Basic Marketing Concepts Demystified! – Part Two: Customer Relationship Management

Marketing October 29, 2013

Why Sustainable Marketing is Relational — not Transactional

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One mistake many inexperienced entrepreneurs and managers make is to look at business from a purely transactional (one-time exchange) perspective. A large part of a marketer’s job — some would argue the main part– is to cultivate relationships.

Of course, relationships are a two-way street. You can’t force relationships to develop, and the vast majority of your customers will make purchases with a purely transactional intent.

Why Manage Customer Relationships?

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Customers with a transactional intent will typically comprise roughly 80% of any businesses’s clientele, following the Pareto Principle. If this is the case, why bother managing customer relationships? Why cater to that other 20%?

Following the same principle,  that same 20% will be typically responsible for around  80% of your sales. This slideshare, while made from a narrower advertising perspective, illustrates why it’s important to consider interactions with customers as opportunities to develop relationships, instead of  as just a way to get more sales.

Keeping track of the habits of thousands, if not millions of customers is a huge challenge. Attempting to systematically develop long-lasting relationships even more so. It is however, worthwhile for several very good reasons.

A good Customer Relationship Management strategy will:

  • Create a stable flow of income.
  • Create a positive impression of your brand.
  • Turn customers with otherwise negative experiences into advocates.
  • Allow you to gather customer information that would be unobtainable without a CRM strategy.
  • Reduce your dependence on additional manpower for external sales and promotion. New customers will come to you from outside the scope of your direct promotions.
  • Increase the positive impression given via word-of-mouth.  Not all word-of-mouth is good for you!
  • Speed up customer decisions, allowing more to be served per unit of time. Increased trust from good CRM will reduce time spent waffling on details.
  • Help you retain existing customers
  • Increase opportunities for joint ventures and promotions with other highly regarded brands.
  • Increase sales!
  • Ultimately reduce the cost of each sale.
  • Improve long-term profitability.

 

What counts as transactional or relational?

This is infinitely debatable, but common answers that contrast the two include:

Transactional Relational
professional friendly
self-interest mutual interest
understand processes understand people
win conflict resolve conflict

 

Of course, you aren’t in business to develop relationships– you’re in business to earn a profit. A relational approach is desirable in most businesses for many reasons, but it always needs to be done with the intent of closing sales. An overly soft approach might leave you without any.

The Sales Process

The first step to a systematic, trackable CRM system is to take a look at your sales process. At casual glance, a sale would seem like just an exchange of one thing of value for another.  But there are actually several things going on in any transaction.

In Management of a Sales Force by Rich, Spiro and Stanton, a sale is broken down into the following steps.

  1. Prospecting /First contact
  2. Planning the sale
  3. Approach
  4. Customer needs assessment
  5. Presentation
  6. Meeting objections
  7. Gaining commitment
  8. Follow-up

Whether or not you believe in this model or another, more things are happening in any sale than a casual observer (or a casual entrepreneur) might expect. Each step is an opportunity for any CRM system, whether for directly improving customer experience, or for tracking and data analysis.

The Purchase Funnel

A Purchase funnel (also known as a Sales funnel, or a Decision funnel) is any of a number of different models that illustrate how a customer arrives at a decision.

Doesn’t have to be a purchase, necessarily. The funnel could be used to look at any of a number of customer actions, from participating in surveys, to sharing your promotions.

You might already have heard about the parts of a  classic purchase funnel. The AIDA modelwith acronym standing for  Awareness, Interest, Desire, and Action, is one of the most popular ways of explaining what goes on in a sale.

sales-funnel

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The idea has been misused and misunderstood a lot as well. Some business writers may omit the inverted pyramid or funnel concept altogether. But the shape actually illustrates that “acting” (i.e. paying) customers will always represent a small fraction of the people who are actually made aware of your product or service.

There are always fewer people taking action compared to those who merely desire to take action. There are always fewer people who desire your product than are merely interested in it. There are always fewer people interested in your product than people who are merely aware of it.

While not a perfect way of saying things, it might be useful to think of it this way: A marketer’s job would then be to widen each stage of the funnel. Widening on top implies increasing your reach, widening the middle or bottom implies higher conversion rates.  Indeed, this pathway is often called the chain of conversion.

