Table of Contents

Executive
Summary....................................................................................................... 3
Introduction..........................................................................................................
.......
Customer Loyalty Doesn’t Have to be
Expensive................................................................ 4
1. What does a new customer
cost? ................................................................................. 5
2. Creating loyal customers cost less and adds more
value.................................................. 5
3. Profiling Existing Customers Helps To Find Better
Customers............................................ 5
Balancing Retention vs.
Acquisition.................................................................................. 6
Affordable
Solutions....................................................................................................... 6
Identifying The Most Cost Effective CRM Solution For Your
Organization................................ 7
Conclusion.............................................................................................................
....... 8
About the
Author........................................................................................................... 8
Sources................................................................................................................
....... 8
Executive Summary
Customer Relationship Management (CRM) is a concept as old as trade itself. Keeping
customers
apprised of new products, remembering their likes and dislikes, promptly resolving
issues, and giving
them chances to vent and offer feedback are customer-centric concepts that were
probably used by the
best iterant peddlers of the dark ages. The major difference between doing business
years ago and
today is the speed at which we not only can service our customers, but the speed with
which our
customers expect to be serviced.
Customers today are much more demanding in their expectations of how they are
serviced and the levels
of service they will get. More often than not, a level playing field between many
businesses means the
only real differentiation and competitive advantages we can develop and sustain will be
the relationships
we forge with our customers. Many good businesses have made the mistake of assuming
that they don’t
have the advantages of knowing their clientele personally because of the rapid pace at
which we do
business today and the driving force to sell sell sell.
The truth of the matter is that with the right tools and business processes in place, it
becomes quite easy
to gather the customer details needed to easily develop and maintain those precious
relationships with
our clients that ultimately translate into key differentiation and competitive advantage.
It’s been highly
documented over the years that it costs between 6 and 10 times more to acquire a new
customer than it
is to retain an existing one, and by implementing a solid CRM solution and work
processes that leverage
it, your business can continue to grow from within.
Today we have an abundance of CRM solutions to choose from. Some are relatively
inexpensive and lack
some key functionality, while others require huge investments in time, planning,
resources and money.
These larger solutions are often overkill for all but the largest of enterprises and so it
becomes a
challenge to strike the right balance between a cost effective solution that delivers the
desired results
and throwing away time, money and resources.
A truly cost effective CRM solution that will serve a large majority of businesses does not
need to include
sophisticated telephony functionality, screen pops, and call management. Unless your
organization is a
major call center and your business is that of telephone support, these features would be
an unnecessary
investment. There are many other components to large CRM systems that add costs yet
will go unused
by most organizations, and knowing which features to trim and which to keep will allow
you to deploy a
cost effective solution that will serve all of your customers needs.
This white paper examines the details of how to gain improved customer retention and
acquisition for a
lower overall investment by defining basic CRM functionality needed by most
organizations to achieve
their customer goals and objectives.
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Introduction
Some companies with high customer churn rates or a more transactional sales style
focus primarily on
bringing new customers in the door, while those with longer business cycles or more
relationshipbuilding
sales processes concentrate on retention. Both acquisition and retention are crucial to
long-term business success and growth, but the majority of businesses regardless of
sales approach
can gain significant benefits by focusing on retention and selling back into their existing
customer base.
This is the primary objective of a CRM solution. Attracting, nurturing and capturing new
customers is a
secondary function of a CRM solution and fortunately most of today’s solutions handle
these tasks
equally well for little or no additional cost.
Acquisition is generally more expensive than retention, and effective acquisition
promotions such as
offering generous incentives to new customers can backfire with existing clients.
Marketing campaigns
and prospecting done in a hap-hazard and uncontrolled manner can cost much more
than their
incremental benefit. It is within these areas that a CRM solution will lower your cost of
acquisition by
providing the tools that your sales and marketing teams can leverage to acquire new
customers while
expending the least effort and cost.
Additional key components of customer acquisition are the metrics needed to make cost
effective
decisions. Having the data readily available to analyze marketing campaigns and
expenditures over time
vs. actual new client adds is vital to an organization. The CRM solution will handle these
reports and
indicators easily while retaining the relationship building history and data throughout the
life of your
new client. This makes the job of transitioning from new client to valued customer a
seamless affair.
