzz word’ used to signal the end of one era of the web and the beginning of a second. In this new era, the web is more a place where like-minded people can meet and share comments, thoughts and opinions (Weber, 2007). The fact that this generation holds the future can be seen from the current day so-called Big Five: YouTube, Facebook, Twitter, LinkedIn and, for The Netherlands, Hyves. In other countries, Microsoft’s Live platform arguably takes fifth place. They draw millions of people to their websites on a daily basis. These people are not using the web to find commercial offerings, but rather to find and meet up with friends and to ‘connect’, not read. This social network environment is associated with (Weber, 2007): ●

Social tagging: jointly creating and managing structures that improve content discoverability. It’s not about what experts say things are, but how the crowd can freely choose to describe content in their own way.



Blogs: online diaries where people express experiences and ideas or links to places they find interesting. Bloggers are also called local journalists, not hindered by any editorial limitations, they can report freely. They may make or break reputations.

297

Part V Channels ●

Podcasts: audio files that are downloadable or can be streamed in real time while online. They can be offered free or as a part of a content subscription. They used to be made to enable the distribution of ‘home-made radio shows’, but are finding applications in the field of education, official and unofficial guided audio tours (of museums and cities) and keynote summaries or alerts for conferences.



Wikis: These are ‘databases’ in which people choose to collaborate to provide good descriptions and/or definitions of things. The best known is the website Wikipedia, the internet encyclopaedia that helps to describe and illustrate any topic in the world. The scientific magazine Nature compared the quality of Wikipedia to that of the famous Encyclopaedia Britannica. For some topics, mostly highly specialist, Wikipedia is more elaborate and complete, but it is also wrong sometimes. Wikipedia has had to rectify and even withdraw articles from the database on several occasions. The corrections one can make, for example, to the description of a company could be an area of dispute between customers, special interest groups and the company itself. An oil company probably does not want oil spills, corruption charges or other ecological and ethical breaches cited on its Wikipedia page. However, since everyone can edit, the chances are this will happen. As long as information is true, it is permissible to include it.



Communities: Online communities go back to the very beginning of the internet. It was always the intention to bring people together, but the early years were primarily dominated by linking computers and content. However, there were already communities of scientists at the outset. Software companies were among the first to ask users to test programs. They were attracting the front runners and bringing them onboard. The first software user groups and communities were born, with beta testers who helped in producing better software. Not too long after that, anybody could build a webpage and a forum application where people could leave messages. Bulletin boards became popular meeting places. People started sharing information about their personal life (birth of a child, career change etc.), companies they liked or disliked, films they had seen, their hobbies and so on. Webster’s dictionary describes communities as a group of different individuals who live together in a certain place: a group of people with common characteristics or interests who live together in a larger society. Knexus translated this to the hybrid world of now, updating the offline connotation of Webster’s definition to ‘a group of people that, out of common interest and motivation, gather to interact with each other and derive value from that’. It is an expression of the fact that place is no longer really important and that it is more about the value of being a community member than about the characteristics of the people.

Successors to web 2.0 are already queuing up. Web 3.0 seems a logical next step, but what will it be all about? It has been referred to as the ‘semantic web’. It is a new set of semantic tools and technologies that will permit new ways of searching and interacting. They should be more organic and make use of ‘fuzzy logic’, rather than the structured and hierarchical structures of the web today. Current day HTML will be replaced by more ‘user friendly’ successors. Metadata and tagging are key to the semantic web, adding extra layers of information, such as facial identification for pictures, which is already allowing users of Google’s Picasa to search the internet for pictures of people, not by name or explicit tags that were user included, but by this layer of metadata. The goal of the semantic web would also be to limit search results and show less information, but more relevant information. The search for Frank Fox would not yield all the documents

298

Chapter 15 The online environment

containing ‘Frank’ and ‘Fox’, but rather the few documents pointing to the person you are looking for. The ambiguity of the question is now posing problems. ‘Frank’ can be a name and a qualification. ‘Fox’ can be a surname, a television channel or an animal. By combining data and improving on the interpretation of it, a search such as ‘pictures of Paris’ should only yield a certain content type (pictures) relevant to the city of Paris, instead of all web pages including the word ‘pictures’ and at the same time a lot of content you were not looking for referring to Paris Hilton, which is a tricky one, by the way. Are you looking to go to the Hilton in Paris, or interested in the person Paris Hilton? Just to indicate the complex challenges the semantic web is facing. According to Mika (2007), the semantic web will even be able to answer questions such as ‘What music do I like?’. It shows that combinations of data that are stored in different locations, maybe somewhere in online profiles, visiting histories or through files on your local computer, are likely to be made. Think this is all too futuristic? Test Apple’s iPhone voice assistant Sirius and you will be amazed at how it already deals with many questions just like this one. The term web 4.0 has also been launched. It may seem like a hype to discover the future of the web and that might well be the case. None the less the image that is presented is worth noting here. Web 4.0 is about the emotional web. Through the increased availability of bandwidth, processing power, quality of the network and of user interfaces, the web should be able to stimulate more senses than it currently does. It may provoke more complex emotions when multimedia is not just video and audio (seeing and hearing), but also smelling, sensing (force feedback, virtual reality) and who knows, even taste. The web will be able to induce a more complete ‘experience’. This future may be hard to imagine from your computer or laptop sitting at home or at work, but the mobility of devices and the increased connectivity between devices all around us, make it quite feasible for devices to react to each other and to users. Imagine that some years from now, while browsing a web page when you’re on a train, the music playing in the background, the smell dispersed through the air conditioning unit and the visual impression showing on the screen of your tablet device might be synchronised to create one emerging experience. Thus, as the computer integrates with our lives, the internet becomes a more allencompassing place, where the virtual and the physical can intertwine. There are some devices that offer sublime platforms for this, because they are personal, always with us, and are also almost always on. Some years ago we were talking about chips, nano-robotics, being implanted into human bodies. Nowadays, everybody seems to have their mobile phone ‘implanted’, never far away. It helps people get in touch, find their way, play, entertain themselves with multimedia, take and share pictures, read, compare and shop, take medication in time, keep track of vital signs, always have the emergency services to hand, pay for purchases on the go etc. Owing to mobile devices, our lives today are very different; in many cases they are social life-lines we cannot do without. They add a dimension to our everyday lives, creating an augmented reality. The online and offline realities will reinforce each other (Pine et al., 2011). The contacts between the offline world and the virtual domain are currently still dominated by human intervention, even if it has become much simpler to connect to a specific part of the virtual world using QR codes and designated apps. However, these still need to be scanned and launched. Sensors will make this a lot easier, allowing interactions to be created whenever a person is nearby a certain location. This can be done by GPS or in some time by Galileo, the European alternative that is developed for these kinds of purposes, but near-field communication technologies are also an option. The best-known are infrared (requiring a straight line of sight between sender and receiver, which is not practical), Bluetooth and RFID.

299

Part V Channels

There are devices on the open market that allow people to measure their heart rate or brain activity. They can give out sensory information that can help create understanding of the emotional, not just the medical state of a person. Imagine that these applications measure a huge level of stress in a person waiting in line at a service desk. Could a virtual agent pick up on it and communicate to the person relevantly? Would that be seen as ‘extra service’, or as ‘the ultimate big brother’? Could limited sharing of sensory information lead to advice on how to sleep or rest better? Could it assist in the right administration of over-the-counter drugs? Could it help provide better advice on food choices made in the grocery store? What started out as mobile telecommunications, has taken less than 20 years to become integrated with internet technology and provide mobile virtual access. It is now on the verge of becoming a contextual services platform (see Figure 15.1) that takes into account: ●

task environment: what is somebody doing? What is their intended purpose?



social context: who is around? What is somebody doing? What’s up?



physiological context: what physical effort is being made? What actions is somebody trying to complete?



mental context: what is somebody’s mood – their attitude?



spatio-temporal context: is somebody moving or standing still? What is the speed of movement? How much time does somebody have to spare?



environmental context: in what physical context is somebody located? Near what facilities or infrastructures?

Mobile technology not only provides a connection between the physical and the online (virtual) world, but also a connection between the commercial and the social world.

Environmental context

Spatiotemporal context

Mental context

Task context

Social context

Physiological context

Figure 15.1 The different contexts of mobile Source: van Geest (2011).

300

Chapter 15 The online environment

Mobile technology is making online social activities have an effect on the real world. The physical encounters, the information shared about locations, activities etc. in real time are providing new opportunities.

15.2

Marketing on the social web The consequences of the social web on marketing The web will provide access to media that stimulate multiple senses and will be the centre of all kinds of activities that people want to engage in (Weber, 2007). Activities will vary from shopping to learning, communicating, playing and planning. It won’t be where our entire life takes place, but it will be an important ‘starting point’ or ‘platform’. The communicative power and the ability to connect people and devices are making the web the place from which access to all media and content can be offered. The web will have a function as an ‘aggregator’ as well as a ‘navigator’. Social functions and search engines help people find what they are looking for. The characteristics of the web are such that marketers can no longer just ‘broadcast’ their commercial messages. People are already indicating they are disgruntled about the way marketers pop-up and ambush them with messages that serve the sole purpose of selling their goods. They are actively preventing undesired mail messages from getting through, are registering their phone numbers with a ‘don’t-call-me register’. Other registers, such as for general (impersonal) direct mail, market research activities and door-todoor sales visits are in the making. People are zapping away from commercials or using recording devices such as Tivo to watch their favourite shows without the commercial breaks. In other words: there will soon be no channel left for marketers to push their message, unless customers choose to allow them to do so. Active and aggressive sales tactics should be avoided (Weber, 2007). An adjustment to our marketing approach is inevitable and seems to be taking place. Organisations cannot present themselves as the classic advertiser or salesmen. Unidirectional traffic is giving way to dialogues. The way in which others speak about the brand, the products and the organisations is becoming a decisive factor in installing trust and is becoming more important than advertising. The network of references, of recommendation, is starting to become a factor. Not just the experts that may approve of products and services, but also the regular users. Not everybody will be positive about the organisation’s performance, and new ways must be found to deal with this, because the experiences are being voiced in an open environment. In order to get attention, content is taking a central role. The need to provide interesting, engaging content and media that people will connect with, engage in and share with others, is quickly dominating the marketing approach. It creates inbound contact: customers interacting when something is of interest to them. While it releases some degree of control as to when and how communication takes place, it increases both relevancy and timing of marketing communication. Content can be developed, sponsored, co-created, user generated or facilitated. The key is to build on winning local initiatives and ideas, rather than rely on centralised and structured campaigns that are orchestrated top-down. The web offers a place for marketers where they can seek cooperation with customers in a fashion befitting the virtual environment. It offers plenty of opportunity to co-create.

301

Part V Channels

crM illustration The first internet President [Note: this article was written during the 2008 presidential campaign.] Obama is taking a different approach to his presidential election campaign. He uses the internet as a tool that allows a lot of civilians to donate a couple of dollars. So far, the many thousands who have donated in the region of $5, together have contributed to the hundreds of millions of dollars in campaign money. Not only do all these little drops contribute to an ocean of support money for the campaign, it also creates a huge base of Obama ambassadors. These people feel that for only a few dollars in campaign contributions, they become part of his success. Millions of ‘believers’ are loyal followers. In June 2008, the campaign contributions reached $250 million, from 1.8 million contributors, 80 per cent of which was internet-generated. How come the internet contributes so much? The Obama site has a special ‘online contact centre’ available which offers volunteers the possibility to Skypecall from their home computers to ask others to donate or to ask them to vote Obama. The site gives instructions on how to make the calls and contains scripts and a database with phone numbers that the volunteers can use. There are enormous numbers of volunteers logging on to Skype at the most convenient times for them and making calls on behalf of Obama and his team. Moreover, there are millions of people contributing through local initiatives spurred by the website. During the campaign it has already happened at several occasions that the campaign teams arrives at a local event,

only to find that volunteers had already taken care of a great number of activities, even without the head of campaigns knowing about it. It is really a grassroots movement that is maybe even uncontrollable topdown. The head of the campaign typically wants to be in charge in a regular presidential election campaign, but the Obama campaign was about sparking local initiatives and responsibility through the internet; less control and directions, more facilitating. Facebook has played its part too. Obama has taken on co-founder of Facebook Chris Hughes as an expert in interactive media. It turned out that the internet and other media were less about short and quick messages than one might suspect. When Obama’s favourite reverend was making awkward speeches, the team produced a 37-minute YouTube film. Some 5 million viewers watched it all and are proof that, if relevant, the modern-day person is able to handle something more than just a sound bite. The popularity of the video even meant that television stations were less reluctant to air longer (fragments of) speeches by Obama. And talking about video, Obama’s ‘friends’ produced a video entitled ‘Yes We Can’. The counter has reached 20 million hits so far. The way Obama is using the internet is quickly becoming a lesson in new marketing of which all marketers should take note. He is quickly becoming the first internet president in the world. Source: Fellinger (2008b).

The role of the social web in different stages of the relationship between customers and suppliers There are several ways to use the social web in marketing and relationship management. Some areas where it can contribute are: ●

general conversation about an organisation, its products, services and brands;



the development phase, where the relationship can be engaged in and deepened;



the orientation and selection phase, where potential buyers evaluate their supplier options and build brand preference;



the transaction itself, where buying, trading, and value exchange take place;



the after sales phase, where service is provided and customers provide feedback. We will now treat each of these uses in more depth.

302

Chapter 15 The online environment

general conversations about the organisation (web care) Organisations are waking up to a reality where it is no longer just about conversations with customers, but also about conversations between customers. People talk. People share. And organisations should probably, if nothing else, listen to what is being said about them. They may, if they take a broader interest, also listen to what is being said about competitors. However, true customer-oriented organisations will care about what is being said about the value they can, could and should provide. They are interested in social groups that exist in the different social media and how relevant needs, wants and problems are discussed. Fortunately, the ‘ears’ of organisations are developing and there are good ‘snorkelling tools’ that can help ‘listen’ to what is being said on open social media (blogs, twitter, LinkedIn groups, Podcasts, videos etc.) about a certain topic or brand. Organisations can, in turn, engage in conversations. Once they find the places where customers are discussing topics that are relevant, web care can be provided. The term care seems to refer to an after sales activity, but it’s much more about ‘community relationship management’ than about online care linked to transactions. In general, a transparent approach is clearly to be preferred. Indicate who you are (use real names, even the name of the web care agent), inform relevantly without pushing, provide clear information or feedback. It is an activity that influences the general reputation and trust, but can also be aimed at helping individual customers (often when they fail to get through by using more traditional channels) and exceeding expectations (in terms of responsiveness, authenticity, commitment and responsiveness). An organisation famously good in this area is the triple-play cable provider UPC. There are several full-time employees who monitor what is being said about UPC on a constant basis. The employees join in on discussions, are open about who they are, whom they work for and what their intentions are. By contributing factual information, they stay out of the emotional discussions, but influence the opinion, the attitude and the nature of conversations in which people engage. They are able to make a positive impression. There are also opportunities to be found in blogs. These allow an organisation to voice an opinion or express a view. The number of blogs that are written on a daily basis is huge. Gartner reports it to be over 100 million in 2007 (Weber, 2007). Many blogs are linked, because bloggers follow each other and point to one another. One story can spread through a chain of blogs like wildfire, and the content is changed in this process (see Chapter 1). People express their own views, pass judgement and interpret. In considering whether it is interesting to blog about a brand or organisation, it should be noted that blogging is hard work. It is a continuous engagement that puts the blogger in the role of writer, editor, publisher, marketer and service representative. The blog is a diary that can be daily or weekly, but monthly is already low in terms of frequency of appearance. So a constant stream of new blogs needs to be thought up, written in a consistent journalistic style, include appropriate text, images, videos and links, be posted in a timely manner to the platform of the blogger and marketed through many third-party platforms. Reactions must be followed up. The rules are not written in stone (yet), but in general it is clear that: ●

it is not well regarded to reveal secrets (it is open communication);



one writes about one’s specialism or area of expertise;



the followers must be borne in mind and the commitment to them must be honoured;



language rules are far stricter than in tweets: express yourself appropriately;



think about the consequences and accept them, even if reactions are strong.

303

Part V Channels

Many blog initiatives are started in a whim and end up having no followers and no interaction. The role the blog is meant to fulfil is not being realised. Quitting might be the best option. However, if one is prepared to invest time, resources and effort, the meaning of blogs in social media can be great. There are opportunities to build a loyal following of people who share ideas, knowledge and relationships. It offers a podium for direct ‘customer engagement’ to the CEO or marketer, but many organisations also like to allow employees who are more operationally engaged to blog on behalf of the company. They require support, but can become a strong representative of how ‘up close and personal’ the company can get. Remember: social media are by definition not top-down.

Development phase: co-creation Engaging customers in an early stage of the development process of products, services or campaigns can be beneficial on several levels. There may be lower development costs, a higher success rate in introduction, better fine-tuning to customer needs and wants, lower stock levels, lower costs of marketing and less waste due to improved forecasting of future demand. At the same time, marketing intelligence is gained. Earlier, we discussed co-creation in considerable detail (see Chapter 11). We highlighted the importance of the question (as specific as can be), of the phasing of the development process and the decisions per phase relating to who is involved, in what way and with what ‘incentive’. We will not repeat ourselves, but rather give two examples of how this is supported by the web and social media. One example that has been widely quoted, but remains inspirational, is LEGO factory (see Figure 15.2). LEGO was enabling fans to make designs of houses, trains, whatever one could think of. Fans could upload their own design to the website. The LEGO community of fans could vote on the specific design and many others. Designs that were getting the most votes were declared winners and were being produced. The name and picture of the designer got to appear on the box and a 5 per cent commission on all sales generated on the item was granted. In turn, the winner relegated intellectual property rights and signed them over to LEGO. That was something the fans were doing without a second thought. It started in 2005. Within 6 months it was able to get a stunning 80,000 design uploads and 1.2 million in downloads. Three models that were most popular were taken into production. LEGO has since then developed a second generation platform. They were also setting up an eBay-like platform, where second-hand LEGO or entire LEGO projects could be traded or sold (Boswijk et al., 2011). Another example is GlaxoSmithKline (GSK). They engaged customers in the development process and introduction of a weight-loss product. Prior to introducing the product, they sponsored a community of women who wanted to lose weight. They used the discussions they were able to engage in to develop both the campaign and the packaging. They collected much more genuine information through the forum discussions in the community than they would have obtained from a focus group discussion with a limited number of potential customers (Weber, 2007).

orientation and selection phase in the buying process Organisations can activate people through the social web and get them to promote their brand and proposition. The referrers or recommenders, also called promoters, are commercially independent and therefore more trustworthy to other customers. They are able to influence potential buyers during very important stages of the buying process, for instance

304

Chapter 15 The online environment

Figure 15.2 LEGO factory Source: LEGO Company Ltd.

the orientation on alternatives and the selection of preferred options. Marketing a product through word-of-mouth is quick and cheap. Viral campaigns can be used to spread the word. Viral campaigns are content-based and include the passing-on of content, be it altered or unaltered, to other people in the network. When marketers talk about something ‘going viral’, they mean that it has attained a level of multi-user networked spreading such that it takes on epidemic proportions. If one follows the theory of ‘six degrees of separation’, by which no single person on earth is more than six connections removed from any other, the force of going ‘viral’ becomes clear. Several aspects of viral campaigns have been studied. First, it is interesting to establish what factors influence the likelihood that someone will read a company’s invitation to a viral campaign, visit the corresponding landing page, actually participate and invite friends. It appears that for a company, ‘social need’ characteristics are more useful for identifying target groups for viral campaigns than product-related criteria. People’s social connectivity and perceived influence are more influential than their attitude towards the brand, the product or the product category (Goldenberg et al., 2010; Toubia et al., 2010). Thus the first ‘rule’ would be that tuning in to the social context is more important than the offering.

305

Part V Channels

Furthermore, for a viral campaign to be effective it is important that the recipients are interested in the topic and willing to pay attention and to listen. The extent to which the campaign evokes a positive emotional response influences their forwarding behaviour (Berger and Milkman, 2009), making positive interest the second ingredient of successful viral campaigns. For viral campaigns to be truly effective, the message will have to be passed on continually, so that it can acquire the epidemic proportions the marketer is hoping for. For this to happen, it is important that the transmitters are also well-connected people in the networks. Research showed that incentives are needed to get their participation (van der Lans et al., 2009). So finding and convincing the ‘hubs’, the ‘network influencers’ is the third rule, relating to the focus one needs to apply in viral marketing. Don’t just shoot the message out into the world, but make sure it lands with people who are most likely to spread it and make an impact. Good examples are by definition well known; everybody must have received them as a forwarded message from a friend one day. One worth noting is the campaign of Old Spice, the after shave you may associate with your father or grandfather. Not particularly geared towards the internet generation, one might say. We will elaborate on this example below. In this phase, prior to purchase, organisations may also stimulate customers to write reviews on products or services. This does not necessarily need to take place on the company’s website, but can also be on comparison sites or review sites, such as epinions. com or tripadvisor.com. Questions such as ‘Have you enjoyed your stay with us?’ are becoming increasingly common. As one hotel puts it: ‘Have you enjoyed your stay with us? Please leave a comment or tip on tripadvisor.com to help others find the perfect hotel in London.’ There are also organisations that post positive opinions on behalf of client organisations. These ‘buzz agents’ perform ‘undercover operations’ to boost the social

crM illustration old spice Old Spice is a rather ‘old’ brand of male grooming products currently manufactured by Procter & Gamble, who acquired the brand in 1990 from Shulton. In February 2010 there was a campaign that gave the brand a major boost. The campaign starred ‘The Most Interesting Man in the World 2.0’, Isaiah Mustafa, and focused on the theme ‘The Man Your Man Could Smell Like’. To date, the original advertisement has attracted 19 million viewings across all platforms. However, the real explosion came when the company started to make personalised videos for fans, random viewers and prominent bloggers alike in which the Old Spice Man had a personal message for the receiver. It became the most popular viral campaign of 2011. In The Netherlands, for instance, it was only a matter of days before the 180 personalised videos that were made had been viewed more than 6 million times (in

306

a population of 16 million!) Some 22,500 people commented on it. Iain Tait of the agency RWW, said about this campaign: ‘We just brought a character to life using the social channels we all [social media geeks] use every day. But we’ve also taken a character people loved and created new episodic content in real time.’ Let’s face it, most viral videos are shocking, disturbing and mock their subject. There’s none of that here. Instead of trying to trick people into sharing content by creating something shocking or over-the-top or coasting along on an established viral theme and attaching a product to it, Old Spice first created a character that people – shock, horror – liked! They then went on to create an immersive experience of which people wanted to be a part. Source: Ehrlich (2010).

Chapter 15 The online environment

reputation of organisations. However, comparison websites are getting better and better at filtering them, as they tend to use similar texts across multiple platforms and messages, post messages more quickly than ‘normal’ customers and often have a distinct ‘tone of voice’.

The transaction itself Although we have, to a certain extent, drawn a distinction between the social web and the commercial web, it would be wrong to conclude that social buying does not exist. Transactional processes are no longer the unique domain of the buyer–supplier interaction, nor can they be directed entirely by the organisation anymore. Let’s take Starbucks as an example. They have launched an app that allows people to send their Facebook friends a cup of coffee (facebook.com/applications/mystarbucks). It is a real cup of coffee, which you, as an identified user of the app are paying for, and which your friend can redeem through a barcode gift certificate, which can be printed. They can now also scan the gift certificate from a mobile device, so there is no need to print it. While providing the customer the service of sharing a remote cup of coffee with a friend, Starbucks is also learning who your best Facebook friends are. Facebook’s reach, with its millions of active accounts, is doing a lot for the Starbucks brand and customers are bringing in new customers (Fellinger, 2008a). In old marketing language, they are even paying for the full ‘sales promotion’ campaign! Earlier on, we discussed the phenomenon of the ‘long tail’ (see Chapter 11). This concept is equally relevant to the social web and buying within the social context of the web. The long tail is characterised by low volume articles, that can be an interestingly assorted category, provided stock is held elsewhere and enough demand can be generated through special interest platforms. As we said, Amazon.com is a perfect example of an organisation which makes the ‘long tail’ work. With their ever-increasing reference base of articles, their second-hand shop and many affiliates, they are a very large transactional platform indeed. However, the transactions in the long tail are being generated in a different way from the ‘regular assortment’ sales. Harry Potter products can be sold through mass marketing without much trouble, but for the true niche products, social interaction is a great source for sales. First, the products often reside with customers, because producers or editors have stopped providing them, so in order to make these products available, the store must be able to achieve a clear presence in specialised communities. Buyers and sellers can meet each other on these platforms, but often the transactions go through Amazon, because of their reliable fulfilment, the broader client base and offering they can generate as well as the relationship they have with their customers. The supplier is in this case not the supplier, but the facilitator of a consumer-to-consumer market (Anderson, 2006).

The after-sales phase Customers can also help each other after the transaction of a product or service has been completed. They can share experiences and guide other customers to the best supplier, but they can also provide each other with help and support in the resolution of questions and trouble-shooting. A good example is Hewlett Packard. Their products are often serviced by other customers who answer questions on the company’s forum. Research by De Ruyter has shown that in community-based servicing, over 60 per cent of the questions are resolved to the complete satisfaction of the person asking the question.

307

Part V Channels

crM illustration a business-to-business community: Philips is discovering Linkedin LinkedIn is often seen as a channel to promote oneself and maintain a public résumé, but businesses are discovering other uses as well. Philips is using LinkedIn as a tool to get in touch with a target customer group that is otherwise quite hard to reach. Raymond Clarijs is Philips’ head of online marketing for business-to-business and works out of the US. ‘Within our business-to-business market we saw the need for customers to increasingly share knowledge and get information from one another. One-to-one communication with the company is over. It’s even truer in our market than in business-to-consumer. Peer-to-peer communication has always been very popular in professional markets, but it has now moved online and that speeds everything up. Online

is a facilitator and accelerator of the same process that has been taking place offline.’ Philips is still investing in their corporate domain, the central website Philips.com. Clarijs: ‘But not everybody will visit that website. A lot of our stakeholders are not focused on lighting, but on design. We have to reach out to them, as they won’t come to us. So we have to go outside of our own domain. We had to make a choice: build a platform, or collaborate. We chose the latter.’ Philips has researched the possibilities of a social platform of their own. ‘We did some pilots, but that kind of platform works best for our core services. If you want to be more broad, LinkedIn is better.’ Source: Eilander (2010).

Through this type of communication, internal links and company communication can also be improved. A good example is KLM’s Blue Lab, where the board and the employees are cooperating to see how they can jointly improve on baggage handling, for instance.

The marketing approach on the social web Marketing in the social web (Weber, 2007) starts with mapping out those of your customers who matter most to you. Observing what the most influential places are and how they talk about you, should be a primary concern. It is a good idea to put together a list of core influencers (the top 30 or top 100) that you would like to have as referrers or promoters. As well as being customers, they might also be influencers who voice opinions. They can be recruited by playing on their entertainment needs, helping them meet others, teaching them new things and helping them increase and exhibit their social status (Algesheimer et al., 2005). Buying support is hardly ever a good idea: recruits that are bought are called ‘mercenaries’. They will sell their loyalty to the highest bidder. Recommendations should be achieved through genuine mutual value creation. It should be made clear what the social interaction will deliver the referrers. Promoting the initiative is necessary for it to become ‘viral’. A good approach is to tap into the 10 or 15 most popular search terms and try and link them to the content. Adword advertising can be used to draw attention to the blog, website or community. It is also a good idea to send out specific invitations to the customer database, announce initiatives on packaging, try and be present at locations where the customer group is (e.g., festivals and/or exhibitions). It is the search for and creative use of momentum that makes the difference. One should also determine which platforms are most suited for the marketing goals that are set. The differences between, for example, YouTube, Facebook, Twitter and LinkedIn may be subtle to the outsider, but the way they work and what they deliver (from visual

308

Chapter 15 The online environment

impressions to engaged conversation or network enhancement) is very different. Instead of starting a proprietary platform that requires a lot of building up, investment and driving traffic, it may be better and easier to hook up with pre-existing platforms. If you manufacture ice skates, linking up with a group that is focused on the winter Olympics or the fan base of a professional ice skater may make more sense than starting your own ice skating community around the products itself. The product acquires a meaning in the experience, remember? Engaging the ‘members’ to participate is the next step. It should be about seeking dialogue with open-ended questions and simple requests. How would you like to improve to the product? How are you using our product? What is keeping you up at night? What are you most excited about? Such questions are simple and open, asking for ways the customers experience the product within a certain context. Optimisation is the penultimate step. The community should be kept alive with news, updates, engaging questions, interesting content, feedback on the results of customer participation, etc. The mistake many organisations make is to apply old thinking to new channels. They believe they have to create the content, manage news items, provide the entertainment and so on, but in the social web, you can get a little help from your friends! The final step is measuring the results. The social web needs to achieve a serious place within marketing and within the organisation as an engagement platform. Determine how it improves relationships, supports product launches, increases market share, revenues and profitability and changes brand attitudes. It is important to realise that the web tends to be more extreme than the offline world in terms of results. It’s more boom and bust, from hero to zero and back again!

15.3

Mobile marketing Mobile marketing is developing rapidly and is generally considered to have enormous potential as a dominant internet infrastructure. Research into this domain is still somewhat limited, but practical experience is growing fast. In this section we take the practical approach and consider business use of mobile marketing. The ultimate promise of mobile marketing is to integrate some form of the organisation’s presence into the everyday lives of its customers. With a mobile device, the organisation can enter their living space, their context, identify people and make wireless connections between several media that surround them. This offers the possibility of offering a more engaging and all-encompassing experience to the customer. Think about the London Marathon. Supporters could send personalised messages to digital billboards that showed up exactly in time for the runner to see. By playing matching music, the sensory experience can become even richer. And it’s an experience that can be watched back on a mobile website or on YouTube later on. Mobile marketing is not yet very mature. Many of the primary applications are directed at advertisements or stimulating transactions. Many companies consider themselves stateof-the-art once they have developed an app, but it is starting to become clear that mobile channels are especially effective in service provision. It capitalises on the strengths of mobile channels: the fact that they are an extension of a person’s personality. The lasting success of mobile applications is dependent on the relevance of the service. They are easy to obtain and try, but there are far fewer apps that find their way into a regular usage pattern

309

Part V Channels

of people. According to Forrester, the percentage of apps in use 12 months after download was reported to be lower than 5 per cent in 2011. The most popular services are news-related, social platform apps and financial services. The applications are available through other channels as well, but take on a new meaning in augmented reality: they combine virtual data with physical locations. The most technical advanced apps are found in the field of banking. They give real-time access to secure data, allowing people to consult their account, transfer money, receive alerts on changes in interest rates, pay their drinks at a bar or pay for the carwash. They are integrated with the CRM systems of the bank and with their primary back-office systems. Data synchronisation is an absolute must. Mobile services do not exist in isolation. The CRM strategy and multichannel approach should lead the development of the mobile channel. It is quite easy to get carried away when it comes to technological features and possibilities, but it should be more about supporting the customer experience. If one can use mobile channels to make payments on the go easier or safer, or help a patient remember to take their medicine, customer value is being created, but not all features and possibilities make sense on this platform. One should question what degree of maturity should be required and when. Can the bank launch an app that just shows account information, or must payment functionality be included right away? If the development takes longer and the launch of the app is pushed back to include that functionality, will the bank lose market share and damage its reputation? Can that be made up for if the introduction includes a feature to match pictures to account numbers or a feature that makes it easy to split a bill with friends (co-payment)? These are hard decisions, as timing and functionality have to match with consumer desires and the capabilities of the organisation. The price that can be charged for mobile services is also influenced by prices of other mobile services, many of which are free or very cheap. This means many organisations develop alternative pricing models (see Chapter 11). The development costs are rising as apps have to be developed for several platforms (Apple iOS, Android, Blackberry), making it more important to find a viable revenue model. Advertising models, which are quite common in digital channels in order to make services available for free, are not well accepted on mobile devices. In a 2012 survey, some 70 per cent of respondents in the United States indicated that they did not want to allow advertisers to use the mobile channel to approach them.

