Customer strategy lies—or should lie—at the heart of customer relationship management. It defines a company's objective with regard to its customers: acquiring them, serving them and retaining them. It involves understanding the nature of customers, the relationships and the different flavors customers and relationships come in, as well as the factors driving those differences. So what is, or should be, marketing's role in defining and driving customer strategy?

Marketing is uniquely positioned with regard to developing customer strategy. It is often the area linked to all the elements needed to develop customer strategy. These include external market information, such as competitive intelligence, data about trends in customer attitudes and behaviors in the market place (not just with relation to the company and its products). It also includes internal company information about overall corporate strategy (is the focus on revenue growth or profit growth?) as well as, in many instances, detailed customer behavior and transaction information, customer profitability (across multiple products), satisfaction data and retention/attrition/loyalty information. Add to this the ability of some sophisticated marketing organizations to analyze customer behavior, develop actionable customer segmentation schemes and build predictive models of customer behavior.

Contrast this with the limited information and capabilities that other areas, such as finance, product development, sales or IT, may have and it becomes clear that marketing is uniquely positioned to help shape customer strategy.

The next logical question is: Should marketing be driving the development of customer strategy or should it play an important role while not leading the effort? The answer depends on the corporate environment and marketing's place within it. In organizations where marketing plays a central role, has the requisite talent, has a close relationship with lines of business and operating heads and is seen as a credible business partner by the various other functional groups and has the ability to be a "boundary spanner," it can play a central role in developing customer strategy and in orchestrating the execution of that strategy.

However, where marketing plays primarily a marketing communications role—or where it is seen as a sales support or staff function—which is, unfortunately, the case in many business-to-business environments, marketing is simply not a credible leader in developing and implementing customer strategy. In these situations, marketing can barely command a seat at the table, let alone commandeer a leadership role. This was painfully obvious in many early CRM efforts, which often took place in sales-driven companies where IT played a prominent role and marketing was relegated to the background, if it was included at all.

Passenger or Driver?
I can recall many marketing clients complaining (some still do) that their firms' CRM effort would not "reach" marketing until the tail end of implementation efforts. The fact that these were seen as implementations itself says a great deal about how little customer strategy was really involved. In these situations, marketing does well by ensuring that it is on the bus at least as a valued passenger and, if the marketers are good, maybe they get promoted to the head of the bus sometime in the future.

But what of situations where marketing is capable of credibly playing a central role in driving customer strategy? Should marketing be the driver or the navigator? Given the choice, as a senior marketer, I would choose to be the navigator, rather than the driver. Now that may seem a strange choice, so let me explain. Successfully executing customer strategy requires commitment from operational areas of business.

Marketing has gobs of information and great 360-degree views of markets and customers. It, hopefully, has a realistic view of the execution capabilities of the organization. By providing valuable input and pragmatic advice to the shaping and development of customer strategy but leaving the final strategic choices and execution to the operational areas of the company, marketing ensures commitment and a focus on execution as well as the ability to monitor progress and correct the course over time without getting bogged down over execution issues, which almost always arise in the course of implementing a customer strategy.

This distinction was brought home to me recently when we were working with a medium-size, specialty, multi-channel retailer (it sold through its own branded stores, through other retail outlets, over the Internet and through its own and other catalogs). The chief marketing officer, who was relatively new, was trying to bring the company into the 21st century. Understanding the value of customer segments; agreeing on where the upside was; and focusing marketing efforts on those segments and products were a key part of the initiative.

Marketing had traditionally been known as the guys who took the pretty pictures for the catalog and ran promotions from time to time. They were not known for their strategic vision or their fact-based decision-making. The CMO was trying to change that. The CEO had brought in the CMO to do just that. However, the CMO, eager to prove himself, developed the strategy and was trying to drive it through his team, which was not quite up to it. The people who had been there a while would not have recognized a strategy if it hit them in the head. The folks he had brought in more recently were too new to have any credibility.

Of course, marketing needed IT's help to pull the customer information together to effectively monitor campaigns and manage these customer strategies. The CIO had been there more than 10 years, knew the company and knew how the game was played. His people gave low priority to a customer strategy that was seen as "marketing's" and not owned by corporate or operational heads. They dragged their feet, and nothing much got done. The CMO? He left in disgust after making little progress. The CIO? He is settling in for another 10 years and probably looking forward to seeing the backs of another 10 CMOs.

So my advice to marketing execs is this. Riding shotgun lets you get a better look at the scenery. The driver has to focus on the road and is responsible for getting the vehicle to the destination. Both roles are critical. Knowing who performs which role is the key to a smooth ride.

Additional Information:
Naras V. Eechambadi, Ph.D. is the CEO of Quaero and the author of High Performance Marketing: Bringing Method to the Madness of Marketing (Kaplan Professional Press, 2005). He can reached at naras@quaero.com.

Cognitive dissonance — a term often used by psychologists to identify the difference between what people say they’re going to do and what they actually do — can be applied to business, too. We've seen a lot of companies that don’t do what they say they’re going to do. Call it corporate dissonance. More specifically, there’s a gap between planning and execution when it comes to keeping companies on the path toward maximizing customer value.

Failure to execute to plan has been a thorn in the side of executives for decades. For many organizations, the complexity of today’s hypercompetitive, multichannel business environment has widened the gap between execution and plan. A study of 197 companies published in the July/August issue of Harvard Business Review reports that those businesses lost an average of 37 percent of their overall performance because of breakdowns in the planning and execution process. The HBR study identifies several cracks in the process. One is closely related to maximizing customer value, and that is: Companies rarely track their performances versus their original plans. This ties in to our insistence in our new book, Return on Customer, that companies must balance their short- and long-term goals. Short-term decisions, even marketing-related decisions such as contact center complaint resolution, can have a long-term effect on customer value.

From our point of view, the execution-to-plan gap is caused by poor adoption and poor change management processes. Lack of attention to either one can derail a customer strategy, and they’re completely intertwined.

When executing a truly enterprisewide customer strategy, you have to bring together people playing different roles in a variety of functions across your entire organization. Sales reps, financial staff, marketing managers, contact center personnel, service technicians — everyone in the company must center himself or herself on the customer and take the customer’s point of view.

Managing to Change
Sometimes a new customer strategy that maximizes customer value also requires employees to adopt a new technology. In addition, vendors, partners and customers themselves may need to use the technology. Customer self-service, for example, offers compelling benefits to customers, not just to you. To encourage adoption, executives must balance the company’s needs for using the technology with the customer’s benefit from accessing it. If customers are demanding more self-service technologies, but your goals for maximizing customer value involve a more personalized approach, your company needs to find a middle ground that serves both the customer and your long-term goals.

Adoption is a process, not a destination. It involves everyone in the company. If your company wants to maximize customer value, that mission is not just for marketing or sales. Eventually, it will touch everybody who touches your company. It’s therefore vital that your customer-focused technologies – and the processes they support – accommodate all of the members of your team. Once again, to cite the self-service example, are sales reps on board with how they will treat customers if customers have more self-service access? Does marketing know how its role will change?

This transformation also takes a commitment from senior managers. Everyone in the C-suite must play an active role in instilling a customer-centric culture, as well as implementing the technology necessary to support it. If a company’s goal is to provide a more detailed and singular view of its customer base, and new database software will support that strategy, for example, all information needs to come from that database. C-level executives must be committed to the process of creating that single customer view. They must insist that the relevant database technology is implemented. Without that awareness, adoption of customer-centric processes will flounder.

