Chapter 11 – Customer Relationship Management
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CHAPTER 11
CUSTOMER RELATIONSHIP MANAGEMENT
ANNOTATED OUTLINE
INSTRUCTOR NOTES
• Customer relationship management
(CRM) is a business philosophy and a set
of strategies, programs, and systems that
focuses on identifying and building
loyalty with a retailer’s most valued
customers.
See PPT 11-3
Ask students to give examples of retailers in
the area who seem to have a loyal customer
base. What are the reasons why customers
(including themselves) frequent this retailer?
I. The CRM Process
• Retailers are now beginning to
concentrate on providing more value to
their customers using targeted
promotions and services to increase their
See PPT 11-4
Ask students if they buy more products from
one specific retailer now, i.e., spend more
money with one specific retailer? If so, why?
If not, why do they buy different products from
A. What is Loyalty?
• Customer loyalty, the objective of CRM,
is more than having customers make
repeat visits to a retailer and being
See PPT 11-5
Ask students how much they like a specific
Chapter 11 – Customer Relationship Management
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retailer and will resist the activities of
competitors attempting to attract their
patronage.
• Programs that encourage repeat buying
by simply offering price discounts can be
easily copied by competitors. However,
when a retailer develops an emotional
connection with a customer, it is difficult
for a competitor to attract the customer.
See PPT 11-6
II. Overview of the CRM Process
• CRM is an iterative process that turns
customer data into customer loyalty
through four activities: (1) collecting
See PPT 11-7 for an overview of CRM
See PPT 11-8 for an illustration of the CRM
Process Cycle
A. Collecting Customer Data
• The first step in the CRM process is
constructing a customer database. This
1. Customer Database
• Ideally, the customer database should
See PPT 11-09
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contain the following information:
1. Transactions – a complete history of the
purchases made by the customer,
including purchase date, the SKUs
purchased, the price paid, the amount of
profit, and whether the merchandise was
purchased in response to a special
promotion or marketing activity.
3. Customer Preferences – what the
customer likes, such as favorite colors,
brands, fabrics, and flavors as well as
apparel sizes.
4. Descriptive Information – Demographic
and psychographic data describing the
customer that can be used in developing
market segments.
5. Responses to marketing activities –
analysis of the transaction and contact
data provide information about the
customer’s responsiveness to marketing
activities.
To demonstrate how a customer database could
have very simple beginnings, ask students the
types of information contained in a typical invoice.
Note that each transaction invoice would contain
details on the customer’s name and address,
products and quantities purchased, price paid, etc.
If a whole year’s invoices were collected, what
types of information could be obtained?
2. Identifying Information
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• Constructing the database is relatively
easy for catalog and Internet shoppers
and customers who use the retailer’s
credit card when buying merchandise in
stores. Customers buying from nonstore
channels must provide their contact
information, their name and address, so
that the purchases can be sent to them.
See PPT 11-10
Asking for Identifying Information
• Some retailers ask customers for
identifying information such as their
phone number or name and address when
they ring up a sale. The information is
then used to create the transaction
database for the customer.
Ask students for their reactions when a cashier
asks them for their name, address and phone
number before ringing up a sale.
How could the store minimize consumer concerns
and still obtain customer identity information?
Offering Frequent Shopper Programs
• Frequent shopper programs, also called
loyalty programs, are programs that
identify and provide rewards for
customers who patronize a retailer.
Ask students if they use a frequent shopper card.
What are the advantages and disadvantages from
a customer’s perspective in using such cards?
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• When customers enroll in one of these
programs, they provide some descriptive
information about themselves or their
household. Customers are then offered
an incentive to show the card when they
make purchases from the retailer.
Connecting Internet Purchasing Data with
the Stores
• If a customer has used a credit card while
shopping on a multichannel retailer’s
Internet site or from its catalog, and then
uses the same card to make a purchase in
What are the various privacy issues when a
retailer unobtrusively collects information
Privacy and CRM Programs
• While detailed information about
individual customers helps retailers
provide more benefits to their better
customers, consumers are concerned
about retailers violating their privacy
when they collect this information.
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1. Privacy Concerns
• The degree to which consumers feel their
privacy has been violated depends on: (1)
their control over their personal
information when engaging in
marketplace transactions and (2) their
knowledge of the collection and use of
personal information.
• Cookies are text files that identify
visitors when they return to a website.
Due to the data in the cookies, customers
do not have to identify themselves and
See PPT 11-12, 11-13
Ask student if they have bought or buy regularly
from Internet retailers. If they have bought from
Internet retailers, what do they feel about privacy
issues? If they have never bought from Internet
retailers, is it due to privacy concerns?
2. Protecting Customer Privacy
• Some people define personal information
as all information that is not publicly
available; others include both public (i.e.,
driver’s license, mortgage data) and
private (hobbies, income) information in
the definition of personal information.
• Retailers need to take the necessary
precautions to protect consumer privacy
by incorporating safety software such as
firewalls and data encryption programs.
See PPT 11-11
Evaluate the differences between U.S. and
European laws regarding privacy. From the
point of view of the individual consumer,
which one is more comprehensive and better
ensures privacy protection? From the point of
view of the retailer, which one offers more
opportunities for reaping the full benefits of a
CRM program?