15.4

Marketing on the commercial web The web is becoming increasingly social, but that does not mean it is becoming less commercial. The functions are complementary and websites will continue to be an important factor in the marketing, sales and service of products, services and experiences that are offered by organisations. The organisation’s website is a platform that it owns on which it can more effectively manage the way it is presented and the way it wants to interface with customers. We now move on to address:

310



traffic building, by which we mean drawing visitors to the website;



engaging the visitor through a high-quality visiting experience;



completing transactions;



retention of visitors and customers.

Chapter 15 The online environment

Traffic building The parallel between the internet and a highway has often been drawn. It is called the information super highway. If that metaphor is applied, then obviously an organisation would like to direct as much traffic as possible to the store or location that is somewhere out there in the super-connected road infrastructure of the web. It should be noted, however, that the quality of the visitors should matter to an organisation. The last thing an organisation wants is for accessibility to suffer because a huge, but commercially uninteresting crowd is blocking the driveway. The tools to build traffic are plentiful and constantly developing. We will discuss: 1 search engines; 2 opportunities in social networks; 3 banners and links; 4 portals and comparison sites. Here we will only address the online means of communicating URLs, as offline means, such as radio and television commercials or on packaging, flyers, direct mail messages, brochures and billboards, are hardly revolutionary. Despite being responsible for up to 60 or 70 per cent of online traffic for some companies, such methods all seem to suffer a huge loss in response because almost no direct action is possible; instead, a channel change has to occur.

search engines An effective way to increase traffic to a website is to establish a presence in search engines. They search the web for content relevant to the user’s request and therefore offer a possibility to be present at the right time, in the right place. It’s a matter of relevancy, not just of volume. To the relationship-oriented marketer, building traffic will be about finding and offering the things (content in the form of information, video, music, podcasts etc.) customers are searching for, based on the insights that the marketer has. The top spots on the search lists are much prized and fought over in the same way as shelf space is in the supermarket. Only the top items get clicked frequently, with a huge drop off once you get below the top 10. There are two ways of appearing in prominent spots with a search engine. The first is called ‘organic search’ and relates to searching website content and rating that content based on relevancy. The second is ‘search engine advertising’, which means the spot has been paid for and is presented as an advertisement rather than a normal search result. In organic search, although calculations and ratings of search engines vary and are increasingly complex, the three basic components that increase the search engine position of a website are: text build-up, indexation and popularity. Text is important because search engines are (at least for the moment) text-based and define the relevancy of a page by the occurrence of the right text. Indexation indicates the way and form in which the contents can be indexed and popularity is assessed on how many pages link to a certain site. Text is an important factor, not just in terms of the contents of a page or blog, but also the metatags. These are tags that a company gives a website to help search engines index it. Search engines also look at page titles, headings, alternative text for images (image tags and description) and text links. One could say that in order to get the text-based part of organic searches right, a company must not only speak the language of the customer (use the same terms and wording), but also understand their mind. They

311

Part V Channels

need to consider not what they want to offer, but rather what the customer is searching for. Internal brainstorming may help, but learning from external research (Google’s most popular words, asking customers through research) is more likely to yield results. Indexation is required for a search engine to find your page. If you go to Google and type in ‘site:[yourwebsitename]’ it shows all pages from that site which are indexed. It is important, because you may want to control the points of entry to your site and avoid people entering the site at odd places. Generally, we don’t like to let customers into our store through the back doors either, as hospitality and experience will suffer as a consequence. Making sure those pages do not get indexed requires active blocking on the organisation’s side. The last step in improving organic search is increasing popularity. This requires active linking from other sites, blogs, tweets, Facebook postings and many other platforms to your own. Link exchange programs have been set up to help with this, but be careful: the goal is not to get as much traffic as you can, but to get the right customers and provide them with the right experience. Relevance should remain key. It is rewarded as well because Google, for instance, also assesses popularity based on how often a link is clicked on and how long the visitor typically stays on that website. The second way of getting to the top of the search results is paid advertising. Often these are clearly identifiable. Google places advertisements, which they call Adwords, on the top right corner. The costs of Adwords are related to the number of views or clicks, depending on the search engine. They may even be combined, with a lower fee per view and a higher fee per click. The costs of search engine marketing or advertising is increasing (Olsthoorn, 2005). In some cases it may be possible to relate banners to search results. Banners are a more graphic display of advertising than Adwords, which are purely text-based.

opportunities within social networks The importance of social networks in building website traffic is increasing. Predictions are that the social networks will take over search engine traffic. It is rather like getting a recommendation on which websites to visit, rather than searching for it yourself. With websites or rather ‘social platforms’ such as Facebook becoming the dominant place where people spend their online time, it becomes easier to navigate your way to a supplier from there. It is also often a place where the purchasing process begins, talking about ‘cool products’ with friends or deciding to go and buy that concert ticket or read that book your friend is recommending. It is a place to check opinions of friends and get feedback. Messages on social platforms are short, but often hyper-connected: they are able to influence the movement of groups of people much better than a classic hyperlink sitting on a webpage waiting for someone to click it.

Banners and links Online advertising is a classic way of attracting attention, and as we have said repeatedly: it always begins with old habits and new technology. So it’s not strange to see billboards (called banners) pop up on the web. They mostly support brand awareness and recognition, but with a click through rate of 0.5 to 1 per cent, they are not really traffic builders in and by themselves. Conversion can be increased by using animations, teasing (not too much text, but rather a puzzle), bright colours (attracting the eyes) and including a clear call to action (what does clicking do for the user? Click&win? Awesome preview?). Most of the time text-based content works better than banners. Advertorials, or sponsored links, are also part of the paid traffic building toolbox. They work well because they

312

Chapter 15 The online environment

are avoided less. People intuitively tend to try and avoid banners and read around them. Sponsored links are seen and, if relevant, clicked on, but up to six times less often than nonsponsored links.

Portals and comparison websites The way people spend their time on the internet tends to follow a pattern, often starting at a certain generic website, offering access to a broad range of services, search possibilities and free news items. These are referred to as portals. In the light of traffic building activities, it is quite important to be present on portals that are relevant in terms of branding and topic or theme and have high volumes of high-quality traffic. A portal-deal, that is the commercial exchange of space on a portal against something else, is often paired with an ‘affiliate program’. The portal and the website affiliate themselves as brands and may share revenues generated through the portal site. It becomes a form of ‘shop in shop’. Imagine a portal on Hollywood films affiliating themselves with Amazon.com or Play.com. Banners can be used both on the portal’s point of entry as well as during relevant searches, in order to attract the portal’s visitors to the affiliate shop. It often has the (almost unlimited) potential to add store locations, where sometimes the available assortment is highly targeted to the niche audience that is reached. Comparison sites in particular make it easier for prospective buyers to get an overview of what is offered where, at what price and with what features or terms. It is not just price, but also quality, availability, delivery time, shipping costs and complex product features that can be compared. The goal of the organisations that submit their offerings for comparison is to compare best for the target segments for which they are aiming. The comparison websites are mostly independent and make money from advertisements and commissions. Before the widespread use of social media, it was sometimes questioned whether comparisons were ‘honestly’ made. Nowadays, most comparison sites do not want to take the chance of being exposed for manipulating comparisons. Since comparison sites often ask their visitors to rate the suppliers and review the products or services purchased, comparisons can be made on quality of service and fulfilment as well.

offering an engaging experience It would be a pity to attract a lot of visitors without being able to retain their interest when they visit. When the internet was beginning, trust was an important issue. The relatively new environment required clear presentation of recognisable elements. Tangible elements in the design, including quality seals or certificates, were highly important. Offline points of sale or collection were also much appreciated (to prove the company actually ‘existed’), to invest in offline communication (‘real world’), possibilities to pay upon delivery, the brand and information regarding the delivery process. It was also necessary to watch loading speeds and keep the total page size limited. Bandwidth was still an issue and the initial enthusiasm for little games and animations was substituted with a ‘back to basics’ approach. This is important again in mobile channels, because the bandwidth of mobile internet networks is still somewhat limited. However, as soon as fixed infrastructures or Wifi are used, bandwidth ceases to be a major issue and working with videos, games, animations and complex graphic features or music can once again make the visiting experience more engaging. With the touch screen navigation offered by mobile devices and tablets, design is again becoming key and these channels offer rich, brand-enhancing possibilities.

313

Part V Channels

If we are to offer an engaging, positive experience to our customers and potential customers, we need to take into consideration: ●

customer expectations;



content;



design and usability;



personalisation;



payment and fulfilment.

customer expectations The quality of a visit is influenced in particular by pre-existing expectations (Verhagen and Broere, 2005). Websites should offer an easy route to the expected content, with no detours or unnecessary clicks. There is no need for distraction or entertainment per se. If such is the goal of the website, it is of course appropriate, but if a visitor just wants contact details of a local dealership, their way of getting the information should be as direct as possible. Of course, most organisations strive to exceed expectations, and do, particularly in the age of the social web, with customers talking up experiences they found surprisingly positive. It is, however, becoming increasingly difficult to make a website on its own an experience worth talking about. Maybe content, rather than the website’s lay-out and functionality, is more important nowadays.

content Most websites nowadays are not just filled with content created by the organisation that owns the website. Third-party content, including user-generated content, is much more widespread. Take the example of an online home electronics retailer. There are product descriptions of a supplier and evaluations by customers, but through inserted widgets, the company can also show blogs by home cinema enthusiasts or articles from relevant media. Or maybe just the weather today or a Google maps add-in to allow people to navigate to the nearest store location. Opportunities for two-way communication are enhanced, with the potential to ask questions through structured forms, forum applications, virtual agents and live chats. References to other platforms, such as Twitter and Facebook or LinkedIn are easy to make and not just individual features, but rather capable of enhancing the other communication options between the organisation, its visitors and other stakeholders. In general, the optimal solution is to have multiple content platforms, instead of just one. The positive effect on search engine ratings is clear, but it also allows organisations to welcome visitors in a more relevant and tailored way. The content becomes, in a sense, the bait with which one catches the fish, and it’s best to tailor that bait to the type of fish one wants to catch.

Design and usability The quality of a visit also depends on the degree to which the visitor is able to use the interactive system, the website, in order to effectively, comfortably and efficiently complete the desired task. That is what is called ‘usability’. The interaction between man and machine is key and design is an important aspect of usability, although designers might often argue it’s the other way around: usability is a part of design. Design has two meanings in this context. The first is the artistic ideal to express oneself, while the second is an engineering ideal to solve the problems encountered by users. The latter is dominant in website design.

314

Chapter 15 The online environment

The goal of a team of website designers is to design an interface that has all the features to allow people to perform a certain task, making it as intuitive as possible to find and use these features, while ensuring that these features will also provide them with long-term benefits. They will also try to limit design-related errors and install design-specific elements that provide people with a satisfying user experience (Wiklund, 1994, in Swinkels, 2001). The principles of product design and website design are not much different. It will quickly prove to be unsuccessful if a website requires a user to adapt to the design or, even worse, force the user or manipulate them to any extent. It is necessary to realise that website visitors typically have a very short attention span. The time spent on webpages shows us that whenever the content does not seem appropriate or the page isn’t sufficiently attractive and engaging, the visitor leaves the website. The tolerance for long loading times is declining and the willingness to learn how a website works is hardly ever present. Simple, solid designs work best, as Google has shown with its very basic search engine lay-out. Compare it to Yahoo! and see which site is more likely to make you use it directly and come back again because of the efficiency of its interface. The ultimate design seems to be restricting the number of functionalities combined on one page, making the learning curve quick and limiting the number of possible errors.

Personalisation Websites offer access to content that is stored elsewhere. If optimal use is made of this feature, the content that is loaded onto a website can be completely tuned to the personal needs and characteristics of the visitor, customer or user. This is called personalisation, but we can distinguish between two kinds of personalisation: ‘moment-to-moment’ marketing and ‘one-to-one’ marketing. The moment-to-moment aspect plays into the actual, current needs of a customer when they purchase a printer on a website, for instance. On the check-out page the appropriate ink cartridge may be offered. It is real-time marketing where content is made relevant by the current context. In ‘one-to-one’ marketing the organisation may be able to use pre-existing knowledge about the customer’s preference for a certain brand and tailor the offering to that. One-to-one is more demanding in terms of matching profile data, website contents and product offerings. Data from different sources need to be integrated into one profile; combing data from social media, product, transaction and marketing databases. Matching records requires ‘business rules’ that determine which customer is entitled to which offer relating to which brand and which campaign content.

Payment and fulfilment The fact that the internet provides global access does not make every e-commerce website a global store. The unlimited possibilities of a borderless virtual space are still subject to the international laws of trade and require a website to be able to handle payments in different shapes and forms and to be able to deliver on promise.

Payments Not all websites will have ‘completing online transactions’ as their goal, but it may be offered when and where customers expect it to. With the democratisation of online payment, where more people trust and use it, as well as the rise in popularity of micropayments (amounts varying from a couple of euros to a couple of pence), payment options have increased. The options, if one does not develop a proprietary payment platform, are: ●

credit card companies;



banks;

315

Part V Channels ●

internet service providers (billing the account of subscription holders);



PC-suppliers;



telecommunications providers;



payment services companies (such as PayPal).

The decision as to which payment system is adopted has to be taken and requires the careful consideration of several aspects, such as safety and ease of use. If a user is required to download and install new software to complete the purchase, it will have a negative effect on the interaction. Transaction costs are also an issue, as some platforms of payment methods (the major credit card companies for instance) may charge a fee per transaction that makes micropayments almost impossible to accept. There is no one single online payment platform or standard. Most payments in businessto-business markets are made in traditional ways (payment-on-delivery, separate billing) and consumer markets show widespread adoption of credit card payments, payment-ondelivery or direct e-banking. The latter requires some explanation. Rather than giving out permission for the supplier to withdraw a certain amount from their chequeing account, the customer logs into the online banking system and makes the transfer in real time. The Dutch banks have developed iDEAL to this end. It is a banking standard that integrates the payment process into a website’s shopping experience. At the time of payment, the customer chooses iDEAL as a payment method and selects the bank. A window is opened through a secure connection, loading that bank’s online banking environment. The customer is required to provide the same secure information as always and a single money transfer is completed. After the transfer, the customer is guided back to the supplier’s website, where an order payment confirmation is given and the shopping experience can continue. Choosing a payment method involves choosing when the organisation wishes a customer to pay and when customers would like to pay. It’s not always a simple ‘equal crossing’ (payment and receipt of product occur at the same time). The three basic options are: ●

Pre-paid: the purchaser pays the amount due with a pre-charged account or e-wallet prior to the purchase being completed.



Pay now: a direct payment that is made from a chequeing account or credit card.



Post-paid: the transfer of money is completed after the product has been shipped and even received. Examples are payment on delivery, separate billing and credit card payments for as far as they include incremental payments or ‘buy now, pay later’ constructions.

The importance of the choice is demonstrated by Dutch online bookstore Bol.com, whose main reason for online success in its early years was the option of payment on receipt of goods. It showed supplier trust in the customer and equally removed the ‘online payment is not safe’ barrier voiced by many potential customers.

Fulfilment The proof of the pudding is in the eating, and so it is for many online purchases, customers are anxious to receive the goods they have purchased. The promise is put to the test. Distribution has a significant influence on online customer satisfaction and the likelihood that they will return. To increase customer confidence, it may be wise to enable the tracking and tracing of packages. FedEx was the first company to introduce a tracking system for packages in transit. The customer is issued with a shipment number when trusting FedEx with a package. On

316

Chapter 15 The online environment

the FedEx website the customer can track the progress of the package every time the package’s barcode (or that of the batch to which it belongs) is scanned at a warehouse, during the loading process or on delivery. The distribution of digital products would appear far less complex, as the product can be downloaded directly from a secure server, but products that can be downloaded can also be multiplied very easily. Preventing theft and fraud become important matters. Furthermore, if a customer has purchased a virus scanner application online and the PC gets stolen or damaged, how can they reclaim a copy from the online store? There is certainly more to distributing digital products than meets the eye. However, the situation with physical products will always be trickier. Delivery can never be as fast and efficient as the internet in the pre-purchase and purchasing stages. Furthermore, distribution costs need to be controlled. If people from around the globe are ordering, will free shipping still apply on all orders? Are there risks in shipping products to countries where the product may be subject to certain age limitations or other legal constraints? These aspects can make the difference between being able to sell products with relatively low margins at a profit or at a loss. The situations differ for luxury watches or high-end audio equipment and bargain-priced DVDs or groceries. Direct distribution costs have increased by 100 per cent in the fast-moving consumer goods category (van der Laan, 2000). Customers used to come by, make their choice and pay. With online grocery shopping, the customer is being served in all those aspects. The costs can only be carried if there is ample demand, a clearly limited assortment, clear areas of delivery and time zones. It has a huge impact on the supplier’s logistical system. Table 15.1 highlights the logistical costs in different distribution scenarios. To permit a comparison, the costs of traditional retail have been included. The numbers are the costs per activity as a percentage of the transaction value. The table shows the costs for online groceries to be about twice as high as those for traditional retailing, the costs of home ordering and (warehouse) order picking being the main reasons for this. However, the returns policy is also a matter of concern. This is a legal and relational precondition, so that customers can turn down or complain about faulty delivery. Table 15.1 Example of cost structures in the grocery industry

Activity Warehouse overheads Reception and storage in warehouse Warehouse order picking Transport to store Store overheads Reception and storage in store Shelf replenishment Order processing Order picking in store Point of sales costs Transport to home Returns Customer service Total

Traditional retail

Online purchase and collect at store

Online purchase and collect from warehouse

Online purchase and delivery from satellite warehouse

1.20 0.5 2.20 0.90 2.40 1.50 3.00 1.20 1.20 0.90 15.00

1.20 0.5 2.20 0.90 2.40 1.50 3.00 3.20 5.00 1.20 5.00 2.00 1.90 30.00

4.50 0.5 7.50 3.00 1.20 8.50 1.80 2.50 29.50

6.00 0.5 7.50 0.80 3.40 1.50 5.50 2.30 3.00 30.50

Source: Cost/profit Analysis, Marketing & Logistics (in van der Laan, 2000), ShelfLife Publishing, bv.

317

Part V Channels

retention It may seem like the internet is all about ‘quick business’ and ‘hit-and-run’ tactics, but that is not true. Most people have a limited number of sites they visit frequently, including only a number of platforms through which they purchase regularly. Commitment and relationship building matter just as much in the online environment, maybe even more. ‘Today, loyal shoppers visit their favourite sites far more frequently than they would any brick-and-mortar store’ (van der Schans, 2001). It pays to build awareness and preference over competing websites. Peppers and Rogers (2001) have distinguished four basic functionalities in their approach to one-to-one marketing. The functionalities, which together support relationship building and improve retention, are (see Figure 15.3): ●

Identify: identify customers based on their identity data.



Differentiate: gain insight into differences between customers based on analysis of customer data.



Interact: engage in a dialogue with the customer based on the knowledge available.



Customise: customise the offering, the products, services, information and pricing based on the interaction.

The ‘identification stage’ is mostly about recognising customers and protecting their privacy. The best platforms are able to use unique identification that is integrated on- and offline. They may even be able to assess whether or not someone is online in their role of employee or private person. It is a sign that the organisation recognises the need for separation of roles and is committed to providing high levels of privacy protection and strong data protection. This level of identification often involves an indication that the customer is appropriately ‘logged-in’. This is shown through a personalised welcome message or the appearance of a personal profile, made up from pre-loaded data, on the website. In the ‘differentiation phase’ the organisation takes it one step further and builds on the customer knowledge it has unlocked with identification. A sub-division is made of the customer base into smaller groups with particular preferences or characteristics. It allows for the further configuration of a website and the tailoring of contents to the individual customer. Which banners, which offers, which content should be proposed to customers who share this profile? It is still a rather generic level on which the website experience is adapted, hence differentiation, rather than customisation. The next step is the true interaction with the customer. It may not truly be an interaction until the moment the customer engages in a purchase or a service interaction. The main characteristic of internet interactions is still ‘the customer controls the conversation’, even though with call-me-now and live chat functionality, organisations can reach out. The goal until then is to limit the number of clicks. Amazon has its patented ‘One-click’ system for this. Effective tactics to increase the likeliness to purchase include availability check (is the item in stock or on backorder?), deferred payment options, track and trace possibilities on orders, etc. The most advanced sites will use real-time interaction suggestions about other relevant products or make combined offers. Customisation occurs when the website starts to adapt to the individual customer. The first sign is a complete order history that is made available, along with their preferred payment method and order collection details. It is about tailored fulfilment. Higher levels of online customisation can be achieved if the customer can influence the offering by tailoring

318

Chapter 15 The online environment

Identify

++

+

0

Differentiate

Interact

Customise

Group Linkages Online/Offline data integration

Differentiated customer service Matching engine Golden questions

Real-time online support Alternative means of push communications

Integration offline/online stores Automatic replenishment Personalised products

Strong data protection 3rd-party privacy protections

Pre-filling of data Detailed customer profiling

Drip irrigation questioning Online order tracking One-click Community sense

Partner integration Personalised wish lists Online product configuration

Disclose privacy policy Recognise returning visitors Registration

Customer preference collection Site organised by need

Ease of return Search engine functionality Effective e-service response

Customised web experience Multiple billing/ shipping options Order history

Figure 15.3 Functionality of transactional websites in the context of one-to-one marketing

the product or service itself. The ‘supreme quality level’ is reached when the supplier can deliver the customised products and even provide replenishment of a stock of customised goods or just-in-time provision of a customised service. Examples in real life are a grocery store that replenishes the refrigerator based on the customer’s predetermined preferences and according to a previously agreed stock level. However, one can also imagine an online vintners that keeps the collection a customer purchases in their own warehouse (professional facilities and space are offered) and sells or buys bottles of wine fitting the customer’s budget and collection profile.

15.5

Measuring results Using the internet as an important network in buyer–supplier interaction requires measurement. How else would an organisation assess: ●

the effectiveness of measures directed at stimulating, facilitating, realising online transactions?



the degree to which online contacts are reinforcing the customer relationship?

Forrester (1999) has given an overview of data that are used when evaluating e-commerce websites. They present an overview that is predominantly geared towards

319

Part V Channels

answering the first question, relating to transactions. They address four sub-questions in their assessment: 1 Who is the customer? ‘customer identity’. 2 What has the customer bought? ‘transaction’. 3 How did the system react? ‘system throughput’. 4 Where did visitors come from and where did they go? ‘basic traffic’. Table 15.2 highlights which data are registered, where they can be collected and what they are used for. Since the appearance of Forrester’s overview, a lot has happened. The e-commerce part of their framework is still very much relevant, but relationship and social media metrics have been introduced since. Furthermore, the success of internet analysis is not in the collection or the analysis of data, but in the effective application of the knowledge acquired in the process (Greenberg, 2011). Within an organisation which aims to build relationships with customers, every discipline has its part to play. Top management should know how big a part internet plays in terms of revenue contribution, both directly and indirectly. Marketers should focus on the effectiveness of content in driving traffic and sales, in the effectiveness of the site in engaging customers in interaction. The contact centre needs to assess the possibilities to provide better, faster and cheaper service through online interactions, but also see the risks of huge amounts of traffic being driven to the website, where they might get confused about information and pick up the phone. IT needs to consider what levels of traffic the servers can handle and how traffic can be managed. The channels are interrelated and should be managed and measured as such. Table 15.2 Internet analysis Measure

Origin of data, for example:

Use of data, for example:

Name and address E-mail address Facebook profile LinkedIn profile Demographic data

Selections Campaigns, mailings Personalised profiles ID Segmentation

Purchase history

Transaction database Newsletter registration Facebook LinkedIn Purchased data 3rd parties, questionnaires Transaction database

Transactions

Purchase history Payments

Transaction database Cash book

Customer valuation Segmentation Managing bad debts Cross selling and up selling Retention Effectiveness of marketing activities

System performance

Error reports Interrupted connections Capacity: how many visitors can you handle simultaneously

Server log files Network packed sniffer

Localise bottlenecks in system Capacity planning Waiting times

Basic traffic

Number of visitors Page visits Entry pages, exit pages Search terms used Visitor origin

Server log files Analytics software

Search engine optimisation Website structure and navigation Optimising banner advertising Traffic stimulation Identify origin

Customer identity

320

Selections

Chapter 15 The online environment

15.6

conclusion The evolution of the web is showing no signs of stopping. It is becoming the centre point of our media landscape, integrating many technologically advanced possibilities to interact with customers and for customers to interact with each other. The biggest change is not technological, but social. The internet has become a place where people interact, create and share. Within this virtual society, which is no longer a parallel universe but a part of our everyday lives, people and organisations interface differently. They are able to be informed more broadly, quickly and relevantly all at the same time. They are able to communicate more personally and extensively than ever before. They are able to get organised themselves and create, produce and contribute. Marketers need to adapt. The changes are not just reaching across the online world, but influence offline marketing as well. It’s not just a world of threats, but also of infinite possibilities. We have distinguished, for argument’s sake, between the social web and the commercial web. The social web is a part of online interaction where the organisation is clearly ‘a guest’, allowed to listen in, sometimes contribute and participate, but it does not ‘own’ anything: not the conversation (which belongs to the community), not the customer (who interacts in a broader context as a person) and not even the brand (which is what the community makes it). The commercial web is safer, more controlled. There is a sender, who owns a platform and directs the interaction, to some extent at least. The social web is exciting. It offers the possibility to engage customers around a brand, creating ‘viral’ campaigns that stimulate the broad proliferation of the marketing message. Customers can contribute and co-create a product or service, consult potential buyers and service other users of a product in the after sales phase. The commercial web offers the challenge of getting more traffic to the website, catering to their expectations and, if appropriate, supporting their buying process with payment and fulfilment. Customer-oriented organisations will invest in relevant content to draw appropriate customers to their website. They will invest in usability, removing barriers in design and making the interaction intuitive and pleasant. They will, moreover, invest in payment options and fulfilment that put the customer at the centre. Using pre-existing knowledge that assists in identification, differentiation, interaction and customisation is highly effective in creating more personalised online customer experiences.

case sTuDies albert heijn: where off- and online meet each other Appie was voted winner of the ‘Best Mobile Application’ category in the 2010 Accenture Innovation Awards. Appie is a well-known iPhone app that helps to build customer loyalty. With Appie a shopper can make a shopping list, find recipes, promotions and order online. The shopping list will present the products in a way that matches the way you walk through your store. Ingredients from a recipe can be put directly on the shopping list. Products that have been bought before can be remembered and promotions can be highlighted. In the store products can be scanned to add them or remove them from the list.

321



Part V Channels

case studies (continued) Consumers can also share their shopping list with other people. When they put a product on the list, others can see this as well. So households can avoid buying the product twice. Also they can twitter and place messages on Facebook walls; what do they like or dislike. A link with Albert.nl, Albert Heijn’s home delivery service has also been created recently. The customer can choose to pick up their order or have it delivered. The payment process had to be safely organised before this functionality could be added. The supermarket chain, later than Tesco, also started to offer free Wifi in their stores, the reason for this experiment being that in a number of Albert Heijn stores there is no mobile internet available. To be able to use the mobile shopping aid, Appie, connection to the internet is necessary. Source: Emerce.nl, 12 November 2009, 20 July 2010, 9 August 2011, 4 January 2012.

harry Potter: a magic brand In the book World Wide Rave there is a description of how a ‘Conversation Manager’ can make optimal use of the leverage effect. Imagine you are a marketing director of Universal Studios (one of the most famous amusement parks in the world). It has recently been decided to invest in some spectacular new attractions around the theme ‘Harry Potter’. It is your job to tell the world this wonderful message and to increase the number of park visitors. A traditional marketer would start a big television campaign, post billboards in prime locations and hire an exclusive PR agency to work on the media. Cindy Gordon, vice president of new media, decided to follow the ‘conversation manager’ approach. The Harry Potter brand is an emotionally loaded brand, with millions of fans around the world. People were queuing in book stores in more than 200 countries the day the latest book was published. J.K. Rowling’s books have been published in more than 65 languages; in total more than 325 million books have been sold. To spread the message of ‘The wizarding world of Harry Potter’ across the world, the Universal Studios team approached a number of known fans of the student-wizard. Together with J.K. Rowling, Universal Studios’ team selected seven Harry Potter die-hard fans. These seven people were invited on a secret webcast on 31 May 2007, at midnight. The place of the webcast was the film set, the office of Perkamentus. Loyal visitors of the Universal Studios park were all e-mailed about this webcast. Even more importantly, however, the seven fans immediately started to post the news of the webinar on different Harry Potter forums and blogs. By the following day, fans all over the world had received the spectacular news. Also, the traditional press picked up on the news very quickly. Universal Studios estimates that some weeks later approximately 350 million people were aware of their plans. Seven people distributing some exclusive news were able to reach 350 million people! The budget for this action was very small. Fans were extremely enthusiastic about the way of announcing the news. Reading the news in the New York Times, would not have produced this positive wave. Source: van Belleghem (2010).

Questions 1 Explore in what sequence Albert Heijn extended the functionality of its mobile app. Argue why they have chosen this path. 2 In your opinion, what is the role of such a mobile application within the integrated social media strategy of Albert Heijn or a comparable supermarket? 3 What factors influenced the success of the Harry Potter social media campaign?

322

Chapter 15 The online environment

QuesTions 1 Look for illustrations of web 2.0, web 3.0 and web 4.0. 2 In viral marketing campaigns organisations can use films that will be edited by customers. They can give the video their own ‘look and feel’. What is an advantage and what is a disadvantage of consumers editing the original film? 3 For an organisation of your choice, describe how they can involve consumers in the marketing of products or services during different phases of the relationship. (a) Describe in what way co-creation can take form during the orientation, selection, buying and after sales phase. (b) Also show how organisations can reward relations for their contribution. 4 People might express themselves more extremely on the web, in a positive or a negative way. What advice would you give organisations on the way they should deal with critics? Give four tips and provide reasons. 5 How could a producer of consumer durables best start a user community around its product? 6 In what way can traffic to a website be generated? For a supplier of your choice, describe the methods they apply to generate traffic. 7 Visit of a website of your choice and evaluate the design of the website. What recommendations do you have for improving the design? 8 Why do the logistical costs of online transactions for the first and third distribution forms in Table 15.1 (from the warehouse and from the satellite) hardly differ from the second distribution form (delivery from the store)? 9 Visit a website of your choice and try to see to what extent it is personalised. 10 For an organisation implementing a customer intimacy value discipline, what are the most important performance indicators on a website?

references Algesheimer, R., Dholakia, U.M. and Herrmann, A. (2005) The social influence of brand community: evidence from European car clubs, Journal of Marketing, July, 19–34. Anderson, C. (2006) The Long Tail: Why the future of business is selling less of more, Hyperion, New York. Berger, J.A. and Milkman, K.L. (2009) What makes online content viral?, 25 December, working paper. Available at: SSRN: http://ssrn.com/abstract=1528077 or http://dx.doi.org/10.2139/ ssrn.1528077. Belleghem, S. van (2012) The Conversation Manager: The power of the modern consumer, the end of the traditional advertiser, London: Kogan Page. Boswijk, A., Peelen, E. and Olthof, S. (2011) Economie van experiences, 3rd edn, Amsterdam: Pearson Education. Bügel, M. (2002) Klantenloyaliteit, over ongelijke behandeling in het digitale tijdperk, Amsterdam: Pearson Education.

