Customer Relationship Management for Luxury Skin Care Brands in the Selective Cosmetics Sector

Table of Contents

List of figures and Tables

APPENDIX

1. Introduction
1.1. Problem and Objective
1.2. Structure

2. Cornerstones of Customer Relationship Management
2.1. Important Customer Relationship Management factors
2.1.1. Customer Value
2.1.2. Customer Segmentation
2.1.3. Customer Loyalty
2.2. Communication tools within a CRM strategy
2.2.1. Communication Channels
2.2.2. Customer Loyalty Programs

3. CRM analysis in the luxury skin care market
3.1. The luxury skin care market
3.2. Research question and research design
3.3. Data collection and interview design
3.4. Limitations in the chosen approach
3.5. Results of the CRM analysis

4. Interpretation of the CRM analysis in the luxury skin Care market
4.1. Interpretation of communication tools
4.1.1. Case study “Club Biotherm”
4.1.2. Direct Mail
4.1.3. Telemarketing
4.1.4. E-Mail Marketing
4.1.5. Online Marketing
4.1.6. Mobile Marketing
4.2. Interpretation of CRM opportunities
4.2.1. CRM and Business performance
4.2.2. Loyalty and Customer Value
4.2.3. Loyalty and Customer Segmentation
4.3. Interpretation of limitations
4.3.1. Case Study “Douglas Card”
4.3.2. Channel Conflict
4.3.3. Who owns the Customer – Brand or Channel?

5. Recommendations
5.1. Improving communication tools
5.1.1. Permission Marketing
5.1.2. Emotional Communication
5.1.3. Personalization
5.2. Leveraging from opportunities
5.2.1. Measuring Customer Value
5.2.2. Treating Customers according to their Value
5.2.3. Increasing Customer Value
5.3. Managing the channel conflict
5.3.1. Applying the right Channel Strategy
5.3.2. Cooperating with Retailers

6. Summary

7. Bibliography

List of figures and tables

illustration not visible in this excerpt

List of figures

Figure 1: Drivers of Customer Equity

Figure 2: YopleX 1993 Net Profit Matrix

Figure 3: Behavioral and emotional loyalty

Figure 4: Emotional loyalty classifications

Figure 5: Why loyal customers are more profitable

Figure 6: Distribution strategies between manufacturer and retailer

Figure 7: Lifeline Concept Biotherm Mailings

Figure 8: Screenshot Biotherm website www.biotherm.de

Figure 9: Weight of rubrics of the Biotherm Internet

Figure 10: Business performance vs. customer management performance

Figure 11: Relationship between bonding and share of wallet

Figure 12: Value of a consumer

Figure 13: Industry portfolio in CRM development

Figure 14: BrandDynamics™ Pyramid of Biotherm and Douglas

Figure 15: Brand Signature™ of Biotherm and Douglas

Figure 16: Screenshot of upcoming Biotherm website with personalized area

Figure 17: DFM Triangle Club Biotherm

Figure 18: Share of wallet, Biotherm skin care

Figure 19: Channel conflict strategy matrix

List of tables

Table 1: Mass Marketing versus Direct Marketing

Table 2: Direct Marketing channels and their strengths and weaknesses

Table 3: Conducted interviews in the luxury skin care market

Table 4: Cooperation for a Shop-in-the-shop site

Appendix

Analysis of the interview results

Cosmetics Market Glossary

Qualitative Interview English

Qualitative Interview (Original German documents)

Qualitative Interview for Case study “Douglas Card”

1. Introduction

1.1. Problem and Objective

Transparent, global and saturated markets as well as increasing homogeneity of products are forcing companies to change. Searching for ways to differentiate themselves, Customer Relationship Management (CRM) is increasingly introduced in order to build relationships with customers.

CRM puts the customers who count at the center of the relationship. The key is to acknowledge that not all consumers are created equal. Companies more and more recognized that only 20 percent of customers may be responsible for 80 percent of their profits. This 80/20 rule reveals companies’ dependence on high value customers and represents the basic of CRM – identifying the high value customers and gaining their loyalty.

Today, increasing ubiquity of the internet and other new direct marketing channels enable marketers to communicate more directly to customers. As a result, possibilities in creating bonded customers through direct communication have increased. This development shows impacts on business-to-consumer markets – and in particular to the luxury skin care market.

