Importance of Customer Relationship Management (CRM)

Importance of Customer Relationship Management (CRM) Abstract: Purpose The primary goal of this paper is to review the literature that critically addresses the importance, application, influence on business and quality service of CRM and impact of CRM application on customer satisfaction and loyalty which consequently affects profitability and performance. Specifically, this paper seeks to present shifting view from transactional business to relational business, which shows significant importance of relationship marketing. Managers knowing the importance of customer focus business should act on time to retain customers, and fulfill their needs and wants in current competitive business environment analyzing and capturing valuable information regarding their customers for better forecasting of future. Design/methodology/approach This paper critically reviews the literature, with regard to importance, views, business application and overtime shifting from transactional marketing to relational one and application of CRM in businesses in the academic literature over the past years. Findings CRM is a new choice for business performers through which they can reach customer satisfaction and loyalty and they can improve profitability and performance of the company. CRM is a business strategy and philosophy that fulfills customers changing expectations and needs and provides individualized and customized service to customers. CRM improves pricing strategy and enhances decision-making. CRM enables better allocation of resources across the customer portfolio. Research Limitations/implications According to vast amount of literature that is published by different experts in this area it is difficult to provide brief review regarding CRM, besides CRM it self is a very wide topic including managerial perspective and technological side. However the researchers have done their best for such an ambitious undertaking. Obviously there is a need for more detailed studies of each and every elements of CRM. Keywords- CRM (Customer Relationship Management), loyalty, Customer satisfaction, retention Paper type- literature review 1. Introduction The way companies do business has changed tremendously during the last fifty years, changing from a product-oriented industry to a more market-oriented where the customer is in the center. This has increased the competition between the companies on the market, where each company has to work out a strong updated competitive strategy if they want to stay in the business because they can not rely on old competitive advantages any more, as for example technology. (Lindbom Jonsson, 1992). Besides, a key driver of this change is the advent of CRM which is underpinned by information and communication technologies (Ryals Knox, 2001). Globalization, increasing competition and advances in information and communication technology has forced companies to focus on managing customer relationships in order to efficiently maximize revenues. Customer relationship management (CRM) is the key competitive strategy businesses need to stay focused on the needs of the customers and to integrate a customer- facing approach throughout the organization. By using information and communication technology, businesses are trying to get closer to the customer so that they can create long-term relationships. Thus, deploying CRM initiatives has become very common (Sevki and Rifat, 2005). Firms are embracing CRM as a major element of business strategy, because technological applications permit a precise segmentation, profiling and targeting of customers and competitive pressures require a customer-centric culture (Gurau, Ranchhod, Hackney, 2003).It is known and as many experts believe, it takes up to five times more money to acquire a new customer than to get an existing customer to make a new purchase. Hence, customer retention is in particular important to every business because of their resources and competition. Moreover, a dissatisfied customer causes market damage because they are more likely to defect to competition and more likely to persuade others to defect. It is therefore no surprise that CRM is an important topic of conversation in business world (Feinberg, Kadam, Hokam, Kim,2002), so firms have to look at CRM as comprehensive business strategy for fulfilling the needs of customers and differentiating their service for different customers, besides concerning CRM as a key tool for reaching customer satisfaction and loyalty in a mutual beneficial relationship. 2. Evolution of Relationship The evolution of relationship management is described by different stages by different scholars (Bauer, Gottgens, Grether, 2001). Several different process models of relationship development have been proposed. In a widely cited article, Dwyer, Schurr, and Oh (1987) distinguish between five general phases in a dynamic model of relationship marketing: awareness, exploration, expansion, commitment, and dissolution. Broadly speaking, their framework suggests that, after becoming aware of the company for the first time, customers search for exchange benefits and perform trial purchases. There is an increase in the benefits obtained from the relationship once transactions have been evaluated positively, and a commitment towards the relationship develops. Finally, as relationships rarely last forever, the customer eventually withdraws from the relationship for whatever reason and switches to another supplier. Other authors have taken closely-related approaches, using lifecycle theory to mo del the dynamics of relationship marketing, sometimes varying the number of relationship stages (e.g. Diller 1995b). 