CRM Performance and Lock-in Effect

By | February 9, 2018

CRM performance focuses on derived relationship benefits concerned with revenue and profit- ability, the acquisition and retention of customers resulting from more appealing product and service offerings, and the ability to customize product and service offerings to better fit cus- tomers’ individuality (Swift 2001; Winer 2001). As the customer-business relationship flour- ishes (i.e., the business learns of and more precisely satisfies its customers’ needs), both sides reap greater benefits. Customer loyalty develops and leads to repeated purchases of products and services (Reichheld and Teal 1996). In contrast to the costs of acquiring or winning new customers, businesses usually incur fewer expenses servicing their existing customers and can expect higher profit margins from their sales (Storey and Easingwood, 1999). Thus, building customer loyalty not only benefits the business with repeated sales, it also holds a key to retain- ing or locking in  customers.

A lock-in effect refers to the extent to which customers are motivated to engage in repeat transactions (Amit and Zott 2001). A customer’s preference to minimize immediate (short-term) costs while deemphasizing future costs drives lock-in (Zauberman 2003). Customer costs include explicit, implicit, and switching costs. Explicit costs fall into one of three categories (Klemperer 1987): transaction (i.e., costs incurred to start and sometimes to terminate a relationship), learn- ing (i.e., the effort to reach the same level of comfort or facility with a new product), and artificial (i.e., earned rewards and discounts). Implicit costs involve risk aversion and decision biases (Chen and Hitt 2002). Often, switching costs carry an information economics implication, such that a search continues while the marginal cost of a search (i.e., acquiring new information) remains lower than its expected marginal benefit (Zauberman 2003). Thus, lock-in occurs when a per- ceived economic cost, such as one linked to acquiring new information about or learning to use another product or service, exceeds the expected benefit of switching. Also, Vandermerwe’s (2000) description of customer lock-on suggests that customers will select a business that pro- vides a superior value at a low delivered cost.

The two components of customer lock-in examined in this study are information sharing and customer network effect. Information sharing occurs after customers have established their trust in a business and sense a benefit from their relationship. It is a voluntary act that

 

relies on an individual’s attitude, often involves the exchange of personal information, and incorporates interpersonal relationships (Kolekofski and Heminger 2003). This also implies a willingness of the business to grant information and service privileges to its partners. Hence, the greater the trust and benefit, the more willing a customer is to share his/her information with the business. Lock-in occurs when the benefits from sharing cannot be obtained else- where, particularly when they are intangible and their value is derived only through contin- ued patronage.

Customers communicating their perceived values and benefits of products and services to others of the segment (group) can also initiate lock-in. A customer network effect builds on the trust of members within the segment that allows them to rely upon each other for assurance. Lock-in occurs when the cost of acquiring a new source of information exceeds the perceived value or benefit of a product or service. CRM assists lock-in by identifying and targeting certain customers among the existing ones to build specific relationships.

If a business is highly successful in understanding and satisfying its customers’ needs through its CRM, the effect of lock-in will be greater. Therefore, lock-in can be seen as the product of CRM performance.

 

RESEARCH MODEL AND TEST OF HYPOTHESIS

 

Figure 8.1 illustrates the research model of this study. The three CRM elements, CRM perfor- mance, and partnership quality will indirectly and directly affect customer lock-in (network ef- fect, information sharing). As intervening variables, CRM performance and partnership quality will influence the relationship between the CRM elements and customer lock-in. Six major test hypotheses have been developed to test the relationships (i.e., associations) between the vari- ables. The paragraphs that follow present and discuss each hypothesis.

Each of the three CRM elements—market orientation, IT investments, and mass customization— will positively affect CRM performance. Market orientation represents the business’s orches- trated and coordinated efforts toward understanding and satisfying its customers’ needs, most of which are enabled or enhanced through ICT. Businesses that are less inclined toward market orientation will not benefit from CRM, since they will be less sensitive to marketing intelligence. In customer-driven and ICT-enabled markets, market orientation is a critical element to CRM performance, as it provides direction, particularly through the discovery and dissemination of knowledge. The resources that a business dedicates to its market orientation should positively influence its use of CRM. Thus, increased market orientation should improve CRM performance, particularly in profits and revenues.

