Lecture notes on Customer Relationship management

what is customer relationship management and its application. how does customer relationship management benefit a business pdf free download
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Dr.NoahHarper,United Kingdom,Professional
Published Date:17-07-2017
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CUSTOMER RELATIONSHIP MANMAGEMENT UNIT - 1 1. INTRODUCTION 2. CUSTOMER LOYALTY 3. SUCCESS FACTORS 4. THREE LEVELS OF SERVICE 5. SERVICE – LEVEL AGREEMENTS 1 CUSTOMER RELATIONSHIP MANMAGEMENT LEARNING ASPECTS Evaluation of CRM Schools of thought in CRM Benefits of CRM Customer loyalty Success factors Service levels Service level agreements 1. INTRODUCTION EVALUATION OF CUSTOMER RELATIONSHIP MANAGEMENT Customer Relationship Management (CRM) is to create a competitive advantage by being the best at understanding, communicating, delivering, and developing existing customer relationships, in addition to creating and keeping new customers. It has emerged as one of the largest management buzzword. Popularised by the business press and marketed by the aggressive CRM vendors as a panacea for all the ills facing the firms and managers, it means different things to different people. CRM, for some, means one to one marketing while for others a call centre. Some call database marketing as CRM. There are many others who refer to technology solutions as CRM. If so, what is CRM? 2 Merchants and traders have been practicing customer relationship for centuries. Their business was built on trust. They could customize the products and all aspects of delivery and payment to suit the requirements of their customers. They paid personal attention to their customers, knew details regarding their customers tastes and preferences, and had a personal rapport with most of them. In many cases, the interaction transcended the commercial transaction and involved social interactions. Even today, this kind of a relationship exists between customers and retailers, craftsmen, artisans – essentially in markets that are traditional, small and classified as pre-industries markets. These relationship oriented practices have changed due to industrial revolution.. Businesses adopted mass production, mass communication and mass distribution to achieve economics of scale. Manufactures started focusing on manufacturing and efficient operations to cut costs. Intermediaries like distributors, wholesalers and retailers took on the responsibilities of warehousing, transportation, distribution and sale to final customers. This resulted in greater efficiencies and lower costs to manufacturers but brought in many layers between them and the customers. The resulting gap reduced direct contacts and had a negative impact on their relationships. The post-industrial era saw the re-emergence of relationship practices. Marketing academicians. (a) Rapid advances in technology, (b) Intensive competition in most markets, 3 High Relationship Orientation Low Pre-Industrial Era Industrial Era Information era (Relationship (Product Centric) (Relationship Centric-Small Scale) Centric-Large Scale) Figure 1.1 The Evolution of Relationship Orientation (c) Growing importance of the service sector, and (d) Adoption of total quality management programs Technological Advancement More information, communication and production technologies have helped marketers come closer to their customers. Firms operating in diverse sectors ranging from packaged goods to services started using these technologies to know their customers, learn more about them, and then build stronger bonds with them through frequent interactions. Marketers could gain knowledge about customers, which helped them respond to their needs through manufacturing, delivery, and customer service. Technology also enabled ordering and product-use related services. 4 Though the emergence of CRM in recent times coincided with the information age, one must remember that technology is just an enabler. Technology enabled marketers overcome several long felt shortcomings of mass marketing. Some of these included: - Inefficiencies of mass marketing: 1980s and early 1990s witnessed some of the most radical business transformations that resulted in cost reductions in almost all functional departments except marketing. Manufacturing and related operations costs were reduced through business process reengineering, human resource costs were reduced through outsourcing, restructuring and layoffs, financial costs were reduced through financial reengineering but marketing costs kept increasing due to increased competition and product parity in virtually every industry. - Lack of fast, effective and interactive models of customer contact, feedback and information. - Lack of consolidated information about customer interactions, purchase behavior and future potential. Intensive Competition In competitive markets, specially the ones that were maturing and witnessing slow or no growth, marketers found it more profitable to focus on their existing customers. Studies have shown that it costs up to 10-12 times more to attract a new customer than to retain an existing customer. Marketers have now started focusing 5 on the lifetime value of customers. They are moving away from just trying to sell their products to understanding, customers needs and wants and then satisfying their needs. This has led to a relationship orientation which creates opportunities to cross sell products and services over the lifetime of the customer. Growing Importance of the Service Sector The service sector contributes to over two-third of the GDP of most advanced economies. In India, the services sector contributes to over 50 per cent of the economy. One of the characteristics of the service industries is the direct interaction between the marketer and