The Wallet Allocation Rule. Aksoy Lerzan

      Viewing market share as a function of these different components points us toward three very different strategies for growth.

      A penetration strategy is all about acquiring new customers. This means persuading potential customers to try the brand and expanding into new markets. Without question, acquiring new customers will always be vital to the success of any business. As markets become saturated, however, it gets more and more difficult to find new potential customers. In fact, lower demand and higher competition in the developed world has caused some of the most-respected brands to chase growth in the developing world.

      A usage strategy is about getting consumers of your brand to increase their total consumption in the category. In other words, if your brand can get its customers to buy more in the category than competitors do, your market share will increase. It's a good idea if you can do it. For example, we are aware of one toilet bowl cleaner that wanted to increase usage of its product to increase its market share. Unfortunately, convincing consumers to clean their toilets more frequently wasn't a realistic option. Instead, the company increased the size of the opening on the spout used to spray the cleaner into the toilet. The result was that more cleaner went down the toilet, and hence the bottles ran out sooner, thereby requiring more frequent purchases of the product.

      For most categories, however, getting customers to buy more is very difficult to do. Need tends to drive most of our purchases. For example, we don't tend to buy more toothpaste when we start making more money (and we probably wouldn't even if they increase the size of the opening on the tube).

      A share of wallet strategy is about getting your customers to allocate a greater percentage of their spending in the category to your brand. It is almost always easier and more cost-effective to improve current customers' share of spending with a firm (i.e., share of wallet) than it is to acquire new customers. This is because, in 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. For example, a study by Deloitte finds that nearly 50 percent, on average, of hotel loyalty members' annual hotel spend is not with their preferred brand.26 Moreover, a study by McKinsey finds that the cost of lost wallet share typically exceeds the cost of customer defections. For example, McKinsey found that on average 5 percent of bank customers close their checking accounts each year; the impact of losing these customers results in a loss of 3 percent of the banks total deposits. By contrast, 35 percent of customers reduced their share of deposits each year, resulting in a loss of 24 percent of total bank deposits.27 Moreover, they observed this same effect for all 16 of the industries that they examined.

      Although managers need to consider how each component of market share fits into their firms' overall growth strategies, share of wallet is the factor most directly affected by the customer experience. After all, share of wallet is arguably the most important gauge of a customer's loyalty – in fact, in their seminal Harvard Business Review paper, business consultant Thomas Jones and esteemed Harvard professor W. Earl Sasser, Jr., assert that share of wallet is “the ultimate measure of loyalty.”28 Clearly, loyalty builds as the result of consistently positive customer experiences.

      As a result, both CEOs and CMOs make customer loyalty a top priority. Seventy percent of CMOs rank customer loyalty as a top three strategic priority for their firms – 93 percent put it in their top five.29 Similarly, CEOs consistently rank customer relationships in their top challenges – in fact, a recent global survey of CEOs found that this challenge is second only to getting top caliber employees.30

      To achieve this goal, firms worldwide have adopted holistic customer experience management programs with the clear aim of improving the share of business that customers allocate to their brands. In fact, 65 percent of companies have a senior executive in charge of their company's customer experience efforts.31 And to help these companies, an entire industry has developed to maximize the customer experience at all points of contact within a company.32 The result is that companies spend billions of dollars each year to improve the customer experience.

To ensure that these efforts are positively affecting customer loyalty, most CMOs measure and manage customers' satisfaction and recommend intention levels (see Figure 1.1). In fact, marketing executives frequently rank customer satisfaction as their number one priority.33 Why? Because managers believe that spending on the customer experience results in the following chain of effects: customer experience → customer satisfaction → share of wallet.

Figure 1.1 Customer Loyalty Metrics Tracked by CMOs34

      Unfortunately, it doesn't work out that way. Although the goal is admirable and the focus on the customer experience is imperative, managers are unable to connect their efforts to improve the customer loyalty metrics that they track with business growth. Spending more money on the customer experience often doesn't result in happier customers.35 Probably more critical for managers, improved satisfaction rarely leads to improved market share.

      To find out why, we undertook an intensive investigation into the relationship between satisfaction and business outcomes. Our research – conducted with Professor Sunil Gupta at the Harvard Business School – uncovered two critical issues that have a strong negative impact on translating customer satisfaction into positive business outcomes. Moreover, these issues are equally applicable for other commonly used metrics, such as recommend intention and the Net Promoter Score (NPS).36 These two problems can be summarized as follows:

      1. Satisfaction ≠ market share

      2. Satisfaction ≠ share of wallet

      Given the serious potential for damaging the financial performance of a company, these findings should affect every company's customer experience strategy.

      Different Metric, Same Outcome

      Before discussing the two most common problems, it is important for managers to understand that whether your firm tracks satisfaction, recommend intention, NPS, or some other commonly used customer survey–derived metric, you are unlikely to get managerially relevant differences in terms of their relationship to growth. This is because these metrics are actually measuring the same underlying construct – specifically, how positively customers feel toward the brand.37 So the argument that one metric works significantly better in linking to growth is not only erroneous but has been conclusively proved to be false in all large-scale peer-reviewed scientific investigations.38

      Our own research clearly and easily demonstrated the fallacy of the “my metric is

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