Far from improving profits and cementing relationships, in the
worst cases CRM wound up alienating long-term customers and
Yet, the benefits of getting CRM right are well-documented. The
objective is to increase customer loyalty. And Bain & Company
research finds a 5% increase in customer retention boosts lifetime
customer profits 50%, on average, across industries, and up to 90%
in industries like insurance. (See sidebar: "In a Downturn, Loyalty
So what's gone wrong? By looking at case histories of the
failures as well as the successes, we found at cause a mistaken
view that CRM is a shortcut to acquiring, building, and retaining
relationships with customers. It isn't. The first step in leading a
successful CRM program is to develop a robust customer strategy
based on good old-fashioned customer segmentation. Step two is to
realign your organization to support this plan. Third, provide the
right tools and technology to support your customer strategy and
realigned organization. And at every step of the way ask yourself
whether customer loyalty could be better promoted by a low- or
Build a robust customer strategy
For a subject that garnered about 15,000 media mentions last
year, CRM is a simple concept: a way of linking the tried and
tested discipline of customer segmentation to determine which
customers you want to "CR"-create relationships with-and which you
want to "CM"-cost-manage. The only way you can do this is to
develop a rigorous customer strategy that separates the profitable
clients with whom you want deeper relationships from the ones you
should service at low cost.
Managing costs of low-margin customers by automating sales,
marketing, and customer service is straightforward. The logic that
supports creating relationships is more complex, but boils down to
this: loyal customers are more profitable over time. As well as
buying more goods, it costs less to serve them. What's more, return
customers refer others to your company. And they may also pay a
premium to continue to do business with you rather than switch to a
competitor they aren't familiar with.
The crux of any customer relationship strategy is customer
segmentation, which is why some of world's pickiest companies have
the most successful CRM programs. Take MBNA Europe, the
international arm of the US credit card giant, which has enjoyed a
75% annual profit growth since 1995.
When its leaders set about expanding into Europe in 1993, they
were as meticulous about selecting the "right" customers as they
had been in the US. To this end, MBNA invests heavily in screening
potential cardholders. A credit analyst manually reviews every
application, and more than half are rejected. Around 65% of its
customers hold affinity cards, reflecting MBNA's strategy of
targeting members of clubs and organizations such as the World Wide
Fund for Nature and the Manchester United football club. Attracted
by the card's affiliation with their organization rather than a
need for credit, these customers tend to have a better risk
profile-one of the reasons MBNA's credit losses are one-third below
the industry average.
Once it has identified and signed up the right kind of customer,
MBNA holds on to them, retaining an impressive 97% of its
profitable customers. MBNA is aggressive about getting the most
from the customers who stay. It does this by continuous analysis of
customer behavior and "re-underwrites" its customers on a quarterly
basis via a dozen credit bureau data points, phone contacts, and
customers' usage and payment patterns. As a result, MBNA customers'
card usage is 52% above the industry norm, and their average
expenditure is 30% more per transaction. By matching the right
products with the right customers, an impressive 10% of account
holders ask for further information on cross-sale products.
Another company choosy about who it does business with is Direct
Line. The UK-based direct home and motor insurer was set up in the
mid-1980s to provide customers with high-quality coverage and good
service. Direct Line, a subsidiary of Royal Bank of Scotland, is
now the leading UK direct insurer for both motor and household
insurance and has successfully expanded into personal loans,
mortgages, and tracker ISAs (Individual Savings Accounts).
Cutting out brokers' commissions, which typically account for
15-20% of premiums written, not only keeps prices competitive, but
also enables Direct Line to vet customers itself. And it is
persnickety about who it insures. It will not provide coverage to
young drivers and exotic cars, for instance. Other riskier
categories are offered insurance, but at prices that properly take
the risks into account and often only under certain conditions. For
example, Direct Line will only insure a property with contents
valued at more than £50,000 after a staff member has visited
Once it signs up a customer, Direct Line rigorously analyzes
customer behavior in order to adjust premiums based on the level of
overall actuarial risk. Its CRM system enables it to hold
information on 18 million customers and it is updated with 60,000
transactions daily. Because this enables Direct Line to price risk
accurately, there is a stringent "no-haggle" policy in which
customers know they will be quoted on non-negotiable price.
Align your organization with your customer strategy
These companies made a success of their CRM programs by ensuring
the organization was aligned with their customer strategy. One of
the reasons more than half of all CRM programs fail is because a
CRM software solution is parachuted into a company in the vain hope
it will single-handedly resolve a business's customer relationship
problems. This puts the cart before the proverbial horse.
