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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

How to Make CRM Successful

How to Make CRM Successful

SHIN Hyung-Won

Apr. 2, 2008

Transcript

Welcome to our Video Program. I’m Hyung-Won Shin from the Marketing Strategy Department.

You may have heard the famous beer and diaper story from Walmart. The retail colossus recently found out that large numbers of customers tend to buy diapers and beer together. Therefore, it placed the two together and achieved stronger sales. In fact, however, this discovery did not come from Walmart, but came from the US drugstore chain Osco. Osco, however, did not benefit from its discovery. Why? Osco found that if beer and diapers were hot-selling items, placing them separately could make customers stay longer and buy more.

This story is a good example demonstrating the gap between perception and reality in Customer Relationship Management (CRM). In the early 2000s, CRM was hyped as being crucial for improvement in corporate earnings, drawing sharp attention from domestic companies.

However, CRM’s link to generating revenue has disappointed in Korea, raising skepticism about its effect. In the global market, CRM was credited with generating $9.8 billion in 2006, up 51.3% from 2001, but in the Korean market, CRM solution’s contribution was 21.6 billion won in the first half of 2007, down 37.6% from 2001.

Domestic businesses failed to understood CRM and adopt it to their circumstances. They simply introduced foreign CRM systems without any real goals and strategies. Since foreign CRM systems conflicted with local systems, Korean companies eventually dumped CRM.

Let’s take a close look at the conditions needed for CRM to function successfully.

First, companies need to identify and understand the key characteristics of their customers. Financial or telecommunications service industries, for instance, which feature less product differentiation and frequent customer contact, need to have a better understanding of the individual tastes and emotional tendencies of their customers. The Bank of Boston, for example, found that the hobbies of its customers can be divided into golf, yachting, and tennis, and promptly began financing social meetings. After three years of efforts to promote social exchanges between customers, the Bank of Boston achieved a three-fold jump in customer loyalty.

Second, companies need to enhance the quality of information about consumers. Simple analysis of demographic information will not be enough to achieve real results. For example, McDonald’s launched a new milkshake based on taste surveys. However, sales did not improve. Consultants discovered that more than half of McDonald’s milkshakes were purchased in the morning by people driving to work. McDonald’s then shifted focus toward a milkshake for breakfast, rather than shakes for children.

Third, companies need to pay more attention to long-term value for customers. Many companies expect customer behavior to be constant. However customer loyalty can be fleeting when rivals improve their offers. Ordinary customers can be transformed into more profitable customers. Accordingly, businesses need to estimate both the current and future value of customers. Products should be aimed at providing life-long value to customers.

Fourth, quality of customer contact rather than frequency must be improved. Businesses believe that increases in customer contacts tend to strengthen their relationship with customers. However, 40% of today’s customers are exposed to more than 60 promotional materials per month. Under these circumstances, any attempt to chase customers indiscriminately could cause undesirable side effects. It is more important to impress the customers by enhancing the quality, rather than the frequency of contacts.

Fifth, a greater gap in benefits between high-value and low-value customers is needed. Businesses need to provide preferential benefits to highly-profitable customers. The famous retail chain Tesco found that 5% of its customers accounted for 20% of its sales, while the bottom 25% accounted for only 2%. Tesco is now running customer programs differentiated by customer value.

To better serve its upper-class customers who tend to use Tesco in the morning, Tesco increases inventory and staff and provides valet parking service in the morning. In the evening, when less-profitable customers shop, Tesco inventory and staff are reduced. This procedure cuts personnel and logistics costs.

Largely due to past disappointments with CRM, Korean businesses tend to have a negative view about CRM itself. In fact, CRM is more important than ever.

Instead of adopting CRM on a full-scale basis at the beginning, they should implement it on a step-by-step basis. That would better allow them to accumulate experience and know-how in adapting CRM to their business environment.

Thank you for watching. I’m Hyung-Won Shin.

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