Lecture 2

Models for Customer Relationship Management

1. Objectives

- Understanding the need for models in CRM.

- Describing several models for CRM and their ides which stud at the base of
their development.

- Discussing the customer segmentation.

- Exemplifying how the models can be used, providing also some tips which
should be considered.

- Introducing and defining the lifetime value concept.

- Describing factors which should be accounted for evaluation of lifetime value.

- Presenting the service guaranties and service level agreement (SLA) concept.
 Models for Customer Relationship Management

2. Models for Customer Relationship Management

2.1 Models for CRM

Usually models are developed for a deeper understanding of the process. They
offer a schematic description of the approach, considering the interface between inside
components and also with the exterior. There are many models presented in literature.
Practically each group of experts (consultants) with large recognition in CRM field
achieves a point when they are promoting their own model which drove them to success in
different case studies. It is considered educational to see how some of these models were
thought. Therefore, such models will be presented next.

2.1.1 Customer service/sales profile

The customer service/sales profile is discussed in [and02]. This model focuses on
three things:

 Type of the required customer relationship;

 Identifying strengths in already deployed CRM;

 Creating a visual image of customer relationship which will help in spreading the
CRM approach through the organization.

The authors of the above model use the expression “service/sales” because of what
they call three truths [and02]:

 Truth 1: Sales do not equal relationship – it is clear that the sale is very
important in customer relationship but the relation will not start with or stop
there;

 Truth 2: Service extends beyond the buyer – regardless of service type, it

should be taking in to account all peoples getting in contact with the service
not only the buyer;

 Truth 3: Service and sales are on the same team – there is a lack of
synchronization between top level strategy and operation level of delivering
the strategy. In the same way we are witnesses all the time when sales are
throwing the blame on support as being incapable of delivering their

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 promises and the support will make the same thing with sales accusing them
of their idealism influenced by their life lived in crystal palaces.

The customer service/sales profile model is composed of three levels as in Fig. 1.

Level 3:
Customer Advocates

Level 2:
Repeat Customers

Level 1:
Initial Transactions

Figure 1. Customer service/sales profile model

Level 1 (initial transactions) deals with first interaction with customers. This level is
also the most expensive one. Attracting customers for the first time requires capital
investments in different campaigns of marketing. The lack of profit is usual at this level.
Acquiring first time customer can be more costly then revenue they could return on their
first deal. At this point it is important to estimate correctly so called “Cost of Acquisition”
[and02]. Traditionally this is defined as the ratio between the cost of campaign and the
number of customers gained. But an actual cost of acquisition should be evaluated. This
should consider other costs beside the one directly spent on the campaign, as cost with
staff time involved in the campaign which has been taken from other functions of the
organization and the cost of service breakdown caused by the campaign. As well it should
be considered that campaigns not only gain customers but can also lose customers
because of the requirements of the campaign which tend to neglect some of existing
customers.

Level 2 (repeat customers) is consisted with the customers which are continuing to
remain attached with the organization as beneficiary of organization’s services. These
customers are providing economical benefits to the organization and CRM should pay
them the attention they deserve. The CRM strategy will establish of how much importance
are they and CRM tools will assist in identifying this category of customers.

Level 3 (customer advocates) are desired to have by any organization. This type of
customers is not only satisfied and willing to continue the relationship with the organization

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 Models for Customer Relationship Management

but its level of satisfaction brought them in a point where they become promoters of the
organization. Usually the level of satisfaction is evaluated as the difference between what
is offered to the customer and what are his/her expectations. A higher positive value of this
subtraction will yield greater satisfaction for the customer and they will recommend the
organization to other acquaintances. They could become great advocates for the
organization and the CRM should identify and even integrate them in the marketing
program.

The customer service/sale profile models can have three shapes based on the
share each level is representing in entire customers volume. The shapes are in relation
with the service type or with status quo of the organization. For example the pyramid
profile (Fig. 2) is a conventional way of thinking the structure of customers and probably is
often met in real life. The explanation is that not all the first time customers will remain
loyal and among the repeat customers only a few will recommend the services to others.

Level 3:
Customer
Advocates
Level 2:
Repeat Customers

Level 1:
Initial Transactions

Figure 2. Pyramid profile

The hourglass profile is another shape which the model can have. This is illustrated
in Figure 3. This is less common but the shape comes from the nature of services. If the
service is not something suitable to repeat customers (consultancy on major change within
organization’s structure and flow, real-estate services, or even weddings) then it is very
important that one time customer become advocate. The CRM should carefully deal with
this type of situation. The focus should be on initial customers giving them a memorable
experience which will yield customers’ feel to tell others about it.

