Harvard Business Review, in its latest issue, debuts a new tool for business in an article entitled, “Customer Loyalty Isn’t Enough. Grow Your Share of Wallet”. The new tool demonstrates a measure for showing the best way to pull ahead of the competition -- the Wallet Allocation Rule.
According to researchers, a two-year study was conducted of more than 17,000 consumers in over a dozen industries in nine countries. They asked a broad range of questions and collected ongoing purchase histories and satisfaction & loyalty ratings. Their analysis revealed a strong correlation between the rank (1st choice, 2nd choice, etc) a consumer assigns to a brand (relative to its competition) with the share of that consumer’s wallet -- known as the Wallet Allocation Rule. It takes into account both rank and the number of brands in competition to allow prediction of wallet share.
Currently, companies spend a great deal of time trying to improve customer loyalty by measuring and managing metrics like satisfaction and Net Promoter Scores. The researchers in this new study claim that customer loyalty correlates poorly with share of wallet. ‘Share of wallet’ is a term for describing the percentage of spending within a category that is captured by a given brand or company. They say that customers may be satisfied with a brand and happily recommend it to others, but if they like a competitor’s just as much (or more), a company is losing sales.
There are three basic truths of the Wallet Allocation Rule:
1. The rewards of being the number one brand are significantly better than being the number two brand.
2. The more competitors used in the category, the lower the opportunity for everyone. Every brand a customer uses gets a portion of the wallet, so the more brands used the less money available.
3. Tying with a competitor reduces the payout to a brand and the winnings are divided evenly with the strongest competitor.
Sometimes, an initiative taken on by a company may result in happier customers but may have little or no positive impact on the bottom line, according to the article. Instead, companies should understand why their customers make the choices they do. If your company is not #1 with your customer, ask why they prefer your competitor and “use the insights you gain to move up the ranking ladder.”
(Source: Keiningham, Timothy L., Lerzan Aksoy, Alexander Buoye, and Bruce Cooil. ""Customer Loyalty Isn't Enough. Grow Your Share of Wallet"" Harvard Business Review October (2011): 29-31. Print.)
