Customer Relationship Management:A Database Approach

MARK 7397Spring 2007

James D. HessC.T. Bauer Professor of Marketing Science

375H Melcher Hall jhess@uh.edu713 743-4175

What is Marketing

• “Marketing is an organizational function and a set of processes for

creating, communicating and delivering value to customers and for

managing customer relationships in ways that benefit the

organization and its stakeholders.”

American Marketing Association,2004

What is Customer Relationship Management?

Customer relationship management (CRM) is a business strategy to identify, attract, convert and reward the most profitable customers to induce recurring exchanges with the business.

CRM requires a customer-centric business philosophy and culture to support effective marketing, sales, and service processes. It is not a software package for keeping track of customers although that facilitates CRM.

January 11, 2004

Reaping What They Sew By Purva Patel Staff Reporter of THE HOUSTON CHRONICLE

Hamilton Shirt Co. has outfitted Texans for more than 120 years.

But the custom-shirt maker has kept itself under wraps as it caters to an elite clientele of prominent businessmen, national news anchors and the well-heeled. The business advertised for the first time last November, by direct mail to select customers.

"There's a certain mystique about it," said David Lynn, manager for custom sales at Richards of Greenwich, a high-end luxury apparel store in Connecticut. "It's like a secret society."

Operating through both World Wars and numerous economic downturns, the company has survived by avoiding major alterations to the business and relying on brand exclusivity for four generations. Owner Jim Hamilton says he runs the shop the way his father and grandfather did. Shirts sell for $155 to $245 in Houston, and first-time buyers must purchase at least four. Behind the storefront on Richmond, sewing machines turn out about 75 shirts a day.

Bolts of fabric imported from Italian and Swiss mills line one wall, ironing tables another in the 3,100-square-foot factory. Some 20 pattern cutters and seamstresses snip, stitch and press the shirts, much like those who worked for Hamilton 's grandfather. Patterns are still hand-cut, side seams are still stitched with a single-needle sewing machine, and customers still talk to the owner as they did when the company opened, under the name Hamilton Bros.

Even the filing system is the same. Salesmen write out orders, tape on swatches of fabric and store them with patterns in manila envelopes. Hamilton estimates he has 30,000 patterns on file, of which 5,000 are active.

Hamilton hopes to eventually pass the business on to his children, who each own 5 percent of the company. His daughter, Kelly Hamilton , 28, handles marketing, helped develop the company's first brochure and hopes to set up a Web site. David Hamilton recently prompted his father to start taking credit cards and is working on a database for direct-mail efforts. When he looked at the company's alphabetical list of clients (more than 2,000 names long and predominantly male) and saw Frank Abignail at the top, the wheels started turning. Abignail was the recent subject of the hit movie "Catch Me If You Can" starring Leonardo DiCaprio as perhaps America's most famous check forger, who went on to become a famous FBI consultant. Recalls David: "I said, 'Dad, do we still take his checks? Maybe we better switch to credit cards.'“

David Hamilton is looking into developing custom software to encapsulate the company's customer database.

Link Between CRM and Database Marketing

Database Marketing

• Customer Databases

– Identify and analyze customer population

– Group based on similarities

– Recommend separate marketing campaigns for different groups

• CRM

– Applies database marketing techniques at customer level

– Develops strong company-to-customer relationships

Link Between CRM and Customer Value

• Customer Value: The economic value of the customer relationship to

the firm – expressed on the basis of contribution margin or net profit

• CRM is the practice of analyzing and utilizing marketing databases

and leveraging communication technologies to determine corporate

practices and methods that will maximize the lifetime value of each

individual customer to the firm

Changes with respect to Data Storage Technology

• Better technology, cheaper and larger storage units

• Huge increase in demand for data storage

• Increased popularity of data warehouses

Consequences

– Better information about customer behavior and attitudes

– Better prediction of customer buying behavior

– Too much data can lead to misapplication and wrong analysis

What should be in a customer database?

•Transactions – complete purchase history with details such as price paid, SKU, delivery date…•Customer Contacts – sales calls, service requests…•Descriptive Information – segmentation data•Response to Marketing Stimuli – responses to direct marketing initiative, sales contact…

What is a relational customer database?

