The Framework
We are built differently.
The status quo has been challenged.
Our Business Framework
From our start over 25 years ago, we’ve designed our business from the ground up to be different. Traditional research firms build software to automate the survey process. They build tools to collect data in large amounts, asking questions whatever way the company wants. The problem they solve is phone surveys, and the solution is to use the internet now to ask them.
From day one, the problem we wanted to solve was how to predict and generate sales growth. Or more succinctly, how to figure how to win more customers.
This follows one of the habits from Stephen Covey’s groundbreaking book, The 7 Habits of Highly Effective People: Begin with the end in mind. By starting with a clear understanding of our destination, we built our company in an entirely different way.
Our initial 12 clients ─ Aramark, Chili’s Restaurants, Cingular Wireless, Coors, Cymer, Equifax, General Motors, i2 Technologies, IBM, Sabre Systems, Sikorsky Aircraft, and Tony Robbins ─ provided us with a cross-section of industries to kick off our analysis of how to connect customer perceptions with a company’s sales growth.
Today, we make a series of fixed investments every year, leveraged by key stakeholders in our business, and subscribed to by corporations, PE firms, and hedge funds.
To our knowledge, we are the only firm that measures the competitive strength of companies based on customer expectations, company performance and pricing power.
Success Leaves Clues
In the early 2000s, we set out to discover what companies did with their customers to build durable competitive strength. Two telltale signs that a company has created strength are found in their financials:
● High revenue share in their industry
● High returns on invested capital (ROIC)
If a company can sustain both of those over an extended period of time (i.e. 5 or 10 years), they must have built one or more barriers to protect them from rivals. Using 2,628 companies across six sectors of the US economy, we examined the ROIC of companies that we able to maintain a minimum revenue share over five years. A company had to meet or exceed the 65th percentile mark of ROIC within their industry across all years from 2001 to 2005.
If competitive strength didn’t vary, then 920 companies (35% of 2,628) would have stayed in the 65th percentile for all five years. Turns out that only 15 companies made the cut for five years, and only 4 companies made it going back ten years.
Starting with those companies, we then examined which of 60+ functional needs and 15 emotional needs we tracked were contributing to their success. We found only 17 customer needs were the precursors to sales growth.
In order to grow, a company must out-perform rivals on one or more of these needs. But we didn’t stop here, we wanted to know how to predict and generate sales growth for any single company.
Crack the Code: Customer Moats
Warren Buffett made the moat concept famous among many of today’s investors. He calls them economic moats, which are easy to identify when a company already has one by looking at financial metrics such as ROIC, revenue share, etc.
Unfortunately, Buffett and others that talk about moats can only tell you when a company has or doesn’t have one. They speculate on how to build them, with virtually all culminating in a statement to “find something of compelling value to the customer.”
At wRatings, we decided to dig deeper into where economic moats originate. We embarked on a follow-up study from 2005 to 2015 to examine even more data that we had amassed. Within that data set, we found 11 key patterns – moats – that shows the compelling sources of value.
Our moats are different than Warren Buffett’s because they are the precursors to economic moats: They are customer moats. In the last several years, analysis by two hedge funds found that sales growth can be maximized by building them in a progression through stages:
● Core Moats
Between 80% to 90% of all companies get stuck in the first two moats as they fluctuate between performance and price promises.
● Early-Mover Moats
These are the moats that provide the fastest pathway to sales growth, and increased barriers to entry against rivals if you can build them early. They aren’t necessarily “first-mover” advantages but getting there before others can be critical.
● Promise Moats
Using consistency over time, these generate powerful barriers to use with customers to impact their buying decision factors.
● Last-Mover Moats
To avoid reversion to the mean in financials, companies must know how to avoid losing their ‘monopoly’ like status within an industry.
Companies Using wRatings to Grow Their Sales
