Preface

In 1993 we published our first book, The One to One Future: Building Relationships One Customer at a Time (New York: Currency/Doubleday). We had no way of knowing how or when ubiquitous, cost-efficient interactivity would arrive, but the march of technology was inevitable, and we felt strongly that genuinely interactive media channels would become widely available sooner or later, in one form or another. And when interactivity did arrive, we suggested, the nature of marketing would have to change forever. At the time, marketing consisted primarily of crafting outbound messages creative or noticeable enough to break through the clutter of other one-way messages. These messages promoted standardized, mass-produced products with unique selling propositions that appealed to the most commonly held interests among the widest possible markets of consumers.

In sharp contrast to this model of marketing, we maintained that interactive technologies would compel businesses to try to build relationships with individual customers, one customer at a time. To our minds, this new type of marketing—which we dubbed “one-to-one marketing,” or “1to1 marketing”—represented literally a different dimension of competition. We predicted that in the one-to-one future, the battle for market share would be supplemented by a battle for “share of customer”; product management organizations would have to be altered to accommodate managing individual customer relationships as well; and the decreasing returns of production economics would be supplanted by increasing returns of relationship economics.

We did not know it at the time, but also in 1993, the first genuinely useful Web browser, Mosaic, was introduced, and by the end of 1994, the World Wide Web had begun making major inroads into business and academia. This meant that interactivity arrived even sooner than we had suspected it would, via a more robust, vibrant technology than we anticipated. But over the next 10 years, our predictions about the nature of marketing in an interactive world proved uncannily accurate, and we were gratified at the popularity our little book enjoyed among the many marketers and information-technology professionals wrestling with the question of how, exactly, to use this new capability for interacting with their customers on the Web. The term “one-to-one marketing” was often used interchangeably with the easier-to-say computer-industry acronym “CRM,” standing for “customer relationship management.” Some think of CRM as a reference only to the software, but from our standpoint, the 1to1 rose smells as sweet by any other jargon.

By the time the first edition of Managing Customer Relationships was written, 10 years later, many other academics, business consultants, and authorities had become involved in analyzing, understanding, and profiting from the CRM revolution. Our goal with the first edition was to provide a comprehensive overview of the background, the methodology, and the particulars of managing customer relationships for competitive advantage. Although we have significantly updated the material in this second edition, we believe this general approach has in fact been confirmed. So we will begin with background and history, move through an overview of relationship theory, outline the Identify-Differentiate-Interact-Customize (IDIC) framework, and then address metrics, data management, and customer management and company organization.

Since our first edition of that first book came out, the steady march of technology has continued to change the business environment, bringing us two particularly important developments, each of which requires some treatment in this new edition. One has to do with the increasing influence of social media—including everything from blogging and microblogging, to sharing and collaboration Web sites such as Facebook, MySpace, LinkedIn, YouTube, and Flickr. The other has to do with the increasing proliferation of mobile devices and interactive services for them, including not just broadband Wi-Fi at places like business hotels, Starbucks, and McDonald’s, but smart phones that can surf the Web, keep your calendar, deliver movies, and track your location, as well.

Over the last few years, there has also been a major change in the way businesses think about the process of value creation itself, given their new technological capabilities to track and interact with customers, one at a time. Increasingly, companies are coming face-to-face with the question of how to optimize their businesses around individual customers. When you think about it, this is the very central issue when configuring a Web site, or when trying to design the work processes or scripting for a call center, or when outlining new procedures for sales reps or point-of-sale operations. Each of these tasks involves optimizing around a customer, and none of them can be completed adequately without answering the question, “What is the right communication or offer for this customer, at this time?”

But a business can answer this kind of question accurately only by disregarding its existing, product-based metrics and using customer-based metrics instead. This is because the fundamental issue at stake is how to maximize the value a particular customer creates for the enterprise, a task that contrasts sharply with the financial objective of the old form of marketing (mass marketing), which was maximizing the value that a particular product or brand created for the enterprise. So we have considerably upgraded the financial issues we consider in the metrics discussion in this edition of Managing Customer Relationships.

