by Art Piccio . October 29th, 2013
Last updated on October 19th, 2022
One mistake many inexperienced entrepreneurs and managers make is to look at business from a purely transactional (one-time exchange) perspective. A large part of a marketer’s job — some would argue the main part– is to cultivate relationships.
Of course, relationships are a two-way street. You can’t force relationships to develop, and the vast majority of your customers will make purchases with a purely transactional intent.
Customers with a transactional intent will typically comprise roughly 80% of any businesses’ clientele, following the Pareto Principle. If this is the case, why bother managing customer relationships? Why cater to that other 20%?
Following the same principle, that same 20% will be typically responsible for around 80% of your sales. This slideshare, while made from a narrower advertising perspective, illustrates why it’s important to consider interactions with customers as opportunities to develop relationships, instead of as just a way to get more sales.
Keeping track of the habits of thousands, if not millions of customers is a huge challenge. Attempting to systematically develop long-lasting relationships even more so. It is however, worthwhile for several very good reasons.
A good Customer Relationship Management strategy will:
What counts as transactional or relational?
This is infinitely debatable, but common answers that contrast the two include:
Of course, you aren’t in business to develop relationships— you’re in business to earn a profit. A relational approach is desirable in most businesses for many reasons, but it always needs to be done with the intent of closing sales. An overly soft approach might leave you without any.
The first step to a systematic, trackable CRM system is to take a look at your sales process. At casual glance, a sale would seem like just an exchange of one thing of value for another. But there are actually several things going on in any transaction.
In Management of a Sales Force by Rich, Spiro and Stanton, a sale is broken down into the following steps.
Whether or not you believe in this model or another, more things are happening in any sale than a casual observer (or a casual entrepreneur) might expect. Each step is an opportunity for any CRM system, whether for directly improving customer experience, or for tracking and data analysis.
A Purchase funnel (also known as a Sales funnel or a Decision funnel) is any of many different models that illustrate how a customer arrives at a decision.
It doesn’t have to be a purchase, necessarily. The funnel could be used to look at several customer actions, from participating in surveys to sharing your promotions.
You might already have heard about the parts of a classic purchase funnel. The AIDA model, with an acronym standing for Awareness, Interest, Desire, and Action, is one of the most popular ways of explaining what goes on in a sale.
The idea has been misused and misunderstood a lot as well. Some business writers may omit the inverted pyramid or funnel concept altogether. But the shape actually illustrates that “acting” (i.e., paying) customers will always represent a small fraction of the people who are actually made aware of your product or service.
There are always fewer people taking action compared to those who merely desire to take action. There are always fewer people who desire your product than are merely interested in it. There are always fewer people interested in your product than people who are merely aware of it.
While not a perfect way of saying things, it might be useful to think of it this way: A marketer’s job would be to widen each stage of the funnel. Widening on top implies increasing your reach, and widening the middle or bottom implies higher conversion rates. Indeed, this pathway is often called the chain of conversion.
Speaking of the chain of conversion, the Customer Lifecycle refers to the measurement of customer behavior as they move through that chain and subsequent interactions over time.
Customer Lifecycle Management involves controlling factors that influence customer behavior as they interact with your business, hopefully leading to positive outcomes for your business (repeat sales, better branding, etc.)
A simplified customer lifecycle is often represented as:
Customer Lifecycle Management is often confused with Customer Relationship Management or CRM. They are mostly similar, except CLM involves the element of time.
This means that your customers are at the “action” stage of the purchase funnel or are at least getting there. It does not necessarily mean they have decided to buy your product. Staple items, such as office supplies, are not usually purchased based on brand as much as they are for function, cost, and availability.
As soon as the decision has been made, a marketer’s job is to make it as simple as possible for customers to get what they already want. Reduce the number of steps they must go through before making a purchase. Make sure not to confuse them with extraneous options.
Some things to consider:
Customer lifetime value (CLV) (or CLTV), lifetime customer value (LCV), user lifetime value (ULTV), or lifetime value (LTV) is a prediction of revenue and sometimes intangible value a customer gives throughout their relationship with a seller/provider.
Customer lifetime value should not be confused with customer profitability which is a purely historical view without future projections.
There are several good reasons for tracking customer lifetime value:
There are no real disadvantages at all to tracking customer lifetime value. However, it is easy to misinterpret data or use the wrong models if there is a lack of understanding of the market context.
There are several ways of calculating lifetime value. Creating accurate models for every possible combination of product, customer, and future outcomes would not be feasible.
Here are some of the more popular inputs:
Examples of different formulas for calculating customer lifetime value:
One of the more popular simplified versions:
Why so many formulas?
Customer Lifetime Value is dynamic, and the required inputs will likely change over time. Formulas should be chosen or developed in the context of your products, environment and Customer Relations Management strategy. The Marketing Accountability Standards Board does not officially endorse any method for calculating customer lifetime value for this and many other reasons.
CLV should not be the sole factor for making decisions on marketing strategy for the following reasons.
There is much confusion about the role CRM plays in businesses, given the non-standardization of terms and methods, and the amount of data gathering and analysis that takes place.
Despite the extensive demands it puts on number-crunching, Customer Relationship Management is by no means an exact science and it is a mistake to treat it as such.
CRM, like most marketing practices, should also be seen as an art, and from both hard and soft science perspectives. A purely numbers-based approach has been the downfall of many attempts at CRM.
Once this is understood, it’s clear that a balanced, rational CRM strategy and prudent execution – as opposed to blindly following set processes – is needed not only for repeat business, better branding, and customer satisfaction, but for sustainable growth as well.
What’s your approach to Customer Relations Management?
Other parts of our Basic Marketing Concepts series!
The Marketing Mix: The 4 P’s of Marketing
The Sales Process
The Purchase Funnel
Window: The Uprooted Photographer via photopin cc
Formula: trindade.joao via photopin cc
Haggle: TheeErin via photopin cc
Service: Lynn (Gracie’s mom) via photopin cc
Quote: deeplifequotes via photopin cc
Transaction CarbonNYC via photopin cc
Arthur Piccio manages YouTheEntrepreneur and has managed content for major players in the online printing industry. He was previously BizSugar's contributor of the week. His work has appeared multiple times on The New York Times' You're the Boss Small Business Blog. He enjoys guitar maintenance and reading up on history and psychology in his spare time.