1. Abstract This white paper explores the Return on Investment (ROI) attributable to Customer Relationship Management (CRM) systems. It provides a discussion of the potential returns from such a system.
Any organization attempting to analyze the ROI from a CRM solution must first complete a Situation Analysis (SA) to understand where the ROI may come from, as the sources of benefits relating to ROI vary from one organization to the next. Sources of ROI attributable to a CRM implementation arise from three general areas: 1.Creation of a long term knowledge asset or “corporate sales memory”.
2. Increased sales revenue (by improving market share and/or customer share). 3.
Decreasing sales costs through increased efficiency. There are sometimes other down stream returns that result from the introduction of a CRM system. For example, collections may be improved or staff turnover reduced. Sources of ROI can be either hard or soft.
Hard returns are easily attributable to the CRM system, are tangible and quantifiable. Soft returns are the obvious benefits that fail to pass the criteria for hard returns.A CRM system has the ability to create competitive advantages: by creating value for the customers, reducing costs associated with customer processes and creating time advantages. In any analysis of ROI, an organization should explore the cost of doing nothing.
The business environment does not stand still and often carrying on without change can result in loss of revenue. In order to achieve these returns a company needs to invest in a CRM solution that provides a relevant, easy to use system, a rapid implementation life cycle and the ability to adapt to ongoing change.The understanding of the benefits and measurement of these results over time allows a corporation to formulate a plan for implementing a successful, long-term CRM strategy. 2. Situation Analysis Before considering the ROI from a CRM system, an organization should first analyze it’s current situation.
In an unregulated market it is unlikely that two organizations will be alike with regard to Sales and Marketing. This is because market forces dictate some level of differentiation. In this regard even two companies in the same industry are unlikely to receive the same enefits from a CRM system. The following questions are designed as a guide to considering your own situation. They are only a sample and are not an exhaustive list. 1.
Is the market that you are in growing, mature or in decline? 2. Who has the highest market share? Is it feasible to grow your market share? 3. What is your average customer share? Do your customers buy products from both your organization and your competitors? 4.
Are there other products that can be sold to existing customers? 5. What is the cycle for repeat business? What is the value of each sale? 6.Is the 80/20 rule relevant for your customer base? How many discrete segments are within your customer base? 7. What is your market distribution strategy? Do you sell through distributors? Are your customer’s individuals or organizations? 8. Can information technology change or enhance the products and services that you offer? What is the information content of the products and services that you offer? What is the technology component of the products and services that you offer? 9. How do you interact with your customers? Does this vary according to task and customer preference?Not every source of ROI may be relevant to your organization. Having a clear picture of how your organization is positioned in your market will help you to apply this discussion to your own organization.
3. Creating an Information Asset The introduction of a CRM System allows for the capture of information about customers, prospective customers and their needs. This information captured in electronic form can provide a corporation with many downstream benefits.
The establishment and ongoing use of this information asset provides significant value.Benefits from this “corporate memory” include: 1. Corporate ownership of end user information. 2. Effective use of marketing budgets through segmentation. 3. Targeting products and communications to customers’ needs.
4. Avoidance of universal discounting through a recording of the sales cycle. 5.
Improved consistency in communication with the customer. 6. An aid to business planning. 7. Reductions in company and individual liability. Targeting provides a greater ROI Whether you want to build effective communication or design effective products, your customer’s needs are important.A good profile of your customers and prospects, which includes information about their needs, can deliver very good return.
Targeted campaigns can produce multiple returns. They reduce marketing costs and increase sales revenue. By only sending information to customers that require it, wastage is avoided. By tailoring communications and products to customers’ needs, sales will increase. A database allows precise groups of customers and prospects that are more likely to provide a greater return, to be targeted more effectively.This in turn, generates high quality leads for distributors or sales professionals. This allows organizations to maximize the performance of their sales force and target highly efficient campaigns directly at the customer.
This targeting of a “universe of one” allows for: 1. Reduced marketing budgets, by eliminating the wastage associated with poor targeting (ie. if the customer is unlikely to respond positively to the offer they are not included in the campaign).
2. Precise offers to be made to counter the competitors’ initiatives where competitor activity is discovered.An understanding of competitor sales and strategies can be captured and stored in a central knowledge base. 3. The CRM system allows for the tailoring of special pricing structures for individual customers. In this way universal discounting is avoided. Additionally, high value customers can be offered special pricing that recognizes the value of their relationship to your organization, which will enhance loyalty.