Among other things, we will suggest that a new metric, Return on CustomerSM, is more appropriate for gauging the degree to which a particular customer or group of customers is generating value for a business. Return on investment (ROI) measures the efficiency with which a business employs its capital to create value, and Return on Customer (ROC) is designed to measure the efficiency with which it employs its customers to create value. The ROC metric is simple to understand, in principle, but it requires a sophisticated approach to comprehending and analyzing customer lifetime values and customer equity. With the computer analytics available today, however, this is no longer an insurmountable or even a particularly expensive task. And this kind of customer-based financial metric will ensure that a company properly uses customer value as the basis for executive decisions.1

In the years since the first edition of this book was released, we have continued to teach seminars and workshops at universities and in for-profit and nonprofit organizations, and we have collaborated in depth with our own firm’s working consultants in various Peppers & Rogers Group offices around the world, from São Paulo to Dubai, and from London to Johannesburg. We have wrestled with the serious, real-world business problems of taking a customer-centric approach to business in all different business categories, from telecom, financial services, and retailing, to packaged goods, pharmaceuticals, and business to business. Over the years, our experience in all these categories has reinforced our belief that the basic IDIC model for thinking about customer relationships is valid, practical, and useful, and that financial metrics based on customer value make the most sense. And, over the years, we have continued documenting these issues, coauthoring a total of seven additional business trade books, in addition to this textbook, with another one on the way.

While we obviously know more about our own work than anyone else’s, and this book draws heavily on our fairly extensive direct experience in the work environment, we also continue to believe that a textbook like this should reflect some of the excellent work done by others, which is substantial. So, as with the first edition, you will find much in this edition that is excerpted from others’ works or written by others specifically for this textbook.

When it appeared in 2004, Managing Customer Relationships was the first book designed specifically to help the pedagogy of customer relationship management, with an emphasis on customer strategies and building customer value. It is because of the wonderful feedback we have had over the years with respect to its usefulness for professors and students that we have undertaken this revised edition. And, while we hope this revised work will continue to guide and teach our readers, we also encourage our readers to continue to teach us. Our goal is not just to build the most useful learning tool available on the subject but to continue improving it as well. To that end, you may always contact us directly with suggestions, comments, critiques, and ideas. Simply e-mail [email protected].

How to Use This Book

The contents pages provide not only a guide to the chapter topics but also a listing of the contributions and contributors who have shared their insights, findings, and ideas.

Each chapter begins with an overview and closes with a summary (which is really more about how the chapter ties into the next chapter), Food for Thought (a series of discussion questions), and a glossary. In addition, chapters include these elements:

• Glossary terms are printed in boldface the first time they appear in a chapter, and their definitions are located at the end of that chapter. All of the glossary terms are included in the index, for a broader reference of usage in the book.
• Sidebars provide supplemental discussions and real-world examples of chapter concepts and ideas.
• Contributed material is indicated by a shaded background, with contributor names and affiliations appearing at the beginning of each contribution.

We anticipate that this book will be used in one of two ways: Some readers will start at the beginning and read it through to the end. Others will keep it on hand and use it as a reference book. For both readers, we have tried to make sure the index is useful for searching by names of people and companies as well as terms, acronyms, and concepts.

If you have suggestions about how readers can use this book, please share those at [email protected].

Acknowledgments

We started the research and planning for the first edition of this book in 2001. Our goal was to provide a handbook/textbook for students of the customer-centric movement to focus companies on customers and to build the value of an enterprise by building the value of the customer base. We have made many friends along the way and have had some interesting debates. We can only begin to scratch the surface in naming those who have touched the current revision of this book and helped to shape it into a tool we hope our readers will find useful.

We are honored to be contributing all royalties and proceeds from the sale of this book to Duke University, where Martha serves as an adjunct professor.

Thanks to Dr. Julie Edell Britton, who team-taught the Managing Customer Value course at Duke with Martha for many years, and to Rick Staelin, who has always supported the work toward this textbook in both editions and the development of this field. Additional thanks to all of the marketing faculty members at Duke, especially Christine Moorman, Wagner Kamakura, Carl Mela, and Dan Ariely, and all those who have used and promoted the book and its topics.

