Customer Relationship Management (CRM)

Department of Marketing
University of Dhaka
Dhaka-1000
BANGLADESH
Recommended Text Book

Managing Customer Relationships

......................................
A Strategic Framework

Don Peppers
Martha Rogers

John Wiley & Sons, Inc.

Chapter-1
Evolution of Relationships with Customers

We have only two sources of competitive advantage:

1. The ability to learn more about our customers faster than the competition.
2. The ability to turn that learning into action faster than the competition.
—Jack Welch, former CEO, General Electric

Learning Objectives of the Chapter

To understand-
Roots of Customer Relationship Management
What Is a Relationship?
What Is Customer Relationship Management?
Stages in implementing a CRM system

Introduction
The dynamics of the customer-enterprise relationship have changed dramatically over
time. Customers have always been at the heart of an enterprise’s long-term growth
strategies, marketing and sales efforts, product development, labor and resource
allocation, and overall profitability directives.

For many years, enterprises depended on gaining the competitive advantage from the best
brands. Brands have been untouchable, immutable, and inflexible parts of the twentieth-
century mass marketing era. But in the interactive era of the twenty-first century,
enterprises are instead strategizing how to gain sustainable competitive advantage from
the information they gather about customers.

Interest in customer relationship management (CRM) began to grow in 1990s (Ling and
Yen, 2001; Xu et al. , 2002). Regardless of the size of an organization, businesses are still
motivated to adopt CRM to create and manage the relationships with their customers
more effectively. An enhanced relationship with one’s customers can ultimately lead to
greater customer loyalty and retention and, also, profitability. In addition, the rapid
growth of the internet and its associated technologies has greatly increased the
opportunities for marketing and has transformed the way relationships between
companies and their customers are managed (Bauer et al., 2002).

ROOTS OF CUSTOMER RELATIONSHIP MANAGEMENT

The goal of every enterprise, once you strip away all the activities that keep everybody
busy every day, is simply to get, keep, and grow customers. Whether a business focuses
its efforts on product innovation, operational efficiency and low price, or customer
intimacy, that firm must have customers. What does it mean for an enterprise to focus on
its customers as the key to competitive advantage? It does mean using new strategies,
nearly always requiring new technologies, to focus on growing the value of the company
by deliberately and strategically growing the value of the customer base.
It’s about increasing the value of the company through specific customer strategies (see
Exhibit 1.1). Enterprises determined to build successful and profitable customer
relationships understand that the process of becoming an enterprise focused on building
its value by building customer value doesn’t begin with installing technology, but instead
begins with:
• A strategy or an ongoing process that helps transform the enterprise from a focus on
traditional selling or manufacturing to a customer focus, while increasing revenues and
profits.
• The leadership and commitment necessary to cascade the thinking and decision-making
capability throughout the organization that puts customer value and relationships first.

EXHIBIT 1.1 Increasing the Value of the Customer Base

■ Acquire profitable customers. GET

■ Retain profitable customers longer.

■ Win back profitable customers. KEEP
■ Eliminate unprofitable customers.

■ Upsell additional products in a solution.

■ Cross-sell other products to customers. GROW
■ Referral and word-of-mouth benefits.
■ Reduce service and operational costs.
----------------------------------------------------------------------------------------------------------
Ref.: Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (New York;
Addison-Wesley, 1995).

What Is Customer Relationship Management?

Although CRM has become widely recognized as an important business approach, there
is no universally accepted definition of CRM. Swift (2001, p. 12) defined CRM as an
“enterprise approach to understanding and influencing customer behaviour through
meaningful communications in order to improve customer acquisition, customer
retention, customer loyalty, and customer profitability”. Kincaid (2003, p. 41) viewed
CRM as “the strategic use of information, processes, technology, and people to manage
the customer’s relationship with your company (Marketing, Sales, Services, and Support)
across the whole customer life cycle”. Parvatiyar and Sheth (2001, p. 5) defined CRM as
“a comprehensive strategy and process of acquiring, retaining, and partnering with
selective customers to create superior value for the company and the customer. It
involves the integration of marketing, sales, customer service, and the supply-chain
functions of the organization to achieve greater efficiencies and effectiveness in
delivering customer value”. These definitions emphasize the importance of viewing CRM
as a comprehensive set of strategies for managing those relationships with customers that
relate to the overall process of marketing, sales, service, and support within the
organization. Moreover, information technology (IT) and information systems (IS) can be
used to support and integrate the CRM process to satisfy the needs of the customer.
To some executives, customer relationship management (CRM) is a technology or
software solution that helps track data and information about customers to enable better
customer service.
Others think of CRM, or one-to-one, as an elaborate marketing or customer service
discipline. We even recently heard CRM described as “personalized email.”
CRM can be thought of as a set of business practices designed, simply, to put an
enterprise into closer and closer touch with its customers, in order to learn more about
each one and to deliver greater and greater value to each one, with the overall goal of
making each one more valuable to the firm. It is an enterprise wide approach to
understanding and influencing customer behavior through meaningful communications to
improve customer acquisition, customer retention, and customer profitability.
CRM focuses on managing the relationship between a company and its current and
prospective customer base as a key to success.

