INTRODUCTION

As Customer Relationship Management (CRM) is increasingly perceived not as a subfunction of marketing or IT but as an integrated business infrastructure that supports or coordinates various functional departments, the perspective of CRM as a business process seems to have come into prevalence recently.1, 2 From a business process perspective, the question of ‘Would our CRM system be successful?’ is not sufficient anymore; rather, companies should ask, ‘Which CRM strategies are more meaningful to us?’ and ‘By what means can such CRM strategies influence our organizational performance?’ If the ultimate CRM goal is to promote corporate organic growth by enhancing customer equity,3 CRM strategy should influence three types of customer equity drivers consisting of customer value, brand equity and customer relationship with the focal company.4 Then, the above questions need to be embodied into ‘Which CRM strategy affects which type of customer equity driver?’ and ‘Which customer equity driver influences organizational performance?’ Research that addresses these questions should not only consider the CRM strategy and customer equity drivers simultaneously but also investigate both the company and customer perspectives. However, previous studies on CRM strategy in terms of CRM process and customer equity were conducted independently, and we are not aware of a study in this area based on an analysis of company-customer dyadic data.

This study attempts to fill such research gaps by analyzing how corporate CRM processes representing CRM strategies affect each customer equity driver and, eventually, organizational performance. In doing so, our study is fundamentally based on the two main research streams of the CRM area: CRM process by Reinartz et al2 and customer equity drivers by Rust et al.3, 4 However, our study, in theoretical perspective, expands each of the two main CRM research streams by addressing their limitations and intends to provide an intersection between them. Moreover, it would present an opportunity to uncover the detailed relational mechanisms through which corporate CRM strategy and actions materialize into organizational performance.

THEORETICAL BACKGROUND

Linkage between corporate activity and customer experience

These research efforts have been initiated by the simple assumption that none of the corporate organizational activities, even a CRM, could be responsible for or credited to the overall business outcomes directly. We believe that any organizational activity (that is, marketing strategy) may trigger customer responses, and such customer responses would affect the company's business outcomes. The theoretical foundation of such a multilayered relationship between firms and customers could be illustrated by the service-profit chain (SPC).5 The SPC provides a holistic viewpoint for understanding how a firm's service operations influence its customer perceptions and behaviors, and consequently how these are related to profits by linking service operations, employee assessment, external services and customer assessments to a company's profitability.5, 6

Among the five-staged relational mechanisms in the SPC, our main research interests focus on the latter three: from external services to organizational performance. First, companies can influence customer perceptions by enhancing their external service qualities.5, 7 Corporate external services can be represented by various business activities, provided the subject of the activities is the customer. With this point of view, CRM is surely not only a corporate external service but also one of core business processes.1 Homburg and Furst8 showed empirically that, as an external service, the handling of complaints by organizations, which is one of the critical CRM initiatives as well, affects customer justices. Second, positive customer assessment drives the company's profitability and growth.5 It means that organizational performance is not a direct result of corporate strategy itself; rather, it should be realized by the customer's evaluation, which is the first-hand effect of its external services.

CRM process

As any corporate business strategy should be implemented by a group of activities leading to desired business outcomes,9 corporate activities for CRM strategy are realized in terms of CRM processes. The basis of the CRM process could be found in the process of relationship development,10 consisting of awareness, exploration, commitment and dissolution. Several academic efforts to define the CRM process have been based on this theory. Blattberg and Deighton11 presented customer acquisition and customer retention processes as the customer equity process. Johnson and Selnes12 categorized a company's CRM strategies into three different stages, ‘from strangers to acquaintances’, ‘from acquaintances to friends’ and ‘from friends to partners’, and insisted that companies should adopt an appropriate strategy depending on market situations.12 Reinartz et al2 suggested three kinds of CRM strategies and developed parameters to measure the level of corporate CRM process, where customer retention and expansion processes are coupled into a single CRM maintenance process. Although the corporate initiatives used for maximizing customer share can also be used to retain customers, recent studies indicate that increasing customer share might require strategies different from the one for retaining customers.12, 13, 14, 15, 16 From this point of view, Kim and Kim17 define the CRM process as a series of activities for acquiring, retaining and expanding the relationship with customers by separating customer retention from customer expansion.

