Business
Customer
Relationship
In a nutshell
Instructor: MSc. Ngo Hien Dan
ngohiendan.cs2@[Link]
Business Customer Relationship
“A relationship is composed of a series of interactive episodes between two parties
over time.”
A relationship has been said to exist only when the parties move from a state of
independence to dependence or interdependence. The first condition is independence
when both parties have little or no interaction, each party can function fully on its own.
At this point, customer can switch easily to other brands with minimal loss and the
company can operate on its own. When one party relies on the other party to fulfill a
need or achieve a goal, for example the customer is fall into the brand’s ecosystem, the
relationship move into the state of dependence. If both parties rely on each other for
long-term success, at this time, we can say that both parties are turned into the
interdependence state that mutually create long-term partnership with significance value.
Woodburn and McDonald have explored the potential mismatching of buyer and seller
preferences for their relationship. Suppliers and buyers each have their own preference
of the level they wish to achieve. Ideally, they match, but often they don’t. The zone of
delusion is when a supplier is investing in building a higher-level partnership with the
customer, while the buyer is merely interested in the basic transaction. Conversely, the
zone of frustration is where the buyer would like to partner but the supplier is focused
only on the next transaction.
5 phases of customer-supplier relationship – Dwyer (1987)
Awareness is when each party comes to the attention of the other as a possible
exchange partner. Exploration is the period of investigation and testing during which
the parties explore each other’s capabilities and performance. Some trial purchasing
may take place at this stage. If the trial is unsuccessful the relationship can be
terminated with few costs. Expansion is the phase in which there is increasing
interdependence. More transactions take place and trust begins to develop. The
commitment phase is characterized by increased adaptation on both sides and
mutually understood roles and goals. Automated purchasing processes are a sure sign
of commitment.
Not all relationships will reach the commitment phase. Many are terminated before
or after that stage, lead to the dissolution. There may be a breach of trust that forces
a partner to reconsider the relationship. Customers exit relationships for many
reasons, such as repeated service failures or changed product requirements. Suppliers
may choose to exit relationships with customers because of the relationship’s failure
to contribute to sales volume or profit goals. One option to resolve this problem and
continue the relationship may be to reduce the supplier’s cost-to-serve the customer.
Relationship components
Two attributes of highly develop relationships: trust and commitment.
Trust is an issue particularly in the early stages of relationship development
when the parties have little knowledge about or experience with each other and
feel vulnerable. Trust emerges as parties share experiences and interpret and
assess each other’s motives. As they learn more about each other, risk and doubt
are reduced. For these reasons, trust has been described as the glue that holds a
relationship together across time and different episodes.
One party may trust the other party:
• Benevolence. A belief that one party acts in the interests of the relationship,
not out of self-interest.
• Honesty. A belief that the other party’s word is reliable or credible.
• Competence. A belief that the other party has the necessary expertise to
perform as promised or expected.
Relationship components
The concept of commitment has transferred into CRM from the organizational
behavior literature. Commitment is seen as a form of ‘stickiness’ that reflects a
desire to maintain a relationship (indefinitely, some have suggested), a pledge of
continuity between parties, a willingness to make sacrifices should the relationship
end, or simply an absence of competitive offerings.
These various perspectives suggest two major dimensions of relationship
commitment: affective commitment and calculative commitment. Calculative
commitment is a more rational, economic-based commitment to a relationship
due to a perceived lack of alternatives or high switching costs. Affective
commitment is a more emotional, trust-based, form of commitment that develops
through reciprocity or personal bonds between a customer and supplier.
Commitment therefore may arise from trust and shared values, or the belief that
partners will be difficult to replace. Commitment motivates partners to co-operate
in order to preserve relationship investments. Commitment means partners forego
short-term alternatives in favor of more stable, long-term benefits associated with
current partners.
Building trust is hard, but maintaining trust is even harder.
This discussion of trust and commitment suggests that some relationships
can be thought to be of better quality than others, that is, higher in levels of
trust and commitment.
However, a number of other attributes have also been identified, including
conflict, cooperative norms, opportunism, mutual goals, power, adaptation,
atmosphere, and social and/or structural bonds.
