Playing Host

Cross-channel customer relationship management has been a buzzword of the retail industry and its vendors for several years. But many CRM initiatives have come to naught because most of today’s largest retail organizations have grown up focused on only one channel or another and the resulting incompatibilities in the way information is captured and stored by point-of-sale, call center and e-commerce systems make integration of customer data costly and cumbersome.

But now, many merchants are turning to hosted CRM programs that work directly with their existing e-commerce and back-office software to develop the integrated databases needed to run sophisticated marketing and customer service programs that will collect and analyze data across channels.

Market shift

In fact, Jupiter Research estimates that within five years, the market for hosted CRM systems will be double what it is today, with most of the growth coming at the expense of home-grown applications. By 2010, hosted CRM will account for 38% of CRM deployment vs. 19% today. Licensed software operated on-premise will account for 32% of the market vs. 33% today. And home-grown applications will fall to 29% of the market vs. 47% today.

In the hosted model, the CRM database is housed at an offsite server, while in the on-premise model, the retailer purchases CRM software and runs the program itself. In the home-grown model, a retailer builds a CRM program from scratch and runs it in-house. “Hosted CRM clearly is the fastest growing segment of the market,” says Zachary McGeary, associate analyst at JupiterResearch.

When introduced, hosted programs were less costly than traditional CRM software but that lower price came at a cost—they did not offer the same breadth of functions, McGeary says. However, over time hosted vendor applications, while still less expensive, have reached a “relative level of parity” of function with traditional CRM software, he says.

Finding an affordable yet effective CRM program is critical for multi-channel retailers because the key to customer loyalty is to deliver the right product to the right customer at the right time, in whichever channel she is shopping, says Mark H. Goldstein, CEO of Loyalty Labs Inc.

No more siloing

But unless a multi-channel retailer can gather information on a customer’s activity across the store, web site, catalog and mobile operations, it won’t have the complete picture needed to make the targeted offers that build loyalty, he says.

That means the retailer could end up recommending the wrong products or fail to recognize a discount offer the customer may have earned on the web. “You can’t just have a CRM system for Internet customers,” says Goldstein, the former head of Kmart Corp.’s Bluelight.com. “If you’ve got a bunch of stores, it gets all screwed up because the store systems don’t recognize what the web system recognizes.”

That was the case at H2OPlus.com, a multi-channel retailer of sea-derived skin care products, which launched a store-based loyalty program in 2001. The retailer soon realized that while the program benefited its retail stores, it had no impact on web site sales. “We were siloing our customers’ information,” says Jim McLaughlin, director of business development. “There was no portability between the stores and the web of the loyalty benefits that come with the program.”

That led H2O Plus to develop a loyalty program that would award points based on both online and offline purchases and enable customers to redeem awards in both channels. H2O Plus has about 30 stores in the U.S. and Canada and sells over 400 SKUs. About a third of H2O Plus’s 400,000 customers shop at its web site.

Leveraging investments

Marketing company Elevation Inc. set up the multi-channel program by leveraging Microsoft SQL server and other Microsoft technologies already used by H2O Plus to set up a data warehouse for all online and offline customer and sales data. “We tried to utilize a lot of the tools they had already paid for to reduce ongoing costs and software and licensing fees,” says Adam Heneghan, Elevation president and cofounder.

Under the program, H2O Plus uses SQL Analysis Server to segment and analyze customer data through Office XP and ASP.Net, and Commerce Server Business Desk and Excel to access the reports. Data feeds automatically into the system as the customer makes purchases online, at the store, or through the catalog call center.

H2O collects such information as birthday, skin type and e-mail addresses. The retailer has a 65% e-mail capture rate in its stores.

Similar data warehouses can be set up using almost any of the major commercially available products, says Eric Heneghan, Adam’s brother and CEO and cofounder. “You don’t need any special, magical software,” he says.

Web site and catalog data feed into the warehouse in real time while information from the stores’ POS systems is uploaded as a batch nightly. “In the morning, they would come in and have all of their transactions online as of yesterday,” Adam Heneghan says.

Elevation developed the batch process in conjunction with H2O Plus’s POS system provider.

A complete profile

IRCE 2008 Conference Multi-Media CD-ROM

H2O Plus employees can view the data using the online analytical processing—known as “OLAP”—reporting capabilities of Microsoft Excel that can segment the information by such categories as purchase tiers, purchase frequency, and channel of purchase. “The OLAP reports are very user friendly for a non-developer, which is ideal for us,” McLaughlin says. “As marketers, we don’t really want to employ a developer every time we want to get some visibility into the information.”

