Retail Book Chap11

CHAPTER 11: CUSTOMER RELATIONSHIP MANAGEMENT INSTRUCTOR NOTES

ANNOTATED OUTLINE •

Customer relationship management (CRM) is a business philosophy and a set of strategies, programs, and systems that focuses on identifying and building loyalty with a retailer's most value customers.

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CRM is based on the philosophy that retailers can increase profitability by building relationships with their better customers.

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Effectively managing merchandise inventory and the stores provides value and supports the primary objective of building customer loyalty. The goal is to develop a base of loyal customers who patronize the retailer frequently.

See PPT 11-3 Ask students to give examples of retailers in the area who seem to have a loyal customer base. What are the reasons why customers (including themselves) frequent this retailer? What is the retailer doing for its loyal customers?

I. The CRM Process •

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Retailers are now beginning to concentrate on providing more value to their customers using targeted promotions and services to increase their share of the wallet – the percentage of the customers' purchases made from the retailers – with these customers. This change in perspective is supported by research indicating that it now costs over six times more to sell products and services to new customers than existing customers and that small increases in customer retention can lead to dramatic increases in profits.

Ask students if they buy more products from a specific retailer now, i.e., spend more money with a specific retailer? If so, why? If not, why do they buy different products from different retailers, even if more of these were available at the same retailer? Discuss the costs of attracting new customers versus the costs of retaining current customers.

A. What is Loyalty? •

See PPT 11-4 Customer loyalty, the objective of CRM, is more than having customers make repeat visits to a retailer and being satisfied with their experiences and merchandise they purchased.

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Ask students how much they like a specific retailer. Are they loyal to the retailers they like most? If so, why? If not, why not? Note that for emotional bonding, there may be less

Customer loyalty to a retailer means that customers are committed to purchasing merchandise and services from the retailer and will resist the activities of competitors attempting to attract their patronage. •

Loyal customers have an emotional connection with the retailer. Their reasons for continuing to patronize a retailer go beyond the convenience of the retailer's store or the low prices and specific brands offered by the retailer. They feel such goodwill toward the retailer that they will encourage their friends and family to buy from it.

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Programs that encourage repeat buying by simply offering price discounts can be easily copied by competitors. However, when a retailer develops an emotional connection with a customer, it is difficult for a competitor to attract the customer.

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Emotional connections develop when customer receive personal attention.

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Unusual positive experiences also build emotional connections.

objective reasons as to why they like a retailer.

See PPT 11-5

B. Overview of the CRM Process •

See PPT 11-6 for the CRM Process Cycle CRM is an iterative process that turns customer data into customer loyalty through four activities: (1) collecting customer data, (2) analyzing the customer data and identifying target customers, (3) developing CRM programs, and (4) implementing CRM programs. Each of the four activities in the CRM process is discussed in the next sections.

II. Collecting Customer Data •

The first step in the CRM process is constructing a customer database. This database, referred to as a customer data warehouse, contains all of the data the

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firm has collected about its customers and is the foundation for subsequent CRM activities. A. Customer Database •

See PPT 11-7 Ideally, the customer database should contain the following information:

1. Transactions – a complete history of the purchases made by the customer, including purchase date, the price paid, the SKU's purchased, and whether or not the merchandise was purchased in response to a special promotion or marketing activity. 2. Customer Contacts – a record of the interactions that the customer has had with the retailer, including visits to the retailer's website, inquiries made through in-store kiosks, and telephone calls made to the retailer's call center, plus information about contacts initiated by the retailer, such as catalogs and direct mail sent to the customer. 3. Customer Preferences – what the customer likes, such as favorite colors, brand, fabrics, and flavors as well as apparel sizes. 4. Descriptive Information – Demographic and psychographic data describing the customer that can be used in developing market segments. 5. Responses to marketing activities – analysis of the transaction and contact data provide information about the customer's responsiveness to marketing activities. •

To get a complete view of the customers, the retailers need to be able to combine the individual customer data from each member of a household.

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The analysis of the customer database can provide important insights for

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To demonstrate how a customer database could have very simple beginnings, ask students the types of information contained in a typical invoice. Note that each transaction invoice would contain details on the customer's name and address, products and quantities purchased, price paid, etc. If a whole year's invoices were collected, what types of information could be obtained?

planning merchandise assortment. •

With today's technology, even small, independent retailers can create and use a customer database.

