Customer relationship management and customer analysis

1 Customer relationship management (CRM)

1.1 Introduction

Customers provide organisations with their only source of revenue, and hence of profits. Businesses must therefore manage their relationships with customers carefully, and understand and nurture what customers require. The syllabus places customer analysis among the core tools for analysing the organisational ecosystem: customers are not simply buyers at the end of the chain, but participants whose behaviour, data and power shape strategy.

CRM means gathering and using information about potential and existing customers to support three activities:

• Customer acquisition – winning new customers.

• Customer retention – keeping the customers you have.

• Customer extension – widening the range of products existing customers buy.

IT contributes enormously to all three – websites, search advertising, databases and CRM software give even a very small company a global presence and a detailed memory of every customer relationship.

1.2 Customer acquisition

Methods that can be used:

• Promotion (advertising, including search-engine and social-media advertising)

• Incentives (for example, incentives to sales personnel to sign up new customers)

• Services (provision of e-services that are of value to potential customers)

• Profiles (understanding potential customers and what they require)

• Customer service (a reputation for good service attracts new buyers)

• Direct e-mail

1.3 Customer retention

Methods that can be used:

• Extranets (allowing customers to see, for example, what inventory you hold)

• Personalisation (recommendations based on the customer’s own history – see hyperpersonalisation below)

• Community (involving customers in user forums and product reviews)

• Promotions (special offers going exclusively to existing customers)

• Loyalty schemes (points per $ of purchases)

• Surveys and feedback (asking how a delivery went, and acting on the answers)

1.4 Customer extension

Extension widens the range of products purchased. Sell someone a laser printer and the natural extensions are toner cartridges and paper – one purchase branching into a stream of repeated purchases. Methods include:

• Direct e-mail about related products

• Learning from customers what their interests and requirements are

• On-site promotion (special offers and impulse buys that persuade customers to try something new)

2 Customer profitability analysis

Many costs are driven by customers rather than by products, and customer profitability analysis (CPA) applies activity-based costing (ABC) techniques to customers. Two customers may each buy 20,000 units a year – but if one orders twice in bulk while the other places 1,000 small orders, the second causes vastly more order processing, despatch, invoicing and chasing. Profitability does not just depend on gross margin.

The approach mirrors ‘normal’ ABC, except that costs are attributed to types of customer. We can then:

• Identify unprofitable customers and attempt to change their buying behaviour (fewer, larger orders; less hand-holding) so they become profitable

• Decide which customers deserve the most attention and resources

• Identify where cost-reduction efforts should be focused

3 The customer profitability statement

There is no set format for a customer profitability statement, but it would normally resemble the following (illustrative figures):

Note the customer-specific financing costs: a customer who takes long credit, or requires special inventory to be held, is consuming working capital – and that cost belongs in the analysis of that customer.

4 Customer portfolio analysis

Customer portfolio analysis is a marketing concept used to analyse supplier-customer relationships, to help managers allocate scarce resources and ensure the long-term profitability of customer relationships. It analyses current and potential customers to decide which customers the firm wants to serve in the future. It builds naturally on customer profitability analysis: profitable customers are worth effort and resources; marginal ones are not – airlines lavish attention (lounges, free seat selection, extra luggage) on their gold-card frequent flyers precisely because those customers are highly profitable, while occasional holiday travellers receive the standard product.

Typical criteria for evaluating customers include:

• Type of relationship – partnership, recurring (client) or occasional

• Service needs – products only, or support, consultancy and hand-holding too

• The customer’s decision criteria when selecting suppliers – price, delivery time, ease of purchase, quality, reliability

• Our share of the customer’s purchases – if it is high, we matter to them (and they to us)

• Revenue generated from the customer

• Customer profitability – high, moderate or low, in absolute terms and as a percentage

• Potential for additional sales – are they expanding, opening abroad, planning new factories?

