Chapter 11 Customer Relationship Management Mc GrawHillIrwin Retailing

Chapter 11 Customer Relationship Management Mc. Graw-Hill/Irwin Retailing Management, 6/e Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

2 Retailing Strategy Retail Market Strategy Financial Strategy Site Location Customer Relationship Management Retail Locations Organizational Structure and HR Management Information Systems

3 Customer Relationship Management • A business philosophy and set of strategies, programs, and systems that focus on identifying and building loyalty with a retailer’s most valuable customers. • What is loyalty? Is it the same thing as liking a retailer or frequently patronizing a retailer?

4 Customer Loyalty • Committed to purchasing merchandise and services from a retailer • Resist efforts of competitors to attract the loyal customer • Emotional attachment to retailer – Personal attention – Memorable positive experiences – Brand building communications programs

Can Offering Discounts Achieve Customer Loyalty? 5 No! Retail strategies like these can be copied by competitors These strategies encourage customers to be always looking for the best deal rather than developing a relationship with a retailer Mc. Graw-Hill Companies, Inc. /Gary He, photographer

6 CRM Process

7 Information About Each Customer in the Database • History of purchases • Purchase date, price paid, SKUs bought, whether or not the purchase was stimulated by a promotion • Customer contacts by retailer (touch points) --visits to web site, inquires to call center, direct mail sent to customer • Customer preferences • Descriptive information about customer • Customer’s responses to marketing activities

Approaches for Collecting Customer Information • Need to connection contacts with a specific customer identifier • Ask for identifying information – Telephone number, name and address • Encourage use of frequent shopper cards • Link checking account number and/or third party credit cards to customer 8

9 Privacy Concerns • Control over Collection • Do customers know what information is being collected? • Do customers feel they can decide on the amount and type of information collected by retailers? • Control over Use • Do customers know how the information will be used by the retailer? • Will the retailer share the information with third parties? Steve Cole/Getty Images

10 Frequent Shopper Cards Card is often squeezed out of wallet Customers forget to bring it to the store Might not even show it if in a hurry (c) image 100/Punch. Stock

11 Heighten Concerns When Using Electronic Channel Information collected without the awareness of customers Collecting click stream data using cookies Similar to an invisible person videotaping a customer as they walk through a store Stockbyte/Punchstock Images

Customer’s Decision to Offer Information Discounts Special Treatment Personal Attention 12 Disclosure of Information Unwanted Sales Contacts Balance benefits and risks

13 Consumer Protection Differences • United States • Limited protection in specific areas – – Credit reporting Video rentals Banking Medical records European Union • Information only can only be collected for specific purposes • Purpose must be disclosed to customer • Information can only be used for specific purpose • Information can not be exported to countries with less stringent regulations

14 FTC Guideline for Fair Information Practices Notice and awareness – comprehensive statement about information storage, manipulation, and dissemination Choice/consent – Opt-in and opt-out options Access/participation – Customer able to confirm accuracy Integrity/security – Controls for theft and tampering Enforcement/redress – Mechanism to insure compliance

15 J. Crew Security and Privacy Policy

16 Analyzing Customer Data Mining – technique used to identify patterns in data. Market Basket Analysis Identifying Market Segments Identifying Best Customers Ryan Mc. Vay/Getty Images

17 Market Basket Analysis Data analysis focusing on the composition of the customer’s market basket – what items are bought during a single shopping occasion Uses: Burke/Triolo Productions/Getty Images -Adjacencies for displaying merchandise -Joint promotions

18 Market Basket Analysis Taught Wal-Mart to Change! Product Bananas Kleenex Measuring spoons Flashlights costumes Little Debbie snack cakes Bug spray Placed Near cornflakes, produce paper goods, cold medicine housewares, Crisco shortening hardware, Halloween coffee hunting gear

19 Identifying Best Customers • Estimating Lifetime Value • Based on assumptions that the customer’s future purchase behaviors will be the same as they have been in the past • Classifying Customers by recency, frequency, and monetary value of purchases (RFM Analysis) (c) Brand X Pictures/Punch. Stock

Which Customer Probably Has the Greatest Lifetime Value Purchases Over Last 10 Weeks 20

21 Customer Pyramid Platinum Best Most loyal Least price sensitive

22 Customer Pyramid Gold Next best Not as loyal

23 Customer Pyramid Iron Doesn’t deserve much attention

24 Customer Pyramid Lead Demands attention May have negative value

25 RFM Analysis

26 RFM Target Strategies

27 Illustration of RFM Application • A catalog retailer is deciding which group of customers to send a catalog. . Based on experience and an RFM analysis of customer database: • Average order size for customers in cell $40 • Contribution margin – 50% • Response rate – 5% • Cost of catalog and mailing -$. 75

28 Illustration of RFM Application • A catalog retailer is deciding which group of customers to send a catalog. . Based on experience and an RFM analysis of customer database: • Average order size for customers in cell - $40 • Contribution margin – 50% • Response rate – 5% • Cost of catalog and mailing -$. 75 Will the retailer make a profit mailing to this RFM segment? $20. 00 contribution x. 05 response rate - $. 75 cost = $. 25 profit per catalog mailed

29 CRM Programs Retailing Best Customers Converting Good Customers to Best Customers Getting Rid of Unprofitable Customers

30 Customer Retention Programs • Frequent Shopper Programs • Special Customer Services • Personalization 1 -to 1 Retailing • Community Royalty-Free/CORBIS

Elements in Effective Frequent Shopper Programs • Tier Based on Customer Value • Offer Choices of Rewards – Non-monetary incentives • Reward all Transactions • Transparent and Simple 31

Issues with Effective Frequent Shopper Programs • • Expense Difficulty in Making Changes Impact on Loyalty Questionable Easily Duplicated – Difficult to Gain Competitive Advantage – Need to offer “invisible” benefits 32

33 Personalization Hello, Barton Weitz

34 Dealing with Unprofitable Customers Offer less approaches for dealing with these customers Charge customers for extra services demanded Don Farrall/Getty Images

35 Implementing CRM Programs Need systems, databases Close coordination between departments – marketing, MIS, store operations, HR Shift in orientation Product Centric Customer Centric