CRM

Shifting channels

1. Definitions

When I use the term “channel”, I include distribution channels and communication channels. Distribution channels transfer title to goods and services to customers (and in the case of services, they are the channel in which services are defined by suppliers - and sometimes by customers – and then taken up by customers). They include third party channels. Communication channels carry dialogue between customer and supplier. They may be the same as the distribution channel, but some communication channels cannot be distribution channels e.g. TV advertising. Communication and distribution channels can be combined. From the customers’ viewpoint, the distinction between the two is not normally relevant – channels are just different ways of learning from, searching for, communicating with and buying from suppliers. Channel issues tend to become more explicit with customers when they are denied the use of certain communication or distribution channels – generally or for particular purposes.

2. Introduction

Getting customers to move to channels that suit suppliers is an important issue for many businesses, but not a new one. Self-service in grocery and department stores in the 1970s was followed by the move in business-to-business markets to telephone-based sales offices, and the explosion in the use of direct mail and telephone marketing in consumer markets in the 1980s. The shifts were enabled by ever-developing technology in computing and telecommunications, deregulation and privatisation in telecommunications and postal businesses, and rapidly developing management practice in marketing, sales and service that enabled the new technologies to be implemented properly. The long term driving forces behind these changes were the rising real cost of labour and the increase in competition in many sectors that followed the period of supply shortages after the second world war. Some suppliers and customers resisted, but the forces of change proved too strong. Customers who refused to use the new technologies got worse service. Suppliers who refused to use new channels lost market share. Companies supplying the old technologies or using the older approaches resisted them by innovating, but as always, the more cost-effective technologies won, even if the older technologies became most innovative just as they were about to be replaced.

3. Waves of channel innovation pose problems

Each new wave of technology and practice offered big cuts in the costs of managing customers (up to 90%). It also offered better service for customers – speed, accuracy of delivery, ability to control the service process or to get more from the supplier. It was not hard to see the incentives for all parties to use new technologies. The Internet and mobile telephones are just the latest innovation waves. However, each new wave has its laggards.

4. Lessons

The main lessons are listed below.

4.1 Market development investment by major suppliers

In the 1980s and early 1990s, big shifts towards direct mail and telemarketing were encouraged by big investments by (increasing deregulated and sometimes privatised) telecommunications and postal authorities. The scent of competition and the profit incentive forced them to broaden and deepen their markets, so that when competition came, they would have a larger share of the expanded markets. The role of dominant suppliers can also be seen in the development of the Internet as a medium. It was helped partly by the transfer of excess profits on operating systems and office software by Microsoft (subsidised websites such as MSN and associated e-mail systems such as Hotmail), partly by investments in the leading search engine and portal sites (Google, Yahoo, AOL). Conversely, absence of dominant suppliers has weakened development of mobile telephony as a channel. It is hampered by acute early-stage competition between network providers, who have focused investment on attraction and retention of end-users (and of course on paying for licences) rather than on encouraging commercial users to explore mobile as channel.

In developing new channels, channel infrastructure suppliers often work with innovative commercial customers, who are ready to invest. Privatised utilities (energy, telcos) have been amongst the bigger users of all new channels, starting with direct mail, in their battle for market share. The investments they made included process change, IT systems, databases, contact centres and skilled managers.

4.2 Catch-up or lose

Channel revolutions are unforgiving. Private sector companies, left behind, lose market share. They end up managing customers at higher cost.

4.3 Accelerating the move

Various things accelerate the move to a “better” channel mix. They are as follows:

4.3.1 Ease of access and self-education by consumers

Customers are often frustrated by how difficult it is for them to review product offers, find the right contact in large organisations, contact that person, and then manage the interaction with them, particularly for relatively simple products and services. This is demonstrated by the rapid take up of new channels in simple financial services (credit cards, general insurance, basic banking) and travel (simple air journeys).

4.3.2 Price carrot and stick

Customers can be motivated to use “better” channels by small incentives, such as a price surcharge for not using them, a discount for doing so.

4.3.3 Service carrot and stick

The same applies to preferential service. Customers may get better service if they use new channels, but be denied service if they do not. Easyjet only launches its new season’s inventory on-line. There is limited availability of short-notice departures on the telephone. It is hard to contact Easyjet on the telephone to complain – Webmail is made easy. .This may be prioritised by segment e.g. low value customers denied service except via a low cost channel, late web change of seating allocation only for registered user (BA).

4.3.4 Customer education and motivation

Customers may need educating to use the new channel. This may involve distribution of guides, trial use of new features. In some cases, the customer may be lent or even given the equipment (e.g. computers, software). Channel movements do not always take place for cost reasons. New channels may be much better at educating customers (e.g. Internet in travel or health).

4.3.5 Product/service simplification/process redesign

Channel innovation depends on product and process innovation and usually simplification. For example, direct selling of motor insurance (cutting out brokers) was enabled by product simplification (abolition of cover note, restriction of payment and other terms). Low cost airlines achieve high Internet sales because of the simplicity of the route and seat product compared with scheduled flights. In some cases, the new channel is made an essential part of the new proposition e.g. Direct Line and telephone in 1985, low cost airlines and Web now.