323

Part V Channels Ehrlich, B. (2010) The Old Spice social media campaign by the numbers, Mashable.com. Eilander, E. (2004) E-mail marketing testen werkt, Tijdschrift voor Marketing, May, 32–5. Eilander, E. (2005) Gevecht om zoekmachinemarketing-euro, Tijdschrift voor Marketing, May, 46–8. Eilander, E. (2010) Zakelijke community: Philips ontdekt LinkedIn, Tijdschrift voor Marketing, 44, 11, 29–31. Emerce.nl (2009) 12 November. Emerce.nl, Starkenburg, J. (ed.) (2010) 20 July. Emerce.nl, Boogert, E. (ed.) (2011) 9 August. Emerce.nl, Libbenga, J. (2012) 4 January. Fellinger, S. (2008a) Fellingers favorieten, Tijdschrift voor Marketing, 42, 11, 8. Fellinger, S. (2008b) Obama, de eerste internet-president, Tijdschrift voor Marketing, 42, 7/8, 10. Fellinger, S. (2008c) Fellingers Favorieten, de A is van App, Tijdschrift voor Marketing, September, 42, 9, 8. Forrester (1999) IT View Report, September. van Geest, Y. (2011) TedxBrainport2012 Eindhoven; http://www.youtube.com/watch?v=yTtL-iAXJxo. Godin, S. ( 2008) Tribes, London: Piatkus Books. Goldenberg, J., Han, S., Lehmann, D.R. and Hong, J.W. (2009) The role of hubs in the adaptation process, Journal of Marketing, 73, March, 1–13. Greenberg, P. (2010) CRM at the Speed of Light, 4th edn, New York: McGraw-Hill. Grewal, D., Iyer, G.R. and Levy, M. (2004) Internet retailing: enablers, limiters and market consequences, Journal of Business Research, 57, 703–13. Haarman, J. and Peelen, E. (2000) Improving the accessibility of web sites by a higher ranking in search engines, Proceedings EMAC Conference, Rotterdam. Harris, L.C. and Goode, M.M.H. (2004) The four levels of loyalty and the pivotal role of trust: a study of online service dynamics, Journal of Retailing, 80, 139–58. Laan, J.W. van der (2000) The future of on-line food retailing, Food Personality, January. Lans, R.van der, Bruggen, G. van, Eliashberg, J. and Wierenga, B. (2009) A viral model for predicting the spread of electronic word of mouth, Journal of Marketing Science, 29, 2, March, 348–65. Marketing International (2003) Hoe ontwikkelt het internetgebruik zich binnen Europa, Marketing International, 38, 3, March, 16. Mika, P. (2007) Social Networks and the Semantic Web, New York: Springer Verlag. Niks, W., Plasmeijer, P. and Peelen, E. (2000) E-commerce, transactiemodel voor internet, Alphen a/d Rijn: Samsom. Olsthoorn, P. (2005) Hoe zwaar inzetten op interactief?, Tijdschrift voor Marketing, April, 57–9. Park, Y.-H. and Fader, P.S. (2004) Modeling Browsing Behavior at Multiple Websites, Marketing Science, 23, 3, 280–303. Peppers, D. and Rogers. M. (2000) One-to-One Manager: Real world lessons in customer relationship management, Oxford: Capstone Publishing. Pine, J., Korn, K.C. and Gilmore, J.H. (2011) Infinite Possibilities, San Francisco, CA: Berret-Koehler Publishers. Punselie, R. and Bugter, B. (2004) Web-communicatie, Utrecht/Zutphen: Thieme-Meulenhoff. Schans, W.M. van der (2001) Consumentengoederen en merkcommunicatie op internet, Rotterdam: Erasmus Universiteit. Srinivasan, R. and Moorman, C. (2005) Strategic firm commitments and rewards for customer relationship management in online retailing, Journal of Marketing, 69, October, 193–200.

324

Chapter 15 The online environment Swinkels, H. (2001) Web Usability bij de Nederlandse e-tailers, een onderzoek naar de bruikbaarheid van vijftien Nederlandse e-tailers, Rotterdam: Erasmus Universiteit. Toubia, O., Stephen, A.T. and Freud, A. (2010) Identifying active members in viral campaigns. Available at http://sites.google.com/a/andrewstephen.net/andrew/researc/papers/Toubia_ Stephen_Freud_viralmarketing_nov2010.pdf. Verhagen, T. and Broere, F. (2005) Een effectief ingerichte webwinkel: het koopproces centraal, Tijdschrift voor Marketing, September, 28–31. Weber, L. (2007) Marketing to the social web, how digital customer communities build your business, Hoboken, NJ: John Wiley & Sons. Wiklund, M.E. (1994) Usability in Practice: How companies develop user friendly products, Boston, MA: AP Professional. Wilde, E. de and Brenk. M. van (2002) Down to earth, e-commercestrategieën na de hype, Amsterdam: Pearson Education. Zhang, J. and Krishnamurthi. L. (2004) Customizing promotions in online stores, Marketing Science, 23, 4, 561–78.

325

Chapter

16

Contact centre management Contact centres face a huge challenge. What started out as the ‘place’ where all telephone contacts were dealt with, has grown into a ‘hub’ where all contacts between an organisation and its relationships are managed through a variety of different channels. Internet and telephone have converged and are facilitating phone calls and electronic messages. The contact centre has become a sort of flight control centre, directing messages, communicating and maintaining contact and hopefully building relationships. In essence, the contact centre of the future reflects the transformation of the organisation from a product orientation to a customer orientation. It is becoming the ‘enterprise relationship centre’ and is responsible for, to quote van Moorst (2004), ‘making sure an organisation can look its customers straight in the eye’. This chapter will deal with the management aspects of the contact centre. We focus first on telephone interactions, then move on to consider the management of other channels. It reflects the growth path of contact centres, but also is reflective of the present-day balance in activities for most contact centres. Section 16.1 describes the contact centres as such. In Section 16.2 we determine what service levels to offer customers and prospects for the telephone and discuss how these can be realised. Section 16.3 looks at the capacity planning that is crucial to the availability and responsiveness of the contact centre. After that, we move on to the topic of quality of contact (in Section 16.4). The scope is broadened in Section 16.5 to include different channels and in Section 16.6 we discuss the so-called ‘Key Performance Indicators’ that allow us to manage and control the call centre performance. In this chapter we will address the following questions: ●

The description and evolution of contact centres



Quality and performance management in contact centres



Managing the transition from a call centre to an ‘enterprise relationship centre’

PraCtitioner’s insight The computer is switched on and three windows are opened. At this time you are chatting through MSN with some people you know, e-mailing is like writing letters . . . too slow. The white cap of the iPod is clearly identifiable in one ear and the mobile phone is within reach. A friend just sent you a link to a nice online video.

326



Chapter 16 Contact centre management

Practitioner’s insight (continued) It’s a short description of communication behaviour and computer usage by today’s youth, and it is changing very quickly. Platforms for social communication are adopted quickly, mobile communication is the default and short messages in signs, specific abbreviations and images are more popular than voice conversations or e-mail. How far along are we, as organisations, to tune into this world of infinite communication options? Are we able to use the channels that will engage them? We might do well to think of the youngsters as the front-runners, because their communication behaviour is increasingly copied forward, to older generations. Parents ask their children how to use an iPhone, grandparents use their grandchildren to learn about online banking or safe browsing.

16.1

Contact centres described At the very start, call centres were a ‘place’ where a large number of employees were dealing with the in- and outbound calls with prospects and customers covering topics of varying nature. They have been spurred by CTI or Computer Telephone Integration, making it possible to integrate the functionality of the telecommunications network with data, computer applications, databases, speech technology and other media (van Moorst et al., 2007). Thanks to CTI it is possible to recognise customers who are waiting on hold, to pull up customer records at the beginning of conversations and select phone numbers and dial them automatically in outbound calling. The growth and integration of telecommunications and internet traffic in all its shapes and forms (sms, mms, MSN, e-mail, fax) are leading to a transformation of the traditional call centre to a (multimedia) contact centre. This centre, which may or may not be located at one physical place, deals with in- and outbound calls, chat sessions, e-mail messages, fax and regular mail correspondence. It provides information, service and can help market or sell (see Figure 16.1). When the channels are integrated and a conscious process to engage customers has started, the maturity of contact centres is increasing. They are no longer the operational departments that handle contact and are regarded as a cost factor, but have become ‘enterprise relationship centres’ or ‘value centres’. In this book we will retain the term ‘contact centre’, regardless of the maturity level. The contact centre consists of four basic elements, as can be seen in Figure 16.2. Of these four elements, people (manpower) are the most important. They determine the quality of the contact to a great degree. As contact centres are becoming more complete ‘enterprise relationship centres’ the complexity is increasing. The agents, a name that is

CrM definitions Enterprise relationship centre: The integration of a multimedia contact centre with marketing and sales within an organisation, which puts the customer experience at the centre of all efforts. Source: vanM oorst(2004) .

327

Part V Channels

Figure 16.1 Possible contacts Source: Huijnen (1997).

Figure 16.2 Elements of a contact centre Source: Belloni Business Consultancy Contact Centers.

given to people working in direct contact with the customers, need different skills and competencies to complete their tasks. They will, for instance, need sales skills to complete their communication skills. They need to be able to handle different systems and have sufficient product and customer knowledge to perform their wide array of tasks. It is necessary to recruit according to the complexity of this job and to provide sufficient training. The type of management and leadership and even the culture within the contact centre will have to change to fit the new ambitions and tasks. In the early maturity stages, contact centres are often run like factories, based on productivity standards closely related to the process. As a more mature contact centre evolves, the shift towards a more result-oriented approach seems appropriate. The telecommunications module comprises the telephone switchboard, the systems for routing the calls to the proper persons and voice response systems (see Chapter 18). The organisation of rescue and relief operations during emergencies is also considered to be part of this element of the contact centre; this involves the organisation of temporary solutions for emergency situations in which the switchboard is out of operation due to computer failures, fire and the like. The choice can be made to have the contacts handled by an external

328

Chapter 16 Contact centre management

contact centre or to relocate this operation to another location where a substitute contact centre can be set up within a short period of time. The information technology component (see Chapter 18) must make it possible to: ●

see who is called when contacting outbound and automatically dialling the number;



identify incoming traffic and route it to different agents;



gain access to required information at the right time and place;



organise the fulfilment: the automatic electronic generation and issuing of documents such as order confirmations, appointment confirmations etc.;



manage the workflow: manage processes and issue status updates (for example, what is the status of an order? Is it received, cleared, in processing or in shipment?);



generate management information on the productivity of the agents (employees), the number of calls completed, the turnover they realised, average call time etc.;



record and distribute quality measurements;



provide the back office with information on order processing and the like;



provide electronic training programmes;



support control activities involving the information system.

Process management focuses on the management of the contact cycle. Important points requiring attention include capacity planning and quality management. The first must ensure that a contact centre can handle the volume of calls; the subject of the second is the quality of the contact. In this part of the book dealing with operational CRM, we concentrate on process management – technology and manpower are a given.

16.2

Determining the service level What determines the quality of the contact? The service level in the contact centre is first and foremost determined by the ability of the customer to actually reach an agent and, more generally, the contact centre’s ability to provide a swift response to incoming messages.

availability The quality of the contact is, to a great extent, dependent on the organisation’s availability by telephone. This would appear to be a simple concept, but, on closer examination, it has more facets than one would think at first glance. It is more than simply the percentage of telephone calls that are answered within y seconds. First, it may be desirable to be able to distinguish between customer groups, for which different levels of service are created. Then, attention needs to be paid to callers who get a busy signal and cannot reach the contact centre at all and to those callers who decide not to wait and break the connection prematurely (call abandon). Calls falling into this latter category are referred to as ‘lost calls’. In general, callers decide right after the establishment of the ‘technical’ connection whether they will wait or not. Should they decide to wait, then the chance is high that they will remain until the end. Finally, the average response time provides an incomplete picture. If we use a graph to indicate which frequency results in a certain response time, we will usually discover a skewed distribution. A small percentage of callers have to wait much longer than the average amount of time.

329

Part V Channels

PraCtitioner’s insight For a service level of 80 per cent answered within 20 seconds, roughly 30 per cent of the callers will end up in the queue, the longest waiting time will be approximately 3 minutes and the average response speed will lie between 10 and 15 seconds. Source: Cleveland and Mayben (1999).1

Quality In addition to availability, the service level is naturally also dependent on the quality of the contact itself. Critical points involved in determining and measuring the level of quality are: ●

Are customer needs and wishes being interpreted correctly?



Are details being noted correctly?



Are customers not being angered or frustrated?



Is the customer prevented from having to call back? Is initiative taken by the organisation?



Are opportunities being captured to connect with the customer on a more personal level and is valuable feedback being picked up?



Has the transaction been completed, the question been adequately answered or the complaint resolved?

An insufficient level of quality has consequences for productivity. Agents have to cope with customer irritation, and lose time, energy and the motivation to do their job. Furthermore, staff turnover and absenteeism increase as a result. The impact of different aspects of the telephone conversation on customer satisfaction is shown in Figure 16.3. Only a limited number of aspects have a positive influence on the caller’s level of satisfaction. How polite the agent is does matter, yet this has only a slight influence on satisfaction. Their product knowledge, friendliness and ability to offer ‘real’ solutions allow agents to exercise a great deal of influence on the level of satisfaction. Aspects which could be considered ‘hygiene’ factors and which must be of high quality can be found in the lower right quadrant. This involves availability, following up on promises, putting customers through and customer recognition.

CrM definitions What is a high-quality telephone conversation?



The caller is satisfied. The data have been input correctly.



The conversation was necessary.



The agent gave the right answers.



The caller received the correct information.



The agent received all the necessary and useful information.



The caller is not put through a countless number of times.



1

330

The calculation follows the Erlang C formula, available at www.erlang.com/calculator/erlc/.



Chapter 16 Contact centre management

CrM illustration (continued) ●

The caller is not rushed.



The caller has the feeling that the conversation was effective.



The contact centre has completed its task.



Unsolicited information from the customer has been noted and recorded.



The caller does not feel it is necessary to enquire, check or to call back.



Other employees can correctly process the customer’s order.



The agent is proud of their work.



The caller did not get a busy signal.



The caller did not have to wait too long in the queue.

Source: Cleveland and Mayben (1999).

Figure 16.3 Impact of quality on satisfaction Source: Call Centre Magazine, 5 (1999).

Determining the service level The desired service level will have to derive from the strategy. With customer intimacy, the quality level of the contact should be higher than that found with operational excellence. By translating customer intimacy into service requirements for the contact centre, just as much attention must dedicated to ensuring that customer intimacy is not seen as a synonym for servitude. Customer orientation and customer friendliness are desirable, yet must not deteriorate into altruism and self-sacrifice. Commercial skills must guarantee that fulfilling customers’ wishes is profitable and satisfying for both parties. Determining the desired level of service also requires weighing costs and returns against one another. Service has its price!

331

332

96

97

40

42

31 32

Source: Cleveland and Mayben (1999).

89

93

38

39

29

30

74

83

35

36

27

28

45 62

33 34

25 26

Contacts answered < 20 sec. (%)

Scheduled personnel (: 1.3)

Active agents

0.5

1.0

1.5

2.0

3.5

6.5

26 12.5

% lost contacts (estimate)

table 16.1 Analysis of the increasing marginal return

0.15

0.30

0.45

0.60

1.05

1.95

7.80 3.75

% calls permanently lost

10.1

10.2

10.3

10.4

10.7

11.2

14.6 12.2

Hrs lines are in use

200

199

199

199

198

196

184 193

Answered calls

4,443

4,437

4,430

4,423

4,403

4,363

4,103 4,293

Gross turnover/ average call ($22.25)

312

302

293

283

273

263

244 254

Labour costs ($)

152

152

154

156

160

167

218 182

Line costs free number/ 15 min.

3,980

3,982

3,984

3,985

3,971

3,933

3,641 3,847

Net turnover

(2)

(2)

(1)

14

38

85

0 206

Increasing marginal return

Chapter 16 Contact centre management

Table 16.1 illustrates how an optimal service level may be determined for a contact centre whose task it is to take orders by telephone. The optimisation decision concentrates in this case on the determination of the number of agents to be deployed for the completion of a given number of incoming telephone calls. How many direct and indirect individuals (columns 2 and 3) must be scheduled to answer the calls (column 7)? Which service level will then be reached? Or how many calls will be answered within the norm of 20 seconds? How many callers abandon? How many of these quitters try again later and which portion have we ‘lost for good’ (columns 3 to 5)? Next, the turnover that may result from the customer contacts may be determined (column 8). This return may be used to offset the contact centre costs which are linked to the workforce size and the use of the telephone lines (columns 9 and 10) in order to determine the net turnover. Finally, the ‘increasing marginal return’ of the use of an extra agent in the contact centre is calculated in the last column: how much extra net turnover is earned through the use of an extra agent? It appears that the optimum is achieved with 29 agents and that, after this amount, the additional costs are no longer offset by the growth in net turnover.

16.3

Capacity planning Realising the desired level of availability is dependent on capacity planning. At any given moment of the day, the right number of agents should be available to handle the telephone contacts. In contact centres where incoming as well as outgoing telephone calls are processed, the work pressure is more or less manageable. Outgoing calls may be conducted at times when there is very little incoming call traffic. None the less, we must also realise that the timing of the outbound calls is of importance for their effectiveness. For example, an agreement has been made with a customer that they will be called back at a certain time and the chance of reaching a prospect is higher at certain times of the day than at others. The result is that capacity planning remains necessary. The number of staff needed will have to be deduced by predicting the number of calls.

Prediction of number of telephone calls In predicting the number of telephone calls, long-term patterns are usually translated into half-hour periods. Figure 16.4 illustrates how the number of telephone calls can be predicted for a half-hour block of time. To do this, a step-by-step breakdown takes place for the aggregated prognosis. In this way, the annual forecast is translated step-by-step into a half-hour prediction. Fluctuations in the call traffic for certain seasons, weeks and days are also taken into account. Figure 16.4 gives an explanation of the calculation concerned. There are contact centres that base their capacity planning on sales forecasts. On the basis of the average transaction amount, the expected turnover can be converted into the number of transactions to be completed. Next, it will be determined how many telephone calls are necessary to be able to complete this number of transactions. This number is multiplied by the average call duration and the completion time required in determining the final contact centre capacity. In predicting the necessary capacity, the influence of campaigns on the work pressure of the contact centre must also be factored into the equation (Bontebal et al., 2001). Which activities have been planned at which times? How much response is expected? Campaigns may cause trend breaks in the size and composition of the call traffic. If this is not taken into account, it can lead to a drop in the level of service and a loss of turnover. In order to be

333

Part V Channels

Figure 16.4 Capacity planning Source: Cleveland and Mayben (1999).

able to accurately estimate the influence of these marketing activities, good communication between marketing departments and the contact centre is a top priority. The most preferred situation is that in which the activities calendar is created in consultation between the two. If marketing determines the calendar contents unilaterally, an unnecessarily high number of peaks in the call traffic may occur. The opposite situation is no more desirable, in which the contact centre and the post room (fulfilment) call the shots. The optimum activity calendar will be one that is born out of weighing commercial against operational interests. With regard to modifications in the calendar, discussions will also have to take place regularly and in a timely manner. In order to be able to make an accurate prediction of the call traffic, the organisation will then have to develop insight into the response percentages to marketing activities. Which response is achieved from a similar mailing at a similar time? How many people call in reply to a direct response advertisement or commercial? What will be the effect of a marketing activity incentive?

Predicting staffing needs In order to calculate the staffing requirement, Erlang developed a much-used yet difficult C-formula back in 1917 (Cleveland and Mayben, 1999). Given the fact that Erlang C is built into many software packages for workforce management, the complexity is no longer

334

Chapter 16 Contact centre management

a problem. In order to calculate the minimum staffing figure, four parameters must be filled in: 1 average conversation time in seconds; 2 average completion time in seconds; 3 number of calls; 4 desired service level in seconds (number of seconds within which the call should be handled). In Table 16.2, the staffing needs have been calculated using the Erlang C formula for an inbound contact centre with the following parameter scores: ●

average conversation time: 180 seconds.



average completion time: 30 seconds.



number of calls per half hour: 250.



desired service level in seconds: 20.

The computer program indicates in this case that the optimum workforce size is 34 agents. This calculation is based on the assumption that the unanswered ‘calls’ wait and do not hang up. This assumption, which lies at the basis of the Erlang C formula, generally results in an overestimation: the actual number of telephone calls to be handled is lower owing to the lost calls. In determining this optimum, the law of diminishing returns applies. table 16.2 Erlang C for inbound contact centres Contact centre for incoming telephone calls Average conversation time in seconds: 180 Average completion time in seconds: 30

No. of calls per half hour: 250 Service level in seconds: 20

No. of agents required

P(0)

ASA

DLYDLY

Q1

Q2

SL

OCC

TKLD

30 31 32 33 34 35 36 37 38 39 40 41 42

83% 65% 51% 39% 29% 22% 16% 11% 8% 6% 4% 3% 2%

209 75 38 21 13 8 5 3 2 1 1 1 0

252 115 74 55 43 36 31 27 24 21 19 18 16

29 10 5 3 2 1 1 0 0 0 0 0 0

35 16 10 8 6 5 4 4 3 3 3 2 2

24% 45% 61% 73% 82% 88% 92% 95% 97% 98% 99% 99% 100%

97% 94% 91% 88% 86% 83% 81% 79% 77% 75% 73% 71% 69%

54.0 35.4 30.2 28.0 26.8 26.1 25.7 25.4 25.3 25.2 25.1 25.1 25.0

P(0) probability of a waiting time longer than 0 seconds ASA average speed of answer for a call DLYDLY average delay for all of the calls that are not answered immediately Q1 average number of calls in the queue (all calls are included in the calculation, even those calls which do not end up in the queue; the designation is misleading as a result) Q2 average number of calls in the queue when all the agents are occupied or when there is a queue SL service level, in this case the percentage of calls that must be answered within a certain number of seconds OCC percentage of agents that are working on the processing of the calls (call and completion time) TKLD the line occupancy rate in hours (conversation time + ASA) × no. of calls per hour Source: Cleveland and Mayben (1999).

335

Part V Channels

Increasing the number of logged-in agents has a diminishing effect on the service level. Each time an agent is added, there will be an increase in the percentage of callers that are handled within 20 seconds, but each time this increase gets smaller, which is why achieving a top service level places demands on the personnel budget. An alternative to the Erlang C formula for predicting staffing needs is simulation. A computer program can be developed in which call traffic spread out over the day, the week and the month can be simulated. Variations can be built into the call duration as well as the probability that callers in the queue will abandon the call and call back. The service and cost levels can be calculated for various staffing levels in the contact centre, thus allowing the optimum workforce size to be determined. In predicting staffing requirements, special attention must be placed on the effect of lengthy calls and peak traffic on the service level. A disorganised effect can be the result, and may extend over a longer period of time. Completion activities can come under pressure and the quality of the contact can decrease. The influence of the workforce size on the line occupancy rate will also have to be reviewed. The more agents that are deployed for a certain ‘call load’, the more the line occupancy will decrease. The opposite also applies: if fewer agents are available to handle a certain call load, the occupancy of the lines will increase because the answer speed has increased. If the supplier provides customers and prospects with the opportunity to call free of charge, its line costs will rise.

routing The effectiveness and the quality of the call traffic increase if the calls take place between the right people. The regular customer will speak to their regular contact person or, if they are either absent or unavailable, to their replacement (the fallback scenario or the secondline back-up). The French-speaking customer will be assigned to someone who speaks their language. The person interested in a specific product will be put through to the product specialist and the person filing a claim will be helped quickly and appropriately. To do this, the call traffic will have to be routed. The first- and second-line agents will have to be specified in the system for the different types of contacts and customers. The effect of this ‘skill-based routing’ on the necessary workforce size most not be overlooked.

16.4

Managing contact satisfaction Once the contact centre’s availability has been taken care of, the focus can be shifted to conducting an efficient and effective dialogue with prospects and customers. Figure 16.2 contains the previously mentioned elements from the customer contact which determine satisfaction.

e-mail The challenge presented by inbound e-mail remains fully understanding the question the customer is asking. The mail message can be vague or broadly formulated, which makes it hard to provide exact answers. E-mail suffers from this problem more than regular mail, because of the perceived speed of communication. A letter, which may take several days to arrive and which requires the effort of posting, provides a better incentive to take the time to be precise in describing the issue. One can imagine that a request for clarification of the

336

Chapter 16 Contact centre management

issue in response to an e-mail is not the answer the customer was hoping for. It leads to communication back and forth and can make e-mail quite an expensive communications channel, of which it is hard to manage the quality. There are several options available for escaping the deadlock of e-mailing back and forth, and they don’t involve making it hard to e-mail or completely closing off the channel by hiding e-mail addresses and eliminating them from customer communication. Automatic e-mail response systems can be used in combination with so-called dynamic content management systems. They can make answers that have been given previously visible and allow agents to quickly mail complete messages or components of messages that they or a colleague have used before. It speeds up the creation of e-mail messages and improves the consistency of the answers provided. The knowledge bank of answers can in turn be used to improve the self-service ability of customers. Another answer to the problem of vague questions asked through e-mail is to work with contact forms, structuring the issue with drop-down menus and additional or background questions. This way the e-mail is structured in a standard format, allowing agents to quickly scan the message and get a more complete view of the problem. In the case of a more standardised formulation of inbound e-mails, it is also easier to provide more standardised responses. The responses can be predefined to a certain degree. They may contain predefined links to direct a customer to appropriate answer pages or locations where further conversation can take place. The conversation can be channelled towards appropriate and available content. Outbound e-mail has been discovered in recent years as an effective marketing communications tool. The initial enthusiasm led to mailbox cluttering: spam messages and junk mail have taken on enormous proportions in a matter of years. Having gained some experience in direct marketing, the different regulating bodies in the Western world were quick to take action and tighten the regimes for outbound e-mailing (see Chapter 5: it is mostly opt-in based). The current day practice is that a clear opt-in must be proposed, so permission needs to be given by customers to allow a company to approach them by e-mail. At the same time it must be clear in any and all communication how the recipient can unsubscribe and have their address removed from the sender’s list (opt-out). The enthusiasm described here was mostly on the advertiser or marketer’s side. The financial advantage of e-mail is huge, with low production costs and virtually no shipping costs, along with the potential to tailor the offering to the customer and to generate direct response. If it isn’t the perfect marketing communications tool, it’s coming pretty close! The messages can be finetuned according to the customer’s indicated interests or the insights the organisation has about a given customer segment. The messages can contain links to other content, websites, communication platforms etc. The possibility of the contact becoming two-way is quite real, although many uses of outbound e-mail marketing are still very much directed at ‘flyering’ or sending out the corporate brochure or newsletter. Let’s just say it’s old behaviour on new channels.

PraCtitioner’s insight ten e-mailing tips 1 Stop sending general information. 2 Use sophisticated, clean databases. Don’t use a blunderbuss approach. Make sure you have opt-in addresses: people who don’t mind being approached with commercial messages.

337



Part V Channels

Practitioner’s insight (continued) 3 Produce concise, tailored reports. 4 Approach your potential customer intelligently; don’t push your product too hard. The customer is no fool. 5 Try starting a one-on-one dialogue with the customer. 6 Create reports. Keep track of how often you have approached a customer, in which stage of contact you are at the moment; don’t send the same e-mail twice. 7 Notify the recipient. Provide information on the reasons why they have received the e-mail. 8 State the sender’s name on the e-mail. 9 Indicate clearly what the recipient must do in order to stop future e-mails. 10 Always send to personal e-mail addresses. Never send to sales@... nl, [email protected] etc. Source: Vlam (2003).

Chat A chat session can have several significant advantages over e-mail in terms of engaging in contact with a relationship. Questions can be formulated in a brief manner and in ‘speaking language’. An answer can be given in a matter of seconds, making the potential for interaction greater as a result. It is quite quick to ask for an elaboration on an answer that is not quite understood, so that a ‘first time fix’ is easier to achieve. It is also easier to refer to content, such as an article or product on the website and guide a customer through the buying process, for instance. Many anticipate that chat sessions will thrive as a communications tool in the years to come, but they pose a problem to organisations in terms of capacity planning. Manual chat sessions are quite time-consuming for employees and can be quite expensive. The spare capacity required for timely responses to questions is quite large and sometimes hard to plan. One solution is the use of so-called ‘chat bots’ – software robots that can chat with customers. They rely on a knowledge base and a logic engine that enables them to present responses through a series of expert rules. As long as relatively simple conversations are presented to the chat bot, it will cope beautifully. The first chat bots were straight ‘question-and-answer’ bots. They had no relevant conversational memories. Nowadays, the conversation can go deeper than one question. If you were to ask Anna, the IKEA chat bot, about opening times, she would ask you for which store location. You would, for instance, answer ‘Milton Keynes’ and she would kindly show you the page with all the opening hours of the Milton Keynes branch of IKEA. If you then ask for directions, she will remember that you were looking for Milton Keynes earlier and provide you with the appropriate directions. The fact that IKEA has given its chat bot a name reflects the perceived personal nature of chatting. Many chat bots have names and faces. It has proved to have a positive influence on the customer experience. There are over 1,000 chat bots currently in operation worldwide, according to the website chatbots.org, which aims to maintain a complete directory per country and area of expertise or application of the chat bot.

338

Chapter 16 Contact centre management

telephone call One of the most important negative influences on satisfaction appears to be the call charges. This raises the question of which costs can be charged to customers and prospects for their use of the contact centre? Should the customer be able to call at the expense of the supplier, or should they be charged a fee? Research has shown that, in principle, customers are prepared to pay a price for after sales service by telephone which goes beyond the call charges themselves, provided they receive proper assistance quickly from a capable individual. It is worth the money to customers to reduce waiting time and to prevent a situation in which they are repeatedly put through to the wrong person. There is a general preference for services in which a fixed price is charged per call rather than a variable charge. One other point of particular interest is the use of ICT (information and communication technology) in the dialogue with customers. To what extent can voice response (VRS) and voice recognition systems be used? The following statement made by a contact centre manager offers something to go on: ‘The efficiency of telephone contact is determinative for the pleasantness of the conversation and the costs. Any technology that may aid in this is welcome.’ In other words, for customers the telephone is primarily a communication channel which can be used efficiently to obtain an answer to a specific question. Voice processing systems help to increase this efficiency and convenience, particularly when it comes to answering frequently asked questions. A good conversation is characterised by a certain structure. The two parties identify themselves and determine the goal of the conversation. Several remarks may be made to positively influence the tone of the conversation from the outset. Next, information may be gained so that a solution can be devised and communicated. Finally, the conversation will be completed and follow-up appointments may be made. The satisfaction with the conversation being conducted is further influenced by the agent’s conversation and listening skills, the directly accessible customer and product knowledge and the time the agent has available. The agent’s competency is a determining factor in the quality of the conversation. Are they capable of uncovering the question behind the question? Someone who calls a financial services company and asks for the interest rate does so for a reason. It can be interesting to determine the motive behind the call and to use it to deepen the conversation, providing a recommendation if desired, or making a product offer. The computer can aid the agent in conducting this conversation. It may contain information about favourable cross-sell opportunities, complaints which have arisen in the past, certain characteristics specific to that customer, an indication of the preference not to

CrM illustration the supporter . . .

the opponent . . .

Voice response systems are a generally accepted tool. Some target groups will not always want or be able to make use of VRS, such as the elderly or foreigners. The barrier to communicating via a VRS may even be lower than that for personal communication, because people can remain anonymous.

Voice response systems are irritation tests for customers . . . Using agents can contribute to a 40 per cent increase in turnover. Source: Second National Call Centre Congress (1999).

