Enterprise Software

CRM costs can derail your efforts to stay competitive

Deciding to focus all your IT efforts on the customer with a CRM solution could prove disastrous if it's performed at the wrong time. See why CRM does not always makes sense when you are competing with others for customers.


Customer relationship management (CRM) is a hot commodity drawing attention from all corners and levels of the enterprise. Because businesses rely on customers to keep them afloat, it stands to reason that money spent on customer retention is money well spent. Or does it? What happened to good old product or service quality and pride in a job well done? Ford Motor’s motto for a long time was “Quality Is Job #1.” Ford’s intent was to create the sense that its first and last thought was to the quality of the product that consumers placed their trust (and money) in. With CRM, the focus now seems to boil down to customer profiling, tracking, and tracing; purchase prediction; and service follow-up. All of that means putting dollars into management and not into product. Let’s look at a common scenario where this management strategy does not always make sense.


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Product quality vs. call center statistics
Customers are drawn to quality, or at least the promise of it. The time spent creating and marketing a solid product draws customers, who in turn supply more customers. The quest for an advantage over competitors, however, has led to all manner of creative customer tracking technologies that are just short of stalking shoppers and taking notes on their every move.

On the other hand, every VP of customer service wants to have good statistics. Every saved customer, every reacquired service contract, and every consumer brought into the fold is a feather in the cap of customer service. To put it metaphorically, if consumerism were a football game, the customer service department would be like a defensive special team unit sent in to stop the extra point kick. The customers are already there—they simply need to be serviced as promised and otherwise kept happy. After all, the happy customer comes back to spend more money. Of course, the use of a football metaphor is intentional, as that special team can’t play the entire game alone. It needs the others to win as a team.

Reactionary CRM is costly
CRM solutions are so divergent in cost and deployment that I’ll use a simplified scenario to examine the changes and effects an installation has on a fictitious company. Our target enterprise is the virtual corporation WidgetWerks, Inc., a small but successful widget fabrication unit with a national marketing and distribution system. To make it easy, WidgetWerks has 10,000 sell-through vendor clients. Each of those clients purchases exactly 1,000 units quarterly at a cost of $10. For a fictional company, WidgetWerks is doing pretty good.

Now, I’ll break that down. Ten million units at $10 per widget makes for $100 million gross income. I’ll round production, marketing, and other overhead into a nice round $5 per unit figure, leaving $5 in net income. Stockholders take home $1 per unit, now leaving $4 after dividends. All in all, WidgetWerks makes a nice and tidy $40 million in profit quarterly. Sure, this is a ludicrously perfect scenario, but the goal is to keep it simple. Now I throw a wrench into WidgetWerks’ perfect world—a competitor. On the scene comes WidgeGo.com with a streamlined process, outsourced marketing and distribution, and a slim physical staff in a virtual office. Its process allows it to sell competitive widgets at $8 per unit.

Of course, WidgeGo.com makes only $2 per unit, and its stockholders take home $0.50, but it has 10 percent of WidgetWerks' staff and 50 percent of its overhead, so the newcomer’s take-home is actually higher per unit. WidgetWerks’ response could either be to ditch its widget line, diversify and branch out, cut its losses and dump the excess, or get existing customers to stay to make it harder for the competitor to win buyers. WidgetWerks chooses the final option and deploys a CRM solution from fictitious CRaM, Inc. at $250 per seat and $5,000 per server. Since 40 percent of the company’s 5,000 employees are in sales, support, and customer relations, it works out to 2,000 seats that cost the company $500,000, with an additional $50,000 for 10 servers.

Now, once a new system is installed, there is a need for training. Cost per trainee equals $150, which carries a price tag of $300,000. Next, I need to add employee hours to cover for the additional floor time and overtime. Additional limitations could compound the decline/no-show rate, as well. Few, if any, outsourced training companies are going to be interested in invoicing for less than a figure based on anticipated participation, so whoever doesn’t show up is a loss of not only training fees but also that seat’s ROI. Firing that employee for not showing up relieves you of the funds spent on internal training and threatens any customer relations established, not to mention any planned management shuffling.

Business as a balancing act
CRM solutions are large, and anything large will take time and money to have an effect on the enterprise as a whole. By the time our friends at WidgetWerks could implement their plan to add CRM for their entire sales force, they could possibly spend $500,000 in costs and control. Additionally, there are no more easy partnerships to offset costs, and there’s no way to write off portions for tax sheltering.

Thus, the balancing act comes when it’s time to decide on a CRM implementation. WidgetWerks is not a good model because its deployment was reactionary, leading to more spending than necessary. Deploying CRM before you need it allows you to test small installations with little expenditure and clearly define costs in advance of a major rollout. Using CRM like a bandage is never a good idea.

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