Haenlein, M. (2017), How to date your clients in the 21st century: Challenges in managing customer
relationships in today’s world
CRM: Customer relationship management.
The 3 main pillars that most CRM strategies have been built on:
First, there was the focus on Marketing Return-On-Investment (ROI). But successful products later
became unprofitable, the profitable product death spiral. This results in a company offering less
products. This realization of the risks of product line profitability analysis gave rise to a paradigm shift
in marketing in the 1980s and 1990s. More effort was put on building long-term customer
relationships. Customers were treated as investments.
Customers had to be acquired (customer acquisition), maintained and nourished (relationship
development), and, at some point once they had reached the end of their life, let go
(relationship termination).
How are customers relationships established:
1. Awareness: Make the other party aware of yourself
2. Explore the relationship (verkennen): moving from the trial purchase to the repeat purchase
stage
3. Relationship expansion: a customer starting to buy other products and services from the
same firm
4. Commitment / marriage: the firm-customer relationship should last ‘until death do us part.’
5. Relationship termination / Churn: The customer leaving the firm has to be avoided.
To establish commitment, firms invested in monitoring relationship quality and predicting churn.
Strategies to avoid termination are called retention strategies / proactive churn
management.
This relationship development is a process of acquisition, development and retention. To valuate this:
- Predicting the probability of relationship termination (Retention rate)
- Assessment of the profit per period (Revenue minus cost)
- Growth in profits over time
- All combined in the NPV-formula.
Investing in customer relationship if: NPV (or CLV) > acquisition costs
, 6 major insights that firms either frequently forget or are not aware of:
1. Customer relationships are not independent but interact on
firm and customer level
A certain customer might look like an attractive acquisition target when analyzed in isolation, but
decreases the return of the whole customer portfolio when considered in the bigger picture.
Customers interact with each other through social influence, which creates a strong form of
dependency: Opinion leadership & Word-of-mouth. Those have influence in the B2C and B2B market.
2. The cost of relationship maintenance can be significant and not all customers are profitable
Customer relationship management requires constant investments. Customers tend to become more
demanding by expecting the next interaction to be as good or better. This requires increasingly higher
efforts for firms, which result in rising relationship maintenance costs.
Since long-term customers are very valuable, they are “attacked” by other companies. Defending
against such attacks also results in increasing costs. Especially with non-contractual relationships.
Due to these high additional costs, long-term customers are sometimes not as profitable as expected.
3. Marriage is just one form of relationship and sometimes divorce is the better option
The flexibility of proactively terminating a customer relationship can have significant value, which
should be considered when performing customer valuation. Sometimes more profit can be achieved
by focusing on absolutely profitable customers, instead of long-term customers. “Marriage” is part of
several different forms of relationships.
4. CRM is a two-way street with strategic behavior on both sides
Customers must be considered as complex systems that can be calibrated and optimized by choosing
the rights (contact) strategies. The rising use of advanced analytics and big data has accelerated this
phenomenon even further. Also emotions play a large role in customer relationships. These
emotional reactions can result in erratic/unpredictable behavior with negative consequences that
firms need to consider when planning CRM actions.
Examples strategic behavior:
Firm: Background music / Package size / Predicting future purchases / Loyalty program
Customer: Future promotions / Deals from other companies / Threaten with a bad review
5. Customer relationship valuation is multifaceted, complex, and difficult to perform
Customer Lifetime Value: Discounted profits that come from the purchase of products and services.
But this is a inaccurate tool to measure value creation in CRM. Alternative sources of value creation:
Customer social value: Influence customers have on each other. Convincing others.
Customer knowledge value: Customers providing information to the firm or other customers.
Customer equity is the sum of all CLV’s from the customers. A customer can contribute to customer
equity (1) through her own CLV or (2) by influencing the CLV of other customers.
So it is not only important to predict future purchase behavior, but also understand the customers’
interactions and influences. This requires moving away from a linear analysis of net present value.
6. Churn prevention might not be optimal, especially within a product portfolio
Important goal in CRM: Maximize customer loyalty. Doing this by predicting customer churn and
preventing this in a proactive way. Proactive: approaching an expected churn customer.
