CRM 2.0: a loyalty marketing benefit of Web 2.0?

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By: Wise Marketer Staff |

Posted on December 7, 2006

The concept of customer-centricity is evolving, and changes in the business and social world are already forcing businesses to change the way they approach management and marketing strategies, says Vladimir Dimitroff of UK-based Prism Consulting, who suggests that perhaps the advent of 'Web 2.0' technologies should naturally lead to the reinvention of CRM systems: 'CRM 2.0', in fact.

What began as awareness of age-old business principles, brought to modern-day marketing with critical help from technology, has now reached a stage where the technology-empowered, connected world is calling for new approaches in marketing and most other management disciplines.

The story so far
The notion of customer focus dates from ancient times when the small businessman, unknowingly, practiced CRM in a most natural manner. In modern days, concepts like relationship marketing emerged in the early 80s but it was only in the mid-90s when technology propelled these practices into the mainstream and CRM became a recognised (and, for a while, much hyped) business discipline.

Since then, CRM has evolved considerably, if gradually. The software industry rapidly embraced it and made CRM a class of technology solutions, misleading many to believe that "CRM can be bought and installed".

Why '2.0' though?
Ironically, the analogy with numbered software releases became popular in business parlance, and is at the centre of today's 'Web 2.0' hype. It has to be said that CRM is not experiencing anything like a quantum leap from 'CRM 1.0' to 'CRM 2.0', although Dimitroff says: "I would certainly place the technology-centred flavour of CRM at a number in the middle of that range. More recent attempts at reinventing CRM (such as re-branding it) like CEM (customer experience management) are probably something like 'CRM 1.8'."

Advanced forms of CRM were envisaged by the early pioneers of CRM, but were (at the time) considered futuristic or even utopian. They were defined by thought leaders as the organic evolution of a company that has embarked on a customer-centric journey. Peppers and Rogers would call such a state of maturity "the 1-to-1 company". And in the baseball metaphor used by Round this would be a "4th base company" - one that has developed so far as to place customers right at the centre of business, seeing them as organised communities and engaging them in critical processes.

But there have been few successful CRM implementations along those lines. As Dimitroff says, "My only (and still favourite) example is the proverbial corner shop, where the owner knows intimately his handful of customers and, without a data warehouse, remembers their history and their needs, and their family stories and much more But for the corporate world this was beyond the horizon."

Are we there yet?
In recent years some companies, primarily from the digital economy, have started to exhibit such advanced capabilities. Even without the baggage of bricks and mortar, they still have plenty of old thinking and a few processes to fix, but prominent elements of advanced customer-centricity make them stand out. Phenomena such as virtual communities (online social networks) and the ubiquity of mobile communications, the proliferation of UGC (user-generated content) are all surfacing at an amazing rate.

Thought leaders brought us new concepts - like Peppers and Rogers' ROC (return on customer). And in her latest book, Outside Innovation, Pat Seybold describes "how customers will co-design your company's future". So it would be wrong to continue placing advanced customer-centricity in the distant future, even if the majority of the world is still struggling on the lower steps of the CRM ladder. While continuing to build essential capabilities, companies now have realistic opportunities to introduce modern approaches, tools, and techniques that define the future of CRM.

What is CRM 2.0, then?
"For the lack of a cutting-edge name or label, I call it CRM 2.0. Luckily this won't cause confusion with Microsoft's releases, because they skipped CRM 2.0 and launched CRM 3.0 instead," said Dimitroff. The simplest way to describe the idea behind Dimitroff's CRM 2.0 is to compare what each letter of the acronym meant before, and the new meanings that have emerged:

CRM 1.0 CRM 2.0
Customers - recognised as individuals (not anonymous masses). They receive value from a business that satisfies their needs, and the business receives value in return. The business recognises their differences and treats them differently. Stakeholders - recognised as inter-connected individuals who exchange value with the business, but also between each other (communities, networks). They may also be internal (employees) or other external entities (suppliers, partners, investors) - often overlapping roles.
One to one - the business seeks direct two-way relationships with individual customers. Loyalty is an expression of the strength and quality of the relationship. In a competitive market, high loyalty means higher market share, resulting in better ROI for the business. Many to many - each stakeholder has multiple relationships with other stakeholders. Promiscuity is recognised as inevitable in a connected competitive model. The quality and strength of multiple 'split loyalties' determines the share of customer. A new central metric is ROC (return on customer).
Customer segmentation (as opposed to market segmentation) is key to good CRM practice. Strategic segments group customers by shared attributes (value, needs) but each individual customer is known to possess specific attributes. Direct marketing takes a major role and often outweighs the one-to-many 'above the line' approach typical in pre-CRM times.

