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Profitability
& Customer Relationship Management
By Michael Alan Hamlin
May 3, 1999
You’d think that Philippine
companies that have undergone painful reengineering of business
and manufacturing processes to meet international standards of efficiency
and productivity and integrated themselves into global extended
value chains to reduce costs and enhance responsiveness are well
prepared for life in the fast lane of liberalization and globalization.
But of course there’s more to do.
Because companies are learning that
expanding market share reaches a point where it is inversely proportionate
to profitability, and thus a poor way to utilize resources in a
demand economy, it is fashionable to concentrate instead on expanding
share of customer. Of course, not just any customer, but MOST profitable
customers.
Figuring out, however, who the company’s
most profitable customers are isn’t as easy — as most
good things aren’t — as it would appear to be at first
glance. Like market share, revenues don’t tell the true story
because lots of variables affect profitability: volume discounts,
product cost and margin, shipping costs, returns, and after sales
service and the like.
Fortunately, the breed of software
commonly known as enterprise resource planning, or ERP, solutions
makes identifying a company’s most profitable customers much
easier. ERP solutions do this because — ideally — they
integrate all of the business and manufacturing processes of a company
and spit out the details in an organized, digestible form that shows
clearly who the priority consumers, among other things, of a company
are. It can actually show profitability by customer. Even hundreds
of thousands of customers. Or more. Neat.
But once the company’s most
profitable customers are identified, how do you go about expanding
the share of customer? That question, and goal, has catalyzed the
development of new software called customer relationship management,
or CRM (Of course, we have to have an acronym.). It is designed
to give companies the capacity to establish and strengthen interactive
relationships with their most coveted customers.
The CRM I’m familiar with was
developed by SAP. There are two good reasons why I’m familiar
with SAP, which in the interest of transparency you should know.
First, SAP Philippines is my client. Second, the Hong Kong affiliate
of the company I work for is a (small-time) investor in SAP, and
it made that investment after SAP became a client. So my company,
and me by extension, have an interest in SAP’s growth and profitability.
Now that my bias is out in the open,
let me get down to the value-added for readers that choose to forge
ahead. CRM is supposed to allow a company to interact with each
of its customers individually, even if there are a great many of
them. It is intended to force an evolution to customer-centric organization
whose purpose is the consistent and dependable delivery of value.
What are the components of value?
In the SAP model, there are seven things customer-centric companies
must do in order to achieve meaningful, interactive relationships
with their customers. These seven roles are intended to first provide
information to the company, then provide the capacity for meaningful
two-way communication, and finally, value-intrinsic support.
The first of these roles is understanding
customer needs. This is accomplished by analyzing customer buying
patterns. Identities can be created from analyses of buying data
tied to loyalty and credit card purchases. When consumer electronics
and large purchases like automobiles are involved, there are guarantees
and service patterns that reveal who a customer is, what pleases
her, and what else she might appreciate. And of course, what she
doesn’t, as demonstrated by neglect of a particular category
of products and services.
With this information, the company
achieves the capacity to address each customer individually. For
example, let’s say that analysis of a particular loyalty card
consumer’s purchases shows that she regularly buys dairy produce
and meat products from a grocery store, but won’t touch the
fruit. First, the company needs to find out if there’s a problem
with the fruit, and if there is, fix it. That of course will entail
a broad analysis of other customer buying patterns. If it’s
determined correctly that the fruit is competitively priced in terms
of value, then the store can arrange to call or write the consumer
with a specific offer.
The offer would begin with a thank
you: "Thanks for buying our products so regularly. But we’ve
noticed that you don’t often try our excellent selection of
fruits. As a sign of our appreciation and an invitation to sample
our fruit, we’re enclosing a coupon that you can use at your
convenience over the next month. Please accept our invitation to
sample our fruit, and determine yourself whether it meets your demanding
expectations." When the customer responds, the company has
started doing the third thing, building an interactive relationship.
But I’m going to have to interrupt
here. The life of a columnist dictates that everything important
must be said in about 850 words. I’m sorry to leave you wondering
what the other five components of CRM are. But I do have space to
say this: Philippine companies are already taking advantage of this
powerful tool (Note: There are other vendors of ERP and CRM solutions.
So you do have a choice of vendors. But that won’t help my
stock investment, or my relationship with my client. Okay, okay.
You can check out Oracle, too.).
One example is Sterling Paper Products.
This company manufactures and retails a wide range of greeting cards,
stationary, and toys through 36 nationwide outlets. This year, the
group intends to increase that number by 12 to 48, a 33 percent
increase. And over the next four years to 100 outlets. That kind
of growth will be possible because Sterling intends to increase
profitability by increasing share of customer. It will increase
share of customer by gaining an understanding of who its most profitable
customers are, and tailoring product mix in its stores to reflect
the preferences of those customers. The company knows what it’s
doing: so far this year, sales are up 20 percent over last year,
and five percent over its previous best year ever.
There’s no end to what a company
has to do to stay competitive these days. But building interactive
relationships with profitable customers is one of the most important.
Copyright © 1999 The Events
& Awards Managers of Asia and
Hamlin-Iturralde Corporation. All rights reserved.
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