Stop talking about technology

By Staffan Elinder

Staffan Elinder is the founder of DM Konsult, the leading Scandinavian CRM consultant firm. The company has today 10 senior CRM consultants handling both development and implementation of successful loyalty programmes. Being an inventor within the marketing area “database driven Relationship Marketing” Staffan has been involved in some of the most successful CRM programmes in Scandinavia; i e Original Levis Store Club,Volvo Car, SAS Eurobonus , IKEA Family, Coop and ICA Card, SAAB Unlimited. His knowledge within loyalty programmes is presented in the book “Customer Clubs” and plenty of articles in business journals. Staffan is a frequently used and rewarded seminary leader both nationally and internationally. His way of turning complex marketing matters into something obviously simple, has convinced many marketing managers to become relationship marketers with astonishing results.

CRM, Customer Relationship Management, is a new concept, though, to a great extent, it deals with established truths. But suppliers of computer systems have hijacked the definition of CRM. This has skewed discussion and debate. In Staffan's view, there is a serious risk that media pressure will force companies to make expensive IT investments without having thought through what CRM is really about. He continues:

“If a company begins to think of IT as the basis of its CRM approach, and not as a technology which supports a well-thought out, long-term process, its efforts are doomed to failure”.

So what does Staffan Elinder believe CRM is about?

“I believe that a company management that is considering investing in CRM must bear the following four points in mind:

1: CRM deals with long-term relationships
CRM is about selecting a strategic direction, not about short-term attempts to maximize the effectiveness of individual units or projects. So it's certainly not about a one-year time horizon, but about the lifelong ownership of customer relationships. This makes CRM a management matter, not an IT project.

2: CRM is based on loyalty
The aim is to increase profitability by persuading current customers to place a greater proportion of their purchases with me as a supplier, and thereby increase their customer share, rather than to chase after new customers.”

Staffan goes on to quote a well-known theory: 20 per cent of your customers are responsible for 80 per cent of your sales.

“Many business people have known for years that a small proportion of their customers represent the bulk of purchases. The problem is that they don't know who their most profitable customers are. Quite simply they don't know who is doing the buying, so they don't know how often or how much.”

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NEW FOCUS. There is far too much focus on systems and technology, and too little on strategy, business development and customer development, according to Staffan Elinder of DM Konsult.

“No one really sells anything. Out in the market, there are individuals who choose.”

“Since, with a few exceptions, the majority of companies have a poor idea of who their most important customers are, they have to target their whole market to reach their customers. They are forced to use mass-communication methods, such as advertising and untargeted publicity which goes to everyone, whether they are customers or not.”

If the active and important customers, the ones who are responsible for 80 percent of sales, are often only 20 percent of the individuals canvassed, then almost 80 percent of the marketing budget has no measurable effect either on sales or profits. The consequence of this is that 80 per cent of the marketing budget is wasted – the bulk of the activities budget is spent on individuals who make absolutely no contribution to earnings! And no one should forget that those customers who do provide revenue are not automatically loyal.

Against this background, it is worth giving thought to whether the marketing resources could be better utilized if they were allocated differently. Staffan Elinder believes that every concerned executive must ask him or herself two questions:

Can I increase sales to my existing customers?
Surveys of various sectors have shown that the average customer share seldom exceeds 30 percent. This means in practice that the majority of companies actually have a growth potential with their existing customers of up to 70 percent. It is no exaggeration to say that the majority of customers – without finding a single new customer – should be able to double their sales just by increasing loyalty among their existing customers.

Which is easier, to get an additional unit of order value from a customer or from someone who has never bought from me before?
Experience has shown that it costs between five and ten times less to gain a unit of order value from a customer than from a person who has never dealt with the company before. People who already know us, and who have been satisfied with our previous service, are, naturally, easier to persuade to come back.

“It makes sense to exploit the growth potential of existing customers, since we obtain each unit of order value at less cost. It therefore makes sense to reallocate marketing resources (both money and personnel) to existing customers. When sales increase as a result of increased customer share, the company's profitability always increases. This is the opposite of what happens when growth results from increased prospecting”, says Staffan Elinder, and adds:
“CRM is about obtaining, in the most cost-effective way, the highest possible conversion figures from 1 to 2 (see the Loyalty Escalator box at the end of this article). This is a more cost-effective way of finding new, profitable customers.”

