Customer Relationship Management

High

High

Low

Lifetime profi te

Springer Texts in Business and Economics

V. Kumar

Werner Reinartz

Customer

Relationship

Management

Concept, Strategy, and Tools

Third Edition

Springer Texts in Business and Economics

Springer Texts in Business and Economics (STBE) delivers high-quality instructional content for under￾graduates and graduates in all areas of Business/Management Science and Economics. The series is

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More information about this series at http://www.springer.com/series/10099

V. Kumar

Werner Reinartz

Customer

Relationship

Management

Concept, Strategy, and Tools

Third Edition

V. Kumar

J. Mack Robinson College of Business

Center for Excellence in Brand

and Customer Management

Georgia State University

Atlanta

Georgia

USA

Werner Reinartz

Department of Retailing

and Customer Management

University of Cologne

Cologne

Germany

Originally published by John Wiley & Sons, Inc., 2006

ISSN 2192-4333 ISSN 2192-4341 (electronic)

Springer Texts in Business and Economics

ISBN 978-3-662-55380-0 ISBN 978-3-662-55381-7 (eBook)

https://doi.org/10.1007/978-3-662-55381-7

Library of Congress Control Number: 2018935246

© Springer-Verlag GmbH Germany, part of Springer Nature 2006, 2012, 2018

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Nature

The registered company address is: Heidelberger Platz 3, 14197 Berlin, Germany

Dedicated with Love

To my parents, Patta and Viswanathan, and Uncle Kannan,

To other Family Members - Prita, Matt, Anita, Rohan, Ryan and Aparna

To Cosmic Guru – Chinna Kumar

V. Kumar

To my parents Hermann and Resi

and to my siblings Josef, Sabine, and Ralf

Werner Reinartz

Preface

Customer relationship management

(CRM) as a strategy and as a technology

has gone through an amazing evolutionary

journey. After the initial technological

approaches, this process has matured con￾siderably  – both from a conceptual and

from an applications point of view. Of

course this evolution continues, especially

in the light of the digital transformation.

Today, CRM refers to a strategy, a set of

tactics, and a technology that has become

indispensable in the modern economy.

Based on both authors’ rich academic and

managerial experience, this book gives a

unified treatment of the strategic and

tactical aspects of customer relationship

management as we know it today. It

stresses developing an understanding of

economic customer value as the guiding

concept for marketing decisions. The goal

of this book is to be a comprehensive and

up-to-date learning companion for

advanced undergraduate students, master

students, and executives who want a

detailed and conceptually sound insight

into the field of CRM.

Aimed at students, teachers, and practi￾tioners of CRM, this book offers a

comprehensive treatment of CRM and

database marketing, the approach to

strategic CRM, and implementing the

CRM strategy and the various metrics to

measure customer value. This book

provides all the necessary steps in

managing profitable customer relation￾ships. It stresses on developing an

understanding of customer value as the

guiding concept for marketing decisions,

and illustrates the importance of the

customer lifetime value metric as the

guiding concept for profitable customer

management. This book also analyzes the

implementation of CRM strategies in the

areas of loyalty programs, marketing

campaigns, and channel management.

Specifically, this book provides insights

into several customer level marketing

strategies that can be implemented by

adopting a customer lifetime value

approach – also integrating the digital

approaches that are prevalent these days.

The goal of this book is to be a useful

learning companion to students, teachers,

and practitioners of CRM.

The goal of this book is to be a valuable

learning companion to students, teachers,

and practitioners of CRM. To summarize,

with this book, you can:

5 Obtain a comprehensive understand￾ing of CRM strategy, concepts, and

tools. This unified perspective would

enable readers to see the forest and the

trees.

5 Benefit from the numerous cases that

show direct application of concepts

thus making the material very acces￾sible and applicable.

5 Learn the latest developments in

metrics, practices, and substan￾tive domains (e.g., CRM and social

media).

Objectives of this Text

This book captures the critical elements of

managing customer relationships.

The objectives in writing this text are to:

1. Outline the need for customer￾centric marketing strategies.

2. Explore the science behind CRM

and the effectiveness of various CRM

techniques.

3. Explain the concepts, metrics, and

techniques that form the backbone of

CRM activities.

4. Learn and apply CRM tools and

methodologies that aid customer￾level analytics.