One show of support from the C-suite is to align the organization’s measurements of success and its incentives with the goals of its customer initiative. Adoption and change management stand no chance without metrics and compensation. Compensation buys compliance, which fuels an organization’s behavior to change. It is a simple equation: No compensation equals no compliance, which equals no behavior change.

Companies should measure and compensate on long-term goals, as well as on the short-term results of their plans. In sales, for example, instead of gauging success entirely on current sales and profits, reward reps for meeting monthly sales and pipeline targets and compensate them for the time invested in gathering key customer data and creating relationships that will pay long-term dividends for the company.

No matter how much you invest in making the changes necessary to adopt a new customer initiative that maximizes customer value and closes the execution-to-plan gap, you won’t effectively execute on it unless you build a culture of trust — one that continuously encourages everyone in your company to see your business from the customer’s perspective. People within your firm must not only understand what it means to be customer oriented; they must also want it to happen. Managers must clearly communicate the benefits of doing so. With that attitude, you can implement the processes, technologies and organizational structure that will help your customer strategy succeed.

When it comes to maximizing customer value, focus on adoption and change management. Only then will your company be able to do what it says it’s going to do, and only then will you execute according to plan.

Additional Information:
Don Peppers and Martha Rogers, Ph.D., are co-founders of Peppers & Rogers Group, a management consulting firm recognized as the leading authority on customer-based business strategy. Together, they’ve co-authored five best-selling books on the subject. Their firm helps its clients worldwide create and execute customer-based initiatives that make a bottom-line impact. Visit Peppers & Rogers online at www.1to1.com.

Most retailers don’t use the information they capture from their loyalty programs. This was proven by the fact that only 25% of respondents to a recent AMR Research survey even see this as a benefit to their retail organization.

The topic was discussed at the recent RIS News Spring 2006 Retail Executive Summit, where I lead a session that previewed results from the study regarding the state of loyalty programs. I also moderated a panel discussion consisting of Stop & Shop, Borders, and Best Buy loyalty program directors. One resounding takeaway was that these companies use loyalty data to make cross-functional planning decisions.

In most companies, the marketing department usually manages customer loyalty programs and merchandising has limited involvement. Marketing is solely responsible for enhancing brand awareness and guiding customers to purchase products. The lack of cross-functional collaboration and alignment is a problem because marketing isn’t using information that lives with merchandising. At the same time, merchandising is accountable for the margin, turn, and sales of products that it is not actively involved in promoting.

On the flip side, the panelists talked about how their companies are bucking this trend:

• Stop & Shop—The grocery chain’s 10-year-old loyalty program, which has member transactions accounting for 68% of sales, is owned by the executive vice president of marketing and merchandising. The data is used to segment customers, create programs, improve merchandise assortment, and optimize stock allocation. What started out as a way to save circular costs and eliminate coupon clipping has evolved into a program that lets merchandising analyze data to make decisions. Marketing also uses product and customer information to fuel its effective online and Shopping Buddy initiatives.
   
• Borders—The book, audio, and movie store piloted a program, last year, and rolled it out nationally in February. It aims to win back market share from Barnes & Noble by providing perks such as holiday savings, personal shopping days, and special prices and rewards. While still early in the program, the company has created a cross-functional Discount Management Committee—including finance—that reviews all reward/discount options to understand the impact on the customer, profit, and brand image.
   
• Best Buy—Started in 2002, Best Buy’s Rewards Zone boasts one of the largest customer databases, with seven million members representing approximately 30% of company revenue. While the program is owned by marketing, the data is shared with various departments in the organization, and is attributed to the success of its segmentation-based Customer Centricity program. Using insights from loyalty data, Best Buy’s marketing and merchandising departments work closely to determine optimal prices, promotions, and product mixes by specific stores.

Customer information is powerful if used correctly throughout the organization, including marketing, merchandising, finance, and store operations (see Figure 1). Retailers like Stop & Shop, Borders, and Best Buy increase the quality and usefulness of its customer intelligence to create the following:

• Marketing insights—For relevant communication, meaningful interactions, and personalized promotions, influencing the buying behavior and ultimately improving retailer image
   
• Merchandising insights—To forecast the effect on merchandise sales and margins by better understanding customer affinities, preferences, and habits
   
• Business insights—To analyze profitability, and plan everything from new store locations and private-label development to store training and labor forecasting
   
• Store insights—To ensure the home office is properly training store associates, and for monitoring store execution effectiveness and performance

Figure 1: Using customer intelligence throughout the organization

Kroger Uses Intelligence to Better Understand Customers
While not at the RIS News event, Kroger’s chairman and CEO David Dillon shares a similar view regarding the importance of loyalty data. In a conference call with analysts in September 2005, he said Kroger’s customer intelligence strategy has “…helped me reset my understanding of what the customer is after, and it helps replace intuition with actual data and actual facts. And it’s those facts that are driving our decision-making.”

 

He went on to say “…our commitment is to make sure that every decision we make positively influences the way our customers feel about Kroger. This emphasis on placing the ‘customer first’ generated increased customer traffic and higher average transaction size.”

Set Yourself Apart with Loyalty Programs
While Wal-Mart has historically focused on lowering product cost through advanced forecasting, replenishment, and logistics, recent moves by its CMO indicates customer intelligence is increasingly coming into play. He plans to grow his marketing team by 30% and create three new departments: brand management, a category marketing group, and an insight and customer strategy group.

Retailers should use this as a wake-up call. Use customer intelligence to lead marketing, merchandising, and business strategies to set yourself apart and build market share early.

 

Financial service companies are currently implementing or planning to implement the last major improvement to management reporting.

This change will significantly upgrade the quality and quantity of information available to support the professional management of the business. They are moving from a top down design to a bottom up design for expense distributions and activity based costing is at the heart of it.

This change clears away the controversy surrounding management reporting and provides actionable insights into product profitability, customer profitability, line of business profitability, staffing and resource management, productivity, and target re-engineering.

At most financial service companies, internal P&Ls (Organizational, Product and Customer) have been completed satisfactorily except for expense distributions. Revenue accounting, internal funds accounting, risk adjustments and capital allocations are basically in place. While there may be some user discord about particulars, the overall methodology is in place. This is not the case with expense distributions. Expense distributions are the most contentious area remaining and one that precludes user acceptance of the P&L itself.

The issue of expense distributions arises from the following situation. In organizational profitability reporting revenue is booked into profit centers. Expense is booked into every center in the institution and is booked by natural classification: salaries, benefits, occupancy, depreciation, etc. The challenge is to credibly and accurately move the expense to the appropriate revenue. This becomes more problematic in product and customer profitability reporting.

Top Down
Top down originally got its name from the concept of allocating expenses on a percentage basis. Today, however, it represents all types of accounting (including rate X volume) which allocate 100% of expenses to current period revenue. This section addresses the methodologies that are used in top down accounting and the issues and bad decisions that arise from its use.

Expense Allocations
Many of the business managers we talk with are dissatisfied with their organizational and product profitability calculations because of expense allocations. In customer profitability, their dissatisfaction level rises exponentially. Profit center managers, product managers, and customer relationship managers in companies that use expense allocations are frustrated with the profitability information they receive. They do not believe the expense amounts allocated to their P&Ls and cannot understand the validity of the allocations. In addition, they can’t articulate the problem or understand the amounts they should have been charged. As a result they usually wind up blaming back office managers for overspending and bickering with finance managers over the allocation rates and rules.

