Saturday, April 29, 2006

Customer Relationship Management & Sales

Customer Relationship Management (CRM) is a well known business concept. Managers today are working hard to build and maintain a relationship with the customer - given the importance of customer lifetime value. While the concepts of CRM and Customer Lifetime value are well established and understood by managers, managing customer relationships has become a challenge for many managers. Several firms have implemented dedicated software tools (Seibel, salesforce.com etc.) for customer relationship management, and even more number of companies are planning to do the same. Few firms have even created offices of customer relationship management: Client partners, Account managers, Program Managers etc. In spite of all these efforts, managers are finding it hard to manage customer relationships.

The challenge of managing customer relationships led to a new concept called Levels of Customer Relationships developed by INSEAD, France. The central theme of this concept is:

  • Customer relationship is an evolutionary process that can be identified as 6 distinct stages.
  • Customers have different needs and expectations during different stages of this relationship.
  • Customer relationship is a dynamic process and can move from one stage to another based on customer’s aspirations and customer’s buying experience

In this article, I will briefly describe the levels of customer relationships and its impact to the vendor firm.

Why do customer’s have a relationship with the vendor?

Every salesman knows that customer often wishes to have a relationship with the vendor. Many firms therefore want to make use of this relationship and have instituted customer loyalty programs - aimed at rewarding loyal customers. For example, Airlines have free miles program, credit card firms have points program, Grocery stores have a special discount for loyalty card holders etc.

Looking from the customer’s perspective, customer expresses a need for a relationship with the vendor for a few basic reasons: satisfy their needs, convenience, reliability, lower cost of transaction. Customers need products or services and will obtain them, but they are willing to enter into a relationship with the seller to make the process of buying more easier and a more pleasant experience.

One has to note that the intensity or depth of the relationship which the customer expresses to have with the vendor depends in the intensity of his/her needs. If a product/service is vital to the customer, then customer is willing to have a deeper relationship in order to have their needs satisfied as precisely as possible. On the other hand if the customer wants a routine service or generic product, then the relationship is superficial - characterized by buyer’s convenience. To understand this consider the following examples:

  1. Customer, who is a car manufacture, wants to develop a new fade resistant paint which is available in few unique colors. In such case, the car company is willing to work closely with BASF( paint company) to develop the paint which it needs. This deep relationship can be identified by joint R&D efforts, commitment to buy a minimum quantity over a period of time etc.
  2. Customer, who is a car manufacturer, wants to buy fasteners. Fasteners (nuts & bolts) are commodity products and hence the car manufacture is willing to buy from the lowest priced vendor from India or China. This superficial relationship can be identified by lack of any long time purchase agreements, a single lot purchase order etc.
  3. Customer, who is a telecom service provider, want to implement a ERP software. Since the software has to be customized for the telco, the customer is willing to establish a deep relationship with the vendor by having a development & maintenance contract with the vendor.
  4. Customer, who wants a copy of MS Project installed in a computer. Since this is a simple purchase, the customer wants to buy it from a near by store and install it himself. Thus there is no real relationship between the customer and the vendor.

All the above examples point to the fact that the level of relationship a vendor enjoys with the customer is directly dependent on the criticality or importance of customer’s needs. In short, customer’s enter into a relationship with the vendor in order to serve their own needs.

Strengthening Customer Relationships

We now understand that the depth of the relationship between vendor and customer is directly dependent on the intensity of the customer’s needs. Also note that the depth of relationship is defined by the customer. This creates a challenge for a salesman or a marketer at the vendor firm. For a vendor to increase sales, the vendor firm must improve the relationship with the buyer. And to improve the relationship, vendor must know the current level/stage of relationship he has with the customer. So the first step in managing customer relationship is to know and understand the levels of customer relationships.

Levels of Customer Relationships

As mentioned earlier, relationship between buyer and seller can be identified in 6 distinct levels. Level-1 being the lowest level of relationship and level-6 being the deepest level of relationship.

