Customer Relationship Management: Concept, Significance and Pitfalls

IRJMSH Vol 5 Issue 6 [Year 2014] ISSN 2277 – 9809 (0nline) 2348–9359 (Print)

Customer Relationship Management: Concept, Significance and Pitfalls

By Dipika Bansal Abstract

Intense competition and demanding customers have made it necessary for companies to develop

new marketing strategies to gain deeper insights of customers. This has lead to the development

of customer relationship management. The purpose of this paper is to integrate the current

research in customer relationship management. The conceptual issues and the factors underlying

customer relationship management have been explored to understand its role in dual creation of

value for firm as well as for firms. Its applications in terms of profitable customer acquisition

and retention along with the factors moderating its implementation have also been discussed.

Finally, the potential pitfalls and unknowns are discussed along with its future prospects.

Introduction

With intense competition and demanding customers, traditional marketing practices failed to

yield good returns. This made it necessary for companies to develop new marketing strategies to

gain deeper insights of customers. In this tenor, customer relationship management came into

existence. The term „customer relationship management (CRM)‟ emerged in the information

technology vendor community in the mid-1990‟s to describe technology-based solutions, such as

sales force automation (Payne and Frow, 2005) and has been expressed as „information-enabled

relationship marketing‟ (Ryals and Payne, 2001). Zablah, Beuenger and Johnson (2003) suggests

that CRM is “a philosophically-related offspring to relationship marketing which is for the most


part neglected in the literature,” and they concluded that “further exploration of CRM and its

related phenomenon is not only warranted but also desperately needed.”

The present paper is an attempt to provide a synthesis of existing knowledge on CRM. The paper

is conceptual in nature and examines the various perspectives on CRM and the evolutions in

marketing that lead to the emergence of CRM. It also presents a thorough understanding of the

relationship philosophy and information technology- the bases of CRM. Ranging from the firm

level to customers level, the various applications and significance of CRM have also been

explored. Finally, the potential pitfalls and unknowns of CRM are discussed along with its

future prospects.

CUSTOMER RELATIONSHIP MANAGEMENT: THE CONCEPTUALISATION

Different authors have given considerably varying definitions of CRM. Each of the definition

offers a different perspective to conceptualize the discipline (Parvatiyar and Sheth, 2001a).

Kutner and Crips (1997) have described it as a “data driven marketing.” According to Couldwell

(1999), CRM is “using existing customer information to improve company profitability and

customer service.” Many authors have viewed it as an extension of relationship marketing.

Glazer (1997) expresses it as an attempt “to provide a strategic bridge between information

technology and marketing strategies aimed at building long-term relationships and profitability.”

Peppers and Dorf (1999) describe it as “an application of one-to-one marketing and relationship

marketing, responding to an individual customer on the basis of what the customer says and what

else is known about the customer.” Hobby (1999) takes it as “a management approach that


enables organizations to identify, attract and increase retention of profitable customers by

managing relationships with them” (Payne and Frow, 2005).

Taking a holistic view, Swift (2000) described it as “an enterprise approach to understanding and

influencing customer behavior through meaningful communication to improve customer

acquisition, customer retention, customer loyalty and customer profitability.” In the similar

direction, Parvatiyar and Sheth (2001a) have approached it as “a comprehensive strategy and

process of acquiring, retaining and partnering with or the selective customers to create superior

value for the company and the customer.” Thus, they have moved a step further by linking CRM

to the creation of value for the firm as well as customer (Payne and Frow, 2005).

Following the discourse of CRM, earlier, it was referred to as a database management activity

(Saraswathy, 2006). As a result of fast development in information technology, availability of

scalable data warehouses and data mining products (Parvatiyar and Sheth, 2001a), information

about individual customers were carefully managed so as to maximize their loyalty (Kotler and

Armstrong, 2003). However, later on, the emphasis shifted from transaction marketing (one time

deal) to relationship marketing aimed at building and maintaining profitable customer

relationships. The objective was to build long term mutually satisfying relationships by

providing high quality product and services and delivering superior customer value and

satisfaction so as to have a win-win situation for the firm as well as for its customers. Thus, dual

creation of value came to be recognised as the central element of CRM (Saraswathy, 2006).

„


Payne and Frow (2005) developed a CRM continuum depicting various perspectives on CRM

as shown in Fig. 1. They suggested that CRM can be defined from at least three perspectives:

Narrowly and tacitly as a particular technology solution, wide-ranging technology and as a

customer centric orientation. They also argued that an organization should adopt a relevant

strategic definition for their firm and should use it consistently throughout their organization.