3. Emergence and Evolution of CRM The discipline of marketing grew out of economics, and the growth was motivated by a lack of interest among economists in the details of market behavior and functions of middlemen (Bartels 1976; Sheth, Gardener, and Garrett 1988). Marketings early bias for distribution activities is evident as the first marketing courses (at Michigan and Ohio) were focused on effectively performing the distributive task (Bartels1976). Early marketing thinking centered on efficiency of marketing channels (Cherrington 1920; Shaw 1912; Weld 1916, 1917). Later the institutional marketing thinkers, because of their grounding in institutional economic theory, viewed the phenomena of value determination as fundamentally linked to exchange (Alderson 1954; Duddy and Revzan1947). Although institutional thought of marketing was later modified by the organizational dynamics viewpoint and marketing thinking was influenced by other social sciences, exchange remained the central tenet of marketing (Alderson 1965; Bagozzi 1974, 1978, 1979; Kotler 1972). The demise of the distributive theory of marketing began after World War II as marketing focus began to shift from distributive functions to other aspects of marketing. With the advent of market research, producers, in an attempt to influence end consumers, began to direct and control the distributors regarding product merchandising, sales promotion, pricing, etc. Thus repeat purchase and brand loyalty gained prominence in the marketing literature (Barton 1946; Churchill 1942; Howard and Sheth 1969; Sheth 1973; Womer 1944). The marketing concept evolved and consumer, became the focus of marketing attention (Kotler 1972). However, marketing orientation was still transactional as its success was measured in such transactional terms as sales volume and market share. Only in the 80s, marketers began to emphasize customer satisfaction measures to ensure that they were not purely evaluated on the basis of transactional aspects of marketing and that sale wasnot considered as the culmination of all marketing efforts. Several ideas of relationship marketing emerged much before Berry (1983) who introduced the term relationship marketing into the literature. For instance, McGarry (1950, 1951, 1953, and 1958) included contractual function among the six activities in his formal list of marketing functions. The contractual function falling within the main task of marketing supported McGarrys relational orientation and his emphasis on developing cooperation and mutual interdependency among marketing actors. He stated contractual function as is the a structured cooperative action focusing on the long-run welfare of business with continuous business relationship developing a two-way communication for mutual interdependence attitude knowing that cost of dealing with continuous contact is much less than casual contacts; by selling only to regular and consistent customers costs can be reduced by 10-20% (Schwartz 1963). Wroe Alderson (1965) focused on inter and intra-channel cooperation, and many relationship marketing scholars have emerged from the tradition of channel cooperation research (Anderson and Narus 1990; Stern and El-Ansary 1992; Weitz and Jap 1995). They supported development of relationship marketing knowledge. In USA, several scholars began examining long-term inter-organizational relationships in business-to-business markets, while in Europe, the Industrial Marketing and Purchasing (IMP) Group laid emphasis on business relationships and networks (e.g., Anderson, Hakansson and Johanson 1994; Dwyer, Schurr and Oh 1987; Hakansson 1982; Halen, Johanson and Seyed-Mohamed 1991; Jackson 1985). As relationship marketing grew in 1980s and 1990s, several perspectives emerged. One perspective of integrating quality, logistics, customer services, and marketing is found in the works of Christopher, Payne, and Ballantyne (1992) and in the works of Crosby, Evans, and Cowles (1987). Another approach of studying partnering relationships and alliances as forms of relationship marketing are observed in the works of Morgan and Hunt (1994), Heide (1994), and Vardarajan and Cunningham (1995). Similarly, conceptual and empirical papers have appeared on relationship-oriented communication strategies (Mohr and Nevin 1990; Owen 1984; Schultz, Tannenbaum, and Lauterborn 1992); supply chain integration (Christopher 1994; Payne et. al. 1994); legal aspects of relationship marketing (Gundlach and Murphy 1993); and consumer motivations for engaging in relationship marketing (Sheth and Parvatiyar 1995a). As observed by Sheth and Parvatiyar (1995b), relationship marketing has historical antecedents going back into the pre-industrial era. Much of it was due to direct interaction between producers of agricultural products and their consumers. In recent years however, several factors like de-intermediation and computer and telecommunication