Chapter 3: Customer Relationship Management Strategies for Business Markets

1. 0 Chapter 3: Customer Relationship Management Strategies for Business Markets

2. 0 Relationship Marketing • Establishing, • Developing, and • Maintaining successful exchanges with customers. Relationship Marketing centers on

3. History of CRM B&S RM CIMS CRM e-CRM Time line Late 80’s Early 90’s Mid 90’s 2002 - Future B&S – Buying & Selling RM – Relationship Marketing CIMS – Customer Information Management Systems CRM – Customer Relationship Management e-CRM- A subset of CRM that focuses on enabling customer interactions via e-channels (The web, email and wireless)

4. Definitions • “is a business strategy with outcomes • that optimise profitability, revenue and customer satisfaction • by organizing around customer segments, • fostering customer-satisfying behaviors and • implementing customer-centric processes.” • “is a strategy • used to learn more about customers' needs and behaviors • in order to develop stronger relationships with them.”

5. Underpinning Theory • Customers have many points of contact with an organisation • Retaining customers is far most cost effective than recruiting new ones • Some customers are more profitable than others • The “80/20” rule • For most firms, 80 percent of profit comes from 20 percent of customers • Use of Technology

6. Potential Benefits Of CRM • Customer retention • Share of customer or share of wallet • Cross-selling • Up-selling

7. Potential Costs Of CRM • IT infrastructure • Process change

8. Three phases of CRM • Acquiring New Relationships • You acquire new customers by promoting your company’s product and service leadership. • Enhancing Existing Relationships • You enhance the relationship by encouraging excellence in cross-selling and up-selling, thereby deepening and broadening the relationship. • Retaining Customer Relationships • Retention focuses on service adaptability – delivering not what the market wants but what customers want.

9. Customer Types • Platinum Heavy, reliable users, not price-sensitive, try new products, loyal • Gold Large users who push for price breaks, shop around and not so loyal • Iron Low volume or intermittent users; cost to serve them is quite high • Lead Demanding, want special attention but don’t buy much and show no loyalty

10. 0 Types of Relationships • Continuum of buyer-seller relationships • Transactional, Value-added & Collaborative exchanges The Relationship Spectrum

11. Transactional Exchange 0 • Centers on timely exchange of basic products at highly competitive market prices • These types of transactions are autonomous, meaning that there is little or no concern as to the needs of buyer or seller • Example: A person comes into a store and buys a hammer. The buyer wants a hammer and the seller sells him one. That’s all there is to it!

12. 0 Transactional Exchanges The business market includes items like: • Packaging, • Cleaning products or • Commodity-type products or service activity where bidding is employed. Transactional exchanges employ an Arms-Length relationship.

13. 0 Collaborative Exchange • Occurs when alternatives are few, market is dynamic, the purchase is complex and the price is high • Features close information, social, and operational linkages, as well as mutual commitments • Switching costs are extremely important to collaborative customers • Trust is the key and it exists when one party has complete confidence in their partner’s ability and integrity

14. 0 Value-Added Exchanges • Value-Added Exchanges fall between Transactional and Collaborative Exchanges • Value-Added Exchanges are those where the selling firms shifts from just attracting customers to keeping them by: • Adding additional services • Developing services that are customized to meet the buyer’s needs • Providing continuing incentives that promote repeat business

15. The Element of Competition 0 • Competition forces a war-like environment whereby competitors are always trying to lure customers from competitors. • Since customer situations (i.e., requirements, expectations, people, preferences) change, there is always opportunity for customers to change from relationship to transactional to relationship with new suppliers.

16. 0 Effects of Market Conditions • Market conditions force different types of relationships. • The marketer needs to understand this aspect of business to determine which strategy to employ with various markets. • What is the best strategy: transactional or collaborative?

