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COPERNICUS WHITE PAPER
CRM—The Most Outstanding 15 Percent Solution to Marketing—To know what is, is expected. To know what could be, is strategy.
By Kevin J. Clancy and Peter Krieg
Like millions of marketers we love the promise of customer relationship management (CRM) software because it applies science and technology to analyzing and measuring marketing. It holds the potential of providing the data we need to make rational, profit-oriented marketing decisions day in and day out. Software vendors claim that it can help evaluate customer profitability, target marketing messages most likely to produce responses, cross-sell products, identify customer acquisition costs, and determine the ideal level of media support and spending weights.
This sounds great! No more from-the-gut, testosterone-based marketing programs. Hallelujah! I see why the CRM software category is projected to explode anywhere between $3 billion and $18.5 billion within the next two years.
But before you bank on your new CRM system providing you with the ultimate competitive advantage, you must recognize that CRM is not a magical elixir, a solution to all of your marketing problems, or a one-shot potion for success. There are some catches:
1. First, there is no consistent definition of what CRM is in our industry. We've talked to at least 20 different firms offering CRM solutions and all of them are different. The vary in the level of technological sophistication, built-in marketing knowledge, AI algorithms, statistical data-mining capabilities, and a host of other variables. Unless CRM acquires some consistent and useful meaning soon, it will pass out of a marketer's vocabulary.
But all of them have at least one thing in common—they employ customer transaction data to improve marketing decision making.
2. Most marketers do not have data on individual buyers of their products and services. This is true for packaged goods marketers, clothing manufacturers, many electronic and software companies, etc. For those who do have external data—the CRM program addresses less than 15 percent of the market. As evidence, at our company Copernicus, our B2C and B2B research studies over the past eight years have found that existing customers usually represent just 14.5 percent of the total potential market in most product and service categories. In other words, CRM will not help you understand the remaining 85.5 percent of the market opportunity.
That's right. CRM programs by and large help analyze existing customers, helping to determine who is loyal and who is vulnerable, who is profitable and who is not. While understanding how to keep profitable customers is crucial to measuring customer identification costs, it's only part of marketing's mission.
Too many marketers rely only on customer transaction data, which reveals nothing about what's in the hearts and minds of customers-their needs, values, brand perceptions, what they're buying from competitors, etc. Take for example one of our clients, an upscale retailer, who for years believed its biggest customers were happy and loyal best friends. This assumption was based purely on transaction data which found that approximately 20 percent of customers accounted for 80 percent of sales. A survey among the target group, however, yielded the astounding discovery that the same group represented the biggest customers at Bloomingdale's and Neiman Marcus! The target group was not especially connected to our client at all. Transaction data alone would never have revealed this kind of information.
One of our clients in the insurance industry once took customers—insurance agents—and divided them into categories also based on transaction data. "High Impact," "Gold, " and "Platinum" described the categories of the biggest customers, and the company assumed the size of the purchase reflected the brand perception of our client as a premier carrier. Yet when they actually asked their biggest customers, only 51 percent of Platinum customers—the group our client believed felt undying loyalty and love to the brand—only 49 percent of Gold customers, and 24 percent of High Impact customers perceived the company as a premier carrier. Even more disturbing, these groups of our client's biggest customers reported having better relationships with other carriers.
The moral of the story of is, in order to avoid the agony and heartbreak of these marketers, you need to analyze external data, and lots of it, to understand such strategic elements as what share of the market is simply unavailable due to customer loyalty to competing brands, so don't even bother spending against it. Or how much incremental market share would be available to your brand if your price or product features were slightly different. Indeed, thousands or even hundreds of thousands of alternative targets based on hypothesized variables should be considered in order to identify the most profitable targets. Relying on the small target sample of existing customers is extremely shortsighted and potentially damaging.
Furthermore, most CRM software today is weak in real analytical strength, which substantially limits its value. In order to obtain valuable predictive information from the data, the analytic software tools must be as good as traditional methodologies such as regression analysis and neural networks. As yet, few are.
3. External conditions have a huge impact on marketing strategy and must be constantly assessed and factored into customer-centric strategies. Things like economic conditions, new competitors, emerging 'replacement' categories, and political and regulatory changes can present huge marketing challenges and opportunities—yet none can be measured by CRM software.
Consider the domino impact the Department of Justice's decision on Microsoft had on NASDAQ companies, or the plummeting valuation and reputation of DoubleClick due to consumer privacy concerns, or the changing supply chain market dynamics as a result of digital marketplaces.
Most critical is keeping a close watch on competitors - especially new players who are apt to redefine the market. Take any technology category and you'll see the traditional competitors reacting to the upstarts, sometimes much too late. In the CRM market itself, pioneers like Aurum and Vantive have been crushed by competitors like Siebel and Epiphany who changed the competitive playing rules. In business analysis software, traditional players like Hyperion and Cognos are rushing to introduce e-business products to keep pace with upstart MicroStrategy. Marketers must pay closer attention to competitors than ever before—and move more quickly than ever before to establish "co-opetive" partnerships, enhance customer service, and explore new untraditional market channels.
4. Amid the clutter of more advertising messages than ever before, buyers are selecting products based not just on perceived quality and value, but also on an emotional connection with the brand. They are motivated to buy company and product brands that are distinct from competitive offerings and have brand personality attributes with which they can relate.
