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Marketing Expert Frederick Newell

How do you take database marketing to the next level? Customer relationship management.

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You know the drill: Go through the checkout line at the supermarket and whip out one of the several hundred plastic cards in your wallet so the checker can scan it for your extra-special "club savings." So did the savings of $.35 on a can of olives and $1 on dog food buy your loyalty for that particular chain? Not likely.

There's a whole lot more to gaining customer loyalty than discounts, and that's where customer relationship management comes in. We've asked marketing guru Frederick Newell, author of Loyalty.com: Customer Relationship Management in the New Era of Internet Marketing (McGraw-Hill, $29.95), to give us a primer on the subject and explain how marketing has changed with the times.

Entrepreneur.com: What is customer relationship management? How is it revolutionary compared to database marketing?

Frederick Newell: It's the next stage of database marketing. In database marketing, we were trying to learn about customers to sell more of what we wanted to sell. With customer relationship management, we're trying to learn more about customers so we can offer them things they want to buy. There's a big difference.

Entrepreneur.com: What are the biggest mistakes you see companies making when trying to build customer relationships and loyalty?

Newell: One of the major points of my book is that discount and points programs are not going to build loyalty. They'll get people to show a card so you can capture transactional information and that's fine, but you can't buy loyalty with discounts or points. You have to develop loyalty by making customers' lives easier and more pleasant, making it easier for them to do business with you. And that's a mistake many, many people are making.

Entrepreneur.com: What are a few examples of what companies are doing right to make customers' lives easier?

Newell: In the book, I talk about Nat Sherman, the tobacconist. The company keeps track of all its customers' likes, dislikes and purchases, and knows so much about its customers that it can serve them beautifully. The company knows when it's time for customers to reorder. Their reminder is online for them, their order form filled out, and all they have to do is just click it. And the company literally does make customers' lives easier. The reason for the loyalty is that customers aren't going to bother to teach somebody else everthing they've already taught Nat Sherman.

Many, many businesses now are collecting data, but they don't know what to do with it, or if they know what to do with it, they're not doing it. And that includes most of the dotcoms and most of the supermarkets in North America. Some of the supermarkets in Europe and the United Kingdom are doing excellent work with this. If Tesco [a supermarket chain in the United Kingdom] does a 5 million mailing, it will have five different magazines based on people's interests. Within each version, there will be 100,000 totally different cover letters addressing specific interests of the customers.

Entrepreneur.com: Why shouldn't a company try to build relationships with all its customers? Why is it important to focus on certain groups?

Newell: Because some customers are just cherry pickers. They come in for low prices, and when the discount goes away, they go away. So you want to find out which customers are profitable and invest your efforts with them. Take the money you were spending in trying to reach everybody and wasting on that bottom group, and you'll be able to afford more communication with your best customers.

Entrepreneur.com: What are some ways a company can use the Web to develop customer relationships?

Newell: First, they've got to get e-mail addresses, which not many companies have done yet. And in the process of getting them, they've got to get approval to send e-mails to customers because customers don't want any more spam. Once you get that information, it's quick and easy and near zero cost to send out thousands of very specific, personalized messages. And I think that's the secret. If you're using e-mail, it has to be very, very personalized.

If you get in the e-mail game and are asking people to reply to you, you'd better be able to handle the replies because people don't want it next week or next day. They want it right now. And not too many people are well staffed to do that, though some are outsourcing it very well. So it's a different ball game.

Entrepreneur.com: How are customer relationship management and the Web changing brick-and-mortar businesses?

Newell: The fact is that customers have the power now because they have so much more information. But I don't think it's the end of brick-and-mortar businesses. I read the other day that 63 percent of people shopping online get their research and information online and then go buy at a brick-and-mortar location. So I actually think that brick-and-mortar companies, in the long run, will do better than the pure dotcoms. The multichannel is going to be the answer, although I think they have to understand that there's a lot more to the Web than just selling merchandise. E-commerce is fine, but e-service and e-information is just as important. Customers value information highly, and the smart retailer, whether pure dotcom or brick-and-mortar, is going to use the Web as a communication tool more than just as an e-commerce selling tool.