4.3.6 Low basic cost for simplified product, few other restrictions, for those in target market

This provides an incentive to customers – they know they can get a better deal from a company that has worked out how to use the best channels (though they don’t express it this way). However, note that what may be really happening is that the low basic cost allows pursuit of a purer business model e.g. tough yield management unobstructed by frequent flyer concessions.

4.3.7 Innovative combinations of channels

Examples include e-ticketing kiosks for airlines, or combining call centre and web (collaborative browsing). Eventually, customers can be encouraged to use only the lower cost one.

4.4 Channels flourish and then die……

Channels can be described as a combination of management and technical processes. Like all such processes, they are subject to innovation and destruction. They tend to go through their greatest innovation just before they die, because they are challenged by new technologies. The innovative period of direct mail was in the 1990s, the innovative period for call centres is now. In the travel market, Viewdata bookings are turning down as the Internet takes a great share of bookings. The old technology then retreats into the niches where it adds most value. Sales and service contact centres are doomed unless they directly add value rather than just plugging gaps in Internet/direct mail or other contact processes, or just coping with those customers who cannot or will not use the Internet.

A channel is vulnerable where it uses high cost means (typically human intervention) to enable complex transactions and processes which could be simplified in their design before they are presented to customers for “self-management”. Of course, value is a moving target. Tomorrow’s ways of adding value will destroy today’s channels unless they change. Once again, there is weakness in decision-making in many organisations,, where decisions on products and processes are taken separately from decisions on customer management. This can lead to value subtraction e.g. in contact centres.

Value can also be destroyed by too early adoption of new technologies, before they have matured or reached the right level of customer acceptance. The Direct Line lesson was – do not innovate in too many ways at once. The systems used were basic transactional ones, but the call centre and marketing approach was innovative.

4.5 But the cycle takes a long time!

Studies of commercial process innovation (which go back to the 19^th century or even earlier) show that the product life cycle or “innovation diffusion cycle” for particular processes lasts for decades, even where the new approach offers a big cost advantage. There are plenty of laggard suppliers….. and plenty of laggard customers, and they tend to find each other. Small businesses are particularly prone to this – though they also supply much of an economy’s innovation. Sometimes this is associated with family business lifecycles, and in consumer markets with the age of the customer. Accessibility becomes an issue as consumers age, but note that this applies as much to physical access to branches as it does to the Internet. Still, the early experience of direct motor insurance was that uptake was not biased by age.

The long diffusion period is also associated with real difficulties in moving tasks across channels. Systems suppliers often exaggerate how quickly customers are prepared to move, or the ease of providing the systems infrastructure to allow them to do so. Customers learn which channels are best for which purposes, form preferences and stick with them. The riskier the situation, the more conservative the choice. Thus, many customers prefer to deal with problems and complaints face to face, even if they are on-line customers, as banks have found to their cost. Customers may use newer channels to explore, older channels to transact, and this can lead to an increase in channel costs as new channels fail to achieve their transactional targets.

5. The need for a multichannel approach

Companies would need to use a multi-channel approach even if their market segmented nicely by customers with propensities to use particular channels, because this propensity may differ by product (e.g. face to face for complex ones, Internet for simple ones). Most customers like to use several channels for each purpose, choosing between them according to the situation at the time. To make things more complex, preferences change over time, so suppliers may need to hit a moving target, changing the channel mix gradually according to customers’ willingness to move. Banks discovered this when they over-invested in Internet banking in the late 1990s – they are now reinvesting in branches.

This means that most suppliers must use a multichannel approach, in which most communications and transactions are possible in most channels, supported by a systems, process and data infrastructure that runs across all channels. Companies who need to use many media and channels need to manage the decisions strategically. This includes changing channel focus to meet customers’ changing channel preferences (including their attitude to permissioning – and here legal or regulatory aspects may need to be taken into account). This may also include using particular channels competitively, perhaps branding them, trying to dominate them, so as to make it harder for competitors.

What makes all this difficult (though it is always possible to make big improvements, so this is not an excuse for inaction) is the transformation in the technologies of media and channel management that is taking place. Most major CRM software suppliers now include (or are about to announce) modules which enable companies to fine-tune channel use in real time or near real time, to optimise outbound and inbound contacts with customers, to take into account permissions, and to change media spend plans according to the latest results (marketing resource management). However, just as with CRM, it takes quite a long time for practice to catch up with technological capability.

6. Channel management is transformational

Getting the right level of savings in costs and improvements in effectiveness is a transformational, change management issue. It involves people, processes, systems and data. It involves strategies and policies in marketing, sales, service and finance. It involves changes in product policy. Research by IBM and others shows that on many CRM projects, change management is the central issue and that when change management disciplines are not used, CRM projects tend to fail.

7. Why get customers to change channels – the benefits and costs

This is implicit in what I have said above. For suppliers, the costs are lower, and competitiveness is maintained. However, transformational costs can outweigh this, particularly for “too-early” adopters (technology immature, customers not ready) or for failed transformation projects. New markets are easier to break in to, and if innovative customers are the same as higher value customers, then leading deployers of new channels get the cream. Customers should get a higher quality experience, and so stay longer, buy more and recommend more often. This is particularly so where suppliers have invested in making their multichannel approach work properly, so if customers wants to revert to higher cost channels for a difficult issue, they can.

About the Author
Merlin Stone is IBM's Business Research Leader and Director of QCi Ltd and The Database Group Ltd. He is currently moving his professorship back to Bristol Business School.