Earning a Positive ROI on Your CRM Initiative

Les Stern

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A CRM Framework

A proper CRM program entails a closed-loop process. This closed loop process allows organizations to do the following:

• Identify the best targets for acquisition, upsell and retention
• Segment these targets
  
• Quantify the value of these segments
  
• Profile these segments
  
• Execute strategies
  
• Track responses
  
• Track return on investment
  
• Refine strategies
  

Each of these is discussed in greater detail below.

Identify the Best Targets

Once the CRM database has been created, the first thing to do is identify who your customers are, and which ones present the greatest opportunity. Several methods can be used for this. For example, lifetime value can be calculated to identify which customers are most profitable over time. This is done by discounting the monthly profitability of a customer over the expected life of the relationship, and subtracting the acquisition cost. This is an ideal, pure way of finding out who your most profitable customers are. Knowing this, you can then try to find prospects who look like them.

Note that this analysis does not have to be restricted to best customers. For example, a health plan may want to identify unprofitable customers for the purpose of identifying ways to make them profitable (i.e., health education programs to keep them out of the emergency room).

Segment The Targets

A group of "best customers" is not homogeneous. For example, a mutual fund company's best customers could include both households aged 55-64 saving for retirement, as well as younger households with children saving for college education. One needs to segment these "best customers," because you obviously cannot attract both with the same services, products and communications methods.

There are several types of segmentation systems. These include the following:

• Geographic: a division of the market according to discreet geographic units
  
• Demographic: a division of the market based upon consumer characteristics such as age, income, etc.
  
• Geodemographic: a division of the market based upon geography and demographics
  
• Psychographic: a division of the market based upon consumer lifestyle or personality
  
• Behavioral: a division of the market based upon consumer knowledge, attitude or product use

Any of these are acceptable methods of segmentation. The critical thing, though, is that the system has to be "tied to the ground," i.e., you have to be able to use those attributes and find them on a marketing list.

Quantify the Value

Once you have identified the segments, you prioritize your opportunities by quantifying the value of retaining best customers, upselling current customers who look like best customers, and acquiring prospects who look like best customers. There are several methods:

• For acquisition, which current customer segments provide the greatest lifetime value. You'll want to find noncustomers who look like them.
  
  
• For retention, what is the impact on lifetime value of extending the tenure of specific segments? At some point, the cost of maintaining a relationship will exceed the expected revenue from the relationship. For example, an insurance company might know that the average tenure of an automobile insurance policy is seven years. By projecting the remaining revenues expected from that particular customer, the insurance company can make investment decisions as to how much it wants to spend to retain that customer at different points in the relationship.

Profile the Segments

Upon identifying and prioritizing the segments, one next needs to find out all they can about those segments, and even individuals within those segments, to design the best products and communications strategies. For travel agents, for example, pieces of information that are helpful include, but are not limited to:

• Recent trips taken
  
• Preference of airline, hotel and rental car companies
  
• Customer demographics
  
• Leisure activities enjoyed (to plan side trips)
  
• Media preferences (for advertising purposes)
  
• Preferred communications method (direct mail, telemarketing, e-mail, etc.)

Execute

The above encompasses the strategic component of CRM: the use of information to identify the best product, sales and communications strategies targeted to the most appropriate segments.

With this information, one can then develop the most effective products, and create and execute the most appropriate sales and marketing programs. This should entail development of a multi-channel strategy to optimize the value of all sales and marketing channels. For example, a company may discover that its customers prefer buying over the phone, but may want to be communicated with via e-mail.

In executing marketing programs, it is always important to include a control cell of people you do not market to. This way, you cannot only analyze which segments perform best, but also the overall impact of the marketing program.

Track Responses

Once a marketing campaign has been executed, the first step is to track the immediate effectiveness of the campaign. This simply entails finding out how many people, by segment, creative cell, etc., responded to your call to action (how many people signed up for your pre-approved credit card offer, etc.). While this is only an interim step and not a substitute for ROI, it is important. A key requirement here is the ability of the organization to actually capture those responses. This must be thought through up front, which is why early buy-in from all operational areas is required.

Track Return on Investment and Other Key Metrics

Tracking return on investment allows you to identify the true effectiveness of a campaign and of the total CRM initiative. For example, for companies that sell technology business to business, this entails capturing the downstream revenues generated from a particular sales or marketing effort, as well as acquisition costs and costs for maintaining the account. Here is what return on investment analysis will do.

• Identify the best performing segments in terms of return on investment, lifetime value, etc.
  
  
• Identify the impact of the marketing campaign, by analyzing the results from people marketed to vs. results from people not marketed to (the control cell).

Additionally, other metrics can be examined, such as productivity metrics, cost reduction metrics, etc.

Refine Strategies

This is the piece that closes the loop. After analyzing return on investment, organizations can refine their strategies to make their following activities even more effective.