Russell S. Winer Haas School of Business University of California at Berkeley
Introduction The essence of the information technology revolution and, in particular, the World Wide Web is the opportunity to build better relationships with customers than has been previously possible in the offline world. By combining the abilities to respond directly to customer requests and to provide the customer with a highly interactive, customized experience, companies have a greater ability today to establish, nurture, and sustain long-term customer relationships than ever before. The ultimate goal is to transform these relationships into greater profitability by increasing repeat purchase rates and reducing customer acquisition costs. Indeed, this revolution in customer relationship management or CRM1 as it is called, has been referred to as the new “mantra” of marketing.2 Companies like Siebel, E.piphany, Oracle, Broadvision, Net Perceptions, Kana and others have filled this CRM space with products that do everything from track customer behavior on the Web to predicting their future moves to sending direct e-mail communications. This has created a worldwide market for CRM products and services of $34 billion in 1999 and which is forecasted by IDC to grow to $125 billion by 2004.3 The need to better understand customer behavior and focus on those customers who can deliver long-term profits has changed how marketers view the world. Traditionally, marketers have been trained to acquire customers, either new ones who have not bought the product category before or those who are currently competitors’ customers. This has required heavy doses of mass advertising and price-oriented promotions to customers and channel members. Today, the tone of the conversation has changed from customer acquisition to retention. This requires a different mindset and a
different and new set of tools. A good thought experiment for an executive audience is to ask them how much they spend and/or focus on acquisition versus retention activities. While it is difficult to perfectly distinguish the two activities from each other, the answer is usually that acquisition dominates retention. The impetus for this interest in CRM came from Reichheld4 where he showed the dramatic increase in profits from small increases in customer retention rates. For example, his studies showed that as little as a 5% increase in retention had impacts as high as 95% on the net present value delivered by customers (advertising agencies) with a low of 35% (computer software). Other studies done by consultants such as McKinsey have shown that repeat customers generate over twice as much gross income than new customers. The considerable improvements in technology and innovation in CRMrelated products have made it much easier to deliver on the promise of greater profitability from reduced customer “churn.” For example, Exhibit 1 shows the results from a 1999 McKinsey study on the impact of improvements in a number of customer-based metrics on the value of Internet companies. The metrics are divided into three categories: customer attraction, customer conversion, and customer retention. As can be seen, the greatest leverage comes from investments in retention. If revenues from repeat customers, the percentage of customers who repeat purchase, and the customer churn rate each improves by 10%, the company value was found to increase (theoretically) by 5.8%, 9.5%, and 6.7% respectively. A problem is that CRM means different things to different people. For some, CRM means direct e-mails. For others, it is mass customization or developing products that fit individual customers’ needs. For IT consultants, CRM translates into complicated
technical jargon related to terms like OLAP (on-line analytical processing) and CICs (customer interaction centers). A major purpose of this paper...