CHAPTER 11 CUSTOMER RELATIONSHIP MANAGEMENT ANNOTATED OUTLINE INSTRUCTOR NOTES • Customer relationship management (CRM) is a business philosophy and a set of strategies, programs, and systems that focuses on identifying and building loyalty with a retailer's most valued customers. • CRM is based on the philosophy that retailers can increase profitability by building relationships with their better customers. • Effectively managing merchandise inventory and the stores provides value and supports the primary objective of building customer loyalty. The goal is to develop a base of loyal customers who patronize the retailer frequently. See PPT 11-3 Ask students to give examples of retailers in the area who seem to have a loyal customer base. What are the reasons why customers (including themselves) frequent this retailer? What is the retailer doing for its loyal customers? I. The CRM Process • Retailers are now beginning to concentrate on providing more value to their customers using targeted promotions and services to increase their share of the wallet – the percentage of the customers' purchases made from the retailer – from these customers. • This change in perspective is supported by research indicating that all customers are not equally profitable, and that more and less profitable customers need to be treated differently. See PPT 11-4 Ask students if they buy more products from one specific retailer now, i.e., spend more money with one specific retailer? If so, why? If not, why do they buy different products from different retailers? Discuss the costs of attracting new customers versus the costs of retaining current customers. A. What is Loyalty? • Customer loyalty, the objective of CRM, is more than having customers make repeat visits to a retailer and being satisfied with their experiences. Customer loyalty to a retailer means See PPT 11-5 Ask students how much they like a specific retailer. Are they loyal to the retailers they like most? If so, why? If not, why not? Note that customers are committed to purchasing merchandise and services from the retailer and will resist the activities of competitors attempting to attract their patronage. • Loyal customers have an emotional connection with the retailer. Their reasons for continuing to patronize a retailer go beyond the convenience of the retailer's store or the low prices and specific brands offered by the retailer. They feel such goodwill toward the retailer that they will encourage their friends and family to buy from it. • Programs that encourage repeat buying by simply offering price discounts can be easily copied by competitors. However, when a retailer develops an emotional connection with a customer, it is difficult for a competitor to attract the customer. • Emotional connections develop when the customer receives personal attention. • Unusual positive experiences also build emotional connections. that for emotional bonding, there may be less objective reasons as to why they like a retailer. See PPT 11-6 II. Overview of the CRM Process • CRM is an iterative process that turns customer data into customer loyalty through four activities: (1) collecting customer data, (2) analyzing the customer data and identifying target customers, (3) developing CRM programs, and (4) implementing CRM programs. Each of the four activities in the CRM process is discussed in the next sections. See PPT 11-7 for an overview of CRM See PPT 11-8 for an illustration of the CRM Process Cycle A. Collecting Customer Data • The first step in the CRM process is constructing a customer database. This database contains all of the data the firm has collected about its customers and is the foundation for subsequent CRM activities. 1. Customer Database • Ideally, the customer database should contain the following information: 1. Transactions – a complete history of the purchases made by the customer, including purchase date, the SKUs purchased, the price paid, the amount of profit, and whether the merchandise was purchased in response to a special promotion or marketing activity. 2. Customer Contacts – a record of the interactions that the customer has had with the retailer, including visits to the retailer's Web site, inquiries made through in-store kiosks, and telephone calls made to the retailer's call center, plus information about contacts initiated by the retailer, such as catalogs and direct mail sent to the customer. 3. Customer Preferences – what the customer likes, such as favorite colors, brands, fabrics, and flavors as well as apparel sizes. 4. Descriptive Information – Demographic and psychographic data describing the customer that can be used in developing market segments. 5. Responses to marketing activities – analysis of the transaction and contact data provide information about the customer's responsiveness to marketing activities. • To get a complete view of the customers, the retailer needs to be able to combine the individual See PPT 11-09 To demonstrate how a customer database could have very simple beginnings, ask students the types of information contained in a typical invoice. Note that each transaction invoice would contain details on the customer's name and address, products and quantities purchased, price paid, etc. If a whole year's invoices were collected, what types of information could be obtained? customer data from each member of a household. • The analysis of the customer database can provide important insights for planning merchandise assortment. • With today's technology, even small, independent retailers can create and use a customer database. 