Chapter 11Customer Relationship Management

Retailing Strategy Retail and Site Locations Chapter 7 and 8

Organizational Structure and Human Resource Management Chapter 9 Retail Market and Financial Strategy Chapter 5, 6

Customer Relationship Management Chapter 11Information Systems & Supply Management Chapter 10

QuestionsWhat is customer relationship management?Why do retailers want to treat customers differently?How do retailers determine who their best customers are?How can retailers build customer loyalty?What can retailers do to increase their share of wallet?What can retailers do to alleviate the privacy concerns of their customers?

Customer Relationship Management (CRM)A business philosophy and set of strategies, programs, and systems that focus on identifying and building loyalty with a retailers most valuable customers.

CRMAll customers are not equally profitable, and more or less profitable customers need to be treated differently

Retailers now concentrate on providing more value to their best customers using targeted promotions and services to increase their share of wallet the percentage of the customers purchases made from the retailer

Customer LoyaltyCommitted to purchasing merchandise and services from a retailerResist efforts of competitors to attract the loyal customerEmotional attachment to retailerPersonal attentionMemorable positive experiencesBrand building communications programs

Can Offering Price Discounts Achieve Customer Loyalty?No! Retail strategies like these can be copied by competitors

These strategies encourage customers to be always looking for the best deal rather than developing a relationship with a retailerMcGraw-Hill Companies, Inc./Gary He, photographer

The CRM ProcessCRM is an iterative process that turns customer data into customer loyalty through four activities:Collecting customer dataAnalyzing the customer data and identifying target customersDeveloping CRM programsImplementing CRM programs

CRM Process Cycle

Collecting Customer Data:Customer DatabaseTransactions a complete history of purchasesPurchase date, price paid, SKUs bought, whether or not the purchase was stimulated by a promotionCustomer contacts by retailer (touch points) --visits to web site, inquires to call center, direct mail sent to customerCustomer preferencesDescriptive information about customerDemographic and psychographic dataCustomers responses to marketing activities

Collecting Customer Data: Identifying InformationApproaches that store-based retailers use:Asking for identifying informationTelephone number, name and addressOffering frequent shopper cardsLoyalty programs that identify and provide rewards to customers who patronize a retailerPrivate label credit card (that has the stores name on it)Connecting Internet purchasing data with the stores

Privacy ConcernsControl over CollectionDo customers know what information is being collected?Do customers feel they can decide upon the amount and type of information collected by retailers?Control over UseDo customers know how the information will be used by the retailer?Will the retailer share the information with third parties?Steve Cole/Getty Images

Heighten Privacy Concerns When Using Electronic ChannelInformation collected without the awareness of customers

Collecting click stream data using cookiesSimilar to an invisible person videotaping a customer as they walk through a storeStockbyte/Punchstock Images

Customers Decision to Offer InformationBalance benefits and risks Discounts Special Treatment Personal Attention Disclosure of Information Unwanted Sales Contacts

Protecting Customer Privacy:Differences between U.S. and EULimited protection in specific areasCredit reportingVideo rentalsBankingMedical recordsOpt out: Consumers must explicitly tell retailers not to use their personal informationStringent consumer privacy lawsInformation only can be collected for specific purposesPurpose must be disclosed to customerInformation can only be used for specific purposeInformation cannot be exported to countries with less stringent regulationsOpt in: Consumers own their personal information, and retailers must get consumers to explicitly agree to share this personal information

United StatesEuropean Union

FTC Guideline for Fair Information PracticesNotice and awarenesscomprehensive statement about information storage, manipulation, and disseminationChoice/consentOpt-in and opt-out optionsAccess/participationCustomer able to confirm accuracyIntegrity/security Controls for theft and tamperingEnforcement/redressMechanism to insure compliance

J.Crew Security and Privacy Policy

Analyzing Customer Data and Identifying Target CustomersAnalyze the customer database and convert the data into information that will help retailers develop programs for building customer loyalty

Data Mining technique used to identify patterns in data

Market Basket Analysis Identifying Market Segments Identifying Best Customers Ryan McVay/Getty Images

