2008 Feb 01

Building Customer Relationships
by David M. Raab
Curtis Marketwise FIRST
February 2008


We’ve all heard the saying, price “Military justice is to justice what military music is to music.”*. Something similar applies to customer relationships: they also serve a purpose different from relationships in general. Not to put too fine a point on it, the purpose of customer relationships is to make money.

Every businessperson knows this. But it’s still easy to get carried away with the romance of building a relationship management program. So let’s be clear: companies nurture customer relationships so they can sell more, reduce costs, or keep customers longer. If a program doesn’t serve at least one of those goals, it isn’t worth having.

But how, exactly, do relationship management programs do this? Other than creating warm feelings towards your bank—not a very reliable motivator, alas—relationship programs produce specific benefits. These include:

– reduced sales effort because customers trust the bank will offer products that suit their needs
– more information for targeting because customers are more willing to share their data with you
– first chance at providing new products because customers turn to the bank before checking elsewhere
– less price competition because customers will do business with the bank unless an alternative is substantially cheaper
– more referrals because customers are satisfied with their own treatment
– higher switching costs for customers because they get multiple services from the bank
– lower service costs because customers understand bank processes and self-service systems

Relationship building investments can be judged by their contribution to these benefits. Let’s see how a few common investment opportunities stack up.

– Customer Relationship Management (CRM) systems. These systems deliver customer data to sales and service personnel. But the data contributes little to customer relationships unless bankers are also given tools to use it wisely. This is why basic CRM systems are often supplemented with analytics that identify the best treatments for each customer. This helps bankers improve the relationship by making more relevant suggestions. CRM systems can also make the bank easier to deal with—and thus preferred over competitors—by letting bankers easily find customer data, thereby speeding and simplifying many interactions. In addition, the CRM system provides a convenient mechanism for capturing customer information in the first place.

– Self-service systems. These create opportunities for customers to bank when, where and how they want to. They include ATMs, Web sites, automated telephone systems, mobile devices, and whatever the technologists will dream up next. Self-service has many advantages: lower costs, greater customer convenience, barriers to switching because of the effort to learn someone else’s systems, and incentive to add new services that share data or functions with existing ones. The challenge to marketers is that customers often resist self-service systems at first, both because of the effort to learn them and because initial implementations often harder to use then traditional methods. Yet the benefits that banks gain from these systems can justify substantial investments in encouraging adoption—something not all bankers have fully realized.

– Customized services. These are services such as alerts for low balances, overdrafts, or market events. They are nearly always self-managed by customers, so they could be considered a type of self-service system. But the technologies involved are different enough that they should be treated separately. The relationship aspects are different too: these services are less about “high tech” efficiency than “high touch” personal treatment. This suggests a different approach to promoting these services, even though they face the same adoption hurdles (customer awareness and training) as self-service. Their primary relationship benefit is improved retention, since customers are reluctant to spend the time to convert to another bank’s system, and even more reluctant to convert to a bank that doesn’t offer the services at all. On the other hand, they don’t really save money, since the services would not otherwise be provided at all. And while they may generally improve a customer’s attitude towards the institution, they are largely tied to specific products, so they provide little direct incentive for customers to add new ones.

– Targeting. Banks can choose from a variety of tools to select offers for individual customers. Labels and technologies overlap, but it’s worth distinguishing three types of targeting systems based on how they are used:

– Event detection systems analyze customer transactions for patterns that indicate opportunities such as a funds to invest or risk factors such as loss of a job.

– Recommendation engines analyze interactions like Web site visits or telephone calls as they happen and suggest appropriate offers based on customer behavior. These engines may also factor in other information about the customer if it can be linked in.

– Predictive models use historical data to select offers for outbound promotions such as direct mail and email. They are also sometimes applied in real time within recommendation engines.

In each case, the goal of the system is to make better recommendations. This contributes directly to increased sales by making more effective use of business opportunities. It also improves the relationship indirectly by building trust that the company “understands” customer needs and acts to fill them. Of course, trust will not be built if the recommendations appear inappropriate or, even worse, contrary to the customer’s best interest.

– Branding. Brand marketing and relationship marketing are sometimes treated as opposites, but this is a false dichotomy. It is based on the idea that brand marketing is aimed at masses while relationship building targets individuals. This is often (but not always) true, but it doesn’t matter. A strong brand will encourage customers to do business with the company, to trust it, and to accept premium pricing. So even though the messages may be targeted differently, the business benefits are the same. This positions brand marketing as a valid competitor for relationship building funds.

Which tool is the best choice for relationship investments? That depends on the value provided in return. Measuring that value can be difficult, but we know it will be based on the relationship benefits presented above. Even an informal comparison of the benefits of the different relationship building tools will help you make a sound decision.

*usually attributed to Groucho Marx, sometimes to Georges Clemenceau. Take your pick.

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David M. Raab is a Principal at Raab Associates Inc., a consultancy specializing in marketing technology and analytics. He can be reached at draab@raabassociates.com.

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