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The Failure of CRM Mathematics

In a previous article (DM News, March 18), I discussed why so many customer relationship management projects have failed. I listed the four assumptions underlying CRM and discussed three of them. This article covers the fourth: that CRM has a positive return on investment. Why is this seldom true?

Let's start with some basic principles. Customers do respond to communications, offers and promotions. For the communications to work the seller needs some sort of established business. He has a product or service to sell, and a working distribution channel. For CRM to be used, he has to have a revenue stream (otherwise, where would he get the money to build his warehouse?).

The reason for using CRM is to make incremental increases sales beyond what is being made with mass marketing, retail stores, catalogs and database marketing. Somehow, the marketer assumes, if he just knew more about the decision-making process in the customers' minds, he could increase sales (to customers and prospects) by as much as 5 percent or 10 percent. Let's say he is selling some product or service for $150. It could be rental cars, small appliances or carpets. He contacts 20 million customers per year, with sales of $900 million. His current marketing methods involve mass marketing and direct marketing to customer segments, including a loyalty program. Assume that of the $150, his net profits a sale are 10 percent, after deducting all costs including marketing.

Assume a modest CRM warehouse containing data on 14 million prospects and past customers and 6 million current customers. Assume that you can build it for $10 million including the software for access, with annual maintenance costs of $1.5 million that includes the cost for the staff, NCOA and appended external data. Amortized over three years, the warehouse will cost $5.5 million per year.

Compare this to the cost of database marketing in the same situation. It costs far less:

To these CRM or database costs, you must add the cost of communications with customers and prospects. After all, if you are going to make the right offer to the right customers at the right time, you have to communicate the offer to them personally, or what is the warehouse for? So assume that your firm has been collecting e-mails to keep the cost of communications down. The firm has e-mails on half of all its customers.

So with these costs in hand, what will be the result of using CRM or database marketing?

By using CRM or database marketing you have managed to increase the average sale per customer by 10 percent to $165. You may have done this by getting some customers to place larger orders, by getting some to place more orders or by reducing the attrition rate, or a combination of these and other methods. Sales have increased by $90 million with increased gross profits of $9 million. But when you factor in the cost of CRM, net profits have gone down by $580,000. That is what virtually all companies installing CRM have discovered. Note that these figures assume that CRM is working — that it is increasing sales by 10 percent. But, in many cases, for reasons shown earlier, the CRM has no such valuable benefit. In the majority of companies, it makes only a very small improvement in the sales rate.

There is a fundamental disconnect between the goals of CRM and the results. If you have invested the millions and have a wonderful data warehouse and analytic software, then what? How do the data warehouse and software increase the retention rate? Somehow, you are supposed to take the software and change customer behavior. The CRM Forum (www.crm-forum.com) lists three reasons why CRM usually fails:

· Problems in organizational change and internal politics.

· Lack of the right skills and enterprisewide understanding of the initiatives.

· Poor initiative planning.

Unfortunately, many CRM analysts write a type of dense prose that is almost impossible for normal people to understand. Take this example from a Gartner report on the CRM Forum:

“Enterprises struggling with lack of coordination across departments should consider the needs of individual groups and work on a top-down/bottom-up strategy. Because department-level CRM deployments may be more cost-effectively supported by a Tier 2 system integrator with domain-specific skill sets and software relationships, the enterprise should identify a master list of approved smaller service providers to work on individual projects.”

It really should not be so complicated. The goal of CRM is to select the right prospects and to get customers to be more loyal and buy more. A warehouse is of only marginal help in doing this. The goals can be achieved by coming up with products, services, tactics, strategies and communications that the customers will like and respond to. The CRM warehouse and software do none of these things. The goal can be realized by building a database, determining customer segments and designing a marketing program for each segment, using personal data from the database for each communication.

Many marketers are doing database marketing and calling it CRM. They do not have a multimillion-dollar warehouse. They are marketing to segments and making money doing it. That is great. But it is not CRM.

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