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Building Virtual Relationships With Customers

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January/February 2001 - Volume 80, Number 2

by Robert Dawson

So the heyday of the Internet economy is over…or is it? Are there still ways to make effective use of the Internet and the technologies surrounding it? Companies that just a year ago, seemed to defy gravity—with stock market valuations that bore no relation to future potential earnings—now find themselves struggling to capture and retain their dwindling customer base. Coincidentally, executives had conveniently downplayed traditional measures of profitability and economic value. Instead, they emphasized nontraditional definitions of revenue, such as the numbers of customers or even more suspicious, numbers that might correlate with revenue...someday! So how the Internet plays a part in your business today has drastically changed from just a year ago. Companies are going back to solid business principals that focus on customer loyalty and customer retention. The question now is: how can the Internet help develop a virtual relationship with your customers in today's seemingly dwindling Internet economy?

What is a Virtual Relationship?
As defined by Merriam-Webster's Dictionary, virtual is "of, relating to, or being hypothetical, an existence that is inferred from indirect evidence." In essence, a virtual relationship is an indirect or inferred relationship that requires little or no direct intervention. As such, the Internet has provided the perfect means in which to develop this type of relationship with customers. Companies can take advantage of the dynamic nature of the Internet to customize their customers' experience online, creating a one-to-one marketing relationship in the process. The development of this one-to-one relationship is also known as Customer Relationship Management, or CRM. Although CRM has been used for many years, the flexibility of the Internet has made CRM a business principle that can be achieved by large and small companies alike.

With the decreasing costs of Internet technologies, companies are able to offer customized relationships, greater variety of products, and lower prices. American Airlines gate agents know when you are a valuable customer and upgrade you to first class. Auto dealers remind you when your car is due for a service. Your children's favorite restaurant sends them birthday cards offering them a free sundae on their next visit. Hertz takes your reservation on a dedicated line, then presents you with a rental car complete with your name in lights. These companies are applying the elements of CRM to marketing, to be used to refine information about current and potential customers and to respond to their needs.

Why is CRM Important?
CRM is important because of today's fast-changing competitive business environment. With the globalization of the Internet, competition can now come as easily from around the world as from around the corner. The power of choice has shifted to the customers as never before, causing companies to decide whether to compete on price or on customer relationships created through value proposition. Today, quality and features are no longer optional, and many industries have little or no product differentiation, and therefore, no competitive advantage. CRM is all about developing a better understanding of customer needs, and responding to those needs with targeted marketing messages and offerings.

CRM should not be taken lightly, and it should involve a holistic approach to business. CRM can be the essential foundation to corporate survival: it is not one system, but strategies brought together to better serve the customers. For many companies, the stumbling block in developing a sound CRM strategy occurs when a company attempts to satisfy its board of directors instead of its customers. For example, many financial institutions often declare that their services are customer-driven, yet many continue to base their marketing on product lines, rather than on a solid understanding of what their customers want. Most institutions have some sort of marketing information on their customers, and many are using it for direct mail purposes. But only a few are building a competitive advantage by differentiating the product offerings that have been developed based on customer needs, thus creating a long-term customer value. The influx of lower-rated credit cards finding their way into mailboxes may make financial sense in the beginning, but their undifferentiated approach and mass-market coverage are unlikely to build profitable and sustainable customer relationships. The core of a CRM strategy should be founded on the marketing concept and the customers. Marketing ideas and customer-centric thinking should form the foundation of your CRM strategy, which in turn, can be laid out as a set of strategic goals and objectives.

Steps to Building an Effective CRM Strategy
There are many different approaches to implementing Customer Relationship Management, but the core is to identify which customers you should target to build one-to-one relationships. This is because not all customers will provide high potential returns. The key to relationship management, virtual or not, is for the company to respond to the customers as distinct individuals with a distinct set of needs; this concept applies to all aspects of the customer's life cycle. The steps to developing the basis of an effective CRM strategy are:

Step 1. Identify who your customers are both offline and online.
Step 2. Differentiate customers within your customer base; who will be more profitable and who will have greater lifetime value?
Step 3. Interact with the customers who have been identified as having long-term value to your organization.
Step 4. Customize products and services to increase the share of a customer and strengthen the customer relationships.

