Great Expectations

It is now almost a decade since management consultancy Bain & Co carried out its ground-breaking research into the key differences between customer acquisition and customer retention. By considering the real costs and long-term returns, it fou

It is now almost a decade since management consultancy Bain & Co carried out its ground-breaking research into the key differences between customer acquisition and customer retention. By considering the real costs and long-term returns, it found that acquisition costs were often under-stated by most companies, while cross-selling to an existing customer cost one-sixth of the price of making a sale to a prospect.

Critically, Bain introduced one of the most famous equations in marketing – that a five per cent increase in customer retention would increase the value of each customer by between 25 and 100 per cent. Not only has that viewpoint become part of the consultancy’s approach, it also informs the 1996 best-seller, “The Loyalty Effect”, written by former Bain guru Frederick Reichheld.

The potential implied in that finding led directly to the explosion in loyalty programmes several years ago. Once their limitations were recognised, the migration began towards customer relationship marketing.

That has now evolved into customer relationship management (CRM), a term which even two years ago would have meant nothing to most practitioners.

With a stable definition of CRM now taking hold – that it is about identifying and interacting with customers for more profitable, long-term involvement with the company – the infrastructure necessary to make it happen is also coming into focus. A database of customers and their history which can be drawn on at any point of contact with the business has become a major objective.

As Neil Morgan, marketing director for Chordiant Software, says: “If it is true that the cost of selling to an existing customer is lower than acquiring a new one, it makes sense to put investment into CRM. That is no longer a question in financial services anymore.”

With the introduction of the euro and the eventual resolution of Y2K (millennium bug) issues, CRM technology is going to be the next major area of IT investment. Yet while the purpose of this type of management is widely agreed upon, how to set about it and which are the appropriate technologies are not settled issues.

To understand the underlying issues, management consultancy ECSoft undertook a survey of delegates to a conference it organised jointly with Chordiant and Marketing 1:1 Group in November 1998. The 40 qualititative survey forms it received revealed some complex problems emerging around the way companies should make themselves ready to manage customers, especially how technology will assist them.

Four out of five respondents agreed that CRM was key in determining the future success of their company, with over two-thirds saying customers wanted a more personal relationship with suppliers.

Simon Bates, sales and marketing director at ECSoft, points out that, “the majority agreed customer service is an important factor in© building the brand, and so getting repeat business. But the fact that fewer than half believe their companies see this as important shows the gap between conviction andexecution.”

Technology was seen as critical to building loyalty through excellent customer service, with more than 75 per cent of respondents estimating its impact on CRM at over 50 per cent – the most effective weapon available to them. Yet 74 per cent did not believe that their company was fully exploiting technology in support of CRM. Among the reasons given were inadequate budgets and company culture.

Getting a company to back CRM and invest in it often requires an internal champion to be found.

“What typically occurs when we come into contact with such individuals in a big company, is that they are selling it to the board and they know that the company needs technology as one of the factors to make it happen. So they need arguments when there might not be that many facts,” says Morgan.

He believes that one of the most important things an application vendor can provide is the tools to justify the investment. Chordiant has built such a return on investment model, while ECSoft has developed a model to define the level of maturity in CRM which a company has reached.

But in this market, the way other companies have tried to justify their sales may have created that concern among clients about the technology itself.

“The classic sales technique is the traditional approach of features and benefits. It is about the functionality and how it delivers a business benefit. But if you are new in the sector, you don’t have that richness of features, so you do a strategic sell at a senior level, where you can be woolly about the detail,” says Shaun Doyle, chairman of Intrinsic.

What is becoming evident in this market is that two entirely different sets of vendors are competing for clients under one umbrella. From one direction, major players like Siebel and SAP are migrating into this area – from their call centre and sales force automation backgrounds. Because those applications require a customer database function, they are now claiming to provide CRM solutions.

From the other direction, campaign management application vendors are positioning themselves as the more relevant providers. Exchange Applications, Intrinsic and Prime Response are among the leaders in this sector. They argue that many clients have already implemented data warehouses – what is needed now is some ouput.

“Companies such as IBM are very interested in campaign management because it is a killer application for the data warehouse to cost-justify the investment,” says Doyle.

The problem for clients is understanding the real underlying architecture of the software and how it will benefit them. “It is important for any organisation not to be sold the hype about CRM,” says Doyle. He reports one rival implementation where the vendor based the return on investment on lifting average product holding among customers from 1.2 per person to 2.2.

The client bought into a high-value front-end package, but realised too late only 15 per cent of its customer base would ever contact it during any one year. That meant the ability to achieve the predicted level of cross-selling was impossible.

CRM software specialist Hatton Blue identified many of these same problems in its own customer survey. This showed that 39 per cent of clients saw the length of implementation as being a major inhibiting factor to success, while 35 per cent named cultural issues and the pressure to complete other IT projects, and 34 per cent mentioned the difficulty of integrating technologies.

“Technology can be a huge enabler. The problem is that vendors have got things to sell which may not be the thing that really does it,” says Barry Smale, sales and marketing director at Hatton Blue. “Having the right team working on a project is the key thing. The only people who know what the business needs to succeed are those in the business itself. Throwing CRM over the wall to IT is not fair to either side.”

He notes that it is a standing joke in the IT community that customer information databases are only ever 70 to 80 per cent completed.

“Anybody who starts from a data warehouse point of view is in the wrong place,” says Smale.

Not that misperceptions are confined to CRM. The idea of workflow has been heavily sold by vendors. Consequently, UK businesses have “spent hundreds of thousands of pounds on them and not been able to show the value because people didn’t really know why they were buying it. People do workflow anyway – it just happens. So why try to improve it?”

Customer relationships do not just happen, of course, and they do need to be supported, which is where IT comes in. The critical difference beginning to be recognised in this sector is between applications that have been specifically developed with CRM in mind, and those that are just being rebadged to fit the vogue.

At Prime Response, chief executive officer Allen Swan, says his company’s approach has been driven by an understanding that it is a solution they need to provide, not just software.

“In our terms, CRM consists of several key areas. You need to understand who the customer is, which means analytics to understand the database if you have one – and you do need one. Then you can run analyses, do segmentations and look at buying patterns. Then you need a form of communication based on that strategy that is executed in a very convincing and clever way,” he says.

Marketing automation comes into its own in supporting that process end-to-end, especially in allowing customer knowledge to inform interactions through the Internet or call centre, as well as in direct mail. He cites clients of his company who have proven that the benefits identified by Bain & Co are real.

“Telenor Mobil in Norway reduced their churn by 11 per cent and increased revenue from new mobile users by 50 per cent, which is phenomenal. Royal Bank of Scotland, by cleverly segmenting its customer base, not only reduced its marketing costs by reducing wastage, it also increased its response rates to double figures – up to 15 and 25 per cent,” says Swan.

Achieving those kinds of return on investment are what marketers and the boards who back them dream of. It is evidence of just how powerful CRM can be, provided that technology is genuinely an enabler, not a disabler of the process. Those timescales which terrify many clients, and which were real in data warehouse implementations, do not need to be a barrier. Smale cites Winterthur, a division of Credit Suisse, which launched its CRM-based new remortgage business last January, having only conceived of the idea the previous June.

He concludes that success often depends on getting the right people involved in defining the solution: “To get a project going, you have got to have a value engineer on the supplier side and business people on the customer side. Often, companies end up with IT people from their side and IT people on the supplier side as well. That is the worst of all combinations.”

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