UK supermarket group Safeway learned the hard way that
installing CRM technology without devising the right customer
strategy and without changing the organization accordingly is bound
to fail. The company launched its ABC loyalty card at the end of
1995 in response to competitor Tesco's successful card program. In
2000, Safeway dropped the initiative altogether, failing to recover
the £50m a year it spent running the program.
As is often the case with "me too" strategies, the initiative
did nothing to tackle Safeway's key problem: stores underperforming
their sales potential. To close this gap, Safeway needed to attract
new customers altogether, not just persuade existing customers to
spend more money by offering loyalty points.
Second, the loyalty card program was at odds with the company's
existing strategy of competing with competitors on a store-by-store
basis to win market share from the bottom up. In fact, the card
scheme was run nationally so did little to help win new local
customers. Third, Safeway did not align its technology with this
strategy. Its software could not collect data for individual
customers or even by store, so Safeway's managers could not adjust
product lines to reflect local preferences. Safeway did not have
the technology infrastructure to do anything with the card data on
a centralized basis either: they could not analyze the information
to help develop an e-commerce strategy or even simply cross-sell
When a new CEO, Carlos Criado-Perez, took the helm in 1999, he
rethought Safeway's customer strategy and decided to get rid of the
loyalty card program. The £50m a year it had cost to run was
instead invested in the company's "Best Ever Deals" promotion. This
strategy proved more effective at increasing customer traffic.
Profits in the year after nixing the loyalty card rose by more than
Safeway's technology infrastructure was unable to usefully
process the information gathered from loyalty card users. But the
key problem was not the technology. It was a flawed strategy and a
failure to marshal business processes behind a CRM program.
Safeway's experience illustrates the results of a recent CRM Forum
survey in which 87% of senior executives pinned the failure of CRM
on leadership and change management issues. Only four percent cited
Contrast Safeway's experience with UK supermarket leader Tesco,
whose CRM program was introduced only after the company
restructured its processes around customer needs. Tesco's CRM
program played a key role in the company's transformation from a
buyer-led organization to a customer-focused group that has held
its position as the UK's largest grocer since 1995. Tesco's profits
now top £1 billion a year.
Throughout the 1980s, Tesco's image among consumers was poor.
Tesco was perceived as having a mediocre product range housed in
poorly maintained stores as well as competing entirely on price. At
the end of the decade its leaders set about reinventing the brand.
First, Tesco embarked on a major investment program to move the
store upmarket, which involved building new, modern superstores and
closing down unprofitable outlets. Second, it radically improved
the quality and range of the products it sold, particularly
developing its line of convenience foods and healthy food lines.
Third, it upped its focus on "value for money" to the customer,
introducing an initial 70 "value lines" and cutting the price of
many other basic goods.
Tesco supported these initiatives with a host of organizational
changes. The company formed a new senior management team to lead
the new customer-focused group. Lord MacLaurin became chairman in
1986 and Terry Leahy was appointed deputy managing director in
1984. Tesco reorganized employees into teams centered on product
categories and gave teams responsibility for the product range in
each store. These employees selected products based on price,
quality, service, innovation, and customers' changing
All this was in place before Tesco's leaders turned to
technology, launching the company's highly successful loyalty card
in 1995. The Club Card allowed Tesco to develop extensive knowledge
of its customer base and to segment customers according to
purchases, location, and life stage. Armed with this information,
Tesco has carefully tailored its offerings to customers:
vegetarians are never sent special offers on meat products and
children's products are not sent to childfree shoppers. Moreover,
Tesco's money-off coupon program encourages customers to try
related, higher-priced products, not just receive discounts on
goods they routinely purchase.
Tesco further adapted its business processes and added
technology for a second innovation-online shopping. By thinking
through the customer experience every step of the way, Tesco
established the gold standard for UK online supermarket shopping
with its repeat order functions and lists of favourites and
previous purchases. A delivery time slot is selected before orders
are made to limit the inconvenience of waiting around for orders,
and customers can give Tesco staff discretion to replace list items
with alternatives should their first choice be out of stock. Tesco
is now the world's largest online grocer.
Provide the right tools
Once a robust customer strategy has been agreed and the
organization tailored to support that plan, it is time to shop for
the tools that best support that strategy. These waters can be
treacherous. Some managers are so beguiled by the latest software
system they fail to select the package that most precisely fits
their customer strategy. Instead of tracking down the solutions
most likely to promote customer loyalty, they retrofit customer
strategies to suit the most dazzling software package.
The second pitfall is to assume that, if some technology is a
good thing, more must be better. Some managers look to companies
like Amazon.com and put its success down to its ability to marshal
a vast array of software to customize its product.