Customer Lifecycle Management

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Speaking of the chain of conversion, the Customer Lifecycle refers to the measurement of customer behavior as they move through that chain, as well as subsequent interactions over time. Customer Lifecycle Management involves controlling factors that influence customer behavior as they interact with your business, hopefully leading to positive outcomes for your business (repeat sales, better branding, etc.)

A simplified customer lifecycle is often represented as:

  • Acquisition – When someone first becomes a customer.
  • Service – When goods are exchanged.
  • Retention - When a customer comes back for another transaction.

Customer Lifecycle Management is often confused with Customer Relationship Management, or CRM. They are mostly similar, except CLM involves the element of time.

The Customer Buying Window

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The “buying window” or “purchase window” is a period of time when:

  • A product or service is available or will be available in the forseeable future.
  • Customers have already made the decision to purchase that product/service.
  • No sale or exchange has been made… yet.

This means that your customers are at the “action” stage of the purchase funnel, or are at least getting there. It does not necessarily mean that they have decided to buy your product in particular. Staple items such as office supplies for instance, are not usually purchased based on brand as much as they are for function, cost, and availability.

As soon as the decision has been made, it’s a marketer’s job is to make it as simple as possible for customers to get what they already want. Reduce the number of steps they must go through before they could make a purchase. Make sure not to confuse them with extraneous options.

Some things to consider:

  • Customer buying windows are extremely variable, ranging from a matter of moments (impulse purchases) to years (i.e. real estate, some preordered tech items).  Up until recently, Google Adwords measured conversions (purchases and opt-ins) using a 30-day period, but recently (and extremely belatedly) have allowed customization from 7 to 90 days to reflect this wide variability.
  • Different marketing channels  and products motivate  in different ways . You are more likely to buy food when you close enough to smell it, for example. On the other hand, banking services are typically less of a hassle online than they are in the real world. You might feel a less immediate need to buy clothes distributed online than you would in a brick and mortar store.
  • You control product availability. Limited time or distribution offers give customers a sense of urgency or exclusivity. These can be tied in to promotions and branding. Luxury or aspirational brands for example, benefit to some degree by not being readily available. Limiting availability can also be used to test new products as well as drum up support for your brand.
  • A good sales team is indispensable! Your salespeople will often have firsthand experience about the market that is often unquantifiable or difficult to otherwise observe. Your customers will also often develop relationships with your salespeople- not necessarily your brand. It’s crucial that your salesforce understands the goals and the intent of your CRM strategies and are a part of your marketing campaign planning process as well.

Customer Lifetime Value

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Customer lifetime value (CLV) (or  CLTV), lifetime customer value (LCV), or user lifetime value (ULTV) or lifetime value (LTV) is a prediction of revenue and sometimes intangible value a customer gives over the course of their relationship with a seller/provider.

Customer lifetime value should not be confused with customer profitability which is a purely historical view, without future projections.

There are several good reasons for tracking customer lifetime value:

  • To determine differences between different kinds of customers
  • To allow better allocation of resources according to types of customers, especially for promotions and retention programs
  • To provide a better idea of how CRM programs are running
  • To give an accurate idea of customer acquisitions costs and how to reduce them
  • Gives business managers a long-term view of customer behavior, necessary for stable growth

There are no real disadvantages at all for tracking customer lifetime value. However, it is easy to misinterpret data or use the wrong models if there is a lack of understanding with regards to market context.

There are several ways of calculating lifetime value. It would not be feasible to create accurate models for every possible combination of product, customer, and future outcomes.

Here are some of the more popular inputs:

  • Churn rate 
  • Retention rate
  • Discount rate
  • Interest rate
  • Inflation rate
  • Contribution margin
  • Gross Contribution
  • Retention cost
  • Period

Examples of different formulas for calculating customer lifetime value:

  • Where \text{GC} is yearly gross contribution per customer, \text{M} is retention costs per customer per year, n is the horizon in years, r is the yearly retention rate, d is the yearly discount rate.

\text{CLV}  = \text{GC} \cdot \sum_{i=0}^n \frac{r^i}{(1+d)^i} - \text{M} \cdot \sum_{i=1}^n \frac{r^{i-1}}{(1+d)^{i-0.5}}

One of the more popular simplified versions:

  • Assume constants for contribution margin, retention rate, and discount rates.

