Customer relationship management is in its infancy and barely toddling. Yet in order for CRM to properly mature, metrics that conclusively prove CRM success or failure within enterprises must be developed and accepted. Currently, the majority of CRM implementations lack standard metrics, which has led to the perception that CRM is ineffective:

• Gartner Group estimates that as much as 60 percent of all CRM installations fail to meet their goal. (Interactive Week 2001)

• Meta Group reports that 70 percent of CRM projects fail "to live up to expectation." (CommWeb.com 2001)

To understand how to measure CRM, it's important to understand what CRM is, or is not. For example, CRM is not just software, nor is it a product. Rather, CRM is an ongoing, iterative process that utilizes technological systems to capture the knowledge of all customer-facing touch points in an enterprise. Those technologies include data warehousing, online analytical processing, data mining, marketing automation, and various front-office applications like sales force and call center automation.

While a CRM infrastructure is complex, the CRM dynamic is elegantly simple. It is essentially a four-stage cycle of analyzing detailed customer data, strategizing sales and marketing plans based on what's learned from data analysis, and properly executing creative campaigns during customer interactions. The data derived from those interactions then feeds successive rounds of even better analysis, campaign planning, and new interactions.

Figure 1 — Gráfica.e.CRM

• CRM is a business strategy in which everyone in the enterprise is focused on the customer and all processes and systems are built with this concept in mind.

• CRM uses technology to synchronize customer relationships across communication channels, business functions, and audiences to improve the customer experience. (Source: Forrester Research, Inc.)

This new way of conducting business requires new metrical approaches to understanding success and failure, and the metric best suited for proving the efficacy of CRM is customer equity.

Although there are many internal and external metrics by which CRM can be measured, this paper seeks to define customer equity as the best metric to gauge the marketing communications success or failure of a CRM implementation. This paper will also identify several time-based, event-driven approaches to measuring customer equity, as well as relationship equity, the component of customer equity most dramatically influenced by CRM.

The New Metric: Customer Equity

Companies need to focus on a new measure — one that reflects the value of their customer relationships. The new value is "customer equity" and the contribution it makes to future growth prospects. Customer equity is comprised of brand equity and relationship equity.

Traditionally, companies have invested in branding to create a positive impression of the brand and lock it into the long-term memory so the customer would draw on that memory when the interaction with the brand's category occurred. That image of consistent quality tied to the physical attributes of the product and/or service and the specific emotional attributes or benefits needs to be seared in the customer's mind. At its core is the commitment to deliver against the promise of value. Relationship equity is the value of the individual customer experience, derived from interactions with the company. It is the way the company fulfills its brand promise.

At each and every touch point — Web, direct mail, email, sales force, among others — the company has the opportunity to demonstrate this commitment. If the individual's experience is consistent, the value is enforced, and the emotional attachment with the experience is positive, then relationship equity will also contribute to repeat purchases.

Relationship Equity Is Tangible and Measurable

Customer equity is the inherent value represented by a company's brand and its customer relationships. It can be expressed mathematically as:

Customer Equity = Brand Equity + Relationship Equity

With 24/7 access to an infinite amount of information available on the Web, even the most loyal customers will make fast comparisons through advanced technology, which means that brand equity can change quickly for the worse.

Also from an empirical standpoint, brand equity is difficult to measure. Traditional advertisers champion brand equity because it, like the mass advertising most often used to create it, relies on methods that approximate success, and is therefore hard to refute. Those methods include, but are not limited to, awareness surveys that benchmark brand recall or focus groups that gather qualitative research used to refine products and services, as well as the requisite messaging for promotional campaigns. Granted, such inexact measures are valid; companies would not advertise via vast broadcast and print media if they felt that advertising did not serve to build awareness and bolster brand equity. However, even the strongest brands have realized through economic downturns, unexpected competition, disastrous crises, instantaneous information, and internal mismanagement that no brand is impervious to harm, and therefore brand equity alone cannot carry the day.

