Required Reading: The Wallet Allocation Rule Is a Better Metric for Businesses

Satisfied customers are loyal customers, but satisfaction does not guarantee exclusivity, coauthors Timothy Keiningham, Lerzan Aksoy, and Luke Williams write in The Wallet Allocation Rule: Winning the Battle for Share. While metrics like the Net Promoter Score and satisfaction ratings offer valuable insight on what a company is doing right or wrong, they offer little on how that company stacks up to its competition or the percentage of customers' wallets it controls. In their new book, Keiningham, Aksoy, and Williams offer a fresh approach to measuring business impact. Keiningham spoke with Associate Editor Maria Minsker to explain how and why the wallet allocation rule works.

CRM: Before we talk about the wallet allocation rule, what are some issues you see with traditional metrics?

Timothy Keiningham: All of the metrics that we commonly use for measuring customer experience do a very poor job of linking to how customers actually spend their money. That's a really hard thing to deal with if your goal is to not only improve your experience, but also to grow business results. On average, if you look at customer satisfaction levels or Net Promoter Scores and you relate that to the share of spending that customers give to your brand, you find a 1 percent variation in the share of wallet, meaning that 99 percent of how they divide their wallet is completely unexplained by the metric.

CRM: So what makes the wallet allocation rule different? How does it work?

Keiningham: Clearly you want happy customers and customers that want to recommend the brand. But the way we measure it is wrong. We have been so focused on our score and being able to say something silly like "95 percent of our customers are satisfied" that it's taken the focus off of what really matters, and that is competitive context. Think about basketball. Your score doesn't matter; what matters is whether you win or lose. Some teams lose with high scores and some teams win with low scores. In business, it's the same principle. A score of nine classifies a customer as a promoter, but if he has given another company a 10, that company would be the first choice. Understanding the relationship between rank and share of wallet is crucial, so we've come up with a simple linear calculation that anyone can do.

CRM: There seems to be an inverse relationship between share of wallet and satisfaction. Can you explain this?

Keiningham: The relationship between satisfaction and market share is negative because of how businesses compete. There are niche brands and mass market brands. Mass market brands consistently have lower satisfaction scores but much higher market share, and it's true in almost every industry. Just look at Walmart. They can cater to a much larger market by broadening their products, but they're likely not going to earn the same kind of satisfaction score as a store that offers very specific products for a niche consumer group.

CRM: Give an example of the rule at work.

Keiningham: Credit unions go heavy on the wallet allocation rule. They consistently have some of the highest levels of satisfaction but ridiculously low market share. Their problem is they keep getting satisfaction ratings that emphasize what people love about them: no fees, higher interest rates on deposits, lower rates on loans. Despite high satisfaction marks, however, the wallet allocation rule reveals that they can't compete with Bank of America or Chase. People go elsewhere if credit unions have terrible Internet and mobile banking services. So a lot of credit unions work with servicing groups that bundle them together and let them pool resources and compete with bigger banks. Wallet allocation has a lot to do with why they're working together.

CRM: Are there any limitations to the rule?

Keiningham: The standard wallet allocation rule works best when customers spend on more than one brand in the category. The limitations happen when customers exhibit serial monogamy or when there's a "winner take all" scenario; for example, when it comes to grocery shopping, a customer might shop at one store for certain things and another for others, but when the customer is buying a car, he buys one car from one brand—that's winner take all. In other words, there's no sharing of the customer across the category. In this case, though, you can still use the wallet allocation rule to understand what's causing customers to choose one brand over the other. Instead of looking at which brand ranks first, which ranks second, and so on, you'd be looking at which brand was chosen and which one wasn't.