CREATING SUSTAINABLE COMPETITIVE ADVANTAGE IN A NEW DIGITAL WORLD.

CRM2.0 CUSTOMER STRATEGY AS A BUSINESS STRATEGY

THOUGHT R K L E I N C . 201 1 M E LEADERSHIP SERIES

1.877.9MERK LE MERKLEINC.COM

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CREATING SUSTAINABLE COMPETITIVE ADVANTAGE IN A NEW DIGITAL WORLD.

A Marketing Revolution
A decade ago, most companies viewed customer relationship management (CRM) as a back office operation function to better support sales and call center operations. Over time, technology has changed the way customers interact with companies and where, when, and how they transact. Customers have become more informed and sophisticated in their buying behaviors, and how they interact across media and channels. Gone are the days of merely monitoring website activity, response cards, and in-store traffic to gather actionable insights. The knee-jerk reaction of many companies to this changed dynamic one that has put customers in a stronger position of control than ever before is to simply gather more data, in hopes of somehow learning how to regain control of a marketing revolution thats already left the station. But the fact is, customer-centricity is no longer an option; it is a business and financial imperative to gain competitive advantage. Today, companies are seemingly drowning in data, much of it gathered in inconsistent ways and scattered throughout the organization, often in siloed, unshared repositories. This and other factors make it difficult, if not impossible, to leverage the data and the investment made to gather it, to understand and use customer data to drive business strategies that build customer value and improve a companys overall financial performance.

CRM 2.0: The digital revolution is now driving the customer revolution.

To be sure, the way in which companies gather and use data must be integrated. But as this paper points out, the marketing revolution thats already underway demands even more of companies. Organizations must rethink how information can be leveraged to better serve business goals, not just marketing goals. Moreover, companies must rapidly evolve to meet the challenges of this new environment or be left behind. Those that have begun this transformation are already realizing competitive and financial advantages.

The Business Case for Customer-Centricity

Focusing on customer needs has long been the foundation of good marketing practice. But up until now, few companies have put the customer at the center of the organizations overall strategies. Still, many companies overestimate the extent of their customercentricity, according to research conducted just last year by Forrester Consulting for Merkle. Forresters study showed that 44 percent of respondents said their company is more customer-focused than brand-focused (compared to 35 percent who said they were more brand-focused). The claim of customer-centricity, wrote Forresters analysts, is more aspiration than fact. Forrester concluded that the time has come for companies to move beyond lip service to deliver on the promise of customer-centric marketing and business strategy. In this environment, marketers must convince their organizations that consumers expect to be communicated with in a way that is of value and relevant to them. Only 11 percent of marketers who responded to Forresters survey said customer engagement is the primary factor in their communications. But todays customers are demanding increased and higher quality engagement. They expect to be at the center of a companys strategies. Contrast Forresters statistics with research by Accenture in 2008 that shows 58% of customers surveyed indicated their service expectations were higher that year than in 2007. Accentures research found that a poor customer experience is the most common reason for customer flight cited more often than finding a better price somewhere else. Customers also do not reward companies that overlook their expectations, and that finding was consistent across industries. Conversely, companies that do a good job of integrating customer marketing and management those that are customer-centric reap significant financial rewards.

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The New Environment

The digital revolution that created so many new business and marketing opportunities is now driving the customer revolution. Digital media and channels allow more data capture, and the ability to capture information in real time is enabling real-time interactions. Technology platforms and advancements are creating mass engagement, changing consumer decision making and buying processes. Because customers have grown accustomed to real time interaction primarily through their experiences in social media they expect the same level of engagement, the same level of attention, from companies with whom they conduct business. Recent economic conditions have accelerated this transformation and have altered customer behavior. Customers are choosier about how and where they spend their money than in the past. Their tolerance level for poor or mediocre service has been reduced because they have more convenient options. They are less forgiving than they might have been just a couple of years ago. And, they expect companies to know them on a more intimate level something they understand is possible given new technology and data capture capabilities. These dynamics have converged to bring about a rapid evolution in both the definition of CRM and the need to bring customer data and insights to the desks of every functional area in an enterprise.The primary shift is from considering and using CRM as a technological tool used by sales and marketing, to employing CRM as an enterprisewide business strategy. Building competitive advantage in this new environment depends on how effectively an organization understands, tracks, engages, measures, and influences consumer behavior at the individual level. Organizations that create a business strategy today around influencing individual consumers to accelerate positive behaviors and decelerate negative will break out from the competitive pack and will become the category leaders of the future. The speed and agility of a company to transform its operations is largely dependent upon its business model, direct marketing and

Future competitive advantage will be dependent upon an organizations ability to understand, track, engage, measure, and influence consumer behavior at the individual level.

