A Failing Grade
But will it? Let's look at an example.
Pricing the CRM Program
Let's say your company is selling some product or service for $150. It could be rental cars, small appliances or carpets. It contacts 20 million customers per year, with sales of $900 million. We'll assume that of the $150, its net profits per sale are 10 percent, after deducting all costs including marketing.
We'll assume a modest CRM warehouse contains data on 14 million prospects and past customers, and 6 million current customers. Let's also assume you can build it for $10 million including the software for access, with annual maintenance costs of $1.5 million, which includes the cost for the staff, NCOA and appended external data. Amortized over three years, the warehouse will cost $5.5 million per year.
Let's compare this to the cost of database marketing in the same situation. It costs far less. Assuming a cost of $500,000 to build the database—which will be enough to create a large corporate database with annual maintenance of $500,000—amortized over three years, this will cost about $700,000 per year.
So with these costs in hand, what will be the result of using CRM or database marketing?
Cost of Communications
To these CRM or database costs, add the cost of communications with customers and prospects. After all, if you are going to make the right offer to the right customer at the right time, you have to communicate the offer to them personally. Otherwise, what is the warehouse for? Assume that your firm has been collecting e-mails to reduce the cost of communications. It has e-mail addresses for half of all its customers. Chart A (shown on page 72) depicts the total CRM and database cost assuming an average of only three communications per customer per year.
As Chart B illustrates (also on page 72), using either CRM or database marketing, you can increase the average sale per customer by 10 percent to $165. You can do this by getting some customers to place larger orders, place more orders, by reducing your attrition rate, or a combination of these and other methods. Sales increase by $90 million with increased gross profits of $9 million. Unfortunately, when you factor in the cost of CRM, net profits decrease by $580,000. That is what virtually all companies installing CRM have discovered.