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 Motivating your CRM system financially is, in many instances, a case of making the return on investment look attractive. One formula that we came across for calculating ROI is: ROI = R + C + P + I – CRM costs In this formula:

  • R is change in revenue
  • C is change in the cost of doing business
  • P is change in productivity
  • I is change in intangibles
  • CRM costs are the total costs accrued over the life of the project.

Being able to measure increased revenues or profit is simple because your accounting system, or financial statements, should provide an established base line against which to measure improvement. But how do you measure the ROI of greater customer loyalty, or increased customer satisfaction without something to compare them against? This can be tricky, because you have to first establish the current levels of customer loyalty and customer satisfaction. And unless you have existing data that you can use, this part of the exercise is based on thumb sucks and guesswork. Lifetime Value Another method of calculating ROI is based on the lifetime value (LV) for each expected new customer and each existing customer whose business you will retain. ROI is the sum of lifetime values for all the customers minus cost of the CRM system. Of course, each customer has unique purchasing patterns and behavior. The business cycle varies for different situations, meaning that there is no single formula for these calculations. The calculation shown here is a generic formula that can be used as the basis of a calculation of the lifetime value of a customer. LV= average sale value x %GP x PF x time period where:

  • LV is the lifetime value for the customer
  • Average sale value is the average value of sales per customer
  • %GP is the percentage gross profit per average sale value for the customer
  • PF is the purchase frequency for the customer
  • Time period is the length of time they will remain a customer.

These calculations are tricky because the values for each customer will differ, to say nothing of the difficulty you will face if any of this information is not available from your present systems. If you only have a few customers or a few whose purchase history you track, the calculations are not too tiresome. But if you have hundreds, it represents a substantial amount of work. CRM System Costs When you calculate the cost of the CRM system, be sure to include all costs. For example:

  • Hardware purchases and/or upgrades
  • Software purchases
  • Training costs for your staff, including travel and accommodation
  • Implementation and customization fees, including consulting fees
  • Cost of software upgrades and/or annual maintenance.

Thus, ROI = Total LV for the life of the system – CRM system costs. As soon as you stop to think about these calculations you can begin poking holes in them, finding fault with aspects that are not accurate or not included. For example, we would expect to be taken to task for not using a net present value calculation to accrue CRM costs, excluding annual fees, over the life of the system. Another aspect to consider is that these calculations are all based on assumptions, and one of the assumptions is that no additional resources will be required to service the ongoing relationship. So, unless you are an accountant, or have money to spare to pay someone to do all the necessary calculations, forget ROI as a justification. Before we leave the subject of justifying your CRM, consider these questions posed by Geoff Ables, in a 2004 paper. Quick, how many customer contacts do you have every month through each channel (direct mail, phone order, on-site, online, etc.)? How much does it cost to supply an order through each channel? Which channel is most profitable? How much unused volume do you have in each channel? How much revenue can you drive through each channel? Can you integrate your channels so that you are touching your customer through all the methods you have at your disposal and creating a 360-degree experience? (Geoff Ables, 2004.) If you cannot answer any of these questions, don’t worry; you are in the same position as most companies without any sort of CRM system. The importance of knowing the answers to at least some of these questions is another justification for your CRM system. As with any project, you need someone senior in the organization to champion your cause. This person has to be someone with executive authority within the business as they, effectively, become the CRM project sponsor. This is generally a separate role from that of project manager although, in a small company and for a small project, the same person could take on both roles. It may be you who fills that role, but you need to carefully consider what is involved before you take on any specific role. If you do not want to be involved with the nitty-gritty of the installation as the project manager, and you have the necessary authority to promote the project internally and externally, set yourself up as the project sponsor. The roles of project sponsor and project manager are discussed more fully under key appointments in The Essential Guide to Articulating CRM Requirements.

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This article is an excerpt from our free CRM Essentials ebook series. Download them all neat and tidy here..

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