The voices of the many contributors who have shared their viewpoints have helped to make this book what it is; and you will see their names listed on the contents pages and throughout the text. We thank each of you for taking the time to participate in this project and to share your views and insights with students, professors, and other users of this book. And, as big as this book is, it is not big enough to include formally all the great thinking and contributions of the many academicians and practitioners who wrestle with deeper understanding of how to make companies more successful by serving customers better. We thank all of you too, as well as all those at dozens of universities who have used the first edition of the book to teach courses, and all those who have used the book as a reference work to try to make the world a better marketplace. Please keep us posted on your work!

This work has been greatly strengthened by the critiques from some of the most knowledgeable minds in this field, who took the time to review the book in both editions and share their insights and suggestions with us. This is an enormous undertaking and a huge professional favor, and we owe great thanks to Becky Carroll at Petra Consulting; Jeff Gilleland at SAS; Mary Jo Bitner and James Ward at Arizona State; Ray Burke at Indiana; Anthony Davidson at NYU; Susan Geib at MSUM; Rashi Glazer at U.C. Berkeley; Jim Karrh at Karrh & Associates; Neil Lichtman at NYU; Charlotte Mason at UGA; Janis McFaul; Ralph Oliva at Penn State; Phil Pfeifer and Marian Moore at UVA; David Reibstein at Wharton; and Jag Sheth at Emory. Thanks to John Deighton, Jon Anton, Devavrat Purohit, and Preyas Desai for additional contributions, and we also appreciate the support and input from Mary Gros and Corinna Gilbert at Teradata. And thanks to Maureen Morrin and to Eric~Greenberg at Rutgers, who have contributed to the Web site supporting this book, and to John Westman, General Manager of Critical Care, NxStage Medical, Inc., and adjunct professor of the Boston College Carroll School of Management.

Much of this work has been based on the experiences and learning we have gleaned from our clients and the audiences we have been privileged to encounter in our work with Peppers & Rogers Group. Dozens and dozens of the talented folks who have been PRGers over the past years have contributed to our thinking—many more than the ones whose bylines appear on contributions in the book, and more than we are able to list here. Our clients, our consulting partners and consultants, and our analysts are the ones who demonstrate every day that building a customer-centric company is difficult but doable and worthwhile financially. Special thanks go to Hamit Hamutcu, Orkun Oguz, Caglar Gogus, Mounir Ariss, Ozan Bayulgen, Amine Jabali, and Onder Oguzhan for their thinking and support. We also thank Tulay Idil, Bengu Gun, and Aysegul Kuyumcu for research. And to Thomas Schmalzl, Annette Webb, Mila D’Antonio, Elizabeth Glagowski, Jessica Bower, Jennifer Makris, and Ginger Conlon of the 1to1 Media team, our gratitude for a million things and for putting up with us generally. We also appreciate the work Tom Lacki has done toward this book and our thinking. Special additional thanks for ideas in the original edition that have survived to this version to Elizabeth Stewart, Tom Shimko, Tom Niehaus, Abby Wheeler, Lisa Hayford-Goodmaster, Lisa Regelman, and many other Peppers & Rogers Group alumni as well as winners of the 1to1 Impact Awards and PRG/1to1 Customer Champions, who are best in class at customer value building.

Plain and simple, we could not have gotten this book done without the leadership and project management of Marji Chimes, the talented and intrepid leader of 1to1 Media and an integral part of the success of Peppers & Rogers Group, or the dedicated day-to-day help from Susan Tocco. Thanks to you both. And the real secret sauce to finishing the many details has been Amanda Rooker—a truly resourceful researcher and relentlessly encouraging and gifted content editor, who has patiently and capably assisted in winding us through the morass of minutiae generated by a project of this scope.

Our editor at John Wiley & Sons, Sheck Cho, has been an enthusiastic supporter of and guide for the project since day one. As always, thanks to our literary agent, Rafe Sagalyn, for his insight and patience.

We thank the many professors and instructors who are teaching the first Customer Strategy or CRM course at their schools and who have shared their course syllabi. By so doing, they have helped us shape what we hope will be a useful book for them, their students, and all our readers who need a ready reference as we all continue the journey toward building stronger, more profitable, and more successful organizations by focusing on growing the value of every customer.

DON PEPPERS AND MARTHA ROGERS, Ph.D.
2011

1Return on CustomerSM and ROCSM are trademarks of Peppers & Rogers Group.