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 Level 3:
Customer Advocates

Level 2:
Repeat
Customer
s

Level 1:
Initial Transactions

Figure 3. Hourglass profile

Another profile could be the hexagon shape (Fig.4). This is characteristic to very
stable businesses. It has its revenue from repeat customers so will yield large profit and
will not need to pay attention to initial transaction because it is feeling comfortable with the
high level of repeat customers, neither to advocates which would increase the initial
customers. Even how stable the business would look like, the profile is considerate to be
vulnerable and the business at risk. Because of its small base consisting of initial
customers, the profile could easily collapse if something happens with the repeat clients.
For example a disturbing fault in provided service could chase away repeat customers who
will be very hard to replace giving the small bases of initial transaction and advocates.

In other approaches on customers’ segmentation are used finer granularities. One

example is the value ladder (or value staircase) model employed by some companies to
position their clients in relation to their business and where we meet seven stages of
customer “journey” [but09]:

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 Models for Customer Relationship Management

Level 3:
Customer
Advocates

Level 2:
Repeat Customers

Level 1:
Initial
Transactions

Figure 4. Hexagon profile

 Suspect – who is possible to match to the target profile;

 Prospect – beside suspect he is also approached for the first time;

 First-time customer – the customer makes a first purchase;

 Repeat customer – the customer continues to make purchases but the

company doesn’t represents a major important choice in his purchasing
portfolio;

 Majority customer – the importance of company has increased significantly in

his purchasing portfolio;

 Loyal customer – the customer becomes resistant to switching for another

supplier;

 Advocate – the customer promotes the company to other potential

customers.

2.1.2 The IDIC model

Other CRM model is the IDIC described in [pep05]. The model’s name comes from
the four actions that authors are considering that a company should take for improving the
relationship with customer:

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  Identifying the customers and increasing the level of understanding them;

 Differentiating the customers based on their actual and future value;

 Interacting with customers for a better understanding of their relationship with

the organization and also with competitors;

 Customizing the offer in accordance with customers’ expectations.

2.1.3 The Quality Competitiveness Index model (QCI)

External environment

Customer experience

Winback Targeting
Analyzing and planning

Customer proposition

Managing Conver-
Measurement dissatis-
faction
sion
Customer
Customer
management
management
activity
activity Value Welcoming
develop- and getting
ment to know

Retention Delivering
activity the basics

People and organization

Infrastructure
Customer Technology Process
Information Support management

Figure 6. The QCI model [woo02]

The QCI model [woo02] is a theoretical and comprehensive model which describes
all the activities required to be taken by an organization to accomplish the CRM’s
objectives of acquiring and maintaining customers. Practically, the model (Fig. 6) is
enumerating the meanings of the term “relationship” without mentioning it.

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 Models for Customer Relationship Management

2.1.4 The CRM value chain model

The CRM value chain model (Fig. 7) consists of five primary stages and four
supporting conditions driving to a customer-centric approach [but09]. Practically is a
schematic explaining the CRM definition quote in previous lecture.

Customer Customer Network Value Manage

Primary
stages

portfolio intimacy development proposition the

analyze development customer
lifecycle

Leadership and culture

Supporting
conditions

Data and information technology

People

Processes

Figure 7. The CRM value chain model [but09]

2.1.5 Cross-functional process model

This is a conceptual framework for CRM described in [pay05]. As previous
presented models, it begins form the definition and emphasizes the cross-functional,
process-oriented approach with CRM situated at the strategic level. The authors present
five cross-functional processes in CRM (Fig.8):

 Strategy development process – which is seen from both organization’s

perspective: business strategy and customer strategy;

 Value creations process – which transforms the results of the strategy into
operations which add and deliver value. There are three key elements for
value creation process as mentioned in [pay05]:

o Determining the value that company is able to provide to customers;

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 o Determining the value that company is able to receive from
customers;

o Maximizing the lifetime value of desirable customers segments based

on good management of the above value exchange. This will involve a
process of co-creation and coproduction;