2. Identifying Information • Constructing the database is relatively easy for catalog and Internet shoppers and customers who use the retailer's credit card when buying merchandise in stores. Customers buying from nonstore channels must provide their contact information, their name and address, so that the purchases can be sent to them. • However, identifying most customers who are making in-store transactions is more difficult because they often pay for the merchandise with a check, cash, or a third-party credit card. • Store-based retailers use three approaches to identify their customers: (1) asking customers for identifying information, (2) offering frequent shopper programs, and (3) connecting Internet purchasing data with stores. See PPT 11-10 Asking for Identifying Information • Some retailers ask customers for identifying information such as their phone number or name and address when they ring up a sale. The information is then used to create the transaction database for the customer. • Some customers may be reluctant to provide the information and feel that the sales associates are violating their privacy. Ask students for their reactions when a cashier asks them for their name, address and phone number before ringing up a sale. How could the store minimize consumer concerns and still obtain customer identity information? Offering Frequent Shopper Programs • Frequent shopper programs, also called loyalty programs, are programs that identify and provide rewards for customers who patronize a retailer. • Some retailers issue customers a frequent shopper card, whereas others use a private-label credit card – a credit card that has the store’s name on in it. In both cases, customer information is automatically captured when the card is scanned at the point of sale terminal. • When customers enroll in one of these programs, they provide some descriptive information about themselves or their household. Customers are then offered an incentive to show the card when they make purchases from the retailer. • From the retailer's perspective, frequent shopper programs offer two benefits: (1) customers provide demographic and other information when they sign up for the program and then are motivated to identify themselves at each transaction, (2) customers are motivated by the rewards offered to increase the number of visits to the retailer and the amount purchased on each visit. Ask students if they use a frequent shopper card. What are the advantages and disadvantages from a customer's perspective in using such cards? Connecting Internet Purchasing Data with the Stores • If a customer has used a credit card while shopping on a multichannel retailer’s Internet site or from its catalog, and then uses the same card to make a purchase in the retailer’s store, the retailer can update the customer’s purchase record and capture information about where the What are the various privacy issues when a retailer unobtrusively collects information through checking account numbers, debit cards and third-party credit cards? customer lives or works from the shipping information. Privacy and CRM Programs • While detailed information about individual customers helps retailers provide more benefits to their better customers, consumers are concerned about retailers violating their privacy when they collect this information. • Even if CRM databases benefit the retailer’s relationship with the consumer, if customers’ data are not secure and susceptible to identity theft, multichannel retailing could cease to exist. • The FBI and Secret Service also are signaling to retailers that consumer privacy is a much more serious issue than it ever has been before. 1. Privacy Concerns • The degree to which consumers feel their privacy has been violated depends on: (1) their control over their personal information when engaging in marketplace transactions and (2) their knowledge of the collection and use of personal information. • These concerns are particularly acute for customers using an electronic channel because many of them do not realize the extensive amount of information that can be collected without their knowledge. In addition to collecting transaction data, electronic retailers can collect information by placing cookies on visitors' hard drives. • Cookies are text files that identify visitors when they return to a website. Due to the data in the cookies, customers do not have to identify See PPT 11-12, 11-13 Ask student if they have bought or buy regularly from Internet retailers. If they have bought from Internet retailers, what do they feel about privacy issues? If they have never bought from Internet retailers, is it due to privacy concerns? themselves and use passwords every time they visit a store. However, the cookies also collect information about other sites the person has visited and what pages they have downloaded. 2. Protecting Customer Privacy • Some people define personal information as all information that is not publicly available; others include both public (i.e., driver's license, mortgage data) and private (hobbies, income) information in the definition of personal information. • Retailers need to take the necessary precautions to protect consumer privacy by incorporating safety software such as firewalls and data encryption programs. • In the United States, legal protection for privacy is limited. Existing legislation is limited to the protection of information in a few specific contexts, including government functions and practices in credit reporting, video rentals, and banking. • The European Union (EU) is more aggressive in protecting consumer privacy and its provisions include: a. Businesses can collect consumer information only if they have clearly defined the purpose such as completing the transaction. b. The purpose must be disclosed to the consumer from whom the information is being collected. c. The information can only be used for that specific purpose. d. The business can only keep the information for the stated purpose. • The EU perspective is that consumers own their personal information. See PPT 11-11 Evaluate the differences between U.S. and European laws regarding privacy. From the point of view of the individual consumer, which one is more comprehensive and better ensures privacy protection? From the point of view of the retailer, which one offers more opportunities for reaping the full benefits of a CRM program? Ask students which one is better from the point of view of customers – opt-in or opt-out? Similarly, which one is less costly from the perspective of the retailer? Retailers must get consumers to explicitly agree to share this personal information. This is referred to as opt in. • In contrast, personal information in the United States is generally viewed as being in the public domain, and retailers can use it in any way they desire. U.S. consumers must explicitly tell retailers not to use their personal information – they must opt out. • The Federal Trade