Article

Customer strategy key in adopting CRM

By many measures, CRM, which harnesses the Internet and other technologies to build customer loyalty, is the hottest growth tool in years.

Par Darrell Rigby, Fred Reichheld and Sunny Yi

First published on mars 14, 2002
min


What's going on when everybody wants something that disappoints most users? Customer relationship management (CRM) poses such a dilemma. By many measures, CRM, which harnesses the Internet and other technologies to build customer loyalty, is the hottest growth tool in years. Who wouldn't want to wield a tool that promises to quickly identify your most profitable customers and target them with campaigns to increase both their purchases and their loyalty—all while lowering the cost of such activities? Indeed, one CRM provider offers "CRM in 90 Days." It's almost as seductive as weight-loss advertising. Yet few CRM users are feeling good about it. More than half of all CRM programs are failing to pay back—and they can cost up to $130 million. In fact, a fifth of CRM users had abandoned the tool altogether. So how do you fix the problem? Determine whichcustomers to invest in The problem starts with CRM's definition. Log on to CRMguru.com and you'll see the most commonly asked question is: "What is CRM?" The truth is that CRM is not so novel. The answer lies in CRM's links to tried-and-true techniques of customer segmentation. That's the starting point for figuring out which customers you want to "CR"—create relationships with—and which you want to "CM"—cost-manage.With CRM, as with good old-fashioned customer loyalty practices, the trick is to start with sound customer strategy. You separate the profitable clients—with whom you can broaden and deepen relationships—from the cherry-pickers you should serve at low cost. Indeed, many successful CRM programs don't even start out looking like CRM. In the 1990s, the New York Times spent years researching its core customers to find similar pools in cities outside New York. Then it studied what would appeal to those non-New Yorkers.In response to its findings the paper upgraded local distribution and customized local content such as weather and TV listings. Upshot? The New York Times is growing in a relatively flat industry, and says that it retains 94 percent of its customers in an industry that averages about 60 percent in customer retention. Improve processes your profitable customers care about The New York Times example points to a second fix—make sure that current business processes are in sync with strategy. In a recent CRM Forum survey of senior executives, 87 percent pinned the failure of CRM on leadership and management issues. Only 4 percent cited software problems. Management at the New York Times got the sequence right. They upgraded printing, delivery and subscriber call-handling procedures before buying Internet software to speed those processes and reduce costs. Another leader in customer loyalty, insurer USAA, shows that to make CRM work, process changes must precede the purchase of technology. The company, the premier insurer of military personnel and veterans, had comprised six regional units, each with large functional departments (claims, underwriting, policyholder services, etc.). Today, now that USAA's management knows more about what customers want, those six units have been broken into 110 teams, each focused on the needs of smaller and more homogenous segments of customers. Within those teams, USAA's thousands of phone reps are divvied up into groups of 10 to 12. The members of each group work out their own schedules and vacations, solve problems together, and are evaluated together. USAA team members know the regional idiosyncrasies of the insurance business. They also know their customers and each other better than they did in the old system. Customers value the "small company touch." And former CEO Bob Herres believes the small-team structure is a key reason USAA has been able to grow and to maintain one of the highest retention rates in the industry, while reducing its bureaucracy. His answer was organization, not technology. Use technology onlywhere needed When you put customer strategy first and make sure your customer activities fit that strategy, you can make wise decisions about where software technology can help—and where low-tech solutions make more sense. In the days after the Sept. 11 attacks, loyalty leader Enterprise Rent-A-Car gave its branch managers latitude to drop the firm's "no one-way rental" rule. Enterprise waived all drop-off fees across the U.S. until Sept. 21 to ensure that every one of its customers could make it home. That no-tech move bought Enterprise a lifetime of loyalty from travelers stranded at airports and train stations, even as other rental car companies were charging one-way penalties of $1,000 and more. Customer-savvy companies can also benefit from a low-tech tool related to CRM: listening to your customers. Loyalty leader Harley-Davidson made key technology decisions but only after quizzing its customers. Harley CEO Jeff Bleustein knew customers wanted to shop for Harley on the Internet. But he turned down a proposal from a big Web site that would have offered Harley's full line to anyone at a computer. Why? Bleustein knew such a site would undercut dealers critical to Harley's customer strategy. Therefore, Bleustein sent the Web experts back to the drawing board. Today, Harley's main Web page asks customers to either choose from a list of Harley's participating e-commerce dealers, or to enter their zip code to find the nearest one. A click on the dealer name takes them to the local dealer's own Web page. Customers win because they've got Web access to lots of Harley merchandise. Dealers are happy: they earn retail profits from all Web sales since Harley isn't muscling in on their territory. And they make contacts with new local customers who found them via the Web. And Harley wins because it has successfully built a Web presence that provides customer convenience at a low cost, and it has strengthened its dealer relationships along the way. (Too many companies venturing onto the Web have alienated such partners. Levi Strauss had to take down its award-winning consumer-direct Web site when angry retailers complained they were being cut out.) By keeping all of his customers in mind, Harley's Bleustein knew when to "say when." Remember the power of one-to-one For the customers who treasure truly cozy relationships, there's another tested tool that CRM software can speed up and refine: one-to-one marketing. Consider the example of Travcoa, a luxury tour provider owned by specialty travel retailer Grand Expeditions, which had built its reputation on pleasing globetrotting customers. This, in an industry where it costs plenty to get customers, and where customers are risk-averse: if they can afford to spend $40,000 on a vacation, they want to ensure it's the trip of a lifetime. After Grand Expeditions acquired several tour operators, it set out to benchmark CRM techniques and opportunities at all of its acquisitions. At Travcoa, Grand Expeditions struck gold in an old list of customers who had not traveled with the tour operator for more than three years. By tailoring its CRM effort around one-to-one marketing to each person on that list, Grand Expeditions yielded three times the average conversion of a typical mailing. This became a key contribution to the company's 30 percent increase in bookings in a flat industry. So how do you achieve the promise of CRM profits? You start with a clear idea of your customer strategy, and you make sure your business processes fit the strategy. Only then should you choose the technology that will enhance those processes. We know it's not simple, and we know it takes more than a 90-day technology roll-out. But it works. What can you do Monday morning, 8 a.m.? -Freeze any CRM requests for proposals and purchase orders until you're clear on your customer strategy, and satisfied that purchases effectively support it. -Renew your search for low-cost, often low-tech, tactics that boost customer loyalty and can be enhanced later with CRM tools. - Explore linking customer satisfaction scores to frontline compensation as Enterprise and eBay do. Ensure employee development and incentives support the customer strategy. Darrell Rigby is a director of Bain & Company in Boston and founder of Bain's Management Tools Survey. Fred Reichheld is a Bain Fellow and author of "Loyalty Rules: How Today's Leaders Build Lasting Relationships." Sunny Yi is a vice president of Bain & Company in Korea and a leader of Bain & Company's CRM practice Bain Book Loyalty Rules! Learn more about how today's loyalty leaders build lasting relationships.