Expense allocations are adversely impacting management’s ability to make informed decisions regarding customers, products, markets, and channels. In financial services, sometimes it’s hard to see the absurdity in the allocation result because the companies are so large and complex. It’s difficult for users to understand whether a wire transfer really costs $23.00 or $2.30. When the allocations arrive all they can do is complain. A large number of companies that have installed profitability systems that employ expense allocations are currently rethinking their designs because of management’s dissatisfaction.

Business manager frustration rises exponentially when expense allocations are used in customer profitability because allocations result in 100% of channel expense being allocated no matter how much of the channel customers have used. Can you imagine how frustrating and demoralizing it is when you successfully divert a large percentage of your customer base from a very costly channel to a less costly channel and 100% of the costly channel is allocated to your P&Ls anyway? Allocating 100% of the expense of positioning channel resources to current period customer revenues misstates customer profitability and leads to poor decision making.

Using expense allocations is analogous to a supermarket determining profitability by subtracting the cost of all the goods they put on their shelves from the day’s receipts, instead of subtracting just the goods that were purchased. The cost of generating the revenue is the amount of resource consumed by the customers not the amount of resource positioned.

$700,000 Porsche
To better understand the problem bankers are having understanding the information generated by their profitability systems, let’s get out of banking for a minute and go into a business where it’s easier to relate to the amounts. Imagine you put up your capital (so you really have a net income focus) and buy a Porsche dealership. That feels pretty good, owning a company. Now you wait for sales. A lot of people come in to look at the cars. They sit in them; they touch them; but no one’s buying. Finally someone buys a car for $100,000. You get to the end of the month and it was the only car sold. Now you turn on the typical profitability system and it reports that you sold a Porsche that costs $700,000 for $100,000. Now what do you do? Do you try to figure out how to sell Porsches for $800,000? Or do you get out of the business because the product is unprofitable?

Obviously the car didn’t cost $700,000. And yet the profitability system allocated 100% of the actual expenses of the dealership to the product. The total dealership incurred a loss with $700,000 in expense and only $100,000 in revenue. But management needs to know that the Porsche only cost $80,000 and there’s a great margin on the product (product profitability) and you have unused resource to manage. Management also needs to know that the customer that purchased the car is also very profitable (customer profitability) and is the kind of customer you want to profile and target market.

Fluctuating Amounts
Another major issue with expense allocations is the large fluctuations that exist month to month. Since the system allocates 100% of expenses each period, the amounts allocated fluctuate as the distribution basis (volumes, etc.) fluctuates. This creates a moving target that does not support decision making. We assisted a major financial service company that was using expense allocations. They had previously formed a pricing committee of senior executives to review and set prices. Each month they would pick products to address and would ask the finance department to supply the product unit costs. The mistake they made was not asking for the same product two months in succession. If they did, they would have received unit cost numbers that fluctuated materially from one month to the next. The unit costs they received were not product unit costs, they were expense per unit and they fluctuate each period. They should not be used to support pricing decisions.

Rippling Effect
Another problem with expense allocations is the rippling effect. Since these allocations always account for the entire universe any change anywhere in the company ripples through every P&L in the company. We have a great anecdote from a major mid-Atlantic bank. They had sold their credit card division to a mid-Western bank. After the transaction was completed the finance department ran the P&Ls for the next month. Once the reports were distributed they received an irate call from the head of commercial banking. He wanted to know why his net income had declined so materially. The finance explanation, of course, was that the company had sold off the credit card division and the profitability system had allocated the remaining expenses that had been previously allocated to credit card. The executive said: “it doesn’t make sense that the sale of a retail product line should adversely impact the commercial banking P&L”. The unfortunate reply from finance was: “it may not make sense from a business perspective but it does make sense from an accounting perspective”. This is a classic disconnect between finance and the business lines and is caused by the top down approach.

Variations on a theme
Some companies have adopted the top down design and sidestepped the rippling and fluctuating effect. They allocate 100% of expenses but do it with a fixed rate X volume. This creates the same basic problems as a percentage allocation. The price for eliminating the fluctuations is a large variance that accumulates and ultimately needs to be addressed. The common term for this is “true ups”. By definition it implies the previous numbers were wrong and now they will be corrected. The worst case of this we encountered was a large mid-Western bank who accumulated the true ups throughout the entire year. In December they would distribute the variances and cause considerable consternation throughout the company. All of those managers who thought they were operating at the reported level of profitability received a year end surprise that adversely impacted their results and their compensation.

Bottom Up
Bottom up is the distribution of the cost of generating revenue to the revenue that was generated. This is not just rate x volume; it’s accounting for the expense of positioning resources, how customers consume them, and how much resource was positioned but not consumed.

The True Nature of Operating Expenses
There are two important components to measuring and managing the financial service company, and both should be evident in the accounting. The first is measuring how much resource was positioned to service customers and to process the transactions they create. The second is measuring how much of that resource was actually consumed by customers. Operating expenses, for the most part, are incurred in the positioning of resources. What is the expense of positioning resources? It’s the salaries and benefits of the employees who do the work, the expense of the space they occupy, the expense of the equipment and supplies they utilize, the expense of heat, light, and power, etc. It is also the expense of positioning computing resources.

These valuable resources are the employees and the computers of the company that process the work, interact with customers, and handle all of the day-to-day activities that keep the bank operational. Allocating 100% of these expenses to revenue each period, without consideration for what they did or how much they did, creates false pictures of the business and leads to bad decision making.

The second is when activity based costing follows the concepts of full capacity costing and as a result provides true insights into the nature of profitability, how capacity is positioned and utilized, and the impact of customer behavior on net income. Financial service companies that use this method of activity based costing are creating usage-based charges to profitability statements with channel identity. Activity based unit costs multiplied by the volumes processed measure the usage, and the amounts appearing in the profitability statements actually reflect the amount of resources consumed by customers as they purchase products and services from the bank (cost of generating revenue). If capacity goes unused it’s reported as unused capacity.

The key to creating this information is double entry bookkeeping. Most profitability systems are created with the design emphasis on the debit side of the calculation. This results from the emphasis on 100% allocation from back office to front office. However, profitability systems that have been designed to take advantage of the power of activity based costing have placed design emphasis on both the debit and credit side of the calculations. This allows for a charge to the P&L with channel and product identity and a credit to the center that did the work with channel and product identity. Creating information on both sides of the transaction is what links P&Ls with channel utilization reporting.

Shortcuts
There are a number of shortcuts to creating profitability information, but they don’t enhance decision making. One shortcut is to bypass the cost accounting and use industry averages. While this may be expedient, it doesn’t provide credible information. It doesn’t identify how your customers consume the resources your company has positioned. Profitability information is too important to guess at the answer. The decisions arising from this information impact the very core of your business.

Another shortcut is to estimate the costs. This saves money in the short term but is more expensive in the long term. By estimating the costs you are missing the profit opportunities that arise from analyzing properly created metrics. It is very profitable to accurately and credibly create and deploy activity based costs and integrated profitability reports. The expense of the project is easily recovered from the profit improvement opportunities that emerge from the rich information content.

Improved Decision Making
This section presents some examples of an improved decision making environment when using the bottom up approach to expense distribution.

Products and Customers
A profitable offering targeted to specific customers or customer segments is the key to sustaining long term profitability and growth. The key to designing the offering and targeting the proper segment lies in understanding customer profitability. Customer profitability should be calculated showing the products the customers purchased, the channels they used and the cost of the resources they consumed. If customer and product P&Ls are created using expense allocations then the results are not representative of the real relationship or the real offer and will lead to bad decisions. Bottom up accounting provides the insights that are essential to strong decision making.