Relationship equity is less of a chimera than brand equity. It evolved from the need to establish measurable relationships between brands and customers. Relationship equity is derived from recognizing individual patterns of consumption and tracking those patterns using CRM technology, which allows marketers to adjust spending to reflect customer potential and worth based on preferences expressed by customers rather than inferences made about customers.

CRM is the overarching process by which relationship equity data can be collected, calculated, and subsequently applied to optimize the value of customers and prospects via an informed, closed-loop marketing communications system. Without CRM, a holistic view of a company's relationship equity with its customers (at both aggregate and individual levels) would be impossible to attain. Instead, a company will be left to rely on "tried yet not quite true" metrics that vaguely justify non-measurable marketing communications. Simply put, in a customer-centric economy, companies without knowledge of relationship equity are putting their future in peril.

Who's Measuring What?

Worldwide spending for CRM is estimated to reach $148 billion by 2005 (crmindustry.com). So despite, or perhaps because of, an uncertain economy, leading companies are focusing on understanding and retaining existing customers and leveraging those relationships through CRM.

Why will CRM survive and more than likely help reverse the recession? Because CRM allows marketers to do more with less of a budget, which is the required recipe for success in today's marketplace. For example, Mercer Management Consulting conducted a survey of 50 Fortune 500 marketing executives prior to the current economic slowdown.

The results indicate that, by 2005, traditional advertising and promotion will continue to play an important, but considerably less dominant, role in the overall marketing mix … . By 2003, marketing expenditures associated with the Internet, direct mail, and customer service [channels that are easily integrated in a CRM environment] are expected to increase by 180 percent, 27 percent, and 10 percent, respectively, relative to the marketing mix of 2000.

The bottom line is that CRM allows businesses to operate according to the dictates of the bottom line. For example, according to the Harvard Business Review, U.S. companies lose half of their customers every five years. For a more industry-specific example, a study by First Manhattan Consulting Group revealed that a large bank had learned that 20 percent of its customers contributed to 150 percent of its profits, which meant that 40 to 50 percent of the bank's customers eliminated 50 percent of the profits. (See sidebar for an additional financial services example.)

A carefully implemented CRM program can help correct such problems by developing a relationship between firm and customer that brings value to both parties. This in turn creates customer loyalty nurtured by the firm over time. Research shows that a 5 percent reduction in customer defections can result in a 25 to 100 percent increase in profits (cyberatlas.internet.com), which makes it clear that there is equity in maintaining long-term customer relationships.

Financial Services Findings from Peppers and Rogers

Consumers who rate their primary financial services provider high on relationship management are less likely to switch providers. This effect is especially pronounced for deposit products. One fourth of consumers (26 percent) who rate their primary financial services provider as poor on relationship management attributes say they are likely to switch away one or more products during the next 12 months. But only 1 percent of consumers who rate their financial services provider high on relationship management say they are likely to switch away products.

The financial implications of these findings are staggering. Using a conservative average annual profitability of $100 per household for U.S. retail banks, a reduction in attrition of 9 percent represents over $700 million in incremental profits for all U.S. households with accounts. If an individual financial institution with 20,000 customers can reduce attrition by 9 percentage points by providing excellent relationship management (e.g., recognizing returning customers, anticipating their needs, etc.), that institution can increase profits by $180,000. For a similar-sized financial institution with an average household profitability of $500, the increase in profitability climbs to $900,000.²

CRM Opinions Vary

Unfortunately, there is certainly no agreement in the CRM industry, by vendors or end-users, on how to measure the success or failure of a CRM implementation. For any highly customizable CRM application, each enterprise must develop its own objectives, baseline, and metrics for success. However, many of the experts hardly agree on even a standard approach.

Robert Caruso of Nextera thinks that ROI for a CRM application is exceedingly difficult to measure: "The ROI for these types of implementations are extremely unpredictable until after the project is executed, and a high percentage of the projects are never fully executed."

On the other hand, Steve Pratt, global leader of Deloitte Consulting's CRM practice, says, "It is absolutely essential to understand ROI for a CRM application, but it is a different measurement than what companies are doing in their IT analysis." Companies are starting to view technology investments in a new light.

