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Chapter II

Literature Review Outline

This chapter aims to accomplish the following purposes:1.


Critically analyse the literature related to CRM, including its impact, principles,objectives,
implementation frameworks, assets and liabilities. This chapter also2.
Examine the various models that have been developed to understand the link between CRM and
customer satisfaction.3.
Understand the literature related to the luxury segment and its features.
3.1 Customer Relationship Marketing
Customer Satisfaction has been in the spotlight amongst marketing, behavioral writers
andresearchers for long. It is one of the most basic and inevitably a very significant
businesselement that cannot be avoided by organisations in modern times. The last three decades
haveseen a number of reports and research work in the area of customer satisfaction (E.g.
Bolton,1995; Perkins, 1991; Wilkie, 1991; Klee and Thurau, 1997). The growing importance
of customer satisfaction, customer retention, changes in market demand, and
competitiveintensity has led to a paradigm shift from transactional marketing to relationship
marketing(Payne, 2009; Grnroos, 1994, Sheth and Parvatiyar, 1994). May researchers argue
that CRMhas a significant impact on customer insight, satisfaction, customer retention and
loyalty e.g.(Ghavami & Olyaei, 2006), (Lee-Kelley, Gilbert, & Mannicom, 2003), (Samanta,
2010) etc.
The 1950s saw the development of frameworks like
the Marketing Mix
in order toincrease demand. Payne, 2009 suggests that the objective
of such Transactional approaches
to marketing was to develop strategies that would optimize expenditure on the marketing mixin
order to maximise sales. With time, the markets matured, competition increased,
customerdemands and loyalty became complex. Customers have gradually become less
responsive aschoices have increased, facilitated by globalisation and new marketing channels
such as theInternet. These challenges, technological developments in managing and maximizing
thevalue of large chunks of data propelled businesses and researchers in developing the concept
of Customer Relationship Marketing.
The shorthand of the 4Ps of product, price, promotion
& place are used to describe the levers, that if pulled appropriately, would lead
to increased demand for the companys offer.
CRM can ideally be described as: a move from functionally based to cross functionally
basedmarketing; a shift in focus from transactional marketing to relationship marketing; a
shiftfrom marketing activities which emphasize customer acquisition to marketing

activitieswhich emphasize customer retention as well as acquisition (Payne, 2009); a shift in


focusfrom treating customers simply as an audience to treating them as key assets of the
business.
3.1.1
Principles and Objectives of Customer Relationship Marketing
McKenna, 1991 argues that the goal of marketing is to own the market, not just to sell
theproducts. Having a single-sales focus involves dealing with pre-mature information about
thecustomer and winning the customer at every sales encounter, a less efficient and effective
useof investment compared to one time acquisition and maintaining sustainable relationshipswith
them.
Marketing is everything and everything is marketing
(McKenna, 1991). Hecontinues to argue that marketing in modern times is not simply a function;
but it is a way of doing business. Marketing has to be allpervasive, a part of everyones job description in
order to integrate the customer into design of the product and a process for interaction.Payne,
2009 identifies the key principles of CRM as: emphasizing on retaining profitablecustomers,
emphasizing on a cross functional approach to marketing and emphasizing onmultiple
stakeholders.The primary objective of CRM is to maximise the life time value of a customer. The
life timevalue of a customer is the future flow of net profit, generated from a specific customer.
Thisforces organisations to engineer strategies to enhance the profitability of those customers
itseeks to target (Payne, 2009). Customers are vital assets of organisations and are
mostlyresponsible for the goodwill earned by the brand. CRM seeks to treat customers
asinvestments. By building on existing investment, in terms of product development
andcustomer acquisition costs, firms can generate potentially higher revenue and profit at
lowercost. Marketing on a transactional basis is proved to have greater financial outlay and
risk (Payne, 2009).As mentioned earlier, marketing is not simply a function. Marketing strategies
often do nottake into account their organisation-wide implications. The problem is that they
arefunctionally focused and not market focused. Rarely, do they consider the inter-relationshipof
different stakeholders (Payne, 2009)
. He adds, that they typically seek to optimize the use
of inputs and hence are budget driven rather than seek to optimize around outputs and hence
be market driven.
CRM seeks to emphasize on a cross functional approach to marketing.CRM seeks to focus
marketing action on multiple stakeholder markets. A market consists of a number of forces or
elements like the government, suppliers, media agencies, unions,customers etc. CRM recognizes
that multiple market domains can directly or indirectly affect
a businesss ability to win and keep profitable customers
(Payne, 2009).There is lack of clarity in the definition and description of Customer
RelationshipManagement. They vary greatly amongst authors and authorities. It is many times
used
interchangeably with the terms Customer Management, Enterprise Relationship Marketing,
Technology Enabled Relationship Marketing (TERM), Customer Relationship Managementetc.
Sometimes, it is used to refer to IT solutions with respect to campaign management orsales
automation. CRM has often been misinterpreted simply as an ecommerce application(Khanna,
2001) or Data Driven Marketing (Kutner & Cripps, 1997). Payne, 2009 defines
CRM as the business approach that seeks to create, develop and enhance customer

