That investment resulted in an updated call center and new sales force automation tool. Although the CRM investments seemed to be airworthier, but it was not what the marketing needed. Kolas explained that they needed to identify which customers should be targeted for new service offerings, determine how to cross-sell/up-sell the most profitable mix of product offerings, and maximize return their marketing investments.
She clearly wanted to analyze customer behavior over time and have the ability to respond more quickly to detailed customer information for enhanced decision making. Johnson did not want to acknowledge that the CRM investments had any payback, so he looked to Davis, hoping he would steer the discussion toward new possibilities. Davis sensed the tension because this was not the first time that the ROI of Gist’s CRM initiative had been discussed, it was also apparent that CRM was a topic of confusion. He continued his presentation by telling “I was thinking about analytical CRM.
Your new enterprise data warehouse combined with analytical CRM solutions could improve the rate of your import marketing programs and the retention of your most profitable customers, significantly contributing to top-line growth. Telecommunications industry experienced significant market changes: an explosion in wireless service demand, deregulation, the elimination f European market barriers, and an ever-growing internet market. Consolidation replaced expansion as the industry practice, and trend of almost unlimited spending for new infrastructure had reversed.
Experts believed the United states and European telecommunications companies, burdened with about $700 billion in debt, would either default on or force lenders to restructure dampened enthusiasm by wall street, limited available capital for new entrants and negatively affected everything from customer service to spending on new technologies. As the number of telephone calls and the amount of data reanimated continued to rise, Customers demand lower prices. This resulted in modest revenue growth and a declining return on equity. According to Lehman Brothers, return on equity fell from 13. % in 1996 to 5. 9% in 2000. The industry found itself in the unenviable position of scrambling to keep up with a technological explosion while margins evaporated and the regulatory landscape changed. To thrive in this environment, telecommunication business needed to understand their customer’s present and future demand. A successful communications service provider would have to analyze detailed customer data o better understand why a particular demand existed and then proactively manage to better forecast what be demanded and they needed to meet that demand.
Customer Relationship Management (CRM), it is an organizational strategy to understand and influence customer behavior through continuous communication to improve customer acquisition, customer retention, and customer profitability. In 2002 the market for CRM-Oriented solutions was estimated to be $3. 6 billion, with a compound annual growth rate of 37% per recent analysis compiled from IDS and MAR data. As a framework for how genealogy-enabled solutions and vendors fit together, CRM solutions can be separated into two segments: Operational CRM and Analytical CRM.
Operational CRM: It will focus on collecting and managing customer interactions through the various touch points a firm uses for sales, service, and support. These touch points include direct sales the web, retail outlets, Tam’s, call centers, direct mail, e-mail, fax, etc.. , Analytical CRM: It helps companies gain greater knowledge of their customers through the analysis and modeling of detailed data. These data are collected from various customer interactions throughout the organization.
It also provides clear customer insight, enabling an organization to take action to strengthen its customer relationships and enhance profitability. The areas for best practices with CRM include customer acquisition, customer churn, revenue assurance, network optimization, and data warehousing. The best practices indicated that if multiple acquisition campaigns were run daily, the take rate averaged 6. 5% and analytical modeling improved the lift by more than 400%. Best practices also saw wireless-customer churn of only 16% and attrition rate approximately one-half the industry average of 29%.
It detected and moved fraud in fewer than three days, thus reducing the percentage of bad debts associated with fraud to 2% and the percentage of revenue lost to fraud to 1%. Operational CRM is typically only effective when combined with robust analysis and planning tools. Analytical tools enable managers to understand who the customers are recognize patterns and trends in those customers behavior and then craft communications tailored to individual customer needs.
Davis demonstrated the value in making Gist’s DEW combined with Attracted CRM solutions would enhance decision making, especially given the dynamic environment in which GIST completed. The proposal defined a business discovery as a statement of work between Attracted and GIST. The immediate payment for hardware and software for the Attracted CRM solution was $1 and $2,500,000 respectively. Annual maintenance and upgrade would be 12% of the list price for hardware and 18% of the list price for software. These charges would be billed at the end of each quarter.
Professional service’s immediate charge for the implementation was $1,000,000. The contract for an additional 20% of the original charge per year for consulting, to be billed monthly. The final issue the am needed to resolve was the appropriate time period for the analysis the team agreed that it would take several months for the hardware and software to be in place, and so a one-year time frame was unreasonably short. 1) What Cash outflow investment is required to initiate the proposed acquisition program?
