- We want to hold on to the customers with the greatest value
- We want to encourage customers to increase their value
- We want to change non-customers into customers
Not that complicated, really. And let's suppose that we could categorize everybody in the market with a nice vector containing their
- Strength of preference for the firm
- Contribution margin
- Responsiveness to promotions
This assumes away a pretty big set of problems, but I want to focus on what a policy should look like from a strategic perspective. And there are interesting strategic problems with thte goals of CRM. A quick outline of them looks like this:
Customers have a high value either because their intrinsic preference for our firm makes them unlikely to switch or else because they have a high contribution margin. If they have a strong preference for our firm, there seem to be little reason to invest much trying to retain them. If they have a high contribution margin, they become prime targets for other firms who will invest resources trying to poach them. Obviously, having one firm investing in retention and another firm investing in poaching can result in high-value customers becoming lower-value customers, which wasn't what we wanted.
Making investments to increase their margins makes the customer into a high-value customer. Which increases their appeal as targets for other firms and could put us back into the bidding war outlined in the previous paragraph.
The customers that are the most attractive targets for switching to our firm are also those customers their current firm is most interested in keeping.
So, strategic interactions might matter quite a lot. To complicate matters, we sometimes start asking the wrong sorts of questions. For example, when it comes to loyalty programs, we might get into a debate over whether to target customers who occasionally make large purchases or customers who frequently make small purchases. Who can possibly say, without knowing why the customers purchase as they do?
So, are the frequent customers simply those who respond to promotions, or are they displaying a strong attachment to the brand? The right policy is determined by the answer to this question. Are the infrequent customers less prone to respond to promotions? If so, then competitors' attempts to poach them might be less effective -- suggesting a lower level of retention efforts would be required.
In short, we simply can't look at customers on a single dimension and expect to develop CRM policies that are right.
