Customer relationship management (CRM) has once again gained prominence amongst academics and practitioners. In this paper, the authors explore the conceptual foundations of CRM by examining the literature on relationship marketing and other disciplines that contribute to the knowledge of CRM.
A CRM process framework is proposed that builds on other relationship development process models. Research issues as well as CRM implementation challenges are discussed in this paper.
Key Words: Customer Relationship Management; Relationship Marketing; CRM Process; CRM Definition; CRM Strategy; CRM Programs; CRM Implementation.
Conceptual framework of Customer relationship management
Developing close, cooperative relationship with customers is more important in the current era of intense competition and demanding customers, than it has ever been before. Customer relationship management (CRM) has attracted the expanded attention of scholars and practitioners. Marketing scholars are studying the nature and scope of CRM and developing conceptualizations regarding the value and process of cooperative and collaborative relationship between buyers and sellers. Many scholars with interests in various sub-disciplines of marketing, such as channels, services marketing, business-to-business marketing, advertising, and so forth, are actively engaged in studying and exploring the conceptual foundations of managing relationship with customers.
They are interested in strategies and processes for customer classification and selectivity; one-to-one relationships with individual customers; key account management and customer business development processes; frequency marketing, loyalty programs, cross-selling and up-selling opportunities; and various forms of partnering with customers including co-branding, joint-marketing, co-development and other forms of strategic alliances (Sheth and Parvatiyar 2000).
Scholars from other academic disciplines, particularly those interested in the area of information systems and decision technologies, are also exploring new methodologies and techniques that create efficient front-line information systems (FIS) to effectively manage customer relationships. Several software tools and technologies claiming solutions for various aspects CRM have recently been introduced for commercial applications. A majority of these tools promise to individualize and personalize customer relationships by providing vital information at every point of customer interface. Techniques such as collaborative filtering, rules-based expert systems, artificial intelligence and relational databases areincreasingly being applied to develop enterprise level solutions for managing information on customer interactions. The purpose of this paper is not to evaluate these application tools andtechnologies. Those aspects are considered in other chapters in this book as well as by several commercial research organizations, such as Forrester Research and The Gartner Group. Our objective, however is to provide a conceptual foundation for understanding thedomain of customer relationship management.
To do so, we develop a framework forunderstanding the various aspects of CRM strategy and implementation. A synthesis ofexisting knowledge on CRM by integrating diverse explorations forms the basis of our framework. We draw upon the literature on relationship marketing, as CRM and relationship marketing are not distinguished from each other in the marketing literature (Parvatiyar and Sheth 2000).
In the sections that follow, we define what is CRM and what it promises to offer. We also identify the forces impacting the marketing environment in recent years leading to the rapid development of CRM strategies, tools and technologies. A typology of CRM programs is presented to provide a parsimonious view of the various terms and terminologies that are used to refer to different activities. We then describe a process model of CRM to better delineate the challenges of customer relationship formation, its governance, its performance evaluation, and its evolution. Finally, we examine the research issues in CRM.
What is Customer Relationship Management?
Before we begin to examine the conceptual foundations of CRM, it will be useful to define what is CRM. In the marketing literature the terms customer relationship management and relationship marketing as used interchangeably. As Nevin (1995) points out, these terms have been used to reflect a variety of themes and perspectives. Some of these themes offer a narrow functional marketing perspective while others offer a perspective that is broad and somewhat paradigmatic in approach and orientation. A narrow perspective of customer relationship management is database marketing emphasizing the promotional aspects of marketing linked to database efforts (Bickert 1992).
Another narrow, yet relevant, viewpoint is to consider CRM only as customer retention in which a variety of aftermarketing tactics is used for customer bonding or staying in touch after the sale is made (Vavra 1992). A more popular approach with recent application of information technology is to focus on individual or one-to-one relationship with customers that integrate database knowledge with a long-term customer retention and growth strategy (Peppers and Rogers 1993).
Thus, Shani and Chalasani (1992) define relationship marketing as “an integrated effort to identify, maintain, and build up a network with individual consumers and to continuously strengthen the network for the mutual benefit of both sides, through interactive, individualized and value-added contacts over a long period of time” (p. 44). Jackson (1985) applies the individual account concept in industrial markets to suggest CRM to mean, “Marketing oriented toward strong, lasting relationships with individual accounts” (p. 2). In other business contexts, Doyle and Roth (1992), O’Neal (1989), Paul (1988), and have proposed similar views of customer relationship management.
McKenna (1991) professes a more strategic view by putting the customer first and shifting the role of marketing from manipulating the customer (telling and selling) to genuine customer involvement (communicating and sharing the knowledge). Berry (1995), in somewhat broader terms, also has a strategic viewpoint about CRM. He stresses that attracting new customers should be viewed only as an intermediate step in the marketing process. Developing closer relationship with these customers and turning them into loyal ones are equally important aspects of marketing. Thus, he proposed relationship marketing as “attracting, maintaining, and – in multi-service organizations – enhancing customer relationships” (p. 25).
