CRM shifts the paradigm

 

Source: Journal of Strategic Marketing; Dec2005, Vol. 13 Issue 4, p275-291
 
Abstract: In today"s environment, companies of all sizes need to practice customer relationship marketing to gain a competitive edge. This is feasible if CRM becomes an integrated part of the marketing management paradigm. The paper suggests adding a fifth P to the marketing mix framework to seek such integration. The fifth P refers to profiling the customer. A managerial model of CRM is presented with propositions for future research on the subject

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Keywords: Relationship marketing; customer loyalty; customer lifetime value; marketing mix and customer relations management; managing customer value; profitability of long-life customers.  

Introduction:
Companies collect and store huge quantities of information about their customers. The growing sophistication of analytical tools makes such information a valuable resource. Using customer information companies can learn a lot about their customers and their world. For example, companies
are able to fashion sample customer segments that are used to test new products. Customer information also helps in relationship marketing, that is, in maintaining long-term relationships with customers. Serving customers over a long period has a positive impact on performance.

CUSTOMER RELATIONSHIP MARKETING (CRM)
Although there are different contexts, marketing scholars have defined Customer Relationship Marketing (CRM) in similar fashions. According to Gro¨nroos (1990), CRM is a way ‘to establish, maintain, enhance and commercialize customer relationships so that the ives of the parties involved are met. This is done by a mutual exchange and fulfillment of promises’. A similar definition has been offered by Shani and Chalasani (1992) who view CRM as ‘an integrated effort to identify, maintain, and build up a network with individual consumers and to continuously strengthen the network for the mutual benefit of both sides, through interactive, individualized and value-added contacts over a long period of time’. The above definitions and different commentaries (i.e., Sheth and Parvatiyar, 1995; Bagozzi, 1995; Peterson, 1995; Wilson, 1995; Berry, 1995) make clear that CRM is characterized by longterm alliances between each buyer and seller that are mutually beneficial if sustained. Thus, the aim of CRM is to capture increasing amounts of the lifelong loyalty of the best customers by offering products and services that respond to their individual needs.
CRM is useful for any company for a variety of reasons. Maintaining a competitive advantage in today’s world of increased offerings and shifting market conditions is extremely difficult. In order to stay ahead of its competitors, a company must be able to monitor and constantly detect changes in customer needs and quickly adjust business accordingly. In a commoditized market, where lasting differentiation is generally thought impossible to achieve, customer integration can lead to a sustainable competitive advantage. Close collaboration with customers not only improves profits but also drives innovation. Excelling in customer care has other benefits too. By shifting its focus from cutting costs to exploiting innovation and the potential for growth, a company can develop a much more positive identity that will eventually translate into an attractive and distinctive corporate image. Such an image may also turn out to be an important asset in luring the best employees.
A number of companies such as Staples, Amazon, e-bay, 3M and Bank One have improved their performance by practicing CRM. They constantly track their customers gaining useful information for price adjustment, determining what products customers want and don’t want, and why, as well as for launching promotions that pitch select deals to select customers. The companies use the information to change their buying stock as well as to target catalogs and coupons more precisely. They use customer information to enhance their value proposition. Thus, customer relationship marketing has changed the paradigm in several industries. Briefly, it is critical for a company to have its fingers on the pulse of its customers’ behavior. Understanding how that behavior equates to customer demand and market opportunity is essential if a company is to make reliable predictions and capture revenue.
CRM is not a fad like enterprise resource planning was in the 1990s. It does not do a company much good to speed up its information flow if its customers defect to the competition, which they increasingly appear ready to do. Furthermore, a strategy that aims to find and keep the most profitable customers while perhaps dropping some who are unprofitable, looks like the best ways to improve profit margins (Czepiel, 1990). Studies have found that retention has a very large impact on customer value. Specifically, a 10% improvement in retention increases the value of a firm’s customer base by about 30%. In contrast, a 10% improvement in acquisition cost improves value by only one percent (Gupta et al., 2001). As far as customers are concerned, CRM makes buying decisions more efficient and more economical. It helps in reducing choices and thus saves time and mental discomfort (Sheth and Parvatiyar, 1995). Furthermore, CRM leads to price discounts, better reception at the hands of the seller (in demonstrating product, answering questions, and sharing information), and better after-sale service. In other words, CRM enables customers to fulfill their goal of acquiring a product or service at a reasonable price expending reasonable effort (Bagozzi, 1995).
Considering the importance of customer relationship marketing, it is imperative that marketers incorporate it in their decision-making. Relationship marketing should be pursued in connection with the four marketing decisions: product, price, promotion, and place. Relationship marketing should be made an integral part of the 4Ps framework. This paper suggests adding customer relationship as the fifth element in the marketing mix concept. Then, the decisions relative to product, price, promotion, distribution, and customer relationship will be made so that the perspectives of one element will be reinforced by the other four. In this way, customer relationship management will become an essential part of the marketing discipline, and both academics and practitioners will find this kind of management a convenient method of making CRM an integral part of marketing. This paper proposes a CRM model from a managerial perspective. Suggestions for future research in the form of propositions
are made for advancing the state of the art.