Commission has developed the following set of principles for fair information practices: a. Notice and Awareness – covers the disclosure of information practices, including a comprehensive statement of information use such as information storage, manipulation, and dissemination. b. Choice/Consent – includes both opt out and opt in options, and allows the consumers the opportunity to trade information for benefits. c. Access/Participation – allows for the confirmation of information accuracy by consumers. d. Integrity/Security – controls for the theft of and tampering with personal information. e. Enforcement/Redress – provides a mechanism to ensure compliance by participating companies. • There is growing consensus that personal information must be fairly collected, the collection must be purposeful, and the data should be relevant, maintained as accurate, essential to business, subject to the rights of the owning individual, kept reasonably secure, and transferred only with the permission of the consumer. • The Electronic Privacy Center (www.epic.org) recommends that privacy policies clearly state what information is collected from each visitor and how it will be used, give consumers a choice as to whether they give information, and allow them to view and correct any personal information held by an online retail site. • Retailers can protect customer privacy by: encouraging businesses to be responsible for customer privacy, being transparent, and simplifying customer choice. See PPT 11-12 B. Analyzing Customer Data and Identifying Target Customers • The next step in the CRM process is analyzing the customer database and converting the data into information that will help retailers develop programs for building customer loyalty. • Data mining is one approach and is a technique used to identify patterns in data, typically patterns that the analyst is unaware of prior to searching through the data. • Market basket analysis is a specific type of data analysis that focuses on the composition of the basket, or bundle, of products purchased by a household during a single shopping occasion. This analysis is often used for suggesting where to place merchandise in a store. See PPT 11-15 Ask students what questions they could answer if they had a computerized record of all of one store's transactions for the last two year. (In other words, what patterns in the data would they look for?) See PPT 11-18 for an illustration of the Market Basket Analysis approach 1. Identifying Best Customers • Customer data analysis is focused on identifying market segments – groups of customers who have similar needs, See PPT 11-16 purchase similar merchandise, and respond in a similar manner to marketing activities. • Using information in the customer database, retailers can develop a score or number indicating how valuable customers are to the firm. This score can then be used to determine which customers to target. • Lifetime customer value (LTV) is the expected contribution from the customer to the retailer's profits over his or her entire relationship with the retailer. • LTV is estimated by using past behaviors to forecast the future purchases, gross margin from these purchases, and costs associated with servicing the customers. Some of the costs associated with a customer are the cost of advertising and promotion used to acquire the customer and the cost of processing merchandise that the customer has returned. • These assessments of LTV are based on the assumption that the customer's future purchase behaviors will be the same as they have been in the past. See PPT 11-17 for an LTV comparison of two different shoppers What can small retailers do to determine the lifetime customer value of their customers? Does a simple mom-and-pop retailer know who its best customers are? 2. RFM Analysis • RFM (recency, frequency, monetary) analysis, often used by catalog retailers and direct marketers, is a scheme for segmenting customers according to how recently they have made a purchase, how frequently they make purchases, and how much they have bought. • Catalog retailers often use this type of analysis to determine which customer groups should be sent catalogs. • Customers who have made infrequent, small purchases recently are See PPT 11-19, 11-20 A catalog marketer has decided on the following rule for mailing customers. Every new prospect would receive 6 catalogs mailed once every month before they are dropped from the mailing list. If they bought at least once in the 6 months, they would get an additional 8 catalogs before they are dropped from the mailing list. If they bought 2 or more times in 6 months, they would receive catalogs for the next 15 months and would also receive special sales and other bargain supplements from time-to-time. Evaluate this plan. Does this plan make a distinction between the considered to be first-time customers. The objective of CRM programs directed toward this segment of customers is to convert them into early repeat customers and eventually high-value customers. • CRM programs directed toward customers in the high-value segment (high frequency, recency, and monetary value) attempt to maintain loyalty, increase retention, and gain a greater share of wallet by selling more merchandise to them. customer in terms of profitability (high) and costs (lower) to the retailer? C. Developing CRM Programs • The next step in the CRM process is to develop programs for the different customer segments. These include: (1) retaining best customers, (2) converting good customers into high- LTV customers, and (3) getting rid of unprofitable customers. See PPT 11-21 Customer Retention • Four approaches that retailers use to retain their best customers are: (1) frequent shopper programs, (2) special customer service, (3) personalization, and (4) community. See PPT 11-31 Ask students why customer retention is important, especially since CRM programs cost so much. How do the rewards of retention outweigh the costs of the CRM program? 