However, depending on strong retail channels, luxury skin care brands still do not have relevant customer access and information needed for an effective CRM strategy. Moreover, in changing the channel strategy, evolving conflicts are feared. Keeping these potential limitations in mind, the question arises – is CRM a valid strategy for luxury skin care brands in the selective cosmetics sector?

The objective of this thesis is to discover the validity of Customer Relationship Management for luxury skin care brands in the selective cosmetics sector. The value of CRM will be determined by analyzing communication tools, CRM opportunities and limitations in successfully implementing a CRM strategy.

This thesis is based on a marketing-focused research. It does not aim to give a full overview of all communication tools available, but concentrates on the most suitable ones for this particular market. CRM technology, processes, the organization and people involved in setting up a CRM strategy, are not part of this thesis.

1.2. Structure

This thesis is divided into six chapters. After giving a brief introduction to the topic, chapter 2 includes the literature review, which represents the theoretical frame of this thesis. In particular, the key factors of customer value, customer segmentation and customer loyalty are considered. Afterwards, communication tools within a CRM strategy, including communication channels and customer loyalty programs, should give an overview of how to build customer relationships.

In chapter 3, the research project is introduced. First of all, the luxury skin care market for the research with its unique characteristics is described. Secondly, the research question is defined. Then different research designs are discussed in order to choose the appropriate one for this research project. Thirdly, data collection and the interview design is demonstrated. The limitations of the chosen approach are briefly discussed. Finally, the results of the CRM analysis are presented.

In chapter 4, the results of the CRM analysis are discussed in applying the case study “Club Biotherm”, a luxury skin care brand’s customer loyalty program. First of all, different communication channels are analyzed. Secondly, CRM opportunities are examined in discussing the impacts of different key factors. Finally, limitations in successfully implementing a CRM strategy in the luxury skin care market are assessed. The case study of “Douglas card”, a customer loyalty program of a retailer, illustrates the limitations luxury skin care brands have. Moreover, the key question brand and retailer pose –who owns the customer?– is discussed.

In chapter 5, recommendations for luxury skin care brands in the selective cosmetics sector are developed considering the “Club Biotherm” as a representative example in detail. First, suggestions are made regarding the improvement of communication tools. Then it is demonstrated of how to leverage from the given opportunities. Finally, recommendations of how to overcome limitations are given. In chapter 6, all key findings are summarized and evaluated in order to determine, if CRM is a valid strategy in the luxury skin care market.

2. Cornerstones of Customer Relationship Management

Customer Relationship Management (CRM) is an often used buzz-word and a more and more popular management strategy. According to the Future Trend Institute, 90 percent of managers interviewed in November2002 mention CRM as the leading management strategy^[1] as well as in a Bain & Company study where 76 percent of all managers state the same in September 2002.^[2]

However, not all CRM initiatives are successful. The research and advisory firm Gartner Group found that 55 percent of all CRM projects do not produce results.^[3] Although Gartner Dataquest expects increasing spending on CRM from forecasted $25.3 billion in 2002 to $47 billion in 2006^[4], an OgilvyOne benchmarking research found out that some CRM initiatives of companies are destroying value.^[5] A survey of Bain & Company also confirms that out of “451 senior executives, one in every five reported that their CRM initiatives not only had failed to deliver profitable growth but also had damaged long-standing customer relationships.”^[6]

This often reveals that CRM is misunderstood. Everybody dealing with CRM has their own definition and interpretation of what it is, but more and more they agree as to what it is not: CRM is not about technology! Frederick F. Reichheld points out that the assumption more technology is better represents one of the four perils of CRM. He emphasizes the importance of a customer strategy which starts with a segmentation analysis, a customer-focused organization and reminds that relationships are always ‘two-way streets’.^[7] In conclusion, the official CRM definition of CRMGuru.com says that

“Customer Relationship Management (CRM) is a business strategy to select and manage customers to optimize long-term value. CRM requires a customer-centric business philosophy and culture to support effective marketing, sales, and service processes. CRM applications can enable effective Customer Relationship Management, provided that an enterprise has the right leadership, strategy, and culture.”^[8]

Core element of every CRM strategy should be the customer because “customers are the lifeblood of every organization. The simple fact is that without them a company will not survive.”^[9]

2.1. Important Customer Relationship Management factors

This chapter provides an overview of important CRM factors, which focus on understanding and managing customers considering variables such as customer value, customer segmentation and customer loyalty.