B. Identifying Information •

Constructing the database is relatively easy for catalog and Internet shoppers and customers who use the retailer's credit card when buying merchandise in stores. Customers buying from nonstore channels must provide their contact information, their name and address, so that the purchases can be sent to them.

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Store-based retailers use three approaches to identify their customers: (1) asking customers for identity information, (2) offering frequent shopper cards, and (3) linking checking account numbers and third-party credit cards to customer names. 1. Asking for Identifying Information

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Some retailers ask customers for identifying information such as their phone number or name and address when they ring up a sale. The information is then used to create the transaction database for the customer.

See PPT 11-8

Ask students for their reactions when a cash register at the store they are purchasing from asks them for their name, address and phone number before ringing up the sale. How could the store minimize consumer concerns and still obtain customer identity information?

This approach has tow limitations: (1) some customers may be reluctant to provide the information and feel that the sales associates are violating their privacy, and (2) sales associates might forget to ask for the information or decide not to spend the time getting and recording during a busy period. 2. Offering a Frequent Shopper Card

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Frequent shopper programs, also called loyalty programs, are programs

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Ask students if they use a frequent shopper card. What are the advantages and disadvantages from a customer's perspective

that identify and provide rewards for customers who patronize a retailer. When customers enroll in one of these programs, they provide some descriptive information about themselves or their household. Customers are then offered an incentives to show the card when they make purchases from the retailer. •

From the retailer's perspective, frequent shopper programs offer two benefits: (1) customers provide demographic and other information when they sign up for the program and then are motivated to identify themselves at each transaction, (2) customers are motivated by the rewards offered to increase the number of visits to the retailer and the amount purchased on each visit.

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The major problems using frequent shopper cards are that the card is often squeezed out of the customer's wallet by other cards. Some retailers allow customers to register all their cards with the retailer and receive rewards if any of them are used to purchase merchandise. Other retailers are experimenting with cardless ways of identifying customers.

in using such cards?

3. Connecting Internet Purchasing Data with the Stores •

If a customer has used a credit card while shopping on a multichannel retailer’s Internet site or from its catalog, and then uses the same card to make a purchase in the retailer’s store, the retailer can update the customer’s purchase record and capture information about where the customer lives or works from the shipping information. C. Privacy and CRM Programs

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While detailed information about

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What are the various privacy issues when a retailer unobtrusively collects information through checking account numbers, debit cards and third-party credit cards?

individual customers helps retailers provide more benefits to their better customers, consumers are concerned about retailers violating their privacy when they collect this information. 1. Privacy Concerns •

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The degree to which consumers feel their privacy has been violated depends on: (1) their control over their personal information when engaging in marketplace transactions, (2) their knowledge of the collection and use of personal information. These concerns are particularly acute for customers using an electronic channel because many of them do not realize the extensive amount of information that can be collected without their knowledge. In addition to collecting transaction data, electronic retailers can collect information by placing cookies on visitors' hard drives. Cookies are text files that identify visitors when they return to a website. Due to the data in the cookies, customers do not have to identify themselves and use passwords every time they visit a store. However, the cookies also collect information about other sites the person has visited and what pages they have downloaded.

See PPT 11-9, PPT 11-10, PPT 11-11, and PPT 11-12 Ask customers if they have bought or buy regularly from Internet retailers. If they have bought from Internet retailers, what do they feel about privacy issues? If they have never bought from Internet retailers, is it due to privacy concerns?

2. Protecting Customer Privacy •

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Some people define personal information as all information that is not publicly available; others include both public (i.e., driver's license, mortgage data) and private (hobbies, income) information in the definition of personal information. In the United States, legal protection for privacy is limited. Existing legislation is limited to the protection of information in a few specific contexts, including government

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See PPT 11-13 Evaluate the differences between U.S. and European laws regarding privacy. From the point of view of the individual consumer, which one is more comprehensive and better ensures privacy protection? From the point of view of the retailer, which one offers more opportunities for reaping the full benefits of a CRM program?

functions and practices in credit reporting, video rentals, and banking. •

The European Union (EU) is more aggressive in protecting consumer privacy and its provisions include:

a. Businesses can collect consumer information only if they have a clearly defined the purpose such as completing the transaction. b. The purpose must be disclosed to the consumer from whom the information is being collected.