Retention and loyalty usually cost less, and effective retention can actually enhance
acquisition, because
existing customers who feel valued will spend more and are generous with word of
mouth
recommendations. Additionally, identifying and getting to know your most profitable
customers helps to
fine-tune strategies for acquiring more high-value clients.
According to Stratescapes, the top 5 goals of retailers implementing CRM systems are:
revenue,
loyalty, ROI, retention, and acquisition. All 5 of these goals are somewhat intertwined,
but the glue
holding them all together is retention. If we were to take “retention” out of the business
sense and
apply it to the customer and what it means from a customer centric perspective we
would end up with
“loyalty”. So in essence “retention” on the business side must equal “loyalty” on the
customer side.
Customer Loyalty Doesn’t Have to be Expensive
Today’s customers may never see the physical sites of the businesses with which they
interact. Goods
and services are purchased globally from home or office over the internet. When
customers shop at a
brick and mortar store it’s because they like to be able to touch and feel products or try
them on for fit
before buying. However, chances are very high that they’ve done research online to find
the best
pricing and service deals. They’ll use that research and information to ensure that they
are getting the
best deal and service. Companies unable to compete on price and service had better
have darn good
relationships with customers.
The high speed and dynamic nature of business today has removed most advantages
enjoyed by
businesses years ago. Today there are hundreds if not more competitors all vying for the
attention of a
finite number of buyers. While price is often a big factor in purchasing decisions, strong
customer
loyalty can mean the difference between a customer that is willing to pay a little extra
and one that
goes with the lowest price
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1. What does a new customer cost?
Most businesses focus on organic growth as the path to long-term success, and that
means adding new
customers and growing their base. This means spending upfront to get a new client–
advertising,
promotions, rebates, discounts, and marketing campaigns–with the expectation that the
lifetime value
of that customer will exceed the cost of acquisition. Unfortunately, customers are a finite
resource. As a
business grows, so does the incremental cost of acquiring each new customer.
Though the cost varies from one industry to another, and most firms don’t break
acquisition and retention
costs into hard numbers, historical data suggests that incremental customer acquisition
costs range from
approximately $32 for companies with physical locations (brick-and-mortar companies)
to $81 for
Internet-based companies.
These costs are only the beginning. By focusing on acquisition excessively, a company
can erode the
value of its existing client base and diminish future revenue. For example, while a mass
mailing and email
campaign may plump up sales initially, it can also annoy customers and make them
more likely to ignore
future solicitations. Promotions designed to bring on new clients with incentives not
offered to existing
ones can undermine customer retention efforts and increase costs on the back end.
Calculating the value of that new customer must take into account two different revenue
streams–the
immediate near-term increase to a company’s bottom line, and the value of future long-
term cash flows.
Tapping into that second stream is where customer retention strategies take over.
2. Creating loyal customers cost less and adds more value
The processes of acquiring new customers and retaining existing customers cannot be
completely
separated. The data around these two areas tends to overlap. As a result, CRM solutions
will often include
both. Unfortunately, shareholder demand for immediate results on quarterly reports
leads to a short-term
orientation and a desire for immediate sales boosts even at the risk of undermining
future cash flows. So,
companies put more emphasis on the more expensive--and frequently less productive–
acquisition
process.
Research by customer loyalty experts suggests that it costs approximately six to ten
times as much to
pitch to a new client as it does to sell to an existing loyal customer. It can be projected
that spending
between $32 and $81 to bring in a new customer means it will cost a maximum of
between $5.33 and
$13.50 to maintain that customer relationship, and a maximum of $3.20 to
$8.10.Furthermore, loyal
customers help acquire new ones–first, by word of mouth. Extensive research shows that
satisfied
customers tell between 4 and 10 people about their experience, and a 2003 article in
Advertising Age
claims that 71% of customers surveyed claimed that “word of mouth” was a top
consideration in
deciding to purchase from a company. Conversely, adverse “word of mouth” can
devastate a business and
lose exactly the type of customers who are potentially the most profitable.