2.1.1. Customer Value

The first step to a better customer understanding is to be aware of the value each individual customer represents to a company. The overall objective of the leading direct marketing agency OgilvyOne is to “grow customer equity in volume, value, and goodwill”. The term customer equity is discussed bilaterally in the literature.

First of all, customer value from the company’s point of view is defined as the economic value of a customer. It is similar to brand equity and therefore is called customer equity.^[10] Blattberg defines a customer in a customer equity context as “a financial asset that companies and organizations should measure, manage, and maximize just like any other asset.”^[11]

The other perspective refers to customer value from the customer’s point of view which is the perceived value shown from the company and the feeling of individual preference experienced by the customer. According to Rust this type of customer equity is composed of constituent parts which are value equity, brand equity and retention equity.

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Figure 1: Drivers of Customer Equity^[12]

Value can be calculated on individual level. The topic of customer value measurement has gained importance in the marketplace, as advantages in point-of-purchase data collection and database technology have made it possible to capture and analyze the purchase histories of households and people.^[13] A major approach to measuring the economic value of a customer relationship is demonstrated by scoring models which apply, if more than just one criteria is evaluated. One of the most familiar scoring models is called RFM model, which stands for recency, frequency and monetary value.

- Recency shows when a customer last purchased
- Frequency shows the number of purchases made
within a specific time
- Monetary value shows the amount the customer spent

within a specific time

Considering the variable recency, companies first have to determine specific time frames which often depend on the industry. Second, they have to find out from their database if a customer bought something in the last six months, between six months and a year ago, or more than a year ago. According to these findings, higher scores are assigned the more recent the purchase. The next step would be to define how frequently the customer made purchases in each of those three time frames. Scores are given, if they made one, two or more purchases in the respective time. The same procedure is accomplished with monetary value and other variables determined. Finally, all scores are added together. In general, the more a customer purchases, the more recent and of great monetary amount the transactions, the higher is the overall score and thus this customer is more valued by the company.^[14] Afterwards, profiling enables the identification of similar types of individuals and helps to target the direct marketing campaign according to their characteristics.

These are simple indices based on transaction data, but still powerful tools. Nevertheless, the RFM model has some drawbacks like the consideration that just because a customer was profitable in the past, it does not mean he will continue to be so in the future. Moreover, the monetary value component is almost always based on revenue rather than profitability or contribution to profit.^[15] Thus, important costs of acquiring and servicing customers are neglected.^[16] In conclusion, rather than considering the short-term transaction view, the long-term view of profitability is more important in managing relationships.^[17]

Another important customer value metric is ‘share of customer’. Share of customer for each brand serves as a practical best measurement and is also based on transactional data. Whereas traditional market share means selling as much of a product to as many customers, share of customer means ensuring that each individual customer buys more products from one brand.^[18] Consequently, share of customer is measured by dividing the total brand purchases of an individual by their total category purchases.^[19] ‘Share of wallet’ utilizes the same concept from a customer’s point of view. Share of wallet is the amount a customer spends on a brand as a portion of their total category spend. The key requirement is to know customers. However, data is difficult obtain and is often based on surveys. Data helps to prioritize CRM initiatives based on the potential an individual customer represents and thus is the beginning of a customer-centric context.

Approaches to understanding and managing customer value are often discussed. Some believe that customer understanding comes from thoroughly analyzing customer value and profitability. Others see customer value analysis as a means of understanding buyer needs and desires. Still others maintain that customer understanding comes from segmentation.^[20] Definitively the best approach is to apply all methods mentioned in order to reach a customer-centric context. Yet, one of the basic principles of strategic customer care is recognizing that some customers are more valuable than others^[21] and thus customer segmentation is a crucial element for action ability.