Augie MacCurrach, CTO of DiaLogos, notes:

Few companies are trying to justify technology efforts on cost savings because we know from 20 years of experience that those cost savings almost never materialize. Whatever efficiencies we created with enterprise resource planning (ERP) were largely offset by a totally new set of costs that probably incrementally added to the cost infrastructure.

To further complicate the CRM ROI scenario, automating closed-loop marketing functions can lead to efficiencies in media delivery and data feedback, but the success of the campaign is also reliant on people, not just processes. As noted in my previously published white paper, "Marketing Leadership in the Planning and Implementation of Customer Relationship Management": Because front-office systems (sales, marketing, customer service) involve the real-time management of human relationships, they are consequently more complex, dynamic, and require continual intervention to direct and redirect processes and outcomes.

So if a marketer fails to identify the optimal audience, provide an appropriate offer, or create a targeted sales message, there is no guarantee that any particular CRM application will immediately show a positive ROI.

The key, then, is to consistently provide high-quality service and personalized interactions, irrespective of the channel the customer chooses. Two internal obstacles typically undermine companies' efforts to provide personalized customer interactions. Companies either fail to develop the skills and technologies to enhance the various interaction channels (i.e., Web, phone, direct mail, or field sales force) that are preferred by their customers, or they fail to knit the various channels together to provide a consistent customer experience.

To overcome these obstacles, companies must seamlessly integrate all customer interactions across multiple channels to offer anytime, anywhere access — a critical component of competitive differentiation.

Again the recommendation here is to measure customer equity achieved through CRM practices, a phenomenon that does not take place overnight and must be observed through a variety of time-based and event-driven metrics.

CLV, CAV, and Equity Ratios

There are methods available to score customer equity. Several formulas factor in time as a key variable, which makes sense for two reasons. First, time — and data — is what it takes for a company to develop a meaningful, mutually advantageous relationship with customers; and second, because CRM, like any technology investment, will ultimately be judged by how quickly ROI can be proved. Again, the paradoxical relationship between CRM and customer equity must be restated and underscored: CRM makes customer equity metrics possible, and the attainment of customer equity metrics cost-justify CRM.

Currently, the three best ways to measure customer equity are customer lifetime value (CLV), customer annual value (CAV), and the ratio between the two, which is known as the equity ratio.

CLV represents the present value of future sales to a customer net the costs of attracting, serving, and retaining him/her, including the cost of capital employed to do so. In other words, one will estimate the amount of purchases a customer will make in the future, over a period of time, less the cost of marketing. (CLV equals the future sales of a customer minus the costs of marketing to a customer.) Put in terms of customer X: FSx — CMx = CLVx

The total of those estimated purchases must be discounted appropriately to reflect the fact that money earned in the future is worth less today. For forecasting purposes, CLV could be critical, but anything in the future involves speculation, and therefore CLV must be categorized as an intelligent projection, assuming that the data used to make that projection is valid; i.e., CRM-derived.

Another less-speculative, highly valuable measure is CAV, the present sales contribution to date net the costs of attracting and serving that customer. Put in terms of customer X: Sx — CMx = CAVx.

Gerry McDonough of Booth Morgan Consulting contends:

Any organization exclusively focused on customer lifetime value (CLV) to the neglect of customer annual value (CAV), could theoretically, ‘go bust by maximizing net present value….After all, you can't maximize long-term shareholder value on a platform of short-term bankruptcy

He provides this highly insightful hypothetical retail-banking example:

University students might be highly profitable customers in the future, but shareholders should not be asked to subsidize them in the interim….I would want to see empirical evidence that these young customers are willing to stay with the bank, how long it takes for the relationship to turn profitable, and exactly what the organization is doing to minimize economic losses in the meantime. Information acquired through customer listening systems, transactional behavior, and stock-and-flow analysis would produce such evidence.

The integration of the systems cited by McDonough can only take place through CRM. The various customer-facing channels must be connected to the same data repository, and the analytic CRM tool within that database must be able to provide the most current, most comprehensive portrait of each and every customer. In doing so, the system enables marketers to then take action to positively influence the CAV, which, broadly, could mean marketing more stringently to customer X or deciding to decrease the marketing effort to customer X and reallocate budget to more lucrative customers.

