Customer Pyramid: A Proven CRM Strategy by mThink, October 5, 2004 Customer marketing is a business method that uses process control techniques to measure, manage and improve customer performance and customer focus. Seventy percent of CRM projects fail to deliver positive results. The trade press and analysts have been repeating this fact for a number of years. But is it true? CRMGuru, a CRM portal, decided to find out. It commissioned a rigorous study of more than 600 CRM implementation projects and concluded that: 45 percent of the CRM implementation projects delivered a positive ROI; 20 percent of the CRM implementation projects were earning profits, with a full payback and ROI likely; and The remaining 35 percent of the CRM implementation projects were not likely to show any ROI largely because these failures were self-inflicted, with the companies not implementing what the study showed to be the critical success factors of CRM. And what were these critical success factors? There were four found to be statistically relevant: 1. The company must follow customer centric strategies, including the use of customer satisfaction data, tracking numbers of customers gained or lost and installation of voice of the customer programs. (This factor was clearly the most important.) 2. Intensive training and coaching of front-line managers and staff. 3. The ability to manage change. 4. Establishing measurable goals. Despite the claims of CRM software suppliers, the choice of a CRM package made no difference. Highly publicized and heavily promoted packages did not gain any more ROI than lesser-known competitors. The conclusion: CEOs must first develop customer centric programs as the highest priority when considering CRM for their companies. Customer marketing is one of these strategies. The Short History Of Customer Marketing I originated customer marketing in 1989 as an American direct marketing consultant based in Amsterdam. For several years I had been confronted with a lot of confusion and negative attitudes about direct marketing among European CEOs. When invited in 1989 to present a seminar on direct marketing to a high-level audience, I decided to resolve the issue completely. I declared that direct marketing was actually customer marketing, the process of finding, making, keeping, and developing customers. And I demonstrated the concept with customer pyramids and a simple 10-step action plan. Encouraged by the response of the audience, I elaborated the concept in my first book, Customer Marketing, which was published in the Netherlands, the United Kingdom, Germany, Spain, Italy, Japan and China. In 1997 the European Commission, recognizing the innovative character of customer marketing, funded project ACUMAP A Customer Marketing Pilot, designed to validate the method and support the development of software, tools, and training materials that could help European companies maintain a competitive advantage. The ACUMAP project was successfully completed in June 1998, which resulted in a validated method to help companies implement and profit from what is now known as customer relationship management. Since early in 2000, Customer Marketing International BV, based in Amsterdam, has brought to market the customer marketing method and tools. The Definition Of Customer Marketing Customer marketing is a business method that uses process control techniques to measure, manage, and improve customer performance and customer focus. The customer performance factors are: Customer profitability; Customer behavior; and Customer satisfaction. The internal customer focus factors are: Organization; Communications; and Information. The customer marketing method is represented graphically in a pyramid (see Figure 1). Lets look at this in more detail. The Customer Performance Factors Customer Value Operational profit is the result of deducting the losses from unprofitable customers from the profit generated from profitable customers. Its as simple as that. Hence the need to maximize customer profitability, as measured in profit per customer and customer lifetime value. Customer Behavior While cost factors play an important role in the profitability of a customer, customer value is, to a large extent, determined by customer behavior. Customer behavior is usually measured in terms of revenue either monetary or volume of product or services ordered over a period of time. Positive customer behavior means, in the first place, that a customer is a customer he buys from you. A second customer behavior parameter is customer lifetime, or the average length of time as measured in months or years that the average customer does business with you. A third and important customer behavior factor is share of customer: the extent to which a customer meets his needs for the kinds of products or services by doing business with you. Customer Satisfaction Happy and satisfied customers behave in a positive manner. They will buy a lot from you and will give you a large share of their business. Customer satisfaction is derived largely from the quality and reliability of your products and services. You make good on your explicit and implied promises. But customers who are just satisfied are likely to walk away for a slightly more attractive proposition from your competitor. The major goal of a customer satisfaction program should be to achieve preferred supplier status with as many customers as possible. The Customer Focus Factors Customer performance customer value, customer behavior, and customer satisfaction is something that happens outside the company. But customer performance is predominantly determined by customer focus factors inside the company and has a major impact on customer performance. There are three primary and six secondary customer focus factors: Organization 1. Managers are committed to customer focus, set an example for themselves, and budget time and money for customer process improvement. 2. Employees possess the necessary customer care skills and experience, have a customer care attitude, and work in teams with others who have customer contacts. Communications 3. Contact logistics: Customer communications are well planned, on time, and have no sloppiness in execution. 4. The most appropriate methods, media and messages are applied to each customer (segment); communications are interactive and stress customer benefits rather than product features. Information 5. Customer data is relevant, complete and up to date. 6. Customer information systems are effective, flexible, and userfriendly. There is clearly a direct correlation between customer focus and customer performance. All things being equal, if you can improve your customer focus, you will improve customer performance. Putting customer performance and customer focus together brings us to a CRM model. The model represents the idea that if your internal customer focus is strong, your customers will be very satisfied. And if your customers are very satisfied, they will behave very nicely, giving you a large part of their business, often without any major marketing and sales effort or squeezing every cent off the price. (Send me another thousand widgets and the invoice.) This positive customer behavior will lead to higher customer value and therefore more operational profit! Its quite a simple concept. But if you cant measure the factors in the CRM model, you cant manage them. There is a whole group of professionals out there measuring your profits the accountants. But is anyone measuring customer profitability, customer behavior, customer satisfaction, and customer focus so that they can be managed and improved? The answer all too often is: not really. Thats why process control techniques are also needed. Process Control Techniques Managing customer performance and customer focus is not really possible without measuring progress and results. Marketing, sales, and service must be subjected to the same process control techniques that are often used for production, logistics, and administration: Customer marketing is carried out on a continuing basis applying the four phases of process control: Registration Customer performance registration: You acquire or integrate from internal sources data on customer profitability, behavior, and satisfaction. Customer focus registration: You undertake a customer focus audit or self-assessment of your customer information, communications, and organization. Analysis Customer performance analysis: You analyze the profitability, behavior, and satisfaction of your customers and prospects to identify problems and opportunities. Customer focus analysis: You analyze the current status of your customer information, communications, and organization and identify priorities for improvement. Planning Customer performance planning: You set top-down/bottom-up profitability, revenue and satisfaction targets for each customer (and prospect) that, when realized, will meet corporate goals for profitability, revenues, and satisfaction. Customer focus planning: You make plans to make measurable improvements in your customer information, communications and organization. Realization Customer performance realization: You execute customer performance plans. Customer focus realization: You execute customer focus plans. You may well be thinking that customer marketing looks great, in theory. But does it work in the real world? Telecom Company Case Study The customer marketing case study illustrated in Figure 2 was a pilot project at the regional office of a national telecom company. The pilot region was responsible for marketing and sales of telephone services to small and medium-size businesses. Because the European Commission funded the pilot, the results were closely followed and highly documented. Customer Value Despite the entrance of competition because of deregulation, traffic revenues in the pilot region increased by no less than 22 percent. But marketing costs remained about the same as the previous year, leading to a sharp growth in profits. Customer Behavior All of the 7,248 customers in the pilot region were identified and their behavior traced. It was thus possible to see that the increased turnover was the result of improved customer behavior: 27.7 percent (2,013) of the customers migrated up the pyramid; only 2.1 percent (150) went down, and 70 percent (5,085) remained in their pyramid position. Customer Satisfaction The percentage of highly satisfied customers in the pilot region had doubled after one year of customer marketing. The pilot region scored substantially higher than the national company. Filed under: Article, CRM Project, Customer Experience, Knowledge, Marketing