The marketing regulatory landscape is in an upheaval, consumers' attention is drawn by both national and international events, and the country's economic status is at best a mixed bag. Direct spoke with Scott Nelson, a vice president and analyst at Gartner Inc. about the challenges and opportunities facing marketers wishing to practice customer relationship management in 2004 and beyond. Nelson is responsible for research in the area of business applications, including CRM, enterprise resource planning and supply chain management. His focus is primarily on business applications strategies. Prior to joining Gartner, Nelson was vice president of strategic marketing services for marketing automation vendor Prime Response. Before that, he spent 14 years in financial services marketing and research.
DIRECT: With CRM, the rules regarding customer contact are somewhat more relaxed than with a straight prospect. What flexibility does this give CRM strategies?
NELSON: Consumers are cocooning more from the firms they are dealing with, which is a trend that goes against the whole concept of CRM. But increasingly they don't want to be called, they don't want to receive anything unsolicited in their mailbox or their e-mail inbox. It's really becoming an ‘I know you're out there, I'll call you if I have any need to contact you’ sort of thing. It has put the burden on firms to figure out if the communication really is going to have relevance to the customer. A good example is the automotive industry. If [an auto manufacturer] has a recall on your car, that is good communication. If there's a good deal on oil changes, that's iffy. [The challenge is] figuring out whether this warrants communicating with customers in their eye, or if this is going to weaken the relationship because it's viewed as intrusive.
DIRECT: What do you feel is the current level of sophistication of real-time information use?
NELSON: It's very low right now. Most companies don't have the capabilities in place, and those that do often haven't figured out how to use it effectively. I joke about a client who tried to do this in a call center. I asked him how it worked, and he said ‘Great, if I keep the customer on the phone for 45 minutes.’ The system just couldn't chug through it that fast. And even if you get it in place and it works fast enough, training the people involved or setting up the Web site, or whatever, to take advantage of that information is challenging. I think that's still going to be an emerging area. And the reason I think so is that companies that want to do CRM tend to get what they can do with real-time analytics as soon as you start to talk about it. It's one of the few concepts of CRM that gets their imagination clicking right away.
DIRECT: Which industries do you see having the largest need for tailored CRM solutions, and which are closest and furthest from having these needs met?
NELSON: The biggest screams we're hearing are in non-banking financial services, things like insurance brokerage, mutual funds. Those are starting to say, ‘We have as much sophistication as our commercial banking brethren, but we're not a commercial bank and we need something that reflects how we do business.’ Insurance, in particular, feels that CRM systems don't have a good fit with their claim-management systems. And to them, claims management is their most crucial CRM application, because that's really the product they deliver at the end of the day: handling a claim properly. They have separate claim-management systems, but they don't give them good opportunity to track the interactions with customers. They are followed by the healthcare industry, which is driven quite a bit by HIPAA, and some of the other legislation out there. They have no choice, they have to do things differently than many of their brethren and they feel that the solutions out there have not been up to speed. As far as good verticalization is concerned, I'd say the best [systems] are [in] commercial banking, because that's where everybody started with CRM.
DIRECT: What about utilities?
NELSON: A lot of the vendors have given up on utilities for the time being. The utilities kept showing interest, but never writing the check or anteing up any money. I think it's [due to] a number of things. One is the mindset they come from. They may be deregulated, but the reality is when you get down to day-to-day business they still pretty much run it the same way, so they don't feel the need. Furthermore, they are not sure if they are going to get acquired, or if they'll be acquiring.
DIRECT: Any thoughts regarding consumer attention or life cycle, especially in light of legislative restrictions on contact such as the do-not-call list?
NELSON: The customer may view that he is a customer over a longer period of time than a regulatory mandate might indicate. Automotive is a good example. Just because I bought a car a while ago and paid it off, I still might view that I am a customer of that company even though I had my service done somewhere else. That's going to put a burden on the databases to still identify that you're a customer, even when you're in the non-contact phase. But most marketers aren't going to worry about it in 2004. It's something they're going to grab hold of when it becomes a bigger problem, when customers who have fallen off the system come back, and marketers realize that they don't know who they are. A more short-term issue is that firms are grappling with the idea of how [to] figure out the value of a customer. A lot of firms have the view that all value is transactional and pretty much front-end loaded to the sale of a product. As long as that is the way of thinking, they are not going to have a lot of concern for the longer life cycle. I think financial service firms have been a lot further along in this for a while. Telecommunications firms, on the cellular side, especially with the number-portability act, are starting to think about how they can evaluate what a customer is worth over time and what it is worth to keep the customer.
DIRECT: Are marketers embracing analytics to the extent you'd like to see them doing so?
NELSON: I think they are, although it's not just a matter of doing the calculations. If you've got the algorithms and you've got the numbers, anybody with a spreadsheet can do it. The key really becomes knowledge. A good example of this is DirecTV. It figured out two years ago that the real determinant of profitability was if it kept a customer six months or not. Once it had that, it started doing some aggressive marketing campaigns around it. However, it has never gone back and revisited that. I don't believe [DirecTV] knows if six months is still the threshold point. It could have moved to eight months. It could be down to four. Firms run the risk of getting something as a rule of thumb and institutionalizing it, even if years later the information has fundamentally changed. I came out of the banking industry, and we always used to say a checking account wasn't profitable unless it had a $1,200 average balance in it. So I started asking around about that, because I had heard it all over the industry. It turned out that was from a Federal Reserve study done years before when interest rates were completely different. But the industry had accepted that as a rule of thumb. It depends on the industry, it depends on how fast conditions change. If you are in financial services, you need to be examining that almost all the time, because interest rates are volatile and cost structures change rather rapidly. If you are in consumer durables, it doesn't change that rapidly. I think the biggest hurdle is that analytics require at least some people involved in the process to have statistical training and understand what they are looking at. And there is a shortage of good analytic talent out there, especially in smaller markets. Some of these people have Ph.D.s in statistics, and they want $100,000. It's hard to staff a marketing department with people like that and still maintain your margin.
