Courtesey of RightNow Technologies
Executive Summary - Turning Theory Into Reality
Customer relationship management (CRM) gained recognition in the mid-1990s, primarily driven by its perception as information technology (IT). However, not enough attention has been given to the fundamental drivers of CRM success: strategy, metrics and the organization.
Successful CRM is about competing in the relationship dimension—not as an alternative to having a competitive product or reasonable price—but as a differentiator. If your competitors are doing the same thing you are (as they generally are), product and price won't give you a long-term, sustainable competitive advantage. But if you can get an edge based on how customers feel about your company, it's a much stickier—sustainable—relationship over the long haul. The purpose of this white paper is to take a fresh perspective on how successful CRM really works. The essence is that you can dramatically improve your chances of getting an ROI from your CRM initiative by following three simple steps: 1) Understand the value your customer wants, 2) deliver that value profitably and 3) repeat.
Simplistic? Perhaps. But that doesn't mean it's easy. Most companies have entrenched ways of doing things, focusing on products, rather than customers. Organization inertia and self-interest are also to blame. As GE's former CEO Jack Welch said in 2000, "Bureaucracies love to focus inward. It's not that they dislike customers; they just don't find them as interesting as themselves."
In this white paper, you'll learn why listening to the voice of the customer is so crucial to CRM success—and how genuine customer loyalty impacts corporate profitability. You'll also find out what the latest research indicates about the gap between potential and actual CRM benefits, and the four key drivers of ROI for CRM projects. Plus, you'll learn the unvarnished "truth" about CRM success and failure, minus both the positive and negative spin sometimes promoted by vendors, consultants, analysts and the media.
The bottom line, though, can be summarized as follows:
CRM can work as a differentiating business strategy. CRM delivers a return on investment for two out of three projects. CRM produces solid short-term returns but lags in providing full strategic benefits. CRM success starts with putting customer interests first. Period. Said another way, you can succeed with CRM by being SMART: Define a customer-centric Strategy; use appropriate Metrics; ensure your organization is Aligned with your objectives; Redesign work processes as needed; and use appropriate Technology tools as enablers. But it all starts by putting your customers first and creating a better relationship with them than your competitors offer.
Differentiate or Else
At a conference in London in May 2004, business strategy guru Michael Porter delivered a simple but powerful message: Effective business strategy means being distinctive. How? Business strategy experts say that you can differentiate based on: 1) the core product/service offering, 2) the price or total cost of ownership or 3) the total relationship and customer experience.
Staying ahead of competitors solely through product leadership is becoming more and more difficult. In an interview with Fast Company, Porter stated, "It's arrogant for a company to believe it can deliver the same sort of product that its rivals do and actually do better for very long. That's especially true today, when the flow of information and capital is incredibly fast."
It's also painfully obvious that every business in an industry can't compete using the same cost/price model. Generally only one or two companies can achieve the scale and efficiencies necessary to compete based on low price and profitably sustain this strategy over the long term. Would you like to start a price war with Wal-Mart?
The Rise of Relationship-Based Differentiation
CRM is a business strategy to acquire, grow and retain profitable customer relationships, with the goal of creating a sustainable competitive advantage. Product/price-based differentiation is waning because of four broad trends: maturing markets, global trade, efficient manufacturing and the Internet.
Now CRM is emerging as a critical strategy simply because relationships are coming to the forefront of the competitive battleground. CRM should mean creating mutual wins for customers and all the company stakeholders, including employees and business partners. It's just common sense. Would you willingly continue to do business with a company if you didn't feel you were a "winner" in the relationship?
In Customers Are People: The Human Touch, author Jon McKean states that in competitive markets, where customers have a choice between similar products and pricing, "Seventy percent of customer decision-making is based on how customers are treated." Yet paradoxically, McKean continues on to say that his research finds: "Over 80 percent of customer initiatives are focused on how to 'sell the customer better' through matching products to customers, rather than investing more resources in treating customers better."
Does relationship-based differentiation really work? Tesco thinks so. With humble beginnings as yet another low-cost grocery retailer in the U.K. market, Tesco has grown into the market leader in a few short years by using data-driven customer insight to manage millions of relationships, creating a loyal bond. If you investigate the success of IBM in computer technology, Nordstrom in retail clothing, HSBC in banking, Ritz Carlton in hotels and Singapore Airlines in air travel, you'll find that all of these companies turned customer relationships into a differentiator. Visit - RightNow Technologies for related articles
Loyalty and the Bottom Line
Frederick Reichheld, author of The Loyalty Effect and Loyalty Rules, found that loyalty leaders grow, on average, more than twice as fast as the industry average across a wide variety of industries. And they do it more cost-effectively. The reason for this so-called "loyalty effect" is that loyal customers tend to spend more, cost less to serve and refer others.
The net result is that loyalty leaders are head and shoulders above their competitors in growth and profitability. Leading examples, according to Reichheld, range from Harley Davidson to Chick-fil-A to Enterprise Rent-A-Car.
