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MANAGING CUSTOMER RELATIONSHIPS
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Abstract
The customer relationship management (CRM) literature recognizes the long-run value of po-
tential and current customers. Increased revenues, profits, and shareholder value are the result
of marketing activities directed toward developing, maintaining, and enhancing successful com-
pany–customer relationships. These activities require an in-depth understanding of the underlying
sources of value that the firm both derives from customers, as well as delivers to customers. We
built our review from the perspective that customers are the building blocks of a firm. In order
to endure long-term success, the role of marketing in a firm is to contribute to building strong
market assets, including a valuable customer portfolio. CRM is an integral part of a company’s
strategy, and its input should be actively considered in decisions regarding the development of
organizational capabilities, the management of value creation, and the allocation of resources.
CRM principles provide a strategic and tactical focus for identifying and realizing sources of value
for the customer and the firm and can guide five key organizational processes: making strategic
choices that foster organizational learning, creating value for customers and the firm, managing
sources of value, investing resources across functions, organizational units, and channels, and
globally optimizing product and customer portfolios. For each organizational process, we identify
some of the challenges facing marketing scientists and practitioners, and develop an extensive
research agenda.
CRM vis-à-vis the Domain of Marketing
Marketing theory has frequently provided guidance on how firms should react to opportunities,
but marketing actions are also able to change the environment and create opportunities (Zeithaml
and Zeithaml, 1984). Marketing—considered as a general management responsibility—plays
“the crucial roles of (1) navigation through effective market sensing, (2) articulation of the new
value proposition, and (3) orchestration by providing the essential glue that ensures a coherent
whole” (Hunt, 2004, p. 22). CRM enhances these capabilities because it is “the outcome of the
continuing evolution and integration of marketing ideas and newly available data, technologies
and organizational forms” (Boulding et al., 2005).
CRM principles and systems help organizations to focus on the dual creation of value: the
creation of value for shareholders (via long-term firm profitability) and the creation of value or
utility for customers (Vargo and Lusch, 2004). These objectives are congruent because relation-
ships represent market-based assets that a firm continuously invests in, in order to be viable in the
marketplace. Strong relationships are associated with customer loyalty and/or switching costs,
which create barriers to competition. Thus relationships provide a differential advantage by making
resources directed to customers more efficient. For example, loyal customers are more responsive
to marketing actions and cross-selling (Verhoef, 2003).
Origins in Relationship Marketing
The foundation for the development of CRM is generally considered to be relationship market-
ing, defined as marketing activities that attract, maintain, and enhance customer relationships
(Berry 1983). Gronroos (1990, p.138) argues for the importance of relationships in the marketing
context. He proposes a definition for marketing, namely, that marketing is “to establish, maintain
and enhance relationships with consumers and other partners, so that the objectives of the parties
involved are met. This is achieved by a mutual exchange and fulfillment of promises.” However,
although the terms “CRM” and “relationship marketing” are relatively new, the phenomenon is not
(Gummesson, 1994, p. 5, 2002, p. 295). Marketers have always been preoccupied with defensive
strategies aimed at increasing customer retention, thereby increasing revenues and profitability
(Fornell and Wernerfelt, 1987). For example, writing in the Harvard Business Review, Grant and
Schlesinger (1995 p. 61) argue that the gap between organization’s current and full-potential
profitability is enormous, and suggest that managers ask themselves: “How long on average do
your customers remain with the company? [and] What if they remained customers for life?” Dur-
ing the same time period, a growing literature has focused on the “service profit chain” linking
employee satisfaction, customer satisfaction, loyalty, and profitability (e.g., Heskett, Sasser, and
Schlesinger, 1997; Reichheld, 1993; Liljander, 2000).
Emergence of Customer Equity and Early Customer Relationship Models
This perspective naturally evolved and expanded to consider the management of customer equity
or the value of the customer base. Initially, researchers were primarily concerned with the alloca-
tion of resources between customer acquisition and retention (Blattberg and Deighton, 1996).
Generally, the management of customer equity requires that organizations use information about
customers and potential customers to segment them and treat them differently depending on their
future long-term profitability (Blattberg, Getz, and Thomas, 2001; Peppers and Rogers, 2005;
Rust, Zeithaml, and Lemon, 2000). Notably, firms must go beyond traditional market segmenta-
tion activities, such as customizing offerings (i.e., goods or services) and efficiently managing
resources to achieve profitability criteria. Instead, firms must identify and acquire customers who
are not only willing to accept the firm’s offer or value proposition—but also provide value for the
company when they do (e.g., Cao and Gruca, 2005; Ryals, 2005).