A third customer equity metric that can help a marketer make budget allocation decisions has been suggested by Keith Allan, a marketing information manager contributing to crm-forum.com. Allan advocates the ratio of CLV and CAV, more commonly known as the equity ratio, which in terms of customer X would be expressed as: CLVx/CAVx = Equity Ratio of x

If you calculate the relationship of future over current value, the higher the value, the more intense your investment in that customer should be, unless other factors are known. For example, if customer A has $10 in future value and $50 in current value, the equity ratio is 0.2. Or if customer B has $100 in future value and $20 in current value, his equity ratio is 5. Customer B represents the highest equity value to the company, and marketing investment in retention should be focused here. Allan e-commented on crm-forum.com about what he calls his lifetime value (LTV) metric:

LTV…is the MOST useful metric you can have on a customer…if you get it halfway right! The way that I have LTV scored in the base is three metrics broken out. Current value, which is how much that customer has contributed (net) to date, [and] NPV which is future net earnings. I also have a calculated measure, which is a ratio between the two. The ratio keeps you honest and stops you throwing away too much money or indeed not enough to manage the customer.

Firms serious about customer-centric strategies will embrace these new metrics for decision-making over time. These types of measures support a focus on customer behavior rather than products or cost savings. They will give marketers benchmarks to set costs for acquiring and maintaining customers. And finally, by assigning a value to customer equity on a corporate level and tracking it over time, these metrics will provide an indicator for the success of aggregate marketing and CRM investments.

Event-Driven Measurement

One of the challenges of CRM is its complexity and amorphous nature. If you ask anyone exactly what CRM is, you will get a large variety of answers. On a macro level, CRM is a customer-centric process, but on a micro level, it could be sales force automation (SFA), marketing automation, customer interaction centers (CIC), data warehousing, enterprise resource planning (ERP), online customer self-service, e-commerce, or any combination thereof.

Vendors who sell CRM software — Siebel, E.piphany, Oracle, SAP, MarketFirst — may claim to provide solutions for any one or all of the above. Yet software itself only enables CRM; it does NOT automatically make CRM happen. For example, to effectively accomplish CRM, you must capture the customer/prospect data being collected from employees, salespeople, agents, brokers, and resellers, to name a few; consolidate and analyze that data; then create appropriately customized creative and messaging delivered through media channels self-selected by customers and prospects. Additionally, this system must be ongoing and iterative, which means that CRM never stops and constantly evolves. Simply put: it's getting the right message to the right person at the right time using the right media. And there's not a single software product around that can create and sustain such a closed-loop marketing system without a CRM-savvy marketing team.

Yet because marketing is often overlooked in terms of directing CRM implementations, corporations mistakenly ascribe the responsibility of measuring CRM to different departments with different objectives. So depending on where you reside in a corporation, the application of CRM to your department might have completely different functions and processes compared to another department.

Of course, the successful implementation of an enterprise-wide CRM (eCRM) application is the ultimate objective. However, large-scale implementations so far have often proven overly ambitious in terms of cost and less-than-remarkable in terms of impact across organizations. Such poor performance has given voice to internal and external cynics whose expressions of contempt for CRM do little to advance CRM progress.

To counteract the troubles and the troublemakers inevitably encountered during a massive CRM implementation, we recommend a step-by-step approach to implementing CRM, if only for the relative ease with which customer equity measurements can be obtained.

In its 2001 white paper titled "Turn Around Your Stalled CRM Implementation," the Peppers and Rogers Group supports a slower, more steady rollout of CRM:

Too many companies have oversold the benefits of an implementation in and of itself. Though quick ROI is definitely achievable (a well-conceived program, for example, streamlines interactions with customers and more effectively allocates resources), the real benefits of CRM are of a longer-term strategic nature…adopting CRM in one giant leap is like trying to boil the ocean — it's too great a task for any organization.