339

Part V Channels

receive mailings, newsletters and the like. Sales arguments or the status of an order can be called up. However, these same screens may also hinder the agent in conducting the conversation. This may be the case if the conversation is set out in scripts from which the agent may not deviate. On the one hand, these texts may have already proven themselves and can benefit productivity, on the other hand, they may prevent the employee from getting a feel for the customer’s unique situation. The human element of the contact then suffers and this can have a significant impact on a CRM strategy in particular. Agents’ competency in conducting a particular conversation is naturally dependent upon their previous education, training, attitude and motivation. In order to achieve an optimal match between customers and agents, many companies divide the contact centre into sections, each staffed by specialised employees. The adverse effects of this segmentation on the capacity planning, productivity and availability of the contact centre are considered to be outweighed by the advantages. Agents specialised in certain customers, products or customer questions are capable of raising the quality of the customer contact and thereby developing the relationship and increasing turnover. In a financial services company for example, the relationship managers may opt for customers from a segment with which they feel they have the most affinity. Advanced (voice) recording techniques make it possible to structurally monitor agents’ performances, both quantitatively as well as qualitatively, and to analyse, compare, combine and process research data simply and in any manner desired to create insightful and valuable management reports. Insight is gained into the quality and the productivity of individual employees and of the contact centre as a whole. Thanks to these data, management can support and guide its personnel in a more targeted manner. Some advanced monitoring techniques even make it possible to register an agent’s entire screen behaviour. Within many contact centres, the quality of the contact moment is still evaluated personally. This is done by logging in and listening in on an agent or through the recording of conversations on tape. Standard evaluation criteria are used to grade the contact. Afterwards, the team leader, mentor or coach will evaluate the agent’s contact. Agents are evaluated on the basis of the following aspects: ●

the result of the conversation – customer satisfaction level;



the use of guidelines;



telephone conduct;



executing cross- and up-sell activities;



structure and content of the conversation;



attitude towards the customer;



providing the correct information.

in general Managing customer satisfaction and the quality of the communication with customers cannot be done without addressing the issue of privacy. Is it really wise to call customers at times when we know that they are at home, but will probably be annoyed about us calling? Is the e-mail we are sending really what the customer is looking for at this point in time, or do we regard the opt-in that was given as a right to harass them at any given time with a junk mail message? In a general sense, an organisation engaged in a CRM strategy will process more inbound than outbound contact. When it engages in outbound contact, it’s often about service calls intended to welcome a new customer or find out about the

340

Chapter 16 Contact centre management

satisfaction level with the repairman who just fixed a problem. It’s not about cold prospecting. Outbound calling is more likely to be agreed to because it is a call back request, rather than a deliberate action to push a marketing or sales message.

16.5

Key performance indicators The availability and the quality of the contact centre can be measured through the use of key performance indicators. The following were identified by Cleveland and Mayben (1999) and are updated here:

16.6



Average value of a call (for turnover-generating contact centres), to be calculated as the total turnover divided by the number of calls.



Customer satisfaction.



First-time resolution or ‘first-time-fix’ rate. What percentage of questions are answered in one single on-going interaction? It is a performance indicator that was initially used for phone calls, but can be used for chat sessions and other media alike. Working with this metric can lead to several complications. First, not all topics can lead to a first-time resolution, perhaps because the customer needs time to reflect upon an offer or a proposed solution. Furthermore, the measurement issue at hand is: how do you make sure that somebody who has called twice in the same week was not helped according to the ‘first-time-fix’ standard twice instead of taking two interactions to solve one problem? And if you introduce this metric, what incentive is given to employees to close tickets and request and consider them ‘fixed’ before the customer thinks so too?



Availability and response time.



Percentage of abandonment: the number of people who hang up, callers who get the busy signal.



Costs per call: the total costs for the contact centre during a specific period divided by the total number of calls; the development of insight into the factors which influence the level of costs.



Errors and work that must be redone. Using the database, it can be determined how often customers must call back, how many problems remain unsolved, and how many errors are made during data entry.



Forecast call load versus the actual situation.



Scheduled personnel versus practice.



Schedule discipline.



Average handling time (AHT): the sum of the average conversation time and the average completion time.

Managing the development of contact centres Transforming the contact centre into an ‘enterprise relationship centre’ is definitely not without its challenges. We will now address some of them.

341

Part V Channels

Management, leadership and employee profile Contact centres used to be referred to as ‘calling factories’. Not a flattering term, but one that reflects a style of management and a way of managing their performance that was by any definition somewhat Taylorian. It is also in stark contrast to the role we would like to give contact centres as ‘enterprise relationship centres’. The industrial way of managing a call centre by measuring its ‘production’ (number of calls handled, waiting time, call duration, etc.) will have to give way to other styles of leadership and management. The value of employees changes. A dominant focus on cost control and efficiency is no longer sufficient. There must be a broader perspective on the added value of customer contact. The days in which the employee base was completely refreshed every two to five years (with employee churn rates of 20 per cent up to 50 per cent!) have to be over. It is detrimental to all investments made in training, skill building and acquisition of unique knowledge on products and customers. Thus, it is probably a primary requirement to make working in call centres more attractive and to offer the prospect of a career, not just outside, but also inside the contact centre. If more room is created to express oneself and engage in customer interaction, without having to stick to pre-scripted messages, the employee motivation and quality of contact will improve. In this new context, the agent should not be directed by technology, but rather supported by it. It’s a transition that is only feasible if management and leadership are changed to allow some breathing room. The strong calculative control over capacity, processes and stringent quality parameters should be complemented, but evidently not replaced entirely. It should be feasible to include elements relating to the attention the customer is given, hospitality, customer experience, effectiveness (as opposed to focusing solely on efficiency), sales results etc. It also requires investment in competencies and skills, empowerment (self-control to a certain degree) and the creation of learning teams. More leadership and less management is required!

PraCtitioner’s insight specialist or generalist agents The call to opt for specialist or generalist agents has many consequences. The choice should not be made on gut feeling, but rather depend on the factors listed below. ●







The effects on the productivity of contact execution. How many of the questions is one agent able to answer? How much transfer of knowledge is required before another person can take over the customer’s case? Agents’ ability to work across several channels. Often agents are restricted to channels, because of good oral skills or their ability to write good letters or e-mails. The positive effects of changing perspectives in providing a challenging and motivating workplace for employees. The possibility to create a stable work package and workload for employees by planning capacity according to channel traffic.

Specialism can be created around different dimensions: channel specialism (web-care, e-mail, telephone inbound or outbound); topic (invoices and billing, technical service, information requests); or even customer group (SMEs, consumers, large key accounts, international, trade relations).

342

Chapter 16 Contact centre management

Customer experience management The attention that is being paid to the customer experience is noticeable in many areas: the experience economy, the value proposition and the way we think about the marketing of services. Within contact centres the topic has been placed high on the management agenda too, maybe even higher than anywhere else. Management is feeling the urgency because of a growing number of channels, privacy issues, data synchronisation issues and the fact that customers are quite outspoken about their preferences. Customer satisfaction with contact centres is suffering as a consequence. The one centre that was supposed to facilitate customer contact is often seen as a barrier, using interactive voice response systems and menus filled with choices, infinite putting-through and holding-the-line, after which reiteration of the problem or questions has to take place, only to find out that fulfilment is not reliable. By paying attention to the customer experience of the different touch-points and their journey across different touch-points (see Chapter 13) the situation is starting to change. The ideal thing would be to engage customers and truly reach out to them, connect with them and offer an experience that is memorable, unique, clearly linked to the brand and associated with the provider of the experience, but that may be a long way from current-day practice.

Knowledge management and content management (van Moorst, 2004) Knowledge management is supposed to contribute significantly to an organisation’s ability to properly identify customers, capitalise on the information that it has on them, use information about products, services and issues therewith and ultimately provide faster, better feedback in customer contact. The knowledge that is inherently present in the heads of employees, in manuals and other information resources, must be gathered and structured. It must be kept up-to-date, so that it retains its relevance and validity. The structure should be clear and provide a good overview of available knowledge to the employees, customers and partners. The disclosure of knowledge is a speciality field. It is often underestimated how much time, attention and intelligence are required to disclose the broad knowledge of an organisation in a way that allows the various users, both skilled and unskilled, to work with it. It is largely about content management: the collection, creation, publication, indexation, actualisation and distribution of content is key, but must be supported by a knowledge management system when it comes to finding solutions. It is advisable to place responsibility for this activity with the contact centre and not with specialist units outside the contact centre. The users must be in control, because they experience the problems and are ultimately also creating knowledge in cooperation with the customer. They know whether the answers in the knowledge management system are satisfactory, or if something is missing. They are able to apply knowledge that has become available quickly. Placing it outside the contact centre would require more coordination and constant marketing of knowledge resources.

outsourcing The last taboo in the contact centre world might be the word ‘outsourcing’ (van Moorst et al., 2007). Customers are the core of the organisation, the reason for its existence. How could any self-respecting organisation outsource that? But with the increasing complexity of contact centres, the maturing of this environment is also proving more difficult and

343

Part V Channels

more costly. The core competencies required to be able to manage all the aspects of the contact centre are not always present within one organisation. With the increased complexity one could argue it is becoming a specialist area that can be outsourced to a third party. Outsourcing does not mean losing control, but rather entrusting the infrastructural aspects and operational execution to a specialist. It is a valid choice that warrants a closer look than many are willing to give it, given the taboo.

16.7

Conclusion The contact centre is the (virtual) place where (all) traffic across multiple channels involving direct customer dialogues, both inbound and outbound, is being managed and handled. It ensures that the organisation can see eye to eye with its customers. The dialogue with prospects and relationships of the organisation is conducted in an effective and at the same time efficient way through a combination of channels, dependent on telecommunications and computer networks. There is a balance between technology and human resources. The technology will need to provide efficiency, ease of use, reliability, information about products and customers and allow for low costs and high productivity. Employees, especially when a CRM strategy is followed, are required to bring the human touch to conversations and be present at the moments that matter most. They will need to be supported, rather than directed, by technology. The quality of the contact centre is greatly dependent on its accessibility and responsiveness. Professional capacity management will take care of the right availability of employees to handle the traffic flows at different times. Forecasting is an important aspect, as is having fall back scenarios in case of emergencies. Quality is determined mostly by the quality of contact. In telephone contact it would be about the ability of agents to really listen and respond appropriately. The key questions that need to be answered in order to assess the broader quality of the contact centre are: ●

Do they have the right communication skills and access to the right knowledge?



Are they empowered to solve issues for customers the first time around?



Is their relationship with the back office solid and are they trained enough to handle complex issues?



Are new channels being explored and developed?



Is the handling of e-mail swift and correct, with attention being paid to knowledge management?



Are chat sessions a productive addition to the channel mix in the contact centre?



Is there a learning relationship so that more and more skills are being developed in the contact centre, allowing employees to grow and develop themselves within the contact centre, rather than elsewhere in the organisation?

If the answer to most questions is ‘no’, the chances are that the maturity of the contact centre is low and the agent is actually just a receptionist, taking calls and making call-back notes or passing on cases to specialists in the back office. A position that is not sustainable in the long term, given the expectations of customers and the progress being made in other contact centres.

344

Chapter 16 Contact centre management

Case stuDy Zappos Zappos is a benchmark in service. This e-commerce up-and-coming organisation that started off selling shoes, complemented their assortment with clothes, accessories, electronics and so on and was sold to Amazon for a little less than $1 billion. They are well known for their 365-day return policy. If the shoes are not worn, you can return them any time up to 365 days after purchase. You don’t even pay shipping to return or exchange the shoes. By simply going back to Zappos.com and logging into your account, you can easily print out a return label for UPS or USPS. Another great feature that sets Zappos apart from the crowd is their user surveys and reviews. When you find a shoe you’re considering purchasing, it certainly helps to know that 85 per cent of the people surveyed believed it to ‘feel a half size smaller than marked’, or whether or not it felt ‘true to width’, and Zappos provides this information through their user surveys. When explaining Zappos.com’s almost obsessive dedication to customer service, the e-tailers’ employees always seem to turn to real-life tales. ‘That’s the Tony pizza story …’ began Jane Judd, senior manager of the customer loyalty team, talking about a time when CEO Tony Hsieh asked his Skechers reps to call in after-hours to test his staffers and find out if they would track down late-night pizza places in their area. (They did, coming up with the names and phone numbers of the three closest options.) ‘One of the craziest stories,’ said Jerry Tidmore, who manages Zappos’ help-desk concierge service, ‘was that a guest checked in to the Mandalay Bay hotel [in nearby Las Vegas] and forgot her shoes.’ According to Tidmore, the guest called Zappos, where she had originally purchased the style, looking for a replacement, but they didn’t have any in stock. So the company found a pair in the right size at the mall, bought them and delivered them to the hotel – all for free. Such anecdotes are a testament to the company’s central tenet, which is written right under the Zappos logo on the website: ‘Powered by Service’. And while most customers don’t call the company looking for pizza, Zappos takes its commitment to service seriously – sacrificing short-term profits for it, investing a minimum of four weeks’ training for each employee and operating a 24-hour warehouse that is admittedly not cost-efficient. The goal, Hsieh said, is to make Zappos’ customers very happy – and that leads to big cost savings elsewhere. ‘We let our customers do the marketing for us’, he said. What emerged was a plan to put customer service first. The company’s 342-person, round-the-clock customer loyalty team in Henderson, Nevada, answers 5,000 calls a day, though that number grows significantly during the November and December busy season. They also answer 1,200 e-mails a week and monitor Twitter and social networking sites for mentions of Zappos, which they use to proactively reach out to potential shoppers. Judd also oversees a resource desk team, which handles more complex requests such as getting the actual measurement of a heel or checking a colour, as well as Spanish-language and Canadian teams. She said call-centre employees are given no time limits for their calls and are encouraged to ‘use their personal, emotional connection on every call’. For example, she said they might ask about the dog barking in the background or send flowers to a bride. To achieve that level of interaction, Zappos has made training a priority – for the entire company. Rachel Brown manages the Pipeline team, Zappos’ in-house training programme, which has grown strongly.

345



Part V Channels

Case study (continued) The first week of training includes everything from how to work the phones to special seminars on Zappos’ culture and core values. Seminars on customer service and in-depth call-centre training start in week two, and employees who will stay in the call centre get another three weeks of training on the phones. The goal, Brown said, is to tell the new employees to ‘forget about all your other jobs, especially if it’s another call centre’, she said. ‘We have to restart the engine the Zappos way.’ All of this requires investment. Training doesn’t come cheap, even though, as Judd pointed out, the company-wide requirements mean that during the holiday rush staff members from every department can help out (including Hsieh, who, Judd said, worked three hours in the call centre last year). ‘The training and education, the free shipping both ways, the surprise [shipping] upgrades, that’s very expensive. Our warehouse is 24/7, which is purposely less [cost] efficient, but faster,’ Hsieh said. ‘Our whole point of view is [to look at it] as our marketing costs, but they all have extra costs.’ It’s a smart strategy, said Karen Leland, president of Sterling Consulting Group in Sausalito, California, and co-author of Customer Service for Dummies and Customer Service in an Instant. ‘It costs five times more to get a new customer than to retain an old one,’ Leland said. ‘Anytime you have to spend marketing dollars, the financial benefit is high to retaining an existing customer.’ In fact, Leland has her own Zappos story. A recent purchase of red patent peep-toe pumps she ordered from Zappos didn’t fit, and she exchanged them for the right size – a transaction she said the company has mastered. ‘They made it easy when there was a problem. And the true measure of a company is how they handle it when things go wrong,’ Leland said. ‘They made a loyal customer out of me. A shoe is just a shoe, but they’re adding value to the shoe through the service.’

Questions 1 Zappos’ return policy may put the company at risk. How come the business case for this policy is none the less positive? Please provide arguments to support your answer. 2 Zappos customer contact department is situated next to the CEO’s office. Those are expensive square metres. How do you evaluate that choice? 3 Please indicate in your own words what the critical success factors of Zappos’ service strategy are. Sources: Press Centre Zappos, available at: about.zappos.com/press-center/media-coverage/zappos-milestonecustomer-service,Emerce.nl (2011, 2012).

Questions 1 What type of message traffic between customer and supplier do you consider to be particularly suitable for processing in the contact centre? Explain your answer. 2 Do you consider a contact centre belonging to a company that implements a CRM strategy to be more of a cost centre than a profit centre? Explain your answer. 3 Under what circumstances would you choose outsourcing for the contact centre?

346

Chapter 16 Contact centre management

4 Name four reasons for the growth in the size and complexity of the work performed in contact centres. 5 What are the five subjects to which a contact centre manager at an organisation that employs a CRM strategy must pay special attention in order to be able to conduct an efficient and effective dialogue with customers? Substantiate your answer. 6 The quality of capacity planning is a direct influence on the contact centre’s availability. What are your recommendations to a contact centre manager who is unable to make an accurate prediction of the size and composition of the in- and outbound message traffic via the telephone and the internet? 7 Contact a number of different service providers in a specific market and compare the quality of their contact centres. 8 Name five measures that you could take to improve the quality of telephone contact. 9 In which sorts of real-life situations do you consider the chance for a successful application of a semi-automatic e-mail answering function to be high? Give four examples. 10 If too many companies send unsolicited e-mails to companies and consumers, this effective communication tool can gain an unfavourable reputation and its efficiency can suffer as a result. What can you do as a commercial company to prevent this from occurring with your customers? Illustrate your answer.

references Bontebal, S., Oudhoorn, C. and Peelen, E. (2001) Vermijd de dolgedraaide direct-marketing klok, Customer Base, 1, 26–8. Brink, M.V. van den (1999) De opzet, implementatie en organisatie van een call center, Amersfoort: F&G Publishing. Broos, L.C.P. (2002) Analytische CRM versus anti-spam wetgeving, Beyond Mapping, Marketing and Datawarehousing, December, 10–11. Cleveland, B. and Mayben, J. (1999) Call center management, in volle vaart vooruit, F&G Publishing, Amersfoort. Elias, D.E. and Panbakker, H.E. (2000) KwaliTijd, onderzoek naar quality management en quality management tools in het call center, Breukelen: Nyenrode University/KPN. Emerce.nl (2010, 2011, 2012) Zappos. Hendrickx, H. (2000) CRM systemen, Utrecht: Cap Gemini/E&Y. Huijnen, R.L.M.E. (1997) Het starten van een call center; een multidisciplinair proces, Nijmegen: Nijmegen Business School. Moorst, A. van (2004) Strategische sourcing van customer care, Woerden: BBP. Moorst, A. van et al. (2007) Customer Management, Amsterdam: Tote-M Business Architects. Nippa, M. (1999) Call center strategierecht organisieren, Harvard Business Manager, 6, 86–93. Vlam, P. (2003) Marketing of spam?, Emerce, March, 60–1. Young, C. (2004) On the other side of the phone line, Philippine Daily Inquirer, 9 June. Zappos (2012) Press Center Zappos, about.zappos.com/press-center/media-coverage/ zappos-milestone-customer-service.

347

Part VI

CRM systems and their implementation Customer–supplier relationships are as old as the hills; however, we have IT to thank for relationship management coming within reach of organisations which serve many millions of customers. Technology makes it possible for individual customers to be recognised and known, for them to be able to interact with the organisation on an individual basis, and allows them to rely on customised solutions. In principle, the deployment of personnel and costs can be kept within limits. However, we are not there yet; many companies still have a long way to go. Strategic questions have not yet been answered, leading to vagueness about the goals companies hope to attain with this technology. As a result, investments in IT are improperly guided; situations can arise where technology takes a leading role instead of being used as a tool to help achieve the organisation’s goal. Embedding the applications in the organisation fails to run smoothly. The project management for innovative multifunctional CRM projects is already complex, and is now suffering from inadequate guidance. In addition, organisations are often product-oriented and not prepared to think and act in a customer-oriented way. Aspects such as strategy and organisation have been covered extensively in the previous parts of this book. This part focuses on CRM systems (Chapter 17). Insight is first offered into the different sub-systems that can support CRM strategy and processes. The front and so-called mid-offices are discussed; special attention is paid to the contact centre, the website, the campaign management and content management systems and the data warehouse. We then proceed to examine the implementation of CRM systems in Chapter 18. The road map used to develop CRM systems is discussed, based on the strategy. The rules of good project management are also set out. The book concludes in Chapter 19 with a glance into the future.

Chapter

17

CRM systems Insight into the most important CRM systems is indispensable in order to identify and use the opportunities offered by information technology. The utilisation of technology will also have to be customised under all circumstances to suit the strategy and the organisation on the one hand (Part II), and the relationship policy to be implemented on the other (Part IV). This chapter briefly discusses the most important elements in the CRM system. The final section looks in particular at the suppliers of CRM software packages that form part of such a system. In this chapter we will address the following: ●

the CRM systems that exist



the contact centre



the internet and websites



data warehouse and a datamart



campaign management systems



content management systems



how to select a CRM architecture and package

PRaCtitioneR’s insight A CRM system that does not make use of IT is practically unthinkable in this day and age. As soon as organisations and (larger groups of) customers are required to maintain contact with one another on a variety of levels, hope to be quickly available to one another and would like to supply customisation to one another, IT will start to play an important role. It will support or take over entire contact processes through different channels. It will contribute to the maintenance, analysis and availability of customer data. The possibilities are numerous. Thanks to voice recognition and voice response systems, the computer is able to conduct telephone conversations. Automatic e-mail response systems can ensure that customised responses will be sent to questions submitted. Campaign management systems are capable of developing, broadcasting and evaluating hundreds of campaigns in a single day. Thousands, if not millions, of people can be reached in a period of 24 hours without a direct human contribution being necessary.

351

Part VI CrM systems and their implementation

17.1

an overview of CRM systems Customer relationship management has been practised since the abolition of economic selfsufficiency and the arrival of the division of labour. The role of information and communication technology (ICT) is to bring CRM within reach of a larger group of organisations and customers. The development of relationships with customers in situations in which it was previously impossible organisationally and economically is now conceivable. Thanks to the technology, even large groups of low-spending customers are personally recognised and known; and they, in turn, conduct a dialogue with, receive customisation from, and, to a certain extent, develop a relationship with the supplier. The technology can also prove its value even for parties who had already been practising CRM. CRM systems make it possible for the members of decision-making units for both parties to easily find one another and remain informed about the communication between them. Salespersons or account managers can maintain their customer and visit profiles in the system and use them for planning and evaluating their work. The placement of orders can be simplified, to the extent that this had not already been arranged, when an enterprise resource planning (ERP) system was implemented; this is another system that can also facilitate order entry. CRM systems can prove their usefulness even in markets where there is no contact with the end user because distributors are used. The system offers suppliers and intermediaries the possibility of collectively developing a clear customer profile and creating and implementing a customised, mutually beneficial relationship strategy. The realisation of this is naturally dependent upon the trust and the relationship that the supplier and distributor have in and with one another. Mutual distrust usually prevents both parties from wanting to share their customer knowledge with one another. The primary task of CRM systems consists in supporting or performing the activities involved in customer contact processes. Customer contact processes may involve exchange of information, placement of orders, invoicing, payment, provision of service and so forth. They consist of the contacts and, to a certain extent, the actions arising from these contacts. An accurate definition of the different processes is an important point of departure for CRM implementation; if this is lacking, it is difficult to programme and automate. The CRM system supports the employees during their contacts with customers; in the case of self-service and customer–machine or machine– machine interaction, the customer contact is also fully taken over by the system. The secondary task relates to facilitating the primary task, and involves providing customer information and management information, among other information. It involves data which can be used to improve the efficiency and effectiveness of the customer processes. A variety of CRM sub-systems have been developed for the performance of these primary and secondary functions in the front and back offices and linking activities between the two. An important characteristic of the systems that support the front office is that customer data must be easily retrievable and modifiable. For example, within several seconds, insight needs to be gained into who the person is on the other end of the telephone line. In order to follow up the contacts appropriately, the so-called fulfilment, there are back-office systems. They register what someone buys and can relate it to their purchasing history and to product availability. Back-office data are required in order to be able to serve a customer in the front office. The link between back- and front-office systems can be realised in different ways. A very popular one is the service-oriented architecture that operates as a middle layer. It connects front-office applications, manages the flow of data that needs to be synchronised and

352

Chapter 17 CrM systems

commands the interaction with back-office systems. The term middleware is often used for these applications. Figure 17.1 shows an illustration of a CRM system where the front and back office are linked by middleware.

the front office ●

The sales force automation or the sales information system that supports the salesperson or account manager during face-to-face sales and relationship management activities.



The partner management system which is geared towards providing support to the intermediaries (distributors) in the joint approach to the end-user market.



The contact centre, where incoming and outgoing traffic by telephone, fax and the internet (e-mail) takes place; even the written correspondence with customers may be (partially) handled here.



Internet, including the website and applications on social media.



The kiosks; examples would be information pillars (points of information) or point-ofpay terminals where customers can help themselves on location.

Figure 17.1 CrM system

353

Part VI CrM systems and their implementation

Middleware ●

The data warehouse or the datamart, in which data originating from different sources are compiled to obtain a clear and better customer profile.



The campaign management system that produces the analysis, planning, execution and management of marketing communication campaigns being implemented through different channels.



The knowledge management system.



The content management system which ensures that data from different sources can be published through different channels using a consistent design.

the back office ●

This usually involves the so-called legacy systems which are generally older and have a longer lifespan. These systems are designed for the management of transactions or products; an example would be the separate systems in which car, health and life insurances and mortgages are maintained.

Every system, be it front-, mid- or back-office, is built up out of a number of layers. At the lowest infrastructural level we find the hardware, the operating system and the network. Computers need to communicate with each other and allow the different functional areas within an organisation to perform their part in servicing a customer. They need to facilitate interaction between salespeople, agents in the contact centre, the department of finance where they manage debtors and warehousing where orders are being prepared and released. At several points in the network there will be data repositories, databases with product data, transaction data and customer data. There are applications, pieces of software that support certain processes to construct commercial offerings, support marketing campaign management, direct calls to the right agent, arrange for fulfilment, construct calling lists etc. Databases and application software together are referred to as CRM software. It is a formidable challenge in and by itself for an organisation to have a solid network to build all the desired functionality into and have it support the business in the right way. Insufficient attention to one of the aspects of the system will, without a doubt, lead to problems during implementation. This can lead to a network failing to provide enough support to the application or a situation in which the data required to actually provide support to the customer process are missing. This chapter only examines several typical CRM sub-systems, namely the contact centre, the website, the data warehouse, the campaign and content management systems. The CRM module partner management is covered briefly in the following box. For a more detailed description, please see the literature available on information systems.

CRM illustration Partner relationship management Customer relationship management is an accepted term within organisations and the realisation continues to grow that entering into and developing relationships with individual customers is a necessity to

354

survive. While the emphasis in CRM lies on companies’ own processes, culture, organisation and direct customers, a new opportunity has revealed itself: the indirect channel.



Chapter 17 CrM systems

CRM illustration (continued) Partner relationship management (PRM) is the continuous and systematic entering into and development of relationships with partners in the indirect channel in order to achieve and retain mutual advantages. IT organisations, financial institutions and telecom companies that offer complex products and services online have an increasing need for partners. They know the products and services, how to reach customers and can supply added value to customers as well as the organisation. In the IT sector alone, 60 per cent of the sales go through the indirect channel. The partners, however, experience difficulties in the area of communication with and getting information from their supplying partner. They see an extensive website where information and materials that they require in order to sell their supplier’s products cannot be found. In addition, marketing managers still have a bad feeling about the indirect channel due to a lack of insight. Lack of insight into the partners’ processes, or feedback on generated leads and success, or lack thereof, of marketing campaigns are likely to

17.2

mean that investments are made in the wrong area and in the wrong partner. In short, the relationship between organisations and partners is not optimal, while it is precisely this channel that offers so many possibilities. In 1999, Hewlett Packard demonstrated that special programmes and projects had increased partners’ profitability considerably. This was due to better and more efficient inventory management, lower administrative costs, automatic stocking, process simplification, better forecasting and demandgenerating activities. There are already many tools available on the market to support PRM (campaign management, sales force automation, e-commerce etc.): as a separate module or integrated into a total solution. As a standalone, PRM can supply high added value for the indirect channel. However, it can also be included in a larger whole, often under the name CRM . . . Source: Stuurman (2000).

the contact centre Systems for the contact centre need to be able to support all in- and outbound traffic from different channels. Consider mail, fax, e-mail, text messaging and even chat functionality. Modern systems are able to handle voice, image and data. There is no need to actually operate via a telephone network. Nowadays, all the traffic can be handled by data connections over the internet. Contact centres and their systems have gone multi-media, which is one of the main reasons we no longer refer to them as ‘call centres’. The communication traffic on this complex infrastructure needs to be handled relatively easily. ‘Routing’ is a much used term and describes the process of handling inbound communication and guiding it to somewhere appropriate action can be taken. Often this will be an available agent who is knowledgeable about the topic or is designated to serve a certain customer type. Databases can automatically bring up customer data for the agent to browse through and use. In outbound contacting the systems may include automatic diallers for customer phone numbers or mail handling systems for quick replies. The systems generally give a lot of feedback about call handling times, number of contacts per agent, average waiting time etc. It is easy to spot opportunities to improve routing or resource allocation. We now go on to consider the required infrastructure, traffic management, communication, databases and management support of the contact centre. The text which follows is based on research and publications by van den Brink, 1990, van den Broek, 1998, van Moorst, 2004 and van Moorst et al., 2007.

355

Part VI CrM systems and their implementation

infrastructure At the infrastructural level, the challenge that we had to face some years ago was called CTI or Computer Telephone Integration (CTI). Thanks to CTI it was possible to reserve agents’ time for the important parts of contact management and have computers take over parts where less value could be added by a human being or where data needed to be shared quickly. The benefit was mainly in cost savings on the organisational side, but customers could see benefits such as a reduced waiting time and an increased chance of being put through to the right agent immediately. CTI has spurred a great deal of new applications, such as (van den Broek, 1998): ●

On-screen dialling: telephone calls are initiated and monitored by the computer. As a result, the calling process is accelerated and supported.



Intelligent routing: calls are transferred to the right person or department. Repeated transfers are kept to a minimum.



Call-based data selection: the caller’s relevant information appears on the agent’s screen at the moment the telephone is answered, or even before that point. The agent, for example, no longer has to ask customers to identify themselves.



Voice and data call association: this provides for the simultaneous transfer of telephone calls between agents in the call centre, as well as the corresponding data.

However, CTI is at risk of being caught up by technological developments before ever achieving maturity. Contact centres are seeing their traffic, even telephone conversations, move to a data-based infrastructure, with Voice-Over-IP (VOIP) gaining in popularity due to lower costs and more direct computer integration. Contact centres are becoming multimedia contact hubs, making the need for integration a lot more urgent. The way a phone call is prepared and conducted is different from an e-mail. The same goes for the registration of images and sound. The future will have to bring simpler solutions. Contact centres will adopt IP technology as their backbone and there seems to be convergence on a system of speech interactions through Voice XML. It is a first step to open-sourcing in the contact centre world. At the time of writing, Voice XML is not yet fully developed in terms of functionality. The ultimate goal will probably be to be able to ‘read’ and direct choice data as any other data type and to be able to distil information from it accordingly (van Moorst, 2004; van Moorst et al., 2007).

traffic management In order to manage traffic in contact centres, a lot of systems have been developed, of which we provide an overview here (van Moorst et al., 2007):

automated outbound-dialling The computer is used to select the numbers to call and then make the connection. With preview dialling, the agent chooses a telephone number from the list on the screen and then manually calls via the keyboard. Power dialling means that the system calls at the time the agent is available. Predictive dialling is an anticipatory system; before a call is terminated, it initiates a new call, ensuring that agents are constantly operational. Blended forms of the methods named above are possible. They are commonly referred to as ‘progressive dialling’.

356

Chapter 17 CrM systems

automatic call distribution (aCD) This application is typical of CTI and takes calls to route them to the appropriate employee. The ACD takes care of welcoming messages in menus, menu options, the texts that are spoken when redirection occurs, emergency texts and waiting time reports. With the assistance of call line identification, the ACD can help determine who is calling and allocate the call to a certain agent based on the type of question, the customer data and the agent’s call load. Messages are given to agents to allow them to start the dialogue right away. If available, user identification has taken place and the customer profile appears on the screen of the agent taking the call. It is possible to manage overflows, so that when one group of agents is busy, another group or even a third-party contact centre is immediately called in to assist. The ACD can register incoming calls, waiting times, average duration of a call and the number of calls lost (because the customer hung up). In multichannel environments a ‘coordinator’ is needed to manage and direct the channels through which agents are responding to messages. This coordinator has the job of maintaining service levels while also establishing priorities. This means that e-mails and calls or incoming chat messages are given the appropriate attention and are handled according to their respective priorities.

interactive voice response systems (iVR) In IVR systems the digitalisation of speech is the focal point of attention. It is possible to answer telephone calls automatically. It is used in processing transactions, in small customer surveys and in order to provide information about the completion of certain transactions, such as the phone line system operated by many banks to allow customers to transfer funds or get information on their current account balance. More often than not, it is a system, not a person, that guides the customer through the process. They are therefore also helpful in enabling customer self-service.

supporting the contact centre Specifically for the contact centre we can also consider: ●

A scripting tool. While conducting the dialogue, the agent is ‘supported’ by a supply of standard texts that they can read aloud. This way, the goal of treating customers and prospects in a consistent manner can be achieved and balanced texts can be used. The disadvantages are that it is less motivating for agents and that the dialogue conducted with the customer is less natural.