Strategy Value creation Multichannel Performance

development process Integration process assessment
process process

Business Value Shareholder

Seles force
strategy Customer results

Physical
receives

Customer segment lifetime value analyzes

Customer segment lifetime value analyzes

 Business  Employer value
vision  Value
proposition Outlets  Costumer value
 Industry and
 Value  Shareholder
competitive
assessment value
characteristics
Telephony  Cost reduction

Co creation Performance
Direct monitoring
marketing
Value  Standards
Organization
receives  Quantitative
Customer Electronic and qualitative
strategy  Acquisition commerce measurements
Virtual

 Customer economics
 Results and key
choice and  Retention Mobile performance
customer economics commerce indicators
characteristics
 Segment
granularity
Data repository

IT systems Analyzes tools Front office Back office

applications applications

Information Management process

Figure 8. CRM cross-functional process framework [pay05]

 Multichannel integration process – which takes the results of business

strategy and operation and translates them into value-adding activities with
customers. This process is responsible for decisions like:

o The most suitable combination of channels to use;

o Ensuring the highly positive interaction experience for customers on

the above channels;

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 Models for Customer Relationship Management

o Creating a single unified view of the customer even if he interacts with

more than one channel.

 Information management process – will be discussed in a later lecture. At

this moment we should know that among its components are found:

o Data repository – which provides a corporate memory of customers;

o IT systems – which include the organization’s IT infrastructure

composed on: computer hardware, software, middleware;

o Analyzes tools – which enable data-warehousing and data-mining.

o Front and back office tools – which assist the broad interactions
activities with customers and suppliers and manage internal
operations.

 Performance assessment process – which offers evaluations mechanisms to

ensure that the organization’s strategy and CRM’s objectives are being
followed. This process is positioned at the end for further improvements and
it has two main components:

o Shareholder results – a macro view of the overall relationship;

o Performance monitoring – a micro view of metrics and performance

indicators.

2.2 Using CRM models

CRM models should be used for guiding the implementation, monitoring after
deployment and improvements. Above where presented several models. Some of them
are very complex but somehow suggestible on their components’ content. At this moment
we will refer only to the customer sales/service profile model which is much simpler and
easy to follow. The three levels are to be properly managed. [and02] presents the key
factors for managing these levels which are described below:

 Level 1 - Initial Transactions – here the customers decide if they should do

business with the company and how and if they should talk with others
about the company. [and02] gives three keys to managing this level:

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 o Key 1: The system should be made simple – otherwise it will be
complicated both for customers and company’s staff.

o Key 2: The experience should be natural (“Feng Shui”) – for both

sides: customer and staff. This should consider the access, the
process flow, and the aesthetics.

o Key 3: Opportunities should be captured – each initial transaction

should be regarded as generator of opportunities like transforming to
a repeat customer or advocate. Otherwise it could appear the danger
of the staff to consider customers as replaceable: don’t bother if one
has gone, other will take his place.

 Level 2 – Repeat customers – usually is representing the core of business

(or service in case of non-profit organization). [and02] presents two
perspectives of approaching this level, each with three keys of managing:

o Perspective 1 – individual customers which made multiple purchases

(either products or services):

 Key 1: The relationship should be tracked – for evaluating the

customer value in terms of predicting his future behavior.

 Key 2: Variations should be introduced – opposite to Henry

Ford philosophy: “the consumer can have any color he wants,
so long it is black”.

 Key 3: The relationship should be considered as expandable –

by looking to potential opportunities.

o Perspective 2 – individual customer (organization) with multiple buying

relationship:

 Key 1: The relationship should be connected – providing more

information and value to the company.

 Key 2: One relationship should not be hold hostage to another

– by conditioning more value adding relationship to those less
important regarding the same customer.

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 Models for Customer Relationship Management

 Key 3: The total value of the customer should be calculated –

for a correct evaluation of the customer position relatively to
the company.

 Level 3 – Customer advocacy – is considered to be the most elusive. [and02]

gives also three keys to encourage and nurture the urge for customer to
become advocates:

o Key 1: Worth talking about should be indentified – by understanding

what customers are willing and likely to say.

o Key 2: Worth taking about could be changed – by creating unexpected

experiences.

o Key 3: Advocates should be asked to share their recommendations –

by putting them in the right places and providing them with
motivation.

