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The Link Between Customer Equity and CRM
CRM systems must collect the metrics that ensure accountability.
Posted Apr 12, 2004
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First, it was synergy. Then vision. Now, the marching orders from executive suites: accountability. So how do you achieve accountability? One key is customer equity. Briefly, customer equity is roughly equivalent to lifetime customer revenue minus cost-of-sales/service. Customer equity is a core CRM benchmark that makes organizations accountable for retention, recovery, service, and, of course, profitability. Despite its importance, few companies have incorporated customer equity into their CRM strategies. They rely on dated, ineffective tools like traditional accounting systems or marketing automation systems. Such systems have several failings. They are generally focused on looking at costs, products, or campaigns at a point in time. They are inadequate for measuring the values and costs associated with customers (or even segments) among various products or even across channels. Additionally, they rarely capture key customer equity variables, including conversion ratios and transaction uplift (cross- and upselling). They are especially inadequate for dealing with a key sales variable: time (frequency, lag time between repeat sales, etc.). CRM, which will be to this decade what ERP was to the last, is seen as the light to illuminate this black data hole. The potential for CRM lies in its ability to increase customer equity. Take, for example, these comments by Doug Andrews, a director at the bank Michigan National: "We don't use customer information simply to sell products. To us, that's failure. All that will do is turn people off. What I try to do is make sure to manage the different relationships we have to add value for customers. If we use CRM effectively, it benefits the customer. It does not necessarily benefit Michigan National." Installing CRM with no greater goal than to collect more customer information is a well-paved road to failure. Companies hope that such knowledge leads to additional sales. But customers don't care about what you know about them. They only care about what you can do for them, consistently. Neither should CRM initiatives be driven by the need for transactional efficiencies. According to investment bank Morgan Stanley, companies interact with customers 15 to 20 times as often as they conduct a transaction. Therefore, CRM implementations should help improve customer interactions--one-call service, accurate responses, timely communications, accurate billing, on-time deliveries--not make them faster or less of an employee burden.
CRM systems must allow customers to define and shape offerings in terms of their requirements. For too long companies have seen relationships as a one-way street to customers. By enabling greater customer input and communications, CRM systems must pave a two-way street that results in benefits to customers. Remember that benefits are not what companies promise in their marketing literature, but are advantages that customers pinpoint. Finally, and most important, CRM systems must collect the metrics that ensure accountability. The most important metric is customer equity, but other important metrics include retention rates, up- and cross-sales, RFM (recency, frequency, and monetary value of purchases) and even brand polygamy (purchases of competitive offerings). In other words, CRM is less about managing a relationship with customers than it is about making your brand one that customers want to have a relationship with. About the Author Nick Wreden is a speaker, customer loyalty consultant, and author of FusionBranding: How to Forge Your Brand for the Future. Contact him at nick@fusionbrand.com
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