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banking.
• The European Union (EU) is more
aggressive in protecting consumer
privacy and its provisions include:
c. The information can only be used for that
specific purpose.
d. The business can only keep the
information for the stated purpose.
they must opt out.
• The Federal Trade Commission has
developed the following set of principles
for fair information practices:
a. Notice and Awareness – covers the
disclosure of information practices,
including a comprehensive statement of
information use such as information
storage, manipulation, and dissemination.
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confirmation of information accuracy by
consumers.
• There is growing consensus that personal
information must be fairly collected, the
collection must be purposeful, and the
data should be relevant, maintained as
accurate, essential to business, subject to
the rights of the owning individual, kept
reasonably secure, and transferred only
with the permission of the consumer.
• Retailers can protect customer privacy
by: encouraging businesses to be
responsible for customer privacy, being
transparent, and simplifying customer
choice.
See PPT 11-12
B. Analyzing Customer Data and Identifying
Target Customers
• The next step in the CRM process is
analyzing the customer database and
converting the data into information that
will help retailers develop programs for
building customer loyalty.
See PPT 11-15
Ask students what questions they could answer
if they had a computerized record of all of one
store’s transactions for the last two year. (In
other words, what patterns in the data would
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1. Identifying Best Customers
• Customer data analysis is focused on
identifying market segments – groups of
customers who have similar needs,
purchase similar merchandise, and
respond in a similar manner to marketing
activities.
• LTV is estimated by using past behaviors
to forecast the future purchases, gross
margin from these purchases, and costs
associated with servicing the customers.
Some of the costs associated with a
customer are the cost of advertising and
promotion used to acquire the customer
and the cost of processing merchandise
that the customer has returned.
See PPT 11-16
See PPT 11-17 for an LTV comparison of two
different shoppers
What can small retailers do to determine the
2. RFM Analysis
• RFM (recency, frequency, monetary)
analysis, often used by catalog retailers
and direct marketers, is a scheme for
segmenting customers according to how
See PPT 11-19, 11-20
A catalog marketer has decided on the following
rule for mailing customers. Every new prospect
would receive 6 catalogs mailed once every month
before they are dropped from the mailing list. If
they bought at least once in the 6 months, they
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recently they have made a purchase, how
frequently they make purchases, and how
much they have bought.
• CRM programs directed toward
customers in the high-value segment
(high frequency, recency, and monetary
value) attempt to maintain loyalty,
increase retention, and gain a greater
share of wallet by selling more
merchandise to them.
would get an additional 8 catalogs before they are
dropped from the mailing list. If they bought 2 or
more times in 6 months, they would receive
catalogs for the next 15 months and would also
retaining best customers, (2) converting
good customers into high-LTV
customers, and (3) getting rid of
unprofitable customers.
C. Developing CRM Programs
• The next step in the CRM process is to
develop programs for the different
See PPT 11-21
Customer Retention
• Four approaches that retailers use to
retain their best customers are: (1)
frequent shopper programs, (2) special
customer service, (3) personalization, and
(4) community.
See PPT 11-31
Ask students why customer retention is
important, especially since CRM programs
cost so much. How do the rewards of
retention outweigh the costs of the CRM
program?
1. Frequent Shopper Programs
• Frequent shopper programs are used
both to build a customer database by
See PPT 11-21 and PPT 11-22
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use the card.
• Four factors limit the effectiveness of
frequent shopping programs: (1) they can
be expensive, (2) it is difficult to make
corrections in programs when problems
arise, (3) it is not clear that these
programs increase consumer spending
behavior and loyalty toward the retailer,
and (4) it is difficult to gain a competitive
advantage based on frequent shopper
programs.
2. Special Customer Services
• Some retailers provide unusually high
quality customer service to build and
maintain the loyalty of their best
customers.
3. Personalization
• With the availability of customer-level
data and analysis tools, retailers can now
economically offer unique benefits and
target messages to individual customers.
They now have the ability to develop
programs for small groups of customers
and even specific individuals.
opportunity for retailers to automate the
See PPT 11-28
Most retail store associates wear a name tag.
Should customers also wear a name tag or
mention their name when shopping at a store?
What types of retailing/services may benefit
from this type of name recognition and
identification?
1 Frank Badillo, Customer Relationship Management (Columbus, OH: Retail Forward, 2001).
Chapter 11 – Customer Relationship Management
practice of 1-to–1 retailing.
• Nearly every online retailer allows
shoppers to search selectively for items in
which they are most interested. Some
retailers attempt to match specialized
promotions to the customer’s search.
reluctant to leave the “family” of other
4. Community
D. Implementing CRM Programs
• Increasing sales and profits from CRM
programs is a challenge. The effective
implementation of CRM programs
requires the close coordination of
activities by different functions in a
retailer’s organization.
• Store operations and human resource
management needs to attract, hire, train,
and motivate the employees who will be
using the information to deliver
personalized services.
See PPT 11-25
What can a small retailer do to implement a CRM
program without expending too much in costs?
What are the basic sources of costs for such a
retailer?
A. Customer Pyramid
* Most retailers realize that their customers
differ in terms of their profitability or
See PPT 11-25-1-28
A retailer is developing a program whereby it
would have a special one-day sales event