LOYALTY MARKETING
SECTION ONE
SECTION TWO
What Is the Wallet Allocation Rule?

In today’s competitive marketplace, customer loyalty isn’t enough to
succeed. It is important to grow share of wallet. This is a percentage of
consumer spending within a category, as identified by a brand, store or
company. Traditional metrics of loyalty program effectiveness, such as
customer satisfaction or Net Promoter Scores, can be greatly enhanced
by measuring share of wallet.

Too many loyalty programs focus on customer retention rather than getting
existing customers to increase spending. So while retailer and consumer
packaged goods companies might keep customers, they also could lose much
of their share of wallet to competitors

“Customers are not loyal to just your brand. They are not monogamous. Your customers are fooling around on you,” said Matthew McNerney, president, Ipsos Loyalty US. “They shop a portfolio of different companies, but we are treating them as though you are the only one that they come to. That’s not the way to think.”

McNerney and Timothy Keiningham, Ipsos’ global chief strategy officer, spoke on “The Wallet Allocation Rule: Analyzing the Relationship between Brand Perception and Share of Wallet” at last month’s LEAD Marketing Conference in Chicago. LEAD, produced by the Shopper Technology Institute, stands for Loyalty, Engagement, Analytics and Digital.

“Focusing on increasing the share of wallet has a 10 times greater impact than focusing on retention alone,” McNerney said. “We know it is easier and cheaper to sell more to existing customers than to acquire new ones.”

One example of how not to do it was Walmart’s Project Impact, which improved the appearance of stores, but eliminated many SKUs customers wanted to buy. Satisfaction scores increased, but same-store sales went into a long period of decline. Even as satisfaction rose, share of wallet fell.

The Ipsos’ executives provided three steps to follow in calculating a company’s share of wallet:

1) Establish the number of competing brands, stores or firms customers use in the product category you want to analyze. When surveying customers, ask about everyone who shops in the category and where they are shopping.

2) Survey customers and obtain satisfaction or other loyalty scores for each brand. Then convert the scores into ranks.

3) Use the Wallet Allocation Rule to determine a customer’s share. The rank customers assign to a brand relative to other brands predicts share of market according to a simple, previously unknown formula. To arrive at a brand’s share of wallet for a given customer, plug the brand’s rank and the number of brands used by the customer into the Wallet Allocation Rule formula:

Rank                                             2
(1 -     ----------------------------- )     x     ---------------------------
    Number of Brands + 1                  Number of Brands

Establishing a brand or company’s rank among the competition is an outgrowth of this formula and is important for planning a strategy for sales growth. If a company or brand can’t improve its rank, it can’t improve its share of wallet.

There are several strategic implications that come out of the Wallet Allocation Rule. First, executives can’t truly evaluate their firms without taking the competition into account. What matters is a brand’s rank, not its absolute satisfaction or Net Promoter score.

Using the rule, it’s possible to craft strategies that directly affect brand performance and then measure the impact on share of wallet. If executives want growth, don’t watch  scores; pay attention to rank instead.

Be the first choice of customers. The difference between first choice and second choice is typically quite large. It’s always better to be number one than number two, and now it can be quantified.

Reduce the number of competing brands. It’s much better to be number one in a field of three than number one in a field of six. Reducing the number of brands a customer uses dramatically increases the share of wallet for the first choice brand.

Parity hurts. If there are six brands customers use regularly, how loyal can they be to any of them? A company or brand must have a reason for customers to prefer it, or it will evenly divide customers’ share of wallet with the closest competitors. There are no multiple gold medal winners. There are no unique benefits from tying for first place, where the winners split the prize money.

Be competitive, but be targeted. Target the reason customers are going to a competitor and give them fewer reasons to shop there. Not everyone will shift in rank, but enough will that it will change share of wallet dramatically.

“The reality is, if we shift from thinking about our absolute score to our rank, we automatically have a very different mindset. It becomes more like a game. But if the goal is to prove share of wallet, it’s not just how many points you score; it just has to be more than the competitor,” Keiningham said.  

Sustainable growth is only going to be achieved by getting customers to buy more. Until now, there wasn’t an easy way to do it. With the Wallet Allocation Rule, however, companies have a way to truly find out what it takes to be number one.

The above article was abstracted from a presentation by Matthew McNerney and Timothy Keiningham at the LEAD Marketing Conference on Sept. 19 in Chicago (Rosemont, Ill.). For more information:  http://www.ipsos.com/loyalty/.

Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for our Email Newsletter
Click on the LinkedIn logo to join the new Shopper Technology Institute Discussion Group
SECTION THREE
Follow ShopperTechInst on Twitter