2.1.2. Customer Segmentation

Customer segmentation is the foundation of customer insight. It is the “core organizing structure from which all else springs. Segmentation is not easy, nor it is inexpensive - but is the first step to a true customer-centric enterprise.”^[22] Whereas classical customer segmentation strategies are made by consumer characteristics such as geographic, demographic and psychographic,^[23] it is more and more recognized that “there is only one source of profits: the individual consumers or households who buy the brand.”^[24]

The Italian economist and sociologist Vilfredo Pareto observed the general phenomenon of a few controlling the majority of influence. He asserted that “la répartition des revenues n’est pas l’effet du hasard”^[25] which tells that the distribution of influence and wealth in a society is not random. This finding was transferred to the field of marketing and is today well-known as the so-called Pareto Principle or 80/20rule. It says that on average of about 20 percent of the users of a brand or a category account for about 80 percent of the volume and, other factors being constant, about 80 percent of the profits.^[26]

OgilvyOne strongly believes that not “all consumers are created equal” and that a relatively small group of consumers drives a vast majority of profit. In praxis, the Pareto Principle has been found to be true for both consumer and business-to-business markets. Profit segmentation is a form of segmentation analysis that focuses on identifying the profit different customer segments represent to a brand. A diagram called Differential Marketing (DFM) triangle shows the results of profit segmentation and thus is a very explicit way of representing the Pareto Principle. Jay and Adam Curry call these triangles customer pyramids and appreciate them as a “useful tool to visualize and analyze the profitability of customers.”^[27]

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Figure 2: YopleX 1993 Net Profit Matrix^[28]

The tool displays basic pyramids showing how different value groups, divided into high, medium, and low-value customers, contribute to a brand. The illustrated DFM triangle of YopleX, a hypothetical yogurt brand based on Yoplait yogurt sales data obtained from research companies as well as marketing spending and profitability data from industry sources. It demonstrates precisely how many customers contribute to the majority of profit.

The DFM triangle of YopleX, representing the consumer package goods industry, indicates that only 16 percent of the high brand buyers account for 79 percent of YopleX brands volume and even 110 percent of total brand profitability. The medium-profit segment delivers an additional 19percent of profit. More than 20 percent of low and no-profit buyers generate loss that drain from profit. In other industries such as in the financial sector it is also indicated that the top 20percent of a typical customer, generate 140 to 150percent of the overall income. The extra 50 percent gets eaten up by the no-profit consumers whose activities drain from the profit as well.^[29]

The care and feeding of this relatively small group of profit-producing consumers should have a high priority for every marketer. Differential marketing is even showing to have a competitive edge for marketers due to the proven fact that “the largest brand is the one that has made the greatest inroads with the small group of highly profitable consumers.”^[30]

Furthermore, it is important to know which consumers will never purchase a product at all. The implication is that a company could improve its profit by ‘firing’ its worst customers. As seen in the examples above, “customers who cost more in time and effort than they possibly return in profit have negative value.”^[31] Therefore, no resources should be wasted on them, if it is known who they are. It is important to consider that what they cost “is not worth the prices they pay.”^[32] However, two other alternatives could be either to raise the prices or to lower the costs of serving less profitable customers.^[33]

2.1.3. Customer Loyalty

The statement that loyal customers are the best customers is well-known by many marketers. However, the extent to which loyal customers influence profitability is often neglected. In this chapter, the different development stages of a relationship are introduced in order to get an understanding of where loyalty operates. Moreover, the concept of behavioral and emotional loyalty is presented and finally, the impacts of loyalty on profitability are acknowledged.

a) Customer development stages

To understand Customer Relationship Management and customer loyalty, the process of customer development has to be discussed. The key to increasing profit is changing consumer behavior either in attracting more consumers in the market, stimulating more sales from current customers or in retaining customers who would otherwise leave the brand. As a result, the three stages where profit through customer relationship management can be increased are customer acquisition, cross-selling and customer retention.

Acquisition starts with identifying suspects in the market. Suspects represent everyone who might conceivably buy the product or service. Afterwards, prospects - a subset of suspects - are identified. They have a strong potential interest and ability to buy the product. Then prospects are converted into customers when they bought the product or service.^[34]

Profit of an individual customer could be increased by cross- and up-selling. Cross-selling is about finding out which customer bought productA and would probably buy productB as well. Up-selling refers to the possibility of selling a customer a more sophisticated or a higher class product than he already has.^[35] The reason behind cross- and up-selling is that it is four to six times more expensive to make a sale to a new customer than to make an additional sale to an existing customer.^[36]

Customer retention is an important task in Customer Relationship Management, because it costs five times as much to get a single new customer as to keep one.^[37] Christian Reichardt, former Managing Director of OgilvyInteractive Germany is not only aware of the cost factor. He states that “it is ten times more difficult to substitute a lost customer through a new one than retaining an existing customer relationship.”^[38] Ultimately, these customers often become advocates from the brand. At this stage, customers recommend a brand to others and members-get-members initiatives could be applied.

