Making CRM Pay: A Customer Value Management Perspective

Originally posted: 10/3/2003

Why is it so difficult to make CRM pay? While analysts regularly point out that 70 percent or more CRM projects destroy shareholder value, it’s not like we don’t know what drives success in CRM. Recent studies, like the CRMGuru Blueprint for CRM Success, have clearly identified the success factors. But putting recommendations into practice often requires difficult, long-term changes across the whole enterprise. Simply knowing that “customer centricity” is a critical success factor is not much help if you are a manager charged with making your CRM project pay back within the current financial year. Or else!

So how should you spend your CRM dollars to get the best return? An answer is can be found through Customer Value Management (CVM).

Beyond Customer Lifetime Value

CVM is not the same as managing customers based upon their customer lifetime value (CLV). As recent research on profitable long-term customers has shown, the most valuable customers at any moment in time may not be the ones who will spend the most with you over the long-term, or the ones who are the most loyal. They may be customers who spend a lot today but are gone tomorrow. Tim Ambler of London Business School recently pointed out that knowing a customer’s CLV is of little use in deciding how to spend this quarter’s marketing budget to earn the highest economic profit.

Show Me the Value

Paradoxically, the key to CVM is not in developing a detailed understanding of the value of your individual customers, but in understanding the individual Profit and Loss (P&L) drivers for each customer segment and which ones you can push the furthest through your customer management capabilities. Once you understand which drivers have the biggest profit impact on each segment, you can identify the segments with the highest profit potential and the corresponding customer management capabilities needed to earn that profit as well as associated development costs and timescales. You can then simulate the profit potential of different combinations of CRM development activities for the segments and identify the combination that offers the highest profit. You can also create a phased implementation plan that develops the capabilities, in the right order, at the right time, to earn profits as quickly as possible.

Using Value Driver Analysis at a Mobile Telco

For example, working with a leading European mobile telco, a detailed P&L value driver model was developed for each of its main customer segments. The two segments with the highest profit potential were selected for further development. Value driver analysis for these segments identified a number of common CRM capabilities with high profit potential, including excellent campaign execution, optimizing retention offers and using inbound service contacts for additional sales. A number of scenarios were developed to determine the impact of implementing the capabilities in different ways, before the company selected the optimum combination of activities. These then were developed as pilot projects using a ring-fenced sample of customers drawn from each of the two segments. The business case for the CRM development program showed a payback period of less than one year, with a 5-year ROI of over 500 percent, generating over GBP20 million (USD33 million) in incremental profits.

If CRM is about generating incremental profits from customers, then CVM is the right tool to show you how to do that. But Value Driver Analysis is just the first step in deciding what to do. You can use the results of Value Driver Analysis (together with insight about customer motivations) to identify the highest profit potential opportunities to be run as pilot projects.

Piloting the Best CRM Opportunities

Knowing how to create value through CRM is not the same as actually doing it. Studies, like the CRMGuru Blueprint for CRM Success clearly identified that implementing CRM as a “big bang” across an enterprise is complex, time-consuming and difficult. But there is another way to implement CRM that eliminates many of the problems associated with the big bank approach, while providing the up-front financial benefits that hard-pressed CRM managers need. This involves implementing CRM as a series of controlled pilot projects.

Selecting the Right CRM Pilot Projects

Effective CVM requires more than just an understanding of how value is created through CRM, it demands an understanding of what CRM capabilities your company has, as well as your target customers’ needs and expectations. This three-way view is essential if you are to select CRM projects that are financially worth it, are doable with your company’s capabilities and will trigger desirable behavior in your customers. Unfortunately, too many CRM projects are still internal dreams that pay scant regard to the right balance of the three factors.

But selecting the right CRM projects is not difficult. The simplest approach is to use a two-dimensional framework with “What” and “How” as the axes. The “What” dimension represents what you want to achieve, for example, acquiring new customers, growing them or retaining them. The “How” dimension represents the CRM capabilities that you will need to use to achieve the “What.” The results of the Value Driver Anaysis will point to a number of key intersections on the framework. These are the CRM projects that are candidates for further development and piloting.

Building the Pilot Environment

Getting the most out of these CRM pilot projects is achieved by creating a pilot environment to test the projects and determine which ones deliver the best results. This can be as simple as ring-fencing a sample of target customers to be managed within the pilot project, all the way to building a separate “model office” to use as testing grounds for the new CRM systems, processes and organizational changes. Whichever is chosen, it must allow the results of the pilot to be statistically compared to business as usual, as only the most successful ones should be industrialized across the whole company.

Piloting CRM ay a Credit Card Company

Working with a leading European credit card company, previous VDA (Value Driver Analysis) and attitudinal segmentation projects had identified a number of potential CRM opportunities in direct marketing. The credit card company was already viewed as a best-practice direct marketer, so any pilot project would have to do significantly better than existing best-practice. A pilot environment was developed to include a ring-fenced sample of about 20 percent of the target audience. An “excellent direct marketing” pilot project was developed to take advantage of new propensity and optimized marketing communications models for the pilot target audience. Direct marketing for the rest of the target audience was carried out by business as usual. The results of the pilot project showed an increase in the return on marketing investment of 25 percent and a reduction in marketing costs of 10 percent. The pilot project is now being industrialized across the credit card company’s entire customer base, generating over GBP 100million [USD167 million] in incremental revenue and cost savings.

Customer Value Management is the next step in the evolution of CRM from being a technology-driven IT project to becoming a bona fide business management strategy. The framework I have outlined provides a tried and tested way to identify what to do to generate incremental revenues from customers, how to select the right CRM projects and how to run them as pilots. The rest is up to you.

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