Customer equity drivers

Because customer satisfaction and loyalty are not sufficient to be effective mediators connecting corporate CRM strategies with its organizational performance, customer equity drivers3, 18 and customer justice8, 19 could be considered as the predictors antecedent to customer satisfaction and loyalty. Customer equity drivers are three types of customer evaluative domains influencing corporate customer equity and consist of perceived value, brand equity and relationship equity. Customer justice is more related to customer value rather than to brand or relationship equity because perceived justice represents the extent to which people ascertain the fairness of an exchange between themselves and another party.20 It means that there exists a conceptual overlap between the concept of ‘inputs against outputs’ in perceived justice21 and the concept of ‘the utility of a product/service based on perceptions of what is received and what is given’ in perceived value.22 Therefore, even though both customer equity drivers and customer justice can reflect immediate responses to corporate marketing activities, explaining the organizational performance better, customer equity drivers seem to be more appropriate because they provide a more comprehensive perspective.

CONCEPTUAL MODEL AND HYPOTHESES

Conceptual research model

Corporate customer strategy brings about the customers’ responses first based on their recognitions, and then connects these responses to sales revenue.5 However, many studies on corporate performance have focused on the direct effects from corporate activities without considering such a mediating mechanism. Studies on CRM are not an exception. For example, Reinartz et al2 showed the direct effect of CRM processes on organizational performance. Meanwhile, a large number of studies on customer equity drivers have tended to overlook its critical counterpart as well, the side of corporate strategy. As they have usually addressed the relationships between customer evaluative factors such as perceived value or relationship equity and customer loyalty/satisfaction, how such customer evaluative factors could be formed has hardly been illustrated. On the basis of such a requirement, our research framework (see Figure 1) is constructed with a three-staged conceptual model: CRM processes, customer assessments that capture the three customer equity drivers and organizational performance. The unit of analysis is a company implementing its CRM processes toward its targeted customers.

Figure 1
figure 1

Conceptual model.

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Hypotheses related to the effects of the CRM process on customer equity drivers

Many studies have been conducted to verify the effects of corporate CRM initiatives or marketing expenditures on the company's financial performance,1, 12, 13, 23 and it has been reported that financial performance is achieved by maximizing customer lifetime value (CLV).4, 12, 24 Moreover, defined as the total of the discounted CLV of all of the company's’ customers, customer equity depends on its drivers, consisting of value equity, brand equity and relationship equity.3 Therefore, we argue that CRM processes have first-hand effects on the three customer equity drivers.

Hypothesis 1:

  • CRM processes have a positive relationship with each customer equity driver.

The process of customer acquisition is a series of corporate initiatives for converting strangers or potential customers into acquaintances or identified customers by initiating a relationship with them.2, 12, 15 To accomplish this purpose, a company may explore proper customers, analyze the customers’ potential value, offer dynamic prices according to the potential value of customers, advertise to acquire customers’ interests and/or provide special sales or marketing events to acquire new customers. If a company provides customers with a value proposition that is at par with that of competitors, or a parity value, customers who perceive the price and quality as fair would start a relationship with the focal company.12 Moreover, as delivering customers a corporate value proposition through various methods would increase the customers’ perception of brand awareness and familiarity,25 the customer acquisition process is likely to influence the company's brand equity. Thus, we hypothesize the following:

Hypothesis 1a:

  • The process of customer acquisition has a positive relationship with each customer equity driver.

The process of customer retention is to convert acquaintances or identified customers into friends or core customers by maintaining relationships with them.2, 12, 15 In a practical perspective, companies usually try to customize their products or services to their customers, communicate with them, provide loyalty programs or prevent customer defection by resolving customer complaints. Relationship marketing initiatives, such as loyalty programs, have been proved to maintain customer relationship, ultimately influencing the firm's customer retention rate.13 In addition, the firm's effort at handling customer complaints, which is one of the customer retention activities, was revealed to have positive relationships with customer justice evaluations, leading to the level of customer satisfaction8, 26 that could be a determinant of the company's brand reputation.27 Consequently, we make Hypothesis 1b as follows:

Hypothesis 1b:

  • The process of customer retention has a positive relationship with each customer equity driver.

