The financial side of CRM

Customer Relationship Management (CRM) enables companies to transition from product management to customer management. Its concept is simple and straightforward: the interaction between the company and its customers is based on a common information system extending in all directions.

In fact, CRM has changed the competitive landscape, distinguishing companies that sell products from companies that own customers. While the requirements for product reliability have not changed at the product and business unit level, having all customer information in one place allows companies to analyze the full financial impact of customer-company interactions, not just Is the impact on a single product line or business unit. The new analytics system supports the idea that customers are a company's most important asset. In order to achieve the goals of CRM, your company's financial management can no longer go the same way.

A question like "How profitable is a customer or group of customers?" is not the same as "What was the profit of product X last year?" Analyzing customer profitability requires collaboration and information from all departments and sales channels in the company Summary: Sales provides information on how to win customers, Marketing provides up-sell and cross-sell data, Customer Service provides information on quality assurance and service activities, and Finance provides revenue and cost data information. Data integration requires the centralization of off-the-shelf, disparate data in order to create a reliable customer database that is known across the company.

Some companies try to skip this step, assuming that their analysts can find the information they need, sort it out, tweak and analyze it, and then provide data on a project-by-project basis. This view is wrong for the following reasons:

For a successful CRM implementation, customer analysis must become a long-term task of financial analysis. The over-the-top approach overwhelms us with too many opportunities, leading to incoherence, frequent mistakes, and misinterpretation. Moreover, such methods create procrastination: taking six weeks or more, yielding reports of little value.

Establishing a central database will force the company to address key issues, and you must complete customer definition, cost, benefit and profit analysis, which is then validated by the business team. It's also important to be clear about the CRM's goals and evaluation methods. In short, treating CRM financial analysis as a series of one-off jobs that go it alone will get you down a dead end.

The three major financial analysis of CRM

When building a central customer database, you need to figure out what data to put in it. Many companies are beginning to realize that the ready-made systems do not contain the required data, or the data is in the wrong format to allow Finance to perform its three CRM functions: customer profitability analysis, budgeting and forecasting, and CRM effectiveness management.

Client Profitability Analysis EDS recently conducted a study for a client to understand which media (direct mail, telemarketing, Internet, magazine advertising, TV advertising) generated more revenue. The study used the lifetime value analysis method, which analyzes the net present value of a customer by calculating the cash flow generated by the customer's interaction with the company.

The method of determining cash flow is very simple. In order to facilitate the calculation of expenses, the accounting system is designed to collect the turnover figures obtained from the client. Each payment record of the client is clearly marked with the amount and time. However, matching costs to customers is tricky, because the current accounting system has the following shortcomings: it can only collect real-world sales information from customers, and does not include pre-sales and after-sales activities that do not lead to sales results. Costs; even for costs that are directly related to sales, such as product costs, accounting systems can only add up individual transactions from different customers to calculate "cost of products sold"; this isolation maintained by accounting systems , resulting in a lack of common customer identification capabilities, leaving people at a loss for cross-system analysis.

Obviously, these flaws in the accounting system are incompatible with the requirement to conduct a customer profitability analysis. CRM requires that a single, valid customer identification code must be established, the revenue and cost figures generated by the buying and selling activities must be collected from the client, and the indirect cost of "customer-company interaction" must be allocated to the customer. It should be recognized that although there is a consensus on customer profitability, there is still some disagreement on how to achieve it. So, which activities to measure, and what exactly the financial impact of those activities will be, these decisions will ultimately differentiate the strengths and weaknesses of different companies.

The main difference between budgeting and forecasting CRM and traditional budgeting and forecasting methods is that the latter uses isolated product-service categories to separate sales and customers, while the former provides a company-wide Because of the differences in the way companies link with their customers, CRM models can be divided into two types, "activity-based" and "continuity-based".

The 'activity-based' CRM forecasting model is suitable for companies that consistently and repeatedly sell products, such as catalog merchandise sellers. When they sell new products to existing customers, they must send a new catalog. One characteristic of such companies is their likelihood of getting customer orders: how often customers order and whether customers have placed orders recently. Therefore, the analysis provided by a customer forecasting model must be based on factors such as expected marketing campaigns, how often customers order and how many months have passed since their last purchase.

In contrast, businesses operating on an "existence-based" model either sell follow-on products (such as telephone or equipment dealers), or regularly launch some products (such as books, records, or perishables) for customers to buy on a regular basis. Unlike "activity-based" businesses, "existence-based" businesses aim not to get the next order, but to keep existing customers. Of course, it is unrealistic to expect service providers to offer too much to customers, since customers can only consume a certain amount of products at a certain time. In this mode, predictive model analysis focuses on consumption and customer base over a certain period of time.

With the above in mind, your company needs to determine how to improve your product-centric forecasting and budgeting models to focus on customer-centricity. Early reaction is important because existing systems can only provide some data, and other parts need to be done from scratch.

Another important thing is to differentiate between customer groups, the interrelationships of the various business units of the company, and the different characteristics of each stage of the customer life cycle. Only when these factors are taken into account can the financial impact of customer activity be revealed. Managing a company's customer base is like managing a portfolio, you have to find a balance between how to acquire new customers and how to maintain old ones.

Effectiveness Management for CRM As with any other change management, successful CRM implementation requires clear financial and operational goals, as well as setting appropriate metrics, and these things need to be done right from the start. The finance department will find this job difficult, as it is still difficult to calculate the profitability of the customer and build a forecasting model for the customer. The company's product structure makes it relatively easy for managers to calculate sales and profits, but often has no idea how to accomplish goals like "customer retention."

The problem isn't just a lack of proper data, it's a vague CRM goal, often expressed in non-financial terms. For example, retailers and catalog sellers often use "time since last purchase" to measure customer retention. Conversely, phone and equipment makers use metrics such as "how many customers are willing to continue using a service without interruption", and magazine publishers calculate "how many customers renew their magazines."

Therefore, it is imperative to define goals that are clear throughout the company. After all, the value of a customer-centric mindset lies not only in its ability to assess the financial impact of a company's CRM strategy, but also in the fact that it encourages collaboration and collaboration.

The second step is to decompose the target, and this process is the same as the refinement process for other targets. For example, in order for a bank to increase the number of checking customers from 40% to 60% within three years, management needs to know in advance, before the task is completed, the financial impact of the goal and how to measure progress. Therefore, the work of the Finance Department is to refine the overall goal into sub-indicators to be completed in stages. In this way, after three years, there are no surprises for management, because the different methods used to achieve the goal are clear, and the costs incurred at different stages of the goal completion process can be broken down.