Statistical Methods in Customer Relationship Management

2.1 Introduction

A survey over the past few years would reveal that successful companies have been the ones that have placed emphasis on and modeled their business practices around customer relationships. This is true for companies across industries, geographical markets, and product offerings. Companies such as Zappos, IBM, and Continental Airlines have become leaders in their respective domains by implementing CRM programs in their organizations. By leveraging the combined power of database, technology, and statistical models, companies have been able to model their entire marketing process around customer relationships – in most cases, at the individual customer level. Gartner Research has predicted that the healthy growth of CRM will continue through 2012, when total worldwide CRM software revenue will reach $13.3 billion. Further, the market for CRM software in North America is projected to reach $7.6 billion in 2012 [1]. With so many resources being directed toward CRM activities, it is important to understand this investment from a managerial viewpoint.

Traditional marketing theory and practice have always advised managers to identify ways to enhance revenues and maximize profits by expanding the customer base. While this may be a viable strategy, it does not always work. For instance, in mature industries and mature markets, customer acquisition may not hold the key to better financial performance. Although we can assume that maximizing profitability is the goal of the ...