During a speech at a strategic marketing conference I asked the attendees the following question: “If you are successful in diverting 50% of your customers out of your most expensive channel and into a less expensive channel how much more money does the company make?” The attendees were predominantly marketing executives but knew the correct answer to my accounting question. The bank doesn’t make any more money until the resources in the first channel are reduced or redeployed to reflect the declining usage.

If companies are going to continue to design and offer lower-cost delivery channels to their customers, they must aggressively manage the resources positioned in all channels. Customers don’t announce their transaction intentions or their channel preferences; they move between channels at will. The best companies are identifying the impact of channel usage in their profitability calculations and they are tracking channel utilization to optimize resource management. As a result, they have a competitive advantage and are sustaining profitability and growth.

A local market is defined as a specific demographic area that is serviced by a branch or cluster of branches. Best practice banks want to view local market results from a number of perspectives. They want to know location profitability. That is the profitability of the customers in that location. They want to know this in aggregate to be able to compare markets and to target attractive markets to penetrate. They also want to know individual customer profitability to identify customers for target marketing. Lastly, they want to know how the location is being utilized by walk in customers. This is different from profitability because the walk-in customers may actually be customers of record of other branches or local markets.

The difference between local market profitability and customer profitability is that customers can move to other local markets and still be customers of the bank. The movement of customers over time is very important as it impacts the very nature of local market demographics. We all know how neighborhoods change. Look at property values over time. Wouldn’t it be wonderful to track local market profitability over time to track the results of your efforts to improve profitability as well as the ebb and flow of profitability as customers move in and out of those markets? A very profitable location could become the most unprofitable over time.

Measuring and managing local markets involves the two most important measures of a branch or location: profitability and productivity. How profitable is it to have a presence in a specific location and what’s the productivity of the people who staff the location to service the walk in business.

Local market profitability is the revenue of the customers of record of the local market less the cost of generating that revenue. Unfortunately not many banks are computing the cost of generating the revenue. Most banks misstate branch profitability by taking the revenue of the customers of record of the branch and subtracting the direct expenses of the branch and some allocated expenses. The direct expenses of the branch are the expenses of positioning resources in the branch to service the walk in customers from any branch. This mismatch of revenue and expense distorts results and adversely impacts decision-making.

Leading banks that utilize the bottom up approach are employing profitability measurement functionality known as inter-branch accounting to reconcile branch of record and branch of process and to clean up the mismatched reporting. They are creating two different reports to support the two primary views. One is an integrated P&L showing local market profitability by product and the other is a capacity utilization report that shows how effectively resources are positioned to service the walk in customers.

Customer Behavior
Customer behavior is apparent in the financials when using activity based costing in the bottom up approach. Since the charges to the P&L are usage based and reflect the channels the customer utilized and the resources they consumed, the P&Ls reflect the impact of customer behavior on net income. Behavior is evidenced by the size of the balances in their accounts, the number of transactions they create, the channels they use and the fees they pay. In combination this is the story line behind understanding and analyzing customer profitability.

We worked with one bank that had been creating retail customer P&Ls for a number of years using the bottom up approach. They had retained all of that history in their data warehouse. Someone in their marketing department came up with a brilliant idea. The retail bank had adopted a company wide objective of retaining their profitable customers. The marketing manager suggested that they use their predictive modeling software and look at the last three years of customer P&Ls and search out the profitable customers that had left the bank. They decided to look at the last ninety days of their behavior and apply what the software learns to the existing customer base and identify the customers that are planning on closing their accounts. The software came back with a list of names of customers likely to close out their relationships.

The marketing department assembled lists by branch and sent them out to the branch managers. One of the branches called to say they received the list around noon and found that one of the names on the list had closed out their relationship at 10 a.m. that morning. This obviously enhanced the credibility of the effort and word spread throughout the branches. Their calling efforts succeeded in retaining many of the customers on the list.

There are numerous examples of profitable decisions arising out of bottom up information that provides insights into the businesses. The key is getting beyond the bickering over rates and rules and forming a partnership with line of business managers that result in a consistent approach to sustaining profitability and growth.

Conclusion
Management accounting should align with how managers run their businesses and how they make decisions. If management is that great discipline they teach in business school and the great art that Peter Drucker writes about, shouldn’t management accounting be the accounting for that great management? Moving to a bottom up design will finally provide that alignment and elevate management reporting to its rightful place in the company.

Additional Information:
For more information on profitability, attend Greg's seminar How to Create Real Value with ABM and Customer Profitability Information.

What Every Exec Should Know About Customer Retention
By Don Peppers & Martha Rogers, Ph.D.
Peppers & Rogers Group
 

As customer acquisition costs continue to rise, customer retention continues to be one of the most important, yet misunderstood, areas of customer strategy. Of all the things that C-level execs need to know about retention, this is the most important: Any strategy you undertake to keep customers must be done under the heading of creating value for your enterprise and your customers.

 

One of the best examples of applying this reality is happening in the wireless telecom business. Here's an industry where it can easily cost more than $300 to acquire a new retail customer, and perhaps $60,000 or more to secure a new enterprise customer. As a result, many mobile firms have placed a great deal of emphasis on customer retention. Of course, retention is only one of the variables that figure in the overall value that customers create, but in mobile telecom, it is certainly one of the most important.

The Good
Best practices in retention can be classified into three categories: differentiated offers aimed at particular types of customers, additional offerings that deepen a customer's relationship, and self-service options that entangle the customer with the firm.

Arguably, the wireless industry's strong suit has been the differentiated offerings and services aimed at specific customers. Nextel, for instance, has staked out a strong claim to serve the needs of mobile sales forces. Among other things, Nextel offers these customers a uniquely appealing suite of "Group Connect" services designed to meet their needs better than routine mobile phone service would.

Virgin Mobile, on the other hand, has appealed to the youth market for the same purpose. Its latest service is called "Rescue Ring." If a customer is headed out on a date or other meeting that may not go well, he or she can arrange for an automated call to arrive 20 minutes into it, which can then either be ignored or used as an excuse to bail out. Among the 3 million users it has acquired in its first two years, Virgin Mobile says more than 60 percent of them use Rescue Ring or other features, such as Comedy Central's Joke of the Day. More than half downloaded ringtones last year at $3.49 a pop.

Self-service is also a top-performing retention tactic. Customers who go online are likely to implement some aspect of their service that they have partly built themselves. Such customer "collaborations" are guaranteed to improve retention. It is probably no coincidence that Verizon Wireless, a company with one of the lowest wireless churn rates, reports one of the highest self-service usage rates.

Room for Improvement
One thing that some telecoms probably aren't doing as well as they could, however, is gleaning insight from their data to engage customers before they become churn risks. For instance, telecoms have a Call Detail Record (CDR) of each call made, listing where it originated, where it went, how long it lasted, and whether it was cut off or not. Telecoms also know how often network outages occur in a geographical area. It's up to telecoms to aggregate these and other forms of data, use them to anticipate churn risks among high-value customers and then take action. If a customer calls you with a problem, it's probably already too late.

Let's take it a step further. Wireless firms track and report monthly churn rates, as well as monthly average revenue per user (ARPU). When combined with operating margin, these figures can help investment analysts determine how much actual value a company has created with its marketing efforts – including not just current earnings, but also any value created from increasing its customers' lifetime value (LTV). In other words, is the wireless company maximizing the value of its customers – its scarcest and most valuable assets? Are its marketing decisions for combating churn and retaining customers creating or destroying enterprise value? To answer these questions, executives require a new form of measurement. We call it Return on Customer^SM.