Customer relationship management (CRM) emerged as an amalgamation of different

management and information system approaches, in particular relationship marketing and
technology-oriented approaches such as computer aided selling (CAS) and sales force
automation (SFA). Following Shaw (1999), we may define CRM as an interactive
process that achieves an optimum balance between corporate investments and the
satisfaction of customer needs to generate the maximum profit. It entails:
- measuring both inputs across all functions including marketing, sales and service costs
and outputs in terms of customer revenue, profit and value;
- acquiring and continuously updating knowledge on customer needs, motivations and
behavior over the lifetime of the relationship;
- applying customer knowledge to continuously improve performance through a process
of learning from successes and failures;
- integrating marketing, sales and service activities to achieve a common goal; the
implementation of appropriate systems to support customer knowledge acquisition,
sharing and the measurement of CRM effectiveness; and
- constantly contrasting the balance between marketing, sales, and service inputs with
changing customer needs in order to maximize profit.

The potential benefits of CRM thus include (i) enhanced customer retention and loyalty;
ii) the creation of value for customers; (iii) customization of products and services; and
(iv) increased customer-related profitability (Jutla et al. 2001; Lin and Su 2003; Lin et al.
2006; Stone et al. 1996).

Building the value of customers increases the value of the demand chain, the stream of
business that flows from the customer up through the retailer all the way to the
manufacturer. A customer-strategy enterprise interacts directly with an individual
customer. The customer tells the enterprise about how he would like to be served. Based
on this interaction, the enterprise, in turn, modifies its behavior with respect to this
particular customer. In essence, the concept implies a specific, one-customer-to-one-
enterprise relationship, as is the case when the customer’s input drives the enterprise’s
output for that particular customer.6
CRM has become a buzzword of late, and like all new initiatives, suffers when it is
poorly understood, improperly applied, and incorrectly measured and managed. The term
CRM is also known by other labels, coined by various experts in their respective fields,
such as integrated marketing communications (Don Schultz), one-to-one relationship
management (Don Peppers and Martha Rogers), realtime marketing (Regis McKenna),
customer intimacy (Michael Treacy and Fred Wiersema), and a variety of other terms.
Clearly, CRM involves much more than marketing, and it cannot deliver optimum return
on investment without integrating individual customer information into every corporate
function, from customer service, to production, logistics, and channel management. A
formal change in the organizational structure is usually necessary to become an enterprise
focused on growing customer value. As this book will show, CRM is both an operational
and an analytical process. Operational CRM focuses on the software installations and
the changes in process affecting the day-to-day operations of a firm. Analytical CRM
focuses on the strategic planning needed to build customer value, as well as the cultural,
measurement, and organizational changes required to implement that strategy
successfully. Big data

2.2 Stages in implementing a CRM system

The successful implementation of a CRM system requires specific actions on the part of
the organisation (Berndt et al. 2005). Various stages in this process have been suggested.

Peppers et al. (1999) proposed four phases in this process: (i) identify end-user customers
in detail (particularly their habits and preferences); (ii) differentiate them (on the basis of
their value to the firm and their own needs); (iii) interact with customers (through
affordable channels that yield more information about their value and needs); and (iv)
customise products and services (on the basis of what has been learnt). Yuan and Chang
(2001) identified three phases in implementing a CRM system: (i) integration (output-
centralised customer data from difference sources); (ii) analysis (a deeper understanding
of customer behaviour and needs); and (iii) action (a positive impact on customer
relationships). Winer (2001) proposed seven components in implementing CRM: (i)
creating a database of customer activity; (ii) analysing the database; (iii) considering
which customers to target; (iv) targeting the customers; (v) building relationships with the
targeted customers; (vi) respecting privacy issues with regard to customers’ information;
and (vii) measuring the success of the CRM programme.

In a model that finds favour with the current study, Kim et al. (2003) divided the
implementation of the CRM system into four stages:
• customer knowledge (CK);
• customer interaction (CI);
• customer satisfaction (CS); and
• customer value (CV).
ACSI American Customer Service Index
2.2.1 Customer knowledge (CK) phase
The success of an enterprise is determined by its ability to enhance relationships with its
customers by fulfilling their present needs and anticipating their prospective needs and
expectations (Chiu and Lin 2004; Gale 1990; Kandampully 1998). The ability of firms to
understand their customers is enhanced by appropriate resources, efficient technology
systems (including data warehousing and data mining) and effective knowledge
management.
A necessary first step in implementing a comprehensive CRM system is the construction
of an accurate customer database (Winer 2001). The application of data warehousing and
data mining to such a database enables firms to communicate with their customers in an
appropriate and personalised fashion, and to know the best time to present a particular
product or service to customers (Ohmae 2005).
Information technology has thus become an essential resource for organisations that wish
to provide appropriate services to customers, adapt to rapid market changes and reduce
time and cost in reaching their customers (Bianchi 2001). A CRM information system
must therefore be established. This should include a knowledge-management (KM)
system, together with hardware and software for various functions (including counter
operations, billing and reservations). In doing so, firms can make effective use of the
Internet and other tools of cyber technology for communications in all aspects of
managing the business.
According to Kim et al. (2003), the CK phase is an essential prerequisite if a firm is to
meet the present and future needs of customers and improve its management processes.
In this phase, the focus is on the use of technology to establish customer profiles and
understand their needs and expectations. The fundamental supporting systems established
in the CK phase are essential for the implementation of all other CRM processes. Once
established, these CK processes require ongoing development to ensure that they remain
relevant in future years.