technologies have contributed to the rapid development and evolution of relationship marketing. A greater emotional bond between the service provider and the service user also develops the need for maintaining and enhancing the relationship. It is therefore not difficult to see that relationship marketing is important for scholars and practitioners of services marketing (Berry and Parsuraman 1991; Bitner 1995; Crosby and Stephens 1987; Crosby, et. al. 1990; Gronroos 1995). Furthermore, Key account management programs led to the foundation of strategic partnering relationship programs within the domain of relationship marketing (Anderson and Narus 1991; Shapiro 1988). In the current era of hyper-competition, marketers are forced to be more con cerned with customer retention and loyalty (Dick and Basu 1994; Reicheld 1996). As several studies have indicated, retaining customers is less expensive and perhaps a more sustainable competitive advantage than acquiring new ones. Marketers are realizing that it costs less to retain customers than to compete for new ones (Rosenberg and Czepiel 1984). On the supply side it pays more to develop closer relationships with a few suppliers than to develop more vendors (Hayes et. al. 1988; Spekman 1988). In addition, several marketers are also concerned with keeping customers for life, rather than making a one-time sale (Cannie and Caplin 1991). Therefore, concerning evolution steps of CRM, obviously its application affects different aspects of business on top of all profitability for both parties, better supply chain management and marketing channel management, customer satisfaction and loyalty, higher retention rate in lower cost and sustainable relationship could be mentioned. 4. The definition and scope of CRM Customer Relationship Management (CRM) has become a leading business strategy in highly competitive business environment. CRM can be viewed as managerial efforts to manage business interactions with customers by combining business processes and technologies that seek to understand a companys customers (Kim, Suh, Hwang, 2003). Companies are becoming increasingly aware of the many potential benefits provided by CRM. Some potential benefits of CRM are as follows: (1) Increased customer retention and loyalty, (2) Higher customer profitability, (3) Creation value for the customer, (4) Customization of products and services, (5) Lower process, higher quality products and services (Jutla, Craig, Bodorik, 2001). CRM is fundamentally an improved tool in marketing and branding practice (Brunt, 2001; Chablo, 2001; Fournier et al., 2001; Wang, 1998). Others present it as a sophisticated information technology project, if not only that and usually with the caveat that it should not be framed as such (Gentle, 2004; Sharp, 2003; Davis Joyner, 2001; SAS Institute, 2001). Still others see it primarily as a toolkit for developing service management processes (Buttle, 2005; Peelen, 2005), or argue that it is fundamental to the extended enterprise which requires integrating supply chain management with customer relationship management (Kracklauer et al., 2004; Piller et al., 2004). Most by now agree that CRM is about growing customer equity and frame it in profit-driven terms (Gupta Lehmann, 2005; Blattberg et al., 2001). But some disagree, arguing that the final result will be higher profits but the foundation is relationship development to grow loyalty and strengthen barriers against customer defect ion (Peppers Rogers, 2005; Prahalad Ramaswamy, 2001). A narrow perspective of customer relationship management is data base marketing emphasizing the promotional aspects of marketing linked to database efforts (Bickert1992). However, this doesnt mean that CRM is database marketing. Customer information and knowledge is used in CRM to better understand and serve customers. Based on customer knowledge the right value should be selected, created and communicated to customer to reach customer satisfaction and loyalty. CRM is based on the ability to facilitate communication and decision-making to provide consistent, high-quality, and cost-effective services to all stakeholders (Andrade, 2003). Attract, retain and develop customer relationship where the main purpose is to create faithful customers, who are pleased with their choice of supplier and who think that they get value for their money (Berry and Parasuraman, 1991). CRM is an active, participatory and interactive relationship between business and customer. The objective is to achieve a comprehensive view of customers, and be able to consistently anticipate and react to their needs with targeted and effective activities at every customer touch point (Piccoli, OConnor, Capaccioli, Alvarez, 2003). Relationship marketing is to identify and establish, maintain and enhance and when necessary terminate relationships with customers and other stakeholders, at a profit, so that the objects of all parties involved are met, and that is done by mutual exchange and fulfillment of promises (Gronroos, 1996).) Relationship marketing is marketing based on interaction within networks of relationships (Gummesson, 1993). A relation means that there are at least two parties who are in contact with each other, networks contain of several complex relationships and interaction means that the