LITERATURE SEARCH
This section traces the current state of CRM knowledge and identifies gaps that exist in current thinking. The idea of CRM is not new. It has strong historical antecedents (Sheth and Parvatiyar, 1995). In some ways, it is a throwback to a time when the world was still easily encompassed. A small-town shopkeeper, for example, knew that a certain customer always bought a bottle of beer on the way home from work and could be talked into buying three on a Friday. He knew which farmer consistently delivered good-quality vegetables, and he knew which of his employees was good at dealing with which customers.
In modern times CRM became popular in the 1990s as competition intensified and customer demands increased. Earlier studies on CRM were focused on buyer-seller relations (Dwyer et al., 1987; Johanson et al., 1991), establishing and structuring networks (Anderson et al., 1994), dealings with channel members (Boyle et al., 1992; Ganesan, 1994), managing the sales force (Swan and Nolan, 1985), and on creating alliances (Bucklin and Sengupta, 1993; Heide and John, 1990; Sheth and Parvatiyar, 1995). In marketing services, the concept of relationship marketing appeared much earlier (Berry, 1983). Other important studies in service marketing have been conducted by Barnes (1994), Gro¨nroos (1994), and Crosby and Stephens (1987). Morgan and Hunt (1994) consider CRM as an alternative way of looking at marketing. According to them, CRM refers to ‘all marketing activities directed toward establishing, developing, and maintaining successful relational exchanges’. In a way they are right. After all, the customer is the core of marketing theory and practice, but the question is, does CRM reinforce the emphasis on the customer or does it add a new dimension to customer focus?
Sheth and Parvatiyar (1995) have examined what motivates consumers to engage in relationships with suppliers. On the other hand, consumers find that CRM helps by reducing their choice options, which is satisfying in various ways. On the other hand, firms practice CRM since it helps in retaining customers (Reichheld and Sasser, 1990; Rosenberg and Czepiel, 1984; Rust and Zahorik, 1992) and in providing a competitive advantage (McKenna, 1991; Nauman, 1995; Vavra, 1992). CRM in business-to-business marketing has been an accepted operating strategy much longer than in consumer marketing or service marketing (Wilson, 1995). A number of studies have analyzed factors that influence the success or failure of customer relations (Anderson and Narus, 1984, 1990; Anderson et al., 1987; Anderson and Weitz, 1990; Wilson and Moller, 1991; Han and Wilson, 1993).
Recent works on CRM have dealt with customer lifetime duration (Allenby et al., 1999; Bolton, 1998; Dwyer, 1997; Schmittlein and Peterson, 1994). Heskett et al. (1994) estimate the lifetime revenue stream from a loyal pizza customer to be $8,000 while for a Cadillac buyer it could be as high as $332,000. Reinartz and Kumar (2000) have developed a model of the lifetime duration profitability relationship. They point out that all customers are not profitable forever and conclude that some customers must be dropped at an appropriate time (Reinartz and Kumar, 2002, 2003). In other words, trying to retain all customers forever can be counter-productive. Customer lifetime value or customer equity has emerged as the core of CRM. It is defined as the net present value of future revenue streams from a customer. The lifetime value concept is based on the premise that acquiring new customers is more expensive than retaining old customers. Rosenberg and Czepiel (1984) assert that it is between five and 10 times more expensive to win a new customer than it is to retain an existing one. For example, in the credit car industry, it costs $51 to win a new account, profits increase annually from $30 in the first year to $42, $44, $49, and $55 in later years. The break-even point is reached sometime in the second year and thus, to be profitable, the relationship must last at least to the second year (Reichheld and Sasser, 1990). Over time, choices must be made as to which customers to acquire, which ones to develop and which ones to retain.
Enhancing of customer equity requires establishing relationships with the customer since relational customers provide better future value than nonrelational ones (Reichheld and Teal, 1996). According to Reichheld and Sasser (1990) sales and profits per account increase the longer a relationship lasts. A number of studies have examined strategies to improve retention rates of desirable customer (Hart et al., 1990; Fornell, 1992; Pitt and Page, 1994; Reichheld, 1993; Rust and Zahorik, 1993). An important step in this direction is to address the root causes of customer defection (DeSouza, 1992; Fournier et al., 1998). Not all causes of customer defection can be understood or remedied. Some customers will
defect no matter what a company does. It is also true that not all customers are worth retaining, since from a long-term perspective not everyone is equally profitable. Nonetheless, it is important to know if a currently unprofitable customer would generate a future profit stream if an investment were made in enhancing that customer’s satisfaction. These problems can be addressed by profiling customers and making investments in those who offer the desirable growth and profit potential.
Technology permits database marketing which makes CRM feasible. The four Ps Paradigm, the traditional mainstay of marketing decision-making, suggests identifying the target customer segment and developing the marketing mix. The customer segments, however, were defined very broadly since forming narrow segments was not then feasible. With the development of computer technology, it is now possible to collect and analyze data pertaining to individual customers. In the 1950s, the focus was on mass-marketing while the 1970s looked at market segmentation. In the mid-1990s, the emphasis shifted to personalized marketing or CRM. CRM provides a unique and sustained competitive advantage since enduring relationships with customers cannot be copied by competitors. This article maintains that CRM, as defined earlier, is much more than database marketing. Database marketing helps in maintaining relations with each customer individually. CRM starts after an individual becomes a customer and is a subset of database marketing (Peterson, 1995). CRM can help a company understand how it can derive economic benefit by better managing customer relationships. It comprises:
• Gathering and utilizing data to anticipate changing customer priorities and market dynamics
• Increasing the effectiveness of its contacts with its most valuable customers
• Driving revenue generation by cross-selling, up-selling and customer loyalty
• Increasing profitability by improving its time to channel effectiveness
• Using privacy as an avenue to customer loyalty and increased wallet sharing
• Monitoring and measuring business results