Trust takes considerable time and effort to build, but a single adverse incident
can compromise trust. There may be a ‘cheating’ incident (e.g. a partner acts
in their self-interest at the expense of the other partner- or opportunism) that
can reduce the partner’s level of commitment to the relationship.
When customers want relationships with companies
In the B2B context
A relationship with a supplier can reduce the customer’s sense of perceived risk.
many Here are a number of circumstances when perceived risk may be high and a
relationship desirable.
• Product complexity. If the product or its applications are particularly complex, for
example, networking infrastructure, a relationship can reduce performance risk –
the risk that the technology will not work as desired or expected.
• Product strategic significance. If the product is strategically important or mission-
critical, for example, supply of essential raw materials for a continuous process
manufacturer, performance risk may be high.
• Service requirements. If there are downstream service requirements, for example,
for machine tools, a relationship can ensure that the tools will remain serviced and
functional.
• Purchase cost. If a purchase is particularly costly, for example purchases of large
pieces of capital equipment such as earth-moving equipment, financial risk is high.
• Reciprocity. A relationship can generate benefits from referrals by each party. A
financial audit practice may want a close relationship with a management
consultancy, so that each party benefits from referrals by the other.
When customers want relationships with companies
In the B2C context
Confidence benefits are experienced as perceived risk is reduced or eliminated. For
example, an automobile owner may develop a relationship with a service station to
reduce the perceived performance and financial risks attached to having a car
serviced. The relationship provides the assurance that the job has been skillfully
performed and that the car is safe to drive. Trust rises as confidence builds.
Social benefits may be experienced when a relationship enhances the consumer’s
power, status, or affiliation with others. Customers may also feel that their status is
enhanced by a relationship with a supplier, such as an elite health club, hotel chain
or credit card company.
Special-treatment benefits may take several forms. Relationships mean that
suppliers are better placed to customize products for customers. For example, over
time, a hairdresser may come to understand a customer’s particular preferences or
expectations. Other special treatment benefits may include prioritized service, better
prices and unique or limited offers.
When companies want relationships with customers
The fundamental reason that companies want to build relationships with
customers is economic, or to build customer relationships is to enhance and
sustain profitability.
Companies generate better results when they manage their customer base in
order to identify, acquire, satisfy and retain profitable customers.
Profitability increases through customer relationships in 3 main ways: First,
company can improve customer retention rate by increasing the size of the
customer base or reducing customer churn rate. Also, by improving customer
retention rate, marketing and customer service costs can be reduced. Lastly, is
by improving customer lifetime value (CLV)
When companies want relationships with customers
1. Improving customer retention rate by increasing the size of the customer base or reducing
customer churn rate
Customer retention rate is the percentage of existing customers stay with a business in a
given period of time. Customer base is a group of people who consistently buy or use a
company's products or services and are a primary source of revenue for the business. Churn
rate (or customer defection rate) is the percentage of customers that leave company service
over a given period
The lower the churn rate leads to the higher the customer base, and that’s mean more loyal
customers and more sales. Therefore, in order to improve customer rate, the company need
to either increasing the size of customer base or reduce the customer churn rate
Lost customers
Customer churn rate formula CR (%) =
Total customer at the start of time period
× 100
CE − CN
CRR= × 100
CS
Customer retention rate formula CE = The number of customers at the end of the period
CN = The number of new customers during the period
CS = The number of customers at the beginning of the period
Tại sao lại có hiệu ứng khuếch đại này?
Vì ở tỷ lệ giữ chân cực cao (ví dụ 99%), khách hàng gần như không bao giờ rời đi. Họ trở thành những khách hàng "trọn đời". Việc
giữ thêm được một vài % khách hàng cuối cùng này có tác động CỰC LỚN đến con số trung bình. Nó giống như việc có thêm
nhiều người sống thọ trăm tuổi sẽ kéo tuổi thọ trung bình của cả làng lên rất cao.
Customer retention Average customer tenure
rate (%) (years)
As customer retention rates rise
50 2
(or churn rates fall), so does the
67 3
average tenure of a customer.