Berry’s notion of customer relationship management resembles that of other scholars studying services marketing, such as Gronroos (1990), Gummesson (1987), and Levitt (1981). Although each one of them is espousing the value of interactions in marketing and its consequent impact on customer relationships, Gronroos and Gummesson take a broader perspective and advocate that customer relationships ought to be the focus and dominant paradigm of marketing. For example, Gronroos (1990) states: “Marketing is to establish, maintain, and enhance relationships with customers and other partners, at a profit, so that the objectives of the parties involved are met. This is achieved by a mutual exchange and fulfillment of promises” (p. 138). The implication of Gronroos’ definition is that customer relationships is the ‘raison de etre’ of the firm and marketing should be devoted to building and enhancing such relationships.
Similarly, Morgan and Hunt (1994), draw upon the distinction made between transactional exchanges and relational exchanges by Dwyer, Schurr, and Oh (1987), to suggest that relationship marketing “refers to all marketing activities directed toward establishing, developing, and maintaining successful relationships.” The core theme of all CRM and relationship marketing perspectives is its focus on cooperative and collaborative relationship between the firm and its customers, and/or other marketing actors. Dwyer, Schurr, and Oh (1987) have characterized such cooperative relationships as being interdependent and long-term orientated rather than being concerned with short-term discrete transactions. The long-term orientation is often emphasized because it is believed that marketing actors will not engage in opportunistic behavior if they have a long-term orientation and that such relationships will be anchored on mutual gains and cooperation (Ganesan 1994).
Another important facet of CRM is “customer selectivity”. As several research studies have shown not all customers are equally profitable for an individual company (Storbacka 2000). The company therefore must be selective in tailors its program and marketing efforts by segmenting and selecting appropriate customers for individual marketing programs. In some cases, it could even lead to “outsourcing of some customers” so that a company better utilize its resources on those customers it can serve better and create mutual value. However, the objective of a company is not to really prune its customer base but to identify appropriate programs and methods that would be profitable and create value for the firm and the customer. Hence, we define CRM as:
Customer Relationship Management is a comprehensive strategy and process of acquiring, retaining and partnering with selective customers to create superior value for the company and the customer.
As is implicit in the above definition, the purpose of CRM is to improve marketing productivity. Marketing productivity is achieved by increasing marketing efficiency and by enhancing marketing effectiveness (Sheth and Sisodia 1995). In CRM, marketing efficiency is achieved because cooperative and collaborative processes help in reducing transaction costs and overall development costs for the company. Two important processes of CRM include proactive customer business development and building partnering relationship with most important customers. These lead to superior mutual value creation.
The Emergence of CRM Practice
As observed by Sheth and Parvatiyar (1995b), developing customer relationships has historical antecedents going back into the pre-industrial era. Much of it was due to direct interaction between producers of agricultural products and their consumers. Similarly artisans often developed customized products for each customer. Such direct interaction led to relational bonding between the producer and the consumer. It was only after industrial era’s mass production society and the advent of middlemen that there were less frequent interactions between producers and consumers leading to transactions oriented marketing.
The production and consumption functions got separated leading to marketing functions being performed by the middlemen. And middlemen are in general oriented towards economic aspects of buying since the largest cost is often the cost of goods sold. In recent years however, several factors have contributed to the rapid development and evolution of CRM. These include the growing de-intermediation process in many industries due to the advent of sophisticated computer and telecommunication technologies that allow producers to directly interact with end-customers. For example, in many industries such as airlines, banks, insurance, computer program software, or household appliances and even consumables, the de-intermediation process is fast changing the nature of marketing and consequently making relationship marketing more popular.
Databases and direct marketing tools give them the means to individualize their marketing efforts. As a result, producers do not need those functions formerly performed by the middlemen. Even consumers are willing to undertake some of the responsibilities of direct ordering, personal merchandising, and product use related services with little help form the producers. The recent success of on-line banking, Charles Schwab and Merryll Lynch’s on-line investment programs, direct selling of books, automobiles, insurance, etc., on the Internet all attest to the growing consumer interest in maintaining direct relationship with marketers.
The de-intermediation process and consequent prevalence of CRM is also due to the growth of the service economy. Since services are typically produced and delivered at the same institution, it minimizes the role of the middlemen. A greater emotional bond between the service provider and the service user also develops the need for maintaining and enhancing the relationship. It is therefore not difficult to see that CRM is important for scholars and practitioners of services marketing (Berry and Parsuraman 1991; Bitner 1995; Crosby and Stephens 1987; Crosby, et. al. 1990; Gronroos 1995).
Another force driving the adoption of CRM has been the total quality movement.When companies embraced Total Quality Management (TQM) philosophy to improve quality and reduce costs, it became necessary to involve suppliers and customers inimplementing the program at all levels of the value chain. This needed close workingrelationships with customers, suppliers, and other members of the marketing infrastructure.Thus, several companies, such as Motorola, IBM, General Motors, Xerox, Ford, Toyota, etc.,formed partnering relationships with suppliers and customers to practice TQM. Otherprograms such as Just-in-time (JIT) supply and Material-resource planning (MRP) also madethe use of interdependent relationships between suppliers and customers (Frazier, Spekman,and O’Neal 1988).