Calculating Return on Customer^SM for Sprint
As an example, we examined the wireless division of Sprint. According to the company's most recent quarterly report, its "Fair and Flexible" spending plans, which allow customers to avoid overage charges for exceeding their plan minutes, "represented the majority of Sprint's direct gross adds in the quarter" (translation: it was this marketing initiative that drove customer acquisition). One result is that over the last four quarters, Sprint's wireless customer base increased by 22 percent, and the division's first-quarter operating income rose 64 percent, to $455 million.

Dig a bit deeper, however, and you'll find that Sprint's marketing efforts actually created a great deal more value for its shareholders over the last year than may be immediately apparent. Its monthly customer churn rate declined significantly, from 2.9 percent to 2.5 percent, year over year. So while its marketing program is successfully acquiring customers, it appears to us that it is also improving customer retention. This decline in the churn rate has substantially increased the lifetime values of all its customers.

When we did the math, we discovered that, in addition to the $2 billion in operating income Sprint Wireless recorded during its most recent four quarters, its customer acquisition success and its improved retention rates have created roughly the same amount of additional value (about $2 billion) in the form of increased lifetime values within its customer base. About two thirds of that extra $2 billion was created by adding new customers, while a third of it stemmed from the increased retention rate.

We calculated a Return on Customer for Sprint, over its most recent four quarters, of nearly 70 percent, a phenomenally good rate of value creation. The challenge now will be maintaining that retention rate, to keep from "giving back" the extra value that Sprint created with this year's marketing effort.

It's important to note that we are only using publicly reported information for this analysis. There are many ways companies can decrease churn, other than earning the trust of customers. In fact, if companies undermine the trust of customers to reduce churn (by locking customers into contracts, for example), they will have difficulty hanging onto the value they had created.

Additional Information:
Don Peppers and Martha Rogers, Ph.D. are co-founders of Peppers & Rogers Group, a management consulting firm recognized as the leading authority on customer-based business strategy. Together, they’ve co-authored five best-selling books on the subject. Their firm helps its clients worldwide create and execute customer-based initiatives that make a bottom-line impact.

Customer Service in Customers' Eyes
 

Customer Service in Customers' Eyes
Accenture    Our Server

Most of us probably know by now that it costs us five times more to win a new customer than it does to keep an existing one. Nobody understands this better than USAA, a small little insurance and financial services company based in San Antonio, Texas—a small little $73 billion company that has 95 percent of its market! USAA specializes in serving military officers and the their families, a few years back the company included the enlisted folks as well.

Create a Sacred Bond with Customers
We realized quickly that what Bob Davis means by "sacred trust" is, in fact, the company's love for members of the collective military family. When the first Gulf War broke out, USAA generated a list of all members who were on duty in the Middle East. When the troops came home, it sent a letter to them all, expressing the company's pride and appreciation for everything they did for our country, and welcoming them home safe. Attached was a premium refund for the entire time they were serving in the Gulf because, as the letter essentially said, "We figured you weren't driving your car too much."

After a presentation in which Kevin extolled the virtues of USAA, a man came up after the program and explained that eight months earlier he had lost his 20-year-old son. The father, a USAA member, explained that he was trying to figure out how to appropriately retire some minor debt his boy had on a USAA credit card. When he got on the phone with USAA, the representative told him they could deal with the boy's credit card later and then asked how the family was doing and if she could send him a couple of books on grieving. During a very emotional exchange the gentleman told Kevin that while other banks had already started sending collection notices, USAA was more concerned about the family's emotional wellbeing.

Courtship After Marriage
What USAA is doing could be referred to as "Courtship After Marriage." When Jackie and I first started dating I was very careful to plan and choreograph every date because I wanted to impress her and communicate just how much I liked her. Before the date I would wash and wax the car. When I picked her up—exactly on time—I was "Mr. Attention to Detail." I would compliment the way she looked and the way she carried herself, I walked her out to the car and opened the door for her and we'd go off on a perfectly executed date. At least that’s the way I remember it.

Two and a half years after we were married I lost some of that romance and attention to detail. When I asked her out it was usually at 7:00 a.m. in the morning in front of the bathroom mirror with a mouth full of toothpaste. If she said yes, I'd say, "Be ready at 6:30 p.m." I’d come home that evening—often 15 minutes late—grab a clean shirt, jump in the car and wait for her in the driveway. If she didn't come out right away I figured that I would encourage her a little bit by honking the horn. She would finally come out, obviously not happy with me, open her own car door and my response was, "Hi honey, what do you want to do?" Now I was a jerk, what a lousy way to start a date! I stopped doing the little things I used to do to say, "You are incredibly important to me. I cherish you!"

Again, ask the people at USAA why they get 95 percent of the market and they will tell you that while the rest of the industry is out there honking the horn, they are still washing and waxing the car—courtship after marriage. What does that look like?

During some heavy ice storms in upstate New York, Stephanie Valdez, a representative of USAA, the financial-services company, received a call from a Mrs. Lawless, the elderly widow of a deceased military officer. Mrs. Lawless told Valdez that she was sick, without her medicine, and, as if that weren't enough, she had no heat and was nearly freezing. She explained that her husband had a USAA insurance policy and had instructed her that if she ever had a problem and didn't know where else to turn, she should call USAA. "He said you would take care of me," she concluded.

When Valdez retrieved the records, she discovered that the policy hadn't been maintained since the officer's death. But that didn't stop Valdez, who put her former client on hold and called the Red Cross. That afternoon, Mrs. Lawless got her medicine, and the heat was restored in her home. Mr. Lawless had told his wife that USAA would take care of her when no one else could, and Valdez was determined to make good on that promise, whether the premiums were paid or not.

Does anyone have a prayer of stealing their business with courtship after marriage like that? When we ask members of our audiences all over the world, how many are insured with USAA, there are always raised hands. When we ask, if any would be willing to switch insurance companies, the response is always an emphatic "No!"

The bond between USAA and its members reflects trust in a military culture, in which the stakes are literally life and death. General Bill Cooney, USAA's legendary former vice chairman, gave this simple example: "If you tell me you're going to be over Bosnia at a certain time and place, you had better be there, because I'm counting on you. If you're not there, I could be dead." What Cooney expressed is the exquisitely heightened expectation that people will look out for each other. And USAA has shown itself worthy of such trust more than once.

For example, Jim Middleton, president and chief executive of USAA Life Insurance Company, told us that, in July 2001, Deborah Patterson, an employee in USAA's property-and-casualty business, suggested to a member who worked at the World Trade Center in New York that he consider life insurance. The member agreed. He began the application process, and by September, the contract, including blood tests and medical examinations, had been completed. All he had to do was pay his first month's premium. Then, on September 11, 2001, two planes crashed into the World Trade Center and the member was killed. USAA immediately sent a crisis response team to Ground Zero.

Among the first people the USAA team encountered at the crisis operations center was this member's widow. In the mayhem of the tragedy, she remembered that her husband had a life-insurance policy pending with USAA. Reminiscent of how Stephanie Valdez handled Mrs. Lawless and due to the tragic and highly unusual circumstances, USAA accepted the first month's payment from the member's wife, and paid off the $125,000 policy. Jim Middleton told us that he "would do it again in a minute."

Customers Reciprocate the Loyalty they Receive
With five million members in four million households, USAA's member retention rate is more than 96 percent, its customer satisfaction is over 98 percent and much of its business comes from word of mouth. What does courtship after marriage look like in your business?