(Semi-)automatic e-mail answering. When the call is being supported by a script, the written internet contact can be processed to some degree to categorise the possible answers and already create some sort of format or pre-formulated reply to this kind of question. The agent only needs to personalise the response and so can speed up the handling process.



Results of marketing analysis. The results of a cross-sell analysis can be entered into an inbound marketing tool that shows tips on the agents’ screen. It provides them with an appropriate follow-up to the customers’ demands or the data the organisation has on the customer. It can also work the other way around, where products and services are listed for which the customer should not be approached. It might be that similar customers have responded poorly to that offer or that, owing to certain features, the customer does not qualify. The tools may also include marketing variables, such as segment information and customer life-time value classifications.

357

Part VI CrM systems and their implementation ●

Workflow management system. This is a system that helps to set out activities in answer to customers’ questions. It also provides insight into the status of the underlying work processes, so that the operator can see whether the requested information has already been sent and, if so, when.



Knowledge management. Contact centres that have a helpdesk function can construct a database where all the frequently asked questions and all the specialist knowledge of the organisation is collected around questions that customers may ask. The solution and the problem need to be described and it should be clear to helpdesk employees what the procedure for dealing with that kind of problem is. If the problems turn out to be too complex, they can be referred to a second line or second level expert. It’s tricky to find the right balance. It’s a trade-off between having experts contribute to the knowledge management system and allowing agents to deal with problems in the first line and aggravating a problem that may be too complex for the agent to begin with.



Documentation information systems (DIS) or content management systems. These make it possible to digitally scan and store written information. In this way, agents gain simple and up-to-date insight into brochures and other mailings that have been sent to customers and that might lead to questions.

the database A database is required primarily to record customer data, so that customers can be identified and their contact history known. Additionally, it is useful to gain insight into data from transactional systems: What has the customer purchased and during which stage was the transaction completed? Is the customer creditworthy? Product information, knowledge of marketing activities and media preferences are also important if the agent is to develop customer contacts to the customer’s satisfaction. Call centres will often have their own datamart at their disposal (see Section 17.4) for the registration of contact history. For insights into the transaction data they can have a real-time connection with the back-office system. Data on customer profiles can be copied to the datamart from a data warehouse where such data are processed and stored.

Management support Contact centre management is supported in many ways. There are many statistics available when it comes to managing the waiting time, the number of calls that were turned away, the number of times a customer is put through and the like. The data can be analysed to great depth, even filtering per call reason, agent, medium and time of day. There is also a large offering on the market to help monitor call quality. Calls can be recorded and replayed at a later time, but there are already smart solutions that analyse the voice intensity in real time and give a signal on the team leader’s dashboard if a call is getting out of hand.

17.3

the internet (web 2.0) The internet cannot be described in a static way. It has been evolving rapidly ever since its first creation. In terms of technology, the driving forces are processors, storage capacity and network carrying capacities etc. It has now made it possible to publish a multi-gigabyte

358

Chapter 17 CrM systems

CRM illustration Mash ups Mash ups originated in the music industry and are all about mixing several songs that together are better than the sum of the parts. On the web, the principle is just the same. The possibilities to combine two or more online applications to offer increased value to the visitors are unlimited. If a central website is enriched with local content, such as maps or local weather conditions, value is being added. Google has introduced a toolkit with search functions, chat options, maps, calendars and functions to plan meetings, and Microsoft and Yahoo! are introducing similar tools.

They often use the programming language of XML. Thanks to publicly available APIs (application programming interfaces), the programs developed by third parties are quite easily integrated in other platforms and applications. Mash ups are boosting the development of the web in a huge way. The costs to develop websites with interactive features are declining, while quality is improved. Source: Laudon and Traver (2008).

film to the web from a home computer or even from a mobile device in a matter of minutes. Interaction is swift, without lag and can be rich in the sense that not only images and data, but also real-time video can be shared. Many people now have wireless access to the internet through smart phones and we are living in a screen society, where a device with a screen and internet connectivity is never too far away (Laudon and Traver, 2008).

the essence of the internet The internet is a worldwide network of computers, each of which may independently consist of different computers, terminals and other equipment such as mobile telephones and digital personal assistants which users can use to gain access to programs, data and information. The computers and the aforementioned peripheral equipment can communicate with one another and thus make use of a common communication protocol; in other words, they speak the same language. The protocol used on the internet is Transmission Control/Internet Protocol (TCP/IP). The TCP in TCP/IP is responsible for splitting the message into separate packages with unique numbers which are then regrouped into the appropriate sequence again upon receipt so that they form a logical message. These packages may actually take different paths along the internet and can reach their final destination independently of one another and at different times. Each package traces out the best route and in this way avoids as much ‘congestion’ as possible. This differs from the telephone network where exclusive capacity is reserved for the transmission of data or the sound from the sender to the receiver before a connection is made. The method used for splitting leads to a better utilisation of the available transmission capacity. Messages can only be sent if the servers on the internet have a unique address; this is the IP address (a 32-bit number). Because the numerical display of the IP address is difficult to remember, names such as Marriott, Hilton etc. may be linked to these addresses. A domain name server makes sure that the IP address 128.193.73.60, for example, is linked to Hilton. The internet uses a specific language HyperText Markup Language (HTML) which is continuously being developed to include more functionality. eXtensible Markup

359

Part VI CrM systems and their implementation

Language (XML) is also used. Hypertext is a way to draw up pages with links to other pages and content, such as third-party information, films, animations and so on. HTML puts the emphasis on the ‘look and feel’ of the way data is presented on a webpage. XML places more emphasis on describing data and information. It takes on more information on document version, origin and destination, but also contents are more flexibly consultable. Web browsers are ultimately necessary to ‘decode’ and present the pages on the internet. However, they also offer additional functionality, such as integration with e-mail functionality or newsgroups. The browser market has seen intense battles being fought over market share. Netscape Navigator was the dominant player some 15 years ago, but lost ground to Microsoft Internet Explorer, which is in turn now losing some ground to Google’s Chrome and Apple’s Safari. Search engines are also incredibly important in finding information. The most widely used search engine is Google.

intranet, extranet and internal computer networks The intranet is a computer network that is based on the same technology as the internet, but it is protected and thus accessible only to those within an organisation who have authorisation to use it. An example of this is the closed system in a hotel that allows guests to view their bill electronically via the television. An extranet is designed also to grant access to external parties to the computer network such as customers and suppliers so that their activities can be better coordinated with one another. For instance, tour operators and travel agencies may be able to gain access to the reservation system of a hotel or an airline company. In general, a different language is used on intra- and extranets and the internet from those used within an organisation’s internal computer networks. These latter are usually older and have been constructed with a goal in mind other than that of communicating with customers. They are used for administrative purposes, for example, or to plan production. In many of these systems, it is even difficult to identify or recognise customers; it is only the transactions that are registered. In order to be able to support the total contact cycle so that, in addition to information exchange, transactions can also be completed, payments made, and goods and services supplied, a link from the internet to these internal computer systems is also desirable. How can potential hotel guests get information on the availability of rooms otherwise? And how else can reservations be processed, loyalty programmes maintained and check-out procedures simplified? In addition to compatibility problems, safety considerations may be one reason to forgo integrating the two systems. It may be undesirable to grant ‘strangers’ access to the internal systems on which the planning and control of the organisation depend. In order to obtain an acceptable integration level, a ‘mid-office’ with data warehouses and datamarts can be created (see Section 17.4), in which data are registered and structured which can be crucial to the communication and support of the interface between the customer and the organisation. Data may be available on the services of the organisation, prices, available capacity and stocks, completion of the transaction, customer profile with data on customer identification, purchase history, satisfaction and complaints, payment behaviour etc.

360

Chapter 17 CrM systems

security The security issue is a two-sided one. First, not only does the stored data require protection, but the transport of the data must also be protected. The internet is an open system that provides people with information from a distance. This same technology, which lies at the base of the internet, can also be used and abused by hackers. Control over access starts with verifying the authenticity of visitors. They will be granted access provided they can supply the customer number, the password, and/ or the IP address. Different authorisation methods can be used simultaneously. One or more firewalls can be placed between the internal computer network and the internet. A visit to the website, or to certain sections of it, can be made conditional upon pre-specified IP addresses. However, more advanced screening methods can be used to arrange access. Coding or encrypting techniques can be used to protect the transmission of messages. Digital signatures may play a role in the verification of someone’s identity. Traffic involving payments in particular must be protected.

software applications Many new applications surface on the web and fuel the development of what we call web 2.0. A brief overview (Laudon and Traver, 2008) follows: ●

Instant messaging: which presents one of the fastest growing forms of communication. It consists of the real-time, line-by-line, sending of messages between one sender and one receiver.



Intelligent agents: so-called bots or software bots, who filter information about a certain topic and present it in a list. The results can be ranked according to certain criteria, often used to make price or feature comparisons.



Online forums: where people can communicate with each other.



Streaming media: such as music or video or large files that are sent in small packages, but presented in a continuous flow.



Cookie technology: which stores information about the users in a small text file on the computer and can be consulted by the website to tailor the user experience to user preferences that are registered or visiting history. The web designer determines the contents of the text files.



Blogs: referred to as the ‘killer apps’ of the web 2.0 because of their enormous popularity. A blog is like a journal or diary entry for which a particular provider offers a template and platform (e.g. Wordpress) that is used by many bloggers. They write short stories or contribute interesting views. It has made web publishing easy, flexible, real-time and open to anyone, even with very limited HTML knowledge.



RSS or Really Simple Syndication: a set of XML-programs which ensure that digital content, in the form of text, blogs and podcasts are automatically ‘announced’ over the worldwide web and noticed by everyone and anything following the RSS feed. It improves discoverability of valuable information.



Podcasts: audio presentations, very much like a radio broadcast without the fixed airing time. They are stored as audio files and can be downloaded to a person’s computer or streamed online.

361

Part VI CrM systems and their implementation

17.4



Wikis: web applications that allow users easily to add information or alter existing information on a website. They enable the collective writing of documents and pages. They are mainly open-source platforms that rely on relational database technology.



New music and video services: the increase in bandwidth makes it very feasible to post videos, animations, complete slideshows and photo collections.



Internet telephone and television: the internet is quickly replacing traditional infrastructures for television and telephone and becoming the dominant carrying infrastructure for digital television and Voice-Over-IP.



Video conferencing: used to arrange remote meetings, but even more widely used to connect friends and relatives who live abroad.



Widgets: content applications or functionalities that can be added to other platforms, such as a ‘weather-widget’ that can be added to the desktop of a user, but also on a blog or webpage. The widget on a desktop may also have a real-time online connection to synchronise information.



Gadgets: mini-widgets such as a calendar or clock. They are not really information heavy and can draw upon system information instead of content services.



M-commerce: mobile equipment with built-in computer features such as speech recognition, imaging capabilities, data and video support are quickly becoming powerful tools in orienting, choosing, buying and using goods and services.

Data warehouses and datamarts Data can be stored and collected in different areas within an organisation. The data architecture will describe where and how the data is stored, while the data model describes what data are stored, what meaning the data have and how they are used in processes. The role for customer data integration is to ensure a clear, complete and integrated view of customers created by accurately integrating data from several sources. Different ways of achieving this kind of linkage were discussed earlier (see Chapter 6). For the purpose of analysis, which is the subject of this section, the role of data warehouses and datamarts is most relevant. There are several definitions of a data warehouse in circulation. The following description may be inferred from the definitions cited by Jonker (1997): A data warehouse is an isolated environment, ●

destined for the support of management information systems/executive information systems/decision support systems, without placing an additional burden on the operational systems;



that contains data that make it possible to gain a clear, topic-oriented view of the organisation’s history;



in which users can obtain access to information in a quick and useful manner which allows them to better support their decisions.

In the mid-1970s, the need began to arise among managers to extract additional information from the existing computer systems (Jonker, 1997). This appeared to be a desire that could not be met in the short term by the IT available at the time. Given the database

362

Chapter 17 CrM systems

CRM definitions SQL or Structured Query Language is the standard programming language that is used to approach relational databases.

structure, it was difficult to use the computer for answering ad hoc questions. This required the development of complex software by specialists. The mainframe also put up barriers. Incorporating these programs occupied a great deal of time and disturbed operational systems upon which primary company processes depended. The completion of ‘tasks’ in batches by the mainframe also appeared to be less suitable for another reason. This led to too much time being wasted in finding and restoring errors in the software intended to answer the ad hoc questions. The need arose for a retrieval system (Jonker, 1997): ●

which could store large amounts of data which related to a certain period;



which could answer complex ad hoc questions relatively quickly;



which did not result in a disturbance of the operational processes.

This demand led to the development of relational databases and SQL. With the arrival of the PC, many of these files were stored and maintained locally. However, this solution quickly proved to be limited. Analysing large quantities of data was very time consuming, and SQL appeared to be a laborious solution for answering complex questions. It also appeared to be difficult to maintain data at various locations and to maintain a clear definition of data. Many data fields were left incomplete or were not kept up-to-date, and different definitions and methods of calculation for certain variables such as profit began to circulate. The consequence was that people formulated additional wishes which the ideal retrieval system was supposed to satisfy, namely: ●

the computer system must be able to keep up with the growing quantity of data and increasing number of users;



the data stored in the retrieval system must be a concise presentation of the concepts used within the company;



the design of the database must be adapted to the usage;



the querying of the database must be made relatively easy, enabling it to be done by a non-specialised computer user.

These are wishes that a data warehouse can fulfil. Data in a data warehouse originates, for the most part, from operational systems that are usually set up as OLTP (online transaction processing) systems. These OLTP systems are primarily designed to process and store many smaller transactions. The design of the databases in OLTP systems is targeted to the rapid processing of small transactions so that the response time of the operational systems is as short as possible. The data warehouse, on the other hand, consists of one or more computer systems which are able not only to quickly answer questions that require large quantities of data but also to store data efficiently (Jonker, 1997). A distinction can be made with data warehouses that are more or less centrally maintained and the degree to which they are updated. The name datamart is used for databases

363

Part VI CrM systems and their implementation

Figure 17.2 Four types of data warehouses Source: Jonker (1997).

which are built locally for a particular function. In contrast to the ‘real’ data warehouses, these may be installed in a shorter period of time and less expensively. The investments vary greatly and are dependent on the size of the (customer) database and the quantity of data to be recorded, among other factors, as displayed in Figure 17.2. A direct link with an existing database is chosen if a certain department would like to consult a single operational system on a regular basis for questions that are not too extensive and complex. An online/active data warehouse is continuously being supplemented with the newest data. Over the course of just one day, the company is capable of discovering trends and responding to them. In order to prevent the connected operational systems from being interpreted in a specific way in each datamart, it is preferable to feed the datamarts from a central data warehouse. This way the view of the data remains clear and thus also the degree to which they can be maintained. The application of CRM often requires a data warehouse to be set up, as well as several datamarts. Usually a separate datamart or data warehouse is installed for the contact centre in which supplementation with the newest data occurs once every 24 hours, for example. For marketing purposes, a data warehouse is kept with data on customer identification and further profiling, and a separate active datamart is used for the website.

answering questions from the data warehouse Queries are created for answering questions. A query is a question which consists of a combination of choices and criteria as these have been compiled by a user, the objective of which is to search for and find data in a database. For example, customers who have purchased products X, Y, Z more than three months and less than two years ago in the regions A and B. In answering these questions, OLAP, or online analytical processing, is often used. This is the generic name for a generation of end-user tools, usually operating under Windows, which make it possible to compile complex queries easily and to run them on a database that is usually maintained on another platform. Normally, the database is implemented in the form of a

364

Chapter 17 CrM systems

data warehouse and thus contains large quantities of historical data. It involves a read-only application so that changes cannot be entered into the files. An OLAP tool can be used, for instance, to gain insight into the turnover, the profit contribution and the communication frequency of customers from different segments during a variety of periods of time. These indicators may easily be broken down in various ways. The breakdown can be adjusted repeatedly in order to expand the insight into the customer database step by step. The results can be presented in a variety of ways: in simple tables, or in pie charts, graphs, radar graphics etc. In addition to OLAP tools, software which supports statistical or data-mining analyses may be used to answer questions. This topic was discussed in some detail earlier (see Chapter 7).

17.5

Campaign management systems origin Back in the old days of direct marketing, campaign management referred to the planning and execution of a single marketing campaign, which made use of the telephone and/or the postal services. The preparation time for this type of campaign amounted to several weeks if not months. Nowadays, within the framework of CRM, campaign management encompasses the multitude of campaigns that are planned and executed through different channels so that a continuous marketing communication flow is created. Sometimes these campaigns are devised in the morning and executed that very afternoon. By continuously measuring the effect of every contact (customer touchpoint) and making adjustments, the dialogue can be continually refined. This puts the organisation in a better position to market its goods and services and develop relationships with the right customers. The goal of campaign management is to interact with prospects and customers at the right moment, with the right offering and the right message communicated through the right channels.

CRM definitions Four types of campaigns 1 Single shot campaign (one-step approach). The most traditional contact strategy; this involves a campaign in which the intended effect is achieved in a single contact; the activity is usually planned and prepared months in advance. 2 Wave campaign. This involves a multiple-step approach in which a direct mailing might be followed up by a telephone campaign, for example. 3 Triggered campaign. In this type of campaign, the time schedule is not determined by the marketer but is made dependent upon the customer’s behaviour. For example, someone will receive a message 60 days before the expiration of their telephone subscription or will receive an offer within a few minutes of clicking on to a certain site. 4 Longitudinal campaign (communication calendar). This campaign takes place over time and its goal might be to acquaint the customer with the supplier and thereby develop a relationship. An example would be the communication calendar that a company creates to encourage new customers to ‘cross-buy’ during the first two years and discover the supplier’s range of products.

365

Part VI CrM systems and their implementation

Functionality of campaign management systems Campaign management systems (see Figure 17.3) are developed to achieve the interaction goal. Data warehouse tools such as OLAP only satisfy part of this requirement. They help provide an answer to a selection question, but do not support the entire contact cycle. They help find an answer to the question of whom should be approached for a specific campaign. Campaign management systems, on the other hand, are characterised by the following functionalities: ●

Opportunity identification: the identification of contact opportunities on the basis of events involving the supplier, the customer or those occurring in the environment.



Relationship planning: indicating how the relationship with customers should be further developed in terms of the communication.



Campaign management: the selection of contacts, the development and the implementation of the campaign.



Customer interaction: supporting the contacts that follow the sent messages.



Measuring and evaluating: what are the effects of the campaign and do they satisfy the goals?

Within the framework of opportunity identification an analysis is performed to determine whom should be approached at a certain time with a certain marketing communication message. Are the (potentially) most profitable customers the ones to be approached? Are certain events involving the customer to be played upon; will customers who are going to move be approached with a mortgage offer, for example? Or is the introduction of a new product the occasion for the contact? For example, a new model of a certain car has just become available, and the manufacturer would like to give the owners of the current model (provided it is two years old or more) the first opportunity to see it when it is presented in the showroom.

Figure 17.3 Campaign management system

366

Chapter 17 CrM systems

Or perhaps a cruise line would like to make a special offer to regular customers who live less than 50 miles from the harbour for a cruise set to sail next week which is not yet fully booked. The relationship planning function demonstrates many similarities with opportunity identification. Contact opportunities are now also placed within the context of relationship planning. It will be determined when is the opportune time to approach a customer with the particular offer. The cruise line wants to exclude customers who have already taken a trip in the previous two months. The salesperson who is involved in negotiations might consider it desirable that no further offers for comparable or different types of products be sent to the prospect during the period concerned. And the organisation that has created a communication calendar to reinforce and perpetuate the relationship with the customer during the first two years prefers only to deviate from this within certain limits. The campaign is designed within the framework of campaign management. Ready-made templates are used to generate the campaign. The system supports the development of different types of campaign, varying from the ‘single shot’ to the ‘wave’ and to the ‘longitudinal’. The progress of the contact cycle can be shown in an easily created tree structure. This tree indicates who will receive a reminder, which channels will be used to receive the response and how all this will be followed up. Selections can be entered and the company can determine how many people satisfy the criteria. Using certain instructions, arrangements can be made so that people who satisfy certain criteria are selected real-time for a certain period. In order to prevent a person or organisation from receiving more than one communication message at a certain time, rules can be established for prioritisation and exclusion. These rules indicate which campaign is considered to be important, which can be sent in a specific situation and which cannot. In addition, customers who have indicated that they do not wish to receive any information from the supplier or those with a history of defaulting on payments can be excluded. The addition of several control addresses may prove useful for being able to monitor the execution of the campaign. For each of the selected groups, it will be specified which communication message they will receive. It is also determined how the response will be measured. The goal of the customer interaction functionality is to initiate and support the contacts which follow the communication message. The system can arrange for the recipients of the message to be called or to arrange for those recipients who are interested to contact the call centre themselves, on their own initiative, and ensure that they speak with an agent who is well informed about the campaign and the fact that the caller has been approached. The results of a campaign are continuously measured thanks to the measuring and evaluation functionality. In this way, a good insight can be gained into the progress of the campaign. The actual results can be measured against the goals at various times throughout the campaign. For example, the response and conversion1 for different channels can be illustrated. It is also possible to compare several campaigns with one another to determine their effectiveness. Which campaign generates the most traffic and which has the highest conversion ratio?

input for campaign management The link between data warehouses, data mining and the campaign management system forms an important point of interest. Opportunities, selections and the like become apparent from the customer data and the analyses performed on these data. Suppliers of CRM systems use terms such as predictive marketing to indicate their datamining tools in this area. 1

Conversion is the number of respondents who end up placing an order, for instance.

367

Part VI CrM systems and their implementation

selection of a campaign management system Campaign management systems are sold on the market by various suppliers. Whereas one system might be adept at generating campaigns on the web ‘real-time’, another may be more capable of supporting processes in the call centre. Functionality and prices vary. In selecting a system and a supplier, the following elements should be taken into consideration (Verduin, 1999): ●

Functionality of the system: – – – –

17.6

Can the system support different types of campaigns? How does the system support different aspects of the campaign management? How does the system link up to the data warehouse and the customer touchpoints? How does the system link up to the back office?



User friendliness: how much training is necessary to use the system and how much time is needed to develop and send a campaign?



Market position of the supplier: does the supplier belong to the category of companies which will still be around five or ten years down the line?

Content management system Content management is interesting for companies with a great deal of content (Dekker and Hiemstra, 2002). Publishers have large quantities of information that they would like to distribute and reuse on the basis of target groups and perhaps even of personal needs. Since the 1980s, they have invested in data structures. Even production companies such as Philips or Sony have large quantities of content with instruction manuals, background information on artists and so forth. Nowadays, they would also like to publish this documentation via different media. A content management system makes it possible for web publishers to maintain their websites easily and in a structured manner. Finally, it offers advantages to those companies that wish to manage all data and documents in a structured way, organisation-wide and make this information available through different channels. Business plans, brochures, sales texts, reports and annual reports are very accessible as a result of ‘enterprise content management’. The functions that a content management system should fulfil are (Dekker and Hiemstra, 2002): ●

Authoring: adding and changing content in an automated digital environment.



Workflow management: management of the steps that are taken between authoring and publishing. For example: who has to have viewed and approved a certain block of information before it may be published, and which blocks of information will be published on one page or in one brochure?



Storage: placement of content in a digital warehouse.



Publishing: publication of the content. This usually occurs in HTML websites, but PDF documents, WAP pages etc. are also becoming more common.

A content management system makes it possible for data from different sources to be combined, while the publications are made consistent in appearance. To achieve this, a strict separation between content and design is ensured.

368

Chapter 17 CrM systems

In order to ensure careful management of the data, management procedures and authorisations must be established. Old versions of documents must be saved in order to be able to trace unwanted changes and reverse them. Metadata will have to be automatically retained during the input of new data. Content managers will have to be able to implement changes without having knowledge of internet technology. The application will have to support cooperation between several people in different departments at different geographical locations.

17.7

selecting CRM software package(s) Developments in the market for CRM systems occur rapidly. The application software is further developed and geared towards market demands, all at high speed. We see a further concentration occurring in the market. Players, particularly local ones, disappear, are taken over and continue together. The market leader with the most expensive applications witnesses its share of the market decrease in favour of suppliers of less expensive applications. Mediumsized and smaller businesses have also shifted to making investments in CRM systems and are opting for less expensive solutions with fewer functionalities. The number of Application Service Providers (ASP) is growing. They are offering organisations, mainly small and medium enterprises (SME) a chance to outsource systems. One good example is Salesforce.com. The company charges a fee for granting access to their systems, which they host and update on a regular basis. The advantage is that the SME is not making any investments in hardware and software or the management thereof, which is often not something an internal IT department can handle. Starting up is easy and takes only a little preparation. The system is omni-accessible and flexible. However, the management of data is transferred into a third party’s hands, the options to tailor the software to the company’s needs are limited and integration with the back-office systems may be trickier than with owned and managed solutions. CRM software can be divided into five categories (Gartner Research, 2004, 2005, 2008, 2011; Hardeveld, 2001): 1 Suppliers of integrated ERP applications, such as SAP and Oracle. Initially, most of the ERP suppliers built a module themselves in order to offer CRM functionality, but in the past few years, several companies have stopped doing this and have either acquired a CRM package or started to collaborate. 2 Suppliers of CRM suites, such as Oracle (previously Siebel). These are systems that support most CRM functionalities; they enable the building of a total solution. 3 CRM frameworks (Pegasystems, for example). These, in contrast to the suite, offer more freedom to the organisation in building its application. Frameworks offer the room to design unique, distinctive processes, an important consideration for some organisations. 4 Best of breed. Companies go in search of the best application software for different CRM functionalities. The systems used for the contact centre may be different from those used for the data warehouse, campaign management system and website. The systems used in contact centres may vary from those used in data warehousing. The website and campaign management system may not be part of the same platform. Organisations striving for best in class performance in each individual area face a huge challenge to integrate application and data. 5 Building own applications (with help from IBM, Oracle, Sun etc.). The advantages to companies who choose to build a CRM application themselves are that they obtain

369

Part VI CrM systems and their implementation

PRaCtitioneR’s insight the details . . . Other than logistical processes, for example, marketing, sales and relationship management processes are generally not thought out and designed beforehand, but instead evolve over time. Every employee adds their own contribution over the course of time, and interprets activities in their own way. The result is that there is often a lack of concrete processes which can be monitored and managed, but rather an interplay of daily activities. In order to provide support to these in daily practice, it is important to know not only what the package does but also how it does what it does. A generic example is the creation of selections . . . Think of a situation in which a quotation must be produced. This always requires the registration of many data. Often ten or more screens must be brought up and filled in first, and it is often unclear how the filled-in data ultimately come together in the quotation. If the decision is made afterwards to grant a discount, this can be a good way to test the accessibility of the package functions. Source: Koenders (2001).

customisation and avoid the substantial investment in suppliers’ own systems. There are, of course, disadvantages as well. What originally seems inexpensive can become expensive in the end as a company wishing to develop applications itself can also find itself having to make many investments. It also appears to be difficult to keep up with the speed of development achieved by suppliers in the market, and the risk arises that companies will trail behind competitors who use the ready-made systems. Growth areas of the market are the players aimed at SMEs, such as Microsoft Dynamics or Salesforce.com. Also, the market share of integrated suites offering ERP and CRM is increasing, the reason being the focus the market places on process integration and the strong need to coordinate front- and back-office processes in a reliable way. The suppliers of CRM suites that are not all encompassing in the sense that they lack ERP integration will suffer, but best-of-breed applications are performing better than one might expect. Apparently, the choice of generic platforms that span ERP and CRM is not preventing a part of the market from working with particular specialists in some areas. These aspects have to be included in the selection of CRM software, as such, the continuity of a firm plays a major role. Will the company exist in five years’ time and will it be able to support the system and to deliver updates? However, a preference for one of the CRM categories has to be indicated. When selecting CRM software, there is a lot of support available in the market; for all vendors and system integrators it is a way of getting in contact with potential leads for their services and products. Many selection criteria have been formulated. Elements that you will find in many lists relate to functionality in marketing and sales (including reporting, document management, workflow processing, customer intelligence, web-enabled functions, compatibility, system configuration, security, system implementation, system support and pricing).

370

Chapter 17 CrM systems

17.8

Conclusion Developing relationships with a large number of different customers can only be achieved if information and communication technology are used. Different systems have been developed to support and implement CRM. In the front office, we first encounter the technology required for the call or contact centre and the website. Possibilities exist to orchestrate the telephone or written contacts from one central location. Systems are put in place to ensure the timely establishment of the right connections, making (customer) data available and processing changes in this data. They can even take over parts of the communication process from people who then have more time for the truly important contact moments. In order to supply the front office with customer data, the creation of middleware is necessary. Part of these data must actually come from the back office, which is usually set up to be able to handle the processing of large quantities of similar tasks in batches. Many of these legacy systems are organised to focus on products or functions and not on customers. In order to supply the front area with the necessary customer information, data are compiled from several different sources through customer data integration. The campaign management system allows for the planning to the sending of messages to customers and prospects; as well as taking care of the follow-up and evaluation of the campaign. The content management system can support the management of the digital content to be presented through a diversity of outlets and channels.

Case stuDY Canada Post delivers on its CRM strategy Background ‘Canada Post Corp. (CPC), a Canadian Crown enterprise, is Canada’s national postal service provider. With 66,000 employees, it is also the country’s fourth largest employer. It serves 30 million residential customers and more than 1 million commercial customers, delivers more than 10 billion pieces of mail annually, and maintains relationships with more than 24,000 retail sales points for CPC products and services. ‘CPC recognised that its future depended on having customer processes and support systems in place . . . ’ with customer expectations rising and the on-going emergence of the internet. ‘To demonstrate its commitment to change, CPC launched an enterprise-wide business transformation initiative to redesign all processes and employ innovative technological solutions to create customer and employee value.’ In the new situation ‘every process must add value for the customer, the employee or the corporation’. ‘Each process was reviewed to ensure that it was customer-focused, process-driven, self-service-oriented and could withstand the scrutiny of measurement with assigned accountability. ‘In the past, customers’ experiences with CPC were often complicated and frustrating. A customer could call three or four times about the same issue and receive different

371



Part VI CrM systems and their implementation

Case study (continued) responses from call centre agents. Customers can now take control, tracking their own parcels and placing online orders, as well as having 24/7 ability to satisfy their postal needs. ‘The new system has also improved the internal employee experience. The former systems were standalone and didn’t integrate customer and call information. Now, when a customer calls, there is a history of the cases related to the customer, and the system can reference frequently asked questions [FAQs] from the CPC solutions database. These provide an integrated view of the customer – from prospect to the placement of orders and accounts receivable.’

Realisation ‘CPC implemented the new system through extensive change management that involved process and organisational redesign . . . Change was communicated through traditional methods, and through a network of “readiness teams”, using leadership coaches, area project managers and local implementation coordinators. Implementation involved two years of process design and system stabilisation. This included a team of CPC employees plus systems integrators from SAP, Accenture, EDS, and interactive voice response telephony suppliers . . . People readiness was addressed through more than 50,000 participants-days of learning delivered to employees during the implementation year . . . Externally, a take-to-market team made advance contact with many of CPC’s largest customers and communicated changes directly to some 145,000 commercial customers. For post-launch fixes and stabilisation activities, customerfacing issues were treated as the first priority.’ Using the built-in processes defined by its application provider SAP, CPC changed its business processes to leverage what it believed to be the best practice inherent in the software. Package tracing, rate calculations, service standards and an online business centre were redesigned to be technology-enabled by SAP modules, such as case management, order-taking, internet sales and internet service. Each of these provides CPC with the functionality to enable the transformation, as well as the integration of back- and front-end processes. The internet service application provides customer-service agents and delivery supervisor with details of customer transactions (including enquiries, complaints, claims and orders) from a single screen. It provides customers with online access to a comprehensive solutions database for self-service query resolution. Internet sales integrates processes with mySAP Retail Online Store to provide customers with online access products. These processes are tightly linked with the back-office SAP R/3 system to provide a single customer view and a single face to the customer. Six customer databases were combined into one, as were three case management databases. Since all parts of the enterprise now have a single view of each customer’s activities, every interaction is more productive. CPC also launched a business warehouse reporting functionality from CRM. The ability to analyse the information from sales and customer cases enables proactive responses to customers’ needs and change processes to better serve customers. CPC deployed technology in a phased programme plan. In launching the CRM initiative, the first three components were as follows:

372



A new CPC website . . . It quickly climbed to a position as Canada’s most visited website.