With the advent of the digital technology and complex products, systems sellingapproach became common. This approach emphasized the integration of parts, supplies, andthe sale of services along with the individual capital equipment. Customers liked the idea ofsystems integration and sellers were able to sell augmented products and services tocustomers. The popularity of system integration began to extend to consumer packagedgoods, as well as services (Shapiro and Posner 1979). At the same time some companiesstarted to insist upon new purchasing approaches such as national contracts and masterpurchasing agreements, forcing major vendors to develop key account management programs(Shapiro and Moriarty 1980).
These measures created intimacy and cooperation in thebuyer-seller relationships. Instead of purchasing a product or service, customers were moreinterested in buying a relationship with a vendor.
The key (or national) account managementprogram designates account managers and account teams that assess the customer’s needsand then husband the selling company’s resources for the customer’s benefit. Such programshave led to the foundation of strategic partnering within the overall domain of customerrelationship management (Anderson and Narus 1991; Shapiro 1988).Similarly, in the current era of hyper-competition, marketers are forced to be moreconcerned with customer retention and loyalty (Dick and Basu 1994; Reicheld 1996). Asseveral studies have indicated, retaining customers is less expensive and perhaps a moresustainable competitive advantage than acquiring new ones. Marketers are realizing that itcosts less to retain customers than to compete for new ones (Rosenberg and Czepiel 1984).On the supply side it pays more to develop closer relationships with a few suppliers than todevelop more vendors (Hayes et. al. 1988; Spekman 1988).
In addition, several marketersare also concerned with keeping customers for life, rather than making a one-time sale(Cannie and Caplin 1991). There is greater opportunity for cross-selling and up-selling to acustomer who is loyal and committed to the firm and its offerings. In a recent study, Naidu,et. al. (1999) found that relational intensity increased in hospitals facing a higher degree ofcompetitive intensity.Also, customer expectations have rapidly changed over the last two decades. Fueledby new technology and growing availability of advanced product features and services,customer expectations are changing almost on a daily basis. Consumers are less willing tomake compromises or trade-off in product and service quality. In the world of ever changingcustomer expectations, cooperative and collaborative relationship with customers seem to bethe most prudent way to keep track of their changing expectations and appropriatelyinfluencing it (Sheth and Sisodia 1995).
Today, many large internationally oriented companies are trying to become global byintegrating their worldwide operations. To achieve this they are seeking cooperative andcollaborative solutions for global operations from their vendors instead of merely engaging intransactional activities with them. Such customers needs make it imperative for marketersinterested in the business of companies who are global to adopt CRM programs, particularlyglobal account management programs (Yip and Madsen 1996). Global account management(GAM) is conceptually similar to national account management programs except that theyhave to be global in scope and thus they are more complex.
Managing customerrelationships around the world calls for external and internal partnering activities, includingpartnering across a firm’s worldwide organization.A CRM Process FrameworkSeveral scholars studying buyer-seller relationships have proposed relationshipdevelopment process models (Borys and Jemison 1989; Dwyer, Schurr and Oh 1987; Evansand Laskin 1994; Heide 1994; Wilson 1995). Building on that work we develop a four-stageCRM process framework. The broad framework suggests that CRM process comprise of thefollowing four sub-processes: customer relationship formation process; relationshipmanagement and governance process; relational performance evaluation process; and CRMevolution or enhancement process. Figure 1 depicts the important components of the processmodel.
CRM Formation Process
The formation process of CRM refers to decisions regarding initiation of relationalactivities for a firm with respect to a specific group of customers or with respect to anindividual customer with whom the company wishes to engage in a cooperative orcollaborative relationship. Hence it is important that a company is able to identify anddifferentiate individual customers. In the formation process, three important decision areasrelate to defining the purpose (or objectives) of engaging in CRM; selecting parties (orcustomer partners) for appropriate CRM programs; and developing programs (or relationalactivity schemes) for relationship engagement with the customer.
The overall purpose of CRM is to improve marketing productivity and enhancemutual value for the parties involved in the relationship. CRM has the potential to improvemarketing productivity and create mutual values by increasing marketing efficiencies and/orenhancing marketing effectiveness (Sheth and Parvatiyar 1995a; Sheth and Sisodia 1995).By seeking and achieving operational goals, such as lower distribution costs, streamliningorder processing and inventory management, reducing the burden of excessive customeracquisition costs, and through customer retention economics, firms could achieve greatermarketing efficiencies.
They can enhance marketing effectiveness by carefully selectingcustomers for its various programs, individualizing and personalizing their market offeringsto anticipate and serve the emerging needs of individual customer, building customer loyaltyand commitment; partnering to enter new markets and develop new products, and redefiningthe competitive playing field for their company (Sheth and Parvatiyar 1995a). Thus, statingobjectives and defining the purpose of CRM in a company helps clarify the nature of CRMprograms and activities that ought to be performed by the partners. Defining the purposewould also help in identifying suitable relationship partners who have the necessaryexpectations and capabilities to fulfill mutual goals. It will further help in evaluating CRMperformance by comparing results achieved against objectives.
