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Customer Relationship Management

PART I: Alternative Definitions of CRM

Customer Relationship Management (CRM) has its roots in relationship marketing which is based in turn on the formative work by Berry (1983), the IMP Group (see e.g. Ford, 1990) and Christopher et al. (1991). Seminal contributions to the relationship marketing debate were made by Reichheld and Sasser (1990) reporting on the customer retention work of Bain and Co. These findings indicated that a 5 per cent increase in customer retention resulted in an increase in average customer lifetime value of between 35 and 95 per cent, leading to significant improvements in company profitability ( Reichheld, p. 36)

Reichheld (1996) concluded that there are six underlying reasons why retained customers are more profitable (p. 39):

• Customer acquisition costs may be high, so customers may not become profitable unless they are retained for one or more years;

• There will be a stream of profits from the customer in each year after acquisition costs are covered;

• Customers buy more over time, so revenues go up; companies become more efficient at serving them (there is a learning curve to the relationship), so costs go down;

• Retained and satisfied customers may refer other potential customers;

• The relationship has a value to the customer too, so that retained customers tend to become less price-sensitive.

The purpose of relationship marketing is to improve long run profitability by shifting from transaction-based marketing, with its emphasis on winning new customers, to customer retention through effective management of customer relationships (Christopher et al., 1991, p. 19). While the development of theory in relationship marketing continues unabated, the key question facing practitioners is, how can this shift in management focus be implemented in practice?

At the center of relationship management is the concept that customers, because of their purchasing of goods and services, provide organizations with an income. The focus, therefore, is on both the long-term relationship and the short-term transaction (Gummesson, 1996). Often the profitability of long-term relationships is higher than that of individual and discrete transactions (Dowling & Uncles, 1997 and Reichheld, 1996), although this is not always so (e.g., Reinartz & Kumar, 2002).

Reviewing how CRM has been advanced in the literature, Zablah, Bellenger, and Johnston (2004a) note that conceptualizations of CRM have defined it as a process, strategy, philosophy, capability, or a technological tool. Each conceptualization, the authors contend (p. 281), “contributes in unique ways to the understanding of this phenomenon [CRM]”. An early definition of relationship marketing is provided by Grönroos (1990: p. 7), “The role of relationship marketing is to identify, establish, maintain and enhance relationships with customers and other stakeholders, at a profit, so that the objectives of all other parties involved are met; and that this is done by a mutual exchange and fulfillment of promises”. CRM, when applied to Grönroos's definition, is the management of relationship marketing applied to (a business's) customers (Lindgreen, 2004). This is in agreement with Zablah, Bellenger, and Johnston (2004b) who define the purpose of CRM as “building and maintaining a profit-maximizing portfolio of customer relationships” ...
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