Emphasizing the importance of defining CRM in its full perspective as it affects the manner in

which an organization accepts and practices it; they gave the following definition of CRM:

“CRM is a strategic approach that is concerned with creating improved shareholder value

through the development of appropriate relationships with key customers and customer

segments. CRM unites the potential of relationship marketing strategies and IT to create

profitable long term relationships with the customers and other key stakeholders. CRM provides

enhanced opportunities to use data and information to both understand customers and cocreate

value with them. This requires a cross-functional integration of processes, people, operations and

marketing capabilities that is enabled through information, technology and applications.”

Figure 1

The CRM Continuum Narrowly

Defined

Broadly

Defined

CRM is about the

implementation

of a specific

technology

solution project.

CRM is the

implementation

of an integrated

series of customer

–oriented

technology

solutions.

CRM is a holistic

approach to

managing

customer

relationships to

create

shareholder value

Source: Payne, Adrian and Frow, Pennie (2005). "A Strategic Framework for Customer Relationship Marketing," Journal of Marketing, 69 (October), 167-176.


THE EMERGENCE OF CRM

The shift from traditional to modern concept of marketing lead to the acceptance of the idea that

the firm should not only focus on selling products but rather fulfilling needs (Levitt, 1960).

Bagozzi (1974) refocused attention towards the fundamental economic concept that an exchange

will take place only when both parties perceive that they are receiving value. Berry (1983)

emphasized the development of relationship between the company and the customer.

Development of concepts such as market orientation (Kohli and Jaworski, 1990; Narvere and

Slater, 1990), market focus (Day, 1994) and market based learning (Vorhies and Morgan, 2005)

further reiterated the process. With these developments in marketing as a backdrop, there was

explosion of customer data in 1980‟s and with hardware and software solutions, the data was

analysed to understand consumer behavior and to decide company actions more easily (Boulding

et al., 2005).

Thus, relationship marketing and information technology came to be identified as the roots of

CRM.

Relationship marketing

The term, relationship marketing, was first coined by Berry in 1983. Since then it has been used

to reflect a variety of themes and perspectives ranging from narrow marketing perspective to

broader marketing orientation (Parvatiyar and Sheth, 2001b). A narrow viewpoint considers it as

data base marketing where it is seen as a promotional aspect of marketing on the basis of data

base (Bickert, 1992). In a constricted way, it has also been seen as a technique of customer

retention with a variety of after marketing tactics (Vavra, 1992). Jackson (1985) defined it as


“marketing oriented toward strong, lasting relationships with individual accounts” (Parvatiyar

and Sheth, 2001b).

McKenna (1991), in his strategic conception of relationship marketing, made it more consumer

oriented and shifted the role of marketing from customers‟ manipulation (telling and selling) to

their genuine involvement (communicating and sharing the knowledge). Berry (1983) also

defined it broadly as “attracting, maintaining, and -in multiservice organizations- enhancing

customer relationships.” Although he limited the concept of relationship marketing to the service

sector, he emphasized that it should not be restricted to attracting consumers alone, but efforts

should be made to turn them into loyal customers. Extending the domain of relationship

marketing beyond customers, Morgan and Hunt (1994) described relationship marketing to

include all types of relationships like buyer partnerships, supplier partnerships etc. However,

Sheth (1996) suggested limiting its domain to customer relationships only.

It has been observed that the “overall purpose of relationship marketing is to improve marketing

productivity and enhance mutual value for the parties involved in the relationship by increasing

marketing effectiveness and/or improving market efficiencies” (Parvatiyar and Sheth, 2001b).

Marketing effectiveness can be achieved through entering new markets, developing new

products, serving new needs of customers etc., whereas, market efficiencies can be achieved

through reduction of distribution costs, streamlining order processing etc. (Parvatiyar and Sheth,

2001b).


Although, the two terms „relationship marketing‟ and „customer relationship management‟ are

often used interchangeably in an academic community, they are not identical (Parvatiyar and

Sheth, 2001b). Zablah, Benenger and Jhonston (2003) suggest that CRM is “a philosophically-

related offspring of relationship marketing which is for most part neglected in literature.”

Parvatiyar and Sheth (2001b) write that CRM is a subset of “relationship marketing.” It follows

the philosophy of relationship marketing and creates an organizational process necessary to

implementations, control and evaluate it. As it is generally used in the context of technology

solutions, it is often described as “information-enabled relationship marketing” (Ryals and

Payne, 2001).