CRM 1.0 Technology Experience Back Office Sales Operations Channel Driven
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CRM 2.0 and Strategy and Engagement and Front Office and Marketing and Revenue and Media Driven
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database marketing sophistication, and current level of customer engagement. For some industries, the data already in its repositories includes information about individual customers while others do not. In the insurance industry, for example, companies like GEICO have marketed directly to customers for years.The company has rich data on hand that will enable relatively quick and painless adoption of CRM 2.0 models. On the other hand, healthcare organizations possess extensive customer data but virtually no experience in marketing directly to those customers or engaging them on a one-to-one basis.

CRM Transformation Business Models Matter

Identified Direct

Non Identified

Financial Services

Retail
Business Model

Indirect

Healthcare

Consumer Packaged Goods

Customer

Still other companies, such as retail organizations, have gathered data about broad swaths of customers who buy from them, but the data does not allow individual engagement. Retail organizations, for instance, havent kept track of individual customer behaviors and are starting CRM at ground zero. Many retailers have used transactional data gathered at the point of sale to track inventory and sales volume and trends, rather than keeping track of customers and their buying behaviors. As a result, many organizations that sell directly to consumers are starting CRM from scratch. Moreover, they are in a high stakes battle to retain customers. Organizations that sell directly to consumers, but whose data does not tie directly back to individual customers, are extremely vulnerable to customer flight in the new marketing environment.

Marketing now has the ability to drive customer advantage much like they did in the 50s with brand and mass advertising.

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Engaging the Customer

Brand Focused

Customer Focused Strategic Integration

Qualitative Big Ideas Attitudinal Brand Advertising Universal - Think Brand

Media

Qualitative Facts Behavioral Precision Marketing Unique - Act Direct

Interactive Mass Direct

Implementation

In terms of shifting from brand- to customer-centric business models, product companies face the biggest hurdle. These companies are the epitome of brand and product focus. Moreover, product marketers typically rely on third parties and retailers to sell their goods to consumers. The product business model put these organizations in jeopardy over the course of the recession, and we expect that vulnerability to continue for the foreseeable future. Product companies across the board have seen dramatic erosion in brand loyalty over the past couple of years. Their inability to communicate directly to consumers on a one-to-one basis, coupled with inexperience in direct marketing and customer-centricity, is very possibly at the root of these significant losses. To evolve from CRM 1.0 to CRM 2.0 is to achieve true customer-centricity and fully integrated customer marketing. The fundamental shift required of all companies is one of customer engagement, changing from a brand and product orientation to a business model that is focused squarely on the customer as a unique individual.

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Integrated Customer Marketing

Merkles Integrated Customer Marketing (ICM) approach provides the pathway for organizational transformation from CRM 1.0 to CRM 2.0 and overcomes barriers that have prevented integrated marketing in the past. At ICMs foundation are currencies that enable the entire organization to optimize financial and marketing dollars to produce the greatest incremental impact on total customer equity. Currencies bring order, alignment, and consistency to disparate terms and metrics across multiple departments, enterprises, and industries. Defining currencies establishes a common, universally understood language.

Integrated Customer Marketing Framework

Strategy & Planning Change Management g g Technology Infrastructure Data & Analy cs

SERVICE INFLUENCE

SALES INFLUENCE

Customer Por olio Op miza on

Lifecycle Management & Segmenta on

Marke ng Op miza on
Budgets & Forecasts

Campaign Op miza on
Targe ng & Interac ons

ICM currencies form the foundation of marketing integration and enable companies to orient around the customer. All three currencies are interrelated, dependent upon each other to create an organization that shares the same customer-centric philosophies, practices, and protocols. Demand for accountability and 21st century business realities urgently require these metrics to ensure sound business decisions focused on building customer value and competitive advantage.

