Master Thesis
The power of customer value:
improving the degree of CVM implementation
Sikko BrandenburgStudent no. 1270923 University of Groningen Faculty of Economics & Business
MSc Business Administration Specialization Marketing Plantage Muidergracht 4 1018 TV Amsterdam phone: +31 654 936 851 e-mail: sikkob@gmail.com
1st Master thesis supervisor: dr. J.E. Wieringa
2nd Master thesis supervisor: dr. J.E.M. van Nierop
Company supervisor: NV Nuon mw. drs. S.M.J. Snoeck
MANAGEMENT SUMMARY
In this research the implementation of Customer Value Management (CVM) is examined. After theoretical research and interviews at the company Nuon, the researcher proposes a framework where the degree of CVM implementation is determined by six organizational factors: strategy, structure, systems, leadership commitment, employee involvement and customer metrics. This conceptual model is validated by interviewing seven other companies in the financial services, online retail and telecommunications industry. Based on this research, the following short conclusions can be diverted about the organizational factors that influence the degree of CVM implementation.
Strategy: Develop and execute customer strategies for each phase of your customer’s life cycle! Structure: Reward employees customer-based to stimulate customer sensitivity!
Systems: Create one data warehouse, integrate all customer information, analyze it and send it
back to the customer contact channels for more effective value creation!
Leadership commitment: Formulate CVM as a companywide project and inspire!
Employee involvement: Involve employees at an early stage because their roles are about to
change dramatically!
Customer metrics: Combine market and customer intelligence to calculate individual customer
value (based on revenues, margin, potential value and risk) and develop a prospect database!
Additionally, recommendations for further research are formulated.
Keywords: Customer Value Management, Customer Equity Management, Customer Centricity,
PREFACE & ACKNOWLEDGEMENTS
“Products come and go, but customers remain” - Hogan, Lemon & Rust (2002)
Typical about a foreword is that it is actually written at the end. At the end of the completion of this thesis, at the end of my internship at Nuon, at the end of my time as a student. Although this observation seems to be terribly sad, at this end a new beginning will start. A revolutionary new beginning when it comes to income, effective working hours, balance between day en night life and so on.
The field of customer value has fascinated me from the beginning. Because it is relatively new, but more because the potential for companies applying it is enormous. Not surprisingly, the overall conclusion of this thesis about the implementation of CVM is that it takes more than an extensive customer value model to be successful.
It took a journey for me to come to this conclusion. I would like to thank the department of BIC, especially Sietske Snoeck and Reindert-Jan van der Meulen, for their effort during my time at Nuon. Next to that, I thank my thesis supervisors Jaap Wieringa and Erjen van Nierop for guiding me through the process. Lastly, I would like to thank my family and friends for supporting me during my studies ‘through thick and thin’.
Regards, enjoy,
TABLE OF CONTENTS 1. INTRODUCTION ...5 1.1 Background ...5 1.2 Relevance of research...5 1.3 NV Nuon ...6 1.4 Problem Statement ...7
1.5 Structure of the Thesis...7
2. THEORETICAL FRAMEWORK ...8
2.1 Customer Value...8
2.2 Customer Value Management ...10
2.3 Towards a Suitable Framework...11
2.4 Strategy...15 2.5 Structure ...17 2.6 Systems...18 2.7 Leadership Commitment ...21 2.8 Employee Involvement ...23 2.9 Customer Metrics ...24 2.10 Conceptual Model ...27 3. METHODOLOGY...28 3.1 Research Method...28 3.2 Data Collection...28 3.3 Plan of Analysis ...29 4. RESULTS...30 4.1 Strategy...30 4.2 Structure ...31 4.3 Systems...32 4.4 Leadership Commitment ...34 4.5 Employee Involvement ...34 4.6 Customer Metrics ...35
5. CONCLUSIONS & DISCUSSION...38
5.1 Conclusions ...38
5.2 Discussion ...41
REFERENCES ...43
APPENDIX A ...47
1. INTRODUCTION 1.1 Background
When a twelve year old boy in the fifties of the 20th century started working at one of the five local bakeries in his little Frisian hometown, knowledge of the customer was crucial to beat the competition. The value of each individual customer was known to the baker himself, so more valuable customers could expect a more extensive service, and the less valuable ones a persuasion to buy more products: up and cross-selling to maximize profitability. When, later on, technological breakthroughs made the production process more efficient and led to mass production, the client base was too small to keep five bakeries up and running, so four of them were forced to exit the market. The one left transformed into a bakery factory and started delivering to grocery stores. A major advantage was that it led to lower production costs due to standardization, but on the other hand the factory lost its direct insight into customer wishes and demands. At the end of the century, computer power increased and the internet was discovered as a new direct sales channel. A new business opportunity arrived: the efficient production process could now be combined with this new direct channel (vertical integration) to serve individual customers in a large area, and computer power made it possible to store customer behavior in a large database.
So far this short historical overview of marketing concepts applied in practice1. But what if this stored customer behavior could be analyzed to turn it into customer intelligence? Then marketing actions could be executed on an individual level, like the baker in the old days only now on a huge scale! The focus of marketing shifts back from products to customers; companies no longer solely compete on production efficiency but are more eager every day to become a champion in customer loyalty.
1.2 Relevance of research
In their paper about the research agenda for customer value management Verhoef, van Doorn & Dorotic (2007) formulate the “Implementation of Customer Value Management” as one of the six important future research themes. Hence, this paper aims to give answer to one of their research
questions: “Which factors determine the successful application of CVM in practice? What is the role of data quality, analytical models and management culture?”. The outcomes of this research are relevant for both marketing practice and marketing science. At a lot of companies there is a willingness to organize business more customer-centric and to make use of the advantages of customer value, but it is unclear how big the project will be, where to start and which activities should be prioritized and executed in which order. With these outcomes, practitioners are better able to clarify and understand activities in the process of customer value management implementation. For scientists, these outcomes give new insights in the factors that affect customer value management adoption. The found factors comprise more than data quality, analytical models and management culture alone. Also, new interesting research opportunities in the field of customer value management implementation are identified for further examination, like the sequence of activities in the implementation process and whether the organizational factors can be generalized across other industries.