3. Profiling Existing Customers Helps To Find Better Customers
Some retailers have achieved remarkable success by using their CRM systems to get to
know their
customers better. By capturing and analyzing RFM (recency, frequency, and monetary)
data, as well as
lifestyle data through customer surveys, and demographic information through customer
addresses and
phone numbers, companies are able to calculate the value of each customer and
determine how they
acquired their highest value “super customers.” For example, rental car industry
research was able to
determine that the top .2% of their customers provided 25% of their business. Rental
agencies putting
this information to work would save on marketing by targeting this narrow strip of ultra-
high value clients
for promotion and loyalty rewards, while using less expensive, broad-based strategies
for lower-value
clients.
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CRM solutions make it possible to find out who the “super customers” are, and most
importantly where
they come from, so companies can directly target similar prospects with the expectation
of acquiring
more high-value clients and wasting fewer resources on lower-value prospects. However,
in order to have
“super customers” to analyze, a firm would first have to acquire and retain them. This
retention strategy
and profiling forms the basis for future high-value client acquisition.
Balancing Retention vs. Acquisition
All customers are not valued equally. By tracking the costs of acquisition and retention
efforts, and
determining the value of each customer’s immediate and future income stream,
companies can calculate
their Return on Customer (ROC). Over time, changes in the ROC help evaluate the
success of the mix of
acquisition and retention efforts. A successful marketing plan increases ROC over time
by focusing
efforts on retaining and acquiring high value clients. CRM solutions help companies with
data collection and
analysis, and allow companies to identify and drop counterproductive efforts. It can
actually be quite cost
effective for some companies to “fire” clients, particularly in the professional services
industry where bad
customers can end up draining profits and actually costing money in the long term.
Research shows that continually flogging an existing customer base for increased sales
results in
diminished returns over time. New clients are needed to provide growth, and existing
ones must be
retained with service and personalized attention rather than an avalanche of sales
pitches. CRM solutions
help track expenses and customer behavior as well as aid the service end of the sales
process.
Using automated workflow and processes create personalized customer touches just
enough to not be
annoying, but rather complementary to their needs. Customer communication planned
around important
customer events such as birthdays, anniversaries, graduations, and holidays may only
occur 4 or 5 times
a year, but will generate far more loyalty and value than a weekly discount mailer.
Affordable Solutions
Many customers these days expect discounts in exchange for their loyalty, with 60%
citing extrinsic or
“hard” rewards such as discounts and freebies as their top reason for enrolling in loyalty
programs. CRM
solutions can help firms direct their most generous discounts toward their highest-value
customers.
Surprisingly, intrinsic or “soft” benefits–like feeling appreciated, valued, and receiving
advance notice of
special sales–are less expensive to provide and sometimes more successful than hard
benefits at
reinforcing customer purchasing behavior.
A department store in Canada tested this successfully by mailing a thank-you note to its
best customers.
There were no special offers or coupons; the note simply thanked them for being loyal
shoppers and invited
them to return soon. The customers responded by boosting sales by 20% over a control
group who did not
receive a mailing.
Other CRM strategies for current customers include point-of-sale promotions, such as
register coupons
issued for discounts on future visits, and upselling based on purchasing behavior. For
example, a customer
who buys puppy food may later receive a mailed promotion offering obedience training
classes.
CRM also works to track customer complaint and resolution, and to capture the history of
a client’s ongoing
relationship with the company. Studies show that customers who complain are actually
doing the company
a favor–giving the firm a chance to show it cares and responds. In fact, one conducted
by the Society
of Consumer Affairs Professionals in Business Australia Inc. (SOCAP) concluded that
effective complaint
handling methods can create “significant marketing advantages.” Often, complainers
who are happy with
the company response are converted to fans, and the type of customer who complains is
also the type most
likely to generate lots of word of mouth feedback.
Properly implemented CRM can take a customer complaint, pass it to an appropriate
department, and
make sure that anyone who speaks with that customer knows what the problem and the
status of its
solution is. Tracking of common problems can lead to the compilation of FAQs and
knowledge base
articles, make them available to clients, and reduce call center activity and costs. Adept
handling of
customer complaints is key to client retention and satisfaction.
