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So much for state of the art

Success in CRM depends more on applying its principles creatively than on armies of experts, huge databases and complex software, according to experts at McKinsey.

Thanks to microchips, companies in developed markets routinely collect and store huge volumes of information about their customers. Thanks to customer relationship management software (CRM), this valuable resource doesn't lie inert but is instead used to fashion sample customer segments that can be used to test new offers. The winning ones are then turned into full-scale marketing campaigns.

Many companies that know about CRM and are keen to apply it mistakenly believe that only the IT-heavy, deluxe version will do. It seems unlikely that CRM would work this well in emerging markets, where accurate customer data, advanced information-technology systems, and marketing experts are all in shorter supply. Yet it does. Overall, from 10 to 60 percent of the customers targeted in well-designed CRM-based campaigns in emerging markets sign up for the offer they receive--far more than the 5 to 20 percent norm in developed markets. Although CRM activity in emerging markets accounted for only 11 percent of the worldwide total in 2000, it has been growing by 35 percent a year since then.

Why? For a start, consumers in developed markets have wearied of unsolicited mail, sales calls and spam, but for many consumers in emerging markets, personal attention from companies is still a novelty, and a welcome one. Second, success in CRM depends more on applying its principles creatively than on marshaling massive databases, complex software and armies of experts. Indeed, some companies that use the best CRM tools available have yet to see any results. But in emerging markets, we have seen substantial value accrue to companies that effectively used whatever skills and data were at hand.

One mobile phone operator in Asia, for example, cut customer churn by more than 40 percent by offering a special discount to just the customers identified as the most likely to cancel. An East Asian retail bank increased its credit card profits by at least $5 million by targeting a direct-marketing campaign at high-income customers who were heavy ATM users, having discovered through the use of CRM that they were four times as likely to take up a credit card offer as the people in a control group.

If consumers respond so enthusiastically, why are so few companies in emerging markets launching campaigns? One reason is that these successes are not well known among senior managers because few companies in emerging markets track the effect of their individual marketing and promotion activities. Second, many companies that know about CRM and are keen to apply it mistakenly believe that only the IT-heavy, deluxe version will do; they are still building the perfect database and acquiring the latest propensity-modeling skills. Even some less technically ambitious marketers worry that they have neither the data nor the human resources that CRM textbooks say are essential.

The textbooks are wrong. In any market, CRM aims to capture increasing amounts of the lifetime value of high-value customers by creating offers that respond to their individual needs. The two most essential resources in any CRM program are a wealth of hypotheses about the composition of possible target segments and a variety of offers to test these hypotheses. A company's first CRM customer database therefore need only be big and accurate enough to support statistically relevant test campaigns.

We have found that a CRM database containing records on 50,000 to 300,000 active customers encompasses enough diverse groups of around 2,000 customers each to make it possible for companies to develop an extensive series of distinct tests that avoid tapping the same customers twice. If a company can reach larger samples of customers by e-mail, it can test and launch new ideas more quickly. But large samples are not a necessary condition of successful CRM campaigns. Nor are lots of details on each and every customer.

Less is more
The amount of information that each customer record in the database must contain depends on the hypotheses a company wants to test. Less is more if it makes it possible for the process of testing and refining offers to start sooner rather than later. It will be more than enough to begin with some demographic details about customers and information about the products they own, such as their account balances, and the kinds of transactions they have undertaken during the course of the previous 12 months.

Of course, the quality of the data available for CRM in developed and emerging markets does differ. Most companies in emerging markets have customer information files and transaction histories located in various computer systems. But hardly any such companies track communications from customers, though these often form the core of fruitful marketing campaigns in developed markets.

Furthermore, systems in emerging markets may not be programmed to reject data that have been entered inaccurately, however obvious the error. One bank's database, for instance, was set up to handle nine different sexes for its customers. At an Asian mobile phone company, 60 percent of new urban account holders were described as "farmers." In emerging markets, the accuracy of such data can rarely be checked against external records, since few if any external data providers exist.

Companies that start small don't need highly sophisticated marketing skills to get good results. Even so, the poor quality of the data collected by companies shouldn't put them off CRM. They can probably build small, usable databases from the information available. Systematic but simple checks can identify omissions and errors early on and ensure that the data collected are fit for the intended purpose. Second, putting together this little data "shed" is the first step toward building a giant data warehouse as the company's data structure and accuracy standards improve and the volume of data about customers grows. Companies can use positive results from their pilot CRM campaigns to show their employees that it actually makes good sense to collect accurate and comprehensive information about customers. In addition, these companies can encourage the meticulous collection of their data by, for example, giving higher commissions to those sales representatives who manage to persuade customers to fill out every space on their various forms.

Companies can build usable databases in a remarkably short time, despite the need to audit and clean up the data. At a leading South Korean retail bank, two employees had a database up and running in only two weeks. It took a Southeast Asian mobile phone carrier no longer to set up its own database. Another built one in a week. With a working database, a company can start to push through pilot campaigns quickly, each campaign typically testing the effects of five or six variations on an offer against groups drawn from a particular category of customers.