75 4
Tenure is the term used to
describe the length of time a 80 5
customer remains a customer. 90 10
92 12.5
The impacts of small 95 20
improvements in customer 96 25
retention are hugely magnified at 97 33.3
the higher levels of retention. 98 50
99 100
2. Improving customer retention rate can reducing marketing costs and service
costs
It has been estimated that it costs an advertising agency at least 20 times as much
to recruit a new client than to retain an existing client. Major agencies can spend
up to $4 million on research, strategic analysis and creative work in pitching for
one major international client, with up to four creative teams working on
different executions. An agency might incur these costs several times over as it
pitches to several prospective clients to replace a lost client.
Improving customer retention reduces a company’s marketing costs. Fewer
dollars need to be spent replacing churned customers. Also from that loyal
customer, they can improve a company’s customer insights and developing the
understanding of customer requirements and expectations, therefore create a
proper marketing strategy to reduce the unnecessary marketing cost. Over time,
as relationships deepen, trust and commitment between the parties is likely to
grow. By improving customer retention, company can decrease costs associated
with managing complaints, therefore the service cost is also been reduced.
3. Improving customer lifetime value (CLV)
The core CRM idea that a customer should not be viewed as a set of independent
transactions but as a life-time income stream, in other words, focusing on the loyal
customers will generate more profits than constantly attracting new customers for
a single transaction. Customer life-time value (CLV) is even more important if you
consider that a small number of customers may account for a high proportion of
the entire value generated by all customers.
CLV can be defined as follows: “Customer life-time value is the present-day value
of all net margins earned from a relationship with a customer, customer segment
or cohort.”
The concept of customer relationship management (CRM) in business context
The term CRM appeared in the early 90s (1990s), with two schools of thought: IT
and Management
1. IT perspectives of CRM:
(1) “CRM is an information industry term for methodologies, software and usually
Internet capabilities that help an enterprise manage customer relationships in
an organized way”
2. Managerial perspectives of CRM
(1) “CRM is a business strategy that maximizes profitability, revenue, and customer
satisfaction by organizing around customer segments, fostering behavior that
satisfies customers, and implementing customer-centric processes”
(2) “CRM is the process of managing all aspects of interaction a company has with
its customers, including prospecting, sales, and service. CRM applications attempt
to provide customer insight by combining all these views of customer interaction
into one picture, therefore improve the company/customer relationship.”
IT perspectives of CRM: CRM Technology
CRM Software (On premise/In-house); It is installed on the company's own servers and
computers, so it requires physical hardware, and it being managed and controlled by the
business itself (ongoing costs for maintenance, updates, and IT staff to manage the
system,...)
WinWorld: Screenshots for ACT! 1.10 (DOS)
ACT! – 1987 GoldMine- 1989 Siebel Systems – 1993
- Manage customer contact - Manage customer contact - Sales automation
- Sending email - Customer service
- Calendaring
IT perspectives of CRM: CRM Technology
CRM Cloud Solutions (Cloud-based): It’s accessible from anywhere with an internet
connection, through a browser or mobile app. There is no physical installation
required, hosted on the cloud and based on Subscription-based pricing (monthly or
annual fees). Therefore, there will be no ongoing maintenance costs as updates and
maintenance are managed by the provider
3. IT and managerial perspectives of CRM
(4) “CRM is an integrated approach to identifying, acquiring and retaining
customers. By enabling organizations to manage and coordinate customer
interactions across multiple channels, departments, lines of business, and
geographies, CRM helps organizations maximize the value of every customer
interaction and drive superior corporate performance.”
(5) “CRM is an integrated information system that is used to plan, schedule
and control the pre-sales and post-sales activities in an organization. CRM
embraces all aspects of dealing with prospects and customers, including the
call center, sales force, marketing, technical support and field service. The
primary goal of CRM is to improve long-term growth and profitability
through a better understanding of customer behavior. CRM aims to provide
more effective feedback and improved integration to better gauge the return
on investment (ROI) in these areas.
4. Definition of CRM
“CRM is the core business strategy that aims to create and maintain profitable
customer relationships by designing and delivering superior value propositions. It
is grounded on high-quality customer-related data and enabled by information
technology.”