Ask students which one is better from the point of view of customers – opt-in or optout? Similarly, which one is less costly from the perspective of the retailer?

c. The information can only be used for that specific purpose. d. The business can only keep the information of the stated purpose. e. Business operating in Europe can only export information from the 15 EU countries to importing countries with similar privacy policy. •

The EU perspective is that consumers own their personal information. Retailers must get consumers to explicitly agree to share this personal information. This is referred to as opt in.

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U.S. consumers must explicitly tell retailers not to use their personal information – they must opt out.

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The Federal Trade Commission has developed the following set of principles for fair information practices:

a. Notice and Awareness – covers the disclosure of information practices, including comprehensive statement of information use such as information storage, manipulation, and dissemination. b. Choice/Consent – includes both opt out

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See PPT 11-14

and opt in options, and allows the consumers the opportunity to trade information for benefits. c. Access/Participation – allows for the confirmation of information accuracy by consumers. d. Integrity/Security – controls for the theft of and tampering with personal information. e. Enforcement/Redress – provides a mechanism to ensure compliance by participating companies. •

There is growing consensus that personal information must be fairly collected, the collection must be purposeful, and the data should be relevant, maintained as accurate, essential to business, subject to the rights of the owning individual, kept reasonably secure, and transferred only with the permission of the consumer.

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The Electronic Privacy Center (www.epic.org) recommends that privacy policies clearly state what information is collected from each visitor and how it will be used, give consumers a choice as to whether they give information, and allow them to view and correct any personal information held by an online retail site.

See PPT 11-15 for an example of J.Crew’s Security and Privacy Policy.

III. Analyzing Customer Data and Identifying Target Customers See PPT 11-16 •

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The next step in the CRM process is analyzing the customer database and converting the data into information that will help retailers develop programs for building customer loyalty. Data mining is one approach and is a technique used to identify patterns in data, typically patterns that the analyst is unaware of prior to searching

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Ask students that if they had a computerized record of all of one store's transactions for the last two years, what questions they can answer (in other words, what patterns in the data would they look for?)

through the data. •

Market basket analysis is a specific type of data analysis that focuses on the composition of the basket, or bundle, of products purchased by a household during a single shopping occasion. This analysis is often used for suggesting where to place merchandise in a store.

See PPT 11-17 and PPT 11-18

A. Identifying Market Segments •

Customer data analysis is focused on identifying market segments – groups of customers who have similar needs, purchase similar merchandise, and respond in a similar manner to marketing activities.

B. Identifying Best Customers •

See PPT 11-19 Using information in the customer database, retailers can develop a score or number indicating how valuable they are to the firm. This score can then be used to determine which customers to target. 1. Lifetime Value

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Lifetime customer value (LTV) is the expected contribution from the customer to the retailer's profits over his or her entire relationship with the retailer.

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LTV is estimated by using past behaviors to forecast the future purchases, gross margin from these purchases, and costs associated with servicing the customers. Some of the costs associated with a customer are the cost of advertising and promotion used to acquire the customer and the cost of processing merchandise that the customer has returned.

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These assessments of LTV are based on the assumption that the customer's

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See PPT 11-20 for an LTV comparison of two different shoppers What can small retailers do to determine the lifetime customer value of their customers? Does a simple mom-and-pop retailer know who its best customers are?

future purchase behaviors will be the same as they have been in the past. See PPT 11-21, PPT 11-22, PPT 11-23, PPT 11-24

2. Customer Pyramid •

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Most retailers realize that their customers differ in terms of their profitability or LTV. They believe in the 80-20 rule- 80 percent of the sales or profits come from 20 percent of the customers.

A retailer is developing a program whereby it would have a special one-day sales event every month. Which segment(s) of the customer pyramid should it target? Why?