parties perform activities and work together (Gummesson, 2002). Similarly, Morgan and Hunt (1994), draw upon the distinction made between transactional exchanges and relational exchanges by Dwyer, Schurr, and Oh (1987), to suggest that relationship marketing refers to all marketing activities directed toward establishing, developing, and maintaining successful relationships. Consider the following summary from Peelen (2005: 3-5) supplemented by other sources as noted. CRM is: A comprehensive development process Customer differentiation Data warehousing and mining The core business strategy Integrated collaboration Empowering the customer (Newell, 2003) A total company reorientation (Buttle, 2005) Customization in products or services (Sharp, 2003) Building mutual value (Peele, 2005; Targetbase, 2001) Building customer equity (Gupta and Lehman, 2005; Shaw, 2001) CRM is a set of business processes and overall policies designed to capture, retain and provide service to customers (Scott, 2001), or a coherent and complete set of processes and technologies for managing relationships with current and potential customers and associates of the company, using the marketing, sales and service departments, regardless of the channel of communication(Injazz and Karen, 2004). CRM is a process designed to collect data related to customers, to grasp features of customers, and to apply those qualities in specific marketing activities (Swift, 2001). So in a single view, CRM is a business strategy enabled by managerial philosophy and technology which applies customer knowledge and database to deliver the quality product and service to provide the best value to customers looking at each customers different needs and wants by customized and individualized service or product to reach customer satisfaction and loyalty in current competitive market. 4.1. CRM; Retention and Loyalty Some experts consider CRM only as customer retention in which a variety of after marketing tactics is used for customer bonding or staying in touch after the sale is made (Vavra, 1992). A more popular approach with recent application of information technology is to focus on individual or one-to-one relationship with customers that integrate database knowledge with a long-term customer retention and growth strategy (Peppers and Rogres 1993). Similarly, CRM goals are to symbiosis and fulfillment of promises (Rapp and Collins, 1990, Ndubisi, 2003). In other words, a key objective is to foster customer loyalty_ a deeply held commitment to re-buy or re-patronize a preferred product or service in the future despite there are situational influence and marketing efforts having the potential to cause switching behavior (Oliver, 1999). CRM requires organizations to lay more emphasis on retaining existing customers rather than on creating new ones (Clark and Payne, 1997). And in a very close definition, the shift in emphasis from customer acquisition to customer retention has been at the heart of relationship marketing (Payne, 1995). While retaining customer loyalty has been a sales principle for a very long time, CRM is actually a tremendous step forward in creating a system that can provide a means for retaining individual loyalty in a world of nearly 6 billion souls (Croteau Li, 2001). In order to understand CRM, you must also understand the changing nature of the customer because customers are not what they used to be (Greenberg, 2001).CRM is a combination of people, process and technology that seeks to understand a companys customers. It is an integrated approach to manage relationships by focusing on customer retention and relationship development (Chen, 2003). It is the number one focus when todays competiti ve market has become more saturated and competitive (Xu, 2002), and it is to turn customers into partners (Arun Balakrishnan, 2003) or to turn current and new customers into regularly purchasing clients, and then to progressively move them through being strong supporters of the company and its products, to finally being active and vocal advocates for the company (Christopher, 2003). Acquiring a better understanding of existing customers allows companies to interact, respond, and communicate more effectively to significantly improve retention rates (Chen Popovich, 2003).Therefore, customer retention depends on the relationship substance built up due to interaction between the parties (Eriksson and Là ¶fmarck, 2000). In summary, CRM struggles to build the relationship with customers and retain them to profit the company in long-term and reduce the cost of attracting new customers. 