These objectives could bespecified as financial goals, marketing goals, strategic goals, operational goals, and generalgoals.Similarly, in the mass-market context, consumers’ expect to fulfill their goals relatedto efficiencies and effectiveness in their purchase and consumption behavior. Sheth andParvatiyar (1995a) contend that consumers are motivated to engage in relational behaviorbecause of the psychological and sociological benefits associated with reduction in choicedecisions. In addition, to their natural inclination of reducing choices, consumers aremotivated to seek the rewards and associated benefits offered by CRM programs.
Customer partner selection (or parties with whom to engage in cooperative orcollaborative relationships) is another important decision in the relationship formation stage.Even though a company may serve all customer types, few have the necessary resources andcommitment to establish CRM programs for all. Therefore, in the initial phase, a companyhas to decide which customer type and specific customers or customer groups will be thefocus of their CRM efforts. Subsequently when the company gains experience and achievesuccessful results, the scope of CRM activities could be expanded to include other customersinto the program or engage in additional programs (Shah 1997).
Although partner selection is an important decision in achieving CRM goals, not allcompanies have a formalized process of selecting customers. Some follow intuitivejudgmental approach of senior managers in selecting customer partners and others partnerwith those customers who demand so. Yet other companies have formalized processes ofselecting relational partners through extensive research and evaluation along chosen criteria. The criteria for partner selection vary according to company goals and policies. These rangefrom a single criterion such as revenue potential of the customer to multiple criteria includingseveral variables such as customer commitment, resourcefulness, management values, etc.
CRM ProgramsA careful review of literature and observation of corporate practices suggest that thereare three types of CRM programs: continuity marketing; one-to-one marketing; and,partnering programs. These take different forms depending on whether they are meant forend-consumers, distributor customers, or business-to-business customers. Table 1 presentsvarious types of CRM programs commonly developed for different types of customers.
Obviously, marketing practitioners in search of new creative ideas develop many variationsand combinations of these programs to build closer and mutually beneficial relationship withtheir customers.Continuity Marketing ProgramsGiven the growing concern to retain customers as well as emerging the knowledgeabout customer retention economics have led many companies to develop continuitymarketing programs that are aimed at both retaining customers and increasing their loyalty(Bhattacharya 1998; Payne 1995).
For consumers in mass markets, these programs usuallytake the shape of membership and loyalty card programs where consumers are oftenrewarded for their member and loyalty relationships with the marketers (Raphel 1995;Richards 1995). These rewards may range from privileged services to points for upgrades,discounts, and cross-purchased items. For distributor customers, continuity marketingprograms are in the form of continuous replenishment programs ranging anywhere from just-in-time inventory management programs to efficient consumer response initiatives thatinclude electronic order processing and material resource planning (Law and Ooten 1993;Persutti 1992).
In business-to-business markets these may be in the form of preferredcustomer programs or in special sourcing arrangements including single sourcing, dualsourcing, and network sourcing, as well as just-in-time sourcing arrangements (Hines 1995;Postula and Little 1992). The basic premise of continuity marketing programs is to retaincustomers and increase loyalty through long-term special services that has a potential toincrease mutual value through learning about each other (Shultz 1995).One-to-one MarketingOne-to-one or individual marketing approach is based on the concept of account-based marketing. Such a program is aimed at meeting and satisfying each customer’s needuniquely and individually (Peppers and Rogers 1995). What was once a concept onlyprevalent in business-to-business marketing is now implemented in the mass market anddistributor customer contexts. In the mass market individualized information on customers isnow possible at low costs due to the rapid development in information technology and due tothe availability of scalable data warehouses and data mining products.
By using on-lineinformation and databases on individual customer interactions, marketers aim to fulfill theunique needs of each mass-market customer. Information on individual customers is utilizedto develop frequency marketing, interactive marketing, and aftermarketing programs in orderto develop relationship with high yielding customers (File, Mack and Prince 1995; Pruden1995). For distributor customers these individual marketing programs take the shape ofcustomer business development. For example, Procter and Gamble have established acustomer team to analyze and propose ways in which Wal-Mart’s business could bedeveloped. Thus, by bringing to bare their domain specific knowledge from across manymarkets, Procter & Gamble is able to offer expert advice and resources to help build thebusiness of its distributor customer.
Such a relationship requires cooperative action and aninterest in mutual value creation. In the context of business-to-business markets, individualmarketing has been in place for quite sometime. Known as key account managementprogram, here marketers appoint customer teams to husband the company resourcesaccording to individual customer needs. Often times such programs require extensiveresource allocation and joint planning with customers. Key account programs implementedfor multi-location domestic customers usually take the shape of national accountmanagement programs, and for customers with global operations it becomes global accountmanagement programs.
