Chapter 3:

Customer Relationship Management Strategies for Business Markets

Relationship Marketing

Establishing, Developing, and Maintaining

successful exchanges with customers.

Relationship Marketing centers on

History of CRM

B&S CIMS CRM RM

B&S – Buying & SellingRM – Relationship MarketingCIMS – Customer Information Management SystemsCRM – Customer Relationship Managemente-CRM- A subset of CRM that focuses on enabling

customer interactions via e-channels (The web, email and wireless)

Time line

e-CRM

Late 80’s

Mid 90’s 2002 - Future

Early 90’s

Definitions

“is a business strategy with outcomes – that optimise profitability, revenue and customer

satisfaction – by organizing around customer segments, – fostering customer-satisfying behaviors and – implementing customer-centric processes.”

“is a strategy – used to learn more about customers' needs and

behaviors – in order to develop stronger relationships with them.”

Underpinning Theory

Customers have many points of contact with an organisation

Retaining customers is far most cost effective than recruiting new ones

Some customers are more profitable than others– The “80/20” rule– For most firms, 80 percent of profit comes from 20

percent of customers Use of Technology

Potential Benefits Of CRM

Customer retention Share of customer or share of wallet Cross-selling Up-selling

Potential Costs Of CRM

IT infrastructure Process change

Three phases of CRM

Acquiring New Relationships– You acquire new customers by promoting your

company’s product and service leadership. Enhancing Existing Relationships

– You enhance the relationship by encouraging excellence in cross-selling and up-selling, thereby deepening and broadening the relationship.

Retaining Customer Relationships– Retention focuses on service adaptability –

delivering not what the market wants but what customers want.

Customer Types

Platinum Heavy, reliable users, not price-sensitive, try new products, loyal

Gold Large users who push for price breaks, shop around and not so loyal

Iron Low volume or intermittent users; cost to serve them is quite high

Lead Demanding, want special attention but don’t buy much and show no loyalty

Types of Relationships• Continuum of buyer-seller relationships• Transactional, Value-added & Collaborative exchanges

The Relationship Spectrum

Transactional Exchange

Centers on timely exchange of basic products at highly competitive market prices

These types of transactions are autonomous, meaning that there is little or no concern as to the needs of buyer or seller

Example: A person comes into a store and buys a hammer. The buyer wants a hammer and the seller sells him one. That’s all there is to it!

Transactional ExchangesTransactional Exchanges

The business market includes items like:

Packaging, Cleaning products or Commodity-type products or service

activity where bidding is employed.

Transactional exchanges employ an Arms-Length relationship.

Occurs when alternatives are few, market is dynamic, the purchase is complex and the price is high

Features close information, social, and operational linkages, as well as mutual commitments

Switching costs are extremely important to collaborative customers

Trust is the key and it exists when one party has complete confidence in their partner’s ability and integrity

Value-Added Exchanges

Value-Added Exchanges fall between Transactional and Collaborative Exchanges

Value-Added Exchanges are those where the selling firms shifts from just attracting customers to keeping them by:

1. Adding additional services2. Developing services that are customized to meet

the buyer’s needs3. Providing continuing incentives that promote

repeat business

The Element of Competition

Competition forces a war-like environment whereby competitors are always trying to lure customers from competitors.

Since customer situations (i.e., requirements, expectations, people, preferences) change, there is always opportunity for customers to change from relationship to transactional to relationship with new suppliers.

Effects of Market Conditions

Market conditions force different types of relationships.

The marketer needs to understand this aspect of business to determine which strategy to employ with various markets.

What is the best strategy: transactional or collaborative?

Switching Costs• A major consideration before changing from A major consideration before changing from

one supplier to another is the one supplier to another is the switching costsswitching costs..• Organizational buyers invest heavily in their Organizational buyers invest heavily in their

relationships with suppliers.relationships with suppliers.

Investments include:Investments include:1.1. MoneyMoney2.2. PeoplePeople3.3. Training CostsTraining Costs4.4. EquipmentEquipment5.5. Procedures and processesProcedures and processes

Switching CostsBuyers hesitate to switch because it

can cause costly disruptions.Risk of making a wrong choice of less-

established suppliers can be costly.From a marketing perspective, the

prospect’s PROBLEM must exceed the BENEFITS that they are presently experiencing with their current supplier before they will consider switching.