Tactical Evidence

We advocate a roadmap to change based on a company's most urgent needs, and then an application-by-application implementation of CRM with a focus on achieving corresponding measurable results event by event. In time, successful organizations will have a collective and singular vision of the customer across the enterprise and will be able to carefully execute at the tactical level. This approach has been proven by a variety of success stories in the press that surround specific, well-executed CRM applications:

• Comshare now has a Web-based self-service component that allows customers to search for product information and view the status of their orders online. This has eliminated about 7,000 calls per month to Comshare's helpline.¹

• Fingerhut has added CRM software additions to its marketing operations. The company notes that each addition allows the creation of new customer models, which increases response rates by 4 to 5 percent.¹

• Technology provider Global Risk Exchange is generating a 24 percent response rate for its first email campaign since it scrapped direct mail contact with customers in the spring…63 percent of the respondents were converted into customers.¹

Closer to home, with respect to email marketing, Gráfica.eCRM Corporation has led several clients down the path of successful migration from direct mail to email, and the results have included reduced production cycles, increased response rates, and decreased costs.

Client A: Data Services

Campaign description: Migrated subscribers from traditional newsletter to an e-newsletter for better tracking and reporting, and, in turn, better sales leads based on superior data.

Figure 2 — Data Services Client

Client B: Telecommunications

Campaign description: Increased the number of online registrants for a telecommunications service, which decreased call center workload and increased profit.

Figure 3 — Telecommunications Client

Client C: Financial

Campaign description: Promoted new financial service offer using permission-based emails rather than traditional direct mail to targets that opted-in and expressed email as their channel preference.

Figure 4 — Financial Client

Eventually, the sum of the parts of an event-driven CRM implementation will produce a unified eCRM state, and the aforementioned time-based customer equity metrics can be applied. In the meantime, the metrics contained in these tables represent concrete relationship equity values obtainable through CRM-based email marketing.

The Relationship Equity of Email Marketing

When you recall the basic formula for customer equity (Customer Equity = Brand Equity + Relationship Equity), it's obvious how even one successful CRM event can affect customer equity. Nonetheless, it's important to focus on the metrics used to measure a CRM event, and email marketing, which by its very nature contains inherent tracking and analytical capabilities, remains the best tactic for compiling data about customer relationships. To clarify, email marketing needs to be clearly distinguished from spam. Reputable email marketers must take extreme measures to include opt-out provisioning in their campaigns. Those nefarious spam artists who do not practice permission-based email marketing are "killing the goose that laid the golden egg," according to Ruth Stevens, NYU marketing professor.

According to Forrester Research, the click-through rate on permission-based emails to house lists is a whopping 10 percent, three times greater than that rendered from a rented list.

Figure 5 — How Successful are your email campaigns? (All figures are medians except percentages of email budget for acquisitions and retention, which are averages. Based on interviews with email marketing managers from 22 traditional companies and 28 internet pure plays.) Source: Forrester Research, Inc.

Despite the annoyance of spam, statistics reinforce the increasing popularity of permission-based email marketing as a channel of choice for a number of firms. "Mergers and acquisitions among email marketers and the development of CRM services will spur 41 percent annual growth in the email marketing industry to $3.5 billion by 2005, up from $910 million in 2001," according to the Winterberry Group. "Permission-based commercial email accounts for about 10 percent of the 300 billion messages sent today. By 2005, it is expected to account for about 25 percent of 600 billion messages."³

An IMT Strategies report revealed that "most consumers feel that permission email is ‘good marketing.' " The same research group also showed that consumers are far more likely to respond more frequently to permission-based email rather than spam.

Email budgets are shifting from "spray & pray" acquisition email campaigns to personalized retention campaigns delivered to an opt-in member base. eMarketer reports that just over 63 percent of email dollars are spent on retention, with the remainder supporting acquisition efforts. Email campaigns featuring surveys and interactive dialogue are frequently used to maintain relationships with at-risk customers.

Furthermore, email goes beyond other tactics in that it enables marketers to establish dialogues with customers and prospects, creating and building upon relationships, and generating consumer loyalty and trust. Marketers' interest in email is tied to their budgets: email pays off in terms of ROI, especially when used to nurture relationships with customers through personalized, permission-based email campaigns.