Category winners in any industry—BMW, Cisco, Pfizer , Saks Fifth Avenue—clearly understand the value of brand positioning distinctiveness. For more examples, look at Mountain Dew—the fastest growing soft drink in the world—and Pepsi; McDonald's; Home Depot; Tommy Hilfiger and Ralph Lauren; AT&T and Sprint; Con Agra with Healthy Choice; and Volkswagen—these are all companies which continuously cultivate an emotional connection between consumers and their brands.
Just a few technology companies seem to understand this well enough to factor it into their marketing strategies. HP gets it with its "Innovate" message. IBM has done a superb job at reassuring CEOs who are fearful of being left behind in e-business Dell has also built a strong personality relevant to its target group of consumers.
5. In 1999, Net firms spent on average an eye-popping 69 percent of revenues on sales and marketing efforts. And a significant, if not majority, of this total was spent strictly on advertising. But it's not just about getting control of ad spending, it's knowing how and where to spend your marketing dollars.
Remember the "ready-aim-fire" mentality of the 60s and 70s which became "aim and fire" in the accelerating 80s and 90s, and morphed again into "fire, fire, and fire some more" in 2000? Despite huge investments in advertising, publicity, Website design, and even hip names, attempts at "speed-branding"—the idea that with sufficient money, a marketer can build a strong brand in record time—have failed time and again. The recent well-publicized demise of many dot.coms such as Mothernature.com, Pets.com, and Send.com demonstrates this point. It doesn't matter how much money you have to spend—if you haven't nailed the four fundamentals of branding you're dead in the water. So, if you want your marketing to succeed, eschew the fire-fire-fire approach, think rationally, and do these four substantive fundamentals well.
- Identify a profitable customer segment and serve that segment better than any competitor. And remember: not all customers are profitable customers as Amazon.com has discovered in its fight for profitability.
- Make the brand different in some real and valuable way from all the competitors— and make sure customers can understand that difference. Brand leaders in every category do this well: Southwest Airlines, Target, Cisco, Dell, Gap, Harley-Davidson, and Lucent.
- Give the target customer a reason to want to buy your product (and we don't mean give away cars to induce trial). Most consumers are reluctant to change brands—whether it's their banking services or the search engine they use. The positioning must not only convey how the brand solves the customer's problem, it must also rock consumer inertia. Dell bundles everything into a PC and ships it to you direct—and even offers home service. Target provides chic stuff cheap. Johnson & Johnson is a caring company with quality products you can trust. Charles Schwab provides more value to the customer than the traditional brokerage houses. Is your brand promise compelling enough to overcome marketing inertia?
- Clearly and consistently communicate the brand's "reason to buy" message to customers in ways that are meaningful and relevant to them. IBM's corporate e-business advertising program helped position IBM as an innovative player in the Internet. Hewlett Packard's recent "innovate" campaign is breathing life into an esteemed brand that seemed to have lost some of its leading-edge technology luster. Sprint PCS focuses on the clarity of its mobile phone services, from both a telephone reception and an easy-to-understand rate plan perspective. It's brand mission: "clear communications, clearly communicated, clear across the country."
6. How to set prices is one of those gnarly issues that keep marketers - and many a CEO - awake at night, especially in view of buyers' ability to bid on price at today's burgeoning Internet marketplaces. Price is often at the heart of strained relationships with customers. It's also the ultimate weapon competitors use to nab marketshare. Whether you're buying raw materials or stereo speakers, there's a place on the Web to name your price. On top of this trend, pricing has become marketing's neglected child, taking a back seat to ecommerce, advertising and customer relationship management software. "If profits don't matter, why should price," the thinking might go.
Yet, to quote a member of the Copernicus Board of Advisors and Chairman of the Strategic Pricing Group, Boston, Massachusetts, Dr. Tom Nagle, "Although the Internet is creating huge economic value, it is not changing the fundamental principles of economics. If anything, it is increasing the speed with which those principles have an effect and the cost of not adhering to them." As investor tolerance for perennial losses wanes, effective pricing strategies which move a company to profitability will manifest themselves amongst the dot.com community.
The pricing strategy too many marketers now follow is to throw their own costs out of the equation and treat price as the consumer's "bottom line." They operate with the mentality that our price has to be as low as—if not lower—than our competitor's to attract customers and grow market share. The problem with trying to match or undercut a competitor's price is that a company cannot know in any real sense whether the competitor is making any money. What company knows its competitor's costs, when the competitor itself may not know them? And if you don't know costs, how can you calculate profitability?
The trick, obviously, is to find the price that maximizes the marketer's profit. Not (usually) the lowest or the highest price possible, but one that produces the most sales at the maximum profit. The "most profitable price" is a function of consumer demand (as estimated by research) and costs. Marketers need to know their costs in order to determine a profitable price, and to calculate even approximate costs requires extensive hard work and cooperation within the organization. Those that adopt a practice of real-time customer-based activity costing will not only have the more accurate cost figures, but also will discover that finding the "most profitable price," is less like closing your eyes and throwing a dart at a dart board.
Conclusion: Looking back is helpful, looking forward is essential.
Points:
- Most customer CRM intelligence and e-intelligence is historical, internal-only information, not a predictive, "whole market" tool. Use it wisely when developing your overall business and marketing strategies.
- Broad CRM targeting based on metrics like monthly bill size is not true targeting.
- Analytic methodologies provided by today's CRM systems are not yet robust enough to provide credible predictive insights.