What is Customer Relationship Management (CRM)? Definition, Need, Types

  • Post last modified:8 August 2021
  • Reading time:11 mins read

What is Customer Relationship Management (CRM)?

Customer Relationship Management (CRM) means an enterprise-wide integration of technologies working together such as data warehouse, website, Intranet/extranet, phone support system, marketing, production, etc.

CRM has many similarities with Enterprise Resource Planning (ERP), where ERP can be considered back-office integration and CRM as front-office integration. A notable difference between ERP and CRM is that, ERP can be implemented without CRM. However, CRM usually requires access to the back-office data that often happen through ERPtype integration.

Customer Relationship Management (CRM) Definition

According to GartnerCRM is a business strategy with outcomes that optimize profitability, revenue and customer satisfaction by organizing around customer segmentation, fostering customer satisfying behaviours and implementing customer-centric processes. CRM technologies should enable greater customer insight, increases customer access, more effective interactions and integration throughout all customer channels and back-office enterprise functions.

CRM principally revolves around marketing and begins with a deep analysis of consumer behaviour. It uses IT to gather data, which can be used to develop information required to create a more personal interaction with the customer.

In long term, it produces a method of continuous analysis and refinement in order to enhance Customers Lifetime Value (CLV) with a firm. Well et al (1999) noted, both (marketing & IT) need to work together with a high level of coordination to produce a seamless process of interaction.

However, in order to work effectively with marketing, IT managers need an understanding of the fundamental marketing motivation driving the CRM trend.


Need and Objective of CRM

CRM is not just a technology, but rather a comprehensive approach to an organization’s philosophy in dealing with its customers. This includes policies and processes, front-of-house customer service, employee training, marketing, systems and information management.

Hence, it is important that any CRM implementation considerations stretch beyond technology, towards the broader organizational requirements. The objectives of a CRM strategy must consider a companies specific situation and its customer needs and expectations.

The experience from many companies is that a very clear CRM requirement with regard to reports, e.g., output and input requirements, is of vital importance before starting any implementation. With a proper demand specification, a lot of time and costs can be saved based on right expectations versus systems capability. A well operative CRM system can be an extremely powerful tool for management and customer strategies.

The data gathered as a part of CRM must consider customer privacy and data security. Customers want the assurance that their data is not shared with third parties without their consent and not accessed illegally by third parties. Customers also want their data used by companies to provide a benefit to them.


Features of CRM

CRM is made up of many features, which include collaborative CRM, analytical CRM and operational CRM.

  1. Collaborative CRM
  2. Analytical CRM
  3. Operational CRM

Collaborative CRM

It is to directly communicate with customers without inclusion of any sales or service representatives. Direct interaction is carried out with collaborative CRM that includes feedback from the customers and reporting of issues if any. This interaction can be carried out through a variety of channels like e-mail, phone, SMS, etc.

The main objective behind going in for collaborative CRM can be reducing the company costs and improving the services provided.

  • It is the communication centre, coordination network that provides neural paths to customer and its suppliers.

  • It could mean a Partner Relationship Management (PRM) application or a customer interaction centre.

  • It could mean communication channels such as web or e-mail, voice applications and even channel strategies.

  • In other words, it is any CRM function that provides a point of interaction between customer and channel itself.

Analytical CRM

It is to investigate customer data for a vast range of reasons and functions. Analytical CRM finds multiple uses such as taking management decisions, predicting future trends, analyzing customer behaviour, planning and executing marketing campaigns and much more. It analyzes customer data for the following purposes:

  • Design and execution of targeted marketing campaigns to optimize marketing effectiveness.

  • Design and execution of specific customer campaigns.

  • Analysis of customer behaviour to aid product and service decisionmaking such as pricing, etc.

  • Aid in taking management decisions such as financial forecasting.

  • Provide a tool in predicting the probability of customer defection.

Operational CRM

It provides support to “Front Office” business processes, including sales, marketing and service. Typical business functions involving customer service, order management, invoice or billing or sales and marketing automation and management are the parts of operational CRM.

Each interaction with a customer is generally added to a customer’s contact history, and staff can retrieve information on customers from the database whenever necessary.

One of the main benefits of this contact history is that customers can interact with different people or different contact channels in a company over time without having to describe the history of their interaction each time.


Types of CRM

CRM allows a company to address all of the types of customers it serves at different points in their life cycle and to choose the marketing programme that best fits a customer’s attitude towards the company and willingness to purchase its products and services.

There are four types of CRM:

  1. Win-Back or Save
  2. Prospecting
  3. Loyalty
  4. Cross-Sell/Up-Sell

Win-Back or Save

This is the process of convincing a customer to stay with the organization at the point they are discontinuing service or convincing them to rejoin once they have left. Of the four categories of campaigns, win-back is the most sensitive.

Research indicates that win-back campaign is four times more likely to succeed if contact is made within the first week following a defection than if it is made in the fourth week. Selectivity is the other essential characterstice of a successful win-back campaign.