Microsoft ACCESS example

CRM

RelationshipInitiation

RelationshipMaintenance

RelationshipTermination

Acquiringcustomers

Retainingand

growingcustomer base

“Firing”customers

(A) (B) (C)

CRM (A)

RelationshipInitiation

ProspectEvaluation

AcquisitionManagement

RecoveryManagement

CRM (B)

RelationshipMaintenance

CustomerEvaluation

RetentionManagement

Up-CrossSelling

Management

ReferralManagement

CRM (C)

RelationshipTermination

CustomerEvaluation

ExitManagement

American Customer Satisfaction Index

Declining Customer Satisfaction- Example

Household Appliances

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-3.5%

Scheduled Airlines

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-8.4%

Commercial Banks

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.7%

Parcel Delivery

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.5%

Personal Computers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-9.0%

Publishing/ Newspapers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-12.5%

(American Customer Satisfaction Index) with products and services

Source: http://www.theacsi.org, University of Michigan

Customer Satisfaction

• Basic assumption:– Satisfaction leads to loyalty– Loyalty leads to higher $$ spending– Higher $$ spending = greater profits

• Therefore: customer satisfaction is key!

• BUT: can satisfy customers right out of business

• Truth: “barely satisfied customers”

Customer Valuation

$/Call

Number of Customers

Call on

ContributionMargin

ServiceCost per Call

Angels Devils

Customer Behaviors

Perceptions

How are products distinguished (benefits or attributes)?

What is in the consideration set? Preferences

How important are attributes?

POSITIONING

Attribute 1

Att

ribut

e 2

PERCEPTUAL MAP

Brand 1Brand 3

Brand 4

Brand 2IdealVectors

Perceptions

Preferences

Why People Use a Product

Perceptual Maps

Suppose that the electrical transformers made by ABB and GE are distinguished based upon their Ease of installation and Spare parts. Specifically, (EA,SA) = (2,3), (EG,SG) = (1,5).

EFFECTIVENESS

GENTLENESS

1 2 3 4

1

2

3

4

5 Tylenol

Bayer

Figure1Perceptual Map

Ease of installation

Spare partsGE

ABB

• Land Rover Discovery • All SUV makes• Land Rover Discovery • All SUV makes

4 5 6 7 8

Luxurious

Value for money

Reasonably priced

Excellent MPG

Substitutes for car

Good interior room

Family use vehicle

Excellent cargo space

Easy to load

Easy enter/exit

Sporty looking

Good looking

Fun to drive

Rugged/tough

Riding/handling on/off road

Excellent towing capacity

Ride/handling highway

Excellent acceleration

Safe on/off road

Excellent workmanship

Dependablequality

safety

performance

off-roadcapability

aesthetics

comfort/convenience

economics

status/image

Item

s an

d F

acet

s

Attribute Rating Score

Perceptual Map Comparisons: Land Rover vs All SUVs

Attitudes toward brands based upon attributesU = wE Eb + wS Sb, for brand b, where wE and wS are the preference weights placed on Ease of installation and Spare parts. (wE,wS) is called the ideal vector*.

EFFECTIVENESS

GENTLENESS

1 2 3 4

1

2

3

4

5

Figure 4Preferences in Perceptual Map

1

- wE/wG

Ideal Vector

Indifference Curve

wE

wG

r

* It is ideal in the sense that were the attributes increase in this proportion, utility

would grow at its fastest rate.

Ease of installation

Spare parts

Ws

/ Ws

Combining perceived benefits and importanceweights provides explanation of buying behavior.

Ease of installation

Spare parts

GE

ABB

AB

ABB Electric Case

Conceptualizations of CRM

• Functional level: focuses on technology– Sales force automation in the sales function– Campaign management in the marketing function

• Customer facing front-end level: focuses on total customer experience– To build a single-view of customers across contact channels– To distribute customer intelligence to all customer-facing functions

• Strategy level: focuses on customer satisfaction– Frees CRM from technology underpinnings– Describes CRM as a process to implement customer centricity in

themarket and build shareholder value

– Knowledge about customers affects the entire organization

Summary

• From a strategic perspective, CRM is the process of selecting the

customers a firm can most profitably serve and shaping the

interactions between a company and these individual customers

• Assessing Customer Value is critical to CRM

• Rapid changes are taking place in the environment in which firms

operate with respect to customers, market places, technology, and

marketing functions

• These changes have driven the marketplace to become relationship-based and customer-centric

• CRM’s goal is to optimize the current and future value of the customers for the company