CRM technology

Mass production as a result of industrialization in 1960‟s separated the production and

consumption functions and created a need for middleman. Reduced interaction between

producers and consumers gave rise to transaction oriented marketing. However, the rapid

advancement in information technology presented firms with new technology-based solutions,

allowing them to interact directly with end consumers and individualize their marketing efforts.

In many industries like air travel, insurance, banking etc. IT solutions changed the nature of

marketing and made relationship marketing more popular (Parvatiyar and Sheth, 2001b).

These new technology-based solutions to manage customer relationships came to be recognized

as CRM technology (Jayachandran et al., 2005). CRM technology is often equated with CRM.

However, this is not true as the former refers to a pack of IT solutions designed to support the

latter (Rigby et al., 2002). They range from front office applications that support sales,


marketing, and service to back office applications that help integrate and analyse the data

(Greenberg, 2001). The CRM technology solutions enable organization to integrate, analyse and

share customer data smoothly so as to customize responses and sustain profitable customer

relationship (Day, 2003).

However, experiences of firms with CRM technology have been mixed. This has raised concern

about its viability and effectiveness (Rigby et al., 2002). Jayachandran et al. (2005) attribute such

failure to inappropriate relational information processes. They argued that when firms are driven

more by technology rather than users need while implementing CRM technology solutions, then

such results occur. Users group play an important role in implementation of CRM technology.

They find difficult to adapt new way of working and learning the complex technology. Thus, it is

important that CRM implementation considers not only technology, but broader organizational

requirements and customer‟s need and expectations (www.wikimediafoundation.org.com).

CRM: USAGE AND APPLICATIONS

Although there are number of cases reporting failure of CRM projects

(www.wikimediafoundation.com), their success stories are equally present

(www.intelnova.com). Examples include National Australian Bank (NAB) and Yorkshire Water

who have won numerous awards for their successful implementation of CRM

(www.wikimediafoundation.com). The following section examines how CRM can be used in the

effective management of customers by firstly, reducing adverse selection and secondly, through

acquisition and retention of customers.

http://www.wikimediafoundation.com/

http://www.intelnova.com/


Reducing adverse selection through CRM

Acquisition of right customers is the first step in successful customer relationship management.

However, a firm‟s attempt to attract new customers, often results into adverse selection. Adverse

selection refers to the “predicament that most attractive customers are unlikely to respond,

whereas potentially unprofitable customers respond in droves” (Cao and Gruca, 2005). It has

been reckoned by number of studies. Reichheld (1996) writes: “In many businesses, the

customers most likely to sign on are precisely the worst customers you could possibly find.”

Richard E. Mirman, chief marketing officer, Harrah‟s Entertainment once remarked that the

“customers you want to attract don‟t respond, and the one‟s you don‟t want to do (Levey, 2002).

The problem escalates, particularly with the marketing of risk products, such as loans and

insurance, and as firms attempt to cross-sell or up-sell a product to their existing customers (Cao

and Gruca, 2005). In an empirical study of cross-selling in a secured loan product, Coa and

Gruca (2005) found the considerable negative effects of adverse selection not only on the

profitability of a marketing campaign, but also on the profitability of the firm as a whole. Thus,

costly screening of customers is required so as to find new customers that can be turned into

loyal and profitable customers.

CRM provides solution to the twin problem of adverse selection and costly screening by

enabling a firm to identify prospects that are likely to show high response rate as well as high

approval rate. It links household‟s observed behavior with their characteristics, such as prior

purchase behavior and geographic, demographic and lifestyle variable and helps to identify

customers that are most likely to convert into sale (Cao and Gruca, 2005).


Selective customer acquisition and retention

Numerous studies have suggested that by focusing on the value of customers i.e. customers who

are highly profitable, firm can improve their performance (e.g., Ryals, 2005). Thus, instead of

trying to acquire and retain every customer, it pays to selectively acquire and retain customers.

CRM techniques helps firm to put greater attention on highly profitable customers by delving

into relationship pricing and product development. It makes managers more cost conscious about

the services to be provided to less profitable customers Thus, what is important is not the

customer loyalty or customer retention per se, but profitable customer retention and profitable

customer portfolio management (Ryals, 2005).

SIGNIFICANCE OF CRM: FROM CUSTOMER KNOWLEDGE TO FIRM VALUE

Customer knowledge and customer satisfaction

A primary motivation for the firm to implement CRM application is to track consumer behavior

to identify their tastes and evolving needs so as to design and develop better products and

services (Davenport et al., 2001).