5. Provide clear examples and illustra￾tions that tie concepts with real-world

scenarios.

VII

6. Understand the relationship between

CRM analytics and business perfor￾mance.

7. Discuss the structure of databases,

their uses and benefits from a mar￾keting standpoint, rather than a tech￾nical one.

8. Understand the implications of CRM

and marketing activities like loyalty

programs, channel management, and

planning promotional campaigns.

9. Learn the cutting-edge profitable

customer-level strategies and how

they have been implemented in com￾panies with impressive bottom-line

results.

10. Understand the reasons of CRM as a

dominant form of marketing strategy.

Highlights of this Book

This book offers a comprehensive treat￾ment of CRM and database marketing.

The highlights of this book are as follows:

1. An overview and summary at the

beginning and the end of each chap￾ter to help the reader stay focused.

2. Exhaustive cases to help readers

appreciate how CRM is being carried

out in the age of information.

3. Real-world illustrations in various

chapters under the title «CRM at

Work.»

4. Mini cases at the end of various

chapters designed to address key

managerial issues, stimulate thinking,

and encourage a problem-solving

approach.

5. A new section on International Per￾spectives.

6. Illustrations and explanations of key

traditional and new marketing met￾rics in a clear and concise manner.

7. Clear explanations for the need for

customer value metrics, such as the

traditional past customer value, and

the forward-looking customer life￾time value.

8. Procedures to follow when measuring

past customer value and customer life￾time value.

9. Explanations of techniques like RFM,

logistic regression, decision trees,

and data mining in an easy-to-follow

fashion.

10. Presentation of the latest advances in

customer value management prac￾tices, which include implementation

of several CRM-related strategies.

11. Adoption of a non-technical viewpoint

of CRM rather than a technical one.

Supplements to this Book

1. An online Instructor’s Manual with

Test Questions accompanies this

text. This manual provides solutions

to end-of-chapter Questions and

Problems, and discusses all text cases

in greater detail. Exam questions are

arranged by chapters and include

multiple-choice and true/false

questions. An example of a course

syllabus is presented, and many

suggestions for the organization of

the course are provided. A link to the

Instructor’s Manual can be found at

http://www.springer.com/?SGWID=

0-102-2-1583162-0

2. Web site support: The Web site will be

updated periodically in order to sup￾plement the text with new up-to-date

examples. This site includes the cases

and Web links cited in the text. URL:

http://www.drvkumar.com/crm3.

3. A computerized version of the test

bank is available to instructors for

customization of their exams.

4. Downloadable PowerPoint presenta￾tions are available for all chapters via

the text Web site.

Preface

VIII

Organization of the Text

This book adopts a holistic approach

towards CRM by providing the concepts,

explaining the tools, and developing rele￾vant strategies. It introduces key concepts

and metrics needed to understand and

implement CRM strategies. It describes

the process of successful CRM implemen￾tation. Finally, it presents techniques to aid

in strategic marketing decisions using the

concept of customer lifetime value. This

book is divided into four parts as follows:

5 Part One: Introduction consists of two

chapters and introduces the concept of

customer equity/value as a key aspect

of customer relationship management

(CRM). This part explains the role of

CRM in the current business scenario

and presents a comprehensive link that

connects CRM and customer value.

5 Part Two: Strategic CRM consists

of 7 Chaps. 3 and 4 and introduces

the concepts related to strategic

CRM. This part describes the differ￾ence between strategic and functional

CRM and presents the case for devel￾oping a CRM strategy. It also elabo￾rates on the elements of a CRM system

and provides the implementation

aspects of the customer management

strategy.

5 Part Three: Analytical CRM consists

of 7 Chaps. 5, 6, 7, and 8 and presents

the tools pertaining to analytical

CRM. This part focuses on commonly

used CRM metrics and techniques such

as acquisition rate, retention rate, share

of wallet, logistic regression, decision

trees, RFM, past customer value, and

customer lifetime value. This part also

discusses the concepts relating to data

mining and implementing database

marketing. Types of databases and their

uses and benefits are outlined. Guide￾lines to develop and plan marketing

campaigns in order to maximize cus￾tomer value are discussed. This section

also addresses the technical aspects of

CRM software tools and dashboards

required to implement and manage

CRM applications.