1. Frequent Shopper Programs • Frequent shopper programs are used both to build a customer database by identifying customers with transactions and to encourage repeat purchase behavior and retailer loyalty. Retailers provide incentives to encourage customers to enroll in the program and use the card. • Several considerations should be made in developing effective frequent shopper programs, including: (1) tier rewards according to the volume of purchases, (2) offer choices in selecting rewards, (3) reward all See PPT 11-21 and PPT 11-22 Should a college bookstore use a frequent shopper card? Why or Why not? transactions, and (4) provide transparency and simplicity1. • Four factors limit the effectiveness of frequent shopping programs: (1) they can be expensive, (2) it is difficult to make corrections in programs when problems arise, (3) it is not clear that these programs increase consumer spending behavior and loyalty toward the retailer, and (4) it is difficult to gain a competitive advantage based on frequent shopper programs. 2. Special Customer Services • Some retailers provide unusually high quality customer service to build and maintain the loyalty of their best customers. 3. Personalization • With the availability of customer- level data and analysis tools, retailers can now economically offer unique benefits and target messages to individual customers. They now have the ability to develop programs for small groups of customers and even specific individuals. • Many small, local retailers have always practiced 1-to-1 retailing, developing retail programs for small groups or individual customers. They know each of their customers, greet them by name when they walk in the store, and then recommend merchandise they know the customers will like. • The Internet channel provides an opportunity for retailers to automate the practice of 1-to-1 retailing. • Nearly every online retailer allows shoppers to search selectively for See PPT 11-28 Most retail store associates wear a name tag. Should customers also wear a name tag or mention their name when shopping at a store? What types of retailing/services may benefit from this type of name recognition and identification? 1 Frank Badillo, Customer Relationship Management (Columbus, OH: Retail Forward, 2001). items in which they are most interested. Some retailers attempt to match specialized promotions to the customer’s search. 4. Community • Retailers can also develop a sense of community among customers. The Internet channel offers an opportunity for customers to exchange information using bulletin boards and develop more personal relationships with each other and the retailer. By participating in such a community, customers are more reluctant to leave the "family" of other people patronizing the retailer. D. Implementing CRM Programs • Increasing sales and profits from CRM programs is a challenge. The effective implementation of CRM programs requires the close coordination of activities by different functions in a retailer's organization. • The MIS department needs to collect, analyze, and make the relevant information readily accessible for employees implementing the programs – the front-line service providers and sales associates and the marketers responsible for communicating with customers through impersonal channels (mass advertising, direct mail, and e-mail). • Store operations and human resource management needs to attract, hire, train, and motivate the employees who will be using the information to deliver personalized services. See PPT 11-25 What can a small retailer do to implement a CRM program without expending too much in costs? What are the basic sources of costs for such a retailer? A. Customer Pyramid See PPT 11-25-1-28 * Most retailers realize that their customers differ in terms of their profitability or LTV. They believe in the 80-20 rule- 80 percent of the sales or profits come from 20 percent of the customers. * A commonly used segmentation scheme divides customers into four segments: 1. Platinum Segment – this segment is composed of the retailer's customers with the top 25 percent LTVs. The most loyal customers who are not overly concerned about merchandise price and place more value on customer service. 2. Gold Segment – The next 25 percent of customers in terms of LTV still shop a significant amount at the retailer but are more price-sensitive and are not as loyal as the platinum customers. 3. Iron Segment – Customers in this third tier probably do not deserve much special attention from the retailer due to their modest LTV. 4. Lead Segment – Customers in the lowest segment cost the company money. They often demand a lot of attention but do not buy much from the retailer or they buy a lot of sale merchandise and abuse return privileges. A retailer is developing a program whereby it would have a special one-day sales event every month. Which segment(s) of the customer pyramid should it target? Why? Converting Good Customers into Best Customers • Increasing the sales made to good customers is referred to as customer alchemy – converting iron and gold customers in to platinum customers. Customer alchemy involves offering and selling more products and services to existing customers and See PPT 11-29 Ask students for examples of cross-selling and add-on selling from their own experience. increasing the retailer's share of the wallet with these customers. • Add-on selling is selling additional new products or services to existing customers, such as a bank encouraging a customer with a checking account to also apply for a home improvement loan from the bank. Dealing with Unprofitable Customers • In many cases, the bottom tier of customers actually has negative LTV. Retailers actually lose money on every sale they make to these customers. • Two approaches for getting the lead out are: (1) offering less costly approaches for satisfying the needs of lead customers, and (2) charging the customers for the services they are abusing. See PPT 11-30 When dealing with unprofitable customers, a retailer may be consciously providing lower levels of benefits or service to such customers. Evaluate the ethical issues involved. VI. Summary • This chapter focuses on activities that retailers are undertaking now and will undertake in the future to increase the sales and profits they get from their better customers. • Customer relationship management is an iterative process that turns customer data into customer loyalty. ANSWERS TO “GET OUT AND DO ITS” 2. INTERNET EXERCISE Go to the homepage of a retailer that you frequent and