• Relationship quality – easy, average or challenging (constant quibbling has a cost)

• The customer’s own business prospects – failing, stable or growing – and apparent strategy

• Credit risk – prompt payer, or a potential bad debt?

The analysis then runs as a cycle:

Shaping the portfolio has to be done with care – openly telling unwanted customers to go away is terrible PR. Pricing structures do the work politely: an investment manager who wants only large clients can charge 1% a year on portfolios below $500,000 and 0.5% above it, deliberately making itself expensive to the customers it does not want and attractive to those it does. Similarly a distributor may set minimum order values so that tiny, cost-heavy orders disappear.

5 Customer empowerment

IT – above all the internet – has shifted the balance of power from sellers to customers. (Chapter 4 lists customer empowerment among the market drivers of change in the ecosystem; this section is the customer-analysis view of the same force.) Examples:

• Social media: customers comment on and rank their experiences, and a perceived misstep can gather a storm of protest within hours; review sites make reputations public property

• E-commerce reviews: marketplaces let consumers rate both the retailer and the product

• Price transparency: comparison sites do in seconds what once took a day of shopping around

• Easy switching: many industries (UK gas and electricity, banking) are required to offer simple, automated switching between suppliers

• Disintermediation: consumers sell directly to each other, and peer-to-peer lenders bypass banks

• Consumer polls and co-creation: companies invite customers to vote on features and adverts

• Buy and return: internet selling obliges sellers to accept no-quibble returns, at their own expense

Customers can, of course, abuse their power – the diner who threatens a savage review unless the bill is cut, or the shopper who orders many items knowing all but one will be returned at the supplier’s expense. Strategy must reckon with empowered customers as a permanent feature of the ecosystem, not a temporary irritation.

6 Hyperpersonalisation

Many websites personalise a visitor’s experience: greeting you by name, tracking orders, offering easy reordering, and prompting ‘you might also like…’ or ‘people who bought that also bought…’. Hyperpersonalisation takes the process a stage further, using detailed behavioural data – and, increasingly, machine learning – to anticipate each individual customer:

• Browse without buying, and an e-mail follows about similar products

• A record of your responses builds up: if you usually accept hotel-room upgrades, upgrades keep being offered; a favourite brand triggers bulk-buy offers

• Never buy meat from a supermarket site and it may infer you are vegetarian, adapting what you are shown

• Start buying nappies and expect baby-food offers in six months and baby-shoe offers in a year

It can misfire. A traveller who books one night in a city they will never visit again may be pursued for months with alerts that prices in that city have fallen – the algorithm has not distinguished a one-off trip from a recurring need. Poorly judged personalisation wastes goodwill; at worst it feels intrusive. Customers grant data willingly only while they trust how it is used – data-protection law and the organisation’s own ethics (Chapter 18) set the boundary, and AI-driven personalisation (Chapter 16) raises the stakes on both.

7 From products and services to experiences

A trend the syllabus highlights in digital consumption: customers increasingly buy experiences rather than stand-alone products or services. The coffee shop sells atmosphere and habit as much as coffee; the games console sells membership of a community; software is bought as an evolving subscription rather than a boxed product. For customer analysis this matters in three ways:

• What is valued shifts from specification and price towards the whole journey – ease of buying, onboarding, support, community, updates. CSFs and KPIs (Chapter 8) must reflect the journey, not just the transaction.

• Revenue models shift from one-off sales to subscriptions and usage – so retention, churn and customer lifetime value become the numbers that matter, and the engagement metrics of Chapter 17 (active usage, stickiness, net promoter score) become the customer-analysis toolkit.

• Relationships become continuous. A product sale ends; an experience is re-purchased every month. That multiplies both the value of loyalty and the cost of disappointing – an empowered customer cancels a subscription in one click.

8 Test your knowledge

Two short exercises close the chapter in the online notes: ten flashcards on the terms and frameworks above, and ten practice questions with worked feedback on every option. Work through the cards first, then the questions.