5 Part Four: Operational CRM consists

of 7 Chaps. 9, 10, 11, 12, 13, 14, and 15

and presents the strategies involved in

operational CRM. This part discusses

loyalty programs and the characteris￾tics that make up an effective loyalty

program. This part also discusses the

impact of CRM on marketing chan￾nels. A separate chapter discusses the

developments of CRM using social

media. The last chapter looks into the

future and envisions the developments

and changes that are likely to take

CRM ahead.

5 Part Five: Advances in CRM Applica￾tions consists of 7 Chaps. 16, 17,

and 18 and traces recent advances

in CRM applications. This section

illustrates new and emerging tech￾niques in customer value–based

CRM. Critical marketing issues like

optimum resource allocation, pur￾chase sequence, and the link between

acquisition, retention, and profit￾ability are examined on the basis of

empirical findings. These applica￾tions are categorized on the basis of

applicability for the B2B and B2C

scenarios.

V. Kumar

Atlanta, GA, USA

Werner Reinartz

Köln, Germany

Preface

IX

Acknowledgments

We wish to thank Maren Becker, Manuel

Berkmann, Vanessa Junc, Annette Ptok,

Julian Wichmann, and Nico Wiegand for

their assistance and contribution in the

preparation of this text. We would also

like to thank our colleagues at various

universities for giving valuable suggestions

in developing this book. Special thanks

are owed to Elena Gros, Anisa Hiabu,

Amber McCain, Maria Niebrügge, and

Bharath Rajan for their assistance in vari￾ous aspects of this book. We owe addi￾tional thanks to Renu for copyediting this

book.

XI

Contents

I CRM: Conceptual Foundation

1 Strategic CRM Today................................................................................................................... 3

1.1 An Introduction to Strategic CRM.............................................................................................. 4

1.2 Why Managing Customers Is More Critical Than Ever........................................................ 5

1.2.1 Changes with Respect to Consumers.......................................................................................... 6

1.2.2 Changes with Respect to the Marketplace................................................................................ 9

1.2.3 Changes with Respect to the Marketing Function.................................................................. 10

1.2.4 Implications......................................................................................................................................... 11

1.3 The Benefits of the Customer Value Management Approach ......................................... 11

1.4 Evolution and Growth of CRM ..................................................................................................... 12

1.4.1 First Generation (Functional CRM) ............................................................................................... 12

1.4.2 Second Generation (Customer-Facing Front-End Approach).............................................. 13

1.4.3 Third Generation (Strategic Approach)....................................................................................... 13

1.4.4 Fourth Generation (Agile and Flexible Strategic CRM) .......................................................... 14

1.4.5 Fifth Generation (Social CRM)........................................................................................................ 14

1.5 CRM and the IT Revolution: The View from the Industry................................................... 14

References........................................................................................................................................... 16

2 Concepts of Customer Value.................................................................................................. 17

2.1 Value to the Customer.................................................................................................................... 18

2.2 Value to the Company .................................................................................................................... 20

2.2.1 From Value for Customers to Value from Customers:

The Satisfaction-Loyalty-Profit Chain.......................................................................................... 20

2.2.2 Extending the Concept of Customer Value ............................................................................... 25

References........................................................................................................................................... 28

II Strategic CRM

3 Strategic CRM ................................................................................................................................. 33

3.1 CRM Perspectives ............................................................................................................................. 34

3.2 Elements of a CRM Strategy ......................................................................................................... 36

3.2.1 CRM Vision ........................................................................................................................................... 36

3.2.2 Culture of Customer Orientation .................................................................................................. 36

3.2.3 Integration and Alignment of Organizational Processes...................................................... 37

3.2.4 Data and Technology Support....................................................................................................... 38

3.2.5 CRM Implementation ....................................................................................................................... 39

3.3 Steps in Developing a CRM Strategy......................................................................................... 40

3.3.1 Step 1: Gain Enterprise-Wide Commitment.............................................................................. 40

3.3.2 Step 2: Build a CRM Project Team ................................................................................................. 41

3.3.3 Step 3: Analyze Business Requirements..................................................................................... 42

3.3.4 Step 4: Define the CRM Strategy................................................................................................... 43

References........................................................................................................................................... 47

4 Implementing the CRM Strategy ........................................................................................ 49

4.1 Types of CRM Implementation Projects................................................................................... 50

