Customers are the lifeblood of any organization. All the organizations grapple with issues like how to acquire the right customers and retain them, developing them into loyal ones and getting back customers lost to competition. Customer strategy resolves all these issues. It helps in customer acquisition, customer loyalty, customer retention, customer dependency, and customer win back strategies. This article evaluates the importance of customer strategy for the success of any CRM initiative.
In the recent past, the mantra all organizations were chanting was `Delighting the customer.' Does this mantra fit in today's business environment? The answer to this question is both a `yes' and `no'. There are many reasons for this. Accepting that `delighting' all the customers implies that each one of them must be provided with exceptional service, much beyond their expectations. Various studies and research into this area has time and again proved that it is neither possible nor desirable. This does not mean that some customers can be provided poor service. A good quality service that any customer expects and is certainly better than what competitors are providing must be provided to all the customers, but `loyal' and `valuable' customers must be provided with exceptional service. These are the customers with whom you wish to develop lifelong relationships. This can be achieved by segmenting them by their value-customer value. According to Stanley A Brown (2000), all the organizations pass through three stages in their evolution, developing lifelong relationships with the customers as they evolve. During stage I, customer acquisition is normally the major activity and organizations consider all customers equal, in stage II, they concentrate on customer retention and as they mature to stage III their focus shifts to "differentiated service for their select, crown jewel customers and the mutual benefits of the partnership with the customers."
Customer lifetime value can be explained as profits that the customers contribute to the organization during their entire lifetime. This is the Net Present Value (NPV) of the expected value of the profit on sales accrued from the customers during their lifetime. Customer service comes at a cost. To be really effective organizations have to prioritize their customers based on their value to the organization. Organizations cannot afford to provide expensive service to low yielding customers. The service that has to be provided must be differentiated. Many organizations fail to recognize this important issue and are generally saddled with unprofitable customers to the detriment of the organization. Many studies have proved that companies are perpetually in customer acquisition mode, spending 75% of their marketing budgets, in the hope that new customers will compensate for lost ones. But they overlook the important issue of acquisition costs, which are seven to ten times more than retention costs. The longer the business keeps a customer the more profitable it becomes. Selling to the existing customers substantially reduces cost of marketing. More importantly, the customers base their transactions on `value for money' and not only on price. They become more dependent on the company and less susceptible for price cuts by competitors. In the year of acquisition, the costs in most cases exceed the returns but as the time passes the profits outpace the costs. In addition, there are intangible benefits when the customer becomes an unpaid advocate of the company's products and services by encouraging friends and others to buy the companies' products.
Mei Lin Fung (2000) Managing Director of eFrontier ventures is an expert on CRM. He developed a widely used model on calculating customer value. The following examples help in understanding the concept. For a particular firm, 60% of the customers come back and 40% never return. The following table gives the total revenue that the company will generate from 1,000 new customers over two years. |