The process of customer expansion could be regarded as a series of activities of the firm for converting friends or core customers into partners or loyal customers by deepening and strengthening relationships with them.12, 15 For this purpose, firms may adapt various initiatives for cross-selling, up-selling or business referral management.2 Similar to customer acquisition, the process of customer expansion tends to appeal to the customer's perceived value and brand equity as well because expansion initiatives are merely different types of value propositions based on customer needs and knowledge.12 Moreover, Verhoef13 verified that direct mailing, an initiative for delivering additional sales, has positive effects on customer share, which is the indicator of the degree of transactional relationship. Thus, we predict the following:

Hypothesis 1c:

  • The process of customer expansion has a positive relationship with each customer equity driver.

Related to the effects of customer equity drivers on organizational performance

The effects of customer equity drivers on organizational performance have also been inferred from the final stage of the SPC model,5 which is to tie customer perceptions to business outcomes. This stage shows that the customer's perceptions of a company might lead its profitability and growth directly. Although Heskett et al5 suggested customer satisfaction and loyalty as critical success factors from the customer's perspective, using only customer satisfaction and loyalty as antecedent indexes of organizational performance might be misleading.28, 29 Although satisfaction is a necessary step in loyalty formation, there is a disparity between the pursuit of satisfaction and loyalty, and the correlation between the two is neither linear nor consistent.30 Moreover, it has been said often that even customers who are loyal to a company might not be profitable at all.29 Instead, the customer equity drivers3, 18 can explain what aspects of customer assessment influence organizational performance. Value equity, brand equity and relationship equity work independently and together to enhance a firm's overall customer equity, improving its organizational performance consequently.3 Therefore, we present another hypothesis and divide it into three separated subhypotheses:

Hypothesis 2:

  • Customer equity drivers have positive relationships with organizational performance.

Hypothesis 2a:

  • Perceived value has a positive relationship with organizational performance.

Hypothesis 2b:

  • Brand equity has a positive relationship with organizational performance.

Hypothesis 2c:

  • Relationship equity has a positive relationship with organizational performance.

RESEARCH DESIGN

Data collection and sample

To validate this research model, we conducted a cross-sectional survey of the organizational level in Korea. We first e-mailed a covering letter notifying the research objective to 320 companies enrolled in the corporate database of Korea Advanced Institute of Science and Technology (KAIST) and the corporate membership database of Korea CRM Association (KCRMA). Although 190 organizations replied positively, we started our survey with 163 companies because 27 of them later decided to withdraw from the study as a result of the relatively complex survey scheme (see Table 1).

Table 1 Survey scheme
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For each company, every CRM manager and staff member and a minimum of 50 customers (about 10 clients in the case of B2B type) had to respond to each relevant questionnaire. With respect to the customer survey, we asked the respondent firms to select their CRM-target customers randomly and conduct the customer surveys through the internet (web survey), through e-mail, fax, or phone, or face-to-face. A total of 104 companies completed both their internal and customer surveys and were included in the final analysis (Table 2).

Table 2 Company sample composition
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Measure development

We followed several steps to develop scales and measurement parameters for the study. First, we adapted measures from relevant studies in the literature. For the constructs that had no available survey items, such as customer equity drivers, we developed measures based on previous relevant studies. Second, we examined the constructs and those survey items by interviewing relevant academics and practitioners. From this step, we found that the termination process among CRM processes is hardly conducted in real situations, at least in Korea. Third, we conducted a preliminary survey in four different companies consisting of a food manufacturer, a dairy company, a pharmaceutical company and a department store, which are the front-running companies in each industry in Korea. All the constructs used in this study are formative indicators that consist of distinct subcomponents, and each item was measured on a seven-point Likert scale from ‘strongly disagree’ to ‘strongly agree’.