the buyer. In services, the provider is usually involved in the production as well as delivery directly. For example, professional service providers like a doctor or consultant are directly involved in production as well as delivery of their services. Similarly, the customers are directly involved in production in the purchase and consumption of these services. These direct contacts create opportunities for better understanding, a better appreciation of needs as well as constraints and emotional bonding all of which facilitate relationship building. Therefore it should come as no surprise when you see the service firms pioneering many of the customer relationship initiatives. Firms operating in the financial services, hospitality business, telecom, and airlines are the early adopters and extensive users of CRM practices. Adoption of total Quality Management (TQM) Programmes Total quality management programmes help companies offer quality products and services to customers at the lowest prices. To enable this value proposition, 6 organizations needed to work closely with their customers, intermediaries as well as suppliers thus fostering close working relationships with members of the marketing system. Companies such as Intel, Xerox, and Toyota formed partnering relationships with suppliers and customers to practice TQM. Other developments such as an increase in the number of demanding customers, increased fragmentation of markets, and generally high level of product quality forced business to seek sustainable competitive advantages. A competitive advantage is sustainable only when it is not easily replicated. One such sustainable competitive advantage is the relationship that a firm develops with its customers. SCHOOLS OF THOUGHT ON CRM The relationship marketing is supported by the growing research interest in different facets of this concept. Researchers in different countries observed this shift in marketer‘s orientation towards customer relationship and started exploring the phenomenon. The initial approaches to CRM can be broadly classified as: 1. The Anglo-Australia Approach, 2. The Nordic Approach, and 3. The North American Approach. The Anglo-Australian approach integrated the contemporary theories of quality management services marketing and customer relationship economics to explain the emergence of relationship marketing 7 The Nordic approach views relationship marketing as the confluence of interactive network theory, services marketing and customer relationship economics. The interactive network theory of industrial marketing views marketing as an interactive process in a context where relationship building is an area of primary concern for marketers. Quality Management Services Customer Marketing Relationship Concepts Economics Relationship Marketing Figure 1.2 Anglo-Australian Approach of Relationship Marketing 8 Interactive Network Theory Customer Service Relationship Marketing Economics Relationship Marketing Figure 1.3 Nordic Approach to Relationship Marketing In contrast, the initial focus of the North American scholars was on the relationship between the buyer and seller operating within the context of the organizational environment which facilitated the buyer seller relationship. Buyer Organisational Environment Relationship Manager Figure 1.4 North American Approach to Relationship Marketing 9 One of the broader approaches to CRM emerged from the research conducted by academics at the Centre for Relationship Marketing and Service Management at the Cranfield University, U.K. The broadened view of relationship marketing addresses a total of six key market domains, not just the traditional customer market. It also advocated for a transition for marketing from a limited functional role to a cross- functional role and a shift towards marketing activities for customer retention in addition to the conventional customer retention in addition to the conventional customer acquisition. The six markets are as follows 1. Customer markets – existing and prospective customers as well as intermediaries. 2. Referral markets – existing customers who recommend to other prospects, and referral sources or ‗multipliers‘ such as doctors who refer patients to a hospital or a consultant who recommends a specific IT solution, 3. Influence markets – government, consumer groups, business press and financial analysts. 4. Recruitment markets – for attracting the right employees to the organization, 5. Supplier markets – suppliers of raw materials, components, services, etc., and 6. Internal markets - the organization including internal departments and staff. 10 Internal Markets Supplier Referral Markets Markets Customer Markets Recruitment Influence Markets Markets Figure 1.5 The Six Markets Framework DEFINING CRM The preceding discussions highlight the range of perspectives adopted by researchers in understanding and explaining relationships. Similarly in marketing literature, the terms customer relationship management and relationship marketing have been used interchangeable to reflect a variety of themes and perspectives. Some of these themes offer a narrow functional marketing perspectives while others offer a perspective that is broad and somewhat paradigmatic in approach and orientation. A narrow perspective of customer relationship management is database marketing emphasizing the promotional aspects of marketing linked to database efforts, Another view point is to consider CRM only as customer retention in which a variety of after marketing tactics are used for customer bonding or staying in 11 touch after the sale is done. A more popular approach with recent application of information technology is to focus on individual or one to one relationship with customer that integrates database knowledge with a long-term customer retention and growth