Level-1: Utility Need
Level-2: Convenience Need
Level-3: Comfort Need
Level-4: Personal Recognition Need
Level-5: Self-expression Need
Level-6: CO-Creation Need

From a marketing perspective, the customer lifetime value is lowest at level-1 and is highest at level-6. This is also reflected in the revenue or sales from a customer. Customer with whom a company enjoys the highest level of relationship, will also be the most profitable customer. It is therefore in the vendor’s best interest to have very deep relationship with the customer.

Level-1: Utility Need

This is the most basic interaction between customer and vendor. Here the customer desires to buy a particular product/service. Customer interacts with the seller with the sole aim of acquiring the product/service. The relationship between the firm and the customer is characterized by efficiency in transactions, straight forward, no-frills selling. To increase sales, vendor must work on availability of the product/service. Customer will buy only if a product/service appeals to the rational side of the customer i.e. Price and convenience. Customer does not bond with the vendor as the relationship is a purely utilitarian one - exchange of goods/service for money.


The vendor should respond to the customer (in this level of relationship) by providing the required goods/service, And refrain from interacting at a deeper level i.e., by not offering added products/service - other than those requested by the customer. If the vendor insists or attempts to force a relationship to a higher level, the customer may "pull-out" thus risking future sales.

To understand this, consider this example: I purchased a laptop from DELL Computers. I placed an order online - for a particular configuration. My expectation from the vendor is that Dell will deliver the computer on stated delivery date. I am buying from Dell to meet by needs at a price which is attractive for me. If the salesman at Dell attempts to push additional hardware or software - which is not what I wanted, I might get annoyed and cancel the order.

Vendors must first identify the level of relationship the customer has with them, and then craft a strategy to deepen it. In this case, a vendor can deepen the relationship by increasing the number of interactions. This can be done by: Offering a wide range of products/service, having a 24/7 sales operations - i.e., Internet or all 24 hour shops.

For example, Dell can increase the number of customer interactions by offering a full range of computer accessories: Printers, Scanners, cartridges, office software, computer games etc. Dell can increase the number of customer interactions by offering value added services such as on-site maintenance, free software updates etc.

Utilitarian relationships can be deepened by augmenting the basic service/goods with a value addition: Cross selling or value addition.

Level-2: Convenience Need

Once the customer has easy access to service/goods that they need, customers look for ease of purchase process. This denotes a second level of relationship. The vendor should respond by providing services that simplify the buying process i.e., identify and eliminate those procedures that are a hindrance to obtaining a product/service. For example, having a shorter checkout lines in a store, having the products courier & providing the tracking number to the customer, having a service personal ready to attend the customer when the customer enters the bank/hotel/office etc.

To improve the buying process, the vendor must understand thoroughly the entire customer purchase experience and then eliminate the nagging problems in the purchase process. Service companies often resort to mystery shoppers - who act as customers and buy the product/service to measure & improve the buying experience. Often times, managers listen to feedback from front-line employees for suggestions to improve the customer’s buying experience.

For example, Dell provides the exact shipment details of the computer and is delivered on the specified time. In addition, Dell has a complete e-Commerce website which enables a secure and easy payment method. Airlines provide comfortable lounges at the airport - while customers wait for their flight. Airlines also provide e-ticketing, curb side luggage check in, on-line flight details etc., to make customers feel comfortable during the purchase process.

Often times, there are several instances of customers abandoning their purchase process in the midway. This is the sure sign of an inefficient and inconvenient buying process. For example, I have seen several abandoned shopping carts in a super mart. In one occasion, customer walked out of contract negotiations as the negotiations dragged on over minor details.

Relationships at this level can in strengthened by widening the service interactions with customers. By this I mean, look at the ways the customer buys your product/service and then provide additional services to make it simpler and easier for the customer. Customer Activity Mapping (CAM) & Customer Decision Mapping (CDM) are the tools that can be used to analyze the decision making, buying, using, and consumption experience. And in each stage, the objective of the vendor is to identify situations that pose obstacles to the buying process.

Making the buying process as pleasurable as possible, a vendor can strengthen relationship with the customer in this level and also take the relationship to the next level.

Level-3: Comfort Need

Once the customer has a convenient buying process, then they wish to have a "pleasant shopping experience" i.e., the customer seeks a buying interaction where he feels comfortable. This implies that the vendor should foster an buying environment in which customer feels comfortable and is characterized by an agreeable and relaxing purchase ambiance.