Electronic shipping tools: enhancing and combining two existing online tools, these are available to commercial customers in both desktop and web-based versions that enable them to place orders directly and create all shipping documents.



Chapter 17 CrM systems

Case study (continued) New telephone tools: CPC deployed mySAP CRM to nine contact centres that handle 5 million calls annually across numerous time zones. Using SAP Phone, CPC supports queuing for customer inquiries and enables fax, e-mail and voice-back options for customers and supply agents.



‘Implementing the CPC systems required some 400 individuals. As it configured and integrated the components, the team replaced more than 80 legacy systems.’ In a little more than two years the implementation was realised. ‘The most significant technical implementation challenges included understanding the fully integrated back-end and CRM processes from an organisational perspective and testing.’

Conclusion ‘CPC’s CRM programme supports the way the enterprise wants to operate . . . It supports its strategic priority for customer-centricity and operational excellence . . . It defined its vision, strategy and business processes choosing an enterprise resource planning/CRM application suite. More importantly, CPC has achieved its business goals by defining and using a CRM strategy as the core of its overall business strategy.’

Questions 1 Why is process redesign so important for CPC’s success? 2 Describe the way CPC redefined its processes. Illustrate your answer with three examples. 3 Analyse the CRM systems that are in place at CPC. In what way do they enable the processes? Source: Eisenfeld (2002), Gartner, Inc.

Questions 1 Voice processing has its proponents as well as its opponents. Both sides are capable of shedding light on the pros and the cons from the perspective of the customers as well as the supplier. (a) Name two advantages of voice processing for the customer as well as the supplier. (b) Name two disadvantages of voice processing for the customer as well as the supplier. 2 Think of four technical measures which could be used to shorten the access time for customers calling a call centre. 3 Indicate three differences between the internet and a closed computer network for a company. 4 Name three methods which could be used to protect critical company data while still facilitating the interaction between customer and supplier on the internet as much as possible. 5 What is the difference between a data warehouse and a datamart? 6 What are the reasons for setting up separate datamarts for call centres and for websites? Substantiate your answer.

373

Part VI CrM systems and their implementation

7 What are the objections to giving visitors to a website direct access to the legacy systems? 8 Think of three recommendations designed to improve the security of your critical business systems in a multichannel environment. 9 In the text, references were made to a cruise line. Customers of a cruise line have a large number of ‘customer touchpoints’ with the carrier. (a) Name 15 of these touchpoints. (b) Create a possible campaign for each contact point. 10 Name five reasons why the implementation of a campaign management system can fail. Substantiate your answer.

References Brink, M.V. van den (1999) De opzet, implementatie en organisatie van een call center, Amersfoort: F&G Publishing. Broek, R. van den (1998) Call centers en databasemarketing, Woerden Beerens Business Press. Collins, K. (2011) Hype Cycle for CRM Marketing Applications, July, Gartner Research. Davis, J. et al. (2012) The Gartner Customer Relationship Management 2012 Vendor Guide, Research Note, 29 November, Gartner Inc. Dekker, H. and Hiemstra, F. (2002) Content management, Emerce, September/October, 62–6. Eisenfeld, B. (2002) Case Studies, CS-16-7100, Research Note, 12 July 2002, Gartner Inc. Fuller, F. (2000) Getting Started with Electronic Commerce, Fort Worth, TX: The Dryden Press. Gartner Research (2003) Overview of CRM Trends, February. Gartner Research (2004) Gartner Business Intelligence Summit, Royal Lancaster Hotel, London. Jonker, J. (1997) Datawarehousing en daarna, Deventer: Kluwer BedrijfsInformatie. Koenders, C. (2001) CRM-pakketten, steeds meer me-too’s?, Tijdschrift voor Marketing, April, 16–20. Laudon, K.C. and Traver, C.G. (2008) E-commerce 2008. Business, technology, society, 4th edn, Harlow: Pearson Education International. Moorst, A.M. van (2004) Strategische outsourcing van Customer Care, Woerden: BBP. Moorst, A.M. van, et al. (2007) Customer Management, Amsterdam: Tote-M Business Architects. Stuurman, B. (2000) PRM zorgt voor grip op het indirecte kanaal, CustomerBase, 6, 29–32. Sybrandy, A. (2003) Nieuwe contact center technieken, de hype voorbij?, Beyond, Mapping, Marketing and Datawarehousing, 8, 1, March, 17–19. Turban, E., King, D., Lee, J. and Viehland, D. (2006) Electronic Commerce: A managerial perspective, 4th edn, Upper Saddle River, NJ: Pearson Prentice Hall. Verduin, R. (1999) Customer Relationship Management, Deventer: Samson. Watson, R.T., Berthon, P., Pitt, L.F. and Zinkhan, G.M. (2000) Electronic Commerce: The strategic perspective, Fort Worth, TX: Dryden Press.

374

Chapter

18

Implementation of CRM systems In this chapter we will highlight the phased build-up of CRM competencies. First, however, we look at the potential pitfalls in CRM implementations, causes of failure that have been identified as such (Section 18.1). Subsequently we provide a way for organisation to assess their current CRM capabilities (Section 18.2); they can determine whether or not the preconditions for CRM success are there and the organisation is ready for a CRM implementation. Depending on the CRM vision and strategy, a roadmap can be constructed showing how the organisation can increase its capabilities in several increments (Section 18.3). CRM project management is discussed in Section 18.4. It’s a classic approach towards the subject, whereas more flexible ways of achieving project results, such as Agile and Scrum, are presented in Section 18.5. The execution of a special type of CRM programme, namely international or multinational and multidivisional CRM programmes, is discussed in Section 18.6. In this chapter we will address the following questions: ●

Factors influencing success and failure in CRM



How to implement CRM and how to form a customer-centric organisation using a stepby-step approach, based on project management

PRaCtItIoneR’s InsIght Even in the first decade of the 21st century, CRM projects were not leading to the desired financial results and the chances of a CRM project being prematurely terminated were quite high. Companies were struggling with CRM and did not know what functionalities they required or in what order these needed to be built. This situation was a direct consequence of the fact that the early years of CRM were selling a dream. By implementing CRM, organisations would be able to become customer intimate. However, we have learned much since then, and the first CRM successes have definitely been seen. The idea has taken hold that CRM needs to be given time and that it is much more realistic to speak of a programme and an on-going process than to speak of a project. We realise that not everyone looks for the same thing from CRM. There are degrees and variations and every organisation will need to explore to what degree CRM fits their specific context. What does CRM mean to an organisation as a system and as a strategy? An assessment can determine how long the road is that the organisation will need to travel to achieve its desired competency level. A growth path for building CRM competencies in a coherent and structured way will need to be constructed.

375

Part VI CRM systems and their implementation

18.1

Reasons for disappointing results CRM is about strategy, organisation, marketing and IT. It touches on so many facets of an organisation that it requires comprehensive changes which have far-reaching consequences and high investments. Thus it should not be surprising that there are many ways in which a CRM programme can fail. Studies conducted by Wurtz et al. (2007) and Gentle (2002) revealed the following causes of the disappointing results obtained with CRM:

18.2



Lack of strategy. There was no real purpose or goal to CRM and ‘the business’, meaning commercially and operationally committed employees, was not in the ‘driving seat’.



Lack of a business case with clear objectives. It was unclear what the company hoped to achieve with the CRM project and whether this would produce a positive ‘bottom line’ result. The relationship between the efforts and the result was unclear.



The organisation was not ready for CRM. Various pre-conditions had not been satisfied; the integration of the front and the back office was still lacking or the quality of the customer data was still insufficient.



Poor data quality led to a failure to customise the dialogue being conducted through the different channels to the relationship, and discouraged agents left behind in the call centres.



The scope of the project was too broad. The company wanted too much at once.



There was a lack of active sponsorship from top management.



The project was IT-driven and the focus on technology was too strong.



Insufficient attention was paid to change management. After the implementation of the CRM system the company was not finished; a relationship-oriented organisation had still not been created.



Customers and others involved in relationships with the company did not react positively to the system: it was incorrectly assumed that customers would want a relationship and appreciate the new possibilities for contact.



The misconception that CRM could be contracted out to system integrators. The problem was shifted outside the company with the idea that a third party could offer a ready-made solution. CRM is, however, too company-specific to place entirely in the hands of others.



An international approach to CRM resulted in additional complexity and was difficult to justify business-wise. Head office imposed the choice of a system on the organisation, and dictated the speed with which the projects must be realised.



A bureaucratic approach to project management: this led to too much focus being placed on the writing of project plans and reports, leaving too little attention for the ‘real’ thing.



Resistance from the IT department. The organisation of horizontal processes around customers had consequences for the functionally oriented IT department.

an initial exploration with CRM and how companies handle this CRM is a container concept that anyone can interpret in the manner which best suits their situation. One person may apply it to the website, while for another it may involve the campaign management system and a third person may be concerned with one-to-one marketing.

376

Chapter 18 Implementation of CRM systems

Vision and strategy (8)

Organisation (5) Marketing Customer Knowledge (8)

Individualised proposition (6)

Relationship policy (6)

Multichannel communication (5)

Metrics (5)

Figure 18.1 CRM assessment

Giving CRM a clear meaning is an initial action that will determine its success. In addition, it is recommended the organisation should stop and consider the manner in which it currently deals with customers. What is the customer knowledge? How is this used during customer contacts? Is a conscious effort being made to develop the relationship with good customers? Is customisation being supplied? How customer-oriented is the organisation? Various assessment processes have been developed to help organisations get a first impression of how they might design CRM. They highlight the organisation’s position and offer important input to determine the gaps in where an organisation believes it should be in order to realise its vision and strategy. One of the most elaborate assessments has been developed by the Dutch CRM award jury (see Peelen et al., 2001). Figure 18.1 illustrates the summary results from an assessment of an organisation which is in the process of adopting and developing a CRM strategy. The scores shown are averages calculated using the scores from individual answers to numerous questions asked during the assessment. The answers to these questions provided a detailed picture of the organisation’s strategy so far, along with insight into which aspects were in need of further attention. The organisation’s score of 8 out of a maximum of 10 points shows that it has formulated a clear CRM strategy. Its top management are fully aware of what they would like to achieve with CRM, but have not yet achieved it. The organisation has a low score on customer value experience (score 5 out of 10); one can question whether or not the top management’s commitment, the way in which CRM is communicated, the customer focus of employees and the collaboration between functional departments is really geared towards meeting the customers’ needs better. Their marketing also shows scope for improvement. There is a low degree of customisation of the offering (score 6) which is subsequently limited to standard products and services. Selectively building relationships with customers is not given enough attention. Insights relating to customer value (both actual and potential) or customer interests are not used to formulate a relationship policy. The only effort made in the area of relationship policy is a communication calendar for new customers in the first six months following their first transaction. It has been given a low score too (score 6). Differentiation between segments is lacking and there is not much being done to build a relationship beyond the

377

Part VI CRM systems and their implementation

acquisition phase. Subsequently, there is no real on-going dialogue across the different communication channels (score 5). The customer contact cycle is not completely facilitated by technology. The website does not allow for transactions, references to the contact centre are ‘hidden’ to prevent costly interactions and the agents in the contact centre are working with several systems that do not give them a clear view of the customer. The insights in the transaction history are incomplete and hindering cross-sales opportunities. It won’t be very surprising to see this organisation show negative CRM performance metrics.

18.3

the CRM road map the range of CRM Implementing CRM for the example given in the previous paragraph could be quite an ordeal. There is huge untapped potential, many projects to be defined to improve communication, for instance. Improving the contact centre’s access to customer information would probably be a very good project goal, as would training agents to deal with this information. However, at the same time the rewards structure for employees would probably require a change. The internet channel may also see different projects initiated such as enriching the content on the website by including third-party knowledge, developing an ordering module, integrating the web with the back-office etc. And we are not even getting in to the subject of social presence yet. Projects in the area of customer management are also abundant: improving retention, reducing churn and improving the identification and capitalisation on cross-sell opportunities or introducing a loyal customer programme, for instance. Customer knowledge is quite well developed, but as soon as it needs to be processed and used, new projects are bound to emerge. Facilitating these projects cannot be done without touching on technology. The CRM software will need to interface with the internet and with other contact centre applications. Metrics will also be introduced to improve the CRM results that the projects were intended for in the first place. The organisation will embark upon a learning journey as to which projects yield good results and how it can even further capitalise on capabilities. A more differentiated approach towards customers will mean the value proposition will also have to change, otherwise fulfilment will lag behind, keeping CRM from achieving return on investment. In Figure 18.2 the domain of the projects is illustrated. They are projects contributing to the transformation of a product oriented towards a more customer-centric organisation.

the CRM vision Formulating and disseminating a vision of CRM is crucial to avoiding getting lost in this expansive field. A vision will reflect the organisation’s ambition: how will it ultimately deal with customers? It reflects the final situation that the organisation strives to achieve and to which it is committed, due in part to its pattern of values and norms. It may involve a vision of an investment fund to make financial markets accessible for private individuals with limited knowledge and the ability to invest. It may be its ambition to support customers and guide them in the way they prefer in the management of their capital. By being the best

378

Chapter 18 Implementation of CRM systems

Figure 18.2 Overview of CRM projects

listener among the service providers, it can utilise its expertise to help private customers become stronger in a turbulent financial climate.

CRM strategy The realisation of a CRM vision requires a strategy that provides an indication of what are the concrete goals and how these are going to be realised. The choice of strategy provides a direction to the CRM functionalities that a company would like to develop. An organisation with operational excellence that invests in CRM systems will not supply customisation nor will it expend any effort in developing customer knowledge. Its customer strategy will also demonstrate more characteristics of transactional rather than relationship marketing. The contacts will have to be efficient yet effective; self-service solutions are therefore likely to be encouraged. Concrete (financial) objectives constitute part of the strategy. The careful specification of these objectives can contribute towards the success of a CRM project. This requires the organisation to establish a clear link between the efforts and the results to be achieved. A compulsion arises to search for possibilities which allow benefits to be derived from CRM during interaction with prospects and customers. The company which employs an operational excellence strategy will have to specify in concrete terms how the costs of order processing, resolving complaints and the like should decline over time. The desired revenues which are to be generated from cross-selling and the increase in turnover per customer will also have to be specified. During the CRM project, it will have to be monitored whether the efforts yield the desired results for the costs budgeted for this purpose.

379

Part VI CRM systems and their implementation

Figure 18.3 depicts the effect of the choice of an operational excellence strategy in global terms for the different CRM sub-topics and the results to be achieved by them. If the circle is unshaded, the importance of the topic is limited. If the circle is lightly coloured, this means that the importance of that topic is of medium significance. Darkly coloured circles on the other hand indicate areas of special interest relevant for CRM.

start at the beginning Figure 18.3 is showing that many different projects can be defined. The million dollar question (sometimes quite literally!) is with what project to begin. In which order should the capabilities and building blocks of CRM be developed? Please note that not all building blocks need to be perfected all at once in the first phase. If an initial project on customer knowledge is geared towards achieving the end position, without the relationship strategy, proposition and communication channels to capitalise on the knowledge investment, the advantages will not outweigh the cost and return on investment will not be achieved. As a ground rule it is wise to focus on the operational primary processes involved in acquisition, delivery and after sales first. These are relationship management activities that are important to the organisation. The projects need to be defined with the customer need as a starting point and should be supported by technology. If we go back to our example, the possibility to order online, through the website, is a clear project that is defined inside out and supported with technology. It is also a primary

Figure 18.3 Relevance of CRM projects in the context of operational excellence Degree of shading equates to level of significance: unshaded = limited significance; light shading = medium significance; dark shading = special significance.

380

Chapter 18 Implementation of CRM systems

functionality that is missing and that can directly show the added value of catering to customers’ needs through different channels. Research into organisations that are successful in CRM has shown that their starting point is often an area of ‘pain’, where they experience trouble. They are losing out on revenue due to the lack of online ordering capabilities. The front and back offices are not cooperating as they should, meaning that sales and fulfilment are not aligned. Solving such issues, famous bottlenecks, can unlock great energy and lead to support for the CRM strategy among operations and management alike. Just to make the contrast clear, however, such an effect should not be expected from focusing on a cross-sell project for an organisation in a growth market with a low market penetration for its primary offering. The scope of the projects should not become too large as this can result in a riskier situation. Not only does the chance of a successful outcome consequently decrease, but the degree to which a failure is acceptable is also reduced: there is too much at stake. The business case will have to demonstrate that the CRM project involved in this process will lead to positive results within a predetermined period of time. Appropriate to the CRM strategy will be an indication of how the project will ultimately pay for itself. What is the profit that will be obtained by developing the order functionality on the website and how much additional turnover will we realise in this way? How will other channels be cannibalised? What is the reduction in costs to sales for these transactions? In budgeting, it is important to review all the costs: those involved in the network, the application software and the data as well as the expenses related to supplier support and possible system integrators. It should be clear how the project will achieve ROI and not in any manner, but in a way fitting the CRM strategy. Is profitability increased through reduced churn? Are efficiency gains leading to the potential to serve a certain customer group more profitably? Which investments are required to develop a certain functionality of the CRM software and what will the return on capabilities be? It’s important to cover all the different expenses that can be expected: investments in the network, the application software, the database, training, consulting and systems integration. Usually, initial CRM projects will lead to a reduction in costs. It becomes less expensive to develop a catalogue, to reproduce it and to distribute it. The costs of the call centre may be reduced through the introduction of self-service concepts. Customers are assisted by voice processing systems or search for the answer to their question on the internet in a ‘frequently asked questions’ section. During a second phase, the justification of projects is supplied by an increase in turnover. The acquisition and relationship management processes are defined and supported by ICT and can now be further optimised. Customer data can be used in approaching prospects in a more targeted way with offers, and cross-sell initiatives can also be geared towards customers’ desires with a greater degree of accuracy.

Phased expansion If the base level of the primary process has been reached, one can start contemplating the phased development of competencies. If the basic level of operational excellence is achieved, customer intimacy can be introduced and increased (see Chapter 3). It is possible to strive for further optimisation of the primary processes, such as attracting, retaining and developing customer relationships by capitalising on customer knowledge. Retention and cross-sell projects can be initiated in the contact centre. A further personalisation of the value proposition can be considered or the website can be enhanced in cooperation with third parties who can improve content and functionality. But it’s easy to get lost in all the things that

381

Part VI CRM systems and their implementation

‘could be done’ and lose sight of what ‘should be done’. The CRM vision and strategy need to direct the efforts and must be used to prioritise projects. There must be a careful consideration of the balancing of customer knowledge, the value proposition, the relationship policy and communication. Performance measurement and management needs to indicate where the current bottlenecks are. Is success being held back due to lack of customer insights, or due to channel issues? Are the capabilities developed properly and functioning well? The balanced scorecard was introduced as a useful tool to keep track of the integrated performance of CRM. From the customer’s point of view, the focus will initially be on increasing customer satisfaction, and later on improving commitment. Attention shifts from satisfaction with the transaction to the bond between supplier and customer. During this same time span, the company will transform itself from a product-oriented organisation into one in which the customer is central. The market is no longer divided up into products but into market segments and ultimately even customer groups. And, the one-way communication makes room for a dialogue conducted through various channels. Business units no longer communicate independently with the customer, but gear their activities to one another.

embedding in the organisation Achieving the relevant objectives is dependent upon the proper embedding of CRM in the organisation. CRM has far-reaching effects for the organisation. Ultimately, the structure and the position of many managers change. Horizontal connections between departments and business units are created in order to arrive at a customer-oriented organisation. The IT department comes to fulfil a more infrastructural function and will integrally support the business processes. Knowledge of individual customers must be built up and exploited. Experiments are employed to find the most effective and efficient relationship strategies. Resistance to setbacks must be built up to prevent the slightest disappointment resulting in a detour from the chosen path, which can lead to the impression that the efforts made were fruitless. The necessary long-term management commitment may originate from steering committees (Gentle, 2002). An important aspect is that the involvement in CRM on the part of

table 18.1 Objectives of the CRM process within the four perspectives of the balanced scorecard Current situation

Medium term

Long term

Financial perspective

Turnover

Cumulative turnover over total period of custom

Customer perspective

Average customer satisfaction Primarily one-way; from business unit Customer knowledge distributed within organisation Product-oriented

Individual customer satisfaction Communication attuned between business units Shared customer information Market-oriented

Life-time value (profit contribution of the customer during period of custom) Individual customer commitment Dialogue conducted through multi-channels Integrated customer knowledge; everyone has the same image of the customer Customer-oriented

Market is divided up into product groups

Market segments are identified

Individual customers and customer groups are identified

Process: communication Learning and growing: customer knowledge Learning and growing: organisation (1) Learning and growing: organisation (2)

382

Chapter 18 Implementation of CRM systems

this senior management concerns the entire process and not just the individual projects. They must be convinced of the importance, magnitude and reach of CRM and must be committed to it. They have a long-term orientation and overview, recognise the importance of a healthy business case, but equally realise that a delay or short-term loss cannot be allowed to endanger the overarching objective. Within the steering committee, individual members can take responsibility for the specific areas within CRM. One could focus on the financial aspects, for example, while the other sets their sights on the communication and development of the channels, and still another concentrates on the customer or the implementation of the CRM systems after a careful definition of processes has taken place. It is common for the members of steering committees to find that their time is limited. This problem may be overcome via core teams. In these teams, professionals with authorisation operate from the top; they have responsibility for developing the organisation’s CRM competency. A division of labour can now also take place by which one person will concentrate on customer knowledge, and others on change management, external communication and the systems.

18.4

CRM project management The separate projects can ultimately be professionally managed. It might seem to be a redundant statement, but experience has taught us that the contrary is true. Various initiatives even receive the label ‘project’ without a project organisation being set up or a project being defined, planned or evaluated. In other projects, those involved work strictly according to the handbooks, in which the procedures seem more important than the people who must do the work (van Putten and Peelen, 2001). The successful completion of a project is dependent upon various factors. A good project description is desirable, one which includes the assignment and the objectives to be realised. The project description should not be exhaustive or become too long; in practice this often leads to reduced usability, lack of interest in the document and, as a consequence, a greater chance of the project’s detailed description not being implemented at all. The objectives should also preferably be SMART (specific, measurable, actionable, realistic, timely). Project descriptions in which the selection and implementation of the software package are central are never going to win first prize in a beauty contest (Gentle, 2002)! In these types of project, the focus is usually on subjects which are unlikely to affect the success of the project. Additionally, the outcome of these projects is predictable; none of the standard packages will satisfy all of the wishes and demands and thus a solution remains forthcoming for the time being. What is important, however, is to realise that the project result is dependent on the degree to which the company is capable of defining processes from the customer’s standpoint which are supported and improved by the use of information communication technology and which bring the realisation of the strategy one step closer. The business case will have to be developed from this angle in the project description. In addition, the nature of the project will have to be identified. Is this a project that can be characterised as ‘business as usual’, or is it a complex and innovative one (van Putten and Peelen, 2001)? If the latter is the case, then a careful risk analysis is all the more important. By recognising risks promptly, they can be more easily managed or it can be determined beforehand that the project should not be started at all. Another danger with innovative

383

Part VI CRM systems and their implementation

PRaCtItIoneR’s InsIght Processes consist of a succession of activities which logically follow one another (Davenport, 1993). Following the identification of an incoming telephone call thanks to caller ID, for example, someone will have to determine whether the customer can be found in the customer database. If they are included in the database, then it can be determined to which segment they belong and the telephone call can be routed to the responsible agent in the call centre. If the customer is not to be found in the database, then the call will have to be assigned to another agent who is capable of handling the input of the personal details in the customer database. If the caller ID has been blocked, then the call will have to be sent to an agent who first will ask the caller to identify themselves. Flowcharts can be used to describe the processes in differing degrees of detail. On the most detailed level, the process descriptions are input for programmers. The example described here is characterised by a relatively high degree of detail. On an abstract level, it is the organisation and recognition of different contact processes that are involved, and the value that these can represent to customers. This involves a major challenge, all the more so because marketing processes are described less accurately than are production and logistical processes, for example. Various marketing activities are not even viewed as processes. Data for various officials, for example, are seldom approached from a process perspective. They are viewed as information and not as incoming data (input) which should be evaluated in terms of quality, stored and protected and which must prove their value in throughput processes.

projects is that it is difficult to define the project beforehand. Many aspects are new and cannot be described in advance. Insights regarding the objectives can change along the way, but the ideas on the project feasibility can also change as well as those regarding the quantity of work involved in the project. The scope of the project may then change as a result and represent a major risk to the project’s chances of success. Furthermore, the chance of a positive outcome is determined to a considerable degree by the people who are involved in the project. The inability to find qualified and motivated people who can work together in a team is reason enough to prevent a project from being started. Characteristic of many CRM projects is that people from more than one discipline must act in concert with one another. There are many situations in which IT professionals, marketers, salespeople and account managers, database specialists and/or call-centre managers will have to work together to complete a project successfully. There is no room for bias and communication barriers will have to be overcome. Those involved will have to learn to speak one another’s language even if that requires effort. As was previously indicated, embedding the project in the organisation represents another point of particular interest. The project must have the aforementioned sponsor at the upper level of management who is convinced of the importance of the project and is responsible for the final result. In the event they appear to have insufficient time available for the project, they must provide a solution beforehand. They will have to delegate a suitable substitute who has the responsibility, and sense of responsibility, and with whom direct contact is maintained. At the same time, there must be sufficient budget available in order to perform the various project activities. In addition to the purchase of the application software, the adaptation of the network, the integration of the systems and training for the staff, room will also have to be made to perform a pilot run of the system before the final rollout, and time and money

384

Chapter 18 Implementation of CRM systems

will have to be provided for the evaluation phase so that people can learn from this project for the future. Financial means will also have to be made available in order to feed the system with data. A campaign management tool without customer data is, after all, not very useful. There is a tendency in practice not to appoint enough means for the data aspect. It is also recommended that a pilot is organised in which the project can be tested out in a live environment over a period of several months by a selected group of users (Gentle, 2002). The goal here is to validate the business case and to increase user acceptance. Opponents of a pilot resist this because a shadow system is maintained during such a period which places an additional burden on staff and is accompanied by extra costs. The advantage, however, is that there is a better chance that a complex and innovative project will be completed successfully. System integration issues should preferably be kept separate from the pilot. These issues should not even be an integral part of the first phase of CRM implementation, so it is especially important to separate them from the pilot. Proper preparation for ‘going live’ with the project is crucial. The users must be trained and the data migration must be arranged. There is nothing worse than a user who does not know how the system works, let alone one who is confronted with a non-functional application. Finally, the last phase of the project management must not be skipped. The project will have to be evaluated and lessons will have to be learned from it for the future. After completion of the project, the company must consider how and when the realisation can be raised to an even higher plane so that customer data and channels can be optimally exploited and realised. It can be considered whether changes in the organisation are desirable with a view to transforming the company from a product-oriented to a relationshiporiented enterprise. In the following overview we summarise the aspects and elements that should together make up a complete CRM project plan.

CRM definitions Elements to include in the project plan: ● ● ●

● ●



Project title Management summary Project definition: description of the project in exact words, translating the strategy to the project goals and placing the project within its organisational context Composition of steering committee and project group Business case: calculation of project expenses and expected returns (both cost savings as well as revenue effects) Planning activities: often describing the project phases along the lines of designing, testing, piloting, training, implementation across the organisation



Description of all activities



Deliverables of the project: what are the tangible and intangible results of the project





Risk analysis and fall-back scenarios: what to do if the project takes longer, costs more or does not reach desired outcomes Budgeting

385

Part VI CRM systems and their implementation

18.5

a different approach to CRM project management The development and implementation of CRM systems is not necessarily a linear process. The principles and methods relating to software selection, development and implementation have evolved over the past decades and a more flexible process has become popular, appropriately named Agile. Agile is a name used for a set of practices that has, in fact, been in existence for quite some time, but only really developed some popularity since 2001. An informal gathering of software developers produced a manifesto for better software development, called the Manifesto for Agile Software Development (Beck et al., 2001). It states that good software is produced by: 1 people and interactions rather than processes and tools; 2 software that works intuitively and correctly, rather than hefty manuals to explain or troubleshoot; 3 collaboration with customers who use the software, rather than contract negotiations; 4 dealing with change, rather than sticking to a plan. The manifesto is not entirely revolutionary, as the ideas underpinning Agile were voiced in the 1990s as a reaction to the traditional cascading methods, that are characterised by a ‘stop-and-go’ or ‘develop and release’ approach. Agile tries to reduce risks and improve results by developing and implementing IT solutions in iterations, smaller projects that are also called ‘time boxes’. The miniature project is worked on in close cooperation with the future users and comprises planning, analysis, design, testing and documentation. However, the small scale makes the projects less complex, more flexible, more manageable and generally a lot faster. Project priorities are re-evaluated after each increment or ‘time box’, meaning there is a lot of control on what is to be delivered, when and how. The results of Agile projects are measured by deliverability, not by process. The working prototype or product is the ultimate metric, not the amount of resources, time nor the degree to which the process was documented. Agile projects include a lot less documentation then traditional IT development and implementation methods. The critique, therefore, is that it is undisciplined and unstructured. A special method of Agile development and implementation is Scrum. The term originates from rugby, where the scrum is a situation in which players are gathered in a group and the ball is tossed into the middle. The team needs to try to push the ball forward holding each other’s shoulders and keeping the ball contained within the group. It is a metaphor for teamwork, communication, resourcefulness and direction. The origins of Scrum can be found in a 1986 article in the Harvard Business Review, outlining the benefits of multifunctional teams in innovation processes (Takeuchi and Nonaka, 1986). Although it sparked an idea, the method was not developed until 1995 by Schwaber and Sutherland. It aims to: 1 increase team effectiveness; 2 guard the team’s progress; 3 resolve barriers and blockages; 4 safeguard project progress; 5 map and manage risks. Scrum uses a structure based on ‘stories’, which are the projects that have to be realised. The stories are prepared and presented in a Scrum room, which can be seen as the war room

386

Chapter 18 Implementation of CRM systems

or situation room that is well known from crisis management. The room is owned and used by the Scrum team. It is important to have a dedicated room. Scrum projects are typically busy and can be noisy, so trying to work on something other than the Scrum project would be difficult to do in the same room. The Scrum room needs to have a lot of wall space. The walls are the project map and contain the projects and tasks that need to be completed, their status, the issues that are encountered etc. The Scrum room needs to be well equipped with stationery that allows teams to write down ideas and questions, make comments, and /or alter the status of tasks and so on. There is one central Scrum board that contains the essential project parts. The people working together in a Scrum project have different roles. The Scrum master is often the lead-developer (if working with third parties, this will be on the vendor side). The product owner is the lead-user and definitely from the client side. It is debatable whether or not the product owner should be part of the team. As a key principle of Agile and Scrum is working with, instead of for a user or client, one could argue that the product owner should be on board. However, an alternative argument is that the product owner does not need to be ‘au fait’ with all the work that is being done by the ‘sprint teams’. Sprint teams are the multifunctional mini-teams completing the individual parts of the project – the ‘stories’. Stories tell the teams what should be accomplished. They are userbased and describe a clear deliverable, such as: As a contact centre agent, immediately after the caller has been identified, I want to be able to see that customer’s last three purchases on my primary screen.

The story is user-based to permit a results focus. It’s up to the Scrum team to attach specific tasks to the story, to take it from a vague concept, to a detailed story, to something that is ‘ready to sprint’. ‘Ready to sprint’ means that the story has been understood and translated into tasks such as ‘build wireframe’ or ‘define business rules’ and ‘develop icons’. The Scrum team is supported by a project leader, focusing on the availability of facilities and resources: room, computers, money, stationery etc. The Scrum team can check in with stakeholders at regular intervals, but also flexibly. Stakeholders can walk into the Scrum room and get an update or attend a daily Scrum meeting. The daily meetings are collective (entire Scrum team) and last about 20 minutes, are held standing up and should contain a quick rundown on: ●

Which stories are in development?



