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There was a lively discussion at Digital Cream in Chicago on October 24 during the multichannel session about why EVERYONE doesn’t leap on bandwagon and develop a customer database that can be used meaningfully for lead nurturing, customer acquisition and retention.
One of the participants at Digital Cream noted that businesses invest where they can get a return for their dollar and those businesses making these investments in a customer database must see the returns. However large the benefits of customer information systems (CIS), it is true that other factors contribute to profitability.
For example, depending on how good your company is at New Product Development (NPD), 25 to 49% of company profits typically come from new product development efforts. Winning new products typically pay off very quickly and their average ROI is over 96%. So a CIS project, with its long development and implementation cycle, must compete for company resources and attention.
One of the things I have been studying in my academic research in the area of customer information management. We surveyed 206 firms and overall we found a definite relationship between the ability to manage customer information well and company performance.
To figure out if companies are more successful by managing customer information well, we created a thirty-item survey that measures the company’s overall database capability, over data quality, the type of information collected and the ability to share and disseminate information in the organization and create knowledge about the customer. We called this measure the CIS or measure of the capabilities of the customer information system. We then looked at the relationship between this CIS variable and reported company performance. We looked at both the customer performance, such as increased share of wallet, CLV, etc. and business unit performance, or growth in sales and net income.
It turns out, the CIS itself is not related to business growth BUT is positively related to customer performance, which in turn is related to growth. So companies need to pay attention to customer metrics because those lead to business growth. And since companies cannot measure customer metrics without a good company database, for the ability to measure alone, firms should collect customer information in their company databases.
We also discovered something interesting in that most of the relationships between the CIS and customer performance came from companies following a particular strategic emphasis. We measured whether companies were pursuing a Low-Cost or Differentiation strategy and created a Strategically Excellent (SE) category for those pursing the “Both” strategy of operational excellence and differentiation in the minds of the customer.
The benefits of pursuing a sophisticated customer information system
In that category (SE) the true benefits of the CIS are realized. Those companies with an SE strategy that were pursuing a sophisticated CIS were able to reap performance benefits for their firms and most of the relationship between CIS and performance comes from the SE firm. Also, firms in these B2B services categories pursuing either the SE or pure Differentiation strategy had better performance than firms in other categories.
Overall, the impact of strategy selection on customer performance was nearly three times that of the CIS, confirming what many business managers know already. That strategy should drive information systems development and not the other way around.
That said, the impact of the CIS on customer performance variables is about 5%; managing customer information well explains about 5% of the variability in the customer performance data in our sample. Getting a five percent increase measures like share of wallet, customer retention and customer lifetime value is important but must be understood in the context of other choices for firm investment. And again, the real benefit of the CIS may be the ability to measure performance from a marketing point of view.
So as our participants noted at Digital Cream, companies will invest in CIS if in their particular firm they perceive a real benefit. Someone pursuing a pure Low-Cost strategy may not need a fully developed customer database. Firms in services industries such as those studied in our research, may reap more benefits from the CIS than firms in other industries. It is up to the firm to decide where to make its investments and we as Marketers to help them make that choice.