2.3 Lifetime value

Along this course one objective is to define and familiarize with common terms and
expressions used in service operation and customer relationship management. Lifetime
value is coming from marketing but is very important for persons involved in designing or
implementing CRM systems. Until now we have seen some models which describe the
complex relationship with customers and how customers can differ between each other.
The idea of customer-centric seems to become a must in CRM approaches. Organizations
will do all their best to preserve their most valuable customers. Successful organizations
will design and develop processes to assist their best customers and deliver value, not
necessarily products and channels [ale02]. So we understand the importance of this
customers but how could their value be calculated? Here is where lifetime value (LTV) or
customer lifetime value (CLV) enters in the scene. LTV is widely used and, resuming to
our engineering approach, LTV should be provided by CRM applications.

First we should define LTV to understand what it is and then what it needs to be
evaluated. [but09] defines LTV as:

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 The present day value off all net margins earned from relationship
with a customer, customer segment or cohort.

This type of words is that which generally creates barriers between economists and
engineers. Other impediment is the fear of losing jobs when things which are procedurals
could be made by machines. CRM applications enter in this category and either an
economist will try to understand information technology or an IT engineer will try to
understand economical terms and techniques. Margins usually represent ratios between
effects and causes but in an average manner (net margin may represent the ratio between
net profit and incomes which generated that profit). When the ratio is desired to reflect a
small change in causes to see what happens with the effect, as in derivatives, is called
marginal evaluation. Cohort represents, as [but09] describes, a group of customers which
have a set of characteristics in common other than those used for segmentation. For
example customers acquired through one campaign.

Now, looking to the definition, to compute LTV it would need that all of the previous
net margins to be accounted at today’s value and the same with all of the future net
margins which should be discounted back to today’s value. There is also an estimated LTV
potential which will look only to the future and it is of great interest for most companies.
Particularly to services are the contracts which are often met.

[but09] presents the needed information for computing LTV:

 For an existing customer:

o Probability for each future period for that customer to purchase from
the company (products or services);

o The gross margins of the above purchases, again for each period;

o The servicing cost for the above purchases (period-by-period);

 Additionally for new customers:

o The cost of acquiring the customer;

 Updating the value to present day:

o The discount rate which should be applied to future net margin.

From the above required information for a usable LTV estimate we can conclude
that the most important component of CRM should be forecasting customer purchasing

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 Models for Customer Relationship Management

behavior. This, together with estimating other cost (operations including support, materials,
capital, marketing, etc) should be addressed by the analytical component of CRM.

There are also other key factors in marketing and CRM based on which important
decisions are taken. These factors should be quantified and evaluated. One example is
the customer satisfaction level. But, on the other side, “not everything that counts can be
counted and not everything that can be counted counts”, as Albert Einstein said.

2.4 Service guaranties

With the goal of increasing value inside the customer relationship, reducing the risk
had to be addressed. One way of doing this is by providing service guaranties. Recently it
was developed a particular approach on service guaranties which is called service-level
agreement (SLA). [but09] defines SLAs in the following manner:

“A service level agreement is a contractual commitment between a service

provider and a customer that specifies the mutual responsibilities of both parties
with respect to the service that will be provided and the standards at which they will
be performed.”

These types of SLAs should be considered not only outside the organization but
also to the inside processes subject to customer-supplier relations. In this way some
process could be identified as able to be outsourced in order to be improved or decrease
their costs. For evaluating the agreement compliance there should be defined quantifiable
performance objective with measurable metrics. In [but09] are given some examples:

 Availability – in percents of total agreed time.

 Usage – number of users that can be served simultaneously.

 Reliability – the estimated failure rate.

 Responsiveness – the time (average or maximal) in which a demand for service

is addressed or fulfilled.

 User satisfaction – acquired periodically or at the time the service is delivered.

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References

[ale02] Alexander, D., Turner, C., 2002. The C.R.M. Pocketbook, Management
Pocketbooks Ltd.
[and02] Anderson, K., Kerr, C., 2002. Customer Relationship Management. McGraw-Hill
[but09] Buttle, F., 2009. Customer Relationship Management. Concepts and Technologies.
2nd Ed, Butterworth-Heinemann, Elsevier.
[pay05] Payne, A., Frow, P., 2005. A strategic Framework for Customer Relationship
Management. Journal of Marketing, V.69, American Marketing Association.
[pep05] Peppers, D., Rogers, M., 2005. Return on customer: creating maximum value from
your scarcest resource. Doubleday.
[woo02] Woodcock, N., Stone, M., Foss, B., 2002. The Customer Management Scorecard.
Kogan Page.

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