An organization can better target members for increased investment--or disinvestment--based on potential value, while delivering more relevant communications and offers geared to member needs.
Posted Dec 29, 2003
CRM has evolved significantly in the past decade, driven by intensifying competition and dramatic growth in enabling technologies. During this time thousands of companies in a variety of industries have invested countless dollars in building the CRM infrastructure. Much of that spending has been focused on marketing databases and software encompassing campaign management, sales force and call center automation, and business intelligence and analytics. Now more than ever, marketers literally have at their fingertips access to data and tools that can dramatically improve the quality and productivity of their customer management and marketing efforts.
Why, then, has there been such widespread underachievement in the payoff from CRM? The answers are numerous, but in many cases it is simply that companies do not properly or completely follow through on their CRM investments. One of the bigger shortcomings is a misalignment of CRM marketing strategies with business objectives and insufficient measurement of the marketing programs.
Clearly, the objective of most companies is to increase market penetration and share, grow revenue and profitability, and maximize shareholder value. This seems pretty straightforward, but too often the marketing programs that companies pursue fail to support these business goals. For example, acquisition programs frequently focus on bringing in as many customers as possible, with secondary importance placed on the quality or long-term viability of those customers. Retention marketing is often conducted with inadequate knowledge of customer value and needs, leading to a misallocation of marketing resources and mismanagement of the customer base. Meanwhile, businesses often lack the rigor and discipline required to test and measure the effects of their marketing programs. As a result, a golden opportunity to learn, improve, and measure ROI is often lost.
Closing the gap
A loyalty program for a leader in the travel industry provides an example of how a company is actively taking steps to better align its marketing activities with its business strategy by leveraging its CRM investments. This loyalty program was designed to build profitable and lasting customer relationships. This is achieved by rewarding members with points in return for their business. Members can also earn points by doing business with company partners such as airlines and car rental companies, further strengthening the value proposition of the program.
The loyalty program consists of four tiers. The higher the tier, the greater the rewards, providing an incentive for members to do more business with the hotel. Marketing programs are structured around the tiers, and the organization invests in members based on their tier--spending the most on the highest tier members and the least on the lowest tier members. Traditionally, a member was placed in a tier based solely on their recent stay activity. Because the tiering looked at the recent value of members and did not take into account their potential value, there was concern that scarce marketing resources were not being allocated in a way that maximized ROI. Some members were probably receiving too large of an investment relative to their potential value, while others were not receiving enough attention. Thus, the marketing strategy was not completely aligned with the business goal of building profitable and long-term customer relationships.
Investing based on value
What the program needed was a more forward-looking means of managing customer value. To do this, the organization developed a tool that would determine the revenue potential of each member. This was accomplished with a two-stage model that predicts the likelihood that a member will record one or more stays at company properties over the following 12 months and their level of spending. Members are ranked and then segmented based on their potential value score. To develop the model, the member database was tapped--a rich repository of member data, including stays, spending, points, rewards, demographics and partner data. The model was validated in-market by comparing subsequent spending levels of the model-based tiers to that of the traditional tiers. The results showed that the model-based approach was far superior to the traditional tiers in its ability to discern member value potential, thus providing a better foundation for allocating marketing dollars. Of particular interest to the company was the identification of lowest tier members who in fact had strong revenue potential--these customers warrant greater marketing attention to lock in their business.
Communicating based on needs
The company did not stop with this addition to its marketing tool chest. It knew that it was not enough to be able to spread marketing dollars more intelligently, based on customer potential value. Management realized that the relevance of customer communications had to be high to make its marketing dollars pay off. To this end, the organization commissioned a research study in which members were asked to articulate the reasons for enrolling in the program. By understanding the motivating factors behind membership, the company would be in a much better position to develop messaging and offers that resonated with members by addressing their needs. The study revealed four distinct members segments: Savers, Gamers, Givers, and Stay Enhancers. Although the segments were developed with attitudinal information collected through a survey, the company was able to accurately apply the segmentation to its entire membership by utilizing behavioral and demographic data from the database.
With the development and implementation of these tools, an infrastructure is now in place that enables marketing activities that directly support the attainment of the program's business goal of building more lasting and profitable customer relationships. The organization can now better target members for increased investment--or disinvestment--based on potential value, while delivering more relevant communications and offers geared to member needs.
About the Author
John Young is vice president and managing director of the Analytic Consulting Group at relationship marketing firm Epsilon, where his responsibilities include design, management, and consultation on various database marketing analytic engagements, including predictive modeling, segmentation, measurement, and profiling. Contact him though Kam Hashim at email@example.com
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