4.1.1 Operational CRM Projects............................................................................................................... 50

XII

4.1.2 Analytical CRM Projects................................................................................................................... 50

4.1.3 Application Projects Deploying Operational and Analytical Outputs.............................. 53

4.2 CRM Implementation Effectiveness .......................................................................................... 53

4.2.1 Costs Associated with a CRM Implementation......................................................................... 54

4.2.2 Financial Benefits from a CRM Implementation ...................................................................... 55

4.2.3 Computing the ROI of CRM Initiatives........................................................................................ 56

4.3 Why Do CRM Implementation Projects Fail?.......................................................................... 57

4.3.1 Resistance from Employees............................................................................................................ 57

4.3.2 Poor Data Quality............................................................................................................................... 58

4.3.3 Low «Actionability» of the Information ...................................................................................... 59

4.4 Case Study: CRM at Capital One (United Kingdom) ............................................................ 60

4.4.1 Case Background ............................................................................................................................... 60

4.4.2 Industry Background ........................................................................................................................ 61

4.4.3 Capital One Company Background.............................................................................................. 63

4.4.4 CRM Practices at Capital One (UK)................................................................................................ 64

4.4.5 Future Challenges.............................................................................................................................. 72

References........................................................................................................................................... 75

III Analytical CRM

5 Customer Analytics Part I ........................................................................................................ 79

5.1 Traditional Marketing Metrics ..................................................................................................... 81

5.1.1 Market Share ....................................................................................................................................... 81

5.1.2 Sales Growth........................................................................................................................................ 81

5.2 Customer Acquisition Metrics...................................................................................................... 81

5.2.1 Acquisition Rate ................................................................................................................................. 82

5.2.2 Acquisition Cost ................................................................................................................................. 82

5.3 Customer Activity Metrics............................................................................................................. 83

5.3.1 Objective of Customer Activity Measurement......................................................................... 83

5.3.2 Average Inter-Purchase Time ......................................................................................................... 84

5.3.3 Retention and Defection Rate ....................................................................................................... 84

5.3.4 Survival Rate........................................................................................................................................ 87

5.3.5 Lifetime Duration............................................................................................................................... 88

5.3.6 P(Active)................................................................................................................................................ 90

5.3.7 Comprehensive Example of Customer Activity Measures.................................................... 91

5.4 Popular Customer-Based Value Metrics................................................................................... 92

5.4.1 Size of Wallet ....................................................................................................................................... 92

5.4.2 Share of Category Requirement.................................................................................................... 92

5.4.3 Share of Wallet.................................................................................................................................... 94

5.4.4 Transition Matrix ................................................................................................................................ 96

References........................................................................................................................................... 99

6 Customer Analytics Part II....................................................................................................... 101

6.1 Strategic Customer-Based Value Metrics................................................................................. 102

6.1.1 RFM Value............................................................................................................................................. 102

6.1.2 Past Customer Value ......................................................................................................................... 111

6.1.3 Lifetime Value Metrics...................................................................................................................... 112

6.1.4 Customer Equity................................................................................................................................. 116

6.1.5 Comprehensive Example................................................................................................................. 116

6.2 Popular Customer Selection Strategies ................................................................................... 118

6.2.1 Profiling................................................................................................................................................. 118

Contents

XIII

6.2.2 Binary Classification Trees............................................................................................................... 119

6.2.3 Logistic Regression............................................................................................................................ 121

6.3 Techniques to Evaluate Alternative Customer Selection Strategies............................. 125

6.3.1 Misclassification Rate........................................................................................................................ 125

6.3.2 LIFT Analysis........................................................................................................................................ 125

References........................................................................................................................................... 134

7 Data Mining..................................................................................................................................... 135

7.1 The Need for Data Mining............................................................................................................. 136

7.2 The Business Value of Data Mining............................................................................................ 136

7.3 The Data Mining Process ............................................................................................................... 137

7.3.1 Involvement of Resources............................................................................................................... 138

7.3.2 Data Manipulation............................................................................................................................. 138

7.3.3 Define Business Objectives............................................................................................................. 140

7.3.4 Get Raw Data....................................................................................................................................... 143

7.3.5 Identify Relevant Predictive Variables......................................................................................... 145

7.3.6 Gain Customer Insight ..................................................................................................................... 148

7.3.7 Act........................................................................................................................................................... 149