relationships with carefully targeted customers in order to improve customer value andcorporat
e profitability. If viewed from a strategic perspective CRM can be defined as
creating increased shareholder value through developing superior and sustainable
customer relationships over the life-time of the customer with the help of IT and relationship
marketing.
3.2 Optimizing Marketing and Customer Relationship Marketing using InformationTechnology
Marketing evolves as technology evolves
(McKenna, 1991). Ecommerce has diminishedloyalty. Customers can change their mind very fast
at the click of a button, if they see a betteroffering from a competitor. Personalization or
customization is vital in the luxury retailorganisation. In order to satisfy their customers,
businesses must have relevant informationabout their customers available at all times. It is
essential that the Information is usedproactively rather than reactively. Experience shows that
proactive use of information can bemuch more effective and rewarding (Payne, 2009). A number
of customers do not take thepain of contacting the organisation or lodging their complaints, they
simply look for
alternatives or at the competitors offerings. Customer relationships are propelled and
nurtured mainly by exploiting customer information or data. CRM seeks to use
customerinformation to increase profits by increasing marketing, sales, support and value added
services. Corporations have begun to use sophisticated CRM softwares or systems for thesame
reasons and mainly to better respond to individual customer needs and reduce
marketing related costs. The firms ability to maximise the value of the information is highly
related to the existence of a supportive IT infrastructure. Luxury businesses must aim toenhance
customer experience as much as possible. It is essential for any retail organisation to
ensure that it has its retail basics in order; otherwise, CRM systems wouldnt bring any
significant change (Chu & Pike, 2002)
. The retail basics refers to superi
or customer
service and directed completely at enhancing customer experience.
Payne, 2009 explains the two major components of an automated CRM. The
data repository
enables the organisation to collect all the relevant information of customers, and is used
withanalytical tools to understand the customers in terms of past and likely future
behavior.Another set of
applications
allows value added interactions with customers, often acrossdifferent channels, in order to meet
their specific needs (e.g. clever screen prompts, whichprovide customer care representatives with
all the relevant details of the customer- This canbe used for cross selling or up selling provided
the staff is well trained and motivated). Byusing information technology luxury retailers can
exploit opportunities, and thereby increasetheir profitability and market share.On the other hand,
a number of authorities and practitioners have raised the issues regardingthe liabilities attached
with CRM systems. A number of them have argued about theinflexibility of the system and the
rigid database that constitutes severe challenges for frontoffice manages, since they will need to
keep the system constantly updated. Also, they argue
about the high costs involved in training the employees in using these systems, but shouldnt

that be seen as an investment by the luxury organisations?Broadly, the objectives of CRM in the
luxury retail sector can be identified as: gather moreand more information by using automated
systems, to know more about the visitors, regularcustomers, buying behaviors etc.; market the
right products to the right people; reduced costof sales and marketing; making vital information
available to the management for strategicplanning and decision making.
3.2.1
Optimising Marketing and Customer Relationship Marketing on the Internet
Electronic Marketing (E-marketing) gives luxury retailers the opportunity to establish,maintain,
preserve their glitzy image, market products/services globally and mainly enhancerelationships
with customers. E-marketing through the use of electronic communicationstechnology such as
Internet, e-mail, databases and mobile devices improves customer loyalty(Smith & Chaffey,
2001). Companies can better target communications that match theindividual needs of the
customers.The changes in business scenarios following the Internet (especially
e
commerce and
e
marketing) required the development of new business models. Modifications in themarketing
mix were eminent and necessary, since the scope of businesses had changedremarka
bly. The word shopping for customers has changed. The traditional Marketing Mix
paradigm is incompatible with ecommerce
(Constantinides, 2002).There was a need toidentify the elements that would give customers the
desired shopping experience online,
similar to offline elements, for e.g. the shops atmosphere, staff friendliness, customer
service, shop layout, presentation, and high class feeling. Constantinides, 2002 developed the
web marketing mix
model also referred to as the
4S marketing mix model.
There was a hugedifference in the features of CRM online as compared to offline. CRM strategy
is a responseto the changing dynamics of the marketplace and a systematic effort to enable
companies tobuild long lasting relationships aiming at profit and maximizing the customer's
lifetime valueto the firms (Cataldo, 2006). The elements of the web marketing mix drawn from
Samanta,2010; Constantinides, 2002 are:
Scope:
This element calls for th
e identification of the organisations strategic objectives on
the Internet, identifying the market potential, competitors, customers etc. It also
involvesidentifying the strategic role of the web activities for the organisation. Luxury retailers
eitherhave transactional or promotional websites. Transactional sites are the ones which
generallyinclude features that allow users to purchase, view purchase history, manage their
personalaccounts etc. Promotional sites aim at simply publishing the content and information
aboutthe products without any transactional functionality.
Site:
The Web Site is the company

