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Catalog CRM: On the Road to ROI

Catalog Age February 2004

Customer relationship management (CRM) solutions promise integrated systems, loyal customers, and unforeseen profits. Unfortunately, something is missing in most applications. It's not service, although CRM has spawned a billion-dollar industry without significantly improving the service index. Nor is it the lack of truly integrated marketing, sales, and operations. The main thing missing is return on investment.

One can argue that there hasn't been enough time yet to see the return or that other factors have interfered with success. The fact remains that CRM strategies are routinely implemented without a realistic plan for generating and measuring the return. Practitioners justify this failure to plan using words such as intangible, branding, customer-centricity, and cutting-edge technology.

The concept of CRM is not new. In 1954, Peter Drucker wrote, “The true business of every company is to make and keep customers.” The new twist is the technology that allows individual management of millions of customers.

This technology has become synonymous with CRM. It is the first step for many initiatives when it should be the last. Every successful initiative begins with a plan to maximize use of existing internal resources before seeking external solutions.

The goal must be to improve processes and systems so that marketers can profitably interact with customers. Achieving this goal requires a plan that details improvement expectations with quantifiable results. An effective CRM strategy increases profitability by reducing expenses and increasing revenue. Yes, there will be intangible benefits, but there must be a tangible accountability to justify the expense. In other words, we must be able to measure the magic to ensure that we are creating and sustaining long-term profitable relationships.

To realize a return on investment in CRM, you need to follow six steps:

1. Find the starting point

   It is impossible to plan a journey if you don't know where to begin. To find the starting point of your CRM strategy, analyze the key performance indicators that drive your business. These include lifetime value, acquisition and retention rates, response rates, marketing costs, service levels, customer complaints, fulfillment costs, and employee turnover. This information will establish the internal baseline benchmarks for monitoring progress and measuring ROI. Establishing the baseline will also identify issues that affect service, efficiency, and profitability. Note these improvement opportunities for future reference.

   Next, create a reporting system for regular analysis, and start publishing timely reports for all employees. Establish appropriate timetables for every benchmark. For example, review sales and productivity data daily, weekly, monthly, quarterly, and annually; review lifetime value quarterly and annually. It is important to monitor the information on a regular basis.

   At the same time, document all processes and procedures. Many companies have training manuals that detail the specific steps for each function. Review every step to be sure that the application matches the documentation.

   This first step is the most difficult, the most time-consuming, and the least enjoyable. It is also the most important, since the information will be used to refine every aspect of the business. Once you've completed this step, release the results to employees with a request that they look for opportunities to improve performance and ROI.

2. Define objectives

   Now that you know where you are you can realistically plan your next destination. There are two levels to objective planning: general and specific. The general objectives will include improving customer loyalty, brand awareness, employee morale, and competitive advantage. The specific objectives are the driving force for a positive ROI and the accomplishment of the general objectives. Examples include increasing acquisition rates 5%, reducing fulfillment costs 10%, and improving order turnaround 20%.

   The key business indicators identified in the first step will enable you to refine your objectives. For instance, if you have identified the average fulfillment cost per order as $15.40, you will know that reducing that cost 10% means achieving an average cost per order of $13.86. It is a specific goal, though still without a defined, exact path to accomplishment.

3. Target opportunities

   Assemble the project team for a brainstorming session to identify the best opportunities to accomplish the objectives. The first part of the session requires that every idea — even the farfetched ones — be given equal consideration. Sometimes Really Odd Ideas are a direct route to ROI!

   Opportunities to improve service and profitability exist in every department. Use the key performance indicators and process documentation to find hidden treasures. Is there an extremely profitable customer segment? How can you acquire or shift customers to that segment? Are there job functions that can be combined or eliminated? Are contracts routinely renegotiated?

   Once you've identified the opportunities, rank them by risk and return. The 80/20 rule applies here: 80% of the return is generated by 20% of the opportunities. Identify the 20% and start there.

   A phenomenon will occur during this stage. Your company will realize internal improvements even though the initiative has not yet been implemented. This is a result of publishing the key business indicators. Everyone becomes aware that the initiative is a true commitment and subsequently increases his or her focus on efficiency and service.

   After you've objectively rated and ranked the opportunities, create a plan with specific steps, deadlines, and expectations. Break it down to departmental levels. This is the foundation of the CRM initiative. It should not include any substantial expenditure — again, the first objective is to maximize the use of existing resources before seeking external solutions.

4. Work the plan

   Ladies and gentlemen, start your engines! The implementation begins with the highest-ranked opportunity. The operational CRM team focuses on reducing costs by increasing efficiency throughout the organization. The analytical CRM team focuses on increasing customer value by improving retention and response. Every area has to be integrated to maximize the return. Interdepartmental teams broaden perspective and improve internal relations.

   Hold brief weekly meetings to monitor the progress and refine the plan. Address any issues and limitations that appear. Alter the plan when necessary to accommodate the issues. Flexibility is mandatory, but don't change the objectives even if some are found to be unrealistic. CRM is a multiphase project. Simply note the issues and revise for the next phase.

5. Measure, measure, measure

   It is impossible to gauge the progress without measuring the results. The reporting system is showing improvement, but is it meeting expectations? It is time for a comparative review. So to your benchmark analysis chart, which already has columns for baseline measurements and goals, add two more columns: current information and improvement. You can then use the improvement information to determine ROI. For instance, if the company processes 150,000 orders annually, a $0.88 improvement in the fulfillment cost per order is an overall cost reduction of $132,000. Repeat this process for every benchmark, then combine the results with the expenses to determine the ROI. Repeat this step monthly and quarterly as appropriate.

6. Expand the initiative

   CRM is a perpetual journey. Once you've made the most of your existing resources, you can target opportunities that warrant external solutions. Again, establish clear objectives, expected returns, and detailed plans. This will make it easier to choose an application that meets your needs.

A successful initiative requires the participation of the entire organization. Ownership and excitement begin with the CEO and cross departmental lines. Add some strong analysis and targeted opportunities for a magical journey.

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