Strategic CRM for public enterprise using various customer segmentation methods

SungMin Bae and Youn Sung Kim Dept. of Industrial & Management Engineering, HANBAT National University SAN 16-1, Duckmyoung-Dong, Yusong-Gu, Daejeon 305-719, Korea loveiris@hanbat.ac.kr Graduate School of Logistics, College of Business Administration, INHA University 253 Yonghyun-Dong, Nam-Gu, Incheon 402-751, Korea keziah@inha.ac.kr younsung.kim@marshall.usc.edu

Strategic CRM for public enterprise using various customer segmentation methods Abstract
The dynamics of the customer-company relationship have changed dramatically over time. Customers have always been at the core of a companys long-term growth strategies. In case of the public enterprise, the customers are also valuable. But, for their unique characteristics, most public enterprises do not know their real customer. They provide specialized services to the customer for the public benefit not their profit. It does not mean that customer relationship is an unimportant matter. In this manner, very recently, public enterprise tries to identify their customer and their characteristics for customer-company relationship. In this paper, we suggest the customer identification and segmentation framework for the public enterprise considering their unique characteristics.

1. INTRODUCTION As the world market becomes more competitive, enterprise economy become financial fluctuation and saturation. A private enterprise has been set a goal of profitability growth by market and customer segmentation. In this manner, market becomes more active, and company should apply the concept of mass marketing, relation marketing,

CRM (Customer Relationship Management).[1][2] In order words, CRM affects on rapidly changing world economy, many competitor, and well-informed customer, and a limitation of existing marketing and development of IT (Information Technology). CRM

understand customers latent needs and provide right product or service to the right customer. That is, CRM define strategy and a best service for customer. Also, it considers customer needs and behavior, and examines profitability and continuous automation process. Recently, private enterprises recognize CRM as a customer-focused strategy but it does not plays an important role in public enterprises. CRM will be a great help public enterprise to renovate and develop like private enterprise. Accordingly, public enterprises increasingly adopt CRM system.[5] In addition, public enterprises have pursued public and economical efficiency of their organization. In this paper, we examine Korea pubic enterprise, which classified a top-class enterprise for year 2005 KCSI (Korean Customer Satisfaction Index). First, we examine their existing CRM system and their customer segmentation scheme. After that, we suggest various customer segmentation methods based on RFM and CSI and reconstruct data structures for CRM system and provide a framework for enhanced CRM system.

2. LITERATE REVIEW 2.1. CRM in public enterprise In Korea, most public enterprises are a kind of state-run organization. It is different from private enterprise, because it pursues public interests and profitability [6]. But, today, existing public enterprise compete with private enterprises so they should more effort for increasing their profitability. Public enterprises have various types of business and customers. And public enterprises have individual-customers as well as enterprisecustomers. But CRM of public enterprise is more difficult than private enterprise. Moreover, many public enterprises are needed to be changed to self-regulate and other-

direct. For example, from 1999, the Korean Ministry of Planning and Budget enforce CSI survey to public enterprises. The CSI result of year 2003 is 76.2/100 point on the average, and it is a big growth compared with CSI result of year 1999 59.7/100 point on the average. That is, public enterprise has been changed rapidly. In other word, public enterprise should take up CRM system for their organization, because CRM is most important system for raising their CSI score, and CRM gives public enterprise to identity their current situation and customer-focused strategy. If public enterprises steadily make an effort, CRM give help for Customer Satisfaction. Table 1 shows CRM case of public enterprises and private enterprises.
Table 1. CASES for CRM system in public and private enterrises - CS, Customer-oriented Korea Trade-Investment Promotion - Internal and external united CRM Agency (KOTRA) - Automatic CRM system in website - Members and visitors united CRM Korea Railroad system - Reservation and sale - Save customer information for DB SK Telecom - Database marketing - Characteristic CRM - Good time party KTF - All customer is owner - Combine service - A partners for life Samsung life insurance - CRM with use Pilot process American International Group Inc. - IT system reinforce for customer (AIG) service Bury St Edmunds Banks U.K. - DM for target customer Bank of Japan - DW use CRM Jebsen & Jessen South East Asia - 7area united CRM (JJSEA) EPSON - Customer service center

Public enterprise

Private Enterprise

2.2. CRM, Customer DB, and Segmentation Basically, CRM makes customer segment from customer DB. Current status of public enterprise does not use customer DB. In this manner, public enterprise should consider customer DB and it helps accurate customer segmentation. Therefore, in this paper, we

will consider customer segmentation by RFM and CSI method.