Attracted is Data warehouse technology provider and Attracted proposed a data mart consolidation pilot program for GIST. Pilot program proposed consolidation of forty-five data marts into an Enterprise Data warehouse (DEW). Documented ROI for DEW implementation was 65% and these gave $27 million of savings in just one year. Total Consolidation to an DEW was extremely successful. And GIST could run the successful business partnership with Attracted for 3 years but in order to increase the revenue GIST need to increase top line revenue growth by customer acquisition and take DEW platform for analytical CRM.
Further, to calculate ROI and to make a business proposition, Cash outflow is required to initiate proposed program. General terminology of Cash outflow investment, its statement of payments make to business partners including employee, vendors, suppliers. Also it involves details about long-term assets, investment purchased and expenses paid. To give reference from current case, investment cash outflow includes, hardware cost $1 software cost $2,500,000 and professional service cost $ 1,000,000. The contract between GIST and Attracted had maintenance contract for 3 years.
Annual maintenance and upgrade price is 12% of list price for hardware and 18% of list price of software. And professional service paid monthly, includes 20% of original charge per year for consulting. If the GIST, shorten the length of contract then penalty is one quarters worth ongoing cost for hardware, software and maintenance. Depreciation basis comes around $5,000,000. Also need to include Customers to be added in 1 year as $2,990,000 and $249, 167 would be the 1/12 of the new customers, new customers added per campaign. If GIST is spending more money on customers campaign than calculated then $10,465,000.
GIST starting campaign in January that year till February next year so $42 per month and 12 month of sales and 12 campaign and 144 units for the entire year. The campaign Incremental revenue will be $690,690,000. Total Campaign incremental value is 40% $276,276,000 (yearly gross margin). 2) What sort of monthly Cash flows should GIST expect to realize from the new aerogram? GIST had $13 Million wireless accounts and they were expecting to grow those accounts by 5%. In order to acquire set goal, company would run monthly campaign for the new customers. Average monthly spending per customer would be $42.
Amount includes goods and services for the proposed campaign. As mentioned in Cash outflow investment professional service immediately charging $1 and further contract called for additional of original charge per year for the consulting and the amount paid monthly. Further mentioned in SOW, services specified for $30,000 and 15 days professional service at $2,000/ ay, paid monthly. Travel and living expenses, travel time from and to GIST locations to Attracted for its subcontractors also paid monthly by GIST on the basis of monthly invoice. 3) What is the expected ROI and payback?
Attracted offers analytical CRM package to GIST, it’s completely worth the investment. With the DEW and analytical CRM implementation, GIST needed to identify the Customers and target new service offerings and profitable mix of product offerings and make maximum returns from marketing investments. To note further, to gain expected ROI, organization should understand customer’s behavior and organization should work on customer’s retention and acquisition policies and strategies. Also organization should work in proper channel, with strategies and used technology solutions and associated skills and put forward a customer centric behavior.
Effective CRM components will result in maximum ROI. To calculate expected ROI organization needs better data, and analytical team as analytical calculations is important with information or better data. Now if we talk about payback, GIST never expected quick payback also they fear if analysis of ROI calculations takes more time then expected ROI is going o decent. After putting all the values in Base Cash flow and Cash outflow and calculating cash flow with CRM the expected ROI for the first year was 882% and for the second and third year were 1045% and 1056% respectively.
Payback period in capitol budgeting refers by Formula, Initial Investment / Average Annual Cash Flow for each year = 0. 00423 [($1 In order to calculate payback period, it’s a year where cumulative cash flow is positive. If we refer the Cash Flow statements, Cash flow values are positive $1 $1 , 242,480,900 and $1,053,305,592. In order to fix the company, and increase ROI and Payback Period, organization can make efforts decrease churn and start making different Customers base.
Also by making different categories for the wireless family plan, wireless configuration and also by making value based category for the Customers. Increase ROI can be achieved, by putting new cash flow for the categories. ROI would be 3626% for the 1st year, 3811% for the 2nd year and 3815% for the 3rd year. Also Payback Period WOUld be Initial Investment/ Average Annual Cash Flow for Each year 5,000,000 / 33994989. 98 = 0. 14 [(243,871 ] 4) How does the Team’s decision to utilize a three-year horizon affect the ROI? Eric Kolas, GIST vice president added that, CRM analytical package seems worthwhile investment.
In order to increase ROI needed to understand customer’s behavior and Customer’s should target for new service offerings, profitable products offerings. Also for the CRM analysis customers information to enhances decision making. GIST target Customers satisfaction and in order to reduce the churn organization’s decision making team should start focusing on marketing activities. Also Enterprise Data Warehousing (DEW) facilitates communication between customer and organization. As DEW provides single IEEE for the organizational data and easily improve organizational operations.