Customer Value Currency

Managing customer value across the enterprise is another essential component of ICM. A near universal truth is that 20% of a companys customers drive 80% of the overall value or profit. In some cases, 90% of profit is driven by only 515% of the customer base. Understanding the relative value of each customer and differentiating marketing, sales, and service experiences accordingly, can ideally grow individual current and future potential value of each customer to the individually optimal level. Performed methodically and stringently measured across the enterprise, this allows reaching the ideal state of customer marketing. Few companies have defined and agreed upon a common definition and measurement of customer value. Making wise investments with a successful return is dependent on understanding which customers or prospects merit investment, and understanding how to differentiate that marketing investment. Customer value calculations must take into account several factors. First, they must sufficiently represent a valid measurement of financial value. This may be calculated by direct means, such as revenue or profitability, or via a substitute economic measure such as an engagement metric. Second, they must contain multiple metric dimensions. Common ones include life-to-date, future value, and potential value. The customer value metrics should be leveraged for both prospects and customers and are relevant throughout the lifecycle. Third, the metrics must have organizational alignment. The metrics must be applied and measured consistently across

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the organization with enterprise-wide buy-in or they will be invalidated as drivers for strategic decisions. The enterprise-wide understanding of how customer lifetime value is calculated and viewed is critical to its successful implementation and usage. Enterprise customer value (ECV) has three components as well. These include transactional value that revenue and profit generated directly by the customer over the relationships lifetime. Primary components are current and potential value of the customer. Engagement value is the second component, and is the value of non-monetary engagements that are tied back to future transactional value. Third is referral value, which is the value of having a customer relationship that creates a referral or advocate value. These must be calculated with some judgment; the cost and efforts to identify these values should never exceed the benefit of knowing them.

The Three ICM Currencies

Incremental Measurement

ICM Currencies Segmentation Universal Customer Value Metric

The Segmentation Currency

Segmentation that is based on attitudes, values, and behaviors is far more useful and provides a much better return than the traditional composite demographic depiction of an organizations typical customer. The traditional composite customer model likely has no real-world counterpart and in any event constrains the marketing environment in such a way that far too many customers or prospects who deviate substantially from that demographic model are ignored or put off by efforts that dont speak to their needs. Recognizing that each customer or prospect has unique needs, perceptions, and value will allow more pinpointed methods to be used. When segmenting customers, organizations commonly take a fragmented approach. The brand or product marketing department views customers from an attitudinal perspective. The finance group views customers from a risk or value perspective. The direct marketing team views customers based on behavior. These disparate perspectives form an inaccurate and often conflicting picture of the customer pool as a whole, a vision that cannot guide the organization in a cohesive, consistent fashion. Using segmentation as an ICM currency involves a true, holistic understanding of who the customer is, and reaching internal agreement on relevant profiles of the customer. This universal definition then defines the needs, values, and behaviors of the customer throughout the organization, for all interactions. An organizations segmentation currency should include: The customer-defining language must remain constant throughout the organization and throughout the customer lifecycle Application across all marketing media (mass, direct, and digital), which implies that the solution should be defined at the individual customer level Connection to the overall brand and communication strategy Be inclusive of multiple dimensions, particularly behaviors, attitudes, and customer value

ICM Framework - Currencies

Segmenta on Value Measurement

SERVICE INFLUENCE

SALES INFLUENCE

Customer Por olio Op miza on

Lifecycle Management & Segmenta on

Marke ng Op miza on
Budgets & Forecasts

Campaign Op miza on
Targe ng & Interac ons

Currencies Enable Movement Across the Levels

Currency (noun): a) a medium of exchange, b) general use, acceptance, or prevalence of a concept, c) something that is widely and universally accepted and circulated from person to person, d) a medium of verbal or intellectual expression. ICM Currencies (noun) plural: three universally accepted, operational protocols that enable companies to achieve fully integrated, customer-centric marketing and realize the accompanying financial benefits: 1)segmentation based on attitudes, behaviors, and value, 2) incremental measurement, 3) universal customer value metric.

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Implementing this segmentation consistently across the organization is extremely powerful. A universal, consistent definition of the customer that includes the key components of value, behavior, and attitudes can be used strategically and tactically, with dramatically improved results. The traditional approach to segmentation is far too generic and isolated, either too esoteric to be meaningfully actionable or too micro to build strategic planning around. The segmentation is often done simply to target media consumption, and often for a single marketing campaign. Not only is this ineffective for the individual action, but it does nothing to further build and define the relationship on an ongoing basis.