17. Switching Costs 0 • A major consideration before changing from one supplier to another is the switching costs. • Organizational buyers invest heavily in their relationships with suppliers. Investments include: • Money • People • Training Costs • Equipment • Procedures and processes

18. 0 Switching Costs • Buyers hesitate to switch because it can cause costly disruptions. • Risk of making a wrong choice of less-established suppliers can be costly. • From a marketing perspective, the prospect’s PROBLEM must exceed the BENEFITS that they are presently experiencing with their current supplier before they will consider switching.

19. 0 Value Drivers in Collaborative Relationships Suppliers of routinely purchased products offer three sources of value: • Value creation through core offerings • Value creation within the sourcing process • Value creation at the customers level of operations

20. 0 Furthering Collaborative Relationships To develop ‘key supplier’ status, sellers need to: • Target the right customer. • Match with their purchasing situation. • Develop strategies that are appropriate for each type of buyer . Collaborative buyers seek long, strong and lasting relationships. • Buyers perceive significant risks with suppliers, so competence and commitment are vital when starting the relationship.

21. 0 Improving Transactional Customer Loyalty • To improve customer loyalty and satisfaction, many companies have developed specialized services and customized products. • Question: Is this really profitable?

22. 0 Differentiation Strategy For a differentiation strategy to work: “The value created, measured by higher margins and higher sales volumes, has to exceed the cost of creating and delivering the customized features and services.” To determine this, the marketer needs to understand the drivers of profitability.

23. High- vs. Low-Cost-to-Serve Customers 0 High-Cost-to-Serve Customers Order custom products Order small quantities Unpredictable order arrivals Customized delivery Frequent changes in delivery requirements Manual processing Large amounts of presales support (i.e., marketing, technical, and sales resources) Large amounts of post-sales support (i.e., installation, training, warranty, field service) Require company to hold inventory Pay slowly (i.e., high accounts receivable) Low-Cost-to-Serve Customers Order standard products Order large quantities Predictable order arrivals Standard delivery No changes in delivery requirements Electronic processing (EDI) (i.e., zero defects) Little to no presales support (i.e., standard pricing and ordering) No post-sales support Replenish as produced Pay on time Source: Robert S. Kaplan and V.G. Narayanan, “p. 8. Measuring and Managing Customer Profitability,” Journal of Cost Management 15, No. 5 (September/October 2001):

24. 0 Customer Profitably As mentioned previously, some customers are profitable and some aren’t. To determine this, we look at the cost/profitability structure with the plan to: • Keep profitable customers • Convert unprofitable ones to profitability • Fire those who are not profitable

25. Figure 3.4Customer Profitability 0 High Passive Product is crucial Good supplier match Costly to service, but pay top dollar Profits Net Margin Realized Losses Price-sensitive but few special demands Aggressive Leverage their buying power Low price and lots of customization Most challenging Low Low High Cost-to-Serve SOURCE: From “Manage Customers for Profits (Not Just Sales)” by B.P. Shapiro et al., September-October 1987, p. 104, Harvard Business Review.

26. 0 Managing Unprofitable Customers Low margin / high cost customers offer the most challenge for marketing mangers. • Start with ways to reduce costs • Next, work with customers to possibly change their actions resulting in lowering costs or increasing profitability

27. Customer Retention 0 • Retention of profitable customers is crucial to business. However, due to competition and internal / external environmental factors, achieving this goal is difficult. • One method that is proving successful for customer retention is the use of CRM programs.

28. 0 Customer Relationship Management Customer Relationship Management (CRM) is a cross-functional process for achieving: • Continuing dialog with customers across all contact and access points • Personalized service to the most valuable customers • Increased customer retention • Continued marketing effectiveness

29. CRM Technology 0 • CRM programs are software systems that capture information and integrate sales, marketing and customer service information. • CRM programs can gather information from many sources including email, call centers, service and sales reps. • The information is available to the right people in the organization in real time.

30. 0 CRM Software Programs There are many types of CRM programs: • Some companies develop their own proprietary programs. • Some companies purchase off-the-shelf programs.