review their privacy policy. How is this retailer protecting their customer’s information? Which policies, or lack of policies, raise your concern? Why? Which policies give you comfort that your private information is being protected? Why? Student responses will vary depending on the web site visited. Most should consider: - Cookies - Personal information - e-mail - Age of web page users - How the company protects customer data and credit card transactions 3. INTERNET EXERCISE Go to the Web site for the Electronic Privacy Information Center (www.epic.org) and review the issues raised by the organization. What does this watchdog organization feel are the most important retailer to consumer privacy issues? How will these issues evolve in the future? Top Ten Consumer Privacy Resolutions - Protect Your Privacy in The New Year! 1. Engage in "privacy self-defense." Don't share any personal information with businesses unless it is absolutely necessary (for delivery of an item, etc.). Don't give your phone number, address, or name to retail stores. If you do, they can sell that information or use it for telemarketing and junk mail. If they ask for your information, say "it's none of your business," or give "John Doe, 555-1212, 123 Main St." Don't return product warranty cards. Don't complete consumer surveys even if they appear to be anonymous. Profilers can build in barely-perceptible codes that link you to the survey, and this data goes straight to direct marketers. 2. Pay with cash where possible. Electronic transactions leave a detailed dossier of your activities that can be accessed by the government or sold to telemarketers. Paying with cash is one of the best ways to protect privacy and stay out of debt. 3. Install anti-spyware, anti-virus, and firewall software on your computer. If your computer is connected to the Internet, it is a target of malicious viruses and spyware. There are free spyware-scanning utilities available online, and anti-virus software is probably a necessary investment if you own a Windows-based PC. Firewalls keep unwanted people out of your computer and detect when malicious software on your own machine tries to communicate with others. 4. Use a temporary rather than a permanent change of address. If you move in 2005, be sure to forward your mail by using a temporary change of address order rather than a permanent one. The junk mailers have access to the permanent change of address database; they use it to update their lists. By using the temporary change of address, you'll avoid unwanted junk mail. 5. Opt out of prescreened offers of credit. By calling 1-888-567-8688 or by visiting https://www.optoutprescreen.com/, you can stop receiving those annoying letters for credit and insurance offers. This is an important step for protecting your privacy, because those offers can be intercepted by identity thieves. 6. Choose Supermarkets that Don't Use Loyalty Cards. Be loyal to supermarkets that offer discounts without requiring enrollment in a loyalty club. If you have to use a supermarket shopping card, be sure to exchange it with your friends or with strangers. 7. Opt out of financial, insurance, and brokerage information sharing. Be sure to call all of your banks, insurance companies, and brokerage companies and ask to opt out of having your financial information shared. This will cut down on the telemarketing and junk mail that you receive. 8. Request a free copy of your credit report by visiting http://www.annualcreditreport.com. All Americans are now entitled to a free credit report from each of the three nationwide credit reporting agencies, Experian, Equifax, and Trans Union. You can engage in a free form of credit monitoring by requesting one of your three reports every four months. By staggering your request, you can check for errors regularly and identify potential problems in your credit report before you lose out on a loan or home purchase. Currently, these reports are available to residents of most western states. By September 2005, all Americans will have free access to their credit report. 9. Enroll all of your phone numbers in the Federal Trade Commission's Do-Not-Call Registry. The Do-Not-Call Registry http://www.donotcall.gov or 1-888-382-1222) offers a quick and effective shield against unwanted telemarketing. Be sure to enroll the numbers for your wireless phones, too. 10. File a complaint. If you believe a company has violated your privacy, contact the Federal Trade Commission, your state Attorney General, and the Better Business Bureau. Successful investigations improve privacy protections for all consumers. For more information about privacy, visit the Electronic Privacy Information Center at http://epic.org/privacy/2004tips.html. 4. INTERNET EXERCISE Go to the homepage for 1-800-Flowers at www.1800flowers.com and read about the Fresh Rewards program. How does this company's CRM program help it to track its best customers, grow its business and increase customer loyalty? Fresh Rewards is a three tier CRM program that rewards loyal customers with savings, a preview of new bouquets & gifts, free or reduced shipping and access to special events. Customers who join are more likely to give flowers as gifts for special events. Knowing the shopping behavior of these customers can help to identify popular merchandise, increase repeat purchases and more closely forecast demand. ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1. What is a Customer Relationship Management (CRM) program? Describe one CRM that you have participated in as a customer. Customer relationship management (CRM) is a business philosophy and a set of strategies, programs, and systems that focuses on identifying and building loyalty with a retailer's most value customers. CRM is based on the philosophy that retailers can increase profitability by building relationships with their better customers. Thus, CRM involves attention to two important aspects: (1) building customer loyalty, and (2) increasing profitability through better customer relationships. In terms of building customer loyalty, the CRM process involves the collection, management, and analysis of customer data to identify target customers and the development of programs to increase value for these targeted customers. In terms of increasing profitability, the CRM process involves the analysis of profitability at the level of each customer segment and then developing programs to increase the loyalty of the most profitable customers, while concurrently developing tactics to deal with the unprofitable customers. Effective implementation of CRM requires close coordination of activities by different functions within a retailer's organization. Students should describe a CRM that they currently use. 2. Why do retailers want to determine the lifetime value of their customers? How does past customer behavior help retailers anticipate future customer retention? Retailers have realized that it costs significantly more to sell products and services to new customers than existing customers and that small increases in customer retention can lead to dramatic increases in profits. Thus, it costs the retailer less to focus on customer retention, i.e., building stronger relationships with existing customers, than to focus on customer acquisition, i.e., attracting new customers through a variety of marketing communications efforts. For every retailer, there may be some customers who are very loyal and frequent shoppers, while others may be occasional shoppers and yet others may cost the retailer more to service than what they bring in for the retailer. Given these characteristics of customers and their different impacts on the retailer's profitability, the retailer needs to identify not only the various segments but also their contribution to the retailer's profitability. Customer lifetime value (LTV) is one measure of the expected contribution of the customer through his or her entire relationship with the retailer to the latter's profits. It provides retailers the measure by which they can identify their best customers in terms of profitability. Moreover, based on the LTV measures, retailers can also develop programs to retain their best customers, convert goods customers into better customers, and deal with unprofitable customers so that the costs of servicing those customers does not adversely affect profitability. To estimate LTV, retailers use past behaviors to forecast future purchases. 3. Why do some customers have a low or negative LTV value? What approach can retailers take with these customers to minimize their impact on the bottom line? Customers with the lowest LTV can cost the company money. They often demand a lot of attention but do not buy much from the retailer, or they buy a lot of merchandise on sale and abuse return privileges. They sometimes are problem customers—complaining about the firm to others. 4. Why do customers have privacy concerns about frequent shopper programs that supermarkets offer, and what can supermarkets do to minimize these concerns? Frequent shopper programs often collect a customer's descriptive information when they sign up for a frequent shopper card. When customers use the card at the supermarket, the firm can associate the transaction information with the descriptive information to identify customers and develop various strategies, including promotions targeted specifically to those customers. These data and analysis help retailers make a wide range of strategic decisions, including store location and merchandising. Some customers may be particularly disconcerted by the fact that the retailer not only knows who they are but what they buy during each visit. Specifically, their privacy concerns may come from the perception that they have little control over their personal information. Besides, they may not know or be able to control how retailers use such information or whether the retailer would share this information with other parties. Moreover, customers may be wary about who would safeguard their interest if the information is used by parties that the customer does not even know or with whom the customer does not want to build a relationship. In many cases, the most important benefits of the frequent shopper program for supermarkets is the information needed to make better decisions at the corporate and store levels, such as store location, assessing traffic in various departments, merchandising, and inventory management. For all these decisions, specific descriptive customer information may not be needed. As such, supermarkets could educate their customers about how their transaction data is being used for enhancing customer service and assure them that descriptive information will not be used without the customer's prior consent. Moreover, the supermarket could develop privacy policies that limit sharing and use of data by third-parties without the customer's explicit consent. In general, supermarkets can reduce the privacy concerns of their customers by: (1) giving them more control over their personal data by offering choices to opt-out of various levels of participation in the program and in the use of information, (2) giving them more information about how their data is being used, and (3) limiting access to the information without the customer's explicit consent. 5. Why are most frequent-shopper programs ineffective in terms of building loyalty? What can be done to make them more effective? Most frequent-shopper programs are ineffective because consumers don’t perceive much difference between programs from competing retailers. Most frequent-shopper programs offer price discounts to customers that are available to all customers that register for the program. There is no differentiation for high CLV customers. In addition, for most retailers, there is nothing unique about their programs, and because of the high visibility of the programs, they are easily duplicated. Finally, frequent shopping programs are difficult to adjust or revise. To make frequent shopping programs more effective, retailers can 1) create tiered rewards to differentiate the high CLV customers, 2) treat frequent shoppers as VIPs, 3) incorporate charitable activities, 4) offer choices, 5) reward all transactions, and 6) make the program transparent and simple. 