First, CRM is not just about IT, it’s also about company capability of creating
strategy for managing the company’s relationships with customers. An
organization must have the capability to set interrelated systems, processes,
procedures, and resources among different departments, in order to successfully
manage the relationship with their customers.
Second, CRM centers on the creation and maintenance of profitable customer
relationships. The ‘creation’ phase means that CRM is used to acquire or attract a
new customers and the ‘maintenance’ phase means that managers use CRM to
keep the customer. The qualification that the relationship should be ‘profitable’
shows that not all potential customers are worth attracting or keeping.
4. Definition of CRM
Thirdly, CRM is also about ‘ the design and delivery of superior value propositions
’. Value propositions (offers or offerings) can be developed, presented and
promoted to customers through different communication and distribution
channels. When customers own or use these offers, they can experience value. If
companies can ensure that the value customers experience is better than what they
experience from competitors, it means that they are successfully manage their
relationship with customers.
And finally, CRM is ‘grounded in insights from customer-related data’. In order to
successfully manage customer relationship, companies need the help of CRM
software that provide customer-related data, which becomes a guidance to many
CRM-related decisions in the future. The data must be high quality, and companies
are required to know how to collect, store and analyze customer-related data for
customer insights that can help companies stay connected to customers, improve
sale process therefore increase profitability.
The development of CRM
CRM 1.0 CRM 2.0
Period 1990 2010
Dominant CRM model On-premise Software as a Service (SaaS)
Customer data sources Internal Corporate Silos Internal silo + external big
data sources
Data characters Structured Structured + Unstructured
Data storage Corporate Serves Cloud
Analytics Standard multivariate Standard multivariate
statistics statistics + AI
Mobile CRM access Rare Common
Customer interaction Pre-planned Real time
Types of CRM
Types of CRM Dominant Characteristics
Strategic Focus on the customer-centric business strategy that aims at winning,
developing and keeping profitable customers by creating and delivering better
value propositions and experiences than those of competitors.
Operational Use technology to automate customer-facing business processes such as
marketing, selling and service process automation, hence improving customer
experience and interactions.
Analytical The process through which organizations transform customer-related data
into actionable insight for maintaining relationship with customer.
Types of CRM
Strategic CRM is focused upon the development of a customer-centric business
strategy dedicated to winning, developing and keeping profitable customers by
creating and delivering better value propositions and customer experiences than
competitors.
Operational CRM uses technologies to automate customer-facing business
processes. CRM software applications that automate marketing, selling and service
processes result not only in efficiency and effectiveness gains but may also improve
customer experience and engagement.
Service automation involves the application of technology to customer service
operations. Service automation helps companies to manage their service operations,
whether delivered through call center, contact center, field-service, web, chatbot or
face-to-face with high levels of efficiency, reliability and effectiveness
Operational CRM
1. Marketing automation (MA) involves the software-based application of rules and
algorithms that execute marketing activities with little or no human intervention.
HubSpot content hub allows marketers to develop content (e.g., Amazon continually refresh items recommendations based on
blog posts, videos, infographics) and schedule their posts among customer searches, purchases or rates on the platform.
social media platforms.
Operational CRM
2. Sales-force automation (SFA): Sales-force automation (SFA) is the application of
computerized technologies to support and manage the sales activities of the company
whether these be through customer-facing staff or through self-service channels. The
main aim for companies that implement SFA is to optimize resource use.
Analytical CRM
Analytical CRM concerned with capturing, storing, extracting, integrating,
processing, interpreting, distributing, using and reporting customer-related data to
enhance customer and company value.
Internal customer-related data
- sales data (purchase history)
- financial data (payment history,
credit score)
- marketing data (campaign
response, loyalty - scheme data)
- service data
External customer-related data
- business partners with whom
companies have data-sharing
agreements
- third-party organizations such as
An example of a sales reporting dashboard
research firms that provide geo-
demographic and lifestyle data.
The role of CRM in business context
1. Satisfaction-Profit Chain
Customer Customer Business
satisfaction loyalty Performance
Understand customer requirements Behavioral loyalty Revenue growth
Meet customer expectations Attitudinal loyalty Share of customer
Deliver customer value Customer tenure
Customer satisfaction
Customer satisfaction is the customer’s fulfilment response to a customer experience, or
some part thereof. So. satisfaction is a pleasurable ‘fulfilment response’ and can come from
any elements that contains in the customer’s experience (e.g. product, service, process and
any other components of the customer experience).