\text{CLV} = \text{GC} \cdot (\frac{1+d}{1+d-r})

And others:

  • CLV = Margin ($) * (Retention Rate (%) ÷ [1 + Discount Rate (%) - Retention Rate (%)])
  • CLV = (Average Value of a Sale) *(Number of Repeat Transactions)*(Average Retention Time in Months or Years for a Typical Customer)
  • CLV = (Avg Monthly Revenue per Customer * Gross Margin per Customer) ÷ Monthly Churn Rate
  • CLV = (latest month’s Average Order Value) * ( [lifetime AOV] / [AOV]) * (Gross Margin)

Why so many formulas? 

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Customer Lifetime Value is dynamic, and the required inputs will likely change over time. Formulas should be chosen or developed in the context of your products, environment and Customer Relations Management strategy. The  Marketing Accountability Standards Board does not officially endorse any method for calculating customer lifetime value for this and many other reasons.

CLV should not be the sole factor for making decisions on marketing strategy for the following reasons.

  • Intangible values and differences in demographic behavior are difficult to include as inputs
  • Serving only “high-value” customers might lead marketing strategists to neglect opportunities to convert other customers.
  • The risk of saturating high-value customer is high (they cannot buy an infinite number of cars, donuts, etc)
  • The nature of product-customer-seller relationships is often difficult, if not impossible to accurately predict.

Why Your Approach to CRM May Be Wrong

There is much confusion about the role CRM plays in businesses, given the non-standardization of terms and methods, and the amount of data gathering and analysis that takes place.

Despite the extensive demands it puts on number-crunching, Customer Relationship Management is by no means an exact science and it is a mistake to treat it as such.

CRM, like most marketing practices, should also be seen as an art, and from both hard and soft science perspectives. A purely numbers-based approach has been the downfall of many attempts at CRM.

Once this is understood, it’s clear that a balanced, rational CRM strategy and prudent execution – as opposed to blindly following set processes – is needed not only for repeat business, better branding, and customer satisfaction, but for sustainable growth as well.

What’s your approach to Customer Relations Management?

Other parts of our Basic Marketing Concepts series!

The Marketing Mix: The 4 P’s of Marketing

Demand Generation 

The Sales Process

The Purchase Funnel 

 

Sources

  1. Barry, Thomas. 1987. The Development of the Hierarchy of Effects: An Historical Perspective. Current Issues and Research in Advertising, 251-295.
  2. A modern purchase funnel concept – Marketing-made-simple.com (2009)
  3. The customer decision journey – McKinsey Quarterly(2009)
  4. “The salesman should visualize his whole problem of developing the sales steps as the forcing by compression of a broad and general concept of facts through a funnel which produces the specific and favorable consideration of one fact. The process is continually from the general to the specific, and the visualizing of the funnel has helped many salesmen to lead a costumer from Attention to Interest, and beyond” (p. 109).
  5. salesboom.com/whitepapers/what_is_clm_whitepaper.pdf
  6.  Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN 0137058292. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear inMarketing Metrics as part of its ongoing Common Language: Marketing Activities and Metrics Project.
  7. Shaw, R. and M. Stone (1988). Database Marketing, Gower, London.
  8.  Peppers, D., and M. Rogers (1997). Enterprise One to One: Tools for Competing in the Interactive Age. New York: Currency Doubleday.
  9.  Hanssens, D., and D. Parcheta (forthcoming). “Application of Customer Lifetime Value (CLV) to Fast-Moving Consumer Goods.”
  10.  Ryals, L. (2008). Managing Customers Profitably. ISBN 978-0-470-06063-6. p.85.
  11. Berger, P. D. and Nasr, N. I. (1998), “Customer lifetime value: Marketing models and applications.” Journal of Interactive Marketing, 12: 17–30. doi:10.1002/(SICI)1520-6653(199824)12:1<17::AID-DIR3>3.0.CO;2-K
  12. Adapted from “Customer Profitability and Lifetime Value,” HBS Note 503-019.
  13.  Gary Cokins (2009). Performance Management: Integrating Strategy Execution, Methodologies, Risk and Analytics. ISBN 978-0-470-44998-1. p. 177
  14. V. Kumar (2008). Customer Lifetime Value. ISBN 978-1-60198-156-1. p. 6

Image Sources

Window: The Uprooted Photographer via photopin cc
Formula: trindade.joao via photopin cc
Haggle: TheeErin via photopin cc
Service: Lynn (Gracie’s mom) via photopin cc
Quote: deeplifequotes via photopin cc
Transaction CarbonNYC via photopin cc

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