Value Drivers in Collaborative Relationships

Suppliers of routinely purchased products offer three sources of value:

1.Value creation through core offerings2.Value creation within the sourcing process3.Value creation at the customers level of operations

Furthering Collaborative Relationships

To develop ‘key supplier’ status, sellers need to:

Target the right customer.Match with their purchasing situation.Develop strategies that are appropriate for

each type of buyer . Collaborative buyers seek long, strong and lasting relationships.

Buyers perceive significant risks with suppliers, so competence and commitment are vital when starting the relationship.

To improve customer loyalty and satisfaction, many companies have developed specialized services and customized products.

Question: Is this really profitable?

Differentiation StrategyDifferentiation Strategy

For a differentiation strategy to work: For a differentiation strategy to work:

““The value created, measured by The value created, measured by higher higher marginsmargins and higher sales volumes, has to and higher sales volumes, has to exceedexceed the the cost of creatingcost of creating and delivering and delivering the customized features and services.”the customized features and services.”

To determine this, the marketer needs to To determine this, the marketer needs to understand the drivers of profitability.understand the drivers of profitability.

High-Cost-to-Serve Customers

Order custom products

Order small quantities

Unpredictable order arrivals

Customized delivery

Frequent changes in delivery requirements

Manual processing

Large amounts of presales support(i.e., marketing, technical, and sales resources)

Large amounts of post-sales support(i.e., installation, training, warranty, field service)

Require company to hold inventory

Pay slowly (i.e., high accounts receivable)

Low-Cost-to-Serve Customers

Order standard products

Order large quantities

Predictable order arrivals

Standard delivery

No changes in delivery requirements

Electronic processing (EDI)(i.e., zero defects)

Little to no presales support(i.e., standard pricing and ordering)

No post-sales support

Replenish as produced

Pay on time

Source: Robert S. Kaplan and V.G. Narayanan, “p. 8. Measuring and Managing Customer Profitability,” Journal of Cost Management 15, No. 5 (September/October 2001):

High- vs. Low-Cost-to-Serve Customers

Customer Profitably

As mentioned previously, some customers are profitable and some aren’t. To determine this, we look at the cost/profitability structure with the plan to:

1. Keep profitable customers

2. Convert unprofitable ones to profitability

3. Fire those who are not profitable

High

Low

Net

Mar

gin

Rea

lized

Cost-to-Serve

PassiveProduct is crucialGood supplier match

Costly to service,but pay topdollar

Price-sensitive butfew specialdemands

AggressiveLeverage their buying powerLow price and lots of customization Most challenging

Profits

Losses

Low High

SOURCE: From “Manage Customers for Profits (Not Just Sales)” by B.P. Shapiro et al., September-October 1987, p. 104, Harvard Business Review.

Figure 3.4 Customer Profitability

Managing Unprofitable Customers

Low margin / high cost customers offer the most challenge for marketing mangers.

Start with ways to reduce costsNext, work with customers to possibly change their actions resulting in lowering costs or increasing profitability

Customer Retention

Retention of profitable customers is crucial to business. However, due to competition and internal / external environmental factors, achieving this goal is difficult.

One method that is proving successful for customer retention is the use of CRM programs.

Customer Relationship Management

Customer Relationship Management (CRM) is a cross-functional process for achieving:

a.Continuing dialog with customers across all contact and access pointsb.Personalized service to the most valuable customersc.Increased customer retentiond.Continued marketing effectiveness

CRM Technology

CRM programs are software systems that capture information and integrate sales, marketing and customer service information.

CRM programs can gather information from many sources including email, call centers, service and sales reps.

The information is available to the right people in the organization in real time.

CRM Software Programs

There are many types of CRM programs:

1. Some companies develop their own proprietary programs.

2. Some companies purchase off-the-shelf programs.

Responsive StrategiesResponsive Strategies

A CRM program cannot help unless a company employs the proper strategy to secure and retain profitable customers.

Special attention must be given to five areas.

CRM Strategy - PrioritiesCRM Strategy - Priorities

1. Acquire the right customer.

2. Craft the right value proposition.

3. Institute the best processes.

4. Motivate employees.

5. Learn to retain customers.

Account selection demands a clear understanding of:

1.Seller’s resources2.Customer’s needs3.Cost of serving various groups of customers4.Potential profit opportunities5.How customers define value and how to meet those expectations

What do customers value?