In fact, though few companies have embraced cutting-edge
technology with such gusto as the online retailer's leader, Jeff
Bezos, the key to Amazon's success is not technology, but the
clarity of its customer proposition. The starting point for
Amazon.com was Bezos' vision of using the information Amazon
gathers about its customers to offer each one their own virtual
This involves more than the personal greeting that repeat
customers receive when they log on to a website. Amazon.com uses
collaborative filtering, which links customers with similar tastes
and purchasing histories as electronic "soul mates"-identifying and
recommending products that one soul mate has purchased but the
other has not.
Amazon also harnesses technology to provide personalized and
detailed feedback to employees. The online retailer provides
feedback to customer service representatives four times a month via
phone or e-mail based on monitoring their contact with customers.
Representatives are given URLs on the corporate intranet to which
they can link for training in areas of weakness.
Initiatives like this have helped Amazon.com almost double its
customer base every year since 1998. And once consumers have
purchased goods from Amazon.com they tend to return; 80% of its
customers are repeat.
The third pitfall is to assume CRM must be technology intensive
at all. Companies with well-functioning CRM programs may use
low-tech, high-tech, or even no-tech methods. Often a good starting
point for examining the benefits of a CRM software program is to
search for a no-tech solution. Try asking managers the following
question: "If I gave this amount of money and time to my customers
and asked them how they would have me spend it, what would they
say? Would they rather have a sales representative know their name
or would they prefer four more checkout registers open?"
The New York Times provides a good example of the way in which
many CRM programs don't start out looking like CRM at all.
When its circulation reached a plateau of about 10% of the
city's newspaper market in the 1990s, the Times invested a good
deal of time and money discovering what it would take to gain more
share. What the company eventually discovered was that, to win the
business of loyal readers, it had to provide better availability
and earlier paper deliveries. So management invested millions of
dollars to address these shortcomings. Satellite feeds now link the
seven additional printing facilities that were brought online
between 1997 and 2000. The paper upgraded distribution capabilities
and customized local weather and TV listings.
The upshot is the New York Times is growing in a relatively flat
industry and it has an enviable 94% retention rate of mature
subscribers-way above the industry average of 60%. And all this was
achieved long before its managers took a look at CRM technology,
which has only recently been implemented to automate some
While there are examples of CRM winners at each point in the
technology spectrum-no, low, and high-many companies take a hybrid
approach, selecting a combination of tools to support their
customer strategy. We've seen how valuable CRM technology has been
to Tesco. But its short queues, wide aisles, large parking lots
and-most importantly-wide selection of quality products are what
customers care about most. While Tesco prizes its online
technology, in the stores Tesco managers emphasize low-tech
customer enhancements-like making sure there are plenty of seats
for elderly customers. And Tesco does not handle complaints by
computer; every Tesco store has a dedicated customer service
representative who swiftly resolves customer problems. Putting its
customer strategy first enabled Tesco to make wise decisions about
where software technology could help and where low-tech solutions
made more sense.
Even Direct Line-which has no face-to-face contact with its
customers-has welded some low-tech initiatives onto its
technology-intense business as it tries to take the hassle out of
insurance. On the high-tech side, Direct Line gives motor and home
insurance quotes over the telephone within three minutes (two
minutes for online quotes). On the low-tech side, Direct Line
accredits and affiliates mechanics and builders to tend to
customers' car and home repairs. And it deals with claims swiftly,
handling many over the telephone without onerous form-filling and
lengthy waits. The company has eliminated complicated forms and
jargon to keep applications simple.
Asked to explain the company's success, Direct Line's group
information technology director, Richard Beal, doesn't point to
software or technology, but to building relationships. "The better
you relate to your customers, the more likely they are to stay
loyal," he says.
The result? Direct Line's insurance profits grew 65% every year
between 1996 and 2000 and group profits before tax grew nearly 350%
annually between 1998 and 2000.
If you want CRM to deliver results rather than disappointment,
make sure you have a clear customer strategy, make sure your
business processes are aligned with that strategy, and then
introduce the right technological and other tools to support it.
And test your program at every stage by asking whether you could do
it without any technology at all.
Crawford Gillies is Bain & Company's managing director
for Europe. Darrell Rigby is a director in Boston and founder of
Bain's Management Tools survey. Fred Reichheld is a
Bain Fellow and author of The Loyalty Effect: The Hidden Force
Behind Growth, Profits, & Lasting Value; and Loyalty Rules! How
Today's Leaders Build Lasting Relationships, both published by
Harvard Business School Press.