Recently, I joined a new Google Group called Social CRM Pioneers created by two Altimeter partners Jeremiah Owyang and Ray Wang. There have been very interesting conversations about social CRM, what it is, what it can do, and the issues to be addressed in the area. Around the same time, these same individuals released an open report on 18 use cases of social CRM, a comprehensive analysis of how social CRM can be used in an enterprise environment (see figure below for the 18 uses). In less than a week, the report has been viewed over 15,000 times, showing the amount of interest in this topic. In this blog, I would like to offer a primer on social CRM (or sCRM for short) and discuss the opportunities and currently unresolved challenges associated with implementing sCRM in practice.

What is Social CRM?

Let’s start with what CRM or Customer Relationship Management is. CRM involves the management and enhancement of customer relationships with the help of a large quantity of data about individual customers and a set of tools to interpret and make use of such data. Putting a “social” hat on CRM, to me, it means to use information and communication/interaction in social media to enrich traditional CRM practices as described above. In other words, social CRM merges social media with traditional CRM, both to create a more 360-degree view of the customers and to interact with customers in a more proactive and engaging fashion.

What are the Benefits/Opportunities Presented by Social CRM?

Social CRM brings a slew of opportunities to enrich traditional CRM practices, as discussed in the 18 use cases report. I discuss only a few here:

1. A more complete view of your customers via what they say in social media. This is important because customers’ conversations with others in a naturalistic social media environment are more likely to reveal their true preference and opinions than self-reported data. Instead of forcing opinions out of consumers, consumers are volunteering all this information to companies who are willing to listen. This can be very helpful when it comes to offering support to customers, discovering new product opportunities, identifying brand advocates, etc.

2. Faster collection of information. Traditional feedback through the distribution channel is simply too slow in today’s environment, where consumers are fickle and their preferences are changing faster than ever. One advantage of social CRM is that it deals with real-time data. As a result, companies can gauge quickly how consumers are reacting to a marketing campaign, what they think of a newly announced product, etc. Using this year’s Oscar as an example, Jeff Bridges and Sandra Bullock could have predicted their own winning a week early if they had tallied up their online buzz in the social sphere like Nielsen did.

3. Faster support and response time to customers. Let’s face it, the Internet makes us an impatient generation. When we run into problems, we want them solved immediately. This is where social media can help a lot. It’s not uncommon to hear anecdotal evidence of consumers receiving laser-speed response from companies when they complain about problems in social media. My own experience with Delta Airlines is an example. When I twittered one day about some statement confusion, overnight I received an email from them addressing the issue. That is what I call a wonderful/well-managed customer experience.

4. Engaging Customers. Through better and faster understanding of customers and faster response time, social CRM can provide a more engaging experience to customers. As I discussed in another post about ING Direct’s social media practice, the company successfully uses a blog, Facebook fan page, and a Twitter account to engage a large number of frugal savers. As the Top 100 Brand Engagement Report shows, effective engagement with customers is correlated with financial measures, suggesting social media’s potential to affect companies’ bottom line.

What Are the Challenges?

As something still in development, there are plenty of challenges that can prevent effective social CRM implementation. Among them, I see the biggest obstacles as:

Scalability. As the 18 use cases report points out, 1:1 support is simply not doable for most B2C companies. How can a company enhance customer experience through social media but still remain scalable and cost-effective with its operations? This is definitely something that has to be addressed. Of course, there are automated tools to help streamline this process, but technical tools can only go so far. Eventually when it comes to facing individual customers, who do you listen to and talk to? Whose problems do you solve first? These will require smart prioritization and proper organizational structure to allow for agile response and operation.

Churning Data into Information. Data mining is not a simple science. Added to this the large quantity of real-time data available through social media, the challenges associated with mining social data for information becomes even greater. Scientists around the world are still working on efficient algorithms to make this happen, but the techniques are still nowhere near maturity yet. For those interested, a look at this INFORMS OR/MS Today article on social media analytics may offer some clues as to the challenges associated with (and potential solutions to) analyzing/mining one type of social media data — blogs.