strategy. Jackson applied the individual account concept in industrial market to suggest markets CRM to mean, marketing oriented toward strong, lasting relationship with individual accounts McKenna offered a more strategic view by putting the customer first and shifting the role of marketing from manipulating the customer (telling & selling) to genuine customer involvement (communicating & sharing the knowledge). Berry, in a broader term stressed that attracting new customers should be viewed only as intermediate step in the marketing process. Developing closer relationships with this customers and turning them into loyal is an equally important aspect of marketing. Thus, he defined relationship marketing as attracting, maintaining, and, enhancing customer relationships. By focusing on the value of interaction in marketing and its consequent impact on a customer relationships, a broader perspective espouses that customer relationship should be the dominant paradigm of marketing. As Gronroos stated: Marketing is to establish, maintain and enhance relationship with customers and other partners, at a profit, so that the objectives of the parties involved are met. This is achieved by a mutual exchange and fulfillment of promises. The implication of Gronroos definition is that customer relationships is should be devoted to building and enhancing such relationship. Similarly, Morgan and Hunt suggested that 12 relationship marketing refers to all marketing activities directed towards establishing, developing and maintaining successful relationships. Figure 1.1 Shift in focus. Traditional Marketing Focus Provider Parity Customer Product Price Consideration and Potential Purchase Promotion Place Customer Experience Focus Customer Differential Marketing Sales Customer Interactions Interactions Satisfaction Loyalty, and Service Support Value Interactions Interactions 13 BENEFITS OF CRM Customers are Profitable over a period of time Studies by the US-based Bain and Company have shown that a customer becomes more profitable with time because the initial acquisition cost exceeds gross margin while the retention costs are much lower. When an organization retains the customer, it gets a larger share of the customers wallet at a higher profit-one percent increase in sale to existing customer increase profits by 17 per cent while the same amount of sale to new customer increased profit by only 3 per cent. This huge different is explained by the fact that for most companies the cost of acquiring the customer is very high. It costs six to eight times more to sell to a new customer than to sell to an existing one. The same study also highlighted that a company can boost its profit up 85 per cent by increasing its annual customer retention by only 5 per cent. Similarly, studies have shown that the probability of selling a product to a prospect is 15 per cent while it is 50 per cent to a existing customer. Thus, the time, the effort and the costs of selling are much lower for an existing customer. Customer probability is Skewed An analysis of the revenue and profit contribution of customer base of banks in the US, Europe and Australia showed the following: 14 - The top 20 per cent of the customers contribute to 150 per cent of the profits while the bottom 20 per cent drain 50 per cent of the profits and the rest 60 per cent just break even. Experiences of Indian organizations are on similar lines. In a large public sector Banks, the top 23 per cent of the customers contribute to 77 per cent of the revenues. Similarly, the top 27 per cent customers of a leading cellular phone service provider contributes to 75 per cent of the revenues. The implication of such a skew in customer profitability and revenue contribution are startling for organizations, which use to conventionally treat ‗all customers are equal‘. Competitors have to just lure these top customers and the organization would face serious problems. It also highlights the fact that one has to adopt different strategies for different customer groups: - Programmes have to be developed to retain and build stronger bonds with the top ‗gold standard‘ customers so that they do not get ‗poached‘ - Activity-Based Costing analysis has to be done with the middle group of ‗potentials‘ so that the cost of serving this customers are reduced. In addition, cross-selling and up selling should be done to increase the profitability of these customers. - An analysis of the bottom growth has to be done to identify those customers who can be shifted to the ‗potential‘ group. For the remaining, the cost of service has to reduce by encouraging them to use lower cost channels. In 15 extreme cases, some of these customers will be encouraged to defect to competitors. Outsourcing of loss making customers to specialized low overhead agencies is an emerging trend. Marketing Benefits of CRM CRM will gradually reduce organization‘s dependence on periodic surveys to gather data. Collection of data related to buying and consumption behavior will be an ongoing process. In many cases, the transaction data is automatically collected some times real time as in the e-commerce transaction. This rich repository of customer information and knowledge updated through regular interactions and actual customer transactions and purchase behavior will help marketers to develop and market customer centric products successfully. Customized promotions-based customer preferences and purchase patterns will substantially reduce the wasteful expenditure of mass communication and even direct mailing. As a customized promotion are more focused and are based on a deeper insight of existing customers, they have a greater chance of conversion to sales. Service Benefits of CRM Research findings conducted across industries as a part of a Technical Assistance Research Project (TARP) indicate that: - 95 per cent of the customers do not bother to complain, the just take their business else where. 