Class 1 KR 11-Introduction

Customer Relationship Management
Kellogg-Recanati MBA Program
May 2008
CRM-Dr. Barak Libai 1

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CRM-Dr. Barak Libai

BusinessWeek Oct 2000
2
For some, life is getting better
Roy Sharda, a Chicago Internet executive and road warrior is a ''platinum''

customer of Starwood Hotels & Resorts Worldwide. When he wanted to
propose to his girlfriend, Starwood's Sheraton Agra in India arranged entry
to the Taj Mahal after hours so he could pop the question in private.
Starwood also threw in a horse-drawn carriage, flowers, a personalized
meal, upgrades to the presidential suite, and a cheering reception line led
by the general manager. It's no wonder Sharda feels he was ''treated like
true royalty.''

Technology is creating a radical new“
business model that alters the whole
“ dynamic of customer service
And Marketing in general

Today
 Introduction to Customer Relationship Management – Some

major terms and thinking

A historical view of marketing
 The product is the center of the marketing

activity:
 Marketing mix: product, price, promotion, place
 Brand management and brand equity
 Emphasis on customer acquisition and market share

At the same time in thedirect marketing
industry
 To a large extent, the individual customer is the “unit of

analysis”:
 Knew who their customers are and what they buy
 Aimed to determine marketing communication based on past

purchases
 Tried to determine individual customer value

The 1990’s
 “Commodization”- stiffer competition and

weaker product- based differentiation lead
marketers to look for new sources of
competitive advantage
 Information systems- faster, cheaper, can

store more and collect more information
 Internet
 Service economy- we know who you are
 Initial findings from financial services- a high

concentration of profits
CRM-Dr. Barak among
Libai customers 10
The profit distribution of a west coast US bank

The result-
a move towardsthe customer as a unit of
analysis
”all of marketing started talking direct marketing“

At the end of the 1990’s a new buzzword appeared:
CRM (Customer Relationship Management)
To become one of the most important areas of attention for managers
The Economist,
April 7 2005

My definition of “Customer Relationship
Management “
■ The management of business processes whose aim

is to increase the long term profit of the firm’s
customers by proper management of customer
interactions at the individual customer level
■ A CRM policy should be typically supported by

information systems to enable data gathering and an
effective management of the individual customer’s
contacts with the organization
Yet, CRM is not merely a nick name for new kind of IT !!

A few points on the basics of Customer
Relationship Management:
• Individual customer level view
• And therefore share of wallet (or “share of customer”) and not only
market share

 Long range view: A relationship vs. a transaction
From: Loyalty Myths

”A focus on the ”customer lifecycle
A “product
centric” approach A “customer centric approach”
– the marketing
mix  Customer Acquisition
 Get new customers
•Product  Customer Development

•Price  Make more money from existing
customers
•Promotion
•Place  Customer Retention
 Retain existing customers
: Customers asassets
 Customers are not created equal
 A better understanding of the contribution of customers

(and marketing actions!) to the firm
 Closing the gap between marketing and finance
 Management of a “customer portfolio”

Customer Portfolio Product Portfolio

Customer Lifetime Value andCustomer
Equity as essential measures of marketing
Customer lifetime value- the expected Net Profit Value

from a customer
Customer Equity- The sum of customer lifetime values for a

certain segment, or the whole customer base

I will repeatedly argue through the course that the
.aim of firms is to maximize customer equity
 And almost every managerial decision should be considered

by this criteria
 Including branding, advertising, new product development , or Mergers

and Acquisitions

The road to customer equity
Customer
acquisitio
n
Customers’
profitability - Customer Custom Marketing
lifetime value developme er mix
and customer nt perceive
equity d value (4 P’s)
Customer
retention

?Is it relevant for all markets

The high potential of a CRM policy is often
discussed in the context of B2C markets
■ Because of the new ability to customize relationships

with a large number of customers
■ However, many B2B organizations have found that

their customer management practices are far from
optimal and work towards a better CRM practice

The same is true for manynon-for profits
 Health organizations such as hospitals

 Government agencies
 Charities
Fund Raising Management, Mar1999

I will largely use examples drawn from some
markets
 Such as cellular phones, banks, cable TV, insurance.
 These are market that most of us are familiar with as

customers, and for which much published data exists
 Yet, it does not imply the issues we discuss are irrelevant to other
markets!