1.3 NV Nuon
1.4 Problem Statement
Congruent with the described management problem of Nuon, the implementation of CVM needs to be examined. Therefore, the research question is formulated in the following way: Which factors determine the successful implementation of CVM in practice?
Based on this, the following sub questions are derived: 1. What is Customer Value?
2. What is Customer Value Management (CVM)?
3. Which organizational factors determine the degree of CVM implementation? 4. How are organizations different in implementing CVM?
5. What are the reasons for these differences?
1.5 Structure of the Thesis
In the next section, the current state-of-the-art knowledge2 about customer value, customer value management and the organizational factors are discussed and the conceptual model is proposed. After that, the used research method is explained. Lastly, the research results are presented followed by conclusions and discussion. Additional information on the research method can be found in appendix A and B.
2. THEORETICAL FRAMEWORK 2.1 Customer Value
The introduction mentioned that the focus of firms has shifted back from products to customers, in steps which have mainly been driven by technological developments. Already in the 1950s the importance of customer based marketing was recognized by prominent researchers like Drucker (1954), Kotler (1967) and Levitt (1960). At that time, Sevin (1965) developed a method to allocate revenues and costs to individual customers. But it was not until the 1990s that these theoretical concepts were applied in practice. At this time the marketing era of customer relationship management gathered momentum through the IT-revolution, which made extraordinary improvements in collecting, storing, analyzing and transmitting huge amounts of information possible (Shah et al. 2006). At first, these new opportunities were mainly used for approaching large quantities of customers, by defining customer segments based on characteristics, without taking individual value into consideration (Sheth, Sisodia & Sharma 2000). But, since database technology and analysis through exploding computer calculating power have taken a flight in recent years, this individual customer value can be taken into consideration too now. Companies are also adjusting their organizations to this: the product-oriented concept of brand equity and product profitability is gradually being substituted by the customer-focused concept of customer equity (the aggregated sum of individual customer value), which focuses on customer profitability instead (Hogan, Lemon & Rust 2002; Shah et al. 2006). According to Rust, Zeithaml & Lemon (2000) this customer equity can be increased by recognizing the three drivers of it: value equity, brand equity and relationship (retention) equity.
Figure 1: “Drivers of Customer Equity” (Rust, Zeithaml & Lemon 2000) Value Equity
Brand Equity
Relationship Equity
With value equity is meant the perception of value by the customer in terms of quality, price and convenience. Brand equity is the perceptions gained from the subjective appraisal of the brand and tend to be rather irrational. Relationship equity is described as the customer’s preference to repeat buying from the firm, which can be influenced by retention programs and relationship-building activities. The customer life cycle shows that the importance of these drivers can fluctuate in the different stages of the customer-firm relationship.
Managing the customer life cycle. Blattberg et al. (2001) distinguish five different stages in the customer life cycle: (1) prospects, (2) first time buyers, (3) early repeat buyers, (4) core customers and (5) defectors. These stages are recognized, because the relationship between the firm and the customer is different over time due to changing customer needs, expectations and behavior. A first-time customer usually only makes a price-benefit consideration, so value and brand equity are significantly important. Core customers learn whether the product suits and whether expectations of the company are met. In case of a positive product or service experience, which could be heavily influenced by an effective retention strategy (relationship equity), a repurchase (or in a service market a prolongation of the contract) is usually the result.
Figure 2: “Customer Life Cycle” (Blattberg et al. 2001)
addressed: all customers are equal, but some are more equal than others3. Wieringa & Verhoef (2007) investigated customer behavior in a liberalizing service market in the Netherlands. Segmentation analysis of the market shows there is a large group of core customers (about 70%) staying put, not at all interested in switching service firms. Another small segment (about 6%) has a high probability of switching and seems to be insensitive for loyalty strategies (the disloyals). This indicates that, despite customer equity efforts, behavior and characteristics of customer segments or even individual customers also play an important role in effectively managing customer value. To tackle this, an individual approach is needed where individual customer value is optimized. This is called customer value management and will be further elaborated on below.
2.2 Customer Value Management
Customer value management (CVM) is defined as the optimization of the value of a company’s customer base, by focusing on the analysis of individual data on prospects and customers. The resulting information is used to acquire customers and to drive customer behavior with the developed marketing strategies, in such a way that the value of all current and future customers is optimized (Verhoef et al. 2007). This makes the dual creation of both firm value and customer value possible (Boulding et al. 2005). Others refer to this concept with the phrase of customer equity management, which is defined as a comprehensive management approach that focuses the efforts of the firm on increasing the lifetime value of individual customers in a way that maximizes customer equity (Hogan, Lemon & Rust 2002; Blattberg, Getz & Thomas 2001). Both come to the conclusion that, by allocating resources to customers, firms have direct insight in individual customer revenues and costs, which gives the opportunity of optimizing individual customer value (or equity) like any other financial asset of the firm. Optimizing includes revenue expansion as well as cost reduction, but using it as an instrument for cost reduction alone is not a good idea according to Rust, Moorman & Dickson (2002).
According to Gupta & Lehmann (2005), Kumar & Reinartz (2006) and Rust, Lemon and Narayandas (2005), it is important for companies applying CVM that4:
1. management adopts the “customer centric view” within the organization and considers customer management and the customer lifetime value as central issues within the organization;
2. management recognizes that customers differ in their needs and their expected lifetime value;
3. customer data, which may be enriched with standard marketing research data (i.e. satisfaction, brand preference) are up-to-date and ‘real-time’ available;
4. management generates customer insights and customer value information based on an extensive analysis of customer data;
5. costs can be allocated to individual customers; and
6. customer value management is a learning system, in which customer strategies can be continually improved based on continuous evaluations of prior customer strategies.
So far customer value and customer value management are defined and the prerequisites for implementing CVM are discussed. Next, the organizational factors that affect CVM implementation need to be defined and proposed as a model so these can be further elaborated on.
2.3 Towards a Suitable Framework
For this paper, a model is needed that describes only the relevant organizational factors that influence the degree of CVM implementation. Because such a model does not yet exist, current models are selected and described. The goal is to combine these existing models into a new conceptual model which is proposed at the end of this chapter.
evaluated based on the criteria of Little (Leeflang et al. 2000). After that, the organizational factors are further elaborated on and the proposed conceptual model is presented.
