The Wallet Allocation Rule. Aksoy Lerzan
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ISBN 978-1-119-03731-6 (cloth); ISBN 978-1-119-03730-9 (ebk); ISBN 978-1-119-03728-6 (ebk)
Preface
It's never enough to tell people about some new insight…Instead of pouring knowledge into people's heads, you need to help them grind a new set of eyeglasses so they can see the world in a new way. That involves challenging the implicit assumptions that have shaped the way people have historically looked at things.1
The impetus for this book began as a quest for an answer to a problem that quite literally had shaken us to our core. We have dedicated our careers to helping companies win through improved customer loyalty. Throughout our careers, however, we consistently found that most of the things we were told about loyalty were wrong.
With each new set of myths we uncovered, we sought to set the record straight. We coauthored several books (Loyalty Myths,2 Return on Quality,3 The Customer Delight Principle,4 and Why Loyalty Matters5) and award-winning papers so that the business community could gain from our insight and avoid the pitfalls we found.
But there was one overwhelming problem that we could not explain away: The measures we use to gauge customers' perceptions of their experience (e.g., satisfaction and Net Promoter Score) are so weakly correlated to customers' share of category spending with the brands that they use that the metrics are managerially irrelevant.
This problem challenged everything we believed about customer satisfaction and loyalty. Specifically, we expect more satisfied and loyal customers to devote more of their spending to a brand. That expectation is the primary reason that efforts to improve satisfaction and loyalty are supposed to be good business decisions.
The truth was horribly bad. On average, customers' satisfaction (or Net Promoter Score) levels explain around 1 percent of the variation in customers' share of category spending. No good manager knowingly makes decisions about how to allocate a company's scarce resources based on a 1 percent model fit.
The reality, however, is that we have in effect been doing this every time we ask managers to focus on improving the customer experience to improve business outcomes. Sadly, the purportedly better-fitting models presented to managers to justify these efforts are almost always based on very bad statistics.
The result has been that businesses seldom see meaningful returns on their efforts to improve the customer experience. Not surprisingly, this has caused managers to question using these metrics to guide their businesses.
Given the seriousness of the problem, we were compelled to see if there was a better way. We began an intensive investigation to uncover why satisfaction and other commonly used metrics do not link to customers' share of spending.
The result of this investigation was the discovery of the Wallet Allocation Rule, a simple formula that managers could use to determine the share of wallet that customers allocated to their brands.
The Wallet Allocation Rule was introduced in the Harvard Business Review6 and received the Next Gen Disruptive Innovation Award.7 It has been subjected to rigorous scientific investigations.8 In addition, many of the strategies and tactics outlined in this book were introduced in the MIT Sloan Management Review.
Our goal in writing this book is to make businesses' efforts to improve customer satisfaction and loyalty pay dividends by giving them a tool that we have proved works. We believe strongly that companies that apply the Wallet Allocation Rule can distinguish themselves in the eyes of both their customers and their shareholders.
Foreword
Is there a strong link between your company's customer satisfaction or Net Promoter Score levels and the share of spending that customers allocate to your brand? We suspect that if we polled managers from virtually any firm, the consensus would be “Yes!”
Unfortunately, almost none of them would have the evidence to actually support this belief. Traditional metrics designed to gauge customers' perceptions of the brands that they use do a terrible job of correlating with customers' share of wallet levels. This is a serious problem.
For most firms, the greatest financial opportunity from improving satisfaction and loyalty is getting customers to allocate a greater percentage of their spending to a brand – far more than the impact of improved retention rates or referrals. Without the ability to link satisfaction to customers' share of spending, it is almost impossible for managers to determine what to do to improve customers' buying behaviors. Consequently, the return on efforts to improve the customer experience is frequently trivial, even negative.
Despite an abundance of books, articles, and speeches on the importance of the customer experience to business success (and a host of metrics that purport to guide managers to this success), to date there has been no easy-to-use system for managers to gauge performance that meaningfully links to customers' spending behaviors. As a result, “proof” of success has too often been limited to anecdotal evidence that seldom proves applicable to other companies.
This book fills that void. It provides a new and rigorously tested approach – the Wallet Allocation Rule – that is proved to link customer satisfaction and other commonly used metrics to share of wallet.
The Wallet Allocation Rule is at once a profound, award-winning Harvard Business Review– published thought leadership and a return to the fundamentals of business success from which managers stray at their peril. The practical principles detailed in this book provide managers with the tools they need to win where it counts most – in their customers' spending.
Chapter 1
It's “Oh My God!” Bad
Marketing is too important to be left to the marketing department.9
● “Marketing measures ROI [return on investment] in terms of marketing, such as customer satisfaction and brand value instead of the most relevant relationship, the one between spending and the gross profit generated from these investments…brand value! What in God's name is this anyway? It's not as if our shareholders care.” (CEO of a Spanish telecommunications firm)
● “There is a disconnect between our overall strategy and what marketing understands to be our customers.” (CEO of an Austrian retailer)
● “Marketers are, simply put, often disconnected from the financial realities of the business.” (CEO of a German financial institution)
● “Marketers make decisions based upon gut feelings rather than a solid ROI analysis.” (CEO of a U.S. professional services firm)10
CEOs around the world have stopped trusting their chief marketing officers (CMOs). Our research proves it.11 The findings are sobering. The majority of CEOs can't bring themselves to say that marketing is strategically
Keiningham, Timothy L., Terry G. Vavra, Lerzan Aksoy, and Henri Wallard.
Rust, Roland T., Anthony J. Zahorik, and Timothy L. Keiningham.
Keiningham, Timothy L., and Terry G. Vavra.
Keiningham, Timothy, Lerzan Aksoy, and Luke Williams.
Keiningham, Timothy L., Lerzan Aksoy, Alexander Buoye, and Bruce Cooil. “Customer Loyalty Isn't Enough. Grow Your Share of Wallet,”
“Ipsos Allocated Its Share at Market Research Innovation Awards,” Ipsos Press Release, November 9, 2011, accessed September 27, 2013, http://www.ipsos-na.com/news-polls/pressrelease.aspx?id=5402.
Examples include Aksoy, Lerzan. “Linking Satisfaction to Share of Deposits: An Application of the Wallet Allocation Rule.”
Davidow, William H.
Klaus, Phil, Bo Edvardsson, Timothy L. Keiningham, and Thorsten Gruber. “Getting in with the ‘In’ Crowd: How to Put Marketing Back on the CEO's Agenda.”
Ibid.