The segmentation capability enables H2O Plus to build a complete profile of each customer, McLaughlin says. “I can tell if they’ve spent less than $100, or between $100 and $200, or between $300 or $400,” he says. “I also can tell if they’re buying once a year, twice a year, three times a year.”

By analyzing that information, H2O Plus gets a comprehensive view of the customer, McLaughlin says. “It allows us to speak to them with a single voice so whether we’re doing e-mail, direct-mail, promotional offers, or what have you, we are able to offer a 360-degree view of the customer,” he says. “That’s been a successful strategy for us from a marketing perspective.”

H2O Plus uses a number of e-mail initiatives to promote sales, including messages triggered by birthdays, store relocations, or product launches. It also sends welcoming e-mails to new customers, and follow-up e-mails at 90 days and 10 months if a new customer is inactive. The database allows the retailer to zero in on its target audience, McLaughlin says.

Those targeted mailings have paid off in the form of higher conversion rates. E-mail marketing programs to inactive customers resulted in a 5% conversion rate, while mailings triggered by birthdays had an 18% conversion rate. H2O Plus also saw a 40% increase in online sales during the first year of the program. In addition, an e-mail marketing program to loyal customers produced a 20% click-through rate.

The integrated database also enables H2O Plus to cut marketing costs because it verifies weekly whether it has valid e-mail addresses for customers. Customers with valid e-mail addresses get only an e-mail promotion; only those without valid e-mail addresses or who have opted out of e-mail get a direct mail piece. “If the customer has either opted out, or we have an invalid e-mail address, we trigger an electronic mailing list that goes to our fulfillment house, and that person gets a postcard or direct-mail piece,” McLaughlin says. “Literally 60% of direct-mail costs are eliminated by sending e-mail instead.”

Loyalty Lab’s hosted CRM system also enables multi-channel retailers to collect and analyze data across all channels without installing special software. “Retailers have point of sale systems if they have stores,” Goldstein says. “If they have a web site taking orders, they already have a web system. They don’t want to rip this stuff out but they want a CRM program that cuts across all their channels.”

That was the goal of Montana Legend, which sells premium Angus beef online and through a catalog. “There were a couple of things that were very important to us,” says Keith Lauver, CEO. “One was the ability to personalize offers, and another was to seamlessly integrate with our existing systems.”

The retailer already had inventory and basic order management and fulfillment systems but wanted to get a specialized CRM tool, Lauver says. “They offered a web-based ASP model and we were already using another ASP web model,” he says. “All we had to do was connect the two, and that’s been really straightforward.”

Because it is an ASP model, Loyalty Lab can have a CRM program up and running within 30 days, Goldstein says. That time frame is typical of hosted models, McGeary says. Most hosted models can be deployed within 45 to 90 days, outperforming the minimum six to 12 months needed to deploy comparatively larger, on-premises applications, according to Jupiter.

Card i.d.

To enable it to collect data from a multi-channel retailer’s operations, Loyalty Lab asks for a retailer’s product data and the daily keylogs from the web site, catalog, and retail stores. Customer transaction information is then automatically sent to the retailer’s database on Loyalty Lab’s web site.

Loyalty Lab’s system also can identify shoppers in the stores based on the type of card they use, whether it’s a debit, credit or loyalty card, Goldstein says.

Loyalty Lab charges retailers a flat fee of $5,000 to $10,000 per month. When a retailer’s CRM program reaches 250,000 members, Loyalty Lab charges an extra penny per member per month. Retailers also are charged additional fees for e-mail comparable to those charged by major e-mail providers such as CheetahMail, Goldstein says.

Loyalty Lab gives the retailer software that allows employees to query the database for specific information. Retailers can ask for data segmented by such criteria as customer preference, customer transactions, and demographic profile. The CRM system also enables retailers to set up customized marketing initiatives, such as triggered e-mails or rewards programs.

Quick results

Montana Legend experienced improvements in e-mail campaign results shortly after it tested the program in December. It will go live this month.

To be sure, Elevation and Loyalty Lab aren’t the only vendors offering hosted CRM solutions. Indeed, many vendors of traditional CRM systems are coming out with hosted applications.

And hosted CRM isn’t for every multi-channel retailer. These programs make the most sense for retailers that don’t want to use home-grown CRM programs but don’t have the money to spend on an on-premise program, Jupiter’s McGeary says. “The on-premise model requires a huge upfront investment, plus you have to have the infrastructure in-house as well as the technological know-how to run the application,” he says. “The hosted model offers a lower-cost entry point.”