For example, many multi-million dollar business deals are done at resorts - away from the clutter of the office environment. BASF, a fortune-100 chemical company often conducts the contract negotiations on a luxury yacht. This provides the right ambiance and mood to put the customer at ease and feel comfortable during the buying process.

To provide a common example, look at Barnes & Noble bookstores. Their large stores are lined with comfortable sofas and coffee tables which encourage customers to sit, relax, enjoy a starbucks coffer and read a book before buying the book. Customers can freely browse the books for hours and are not pressurized in any way to buy.

Irony of this "comfort need" is that customer’s often overlook the comfort factor - and often customer notices the absence of the comfort. A discomfort during the buying experience is easily noticed and registered, while comforts are forgotten by customer.

CRM efforts in this level must be focused on making the customer feel comfortable, create a feel-at-ease feeling. The marketer should strive to provide customers comfort, fun, surprise, and other means of generating a positive feeling. Note that this is distinctly different than relationship building at level-2, where the focus was to remove any factor which caused inconvenience to the customer.

Relationship is built on a feeling of ease and comfort can be strengthened by providing more of the same - greater comfort, fun and pleasant interaction environment. This involves training the front-end employees to provide a comfortable experience to the customer and being sensitive and responsive to the customer’s level of interaction. The marketing efforts must be directed at improving/building the memory of pleasant experiences of the customer.

Level-4: Personal Recognition Need

Often times, regular/loyal customers expect the vendor to interact in a way that his/her personal choices are recognized. This implies that the customer is seeking a level of relationship where they expect the vendor to recognize their needs - without them asking for it.

At this level, the loyalty of customer has been well established; customer enjoys the convenience and a feeling of comfort. Here, in this level of relationship, the customer needs are "personal". In earlier levels, the needs were mostly contextual, i.e., based on the context of buying experience.

CRM efforts at this level is to personalize the service/product offerings. For example, financial institutions treat their high value customers with personalized checkbooks, providing a personal financial advisor, etc. In business-to-business environment, this is characterized by having a dedicated account manager who interacts with the client, who knows the clients exact needs and has the authority to deliver the customer’s needs. The "account manager" or "client partner" can also make suggestions, provide consulting advice to the customer - Along with dinners/luches, tickets to popular events etc.

Advent of Internet has created opportunities for vendors to provide customized web interfaces to each of their clients. Amazon.com, ebay.com etc. Provide customers with customizable web interfaces.

To bring a customer to this deep level of relationship, the level-3 relationship of making the customer feel comfortable must always be accomplished. Only when the customer is comfortable, vendor can discover (discreetly) the personal needs of the customer - and then move the relationship to the next higher level. Relationship at Level-4 is analogous to that of a romantic partner - but not a spouse or fiancé. The relationship at this level is more personal - but without invading the privacy of the customer. The timing therefore needs to be right - so that any potential tensions or conflicts are avoided or reduced to minimum. The company must know the customer details, possible tastes and preferences sufficiently well to build the relationship. Interactions must be respectful as exchange of personal information may be perceived as invasive.

The irony of the CRM systems at this level is that customer feels that the CRM systems compromise customer’s privacy - and for that reason most customers are reluctant to share personal information with the vendor, which in turn cause most CRM implementations fail. A salesman or marketer or account manager must therefore take extra precaution not to reveal any personal information of the customer to the CRM database system. This personal information must be carried in the heads of the vendor salesmen.

Customer’s need for personal recognition may be met by very simple acts by the salesman, such as rewards for customer loyalty (given to the customer - i.e., buying agent or the key decision maker), tailor made products, and words of appreciation.

Level-5: Self-Expression Need

Once the customer feels that the vendor recognizes him/her as person and can associate personally with the vendor, the customer is ready for the next level of relationship - that is of Self-expression. Customer who are in this level of relationship expect the vendor to focus on customizing and personalizing the product/service offerings. The customer expects the vendor to have a clear understanding of their needs and the vendor should be able to meet them. The relationship is characterized by mutual trust, confidence & respect.