A commonly used segmentation scheme divides customers into four segments:

1. Platinum Segment – this segment is composed of the retailer's customers with the top 25 percent LTVs and the most loyal customers who are not overly concerned about merchandise price and place more value on customer service. 2. Gold Segment – The next 25 percent of the customer in terms of LTV are more price-sensitive and are not as loyal as the platinum customers. 3. Iron Segment – Customers in this third tier probably do not deserve much special attention form the retailer due to their modest LTV. 4. Lead Segment – Customers in the lowest segment cost the company money. They often demand a lot of attention but do not buy much from the retailer. •

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Another common segment scheme, called decile analysis, breaks customers into 10 deciles according to their LTVs rather than the quartiles as above. 3. RFM Analysis

See PPT 11-25

RFM (recency, frequency, monetary) analysis, often used by catalog retailers and direct marketers, is a scheme for

A catalog marketer has decided on the following rule for mailing customers. Every new prospect would receive 6 catalogs mailed once every month before they are

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segmenting customers according to how recently they have made a purchase, how frequently they make purchases, and how much they have bought. •

Catalog retailers often use this type of analysis to determine which customer groups should be sent catalogs.

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Customers who have made infrequent, small purchases recently are considered to be first-time customers. The objective of CRM programs directed toward this segment of customers is to convert them into early repeat customers and eventually high-value customers.

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dropped from the mailing list. If they bought at least once in the 6 months, they would get an additional 8 catalogs before they are dropped from the mailing list. If they bought 2 or more times in 6 months, they would receive catalogs for the next 15 months and would also receive special sales and other bargain supplements from time-to-time. Evaluate this plan. Does this plan make a distinction between the customer in terms of profitability (high) and costs (lower) to the retailer?

See PPT 11-26, PPT 11-27, and PPT 11-28 for an illustration of an RFM application.

CRM programs directed toward customers in the high-value segment (high frequency, recency, and monetary value) attempt to maintain loyalty, increase retention, and gain a greater share of wallet by selling more merchandise to them.

IV. Developing CRM Programs •

See PPT 11-29 The next step in the CRM process is to develop programs for the different customer segments. These include: (1) retaining best customers, (2) converting good customers into high-LTV customers, and (3) getting rid of unprofitable customers.

A. Customer Retention

See PPT 11-30

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Ask students why customer retention is important, especially since CRM programs cost so much. How do the rewards of retention outweigh the costs of the CRM program?

Four approaches that retailers use to retain their best customers are: (1) frequent shopper programs, (2) special customer service, (3) personalization, and (4) community. 1. Frequent Shopper Programs

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See PPT 11-31 and PPT 11-32 Frequent shopper programs are used both to build a customer database by

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Should a college bookstore use a frequent

identifying customers with transactions and to encourage repeat purchase behavior and retailer loyalty. Retailers provide incentives to encourage customers to enroll in the program and use the card. •

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shopper card? Why or Why not?

Several considerations should be made in developing effective frequent shopper programs, including: (1) tiered rewards according to the volume of purchases, (2) choices in selecting rewards, (3) reward all transactions, and (4) transparency and simplicity1.

Should a retailer’s frequent shopper program focus primarily on contributions to Other retailers choose to link their charitable causes? Why or why not? (No, the frequent shopper programs to charitable most effective incentives are those that causes directly benefit the recipient.) Four factors limit the effectiveness of frequent shopping programs: (1) they can be expensive, (2) it is difficult to make corrections in programs when problems arise, (3) it is not clear that these programs increase consumer spending behavior and loyalty toward the retailer, and (4) it is difficult to gain a competitive advantage based on frequent shopper programs. 2. Special Customer Services

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Retailers provide unusually high quality customer service to build and maintain the loyalty of their best customers. 3. Personalization

See PPT 11-33

With the availability of customer-level data and analysis tools, retailers can now economically offer unique benefits and target messages to individual customers. They now have the ability to develop programs for small groups of customers and even specific individuals.

Most retailer store associates wear a name tag. Should customers also wear a name tag or mention their name when shopping at a store? What types of retailing/services may benefit from this type of name recognition and identification?

Frank Badillo, Customer Relationship Management (Columbus, OH: Retail Forward, 2001).

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Many small, local retailers have always practice 1-to-1 retailing. They know each of their customers, greet them by name when they walk in the store, and then recommend merchandise they know the customers will like.