customer interface, an important source of customerexperience and therefore a vital


communication element on the Internet. It is the virtualproduct display similar to a shop floor in
traditional marketing. The website acts as the virtualsales force and virtual display platform.
Other web objectives includes promoting the
The Impact of Customer Relationship Marketing in the Luxury Retail Market of Kuwait
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business, providing company information to all the relevant stakeholders, a privacy policy
inorder to gain customer confidence, promotional information if any, customer
servicefunctionality, collecting market data, customer data, direct sales, online payment
facilities(transactional) etc. These objectives in some way or the other can be helpful in
enhancingcustomer loyalty and retention. It is very important that the luxury brands create the
sensorialexperience of the brand online.
System:
This element provides
an outline of technical factors, especially concerning thesecure, safe, time-cost efficient, user
friendly interface, market analysis reports andperformance analysis. This element includes
decisions to be made regarding the web-siteadministration, maintenance, service, availability of
full time technical and service personnel.It also includes web server hosting, choice of Internet
service provider, site construction,content management, managing website traffic etc.A number
of authors argue that CRM can help in customer retention (e.g. Constantinides,2002; Samanta,
2010, Payne 2009). Many argue that that a 5% improvement in customerretention can result in an
increase in profits of between 25 and 85 percent depending on theindustry (Christopher, Payne,
and Ballantyne, 1991; Reichheld and Sasser, 1990).
Relationship
marketing takes over after the sale for existing customers by stimulating theintention to buy and
sometimes after the sale through postpurchase reinforcement
(Samanta, 2010). Many organisations draw on Gilbert and Powell-Perry, 2000 in order
tomaintain and market good customer relationships. The five steps have been drawn uponGilbert
and Powell-Perry, 2000 in a luxury retail organisational context:
Identify more about the customer through database analysis.
The web provides luxuryorganisations with the opportunity to know more about their customers
and exploit thisinformation in different ways. The organisations can know more about their
customersindividually by tracking their purchases, likes, dislikes, reactions, behaviors
duringpromotions etc.
Improve and make the product/service more attractive.
By analyzing the collectedinformation and through the feedback provided by regular customers,
organisations can knowmore about the likes and dislikes of the customers and use this
information to improve thefunctionality for the web or better meet the needs of the customers

individually. Feedback can be gained through questionnaires or surveys targeted at regular


buyers. This is animportant feature of customer relationship marketing.

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few researchers have investigated and analysed the relation between customer satisfactionand
customer retention (Bloemer and Poiesz, 1989).Klee and Thurau argue that most of the research
works use
monetary values
like profits andrevenues as dependent variables, thereby substituting the individual level of
analysis with anaggregated company-wide level (Klee & Thurau, 1997). The validity of such
research worksfor investigating the relation between customer satisfaction and retention is very
limited sincethere is no analysis on the individual customer level. Profits and revenues are
influenced by anumber of contingencies (for eg. of such a work see Reichheld and Sasser, 1990).
Someresearchers use
repurchase intentions
of customers to identify and analyse the link betweencustomer satisfaction and retention (for e.g.
of such research works see Oliver and Swan,1989; Bitner, 1990). Klee and Thurau point out the
limitations of this approach by stating thatthe satisfaction and intention measures are obtained
from the same source and the data isinherently correlated (Klee & Thurau, 1997). There is a high
probability that it may lead to anoverestimation in the strength of the relationship between the
two also the research in thefield of customer loyalty shows that the validity of intention measures
varies depending onthe time frame, respondents, measurement scale, products etc. (Bolton,
1995). Lastly, a fewresearch works through light on the subject on an individual level by using
real purchasingdata
to examine the relationship. This kind of study avoids the problems discussed above.These
studies show a very weak or in many cases, a non-existent relationship between thetwo variables.
No significant relationship between the transaction specific satisfactionappraisal and the length
of the relationship was found (Bolton, 1995 also for similar works inthe third group see Newman
and Werbel, 1973; LaBarbera and Mazursky, 1983).A number of investigative studies have
reported that the percentage of satisfied brandswitchers exceeds the percentage of dissatisfied
brand switchers (For e.g. Gierl, 1993;Reichheld and Sasser, 1990). Klee a
nd Thurau comment that skepticism seems to be well
-founded as to the widespread conceptual view of a strong satisfaction

