Intelligent Enterprise

Excerpted from Defying the Limits: The CRM Project

The field of CRM is at a crossroads. The promise — while still very much alive — has in too many cases not been delivered. Too many projects have been abandoned; too much investment has been written off. While there are many potential reasons for the current state of affairs, one of the most obvious is that, in many organizations, CRM initiatives are often "non strategic." This paper offers a "strategic approach" to thinking about CRM in the hope that it will help firms realize the true benefits of this fundamentally revolutionary and vital business technology.

Smart Markets

Strategy is essentially a matter of aligning business practice and process to the demands of the environment. Perhaps the most important implication of the information age for business is the emergence of information-intensive or "smart" markets, which are markets defined by frequent turnovers in the general stock of knowledge or information embodied in products and services and possessed by firms and consumers. In contrast to traditional "dumb" markets — which are static, fixed, and basically information-poor — smart markets are dynamic, turbulent, and information-rich.

It is in the context of smart markets that CRM should be viewed. Smart markets are based on smart products, which are product and service offerings that have intelligence or computational ability built into them and can adapt or respond to changes in the environment as they interact with customers. Smart markets are also characterized by smart consumers — consumers who, from the standpoint of the firm, are continually "speaking" (they are not mute or "dumb"); and, in so doing, educate or teach the firm about who they are and what they want. In such an environment, competition is less about who has the best products and more about which firm can spend the most time interacting with (and therefore learning from) its customers.

Customers as Assets

The essence of smart markets — and therefore the imperative behind CRM initiatives — is that the customer is the "new asset" of the organization. This approach shifts the focus away from the product and toward the customer as the key asset or source of wealth generation. The company of the future is likely to be organized around customer managers (CM) rather than product managers who will have bottom-line profit-and-loss responsibility for a set of customer targets. In addition, the CM will be charged with developing and delivering a set of offerings to chosen customers. Consistent with this responsibility, the CM will act as a team leader who coordinates the activities of a variety of marketing-mix professionals or specialists (in pricing, advertising, forecasting, etc.) who will be necessary to develop and implement customer plans, which specify specific strategic objectives with respect to designated customer targets.

Identifying the customer as an asset means that the focus of attention shifts away from the offerings and that the customer, not the product, is viewed as the real generator of wealth for the company. The source of competitive advantage is seen less in terms of unique or superior products and more with respect to having special relationships with customers. Consequently, both performance measures and organizational structure become aligned around customers as opposed to particular products or services.

In particular, the current structure of accounting for profit and loss (P&L) by product — the foundation for the product management system — is being replaced by a customer management structure in which P&L is organized by customer. Notions such as profitability or market share per product are being replaced with concepts such as profitability per customer — increasingly referred to as the customer's lifetime value (LTV), which is the total profits generated over a given customer's "life." The associated concept of customer share is the total share of a customer's purchases in a broadly defined product category — such as Visa's "share of wallet," Levi's "share of closet," or Coke's "share of stomach."

The Customer Information File: The Organizing Framework for CRM Decisions

The organizing principle, as well as the raw material from which a firm measures and evaluates its customer assets, is the customer information file (CIF). It is the data collected and processed as part (increasingly) of every customer transaction or interaction. As a practical matter, this is what it means for the customer to be the asset, since the foundation of relationship marketing is continual communication (the exchange of information between a firm and its customers). CRM activities are based on an understanding of both the structure and strategies that are the result of a well-designed CIF.

The CIF can be thought of as a single virtual database that captures all relevant information about a firm's customers. The database is described as virtual since, while operating as though it were an integrated single source housed in one location, it may comprise several isolated databases stored in separate places throughout an organization. As noted in Figure 1, the rows (or records) of the CIF are individual customers — both actual as well as potential — and not segments. The columns are data that have been collected about customers. At least conceptually, these can be organized into three categories:

• {C} Customer characteristics: Typically (though not exclusively) composed of demographic data, this is information about customers (who they are) that is independent of the firm's relationship with the customer.
• {R} Response to firm decisions: Perception and preference (e.g., product attribute importance weights) and other marketing-mix response data (price sensitivity, sources of information, channel shopping behavior), this is information about customers (when, where, how, and why they buy) that is based on some (perhaps limited) level of interaction between the firm and its customers.
• {P} Purchase history: Data on what products customers have purchased, as well as the revenues, costs, and profits associated with these purchases. This is information that is based on the firm's actual transactions with its customers.

As noted in Figure 1, there is one additional column of information in the CIF (at the far right), labeled as P*. If Pit is the actual profit realized from customer i in period t, then P*it is the potential profit that could have been realized from customer i had the firm made the optimum use of its information assets. P*-P thus represents foregone or unrealized profits and the new objective function of the firm is to minimize (P*-P) across all customers in all periods; or, equivalently, to maximize P*it — the value of the CIF. This is the strategic objective of CRM activities.

Figure 1