CRM Economics 101

An examination of theory and the bottom line

Economic and management theory teaches us to examine options with relative scientific objectivity to determine the most efficient and profitable processes to increase revenue. Simply put, we look for the quickest and most effective way to make a profit.

What does economic and management theory teach us about CRM? In 1959 Frederick Herzberg, a psychologist, found that job satisfaction and job dissatisfaction acted independently of each other. The theory states that there are certain factors in the workplace that causes job satisfaction, while a separate set of factors cause dissatisfaction. The factors that cause job satisfaction are called motivating factors while the factors that cause dissatisfaction are called hygienic factors. Basically put, motivational factors tend to increase job satisfaction. Hygienic factors are necessary to prevent dissatisfaction, but only serve to de-motivate job satisfaction if these factors are not present.

If we relate this theory to CRM we can safely state that hygienic factors are those things that the customer expects whenever they purchase your goods or services; the phone is answered in a timely fashion, the bathrooms are clean, orders are fulfilled correctly, and the many things customers simply expect from your company every time they interact with you. Motivational factors can further be defined (in relation to CRM) as those factors that increase your sales; lowering your price, customer loyalty rewards, holiday specials, and so forth.

In economic theory, the law of demand states that, in general, price and quantity demanded in a given market are inversely related. In other words, the higher the price of a product, the less of it people would be able and willing to buy of it (other things unchanged). As the price of a commodity rises, overall purchasing power decreases (the income effect) and consumers move toward relatively less expensive goods (the substitution effect). Other factors can also affect demand; for example and increase in income will shift the demand curve outward relative to the origin (increased demand leads to increased prices and vice versa).

So we can say that customers have a certain level of expectations (hygienic factors) and are enticed to purchase our goods and services through sales, marketing, and other factors (motivational and economic factors). In other words, the customer is very complex. It is rarely only about price (unless you have a homogeneous product/service with an abundance of substitutes and a perfectly inelastic supply curve). Customers expect a certain level of service to accompany their purchasing experience. The key item here is what kind of experience, how much service, and what and how often they purchase.

So how can CRM provide us with the insight into our customer to determine the best methods to make more money? It's all about history. The ability to track your customer and review what they have done in the past can give your insight into their new buying behaviors. Why is this important? The ability to review and analyze past behaviors and purchases allow you the ability to do two very important things: 1) ensure you have resources (product and labor) at the right place and the right time in anticipation of demand for your goods and services. 2) Analyzing and trending information to predict future buying patterns.

CRM allows you to track a multitude of information about your customer, including personal information that allows you to build upon your existing relationship. It also ensures that your customer receives a level of service commiserate with their purchasing power by everyone who accesses your CRM. Most importantly, CRM is an essential tool (more so in a sluggish economy) that enables you to do what you do best - offer your goods and services at a price the market will bear.