Customer equity model. The first framework is found in Blattberg et al. (2001). In their chapter about “organizing for customer equity”, they distinguish five ‘organizing weapons’: 1) structure, 2) systems and processes, 3) people and skills, 4) beliefs and 5) leadership behaviors. ‘Structure’ is about the appropriate dominant dimension around which to organize. ‘Systems and processes’ define the way activities are coordinated and the way information flows through the organization. With ‘people and skills’ is meant that talented people are needed to organize customer equity management. ‘Beliefs’ describes the organizational culture, and ‘leadership behavior’ is about the crucial support and commitment of top management.
Customer concept adoption model. The next model is found in Hoekstra et al. (1999), an article about the adoption of the new marketing paradigm called the customer concept. The customer concept is defined as a paradigm in marketing stating that not single transactions (the marketing concept) but building up long-term relationships with customers is most important. The authors sum up nine aspects of (marketing) management that are subject to change in the adoption of this new marketing paradigm: 1) vision, 2) objectives, 3) strategy, 4) structure, 5) culture, 6) information, 7) decisions, 8) business processes and 9) human resource management. With ‘vision’ is meant a shared vision among employees for creating superior customer value. ‘Objectives’ are goals that should be absolute instead of relative. ‘Strategy’ is about choosing the right value discipline (instead of a competitive strategy). The ‘structure’ should be congruent with the chosen value discipline, preferably customer-oriented. The term ‘culture’ refers to the unwritten system of shared values and norms. The aspect ‘information’ refers to the collection and use of customer information and the systems that need to be set up. This ‘information’ should lead to customer-based (instead of product-based) ‘decisions’. Due to this, ‘business processes’ should no longer be focused on transactions, but on relationships with customers and redesigned congruently. Lastly ‘HRM’ discusses the changing roles and responsibilities of employees.
‘Structure’ divides tasks, provides coordination, trades off job specialization & integration, and deals with centralization. With ‘strategy’ is meant, those actions that a company plans in response to or anticipating on changes in its external environment: its customers and competitors. The variable ‘systems’ refers to all procedures that make the organization go. ‘Style’ is about top management attention, symbolic (leadership) behavior and organization culture. With ’staff’ is meant the way companies deal with their employees, preferably as a pool of resources to be nurtured, developed, guarded and allocated. The variable ‘skills’ tries to capture a company’s crucial attributes that characterizes the company. ‘Shared values’, or ‘super ordinate goals’ as it was called in earlier versions of the model, represents a set of values and aspirations, often unwritten, that goes beyond the conventional formal statement of corporate objectives. A summary of the models can be seen in the table below.
Blattberg et al (2001) Hoekstra et al. (1999) Waterman et al. (1980)
- Strategy Strategy Strategy
Structure Structure Structure Structure
Systems & Processes Business Processes / Information
Systems Systems
Leadership Behavior Decisions Style Leadership Commitment
People & Skills HRM Staff Employee Involvement
- Objectives Skills Customer Metrics
Beliefs Vision / Culture Shared Values CVM Implementation
Table 1: “Comparing the different frameworks”
The first model of Blattberg et al. (2001) comprises five important organizational factors which makes it look rather simple, but on the other hand disputable whether it is complete. First, it is impossible to characterize the differences in strategy between companies, which could have an influence on the degree of CVM. Secondly, customer metrics cannot be addressed anywhere.
complete but not that simple. Thoroughly studying the factors information and culture, it has become clear that these can also be described within business processes and vision respectively.
The model of Waterman et al. (1980) is very popular because of its applicability. By keeping the names of the organizational factors quite general and simple, it is adaptive in different situations and contexts, but it misses some specific factors in this particular case.
In the last column, these three models are combined into six organizational factors shortly motivated below.
The organizational factor ‘strategy’ is considered as the way an organization anticipates on the competition (business strategy) and how value is created to the customer (customer strategy). Both Hoekstra et al. (1999) and Waterman et al. (1980) replenish each other on this, while Blattberg et al. (2001) do not mention it.
‘Structure’ is mentioned in all three models and includes the coordination between departments (interdepartmental connectedness) and market-based rewarding. In most cases it describes the way companies are organized. The rewarding structure is mentioned under different variables across literature, usually under ‘structure’ or ‘systems’. In this research, rewarding is described under ‘structure’ because the systems part is fully grounded in CRM literature.
‘Systems’ (and processes) are also mentioned in all three models. This usually comprises the coordination and support of information flows through the organization. Because in practice this is usually covered by companywide CRM solutions, CRM literature is used to describe in what way these systems support the proposed five processes.
‘Leadership commitment’ refers to the top management support (in terms of attitude and behavior towards using CVM) that exists within the company. Although the three sources name it differently, the descriptions show great similarity and it is therefore recognized by all three articles as an important factor. This factor also includes in what way companies manage the process of CVM implementation.
The topic ‘customer metrics’ describes the models used by companies to calculate current and potential customer value. Congruent with the factor ‘objectives’ of Hoekstra et al. (1999), these metrics are absolute and not relative. The fit with the factor ‘skills’ of Waterman et al. (1980) is more vague, although customer metrics do tell in a way what a company does best. Because this factor is very CVM specific, it is not comparable mentioned in the other models.
Lastly, the factors of beliefs, vision, culture and shared values should be noted. It is much discussed in literature whether culture is a cause or an outcome. The most prominent discussion on this is in the context of market orientation between Kohli & Jaworski (1990) on the one side and Narver & Slater (1990) and Day (1999) on the other. Homburg & Pflesser (2000) recognize these as two distinctive approaches, where Kohli & Jaworski (1990) emphasize the behavior that results in market orientation and the others characterize it as the attitude needed for market orientation. This research focuses on CVM Implementation as an outcome. Possible cultural causes for this are covered by the organizational factor ‘leadership commitment’ and ‘employee involvement’.
In the next paragraphs these proposed organizational factors will be further explained, and hypotheses about the relation between the organizational factors and the degree of CVM implementation are formulated accordingly.