The third type of CRM programs is partnering relationships between customers andmarketers to serve end user needs. In the mass markets, two types of partnering programs aremost common: co-branding and affinity partnering (Teagno 1995). In co-branding, twomarketers combine their resources and skills to offer advanced products and services tomass-market customers (Marx 1994). For example, Delta Airlines and American Expresshave co-branded the Sky Miles Credit Card for gains to consumers as well as to thepartnering organizations. Affinity partnering program is similar to co-branding except thatthe marketers do not create a new brand rather use endorsement strategies.
Usually affinity-partnering programs try to take advantage of customer memberships in one group for cross-selling other products and services. In the case of distributor customers, logistics partneringand cooperative marketing efforts are how partnering programs are implemented. In suchpartnerships the marketer and the distributor customers cooperate and collaborate to manageinventory and supply logistics and sometimes engage in joint marketing efforts. Forbusiness-to-business customers, partnering programs involving co-design, co-developmentand co-marketing activities are not uncommon today (Young, Gilbert and McIntyre 1996).CRM Governance ProcessOnce CRM program is developed and rolled out, the program as well as theindividual relationships must be managed and governed.
For mass-market customers, thedegree to which there is symmetry or asymmetry in the primary responsibility of whether thecustomer or the program sponsoring company will be managing the relationship varies withthe size of the market. However, for programs directed at distributors and businesscustomers the management of the relationship would require the involvement of both parties.The degree to which these governance responsibilities are shared or managed independentlywill depend on the perception of norms of governance processes among relational partnersgiven the nature of their CRM program and the purpose of engaging in the relationship. Notall relationships are or should be managed alike, however several researches suggestappropriate governance norms for different hybrid relationships (Borys and Jemison 1989;Heide 1994; Sheth and Parvatiyar 1992).
Whether management and governance responsibilities are independently or jointlyundertaken by relational partners, several issues must be addressed. These include decisionsregarding role specification, communication, common bonds, planning process, processalignment, employee motivation and monitoring procedures. Role specification relates todetermining the role of partners in fulfilling the CRM tasks as well as the role of specificindividuals or teams in managing the relationships and related activities (Heide 1994).Greater the scope of the CRM program and associated tasks, and the more complex is thecomposition of the relationship management team; the more critical is the role specificationdecision for the partnering firms.
Role specification also helps in clarifying the nature ofresources and empowerment needed by individuals or teams charged with the responsibilityof managing relationship with customers.Communication with customer partners is a necessary process of relationshipmarketing. It helps in relationship development, fosters trust, and provides the informationand knowledge needed to undertake cooperative and collaborative activities of relationshipmarketing. In many ways it is the lifeblood of relationship marketing. By establishingproper communication channels for sharing information with customers a company canenhance their relationship with them.
In addition to communicating with customers, it is alsoessential to establish intra-company communication particularly among all concernedindividuals and corporate functions that directly play a role in managing the relationship witha specific customer or customer group.Although communication with customer partners help foster relationship bonds,conscious efforts for creating common bonds will have a more sustaining impact on therelationship. I
n business-to-business relationships, social bonds are created throughinteractions, however with mass-market customers frequent face-to-face interactions will beuneconomical. Thus marketers should create common bonds through symbolic relationships,endorsements, affinity groups, and membership benefits or by creating on-line communities.Whatever is the chosen mode, creating value bonding, reputation bonding and structuralbondings are useful processes of institutionalizing relationship with customers (Sheth 1994).
Another important aspect of relationship governance is the process of planning andthe degree to which customers need to be involved in the planning process. Involvingcustomers in the planning process would ensure their support in plan implementation andachievement of planned goals. All customers are not willing to participate in the planningprocess nor is it possible to involve all of them for relationship marketing programs for themass market. However, for managing cooperative and collaborative relationship with largecustomers, their involvement in the planning process is desirable and sometimes necessary.
Executives are sometimes unaware, or they choose to initially ignore the nature ofmis-alignment in operating processes between their company and customer partners, leadingto problems in relationship marketing implementation. Several aspects of the operatingprocesses need to be aligned depending on the nature and scope of the relationship. Forexample, operating alignment will be needed in order processing, accounting and budgetingprocesses, information systems, merchandising processes, etc.Several human resource decisions are also important in creating the right organizationand climate for managing relationship marketing.
Training employees to interact withcustomers, to work in teams, and manage relationship expectations are important. So is theissue of creating the right motivation through incentives, rewards, and compensation systemstowards building stronger relationship bonds and customer commitment. Althoughinstitutionalizing the relationship is desirable for the long-term benefit of the company,personal relationships are nevertheless formed and have an impact on the institutionalrelationship.
Thus proper training and motivation of employees to professionally handlecustomer relationships are needed.Finally, proper monitoring processes are needed to safeguard against failure andmanage conflicts in relationships. Such monitoring processes include periodic evaluation ofgoals and results, initiating changes in relationship structure, design or governance process ifneeded, creating a system for discussing problems and resolving conflicts. Good monitoringprocedures help avoid relationship destabilization and creation of power asymmetries. Theyalso help in keeping the CRM program on track by evaluating the proper alignment of goals,results and resources.Overall, the governance process helps in maintenance, development, and executionaspects of CRM.