For example, Dell Computers being a customer of Intel, expects Intel to know its needs for latest and most powerful microprocessors for the Christmas season. The customer then expects Intel (vendor) to announce and supply the latest processors in time so that Dell can ship the computers to its customers in time for Christmas.

Another example is Weyerhaeuser, a leading supplier of Timber products to Home Depot. Weyerhaeuser implemented a shipping system in which goods were loaded into trucks in such an order that it enabled Home Depot to unload the truck faster and sort out the goods in a more efficient manner.

In a consumer world, a common example will be that of a (famous) client and his/her fashion designer. The client expects the fashion designer to know his/her tastes and provide clothes accordingly.

It must be noted that in a B2B world, customers are more rational. Their business needs drives the relationship and is partly independent of personal factors. As a result, vendor can build this relationship by learning the customer needs. Based on this learning/insights, vendor should be able to offer highly customized and personalized offerings.

Customer relationships in levels 1-4 are defined by customer’s experience and is therefore heavily dependent to the external environment (i.e., external to the customer). At levels 5 and above the relationship depends on internal and external factors including rational and emotional considerations.

The key for success in building relationship at this level is to understand the customer’s implicit needs - i.e., those needs which are not expressed verbally. Vendor can strengthen the relationship by understanding the customer’s implicit needs and focusing on different ways to customize and personalize the offerings. In a B2B setting, this involves understanding the customer’s business operations, business models and then providing customized solutions: Like releasing products in time for Christmas or having goods packed in a truck in a manner it is efficient for customer etc.

Level-6: Co-Creation Need

This denotes the highest level of customer relationship. At this level, customer is very comfortable dealing with the vendor, the relationship is characterized by a sense of collaboration. The customer feels a need for a unique product/service and is willing to work with the vendor to develop the product/service. Often the idea of co-creation is initiated by the customer to the surprise of the vendor.

Co-creation relationships are personal and rational. At this level of relationship, the customer loyalty & trust is very high. Customers are willing to invest for joint development of products/service. Customer feel closely bonded to the vendor - to the point that the customer seeks a joint destiny with the vendor. I.e., some aspects of customer’s interests merge with that of the vendor’s interests.

A good example of Co-creation is collaboration between IDT Inc, and AT&T to develop a networking chip. AT&T provided the architectural guidance and design verification services while IDT provided the design engineering expertise to develop a network processor IDT32355. (I was a part of the design team at IDT Inc.) IDT was not bonded to sell the chip exclusively to AT&T and AT&T had the advantage of being the first user of this processor.

Alcoa’s wheel and forged products division does custom products for several auto manufacturers - Jeep Grand Cherokee, GMC Hummer etc. The result is a more distinctive products for the customer, and Alcoa increased it market share from 5% to about 35%.

Co-Creation denotes the highest level of customer relationships. This relationship can be strengthened by broadening interactions which involve co-creation of products/services.

Business Implications

Understanding the existing customer relationship levels has a huge impact on the future sales. The first step is to understand the level of existing relationship and then look at means of improving the levels of customer relationship. With every increase in level of relationship, the pay off in terms of additional sales in immense. One can only guestimate what the value of the increased sales. The increase can range from 2x to 100x or even 1000x!

Closing Thoughts

In most of today’s CRM implementations and its supporting policy - are based on revenue generated by customer. The customer’s are classified according to the revenue generated - this leads to a false sense of customer loyalty and a misplaced attention by the marketer or salesman. As a result, lot of valuable customers feel mistreated and move their business elsewhere. The idea of levels of customer relationships is simple & yet very powerful tool to explain complex scenarios - that have real business implications.

CRM policy must consider levels of customer relationship to strengthen the relationship. This can be done only with a high level of human involvement in terms of salesmen efforts, marketing efforts and even executive efforts to forge a strong relationship.

In a B2B setting, the development of customer loyalty - which is at the heart of marketing, falls right within the context of being customer focused and customer centric marketing based on customer relationship levels.

8 comments:

pegasys said...

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Maria_Rilke said...

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Stephen Marble said...

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Sharad Jain said...

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Bangalore RWD said...

Improving the sales is very essential for every business.It could be happen by making good Customer Relationship Management process.
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HOW -2 DO said...

Thanks

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