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The Internet channel provides an opportunity for retailers to automate the practice of 1-to-1 retailing.. 4. Community

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Retailers can also develop a sense of community among customers. The Internet channel offers an opportunity for customers to exchange information using bulletin boards and develop more personal relationships with each other and the retailer. By participating in such a community, customers are more reluctant to leave the "family" of other people patronizing the retailer.

B. Converting Good Customers into Best Customers •

Increasing the sales made to good customers is referred to as customer alchemy – converting iron and gold customers in to platinum customers. Customer alchemy involves offering and selling more products and services to existing customers and increasing the retailer's share of the wallet with these customers.

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The retailer's customer database reveals opportunities for cross selling and addon selling. Cross selling is selling a complementary product or service in a specific transaction, such as selling a printer when a customer buys a computer.

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Add-on selling is selling additional new products or services to existing customers, such as a bank encouraging a customer with a checking account to also apply for a home improvement

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Ask students for examples of cross-selling and add-on selling from their own experience.

loan from the bank. C. Dealing with Unprofitable Customers

See PPT 11-34

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In many cases, bottom tier of customers actually have negative LTV. Retailers actually lose money on every sale they make to these customers.

When dealing with unprofitable customers, a retailer may be consciously providing lower levels of benefits or service to such customers. Evaluate the ethical issues involved.

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Two approaches for getting the lead out are: (1) offering less costly approaches for satisfying the needs of lead customers, and (2) charging the customers for the services they are abusing.

V. Implementing CRM Programs •

See PPT 11-35 Increasing sales and profits from the CRM program is a challenge. The effective implementation of CRM programs requires the close coordination of activities by different functions in a retailer's organization.

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The MIS department needs to collect, analyze, and make the relevant information readily accessible for employees implementing the programs – the front-line service providers and sales associates and the marketers responsible for communicating with customers through impersonal channels (mass advertising, direct mail, and email).

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Store operations and human resource management needs to hire, train, and motivate the employees who will be using the information to deliver personalized services.

What can a small retailer do to implement a CRM program without expending too much in costs? What are the basic sources of costs for such a retailer?

VI. Summary

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1.

What is CRM? Customer relationship management (CRM) is a business philosophy and a set of strategies, programs, and systems that focuses on identifying and building loyalty with a retailer's most value customers. CRM is based on the philosophy that retailers can

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increase profitability by building relationships with their better customers. Thus, CRM involves attention to two important aspects: (1) building customer loyalty, and (2) increasing profitability through better customer relationships. In terms of building customer loyalty, the CRM process involves the collection, management, and analysis of customer data to identify target customers and the development of programs to increase value for these targeted customers. In terms of increasing profitability, the CRM process involves the analysis of profitability at the level of each customer segment and then developing programs to increase the loyalty of the most profitable customers, while concurrently developing tactics to deal with the unprofitable customers. Effective implementation of CRM requires close coordination of activities by different functions with a retailer's organization.

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Why do retailers want to determine the lifetime value of their customers? Retailers have realized that it costs significantly more to sell products and services to new customers than existing customers and that small increases in customer retention can lead to dramatic increases in profits. Thus, it costs the retailer less to focus on customer retention, i.e., building stronger relationships with existing customers, than to focus on customer acquisition, i.e., attracting new customers through a variety of marketing communications efforts. For every retailer, there may be some customers who are very loyal and frequent shoppers, while some others may be occasional shoppers and yet others may cost the retailer more to service than what they bring in for the retailer. Given these characteristics of customers and their different impacts on the retailer's profitability, the retailer needs to identify not only the various segments but also their contribution to the retailer's profitability. Customer lifetime value (LTV) is one measure of the expected contribution of the customer through his or her entire relationship with the retailer to the latter's profits. It provides retailers the measure by which they can identify their best customers in terms of profitability. Moreover, based on the LTV measures, retailers can also develop programs to retain their best customers, covert goods customers into better customers, and deal with the unprofitable customers so that the costs of servicing them does not adversely affect profitability.