6. Which of the following types of retailers do you think would benefit most from instituting CRM: (a) supermarkets, (b) banks, (c) automobile dealers, or (d) consumer electronic retailers? Why? All of the types of retailers would benefit from instituting CRM. However, for some the benefits of CRM may be far greater than others. Supermarkets may benefit from some aspects of CRM, such as frequent shopper cards and targeted promotions, especially if there is a strong competitor in the same trading area. However, in the absence of a strong competitor in the neighborhood, supermarkets only need to ensure that their assortment, prices, and services are satisfactory to the residents in the area. Banks may benefit much more than other retailers. Banking as a service could be costly, especially if customers do not have large balances with the bank. Banks could carefully analyze their customer base, and devise various types of accounts geared to the needs of the customer segments. The programs so designed would also ensure that banks are able to match the segment profitability with its own costs. For example, those carrying large balances could be offered various additional services, such as free checking and free travelers' checks, while those maintaining low balances could be charged extra fees for various transactions and services. Many banks already do this. Automobile dealers benefit from CRM, especially since automobile servicing at the dealership is a highly profitable business. The dealer’s goals should not simply be to sell a car to a customer, but also ensure that the customer brings the car back to the dealership every time some service is needed. For this, they would need to devise programs that would enhance dealer repair services as well as special targeted promotions that would encourage customers to use the dealer’s repair service not only more often, but also beyond the warranty period. Consumer electronics dealers could benefit from CRM due to the tremendous opportunities for add-on selling. For example, a customer buying a new TV may also be in the market for a new DVD player and one buying a stereo system may need speaker wires. These dealers could target special promotions to attract these customers back to the store. Moreover, they could develop programs wherein the best customers get more personalized sales associate attention with advice and service. In general, while all retailers benefit from CRM, banks are better positioned than others to take advantage of the benefits from CRM programs. For one, these firms are much larger than the others being compared and are better placed to make the necessary investments in data warehousing and analysis. In addition, there are very few tangible factors for these firms – everything is a service and thus, subject to more variations in quality as well as customer satisfaction. A strong CRM program reduces some of these variations by identifying the types and quality of services to be provided to the various segments of profitable customers. 7. Develop a CRM program for a local store that sells apparel and gifts with your college’s or university's logo. What type of information would you collect about your customers, and how would you use this information to increase the sales and profits of the store? The various activities in the CRM program include: (1) collecting customer data, (2) analyzing data and identifying target customers, (3) developing CRM programs, and (4) implementing CRM programs. The focus here on collecting and using information addresses the various activities involved in the CRM program. Collecting Information. The local store could obtain data through various sources to build a comprehensive database. First, it could make some mutually satisfactory arrangement with the college/university and obtain the names and addresses of current students, faculty and staff as well as the college/university's alumni. Second, it could use transaction data from all identified customers who have visited the store in the past, as well as those who have bought logo apparel. Finally, it should implement a system whereby all customers could be identified. For a local store, this last step may involve simply asking for the customer's phone number as an identifier each time a purchase is made. After matching all sources of information in the database and deleting redundant or repetitive entries, the information collected would have the following features: (1) it would show a history of purchases made by the customer, including whether the customer has bought logo apparel in the past, the price paid, and whether or not the customer paid a sale or promotion price for the product; (2) it would have a record of all interactions with the store, including the timing of the transactions (e.g., during the college football season, etc.); (3) it would also be grouped according to customer preferences, such as the types of apparel sought, sizes, etc. ; (4) it would have descriptive information, at least in terms of the contact information, and; (5) it would record the customer responses to marketing activities, such as mailing, special event promotions, alumni discounts, etc. Uses of Information. The store could then use the information to segment customers according to their contribution to store sales and profitability. LTV analysis could be performed to segment customers according to their contributions to store revenues and profitability. These segments could then be matched to the basic descriptive information as well as transaction information. A number of questions could be asked, including: (1) do current college students buy more logo apparel? (2) when do alumni buy most from the store?, etc. A number of different programs could now be developed based on the answers to various data mining questions. The store could develop special event promotions during specific sports seasons. It could offer various linked deals, such as buying a baseball cap along with a rugby shirt, or various special services, including ordering over the phone, especially for the alumni who may be living beyond the local trading area. In addition, it could attempt to enhance customer loyalty through targeted mailings, in-store services, and sponsorship of events most valued by students and alumni, such as sports, victory parties, and homecoming or family weekends. 