An indication to the popularity of CRM-
the market for CRM information systems
 There is no clear definition of what is a “CRM system”
 An umbrella for many customer connection systems

including markets such as :Call center solution and Sales
force automation
 An integrative solution to CRM will aim to manage and

help analyze all customer related information throughout
the organization

 Due to the growing awareness to the power of
customer relationship management, the market for
CRM systems is large and is expected to continue to
grow.
 Yet there had been also reports of many (55% ? 70%)

failures in the implementations of CRM systems
 A possible reason is that firms focused on the

technology and did not understand the need for a
major change in strategy for a CRM process to
succeed, partly because managers don’t have
sufficient background on how and why customers
should be managed.
In the following classes we will discuss
 The analysis of customer profitability

 Value to the customer
 Customer Retention
 Customer Acquisition
 Customer Development Customer
acquisition
 CRM strategy
Customers’ Customer Customer
profitability - development Marketing
perceived mix
lifetime value value
and customer (4 P’s)
equity
Customer
retention

Some questions we will raise though the course
 Should the best deals go to new customers?

Some questions we will raise though the course
 Should we “fire” unprofitable customers?

 What should be taken into account when assessing the
profitability of customers?
 Are satisfaction surveys a good customer management tool?
 Why do satisfied customers defect?
 How do customer acquisition patterns for new products look

like?
 In what cases is a CRM emphasis more vital to success?

I hope to convince you that CRM is not just another three letter
managerial fad, but a real major topic of substance for today’s
managers, andis going to stay with us for the
foreseeable future
The Economist,
April 7 2005

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Customer Relationship Management

Kellogg-Recanati MBA Program

CRM-Dr. Barak Libai 1

CRM-Dr. Barak Libai

Roy Sharda, a Chicago Internet executive and road warrior is a ''platinum''

CRM-Dr. Barak Libai 5

And Marketing in general

CRM-Dr. Barak Libai 6

 Introduction to Customer Relationship Management – Some

CRM-Dr. Barak Libai 7

 The product is the center of the marketing

 Marketing mix: product, price, promotion, place

 Brand management and brand equity

 Emphasis on customer acquisition and market share

CRM-Dr. Barak Libai 8

 To a large extent, the individual customer is the “unit of

 Knew who their customers are and what they buy

 Aimed to determine marketing communication based on past

 Tried to determine individual customer value

CRM-Dr. Barak Libai 9

 “Commodization”- stiffer competition and

 Information systems- faster, cheaper, can

 Service economy- we know who you are

 Initial findings from financial services- a high

CRM-Dr. Barak Libai 11

”all of marketing started talking direct marketing“

CRM-Dr. Barak Libai 12

To become one of the most important areas of attention for managers

CRM-Dr. Barak Libai 13

■ The management of business processes whose aim

■ A CRM policy should be typically supported by

Yet, CRM is not merely a nick name for new kind of IT !!

CRM-Dr. Barak Libai 15

From: Loyalty Myths

CRM-Dr. Barak Libai 16

•Product  Customer Development

 Customers are not created equal

 A better understanding of the contribution of customers

 Management of a “customer portfolio”

CRM-Dr. Barak Libai 18

CRM-Dr. Barak Libai 19

Customer lifetime value- the expected Net Profit Value

Customer Equity- The sum of customer lifetime values for a

CRM-Dr. Barak Libai 20

 And almost every managerial decision should be considered

 Including branding, advertising, new product development , or Mergers

CRM-Dr. Barak Libai 21

CRM-Dr. Barak Libai 22

CRM-Dr. Barak Libai 23

■ Because of the new ability to customize relationships

■ However, many B2B organizations have found that

CRM-Dr. Barak Libai 24

 Health organizations such as hospitals

Fund Raising Management, Mar1999

 Such as cellular phones, banks, cable TV, insurance.

 These are market that most of us are familiar with as

CRM-Dr. Barak Libai 27

 There is no clear definition of what is a “CRM system”

 An umbrella for many customer connection systems

 An integrative solution to CRM will aim to manage and

CRM-Dr. Barak Libai 28

 Yet there had been also reports of many (55% ? 70%)