It also helps in strengthening the relationship among relational partners andif the process is satisfactorily implemented it ensures the continuation and enhancement ofrelationship with customers. Relationship satisfaction for involved parties would includegovernance process satisfaction in addition to satisfaction from the results achieved in therelationship (Parvatiyar, Biong and Wathne 1998).CRM Performance Evaluation ProcessPeriodic assessment of results in CRM is needed to evaluate if programs are meetingexpectations and if they are sustainable in the long run. Performance evaluation also helps inmaking corrective action in terms of relationship governance or in modifying relationshipmarketing objectives and program features. Without a proper performance metrics toevaluate CRM efforts, it would be hard to make objective decisions regarding continuation,modification, or termination of CRM programs.
Developing a performance metrics is alwaysa challenging activity as most firms are inclined to use existing marketing measures toevaluate CRM. However, many existing marketing measures, such as market share and totalvolume of sales may not be appropriate in the context of CRM. Even when a more CRMoriented measures are selected, it cannot be applied uniformly across all CRM programsparticularly when the purpose of each program is different from one another.
For example, ifthe purpose of a particular CRM effort is to enhance distribution efficiencies by reducingoverall distribution cost, measuring the programs impact on revenue growth and share ofcustomer’s business may not be appropriate. In this case, the program must be evaluatedbased on its impact on reducing distribution costs and other metrics that are aligned withthose objectives. By harmonizing the objectives and performance measures one wouldexpect to see a more goal directed managerial action by those involved in managing therelationship.For measuring CRM performance, a balanced scorecard that combines a variety ofmeasures based on the defined purpose of each program (or each cooperative/collaborativerelationship) is recommended (Kaplan and Norton 1992).
In other words, the performanceevaluation metrics for each relationship or CRM program should mirror the set of definedobjectives for the program. However, certain global measures of the impact of CRM effortof the company are also possible. Srivastava, et. al. (1998) developed a model to suggest theasset value of cooperative relationships of the firm. If cooperative and collaborativerelationship with customers is treated as an intangible asset of the firm, its economic value-add can be assessed using discounted future cash flow estimates. In some ways, the value ofrelationships is similar to the concept of brand equity of the firm and hence many scholarshave alluded to the term relationship equity (Bharadwaj 1994; Peterson 1995).
Although anwell-accepted model for measuring relationship equity is not available in the literature as yet,companies are trying to estimate its value particularly for measuring the intangible assets ofthe firm.Another global measure used by firms to monitor CRM performance is themeasurement of relationship satisfaction. Similar to the measurement of customersatisfaction, which is now widely applied in many companies, relationship satisfactionmeasurement would help in knowing to what extent relational partners are satisfied with theircurrent cooperative and collaborative relationships.
Unlike customer satisfaction measuresthat are applied to measure satisfaction on one side of the dyad, relationship satisfactionmeasures could be applied on both sides of the dyad. Both the customer and the marketingfirm have to perform in order to produce the results in a cooperative relationship and henceeach party’s relationship satisfaction could be measured (Biong, Parvatiyar and Wathne1996). By measuring relationship satisfaction, one could estimate the propensity of eitherparty’s inclination to continue or terminate the relationship. Such propensity could also beindirectly measured by measuring customer loyalty (Reicheld and Sasser 1990). Whenrelationship satisfaction or loyalty measurement scales are designed based on its antecedents,it could provide rich information on their determinants and thereby help companies identifythose managerial actions that are likely to improve relationship satisfaction and/or loyalty.CRM Evolution ProcessIndividual customer relationships and CRM programs are likely to undergo evolutionas they mature. Some evolution paths may be pre-planned, while others would naturallyevolve. In any case, several decisions have to be made by the partners involved about theevolution of CRM programs.
These include decisions regarding the continuation,termination, enhancement, and modifications of the relationship engagement. Several factorscould cause the precipitation of any of these decisions. Amongst them relationshipperformance and relationship satisfaction (including relationship process satisfaction) arelikely to have the greatest impact on the evolution of the CRM programs. When performanceis satisfactory, partners would be motivated to continue or enhance their CRM program(Shah 1997; Shamdasani and Sheth 1995). When performance does not meet expectations,partners may consider terminating or modifying the relationship. However, extraneousfactors could also impact these decisions. For example, when companies are acquired,merged, or divested many relationships and relationship marketing programs undergochanges. Also, when senior corporate executives and senior leaders in the company moveCRM programs undergo changes. Yet, there are many collaborative relationships that areterminated because they had planned endings. For companies that can chart out theirrelationship evolution cycle and state the contingencies for making evolutionary decisions,CRM programs would be more systematic.
