Customer Relationship Management BY SHANNON MORRISON

Questions from this chapter  What is customer relationship management?  Why do retailers engage in customer relationship management?  What is customer lifetime value?  How do retailers determine who their best customers are?  What do retailers do to increase their share of wallet from their best customers?  What can retailers do to alleviate the privacy concerns of their customers  How can retailers get rid of unprofitable customers?

The CRM process  CRM philosophy states that retailers can increase their profitability by building relationships with their customers.  The main goal of this process is to develop a base of LOYAL customers.

What exactly is customer loyalty? CUSTOMER LOYALTY- means that customers are committed to purchasing merchandise and services from the retailer and will resist the activities of competitors attempting to attract their patronage.

The CRM process  1) collecting customer data  2) analyzing the customer data & identifying target customers  3) developing CRM programs  4) implementing CRM programs

Collecting Consumer Data  First step is to construct a customer database. CUSTOMER DATABASE : A database that contains all the data the firm has collected about its customers and is the foundation for subsequent CRM activities.

Customer Database consists of 5 parts  1) TRANSACTIONS- A complete history of the purchases made by the customer.  2) CUSTOMER CONTACTS- Record of the interactions that the customer has had with the retailer.  3)CUSTOMER PREFERENCE- What the customer likes.  4) DESCRIPTIVE INFORMATION- Demographic and psychographic data describing the customer.  5)RESPONSES TO MARKETING ACTIVITIES- Analyses of transaction & contact data that provides info. About customers responsiveness.

Identifying Information  1) Asking Identifying information  2) Using Biometrics  3) Offering Frequent-Shopper Programs- Loyalty Programs- Identify and provide rewards to customers who patronize a retailer. Other retailers use pivate-label credit card- A card with the store’s name on it.  4) Connecting Interner Purchasing Data with the Stores

Privacy and CRM Programs Privacy Concerns  1) Their control over their personal information when engaging in marketplace transactions  2) Their knowledge about the collection and use of personal information Cookies- text files that identify visitors when they return to a Web site. ( because of these customers don’t have to identify themselves or use passwords everytime.

Protecting Customer Privacy- European Union, Australia, New Zealand, and Canada have stringent privacy laws.  Businesses can collect consumer info. Only if they have clearly defined purpose.  The purpose must be disclosed to the consumer  The info. Can only be used for that specific purpose  They can keep info. For only the stated purpose.  Businesses operating in Europe can export info. For the 27 EU countries and only to importing countries with similar privacy policies.

EU perspective Basically we own our info. So retailers must get consumers to agree excplicitly to share personal info. Opt In- The actual agreement of agreeing to share explicit info. Opt out- when a consumer tells a retailer not to use their personal info.

Federal Trade Commission- Developed a set of principles for fair information practices.  1) Notice and Awareness- Covers the disclosure of info. Practices, including a comprehensive statement of info. use.  2) Choice/ consent- includes both opt-out and opt-in which allows consumers to have the opportunity to trado info. For benefits.  3) Access/participation- Allows for the confirmation of info. Accuracy by consumers.  4) Integrity/security- Controls for the theft of and tampering with personal info.  5) Enforcement/redress- Provides a mechanism to ensure compliance by participating companies.

There is a growing consensus that personal information must be fairly collected, that the collection must be purposeful, and that the data should be relevant, maintained as accurate, essential to the business, subject to the rights of the owning individual, kept reasonably secure, and transferred only with the permission of the consumer.

Analyzing Customer Data  The 2 nd step in the CRM process is to analyze the customer database and covert the data into info. That will help retailers develop programs for increasing value they offer to the best customers. OBJECTIVES  1) identifying patterns that can improve effectiveness of retailing decisions such as forecasting sales and allocating merchandise to stores.  2) deciding wher to place merchandise categories in the store

Analytics Retail Analytics- are the application of statistical techniques and models to find patterns in customer purchase data and make recommendations for improving the effectiveness of retailers Market Basket analysis- is a specific type of retail analytics that focuses on examining the composition of the basket, or bundle, of products purchased by a household during a single shopping occasion. EXAMPLE: TISSUES IN THE PAPER GOODS ISLE AND ALSO MIXED WITH THE COLD MEDICINE.

Identifying the Best Customers One of the objectives of CRM is to identify and cater to the best, most profitable customers. example- Home Depot relized that percent of its kitchen removation sales were coming from percent of the departments customers. It speculated that these heavy spenders might spend even more if it organized the department around meeting their needs. So, it added more assortment, better-trained associates and kitchen layouts which were appealing to these target customers. Results: Higher sales and profit per square foot than departments designed to satisfy all customers.