Additional Information:
 

By now, you've probably implemented CRM programs and built your CRM database. You've recognized that CRM is a necessary tool, rather than a luxury, to do business in a competitive age. As Russ Hill, worldwide director of retail, consumer products, and distribution industry marketing at business intelligence provider Business Objects, says, "As retailers spend every day in 'survival mode,' the competition to gain insight that helps them understand who their customers are is increasingly intense. They rely on CRM to learn their consumers' preferences, then take that preference data and use it to provide products and services that create the potential for retaining, cross-selling, and up-selling." But if you look further into that customer insight, you can use the data to gain more than a mere understanding of your customer -- you can use it to drive your supply chain decisions.

Right now, you're collecting CRM data in a number of different ways: at the POS, during online transactions, through kiosks in your stores, and via customer surveys. You know what your customers purchase, how frequently those customers make purchases, and how much those customers spend on each purchase. CRM solutions that delve deeper can bring you data on your customers' demographic groups (age, sex, even income bracket), purchase influencers, and the importance of product features. Cross-referencing CRM data can bring you further insight, like how large a customer's average sale is and what items are typically purchased together. This information can benefit many retailers in a number of niches, including, but not limited to, apparel, specialty, grocery, and drugstore. "If you understand different components of your shopper base and you can prioritize what those different components are, you can segment them to market to them, which is the original goal of CRM," says Ramesh Murthy, COO at Retail Solutions, Inc., which provides consumer data analysis services to retailers.

Success Can Be Had With Traditional CRM Solutions
The fact that many retailers have yet to optimize and integrate their CRM solutions does not mean the technology is without merit. There are numerous accounts of retailers who are using traditional methods, and even stepping a bit beyond those methods, to gain benefits from their CRM projects. For example, many stores are capitalizing on loyalty/guest cards with entry-point kiosks. Customers scan their guest cards before they shop to gain targeted promotional offers, which provides retailers the opportunity to influence customer buying decisions not only on the customer's next purchase, but on the current shopping trip.

Cyndy Renfrow, senior director of global market development for business intelligence provider SAS, cites several examples of retailers who have seen CRM success in this manner. "Victoria's Secret reported a 400% ROI using a CRM solution in a pilot test on its e-commerce site," she says. "A fashion chain relies on CRM for targeted direct mailings that saved the retailer $800,000 in nine months. Also, a large gift retailer saw increased revenues and a 15% increase in customer retention, thanks in part to using CRM to build intimate customer relationships."

Analytics Can Extract Inventory Insight From CRM
As good as these CRM success stories sound, the benefits of the technology reach beyond its customer-facing aspects. Once you've applied analytics, CRM data can be used to influence your inventory and ordering decisions. "Traditionally, CRM has been treated merely as a way to gather data on a customer's purchasing habits," says Renfrow. "Today, retailers are looking to drive proactive business decisions by applying analytics and predictive modeling to the extensive databases that are now available to them. They are using modeling and analytics to look at the business innovatively, rather than being steered by the trended data." Information is not something you're lacking from your CRM solutions. Rather, you have so much data that you may wonder, "What do I do with all of this?" That's where the analytic tools that Renfrow refers to come into play.

You can apply these analytic tools to almost any customer- and purchase-specific data. It takes some creativity, though. You must be willing to aggregate data differently than you may have done in the past. For example, look at how purchase history and frequency can be applied to demographic groups to see who your "ideal" customer is. You can see if what they purchase aligns with what you have in stock or what you have on promotion. "Many retailers look at item- and store-level demand, and that gives them a good picture of what's going on in their stores," says Murthy. "But when you get down to CRM data, you have the most finite, granular level of demand possible: that person's purchase at that point in time. You can start by using the data diagnostically, trying to understand the demand for products in your stores. You look at that segmented demand, and you can actually organize and aggregate it back to your stores, back to your DCs, and even to your orders."

That statement may seem over-confident, or even unattainable. But, if you can predict the relationship between what your customers purchase and what you have in your stores, you can cut down on inventory lag time and out-of-stock merchandise. Retailers with multichannel outlets, where there is typically a wealth of specific purchase and customer-type data, can perform this prediction more easily. "Multichannel retailers tend to be more focused on understanding customer purchase behavior. This helps them develop more effective promotional and seasonal campaigns," says Renfrow. "This also enables better product allocation among channels, which in turn reduces the cost of excess inventory and helps retailers increase revenue by keeping what the consumer wants in stock."

Have you thought about applying the CRM data you have to the supply chain decisions you make? Maybe not. But you should consider it and look at the resources you have to see if you can apply some of the analytics SAS, Retail Solutions, and Business Objects spoke of. As Renfrow says, "CRM should not be viewed as a separate module to be integrated with other application systems. Instead, it needs to be viewed and supported as the foundation of the art of retailing. CRM is a critical component in all of retail intelligence."
 

Additional Information:
 

For customer loyalty, 88% of surveyed organisations only reported on basic voice of customer and customer satisfaction information. However, reporting on the specific drivers of customer loyalty as correlated to revenue and profit was rarely reported. The main reasons cited for this were that the customer satisfaction and voice of customer were perceived to be adequate customer loyalty information. However, the companies did not know whether customer satisfaction changes were driving or impeding profitability or it was too difficult to determine and monitor the underlying customer loyalty drivers.

Only 9% of organisations reported comprehensively on customers as an asset. In these cases reporting on customers was linked back to financial indicators and created a comprehensive breakdown of the customer movements and values that drive company profit.

Changing the organisation's view of customers to that of a managed financial asset is not just an interesting theoretical framework but a practical approach to meeting business goals. Customers are assets and have similar characteristics to other assets, so what do we need to change in organisations to drive the maximum value in our business? There are three key areas to address:

1) Corporate Governance
In the same way that boards actively manage their non-customer asset base they must actively manage their Customer Asset base. For instance, no board would contemplate changing the capital structure of the company without examining how it might affect the organisation's credit rating. Yet the same board doesn’t even question how a marketing campaign might impact the bad debt profile of its Customer Assets, with an equal impact on the organisation’s credit rating.

Boards and executive management must manage their Customer Assets in financial terms and have an understanding of how different business strategies impact on the Customer Asset return/risk profile created.

As another example of the way governance structures should approach Customer Assets, lets review how a company might approach two analogous situations. In the first situation a company wants to expand production capacity. Rather than immediately purchasing new equipment, hiring staff and building new facilities, it tries first to make the current equipment work harder, i.e. improve the return on assets. Reducing bottlenecks, optimising configurations, running closer to full capacity, improving maintenance to reduce downtime, etc, are the initial focus. Only after all those options have been investigated does it purchase new production capacity.

In the second situation the same company wants to grow revenue. In contrast to the first situation, it immediately tries to acquire new customers. This is the equivalent of buying new equipment when it hasn’t even looked at how well the old equipment is working. A better approach is to examine at the current Customer Assets to see if they can be worked harder, i.e. can it sell more to the existing customers (equivalent to increasing throughput) or reduce customer outflow (equivalent to extending working life).

2) Manage Customers as an Asset Portfolio
Just like non-Customer Assets, each individual Customer Asset (i.e. customer) exhibits a different return / quality profile. A company’s customer base is in effect an asset portfolio to be actively managed.

For maximum return, customers need to be managed in a similar way to any other investment portfolio by creating a balance between customers with different returns / quality profiles. The analogy with modern portfolio theory is very strong because both ideas are based on building an optimal risk/return portfolio on a spread of assets. In order to maximise outcomes it is necessary to create a balanced portfolio of different customer types.

