strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: August 25, 2004

 
 

No-Frills CRM

By leveraging the customer data it already possesses, a company can improve customer profitability and uncover new opportunities. 

Customer relationship management (CRM) software is the most talked-about business technology today. The potential benefits are obvious: What could be more fundamental to a well-run company than CRM’s declared aim of identifying, attracting, and retaining the best customers? The promised performance improvements are alluring. Increasing a company’s customer satisfaction by 1 percent translates into a 3 percent increase in market capitalization, according to Claes Fornell, director of the University of Michigan’s National Quality Research Center. And CRM success stories abound. For instance, The Limited, the company that owns Victoria’s Secret and Lane Bryant, reported in 2001 that increased cross-selling yielded a return of 400 percent on its investment in analytical CRM software.

But CRM systems come with two big disadvantages: cost and complexity. Forrester Research found that large companies can spend between $15 million and $30 million per year on CRM software. And the Meta Group estimates that 55 to 70 percent of CRM projects fail to meet their objectives. Gathering coherent customer data in a single place, analyzing it effectively, realigning an organization according to the insights obtained — all of this is hard to do. It’s no surprise that some organizations fail to complete the journey, or that many companies, mindful of the expense involved and of the mixed results reported, have opted to sit on the CRM sidelines for a while.

We think it is possible to reap some, even many, of the rewards of CRM without buying a specialized software package. We call our method “Cheap CRM.” It involves leveraging the customer data the company already possesses — and most companies already possess a lot more customer information than they think.

 The payoff from the kind of “Cheap CRM” we propose is significant. Managers can dramatically improve customer profitability and retention and reveal new opportunities without incurring the disadvantages.

Much of the data needed to implement Cheap CRM already exists, in fact, on the humble invoice. Most multinational companies have invested massively in mainframe enterprise resource planning systems. These have brought rigor to their sales administration, summarizing each month’s invoices at a customer or business unit level, but they don’t necessarily provide transparency in sales reporting, thus leaving the organization blind to the richness of transaction-level analysis.

By downloading invoice data into a simple database tool such as Microsoft Access, however, company analysts can construct a revealing picture of the shape of the business. Which customers are delivered to, and where? Which supply points generate the most revenue, and which receive the most orders? With this data, managers are able to calculate profitability with a precision that occasionally leads to revelation. They can also monitor changes in profitability inside a given reporting period. This is of particular significance with products subject to variable supply prices and potentially volatile margins. Knowing the number and types of transactions, managers can allocate fixed administrative expenses effectively. They can then link the database to external factors that may be driving buying behavior, such as the weather or advertising. By subjecting this data to regression analysis, one can get very close to the heart of CRM: understanding the customer’s propensity to buy.

The major impact of this analysis emerges in the company’s balance sheet rather than in the income statement. Invoices contain not just values but dates: dates of order, delivery, invoice, and payment due. In short, each invoice reveals the time taken to complete the order-to-cash cycle. With a set of invoices for a complete period, a company is able to calculate the weighted average cost for each customer (delivery to the payment date divided by days in the period multiplied by the value). Bring in dates for payment of taxes, such as the value-added tax (VAT) in Europe, and managers can create a weighted average for all customer-related working capital outside inventory. In other words, with some clever analysis of invoice data, customer profitability — one of the murkier metrics to track — can become highly visible.

 
 
 
 
Close
Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.

Close