Figure 6 — Most Consumer Feel that Permission Email is “Good Marketing”
Source: IMT Strategies, 1999; based on a survey of 403 adult internet users.

Figure 7 — Frequency of Response to Permission vs. Spam Emails (in percent) Source: IMT Strategies, 1999

Figure 8 — Bricks-and-Mortar Loyalty through Email (in percent)

There are many reasons for the popularity of email marketing, but none is more attractive than cost savings. "No marketing communications medium exists that is more targetable, customizable, and more flexible than email," said Jonathan Jackson, a senior analyst at eMarketer. "Email direct marketing, when done correctly, can overcome the limitations of traditional direct marketing by offering limitless targeting ability at pennies per email and allow marketers to have one-on-one conversations with their customers." In fact, the average cost per email message in the United States is less than 1 cent, compared with $1 to $3 for telemarketing and 75 cents to $2 for direct mail.

Figure 9 — Building Loyalty Less Costly with Email

Figure 10 — Email Lowers Customer Retention Costs

Figure 11 — Source: Jupiter Communications, 2000

Other reasons marketers look toward email campaigns include real-time decision-making and flexibility that can immediately improve campaign results. Online campaigns can be monitored in real time to measure effectiveness. Responses from one wave can be analyzed and modified within the same campaign. Finally, the immediacy of the medium lets marketers take quick action on emerging opportunities to optimize ROI.

An ROI model for an email marketing campaign is basically the same as for any strategic marketing program. A basic requirement is accurate customer information and behavioral data captured over time. There are a variety of vital measurements for Web site and email marketing that include hard and soft data reports, such as:

According to a report by Boldfish, "Beyond Email Marketing: Achieving Exponential ROI via Business Integrated Messaging,"

Email is capable of going beyond this type of marketing focus. It is capable of delivering information, which, until the broad reach of Internet email, was impossible to disseminate in any other way. Business-integrated messaging has the capability of being event-driven. The integration of email and other business systems can trigger emails that ultimately increase your ROI and significantly impact your company's bottom line.

Figure 12 shows how the use of high-volume email has evolved over time and how this evolution has improved the ROI that users have received by using this powerful communications medium.

Figure 12 — Source: Boldfish

All metrics considered, email marketing is the fastest, most efficient way to test the CRM waters. Before corporations and organizations attempt to integrate any front-and back-office systems, ERP, SFA, and CIC functions — extremely complex and bureaucratically challenging endeavors — they should get their email house lists in order and begin to "talk" to their customers via email. The results, as indicated above, can be staggering, but most importantly, the results provide a glimpse into relationship equity, the metric most immediately influenced by CRM. In today's tightening economy, when marketers are charged with providing an E:R analysis of their campaigns, such data could save their company, not to mention their jobs!

Conclusion

Clearly, CRM is here to stay, but like the toddler it is, CRM will not stay put. Its direction, for better or worse, depends on how effectively the truest practitioners can prove its statistical significance. And the best statistic will be customer equity.

This white paper presented several ways to calculate customer equity, as well as more pointed tactics for arriving at relationship equity (half of customer equity) through permission-based email marketing. The metrics advocated here fall into two broad categories: time-based and event-driven. Selecting these measurements or others should be determined on an individual, business-case basis. The ideas presented here are not meant to be exhaustive. The intent, rather, was to identify practical means for measuring CRM.

Without CRM philosophy properly infused into a business strategy, then analytically tracked and measured, few companies will be able to survive, let alone succeed, in an economy controlled by customers. CRM welcomes and facilitates that paradigm shift by literally putting customers first, which makes measuring customer equity possible today. As for tomorrow, the metrics we strain to identify now will give way to even more valuable and obvious measures revealing even more insight into customer behavior. Ironically, the potential of CRM in the future will be, in a word, immeasurable.

Endnotes

¹ Email Marketing Weekly 2001

² Source: The Practice of CRM at Financial Services Firms by Peppers and Rogers Group and Financial Services Marketing magazine.

³ iMarketing News 2001