This is an active not passive process. Companies that actively manage their customer acquisition, migration and disposal are able to closely match their Customer Asset portfolio to their business needs.

3) Reporting
It has already been noted that the difference between customer reporting and other asset reporting in most companies is stark. Request a plant and equipment report in most companies and you will receive a detailed description of acquisition, disposal, lifetime costs, liabilities, etc. Request a customer report in the same organisation and you are unlikely to receive an integrated report showing acquisition, attrition, migration and lifetime values.

Substantial changes are needed in the way organisations view and report on Customer Assets. Critical Customer Asset information is not their name (in fact this is the least useful piece of information) and product holdings. Companies must go beyond this simple view to look at indicators such as customer lifetime values, migration movements, potential credit risks, customer gross margins, future customer revenue lost, etc. With this information it is possible to manage the Customer Asset portfolio more efficiently and effectively.

In summary, many organisations do not realise that customers are a financial asset and can be managed the same way as all other financial assets. Changing the organisation’s perspective to managing customers as a financial asset can make a huge difference to the organisation's bottom line and future growth.

Additional Information:
¹Harvard Business School Working Knowledge, “Your customers: Use them or lose them” 19 July 2004.

Customers are like puppies. Everyone wants them, but once acquired, no-one wants to take them for a walk! So, how seriously do we take customer orientation and customer focus? And what does this actually mean?

What Does Customer Orientation Mean?
Does it mean sending a multimedia message to the mobile phone wishing someone a "Merry Christmas" while referring to attractive value-added services at the same time? Perhaps a glossy mailing with attached "additional value"? Or a friendly voice that makes a newspaper subscription, or a change of telephone provider, palatable to a besieged phone customer? Such marketing activities may make the blood of a marketing manager stir, but what does the return on such activities really look like, in particular if we analyze the customer who was acquired, over time, with regard to his profitability to the company? And have these activities really been reconciled across the entire company, or is the marketing division selling something that the company is not (or no longer) able to supply?

Or do we simply understand an increase in customer satisfaction by customer orientation? Of course, that's what the marketing division is responsible for, or is it? Because customer satisfaction is often regarded as a task of marketing, many CRM projects in the past were planned and implemented only for a specific business area. Sales and marketing related activities with customers that could have been recorded and stored were not, and within individual business units information silos have arisen which today prevent a comprehensive view of the customer.

Do we really want to satisfy all customers? Is "Love all, serve all" really the proper approach today? Didn't we once learn that we should focus? Didn't we once put on paper which customer segments we wanted to address? But which criteria did we use when choosing these customer segments? Do we focus on those segments in which we expect a high turnover, or those with high profitability? Does anyone in the company know how profitable a customer segment or even an individual customer is today, and which interdependencies exist between individual customer segments? To put it in concrete terms: Do the major banks now want to get rid of their retail customers, or does this cut off their access to prospective clients for private banking?

Many Open Questions…
We see that despite the long period of customer orientation, which is reported to have begun in the 90s, there are still many questions to be addressed. Here are the most important ones:

• How do we make sure that the marketing strategy is linked with the overall strategy?
• Which are our profitable customers?
• How can we make sure that the relevant information to answer the above questions is available in the right form?
• Consequently how do we translate customer orientation into daily business in a  strategy-compliant manner?

Measurement is increasingly being looked upon as the "missing ingredient" in today's Customer Relationship Management (CRM) strategies.

The enormous failure rate of CRM initiatives - 70% to 90% by most accounts - is forcing many organizations to look beyond the promises of technology and return to a basic tenant of business management - what gets measured gets done. But, to drive CRM performance, not just any measurement system will do.

What's needed is a measurement system that specifically links CRM strategy and customer profitability objectives to metrics that drive CRM performance throughout the organization - a CRM Scorecard. To effectively implement and benefit from a CRM Scorecard, an organization must successfully perform five key steps (Figure 1):

Figure 1.

 

Steps for Implementing and Benefiting from a CRM Scorecard

	Step Activity 1 Define CRM Strategy – Create a CRM Strategy Map 2 Select CRM Strategic Measures 3 Cascade CRM Strategic Measures 4 Select and Implement CRM Performance Reporting System 5 Entrench CRM Measurement in Organizational Culture

 

This article is the first of five parts focused on successfully implementing a CRM Scorecard. Part 1 focuses on Step 1. Defining CRM Strategy - Creating a CRM Strategy Map.

Step 1. Defining CRM Strategy - Creating a CRM Strategy Map
Creating an effective enterprise CRM scorecard does not start with measurement. A comprehensive CRM strategy is too complex for that. Building an effective CRM Scorecard begins with defining an organization's unique CRM strategy. Without a clear understanding and commitment by the CRM strategy team as to what the CRM strategy is and how, specifically, strategic CRM goals will be achieved, efforts to select and effectively communicate critical strategic CRM measures will quickly become unfocused and unproductive. A powerful tool for defining an organization's CRM strategy is the CRM Strategy Map

The CRM Strategy Map clearly and visually outlines the specific goals of an organization's CRM strategy and the specific cause-and-effect links by which these goals will be achieved. CRM Strategy Maps are powerful communication tools giving everyone in the organization a clear picture of what their organization's CRM strategy is and how their jobs contribute to CRM success.

The development of an enterprise CRM Strategy Map can be facilitated by the use of a CRM Strategy Map template like that shown in Figure 2.

A CRM Strategy Map consists of three key components:

1. Strategic perspectives
2. Strategic themes
3. Strategic linkages

Strategic Perspectives and Themes
The perspectives recommended for a CRM Strategy Map mimic those used by Kaplan and Norton in their Balanced Scorecard Strategy Map with one critical addition - Segment.

Strategy perspectives serve to focus the CRM strategy team on the essential elements of CRM strategy execution. Each perspective has a related strategic theme or thrust that, together, guides the team in identifying and mapping the key success factors and strategy-critical cause-and-effect linkages that will drive their organization's CRM performance and ROI.

The CRM Strategy Map template is comprised of five strategic perspectives and their related strategic themes. The focus of each strategic perspective / theme is outlined below:

1. Segment Perspective / Theme
The segment perspective of the CRM Strategy Map focuses on the specific customer segments targeted for CRM. The strategic theme for the segment perspective focuses on targeting customer segments and their value propositions.

2. Financial Perspective / Theme
The financial perspective of the CRM Strategy Map reflects the strategic CRM financial objectives for each targeted customer segment. The strategic theme for the financial perspective is to maximize the profitability of targeted customer segments.

3. Customer Perspective / Theme
The customer perspective focuses on the strategic CRM customer success factors for achieving desired CRM financial outcomes. The strategic theme for the customer perspective is to maximize the experience and desired behavior of targeted customer segments.

4. Operations Perspective / Theme
The operations perspective of the CRM Strategy Map focuses on the strategic CRM operational success factors for achieving desired customer outcomes for each CRM function (e.g., marketing, sales, customer service) and customer contact channel (e.g., inbound phone, outbound phone, e-mail, Web, field force). The strategic theme for the operations perspective is to maximize the efficiency and effectiveness of enterprise CRM operations.

5. People / IT Perspective
The people / IT perspective of the CRM Strategy Map focuses on the strategic CRM people and technology success factors for achieving desired CRM operational and customer outcomes for each CRM function and customer contact channel. The strategic theme for the people / IT perspective focuses on maximizing the experience and capabilities of CRM operations employees.

Key Customer Success Factors for CRM strategy include

• maximize retention
• maximize penetration (i.e., cross-sells and up-sells)
• maximize win backs
• maximize acquisitions
• maximize satisfaction
• maximize loyalty
• maximize share-of-wallet

Once selected, the key customer success factors are added to the CRM Strategy Map and serve as input for the Operations strategy work session.