ROI. This is something on everyone’s mind, isn’t it?  Earlier, I mentioned that brand engagement with consumers is correlated with financial performance. Note the words used — “is correlated with”, not “leads to”. In other words, the causal effect is less straightforward. How to measure return from social CRM efforts likely will depend on the goal of the deployment, and a single engagement measure is not going to be sufficient. Moreover, while Dell Outlet was able to pinpoint $3 million incremental revenue from its Twitter presence, for many companies, it won’t be straightforward to isolate the impact of social CRM from other strategies.

I hope you find this discussion helpful in getting you started on social CRM. If you want to dig deeper, I strongly recommend you to download and read the 18 social CRM use cases report, and join in the conversation at the Social CRM Pioneers Group.

At the INFORMS Marketing Science 2009 Conference, I presented my current research project on the effects of loyalty program expiration policy change.  For those who missed the conference, here’s a summary of what I presented. I have also included the summary of the other two research projects that were presented during the same session.

Shortening Loyalty Program Expiration Period May Not Be Bad

One of the headaches companies running loyalty programs have is the liability associated with unredeemed points in program members’ accounts. One way of reducing such liabilities is to shorten the expiration period associated with program points, as major US airlines did in 2007. However, it is possible for such a policy change to alienate existing customers. To see whether this is the case, my co-author and I analyzed data from a convenience store chain that has switched from a no-expiration policy to a monthly expiration policy. To our surprise, we found that, participation in the program has actually increased significantly since the program change. Overall in-store sales have also increased, while fuel sales remained unchanged. What we plan to do next is to see how individual consumers have adjusted their purchase behavior in reaction to the policy change. We suspect that the addition of an expiration policy imposes what we call an “expiration pressure” on consumers, as consumers are pressured into making more purchases to reach a reward threshold before the points expire. However, different consumers (e.g., those with different patronage levels) will experience the pressure differently. I’ll report more findings when we are further along with the project. For now, you can download the presentation slides. We welcome any feedback or comments you may have.

Two other researchers also presented their projects on loyalty program and customer relationship management in the same session. As these are also relevant to loyalty managers, I am summarizing them below:

Loyalty Program Increases Share of Wallet by 10%

Martin Boehm from IE Business School presented his co-authored research project on the effect of loyalty program membership on consumers’ share of wallet at an European supermarket chain. By looking at a consumer panel’s behavior before and after loyalty program enrollment, they show that the loyalty program increased share of wallet by 10%.  This lift is negatively correlated with a consumer’s original share of wallet before the program enrollment. In other words, those with a high share of wallet exprienced minimal lift, whereas those with a low share of wallet experienced the highest lift. These results echo my earlier research findings showing a similar pattern. However, their research better controls for self-selection bias (i.e., better customers are more likely to enroll in loyalty programs) and therefore provides an even stronger argument for loyalty program impact.

Email and Mail Are More Effective Customer Contact Channels…

At least in the context of auto dealership’s services. Using data from an auto dealership, Andrea Godfrey at University of California at Riverside and her co-authors compared the effectiveness of phone, mail, and email customer contact in increasing sales (in this case, service revenue).  They found that mails and emails were similarly effective in increasing sales, while phone contact was the least effective. The effects of mails and emails were both curvilinear, meaning that the effects of those contacts reach maximum after a few times and then drop after the threshold. Not surprisingly, the exact effectiveness of each contact channel on individual consumers also depends on the consumers’ channel preference.  I hope these findings will help eliminate a few annoying dinner disruptions and result in less waste of papers. But I am not so sure I like the prospect of receiving more emails either. Hmm…

Questions or comments?  If you have any questions regarding any of these research projects that I have summarized here, please feel free to let me know, and I’d be happy to answer your question or forward your question to the right author.

This is a true business tale that I heard a while back.  A Japanese firm did not do very well one year and could not afford to give employees bonuses at the end of the year.  The management thought of a clever way to reduce dissatisfaction among employees.  First, news leaked out that there would be no end-of-the-year bonuses, and everyone started complaining.  Soon it became known that the situation was worse and that not only there would be no yearly bonuses but there would be no regular yearly salary raises for next year.  Later, another rumor broke out that the situation was even worse and that some people might have to be laid off to reduce cost.  Can you imagine the employees’ reactions when the management finally announced that there simply would be no bonuses but yearly salary increases would still happen next year?  Everyone was very relieved and happy!  Why?  Because after the three rounds of “rumors”, the employees were expecting much worse and were relieved to find that not only were they not going to lose their job but they would actually get a raise next year.