2.4 Strategy
In this research an explicit distinction is made between the business strategy and the customer strategy. Because the first is the responsibility of top management and the latter of the marketing department, it is interesting for this research to find out how both interrelate (Payne & Frow 2005) and what effect this has on the degree of CVM implementation. Below these terms are further explained.
With the product-market investment strategy is meant what scope of business the organization wishes to serve. Here the company defines in what markets to compete and choices are made about what goals to achieve (investing to grow, investing to maintain, minimal investment to milk the cow or divesting the business).
The customer value proposition can be best explained using the value disciplines of Treacy & Wiersema (1993). They state that successful companies have focused on delivering superior customer value in line with one of the three value disciplines: operational excellence, customer intimacy or product leadership. One (or two) disciplines should be dominant while in the other(s) industry standards are met. Operational excellence has a strong focus on processes to lead in price and convenience, customer intimacy focuses on shaping products to fit specific customer needs and product leadership means a strong emphasis on product innovation. Hoekstra et al. (1999) argue that firms delivering value in line with a customer intimacy value discipline are most likely to adopt the customer concept to the full extent. The choice for this discipline is heavily influenced by the degree to which the market environment is stable and the degree to which there is a relationship potential in the market (Hoekstra et al. 1999).
Assets and competencies are sustainable competitive advantages that should be considered when formulating the strategy. These strategic assets can be very diverse, from having a distinctive brand to the size of the customer base or the competencies of its personnel.
Functional strategies and programs usually are an execution of a business strategy. But it can also be the other way around: functional strategies leading to a sustainable competitive advantage that drives the business strategy and gives substance behind the vision.
Later on, pressure on margins intensifies so firms become more selective in acquiring the customers that are most valuable and hopefully most retainable. In the example of Wieringa & Verhoef (2007), firms in that particular service market should not bother acquiring disloyals, because these customers will leave anyway. Retention is in fact all about loyalty: cherishing valuable customers, meeting their expectations with the delivery of excellent service quality so that they are willing to pay more and recommend your firm to others (Reichheld 2003). Nevertheless, some customers are loyal but their value could be optimized. A solution to that is customer expansion. This comprises the effective management of selling the customer more products (cross-selling), upgrade the customer to a more profitable product (up-selling) or just deliver small additional add-ons and services to the existing product.
The following two separate hypotheses are formulated to test whether one of these strategies affects the degree of CVM implementation.
(1) H0: The business strategy does influence the degree of CVM implementation H1: The business strategy does not influence the degree of CVM implementation
(2) H0: The customer strategy does influence the degree of CVM implementation H1: The customer strategy does not influence the degree of CVM implementation
2.5 Structure
The second issue is that employees should be made accountable for managing customer relationships, by using customer or market-based rewarding. Both interdepartmental connectedness and market-based reward systems are significant variables in the market orientation research literature (Ruekert 1992; Jaworski & Kohli 1993; Kirca et al. 2005).
Interdepartmental connectedness. Departments having informal contact with each other are in the first level of connectedness. This can be achieved by well-incentived product managers, but cross-functional teams or segment task forces that coordinate customer activities may do the job too. An intermediate form would be a matrix structure in which segment managers or customer-based front-end units are appointed to work together with product-providing back-end units to deliver complete solutions. The most extreme form is that product/brand managers are replaced by customer (segment) managers (Shah et al. 2006).
Market-based reward systems. In line with the abovementioned, employee incentive programs and evaluation should be congruent with customer objectives. It is evident that when employees are rewarded based on short-term financial performance only (i.e. units sold) one cannot expect any long-run strategic orientation. A solution would be to partly designate market-based objectives like customer satisfaction and retention rates instead of traditional sales measures, to force customer sensitivity (Kohli & Jaworski 1990; Ruekert 1992).
Again two hypotheses are formulated, because of the strong distinction between the two issues, to test whether these variables influence the degree of CVM implementation.
(3) H0: Interdepartmental connectedness does influence the degree of CVM implementation H1: Interdepartmental connectedness does not influence the degree of CVM implementation
(4) H0: Market-based rewarding does influence the degree of CVM implementation H1: Market-based rewarding does not influence the degree of CVM implementation
2.6 Systems
though, to be customer-centric by allocating resources to customers. For this reason, to manage customer value, employees need to be supported by systems and processes that make this possible. Customer Relationship Management (CRM) is a concept rooted in technology that offers the solution, provided correctly implemented. The most common mistake is that CRM technology is often incorrectly equated with CRM itself (Reinartz, Krafft & Hoyer 2004). The relation is more indirect: IT investments enhance the firm’s ability to perform the required customer-centric processes (Jayachandran et al. 2005). Payne & Frow (2005) analyzed the different opinions of scholars and managers, and come up with the following extensive definition: “CRM is a strategic approach that is concerned with creating improved shareholder value through the development of appropriate relationships with key customers and customer segments. CRM unites the potential of relationship marketing strategies and IT to create profitable, long-term relationships with customers and other key stakeholders. CRM provides enhanced opportunities to use data and information to both understand customers and co-create value with them. This requires a cross-functional integration of processes, people, operations and marketing capabilities that is enabled through information, technology and applications.” These enhanced opportunities to use data and information, and this cross-functional integration of processes, people, operations and marketing capabilities are just the ingredients needed to make CVM work. According to Kumar & Reinartz (2006) there are three generations in the CRM evolution, from separated functional applications in the first to a strategic integration throughout the entire organization in the third generation. Below, the five key cross-functional CRM processes are discussed.
Figure 4: “Conceptual Framework for CRM Strategy” (Payne & Frow 2005)
Information Management Process. This concerns the systems and applications aspect of the organization, like data warehouses (mainframe), IT systems (workplaces), analytical tools (applications for data mining purposes), FO/BO-applications (for a direct interface with customers) and CRM software suites (e.g. PeopleSoft, SAP or Siebel). It is important that customer information is gathered in a central database and not spread throughout the organization. Based on this central database, applications should run that make data analysis possible and facilitates insights from front to back of the organization.
value when making decisions towards the customer. Another issue is that in the process of being a customer of a firm a certain product cycle exists, meaning that there is a logical sequence of products and services consumed, based for instance on customer characteristics. Both functional infrastructure and product cycle sequence can be facilitated by CRM.
