Timothy Keiningham is the bearer of some bad news for most marketers. “Discovering that commonly used metrics like customer satisfaction and the Net Promoter Score (NPS) tend to explain around 1% of the variation in customers’ share of wallet is very bad news,” says Keiningham, chief strategy and client officer at Rockbridge Associates and coauthor of The Wallet Allocation Rule.
Fortunately, one of his key messages to marketers contains some good news: “Managers don’t need to throw out everything they’ve been doing,” he suggests. Not surprisingly, Keiningham recommends that marketers add the Wallet Allocation Rule system to build on what they’ve been doing to better determine what it takes to gain share.
What is “share of wallet,” and why is this metric important to marketers?
Share of wallet is the percentage of a customer’s spending in an industry category that goes to a particular brand. In most industries consumers are not loyal to “a” firm or brand; instead they are loyal to “a set” of firms or brands. As a result, share of wallet represents the ultimate behavioral measure of a customer’s loyalty to the brand. Marketers frequently find that their best customers are also their competitors’ best customers, and that they are giving a higher share of their business to a competing brand.
And what’s the Wallet Allocation Rule?
The Wallet Allocation Rule is a formula that allows managers to estimate the share of wallet that customers give to their brands—and to competing brands—based on two things: 1. a brand’s rank (i.e., the relative position that a customer assigns to a brand in comparison to other brands she uses in the category); and 2. the total number of brands used in the category by the customer. Mathematically, the Wallet Allocation Rule formula is:
There [are four strategic implications] of the Wallet Allocation Rule…
- Be your customers’ first choice. The difference in share of wallet between first and second is typically quite large.
- Reduce the number of competing brands. Reducing the number of brands a customer uses dramatically increases the share of wallet for the first choice brand.
- Parity hurts. You must have a reason for customers to prefer your firm, or you evenly divide your customers’ share of wallet with your closest competitors.
- Customer satisfaction and loyalty isn’t enough. Because customers have a logical reason for using every brand that they do in a category, the most important drivers of satisfaction with a brand are unlikely to be the most important drivers in improving rank and therefore, share of wallet.
What are three must-have marketing metrics, and why are they valuable?
Because the Wallet Allocation Rule is based on a company’s relative rank, not its absolute satisfaction levels, firms need to add to their key performance indicators (KPIs). The three metrics that every firm using the Wallet Allocation Rule should track are:
1. Percent first choice
A brand’s average rank is not easy for either senior managers or front-line employees to interpret, nor is it easy to rally the organization around. That is because we think of ranks as whole numbers, like 1st, 2nd, 3rd place, etc. A firm’s average rank, however, is almost never a whole number. As a result, it is hard for managers and front-line employees to internalize.
An easy way to get around this problem is to track the percentage of customers who give your brand their highest satisfaction rating among all brands that they use. In other words, is your brand really a customer’s first choice, or do customers view your brand as being the same or worse than competitors? Looking at the percentage of customers who rate a brand better than all other competitors correlates strongly with share of wallet. Although the first-choice percentage is not quite as strongly correlated to share of wallet as the complete Wallet Allocation Rule calculation, it provides an easy-to-understand and easy-to-use metric that keeps the focus on where the brand ranks relative to competition.
2. Average number of brands used
The Wallet Allocation Rule also makes clear that the number of brands used in the category by a customer has a strong impact on share of wallet. Tracking the number of competing used brands keeps the focus on reducing customers’ perceived needs to use competing brands with the ultimate goal of eliminating competitors from customers’ usage sets entirely.
3. Share of wallet
It’s important that managers monitor the share of wallet that customers allocate to their brands. It’s also important to know the share of wallet that your brand’s customers allocate to competitors, which you can determined using the Wallet Allocation Rule.
Your research shows that customer satisfaction has limits as a performance measure. What is useful about customer satisfaction?
Clearly, customer satisfaction is important to the success of a business. Our argument isn’t that satisfaction isn’t important. Rather, our argument is that the way satisfaction is currently measured and managed is wrong. As a result, satisfaction does a terrible job of linking to the share of spending that customers allocate to the brands they use…. Without that linkage it’s virtually impossible to make efforts to improve the customer experience payoff. The Wallet Allocation Rule allows managers to make that link between satisfaction and share of wallet.
What should marketers be doing differently right now to better understand wallet share?
The first thing I would do is change the way I measure customer satisfaction and loyalty. Most managers are focused on achieving a particular score, not on being the first choice of customers. This requires setting up a feedback process that takes competition into account. Most firms measure their performance as if they competed in a vacuum…. This must be done at the customer level, as opposed to the firm level.
The second thing I would do is determine precisely why my brand’s customers are also using competing brands. Without addressing why customers feel the need to use a competitor there’s no way to grow share. Customers have a logical reason for choosing every brand that that use.
The third thing I would do is determine how much of my customers’ money is going into my competitors cash registers. This number tends to be quite large, and makes clear the opportunity from improving share of wallet.