- RFM analysis: how recently is customer purchase (Recency), how frequently is purchase (Frequency), how much is total purchase per customer (Monetary). RFM analysis makes grade each item, and find customers target and improves profitability. - CSI analysis: CSI is an index of customer satisfaction to each product or service for customer. In Korea, Korea Management Association consulting (KMAC) develop KCSI. This survey has been performed to 103 enterprises in every year.

3. VARIOUS CUSTOMER SEGMENTATION SCHEME FOR STRATEGIC CRM

In this section, we examine Korea public enterprise. Our target public enterprise provides specialized services related with imports and export to small and mediumsized enterprises (SME). It serves as a bridge between Korean and foreign businessperson who wish to forge trade or investment relations.

3.1 Basic customer segmentation methods As we mentioned before, RFM data used to segment the customers of our target enterprise. Figure 1 shows processes of Frequency value based segmentation, and Figure 2 indicates processes of Recency value based segmentation. In this time, we could not perform Monetary value based segmentation, because the service fee, which is provided by our target enterprise, could not reflect their real expenses. That is, our target

enterprise is a Public enterprise and their main target customer is SME. Also, the definition of RFM differs from original definition.

Recency: numerical difference between recently and now service use data (do not care field of service) Frequency: the number of use each customer to main services Monetary: service amount, and value of current and future

Figure 1. Analysis process of Frequency

Figure 2. Analysis process of Recency

Based on RFM data, we build a decision tree, as depicted Figure 3, for customer segmentation. As a result, we find two groups of customers based on Frequency value. The criteria between loyal and normal customers are 5. It means that loyal customers uses our target enterprise more than five times in specific periods. In this time, number of loyal customer group is 168, and number of normal customer is 65.

Figure 3. Decision Tree case customer segmentation

Figure 4 is an example of customer segmentation in view point of services which is provided by our target enterprise. For HB service case, if a frequency value has over 13, then we classify this customer group is a loyal customer group.

Figure 4. 2004 Customer segmentation results

As a result, we find that customer segmentation of our target enterprise is greatly influenced by frequency value. Also, in view point of service, frequency value is deeply related to the level of customer group.

3.2 Various customer segmentation schemes As we mentioned before, we can show our target enterprises customer segmentation is influenced by customers frequency value. If our target enterprise want to more precise customer segmentation, than they should consider each services frequency value. In this section, we suggest other methods to segment their customers in view point of customer value, their services, and customers needs as depicted Figure 5.

Figure 5. Various customer segmentation methods

- Value-based customer segmentation Value-based customer segmentation focuses on the current and future value of their customers. Table 2 and Table 3 show results of customer segmentation. In Table 2, cluster F1 and F2 is loyal customer groups and customers in cluster F1 uses our target enterprises 30 times per year and 2.5 times per month. Also, in Table 3, recency value of loyal customer is one month.
Table 2. Frequency customer segmentation Group Cluster F1 Cluster F2 Cluster F3 Cluster F4 Cluster F5 Sum Frequency value 31~854 7~30 3~6 2 1 n/a Number of customer 127 1833 2387 1486 3387 9220 Rate (%) 1.38 19.88 25.89 16.12 36.74 100 Group Cluster F1 Cluster F2 Cluster F3 Cluster F4 Cluster F5 Sum Table 3. Recency customer segmentation Recency value 31 69 158 276 362 n/a Number of customer 2021 1861 2239 2450 649 9220 Rate (%) 21.92 19.64 24.83 26.57 7.04 100

In Table 4 and Table 5, we use frequency and recency value simultaneously to segment customers. Each cluster has own character of Frequency and Recency value, and their characteristics are divided high and middle and low.

