Customer relationship management (CRM) in layman terms

A question that new entrepreneurs wonder about is what actually is a CRM? What are the benefits? Should I go for it? The major answer that most of us get is that it is something related to a database. It’s all about customer loyalty schemes. The IT department should handle it. And more. If you want to know what exactly is a CRM and what are its benefits, here is something that will be helpful to you.
good service providing with thesis editing
By definition, customer relationship management is a computerized system for identifying, targeting, acquiring, and retaining the best mix of customers. It helps in profiling prospects, understanding their needs, and in building relationships with them by providing the most suitable products and enhanced customer service. It integrates back and front office systems to create a database of customer contacts, purchases, and technical support, among other things. This database helps the company in presenting a unified face to its customers and improve the quality of the relationship while enabling customers to manage some information on their own.
Now as we are talking about the relationship between a customer and a company, a question that arises is when do we say a relationship is built? Is it when the first purchase occurs or the second or the third? The answer to it is that the relationship doesn’t depend on the number of purchases but is formed when a certain amount of trust and commitment is developed between the customer and the company.  Here the customer trust’s that the product is of good quality and is suited for his needs. And the company feels that the customer has accepted the product and is willing to provide him with its services and take into consideration his complaints and suggestions.

In the initial stages of a company, the company focuses more on acquiring customers. Only when it reaches a stage of saturation, i.e. when acquiring more customers become costly or is not needed, that time the company focuses on retaining its customers. Retention activities can start before as well, but generally a company focuses on retention when the market is saturated.

By using CRM the company has a database (or records) of its customers and the revenue each customer provides to the company. The aim here is to let go of the loss incurring customers and retain the profitable customers.  

There are two types of costs associated with the customers; the acquiring cost and the retention cost. The acquiring cost consists of the amount spent by the company to get new customers. It may include the cost of advertisement, salaries of sales representatives, the cost of distribution of product etc. The other cost i.e. the retention cost is the amount the company incurs to retain the customer. It may include after sales service, discounts provided to member customers etc.

Another concept in CRM is customer lifetime value, this is the amount of revenue a company earns from a customer throughout the life.

The concept used is if the sum of the cost of acquiring and the cost of retaining a customer exceeds the customer lifetime value, the company tries to let go of this customer. Else, check how profitable a customer is and accordingly decide whether to retain him and how much to invest in the retention activity. This deduces that not all customers are important.

There are instances when a loss making customer acts as a referral to the company, he brings more customers along with him. If he leaves, the customers he brought in may also leave. So the company should be careful to select the right customers it wants to retain.

The advantages of retaining the right customer are given below:

1. Firstly, the company gets rid of the wrong customers.
2. By retaining more right customers, the average profit from each customer increases.
3. The cost to serve a customer reduces over time. This happens because the customer knows the transaction process well. Less support is required to guide him through transactions and to explain him how a product is to be used and other instructions.
4. The volume and value of purchases from a customer increases. Explanation: A new customer is always sceptical about the product offering. His first purchase will be a test one. Slowly trust is developed and the purchases increase. Like when e-commerce just started, most of the customers first purchased a low priced product, associating with a belief that lower price is equal to lower risk. Gradually the customers trusted the e-commerce sites and the size and value of online purchases increased.
5. As the time passes, the processes adopted by the company became clearer and automation can be built in. This will reduce the errors and the cost of executing the processes.
6. Customers which the company have acquired and retained will not negotiate with prices. Negotiation occurs when there is a gap between what a customer wants and the product offered by a company. Here the customers know that the product or service is of a quality that the customer desires and is value for money.
7. The first few discounts given out by the company attract customers, but as time goes by, even the reduction of discounts will not lead to loss of customers.
8. Once retained, a company can get many insights from the customers and know their needs better. No explicit external activity is required to identify customer needs. The company can develop products and services that address these needs. The company can also communicate well to the correct customers about their offerings through television media, press etc. Communicating to the correct customer correctly will have high efficiencies. Hence, the overall cost of acquiring will reduce.

References:

http://www.businessdictionary.com/definition/customer-relationship-management-CRM.html#ixzz3mkjuWEQj

Comments

comments