What's going on when everybody wants something that disappoints most users? Customer relationship management (CRM) poses such a dilemma.

By many measures, CRM, which harnesses the Internet and other technologies to build customer loyalty, is the hottest growth tool in years. Who wouldn't want to wield a tool that promises to quickly identify your most profitable customers and target them with campaigns to increase both their purchases and their loyalty—all while lowering the cost of such activities?

Indeed, one CRM provider offers "CRM in 90 Days." It's almost as seductive as weight-loss advertising. Yet few CRM users are feeling good about it. More than half of all CRM programs are failing to pay back—and they can cost up to $130 million. In fact, a fifth of CRM users had abandoned the tool altogether.

So how do you fix the problem?

Determine whichcustomers to invest in The problem starts with CRM's definition. Log on to CRMguru.com and you'll see the most commonly asked question is: "What is CRM?" The truth is that CRM is not so novel. The answer lies in CRM's links to tried-and-true techniques of customer segmentation.

That's the starting point for figuring out which customers you want to "CR"—create relationships with—and which you want to "CM"—cost-manage.With CRM, as with good old-fashioned customer loyalty practices, the trick is to start with sound customer strategy. You separate the profitable clients—with whom you can broaden and deepen relationships—from the cherry-pickers you should serve at low cost.

Indeed, many successful CRM programs don't even start out looking like CRM. In the 1990s, the New York Times spent years researching its core customers to find similar pools in cities outside New York. Then it studied what would appeal to those non-New Yorkers.In response to its findings the paper upgraded local distribution and customized local content such as weather and TV listings.

Upshot? The New York Times is growing in a relatively flat industry, and says that it retains 94 percent of its customers in an industry that averages about 60 percent in customer retention.

Improve processes your profitable customers care about

The New York Times example points to a second fix—make sure that current business processes are in sync with strategy. In a recent CRM Forum survey of senior executives, 87 percent pinned the failure of CRM on leadership and management issues. Only 4 percent cited software problems.

Management at the New York Times got the sequence right. They upgraded printing, delivery and subscriber call-handling procedures before buying Internet software to speed those processes and reduce costs.