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Why do customers have privacy concerns about frequent shopper programs that supermarkets offer, and what can supermarkets do to minimize these concerns? Frequent shopper programs often collect customer's descriptive information when they sign up for a frequent shopper card. When customers use the card at the supermarket, the firm can associate the transaction information with the descriptive information to identify customers and develop various strategies, including promotions targeted specifically to those customers. These data and analysis help retailers make a wide range of strategic decisions, including store location and merchandising. Some customers may be particularly disconcerted by the fact that the retailer not only knows who they are but what they buy during each visit. Specifically, their privacy concerns may come from the perception that they have little control over their personal

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information. Besides, they may not know and not be able to control how retailers use such information and whether the retailer would share this information with other parties? Moreover, customers may be vary about who would safeguard the customers' interest if the information is used by parties that the customer does not even know or with whom the customer does even care for relationship. In many cases, the most important benefits of the frequent shopper programs for supermarkets is the information needed to make better decisions at the corporate and store level, such as store location, assessing traffic in various departments, merchandising, and inventory management. For all these decisions, specific descriptive customer information may not be needed. As such, supermarkets could educate their customers about how their transaction data is being used for enhancing customer service and assure them that descriptive information will not be used without the customer's prior consent. Moreover, the supermarket could develop privacy policies that limit sharing and use of data by third-parties without the customer's explicit consent. In general, supermarkets can reduce the privacy concerns of their customers by: (1) giving them more control over their personal data by offering choices to opt-out of various levels of participation in the program and in the use of information, (2) giving them more information about how their data is being used, and (3) limiting access to the information without the customer's explicit consent.

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What are some examples of opportunities for add-on selling that might be pursued by (a) travel agents, (b) jewelry stores, and (c) dry cleaners? Add-on selling is selling additional new products or services to existing customers, such as a bank encouraging a customer with a checking account to also apply for a home improvement loan from the bank. These opportunities could be pursued by other retailers as well. Travel agents could sell other services to customers. Since most customers may need a whole package of travel services, such as airline or train tickets, hotel accommodations, and rental cars, when they go on a trip, travel agents could offer these other services whenever a customer approaches them for only one of them. For example, airline ticket buyers could be offered the "best" rates and services on hotels at their destination as well as rental cars. Travel agents could sell these products as an entire package or offer them separately depending upon customer needs. Jewelry stores could offer various other services related to jewelry ownership. For example, they could offer extensions of warranty on specific items, insurance services for the protection of the customers' valuable jewelry, and repair and cleaning services for customers buying their jewelry. Customers could be encouraged to sign-up or buy these additional services when they buy their jewelry. Jewelry stores could also run buy-back plans where they would buy back the jewelry sold to customers when the customer wishes to dispose of them. Drycleaners could offer a variety of services that customers may need during their dry cleaning visit. For one, some customers may need to have their clothes altered or repaired. Drycleaners could offer tailoring services through an in-premise tailor or through contracting out. Drycleaners could also offer storage services. Since many

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clothes worn by customers, such as parkas, furs, etc., may be seasonal and take up space at their residences, drycleaners could offer storage services for these clothes.

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Which of the following types of retailers do you think would benefit most from instituting CRM: (a) supermarkets, (b) banks, (c) automobile dealers, or (d) consumer electronic retailers? Why? All of the types of retailers would benefit from instituting CRM. However, for some the benefits of CRM may be far greater than others. Supermarkets may benefit from some aspects of CRM, such as frequent shopper cards and targeted promotions, especially if there is a strong competitor in the same trading area. However, in the absence of a strong competitor in the neighborhood, supermarkets only need to ensure that their assortment, prices, and services are satisfactory to the residents in the area. Banks may benefit much more than other retailers. Banking as a service could be costly, especially if customers do not have large balances with the bank. Banks could carefully analyze their customer base, and devise various types of accounts geared to the needs of the various customer segments. The programs so designed would also ensure that banks are able to match the segment profitability with its own costs. For example, those carrying large balances could be offered various additional services, such free checking and free travelers’' checks, while those with maintaining low balances could be charged extra fees for various transactions and services. Many banks already do this. Automobile dealers benefit from CRM, especially since automobile servicing at the dealership is a highly profitable business. The dealers' goals should not simply be to sell a car to a customer, but also ensure that the customer brings the car back to the dealership every time some service is needed. For this, they would need to devise programs that would enhance dealer repair services as well as special targeted promotions that would encourage customers to use the dealers' repair service not only more often, but also beyond the warranty period. Consumer electronics dealers could benefit from CRM due to the tremendous opportunities for cross-selling and add-on selling. For example, a customer buying a new TV set may also be in the market for a new VCR or DVD player and one buying a stereo system may need speaker wires. These dealers could target special promotions to attract these customers back to the store. Moreover, they could develop programs wherein the best customers get more personalized sales associate attention with advice and service. In general, while all retailers benefit from CRM, banks are better positioned than others to avail of more benefits from CRM programs. For one, these firms are much larger than the others being compared and are better placed to make the necessary investments in data warehousing and analysis. In addition, there are very few tangible factors for these firms to hold on – everything is a service and thus, subject to more variations in provision as well as customer evaluation. A strong CRM program reduces some of these variations by identifying the types and quality of services to be provided to the various segments of profitable customers.