With the help of CRM applications relevant information about each customer transaction can be

recorded, processed and converted into customer knowledge on the basis of organizational

policies. This customer knowledge can then be used to respond to customers‟ need in a better

manner in future transactions. Also, by creating profiles of customers, their latent needs can be

identified on the basis of similarity between their purchase behavior and others in the group

(Mithas et al., 2005).


By customization of offerings as per the individual tastes of the customers on the basis of

knowledge accumulated through earlier interactions, CRM applications enhances the perceived

quality of the product from consumers‟ viewpoint resulting in their greater satisfaction. Also,

through timely processing of customer order and request, the reliability of consumption

experience enhances. It also helps in the effective management of customer relationship across

the stages of relationship initiation, maintenance and termination. As a result, greater customer

satisfaction and loyalty can be achieved (Mithas et al., 2005).

Customer retention

Customer retention, also described as customer loyalty, is a corner stone of CRM (Gustaffson et

al., 2005). Richard L. Oliver has defined it as a “deeply held commitment to re-buy or re-

patronize a preferred product or service consistently in the future despite situational influence

and marketing efforts having the potential to cause switching behavior.”

Customer retention has a tremendous profit potential. A small improvement in customer

retention dramatically improves the profitability of the organization (Jasola, 2004). This is

because retention of customer helps a firm to earn not only a single transaction, but the entire

stream of transactions that the customer would make over his lifetime. Swell in Customer For

Life, estimated that a customer entering into a transaction with a firm represent a potential life

time value of more than $3,00,000. Further, retention of customers has been found to be less

expensive than customer acquisition (Dick and Basu, 1994). Thomasn (2001) estimated the

acquisition cost per customer to be $26.94 whereas retention cost to be only $2.15. Thus,


companies are using CRM techniques to retain customers and build long term relationship with

them (Saraswathy, 2006).

Customer Lifetime Value

Customer Lifetime Value (CLV), a well known concept in database marketing, has grown in

significance in the marketing community. It is the summation of present value of expected

income and expenses during the life of customer relationships (Gupta et al., 2004). CRM favours

focusing over the lifetime value of customers rather than encashing each and every transaction

with them. CLV is a better indicator than sales statistics as the latter is only a revenue measure

whereas the former is an asset measure. It shows how the customers have responded over their

lifespan rather than during a fixed interval of time. Thus, companies can judge their expenditures

and can measure their growth each year. Difference in the aggregate life time value of customer

from year to year, can be used as a measure of performance of the company rather than solely

relying on sales revenue figures (Saraswathy, 2006).

Firm Value

With measurement of Customer Lifetime Value (CLV), CRM has made costumers an important

intangible asset of the firm and their measurement and management as important as any other

asset. Expenditure on them came to be viewed as investment rather than a marketing expense

(Boulding et al., 2005).

Gupta et al., (2004) offered the linkage between CLV and firm value. They advocated that once a

company‟s current and future customer base can be estimated on the basis of their long term


value and growth in the number of customers, it can be used as a proxy for firm‟s value. With

increase in customer base, firm value will increase. They found that 1% improvement in

retention improves firm‟s value by 5%, suggesting that firms in mature and low risk industries

should concentrate more on customer retention than customer acquisition (Boulding et al., 2005).

FACTORS MODERATING THE EFFECT OF CRM

CRM in itself is not a panacea for all marketing problems. Its effectiveness depends on how it

has been integrated within the firm‟s existing processes and its pre-existing capabilities. As

different firms have different core capabilities, CRM activities are bound to make different

impact (Boulding et al., 2005). Srinivasan and Moorman (2005) noted that for the reason of

observed variability in the CRM performance, it‟s important to identify the moderating factors or

antecedents working behind it. The following section examines the same.

Customer centric organization

CRM places customer at the center of business along with the product (Saraswathy, 2006). Thus,

for CRM to be effective, customer relationship orientation should be rooted in the firm‟s overall

culture. A belief system supporting customer relationship as an asset should be in place to drive

the choice of means necessary for the implementation of CRM (Day, 2000). All actions related

to CRM should be strongly rooted with organizational goals (Saraswathy, 2006) and all

organizational actions should be driven by customer needs, not by internal organizational

concern (Jayachandaran et al., 2005). CRM should be an overall business strategy for the whole

organization rather than of sole marketing department (Saraswathy, 2006). Various studies like


Jayachandaran et al. (2005) and Reinartz et al. (2004) have advocated the necessity of existence

of customer centric management system for the effectiveness of CRM activities.

