Customer Relationship Marketing and Sales Management 7BSP1016 (B/ 2010-11)
❶ Question 1: ‘The ultimate accountability of marketing [and sales] activities lies in their contribution to the life-time value that the customer base represents’ (Peelen, 2006). Discuss and evaluate this comment in relation to the principles of customer relationship marketing. Identify the limitations that a sales manager may encounter when developing a sales strategy which moves from a transactional to a relationship basis.
❷ Question 6: In order to develop a value proposition for customers, organisations must collect sufficient data on their customer base. Discuss the extent to which sufficient data can be collected to inform future marketing decisions and product alignment.
Deniz Kurugollu 10283502
MSc Marketing 5th May 2011
❶ Customer retention has been shown to attract more attention within marketing activities. Customer Relationship Marketing (CRM) can be regarded as a manifestation of acknowledging long term value of customers. In this regard, Peelen (2006) indicates that “the ultimate accountability of marketing activities lies in their contribution to the life-time value that the customer base represents.” Lifetime customer value refers the monetary amount of purchases made by the customer from a particular company in a given period of time. It can therefore be inferred that the longer a customer stays with a company, the greater the customer’s value (Vavra, 1994). Having accepted the importance of customers today, companies are trying the streamline their operations. For example, companies like Campbell Soup, Coca-Cola, Hershey, Intel and Hewlett-Packard all have Chief Customer Officers (CCO) now so as to response better the needs and wants of their customer base (Brandchannel, 2011). Building close relationship with customers on the basis of trust and commitment seems to be vital to cut above the competition (Gobe, 2001). However, there are several limitations that can arise when building a strategy based on establishing relationship. The aim of this essay is to acknowledge both the advantages and limitations of relationship marketing. Drucker (2007) considers that marketing has two main tasks; attracting new customers and retaining already existing ones. As is the case in almost every dichotomy, the optimum results are tied to the balance between two ends. Hence, it is expected that the limited marketing resources should be spent between two tasks in an optimal way. Yet, research (Payne, 1994) shows that marketing efforts (i.e. time and money) still disproportionately focus on acquiring new customers rather than customer retention even though the positive correlation between customer retention and profitability has been acknowledged as the fact of business life for a long time (Rosenberg and Czepeil, 1983). Retaining customers are more profitable for several reasons (Payne, 1994). First of all, existing customers cost less to service. Figures reveal that it costs five times less to keep an existing customer than it does to attract a new one (Duddy and Kandampully, 1999). Second, customer expenditure is expected to increase over time. Xu and Walton (2005) points out that 20 % of existing customers contribute 80 % of the profit or revenue. Moreover, customer retention is cost effective. Marketing costs can be amortized during a longer time period. Furthermore, it is evident that satisfied customers provide positive word of mouth and they are most likely to pay price premiums (Aggarwal, 2004).
In the light of foregoing, building a long-term relationship with customers on the basis of trust and commitment is the key to long-term success. In line with this target, the marketing focus shifts from transaction marketing to relationship marketing. The Figure 1 shows the paradigm change in question. Therefore, the relationship marketing is long-term approach focusing on customer retention with high emphasis on customer service and contact.
Acquiring new customer
Figure 1: Transaction vs. Relationship marketing Adapted from: Payne, 1994
However, there are some limitations managers may encounter when moving from a transactional to a relationship basis (Palmer, 1996). First of all, building close relationships requires thorough information about the other party (i.e. customers). Vavra (1994) offers using customer information files (CIF) in order to manage customer relationships. CIF is suggested to involve all information based on the interaction between customers and the organization from basic personal information to frequency, monetary value of purchase, and so on which, in turn, may lead to strategic competitive advantage for the organization. Therefore, acquisition, storage, updating, and reporting of the information means huge cost for the company, ranging ‘from $200.000 to $10 million’ (Vavra, 1994). On the other hand, some relationship marketing activities such as loyalty programs (e.g. financial incentives, frequent flyer programs, etc) over time can become an expected standard for customers. Consequently, it leads to losses in revenue (Mowlana and Smith, 1993).
Secondly, the nature of the exchange may not be suitable to form long-term relationship. Tourism related businesses may suffer from this situation. For example, religious based destinations or luxury cruise travels might be once in people’s life, so this prevents to build long term relationship (Palmer, 1996). Likewise, in business-to-business markets strategic alliances based on short term contracts in order to acquire specific skills may not need ongoing relationships (Main, 1990).
Next, customers may not have a positive look for building relationship with companies if they feel that the relationship will not provide them with more benefits, but cost. For example, if one believes that all relevant information given to an organization will be used by the organization to push, advertise, try to cross-sell more items, and eventually make him become a victim of marketing, then one may not want to form an ongoing relationship. Finally, considering the mantra today ‘customer is king’, coupled with the current market place where thousands of new brands are launched each year, fighting to satisfy the same consumer’s needs and desires better than the competition; therefore in this context, Palmer (1994) argues that
consumers’ increasing level of confidence may lead them not to form ongoing, close relationship with suppliers in order to minimize risk of dependency (Gobe, 2001; Kotler, 2005). Moreover, it appears that the power of customers will increase much more with the help of government recent initiative which encourage companies to release personal data back to individuals (Mitchell, 2011). The new paradigm is called as ‘Vendor Relationship Management’ (VRM) where individuals are equipped with the tools to control their relationship with suppliers. In this sense, VRM is put forward as the corresponding item for CRM (Haymarket, 2011).