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6.

Develop a CRM program for a local store that sells apparel with your college’s or university's logo. What type of information would you collect about your customers, and how would you use this information to increase the sales and profits of the store? The various activities in the CRM program include: (1) collecting customer data, (2) analyzing data and identifying target customers, (3) developing CRM programs, and (4) implementing CRM programs. The focus here on collecting and using information addresses the various activities involved in the CRM program. Collecting Information. The local store could obtain data through various sources to build a comprehensive database. First, it could make some mutually satisfactory arrangement with the college/university and obtain the name and addresses of current students, faculty and staff as well as the college/university's alumni. Second, it could use transactions data from all identified customers who have visited the store in the past, say, 2 years, as well as those who have bought logo apparel. Third, it could use local telephone and other database to develop a list of prospective customers. Finally, it should implement a system whereby all customers could be identified. For a local store, this last step may involve using a frequent shopper card, or simply asking for the customer's phone number as an identifier each time a purchase is made. After matching all sources of information in the database and deleting redundant or repetitive entries, the information so collected would have the following features: (1) it would show a history of purchases made by the customer, including if the customer has bought some logo apparel in the past, the price paid, and whether or not the customer paid a sale or promotion price for the product; (2) it would have a record of all interactions with the store, including the timing of the transactions (e.g., during the college football season, etc.); (3) it would also be grouped according customer preferences, such as the types of apparel sought, sizes, etc. ; (4) it would have descriptive information, at least in terms of the contact information, and; (5) it would record the customer responses to marketing activities, such as mailing, special event promotions, etc. Uses of Information. The store could then use above information to segment customers according to their contribution to store sales and profitability. Lifetime value analysis could be performed to segment customers according to their contributions to store revenues and profitability. These segments could then be matched to the basic descriptive information as well as transaction information. A number of questions could be asked, including: (1) do current college students buy more logo apparel? (2) when do alumni buy most from the store?, etc. A number of different programs could now be developed based on the answers to various data mining questions. The store could develop special event promotions during specific sports seasons. It could offer various linked deals, such as buying a baseball cap along with a rugby shirt, or its various special services, including ordering over the phone, especially for the alumni who may be living beyond the local trading area. In addition, it could attempt to enhance customer loyalty through targeted mailing, other in-store services, and sponsorship of events most valued by students and alumni, such as sports, victory parties, and homecoming.

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What are the different approaches retailers can use to identify customers with their transactions? What are the advantages and disadvantages of each approach?

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There are three approaches that retailers can use to identify customers with their transactions. They could: (1) ask customers for the identifying information, (2) offer frequent shopper cards, and (3) link checking account numbers and third-party credit cards to customer names.

Advantages

Disadvantages

Asking Customers

1. Customers do not have to carry a card.

1. Customers may be reluctant to provide information and feel that 2. The information is simple their privacy is violated. and easy to provide, collect and record. 2. Sales associates might forget to ask or decide not to spend time getting and recording information during a busy period.

Offering a Frequent Shopper Card

1. Transactions information could be better linked to descriptive customer information.

1. Customers already carry too many cards and may not want to carry another one.

2. Rewards offered would motivate customers to use the card every time they purchase.

2. Customer may forget o bring the card or decide not to use it if they are in a hurry.

3. Rewards may motivate customers to make more visits and purchase more from the retailer. Connecting Internet Purchasing Data with Stores

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1. Information about customers can be obtained unobtrusively.