4. Improvements to direct marketing campaign effectiveness by personalizing the offering. 5. Production of better qualified leads within existing customers. Aid to business planningInformation capture and recording to a centralized customer relationship database allows an organization to adopt information driven strategy.
The information asset created by a CRM system over time can be used to plan new product launches, respond to competitive threats and aid the development of marketing plans. This greatly increases the accuracy and reduces the effort of plan preparation and implementation. Ownership of end user information Company ownership of end user information helps the company retain and secure knowledge of a customer’s relationship instead of this information residing only with individuals within the company.
The impact of staff turnover is reduced – information is no longer lost to the corporation when staff leaves or are transferred/promoted to different positions. New staff can learn an account’s history quickly and become an effective asset to the organization in a shorter space of time. Company and individual liability reduced There are several ways that a CRM system can reduce liability. A CRM system can provide: 1. A comprehensive call and literature history that provides a well recorded “evidence trail” in the possible event of litigation. 2.A mechanism for ensuring that the legislative requirements for product sample recording and marketing are adhered to (particularly in the pharmaceutical Industry).
3. A record of contract details, such as tracking price quotation time limits. 4. Increased Revenue There are many ways that a CRM system can improve an organization’s revenue.
Two of the main sources are: 1. Through improved opportunity management. 2. Through increased customer loyalty Improved opportunity management Users of CRM Systems are able to add new opportunities and track existing business through a central database repository.
These opportunities can be accumulated, shared and tracked by sales management. Financial gains from this include: •Increased new business revenue from improved tracking of all new opportunities. A successful CRM package will help to create seamless integration between different functions (call center, marketing, sales force) within an organization. This system allows leads to be processed and tracked in an efficient and timely manner. An example is in the lead flow from a call center through customer service and onto sales staff. Many organizations have customer information residing in a separate database for each application.An integrated CRM system will allow these applications to write to and read from one central database, ensuring that no opportunities are lost in transit between the different sales and marketing functions of an organization.
•Improved repeat order retention from better follow-up and order management tools. Sales situations where opportunities are based on a cyclical period can be effectively managed. For example, in situations where sales are based on lease periods, a CRM system will allow a sales force to identify when the new reorder opportunity will be developing.They can then proactively market to clients at that critical time of re-evaluation of the contract. A successful CRM system will also have the ability to track competitors’ lease cycles, allowing a company to get a second chance at selling. •Identifying and managing all opportunities more efficiently and effectively. A CRM solution will give management an overview of the sales cycles of not only individual, but even groups, of opportunities. •Cross selling, up selling and lead sharing between divisions.
Opportunities can be distributed more effectively to representatives.Sales representatives can forward opportunities that they identify at customer sites for other divisions. Cross selling of complementary goods and services becomes an easier task to handle. •Team selling. A CRM system underpins the management of national customers and complex sales opportunities through the co-ordination of customer information between widely dispersed staff and mobile representatives. Increased customer loyalty Increased customer satisfaction and retention are among the most important benefits that are attributable to a CRM system. Increased customer satisfaction provides real returns from a CRM system.
Reichheld and Sasser depict this in the following graph: Higher quality customer relationships are formed using a CRM system. This is achieved by tracking customer service issues and keeping staff well informed of current opportunities and issues, enabling them to respond to customer requests quickly. Improved service leads to improved customer retention and increased customer share. Customer satisfaction is facilitated by: 1. Faster customer response. Builds the company image through reliable follow-up and rapid resolution of customer inquiries.
2. Better understanding of customers’ requirements. . Maximizing meeting times. Better use of direct sales time through improved planning.
4. Timeliness. Information provided to customers is up to date and accurate. 5. Information at the point of sale. Sales professionals can be provided with the ability to process orders immediately or to access up to date inventory information. 6. Fact based selling.
Sales proposals are based on the customer’s profile and requirements. 7. Consistent front. Every contact with the customer forms part of an integrated marketing communications strategy, ensuring consistency of communication across the organization. .
Improved product knowledge. Product information such as technical applications, pricing, availability and promotional detail is available at the sales representative’s fingertips. 9. Use of telemarketing for customer service. Follow-up telephone calls from telemarketers can trigger sales representatives’ visits. Telemarketers have all customer details available, providing customers with a “single shop-front” service.
10. Best practice. Allows best sales practices of sales representatives to be shared amongst the entire sales force increasing productivity for representatives.
