Magazine Article | October 1, 2003

Retail CRM: Where Customer Loyalty And Profitability Collide

Source: Innovative Retail Technologies

Knowing your frequent customers and big spenders is half the battle of CRM (customer relationship management). Establishing their profitability is the other half.

Integrated Solutions For Retailers, October 2003

I drive a pretty hard bargain. Just ask the guy I recently bought a yard tractor from. By deal's end, I had several hundred dollars off an already good sale price, an upgrade to a model with a cup holder and cruise control, plus a free mulching kit. There had to be a point at which the salesman thought about getting me off his showroom floor and letting his competition deal with me. But he sold me the tractor. I got it home and realized parts were missing. I ordered them. They never came. I called the store. I visited the store. I called the factory. I finally got my parts. Then I returned the tractor and bought an identical model from a different dealer for a lower price. Believe it or not, I still receive preferred customer mailings from dealer number one. That's poor CRM (customer relationship management) in action.

CRM is one of the hottest topics in retail right now. Unfortunately, most retailers aren't executing CRM solutions as well as they should, as my personal experience above indicates.

Data Is The Foundation Of CRM
Retailers who are adopting CRM solutions are typically mature in their channel strategy and market penetration. It's a technology that's best added by a retail enterprise that's found its sweet spot and has moved beyond aggressive growth plans. Therefore, the ideal target for a CRM vendor is a retailer with an established customer base. Only then can relationship management achieve optimal results. A data warehouse infrastructure capable of storing and querying a fast-growing customer information database is an imperative. Fortunately, the cost of storage is low right now, says Catharine Harding, retail industry manager at CRM software provider Blue Martini (San Mateo, CA). "That's a key enabler for CRM in retail right now. The cost of keeping 10 years' worth of transaction history on customers is not cost prohibitive anymore," she says.

But the source of the data collected can vary. "Established department store retailers like Saks and Belk have the advantage of having collected lots of data over the years from strong private label programs," says Harding. "Newer retailers like Lowes and Home Depot ramped up their customer data collection efforts because they're very interested in CRM." Experts suggest that retailers tie any potential source of customer data into their CRM solution, including gift registries, loyalty cards, and transaction history. The single most important source of data for CRM projects is undoubtedly the POS station, which is also the biggest bone of contention with CRM vendors. Too many POS configurations are simply too old or ill-equipped to effectively accommodate a CRM application. Harding says her company finds the retailer running a flexible application written in Java, for instance, its most attractive customer. Unfortunately, there aren't many of these around - yet. "We've seen situations where just adding the functionality to collect zip codes or phone numbers from customers is a major undertaking that involves memory management at the POS. The retailer sometimes needs to remove some other function to enable ZIP code capture because their system is so ancient," laments Harding.

Finally, the data must be readily available to stores, so Harding suggests retailers take connectivity between the store and headquarters into consideration prior to implementing CRM. "CRM should be a centralized function for cost purposes," she says. "You can't replicate a major database in every store. For this reason, a hosted application distributed via high speed network connection between all of your stores and your headquarters is ideal."

Execute With Analysis
Once data is aggregated, it can be segmented in any number of ways - by geography, demography, brand loyalty, purchase history, etc. - and used in any number of marketing and incentive campaigns.

Some retailers target the top 20% of their customers based on purchase amount. Harding says one customer determined that if it could get the top 20% of its customers in the store two more times per year, and persuade them to buy one more item per transaction, it would earn the company close to a billion dollars in incremental sales per year. The numbers can be dramatic. But, how do you get those customers back in and buying more? Harding and David Joseph, manager of global retail strategy/worldwide marketing at CRM software provider SAS (Cary, NC), agree that the key is understanding who they are and what they're buying. Then, they say, you can tune your direct mail better, and include the store-level sales associate in the CRM puzzle. "The associate knows the customer's preferences. Getting him on the phone with customers is an extremely effective way of driving store traffic," says Joseph. "But the clerk can't call every customer," says Harding, "so you need an analytical CRM solution to guide you to the customers who are loyal to your store and the brands you carry."

Dig Deep For Profitability
It makes good sense to integrate back-end applications like merchandise and inventory management with your CRM package. After all, you obviously can't keep a loyal customer coming back for his favorite brand if you discontinue it. But should you integrate your accounting application? What about returns management? Is there any sense in tying human resources into CRM? Yes, yes, and yes, says Joseph. "The problem retailers currently have is being able to measure profitability. Loyalty does not spell profitability," he asserts. "The sale of high ticket items means nothing if the return rate is through the roof. Retailers need to analyze the profitability of their 'preferred' customers to determine how much money they should spend on keeping them," he says. Completing the loop by integrating back-office applications to help account for costs is the only way to make this happen.

Joseph says retailers interested in CRM should first focus on the cost to acquire, serve, and maintain customers. "Somewhere in a retailer's IT scenario is data on cost per catalog, mailing, ad placed, etc. There is data on the picking, packing, and shipping expenses of mailing merchandise to catalog customers. There is information on the cost of returned goods. There are customer service representative payroll expenses. It's up to the retailer how deep it wants to take this and how directly it wants to apply these costs to individual customers, but these costs should certainly be applied when classifying them," he says. "Only then can strategic decisions be made about 'best' customers."

I'm not sure how much my dealer paid the manufacturer for the tractor I bought, but I can almost guarantee I was the least profitable buyer that salesman saw all summer. Not only did he not earn a red cent of my money, his company spent a lot of money serving me. Good for me, bad for him. As for my preferred customer status, I'm sure if the store did its homework, it would realize it prefers the business of my neighbor more. He paid full price for the same model.