Step 1: Identify Your Customers
Without knowing the identity of your customers, it is impossible to start a one-to-one relationship. This is where capturing customers' data from your Web site comes into play. By developing and capturing customer-specific data, your Web site serves as the first level of your virtual relationship. The identities of customers may be obtained by implementing marketing programs to drive relevant traffic to your Web site, supplemented with targeted marketing messages and branding image of the company. By developing a value proposition for your customers online (a reason for them to be there), you can effectively begin to profile customer-centric data through your Web site. Some companies have successfully used club rewards integrated with their Web sites to better understand their customer base. The true benefit of the Internet is the ability to track and profile the effectiveness of any online marketing program in real-time. This enables companies to exploit additional channels for marketing and for obtaining customer information. Naturally, whichever way the customer identity is obtained, the ultimate objective is to move from a mass marketing approach to a one-to-one relationship.

Step 2: Differentiate Your Customers
The next stage in implementation of a CRM strategy is to differentiate your customer base. This is because each customer will have a different value to your organization, some more valuable than others. Companies can measure the lifetime value of that customer, or the profit margin over time, to assess the value of a customer.

After measuring the lifetime value of your customer base, it is then necessary to differentiate and rank the customer base into groups that represent similar value to the organization. These groups, in turn, are given distinctive attributes and require different marketing messages. By differentiating each group, you can then begin to interact with each customer group differently. It is important to let your most valuable customers know that they are the most valuable and then start to treat them differently in a way that is clearly discernable to them. Your company should develop new products or customize current products based on their needs and develop online communication channels that go a step beyond the traditional role.

It is also important to develop a strategy for how to deal with the less profitable customers. A number of companies have started to charge the less profitable customers for products or services, to a point where they either leave the institution or take their business and costs elsewhere, or become profitable enough to keep. Developing online customer interactions this way could be one of the hardest aspects of developing a CRM strategy. Traditionally, most companies operate a one-way communication process with customers by not effectively leveraging all communication channels available or ignoring the online channels that may exist. This one-way process needs to change and become a two-way dialogue.

Step 3: Interact with Your Customers
During each customer interaction, make sure you are clear about why you are making contact. It should be convenient to the customer, and it should bring them some benefit. When asking for information, only ask for the information once, do not ask for extraneous information, and do not ask for information that can be obtained elsewhere. A long online form can disrupt the one-to-one relationship process. Online interaction may occur when a company markets or sells its products on its Web site, when a customer completes an online comment form to inquire about the company's offerings or to complain.

Step 4: Customize Offerings
To meet the needs of your most profitable customers, you should customize your products, services, and online communications. However, the degree of customization should be proportional to the complexity of the customer needs. Over-engineering a solution cannot be justified, and providing too little customization will not bring enough benefit to the customer to encourage them to participate in the development of the relationship.

Implementing a CRM Strategy
Implementing one-to-one relationships across any company is a significant undertaking. It requires the backing and involvement of everyone from the chief executive to first-line employees who deal with customers daily. Hewlett-Packard has implemented a move to a one-to-one organization with the aim of being the "...most customer-oriented, technology-driven company." As with many dynamic programs, it will be a continuous process. They expect the change to take at least 5-10 years before there is any substantial benefit. Their strategy was to introduce many small and often localized initiatives around the world with at least one in every division. Some of their CRM strategies include differentiating customers and implementing customer prioritization, introducing a global account management initiative, increasing interactivity with customers through their network of Web sites, and introducing customized services, supplies, and information. Not every company initially commits to CRM concepts on this scale. Many companies start with quick wins and progress on a step-by-step basis, justifying each step separately. There are numerous benefits from making a quick start, such as: an increased level of cross-selling, potentially lower processing or transaction costs, a faster cycle time for purchases, and higher customer satisfaction ratings. As the benefits accrue, the change can then start to take place simultaneously in a number of areas.

Robert Dawson is vice president and co-founder of E-site Marketing, an Internet marketing firm that specializes in developing e-businesses strategies for the online businesses community. He can be reached at 301-986-9566 or This article is an excerpt from Dawson's presentation at the 2001 ALTA® Tech Forum in Orlando, FL.

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