DIRECT: Has there been movement in analytics spending?
NELSON: Definitely. That was the one growth area during the economic downturn. There hasn't been as much activity in other areas because this downturn did clamp spending on CRM to virtually nothing. But we are now seeing a lot of budgets being approved for 2004 for firms starting to embark on these initiatives: analytics, personnel and technology. Within technology investment, we are seeing a resurgence of the idea that the best way to get a competitive edge is to write your own application, although not necessarily everything from the first line of code to the last. Especially in the Web services environment, there is some interest in buying up key modules and writing code around that. Some of that is IT departments trying to show their relevance to management so they don't get outsourced, but I also think it reflects more sophistication in the CRM arena.
DIRECT: What's the thinking for 2004 on the business-to-business CRM front?
NELSON: B-to-B is fragmenting into two sub-segments. There is pure B-to-B, what we have always thought of with big sales forces and things of that sort, and then there is the emergence of business-to-business-to-consumer, which is more the consumer packaged-goods model, in which I sell to a store, which turns around and sells to a consumer. Under traditional B-to-B, marketers have good relationships because they are highly invested in sales reps. Because of that, the key is going to be knowledge management. Marketers are extremely vulnerable to what's in the heads of their salesmen, and they are extremely vulnerable to the tendency of salesmen to leave and take their accounts with them. The emphasis there is going to be on institutionalizing what the top salespeople know, institutionalizing their relationship with their accounts, so that when a salesman leaves, or gets hit by a bus or retires, the company doesn't have to start all over with a customer. The other thing about B-to-B marketers is that they have to figure out how to become more multichannel. How to link the Web site, in particular, into the sales environment, so that maybe they have a sales relationship, but routine stuff they can do themselves online. In that case both information channels, the Web and the call center, have to be shared with the salesmen. If there's a problem with the relationship because the call center has received 10 calls in the last two days about the same problem at different ends of the entity they deal with, it's going to become more important to share that information.
DIRECT: In 2004, there will be a lot of competition for the consumer's attention, such as the potential of war, elections, and the Olympics. Do you think these will have any impact on marketing messages' ability to penetrate?
NELSON: They are valid as long as they affect consumer confidence. Things like a continuing war I think is valid. An election, if the country feels the election turns out to be a good thing, or they don't like the direction it goes, in, certainly can have an impact on that. I think at the end of the day, customers are going to go about their lives. What does distract them is if they lose confidence in the recovery, if they lose confidence in the long-term direction of the political arena, that's when they start to say, ‘Well, I'm not so sure if my job is secure, and therefore I am not going to spend money.’ The one interesting caveat I could see in the Olympics is that they do have an impact on national pride. If a country is having a very good Olympics, we might start to see consumer and business-to-business spending increase because of a general euphoria that says, ‘Things are pretty good, they are good in our country, we are in a recovery,’ and that will paint a positive light on things.
DIRECT: To conclude, then — what are the directional indicators that people should be watching out for?
NELSON: A big thing is hiring numbers in general. If we start to see signs that companies are hiring, that's going to positively affect consumer confidence. The flip side is that we're seeing the opposite. We're still going through rounds of reductions, which continue to badly affect confidence. I think we need to see hiring really pick up. I think a continuing-to-improve stock market is critical for that too, because it has the wealth effect and it causes people to feel more optimistic about the economy in general. If it starts to retrench, it's going to have people continuing to hunker down and it'll scare them. I think we need to avoid more financial scandals. We don't need more WorldComs and Enrons and things of that nature because that rattles the confidence greatly.
Analytics and the E-Marketer
Embracing real-time data analysis is key to identifying customer needs
The greatest rewards for marketers using electronic channels will go to those quickest to embrace real-time data analysis, according to Gartner's Scott Nelson. While data crunching when there is no time pressure is child's play, the hazard of losing an online customer's attention is significant — and nothing loses attention faster than an irrelevant offering.
“Offline, where I've got my customer database, I can do data mining against it, I can do trend analysis, I can do lookalike modeling or attrition modeling. I can do all that stuff to figure out what's important to my customer, how the customer relates to us, when is the most likely time that we're going to need to send a communication and what his next most-likely-to-buy is,” Nelson says.
“This allows a marketer to have a plan of attack. But what if the customer is online right now, and is starting to volunteer information that changes our perception of what's important? Say we didn't know about presence of children, and in the course of the conversation the customer not only makes reference to children but mentions that one of them is in college?
“Now we start to get some key pieces of information that may cause us to do something different. But we're going to have to do it in this session, because the odds are that information may not be valid the next time the customer contacts us.
“A better example is if a consumer is a wine drinker, and always tends to buy California Merlots when on a wine site. One day the consumer comes on and starts looking at imported sparkling white wines. A marketer has to do some analysis and figure out what's going on. Is the customer experimenting, trying something different? Is the customer buying a present for a friend? Or is this somebody else using his computer and the cookie is just fooling you?
“Answering those three questions will give you very different direction as to where to go. If you assume that because a customer is looking at sparkling white wines that the customer is now interested in those, and the next time he or she comes on you start offering information about sparkling whites, if indeed the customer was buying it as a gift for a friend, that's useless information if the customer wants to go back to California Merlots. Real-time burdens like that are going to become increasingly important.
“Regarding the consumer attention issue: I believe the whole battle over spam is going to be an even bigger issue this year, along with privacy and related issues. On the one hand, you've got a distracted consumer. On the other, the more you do to get their attention the more you are going to bring the wrath of government down on you over spam and privacy.”
— Richard H. Levey