2.2.2 Customer interaction (CI) phase

Customers perceive value and service quality at the time of the service encounter
(Fitzsimmons and Fitzsimmons 2004), and their evaluations of service quality also
involve evaluations of the process of service delivery (Babbar 1992; Ferguson and
Zawacki 1993; Gronroos 1982; Parasuraman et al. 1985; Wilson 1998). It is therefore
essential that service processes must be monitored and maintained at an optimum level of
performance. If necessary, the firm must take actions to improve or re-engineer the
processes to ensure that they are being performed in a satisfactory manner (as perceived
by the customers).
Empowerment of employees will assist in CS. If firms train their employees and enhance
their professional skills, and ensure that they are authorised to exercise their personal
authority in service delivery, such employees will serve customers more effectively and
solve their problems more quickly.
Customers’ evaluations of perceived quality and value are thus influenced by actual
encounters and real experiences of the offered service—which, in turn, are dependent on
the operations of service-provision processes. By adding service provision processes to
the ASCI model, the aim of the extended model proposed here is active pursuit of higher
perceived quality through operational excellence. By managing CI more effectively, a
company can create CV and operational excellence.

2.2.3 Customer perception (CP) phase

In the ACSI model, customer expectation represents a combination of the customer prior
consumption experience with the firm offering, non-experiential information available
(through sources such as advertising and word-of-mouth) and customer confidence in the
supplier ability to delivery quality in future (Fornell et al. 1996; Teas 1993). In addition,
perceived quality is the customer evaluation of the actual Conceptual analysis and
implementation of an integrated CRM system quality, as influenced by recent
consumption experiences (Fornell 1992; Fornell et al. 1996). Perceived value is defined
as the perceived level of product/service quality relative to the price paid (Disney 1999;
Fornell et al. 1996; Ostrom and Iacobucci 1995). Price and service quality are thus the
determinants of CV (value to customer) (Rao et al. 1996). Most consumers are price-
sensitive, and their perception of value is a relative judgment that takes into consideration
both the benefits obtained through a purchase and the costs entailed in gaining those
benefits (Ostrom and Iacobucci 1995).

2.2.4 Customer satisfaction (CS) phase

Customer satisfaction is a measure of how well a customer’s expectations are met by a
given transaction. Antecedents to CS include CK, service delivery and customer
interaction. It is thus apparent that the highest priorities for any service organisation must
be a thorough understanding of customer needs and expectations, effective control of
inputs and successful operation of the service-provision processes. Values that customer
perceived, CS and customer loyalty, are deemed to be distinct constructs but closely
related to one another in fact (Hau and Thuy 2012).
Because the CS phase represents the degree to which the service meets customer
expectations, the level of CS is significantly influenced by perceived value. In addition,
CS has a strongly positive effect on customer loyalty (Gronholdt et al. 2000), which can
be defined as the likelihood of a customer repurchasing and engaging in partnership
activities (Shoemaker and Lewis 1999).

2.2.5 Customer value (CV) phase

In the proposed model, the term ‘customer value’ refers to the value of the customer—
that is, the benefits that firms gain from loyal customers. CRM aims to enhance CS and
customer loyalty, with a view to increasing a firm revenue and profit (Kim et al. 2003).
Several researchers have recognised that enhanced customer loyalty and retention rates
lead to additional future purchases and increased future profits (Disney 1999; Eklof and
Westlund 1998; Kristensen et al. 2001). The extended model presented here aims to
accentuate the potential benefits of enhanced customer loyalty.

What makes CRM into a truly different model for doing business and competing in the
marketplace? It is an enterprise wide business strategy for achieving customer-specific
objectives by taking customer-specific actions. All businesses will be embracing CRM
sooner or later, with varying degrees of enthusiasm and success, for two primary reasons:
First, CRM represents the way customers, in all walks of life, in all industries, all over
the world, want to be served. Second, it is simply a more efficient way of doing business.
Chapter’s Sample Questions

1. What do you mean by CRM? Mention different dimensions of CRM

2. “CRM is an interactive process that achieves an optimum balance between
corporate investments and the satisfaction of customer needs to generate the
maximum profit.” Do you agree or disagree? What this statement entails?
Explain.
3. Discuss the roots of customer relationship management.
4. How will you define operational CRM and analytical CRM?
5. If you are asked to implement CRM what stages will you follow in implementing
a CRM system and why? Justify your answer.