Share of Wallet: A Go-To Financial Metric for CX
Finance, sales, marketing, and others all have acceptable ROI metrics by which their groups are evaluated, but, until recently, customer experience (CX) was often seen as too focused on the “soft numbers” around the customer.
Given the intense focus on measuring customer loyalty and the service delivery aspects of a business, the majority of headline CX metrics are derived from survey-based methods used in relationship and transactional research programs. The KPIs from these metrics are commonly attitudinal: customer satisfaction, likelihood to recommend, likelihood to repurchase, customer effort, and others. Certainly, CX programs do attempt to relate their efforts to specific nonattitudinal outcomes, such as customer retention, customer recovery, customer spend, and customer lifetime value. But these multivariate metrics often prove too difficult to deconstruct and influence for many CX practitioners.
Among all metrics, share of wallet has evolved into the go-to financial metric for customer experience because it is a true measure — relative to alternatives — of how customers spend their money at the point of sale. In addition to this “measure of true loyalty,” share of wallet is also a foundational variable in a firm’s market share:
Market share = (Penetration Share) x (Share of Wallet)
x (Heavy Usage Index)
While “penetration strategies” are indeed effective, these remain the domain of many marketing and strategy teams. “Usage strategies” require a firm to convince a customer to spend more on the entire category than they typically do (e.g., influencing a decision to spend more on high-end food and groceries than we may have done a year ago, while spending less on entertainment to compensate) and often require a fundamental shift in marketplace thinking about customer priorities. Share of wallet, however, remains an effective relative measure that CX teams own.
For more articles on improving the customer experience, see the new Cutter Business Technology Journal report – Transforming the Customer Experience!
Connecting Traditional Metrics to Share of Wallet
Given that foundational teachings of luminaries like Peter Drucker focus on the creation and service of a customer as a premise for existing as a business, it is easy to presume the connection between customer experience and firm outcomes.
There is some scientific evidence of customer satisfaction metrics directly linking to company performance, such as the ASCI claim that a subset of its metrics can predict cumulative stock performance. However, despite an assumed connection between CX and the outcomes it is purported to deliver, many of these connections lack uniform scientific underpinning to declare any real victory. For example, Bloomberg has reported on the utter lack of a relationship between customer metrics and firm performance on stock returns. In the case of predicting stock market returns, of course, much noise can influence outcomes: market perception, investor preference, macroeconomic effects, stock buybacks, and multidirectional influences stemming from profit management or sector shifts.
Seeking to reduce this noise, then, it is best to reduce the relationship between CX and outcomes to its simplest part — the customer — with a hypothesis that the more positively customers view a firm, the better off the firm will be. However, in a seminal, award-winning piece of scientific research by Keiningham et al., there is clear demonstration that common CX metrics — specifically satisfaction, recommend intention (and net promoter score [NPS]), and purchase intention — have less than 1% explanatory power in the variance around share of wallet.
These findings shed light on difficult truths around customer experience; specifically, the apparent lack of a direct correlation between satisfaction, customer spend, and firm performance. In most everyday experiences of CX leadership, this is often evident in the rise and fall of “soft” customer-tracking metrics with no apparent relationship to how well the firm does from quarter to quarter.
[For more from the author on this topic, see “The Wallet Allocation Rule: CX as Value-Creation Strategy.”]
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