GROWTH! It is arguably the most important gauge of a company's long-term success. Growth creates economic value for shareholders. As a result, growth is the common goal of every CEO of a public company, and one of the most important metrics by which the board of directors will assess a CEO's performance.
Yet research indicates that only one in 10 companies is able consistently to deliver above-average growth. And once growth stalls, the odds of ever resurrecting even marginal growth rates are very low. Consequently, while there is no question that growth is the imperative, the dismal results for most companies prove that it's hard to know just how to make it happen.
At its most basic level, there are only two ways to grow: 1) acquire more customers, or 2) sell more to existing customers. Clearly, both of these activities are important. It is almost always easier and more cost effective, however, to improve current customers' share of spending with a firm (i.e., share-of-wallet) than it is to acquire new customers.
As Jones and Sasser remind us in their seminal November-December 1995 Harvard Business Review article "Why Satisfied Customers Defect," "The ultimate measure of loyalty, of course, is share of purchases in the category." That's because in many, if not most categories today, consumers are not loyal to "a" firm or "a" brand, but rather by "a set" of firms and brands. This means that more customers alter their spending patterns instead of completely halting business with a firm. Therefore, efforts designed to manage customers' spending patterns tend to represent far greater opportunities than simply trying to maximize customer retention rates.
Improving share-of-wallet clearly means improving customer loyalty, so managers typically survey customers to gauge their experience via metrics such as satisfaction and Net Promoter Scores (NPS). The underlying logic is that improving satisfaction and NPS will have a big impact on share of wallet. Without question, the logic is intuitive. Unfortunately, satisfaction, NPS, and all other commonly used loyalty metrics are poorly correlated to share-of-wallet. The result is that companies spend a great deal of time and money on efforts to improve satisfaction and NPS, but typically find that the impact on customers' share of spending shows very little improvement.
Given that share-of-wallet is the ultimate demonstration of customers' loyalty, and that traditional metrics don't link well with share-of-wallet, there is an obvious problem with how we measure and manage customer loyalty. This led us to conduct a comprehensive investigation into the drivers of share-of-wallet. We completed more than 17,000 completed interviews covering more than a dozen industries, collecting data from a total of nine countries, and examining the same customers over time. Our primary goals were to determine 1) the best approach to link customer metrics with share-of-wallet, and 2) the best metric for managers to track.
What we found surprised us. Our research found that the problem with correlation between satisfaction and other common loyalty metrics to share of wallet was not in the metrics themselves, but in how they are collected and analyzed. In particular, what matters is not the absolute score (e.g., "my satisfaction score is X"), but the relative position of the score vis-?is the scores of competing brands that customers also use. When looking at the relative ranking of brands a customer uses, we uncovered a simple mathematical formula that predicts the share of wallet a customer allocates to each brand that we call the Wallet Allocation Rule.
Across companies and industries, the correlation between a brand's Wallet Allocation Rule score and its share of wallet was consistently high, averaging greater than 0.9 (a perfect correlation is 1.0). More important, the correlation between changes in a customer's Wallet Allocation Rule score and in his or her share of wallet was a robust 0.8.
A three-step process
The Wallet Allocation Rule makes calculating share-of-wallet an easy task. In just three steps, you can fill out the formula and determine your brand's share.
Step 1: Survey customers to determine the brands they regularly use.
Step 2: Gauge satisfaction (or another common loyalty metric such as the intention to recommend) for each brand the customer uses, and then convert those scores into ranks. The highest scoring brand for a customer would be ranked 1st, the second highest 2nd, and so forth. For example, let's assume that John, Jane, and Mary each use three brands of shampoo, Supra, Apex, and Summit. The chart below shows their satisfaction rating for each brand (1=completely dissatisfied, 10=completely satisfied).
The chart below shows the ranks of the three shampoos according to the satisfaction scores provided by John, Jane, and Mary. In the case of a tie, as was the case for Jane with Supra and Apex, assign each a rank for the average of the two places they would have occupied had they not been tied. In this case, Supra and Apex would have been in 2nd and 3rd place for Jane had they not been tied, so their rank corresponds to 2.5, i.e. (2+3)/2.
To arrive at a brand's share of wallet for a given customer, plug the brand's rank and the number of brands into the Wallet Allocation Rule formula. For example, John's share of wallet for Summit:
Repeat for each consumer and brand. To determine the average share of wallet for the brand simply average the customer-level share of wallet scores for each brand.
Every manager knows that it's better to be number one than number two. But the Wallet Allocation Rule makes it easy for managers to determine the bottom-line implications of that. The difference between first and second place is typically quite large. Making that jump can have a tremendous financial impact.
So we need to stop pushing for higher satisfaction scores for their own sake. Instead, we need to focus how satisfaction and other loyalty boosters can be employed to help us pull ahead of our competitors. With an understanding of why our customers use our brand as well as competitive brands, managers can identify what it really takes to be their customers' 1st choice. And because the Wallet Allocation Rule is tied to share-of-wallet, managers can prioritize their efforts by their potential impact on future revenues. We don't chant "We're Number 2" for a reasonthe championship rings go to the winners.