Customer Lifetime value (CLV)  The expected contribution from customers to the retailer’s profits over their entire relationship with the retailer To estimate CLV, retailers use past behaviors to forecast future purchases, the gross margin from these purchases, and the costs including the cost of advertising, promotions used to acquire the customers, and processend merchandise that the customers have returned.

Customer Pyramid Platinum Gold Iron Lead Most profitable customers Least Profitable Customers

80-20 Rule- where 80 percent of sales or profits come from 20 percent of ther customers.  Platinum segment- composed of the customers with the top 25% CLV’s. These are the most profitable and loyal customers, are typically not overly concerned about prices  Gold Segment- Next 25% of pyramid. they buy a significant amound of merchandise but are not as loyal as platinum and patronixe competitors.  Iron Segment-Following 25% of pyramid. Purchase modest amound of merchandise, but spending levels & loyalty are not substantial enough for special treatment.  Lead Segment- Bottom 25% of pyramid- Customers with the lowest CLVs and can make a negative contribution to the firm’s income.

RFM analysis- a scheme, used often by most catalog retailers and direct marketers, for identifying the retailer’s best prospects based on recent purchases.

Developing CRM Programs This is the next step in the CRM process is to develop CRM program for different customer segments The objectives of CRM are  To retain their best customers  To convert good customers into high- LTV customers  To get rid of the unprofitable customers

Customer Retention 4 approaches that retailers use to retain and increase share of wallet from their best customers  1) Frequent-shopper programs  2) Special customer services  3) Personalization  4) community

Frequent Shopper Programs These are used to build customer data base. Some most common programs are:  Use Teirs- Rewards should be tiered according to the volume of purchase to motivate customers to increase purchases.  Offer Choices- Offering different rewards for different customers  Reward all Transactions- rewarding all transactions to get entire customer info. On all purchases.  Feature Transparency & Simplicity- so customers can understand quickly and easily how to receive rewards.

Limitations of the Frequent-Shopper Programs 3 Factors limit effectiveness of programs  1) Cost- the programs can be somewhat expensive to retailers  2) It is difficult to make corrections when problems arise. Negative reactions can reduce a customers trust and loyalty.  3) It is difficult to gain a competitive advantage because with the programs they are visible and can be copied by competitors.

Special Customer Services Some retailers provide unusually high-quality customer service to build and maintain the loyalty of their best customers. Example: Nordstroms holds complementary private parties for invitees to view new clothing lines. Or Saks Fifth Avenue offers free fur storage, complimentary tailoring, and dinner at the captain’s table on a luxury cruise.

Personalization Building a relationship with customers on a more personal level 1-to-1 Retailing- Developing retail programs for small groups or individual customers. Many small, local retailers practice this method in order to build personalization with customers.

Community The last approach for building customer retention and loyalty is to develop a sense of community among customers. Retail brand community- a group of customers who are bound together by their loyalty to a retailer and the activities in which the retailer engages. Example: Nike stores create a sence of community by hosting running groups that meet tow times a week, after which the runners meet at the Nike store for refreshments.

Converting Good Customers into Best Customers Customer Alchemy- when a retailer increases sales to a “good” customer. The best way to achieve this goal is through: Add-on Selling- offering and selling more productgs and services to existing customer’s to increase the retailer’s share of wallet with these customers. Example: if a supermarket discovers that customers are buying cat food and not kitty litter, it might distribute coupons for kitty litter to the customer.

Dealing with Unprofitable Customers Bottom of the tier of customers and they have a negative effect on CLV. Retailers lose money on every sale they make to these customers. “Getting the lead out”- the process of no longer selling to these unprofitable customers.  1) offering less costly services to satisfy the needs of lead customers.  2) charging customers for the services they are abusing.

Examples of a Lead Customer  Customers who make an excessive amount of returns.  Someone who purchases a flat screen T.V. to watch the superbowl then returns it days later.  Someone who purchases an expensive dress for an occasion. Wheres it once, then returns it.

Implementing CRM Programs  The last step of the CRM process is to implement the program they find suitable for their particular store and target market.  Needs systems, databases put all together to build program.  Close coordination between departments – marketing, MIS, store operations, HR when implementing program  Shift in orientation from the product to the customer. Focus on customers needs and wants

Examples of Rewards programs

Key Terms Add on selling80-20 rule Opt out Cookies frequent-shopper program Private-label card Customer database loyalty program retail brand comm. Customer lifetime value market basket analysis RFM analysis Customer loyalty 1-1 retailing share of wallet Customer relationship management opt in