Another leader in customer loyalty, insurer USAA, shows that to make CRM work, process changes must precede the purchase of technology. The company, the premier insurer of military personnel and veterans, had comprised six regional units, each with large functional departments (claims, underwriting, policyholder services, etc.).

Today, now that USAA's management knows more about what customers want, those six units have been broken into 110 teams, each focused on the needs of smaller and more homogenous segments of customers. Within those teams, USAA's thousands of phone reps are divvied up into groups of 10 to 12. The members of each group work out their own schedules and vacations, solve problems together, and are evaluated together.

USAA team members know the regional idiosyncrasies of the insurance business. They also know their customers and each other better than they did in the old system. Customers value the "small company touch." And former CEO Bob Herres believes the small-team structure is a key reason USAA has been able to grow and to maintain one of the highest retention rates in the industry, while reducing its bureaucracy. His answer was organization, not technology. Use technology onlywhere needed When you put customer strategy first and make sure your customer activities fit that strategy, you can make wise decisions about where software technology can help—and where low-tech solutions make more sense.

In the days after the Sept. 11 attacks, loyalty leader Enterprise Rent-A-Car gave its branch managers latitude to drop the firm's "no one-way rental" rule. Enterprise waived all drop-off fees across the U.S. until Sept. 21 to ensure that every one of its customers could make it home. That no-tech move bought Enterprise a lifetime of loyalty from travelers stranded at airports and train stations, even as other rental car companies were charging one-way penalties of $1,000 and more.

Customer-savvy companies can also benefit from a low-tech tool related to CRM: listening to your customers. Loyalty leader Harley-Davidson made key technology decisions but only after quizzing its customers.

Harley CEO Jeff Bleustein knew customers wanted to shop for Harley on the Internet. But he turned down a proposal from a big Web site that would have offered Harley's full line to anyone at a computer. Why? Bleustein knew such a site would undercut dealers critical to Harley's customer strategy. Therefore, Bleustein sent the Web experts back to the drawing board.

Today, Harley's main Web page asks customers to either choose from a list of Harley's participating e-commerce dealers, or to enter their zip code to find the nearest one. A click on the dealer name takes them to the local dealer's own Web page. Customers win because they've got Web access to lots of Harley merchandise. Dealers are happy: they earn retail profits from all Web sales since Harley isn't muscling in on their territory. And they make contacts with new local customers who found them via the Web. And Harley wins because it has successfully built a Web presence that provides customer convenience at a low cost, and it has strengthened its dealer relationships along the way. (Too many companies venturing onto the Web have alienated such partners.

Levi Strauss had to take down its award-winning consumer-direct Web site when angry retailers complained they were being cut out.) By keeping all of his customers in mind, Harley's Bleustein knew when to "say when."

Remember the power of one-to-one For the customers who treasure truly cozy relationships, there's another tested tool that CRM software can speed up and refine: one-to-one marketing.

Consider the example of Travcoa, a luxury tour provider owned by specialty travel retailer Grand Expeditions, which had built its reputation on pleasing globetrotting customers. This, in an industry where it costs plenty to get customers, and where customers are risk-averse: if they can afford to spend $40,000 on a vacation, they want to ensure it's the trip of a lifetime. After Grand Expeditions acquired several tour operators, it set out to benchmark CRM techniques and opportunities at all of its acquisitions.

At Travcoa, Grand Expeditions struck gold in an old list of customers who had not traveled with the tour operator for more than three years. By tailoring its CRM effort around one-to-one marketing to each person on that list, Grand Expeditions yielded three times the average conversion of a typical mailing. This became a key contribution to the company's 30 percent increase in bookings in a flat industry.

So how do you achieve the promise of CRM profits? You start with a clear idea of your customer strategy, and you make sure your business processes fit the strategy. Only then should you choose the technology that will enhance those processes. We know it's not simple, and we know it takes more than a 90-day technology roll-out. But it works.

What can you do Monday morning, 8 a.m.?

-Freeze any CRM requests for proposals and purchase orders until you're clear on your customer strategy, and satisfied that purchases effectively support it.

-Renew your search for low-cost, often low-tech, tactics that boost customer loyalty and can be enhanced later with CRM tools.

- Explore linking customer satisfaction scores to frontline compensation as Enterprise and eBay do. Ensure employee development and incentives support the customer strategy.

Darrell Rigby is a director of Bain & Company in Boston and founder of Bain's Management Tools Survey. Fred Reichheld is a Bain Fellow and author of "Loyalty Rules: How Today's Leaders Build Lasting Relationships." Sunny Yi is a vice president of Bain & Company in Korea and a leader of Bain & Company's CRM practice