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What is the Wallet Allocation Rule®?

The Wallet Allocation Rule® is a breakthrough approach for growing share—backed by rock-solid science.

Growth is the common goal of every CEO. Sustainable growth begins with understanding customers’ needs and wants so well that your firm becomes customers’ first choice.

Most leaders recognize this fact. That is why companies have devoted time and money to improving the customer experience.

Unfortunately, there is one overwhelming problem. The metrics managers use to measure and manage the customer experience—such as customer satisfaction and Net Promoter Score—don’t link to what matters most: share of wallet (i.e., the percentage of spending in a category that customers give to a brand). Without this linkage, it is virtually impossible to make efforts to improve the customer experience pay off. As a result, the returns on investments from these efforts is frequently trivial, even negative.

With the Wallet Allocation Rule®, managers finally have the missing link within their grasp: the ability to link their current metrics to the spending customers allocate to their brands.


How is the Wallet Allocation Rule® related to share?

The Wallet Allocation Rule® is proved to link the most common satisfaction and loyalty metrics to share of wallet. It was created by a team of leading academic and business researchers, and has been vetted in numerous peer reviewed scientific publications (see Rock-Solid Science).

It is easy for managers to see for themselves that it works using their own data. Simply analyzing the relationship between the Wallet Allocation Rule® and the share of category spending that customers allocate to your brand consistently shows a strong relationship.

Perhaps more important for managers, it is also very easy to see that the metrics managers are currently tracking do not link to share of wallet.

It Is Easy to Prove that Satisfaction and NPS Are Very Weak Predictors of Share of Wallet

It is easy for managers to see for themselves that the correlation between satisfaction/NPS and share of wallet is very weak by using simple spreadsheet software such as Microsoft Excel. Simply input customers’ satisfaction (or NPS) levels for your firm or brand in one column, and their corresponding share of category spending (share of wallet) in another column. Then compute the R-square, the squared correlation coefficient. The percentage of variance explained (i.e., R-square) is almost always less than 5 percent and is typically around 1 percent.

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Note 1: In Microsoft Excel the formula for calculating R-square is:
=RSQ(column1,column2)
Columns 1 and 2 correspond to customers’ satisfaction and share of wallet levels—when computing R-square it does not matter whether satisfaction is column 1 or column 2 in the Microsoft Excel formula.
Note 2: If you are using the Net Promoter Score, simply input “3” for Promoters, “2” for Passives, and “1” for Detractors.

Looking at the relationship between satisfaction and NPS to share of wallet always results in bad news. The percentage of variance explained will almost always be less than 5 percent—typically around 1 percent—meaning that 95 percent or more of the variation in your customers’ spending is completely unexplained by the satisfaction or NPS metric your firm is tracking.

The Wallet Allocation Rule® solves this problem. With the Wallet Allocation Rule®, managers are able to strongly link their current loyalty metrics to share of wallet. As a result, managers can identify precisely what it takes to gain a greater share of their customers’ wallets.


How does the Wallet Allocation Rule® work?

Managers know that satisfaction is relative to competitive alternatives. But that isn’t how we actually measure the experience. Satisfaction (and Net Promoter Score) levels are almost always determined based on customers’ ratings of your brand alone.

For example, most managers consider a rating of “9” (where “10” is the best) to be a good score. Using the Net Promoter Score, customers who rate your brand a 9 or 10 are considered Promoters, which is the goal of the approach. The problem is that our research finds if a customer is a Promoter for your brand and also uses one or more competing brands, 80 percent of the time the customer is also a Promoter for the competition—and frequently the competitor is rated higher despite the customer being classified as a Promoter for both organizations. Clearly, a system that cannot distinguish winners from ties and losers has major flaws.

Our research has found a very simple solution to this problem. Instead of focusing on a customer’s absolute satisfaction (or NPS) level, focus instead on the relative rank that this satisfaction level represents vis-à-vis the competitors the customer also uses. To see how this works, imagine that your firm has two customers, John and Mary, who both rate your brand a “9”.

Using the Net Promoter classification system, both John and Mary are Promoters of your brand. John and Mary, however, also use two of your brand’s competitors: Brand A and Brand B. John rates his level of satisfaction with Brand A a “9” and his satisfaction with Brand B a “10”. On the other hand, Mary rates her level of satisfaction with Brand A a “7” and with Brand B an “8.”

Despite the fact that John and Mary both rate your brand a “9”, with Mary your brand is her clear first choice. With John, your brand is tied for last. The result of this difference in rank is that Mary allocates a substantially higher share of her category spending with your brand than John does.

By using the Wallet Allocation Rule® to transform rank into predictions of customers’ share of wallet levels, managers can finally bridge the missing link between the loyalty metrics they are tracking and customers’ spending behaviors.

Different Ranks Result in Different Wallet Shares!
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This shift to relative rank, however, has serious implications for identifying where companies should focus their scarce resources to improve the customer experience. That’s because it turns out that what drives share isn’t what drives satisfaction or NPS.

For example, compare the drivers of satisfaction with the drivers of share of wallet for Ziraat Bank, one of the largest banks in Turkey (see figure below). If Ziraat Bank were to follow a model solely based on driving satisfaction, it would see no meaningful change in the share of wallet its customers allocate to the bank. Ziraat’s top driver of satisfaction has a 0% impact on driving share of wallet. Similarly, its top driver of wallet share (customer service) would likely have been ignored altogether as it represents the fifth strongest satisfaction driver.

Drivers of Satisfaction and the Drivers of Share of Wallet for the Ziraat Bank in Turkey
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Using WAR

At its core, the Wallet Allocation Rule® stipulates that a customer’s share of wallet is a function of a customer’s rank of the firm/brand relative to the competitors the customer uses.

Mathematically, the formula we use estimate share of wallet is:

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where rank is the relative position that a customer assigns to a brand in comparison to other brands also used by the customer in the category and number of brands is the total number of brands used in the category by the customer.

To use the Wallet Allocation Rule to predict share of wallet, follow these steps:

  1. Establish the firms/brands in a product category that customers use.
  2. Ask an overall satisfaction/loyalty question to gauge performance for each firm/brand a customer uses.
  3. Assign a performance rank for each firm/brand for each customer (e.g., the highest rated firm/brand based on the overall satisfaction/loyalty question used would be ranked 1, the next highest 2, etc.).
  4. Calculate a customer-level Wallet Allocation Score (i.e., the customer’s predicted share of wallet) using the rank and number of brands used by the customer.
  5. If you want to calculate firm/brand level scores, simply average the Wallet Allocation Scores for each firm’s/brand’s customers.

The ramifications of the Wallet Allocation Rule® are profound. Using this simple formula, managers can easily and strongly link their customer metrics with share of wallet. These findings also point to the need for a new approach for identifying opportunities designed to enhance the customer experience and share of wallet simultaneously.

To help you get started, we have created a Quick Start Guide designed to help managers apply the Wallet Allocation Rule® in their organizations.

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