An emerging critical element to competing in customer-driven markets is IT. IT investments reflect a business’s profile and commitment to technology, including its IT architecture, IT infra- structure, (software) applications, and ability to share information and knowledge across organi- zational boundaries both within the business and across to its partners. Various ICT are chosen for their different effects on the business (i.e., advantages, benefits), thus creating an IT profile of the organization. Because CRM requires the integration of business units, IT is essential to CRM performance. Organizations that recognize IT’s strategic advantages and have committed them- selves to its adoption (acceptance) will use it to boost their CRM performance. Often cost advan- tages (i.e., reduced operating and marketing costs) characterize IT investments.

Mass customization seeks to achieve a one-to-one marketing level through products and ser- vices specifically tailored to meet the needs of an individual customer. ICT has been pivotal in enabling this. When products and services are successfully presented in such a way, customer retention will be high. Although the cost of customizing products and services will be higher than that of a mass marketing approach (i.e., a product or service to fit a broad range of customers), the long-term benefits, revenues, and profitability will be greater. The more successful a business is with mass customization, the greater its ability to retain and satisfy its customers. Less successful efforts will be detrimental to CRM performance.

H1: CRM elements have a positive relationship with CRM performance

H1a: Market orientation has a positive relationship with CRM performance H1b:  IT investments have a positive relationship with CRM performance H1c:  Mass customization has a positive relationship with CRM performance

Market orientation will also have a positive effect on partnership quality. Businesses that are dedicated to sensing the needs of their customers will engage in meaningful two-way dialogs with them. Opening channels of communication helps build customer satisfaction through feedback and education, and instills trust. As a business projects a single image to its customers, partner- ship quality will flourish.

Partnership quality also requires that the organization recognize its customers’ individuality. Greater investments in IT to collect, retain, analyze, and organizationally share and integrate its customers’ information into its production processes will improve the business’s ability to reach each customer on a one-to-one basis. In the past, this was less achievable. However, continual advances in IT have opened new opportunities and lowered the cost of intelligence (i.e., scanning repositories for informa- tion and knowledge). IT now enables a business to personably manage its customer relationships. Thus, greater investments to boost IT capabilities will improve partnership quality.

Partnership quality reflects customer satisfaction built over time. A business’s ability to meet its customers’ needs and expectations and recognize their individuality contributes heavily to- ward forging closer relationships with them. Mass customization is based upon open two-way communication to create products and services specifically tailored to suit individuals. As the differences among expectations, conformation, and performance of these products and services approach zero, customers will be more willing to engage in further transactions. Thus, mass customization contributes to satisfaction and trust and improves partnership quality.

 

H2: CRM elements have a positive relationship with partnership quality

H2a: Market orientation has a positive relationship with partnership quality H2b:  IT investments have a positive relationship with partnership quality H2c: Mass customization has a positive relationship with partnership quality

 

 

Two major objectives of CRM are to retain customers through loyalty and to increase their switching costs. If a business succeeds with CRM, customer needs and expectations are more precisely met, leading to greater customer loyalty. Thus, the lock-in effect will result when the business uses its resources to instill confidence in its customers and give them incentives to main- tain their relationships. The actual and perceived benefits they receive from the relationship add to the burden of opting out of the relationship. Thus, the more successful a business is in estab- lishing close relationships with its customers through CRM, the greater the lock-in effect.

 

H3: CRM performance has a positive relationship with customer lock-in

H3a:  CRM performance has a positive relationship with customer network effect

H3b:  CRM performance has a positive relationship with information sharing

 

Partnership quality will also affect customer lock-in. Because lock-in is built on trust and loyalty, partnership quality is essential to achieving and sustaining the lock-in effect. When part- nership quality is high, customers will be more motivated to engage in future transactions through means such as meaningful incentives and added value. Therefore, while the business maintains its partnership, switching costs remain high.

 

H4: Partnership quality has a positive relationship with customer lock-in

H4a: Partnership quality has a positive relationship with customer network effect

H4b: Partnership quality has a positive relationship with information sharing

 

Reaping the benefits of customer lock-in requires the business to commitment itself to market orientation, IT investments, and mass customization. These alone, however, cannot directly af- fect the lock-in, as it is derived through CRM performance. The infusion of ICT in the CRM elements will have a positive effect on CRM performance, which in turn will have a positive effect on customer lock-in. This suggests that CRM performance mediates the relationship be- tween the CRM elements and customer lock-in.

 

 

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