Table 4. RF customer segmentation (2004) Cluster F1 Frequency Recency Rate(%) Characteristics 70 8 0.81% High F, Low R Cluster F2 11 22 6.57% Middle F, Low R Cluster F3 4 14 36.68% Low F, Low R Cluster F4 4 82 19.31% Low F, Middle R Cluster F5 3 197 22.68% Low F, High R Cluster F6 2 290 13.95% Low F, High R

Table 5. RF customer segmentation (2005) Cluster F1 Frequency Recency Rate(%) Characteristics 11.19 8.85 17.17% High F, Low R Cluster F2 5.35 38.28 20.02% Middle F, Middle R Cluster F3 3.24 81.79 26.57% Middle F, Middle R Cluster F4 3.58 178.48 16.52% Middle F, High R Cluster F5 2.19 244.18 13.33% Low F, High R Cluster F6 1.89 322.48 6.40% Low F, High R

And we can build a transition matrix between customer group based on customer segmentation results in 2004 and 2005. As a result, we can find almost year 2004 customer moved to higher level cluster in 2005.

Table 6. Customer transition matrix from 2004 to 2005 2005 2004 Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Sum Group 1 (%) 61.9 46.86 23.94 16.60 18.34 8.45 23.70 Group 2 (%) 19.05 22.31 20.44 24.90 20.67 14.29 21.00 Group 3 (%) 6.35 15.21 24.25 21.42 17.76 18.95 20.70 Group 4 (%) 4.76 8.92 15.06 17.94 21.11 14.29 15.66 Group 5 (%) 6.35 5.27 10.00 13.39 15.43 27.70 12.48 Group 6 (%) 1.59 1.42 6.31 5.76 6.70 16.33 6.46 Total (%) 100.00 100.00 100.00 100.00 100.00 100.00 100.00

- Service-based customer segmentation Service based customer segmentation is most important element for several services management. It helps to grasp each service character and identify trends of service. It could be coupled with behavioral segmentation. Figure 6 show processes of customer

trend analysis. Table 7 shows that each customer group uses their unique service. It means that we could extract the characteristics of customers which are linked with specific services.

Figure 6. Process of used customer trends

Table 7. Result of customer trends % Cluster F1 Cluster F2 Cluster F3 Cluster F4 Cluster F5 Service 1 0.81 0.22 0.88 0.54 58.84 Service 2 31.35 15.94 21.75 15.00 21.02 Service 3 13.58 1.91 13.94 13.01 2.45 Service 4 47.87 46.06 38.37 29.96 9.46 Service 5 3.73 6.98 15.06 38.95 6.35 Service 6 2.36 0.0 1.81 1.96 0.66 Service 7 0.30 28.28 8.18 0.58 1.23

Figure 7 indicates service-usage sequences extracted from customer transaction data. Each service has their sequence like service 1 service 3 service 4. It could be applied with marketing promotions.

Figure 7. service-usage sequences

- Needs-based customer segmentation Needs based customer segmentation is coupled with customer satisfaction. Therefore, CSI data is used to needs-based customer segmentation but, in general, CSI survey data is commonly used to identify the level of customer satisfaction. Figure 8 shows segmentation process using CSI survey data.