Identifying the Most Cost Effective CRM Solution for Your Organization
CRM software solutions are available for companies of all sizes and come in all forms,
from in-house
developed proprietary systems, to customizable enterprise products, to smaller packages
with core CRM
features. Companies can save upfront procurement and deployment costs by taking
advantage of the
growing number of hosted CRM solutions.
AMR Research estimates that 40% of companies use hosted CRM systems, while the
remainder use
premises-based solutions. Hosted solutions are gaining popularity and are becoming
increasingly secure,
reliable and priced lower. Growing competition in the hosted space has brought the costs
down to $5 per
user per month in many instances. At these prices there is no reason for any company to
delay using a
CRM solution.
The real key to finding the right CRM solution for any organization comes from analyzing
its existing
pre-CRM processes and workflow.
•Take the time to gather sales, marketing, service, and executive teams for a lengthy
business
analysis.
•Identify all of the existing processes that affect new customer acquisition, existing
customer
nurture processes, customer service processes, and executive analytical processes.
•Map out existing processes to allow the organization to identify the key components the
CRM
solution will need to have in order to fit into the existing business model. Only then will it
be fea
sible to go out and navigate the CRM landscape to narrow down options.
•Resist the temptation to deploy a solution with functionality above and beyond needs. A
large
majority of businesses that have deployed CRM solutions are only using roughly 30% of
the
capabilities of the system they own, yet those added features were part of the overall
solution
price and implementation.
•Finally, encourage across the board acceptance of the chosen CRM to ensure its
successful
implementation.
Executive sponsorship and commitment is needed to ensure that employees are well
trained and
understand the goals of the solution and each of their role in the overall success. CRM
solutions that fit
into existing business applications to offer a seamless user experience offer the greatest
path to success
and ease of use.
© 2007 VendorGuru.com. All rights reserved. www.VendorGuru.com Page: 6
Conclusion
Organizations that focus on raw revenue metrics and growth through pure customer
adds run the risk of
losing existing customers. With customer acquisition costs significantly outrunning
retention costs it makes
sense for companies to direct significant efforts towards retention. Additionally, loyal
clients can aid in
acquisition of new clients and provide data to facilitate targeting of higher value clients.
In order to strike an
appropriate balance, analysis of the costs of customer acquisition and retention, as well
as the customers’
long term value is critical. CRM solutions are vital in retention efforts as they can help in
both the collection
of needed data for analysis and enhancing the actual level of service to existing clients.
With CRM
solutions readily available for businesses of all sizes and budgets, organizations that
want to gain a
competitive advantage can easily choose and deploy a cost-effective CRM solution that
will maximize their
return on customer, strike an appropriate acquisition and retention effort balance,
identify their
highest-value clients, and increase loyalty through incentives and service.
About the Author
Gina Pogol writes for an online media company, specializing in business and finance, and
has a BS in
Financial Management from the University of Nevada. She formerly worked for Experian
as a business
credit systems consultant and with Deloitte and Touche as an accountant.
Sources:
1. Australian Sports Commission (1999) Turning Complaints into Customer Loyalty
2. Click Z Network (2002) CRM Meets Search
3. CRMAdvocate (2005) Customer Retention
4. CRM News and Information (2007) AMR Research
5. DStar (2001) CRM Programs Hot New Business Issue
6. Peppers and Rogers (2005) “Hail to the Customer,” by Sales & Marketing Management
157.10
7. Stauffer, D. (2001) “What Customer-Centric Really Means,” Harvard Management
Update Article.
8. Stratescapes (2003) The New Retail Reality
9. Stratescapes (2002) Trim Your CRM Budget and Get Better Results
10. Supply and Demand Executive (2001) Seeing the Value in CRM
11. TechTarget (2005) Return On Customer
12. TMCnet (2007) Selecting VoIP Solutions
13. Wreden, N. (2005) All About Branding
Ensuring an
© 2007 VendorGuru.com. All rights reserved. www.VendorGuru.com Page: 7
effective increase in customer base generally entails two major aspects, namely: a)
Customer acquisition and b) Retention of existing customers;