Multichannel integration process. Neslin et al. (2006) define multichannel customer management as the design, deployment, coordination and evaluation of channels through which firms and customers interact. The challenges they identify are in line with this topic, namely improving the insight in the behaviour of customers across channels and allocating the resources coherently. Therefore, integrated channel management is necessary to centralize customer information gathered by the different customer contact channels. The arrows pointing both ways indicate that this also includes information towards the customer contact channels.
Performance Assessment Process. It is important to assess whether value is created by the firm over time. According to Payne & Frow (2005) a distinction should be made between shareholders results and performance monitoring. For the first-mentioned, it is important to make a distinction between a short-term and a long-term orientation towards shareholder value creation. The latter is done by formulating key performance indicators (KPIs) that clearly indicate improvements over time. A head start can be made by using the summed customer lifetime values, customer equity, as discussed further on under customer metrics. This higher firm value and customer value can be realized by focusing on superior financial performance and loyal customers (Boulding et al. 2005; Shah et al. 2006).
Whether the increasing support of the five formulated processes by systems also increases the degree of CVM implementation is tested by the following hypothesis:
(5) H0: Systems do influence the degree of CVM implementation H1: Systems do not influence the degree of CVM implementation
2.7 Leadership Commitment
preparing the organization well before deploying a vision. They call this “establishing a sense of urgency”. There are five external trends in the market which should ‘urgently’ force the organization to become more customer oriented: 1) intensifying pressures to improve marketing productivity, 2) increasing market diversity, 3) intensifying competition, 4) demanding and well-informed customers and consumers, and 5) accelerating advances in technology (Sheth et al. 2000).
The next step in the change process is to create, communicate and empower others to act on a vision. Next to the before mentioned interdepartmental connectedness and market-based rewarding, this top management emphasis is the third significant factor wherefore empirical evidence is found in market orientation literature (Ruekert 1992; Jaworski & Kohli 1993; Kirca et al. 2005). This top management commitment and a sufficient focus on the implementation process have also been proven in a CRM context (Bohling et al. 2006). Senior management needs to be convinced of the value of it and communicate this commitment to junior employees (Kohli & Jaworski 1990). The importance of this issue is often greatly underestimated. Fact is that leadership commitment is a necessary condition to break through a functional orientation, since functional differences are deeply rooted in incentives, backgrounds and interests, time scales and task priorities (Day 1999). Narver & Slater (1990) have also proven that top management emphasis on market orientation has a positive impact on the level of an organization’s market orientation. In day-to-day work this includes the explicit identification of desired behaviors, open discussion with managers about expectations and active correction of any behavior that undermines the realization of customer value (Blattberg et al. 2001).
customers should be in the position and have the authority to solve problems for these customers without always having to consult a manager (Hoekstra et al. 1999).
The effect of the commitment of senior management on the degree of CVM implementation is measured and tested by the next hypothesis:
(6) H0: Leadership commitment does influence the degree of CVM implementation H1: Leadership commitment does not influence the degree of CVM implementation
2.8 Employee Involvement
The degree of CVM implementation also has an impact on the requirements towards personnel. As mentioned before, companies should deal with their employees as a pool of resources to be nurtured, developed, guarded and allocated (Waterman et al. 1980). Hoekstra et al. (1999) are more specific, mentioning that the hiring and training programs should aim at the employee’s ability and attitude with respect to customer orientation. They argue that these skills may be more relevant than content-related knowledge and abilities of a function, because these are the core of new functional profiles and rewarding systems congruent with a customer-oriented strategy. This new approach forces functions to change in the organization (Blattberg et al. 2001). New roles lead to new skills, five are recognized: 1) technical, 2) analytical, 3) synthesis, 4) design and 5) communication & interaction (where synthesis in this context is defined as taking a helicopter view by stepping out of the functional silo to see the broader picture). Although every department will have its own strongest emphasis, in general there is a strong need at all functions for more broader educated personnel that is, next to their own specialty, capable of understanding their colleagues in other departments.
knowledge of marketing is needed to set-up, implement and use CRM-systems that facilitate these customer-centric processes in an efficient way.
Intelligence. Where the activities in the intelligence department before focused on aggregated customer characterization and market-size analysis, it changes to more customer affinity analysis, customer intelligence. For that reason, firms need analysts in the marketing intelligence department that cannot only deal with marketing research but also have knowledge of database marketing techniques. Next to this change of content of the job, employees are more and more asked to pro-actively advice marketers with campaign preparations, which demands more of their presentation and communication skills.
Marketing. Because of this development, marketers need to have more understanding of IT (since that is where the customer information is) and database analyses delivered to them by the intelligence department. More than before, marketers are responsible for the whole customer-firm interaction process since they are increasingly expected to effectively serve customer groups. This also forces them to get in ‘the skin’ of the customer and discover what innovation they really need instead of waiting for a new product-related innovation to come.
Whether the involvement of employees in the departments of marketing, intelligence and IT affects the degree of CVM implementation is tested with the following hypothesis:
(7) H0: Employee involvement does influence the degree of CVM implementation H1: Employee involvement does not influence the degree of CVM implementation
2.9 Customer Metrics
said: “what gets measured is what gets done”. Again referring to the customer life cycle, a distinction needs to be made between current customers and potential customers. This difference will be described below, where different techniques are presented.
RFM-analysis. The most basic metric to evaluate customer behavior and value is RFM, which stands for recency, frequency and monetary value. After scoring a test group based on these three criteria and determining a weight for every criterion, this can be generalized to the whole database. Now for every customer a RFM-score has been calculated, which represents the monetary value corrected by the likelihood of responding. Despite the proven effectiveness of RFM in direct marketing settings, several researchers found Customer Lifetime Value (CLV) to be superior over RFM for being more extensive (Reinartz & Kumar 2003; Venkatesan & Kumar 2004).