3: Effective CRM builds on knowledge of the customer

Staffan Elinder believes that successful CRM is based on three elements:

• Customer empathy
• Systems which reward genuine loyalty
• Process-controlled marketing, based on knowledge of the customer and the customer's behavior.

“Without empathy, CRM will fail. The company's ability to listen to its customers and their needs, and its willingness to understand its customers' situation, are fundamental to building long-term loyalty. Customers notice right away whether a supplier really wants a long-term relationship or whether they are just paying lip-service to the concept. Genuine loyalty stems from empathy. All other forms of loyalty are bought, not earned. That's why CRM is a matter for management: Do we really want to listen to our customers? Do we want to and will we in fact provide solutions which suit our clients?”

“If the answer to these questions is yes, then the conditions exist for the organization to adopt CRM successfully.”

Staffan is firmly of the opinion that no one really sells anything. He believes that what actually happens out in the market is that there are individuals who choose. Since companies operate in a competitive environment, customers always have a free choice, and they can and will reject suppliers who do not appeal to them. The choice will fall on the company which the individual perceives as best able to supply the solution he or she prefers. And the company's ability to provide a better solution depends on its ability to deal with the information (interests, plans and behavior) it obtains in customer meetings.

It is essential that customers identify themselves in every contact, so that we can get to know them. But how do we get customers to identify themselves? A classic approach is to set up customer clubs, with a membership card which is swiped at the cash desk when purchases are paid for. Now we have new opportunities via the Internet, where members log on using their personal codes.

Advice to newly-employed sales staff: Listen!

 “Membership often provide some form of bonus. Many people think that it is the bonus that generates loyalty, but this is not the case," Staffan Elinder points out. The bonus is the price the company pays to get its customers to identify themselves. Using the information we obtain during customer meetings, we can provide customers with solutions which are better suited to them. Since competitors do not have this information, this increases the likelihood that the customer will choose us, since we have improved our ability to provide a better solution than our competitors can. If we do this, our customers will choose us more often!”

When the company has acquired a system for registering each customer contact, it builds up a new kind of database.

“The difference is that we used to select from databases using socio-demographic criteria (e.g. gender, age, residential area, profession and income). Now we can compile new types of databases – which register and process behavior. Using this knowledge, the company can supply the next element in loyalty-building: the Reward.”

“The customer is rewarded through customized offers based on individual knowledge.”

To the customer, these offers will appear better than all others, the customer will buy again, and loyalty will be strengthened. And what are the customers being rewarded for? Well, partly for loyal behavior, and partly for identifying themselves. For Staffan, these are two different things. Most people who have set up customer clubs, for example, have not understood this, and so their bonus system never achieves any real success. Instead of increased loyalty and improved profitability, the result has been higher information processing costs and bonus payments.

“On the other hand, companies who adopt this process successfully enter a benign circle, a win-win situation!”

4: Marketing and sales must be process-orientated.
Staffan Elinder sees a clear common denominator among successful companies: they treat their marketing as processes, not as short-term selective measures.

“The process involves Acquiring – Keeping – Developing – Recycling customers. The process flows are always the same for all companies, it is the skill in handling them that separates the winners and losers. Sales Managers who are aware of this ask themselves: What do our marketing and sales processes look like? How can we improve them? How can we run them with the support of better IT?”

According to Staffan, CRM is a way of handling these processes by utilizing contacts and interaction with customers better and faster.

“The fundamental idea behind CRM is to build up a marketing system which generates more customers with high life-cycle income. The type of customer who buys more often, spends more on each buying occasion and remains faithful for a long time.”

“Once a company has a clear idea of own customer processes, and has decided to run them more effectively, you have the basis to begin the CRM work. Then, and only then, I am prepared to discuss the kind of computer support and organization required,” concludes Staffan Elinder.

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The Loyalty Escalator
(M Raphel et al)

1: No revenue
(about 80 percent of the market)

Suspects
(could be interested, but are not)

Prospects
(have shown interest)

2: Revenue
(about 20 percent of the market)

Customers
(buy sporadically)

Clients
(buy often)

Recruiters
(ambassadors, speak positively)

20 percent of your customers are responsible for 80 percent of sales. The loyalty escalator shows that the company gains all its revenue from its clients or the little group of customers we have called recruiters (clients who speak positively about the company and so recruit new customers). Activities aimed at suspects and prospects has not yet generated any revenue. Since they constitute perhaps 80 percent of the canvassed market, too high a proportion of the marketing budget is frequently used to activate individuals who are more difficult to influence.