The wallet allocation rule explained

July 26, 2012 - PRLog -- In October of last year, I read a very informative paper in the HBR entitled 'The Wallet Allocation Rule'. This was authored by a number of distinguished scientists, and won the 2011 NextGen Disruptive Innovation in Market Research Awared (my kind of paper!).

The concept centred around the inadequacies of (only) measuring customer loyalty by Net Promoter Score and other satisfaction metrics. They argued that loyalty does not necessarily improve what matters most: 'the share of wallet'. The measurement of whether a customer would recommend you is a valuable strategic metric, however this does not distinguish how your customers will divide their spending.

Customers may well be loyal to your brand, but this does not mean that they like your competitors just as much. This means that you are losing sales. A theme-park may (for example) have only one local competitor. Even if your customers share an equal preference, you are losing 50% of potential income.

In 2008, Walmart listened to their customers. They removed pallets from their aisles, thinned overstocked shelves and reduced distracting displays. As expected, customer satisfaction score increased. Conversely, same-store sales entered their longest decline in the company's history. CFO Charles Holley said: "The customers, for the most part, are still in the stores shopping, but they've started to do some more shopping elsewhere."

What followed was a longitudinal study of more than 17,000 consumers, looking at purchasing in more than a dozen industries and in nine countries. A generous list of questions were asked concerning purchase history, satisfaction and loyalty ratings. Their findings revealed a striking and consistent correlation: The rank that consumers assign to a brand relative to the other brands (they use) predicts a share of wallet.

The essential distinction of the Wallet Allocation Rule is that it takes into account both rank and the number of brands competing for the same outcome. Knowing these two values allows you to predict your share of wallet.

The new rule should have important ramifications with strategic direction. To understand what drives a change in share of wallet, one must shift focus from satisfaction metrics to drivers of rank.

Once successfully measured, an organisation can look to improve their rank by:

- Determining how many customers use each competitor.
- Calculating the revenue that is spent by their customers (to competition).
- Identifying the primary reasons why customers use their competitors
- Prioritising opportunities to improve their share of wallet.