Customer Lifetime Value. Berger & Nasr (1998) were the first to enlighten the field with a simple CLV model. Customers should be viewed in terms of long-term profits instead of a single transaction (Hoekstra et al. 1999). This can be done by calculating the discounted value of all expected future individual customer profits in a determined time period. This way, a customer can be viewed as an ‘asset’ which should have a certain return on investment (ROI) within a predetermined amount of time (Bolton et al. 2004).
time t i customer i rate discount d ) 1 ( 0 t i, , = = = + =
∑
∞ = t t t i d Profit CLV rate discount d y probabilit retention r ) 1 ( * ) ( 0 , = = + =∑
= T t t i t t i t i, d Profit r CLV rate discount d y probabilit sell -cross cs y probabilit retention r ) 1 ( ) * ) ( ( * ) ( 0 , , 1 , , = = = + + =∑
= − T t t t i t i t i t t i t i, d CS Profit cs Profit r CLV Equation 1: CLV with discount rateEquation 2: CLV with discount rate and
retention probability
Equation 3:
CLV with discount rate, retention probability and cross-sell probability
Above, the profit (revenues minus costs) of a customer (i) in a certain time period (t) is divided by the discount rate (d), which should be done for each expected time period the customer has a relationship with the firm. By summing up these outcomes, the discounted value of the expected future profits is calculated. In the first most simple form only the discount rate is taken into account (equation 1). The more complex models include retention probability and cross-sell probability respectively (equation 2 and 3). Gupta, Lehmann & Stuart (2004) show that the impact on CLV of a change in retention is far greater than a change in the discount rate and can therefore be qualified as quite important. Donkers, Verhoef & de Jong (2007) add, while testing a range of models to predict CLV, that simple models perform very well and retention probability should not be viewed solely without considering cross-buying needs.
CLV can also be viewed on an aggregated level, which is called customer equity. Customer equity is defined as the total of discounted lifetime values summed over all current and potential customers and is closely linked to the shareholders value of the firm (Rust, Lemon & Zeithaml 2004). Now customers can be segmented based on profitability, which usually results in a customer pyramid with three or four tiers of customers (Rust, Zeithaml & Lemon 2000). Farris et al. (2006) use a classification of three tiers of customers: the top tier which is most valuable and should be rewarded to retain, the second tier who have the potential to grow to the top, and third tier customers which have a negative profitability. Kumar & George (2007) compare the different available approaches to calculating customer equity, and propose a new integrated approach where the proper customer equity calculation can be chosen based on the kinds of data available in the firm.
Prospect Lifetime Value. In the same way, prospects can be assessed using Prospect Lifetime Value (PLV). This means the expected value of the prospect minus the cost of prospecting is calculated (Farris et al. 2006). A PLV calculation would be executed as follows:
PLV (€) = Acquisition rate (%) * CLV (€) – Acquisition spending (€) Break-even acquisition rate (%) = Acquisition spending (€) / CLV (€)
of the marketing campaign divided through the amount of targeted customers (Sales & Acquisition Costs, SAC).
The following hypothesis tests the causal relationship between customer metrics in the form of customer value models and the degree of CVM implementation:
(8) H0: Customer metrics do influence the degree of CVM implementation H1: Customer metrics do not influence the degree of CVM implementation
2.10 Conceptual Model
Based on the preceding findings in literature the following conceptual model is proposed:
Figure 3: “Conceptual Model”
In the next section the research methodology is outlined, where after the results are presented in section 4 followed by the conclusions and discussion in section 5.
3. METHODOLOGY
3.1 Research Method
Because current literature lacks a suitable existing model for this problem, explorative research is chosen to gain additional insights in the organizational factors that determine the degree of CVM implementation. To test whether the proposed model makes sense, interviews are conducted in the field. Congruent with this research design, qualitative research is used as an unstructured, exploratory research methodology based on small samples that provides insights and understanding of the problem setting (Malhotra 2004). This means that the sample is rather small, the data collection is unstructured and the analysis is non-statistical. Leeflang et al. (2000) describe the difference between qualitative and quantitative as follows: the direction of a solution for a marketing problem can often be found by qualitative analysis, a quantitative treatment of the problem can be instrumental in finding the approximate length of the solution.
3.2 Data Collection
Here is described in what way the data is collected. The sources that are used for this research are scientific literature, open-ended interviews, organizational documents and semi-structured interviews.
For a first direction, the management problem has been grounded with scientific literature. After that, some open interviews were conducted within the company to see whether there was empirical evidence for the theories found. This way the conceptual model and theoretical framework evolved: new insights were added through an exchange between newly found theoretical insights and empirical findings through the interviews.
3.3 Plan of Analysis
The results of the interviews are presented in the same way as the theoretical framework is set up. Again, in order of appearance: strategy, structure, systems, leadership commitment, employee involvement and customer metrics. After that, conclusions are presented whether a causal relation can be considered between the organizational factors and the degree of CVM implementation. Lastly, the relevance of this and further research is discussed. There are some important criteria when doing scientific research, mentioned below.
Reliability means whether the results are consistent so the research can be repeated in the same way, regardless of time, researcher and instrument (Malhotra 2004). To increase this reliability, data is retrieved from multiple sources like organizational documents, presentations and thirteen different employees from different parts of the organization.
The internal validity, whether this research really determines the causal relationship between the independent variables (organizational factors) and the independent variable (degree of CVM implementation), is strong. Eight companies from different industries have been thoroughly interviewed, not surveyed, to really get a hold on the relevant variables.
The possibility of generalizing this research to other companies, the external validity, is poor. The number of cases is too little to safely generalize the outcomes to the whole population. To increase this external validity, further quantitative research is needed.
4. RESULTS
4.1 Strategy
The strategy is outlined based on the business and the customer strategy as explained earlier in section 2.4. The business strategy can be divided in a part about the product-market investment strategy, the dominant value discipline and assets & competencies. The customer strategy is divided into the acquisition, retention and expansion phase.
Business strategy. Of all the companies interviewed, there is a great resemblance when it comes to the product-market investment strategy. Most firms have expanded their markets next to the core product they are mainly known of in their home markets. In the telecommunications industry the convergence of the telephony, internet and television markets (triple play) has really turned around business as usual at these different service providers. The online retail industry focuses on selling more and more additional products of which consumers accept to buy them online. The other industries emphasize on additional products that synergize with the origin of the core product, like various types of insurances in the financial services industry.