MAKING CRM MAKE MONEY
Customer demand, global competition and changes in regulatory compliance are forcing companies to predict more accurately and to manage their businesses more effectively across all functional groups, including sales, marketing, service, and operations. As market and business conditions change, companies must be able to adjust their processes instantaneously to meet new requirements. Successful companies will be those that are able to establish global business processes and then monitor and measure every aspect of their business—from finance and administration to marketing, sales, and customer care; tracking actual versus planned corporate performance and customer satisfaction. The requirements for success in the current marketplace are much different from those in the past. The old marketing mix framework is insufficient to practice marketing in today’s business environment (Gro¨nroos, 1994; Kandampully and Duddy, 1999). It seems apparent that a paradigm shift in marketing management is overdue (Peters, 1991). This paper advocates that there should be a paradigm shift toward creating a customer-centric organization. Such a mind set implies a customer focus that extends throughout the company, not simply within the marketing department.
Following the paradigm shift, the key role of the marketing department will be that of a facilitator. Marketing acts as the integrator of understanding customer needs. Hence it functions as an enabler to R&D, production, finance, and human resources so that all parts of the company think customer. The entire culture of the company changes from a transaction-based view to a customer-centric view. Marketing departments will still play a key role but they must reinvent themselves. Organization becomes more responsive and efficient. The walls between the different units of a company are broken. All work as a team everyone share common information and present a united front to the customer. To establish this type of transformation, it is suggested that a fifth ‘P’ be added to the marketing mix framework; this may be called ‘Profiling the Customer’. The point may be illustrated with reference to 3M. 3M sold 50,000 products in 200 countries through its 40 divisions in one year. Salespeople from different divisions called on customers independently and each division maintained its own database. This type of arrangement failed to identify how much business the company did with individual customers. Without complete customer knowledge, the company was hamstrung in the market. It could not uncover crossselling opportunities. The separate databases were prone to duplication and error, for example, 40% of the customer records in 3M’s various US databases had invalid addresses (Sawhney, 2001). The 5Ps framework will be able to help companies systematically revamp their marketing operations with customer relations in mind. Building customer relationships cannot be practiced as an add-on activity. It must be integrated with a business’ marketing mix. Adding a fifth P will do the trick in making the firm customer-centric on an on-going basis. Falling costs and increasing capabilities of information technology make it possible for more and more firms to become customer-centric.

PROFILING THE CUSTOMER—THE FIFTH P
The fifth P involves:
1. Capturing the right customer information: choosing the most important customers and touchpoints
for data collection; gathering information that reveals what current and potential
customers really want; using data to anticipate changing customer priorities and market
dynamics; using key customer information to introduce changes that increase loyalty and
revenue.
2. Managing the quality customer data: assessing the quality of data; establishing a marketing
automation infrastructure to drive cost-effective acquisition and retention of data