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Who You Know, Or Who Knows You!

By
  • Claudia Imhoff, Jonathan G. Geiger, Lisa Loftis
Published
  • February 01 2005, 1:00am EST
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Influence Value in CRM Strategies

Claudia wishes to thank Lisa Loftis and Jonathan Geiger for authoring this column.

In today's competitive environment, customers have a level of sophistication that requires the organizations that they do business with to truly know them. Frequently, customers demand that you not only know them, but that you also understand a bigger picture: the associations and relationships that these customers have with each other.

One type of relationship that exists in a CRM environment is not obvious but can be quite important. This is a C-to-C, or customer-to-customer relationship. Households provide a good example of C-to-C relationships. Households can be defined as "economic decision-making units" and can consist of corporations or individuals. The first step in using C-to-C relationships is to understand that they exist. Financial services organizations utilize items such as joint account ownership and shared mailing address to identify household relationships between individuals. Next, the organization must understand how these types of relationships can influence the behavior of its customers. Households purchasing financial services typically function as a decision-making unit, which means that key financial decisions for the household are likely to involve multiple parties. Last, the organization must make a determination as to how it will incorporate these relationships into its customer interactions. Banks might decide to treat adult members of a household as equal partners, sending mailings to the household rather than to each member and providing all parties with access to all appropriate bank products and service options.

This household example does more than describe C-to-C relationships. It also serves to introduce a very important relationship concept: influence value. Influence value is the understanding of how relationships within the customer base can affect both the customer's behavior and the organization's treatment of that customer. By choosing single household mailings and equal service status, the bank illustrates a clear incorporation of influence value into the customer contact interactions.

Influence Value in the Contemporary Household

To get the true measure of influence value, let's look more closely at the household. While many organizations view households as customers and include these groups in an overall definition of customer, it is actually the C-to-C relationships between the members of this group that produce the influence value. The concept of household relationship is not static; it is evolving to keep pace with our changing society. To be included in a traditional household, the members were expected to have the same last name and the same address. Closer examination of influence value is causing CRM organizations to adopt a contemporary household view that eliminates these name-and-address limitations and looks instead at true economic links. For example, a contemporary household might include not only the immediate family members, but also the elderly parents of the woman in the household. These elderly parents may not live at the same physical address nor share the same last name as the traditional household members. However, the value of understanding contemporary household relationships like this one is clearly illustrated in the following true example.

The marketing department of a large regional U.S. bank performed an analysis of its customer base in order to understand the impact of raising service fees for customers in lower profitability categories. The bank first ran a traditional household analysis and categorized the resulting households according to value. The bank then decided to take a closer look at the households that fell into the lower profit categories to be sure it understood the influence value of these households before raising fees. One of the techniques it employed in this additional analysis was to run matching software that looked not for name or address matches, but instead for links to common accounts and links to common phone numbers.

This analysis yielded an interesting and surprising result. One of the households (we'll call them the Smiths) that fell into the lower profit category matched on the account link to a different household (Mr. and Mrs. Johnson) in the highest profit category. Further investigation indicated that the Smith household did not use the bank as its primary financial institution; they had only a low margin, high volume checking account that was used to run the household expenses. However, Mrs. Smith also had non-ownership privileges on a highly profitable (multimillion-dollar) investment account owned by her retired parents, the Johnsons. Because Mrs. Smith's parents did not live with her and did not share the same last name, this relationship was not identified in the traditional household analysis. If the bank had stopped after the first step, it would have completely missed the relationship that existed between Mrs. Smith and her parents. Because of this contemporary household relationship (not at all unusual in today's society), the Smith household has a true influence value that far exceeds the value of the accounts they actually own. Any attempt to de-market the Smiths could result in the loss of the Johnsons' highly profitable account as well.

While the contemporary household described is clearly different than a traditional household, there is much potential for influence between the parties in this non-traditional household relationship. Thus, it really does behoove an organization to understand both traditional and contemporary relationships between its customers.

Influence Value in the Extended Household

Another concept of increasing importance is the extended household. Sometimes called the social network or extended customer, this relationship goes beyond family relationships to look at other types of links. The most common type of extended relationship is one that exists between small- to medium-sized businesses and the individuals who own these companies.

While there is no question that the small business market segment is a high potential growth area, historic treatment of these small businesses tells another story. These small businesses are not large enough to be included in the corporate or business customer base, and they are different enough to cause an awkward fit when grouped with the retail or individual customer base. The banking industry illustrates this problem well; businesses that have less than $5 to $10 million in revenue do not generate enough income to be handled by the corporate banking organization; instead, these smaller businesses are typically handled in the retail bank. This can cause problems because the systems built to house retail customer information do not always provide the structures necessary to store more complex business customer information. Also, business policies designed to handle simple retail customer issues and relationships do not always work on more complex business customer situations. The following example from the telecommunications industry highlights the type of real problems that can arise when an organization does not understand the extended relationships of its customer base, particularly those involving small businesses.

A telecommunications company has a large established wireless (cellular and paging services) business line. It also owns a cable company that was recently purchased and now operates as a second business line. Because this merging of the cable and cellular companies was highly publicized, most customers are aware that the once independent companies are now one entity. Shortly after the merger, a cable customer inadvertently skipped a bill payment. The cable organization let the allotted number of days pass, and then sent the customer their standard "pay the bill or your services will be terminated" collections letter. Under normal circumstances, use of the standard collections policy is appropriate when a customer fails to pay the bill. However, this particular residential (retail) cable customer also happened to own a small construction business that purchased (from the wireless business line) cell phones and calling plans for each of its 25 mobile employees. Although this wireless relationship was an extremely profitable one, the company failed to recognize the link between the profitable small business owner and the individual cable customer. Had this link been understood, the company may have sent a milder letter or possibly tried a reminder phone call instead. They did none of these things and, in this case, the mistake was costly. The business owner was so irate over the company's failure to recognize his value and treat him accordingly that he moved his entire business account to another cellular provider.

Customers' True Value

There are multiple solutions to assist in the identification of this type of relationship. Popular providers of information on the world's businesses such as D&B, Claritas and Acxiom have expanded the type of information they provide to include companies in this segment. Companies interested in understanding the extended relationships of their customers can match their retail customer names against the small business owner names in third-party files such as the one D&B provides. This process enables them to look at customers who already own individual or retail products to determine if these customers are also the owners of small businesses. Matches here highlight the overall relationship with the customer and the potential influence value of the customer. They can allow a company to tailor business processes to fit the true value of the customer and prevent a situation such as the one described here. Also, if the small business owners in these files have individual or retail products with the company but obtain their business products elsewhere, the potential for high margin cross sales is significant and likely. Either way, the understanding of these extended household relationships is a significant component in any CRM strategy. 

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