Customer acquisition evaluates the level of corporate activities aimed at acquiring prospective customers and winning back defected customers. Customer retention includes corporate activities to evaluate customer value and retention cost, prevent customers from churning and operate loyalty programs. Finally, customer expansion is a set of corporate initiatives for cross-/up-selling, customer referrals and prosuming strategy, which aims to motivate customers to participate in producing products or services. In terms of customer equity drivers, Zeithaml22 emphasized that value equity (that is, perceived value) could be abstracted from product/service quality, and from its price and convenience; hence, we reflected it in our measurements. Brand equity could be assessed by measuring advertising awareness, perception of information from the company, corporate citizenship, community event, ethical standards and image fit with the customer's personality. We also adapted the suggestion of Rust et al4 and used it as our construct for relationship equity, which can be measured by the degrees of investment in loyalty programs, preferential treatments, familiarity with supplying procedures, individual relationship and consciousness of community, and trust. In the meantime, we adopt four measurement items including comparative overall performance, market share, growth and profitability, as suggested by Reinartz et al.2

ANALYSIS AND RESULTS

Assessment of measurement

As all our constructs are formative rather than reflective, traditional assessments of convergent validity and individual item reliability might be irrelevant owing to the very nature of formative measurement.31 This situation stimulates us to use confirmatory factor analysis for assessing measurement reliability and validity for each factor (Table 3). We selected PLS because: first, it accepts formative factors, whereas LISREL and AMOS usually regard latent variables as reflective factors, occasionally causing identification problems32; second, PLS produces stable results in spite of the small sample size32; and third, it is more suitable for a explorative study such as this.

Table 3 Confirmatory factor analysis
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As the unit of analysis of our study was at the company level, we had to calculate the average of the individual answers for each item to represent the current state of the company. For example, employees might answer a question such as ‘How is your company's loyalty program working?’ differently. However, if you can confirm that the answers are converging into a specific level, the average value can represent the level of the company's loyalty program. To do this, we had to adopt another analytic to show the reliability between raters rather than normally used reliability, which is to calculate the consistency between items, such as Cronbach's alpha. It required us to examine the perceptual agreement by judging the extent to which data aggregation across respondents was adequate.33 We computed the inter-rater agreement (rwg(1))2 for each measurement parameter per company,34 and most rwg(1) values ranged from 0.69 to 0.94, which could be considered as the acceptable level.35 Moreover, the three customer equity drivers, which are the mediators in our model, were answered by the firm's designated customers. This survey scheme would preclude the common-method bias that might occur when dependent and independent variable data are collected from a single informant during an organizational research.36

The confirmatory factor analysis shows that the convergent validity for each construct is valid because all the factor loadings are higher than 0.7 (P<0.01) and composite reliabilities exceed 0.9 (Table 3). As the correlations between o ur cons tructs are lower than the square root of AVEs, we concluded that the discriminant validities are provided32 (Table 4).

Table 4 Correlation matrix
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Results

As we mentioned above, we used PLS to validate our research model. We summarized the results in Figure 2.

Figure 2
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Summary of results.Note: *P<0.1, **P<0.5, ***P<0.01.

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Our results show that corporate CRM processes have positive effects on each customer equity driver: namely, customer acquisition to value equity (β=0.370, t=2.594) and brand equity (β=0.337, t=2.392), customer retention to relationship equity (β=0.682, t=15.155) and customer expansion to value equity (β=0.287, t=2.129), brand equity (β=0.261, t=2.229) and relationship equity (β=0.381, t=4.103). Therefore, Hypothesis 1 addressing the relationships between CRM processes and customer equity drivers is partially supported. It is noteworthy that relationship equity has a comparatively higher R2 (61.4 per cent) in terms of customer retention and expansion. As the mediating variables between CRM processes and organizational performance, value, brand and relationship equities were ascertained to impact significantly on organizational performance with coefficient values 0.425 (t=3.993), 0.392 (t=4.116) and 0.616 (t=9.287), respectively. Therefore, Hypothesis 2 including all its subhypotheses is supported.