When it comes to the dominant value discipline, most companies are in the process of a shift from product leadership or operational excellence to a customer intimacy approach. The reason for this is that they have a large base of customers using the core product that could be potentially interested in newly developed additional products. It takes more effort to acquire totally new customers than to sell additional products to customers that already have a (positive) experience with the firm: “Our company started out as just another reseller of products but then over a new channel that time, the internet. Gradually there is an increasing shift in effort to selling more products by matching it with the right customers”. Other companies, mostly in the financial services industry, have always followed a customer intimacy approach using a lot of human capital. Their challenge lies in the integration of customer information scattered out over different systems of the organization.
products have a cannibalizing influence on the core product which could be perceived as a contradiction.
Customer strategy. In all industries a strong emphasis lies traditionally on the acquisition phase through direct channels like DM or telemarketing. An exception can be made for the internet retail industry: they primarily use the internet channel (banner advertising, partnerships and electronic newsletters) and above the line campaigns to attract customers, which means that they do not actively approach customers individually through offline direct channels.
In the telecommunications industry customers are mainly expanded by selling additional services to the telephony product, i.e. a service contract, or by stimulating the usage of the phones. Here a strong emphasis (and an advanced level of CVM implementation) can be observed in the retention phase because of the unfavorable alternative: extreme propositions are needed to acquire a customer. High value customers are actively approached before the contract is expired, medium and low value customers are carefully handled reactive or passive. The utilities and online retail industry show close resemblance because of the emphasis on innovation in additional products. Because the growth in these new markets seems to steepen, the strategy is slowly shifting to more customer-based growth. In one case in the financial services industry, new customers were following a cross-sell trajectory of campaign follow-ups and unsatisfied inbound calling customers were routed to a special team to minimize defection.
4.2 Structure
The way the business is organized and employees are rewarded, as outlined in section 2.5, is explained below.
of the customer lifecycle (acquisition, retention and expansion). These managers have targets based on contact pressure and customer value, and are for marketers an obligatory step in the campaign management process; just like marketing intelligence by the way”. In another case, project teams with members from every business line are responsible for the different phases of the customer lifecycle and the same way customer group teams are formed. In every organization different combinations are made between the dimensions products, customers and channels.
Market-based rewarding. In all companies there is the usual trade-off between customer value vs. number of customers (market share in numbers not value) and acquisition vs. retention. When a matrix structure is applied, in the case of clashes the number of customers is usually dominant. The internet retail industry is different in two ways: the click-through rates of web pages are important to steer on because it increases the conversion of marketing campaigns, and customer value is the important measure because it concerns single transactions of products and services. In more than one case it is stressed that the rumor of a merger or hostile acquisition boosts customer value, which means more marketing budget can be spend on the acquisition and retention of customers. The reason for this is that in Merger & Acquisition (M&A) analyses an extra premium is added to the actual value of the customer base.
At one financial services firm “customer success”, based on the concept of ‘customer advocacy’ developed by Forrester, is embedded in the strategy and is used to reward managers on: “We see customer value broader than delivering the right service concept only based on the customer’s (potential) monetary value. We believe that emotional value in terms of transparency, rational advantages and customer risk-based advice creates loyal customers. This customer satisfaction is assessed twice a year with a survey under customers and employees”.
4.3 Systems
In this section systems are characterized based on the support of the five different processes that are described in section 2.6.
respondents do believe though, that if CRM would be more firmly integrated in the business strategy and represented in top management, it would accelerate the CVM implementation process.
Information management process. All industries have a central data warehouse (DWH) where relevant information is leached out and is used differently in different settings (finance, marketing, etc.). In more than one case there is a strong difference in the interpretation of the same data by finance and marketing, which leads to discussions. In another case, internal customer data is combined with external aggregated data and saved on an individual level in the central data warehouse. It does seem to be hard and takes a lot of time, especially for traditional companies, to integrate customer information from different parts and channels of the organization into one DWH: “To our company, an excellent personal relationship with our customers is and has always been of the uttermost importance. Because before business units have always operated quite autonomously, customer information is scattered over different systems in the organization. To guarantee customers that they can expect and receive the same personal service whenever, wherever, our challenge now lies in the integration of this customer information into one system” says a representative of a financial services firm.
Multichannel integration process. In most cases there is a very strong integration with the customer support channel but not that good with the other (marketing) channels and subsidiaries. The consequence is that analyst generate incomplete value-based customer information because they do not have all the information on the customer that is available. Next to that, it is not possible to communicate this value-based customer information back to the customer contact channels. When the internet is the main marketing channel, it is a lot easier because the website is the actual DWH so system and channel are automatically integrated.
mentioned to the agent, but only to get a clear image of the customer (no action required). An interesting development is that the potential value of customers can be predicted very well by studying the contact channel the customer came in and the post-acquisition behavior.
Performance assessment process. Most companies report monthly about the change in value of the customer base, trends, the number of new customers (acquisition-rate) and the development of spending during the life cycle (based on cohorts). The online retail industry is especially eager on developing these KPIs, because they are not in the comfortable situation of identifying customers easily based on contracts.
4.4 Leadership Commitment
The results for leadership commitment, as described in section 2.7, are discussed here. Before is mentioned that the commitment for CRM in top management accelerates the implementation process. The same is true for CVM. One manager in the telecommunications industry mentioned the following: “at another company we had a commercial director who was a true ‘brand master’ fully dedicated to the customer experience but not very interested in the numbers behind the customer. The next marketing director did, which really shifted priorities radically towards the use of customer value. So the commitment of top management is an absolute necessity to get CVM implemented”. Managers can also force employees to be customer-centric innovative. The “customer success” KPI, earlier mentioned under 4.2, can support this by rewarding positive behavior regarding ‘customer advocacy’.
Another financial services company in the middle of the implementation process also mentioned the importance of an internal project manager. Too often companies blame an external party for implementation failure because the system was too strict to match the organizational requirements in the long term. A solution would be to keep the organization of the project under own administration and outsource subprojects when the organization is lacking specific capabilities.