16 - Most loyal customers take time to complain. This enables the product / service provider to improve and ensure that such mistake do not recur. - A typical dissatisfied customer will tell an average of 14 others about a bad experience while she will tell only six about a satisfying experience with an organization. - 70 per cent of customers who complain will do business with a company again if it quickly takes care of a service problem. ENABLES FOR THE GROWTH OF CRM The tremendous growth of interest and investment in CRM across the globe can be attributed to the following macro – environmental factors: (a) Emergence to service economy, (b) Emergence of market economy (c) Global orientation of businesses, and (d) Aging population of the economically advanced economies. Emergence of Service Economy The emergence of service economy is a global phenomenon. In the US, the service sector accounts for over 75 per cent of GNP and employees 80 per cent of the work force. The service sector contribute to 60 – 70 per cent of the GDP of economically advanced nations of Western Europe, Canada and Japan. The increasing 17 contribution of service sector is not limited to develop countries. Developing economies like China, Indonesia and Thailand employ about 40 per cent of the work force in the service sector. In the year 2001, the service sector contributed to 48 per cent of GDP in India, 54 per cent in Philippines and 33 per cent in China. The average annual growth rate of the services during the decade of 1990s was 8 per cent in India, 9 per cent in China and 4.1 per cent in Philippines (Statistical Outline of India, 2002 – 2003). Advanced countries progressed from agriculture to industrial and then to post – industrial economies. The shift from manufacturing to services was spread over a few decades of the last century. However, in developing countries, the growth is lead by all three sectors of the economy in varying proportions. The growing importance of services resulted in greater customer orientation as services are characterized by simultaneity / inseparability. It implies that the production and consumption of services are inseparable. In services, one needs to be closed to customers to deliver the service offering. The factory is where the customer is and services offered in real time. The customer perceives the production process as part of service consumption, not just the outcome of production process as in traditional marketing of physical goods. Therefore, it is not surprising that service businesses like hotels, airlines, banking, financial services, telecom and retailing where the early adopters of CRM. 18 Emergence of Market Economy In addition to the shift towards service, there is a global emergence of the market economy. The power is more to the market as compare to the controlled economy. Market regulation was in place all over the world including the US, Europe, USSR, China and India. The 1990s witnessed acceleration in the deregulation of many large industries including banking, telecommunications, broadcasting and airlines across the world. As a result, market – orientation firms operating intensely competitive market now takes decision that was once controlled by the government. The focus have shifted from capacity creation under control to the markets. Market – oriented economy necessitated a customer focus and boosted the importance of CRM. Global Orientation of Businesses National boundaries are giving way to either a borderless world or atleast a regional world resulting in the emergence of trading blocks like North American Free Trade Agreement (NAFTA), European Union and the Association of South – East Asian Nations (ASEAN). The abolishment of the General Agreement on Tariffs and Trade (GATT). And the emergence of World Trade Organization (WTO) helped create a global orientation for business establishment. Increasing international trade became the growth engine for the global economy. Liberalisation of markets and trade proved to be a far stronger growth engine. It has eased the entry into foreign markets. Firms need stronger customer – orientation to be able to tab opportunities in new markets while defending themselves in their home markets. 19 Aging Population in Economically Developed Countries The economically advanced nations are witnessing an aging of their population. In 2000, 12.6 per cent of the US population was 65 years of age or older. The comparative figures for Sweden and Japan were 17.2 per cent and 17 per cent of their respective population (Sheth and Mittal, 2004). This trend is visible in most part of Europe, except in Ireland (Leeflang and Raij, 1995). Aging of population has been attributed to the combined effects of a slow down in birth rate and an increased in life expectancy. While an aging population creates new opportunities for wellness, financial wellbeing, safety and security and recreation (Sheth and Mittal, 2004), it has also slowed the markets for traditional goods and services designed for a younger population. Therefore, in these markets, growth is being achieved by increasing the ‗share of wallet‘ and not through ‗growth of markets‘ driven by a growing population. Marketers are now forced to develop a deep understanding of their existing customers and meet their ever changing needs through suitable products and services. Indeed, most large companies, especially the services sector, wants to become One-Stop-Shop for the customers. After identifying and discussing the factors responsible for the growth of CRM across the globe, we now evaluate the reasons as to why managing customer relationship has become critical for business. 20

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