However, today a lot of companies suffer from a high customer churn rate.^[39] If a company is losing 25 percent customers per year, the churn rate is 25percent which means the customer retention rate is 75 percent.^[40] In order to avoid customer churn, customer retention is necessary. “If a customer churns out of a brand, he may or may not fall out of the product category as well” and thus still is a prospect for a brand.^[41] The only possibility is to reattract these ex-customers in applying customer win-back strategies or to avoid customer churn in investing more in customer loyalty.

Finally, the question arises - what drives customers to buy repeatedly and to become advocates from a brand? As a result, customer loyalty and customer retention remarkably gains importance. Two types of loyalty have to be examined in order to better understand the effects of loyalty.

b) Behavioral and emotional loyalty

A good analysis of customer loyalty considers two kinds of loyalty, behavioral loyalty and emotional loyalty. Behavioral loyalty refers to when a customer buys from one brand and emotional loyalty measures the extent to is emotionally bonded to a brand.

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Figure 3: Behavioral and emotional loyalty^[42]

Behavioral loyalty describes the simplest form of loyalty occurs when a customer buys a brand. Customers may be behaviorally loyal for many reasons. However, if there are no other choices in brands, the customer shows a high behavioral loyalty and a low emotional loyalty. Consequently, he has the characteristic of a “prisoner”. Customers are only behaviorally loyal as long as there is no emotional alternative. Emotional loyalty is a strong form of loyalty and measures the extent to which a customer feels good about a brand. The ideal stage would be to reach emotional loyalty which leads to repeat purchase and thus relates to “happy marriages”.

As a result, loyalty is not only based on transactional data, it also incorporates emotional factors. Reichheld confirms that “loyalty is about earning the trust of the right kind of customers.”^[43] Therefore, customers for whom a brand can deliver a consistently superior experience will continue to do all their business with the respective company. They leverage from true loyal customers “when the customer becomes an advocate for the organization, without incentive.”^[44]

The different levels of emotional loyalty are demonstrated by pyramids in the Ogilvy Loyalty Index^[45]. The following figure shows the levels of the pyramid which categorize the degree of emotional loyalty each consumer has with a brand. These levels are mutually exclusive because each consumer can be only found in only one level for a brand.

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Figure 4: Emotional loyalty classifications^[46]

First of all, emotional loyalty starts with the level of presence. Consumers are familiar with the brand, they often have tried the brand, are spontaneously aware of it, or know the promises of the brand. A consumer at presence has brand awareness, but not a positive brand image yet. At the relevance level, consumers have a moderate emotional loyalty and positive feelings towards the brand. The brand can meet their needs and is about the right price. The degree of emotional loyalty strengthens even more with the performance level, where consumers are convinced that the brand performs its job adequately.

A consumer at the advantage level has a high degree of emotional loyalty towards the brand and is willing to choose the brand at any purchase occasion. He positively rates the brand with at least two attributes such as acceptable price, unaided first mention or as most popular. Bonding is the final level of emotional loyalty, where true emotional loyalty is achieved. The brand is the consumers’ favorite, beats all other brands and is often recommended. Bonded customers tend to “own” the brand. Moreover, they rate the brand highly on emotional loyalty attributes, especially those most important for brand choice. Bonded customers are the real loyal customers.

c) Loyalty and Profitability

The challenge is to produce loyal customers due to the link between loyalty and profitability, which has been firmly established. As already indicated in the segmentation analysis, the number of high value consumers a brand attracts is critical to growth and profits and so is the loyalty of those customers.^[47] The effects customer loyalty has on profitability is found out by Reichheld and Sasser. They state that “customer defections^[48] have a surprisingly powerful impact on the bottom line.”^[49] A five percent decrease in customer defection could increase the value of an average customer by 25 to 100 percent depending on the industry.^[50] Taking the example of a credit card company, a five percent increase in customer retention shows that the total lifetime profit of a customer will rise on average 75 percent. That means in most businesses, the profit earned from each individual grows when the customer stays with the company.