Marketing Metrics
The challenges of applying CRM principles were exacerbated as managers and researchers turned
their attention to “metrics” or the measurement of the impact of marketing on business performance
(cf. Lehmann, 2004). Most popular measures of current CRM systems are outcome measures:
number of acquired customers, “churn” as a percentage of the customer base (the inverse of the
customer retention rate), the dollar value of cross-selling, the percentage increase in customer
migration to higher margin products, changes in individual customer lifetime value (CLV), and
so forth. Any single outcome measure provides an incomplete and (often) short-run assessment of
the firm’s success at creating value for both customers and shareholders (Boulding et al., 2005).
Most dangerously, optimizing a small number of outcome measures may lead to core rigidities
(Atuahene-Gima, 2005; Leonard-Barton, 1992) that undermine the organization’s core capabilities
and lead to business failure. For example, there are numerous stories of firms that have focused on
customer acquisition at the expense of customer retention activities or vice versa.
More Nuanced Approaches to Evaluating CRM Systems and Technology
Research has established that CRM systems can improve intermediate measures of business perfor-
mance. For example, Mithas, Krishnan, and Fornell (2005) study the effect of CRM applications
on customers and find out that the use of CRM systems positively impacts customer satisfaction,
both directly and through improved customer knowledge. Despite this fact—and the common
belief that more and better customer knowledge can only benefit a firm and its customers—the
financial return on large investments in CRM technology has been questioned. For example, as
Reinartz, Krafft, and Hoyer (2004, p. 293) report, commercial studies “provide some convergent
validity that approximately 70 percent of CRM projects result in either losses or no bottom line
improvements.” Contrary to such reports, their own empirical investigation indicates that com-
panies that implemented CRM processes performed better not only in relationship maintenance
but also in relationship initiation.
Strategic Choices
In a recent executive roundtable discussion, executives from IBM, Yellow-Roadway, Luxottica Retail
(Lens Crafters and Sunglass Hut), McKinsey & Company and Cisco Systems stated that that there
were immense opportunities for the transformation of organizations through the integration of busi-
ness processes and the use of technology to generate competitive advantage, cost saving efficiencies
and an enhanced customer experience. Executives in Europe and North America strongly believe that
successful organizations require a cross-functional process-oriented approach that positions CRM at
a strategic level (Brown, 2005; Christopher, Payne, and Ballantyne, 1991; Payne and Frow, 2005).
This notion is consistent with empirical evidence showing that firms’ prior strategic commitments
(as opposed to their general market orientation) have impressive effects on the performance of their
CRM investments in a retailing context (Srinivasan and Moorman, 2005).
Managing Sources of Value
Organizations can manage sources of value by acquiring and retaining the most desirable customers;
expanding relationships through the stimulation of usage, upgrades, and cross-buying; improving
their overall profitability by adjusting prices or managing costs; and managing the customer and
product portfolios. Since not all customers are equally profitable, investments in customers should
be based on their profit potential, as illustrated in Table 1.2. Firms should acquire customers in the
upper-right quadrant and divest customers in the lower-left quadrant. Vulnerable customers may
defect to competitors unless the firm develops an appropriate marketing program to retain them;
free riders should receive lower product quality and higher prices.
These strategies require the firm to develop marketing programs targeted at individual
customers or segments that influence acquisition, retention, and margins (via cross-buying),
thereby maximizing CLV and value for customers. Marketers have developed a substantial
body of knowledge about how firm actions influence customer behavior. A useful summary of
this literature is provided by Bolton, Lemon, and Verhoef (2004), who identify six categories of
marketing decision variables that can be used to influence customer behavior and CLV: price,
service quality programs, direct marketing promotions, relationship marketing instruments (e.g.,
rewards programs), advertising communications, and distribution channels. In the following
paragraphs, we briefly summarize some key considerations concerning how these marketing
actions influence each source of value.
Loyalty or Rewards Programs
There is ample evidence that a loyalty program can stimulate purchase behavior. For example, when
Hilton Hotels introduced a guest loyalty program about a decade ago, it helped the company focus
on the most profitable group of customers and reduced the weight of brand positioning—chang-
ing the nature of competition in the hospitality industry (Bell et al., 2002). Bolton, Kannan, and
Bramlett (2000) discovered that loyalty programs can positively reinforce purchase behavior via a
virtuous cycle: more experience with the product stimulates more usage, and more usage leads to
more experience. They observed that loyalty programs had complex effects on customer behavior.
Members of the loyalty programs were more forgiving of billing errors and exhibited more stable
behavior over time (because they were less affected by perceived losses or gains from previous
transactions). The authors concluded that loyalty reward programs have the potential to “operate
as a form of mass customization that strengthens customers’ perception of the company’s value
proposition” (p. 106). Moreover, Kivetz and Simonson (2003) found that a key factor affecting
consumers’ response to loyalty programs is their perceived relative advantage or “idiosyncratic fit”
with consumer conditions and preferences. When consumers believe they have an effort advantage
over others, higher program requirements magnify this perception and can increase the overall
perceived value of the program.