Findings

From this study, we stress that corporate CRM strategies have effects first on customer equity drivers, and those drivers then determine its organizational performance. Although three customer equity drivers surely relay the effects of CRM strategy to corporate performance, they are not identical. In more detail, customer acquisition was validated to have effects on both the customer's value and brand equity. It implies that marketing initiatives to acquire new customers should be designed to build up customer perceptions of corporate value and brand equity rather than relationship equity. Customer retention, however, is directly opposite to customer acquisition: its only significant effect was on relationship equity. Thus, a company should have a better understanding of the limitation of its customer retention strategy in that it hardly enhances their value or brand equity. In other words, it might be better to plan a retention strategy not relying on the instruments of value or brand equity such as price discount, extra or free gift or mass communications accentuating its brand power but rather on those providing relational benefits. Meanwhile, customer expansion was shown to have effects on all of the customer equity drivers. It notifies that a stalwart relationship between company and customers, which often results in cross-/up-purchasing or recommending friends, would demand practical utilities and a good brand awareness as well as mutuality.

This study also shows that customer equity drivers could be better predictors of organizational performance by indicating the R2 value on it as 0.713. Although all of the customer equity drivers have positive relationships with organizational performance, they have been shown in the order of relationship, value and brand equity in terms of the degree of effects on organizational performance. It might reconfirm the assertions of previous studies4, 12 that product or brand-oriented strategy might not be effective in companies arriving at the maturity period in terms of product lifecycle. In other words, companies, at least those facing a keen competitive situation, should give more attention to customer retention or expansion strategies rather than to customer acquisition ones.2, 3, 37

CONCLUSION

Research implications

We can derive several academic implications from this study: first, this study is the first attempt to integrate two important research streams in the CRM domain, CRM processes and customer equity, by showing that those factors from different facets could be coupled tightly in terms of organizational performance. Second, this integrated model exposed the detailed relational mechanisms verifying which CRM processes affect which customer equity drivers, and then reaching organizational performance. To make this causal relationship more realistic, we collected data on CRM processes from within each company and those on customer equity drivers from outside, the customers. Third, we developed and validated the measurable instruments of customer equity drivers, which have been discussed just conceptually, and we corroborated empirically the previous conclusions12, 13, 14, 15, 17 that customer retention strategies are different from customer expansion ones.

We believe that this study can present some managerial insights as well. First, as all corporate activities were first evaluated by customer perceptual valuation and then those effects were shown in terms of organizational performance, it is quite indisputable that companies should reflect those causal relationships in their performance measurement system. It means that they have to include not only company-side key performance indicators (KPIs), which are usually expressed in financial or economic indexes, but also customer-side KPIs such as customer satisfaction or loyalty into their assessment systems. Second, this study implies that companies should understand which marketing activity would have effects on which customer equity driver when they plan CRM initiatives. This study highlights the fact that customer retention strategies might not have strong impacts on the customer's value and brand equity. In other words, they should focus on customer acquisition strategies such as product promotions or media advertisement if they want to strengthen their brand equity.

Limitations and future directions

We recognized several research limitations in this study. First, we could not reflect industry characteristics in our study because of the relatively small sample size. This small sample size was the result of a pure dyadic data set that was formed by collecting data from both companies and customers but not boosting it by one-to-many coupling: we calculated the one representative customer-side value from a lot of customer data from each company and made it correspond to the company. Although we still believe that this survey scheme can show us the existing situation in status quo without magnifying it, the sample size was too small to generalize the results from this study; instead, it might be fair to call this study an exploratory one. Second, we could not exclude the possibility of sample bias in our study because we used the customer data stored in the companies’ database, which means all the customers we surveyed were already acquired ones. Although it is desirable to acquire new customers by analyzing existing customer data gathered through various channels, most customer acquisition initiatives in companies still depend on mass communication to an unspecified number of the general public. Therefore, this study's results, particularly that related to customer acquisition strategy, might include nonrandom error caused by sample characteristics. Thus, to identify the effective corporate activities and customer equity drivers in each relationship phase, the future study should expand the boundary of subjects to potential customers and then analyze those data in terms of their life stages and purchasing history.