The Money ShiftCustomer relationship management requires a radically new approach to financial analysis
by Thomas F. Richebacher Continued from Page 1 Activity-based CRM forecasting models are appropriate for companies needing to continuously resell their merchandise. Catalogers fall into that category, when they decide to sell new products to existing customers they must first send another catalog. One characteristic of these companies is that the probability of additional customer orders, and accordingly the value of their customer base, strongly correlates to how frequently and recently a customer has made purchases. Therefore, a customer forecasting model that EDS builds for a cataloger projects financial results based on expected marketing activities, customer order frequency, and months since last purchase. In contrast, companies that use continuity-based models either sell a continuous service (such as phone or utilities) or products delivered periodically (such as books, records, or perishables) in return for regular customer payments. They differ from activity-based companies in that their goal is not to get the next sale (their customers have already signed up for the service), but to keep customers in the service. In fact, it often doesn't make sense for service providers to sell more of a product to customers already enrolled in the service because of limits to how much can be consumed in a given time period. Accordingly, the forecasting model is based primarily on consumption and customer segmentation patterns in relation to time factors. Therefore, before building the data warehouse, your company needs to decide how it wants to evolve its product-focused forecasting and budgeting system toward customer-based ones. Being proactive is important because while existing systems provide some of the data, the rest of it must be created from scratch. Central to this transformation is the identification of relevant customer segments, interrelationships among business units, and the critical elements that move customers through their life cycles. With that information in place, the financial impact of customer activities is exposed, enabling a company to manage its customer base like an investment portfolio through the discovery of its own unique equilibrium between the need to acquire new customers and keep existing ones. CRM performance management. As with all change initiatives, successful CRM implementations require that financial and operational goals, as well as the metrics to evaluate them, are clearly defined at the onset. Finance will find this task to be a challenge for the same reason that calculating customer profitability and creating customer forecasting models are difficult. The product structure of its systems makes it easy to evaluate whether sales or margin targets by product are being met, but nearly impossible to measure progress toward a goal such as customer retention (let alone understand its financial implications). The challenge isn't just the absence of the appropriate data, but the ambiguity of CRM goals, which are often expressed in nonfinancial terms. For example, as pointed out earlier, retailers and catalogers often measure retention by time elapsed since last customer purchase. Conversely, utility and phone companies measure retention by how many customers remain without interruption in a service, and magazine publishers count the number of times customers renew their subscriptions. Thus, the first step for finance is to establish a common enterprisewide definition. After all, from the perspective of establishing CRM goals, the value of a single customer view is not only its ability to measure the potential financial impact of a CRM strategy, but also to encourage cooperation and coordination. The next step is to split the goal into subcomponents, a process practically identical to the one used for conventional goals. For example, a bank may want to increase its retention of checking account holders from 40 to 60 percent over a three-year period. Management wants to know, prior to that time passing, the financial impact of this goal and how to measure progress toward the target. Thus, finance needs to break the cumulative goal into smaller parts to be measured in regular intervals. Now management can be notified of unexpected developments before the three years elapse, the different means of achieving the goal become visible, and costs that truly reflect a specific stage in the goal development process can be assigned. Best Foot ForwardCustomer financial analysis capabilities are a critical element of every CRM implementation. There are pitfalls, however:
To avoid these pitfalls, you must involve finance during the early CRM planning stages. As the guardian of company assets, that function can help maintain fiscal discipline by ensuring that a CRM undertaking is justified. Finance also provides a unique and important perspective on IT systems — relevance, reliability, timeliness, and accuracy are traditional accounting concepts that apply to all data, regardless of source. Finally, take it slowly: Start out with small, attainable goals. That way, you can test the effectiveness of your vision as it develops and take corrective measures early. Thomas F. Richebacher [thomas.richebacher@eds.com] is an analyst for the customer relationship management service line at EDS. He specializes in the development of customer intelligence through data analysis. RESOURCESVisit IntelligentCRM.com for focused content, news, and discussion about customer relationship management. If business performance management is your interest, IntelligentBPM.com is the place to go for customized news, features, and analysis. Thomas Richebacher's "The Model Customer" (Jan. 30, 2001) describes the value of direct marketing principles for clickstream analysis.
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