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Summary
Customer relationship management (CRM) means many things to many people, encompassing a spectrum from merely maintaining a database of customer contacts to running contact centers that deal with all of a customer’s business through multiple communication channels. Customer loyalty schemes, which are designed to reward customers for making additional purchases, normally are seen as outside the scope of CRM. Ventana Research, however, believes that at their heart, both address the same issue – how to retain customers and maximize the chances of winning additional business – and should be approached in a coordinated manner.

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In their 1996 book “The Loyalty Effect,” Frederick Reichheld and Thomas Teal postulated that customer retention – loyalty – was the key to maximizing revenue from customers. They argued that as a result of having top recover the costs of acquiring and retaining customers, it could take a company up to seven years to turn a net profit on any one customer. And even then, the company would have to achieve considerable additional sales and spin-off business generated by the customer recommending the company to others.

These observations led to the concept of CRM, whereby companies manage their relationships with customers to retain them for as long as possible and take every opportunity to make additional sales. Software vendors soon released products to support efforts to do this, and the CRM technology market was born. However, most of the products focused on automating the sales process rather than managing the customer relationship to its full potential. This missed focus goes a long way toward explaining why our recent research revealed that only 30 percent of companies measure the average life span of customers and only one-third measure the lifetime value of customers.

In their 2002 book “The Mismanagement of Customer Loyalty,” Werner Reinartz and V. Kumar questioned this thinking, asking whether loyal customers indeed are more profitable. They found no evidence to suggest that loyal customers who purchase steadily from a business are less costly to serve, that they become less sensitive to price or that their recommendations actually generate any new business. What’s more, simply automating the sales process encourages companies to attach more importance to, and spend more time and money on, winning new customers rather than marketing to their existing customer base. Practical experience supports both these perceptions and suggests that a different understanding of the behavior of customer segments is needed to uncover which ones are likely to spend more and become more profitable.

In striving to create loyal customers, many companies invested in loyalty reward programs. The airline and retail industries were the first to offer members of their loyalty programs redeemable points for additional purchases. However, evidence suggests that customers become more loyal to the rewards program than to the company sponsoring it – for example, continuing to fly with an airline to collect the points rather than because they are happy with the airline’s performance. Companies on their part have done little with the data they collect other than check the customers’ balances when they come to trade the points in.

We believe companies can do better at translating customer loyalty into profit. For example, the manager of a dealership associated with one of the major car manufacturers told us that his old business model didn’t allow him to build relationships with his customers: It was geared purely to people looking to purchase a new car, and it stopped when they did so. The customers were rarely seen again – if ever – until the time came to buy their next new car. In between they were purchasing auxiliary parts and services – such as replacement tires, oil changes and other servicing – from independent third parties that offered them at lower prices than the dealer.

The retailer wanted to make up for these missed opportunities, gain more auxiliary business from its customers and increase the probability they would return for their next car purchase. But it simply didn’t have the data to drive more proactive relationships. Fortunately some vendors now offer software and services packages that support customer loyalty programs. The dealership manager settled on MediaTrac’s LoyaltyTrac service, which manages data to reward customers with points for every purchase. In this and similar schemes, customers can trade in the points to reduce the cost of subsequent purchases; this discount encourages them to buy not only new cars but auxiliary services.

The dealer soon put the data to fuller use. For example, it ran surveys to discover what customers were looking for and in response built more competitive services and proactively marketed them to target customer segments. Customers started to visit between new car purchases, which drove up the sale of additional services and also resulted in a much higher percentage buying their next new car from the dealership. The new business model based on proactive customer relationships generated additional revenues that soon recouped the cost of the service. 

Assessment
The example above shows how a proactively run loyalty scheme that makes full use of customer data can enhance customer relationships and increase business. Ventana Research believes that companies should realign their CRM initiatives away from sales automation and use the information collected about customers, through both CRM and loyalty schemes, to drive customer relationships proactively. We also believe that companies should change what they measure from the efficiency of the sales process to their effectiveness in serving customers. Companies shouldn’t pigeonhole software products and services into narrow categories such as CRM, loyalty schemes or business intelligence but should re-examine all the processes that touch customers, make these more customer-centric, and make sure they have technology that will make the best use of all their customer data.