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Figure 5: Why loyal customers are more profitable^[51]

The underlying economic effects on customer loyalty are acquisition cost, revenue growth, cost savings, referrals and price premium.

- Acquisition cost refers to the money which has to be invested in order to get new customers.
- Base profit is the money received from customers who bought a product for the first time.
- Revenue growth relates to the fact that customer spending tends to accelerate over time.
- Cost savings apply to decreasing operating costs such as service, information and advice.
- Referrals are satisfied customers who recommend the business to others and thus they are a vital source of new customers.
- Price premium relates to the fact that old customers pay effectively higher prices than new ones.

In conclusion, loyal customers cost less to serve, are usually willing to pay more than other customers, and they often act as word-of-mouth marketers for the company. Putting all these effects together, an accurate picture of the lifecycle profit patterns of each customer could be generated. As a consequence, profit increases with the lifetime of each customer.

However, Dowling and Uncles caution, “the contention that loyal customers are always more profitable is a gross oversimplification.”^[52] Although Reinartz and Kumar found out that in a non-contractual setting, it is revenues that drive lifetime value of a customer and not the length of a relationship.^[53] Reicheld and Teal proved a positive association between lifetime duration and profit in a contractual setting. This affirms that in contractual settings such as a customer loyalty program, profit increases with customer lifetime.

In summary, customer value, customer segmentation engendering customer loyalty are key factors in a CRM strategy. Thus the focus should be to continuously assess and manage these factors. Customer loyalty is of major importance, due to its link to profitability. Communication tools have to be taken into account within a CRM strategy in order to show how customers and their loyalty are managed.

2.2. Communication tools within a CRM strategy

Customer Relationship Management incorporates a communication strategy that targets individuals through different communication channels. The aim is to acquire, to retain and to win-back customers. In this chapter, direct marketing as a way to directly communicate with customers is defined. Afterwards, the strengths and weaknesses of relevant communication channels are illustrated. In a CRM strategy, communication tools that mainly focus to keep customers loyal, are important. Thus customer loyalty programs are introduced, that show how different communication channels are applied in order to bond loyal customers to a brand.

2.2.1. Communication channels

Communicative CRM, One-to-One Marketing or Direct Marketing^[54] are building the core element of Customer Relationship Management. In order to give an understanding how direct marketing communication channels are separated from mass-marketing channels, the following table summarizes the main differences.

Table 1: Mass Marketing versus Direct Marketing^[55]

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The Direct Marketing Association (DMA) defines direct marketing as “an interactive marketing system that uses one or more advertising media to effect a measurable response and/or transaction at any location.”^[56] This definition emphasizes the measurable response and the interactive system indicates a dialog between brand and customer.

At the heart of direct marketing is a customer database, since direct marketing depends on customer information. Moreover, campaigns have to be addressed to customers. Thus a customer database is an organized collection of data about individual customers or prospects.^[57] Blattberg even stated that “not having a customer database is now a competitive disadvantage.”^[58] Database marketing allows analyses through transaction data and demographic data or also referred to as quantitative and qualitative data. Besides identifying customers, a database helps to measure the effectiveness of direct marketing campaigns and of the different channels.

“Interactivity” is executed through major communication channels like mail, phone and online. All these channels are deployed in order to achieve personalized communication that allow customers to respond. Consequently, response rates measure the number of people undertaking the desired action. Besides the number of respondents, response rates could be measured by click through rates, page views and page impressions depending on the channel. If all costs involved for a marketing campaign and its results are known, the ROI^[59] for a single campaign could be calculated. The choice for every marketer is to apply the right channel in order to successfully reach the right customer. Table2 illustrates the strengths and weaknesses of the most important direct marketing channels including direct mail and E-mail marketing, telemarketing, online and mobile marketing.

Direct marketing channels could be applied as a stand-alone, using one single media at the same time, or a multi-channel approach, using multiple media at the same time. Of particular interest to direct marketers, are opportunities to increase the number of “touch points” through a multiple media strategy. Furthermore, the number of contacts could be distinguished in either applying a single-stage campaign or multi-stage campaign. If three direct mail pieces are sent to customers, a multi-stage campaign is employed. The final choice of the media and contacts depends on the objectives and the budget of the marketing campaign.^[60]

Table 2: Direct Marketing channels and their strengths and weaknesses^[61]

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2.2.2. Customer Loyalty Programs

Direct marketing channels are implemented for different objectives. As discussed, Customer Relationship Management focuses on the retention of customers in the customer development process in order to increase customer loyalty and to leverage from the positive effects on profit. Thus more and more direct marketing activities aim to retain customers. According to Direct Magazine, 90 percent of all E-mail campaigns aim to retain customers.^[62] As a consequence, customer loyalty programs are getting more and more popular in the market due to their ability to combine different channels in order to retain customers.