With the help of DEW, organization can create strategic and tactical plans for more profit and these could lead to increasing ROI. Once GIST changes Enterprise Data Warehouse Environment that will give better, faster, operational actions and customer communications. DEW includes, supply chain, demand chain, financial operations, business process management, e-commerce, industry- specific operations. In order to fixed the company, to increase the ROI for the next five years. Customer base needs segmentation and focus should be on marketing activities.
High-Value Customers Average monthly average $115 with 15% customer base; Medium value customers $30 with 70% customer base and low value customers 15% customer base with average monthly revenue of $25. Most Important point is take rate is 3. 50% with the cash flow. Revised Data with new Configuration Customer base 13,000,000 Growth target 5% Take rate for new offers 3. 50% Cost to contact one customer $4 Gross margin Tax rate 38% WAC Old configuration Annual growth target for customer base Customers lost to churn Projected lift in take rate Cost to contact one potential customer $5. 00 Average monthly spending per customer $42. Projected lift in average monthly spending 20% Also Difference for the Third Year and Five Year Also Old Cash Flow first year cash flow is: $(243,871,015) First year New Configuration Cash Flow is: $(430, 156,827) First Incremental Cash flow: – = Also Old Cash Flow second year cash flow is: $113,652,251 First Year New Configuration Cash Flow is: $(249,229,708) First Incremental Cash flow: – $362,881,959 Also Old cash Flow Third year cash flow is: First Year New Configuration Cash Flow is: $(261,691,1 93) First Incremental Cash flow: – 261 If consider ROI, first year 882%, second year 1043% and third year is 1056% and incremental ash flow $49,089,656, 94 and $96,620,517 in the three years. Also Total Revenue is increasing from first to second year $6,201 ,46800 to $6,255,358,200. ) How should the team incorporate its discussion of data reliability in to assessment? CRM should be viewed first and foremost as an organizational communications to improve customer acquisition, customer retention, and customer profitability. The CRM solution address the front office operational segment, marketing automation solutions from the hub of all customer understanding and communications planning, customer service and support solutions. There are two types of CRM operational CRM and analytical CRM, The proposed Attracted solution for the GIST is analytical CRM. It helps the company to gain greater knowledge of their customers through the analysis and modeling of detailed data.
These data are collected from the various customer interactions throughout the organization, it also provides clear customer insight, enabling an organization to take action to strengthen its customer relationships and enhance profitability, detailed data is leveraged via analytical modeling, thus enabling an organization to proactively serve its customers by adapting to change as well as improving the effectiveness and efficiency of operational CRM solutions. The effective CRM program will result in maximum ROI only with better data. The Dearest’s review of Gist’s five-year strategic plan discovered a growth target for a portion of its customer base. Specifically, GIST management believed the company s 13 million wireless accounts should grow by 5% per year and in an attempt to reach that goal, the company would run monthly campaigns to acquire new customers.
One of these targeted acquisition campaigns involved an analysis of Gist’s customer base to create a prospect list of parents of men’s between 15 and 17 years old by offering a special package on a prepaid wireless phone. The purpose for designing and executing all campaigns was the same, regardless of the individual offers details. It began with analysis and segmentation of targeted prospects for increased probability of acceptance. A personalized offer was then extended through single or multiple channels, such as direct mail, telemarketers, and e-mail. The results were tracked for continued knowledge of customer and prospects. Gist’s past experience showed that the cost of contacting a single potential new customer was $5.
Approximately 3% f the potential customers contacted became new customers. The average monthly spending by a customer in the targeted group was $42 for the goods and services included in the proposed campaign offer. In order for GIST to grow by 5% per year, it would have to replace any customer lost to churn throughout the year. GIST had one of the lowest churn rates in the industry at only 18% per year. Therefore, in order to increase the customer base by 5%, GIST would need to increase new customers by about 23% each year. And with better data, firms could target customers likely to spend more per month than the average customer. The average customer spending may be increased to 10 to 32%.
It also might attract customers with increased spending habits, the completion for these customers would be intense, and projected revenue for new customers beyond one year should be highly discounted. The Attracted can also provide the customers with detailed offer plans which they are eligible. 6) Why might using a high hurdle rate for risky investments be a good idea? Why might it be a bad idea? The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, the riskier he project, the higher the hurdle rate. In the present project the investment for CRM is The Net Present Value (NP) with no CRM is The estimated NP with CRM is $130,866,658.
