To marketers, the appeal of "customer relationship management" (CRM) remains strong, although its demonstrated successes are disconcertingly elusive. There’s a fascinating dynamic in play, in which CRM’s huge and compelling promise far surpasses its mediocre performance. It’s readily apparent that CRM programs take considerable time to implement, and they’re enormously expensive. Companies are spending an estimated $3.5 billion a year just on the software required to implement these programs. (See "Is CRM All Hype?" in See Also.)
Also, it’s no longer newsworthy that these hefty expenditures have frequently yielded poor returns. Manuel Ebner and his team at McKinsey examined financial institutions -- among the heaviest users of CRM -- and noted that only one in five U.S. retail banks had increased profitability as a result of a CRM implementation. Lynette Ryals of the U.K.’s Cranfield School of Management cites surveys showing that "50% of CRM projects do not produce results and, even worse, in 20% of cases, users say that CRM has damaged customer relationships." What’s more, CRM solution providers themselves are in trouble; marketing consultant Frederick Newell reports that they have lost $8.8 billion "spending three dollars for every two dollars in revenue."
Management seems to have taken note. When Bain surveyed senior managers in 2000, those managers rated their satisfaction with CRM a dismal 22nd out of 25 available management tools. And Wharton Professor George Day has concluded that "big investments in CRM technology are yielding negligible competitive advantages."
However, despite appreciable dissatisfaction with CRM’s performance to date and occasional horror stories about the lousy return on these sizeable investments, the focus on CRM programs continues. Even in a very tight economy, corporate interest seems largely unabated. A Jupiter Media Matrix study found that almost three-fourths of U.S. companies increased their CRM expenditures from 2000 to 2001, while Gartner Dataquest forecasted another 15% increase in 2002. The continued commitment reflects the allure of CRM’s promise rather than its demonstrated performance.
CRM has managed to entice companies with visions of sugarplums, from a promised boost in customer retention to an increase in the cross-sell of the company’s products and services. Regardless of CRM’s spotty performance record, its promise has been powerful enough to drive sustained company support and investment.
CRM remains compelling because companies have learned that improved customer management demands improved customer information. Companies can’t hope to manage what they cannot measure, nor can they chart a course in the absence of a reliable map. And interest has been further spurred by reports that at least some companies are beginning to reap the promised rewards of CRM.
"C" is for customer
Unfortunately, a clear picture of customer relationship management has been blurred by the widely disparate activities and initiatives that are lumped together under the "CRM" heading. If a company begins collecting and compiling information about customer inquiries and purchases, that doesn’t mean the company has established the basis for more successful customer management. Nor does it imply that the company is now "customer-centric." And if a company has acquired new customer database software, that doesn’t mean that it has created a powerful marketing or retention tool. All customer information is not equally meaningful, and not all databases are equally useful to the people who work directly with the company’s customers.
One particularly useful distinction has been proposed by Professor Day. He differentiates among three types of CRM: "inner-directed" CRM, aimed at increasing efficiency and cutting costs; "defensive" CRM, which "rewards" (or, perhaps more accurately, bribes) customers to blunt a competitor’s potential advantages; and "market-driven" CRM, which uses customer information to design and deliver superior service.
Noteworthy returns on CRM investments, Day contends, are only likely when the company embraces a market-driven approach that focuses on the customers’ needs rather than the company’s needs. Inner-directed activities convey no customer benefit and may actually, Day notes, make things worse. Defensive CRM programs merely increase marketing costs without establishing a lasting competitive advantage.
In a similar vein, Newell argues: "Many marketers still think CRM is just an advanced stage of database marketing . . . They don’t yet understand that relationship building must start with an understanding of the customer’s needs."
Relationship building is more than that, however. If companies want to build enduring customer relationships, they must start with a much deeper understanding of the real nature of those relationships, as scientists at The Gallup Organization have learned. (See "The Constant Customer" and "The Engagement Imperative" in See Also.) What’s critical is not only what the customer apparently "needs," but what bonds that customer to the company. Importantly, those bonds are not just rational. They are, at their very heart and core, emotional.
Gallup’s extensive research on customer relationships has identified and quantified those emotional connections. (See the Follow This Path Book Center in See Also.) Moreover, recent case studies vividly demonstrate the powerful business returns that result from strong emotional connections.
CEM, not CRM
Gallup case studies reveal that customers who have emotional ties to companies they do business with -- customers who are "fully engaged" -- spend more, buy more often, stay longer, and give the company a much greater share of their purchases. And they spread the (good) word.
However, tracking the purchases of customers -- regardless of how advanced the database software might be -- is actually of little help in identifying the customers who are fully (and profitably) engaged with a company. And yet many companies rely on past behavior tracks as the key input to CRM. Businesses assume that past purchases reliably indicate the extent to which a company has built customer relationships. Unfortunately, they don’t.
CRM databases that compile customer behaviors provide little insight into the reasons for those behaviors. Customer behaviors may well have been "purchased" at considerable expense through discounts or special offers. As other analyses have noted, behaviors alone are inadequate and potentially misleading indicators of the strengths of a customer relationship, and they are poor indicators of the path to profits.
Customer purchase behaviors merely reflect the success or failure of a company’s past activities. "Customer engagement," in contrast, is a forward-looking metric. It reflects the extent to which the company has been able to go beyond generating transactions or purchases to creating a lasting emotional bond with its customers. And that bond pays off handsomely in customers’ future behaviors.
CRM -- despite the persistent interest and investment in it -- must be deemed a promise that has yet to be fulfilled. In part, that’s because CRM’s emphasis has too often been on the company and too seldom on the customer. As one corporate leader stated, "A lot of the benefits that are claimed for CRM are really benefits that accrue to the enterprise, but have nothing to do with the customer."
But the unfulfilled promise of CRM is also the result of an incomplete and even misleading picture of the customer relationship that has hopelessly obscured the true nature of the customer connection. It’s time for companies to move away from CRM. It’s time to talk about and focus on customer engagement management (CEM). After all, the real objective is to build something that is as enduring as it is valuable: customer engagement.