Figure 8. Segmentation process using CSI survey data

In Table 8, we classify Cluster 3 has high-level of customer needs and Clsuter 2 has low-level of customer needs based on CSI survey data. Table 9 shows Frequency and Recency value of each cluster. It shows that needs-based segmentation is deeply related with Recency value of each customer group.
Table 8. Result of analysis High (Cluster 3) Point 93.4 Middle (Cluster 1) 69.3 Low (Cluster 2) 41.2 Table 9. RF needs segmentation average Cluster cluster 1 cluster 2 cluster 3 Sum Frequency 4.54 3.64 6.67 5.24 Recency 57.84 52.36 55.42 56.17

4. FUTURE FRAMEWORK FOR PUBLIC ENTERPRISE CRM

4.1 Elements of CRM system: Architecture, Data Structure To build an effective CRM system for public enterprise, they should identify their current status of their CRM system and consider the integration of their legacy systems. For our target enterprise, their CRM system only focuses on the segmentation so it should be extended to the targeting and positioning of customers. Figure 9 indicates the architecture of future CRM system. VOC and CSI DB should be managed to conduct the customer segmentation, targeting, and positioning. And, main CRM DB should be connected to the other customer DB to enrich their customer data.

Figure 9. Future CRM system architecture

In addition, as listed in Table 10, several data should be collected and managed for transaction DB.
Table 10. Items in Transaction DB items contents Common information - Customer ID, Name Use Service - Kind of services, Service name, Use date, agency Service amount - Service amount, Credit Attitude - Participation

Table 11 shows data structures of future CRM system. For existing customer, it contains customer value related data, cost-related data, needs-related data, and so on. For potential customers, it contains the results of analysis, such as cluster information, their service-usage patterns, customer transaction matrix, and so on.
Table 11. Data structures of future CRM system
items contents note

Existing customer

Common Information Customer Value Customer cost Use service Customer Needs Cluster Information Ect. Common Information Potential value

- Existing CRM system information : Customer ID, name, area, job, wealth - Frequency in term, Recency, Monetary - Number of service cancel, credit - Prefer service, Recently use service, Next forecast service, Agency - VOC indicate, Recently VOC, CSI data - Value, Service, Needs - K-CSI behavior and common needs - Existing CRM system information : Customer ID, name, area, job, wealth - Similar cluster information

- Necessary data - From Transaction DB - With external systems - From Transaction DB - From Transaction DB - From VOC DB and CSI

Potential Customer

- Add data from CSI - From Transaction DB

4.2 VOC Control Tower (VCT) Voice of Customer (VOC) is participation of customer and VOC is a valuable source to share valuable customer information with sales, marketing, and operation management. In many enterprises, we found that the actions on the VOC occurrence and its fluctuation rely on the knowledge from experts experiences not on the systematic and scientific method. These approach may derive wrong results, and even if the results are correct, these are mere personal know-how not the knowledge stored in the knowledgebase that can be transmitted within the enterprise. In this manner, the structures of VOC are the most important job to collect and manage the VOC. Figure 10 shows the VOC data structures. To build effective and flexible VOC data structure, we

focus on the process of each service. Also, several metadata, such as FTA and FMEA related data, should be added to enrich their information.

Figure 10. VOC data structures example

5. CONCLUSIONS

Todays competitive environment requires customer-driven excellence for enterprise competitiveness. To establish the basic framework for business excellence based on customer data, we conducted the in-depth examination on customer data and provide several customer segmentation methods. In addition, to derive significant improvement point from VOC, we proposed the VOC data structures with FTA (fault tree analysis) and FMEA (failure mode and effect analysis). CSI survey data as the major source of customer needs is newly applied to segment customer groups.

6. REFERENCES

[1] V. Kumar, Werner J. Reinartz, Customer Relationship Management :a Data based

Approach, John wiley & Sons, Inc., 2005ChanUk Park, Korean CRM practice method, The 21C Organizations Series 8, sigma insight, 2005 [2] Don Peppers, Martha Rogers, Managing Customer Relationships :a Strategic Framework, John wiley & Sons, Inc., 2004 [3] YoungOk Kang, Public sector CRM case & report, Seoul development institute, 2004,7 [4] Ministry of Commerce. Industry and Energy, e-Business case Library, The Federation of Korean Industries, 2004 [5] Dyche, Jill, THE CRM HANDBOOK, Addison-Wesley, 2003 [6] JongSic Park, Element of KOTRA success, KOTRA, 2003