Which are ready to sprint and which team will sprint with them?



How are the current sprints coming along and what is required to complete them?



What are the open ends?

Documentation is built up during the sprints. The Scrum board will typically contain room for these elements: ●

Stories and tasks status area: Which tasks are in stock? Which stories are being worked on and which have been completed?



Burn down chart: A tool comparing work outstanding against time available. The daily sprints are used to compare what remains to be done with the time available and identify issues in terms of capacity and planning.

387

Part VI CRM systems and their implementation ●

Evaluation and learning: every task or sprint offers opportunities to learn. What aspects received too little attention? What could have been handled better? And especially, how can what has been learned be used in subsequent tasks, stories or Scrum projects?

The items that are finished are documented. The stories are kept in a product ‘backlog’ as soon as they reach the status ‘ready to sprint’. The sprints and their progress are kept in a sprint backlog. The end results are working increments of the software. It is not surprising that, owing to the vendor–client and multifunctional team aspects of Agile development, and in particular the Scrum method, they are becoming increasingly popular methods of working in CRM. Very often, the processes of the client organisation are in development as it tries to discover how best to focus its organisation around customers. An approach whereby projects, rather than being outlined for years to come, focus on small, incremental steps that can be relatively quickly implemented, makes sense for CRM. Especially since CRM programmes are no longer approached as a ‘leap of faith’, but have to prove their worth quickly. CRM is especially suited to Scrum’s multifunctional way of working because it brings different disciplines, such as the different channel managers, or the marketers, sales people and information specialists together (Aydin et al., 2005).

18.6

International or cross-division projects (gentle, 2002) expectations versus reality In large organisations with activities in different countries and divisions, there is a good chance that the head office will ‘adopt’ CRM and pursue a standardised approach across the business units. ‘Standardised’ does not necessarily refer to the project management being linear, it may very well be an Agile project. It refers to developing ‘the same CRM systems and capabilities across the entire organisation’. The general idea is that this type of centralised approach has many advantages. It offers prospects for a professional approach. The best staff members are charged with the CRM task and they will have a sufficient budget at their disposal. Cost savings seem feasible through the centralisation of the purchase of CRM systems and by preventing the wheel from being reinvented at different locations within the organisation. By sharing best practices with one another, better performances can be achieved, more quickly and at a lower cost. IT divisions, as champions of standards, are generally also proponents of a centralised approach. The actual practice of international and/or cross-division projects doesn’t normally reflect these initial expectations. The national organisations and separate divisions do not necessarily embrace the initiative. Their perception is that their local reality is being neglected. Their customers set specific demands which are not supported by the system. Their company division differs significantly from the others and thus deserves a different approach. The system with which they now work satisfies these requirements and they have the impression that the new one will probably perform worse rather than better. For them, being forced to adhere to centralised standards feels like a punishment. Whether the response from the national organisations and divisions described here is justified is usually not even relevant. Their perception determines their level of cooperation with the head office initiative, and a perception that ‘everything that comes from head office should be viewed with suspicion’ is the subjective reality.

388

Chapter 18 Implementation of CRM systems

It must be recognised that, in various situations, the implicit (assumed) economies of synergy and scale of a central approach are also lacking. The cumulative quantity discount of the system supplier appears to offer hope; however, this ultimately proves disappointing. If we compare this discount with the sum of the individual price reductions from the systems purchased locally, then the latter is often higher than the former. Additionally, the costs of hardware and software usually amount to only 50 per cent of the total costs involved in CRM projects and many more hidden costs emerge. Coordinating all the activities appears to be more difficult than was expected and is accompanied by the requisite travel. It is also difficult to learn from mistakes. The political interests are great on all levels with a standardised approach; mistakes are more likely to be hidden or camouflaged than with local projects because the failure of even a part of a prestigious project presents major difficulties. Even if the central approach leads to a satisfactory solution, the negative consequences for flexibility will have to be recognised. Changes and renewal are not easy to implement quickly. Signals are received more slowly and less adequately; people do not realise that there is a need in certain segments of the organisation to change in order better to address the customer’s needs, nor are they capable of estimating the importance of the desire for innovation.

When should a standardised approach be taken? In overseeing the risks of the standardised approach, the question arises as to whether it is even useful in certain company and market situations. The answer is heavily dependent upon the degree to which cross-border or cross-division activities are being undertaken by the organisation: ●

Are there corporate clients who maintain a relationship on a central level and acquire products from different national organisations and divisions?



Are cross-border or cross-division services being performed? This is the case with express couriers such as DHL; they collect a package in country A and deliver it in country B; telecom companies that set up international connections; and banks that transfer funds from one country to another.

If either of these questions can be answered in the affirmative, then an integral system is desired on a transactional level and a standardised approach to CRM can be legitimate.

CRM illustration one company, one database. the economist group integrates thirty databases into one system: View360 Four-fifths of the readership database of the Economist (circulation 830,000) is located outside of England; one-third of this segment lives in the United States. In spite of this, the numerous possibilities that the enormous database offers for the cross- and up-selling of the different products and services of The Economist Group remains unutilised. Cause? The five business

units employed more than 30 incompatible databases with different criteria and platforms.The solution? One customer view, or one coherent picture of all the customer segments that works globally and unites all the data sources in the form of a customer data solution. To accomplish this, View360 was developed, a system that supports cross- and up-sell marketing activities,

389



Part VI CRM systems and their implementation

CRM illustration (continued) simplifies the integration process by collecting customer data from multiple sources and reprocessing these for sales and marketing purposes. The integration of all the group’s customer data and channels was not achieved without a struggle, however. Everyone had to be convinced to share data with others and all the international data had to be moulded together with different (address) structures to form one whole. However, the result has proven that the efforts were worthwhile. The group now has access to a consolidated database,

with details on 4.5 million (opt-in) customers with purchase histories of up to 12 years. The data are used for activities such as prospecting, analyses, campaign selections, optimisation of the advertisement offering and direct mail activities, and successfully. The turnover rate for data collection was drastically reduced, the number of orders rose, customer activity increased and office costs dropped by 45 per cent. Source: Marketing Direct (2002).

Other arguments for a standardised approach should be viewed with suspicion, as has been shown above. Only the advantages offered by standardised international reporting deserve any attention. It is a considerable advantage for everyone to report in the same manner on their financial results, customer satisfaction, processes and innovations. The possibility of formulating norms and assigning meaning to the results presented increases significantly. Comparisons between divisions and national organisations become possible. The situation in country A may be very similar to that in country B several years prior and as such, it is easier to evaluate developments in that area more accurately. The fact is that this represents only a secondary benefit of a standardised CRM system, and can never serve as the reason to implement this type of approach. The choice of a uniform approach will have to be dependent upon a consideration of the pros and cons on a transactional/ operational level.

areas of particular interest in managing these types of projects The successful management of international and/or cross-division CRM projects requires attention to the relationship between head office and local units. It is important to prevent users from getting the impression that the system is being forced upon them. Obtaining their acceptance is a project in itself for which the time and means must be made available. Users deserve to be able to participate and have a say and must be involved in all stages of the standardised project, not only during implementation. Members must be recruited from the specific countries and business units which are to become part of the project team. The final team will have to consist of members who have international experience and who are capable of assessing the situation in different countries. The requirements for the system will have to be determined collectively and agreement will also have to be reached collectively when it comes to the selection of the package and the solution. Investments in meetings should also not be avoided. A sensitive issue in the relationship between head office and the units involves access to local data. This is seen as an undesirable invasion of privacy to which there is a great deal of resistance. The fact that head office will have access to information on customer churn, lead times, complaints etc. is viewed as a wholly undesirable attempt at interference which may well prove to have a counterproductive effect. Insisting on access to these data will have to be avoided as long as it remains a sensitive issue. There is a very good

390

Chapter 18 Implementation of CRM systems

chance that it will have negative consequences for the commitment to a project, whereas it does not necessarily have to be crucial to its realisation. There are, after all, other workable solutions. Furthermore, the success of these comprehensive projects is dependent to a great extent on the restriction of their complexity. Requests for separate versions in a specific language and/or separate functionalities will have to be examined with caution. This usually implies higher costs than were originally expected, and, in the beginning, simplicity is crucial to success. It is only in situations in which implementation is otherwise not possible that these requests should be honoured: for example, if a translation is indispensable to those in the front office for the interaction with customers; or if the agents do not understand English (the language used by the software package), and thus cannot work with the application. The initial architecture should also be kept as simple as possible. Knowledge of the specific situation is required to evaluate whether a central, mixed or decentralised architecture is preferred. Whatever the case, any situation should be prevented wherein the chosen solution becomes too risky, or delays the progress of the project and becomes a source of irritation during the development and initial phase of operation. Finally, the actual implementation and use of the CRM system will have to be adapted to local circumstances. The training will have to be provided in the local language and the first-line helpdesk will have to be able to assist users in their native tongue. For more complex questions that are referred to the second line, this is not a precondition, however.

18.7

Conclusion Many CRM projects continue to fail. They do not produce the desired result; management struggles with the possibilities offered by CRM. In order to put an end to this pessimistic situation, a careful CRM change and implementation project is essential. Companies will have to base their reasoning on the strategy and not the packages. An assessment of the current situation in comparison with what is desired from a strategic standpoint will have to provide insight into the direction CRM development will take with regard to the different areas of focus such as customer knowledge, the channels and the communication, the relationship strategy, the organisation and the culture etc. Long-term commitment will have to be obtained within the organisation for this path of change and development. Senior management will have to take responsibility; because their time is so limited, they will have to delegate and appoint authorised professionals. Projects will then have to be defined. The focus should not lie on the package selection. It is more important to focus attention on the processes, the manner in which these can be supported and improved with the use of ICT and how they will help realise the strategic objectives. A proper manning of the projects, good budgeting, timely involvement of the users and the like should all lead to a smoother implementation of the systems. Finally, caution is called for in situations in which a standardised approach of crossborder or cross-division projects has been adopted. Potential economies of scale and synergy may be missing, while the additional costs of coordination are higher and increased resistance must be overcome.

391

Part VI CRM systems and their implementation

Case study shell and CRM: one database for 20 million customers Interview by Peter olsthoorn with Ruud van Munster, european Loyalty and CRM Manager for shell ‘Using overly expensive IT-driven CRM projects, other companies paved the way for Shell,’ is one of the opening remarks made during an interview with Ruud van Munster, Shell’s European Loyalty and CRM Manager. The oil company has learned from its failures and has chosen not to implement CRM on a Europe-wide scale, but instead to take a step-by-step approach.

a country-by-country basis Shell has elected to expand its CRM programme on a country-by-country basis and is currently (2004) active in nine out of seventeen targeted countries. Munster: ‘We first want to prove that something works on a small scale before we invest in something huge. There are too many CRM failures in the world. There are already too many projects in which the IT focus is too strong. Companies stare at huge CRM systems with abundant possibilities for which they have no sound application. If you do not know how to use them to create customer and company value and just climb aboard the CRM train, you will not succeed.’ According to van Munster, too many companies have also implemented a call centre without first formulating a proper business case. ‘In our organisation IT follows and we only install a call centre if we are convinced it will improve sales. We spend as little as possible on operations. Besides, a European CRM system is not necessary in our organisation since there are only a few customers that fill up their cars across the border and those that do are normally less brand loyal.’ Shell currently maintains its own Shell (Club) Smart programme in thirteen countries and a ‘coalition programme’ in four countries: Air Miles in the Netherlands, Happy Days in Belgium, Thrumf in Norway and Smiles in France. The fuel card that can be used to pay for the fuel can also be seen as a loyalty programme and is in use in the Scandinavian countries. Shell has created a three-layered CRM organisation: ●

A loyalty competency centre in Hungary with IT and CRM knowledge. Van Munster: ‘Hungary is known for the quality of its IT people, in addition to being one of the most successful countries for the Shell loyalty programme.’



A European team of CRM experts; each of the team members has strategic responsibility for a cluster of countries. The local loyalty and CRM groups in the countries, who implement the programmes and have succeeded in creating value.



Van Munster: ‘Centralisation has absolutely paid off. It was here that we developed our standard building blocks that we can apply to the countries. A few years ago we needed one year per country to implement a programme; now we do it in three months.’ If it is up to van Munster, CRM applications will be further simplified and standardised in 2004, making implementation easier for local CRM teams. ‘Practical efficiency is the goal. Perhaps it will become possible at some point to produce a single European or even global catalogue instead of national versions, and the articles can be sourced at lower cost.’

➨ 392

Chapter 18 Implementation of CRM systems

Case study (continued) Facts Is this approach typical for a follower? No, if we ask van Munster. ‘You have to find out what does and what does not work on a step-by-step basis. You have to remain pragmatic. We sell fuel and cannot innovate CRM theory.’ At present, Shell has a database of 20 million customers in Europe. This database is filled country by country and is currently operational in seventeen countries. The relation and transaction data are known and it is possible to identify customers and send them correspondence or products. It is possible to look into the database to find out how active they are, how frequently they cash in their loyalty points, determine their fuel purchasing behaviour and evaluate the value that they represent. Van Munster likes facts: ‘Not many consumers will admit that loyalty points influence their choice of a fuel brand, but practice has proven otherwise. I attach more value to information I get from the database than to the results obtained through traditional market research. There is a difference between what consumers say and what they actually do.’

shell actions Crucial within Shell is the accountability for a campaign. Control groups are used, for example, to show the value of a campaign. ‘In France we noticed a significant difference in customer revenue. Campaigns pay off and add approximately 10 percentage points. We had campaigns with a 50 to 60 per cent response rate, which is extremely high. The road warriors in particular, the group that drives a lot and buys plenty of petrol, responds quite well. They love to reach the individual target we communicated to them.’ The example here is England where key customers received eight to ten e-mails during the summer with the offer of increasing their loyalty points by buying additional litres of fuel. ‘They saw it as a game and took on the challenge.’ E-mail has become a favourite, although Shell will continue to send physical mailings as well. ‘In three hours’ time you can invent and create an e-mail campaign; in a regular direct mail process this will take much longer. I do not want to abandon traditional direct mail, as it is part of the multichannel approach and complements the other channels, but the internet is gaining ground.’

Intranet In England, the entire CRM operation, including the call centre, is outsourced to Carlson. Shell’s competence centre, however, remains in charge and manages the relationship with Carlson. The future of outsourcing depends on several factors. ‘In England, Shell has made good progress with CRM, the wages are high and there is a wide range of service providers. But taking on the challenge in-house also has its advantages as has been proven in Hungary, a country with 2.2 million cars and 2 million Smart customers in Shell’s database. Smart customers can cash their points in at McDonald’s and this makes the loyalty programme attractive for many. Success depends to a large extent on the efforts and spirit of the local organisation,’ according to van Munster. Crucial to the organisation of CRM is the communication between the three layers and it is here that the web is useful. Shell has a European portal, an intranet, which functions simultaneously as a knowledge base, a communication vehicle and the beginning of e-mail campaigns. Van Munster: ‘Nearly everything we know about the 20 million customers may be traced on the intranet. Target groups in the seventeen countries and the success of campaigns are described in detail. If Turkey wants to copy a British campaign, they first read everything on the intranet and then get together for a face-to-face meeting to further

393



Part VI CRM systems and their implementation

Case study (continued) develop the campaign. Each country has access to the available information. But only the local people have permission to access relationship data. ‘This online tool is for us the basis for guiding CRM. You can do as much with it as you want. You can select customers for your campaign, based upon their life-time value or transaction profile and you can approach them whenever you want.’

Conclusion The CRM targets differ per country and are defined using terms such as retention, reactivation and share of wallet. Van Munster: ‘If we realise a retention rate of 68 per cent in the experimental group for the high value customers and 58 per cent in the control group, you can say that CRM is a success.’

Questions 1 What are key factors determining the success of Shell’s CRM approach? 2 How would you formulate Shell’s vision and strategy towards CRM? 3 Reconstruct Shell’s CRM road map. 4 Formulate Shell’s CRM business case(s). 5 How useful will a standardised global CRM approach be for Shell? Why? Source: Olsthoorn (2004).

QuestIons 1 Describe step by step how a CRM change and implementation project could be designed. 2 Why do so many CRM projects fail? Name ten reasons and explain your answer. 3 CRM systems can be employed for companies which implement an operational excellence strategy. In this case, the demands placed on the CRM system are different from those found in companies which implement a customer intimacy strategy. Indicate the differences between the two in the various areas of CRM, namely customer knowledge, channels and communication, the relationship strategy and the supply of customisation. 4 A comparison of the strategic ambitions and the current situation should provide insight into the direction the development of CRM will take. Indicate how these can differ for companies involved in business-to-business and business-to-consumer sectors with direct or indirect distribution. Provide more detail using four company and market situations. 5 Obtaining a long-term commitment from top management for CRM projects is vital. Formulate the so-called ‘elevator pitch’ for a company of your choice. (This is the situation in which you are standing next to the CEO in the lift and have one minute to make your case for the topic and see that it gets put on the agenda.) 6 Defining processes represents an important part of CRM projects. On an aggregated level, provide an indication of the processes that you would like to define within an energy distribution company. 7 Explain how you would evaluate the following method of approach. In order to increase the chance of success of the CRM project in the contact centre, users (agents) are asked about

394

Chapter 18 Implementation of CRM systems

their specific preferences. On the basis of their answers, the demands are then determined for the system. In your answer, describe the pros and cons of this method of approach. 8 Name several criteria that a good CRM project description must satisfy. Explain your answer. 9 Under what circumstances is it profitable to approach CRM projects in a cross-border and/or cross-division manner? Explain your answer. 10 How can you increase the local acceptance of a standard CRM package that will be implemented throughout the entire organisation in different countries and divisions? Explain your answer.

References Aydin, M.N., Harmsen, F., Slooten K. van and Stegwee, R.A. (2005) On the adaptation of an agile information systems development method, Journal of Database Management, Special Issue on Agile Analysis, Design, and Implementation, 16, 4, 20–4. Beck, K. Beedle, M. and Bennekum, A. van (2001) Manifesto for Agile Software Development. Available at: http://www.agilemanifesto.org/. Berger, R. (2002) CRM moet worden opgevolgd door CMR: customer managed relationships, Tijdschrift voor Marketing, December, 18–20. Boulding, W., Staelin, R., Ehret, M. and Johnston, W.J. (2005) A customer relationship management roadmap: what is known, potential pitfalls and where to go, Journal of Marketing, 69, October, 155–66. Davenport, T.H. (1993) Process Innovation: Reengineering work through information technology, Boston, MA: Harvard Business School Press. Gentle, M. (2002) The CRM Project Management Handbook: Building realistic expectations and managing risk, London: Kogan Page. Marketing Direct (2002) One company, one database. The Economist Group integrates thirty databases into one system: View360, Marketing Direct, November. Olsthoorn, P. (2004) De CRM van Shell, een database voor 20 miljoen klanten, Tijdschrift voor Marketing, April, 43–8. Peelen, E., Montfort, K. van, Beltman, R. and Klerkx, A. (2009) An empirical study into the foundations of CRM Success, Journal of Strategic Marketing, 17, 6, December, 449–67. Putten, W. van and Peelen, E. (2001) Kluwer Project Management Workshop, Breukelen: Nyenrode Business Universiteit. Takeuchi, H. and Nonaka, I. (1986) The new new product development game, Harvard Business Review, January, 137–46. Wurtz, W., Putter, T., Cirkel, M. and Rigterink, K. (eds) (2007) CRM in Nederland, Trento: CRM Association.

395

Chapter

19

The future The future is uncertain. Extrapolating from past trends what the future is likely to hold for CRM is unreliable if there are too many changes taking place in the environment. We start paving the road to the future the moment we take a step towards it and acquire experience. On the basis of our findings with CRM, however, we can also make several pronouncements on the continuation of the CRM journey. In this chapter we will address the following: ●

factors influencing the future of CRM



the image of an uncertain, but alluring future

PRACTITIONER’S INSIGHT CRM has climbed out of the post-hype depression; the experience that many organisations have with CRM is more positive than some years ago. The doubts as to whether CRM is here to stay are gone. CRM does not have to be abandoned and locked away with the other great ideas whose time just hasn’t come. The ideas of the early 1980s, when dreaming of mutually beneficial relationships with customers based on dialogue, have become a reality and are proving to deliver tangible results. The insights into the possibilities are being built through ‘experimenting-on-the-job’. We are discovering the added value of new systems, of certain new approaches towards implementation and change management and the way they support our overall strategy. Most of all, however, we are discovering that truly engaging the customer and letting go of the dominance of our own products and service to find the value in customer experiences, pays off.

19.1

Factors which influence the future of CRM The continuation of the ‘journey’ is influenced primarily by the factors noted under the following sub-headings.

396

Chapter 19 The future

Technological progress Technology is sometimes referred to as if it were an autonomous factor of progress. It is hard to make inventions go away, as long as no superior substitutes are available. It has been the case for gunpowder, the steam engine and electricity as well as for the (mobile) internet and the (mobile) phone. Internet technology and telecommunications have merged. Until recently, their application has been geared towards supporting certain processes and methods of working, but we are now seeing them put to new creative uses every day. As a tool that gives people the ability to act upon their needs and desires, the technological infrastructure is giving rise to a new order, socially and economically. However, it’s not just internet and telecommunications technology that is merging. Several technologies have converged and are being applied in a more integrated manner. Let’s take biotechnology, making it possible to read DNA and storing the profile on a USB storage device or ‘in the clouds’. It is a development known as ‘singularity’. The convergence of several areas of science and technology means that CRM too will become more multifaceted. The application of neuroscience, for instance, shows promising prospects for really getting ‘inside the customer’s head’ and learning about emotional drivers. New identification techniques may become available, rendering obsolete awkward ways of recognising customers by their address, date of birth or account number. The expectation is that these developments will follow Moore’s law and therefore will show a year-on-year multiplication of the possibilities with a factor two at equal price. An exponential growth in technological possibilities is likely to occur.

Changes in human behaviour in their role as consumers Consumers are becoming ever more critical and outspoken. Many organisations view this as a threat, whereas they might have to think about embracing it. Customers’ determination to voice their opinions more clearly is being fuelled by social media. They make it very easy for customers to find information, and compare and review products and services as well as organisations. They have a low-cost way of reaching out to large audiences and their messages are trusted more than those transmitted through official media and advertising campaigns. They can get help from friends or complete strangers with whom they happen to share an interest. They can trade, share and create together. The social group interaction is pushing the commercial bilateral relationship to the background. It’s no longer one-to-one, but rather many-to-many. The customer is no longer being lured in by enticing stories carefully crafted by marketers and advertising agencies. They are less gullible and more knowledgeable about the options available in the open marketplace. They close themselves off to commercial messages and consult with people in the social network, who have no direct interest in the buying process. The role of social contact is, and will become, more important than ever before in the early stages of a decision process than are contacts with a supplier or service provider. The new reality is that customers demand transparency, authenticity and honesty from their corporate counterparts. They are more aware of the value of information given and expect a company to be careful in dealing with their personal data. They want to be involved and taken seriously and are often willing to actively play their part in the development and delivery of a more customised proposition. Paradoxically, customers are not more demanding when it comes to product quality. It is increasingly acceptable that a product needs updating, upgrading or even tweaking and fixing, as long as the supplier’s responsiveness is up to their high standards and expectations. The value lies in the interaction and in the experience, not in the product itself.

397

Part VI CRM systems and their implementation

These are developments that take place in light of a broader social movement. Societies are changing and people are changing their behaviour within them as people and as consumers. Differences between countries aside, a broad tendency towards more egalitarian relationships is appearing globally. The state, the Church, the employer, the family and school are less able to dictate what we should do and how we should think. As freedom increases to show individuality, classic role patterns are broken and a new sense of selfdirection emerges. We can make our own choices, be who we want to be and give our life a meaning. We can choose the groups to which we belong and want to contribute, be it in school, at work, in sports or hobbies, holidays and many other areas. There is a shift in what people value as important. We are seeking for ways to improve our lives that take up less personal, natural and social resources. It’s no longer all about material wealth, but often more about wellbeing. This too, is a sign that the value lies not in the product, but in the customer. We will be increasingly interested in non-material aspects of life and less interested in ‘stuff’, which by its sole possession is not delivering as great a satisfaction as in the 1960s or 1970s, when owning a washing machine or television set was a sign of having ‘got somewhere’ in life. Of course, this remains very much an indication of having achieved a higher level of wealth in Western economies, which have traditionally been more object-oriented and capitalist. Maslow’s hierarchy of needs1 seems to dictate that the need for a better quality of life and self-realisation is dominating the need for a second house or third car. Reon Brand (in: Boswijk et al., 2011) distinguishes between six social values and aspirations: 1 need for an own identity: an individual lifestyle and expression; 2 exploration and self-development; 3 belonging: developing and maintaining relationships and networks; 4 fun: experiencing joy and happiness; 5 protection: for oneself, loved ones and the environment; 6 harmony: finding meaning, purpose, balance and satisfaction.

Changing market order Technological developments, along with globalisation, are leading to major changes in our market order. Value chains are becoming value networks that are no longer created with the producer at the heart, but with the consumer or user. The world in which the end-user or customer is experiencing the product or services, is dictating the partners that are involved in the value network. The user can configure a combination of products and services that together meet their individual needs for a positive and valuable experience. It is not a given that every trade is a trade of goods or services against money. Social trading is taking up a more significant place in the market. It is requiring traditional organisations with a significant influence on the value network to adapt their business model; different types of partnerships will have to be admitted and actively sought and the control in the partner relationships will need to be different. More flexible partnerships are required to meet the 1

398

Maslow’s hierarchy of needs is often portrayed in the shape of a pyramid with the largest, most fundamental levels of needs at the base (food, water, sleep etc.) and the need for self-actualisation (morality, creativity etc.) at the top. In between these two levels lie: safety (of self, family etc.); love/belonging (friendship, family) and esteem (self-esteem, respect of and for others etc.).

Chapter 19 The future

individual needs and demands of customers. Global players with perfect propositions will deal with local players who can customise and communicate with the customer through infrastructural parties who are able to service platforms and connections between all those involved. The changing composition of the value network means that cooperation in one area may be very complementary while conflicting in others. However, value networks are by nature not competing against each other, but rather competing for optimum value delivery. In these dynamic and complex surroundings, organisations will probably have to reinvent themselves from the ground up. Closed organisations, whic protect their resources as a precious source of competitive advantage, will have to open up. Organisations taking an insideout approach to seduce customers to their offering and try to close the deal in one-on-one interaction will see that increasingly their approach is failing. Organisations that operate within the social domain where people experience life can use products and services to give meaning to people’s life and become part of it. However, in the social domain they need to adapt to the ethics of people. Right and wrong are determined more by people than by what constitutes ‘good business practice’ or what is permitted by law. The relationship with the right customers must be sought and developed, if customers give their permission. It requires the organisation to engage in dialogue with customers, show their socially committed side and help when help is required, not when the company wants to sell something. It is intrinsically more about helping the customer to buy than it is about selling. Obviously, an honest value exchange must take place and the efforts made on both the organisation’s side as well as on the customer’s side must be compensated by a certain price or benefit. All this brings new challenges for CRM at time when many organisations have not yet dealt with the old challenges. In consequence, many projects relating to the internet or social media are allocated to departments other than CRM and remain largely unconnected. This is a fundamental mistake and a flaw that may hinder CRM success in the future. CRM is not associated with these new and innovative projects and is unjustly branded ‘Old School’. It is being associated with the implementation and optimisation of classical processes, inside-out selling and supporting the one-on-one relationships in contact centres, not the complex networked relationships of the social web. This situation should and can be prevented if CRM is approached as a fundamental business strategy, not front-office automation, and the key question that remains answered is ‘How will we, as an organisation, create and derive value from meaningful interactions with our customer base?’, making it then impossible to treat internet and social media as anything less than a CRM-related challenge! To get to grips with the future of CRM, an overview of our current state and several future directions for CRM are presented here.

19.2

The journey continues CRM is becoming more crystal clear At the time of writing, 2012, many are fully aware that CRM is not just a system, but also a strategy, entailing many organisational consequences. The insight into the exact nature of this strategy has been developed over time. The belief has actually decreased that, by investing in the right customer relationships, profits will come over time. The number of cases in which organisations have been able to reach a return on customer investments in the long run is limited. We are increasingly convinced that customer commitment should

399

Part VI CRM systems and their implementation

not be exaggerated. Customers are easily seduced by competitive offerings, switch easily and show little concern for pre-existing relationships. We are, as yet, not fully clear on why customers fail to commit for a longer period of time. Too often we seek the cause within the customer and believe they are disloyal by nature, without closely analysing our behaviour as an organisation, our offering and the way we have been servicing the customer’s needs. Many a CRM project has not been without problems, but has contributed to increased expectations with customers. As the company promised a more customer-centric approach, service delivery was halted due to implementation problems. Also the actual needs of customers were often misunderstood, the organisation tended to force itself onto the customer and showed little empathy or was too preoccupied with achieving its own targets and benefits. It has led to an increasingly large part of the consumer base ‘turning organisations away’ and developing a preference for self-service and companies that are uncomplicated and manage to deliver on promise. We see no-frills companies achieve success because they promise nothing more than the bare product and manage to deliver and even sometimes positively surprise the customer on a consistent basis. Because organisations are having such a hard time looking at relationships from their own point of view as well as that of the customer, the future prospects for customer–supplier relationships are not too optimistic. CRM strategies will have to give even more priority to realising short-term results that are at least attributable to CRM and achievable. The goal may be to improve sales or to boost the relationship with the customer. Customers should be viewed as assets in which organisations invest when they show a promising return.

The end of dominance of operational CRM The number of organisations with an operational CRM programme is increasing. Processes have been redefined from the customer’s point of view, systems have been implemented and integrated to support all touchpoints of an organisation. They are able to identify contact opportunities, make contact in a relevant way, have an on-going dialogue and register data, take proper action in following up the contact and evaluating the effects of the contact. In personal sales this is often already a cycle that is mastered quite well by many organisations. The telephone often has a closed contact cycle and even on the internet (and not only in mobile applications), the ‘closed loop’ is becoming a reality. Customers are no longer ‘lost’ halfway through a process. Partners are increasingly being involved in communications networks. There are initiatives to develop applications and implement them so that not only intermediaries and agents, but also consultants, wholesalers and even customers themselves have better access to customer data and company resources. However, the integration of channels is by no means complete. The continuous developments in channels are making it an area that is hard to keep up with. Integrating channels requires a very open architecture and an even more open spirit towards how customers would like to interact with the organisation.

Customer intelligence is on track The main challenges that organisations faced in the area of customer intelligence have been met by the front-runners. They have identified the need for customer knowledge as a critical resource to marketing optimisation. The importance of a subject such as data quality is seen and placed in the right strategic context. Data mining seems to be experiencing a comeback

400

Chapter 19 The future

too. The overload of customer information makes it almost a prerequisite to success to distil insights instead of collecting data. The user-friendliness of data-mining tools is increasing and an increasing number of data warehouses are managed so well that the data processing incurs fewer risks. There is good-quality, clean data with a well-managed process to allow the organisation to make active use of it. Add to this an accurate description of the problem at hand and all the elements for successful analysis are present. Nowadays, there are even modules available that allow the direct insertion of results from cross-sell or retention analysis into the marketing campaign management software. There is an increasingly large user base of customer intelligence within organisations. Marketers and front-line employees are being joined by strategic planners, who explore the potential to construct the ideal customer and product portfolios of the future and construct growth scenarios. When databases are completed with competitor information and general data on the external environment, customer intelligence systems may become more complete market intelligence and eventually, business intelligence systems.