References........................................................................................................................................... 155

8 Using Databases ........................................................................................................................... 157

8.1 Types of Databases .......................................................................................................................... 158

8.1.1 Categorization Based on the Information Included in the Databases.............................. 158

8.1.2 Categorization Based on the Nature of the Underlying Marketing Activities................ 162

8.1.3 Categorization Based on the Database Technology............................................................... 163

8.2 The Benefits of Marketing Databases....................................................................................... 164

8.2.1 The Ability to Carry Out Profitable Segmentation .................................................................. 164

8.2.2 Retained Customers and Repeat Business................................................................................. 164

8.2.3 The Ability to Spot Potentially Profitable Customers............................................................. 164

8.3 The Uses of Marketing Databases (Jackson & Wang, 1994) .............................................. 164

8.3.1 Uses that Directly Influence the Customer Relationship....................................................... 164

8.3.2 Uses that Directly Influence Other Business Operations....................................................... 165

References........................................................................................................................................... 167

IV Operational CRM

9 Software Tools and Dashboards.......................................................................................... 171

9.1 CRM Implementation Options..................................................................................................... 172

9.1.1 Developing Software In-House ..................................................................................................... 172

9.1.2 Buying Licensed CRM Software..................................................................................................... 173

9.1.3 Outsourcing a Managed Service................................................................................................... 173

9.2 CRM Software and Applications ................................................................................................. 175

9.2.1 Stage-Wise Implementation Versus an Enterprise Wide CRM Solution............................ 175

9.2.2 Relationships and Flows Between CRM Modules.................................................................... 175

References........................................................................................................................................... 178

10 Loyalty Programs: Design and Effectiveness............................................................... 179

10.1 What Is Loyalty? Behavioral Versus Attitudinal Loyalty..................................................... 181

10.2 What Is a Loyalty Program? Definition and Key Objectives ............................................. 182

10.2.1 Building True Loyalty ........................................................................................................................ 182

10.2.2 Efficiency Profits................................................................................................................................. 183

Contents

XIV

10.2.3 Effectiveness Profits.......................................................................................................................... 183

10.2.4 Value Alignment................................................................................................................................. 184

10.3 Loyalty Programs: Increasing in Popularity............................................................................ 184

10.3.1 Examples of Loyalty Programs....................................................................................................... 187

10.4 Problems with Loyalty Programs................................................................................................ 188

10.5 Design Characteristics of Loyalty Programs........................................................................... 189

10.5.1 Reward Mechanism: Transaction-Based Versus Engagement-Based ................................ 189

10.5.2 Reward Structure ............................................................................................................................... 189

10.5.3 Participation Requirements............................................................................................................ 191

10.5.4 Payment Function.............................................................................................................................. 192

10.5.5 Sponsorship......................................................................................................................................... 192

10.5.6 Cost and Revenues of LPs................................................................................................................ 193

10.6 Drivers of Loyalty Program Effectiveness................................................................................ 193

10.6.1 Loyalty Program Design Characteristics..................................................................................... 194

10.6.2 Customer Characteristics................................................................................................................ 194

10.6.3 Firm Characteristics........................................................................................................................... 194

10.6.4 Achieving a Competitive Advantage........................................................................................... 195

10.7 Empirical Evidence on Loyalty Program Effectiveness....................................................... 197

10.8 Loyalty Programs, Shackle or Reward: And to Whom? ...................................................... 197

10.9 The Seven-Point Checklist for Successful LP Design and Implementation................ 197

References........................................................................................................................................... 204

11 Campaign Management........................................................................................................... 207

11.1 Campaign Management ........................................................................... 209

11.2 Campaign Planning and Development ........................................................ 210

11.2.1 Setting Objectives and Strategies................................................................. 210

11.2.2 Identifying Customer Segments................................................................... 211

11.2.3 Developing the Communication Strategy ...................................................... 212

11.2.4 Developing the Offer................................................................................. 214

11.2.5 Campaign Budget .................................................................................... 219

11.2.6 Testing................................................................................................... 224

11.3 Campaign Execution ................................................................................ 228

11.3.1 Implementation and Coordination ............................................................... 228

11.3.2 Monitoring and Fine-Tuning ....................................................................... 229

11.3.3 Problems to Take into Account .................................................................... 229

11.4 Analysis and Control ................................................................................ 230

11.4.1 Measuring Campaign Results...................................................................... 231

11.4.2 Response Analysis .................................................................................... 232

11.4.3 Profile Analysis......................................................................................... 232

11.5 Campaign Feedback................................................................................. 232

References........................................................................................................................................... 235