Here the Internal Rate of Return for first year is 882% and for second year is 1043% and for third year is 1056% so there is less hurdle rate for implementing CRM for GIST. So it is a good idea to implement CRM in order increase the customer satisfaction. Here is the detailed investment of CRM for GIST. The CRM implementation costs at GIST are the immediate payment for hardware and software is $1 , 500,000 and $2,500,000 respectively. Annual maintenance and upgrades would be of the list price for hardware and 18% of the list price for software. These charges would be billed at the end of each quarter. The professional service immediate charge for the implementation was $1 The contract called for an additional of the original charge per year for consulting, to be billed monthly.
The contract between GIST and Attracted called for an initial commitment of three years for consulting and hardware and software maintenance. GIST could shorten or lengthen the contract at its direction. The penalty for shortening the contract was a payment equal to en quarter’s worth of the ongoing costs for hardware, software, and consulting. The contract would be extended for a maximum of one year at the same rate quoted in the original contract. The total software, hardware and professional service costs will be when implementation, the estimated ROI with the CRM implementation is 882% for first year, 1043% for second year and 1056% for third year, if the project would be success full they will get their invested money in short run of time.
The business environment should change according to the customer needs so that they should always implement a new solution for he problems facing by the customers and they should always provide a good customer service. Sometimes risky investments will be a good idea, if they are moving with a good plan in implementing the systems for customer problems. 7) Should Kolas and Johnson adopt Dearest’s proposed acquisition solution? In the proposed plan of Attracted solution with CRM for GIST they have concentrated on three aspects they are communications management, front office analytical and marketing, the resulted best practices would be on several elements within the CRM space.
These areas include customer acquisition, customer churn, venue assurance, network optimization, and data warehousing. In telephone industry customer acquisition programs typically occurred monthly, had taken about a 3% take rate and usually were not based on analytical modeling. If multiple acquisition campaigns were run daily, the take rate averaged 6. 5 %, and analytical modeling improved the lift by more than 400%. Best practices saw wireless customer churn of only 16%, an attrition rate approximately one- half the industry average of 29%. For long distance, the industry average was 25% annually, while best practice only lost 20% per year. Customer churn for able averaged 28%, for firm demonstrating best practice, that figure dropped to 7. 3%.
On average, the industry lost more than 5% of revenue to fraud, and companies took 90 to 120 days to detect and remove fraud. In addition, fraud constituted about 15% of bad debts. On the other hand, detected and removed fraud in fewer than three days, thus reducing the percentage of bad debts associated with fraud to 2% and the percentage of revenue lost to fraud to 1%. Similar savings could be seen with best practices for management of operational assets. The industry examined monthly data trends, generated monthly engineering reports and received fifty to one hundred customer complaints per day. Best practice firms in the industry produced daily data trends and daily engineering reports and received fewer than two customer complaints per day.
Finally, considering the industry’s use of data warehouses, on average, one to two operations were supported, with fewer than twenty end users and fewer than ten applications. Firms that fully exploited their warehouses, however, typically handled more than 10,000 end users and ran more than one hundred applications. In order to get benefits from all the best practices and also to roved best customer service and acquire more customers, Kolas and Johnson should adopt Dearest’s proposed acquisition solution. 8) Are there any other factors Johnson and Kolas should consider prior to making their decision? The other alternate option that Kolas and Johnson has is acquisition of customers by the lifetime value (LTV) distribution of existing wireless customers.
GIST has a three range of customers they are Customer ‘A’ who has an expected LTV of $1 k, customer ‘B’ has an expected LTV of $800 and other is customer ‘C’ who is unprofitable who pays late. 18% of customer’s who are named as customer ‘A’ ill make up 50% of total portfolio value of LTV, and other 76. 8% of customer’s who are named as customer ‘B’ will make up other 50% of total portfolio value of LTV and remaining 5. 2% of customers are named as customer ‘C’ there are no profits from these customers. Lifetime value distribution is also known as Net Present Value. If they implement this option which they will have growth of current customers but they will not concentrate on current customers, this also results in retention of customers.
Retention of customers indicates leverage detailed data/analytical modeling/event triggers to predict who is keel to discontinue use of service. This also indicates the timely and specific offers that are available for the existing customers which is a part of CRM. By implementing this they will increase the save rate based up on the current NP. And a small percent of improvement in attrition yields big returns. But if they implement the Dearest’s proposed acquisition plan they can also implement the LTV distribution of existing customer’s method with the amount gained by implementing the CRM. And also acquisitions of new customers are also possible if they implement the CRM.