While I would not encourage manipulating employees’ mind like this, the story does demonstrate the power of expectations.  In other words, as human beings, we do not perceive things in absolute terms.  Rather, we interpret them in a relative light according to our expectations.  Thus, when our expectations vary, how we feel about a situation can be interpreted and accepted under completely different lights. If we expect a full glass, we see half a glass as half-empty. But if we expect an empty glass, we see half a glass as half-full.

This aspect of human psychology has important implications for customer relationship management.  When dealing with customers, firms need to be aware that not only is it necessary to provide superior service but it is also important to manage what customers expect to receive from the firm.  For example, while it may be temporarily beneficial for a firm to pamper its best customers, such a tactic may also increase the expectation of these customers such that they can become easily disappointed.

To use a more concrete case to illustrate this point, consider airlines’ frequent flyer programs.  Most of these programs are structured in tiers, such that consumers who fly over a certain number of miles per year are granted higher status and receive special treatments and privileges.  This special treatment aspect is considered an important feature of a loyalty program (see this Colloquy article on the soft side of loyalty). While I acknowledge the usefulness of this tiered structure, firms do need to carefully balance the potential gain in loyalty via such a structure and the potential loss that can happen in setting up consumers’ expectations too high and subsequently disappoint them and lose their hard-earned loyalty.

I would like to conclude this discussion with another true story that actually happened to me personally.  In my recent trip to Seattle, I flew for the first time as a Silver Medallion member of Delta Airline’s SkyMiles Program.  Below is a log of my experiences and how I reacted to them in my mind.  From these, you can see how an elevated expectation can set up a higher possibility of disappointment.

1. Prior to departure: I was successfully upgraded to first class for the longer leg of my flight.  It made me feel very happy to receive the upgrade, especially for a four-hour flight. Prognosis: no prior expectation, high satisfaction.

2. Checking in for my flight: I waited in the Medallion member special line. But the agents were all dealing with other customers who were not Medallion members.  Despite being the first person in line at the special check-in line, I did not receive immediate service.  Normally I would have just patiently waited in line, but this time it created some irritation.  Prognosis: some prior expectation, some dissatisfaction.

3. Flight from Norfolk –> Seattle: Being my first time flying first class, I was happy with the treatment that I received on board the airplane.  I had a very decent dinner with real china and silverware rather than no meal or paid meal with plastic plates one would expect in coach.  Prognosis: low/no expectation, high satisfaction.

4. Flight from Seattle –> Norfolk: Due to bad traffic to the airport, I arrived at the airport just past the 30-minute threshold and had to miss my flight.  I was told that I had to either pay a substantial amount of several hundred dollars to be rebooked to another flight, or wait till three hours before the next available flight for the same-day call rule that would cost me only $50 for the change.  Yes, I was the one responsible for the flight.  But airlines miss my flights all the time, and they never pay me a few hundred dollars for my lost time.  Well, normally I would have just blamed myself for missing the flight and creating the subsequent situation.  But now that I am a Medallion member who actually flew first class once, I was expecting a much better response, something along the line of “I am sorry you missed your flight.  We value your business as a Medallion member.  Since this is your first offense, we will ignore that it is your responsibility, and we will book you onto the next flight right away so that you can be on your way” (of course costing me little to no money for doing that). The ending of the story was that I was not able to get onto the immediate following flight and had to wait for the next one.  I ended up paying close to $250 extra (or about half of the price of the original ticket), and my return date was delayed till the next day.  Prognosis: high expectation, high dissatisfaction.

In sum, managing customer loyalty is a science, and this science can be crystallized by a better understanding of consumer psychology.  Understanding what consumers expect and properly managing that expectation should be part of every firm’s loyalty marketing strategy.  For readers who would like to learn more about the effects of having tiered structures in a loyalty program, you may want to check out this MSI Working Paper entitled “Feeling Superior: The Importance of Loyalty Program Structure on Customers’ Perception of Status” by Nunes and Dreze.