1. The expectations–disconfirmation model
Customer satisfaction refers to the difference between the actual performance experienced
by a customer and the expectation of the customer.
Expectation
Disconfirmation
Satisfaction
Perceived
Performance
There are 3 types of disconfirmation:
1. Positive disconfirmation: The perceived performance > expectations → High satisfaction
2. Zero disconfirmation: The perceived performance = expectations → Satisfaction
3. Negative disconfirmation: The perceived performance < expectations → Dissatisfaction
Customer satisfaction
2. Deliver customer value
When customer acquiring and using a product or service, the value is often
defined as the balance between the perceived benefits (quality, service,
experience or functional, emotional, social) and the perceived costs (money,
time, effort).
So, the higher the perceived benefits compared to the perceived costs, the
more value a customer derives from the product or service.
Customer loyalty
Customer loyalty refers to a customer’s willingness to repeatedly return to a company’s
products or services due to satisfaction, trust, or emotional connection with the brand.
1. Behavioral loyalty:
Behavioral loyalty refers to customer behaviors, in which loyalty involves repeat
purchases of the products/services.
Company often use RFM metrics to measure customer behavioral loyalty: RFM used to
segment customers based on their purchase behaviors which help company to find a
company's best customers to maintain the relationship or to improve the experience
for those who has lower score
RFM is based on three quantitative factors: Recency, Frequency, and Monetary value.
R = Time elapsed since last purchase (How recently a customer has made a purchase?)
F = Number of purchases in a give time period (How often a customer makes a
purchase?)
M = Monetary value of purchases in a given time period (How much money a
customer spends on purchases?)
Customer Loyalty
2. Attitudinal loyalty
Attitudinal loyalty reflects the beliefs and feelings that customer have with respect
to their repeat purchase intention.
Here is the two-dimensional model of customer loyalty (Dick and Basu)
Repeat purchase
Loyals Latent
Relative attitude
Strong
Loyalty
Spurious No Weak
Loyalty Loyalty
High Low
Business performance
Business performance refers to how well a company achieves its financial and
non-financial goals, including profitability, market share, and overall growth.
1. Triple Bottom Line
The triple bottom line (TBL) is a framework for measuring an organization's
performance in three areas: people, planet, and profit. By maximizing all three
bottom lines, organizations are more likely to have a positive impact on the world
while still improving financial performance.
Business performance
2. Share of customer spend and share of market
2. 1. Share of customer spend: Share of wallet (SOW)
Share of Wallet (SOW) is the amount of money an average customer typically spends
on a particular brand rather than on competing brands in the same product category.
Wallet Application Rule is one of the formula to calculate the share of wallet : It will
come after the customer survey to see how customer rank the company among other
competitors.
Business performance
2.2. Share of market
Market share is the percentage of a market's total sales, revenue, or customer
base that a company or product controls.
Market share formula: A metric that helps determine a company's position in a
market or industry.
Business performance
2.3. Share of customer spend and share of market
• Market share is the percentage of a market that a single company controls
by revenue or number of customers.
• Share of customer spend (Share of wallet) is how much a specific customer
spends on a brand relative to its competitors.
A core goal of CRM is
to win a high SOW for
the company or
dominate sales for a
customer or customer
segment rather than
having a high market
share.
CRM model: The IDIC model
The IDIC model suggests that companies should take four actions to build
closer one-to-one relationships with customers
(Peppers and Rogers)
The CRM value chain
The CRM (Customer Relationship Management) value chain is a strategic framework
designed to help businesses develop and manage relationships with customers
effectively, maximizing customer value and business profitability
This model consists of five primary stages and four supporting conditions leading
towards the end goal of enhanced customer profitability.
(Buttle, Jones and Stone)
The Five-process model
The Five-Process Model in Customer Relationship Management (CRM) is a
framework that emphasizes five key processes of building and maintaining profitable
customer relationships.