Some demand low price Some demand customer service Some demand quick delivery

The question is: “Can the seller deliver it profitably?”

Many sellers try to meet all their customer’s needs, and may do so, but fail to do it profitably.

#2 – Crafting the Right Value Proposition

A value proposition encompasses the products, services, ideas and solutions that a business marketer presents to the prospect/customer that is designed to solve the customers’ problems.

They can be generic or customized.

Value Proposition

A value proposition may include:

1. Points of parity to a competitive option

2. Points of difference

Best practice suppliers base their value proposition on their target market’s needs by communicating their offering of superior performance in a way that conveys they understand their customer’s business priorities.

Value Proposition StrategiesValue Proposition Strategies

Strategies that competitors employ Strategies that competitors employ fall into a range referred to as: fall into a range referred to as:

““Industry Bandwidth of Working Industry Bandwidth of Working Relationships”Relationships”

It ranges from pure transactional to It ranges from pure transactional to pure collaborative exchanges (see pure collaborative exchanges (see Fig. 4.5 on the next slide). Fig. 4.5 on the next slide).

Flaring Out StrategyFlaring Out Strategy

‘‘Flaring out’ strategy (Fig 4.5b) states that Flaring out’ strategy (Fig 4.5b) states that the seller can either the seller can either unbundleunbundle (point A), (point A), that is, reduce the service associated with that is, reduce the service associated with a lower price (transactional in nature), ora lower price (transactional in nature), or

Augment Augment by adding more services to the by adding more services to the core offerings (point D) which adds cost to core offerings (point D) which adds cost to the services. This is collaborative in the services. This is collaborative in nature.nature.

Creating Customized Products

The seller starts with a core service (“naked solutions”) and adds customized services to it (“custom wrapped”) that create more value.

#3 - Institute Best Practices The sales force plays a key role in establishing and

growing a customer from a transactional account to a collaborative partnership.

They can do this by aligning and deploying technical and service support units to match with their customers’ units.

Technical groups can consist of research, logistics and customer service units.

Through careful management and screening, transactional accounts can progress to partnerships.

In addition to using best practices, successful organizations (like IBM) employ follow-up techniques such as:

1.Assigning a client representative to take ownership of the relationship.

2.Assigning a Project Owner who completes the project or solves project problems.

3.Developing an in-process feedback and measurement system.

#4 - Motivating EmployeesDedicated employees are the key to a successful customer relationship strategy.

The best approach is to:

1.Hire good people.2.Invest in them to increase their value to the company and its customers.3.Develop challenging careers and align incentives to performance measures.

Why Retain Loyal Customers?

Less expensive than acquiring new customers.Less expensive than acquiring new customers.

Established customers buy more.Established customers buy more.

Cost of serving loyal customers declines.Cost of serving loyal customers declines.

#5 - Retaining Customers

Retain customers by:

• Providing superior value (more than expected) to ensure high satisfaction.

• Nurturing trust.• Developing mutual commitment.• If possible, helping customers grow their business.

How to Pursue Growth from How to Pursue Growth from Existing CustomersExisting Customers

Identify and cultivate customers that offer the most growth potential by:

1.Estimating current percent “share of wallet”

2.Pursuing opportunities to increase share

3.Projecting and enhancing customer profitability

Evaluating Relationships

Some relationship-building efforts fail because expectations of the parties don’t mesh.

Example: Seller wants a business relationship whereas the customer responds in a transactional mode.

By understanding and isolating customer needs, the marketer is better equipped to match their product offerings to a particular customer’s needs.

Copyright © 2007 by South-Western, a division of Thomson Learning, Inc. All rights reserved.Developed by Cool Pictures and MultiMedia Presentations

• Relationship Quality: High-caliber relational bond characterized by commitment and trust

• Relationship Breadth: Number of interpersonal ties that connect the relationship

• Relationship Composition: Portfolio of contacts ranging from low-level influencers to high-level decision makers

• Relationship Strength: The ability of the buyer-seller relationship to withstand stress and/or conflict

• Relationship Efficacy: The ability of an inter-firm relationship to achieve desired objectives

Drivers of RM Effectiveness: Definitions