Say that a bank wanted to test the effectiveness of three promotional incentives, communicated by phone or by mail, among customers with only one account. That would give the bank six variations in all--incentive one by phone, incentive one by mail, incentive two by phone, and so forth. The CRM team would need to test each variation against six separate customer groups drawn from the pool of customers with only one account.

The CRM team tracks the results, revises the offers, retests the refinements, and selects offers to launch across the customer base. Usually, just a few important variables identify the target customers for a launch, so they are easy to locate in the company's main databases.

Human resources
Success with CRM is closely related to the number of pilot campaigns and tests a company can run at a given time. Capital One--a U.S. credit card issuer and leading CRM marketer--tested 45,000 variables in its pilot campaigns during the year 2000. But a typical large U.S. bank is more likely to have only 20 to 50 CRM specialists, which is still far more than would be on hand at most companies in emerging markets, where external resources such as direct-mail agencies, call centers, analytic-service providers and telemarketing shops are also scarce.

However, companies that start small don't need highly sophisticated marketing skills to get good results. A pioneer CRM team needs only one or two representatives from each of the CRM support disciplines: namely, marketing, product management, statistics, call-center management, finance, IT and sales. Moreover, a company's initial levels of skill and commercial judgment really are not as important as a willingness to learn from differences in the ways in which statistically similar groups of customers respond to a range of offers.

A single CRM corporate- or divisional-level team run by a senior CRM champion can carry out high-profile tests and campaigns that could have an impact on all of a company's business units. Alternatively, a core CRM team might be located in the marketing function or a retail business unit and work with designated CRM champions in each channel. A bank, for example, set up a CRM pilot team to run test offers and a call center that released the successful ones to each business unit's wider customer base--all under the aegis of the consumer-banking business unit's marketing department. At the front line, each business unit had a designated CRM champion responsible for assessing the financial potential of the relevant pilots and for helping to feed new offer ideas and customer-segment hypotheses into the testing pipeline.

Of course, the best way to get the backing of senior managers is to show them the money. A feedback loop runs from the marketers who develop hypotheses to the call-center operators who explain offers to the company's customers and listen to their responses. When CRM teams are small and the links in this loop are tight, information flows around it quickly enough to produce successful offers. In such companies, it is not unusual for marketers to write direct-mail material and to script sales calls themselves. Unfortunately, however, the hierarchical cultures of some companies in emerging markets can get in the way of such fast-paced, democratic teamwork. A failed test may, for example, be treated as someone's mistake rather than as an essential step in the progressive refinement of an offering.

Corporate cultures can change, however. In one Asian mobile phone company where a campaign flopped unexpectedly, everyone involved--from the campaign manager to the call-center operators and the statisticians--discussed the causes of the failure. Chief among them, the company discovered, was the procedure for handling customer complaints. For one thing, the company responded to them so slowly that it reminded some people of unresolved grievances long since forgotten. For another, it irritated customers who had deep-seated problems that it could do nothing to fix by making any kind of contact. Using this information, the company changed the way it handled complaints and thereby cut its rate of customer churn considerably.

Winning over the executives
Most companies in emerging markets track aggregate measures such as total sales or customers. To win the backing of senior managers, CRM teams must understand the components of those aggregates and the degree to which CRM campaigns change the factors that most influence the aggregates.

Showing corporate leaders the process at work is another powerful means of winning them over. The CEO of a Brazilian insurance company, for example, was converted when he overheard a skilled call-center operator securing a renewal and a new policy just by calling the right customer, at the right time, with the right message--all three revealed by a CRM campaign. In addition, a CRM team needs support from the business unit or line in which it is located.

The potential rewards of CRM for companies in emerging markets are huge. Yet too few companies are enjoying these rewards. But in many emerging markets, value-based performance measures are simply not sufficiently disaggregated to demonstrate that a team is having a beneficial effect on a particular organizational unit. CRM campaigners really need such measures if they are going to reward the performance of every CRM team and of the individuals who serve on it. In the absence of such measures, a CRM team can go ahead and develop its own measures, calculating the net present value of each of the campaigns and extrapolating their effect on the profits of the business.

Of course, the best way to get the backing of senior managers is to show them the money. Fortunately, the results of a series of rapidly launched pilots are likely to come in quickly.

The potential rewards of CRM for companies in emerging markets are huge. Yet too few companies are enjoying these rewards, partly because many executives believe that it is impossible to make state-of-the-art database tools work in emerging markets. But businesses piloting CRM in "do it now, fix it later" campaigns enjoy growing market shares. Wait too long, and companies from Seoul to Johannesburg may find that customers have transferred their allegiance to competitors that took a chance on CRM.

For more insight, go to the McKinsey Quarterly Web site.

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