But instead of making a customer more loyal, this can also result in motivating a customer to optimize
their deal with the firm.
relationships in today’s world
CRM: Customer relationship management.
The 3 main pillars that most CRM strategies have been built on:
First, there was the focus on Marketing Return-On-Investment (ROI). But successful products later
became unprofitable, the profitable product death spiral. This results in a company offering less
products. This realization of the risks of product line profitability analysis gave rise to a paradigm shift
in marketing in the 1980s and 1990s. More effort was put on building long-term customer
relationships. Customers were treated as investments.
Customers had to be acquired (customer acquisition), maintained and nourished (relationship
development), and, at some point once they had reached the end of their life, let go
(relationship termination).
How are customers relationships established:
1. Awareness: Make the other party aware of yourself
2. Explore the relationship (verkennen): moving from the trial purchase to the repeat purchase
stage
3. Relationship expansion: a customer starting to buy other products and services from the
same firm
4. Commitment / marriage: the firm-customer relationship should last ‘until death do us part.’
5. Relationship termination / Churn: The customer leaving the firm has to be avoided.
To establish commitment, firms invested in monitoring relationship quality and predicting churn.
Strategies to avoid termination are called retention strategies / proactive churn
management.
This relationship development is a process of acquisition, development and retention. To valuate this:
- Predicting the probability of relationship termination (Retention rate)
- Assessment of the profit per period (Revenue minus cost)
- Growth in profits over time
- All combined in the NPV-formula.
Investing in customer relationship if: NPV (or CLV) > acquisition costs
, 6 major insights that firms either frequently forget or are not aware of:
1. Customer relationships are not independent but interact on
firm and customer level
A certain customer might look like an attractive acquisition target when analyzed in isolation, but
decreases the return of the whole customer portfolio when considered in the bigger picture.
Customers interact with each other through social influence, which creates a strong form of
dependency: Opinion leadership & Word-of-mouth. Those have influence in the B2C and B2B market.
2. The cost of relationship maintenance can be significant and not all customers are profitable
Customer relationship management requires constant investments. Customers tend to become more
demanding by expecting the next interaction to be as good or better. This requires increasingly higher
efforts for firms, which result in rising relationship maintenance costs.
Since long-term customers are very valuable, they are “attacked” by other companies. Defending
against such attacks also results in increasing costs. Especially with non-contractual relationships.
Due to these high additional costs, long-term customers are sometimes not as profitable as expected.
3. Marriage is just one form of relationship and sometimes divorce is the better option
The flexibility of proactively terminating a customer relationship can have significant value, which
should be considered when performing customer valuation. Sometimes more profit can be achieved
by focusing on absolutely profitable customers, instead of long-term customers. “Marriage” is part of
several different forms of relationships.
4. CRM is a two-way street with strategic behavior on both sides
Customers must be considered as complex systems that can be calibrated and optimized by choosing
the rights (contact) strategies. The rising use of advanced analytics and big data has accelerated this
phenomenon even further. Also emotions play a large role in customer relationships. These
emotional reactions can result in erratic/unpredictable behavior with negative consequences that
firms need to consider when planning CRM actions.
Examples strategic behavior:
Firm: Background music / Package size / Predicting future purchases / Loyalty program
Customer: Future promotions / Deals from other companies / Threaten with a bad review
5. Customer relationship valuation is multifaceted, complex, and difficult to perform
Customer Lifetime Value: Discounted profits that come from the purchase of products and services.
But this is a inaccurate tool to measure value creation in CRM. Alternative sources of value creation:
Customer social value: Influence customers have on each other. Convincing others.
Customer knowledge value: Customers providing information to the firm or other customers.
Customer equity is the sum of all CLV’s from the customers. A customer can contribute to customer
equity (1) through her own CLV or (2) by influencing the CLV of other customers.
So it is not only important to predict future purchase behavior, but also understand the customers’
interactions and influences. This requires moving away from a linear analysis of net present value.
6. Churn prevention might not be optimal, especially within a product portfolio
Important goal in CRM: Maximize customer loyalty. Doing this by predicting customer churn and
preventing this in a proactive way. Proactive: approaching an expected churn customer.
But instead of making a customer more loyal, this can also result in motivating a customer to optimize
their deal with the firm.