Prospecting

Prospecting is the effort to win new, first time customers. Apart from the offer itself; the three most critical elements of a prospecting campaign are segmentation, selectivity and source. It is essential to develop an effective needs-based segmentation model that allows the organization to effectively target the offer.

Without this focused approach, the organization either fails to achieve an adequate acceptance or rate an the offer or spends too much on promotions, advertising and concessionary pricing. It is advisable to achieve a 95% confidence rate before embarking on a prospecting effort.

Selectivity is as important to prospecting as it is to win-back. Needs-based segmentation defines what the customer wants from the organization and profit-based segmentation, defines how valuable the customer is and helps the organization to decide how much it is willing to spend to get that customer.

Pre-scoring a customer credit rating is one of the techniques that an organization can use to determine the latter.

Loyalty

Loyalty is the category in which it is most difficult to gain accurate measures. The organization is trying to prevent customers from leaving and uses three essential elements as shown in Fig.

  • Value-based segmentation
  • Need-based segmentation
  • Predictive churn models.

Value-based segmentation

It allows the organization to determine how much it is willing to invest in retaining a customer’s loyalty.

Needs-based segmentation

Once the customer has passed the value-based segmentation, the organization can use needs-based segmentation to offer a customized loyalty programme.

Predictive churn models

Using the vast amount of demographic data and usage rate available for the existing base of customers which helps in forecasting customer attrition. Through the use of advanced data-mining tools, organizations can develop models that identify vulnerable and potential customers which can be targeted for the loyalty campaign or offered alternative products

A small percentage of customers account for a large percentage of profits.

Cross-Sell/Up-Sell

The purpose is to identify complementary offering that a customer would like. For example a basic long-distance customer could be a candidate to buy Internet access.

The customer’s need-based segment, usage pattern and reaction to previous contacts/interactions determine the nature of the offer. Once the composition of the offer is determined and the contact medium is agreed to, it presents that offer to the customer.

Up-selling is similar, but instead of offering a complementary product, the organization offers an enhanced one.

For example: Replacing an analog data line with ISDN. Cross-sell/upsell campaigns are important because the customers targeted already have a relationship with the organization. They are less likely to see the offer as a commodity and are thus more willing to pay a premium for it. In financial terms, when a customer accepts a cross-sell or up-sell offer, that customer begins to become much more profitable.


CRM Marketing

During the 1850s, businesses could sell almost anything they made. Consequently it was a seller’s market and businesses focused on product. In the early 1900s, competition was creeping up and businesses realized customers wielded more power and firms had to find reasons for people to buy their products. This brought about a sales orientation.

But some forty years ago (during 1950s) marketers predicted that product focus would be downfall of many of the large organizations. They believed that nothing less than totally customer-oriented business view could ensure organizational survival.

Organizations that defined themselves otherwise—by what they did, what they produced, or what technologies they used—were suffering from “Marketing Myopia” or “Marketing Shortsightedness”, which ushered in marketing orientation. The marketing orientation focused on addressing the needs and wants of market segments. We are now at the beginning stages of a new “Customer-Centric Orientation” which is the subset of Marketing Orientation.

There is a shift from mass-customization to one-to-one marketing or customization of products, which is also capable of treating every customer individually and uniquely depending on the customer’s preference.

As Berger & Benchwati (2000) put it, the “core of relationship marketing is the development and maintenance of long-term relationships with customers, rather than simply a series of discrete transactions”. They further note that a guiding principle is the management of “Customer’s Life Time Value (CLV)”. Rather than calculating profit from a discrete transaction, the firm must consider the value of a customer over his or her entire relationship with the firm as shown in Fig 1.

Customer relationship with the firm
Fig 1: Customer relationship with the firm

(Here value refers to tangible parameters, intangible parameters and offer of the organization). Marketing is the area where customer insight, or the process of identifying the most valuable customer, is primary.

Simply achieving a single view of the customer across diverse lines of business and departmentally focused information systems is the tremendous value and the added ability to gather and correlate this information in real time makes the information that much more valuable in making better business decisions as shown in Fig 2.

This capability is a core underpinning of successful customer relationship management, and is made possible by the CRM interaction capabilities. Once in possession of detailed customer information, it becomes possible to create and execute high-personalized targeted marketing programmes for high value customers, which maximize the revenue opportunities, customer satisfaction and also efficiency and effectiveness of marketing efforts.

Valuable information for business decisions
Fig 2: Valuable information for business decisions

Indeed, this revolution in Customer Relationship Management (CRM) has been referred to as the new “mantra” of marketing. Companies such as Siebel, Oracle, Broadvision, Kana, net perceptions and others have developed CRM products that do everything from tracking customer behaviour on the web to predicting their future moves to sending direct e-mail communications.

Thus, the market expects organizations to be able to manage down costs. What investors are skeptical about is the organization ability to attract and retain profitable customers. Customer Relationship Management allows them to do just that.

The biggest threat to CRM is management focuses on short-run profits rather than long-term vision. CRM is an expensive, time consuming and complex proposition. Even in the best case, this tool is an opportunity to rise above minor advantages and develop an actual relationship with the customers. Companies that are the most successful at delivering what each customer wants are the most likely to be the leaders of the future.

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