8. What are the different approaches retailers can use to identify customers by their transactions? What are the advantages and disadvantages of each approach? There are three approaches that retailers can use to identify customers by their transactions. They can: (1) ask customers for the identifying information, (2) offer frequent shopper programs, and (3) connect Internet purchasing data with stores. Advantages Disadvantages Asking Customers 1. Customers do not have to carry a card. 2. The information is simple and easy to provide, collect and record. 1. Customers may be reluctant to provide information and feel that their privacy is violated. 2. Sales associates might forget to ask or decide not to spend time getting and recording information during a busy period. Offering a Frequent Shopper Programs 1. Transaction information could be better linked to descriptive customer information. 2. Rewards offered would motivate customers to use the card every time they purchase. 3. Rewards may motivate customers to make more visits and purchase more from the retailer. 1. Customers already carry too many cards and may not want to carry another one. 2. Customers may forget to bring the card or decide not to use it if they are in a hurry. Connecting Internet Purchasing Data with Stores 1. Information about customers can be obtained unobtrusively. 1. Customers may not feel they have knowledge of use or control over their private information. 9. A CRM program focuses on building relationships with a retailer's better customers. Some customers who do not receive the same benefits as the retailer's best customers may be upset because they are treated differently. What can retailers do to minimize this negative reaction? On one hand, retailers may feel that the minimum negative reaction from customers would be to not patronize the retailer again. If this segment of customers is the one most costly to serve and the least profitable to the retailer, the unprofitable customers are weeded out anyway. However, the problem is compounded during two likely cases: (1) the customers are somewhat profitable but are not yet the retailer's best customers, and (2) when customers spread their negative reactions to others by word-of-mouth. In the first case, the retailer wants to build a better relationship with the customers and hence negative reactions may jeopardize the future of the relationship. In the second case, the retailer's practices may turn away more prospects and existing customers. Retailers can minimize these negative reactions a number of different ways. The first is to be very unobtrusive in offering various benefits. The firm could handle the special treatment of its best customers so others do not see the benefits and services offered to them. Programs, such as special sale events, assignment of sales associates, more reward points for preferred customers, and other direct benefits may be less noticeable to others and could be used more than others. For example, one frequent shopper card member may not know what reward points another is accruing for purchases. Another way is the exact opposite: publicize the differences in benefits more clearly. Customers then make their own decision as to the level and quality of interactions they want with the retailer. For example, some banks clearly promote various types of checking and savings accounts customers could enroll in as well as the interest rates for various levels of balances. Customers can then decide, for example, if they want an account with higher minimum balances and free checking or lower minimum balances and a charge for checks above a low minimum limit per month. Retailers typically have little control over word-of-mouth negative opinions. The best strategy would be to carefully monitor the implementation of benefits and services so that negative reactions are kept to a minimum. Moreover, retailers could actively encourage and publicize positive word-of-mouth, such as customer testimonials and referrals. 10. Think of one of your favorite places to shop. How does this retailer create customer loyalty and satisfaction, encourage repeat visits, establish an emotional bond between the customer and the retailer, and provide personal attention and memorable experiences to its “best customers”? Retailers have any number of practices in place to create these positive relationships with customers. One effort toward building these relationships is establishing a truly valued frequent shopper program. A truly valued program is one the retailer’s consumers understand and appreciate as providing them direct benefits through an easily understood program. Many of the frequent shopper programs now offer tiered benefits, providing higher levels of benefits to the retailer’s “best customers”. Retailers can also create customer satisfaction and loyalty be providing “best customers” with special treatment. These retailers make their customers comfortable and often go above and beyond typical customer service levels to show these customers how valued they are from the retailer’s perspective. An example is an exclusive hair salon providing full service and a full staff at no extra charge on a Sunday afternoon the salon is normally closed to provide hair, manicure and makeup services for a “best shopper” bride and her attendants on her wedding day. Personalization is another technique retailers use to foster emotional connections and loyalty with customers. One-to-one relationships, like a personal shopper service, allow the retailer to connect with each customer’s needs and wants directly. Internet retailers often use this technique providing purchase suggestions and tailored merchandise information each time a “best shopper” logs onto the retailer’s web site. Finally, retailers create communities of shoppers to foster connections and loyal relationships. The pet store sponsoring a “Happy Hour” for customers and their furry friends to socialize with one another, the ski shop offering lessons, a bulletin board posting local races, and a blog about local ski conditions and the toy store sponsoring playground activities at the local elementary school are all examples of retailers cultivating a relationship with and among their customers that goes beyond the merchandise or service purchase relationship. Solution Manual for Retailing Management Michael Levy, Barton A. Weitz, Dhruv Grewal 9780078028991
Download
Close
Close