31. 0 Responsive Strategies • A CRM program cannot help unless a company employs the proper strategy to secure and retain profitable customers. • Special attention must be given to five areas.

32. CRM Strategy - Priorities 0 • Acquire the right customer. • Craft the right value proposition. • Institute the best processes. • Motivate employees. • Learn to retain customers.

33. 0 #1 - Acquiring the Right Customer Account selection demands a clear understanding of: • Seller’s resources • Customer’s needs • Cost of serving various groups of customers • Potential profit opportunities • How customers define value and how to meet those expectations

34. What do customers value? 0 • Some demand low price • Some demand customer service • Some demand quick delivery • The question is: “Can the seller deliver it profitably?” • Many sellers try to meet all their customer’s needs, and may do so, but fail to do it profitably.

35. 0 #2 – Crafting the Right Value Proposition • A value proposition encompasses the products, services, ideas and solutions that a business marketer presents to the prospect/customer that is designed to solve the customers’ problems. • They can be generic or customized.

36. 0 Value Proposition A value proposition may include: • Points of parity to a competitive option • Points of difference Best practice suppliers base their value proposition on their target market’s needs by communicating their offering of superior performance in a way that conveys they understand their customer’s business priorities.

37. 0 Value Proposition Strategies Strategies that competitors employ fall into a range referred to as: “Industry Bandwidth of Working Relationships” It ranges from pure transactional to pure collaborative exchanges (see Fig. 4.5 on the next slide).

38. 0 Flaring Out Strategy • ‘Flaring out’ strategy (Fig 4.5b) states that the seller can either unbundle (point A), that is, reduce the service associated with a lower price (transactional in nature), or • Augment by adding more services to the core offerings (point D) which adds cost to the services. This is collaborative in nature.

39. Creating Customized Products 0 The seller starts with a core service (“naked solutions”) and adds customized services to it (“custom wrapped”) that create more value.

40. #3 - Institute Best Practices The sales force plays a key role in establishing and growing a customer from a transactional account to a collaborative partnership. They can do this by aligning and deploying technical and service support units to match with their customers’ units. Technical groups can consist of research, logistics and customer service units. Through careful management and screening, transactional accounts can progress to partnerships. 0

41. 0 Best Practices Follow-Up • In addition to using best practices, successful organizations (like IBM) employ follow-up techniques such as: • Assigning a client representative to take ownership of the relationship. • Assigning a Project Owner who completes the project or solves project problems. • Developing an in-process feedback and measurement system.

42. #4 - Motivating Employees 0 Dedicated employees are the key to a successful customer relationship strategy. The best approach is to: • Hire good people. • Invest in them to increase their value to the company and its customers. • Develop challenging careers and align incentives to performance measures.

43. Established customers buy more. Cost of serving loyal customers declines. Less expensive than acquiring new customers. 0 Why Retain Loyal Customers?

44. #5 - Retaining Customers 0 Retain customers by: • Providing superior value (more than expected) to ensure high satisfaction. • Nurturing trust. • Developing mutual commitment. • If possible, helping customers grow their business.

45. How to Pursue Growth from Existing Customers 0 Identify and cultivate customers that offer the most growth potential by: • Estimating current percent “share of wallet” • Pursuing opportunities to increase share • Projecting and enhancing customer profitability

46. 0 Evaluating Relationships • Some relationship-building efforts fail because expectations of the parties don’t mesh. • Example: Seller wants a business relationship whereas the customer responds in a transactional mode. • By understanding and isolating customer needs, the marketer is better equipped to match their product offerings to a particular customer’s needs.

47. Drivers of RM Effectiveness: Definitions • Relationship Quality: High-caliber relational bond characterized by commitment and trust • Relationship Breadth: Number of interpersonal ties that connect the relationship • Relationship Composition: Portfolio of contacts ranging from low-level influencers to high-level decision makers • Relationship Strength: The ability of the buyer-seller relationship to withstand stress and/or conflict • Relationship Efficacy: The ability of an inter-firm relationship to achieve desired objectives