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Pricing the CRM Program
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We will assume a modest CRM warehouse containing data on 14 million prospects and past customers and 6 million current customers. Let us assume that we can build it for $10 million, including the software
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for access, with annual maintenance costs of $1.5 million, which include the costs for the staff, NCOA (National Change of Address), and appended external data. Amortized over 3 years, the warehouse will cost us $5.5 million per year, as shown in Table 2-1. Let s compare this to the cost of database marketing in the same situation, shown in Table 2-2. It costs far less. We are assuming a cost of $1.5 million to build the database. Many databases are built for far less, such as $500,000, and some, of course, cost more. The number $1.5 million is a good number for a large corporate marketing database.
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Cost of Communications
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To these CRM or database costs, we must add the cost of communications with customers and prospects. After all, if we are going to make the right offer to the right customer at the right time, we have to communicate the offer to customers personally, or what is the warehouse for Let s assume that our rm has been collecting email names to keep the cost of communications down. It has email names for half of its customers. Table 2-3 shows the total CRM and database cost, assuming an average of only three communications per customer per year. Note that when CRM or database marketing is used properly, some likely customers may get more than four communications a year, and some will get only one. Table 2-1 Warehouse Cost
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Cost Cost to build warehouse Amortize over 3 years Annual maintenance Annual cost $10,000,000 $ 4,000,000 $ 1,500,000 $ 5,500,000
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Table 2-2 Database Cost
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Cost Cost to build database Amortize over 3 years Annual maintenance Annual cost $1,500,000 $ 600,000 $1,000,000 $1,600,000
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Table 2-3 Comparison
Communications Quantity Rate DB/warehouse Mail communications Email communications CRM/database costs 3,000,000 3,000,000 $0.60 $0.04 Per year 2 4 CRM annual cost $5,500,000 $3,600,000 $ 480,000 $9,580,000 Database annual cost $1,600,000 $3,600,000 $ 480,000 $5,680,000
Table 2-4 Net Pro t
Without CRM or database marketing Customers Annual sales per customer Sales Pro t per sale Gross pro t CRM/database cost Net pro t 6,000,000 $150 $900,000,000 10% $90,000,000 $0 $90,000,000 With CRM 6,000,000 $165 $990,000,000 10% $99,000,000 $ 9,580,000 $89,420,000 With database marketing 6,000,000 $165 $990,000,000 10% $99,000,000 $ 5,680,000 $93,320,000
So with these costs in hand, what will be the result of using CRM or database marketing See Table 2-4. Using either CRM or database marketing, we have managed to increase the average sales per customer by 10 percent, to $165. We may have done this by getting some customers to place larger orders, by getting some to place more orders, by reducing the attrition rate, or by a combination of these and other methods. Sales have increased by $90 million, with increased gross pro ts of $9 million. Unfortunately, when we factor in the cost of CRM, net pro ts have gone down by $580,000. That is what virtually all companies that installed CRM have discovered. Note that these gures assume that CRM is working that it is in fact increasing sales by 10 percent. But in many cases, for the reasons given earlier, CRM has no such valuable bene t. In the majority of companies, it does not affect the sales rate at all. Much of the money spent on CRM is wasted. That is the reason for the Gartner Group s pessimistic conclusion on CRM.
T h e M i r a g e of C R M
The methods whereby database marketing produces the gains in pro t shown in this section are explained in the remaining chapters and case studies in this book. A further discussion of the bene ts of a data warehouse is given in 10, Customer Management.
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