CRM Implementation IssuesOne of the most interesting aspects of CRM development is the multitude of customerinterfaces that a company has to manage in today’s context. Until recently, a company’sdirect interface with customers, if any, was primarily through sales people or service agents.In today’s business environment most companies interface with their customers through avariety of channels including sales people, service personnel, call centers, Internet websites,marketing departments, fulfillment houses, market and business development agents, etc.For large customers, it also includes cross-functional teams that may include personnel fromvarious functional departments. While each of these units could operate independently, theystill need to share information about individual customers and their interactions with thecompany on a real-time basis.
For example, a customer who just placed an order on the Internet and subsequently calls the call center for order verification, expects the call centerstaff to know that details of his or her order history. Similarly, a customer approached by asales person unaware that she has recently complained about dissatisfactory customerservice, is not likely to be treated kindly by the customer. On the other hand if thesalesperson were aware of the problem encountered by the customer, her complaint and theaction already initiated to resolve the complaint, would place the salesperson in a relativelysuperior position to handle the situation. Therefore, effective CRM implementation requiresa front-line information system that shares relevant customer information across all interfaceunits.
Relational databases, data warehousing and data mining tools are thus very valuablefor CRM systems and solutions.However, the challenge is develop an integrated CRM platform that collects relevantdata input at each customer interface and simultaneously provides knowledge output aboutthe strategy and tactics suitable to win customer business and loyalty. If call center personnelcannot identify and differentiate a high value customer and do not know what to up-sell orcross-sell to this customer, it could be a tremendous opportunity loss. Although most CRMsoftware solutions based on relational databases are helping share customer information, theystill do not provide knowledge output to the front-line personnel. As shown in figure 2,CRM solutions platform needs to be based on interactive technology and processes. Itshould assist the company in developing and enhancing customer interactions and one-to-onemarketing through the application of suitable intelligent agents that help develop front-linerelationship with customers. Such a system would identify appropriate data inputs at eachcustomer interaction site and use analytical platforms to generate appropriate knowledgeoutput for front-line staff during customer interactions.
In addition, implementation tools tosupport interactive solutions for customer profitability analysis, customer segmentation,demand generation, account planning, opportunity management, contact management,integrated marketing communications, customer care strategies, customer problem solving,virtual team management of large global accounts, and measuring CRM performance wouldbe the next level of solutions sought by most enterprises.In the enthusiasm to implement CRM solutions, some companies seem to beoverlooking the basic considerations that would make such initiatives successful. Since CRMimplementation comprises a significant information technology (IT) component, thesecompanies have handed over the responsibility of CRM implementation to IT Departments.They are focused on simply installing CRM software solutions without a CRM strategy orprogram in place. This leads to creating an operational tool within the company, but theusability and effectiveness in producing desirable results from such tools is limited. CRMtools would be valuable when they are used to identify and differentiate individual customersand to generate individualized offer and fulfill customized solutions.
The lack of a CRMstrategy or CRM programs, would leave the front-line people without any knowledge of whatthey should be doing with additional customer information that they now have access to. Forthose who apply themselves and develop improvised solutions, it could backfire as ad hocsolutions could cause unintended deterioration in customer relationships. Hence, it isimportant to consider CRM process framework in totality. CRM tools are meant tosupplement a company’s strategy for building effective customer relationships. Appropriatestrategy and excellent implementation are both needed for obtaining successful results. Inthe future we expect to see more research on the barriers to implementing successful CRMstrategies as well as empirical research on the impact of CRM on company performance.CRM Research DirectionsWilson (1995) classified relationship marketing research directions into three levels:concept level, model level and process research. At the concept level he indicated the needto improve concept definitions and its operationalization.
Concept level research relates toidentifying, defining and measuring constructs that are either successful predictors or usefulmeasures of relationship performance. Several scholars and researchers have recentlyenriched our literature with relevant CRM concepts and constructs. These include suchconstructs as trust, commitment, interdependence, interactions, shared values, powerimbalance, adaptation, mutual satisfaction, etc. (Doney and Cannon 1997; Gundlach andCadotte 1994; Kumar, Scheer and Steenkamp 1995; Lusch and Brown 1996; Morgan andHunt 1994; Smith and Barclay 1997).At the model level, scholars are interested in presenting integrative ideas to explainhow relationships are developed. Several integrative models have recently begun to emergeproviding us a richer insight into how relationships work and what impacts CRM decisions.The IMP Interaction model (Hakansson 1982) was based upon insights obtained on morethan 300 industrial marketing relationships. By identifying the interactions among actors, theIMP model traces the nature and sources of relationship development.
The IMP model andits research approach have become a tradition for many scholarly research endeavors inEurope over the past 15 years or more. The network model (Anderson, Johansson andHakansson 1994; Iacobucci and Hopkins 1992) uses the social network theory to trace howrelationships are developed among multiple actors and how relationship ties are strengthenedthrough networks. Bagozzi (1995) makes a case for more conceptual models to understandthe nature of group influence on customer relationships.A more evolutionary approach of integrative models is to look at the process flow ofrelationship formation and development. Anderson and Narus (1991) and Dwyer, Schurr andOh (1987) along with numerous other scholars have contributed towards our understandingof the relationship process model.
