Alf's Articles

Instead of Reducing Prices, Offer More Services

by Alf Nucifora

Businesses small and large can no longer ignore the need to gird themselves for tough times. After all of the knee-jerk protective measures have been taken, e.g. restricting travel, slashing ad budgets, delaying approved capital expenditures etc., smart marketers will revisit the fundamentals that tend to be forgotten by lemming marketers on their panic pilgrimage to the cliffs.

One such basic is Customer Relationship Management (CRM), the process of better managing and optimizing the value of the existing client/customer relationship while approaching the prospect solicitation with a more rational and compelling message and value proposition.

According to the Peppers and Rogers Group (www.1to1.com), one of the preeminent management consulting firms specializing in customer-focused business issues and the organization that first popularized the term "one-to-one marketing," there are three primary reasons why focusing on CRM makes good sense in a downturn:

1. Managing customer relationships represents a "cheap growth" option… more efficiency and less waste.
2. Investments in CRM process changes or implementation can be made incrementally in small bites with the possibility of each incremental investment generating immediate cash flow benefit.
3. Locking in valuable customer relationships is a strategic capability that will determine the competitive performance of a company in both good and bad times.

CRM Is "Cheap Growth"

It's axiomatic in marketing that not all customers are created with equal profit potential. Therefore, the smart company will grow its business by managing its customer relationships in order to make each individual customer as profitable as possible. To do this requires "a firm to have a reasonably good idea of the value and growth potential of different individual customers whether it uses a sophisticated statistical model of lifetime value or a rougher, down-and-dirty ranking mechanism." If you know your customers and prospects and how they vary by value, e.g. revenue and/or profit potential, it makes sense to concentrate on those who are more likely to generate the most profit. As Peppers and Rogers note, "in any customer base there will almost certainly exist some customers who tend to cost more to serve than they are likely to return in profit." While a non-CRM user is powerless to address that unfortunate reality, companies that segment and market according to a CRM strategy can grow their business cheaply by simply serving fewer unprofitable customers, all of whom can be efficiently identified and targeted for benign neglect.

Another reason for concentrating on the individual customer relationship is, that by doing so, a company can somewhat insulate itself from pricing pressure in a downturn when price competition tends to become more aggressive and pervasive. For example, during the Christmas retailing season last year, heavy discounting by traditional chains like Sears, Federated and even Wal-Mart resulted in dramatic sales decreases and in some cases bankruptcy (Montgomery Ward and Bradlee's). But those marketers that are accustomed to maintaining the strongest relationships with their current and past customers were able to make their numbers without significant discounting. Lands End, for example, saw a 12% sales increase for the season, including a 50% bump in website sales.

Peppers and Rogers also preach the gospel of "harvesting" the customer base in a downturn. Specifically:

• Business Growth: Get the most from every existing relationship by selling more to the customers you already have.
• Marketing: Focus on activation. Current customers are a known quantity so motivate them to do more business with you.
• Channels: Focus on economics. Squeeze the most value from each account or customer. Pay for profitability, not volume or conquest.
• CRM Infrastructure: Because cash is short, optimize current IT capabilities. Most existing CRM systems are underutilized and now is the time to increase their usage.
• Product/Service Portfolio: Add to core capabilities while downturn prices are low. Use acquisitions and partnerships to create alliances around core offerings.
• Unprofitable Customers: Be more aggressive about converting unprofitable customers and cut them if profitability seems impossible.

Implement Incrementally

Be prepared to launch even the most comprehensive CRM initiative with a series of bite-sized steps. And, before committing to the expenditure, try to ascertain the results before committing to spend. Like its counterpart, direct marketing, CRM lends itself to pre-testing. Be willing to experiment with small customer test batches, learn from the results and extrapolate accordingly. Notes Peppers and Rogers, "rather than an all-or-nothing proposition, CRM is something that any business can do incrementally and it can implement it in ways that generate provable, measurable financial benefits."

CRM As A Strategic Capability

Ultimately, CRM allows the marketer to stay very close to the customer, to respond quickly to ever changing needs and behavior. The better the marketer knows the customer, the more efficiently and effectively can it customize its relationship with that customer for a mutually satisfying experience. What this means, in essence, is increasing the "share of customer" with each individual customer. At its simplest level, this means more cross-selling, up-selling and customer service and, in many instances, seeking out more opportunities to collaborate with the customer via a customized, individual approach. In the case of Dell, a web-based service was developed which allowed enterprise customers to order pre-configured Dell products and services within company-specific purchasing guidelines. What Dell was doing was helping its customers manage their total cost of ownership of Dell products. Dell did this by inserting itself in the middle of its customers' own cost equations, making its services highly valuable to any business customer focused on cost.

Not surprisingly, most B2B customers are eager to negotiate arrangements such as Dell's when the economy turns down and reducing cost becomes the key demand of the day. Where the traditional marketer is forced to negotiate on price, a CRM-enabled organization can give the customer exactly what it wants by adding services rather than reducing prices.