Market Basket Analysis Data analysis focusing upon the composition of the customers market basket what items are bought during a single shopping occasion

Uses:Adjacencies for displaying merchandiseJoint promotionsBananas in the cereal aisle as well as in the produce sectionBeer with baby dippersTissues with cold medicine

Burke/Triolo Productions/Getty Images

Market Basket Analysis Taught Wal-Mart to Change!Product Placed NearBananas cornflakes, produceKleenex paper goods, cold medicineMeasuring spoons housewares, Crisco shorteningFlashlights hardware, Halloween costumesLittle Debbie snack cakes coffeeBug spray hunting gear

Identifying Best CustomersEstimating Lifetime Value (LTV)The expected contribution from the customer to the retailers profits over his or her entire relationship with the retailer

Use past behaviors to forecast future purchases, the gross margin from these purchases, and the costs associated with serving the customers

Classifying Customers by recency, frequency, and monetary value of purchases (RFM Analysis)(c) Brand X Pictures/PunchStock

Which Customer Probably Has the Greatest Lifetime ValuePurchases Over Last 10 Weeks

Sheet1

12345678910

Jack$20$20$20$20$20$20$20$20$20$20

Jill$210$0$0$0$0$0$0$0$0$0

Sheet2

Sheet3

Customer Pyramid Platinum Best Most loyal Least price sensitive80-20 rule: 80% of sales or profits come from 20% of the customers

Customer Pyramid Gold Next best Not as loyal

Customer Pyramid Iron Doesnt deserve as much attention

Customer Pyramid Lead Have negative LTV value Lead out

RFM AnalysisUsed by catalog retailers and direct marketersRecency: how recently customers have made a purchaseFrequency: how frequently they make purchasesMonetary: how much they have bought

RFM Target Strategies

Illustration of RFM ApplicationA catalog retailer is deciding which group of customers to send a catalog. Based on experience and an RFM analysis of customer database:Average order size for customers in cell - $40Contribution margin 50%Response rate 5%Cost of catalog and mailing -$.75Will the retailer make a profit mailing to this RFM segment?

Illustration of RFM ApplicationA catalog retailer is deciding which group of customers to send a catalog. Based on experience and an RFM analysis of customer database:Average order size for customers in cell - $40Contribution margin 50%Response rate 5%Cost of catalog and mailing -$.75Will the retailer make a profit mailing to this RFM segment?$20.00 contribution x .05 response rate - $.75 cost = $.25 profit per catalog mailed

Developing CRM ProgramsRetaining Best CustomersConverting Good Customers into Best CustomersGetting Rid of Unprofitable Customers

Customer RetentionFrequent Shopper ProgramsSpecial Customer ServicesPersonalization 1-to1 RetailingCommunityRoyalty-Free/CORBIS

Elements in EffectiveFrequent Shopper ProgramsTiered rewards based on customer valueOffer choices of rewardsNo all customers value the same rewardsNon-monetary incentives, altruistic rewardsReward all transactions to ensure the collection of all customer transaction data and encourage repeat purchasesTransparent and simple so that customers easily understand when they will receive rewards

Issues with Effective Frequent Shopper ProgramsExpenseDifficulty in Making ChangesImpact on Loyalty QuestionableEasily Duplicated Difficult to Gain Competitive AdvantageNeed to offer invisible benefits

Personalization

Converting Good Customers into Best CustomersCustomer alchemy: converting iron and gold customers into platinum customersAdd-on selling as a way to achieve customer alchemyInvolves offering and selling more products and services to existing customers and increasing the retailers share of wallet with these customersThe Oprah Winfrey Show to sell books, movies, and TV specials (Harpo Productions), a cable channel (Oxygen Media), a Web site (www.oprah.com), magazine (O)Shopping Buddy

Dealing with Unprofitable CustomersOffer less approaches for dealing with these customers

Charge customers for extra services demandedDon Farrall/Getty Images

Implementing CRM ProgramsNeed systems, databases

Close coordination between departments marketing, MIS, store operations, HR

Shift in orientationProduct Centric Customer Centric