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Article : Customer Relationship Management: Some Myths and Realities

According to Buttle*, "CRM is widely misunderstood by Marketing Management and seriously misrepresented by software houses. Companies are being sold front office and back office solutions, but are missing out on the fundamental, strategic benefits that CRM can provide. CRM at its most sophisticated has the potential to integrate all business processes around the requirements of strategically significant customers, a fact that most IT solutions fail to acknowledge". The author shares this view and this article will try to highlight some of the myths and realities emerging from the concept in a Business-to-Business environment.

Myth and Reality
1. Customer Relationship Management.
Playing the devil's advocate, one could say that the name of the concept itself is based on a myth: the myth that it is possible to manage a relationship. If we accept the fact that a relationship is an exchange between two parties, the reality is that, in the case of Customer Relationships, we cannot manage the Relationship because, at the end of the day, it is the Customer who has the power! What needs to be understood is that it is the "unique" value of the exchange that keeps the relationship alive and enhances it. This leads us to the second myth or should we say misunderstanding surrounding CRM.

2. The Purpose Of CRM. Contrary to common belief, Customer Relationship Management is not Customer Satisfaction Management in a new design, supported by the latest technology. Customer Satisfaction Management has become redundant: Research in the US and here shows that the percentage of satisfied customers who intend to stay with a firm can be as low as 21%!

The reality is that CRM is about creating value, both for the customer and for the company. In their excellent book, Treacy and Wiersema** highlight three ways of achieving this: Product Leadership, Operational Excellence or Customer Intimacy. CRM enables companies who do not have Product Leadership to combine Operational Excellence and Customer Intimacy to create value.

3. The Notion Of Value. In many Managers' minds, the notion of value (for the Customer or the Company) is often very diffuse. The fact that one is supposedly better than the competitor is often regarded as proof of value to the customer. "It's really not very good value our competitor is offering, because it does not include a lot of our features" said several European Airlines CEO's, when the likes of Ryanair and EasyJet entered the market. How wrong they were!

Value: The Customer's Perspective. The reality is that customer value is in the beholder's eyes, or more accurately in the customer's mind. To understand what customers value, Managers need to look away from satisfaction as the main driver of customer retention. They need to assess value creation from two different perspectives: A Problem solving dimension and a Relationship Experience dimension. In the Problem Solving Dimension, Unique Value creation starts at a point in space and time, which is beyond the augmented product (product with all the whistles and bells). It is based on a conceptual solution with up to four main characteristics or a mixture of them:

The concept is Customer centric: The customer is part of the solution.

The product part of the concept is easy to use and cost efficient

The concept involves professional advice: Everything is done to help the customer succeed in his endeavours.

The concept is perceived as Leading Edge.

In the Relationship Experience dimension, Unique Value creation starts at a point in time beyond confidence building. It is based on a safe and trustful experience that relies on respect, honesty and fairness.

Figure 1: Value Creation from a Customer's Perspective

Value: The Company's Perspective. In many Managers' minds, the belief is still there today that every customer must be kept, no matter the cost to the organization, even if it means at a loss!

Another belief is that those customers with the highest turnover and highest profit margin are the strategically most significant customers for the company.

The reality is that while this maybe true from a short term accounting point of view (the assessment is based on historic figures), it might not necessarily be true from a long-term relationship perspective, when the assessment takes into account the PLTV (Potential Life Time Value) for each of these customers.

The Potential Life Time Value of a particular customer is a summary of the net present value of this customer in terms of future contributions to profits. CRM offers several techniques, either based on analysis of historic accounting data (allocation of revenues and costs for each event i.e.: enquiry, order, delivery etc. in the customer life cycle) or on analysis of future customer intentions. This author favors the later (analysis of future intentions) because of its future orientated approach. After all, PLTV value is created in the customer's mind and is therefore intangible. Whatever the method, what the firm needs to do is to determine who are the customers who generate a positive value in the portfolio and those who do not generate any value at all or a negative value. It is the sum of these value positions that will determine the value of the portfolio.

A "healthy" portfolio consists solely of customers with positive values, whereas an "unhealthy" portfolio contains many "negative value" customers.
An "ambivalent" portfolio contains many customers who have a "love-hate" perception of the firm, either in the way in which the firm solves their problems or in the way in which it relates to them.

Figure 2: Value Creation from a Company's Perspective.

Value Assessment Of Your Customer Portfolio. CRM Analytical techniques help a company to assess the asset value of its Customer Portfolio. The worth of its existing Portfolio will help it determine how much it needs to spend to recruit new customers. The higher the asset value, the less the firm will have to spend on recruiting new customers. The firm also needs to measure the return on investment of its customer asset. It has invested substantial amounts in order to retain its customers and needs to know what return this investment gives. This will help it to determine who are its most profitable customers and what to do with its unprofitable customers.

4. Focus Of CRM. "Keep your customers happy and you will keep them for life" seems to remain the main belief of companies investing in a CRM strategy. Reality has changed. Keeping customers happy is obviously one of the ways of ensuring that they stay with you. But there are other more influential drivers to customer retention. Consequently, the focus of CRM must be widened much further to really unlock the potential of a company's customer base and maximize profit contribution.

Focus On Customer Relationship Quality: Customer Relationship Quality is the assessment made by your customers of the overall quality of the firm's products or services (benefits and pricing), customer satisfaction (general assessment of what the firm does), leading edge (comparison with its competitors), service performance (reliability, responsiveness, customer care), trust and relationship commitment.

Focus On Internal Relationship Quality: Your Customer Portfolio's worth is determined by factors that are internal to the firm. Our research suggests that there is a strong positive correlation between the Customer Portfolio's "health" and the Organization's "health". In other words a "healthy" Organisation goes often hand in hand with a "healthy" Customer Portfolio. Firms have the employees and customers that they deserve!

5. CRM Technologies Are The Solution. For many companies, an investment in CRM Technology is seen as the ideal solution to effective Customer Relationship Management.
Reality is that CRM Technologies: Implementation CRM, Analytical CRM and Collaborative CRM, are not a solution in themselves, despite what CRM software houses tell you. They are efficient tools that can help you in many ways to analyse, implement and manage the quality of your Customer Relationships. Like a joker, if properly used, they will enhance your customers, employees and suppliers' trust, securing a long-term co-operation (read profitability) with your company. Badly played, they will have a detrimental effect on your company's profitability. Customers are becoming annoyed by the results of profiling, employees are stressed due to lack of proper CRM technology training, and the list could go on…

The CRM concept is here to stay, but it means that Companies need to re-examine their way of thinking and their approach to products, customers, employees, suppliers and other stakeholders. CRM implies a strategic culture change with its consequences, positive and negative. CRM Technology can help implement and analyse this change process, but we need to remember that Relationships are above all the result of interactions between people.

About Dr. Pierre Chenet:
Dr. Pierre Chenet is one of the founders and director of Deep-insight, an analytical CRM consultancy. He is also an Associate Faculty member at the Irish Management Institute in Dublin, where he lectures in CRM.

About Deep Insight:
Company LogoDeep-insight Ltd responds to the growing need for analytical Customer Relationship Management (CRM) solutions. The company is a low cost, web based, CRM quality assessment solution provider to the business to business market.
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Today's Tip of the Day - Measuring Performance

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Published: Monday, January 13, 2003

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