Direct feedback enhances customer insight and plays a critical role in customer-centric process improvement, as well as product development, seeking relevance and satisfaction.

Direct distribution models lead to disintermediation or significantly redefine the role of intermediaries in the supply chain and route-to-market.

Dynamic micro-segmentation becomes possible (with technology) and necessary (in the interconnected stakeholder model). Superimposed on strategic segments, this drives operational and tactical decisions.

Viral marketing (and similar, but not identical, word-of-mouth and buzz techniques) harness the power of social networks for unprecedented reach and influence. Participation and co-creation engage stakeholders directly in business processes, user-generated content, and similar forms of product development transfer entire business functions to the stakeholder communities.

Stakeholder-led value chains involve 'poly-intermediation', or similar network trends. Customer participation reaches all areas of the business, including the investment process.

Table 1: The transition from CRM 1.0 to CRM 2.0
Source: Prism Consulting (UK) Ltd

Changes for the Customer
'Customer' in CRM 1.0 meant it was critical to recognise the importance of customers for any business, and the fact that they are individuals, not a grey anonymous mass with 'typical' preferences (statistical averages) and 'common denominator' needs. The fundamental differences between 'the market' and the customers who inhabit it are yet to be understood by many business managers, including marketers and even academics. But today seeing them as individuals is not enough - they are intricately interconnected with each other, and with the business.

The first signs of recognising this were seen in the past in banking (the concept of households, tagging family members' accounts as belonging to related customers) in retail (e.g. Tesco's Club Card allows and aggregates multiple bearers) and in travel (e.g. BA's Executive Club scheme recognises family members). More recently mobile telecoms operators are also becoming aware and introducing the 'household' concept for multiple subscribers. They also start to recognise individual (consumer) subscribers as related to corporate ones (e.g. this low-value prepaid user is the teenage son of a decision maker at a 500 SIM card corporate account) and, increasingly (the more advanced operators at least) are looking into communities and social networks.

To add complexity to the concept of 'customer' there are multiple entities that a business depends on (and they depend on it). It is not unusual to call employees 'internal customers', who have to be managed along CRM principles (segmented, treated differently on a one-to-one basis, building loyalty). Their behaviour and performance dramatically impacts the (external) customer relationships, one cannot have happy customers with unhappy employees (and many studies show quantitative correlation between customer loyalty and employee engagement).

Then there are suppliers who derive value from the business as their customer, and deliver value by providing essential ingredients for the business to satisfy its own customers' needs. The distribution partners bring the product to the customers and, increasingly (in their re-defined intermediary role) bring customer insight back to the principal company. Another entity that cannot be ignored are the investors, the relationship with them demanding more than a press release on interim results. They also come in all shapes and colours and segmenting is the order of the day, even retention efforts are not unusual.

Changes for the Relationship
It was originally important to recognise that relationships are two-way. In the pre-CRM model of 'broadcast' relationships (one-to-many) it was often said that the customer has a relationship with the brand. But that was not enough. CRM 1.0 did much to change this, not least with sales-oriented database technology. Today we recognise that not only our business has relationships with each customer, but they also are related to each other in multiple and complex ways.

They always were. This is the nature of society in which there was a network before there were digital networks. But the revolution in communications is giving the term social network a totally new meaning. The digital networks facilitate and multiply inter-customer relationships, but they also enable the business to study and understand them. I will stop short of suggesting 'to manage them' - because manipulation is definitely not the name of the game and anyone who imagines they can 'manage' networked relationships for unilateral advantage simply doesn't "get it". One can derive huge benefits from participating and engaging, facilitating and encouraging networked relationships, gleaning insight and aligning the business with the learning in order to deliver benefits before getting any.

Loyalty was (and remains) the ultimate mantra of customer-centric business. Almost separate from CRM, there is an entire 'loyalty industry', not to mention scholars and entire academic schools devoted to it. They keep proving that loyal customers are more profitable, while retention protects a market share that should translate into shareholder value. But in today's world of choices hardly any business can command the total devotion and unconditional loyalty of each customer.

