CRM and Its Arguments Are Failing

Despite millions of dollars invested in it, customer relationship marketing does not seem to deliver the benefits that it promised and may, after all, be a failure. Why?

CRM is based on four assumptions, all of which are open to question:

· One-to-one marketing is an achievable goal given the right information and software. Stated another way, customer and prospect purchasing behavior can be predicted accurately based on information that you can collect about them.

· Customer and prospect behavior is heavily influenced by timely and relevant offers.

· Companies can shift rapidly from being product focused (employee bonus based on the level of sale of particular products) to being customer focused (employee bonus based on the level of sales to particular customer segments, regardless of what products they buy).

· Introduction of CRM has a positive return on investment by increasing sales and profits by more than its cost.

Let's see why none of these assumptions has proved to be correct.

One-to-one marketing is achievable. People buy products because they decide that owning the product or service at a particular time will make them happier than not owning it. What happiness consists of is defined by the person who is trying to possess it, and varies from person to person, and from time to time.

I like Big Macs, but not all the time. Sometimes I like fish, sometimes chicken and quite often I like home-cooked vegetables. There is no way that you can accurately predict what I want to eat next, unless you know what I ate last, how hungry I am, where I am at the time, who I am with how much money and time I have available right now for eating. There is no way that any data warehouse could ever collect such timely and relevant information, or that someone besides the customer himself could accurately weigh the importance of each fact.

Besides my eating habits, the same principle applies to predicting my interest in taking a trip, buying clothing, buying a car or an appliance or taking a college course. You can collect some relevant information, but you cannot collect enough to make accurate predictions concerning Arthur Hughes today. What you can do with some accuracy is to say that people in a segment containing Arthur Hughes are likely to buy some product in the next few months. But of course, that is not CRM, or one-to-one marketing. That is regular database marketing where you are targeting segments.

What is the difference between database marketing and CRM? They are both based on databases of prospects and customers that are used to guide marketing and sales strategy. CRM requires a large data warehouse with costly software, aimed at determining and influencing the behavior of individuals through one-to-one marketing. Database marketing is based on a data mart, which costs about 10 percent of that required for a CRM warehouse. Database marketing is usually aimed at identifying customer segments and marketing to them, plus building one-to-one relationships with existing customers through loyalty building communications.

To see the difference, think of 100,000 customers on which you have data. With database marketing it might be possible to predict with 90 percent certainty that 75 percent of a certain segment of them will buy product X within the next month. But you cannot be 90 percent certain that Arthur Hughes (a member of the segment) will buy the product next month or ever. The first conclusion comes from segment analysis using database marketing. The second conclusion would come from CRM if it could be made to work. Unfortunately, it cannot.

Timely and relevant offers. The second assumption is wrong for a similar reason. Do you eat because you are hungry or because you received a timely communication telling you that a particular restaurant was having a special on lobster dinners? If you are hungry, enjoy lobster and have the time and money to go to that restaurant right now, the offer would be wonderful. But the warehouse cannot contain that information. Mass marketing on TV showing people eating delicious lobster dinners at a low price can work wonderfully.

Of course, there are situations when a timely and relevant offer can make the difference in a sale. Banks can predict the probability of a particular customer buying a particular product. Automobile companies know when your three-year lease is up. But for these situations, good old database marketing will work just fine.

Becoming customer centric. It is almost impossible for most companies to become customer focused. Why? Because of the way business is developed. You create a new camera, new computer, new automobile or a new hotel. The company that develops the product wants to realize a return on its investment. It puts a product manager in charge of the marketing of it and tell her to get busy.

She does everything she can think of: mass marketing, point of purchase displays, retailer subsidies, direct marketing. Her goal is to sell hotel space in this new hotel, and only secondarily to increase overall company customer lifetime value.

Could you replace all the product managers with customer segment managers, and have no product managers at all? Not likely. No company has ever done that, and none ever will. Once you have developed a product, you can't leave the promotion of that product to chance. You simply won't say, “We will be nice to our customers and hope that they notice our new hotel. We won't specifically promote this new hotel, because one of our older hotels may suit some customers better.”

In a later article I will explain why the economics of CRM does not work out.

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