By looking at the stages of the relationship developmentprocess, one could identify which constructs would actively impact the outcomeconsiderations at that stage and which of them would have latent influences (Wilson 1995).The process model of relationship formation, relationship governance, relationshipperformance, and relationship evolution described in the previous section is an attempt to addto this stream of knowledge development on relationship marketing.For practitioners, process level research could provide useful guidelines in developingand managing successful CRM programs and activities. Some research has now started toappear in the marketing literature on partner selection (Schijns and Schroder 1996; Stumpand Heide 1996). Mahajan and Srivastava (1992) recommended the use of conjoint analysistechniques for partner selection decisions in alliance type relationships. Dorsch et. al. (1998)propose a framework of partner selection based on the evaluation of customers’ perceptionrelationship quality with their vendors.
At the program level, key account managementprograms and strategic partnering have been examined in several research studies (Aulakh,Kotabe, and Sahay 1997; Nason, Melnyk, Wolter, and Olsen 1997; Wong 1998). Similarlywithin the context of channel relationships and buyer seller relationships several studies havebeen conducted on relationship governance process (Biong and Selnes 1995; Heide 1994;Lusch and Brown 1996). Also, research on relationship performance is beginning to appearin the literature. Kalwani and Narayandas (1995) examined the impact of long-termrelationships among small firms on their financial performance. Similarly, Naidu et. al.(1999) examine the impact of CRM programs on the performance of hospitals. Srivastava,et. al. (1998) examine the economic value of CRM assets. However, not much research isreported on relationship enhancement processes and relationship evolution. Although,studies relating to the development of CRM objectives are still lacking, the conceptual modelon customer expectations presented by Sheth and Mittal (1996) could provide the foundationfor research in this area. Overall, we expect future research efforts to be directed towards theprocess aspects of relationship marketing.
Convergence of CRM and relationship marketing knowledge with some otherparadigms in marketing is also taking place. These include database marketing (Shani andChalasani 1992; Schijns and Schroder 1996), integrated marketing communications (Duncanand Moriarty 1998; Schultz et. al. 1993; Zhinkan, et. al. 1996), logistics, and supply-chain integration (Fawcett, et. al. 1997; Christopher 1994). Some of these are applied as tools andwork processes in relationship marketing practice. As more and more companies use theseprocesses and other practical aspects such as total quality management, processreengineering, mass customization, electronic data interchange (EDI), value enhancement,activity based costing, cross-functional teams, etc. we are likely to see more and moreconvergence of these and related paradigm with CRM.
A number of theoretical perspectives developed in economics, law, and socialpsychology is being applied in CRM. These include transactions cost analysis (Mudambiand Mudambi 1995; Noordeweir, John and Nevin 1990; Stump and Heide 1996), agencytheory (Mishra, Heide and Cort 1998), relational contracting (Dwyer, Schurr and Oh 1987;Lusch and Brown 1996), social exchange theory (Hallen, Johanson and Seyed-Mohamed1991; Heide 1994), network theory (Achrol 1997), game theory (Rao and Reddy 1995),interorganizational exchange behavior (Rinehart and Page 1992), power dependency(Gundlach and Cadotte 1994; Kumar, Scheer, and Steenkamp 1995), and interpersonalrelations (Iacobucci and Ostrom 1996). More recently resource allocation and resourcedependency perspectives (Lohtia 1997; Vardarajan and Cunningham 1995), and classicalpsychological and consumer behavior theories have been used to explain why companies andconsumers engage in relational behavior (Iacobucci and Zerillo 1997; Kahn 1998; Sheth andParvatiyar 1995b; Simonian and Ruth 1998).
Each of these studies has enriched ourunderstanding of customer relationship management. As we move forward, we expect to seemore integrative approaches to studying CRM, as well as a greater degree of involvement ofscholars from almost all sub-disciplines of marketing into it. Its appeal is global, as marketing scholars from around the world are interested in the study of the phenomenon, particularly in Europe, Australia, and Asia in addition to North America.
The domain of customer relationship management extends into many areas of marketing and strategic decisions. Its recent prominence is facilitated by the convergence of several other paradigms of marketing and by corporate initiatives that are developed around the theme of cooperation and collaboration of organizational units and its stakeholders, including customers. CRM refers to a conceptually broad phenomenon of business activity; if the phenomenon of cooperation and collaboration with customers become the dominant paradigm of marketing practice and research, CRM has the potential to emerge as the predominant perspective of marketing. From a corporate implementation point of view, CRM should not be misunderstood to simply mean a software solutions implementation project. Building customer relationship is a fundamental business of every enterprise and it requires a holistic strategy and process to make it successful.
Atul Parvatiyar, Ph.D.
Adjunct Associate Professor of Marketing
Goizueta Business School
Atlanta, GA 30322
Jagdish N. Sheth, Ph.D.
Charles H. Kellstadt Professor of Marketing
Goizueta Business School
Atlanta, GA 30322
November 5, 2000
Paper Prepared for the International Conference on Customer Relationship Management,
November 24-25, 2000
Management Development Institute, Gurgaon, India