Split loyalties
There is a new breed of promiscuity, or 'split loyalty' whereby most customers persistently satisfy parts of their needs from 2 or more alternative suppliers. The customer with a Sony Playstation, Sony TV and Vaio laptop buys a Nikon camera because of a feature where it excels over his preferred brand. He also sticks to his tried and faithful Nokia phones, although Sony Ericsson's may be technically better, because Nokia is recommended by his trusted operator. Similarly, Tesco customers (a massive and fanatically loyal bunch) would occasionally shop at a Sainsbury's for convenience or at M&S for a difference (in flavour or even just in packaging). Mobile penetration in mature markets has long exceeded 100% and operators are learning to live with the fact that their subscribers have more than one phone or SIM card. In this picture the objective of market share gives way to share of customer and loyalty, while still possible and desirable, acquires a new meaning.

Changes for the Management
For the management of customers, CRM 1.0 dictated that they should be individually identified, their differences understood, and each one (or group of similar customers) treated differently from other customers or groups. This brought the discipline of customer segmentation - one cannot overstate the importance of understanding how this is different from market segmentation. Whereas in segmenting markets we distinguish between groups but are not aware of individual members, in customer segmentation each individual customer is known to belong to a particular segment - and, furthermore, is known to exhibit a set of attributes (with a very individual accuracy, usually a score) that qualifies him as belonging to a segment.

Good CRM dictates that this differentiated view is used not only for marketing and service levels, but in every end-to-end customer process, in planning and managing the operations and financial returns of the company. CRM 2.0 recognises the complexity and dynamism of customer attributes (even the same customer A may exhibit a different 'score' when interacting with his related customer B from the one displayed with related customer C). The streamlined dimensions of strategic segmentation (usually a value/needs matrix) become a multidimensional maze that, to make things even more complicated, pulsates in all directions as dimensions change with each interaction. To operate successfully in a networked environment, companies are learning and adopting micro-segmentation - and linking it to dynamic decisioning in their systems. The discipline of social network analysis (SNA) is also evolving and some amazing progress is happening as we speak, as always helped by technology.

"Whisper, don't shout!" used to be the motto of direct marketers who proved many times over the effectiveness of targeted communications. The refined version of this should now be "Whisper in the right ears for maximum impact". In the networked space there are some 'nodes' (customers) with far more connections than others and some (not necessarily in proportion to the number of links) have a lot stronger influence on others. Being able to identify those community members and focusing messages (and all 'customer management' efforts) on the connected influencers is a critical CRM 2.0 capability and provides an unparalleled competitive advantage.

A decade ago, with the advent of the digital age, the advantages of a direct distribution model became evident - and possible. Visionaries spoke of disintermediation and their followers hurried to proclaim the imminent death of insurance brokers and travel agents. But ten years later the agents are alive and doing quite well. Gurus, having understood the value added by intermediaries started writing about re-intermediation or redefining their role to reflect the relationship principles of CRM.

With CRM 2.0 every stakeholder has become an intermediary - to continue the trend of coining 'clever' wording, I might call it poly-intermediation or multi-intermediation. In a viral or WoM (word-of-mouth) campaign a company has as many intermediaries as it has been able to reach through those all-important connected influencers.

Web 2.0 dies without CRM 2.0...
Dimitroff believes that the much-hyped Web 2.0 is the enabling platform but that it cannot be a successful model in itself unless it also embraces CRM 2.0 principles. Understanding this will make all the difference in the imminent shrinking of the 'Web 2.0 industry' at the tail of the hype cycle (perhaps not a dot-com-like implosion, but some correction is definitely to be expected soon).

In a press release about a recent acquisition of a UGC web site, a marketing executive declared "We enter the social networks arena because it's a powerful way to get our message across". But communities don't really want powerful messages. Instead, marketers should be inside the networks to listen, not to shout... and, just occasionally, to whisper in the right ears.

Dimitroff's advice to would-be CRM 2.0 practitioners is to keep building the remaining parts of CRM 1.0. But while they build, there's nothing to stop them from adopting low-cost (and low-risk) CRM 2.0 methods and techniques.

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