12 Impact of CRM on Marketing Channels .................................................. 237

12.1 CRM and Marketing Channels .................................................................... 239

12.1.1 What Are Channels? .................................................................................. 239

12.1.2 The Role of Channels in Customer Relationships.............................................. 240

12.1.3 Managing Customer Relationships Through Indirect Channels............................ 241

12.1.4 Managing Customer Relationships Through Direct Channels.............................. 242

12.1.5 Multichannel Trends and CRM ..................................................................... 245

12.2 CRM and Multichannel Design ................................................................... 250

12.2.1 Attributes of Multichannel Designs............................................................... 250

12.2.2 Designing Optimal Multichannel Offers......................................................... 252

Contents

XV

12.3 CRM and Multichannel Management........................................................... 254

12.3.1 Managing Multichannel Systems: Integration Versus Separation ......................... 254

12.3.2 Managing Multichannel Shoppers................................................................ 256

12.3.3 Managing Research Shoppers ..................................................................... 259

References ............................................................................................. 263

13 CRM Issues in the Business-To-Business Context .................................... 265

13.1 CRM and Sales Force Automation ............................................................... 267

13.1.1 What Is SFA?......................................................................................................................................... 268

13.1.2 SFA Benefits ............................................................................................ 268

13.1.3 Conditions for Realizing Benefits.................................................................. 268

13.2 CRM and Key Account Management............................................................ 270

13.2.1 What Is KAM? .......................................................................................... 270

13.2.2 Implementation of the KAM Program............................................................ 271

13.3 CRM and the Shift from Goods to Services.................................................... 276

13.3.1 What Are Hybrid Offerings? ........................................................................ 277

13.3.2 Advantages and Disadvantages of the Shift to Hybrid Offerings.......................... 278

13.3.3 Rules for Successful Shifts........................................................................... 279

References ............................................................................................. 282

14 Customer Privacy Concerns and Privacy Protective Responses......................... 285

14.1 Customer Privacy Concerns ....................................................................... 287

14.1.1 Customer Privacy ..................................................................................... 287

14.1.2 Drivers of Customer Privacy Concerns........................................................... 288

14.2 Regulations to Protect Customer Privacy ..................................................... 294

14.2.1 United States: Customer Privacy Protection Based on Industry Self-regulation........ 295

14.2.2 Germany: Customer Privacy Protection Based on Governmental Legislation .......... 296

14.2.3 The General Data Protection Regulation (GDPR) .............................................. 297

14.3 Customer Privacy Protective Responses....................................................... 299

14.3.1 Information Provision................................................................................ 299

14.3.2 Private Action.......................................................................................... 300

14.3.3 Public Action........................................................................................... 300

14.4 Privacy Paradox....................................................................................... 300

14.5 Consequences of Privacy Protective Responses............................................. 301

14.5.1 Loss of Trust and Brand Integrity .................................................................. 301

14.5.2 Decreased Sales....................................................................................... 301

14.5.3 Decrease in Data Quality ............................................................................ 301

14.5.4 Increased Costs due to Privacy Protection ...................................................... 301

14.5.5 Ethical Dilemma....................................................................................... 301

14.6 Implications for Companies ....................................................................... 301

14.6.1 Align Privacy with Strategy ......................................................................... 302

14.6.2 Look Beyond Rules to Values....................................................................... 302

14.6.3 Anticipate Issues ...................................................................................... 302

14.6.4 Create Accountability ................................................................................ 302

14.6.5 Do Not Conflate Security and Privacy ............................................................ 302

14.6.6 Treat Privacy as a Social Responsibility .......................................................... 302

14.6.7 Manage Your Data Supply Chain .................................................................. 302

14.6.8 Rely on Technology When Appropriate.......................................................... 302

14.6.9 Plan for Disaster Recovery .......................................................................... 302

14.6.10 Heed both Boomers and Millennials ............................................................. 302

14.7 Future Issues: Data as Currency .................................................................. 303

References ............................................................................................. 307

Contents