The Incremental Measurement Currency

Incremental measurement is the third major component of ICM. Many metrics have been used for years to measure marketing effectiveness and continue to be important in managing a business. Incremental and enterprise measurement are sometimes used interchangeably, but have very different meanings. Enterprise measurement in ICM encompasses and organizes the many metrics used within an organization today. ICMs incremental measurement currency differs and is a component of enterprise measurement. An incremental metric measures the change due to a decision, event, or action. It refines those transactional measurements to screen out clutter those transactions that would have happened anyway without the offer, promotion, discount, or other factor to truly assess the effectiveness of the variable being examined. Incremental metrics have two key advantages over non-incremental ones. First, incremental metrics assess the correlation versus causality issue. An increase in sales coincidental with a campaign launch does not alone prove the effectiveness of the campaign. Many other factors could have caused the sales increase. Second, incremental metrics measure average versus marginal performance. Incremental measurement assesses the objectives of the entire company, evaluating disparate data housed in multiple locations. ICM tools are used to calculate scores for every factor that can influence a sale, customer acquisition or retention, and long-term loyalty. Incremental measurement consolidates data on an ongoing basis to continually optimize the data and what it represents. This evergrowing intelligence enables a big picture view that allows for much more informed decisions about which campaign, promotion, or other activity will result in the greatest yield in both the short and long term. Everyone in the organization, armed with the same data utilizing the same criteria, can make operational decisions based on incremental benefits. That enhanced decision-making model results in improved financial, operational, and marketing outcomes.

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The Roadmap for the New Paradigm

ICM is both a systematic pathway to integration and a business philosophy that puts customers at the center of a companys business strategy in a way that trumps the old brand- and product-centric approaches. Merkles proprietary ICM framework fully integrates the marketing function across the entire enterprise in a customer-centric fashion. When ICM is implemented, customers and companies win. ICM informs and integrates the total customer experience from strategic lifecycle management, enterprise segmentation, and marketing mix optimization to comprehensive program development and campaign execution. In traditional marketing operations models, business units are engaged in campaign-focused interactions that are driven by product objectives. In the ICM model, the enterprise engages in customer-focused interactions designed to heighten and maximize customer experience and lifetime value delivered through a series of well-defined and well-executed business processes. Designed to overcome organizational, operational, and technological constraints that typically hinder organizations from maximizing value, the ICM framework incorporates strategy and planning, change management, technology infrastructure, and data and analytics. Enterprise segmentation and enterprise measurement frame four major areas of integration, each of which is implemented as a gradual, planned journey via a clearly defined, multi-step process.

Integrated Customer Marketing Journey

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For many organizations, the first step in this journey is to form a cross-functional team a CRM Center of Excellence. This group sets vision and gathers organizational alignment to support the transformational shift. Merkle works with the organization to establish a customer-centric foundation by building upon basic infrastructure and capabilities, such as campaign-based modeling and targeting. Later, enterprise engagement begins with advanced lifecycle strategies, and then the organization moves into implementation of customer touchpoint management, enterprise segmentation, and measurement. Ultimately, ICMs systematic approach reengineers the organizations customer marketing strategy and business processes to allow the integration of sales, marketing, and service functions throughout the enterprise. The result is an enterprise that uses measurable, data-driven methods to actively manage every customer interaction across the organization. ICM offers many benefits, among them: Improved short- and long-term profitability by optimizing the value of the entire customer portfolio. Informed customer-centric, strategic planning. The flexibility and organizational processes to quickly adapt to change and seize every opportunity, including those that arise from fluctuations in the economy or changes in the marketplace. CRM has undergone a metamorphosis from a software tool (think Siebel) to manage customer data to an imperative business strategy. Next generation CRM requires organizations to focus all business activities around measured customer behaviors and trends. Data must still be collected, of course. But information needs to be gathered from all touchpoints in a united way across all business units, and then integrated so that the entire organization can accurately view and act upon a complete picture of its customers. To succeed in the new customer-driven environment, organizational attention must shift from brand and product focus to true customer-centricity, and not just in name only. Many companies have begun the journey to establish ICM as a business philosophy in their organizations and are already seeing the promise of enviable financial results. Wherever organizations have made a commitment to implementing customer-centric marketing approaches many of which incorporate some but not all of the elements ICM advocates there have been significant short- and long-term payoffs. Companies like DIRECTV, GEICO, American Cancer Society, Harrahs, 1-800-FLOWERS, and Procter & Gamble have demonstrated the value of socializing customer insights across the enterprise.

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About Merkle Inc.

Merkle is the nations largest and fastest growing customer relationship marketing agency. For more than 20 years, Fortune 1000 companies and leading nonprofit organizations have partnered with Merkle to maximize the value of their customer portfolios. By combining a complete range of marketing, technical, analytical, and creative disciplines, Merkle works with clients to design, execute, and evaluate Integrated Customer Marketing programs.With more than 1,400 employees, the privately held corporation is headquartered near Baltimore in Columbia, Maryland with additional offices in Boston, Chicago, Denver, Little Rock, Minneapolis, New York, Philadelphia, Seattle, Hagerstown, Maryland and Shanghai. For more information, contact Merkle at 1-877-9-MERKLE or visit www.merkleinc.com.

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