. Increased Efficiency The easily quantifiable “hard cost” savings from a CRM project mainly arise from decreasing the cost of sales and include: 1. Reduction in cost of sales support 2. Increased efficiency of sales reps allowing larger coverage of accounts 3. Use of less expensive communication channels increasing the efficiency of sales processes can be used to maintain existing levels of sales revenue while reducing associated costs, or to increase sales revenue while maintaining the same level of expenditure on sales related activities.Maximize time spent with customers The cost of sales activities is reduced by automating sales reporting and repetitive tasks and by reducing the non-selling activities of sales representatives such as administration and non-sales follow-up. Call history, sales history and special segment reports are automatically produced, no longer requiring representatives to fill in call reports.
This allows the sales professional to maximize the time spent with the customer. Sales professionals become more effective allowing them to service a larger number of clients.This provides a company with an increased market presence at no change in sales cost. Sophisticated synchronization software allows sales professionals to spend longer periods of time away from the office and more time with customers. Reduction in the cost of sales support A number of successful CRM implementations have resulted in the ratio of support staff to sales representatives being dramatically reduced. A CRM system automates a wide range of tasks in sales support. This enables sales support staff to assist sales professionals more effectively and with greater consistency.Savings are made by: 1.
Automation of tasks and avoidance of double handling, leading to less administrative work 2. Automation of repetitive tasks such as generating follow-up letters, allowing staff to be used in more productive roles 3. Lowering the costs associated with gathering marketing data, as data is entered incrementally over time and built up. One recent CRM system implementation carried out by StayinFront, reduced the sales support staff ratio from one support staff member per two representatives to one support staff member per ten representatives. More efficient information flowThe flow of information between sales team members and management is improved dramatically with a successful CRM project. Less double handling of information means fewer mistakes. Information is entered once, at the source. Managers and sales teams can share information created by field sales professionals, such as meeting notes, schedules and forecasts, allowing resources to be targeted more effectively and other decisions to be made with more timely, accurate and relevant information.
Use of less expensive communication channels The cost of an e-mail is approximately 5 cents, a letter $1. 0 to $15, a phone call $20-$70 and a “face-to-face” sales meeting $200-$1000. These costs differ by orders of magnitude. Each form of communication has advantages and disadvantages, but by choosing the correct mix of communications channels an organization can become a more efficient communicator. Warning: It is difficult to derive the correct mix and requires careful planning and research to ensure that customer preference is understood and opportunities for information discovery are not lost. 6. Downstream Benefits Many of our customers have received downstream benefits from CRM projects.Often the introduction of a CRM system has had a spin-off benefit that was not planned for, but generated a real return nonetheless.
These benefits are hard to plan for as they are rarely anticipated in advance. Here are some examples: a) Personal skill base growth The introduction of a CRM system increases the technical skills of the sales force. These new skills can often benefit the customers. The new skills increase sales professionals’ interest in using personal computers to enhance productivity in other areas. b) Reduction in staff turnover A successful CRM system results in reduced staff attrition.After CRM system implementations, corporations regularly report staff turnover reductions of up to 40% due to increased employee satisfaction.
Cost savings can be significant due to the reduction in staff recruiting fees and reduction in the cost of discontinuities resulting from the “downtime” of a new sales team member. Rehiring and training time saved contributes to the ongoing long-term savings attributed to a CRM project. Remember that the information collected in the CRM system (the “Corporate Memory”), helps to lessen the impact of employee turnover. ) Improved collections and inventory management A company that includes order entry and order management in their CRM system will often decrease their Accounts Receivable balance (freeing cash resources and reducing the cost of working capital) and decrease inventory management costs (lowering handling and stock charges). This is achieved because the accuracy of order pricing, discounting and shipping instructions are improved. Less stock is returned, fewer orders are backordered and the customer queries fewer invoices. 7.
Creating Competitive AdvantageNearly everyone involved in a competitive endeavor is happy to have an advantage, whether this is superior fitness for a football player or a significant price advantage in a sales situation. An advantage will give you the edge and help you win. In the business world competitive advantage comes in three forms: cost, time and value. All of these advantages normally arise from reengineering an existing business process. A CRM can create competitive advantage by allowing sales and customer service processes to be reengineered.A competitive advantage can be used to acquire new business or rise competitive barriers to protect existing markets. Cost advantages are created when a sales or customer service process is reengineered to be significantly less expensive.
These cost savings can be used to generate cash reserves to spend on other activities such as branding, or passed back to the customer as a reduced price. Time advantages occur when a business process is reengineered for speed. This allows your organization to raise service levels, pass on time advantages to your customers or increase throughput without increasing resources.A time advantage inevitably saves someone money, which will either grow sales or improve margins. Value advantages arrive when reengineering a business process will improve a product or service so that it delivers additional benefit to the customer.