The new challenge Now that the basic operational CRM system has taken, albeit somewhat rudimentary, shape in most organisations, and customer intelligence is increasingly performing well, more attention can be paid to the way we communicate. In a relatively short timeframe, a lot of new ways of communicating with customers have appeared. Moreover, a lot of these communication channels are even powering consumer-to-consumer interaction and are consumer-controlled. This is a new reality with which organisations have trouble dealing. It requires investments in new channels and the willingness to experiment with them. The development of social interaction requires special attention. It is not acceptable to develop a blog, Facebook page, community platform or viral campaign as an unconnected and ad hoc initiative. A social media strategy that is derived straight from the CRM strategy should be at the basis of any social activities the organisation chooses to launch. A roadmap should indicate what steps need to be taken in order to implement the strategy, but with a keen eye on the results achieved. By its very nature, the social strategy cannot be directed in the same way as a direct-mail campaign. It’s about trying to facilitate, not direct, the way in which customers want to engage with the brand. The company can try and lead the way, but must be very responsive to the customers’ needs as they become clearer. At the same time we wonder how we can take advantage of the benefits of the mobile internet. The fact that time, space and matter, the three fundamental components of the universe, are becoming our own building blocks is fascinating. It opens up a world of infinite possibilities as we are able to switch to alternate realities where time is of no importance, where space is unlimited and matter is virtual. What service possibilities arise to enhance brand value and brand engagement on an individual basis? Because of social media, we need to do more than adapt our communication towards customers. We need to fundamentally re-evaluate our value proposition. We must be responsive to the rules of engagement in the social networks and cannot just be ‘commercially driven’ on that stage. The challenge is therefore to develop social CRM to a level where it is connecting an organisation with the social context of its (potential) customer base and allowing it to create value beyond a mere ‘goods for money’ exchange. The social CRM strategy will need to be an integral part of existing customer relationships. There may be more deeply engaging and more shallow relationships with different customer groups. Furthermore, the organisation

401

Part VI CRM systems and their implementation

needs not only to adapt to that, but also to explore possibilities to reinforce the bond it has with the community as well as with the individual customer in bilateral relationships. An on-going exploration into the required off- and online availability will need to take place and the presence in the virtual realm as well as in the real world will need to be integrated, in order to facilitate the customer experience. There is still a lot of room for improvement, which is attainable by looking at sensory stimulation, making use of combinations between the virtual and physical through mobile and digital technology, etc.

A new culture During the hype period of CRM and e-commerce, the saying was that the customer would be in command. However, in reality, the customer was not. It has taken some time, but it appears there is a ‘revival’ of this principle and a changing role of buyer and supplier is taking shape. It’s not so much about a reversal of control as it is about cooperation and collaboration. Co-creation, or collaboration, is the new magic word for the time being, since it is probably a hyped word too. ‘Lead customers’ are being actively involved in new product development, and these are the customers who have product requirements that will probably attract other customers over time and therefore are showing organisations how to shape the value proposition of the future. Highly satisfied customers are being engaged to act as ambassadors or promoters for the brand and encourage other customers to buy. Experienced customers are being called to help other customers, the ‘newbies’, get to grips with the product or service. They are acting as a service agent solving many after-sales questions. The introduction of many self-service applications is allowing customers to take over roles and responsibilities that traditionally resided within the organisation. They can track and trace orders, look at the financial sheets, change their address and communication preferences, etc. Traditional walls between the organisation and the customer are being broken down and the distinction between a customer and an employee may even become hard to make. This process is not just the consequence of a more mobile and active customer, but also of the search that many organisations have engaged in. They have sought to improve the customer experience and asked themselves the question of how customer processes can be matched to the surroundings the customer is operating in. How can they explore and go beyond the boundaries of the customer’s own experience and expectations? They realise that they have to provide access to their company resources and let customers compose their own value propositions, rather than to think for the customer. They are learning about customer preferences in this way and building customer knowledge. They are more open to value creation with a network of partners that may even include competitors, for as long as customers are seeing their needs catered to. Take the example of an insurer who needs to assist a customer who has broken down with a car along the highway. Instead of the financial pay-out the insurer could make, they turn the experience into something of value to the customer by providing a customised solution in collaboration with a car repair shop, car rental company and maybe even a telecom operator. There is a complete mobility solution for the insured person, while all parties involved are expanding their market reach, value proposition or quality. They ultimately end up achieving more for the customer at lower costs. This requires a different business culture, where we don’t compete against other businesses, but compete in value networks that are ever-changing in composition. The classic buyer–supplier relationship is fading and the organisation is moving from a customer focus in the bilateral sense of the word to a more holistic customer experience focus, where experience gives meaning to life and to relationships (Boswijk et al., 2012).

402

Chapter 19 The future

19.3

Conclusion It would be arrogant and foolish to claim to know where the road will take us. It is, in a sense, not so much about the final destination as it is about the continuing journey that keeps on urging organisations to stay in tune with the needs and wants of their customer base. What provides value will change over the years. The value appeared to be, and probably was, in the product many years ago. Later on it was in services and nowadays we are beginning to understand that value is actually much more a matter of how the customer experiences the interactions, not just the products and services. How we communicate value is also changing. New possibilities arise to interact with customers and to learn from them. We have struggled for many years to come to grips with bilateral dialoguing with customers, only to find out that the social conversations taking place on open platforms are dominating the way value is created and communicated. Likewise we are continuously building our knowledge not only of what customers want but how they want it. The challenge of actually acquiring customer data and properly registering it is making way for the challenge of analysing it and gaining insights. The challenge now is to expand customer intelligence from a context limited to contact and purchasing histories to one that understands emotional, social and contextual, as well as financial, data. The ultimate goal of complete ‘customer intimacy’ or ‘an economy of experiences’ may never be reached, because it is much like a horizon: it shifts as you move towards it. What we may consider mediocre relationship management nowadays is beyond anything we could have dreamt of in the 1980s! Thus it becomes a learning journey, but one that should be embarked upon with care. Experimenting and innovating are prerequisites to success, but so is demonstrating value creation and achieving tangible results in the process. CRM has moved beyond the phase of being a ‘leap of faith’ and is now very much accountable for its contribution to the life-time value of the customer base and organisational growth. A balance between vision, strategy, culture and capabilities must be preserved. It prevents us from dreaming about a future, without ever truly committing to it. It keeps us safe from many frustrations or conflicts, because it creates a sense of direction.

QUESTIONS 1 Ever since 2005 successes have been reported by organisations. There seems to be an end in sight to the period where failures were reported. What explanation do you have for this upturn or change in CRM fortunes? 2 Collect several examples (three or four) from your own personal experience as a consumer or business customer of organisations that in your eyes are performing very well in the area of CRM. 3 What areas will attract most attention in the next few years of CRM? Please illustrate and explain your answer. 4 How do organisations have to adapt their strategy, organisation and commercial approach in order to meet the changing needs of customers? Please illustrate your answer. 5 How can we deal with uncertainty about the future in our CRM strategy and roadmap?

403

Part VI CRM systems and their implementation

References Boswijk, A., Peelen, E. and Olthof, S. (2011) Economy of Experiences, Bilthoven: The European Centre for the Experience Economy. Boulding, W., Staelin, R., Ehret, M. and Johnston, W.J. (2005) A customer relationship management roadmap: what is known, potential pitfalls and where to go, Journal of Marketing, 69, October, 155–66. Payne, A. and Frow, P. (2005) A strategic framework for customer relationship management, Journal of Marketing, 69, October, 167–76. Peelen, E., Montfort, K. van, Beltman, R. and Klerkx, A. (2009) An empirical study into the foundations of CRM Success, Journal of Strategic Marketing, 17, 6, 449–67. Reichheld, F.F. (1995) The Loyalty Effect, New York: The Free Press. Tissen, R., Andriessen, D. and Deprez, F.L. (1998) Value Based Knowledge Management, Amsterdam: Addison-Wesley.

404

Index ‘A’ customers 74–5 access to end-users 209 accessibility of organisations 261 account managers and account teams 52, 74–8 adaptive customisation 217–18 address changes 235 ‘adventurous young’ customers, service profile for 233–4 advertising online 312–13 ‘agents’ in direct contact with customers skills needed by 327–8 specialist or generalist 342 ‘aggregation’ function 215, 301 Agile process 386 Agrifirm (case study) 291–4 airlines 222, 224, 257–9, 267 Albert Heijn (case study) 322 allocation algorithms (dividing capacity between market segments) 224 Alpe d’HuZes (case study) 158–9 Amazon 53–4, 206, 214–15, 221, 262, 307, 318 analytics-driven organisations 101 Android tablets and smartphones 207 ANWB breakdown assistance 236 Apple 51, 205, 207 Safari 360 application service providers (ASPs) 369 apps 309–10 Arndt, J. 4 ASCI database 60–1 Ashridge mission model 70 association rules 143 automated outbound-dialling 356 automatic call distribution (ACD) 357 ‘B’ customers 74–5 back-office functions 39, 54, 269, 352, 354 Bagozzi, R.P. 4 balanced scorecard 80–3, 188, 382 Bales, R.F. 10 Bang & Olufsen 51 banking services 26–7, 189, 233, 236, 259, 264, 267, 310, 316 Barabási, A.L. 23 Barnes, J.G. 59

Bayesian analysis 171–2 Bel, E.J. van 104 belonging, sense of 20 ‘below-the-line’ communication channels 255, 262 ‘best-of-breed’ software 369 beta testing 211 Blattberg, G. 180 blogs 297, 303–4, 361 ‘blow-ins’ 61 Bol.com bookstore 262, 316 Bonoma, T.V. 148–9 Boswijk, A. 259–60 bots 338, 361 Brand, Reon 397 branding 25–6 browsers 360 Bruce, L. 256–7 Bruhn, M. 4–5, 149 bundling for pricing purposes 220 business strategy 36, 49 buzz agents 306–7 ‘C’ customers 74–6 C-formula (Erlang) 334–5 C. Fun Parks 43–5 call centres 124, 342, 358 call charges 340 campaign management 365–8, 371 for different types of campaign 365 input to 367–8 selection of a system for 368 Canada Post (case study) 371–3 capacity planning for a contact centre 333–8, 344 car manufacturers 58–9, 210 Carglass (case study) 197–8, 236 case-based reasoning 143 Center Parcs 113–14 ‘certainty seeker’ customers, service profile for 233–4 ‘champions’ 69 chat bots 338 chat sessions 338–9 ChemStation 217 chi-squared automated interaction direction (CHAID) analysis 153–5

405

Index chi-squared test 193 churn see customer churn; employee churn classification and regression trees (CART) analysis 155–6 Cleveland, B. 341 close relationships 8–9 cluster analysis 103, 149–51 co-creation 205–15, 402 applications of 212–13 examples of 304 principles of 208–12 techniques and instruments for 211–12 collaborative customisation 217–18 collateral trust obligations (case study) 26–7 commercial web, marketing on 310–21 commercials 233 commitment 12–15, 69 definition of 12 forms of 12–13 social context of 15 communication calendars 244 communication channels governing law on 111 preferences for 106 communication with a customer 38, 70, 76–8 history of 106 communication plans 243–6 community relationship management 303 comparison websites 313 competition in the marketplace 57–8 competitive advantage 59, 205–6 complaints from customers 60, 106, 190, 259, 267 completeness of data 120 ‘complex’ sales 279–81, 288 computer-telephone integration (CTI) 327, 356 confidence levels 193 congruence 77 conservatively-minded customers 263 ‘consultative’ sales 279–88 contact centres 251, 254, 259, 261, 266, 270–3, 320, 326–44, 355–8 aspects of quality 344 capacity planning for 333–8, 344 determination of service level 331–3 key performance indicators 341 management of contact satisfaction 336–41 managing the development of 341–4 support systems for 357–8 ‘contact moments’ 243–6 content management systems 368–71 continuity in a relationship 5, 7, 17–18 control addresses 120 control groups 191–3

406

conversations about organisations 303 structure of and satisfaction with 339–40 see also telephone calls conversion rates in the sales process 285–6 cookie technology 361 Cooper, Alan 104 core competencies 205 corporate culture 68, 72–3 correctness of data 120 cosmetic customisation 216–18 critical success factors 82, 188–90 interrelations between 190 CRM strategy analysis questions for 138 context of 56–9 as distinct from CRM systems 63 nature of 50–6 rewards for success in 59–62 cross-functional project teams 196 cross-over points in channel management 271 cross-sell probabilities 171–3 cross-selling in a convenience store (case study) 174–6 definition of 167 economic significance of 169 over time and within the product range 167–8 time between transactions 169, 171 cross-selling analysis 161–2, 167–74 cross-tables 169 crowd sourcing 206–7 culture 68, 71–3 customer acquisition 181 effectiveness of 97 policy for 232–3 targeting of 230 versus customer retention 186–7, 230 customer asset management 201, 230–2 customer base, quality of 233, 246, 269 customer-centric organisations 36–7, 41, 47, 50 customer churn 61, 63, 114–17, 241, 269 customer contact processes 352 customer data integration (CDI) 130–1 customer experience 259–62, 343 customer identification 118–22, 131, 318 ‘customer intimacy’ strategy 51–7, 63, 84, 107, 331, 403 ‘customer journey’ model (Boswijk) 259–63 customer knowledge 37–8, 43, 135–6, 144, 400–1 at Center Parcs (case study) 113–14 data overload 123 derivation from data 101–7

Index value of 91–8, 112–13 within different types of organisation 100–1 customer lifetime value see lifetime value of a customer; net present value of a customer relationship customer managers 52 customer ownership 74 customer participation in product develop-ment 208–12 continuous feedback from 212 customer performance 182 customer pyramid 74, 231, 281 customer relationship management (CRM) building blocks of 36–9, 47, 112 case study (C. Fun Parks) 43–5 choice of strategy for 379–80 definitions of 33–6 disappointing performance of 43, 349, 375–6, 391, 400 embedding of 382–4 future prospects for 396–403 and information technology 351–2 initial projects of 380–1 international or cross-division projects 388–91 key principles of 100 as a long-term strategy 86 operational programmes of 400 optimal implementation and execution of 188–9 organisational forms of 76 phased expansion of 381–2 preliminary assessment for 376–8 project management 383–8 project planning 385 proportion of projects that are successful 41, 69 range of 378 return on investment in 60–1 ‘road-map’ for 378–83, 401 selection of software for 369–70 technocratic approach to 1 use of the term 40, 353 vision of 378–9 see also CRM strategy customer retention 40, 61, 161–7, 174, 186–7, 230, 318 versus customer acquisition 230 customer satisfaction 69, 287, 331, 339–43 return on investment in 59–60 customer–supplier relationships classification of 6–8 different views of 3 phases in 4

customer value 106 calculation of 180–5, 197 and customer selection 281–2 effect of marketing activities on 179–85 influence of data quality on 98 for large accounts 184 non-economic 185 for small accounts 183 customisation 53, 70, 204–7, 225, 318–19 of CRM 102 see also mass customisation ‘DART’ principles 208–10 data analysis 135–41 data as distinct from information and knowledge 93 utilised as an asset 98–101 data maintenance 125–6 data management 100–1 data mining 136–7, 140–4, 400–1 data protection 108–11 data quality 131 cost of 94–5 definition of 119–21 earnings derived from 97–8 waste resulting from deficiencies in 95–6 data sources 126–30 external 127–30 internal 126–7 data warehouses 362–5; see also marketing data warehouses database architecture 122 database management 100, 107, 112 database managers 122 database marketing, organisations oriented towards 100 databases 117–18, 126, 358, 363–4 expansion of 122–4 external 130 use of 78, 91, 94, 102, 106 Datavision Technologies Corporation 218–19 decision trees 143, 187–8 deep-selling 168 defensive strategy 55–6 Dell Computers 50, 205, 262 demand curves 223 de-marketing 233 ‘democratisation’ of production 215 dependence in a relationship 7 designers, role of 212 Devicentis, J. 280 dialogue with customers 208–9 Dickens, Charles 220

407

Index differentiation between customers 57, 222–3, 264–5, 318 ‘dilution’ of market segments 224 direct marketing (DM) 97, 152, 186 discounts 220, 371 discriminant analysis 151 distribution channels and costs 316–17 division of labour 78 divorce 240 documentation information systems (DIS) 358 Dodd, P.S. 25–8 Dwyer, F.R. 16–17 dynamic content management systems 337 dynamic pricing 220 easyJet 50 e-commerce 214–15, 219, 319–20 economies of scale in production 216 Economist Group 389–90 Edison, Thomas 51 efficiency marketing 71 80:40 rule 214 e-mail 336–8 embedding of CRM in the organisation 382–4 emotions and emotional intelligence 10–11, 72 empathy 16, 72, 76–7 ‘Empathy Map’ 238–9 employee churn 342 employee satisfaction 79–80 engaging experiences online 313–14 enterprise relationship centres 326–7, 341–2 enterprise resource planning (ERP) 269, 352, 369 Erlang, A.K. 334–5 European football 132–3 ‘events’, categorisation of 104–5 evolutionary computation (EC) 142–3 expectations of customers 314 experiments and experimental settings 190–3 eXtensible Markup Language (XML) 359–60 external validity of an experiment 191–3 Facebook 107, 123, 261, 297, 307, 312 facial recognition technology 107 favour as an aspect of the sales process 280 FedEx 316–17 Fiat 213 financial management 80 ‘first-time fix’ rate 341 fixed data 124 Foa, U.G. and E.B. 9, 15 Ford Motors 50 formula managers 270 Fornell, C. 59

408

Forrester Research 310, 319–20 Fournier, S. 84 fragmentised analytics organisations 100 front-office systems 353 Frow, P. 34 future prospects for CRM 396–403 fuzzy logic 298 ‘gadgets’ 362 Galileo positioning system 299 Garbarino, E. 8 Gartner Group 34 Gates, Bill 27 Gentle, M. 376 geographic information systems (GIS) 128–9 Geyskens, I. 11 Gillette razorblades 219 Gilmore, J.H. 216 GlaxoSmithKline (GSK) 304 global financial crisis (since 2008) 41 Godin, S. 112 Google 107, 214–15, 312, 360 Chrome 360 Earth 255–6 Picasa 298 grocery industry, cost structure of 317 Grönroos, Christian 4 group formation 24–6 growth paths 54–5 Gummesson, Evert 4 Gupta, S. 62 Hagel, J. 54, 107 Håkansson, H. 5 happiness, forms of 11 ‘hard’ criteria 79 hedonistic post-materialism 129 Heskett, J.L. 79 Hewlett Packard 307, 355 Hinds, R.A. 5 honesty 11 Horovitz, J. 73 human behaviour, change in 397–8 Hunt, S.D. 11 hypertext 359–60 Hypertext Markup Language (HTML) 359–60 IBM 73–4, 210, 213 ‘ideal’ customers, over-reliance on 230 iDEAL standard 316 identification errors in data 95–6 IKEA 260, 338

Index incentives for customers participating in co-creation 211 for staff 79, 272, 281–2, 288–9 individual customers, allocation of income and expenses to 179–80 individualised value propositions 37, 201, 203, 207, 216–25 industrial revolution 40 ‘influencers’ 306, 308; see also opinion leaders information as distinct from data and knowledge 93 information gain chart 164–5 information policy 111–12 information superhighway 311 information systems 290 information technology (IT) 38–9, 43, 78, 211 and CRM 351–2 and sales performance 289–91 infrastructure for CRM 356 ING Bank 267 innovation phasing and organisation of 211 see also user innovation ‘Innovation Wheel’ of multichannel strategy 257–8, 268, 271 instant messaging 361 insurance industry 59–60, 402 Intel 51 intelligent agents 361 intelligent data systems 121–2 interaction patterns 24–5 interaction process analysis 10 interactive voice response (IVR) systems 357 intermediaries between customer and supplier 58–9 internal validity of an experiment 191–3 International Marketing and Purchasing Group 5 internet analysis 319–20 internet data 141 Internet Explorer 360 internet forms 123–4 internet resources 20, 33, 38, 54, 105, 107, 209, 219–21, 225, 254, 296–9, 358–62 internet security 361 internet telephone and television 362 interpersonal relationships 5–6 IP (Internet Protocol) addresses 359, 361 iPhones 298 iPods 205 iTunes 214 Johnson, M.P. 12 Johnson, M.S. 8 Jonker, J. 362

K-means analysis 150–1 Kahneman, D. 260 Kaplan, R.S. 80–1 Keiningham, T.L. 14 King, Stephen 220 KLM Blue Lab 308 Knexus 298 knowledge as distinct from data and information 93 knowledge management 195–6, 343, 358 Kozinets, R.V. 25 KPN Telecoms 273–4 Kraljic, P. 278 Krishnan, M.S. 219 Krugman, Paul 27 Kumar, V. 62 ‘labelling’ of customers 281 Lacoste brand 233 lead customers 207, 211, 402 lead generation 288 leadership of change 69 learning organisations 193–6 ‘legacy’ systems 39 LEGO Factory 210, 304–5 ‘Lego-lisation’ of products 204 leisure industry 55 ‘leverage’ situations 281, 288 Levitt, T. 4 life events 235–40 context of 236–8 impact of 235–6 link with relationship policy 239–40 lifetime value of a customer 52, 56, 63, 69, 74, 79, 81, 124, 179–90, 230, 233 limitations as a measure 182 related to marketing effort 185–90 LinkedIn 308 Linux software 207 list brokers 123 location of customers 255–6 logistics service providers (case study) 246–8 ‘long tail’ distribution strategy 213–15 drivers of 215 on the social web 307 ‘lookalikes’ 130 love 8 ‘low involvement’ products 74 ‘loyal loss-generators’ 186 loyalty 18, 25, 57–8, 61–2 definition of 13 Loyalty Profiles (company) 185 Lutron Electronics Company 218

409

Index M-commerce 362 McDonald’s 50 McKenna, Regis 35 management reporting 178 market order, change in 397–8 market research 102–3, 209 organisations driven by 100 marketing, definition of 4 marketing analysis, results of 357 marketing data warehouses 126 marketing service concepts 152, 157 marketing strategy 43 mash ups 359 Maslow, A. 398 mass customisation 216–19 mass individualisation 204–7 mass marketing 179 mass media 255, 262 mass production 216 matchcodes 121 ‘maturity’ of an organisation 101 Mayben, J. 341 ‘member-get-member’ promotions 189–90, 246 mental models 194 Mercedes 51 ‘mercenaries’ 308 Meta Group 33 metadata 139 metrics, use of 272 Microsoft Internet Explorer 360 middleware 353–4, 371 Mika, P. 298 mission 69–71 mobile marketing 309–10 mobile technology 266, 296–7, 300–1 Moore’s Law 397 Moorman, C. 11 Moorst, A. van 326–9 moral commitment 12 Morgan, N. 60 Morgan, R.M. 11 ‘motivaction’ 127–9 motivation of participants in co-creation 211; see also incentives multichannel management 253–7, 269–72 avoidace of unhealthy competition between channels 272 organisation of 269–70 performance measurement for 271–2 multichannel strategy 190, 255–73 adaptation of 257–62 benefiting from 257 business case for 268–9

410

combination of channels in 256, 262–6 customers’ use of channel mix 272–3 goal of 255 integration of 266–8 lack of progress with 273 needs, hierarchy of 398 ‘negative’ customers 263 net present value (NPV) of a customer relationship 5, 69–70, 179 net promoter score (NPS) 14, 59–60 Netherlands, the 96, 106 Netscape Navigator 360 networks 19–26 neural networks 141–2 new products 51 niche products and niche markets 215, 307 Nike 51, 205, 219, 225–7, 256 Nocera, Joseph 27 Nordic school of relationship marketing 4 Norton, D.P. 80–1 Obama, Barack 302 offensive strategy 55–6 offering to a customer 201 Old Spice 306 Oliver, R.L. 13 one-to-one marketing 84, 315, 318–19 online analytical processing (OLAP) 364–5 online communities 19, 298 online forums 361 online transmission processing (OCTP) systems 363 open-source software 207 operational excellence 50–5, 63, 331, 380 opinion leaders 25; see also ‘influencers’ opportunity identification 366 optimal allocation of resources 186–9 optimal service level for a contact centre 332–3 organisational change 68–9 organisational structure 73–6 origin-and-destination matrix 163 Osterwalder, A. 238–9 outflow analysis 163 outsourcing 343–4 Panak, J. 73 Pareto-optimal business rules 171–2 Paris Miki 217 ‘parking’ of customers 244 partnership relationship management (PRM) 354 ‘passers-by’ 61 Payne, A. 34

Index Peacock, P.R. 141–2 Peelen, E. 17, 69, 77–8, 81, 96, 100, 263 penetration probabilities 172–3 people, importance of 76–8 Peppers, D. 318 performance measures for contact centres 341 in a multichannel environment 271–2 for the sales process 285–7 permission marketing 112 personal commitment 12 Personal Data Protection Act 108–11 personal selling 251, 277–8, 290 personalisation 315 ‘personas’ 104, 151–2 Philips (company) 242–3, 308 Pigneur, Y. 238–9 piloting of CRM 385 Pine, B.J.H. 216 planning issues in sales process management 288 podcasts 298, 361 Poeisz, T.B.C. 5 portals 313 ‘positive’ customers 263 postcode segmentation 127–8 power distribution between customer and supplier 7 Prahalad, C.K. 204, 208, 219 precision pricing 119–21, 225 predicting the number of telephone calls and staffing needs 333–6 price elasticity, measurement of 221 price premia 219 price sensitivity 221–3 price tailoring 221 pricing policy 219–25 prioritisation 201, 268 privacy policy 107–8, 113 problem formulation for purposes of analysis 137–9 process-based approach to sales 284–5 Procter & Gamble 212–13 product development techniques 212 product leadership 51, 53, 55 productivity in sales processes 290 profile errors in data 96 profiling 124–30, 151–2, 157 profits, ‘unfair’ 60 purchase opportunities 245 purchasing situations 278–81, 291 queries 364 ‘quitters’ amongst customers 165–6

Raaij, W.F. 5 Rackham, N. 280 Ramaswamy, V. 208 random sampling 139 Rayport, J.F. 107 real-time marketing 35 Really Simple Syndication (RSS) 361 recent frequency monetary value (RFM) model 152–4 reciprocity in a relationship 8–9 recommendations from customers 14, 59–60, 215, 269 Redeman, E. 96 registration on websites 123–4 Rego, L.L. 60 Reichheld, Frederick 14, 40, 59–62 Reinartz, W. 62 relational databases 363 relational marketing 4–5 relationship data on customers 118, 131 relationship development, influence of marketing communication on 246 relationship life-cycle 17, 201, 240 relationship marketing 40, 70 optimal allocation of resources to 186–7 ‘premature death’ of 84, 86 relationship-oriented organisations characteristics of 69–71 culture of 72–3 current state of development of 83–5 quality of 78 relationship planning 367 relationship policy 201, 229, 233–46 for different market segments 233–5 for different relationship phases 240–3 and life events 235–40 translated into contact moments 243–6 relationships in general dynamics of 15–19 nature of 5 phases in development of 16–18 primary and secondary 5 repeat customers 62 research questions 137–9 resource allocation to different phases in the customer relationship 187–8 to relationship marketing activities 186–7 response gain charts 156–7 revenue management 222–4 reward systems see incentives

411

Index risks from involving customers in co-creation processes 210 in multichannel organisation 270 perceived as being associated with certain products and services 263 from precision pricing policy 221, 225 Ritz Carlton 52 Robeco Direct 103, 244 Rogers, M. 318 Rooy, Pieter de 55 Roubini, Nouriel 27 Rowe, W.G. 59 rule extraction algorithm technique (REAT) 168 sales performance improvement of 287–9 and information technology 289–91 sales process management 283, 291 sales processes 282–90 desirable characteristics in 283–4 and information systems 290 management of 285–9 value added in 284 Salesforce.com 369–70 salespeople 19, 195, 277–82, 288–91 allocation of customers to 282, 291 and information technology 290 rewards for 281–2, 288–9 roles and functions of 278–81 threats to jobs of 290–1 training of 288 Schans, W.M. van 318 scripting tools 357 Scrum methodology 386–8 search engines 311–12, 360 segmentation of markets 106, 127–9, 147–57 behavioural 152 criteria for 148–9 goal of 152 research on 152–7 techniques of 149–51 with a view to non-customers 231–2 self-analysis 20 ‘semantic web’ 298–9 semi-automatic e-mail answering 357 service-oriented architecture (SOA) 39 service profiles for different categories of customer 233–5, 246 service–profit chain 79–80 ServQual measurement 5 Shapiro, B.P. 148–9 shared vision 195

412

‘share-of-wallet’ calculations 127 Shell (case study) 392–4 Shiller, Robert 27 simulation for purposes of capacity planning 336 Sinha, R.K. 25 situated experience 20 Smart cars 219 ‘SMART’ objectives 383 Smith, John 68 SNS Bank 144–5 social competency 76–7 social CRM 35, 401 social exchange theory 8 social groups 303, 397–8 social identification 25 social media 19–21, 26, 123, 206, 255, 261, 397, 401 social network analysis (SNA) 22–4 social networks 19–22, 26, 209, 251, 297–8, 312 social position of an individual 19 social practices theory 20 social psychology 16 Social Readjustment Rating Scale 235–6 social web 301–9, 321 consequences for marketing 301 marketing approach on 308–9 role in customer–supplier relationships 302–8 socialisation 19–22 Socioconsult compass 127–9 sociograms 23 ‘soft’ criteria 79–80 SOS International 236 specialist service providers 205 Starbucks 63–4, 307 statistical techniques 140 ‘stayers’ amongst customers 165–6 Steenkamp, J.E.B.M. 11 steering committees for CRM 382–3 ‘strategic’ sales 279–81, 285–7 stratified random sampling 139 streaming media 361 Street, R. 256–7 stress caused by life events 237 Strogatz, S.H. 23 Structured Query Language (SQL) 363 Suit Supply 219 supermarkets 7 Swatch 51 ‘switching costs’ for customers 69 systems approach to innovative co-creation 212 T-Mobile 166–7 t-tests 193

Index team learning 195 technological progress 397–8 technology, role of 205 telecom providers 264, 266 telephone calls 329–40 predicting the number of 333–4 quality of 329–31 routing of 336 Thompson, S.A. 25 360-degree view of a customer 131 threshold curve method of capacity allocation 224 Tolboom, M. 13 top management, role of 71, 136, 320 ‘touch points’ 262, 267, 343 Toyota 54 tracking and tracing of customers 271 traffic building 311–13 traffic management 356–8 training needs 288 transaction history of a customer 106 transaction marketing 4–5 ‘transactional’ sales 279–81, 284–8 Transmission Control/Internet Protocol (TCP/IP) 359 transparency of sales processes 210, 282–3 transparent customisation 216–18 Treacy, M. 49–50 trust 11–12, 15, 69, 352, 280 definition of 11 see also collateral trust obligations Twitter 261 tyre manufacture 204 ‘unbundling’ of an organisation 54 unconditionally positive attitudes 77 underground economy 215 uniform product codes 220 UPC (company) 303 user-generated content (UGC) 206 user innovation 207 validation sets 140, 165 ‘value disciplines’ 49–54 value perception 119 van den Berg, Sander 166–7 variable data 124

Verbeke, W. 246 vertical integration 205 video conferencing 362 viral campaigns 305–6, 321 visualisation 140–1 voice-over IP (VOIP) 356 voice recognition and voice response systems 339, 352–5 Voice XML 356 waiting times 261–2, 329–30 Wal-Mart 50 Watts, D.J. 23, 25–8 ‘weak ties’ 23 Web 2.0 technology 297, 361 Web 3.0 and 4.0 technology 297–8 web browsers 360 web care 303 Weber, M. 209–10 webmining 141 websites 296, 310, 314–17 content of 314 design and usability of 314–15 and fulfilment 316–17 and payment systems 315–16 and personalisation 315 Webster, F.E. Jr 4 Webster’s Dictionary 298 ‘Welcome’ calls 189, 244 widgets 362 Wiersema, F. 49–50 Wikipedia 206, 215, 298 wikis 298, 361 Wilson, H. 256–7, 264 Wolfs, Gerard 102 Wordpress 297 workflow management 358, 368 worldwide web 296 evolution of 297–301, 321 see also commercial web; social web Wunderman, Lester 52 Wurtz, W. 376 YouTube 206, 261 Zappos (case study) 345–6 Zeithaml, V.A. 5

413