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Customer Relationship Report

  • Melinda Nykamp, Carla McEachern
  • September 01 2001, 1:00am EDT
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We've frequently said that you can't have a relationship with customers unless you can create an effective value proposition. Customers will not buy into having a relationship with your firm unless they can clearly see what they will get out of it. Despite what many organizations might say, there's no point in pursuing CRM unless there is value created for the organization.

That said, it's important to revisit the CRM business cycle we introduced more than a year ago (see Figure 1). The cycle illustrates that with the appropriate understanding of customers, you can develop and customize your products and services and, ultimately, deliver increased value to customers. That continuous customer intelligence and optimized interaction cycle will then allow you to acquire "better" (i.e., more valuable) customers and retain them longer.

Figure 1: The CRM Business Cycle

This business cycle makes a lot of sense to most organizations, and many just jump right in and start customizing products, services and interactions on a relatively ad hoc basis. However, they often forget one of the critical first steps – establishing the value proposition. In this case, the result is a lack of consistent vision, voice and, most importantly, relevance from their customers' perspective. Or, perhaps even worse, they forget that a value proposition is not just limited to creating value for customers – many have not defined just how CRM will create tangible value for the organization. In this case, they often lack the ability to show measurable results or a reasonable return on investment. In order to avoid this dilemma, be sure that you define both sides of the value proposition.

Defining the Value Proposition for Your Organization

If it's worth implementing, CRM ought to bring tangible value to your organization in three key areas:

  • Increased revenues
  • Decreased costs
  • Increased competitive differentiation

Within these three categories, however, there are many ways of thinking about what will drive value for the organization. In developing your business case for CRM, you should be able to develop a financial model that includes the most relevant of these components (see Figure 2).

Figure 2: Key Areas of Value in a CRM Implementation

Defining the Value Proposition for Customers

Your value proposition starts with the product or service you have to offer, but it certainly doesn't end there – unless your product is truly a commodity. Frankly speaking, if it is, then CRM probably doesn't make a lot of sense for you. While you can come up with all kinds of ways to add value for customers, the value you can deliver to the organization is likely very limited. For example, if your product is shampoo with only a $.30 margin, and most customers buy only six times per year, it's hard to imagine how you can cost-effectively increase their value (i.e., get them to buy more shampoo) by fostering a relationship.

If you have a non-commodity product or service, then there are many ways that you can create a value proposition that has meaning for your customers. However, there are two caveats:

  1. Don't look to add value for all customers. Rather look at how you can cost- effectively craft a value proposition that makes the most sense for each customer segment or sub-segment. This usually means starting with your best or highest-value customers in each segment and then looking at those customers with the potential to be high-value. You may not want to create a differentiated value proposition for those that are unprofitable or only marginally profitable, unless you can demonstrate the impact in terms of increased revenues or decreased costs.
  2. We're talking about value as your customers perceive it – what you think is valuable may be meaningless to your customers. You first have to ask them about their needs, and the only way to do this is with a combination of qualitative and quantitative research. Remember that your customers' perceptions of value will differ greatly by segment, so you'll want to be sure that your research is set up to representatively sample your various customer groups.

So, what will be important to customers in creating your value proposition? Figure 3 is just a sample of the categories you might want to consider beyond the traditional four P's (product, price, place and promotion) which companies usually focus on for their value propositions.

Figure 3: Categories to Consider for Value Proposition

If you take the time up front to define the value proposition for both your customers and your firm, you are much more likely to meet your CRM goals and demonstrate a tangible return on investment.

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