Growing share of wallet

For anyone active in the market, it must seem as if the bad news will not end. After the perfect economic storm of 1999 to 2001 - the e-collapse, the telecommunications meltdown, the post-Y2K slowdown, and the events of 11 September - we now have the endless rounds of corporate collapses, the restating of numbers and the loss of shareholder value and confidence.

Firms that put their customers first are profoundly different from those that put their products first.

Doug Leather, CEO, Knowledge Factory

Amid this is the undiminished need for companies to be competitive, to generate revenues and profits, to produce goods or services, and to return value to stakeholders.

It is axiomatic that solid and sustainable revenues are the by-product of correct activities. These correct activities are simple yet profound:

* Having the right people

* Selling the right product (at the right price!)

* Through the right process

* To satisfied customers

* Generates sustainable competitive advantage

If one of the first three steps (the inputs) is misfiring, your revenues will falter, your customers will defect, and your business will surely struggle, just as many companies around the world are faltering.

In this Industry Insight, I`m going to focus on the one area where I believe significant competitive advantage is to be gained: it is the process through which customers are engaged, as it is here where relatively easy wins are to be had, and where a profound difference can be made at relatively low cost.

Firms that put their customers first are profoundly different from those that put their products first. Consider banks, which have designed their systems around their products, rather than around their clients. If you doubt this, ask yourself why you have to fill in a form every time you want a new product, when you may already have several products with a bank.

Or consider the example of hotels: no matter how many times you may stay at a hotel, the reception desk still expects you to fill in a form every time you return. The customer-centric hotel would pre-fill the form for you!

Customer-centric companies understand implicitly that the only reason they are in business is for their customers. They go out of their way to get to know everything they can about their clients, and welcome every opportunity to engage (including complaints!) as a chance to learn more.

Customer-centric companies also understand inherently that it`s not just about happy customers, but about better business. Industry studies show that it is five times more costly to acquire a customer than to retain one. Retaining clients boosts revenue that drops straight to the bottom line.

Yet think of how most sales teams are rewarded in companies today: they are incentivised on new business generated (revenue or profit mainly), rather than on retaining and growing existing customers. In other words, businesses are not generally geared towards customer satisfaction or retention, but towards constantly chasing new custom.

The ideal approach is to retain customers through a combination of correct activities. Reduction of client churn means a company can begin cross-selling and up-selling, increasing share of customer wallet rather than focusing purely on market share.

This makes profound business sense: it is very expensive to acquire new clients (the process by which you grow market share); much lower-cost to retain and grow share of wallet. An interesting dynamic occurs with profit - think about it!

Each additional point of market share normally comes at a higher cost to company (therefore lower margin) because the business has had to invest in gaining that market share (a special offer, advertising, promotion) whereas each additional point in a share-of-customer strategy normally comes at a lower cost than the previous gain (therefore higher margin) because the company is already doing business with that customer.

Growing share of wallet is not difficult, but it can be the most profound change you make in your business. It begins with management`s insight that this is the right way to go. Driven top-down, it can energise and engage the entire organisation.

Then, the processes and customer-facing aspects of the business need to change, along with the systems that support them. For instance, the call centre, the first line of contact with many customers, would need to undergo a change of orientation that turns it into a revenue generator rather than a cost centre.

Then the organisation needs to undergo a long, arduous and sometimes painful process to identify all its customers, uniquely and correctly. Astonishingly, this is beyond the scope of most companies!

The next step, once you have your customers correctly and uniquely identified, is to begin differentiating them by value and need. This is where the process of learning about your customers is conducted. It only works if the entire organisation is aligned around the process.

Then, and only then, should organisations begin the process of interaction, through whichever channels they choose.

Not all companies will embrace this opportunity; but those that do will find it a lot easier to conduct correct business and generate profits.