Customer loyalty programs represent specific marketing instruments that companies apply to develop stronger loyalty. The purpose of a customer loyalty program is to build long-term relationships with customers. Steadily increasing numbers indicate that loyalty programs have never been more popular than today. In Germany, 400 different programs are on the market and “Payback” alone, a cooperation of companies in different industries, counts 19million members.^[63]

Furthermore, marketers are able to gather a great deal of customer information and are able to apply a variety of direct communication channels in utilizing customer loyalty programs. In return for giving information and for their commitment to the brand, customers get benefits. According to Berry and Parasuraman, loyalty programs are classified into three approaches according to the benefits delivered. Thus, programs are distinguished in either adding financial, social or structural benefits.^[64]

Financial benefits are offered by a company through providing rewards such as discounts, points or premiums to customers, who buy frequently or use a service in substantial amounts. Financial benefits focus on short-term benefits such as discounts, rebates, coupons or free samples.

Social benefits are added by individualizing and personalizing customer relationships. The objectives are to develop trust, truthfulness, reliability, friendliness and affinity to the brand or category. Customer cards, customer clubs and other special customer care programs are examples of programs focusing on social benefits. Social benefits could be also associated with emotional loyalty and thus its importance is recognized.

Structural benefits are based on mutual commitment and can be compared to a contract between brand and customer in order to add real value to the customer. A company even may supply customers with special equipment and often automatic mechanisms are essential for these kind of benefits. Objectives are to increase sales and to give loyal customers even more advantages, such as frequent flyer programs, where gathered miles give advantages to customers.

Obviously, the most suitable form depends on the loyalty program’s goals, target group and individual context. Although savings are desired by customers and represent a certain value to them, financial benefits will not be the retention drivers of a program. Butcher confirms that “the only way to create customer loyalty is to establish a true relationship with customers which is not only based on financial incentives, but on emotion, trust and partnership.”^[65]

According to Butscher, customer clubs are real value-oriented loyalty programs which do not only focus on financial benefits, they also build strong emotional relationships with customers. Customer clubs are a German invention due to the fact that Germans join a lot of clubs. Thus they were the first to use membership-based instruments in marketing as well. In addition, until fall 2001 German law placed restrictions on giving discounts or other financial incentives to particular customer groups. Consequently, customer clubs were primarily based on non-financial benefits.^[66]

Customer clubs can be split into two groups: limited and open. Open club programs have no entry conditions. As a result, they often include members who are of no benefit to the company. Although open clubs are good for building databases, limited loyalty programs are more powerful long-term loyalty builders. Membership fees try to channel membership towards the primary target groups and help to keep out freeloaders. While it might seem odd to charge best customers for added service “this kind of relationship is one that a customer is often willing to pay for.”^[67]

The objective of every customer club is to increase the dialog with a customer and to offer exclusive, tailored services for club members.^[68] A variety of communication channels with club members helps to establish real one-to-one relationships such as loyalty program magazines, regular newsletters or mailings, a loyalty program hotline, a Web page, loyalty program meetings, events and loyalty program selling points.^[69] Consequently, a company has to decide which channels they use to communicate with their customers.

In summary, marketers face an array of direct communication tools applicable for a CRM strategy. The challenge is to find the most suitable for their objectives and their industry. The core element of Customer Relationship Management is to retain loyal customers. This is why customer loyalty programs are increasingly important. They enable marketers to manage loyal customers by applying different communication channels and acknowledging the importance of emotional loyalty. Thus customer loyalty programs represent important communication tools within a CRM strategy.

3. CRM analysis in the luxury skin care market

Throughout this chapter the need for research in this particular field is explained. First, characteristics of the luxury skin care brands in the selective cosmetics sector are briefly described. Second, the research question is introduced and the research designs, positivism and phenomenology, are discussed. Then the appropriate design for this research project is chosen. Third, data collection and interview design for this research is shown. The fourth section refers to the limitations of the chosen method. Finally, the results of the CRM analysis in the luxury skin care market are presented.