4.2. CRM; Customization and Individualization CRM is an integrated effort to identify, maintain, and build up a network with individual consumers and to continuously strengthen the network for the mutual benefit of both sides, through interactive, individualized and value-added contacts over a long period of time (Shani and Chalasani, 1992), it is about managing data to better understand and serve customers (Arun Balakrishnan, 2003). Jackson (1985) applies the individual account concept in industrial markets to suggest CRM to mean, Marketing oriented toward strong, lasting relationships with individual accounts. In other business contexts, Doyle and Roth (1992), ONeal (1989) and Paul (1988) have proposed similar views of CRM. CRM is a concept that enables an organization to tailor specific products or services to each individual customer. In the most advanced scenario, CRM may be used to create a personalized, one-to-one experience that will give the individual customer a sense of being cared for, thus opening up new marketing opportunities based on the preferences and history of the customer (Wilson, 2002). CRM is also a costumer-focused business strategy that aims to increase customer satisfaction and customer loyalty by offering a more responsive and customized service to each customer (Fayerman, 2002). So value-laden relationship supported by data management for individual accounts offering personalized service or product is in heart of CRM, that results in customers unique experience of being with the company and makes barriers in front of brand switch, and this is the step forward to customer satisfaction and loyalty. 4.3. CRM; Value Creation CRM is the process of creating, maintaining and enhancing strong value-laden relationships with customers and other stakeholders (Kotler, 1998; Payne, 2004). It is ongoing collaborative business activities between the supplier and a customer on one-to-one basis for the purpose of growing the total market by creating better end user value at a reduced cost (Sheth, 1998). CRM is the infrastructure that enables the delineation of and increase in customer value, and the correct means by which to motivate valuable customers to remain loyal; indeed, to buy again (Dychà ©, 2001). 4.4. CRM; Customer Knowledge Management CRM is about managing customer knowledge to better understand and serve them. Meaningful customer relationships are those characterized by high level of emotional value, which is created by more than functional and instrumental components; the company and the customer should share something in common, it can be background, interests, values and beliefs. This can be attained by gaining knowledge about the customers, what role the brand plays in the customers life, now and in the future, as well as being aware of the expectations of the customers. Real meaning derives from anticipation and a company addressing issues that the customer does not expect them to address (Barnes, 2003). The company should keep track of everything they buy and ask them if they were satisfied with their last purchase. The customers should bee seen as the most valuable assets of the service company because they do not only pay for the service, if the company listens to them they will tell the company how it ca n get them to spend even more (Geller, 1997). Organizations and their staff need not only to empathize with the customer, but they need to respond appropriately to his/her needs. Once that is apparent, they need to respond by providing what is necessary on time and at the expected cost. This can be much more difficult than meets the eye, since customers do not always have a clear idea of what they want and sometimes require the vendor or service provider to simulate their imaginations (Solomon, 1999). The goal of CRM is to create as effective customer relationships as possible and during that time also develop future competences within the company. Although satisfied customers opinions make it easier to continuously improve the competences of the company, these are not enough. The company needs to detect the customers unexpressed needs, and primarily the customers future needs. The worst scenario that might occur for the company, when using these types of customer feedback activitie s, is that the company realizes that it needs to bring new innovations into their customer relationships (Storbacka Lehtinen, 2000). So, innovation and creativity besides better understanding of customers present and future needs and changes in customers tastes and values lies under better relational factor that gathers valuable knowledge for the company. 4.5. CRM; Information Technology Some scholars have applied the importance of information technology to define CRM. CRM unites the potential of IT and relationship marketing strategies to deliver profitable, long-trade relationship (Simon Knox, Stan Maklan, Adrian Payne, Joe Peppard and Lynette Ryals). CRM is not a technology, though. Technology is a CRM enabler (Greenberg, 2001). CRM technology applications link front office (e.g. sales, marketing and customer service) and back office (e.g. financial, operations, logistics and human resources) functions with the companys customers touch points (Fickel, 1999). A companys touch points can include the Internet, e-mail, sales, direct mail, telemarketing operations, call centers, advertising, fax, pagers, stores, and kiosks. Often, these touch points are controlled by separate information systems. CRM integrates touch points around a common view of the customer (Eckerson and Watson, 2001). As stated previously, CRM is a technology based business strategy that manages cu stomer data through data collection and data mining systems and data warehousing and transforms the customer data to valuable managerial supporting knowledge. Technology supports better marketing channel and customers touch points management. 