retention relationship.Therefore, it is necessary to critically examine the sweeping postulate of a


close relationshipbetween customer satisfaction and customer retention and identify the causes
for the existing
divergence of both constructs

(Klee & Thurau, 1997).


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There are dangers associated with not adapting CRM with a strategic perspective
5
. Paynehighlights quotations from Insight Technology Group, the CRM institute, Giga and
Gartner(Payne, 2009, P. 20):

69% of CRM projects have little or no impact on sales performance.

Companies think that CRM projects are significantly less successful than theirconsultants.

60% of CRM projects end in failure.CRM requires a recipe for success, to avoid the dangers. A
successful CRM program isintegrated, insightful and across the senior management (Shenger,
2001). By integrated theauthor means allowing the entire organisation to align around the
common goal of exceedingcustomer expectation and experience. It must be paid attention to and
supported by the entireorganisation including the senior management.
3.5 Distinctive Features of the Luxury Segment
Luxury goods are an important part of modern society. They played an equally important rolein
the ancient times as well. History has witnessed clear distinctions between social classes inearlier
civilizations where luxuries were limited to the elite classes. The definition of luxury
then was clear and concise. With changes in global politics (Democratization
- Wong andAhuvia, 1998), world economies and purchasing powers of people new types of
luxuryproducts were launched which were called as accessible luxuries or mass luxuries. Such
typesof luxury products target
the so called middle class (the well to do class of people, neither
very rich nor poor). As luxury has penetrated into the masses, luxury has become verydifficult to
define. There is no common definition for luxury products, since the perception of luxury goods
has been changing very fast over time. The concept of luxury differs from placeto place, person
to person etc. Researchers define luxury products differently, some refer to itas the higher priced
category of any offer in any product range (Prof. Dubois, Gilles, andSandor, 2010).
5
As highlighted in the previous sections, strategic CRM involves developing an approach to CRM
that starts with the business strategy of the organisation and is concerned with the development
of customer relationships that result in long term shareholder value creation(Payne, 2009).
The Impact of Customer Relationship Marketing in the Luxury Retail Market of Kuwait

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Similarly, some of them define luxury products as those that provide extra pleasure (Prof.JeanNoel Kapferer). Several others argue that luxury goods are the ones that evoke a senseof
belongingness to a certain esteemed or elite class of people.In Economics, a luxury good is a
good for which demand increases more than proportionallyas income increases, in contrast to a
necessity good, for which demand increases less thanproportionally as income increases. As
people become wealthier they buy more and more of luxury products and with a decline in
income its demand will drop. The perception of luxurygoods may change with income for a
person for e.g. an automobile collector stops buyingmore luxury cars because of increase in
income and a shift of interest towards buyingairplanes (at such an income level, the expensive
luxury cars would simply become anecessity or a normal good). A lot of goods are perceived as
luxury goods because they playan important role in fulfilling the esteem needs or status symbol
needs of people as theysignify the purchasing power of people (also known as conspicuous
consumption). Many atimes a number of goods attain the status of luxury goods due to their
design, quality,durability, performance, remarkable superiority over substitutes, appearance etc.
Some luxury products are examples of Veblen goods, which defy the law of demand
6
, fore.g. an increase in price of a perfume can increase its perceived value as a luxury good
andincrease its sales rather than decrease itThe luxury market has been growing since many
years. The year 2010-2011 is expected tobring glad tidings for the luxury retail sector, especially
in the middle-east (Fabre, 2011).Another important feature of the luxury segment is that it is
highly sensitive to economicupturns and downturns. The future holds some unanswered
questions like:

Will Luxury still remain something that is not a necessity?

Will the primary purpose of luxury products still be to display income or wealth?

How much control will the luxury brands have over the lives of the people?
6
The
law of demand
is an economic law which states that consumers buy more of a good when its price decreases and
less when itsprice increases (while all the other factors remain constant)