Strategic commitments

Strategic commitments refer to firm long term decisions such as the decision to enter a specific

market, to invest in a particular product or brand and alike. Srinivasan and Moorman (2005)

found the influence of firm‟s strategic commitments on the successful implementation of CRM

project. They found that the strategic commitments of online retailers in terms of prior brick-and-

mortar experience and online CRM experience bears a significant impact of online CRM

investments on their performance, as measured by customer satisfaction.

Supply chain integration

Supply chain integration refers to the sharing of relevant customers‟ information by a firm with

its supply chain partners so as to ensure that the product and services provided are coordinated to

customer satisfaction (Mithas et al., 2005). Anderson et al. (2003) argues that “interweaving of

IT links throughout the supply chain create(s) value by enabling each member of the supply

chain to identify and respond to dynamic customer needs.”

Mithas et al. (2005) recognized that firm with greater supply chain integration gets better

rewards from CRM investment. Failure of many CRM projects is due to “the propensity of firms

to avoid the important data transformation and convergence processes including all transaction,

interactions, and networked touch points” (Swift, 2002). It is due to their excellent supply chain


management, corporates like Saturh, Dell and Southwest have been able to draw results from

their customer relationship programmes (Harward Business Review, 2003).

Miscellaneous Antecedents

There should be willingness on the part of the company as well as customers to stay committed

to the relationship for the effective implementation of CRM. Further, the company should also be

willing to invest in the necessary infrastructure (hardware and software) for the smooth

implementation of CRM (Saraswathy, 2006).

POTENTIAL PITFALLS OF CRM

CRM, although an important tool in the hands of marketers, it has some pitfalls as discussed

under:

Firstly, the sensitive issues of consumer trust and privacy tend to undermine successful

implementation of CRM activities. Ideally, both consumers and firms are better off as a result of

CRM. However, number of studies shows that that the focus of CRM eventually shifts to the

creation of value for the firm only. For example, differential pricing scheme as developed by

Lewis (2005) for different market segments through CRM practices (Boulding et al., 2005).

Similarly, Ryals (2005) found reduction in attention of firms towards customer groups which are

low in value.

Thus, it may always be in the interest of firm to acquire customer knowledge so as to improve its

performance, it may not be in the interest of customers to provide this data (Boulding et al.,


2005). On anticipating wrong use of information by firms, customers may act strategically and

modify their own behavior (Lewis, 2005). Hence, it is important for firms to understand the

importance of earning customer‟s trust, otherwise, they may lose access to the data required for

dual creation of value.

Secondly, in the similar vein, issues of customer fairness shall be dealt with great care for the

successful implementation of CRM as firms often resort to differential treatment to different

customers on the basis of CRM activities (Boulding et al., 2005). Amazon.com was highly

criticized in 2000 for selling same DVD‟S at different prices to different customers (Hamilton,

2000). It has been observed that on the basis of past experiences, customers develop expectations

of what they should receive and downgrade their perception if they receive anything less than

that. Thus, firm should carefully manage perception of their fairness so that data can easily be

acquired from them (Boulding et al., 2005).

Thirdly, CRM is not suitable for all kinds of markets. When market consists of customers with

short time horizons and low switching cost such as buyers of commodities with low unit profit

margins, basic marketing is more appropriate than relationship marketing (Saraswathy, 2006).

Fourthly, for CRM to give desired results, the active role played by customers shall be given due

consideration, which is not the case at present (Saraswathy, 2006).

Fifthly, a proper coordination of channels, technologies, customers and employees is essential

for the effective implementation of CRM. However, the human factor has received little attention


till date. Although all processes and systems are important for CRM success, without appropriate

human interaction none of them will yield desired results (Boulding et al., 2005).

Sixthly, incomplete and inappropriate use of CRM technology put the company at the risk of

long term failure (Boulding et al., 2005).

Last but not the least, as CRM is based on consumer databases, the accuracy and appropriateness

of databases are matter of high concern. These databases are themselves of little value. They

acquire value only if they are analysed and reported thoroughly in a coherent manner

(Saraswathy, 2006).

CONCLUSION

The field of CRM has moved over time. The progress is evident by increase in number of

academic centers, conferences, research papers, courses and industry attention devoted to this

topic. The main objective of CRM is to build long term relationship by delivering superior

customer value and satisfaction. The focus is on maximizing profits over lifetime value of

customers rather than transaction-oriented marketing. However, the exact meaning of CRM

seems to be still undercover with different interpretations provided by different persons.

Vendors have vested interest in defining CRM their way. It is generally restricted to technology

based solutions only. Though one may take it to strategic level, progress in that direction seems

lacking.


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Customer Relationship Management: Concept, Significance and Pitfalls

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