Today, most organizations have a philosophy about how they interact with their customers and more, their customers' customers. We have finally reached a point where CRM is not only considered in isolation, but is practised holistically, so that all of the divisions of an organisation, from production, to marketing, are able to add value to an approach designed to endear the customer to the company. When you consider the importance of understanding and meeting the needs of the customer, and doing it well, it is easy to understand why CRM has become an essential component of the corporate strategies identified by most senior executives.
Interestingly, out of 550 CEOs surveyed in a Conference Board study, 45 per cent identified customer loyalty as their key strategic issue, putting it first among all of the issues that were raised. However, another study by analyst firm Meta Group of the 50 largest end-users in the CRM market, demonstrated that 90 per cent of these CRM users were unable to measure a tangible return on their CRM measurement. This has become a key issue in appropriately deploying CRM initiatives and deciding a suitable level of investment in them.
Some of the key questions that executives need answers to include:
In their quest for good measurement metrics, companies have traditionally used financial metrics such as Internal Rate of Return (IRR), Net Present Value (NPV), Return on Investment (ROI). All of these techniques have obvious merits and could be easily used to relate to a CFO's requirements for hard figures. Unfortunately, they also require the use of an equation, which looks at the company in its entirety. This assumes that the company enters a fixed end state and has little reference to the impact of the company's action on its customer segments. Valuing CRM initiatives requires an iterative methodology, as the end-state is not always known in beginning of an assessment of those initiatives. Most of the traditional metrics do not accommodate the unknown factors associated with customer relationships and thereby may provide misleading information regarding the financial returns from a CRM initiative.
From my experience, a better method of evaluating CRM initiatives would be to measure their impact from an operational, customer and shareholder value perspective. The airline industry is currently a very good example of a sector that has a very comprehensive approach in using CRM to segment and manage its customer database. Customers can be moved up and down segments, and earn varying amounts of upgrade points depending on their frequency of flight, choice of airlines etc. This market is also a good example of where a customer can then be locked into a relationship with a specific company, as once you had earned a significant amount of upgrade points with one airline it is unlikely that you would switch to economy class in another. If the metric employed utilised the latest advances in corporate financial theory, then it would also need to be coupled to a practical set of tools and techniques to implement the CRM evaluation programme. The goal of any such evaluation programme should be to provide a company's management team with a common language for evaluating their CRM activities in both the planning and actual implementation of those initiatives
In order to meet this need in organisations, executives are in need of a methodology that evaluates, prioritises, selects and tracks specific CRM initiatives and the incremental value contribution to the various customer segments of the enterprise. For instance, a company with a discrete budget for CRM initiatives or with a tight timeframe in which to achieve certain results (e.g., increased customer profitability or decreased churn rate), could utilise a specific type of programme to identify those projects with the greatest return in the shortest amount of time. Also, such a programme should be flexible enough that it can double as a scenario-planning tool to rearrange the initiatives as economic and competitive market factors change.
Critically, I believe that it is also vital that any measurement tools employed by organisations should be able to assess the "time value" of a CRM initiative. The results of this full evaluation thinking can then be used in calculations to help executives make a decision on whether to execute their CRM initiatives. Essentially, this should enable a company to estimate the tradeoffs associated with executing an initiative immediately, as opposed to delaying implementation for a period of time. This ability to "weigh-up" the alternatives could identify the projected return from CRM initiative by translating customer-related operating and performance metrics into a quantifiable financial impact that could then be used to measure the incremental customer value contribution from those initiatives. A good example of this is when organisations trial a variety of different communications channels, such as email and SMS. Because of the nature of these mediums, it would be relatively easy for a company to be able to track the returns that they receive from this, and to reliably estimate the effect that these communications have on the customer relationship - meaning that the organisation can choose the most cost-effective method.
An underlying assumption relates to a company's ability to identify and isolate its key CRM drivers, enabling executives to identify those key drivers and factors that provide the greatest incremental value. This measurement should be based on financial levers derived from the operating variables of specific CRM initiatives, based upon those that a company would use to enhance customer loyalty. The inter-relationships among the various factors used to identify the progress of projects should be matched with the traditional measures of financial valuation, such as IRR, NPV and ROI. The principal drivers of the metric should include the revenue from customers, the probability of retaining those customers as well as the costs of acquiring and retaining those customers.
The objective of an analysis of an organisation's CRM initiatives is to measure the profitability of the company's customer segments and to calculate the extent to which identified CRM initiatives add incremental value to the targeted customer segments. As an example, it is likely that a company looking to evaluate its CRM programme would go through some - if not all - of the following stages:
If you can convince senior management to conduct a full analysis of its CRM programmes, they are likely to experience many benefits, including: being able to establish the value of customer segments targeted by certain initiatives and compare the incremental results from the initiatives against the baseline value; and through the quantification of business drivers, the analysis could establish several alternatives for investment in initiatives with the goal of preserving and enhancing customer value. In addition, a flexible customer-centred metric could be utilised by the Marketing function as a scenario-planning tool to rearrange project priorities when factors affecting the individual projects change. The analysis could be utilised to measure the contribution from different customer segments and estimate the incremental impact of CRM projects on overall shareholder value. This ultimately will enable many companies to put a return on that which, up to now, many believed as being completely in-quantifiable. But, as markets continue to become more competitive and consumers become increasingly fickle in their choices, companies have little choice but to continue in their efforts to develop their relationships. This means that CRM is here to stay, so its time for businesses to focus on this, quantify their results and ensure they are getting the maximum return on their investments.
About Sarah Faux:
Published: Tuesday, October 19, 2004
Contact Center Innovation Channel and Digital Transformation Enabler
Providing Research, Training and Consulting related to Customer Experience Delivery, support Project Management by Unit or Corporate.
Have the ability to conduct research for specific needs.
Having deep knowledge on the Digital Interaction/Contact Center / Omni Channel / CRM various Stakeholder and Emergency Response ecosystem in Indonesia.
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