[...]

^[1] “Management/Trends”, Wirtschaftswoche Nr. 49, 2002, p. 114

^[2] “Der Kunde im Focus“, Wirtschaftswoche Nr. 38, 2002, p. 137

^[3] Reichheld et al., 2002, p. 101-109

^[4] http://www.entrepreneur.com/article/0,4621,299391,00.html; December 8, 2002

^[5] “CMAT – State of the Nation II:2002”, October 2001

^[6] Reichheld et al., 2002, p. 101-109

^[7] ibid.

^[8] http://www.crmguru.com/content/anwers/whatiscrm.html; December 8, 2002

^[9] Brown, 2000, p. 34

^[10] Krafft, 2002, p. 33

^[11] Blattberg et al., 2001, p. 2

^[12] adapted from Rust et al., 2000, p. 8-9

^[13] Bell, Deighton et al., 2002, p. 77

^[14] Reinartz, Kumar, 2002, p. 90

^[15] Contribution to profit is defined as the revenue obtained from a customer minus the direct costs of serving the customer.

^[16] Reinartz, Kumar, 2002, p. 91

^[17] Blattberg et al., 2001, p.34

^[18] Peppers, Rogers, 1997, p.18

^[19] Hallberg, 1995, p. 55

^[20] Freeland, 2002, p. 78

^[21] Brown, 2000, p. 71

^[22] Freeland, 2002, p. 84

^[23] Kotler, 2000, p. 263

^[24] Hallberg, 1995, p. 28

^[25] Pareto, 1897, p. 315

^[26] Hallberg, 1995, p. 30

^[27] Curry, 2000, p. 7

^[28] adapted from Hallberg, 1995, p. 245

^[29] Newell, 2000, p. 50

^[30] Hallberg, 1995, p. 7

^[31] Peppers, Rogers, 1997, p. 123

^[32] ibid.

^[33] Kotler, 2000, p. 54

^[34] Kotler, 2000, p. 50

^[35] Dangelmaier et al., 2002, p. 11

^[36] Butscher, 1998, p. 24

^[37] Peppers, Rogers, 1997, p. 52

^[38] Reichardt, 2002, p. 170

^[39] Churn rate is defined as the quotient of the amount of all terminated customer relationships in one period and the total amount of customers of one company in the same period.

^[40] Krafft, 2002, p. 52

^[41] Hallberg, 1995, p. 82

^[42] OgilvyOne Customer Ownership™

^[43] Reichheld, Schefter, 2000, p. 106

^[44] Brown, 2000, p. 55

^[45] OgilvyOne Loyalty Index

^[46] OgilvyOne Loyalty Index

^[47] Hallberg, 1995, p. 49

^[48] Customer defections is synonymous to customer churn.

^[49] Reicheld, Sasser, 1990, p. 105

^[50] Reichheld, 1996, p. 33

^[51] Reichheld, 1996, p. 39

^[52] Dowling, Uncles, 1997, p.78

^[53] Reinartz, Kumar, 2000, p.17-35

^[54] These terminologies are used interchangeable and the author uses the term direct marketing in further discussions.

^[55] adapted from Peppers, Rogers, 1997, p. 3-338 and Kotler, 2000, p. 654

^[56] Kotler, 2000, p. 650

^[57] Kotler, 2000, p. 652

^[58] Newell, 2000, p. 22

^[59] A common definition of ROI (Return on Investment) involves the cost of a marketing campaign relative to the profit generated.

^[60] Jobber, 1998, p. 403

^[61] Own illustration adapted from Roberts, 1989, p. 147-297, Kotler, 2000, p. 650-677, Schefer, 2002, p. 105-123, presentation Mindmatics AG, 2002

^[62] “E-Mail Marketing: Strategies, Stats, Techniques & Tools”, August 2002

^[63] Bommersheim et al., 2002, p. 187

^[64] Berry, Parasuraman, p. 136-142

^[65] Butscher, 1998, p. 1-63

^[66] Butscher, 1998, p. 46

^[67] Peppers, Rogers, 1997, p. 63

^[68] Krafft, Manfred, 2002, p. 247

^[69] Butscher, 1998, p. 33