❷ Customer Relationship Management (CRM) mostly refers to Information Technology (IT) systems which are used to obtain, analyse and use of knowledge about customers in order to improve organisational profitability through generating greater customer life time value (Bose, 2002; Bull, 2003). As inferred from this definition, gathering data by using IT tools is the starting point of the whole CRM process. This essay will firstly be addressing to how and what sort of data can be collected to improve future marketing decisions. Then, it will be producing some real life examples to illustrate how the given data is used to direct relevant marketing activities.
Customer data can be collected through various contact points such as call centre, mail, fax, web sites, salespeople or more specific software packages such as SAP, PeopleSoft, and so on (Xu and Walton, 2005). Then, data mining, digital library, or more specific systems like Decision Support System (DSS), Executive Support Stsyem (ESS), Expert System (ES), and so forth can be employed to analyse the given data so that it leads to a strategic direction (Bose, 2002; Xu and Walton, 2005). At this point, Raghunathan (1999) notes that the decision quality is tied to information quality that a decision maker has got. In this respect, this essay will address what sort of data can be collected and how they can influence the future marketing decisions.
Traditional customer information can be gathered under three components; time (i.e, when was the last purchase), frequency (how often does the customer buy, and monetary value (i.e. how much money has the customer spent in a given period) (Vavra, 1994). However, as Raghunathan (1999) points out that the more the information about customer, the better is to come up with optimum results. Hereupon, Vavra (1994) suggests that CIF should include such data as customer financial report, customer comments and complaints, promotion participation, service request, and the results of questionnaire and surveys that the customer was involved. In addition, more personal soft data such as consumers’ attitudes, likes and dislikes, lifestyles, and so on can be suggested to capture in the CIF since attitude is believed to lead consumer behaviours eventually (Elliot and
Percy, 2007). However, the cost of acquiring and processing data should be kept in consideration (as mentioned in question 1). At this point, new media such as Facebook, Twitter, or even personal blogs may help marketers to gain in depth personalized knowledge about their target audiences at relatively lower cost.
Having acquired the relevant data by â€˜360 view of the customerâ€™ (Kotorov, 2002), the next and vital stage is to make use of the information in question. CRM in its nature is an investment, not expenditure. However, if the given data collected by CRM systems do not direct to add value to both customers and the firm itself, then all efforts mean nothing, but a significant cost for the company. Therefore, implementing CRM is expected to provide the company with long-term competitive advantages such as cost savings, improving customer lifetime value, product alignment, better customer service, optimal marketing strategy, and so on (Xu and Walton, 2005; Vavra, 1994). Some practical examples from real organizations will be produced to show how relevant data can influence marketing activities illustrated in Figure 2.
Branding CONSUMER DATA
Segmenting Tailoring Targeting
Figure 2: The usage of consumer data
Cost saving: e-CRM is defined as a web-based system to coordinate customer relationships across all touch-points including channels, company departments, and customers. It consists of such features as online ordering, automatic response to e-mail, virtual help, and so on (Rowley, 2002). In this sense, e-CRM can help to reduce cost. For example, UPS customer self-tracking system helped the company to save $164 million by outsourcing business operations directly to customers (Hamm and Hof, 2000).
Segmenting, Tailoring, and Targeting: CRM data enable marketers to segment their customer based according to, for instance, purchase frequency, preference, usage volume and so on (Vavra, 1994). Hereupon, they can tailor their offerings to specific target audiences. For example, frequent flyer programmes can be seen in this context. Many airlines today have their own club cards representing certain levels such as classic, silver, gold, and so forth (TA, 2011) to provide stratified incentives to respective customer groups. This supports the idea of key account management (McDonald et al, 1997).
Branding: Customer data can be utilized more deeply to capture better insight for branding. Miller (2009) argues about the ‘big five’ personality traits and what sort of information might address to identify each traits. Hereby, he points out that, for example, ‘openness’ – one of the five personality traits – can be captured by looking at the Amazon.com database, in particular the record of books purchased by that person. If one buys books from diverse topics in a given period, this may indicate that one is open to experience (i.e. openness). In this respect, it might be suggested that marketers can segment consumers based on personality traits, and then brand their products with a congruent brand personality that supports customer personality.
Customer service: High emphasis on customer service – one of the main principles of CRM– has already been acknowledged (see Figure 1). As a matter of course, the CRM data is primarily expected to enhance service by providing better insight about customers. For example, Blockbuster realized that customers’ priority was to rent their first-choice movie when they came to the store. By implementing a proper software system, Blockbuster improves stock availability of first-choice items, so delivers greater customer service compare to its competitors (Newell, 2000). Marketing strategy: Considering the CIF suggested by Vavra (1994), such consummate data can be suggested to utilize in providing greater information for not only short term tactics such as crossselling and promotion but also, overall marketing strategy. For example, Hewlett-Packard review 80 marketing programs (e.g. direct marketing, e-mail marketing, customer loyalty and so on) by using the knowledge obtained from CRM systems, and achieved to decide more effective three major programs to follow for the future marketing strategy (Brandweek, 2008).
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