1. Customers may not feel they have knowledge of use or control over their private information.

A CRM program focuses on building relationships with a retailer's better customers. Some customers who do not receive the same benefits as the retailer's best customers may be upset because they are treated differently. What can retailers do to minimize this negative reaction? On one hand, retailers may feel that the minimum negative reaction from customers would be to not patronize the retailer again. If this segment of customers is the one most costly to serve and the least profitable to the retailer, the unprofitable customers are weeded out anyway. However, the problem is compounded during two likely cases: (1)

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the customers are somewhat profitable but are not yet the retailer's best customers, (2) when customers spread their negative reactions to others by word-of-mouth. In the first case, the retailer wants to build a better relationship with the customers and hence negative reactions may jeopardize the future of the relationship. In the second case, the retailer's practices may turn away more prospects and existing customers. Retailers can minimize these negative reactions through a number of different ways. The first is to be very unobtrusive in offering various benefits. The firm could handle the special treatment of its best customers through ways in which others do not see the benefits and services offered to them. Programs, such as special sale events, assignment of sales associates, more reward points for preferred customers, and other direct benefits may be less noticeable to others and could be used more than others. For example, one frequent shopper card member may not know what reward points another is accruing for purchases. Another way is the exact opposite: publicize the differences in benefits more clearly. Customers then make their own decision as to the level and quality of interactions they want with the retailer. For example, some banks clearly offer the various types of checking and savings accounts customers could enroll in as well as the interest rates of various levels of balances. Customers can then decide, for example, if they want an account with higher minimum balances and free checking or lower minimum balances and a charge for checks above a low minimum limit per month. Retailers typically have little control over word-of-mouth negative opinions. The best strategy would be to carefully monitor the implementation of benefits and services so that negative reactions are kept to a minimum. Moreover, retailers could actively encourage and publicize positive word-of-mouth, such as customer testimonials and referrals. 9.

Think of one of your favorite places to shop. How does this retailer create customer loyalty and satisfaction, encourage repeat visits, establish an emotional bond between the customer and the retailer, and provide personal attention and memorable experiences to their “best customers”? Retailer’s have any number of practices in place to create these positive relationships with customers. One effort toward building these relationships is establishment of a truly valued frequent shopper program. A truly valued program is one the retailer’s consumers understand and appreciate as providing them direct benefits through an easily understood program. Many of the frequent shopper programs now offer tiered benefits, providing higher levels of benefits to the retailer’s “best customers”. Retailers can also create customer satisfaction and loyalty be providing “best customers” with special treatment. These retailers make their customers comfortable and often go above and beyond typical customer service levels to show these customers how valued they are from the retailer’s perspective. An example is an exclusive hair salon providing full service and a full staff at no extra charge on a Sunday afternoon the salon is normally closed to provide hair, manicure and makeup services for a “best shopper” bride and her attendants on her wedding day. Personalization is another technique retailer’s use to foster emotional connections and loyalty with customers. One-to-one relationships, like a personal shopper service, allow the retailer to connect with each customer’s needs and wants directly. Internet retailers

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often use this technique providing purchase suggestions and tailored merchandise information each time a “best shopper” logs onto the retailer’s web site. Finally, retailers create communities of shoppers to foster connections and loyal relationships. The pet store sponsoring a “Happy Hour” for customers and their furry friends to socialize with one another, the ski shop offering lessons, a bulletin board posting local races, and on online blog about local ski conditions and the toy store sponsoring play ground activities at the local elementary school are all examples of retailers cultivating a relationship with and among their customers that goes beyond the merchandise or service purchase relationship. 10.

How would a retailer use transactions, customer contacts, customer preferences, descriptive information, and responses to marketing activities in its customer database? Retailers use each of these pieces of data to establish and enhance relationships with customers. Transaction data, including purchase date, type and price and customer contact data showing the number and type of interactions that customer has with the retailers allow the retailer to recognize its “best customers”. Customer preference data allows the retailer to anticipate its customers’ needs and wants, and to provide for them without being asked. This contributes to a personalized experience for each customer. Descriptive information, including demographic and psychographic data, allows the retailer to identify segments of customers with similar interests and needs. These segments then become the focus of special programs or promotions tailored to the segment. Responses to marketing activities are determined by monitoring transactions and customer contacts. This way the retailer can determine which programs are most effective with various customer segments and individual customers.

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