The Wallet Allocation Rule. Aksoy Lerzan

12 Oh my God!

      This is a major problem. Marketing's job is to bring the voice of the customer to the company. Customers are the only reason companies exist, and marketing is charged with overseeing the customer experience. In fact, 90 percent of CMOs are personally responsible for the overall customer experience management efforts of their firms.13

      Unfortunately, for many corporate leaders marketing has become, to quote the CEO of an Italian telecom, a “function not on the top of my everyday priority list.”14 Or worse! CEOs often view marketing as a money pit. To quote the CEO of one U.S. retailer, “Marketing [has] great ideas but no clue how to measure its impact on what really counts How can I allocate them a budget that disappears into a black box while others can deliver me an ROI for every dollar I give them?”15

      Marketing's detractors likely don't see a problem at all – and to be sure, there are lots of detractors. Ironically, for a management science charged with managing the reputation of their companies, marketing has a terrible reputation among consumers and business professionals.16 Only 10 percent of the population has a positive impression of marketing. By contrast, 62 percent have a negative opinion of marketing. Moreover, detractors can rightfully point out that companies still exist and that companies must, by definition, have customers. So companies can exist just fine without much help from marketing. What difference does it make that marketing has lost strategic relevance with CEOs?

      The reason is best summed up in the words of Peter Drucker, the father of modern management.

      There is only one valid definition of business purpose: To create a customer Because it is its purpose to create a customer, any business enterprise has two – and only these two – basic functions: marketing and innovation. They are the entrepreneurial functions. Marketing is the distinguishing, the unique function of the business. Any organization in which marketing is either absent or incidental is not a business and should never be run as if it were one.17

      Marketing's failure will ultimately be reflected in the customer experience. In fact, it already is. Given the current CEO-CMO breakdown, it's not surprising to find a corresponding breakdown between the way senior executives view their companies and the way their customers do. After all, it's marketing's job to be the champion of the customer for the CEO. What is surprising, however, is the enormity of the gap. A study reported in the Harvard Management Update finds that 80 percent of company executives believe that their companies provide a “superior” customer experience. Only 8 percent of their customers agree.18 This finding is confirmed in the Temkin Group report, “The State of Customer Experience Management, 2014,” which found that only 10 percent of firms are customer centric.19

      Of course, positive change for customers will happen only when CEOs view their companies from their customers' perspective. After all, there's no need to change things when you believe you are already doing a superior job.

      It is easy to blame CEOs for being shortsighted. The sad truth is that CEOs' complaints about marketing are valid. Marketers do a terrible job of linking their efforts to tangible business outcomes. To be fair to CMOs, it isn't for lack of desire or effort. The problem is more pernicious. All too often, the expected linkage isn't there – and it never was! The underlying assumptions CMOs use to justify most of their investments in improving the customer experience are wrong.

      Growth Is Hard to Find

      CEOs at every public company are obsessed with achieving two outcomes: profits and growth. The reason for profits is obvious: Profits determine a company's viability.

      It is growth, however, that is the lifeblood of companies. It is arguably the most important gauge of a company's long-term success. It is what 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.

      Unfortunately, growth is a goal that is seldom achieved. An investigation of 4,793 public companies reported in the Harvard Business Review found that fewer than 5 percent achieved net income growth of at least 5 percent every year for five years.20 Furthermore, once growth stalls, the odds of ever resurrecting even marginal growth rates are very low.21 Consequently, although 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.

      Deconstructing Market Share

      If the goal is market share growth, then we need to begin by understanding what actually drives market share. Strangely, although growth is the goal of virtually every CEO of every public company, few managers know the main components of market share. Virtually all managers calculate market share as follows:

      In other words, they simply take the sales figure for their firm or brand and divide this by total sales for the category.

      The good news is that this is technically correct. The bad news is that it provides no strategic guidance for growing market share. To do that, managers need to understand the impact of three distinct components that drive the market shares of all firms:22

      1. Penetration: This is the proportion of customers within an industry category who use your brand at least once in a given time period.23 It is calculated as follows:

      2. Usage: This is a measure of how heavily customers of your brand use products in the category relative to all customers in that same category.24 It is calculated as follows:

      3. Share of wallet: This is the percentage of your customers' spending in the category that is allocated to your brand.25 It is calculated as follows:

      Looked at this way, the formula for market share becomes as follows:

      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

13

Kranik, Pete. “CMO Impact on Customer Experience.” A Joint Survey by The CMO Club and Neolane (June), 2013, www.neolane.com/usa/resources/CMO-Survey-Report/cmo-club-survey-results.

14

Klaus, Edvardsson, Keiningham, and Gruber, “Getting in with the ‘In’ Crowd: How to Put Marketing Back on the CEO's Agenda.”

15

Ibid.

16

Sisodia, Rajendra S. “Marketing's Reputation with Consumers and Business Professionals.” Proceedings of Symposium Does Marketing Need Reform? Bentley College, Boston, MA, August 2004, http://atc3.bentley.edu/mkseminar/reformsisodia/msh.htm.

17

Drucker, Peter F. The Practice of Management. New York: Harper & Brothers, 1954, pp. 37–38.

18

Allen, James, Frederick F. Reichheld, and Barney Hamilton. “Tuning In to the Voice of Your Customer.” Harvard Management Update (2005, October 1), http://hbr.org/product/tuning-into-the-voice-of-your-customer/an/U051 °C-PDF-ENG.

19

Temkin, Bruce. “The State of Customer Experience Management, 2014.” Waban, MA: Temkin Group, 2014.

20

McGrath, Rita Gunther. “How the Growth Outliers Do It.” Harvard Business Review 90 (January–February 2012): 110–116.

21

Olson, Matthew S., Derek van Bever, and Seth Verry. “When Growth Stalls.” Harvard Business Review 86 (March 2008): 50–61.

22

Farris, Paul W., Neil T. Bendle, Phillip E. Pfeifer, and David J. Reibstein. Marketing Metrics: 50+ Metrics Every Executive Should Master. Upper Saddle River, NJ: Wharton School Publishing, 2006, p. 27.

23

Ibid., p. 26

24

Ibid., p. 32

25

Ibid., p. 32