4.5 Employee Involvement
companies. Usually the marketing or customer intelligence department is responsible for pushing CVM. Sometimes IT drives the implementation of CVM because it is able to successfully automate customer data management and knows what to do with it (data driven). In another case the finance department catalyzed the change because it is in their interest not to give away too high discounts to customers with a low value. There were also two cases where top management was absolutely convinced of the importance of customer value management but was not able to execute these issues on a lower level. Below, the changing role of departments is discussed.
IT. In all cases the importance of having IT and CRM knowledge in-house was recognized as one of the core assets. IT does have to get used to the fact their responsibility is getting more towards data engineering and process design so that marketing and intelligence can get along with it easily.
Intelligence. The intelligence department in most companies is focused mainly on the selection of customers for campaigns. Pre and post analysis, i.e. campaign evaluations, are opportunities that can make marketing actions far more efficient and accountable, but usually has too little priority. When there are database marketers, the major challenge lies in combining the different analysis to work out a model as described under 4.6: ‘customer metrics’.
Marketing. Marketers usually do not yet know what customer value can do for them. When some internal branding has been done to create awareness, the possibilities are clearer to the marketer. It usually also helps to assign a part of the marketing budget to campaigns with the condition it should be based on customer value. Again, rewarding customer-centric behavior, as described under 4.2, is the best motivator.
4.6 Customer Metrics
Like in the theoretical framework section 2.9, these results are structured by the distinction between the calculation of RFM, customer lifetime value and prospect lifetime value.
because all tracked data is saved in the database. Customer value is determined based on customer activity (recency, frequency, monetary) when it comes to sales, customer service, site visits, electronic newsletter click-through rates, etc. Now, by watching customer behavior carefully month to month, the post-acquisition process (after the first purchase) can be carefully monitored and anticipated on.
Customer Lifetime Value. Describing what elements to use when calculating CLV, there seems to be agreement about the revenues per customer: the most recent gross margin. When it comes to costs, some only use direct costs while others spread all costs over all customers. A few companies have the intention of adding a retention probability but in practice it is very hard to find the right determinants for this value. The customer value is usually determined once a month or quarterly. Not one of the interviewed companies has added growth or cross-sell probability to the calculation (yet). A pity, according to one manager: “customers basically need to be characterized based on four different determinants: total revenues (€), gross margin (€), potential value (cross-sell probability) and risk (churn/retention probability). Now different selections can be made for marketing campaign purposes. When the difference between gross margin and total revenues (per customer) is smaller than the average, measures can be taken to lower the direct costs. Loyalty efforts can be made to customers with a high churn probability and a high potential value. Customers with low revenues but a high potential value are interesting for cross-sell marketing”.
When the differences between the industries are viewed, also some remarks can be made. The telecom industry is more than the other industries developed in doing value-based retention propositions to current customers. There seems to be more urgency in the market here, because handhelds are high-involvement products and competition is fierce. The internet retail industry has the advantage that their database is also the main sales channel. On the other hand, lacking a contract with the customer, these firms are forced to use other metrics to allocate value to their customers. For this reason they are very keen on customer segmentation and post-acquisition consuming behavior. The financial services and utilities industry differ very much per company, but getting CVM implemented seems to be tougher than in other industries. These companies are usually somewhat older, have often evolved into strong formal organizations with a lot of procedures and systems which make changes go slowly. The following graphical presentation shows the average scores on the organizational factors per industry5:
Figure 6: “Average scores on organizational factors per industry”
These scores are based on the answers given by the respondents in the interviews and are therefore solely based on the subjective judgment of the scores by the author.
5. CONCLUSIONS & DISCUSSION
5.1 Conclusions
These conclusions are based on the results discussed in the previous section. Although it seems that hypotheses are accepted or rejected, the text makes clear that a causal relationship is expected or not; because of the nature of this research, this cannot be ruled out.
1. Strategy. The business strategy is defined as the way the company does business compared to the competition, and the customer strategy as the way a firm approaches customers in the different phases of the customer life cycle. This research shows that, despite the increased enthusiasm for the customer concept (Hoekstra et al. 1999), companies remain reluctant in adopting a customer intimacy strategy. An explanation is that the business strategy is strongly determined by the competitive environment the firm is in, which leads in many cases to a dominant focus on innovation or processes instead of customer relationships. Despite this, no evidence is found that not choosing for customer intimacy would lead to a higher degree of CVM implementation. Therefore, there does not seem to be a causal relationship between the business strategy and the degree of CVM implementation.
Customer strategies on the other hand, lead to programs that take customer value into account. Examples are “new customer programs”, “retention propositions for high value customers” and “defection teams in call-centers”. Because these programs consider the individual value of customers, the company is forced to implement CVM to a certain degree. Evidence is therefore found to suspect a causal relationship between customer strategy and the degree of CVM implementation.
(1) H1: The business strategy does not influence the degree of CVM implementation (2) H0: The customer strategy does influence the degree of CVM implementation
organizational designs can be supplemented with coordinating functions to cover this customer relationship. For example, by adding lead managers responsible for separate phases in the customer life cycle. Another option is project teams or customer group teams responsible for lifecycle phases and distinctive customer groups respectively. So, it is expected that the existence of interdepartmental connectedness does not lead to a higher degree of CVM implementation, because it is a result of forced customer-orientation through customer-based rewarding.
The way employees are rewarded is strongly related with the chosen organizational structure. In general, a combination of a quantitative and qualitative approach is most effective. The first is based on revenues or value aiming on the generation of more business (acquisition, retention, development). The qualitative approach sets its targets based on customer satisfaction or other benchmarks that imply ‘customer advocacy’. In one case, an index of “customer success” is formulated as a target for managers and assessed each half year by surveying both customers and employees. Either way, again a customer orientation forces a company to consider individual customer value instead of market-based metrics like total revenues. Therefore, customer-based rewarding is heavily expected to influence the degree of CVM implementation, on the condition that supporting customer metrics exist and are provided to work with.
(3) H1: Interdepartmental connectedness does not influence the degree of CVM implementation (4) H0: Customer-based rewarding does influence the degree of CVM implementation
3. Systems. Effective Customer Relationship Management is the necessary infrastructure for optimal CVM implementation. The organizations under research are reviewed using the framework of Payne & Frow (2005) as a reference, and great differences are observed.