For example, supplying a “help line” to support the installation of product. This adds value to the product because it will save the customer time and helps deliver a successful installation. The problem with competitive advantage is that if it is significant it will usually be quickly copied by a competitor.
Because of this, emphasis is often placed on building sustainable competitive advantages. These advantages leverage a natural advantage that your organization has that can not be copied. For example, if you are the largest vendor, then look for advantages that can leverage your economies of scale, and are difficult for small competitors to copy. 8. Cost of Doing Nothing Many organizations will complete an ROI analysis using only hard benefits and hard costs. This is a normal accounting approach as both sides of the equation are tangible, attributable and quantifiable.There are some problems with this approach that will be discussed in the next section, but inevitably, an assumption is made that things will carry on as they are.
In other words there are no costs associated with doing nothing. Doing nothing (or continuing without change) very often has dramatic costs. Here are three reasons why: 1. Sales and Marketing is a very dynamic area of any unregulated business.
New competitive offerings enter the market, technological innovation changes the sales and marketing mix and customer preferences change. Failing to keep pace with change can lead to lost opportunity, customer share and market share. . If you don’t adopt a CRM system, your competitor might, and that may change the market.
It is usually better to be the innovator than the follower. What will be the consequence of letting your competitor lead? 3. If the CRM system creates a significant innovation, a delay may create a long-term barrier to entry.
For example, if you delay building a presence on the Internet for several years, will your opportunity to have a significant presence eventually be lost? It is sensible to consider the cost of doing nothing and include a discussion of this in any ROI analysis. . Hard Return Hard benefits and costs are tangible, attributable and quantifiable. Soft benefits and costs do not pass the test for hard figures. A tangible benefit is one that can be easily seen. For example, it is difficult to see the value of your brand increasing.
An attributable benefit is one that can easily be “causally” related to the project. In other words, if we didn’t embark on this project, then this benefit would not be realized. An increase in sales revenue is normally not attributable because many business activities could claim to have increased sales.For example, if sales increased by 10% following a CRM system deployment, how much of the increase was related to the CRM system and how much to other activities such as advertising or product innovation. A quantifiable benefit is one that can be measured (usually in dollar terms). As mentioned previously, many organizations will complete an ROI analysis using only hard benefits and hard costs. This is a normal accounting approach as both sides of the equation are tangible, attributable and quantifiable.
By focusing on hard numbers there is a perception that the return is more certain.There are several problems associated with this approach: 1. A key consideration when estimating the returns from a CRM project is that often many of the benefits are difficult to identify due to their “soft return” nature. An example of this is how to calculate the value of increased customer loyalty.
2. There are both soft benefits and soft costs, and both the soft benefits and soft costs can often be considerable. 3. These need to be managed and measured to get a good return. There are usually risks associated with both the benefits and the costs that should be managed.For example, training is a hard cost that if cut; will put the benefits of the project at risk. 4. CRM projects rarely end.
Payback and ROI calculations are normally done over a fixed investment period. This suggests that discrete spending is possible where the norm requires ongoing expenditure to facilitate the introduction of new benefits. In order to overcome the problems with soft numbers, it is important to manage and measure sales drivers. These are the activities that are tangible, attributable and quantifiable that will lead to the delivery of a soft return.For example, we know that if we increase direct sales time then sales revenue should increase. Direct sales time is a sales driver, it is also measurable as a hard number. An increase in direct sales time should lead to an increase in sales.
10. Critical Success Factors In order to gain real returns from a CRM project a system must meet a base set of criteria. The selection of a package that provides a relevant, flexible CRM solution is important.
The project should aim for a high level of user adoption. If the system isn’t used, it will not return any benefits.A customer database is an appreciating asset, the more it is used, the more information is gathered and the more valuable it becomes. Therefore, a key success factor for a successful CRM project is the level of user adoption. The common Critical Success Factors for CRM projects are: •Relevancy. In order for user adoption to be maximized, the end users of the system must see that the information that they are being asked to input into a CRM system is relevant and will have a positive return for them, personally.No CRM system will succeed without the buy-in of the end users.
•Rapid Implementation Cycle. The sooner a CRM solution is rolled out to a sales and marketing field force the faster a company will begin to see a return on their investment. •Ability to adapt to a changing environment. Sales and marketing is a constantly changing environment, requiring a CRM system to be adaptable. A system that cannot be easily changed to suit new marketing initiatives soon becomes obsolete and therefore irrelevant within as short a period as 6-12 months. 11.
The ROI Diagram