4.6 CRM; Organizational Strategy Today, customers are more highly educated, under higher stress, more specialized, living longer, and more influenced by global culture than those of the 60s and 70s when our view of marketing was formed (Wilson, Daniel, McDonald, 2002). This as well as the emergence of e-Business, organizational dynamics, and cultural change issues has dramatically shifted organizations ´ functional units to focus on the customer. Consequently, organizations have recognized the need to develop customer-centered orientations (Romano, 2003). Organizations are learning more about their customers and their preferences, needs, and expectations (Jukic, Jukic, Meamber, Nezlek, 2003) According to Schultz (2000) the practice of planning, creating, and managing customer relationships has nowadays become the heart of organizational strategy and the key to customer retention. Similarly, CRM is the core business strategy that integrated internal processes and functions, and external networks, to create a nd deliver value to targeted customers at a profit (Francis Buttle, 2004). 4.7 CRM; Profitability It is shown that the large impact on profitability of small increases in customer retention rates, was the start out, making the marketing community more conscious of the need to manage customer relationships in the long term as well as prior to the first sale (Wilson, 2002; Reichheld and Sasser, 1990). Similarly, CRM can help businesses enhance their customer relationships by attracting more profitable customers and establishing stronger and more durable customer relationships (Falk, 2004). Blomqvist (1993) proposed the following key characteristics of relationship marketing: every customer is considered an individual person or unit; activities of the firm are predominantly directed towards existing customers; implementation is based on interactions and dialogues; and the firm is trying to achieve profitability through the decrease of customer turnover and the strengthening of customer relationships. The long-term orientation is often being emphasized because it is believed that marketing actors will not engage in opportunistic behavior if they have a long-term orientation and that such relationships will be anchored on mutual gains and cooperation (Ganesan 1994). CRM is the set of methodologies and tools that help an enterprise manage customer relationships in an organized way (Lawson-Body Limayem, 2004). In other words, CRM can be defined as an interactive process achieving the optimum balance between corporate investments and the satisfaction of customer needs to ge nerate the maximum profit. It involves (Gebert, Geib, Kolbe, Riempp, 2002): Measuring both inputs across all functions including marketing, sales and service costs and outputs in terms of customer revenue, profit and value. Acquiring and continuously updating knowledge about customer needs, motivations and behavior over the lifetime of the relationship. Applying customer knowledge to continuously improve performance through a process of learning from successes and failures. Integrating the activities of marketing, sales and service to achieve a common goal. Implementing appropriate systems to support customer knowledge acquisition, sharing and measuring CRM effectiveness. Constantly flexing the balance between marketing, sales and service inputs against changing customer needs to maximize profit. There for, customization and individualization besides long-term relationships aiming to build loyal customers and increase retention rate will directly profit the company. 4.8. CRM , LTV and Customer Selectivity CRM is business philosophy and set of strategies, programs, and systems that focuses on identifying and building loyalty with a firms most valued customers (Michael Leavy and Barton Weitz, 2004), it is a cross-functional process for achieving a continuing dialogue with customers, across all their contact and access points, with personalized treatment of the most valuable customers, to increase customer retention and the effectiveness of marketing initiatives (Day and Van Den Bulte, 2002) CRM is a management approach that enables organizations to identify, attract and increase retention of profitable customers, by managing relationships with them (Bradshaw and Brash, 2001; Hawkes, 2000). When evaluating customer profitability, marketers are often reminded of the 80/20 rule (Gloy, Akridge, Preckel, 1997). Similarly, companies have come to realize that in order to develop long-term, successful relationships with their customers they need to focus on economically valuable customers while eliminating economically valueless ones, instead of treating all customers equally, it is better to develop customer-oriented strategies (Verhoef Donkers, 2001). To cultivate the full profit potentials of customers, many companies already try to measure and use customer value in their management activities (Rosset, Neumann, Eick, Vatnik, Idan, 2002). Therefore, many firms are needed to assess their customers value and build strategies to retain profitable customers. As several researc h studies have shown not all customers are equally profitable for an individual company (Storbacka2000).Customer relationship management is a comprehensive strategy and process of acquiring, retaining, and partnering with selective customers to create superior value for the company and the customer (Sheth2001). Furthermore, Diller (2000) has id