The key question: How does a company create loyal relationships? And remember, we're talking about relationships where customers have real choices. Don't include monopolist industries (as is the case with some utilities or government services) or customers "trapped" behind high exit barriers (such as database software or factory equipment that can't be easily replaced).
Reichheld and other loyalty experts have studied this issue for years and concluded that loyal attitudes and behavior are driven by the customer's perception of value, which is an amalgamation of what the customer receives; how it's sold, delivered and supported; and how much it costs—the price or total cost of ownership. Experts in customer psychology say that customers' emotional states influence about 50 percent of the value they perceive. Jim Barnes, author of Secrets of Customer Relationship Management: It's All About How You Make Them Feel, sums it up by saying, "Value is created every time a customer is made to feel welcome, important and valued."
Simple Metric, Powerful Insight
Loyalty guru Reichheld has found one simple metric to be highly related to growth in most industries: the willingness of a customer to recommend the company (supplier or brand) to a friend or colleague. Using a 0 to 10 scale, a "net promoter" score is calculated by taking the percentage of customers giving the company a score of 9 or 10 ("promoters") and subtracting the percentage giving the company a score of 6 or below ("detractors").
For example, over the past three years, Southwest Airline's net promoter score was two to five times higher than its major competitors. During that same period, Southwest grew at about 5 percent per year, while the rest of the industry was in decline.
In a Bristol Group/CRMGuru study in 2003, Southwest had a "recommendation" rating of 67 percent, meaning that two-thirds of respondents said that they were highly likely to recommend the airline to their friends and colleagues. This was more than double the industry average and nearly seven times higher than struggling United. This referral behavior is a key reason why loyalty matters: Genuine feelings of loyalty drive referral behavior (think "free marketing") to propel growth-and do so very cost—effectively.
Over the past decade, the American Customer Satisfaction Index (ACSI), an organization supported in part by the University of Michigan Business School, has emerged as a valuable source of consumer insight. The ACSI model links customer expectations, perceived quality and perceived value to an overall score (ACSI), which, in turn, is linked to consequences such as customer complaints and loyalty. ACSI leaders—those in the top 50 percent in ACSI rankings—have been able to build market value more rapidly over the past decade. A case in point is Southwest, which has made more profit and created more market (stock) value over the past decade than the rest of the airline industry combined. Any way you slice it, achieving high levels of customer satisfaction and loyalty compared to your competition is a powerful engine for growth and profitability.
The Customer View of Value
To be successful with CRM, you must start by understanding your customers and do the best job you can of listening to their needs. As Michael Dell said in his book, Direct From Dell: Strategies That Revolutionized an Industry, "If you're constantly getting feedback from your customers, and you're willing to listen, you can make the most of the opportunities implicit in those needs."
In CRMGuru's research, customers speaking about a great relationship use terms that imply the relationship is win-win. Only about 20 percent of the time do customers talk about the functionality of the product or service*#151;or about the price. There seems to be an implicit assumption that these are competitive but not differentiating factors. Common phrases used to describe loyal supplier relationships include:
Gerald Zaltman, professor of marketing at Harvard Business School and author of How Customers Think: Essential Insights into the Mind of the Market, reached similar conclusions from a massive study of consumer behavior. He found that similar phrases emerged from consumer interviews about their "ideal company," such as: "I want it to be easy, pain-free"; "they (the supplier) want to take care of their customers"; and "I like the teamwork and cooperation."
Are your customers saying these things about your company? Every company has happy and loyal customers. Learn from them! Ask your most loyal customers why they continue to do business with your company. You may be surprised how seldom your customers mention your product/service or price. Learn what they do value, then work with other not-so-loyal customers to find how to get them to feel the same way.
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Success or Failure
The ideas behind customer relationship management are not new. Today it’s widely acknowledged that how you treat your customers goes a long way to determining your future profitability, and companies are making bigger and bigger investments to do just that. Customers are savvier about the service they should be getting and are voting with their wallets based on the experience they receive.
Customer relationship management (CRM) is a business strategy to acquire and retain the most valuable customer relationships. CRM requires a customer-centric business philosophy and culture to support effective marketing, sales, and service processes. CRM applications can enable effective customer relationship management, provided that an enterprise has the right leadership, strategy, and
So why has CRM bulled its way to a billion-dollar industry? Bottom line: Power has shifted to customers, who stand astride three powerful currents:
The failure of enterprise resource (ERP) planning systems to bestow a lasting competitive advantage for companies. Your back office is fully automated? Nice. So? The cycle of innovation-to-production-to-obsolescence has accelerated, leading to an abundance of options for customers and a shrinking market window for vendors. Internet-surfing customers have a far easier time collecting information about competing suppliers, and can switch to another vendor at the click of a mouse.
With product advantages reduced or neutralized in many industries due to increased “commoditization,” the customer relationship itself is the focus of competitive advantage. For more complex businesses, the neighborhood boutique approach is impractical. CRM technology enables a systematic way of managing customer relationships on a larger scale.