 

CRM Strategy Work Session #4 - Selecting Operations Success Factors
With strategic customer success factors selected, the CRM strategy team next convenes to select the key operations success factors that will drive desired customer outcomes. Operations refers to both the key functions and customer contact channels used by the organization in delivering customer value.

Key enterprise CRM functions include sales, marketing and customer service. Key customer contact channels include inbound phone, outbound phone, fax, e-mail, Web and face-to-face.

Key Operations Success Factors for CRM strategy include:

• maximize sales productivity
• maximize sales productivity
• maximize marketing effectiveness

Once the key operations success factors have been selected for each customer contact channel, they are added to the CRM Strategy Map and serve as input for the People/IT strategy work session.

 

CRM Strategy Work Session #5 - Selecting People / IT Success Factors
With strategic operations success factors selected for each customer contact channel, the CRM strategy team meets to select the key people / IT success factors that will drive desired operations and customer outcomes. People / IT success factors incorporate key employee competencies, employee commitment and IT capabilities for each customer contact channel used in delivering customer value.

Key People/IT Success Factors for CRM strategy include:

• increase employee satisfaction
• increase employee commitment to CRM
• increase employee loyalty
• increase employee strategic competencies
• increase employee strategic knowledge

Once the key people / IT success factors have been selected for each customer contact channel, they are added to the CRM Strategy Map.

 

In selecting CRM strategy success factors, great care must be used by the CRM strategy team to ensure that those chosen are both necessary and sufficient for maximizing CRM strategy success for targeted customer segments and their value propositions.

While the exact number of success factors will be dependent upon an organization's unique CRM strategy, a good rule-of-thumb is three to five success factors per perspective (except for the segment perspective which is dedicated to a single targeted customer segment and its specific value proposition).

CRM Strategy Work Session #6 - Selecting CRM Objectives
With the selection of the key success factors for the Operations and People / IT perspectives successfully completed, the CRM strategy team meets in a final work session to document the specific CRM Objectives that will drive CRM performance for their organization.

CRM Objectives define the specific tactics and actions the enterprise has selected to execute in the Operations and People / IT perspectives to drive achievement of their related key success factors for each customer contact channel. CRM Objectives not only provide information helpful in communicating CRM strategy but also serve as the basis for selecting and prioritizing enterprise CRM initiatives.

Examples of CRM Objectives for selected Key Success Factors are shown below:

• Increase Employee Satisfaction / Commitment
  • Understand employee satisfaction, retention and commitment drivers
  • Create compelling place to work
• Increase Strategic Competencies
  • Improve competencies in core CRM processes and functions
  • Master use of customer databases
• Increase Strategic Knowledge
  • Increase access to / depth of customer knowledge
  • Increase access to / timeliness of CRM performance across all customer touch points
• Maximize Sales Productivity
  • Increase conversion rate
  • Increase revenue per conversion
• Maximize Marketing Effectiveness
  • Increase lead generation
  • Reduce cost per lead
• Maximize Service Quality
  • Improve customer service quality
  • Reduce cost per service encounter

 

Summary
A well-designed CRM Strategy Map enables an enterprise to clearly define and communicate its CRM strategy to all enterprise stakeholders. While requiring some effort, a CRM Strategy Map can also provide an organization with many additional and strategically important benefits.

A CRM Strategy Map can help organizations to:

• clarify confusing aspects of CRM strategy among CRM strategy team members
• forge alignment among the CRM strategy team
• discover costly ¡§strategic misalignment¡¨ of key success factors and CRM objectives
• identify missing key success factors and CRM objectives critical to CRM success
• illustrate the integrated and holistic nature of a successful CRM strategy
• develop a common language for discussing CRM strategy
• outline what should be measured to manage and continuously improve strategic CRM performance

With a CRM Strategy Map successfully developed, an organization is ready to advance to the next step of implementing a CRM Scorecard

 

Next issue: Step 2. Selecting Strategic CRM Measures.

Marketing Performance Management: The CMO’s Ultimate Toolkit
By Lane Michel
Quaero
 

Tired of the CFO hammering Marketing because it’s an easy cost reduction for this quarter’s shortfalls? Frustrated with all the hype about the marketing and CRM systems that are going to put your organization on the road to “ROMI”? And yet, you are still somehow exhilarated and hopeful that the power, insight and value that Marketing can create for your company and its customers is on the verge of that promised breakthrough.

The end game to achieving the breakthrough is all about getting your company through the par course for performance. That is, where performance means you run a Marketing organization that delivers:
 

• Predictable results… as believable and valuable as any other business forecasts
   
• Effective and Efficient use of company resources … and customer attention
   
• Competitive advantage to leapfrog the market... to stand out as a leader; to have the most buzz from customers and analysts; to achieve sustained high growth

 

The focus for marketing executives has shifted to Marketing Performance Management. The search for talent, answers, the right tools and especially positive customer responses has moved into high gear. Unfortunately, the marketing “vehicle” still isn’t moving anywhere. Why? Because someone still has their foot on the brake, blocks around your wheels, the hood up telling you to replace your engine, no steering wheel to direct the vehicle, and by the way, foggy windows with no mirrors to see what’s happening around you. But other than that, the hype is in high gear and the engine is making a lot of noise. Sorry, if this is you, the CFO traffic cop is forced to keep directing you into the lane of short term thinking and cost reductions.

Managing marketing performance is all about creating a customer and data-driven discipline in your organization, enabled with the right tools and information when needed, measured in such a way that every one in the marketing organization that makes decisions gets immediate feedback as to whether their decisions:
 

• Created or destroyed customer value
   
• Generated or reduced return on marketing investment
   

There is a simple model for taking the new focus on marketing performance management into action and not just wasting words or a playing a guessing-game. It has three basic components:
 

1. Customer insight derived from individual customers’ needs and experiences
    
2. Six dimensions of marketing capabilities: namely actionable strategies, appropriate measures, organization alignment, effective processes, information assets, and enabling technologies
    
3. Measurement of both Return on Marketing Investment (ROMI) and Return on Customer^SM (ROC)

 

There has been enough learning in pursuing CRM, MRM, campaign management and marketing automation over the last ten years that now there is an equally simple formula for making a dramatic shift in the performance of your marketing organization over a period of about 18 to 36 months. This is the CMO’s ultimate toolkit. Not hollow promises. Not overset expectations. Just the reality of how the best marketing organizations are now transforming all the rhetoric into action and results for their customers and companies.

The Ultimate CMO Toolkit for MPM contains strategies and tactics that will become the new discipline of marketing. Marketing is becoming more scientific in its approach and accountable to shareholders. The creativity and art of marketing still has an important place in using imagination to better understand how to link insights on customer needs with the capability to meet those needs better than anyone else.

If you are relying on the “tried and true” seat-of-the-pants marketing to meet your commitments to your company, then start brushing off your resume. That just isn’t going to get the job done and will de-value the equity of your company.

In the months ahead, I’ll be covering each of the elements of the CMO’s Toolkit for MPM and share the stories of companies that are getting significant lifts in customer satisfaction, response and conversion through their focus on managing the performance of marketing.

Additional Information:
Lane Michel is Executive Vice President and Managing Director of the Marketing Performance Management business unit of Quaero Corporation. He can reached at lane@quaero.com

Return on Customer^SM is a registered service mark of Peppers & Rogers Group, a Carlson Marketing Group company.