The Wallet Allocation Rule - Timothy L. Keiningham - ebook

The Wallet Allocation Rule ebook

Timothy L. Keiningham

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Customer Loyalty Isn't Enough--Grow Your Share ofWallet The Wallet Allocation Rule is a revolutionary, definitiveguide for winning the battle for share of customers' hearts, minds,and wallets. Backed by rock-solid science published in theHarvard Business Review and MIT Sloan ManagementReview, this landmark book introduces a new and rigorouslytested approach--The Wallet Allocation Rule--that isproven to link to the most important measure of customer loyalty:share of wallet. Companies currently spend billions of dollars each yearmeasuring and managing metrics like customer satisfaction and NetPromoter Score (NPS) to improve customer loyalty. These metrics,however, have almost no correlation to share of wallet. As aresult, the returns on investments designed to improve the customerexperience are frequently near zero, even negative. With The Wallet Allocation Rule, managers finally havethe missing link to business growth within their grasp--theability to link their existing metrics to the share of spendingthat customers allocate to their brands. * Learn why improving satisfaction (or NPS) does not improveshare. * Apply The Wallet Allocation Rule to discover what really drivescustomer spending. * Uncover new metrics that really matter to achieve growth. By applying The Wallet Allocation Rule, managers get realinsight into the money they currently get from their customers, themoney available to be earned by them, and what it takes to get it.The Wallet Allocation Rule provides managers with ablueprint for sustainable long-term growth.

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Table of Contents

Title Page

Copyright

Dedication

Preface

Notes

Foreword

Chapter 1: It's “Oh My God!” Bad

Key Takeaway:

Customer satisfaction is the most widely used metric for measuring and managing customer loyalty. But our research finds that satisfaction does not link to what counts most: market share and share of wallet. Satisfaction is a strong negative predictor of market share. And satisfaction typically explains a miniscule 1 percent of customers' share of spending in an industry category. This problem isn’t just limited to customer satisfaction. All commonly used measures of customer loyalty—such as the Net Promoter Score (NPS) or recommend intention—perform equally badly. This contradicts the message of virtually all programs discussed in the business press regarding the relationship of satisfaction and NPS to business performance. The grim reality is that most of these efforts are doomed to fail. Moreover, they often run counter to a firm's competitive positioning and strategy.

Growth Is Hard to Find

Deconstructing Market Share

Different Metric, Same Outcome

Satisfaction ≠ Market Share

Satisfaction ≠ Share of Wallet

Always Wrong on Average

A Cautionary Tale

The Moral of the Story?

Notes

Chapter 2: Eureka! The Discovery of the Wallet Allocation Rule

Key Takeaway:

Satisfied customers who recommend your brand are important. But all too often customers like your competitors just as much as they like your brand. The end result is that you are losing sales. To understand what drives share of wallet and ultimately market share, managers need to shift their focus from the drivers of satisfaction or NPS to the drivers of rank. Our research conclusively proves that the rank that customers assign to a brand relative to other brands they use predicts share of wallet using a simple, previously unknown formula, which we've named the Wallet Allocation Rule.

Getting There

Determining Your Rank

The Wallet Allocation Rule and Share: The Evidence

The “Best” Metric?

Why Does the Wallet Allocation Rule Work?

Using the Wallet Allocation Rule

Wallet Allocation Rule Strategy

How to Improve Your Rank

The Rule in Practice

Conclusion

Notes

Chapter 3: The Wallet Allocation Rule in Action

Key Takeaway:

The drivers of share of wallet are almost always very different from the drivers of satisfaction or NPS. Wallet Allocation Rule analysis gets to the heart of what drives wallet share by identifying what drives customers' preference for your brand vis-à-vis competition instead of simply determining what makes customers happy.

Grinding a New Set of Lenses

Putting the Wallet Allocation Rule to Work

Conclusion

Notes

Chapter 4: Customers as Assets

Key Takeaway:

Growth is easy for firms willing to give their products away—for as long as they remain in business! But the first duty of a business is to survive. Managers must never lose sight of the fact that the end goal is profits, not just revenues.

The Wallet Allocation Rule Is Not a Panacea

Revenue ≠ Profits

Short-Term Gain, Long-Term Pain

Money-Losing Delighters

Aligning Satisfaction, Share of Wallet, Revenue, and Profit

Conclusion

Notes

Chapter 5: New Metrics That Matter for Growth

Key Takeaway:

The Wallet Allocation Rule makes it possible for managers to easily link customer satisfaction to share of wallet. But because the rule is based upon a company's relative rank, not its absolute satisfaction level, firms need to add new metrics to their list of Key Performance Indicators (KPIs)

Glass Houses and Stones

Must-Have Marketing Metrics

Customer Satisfaction

Key Drivers and Market Barriers

Demand Evidence

Notes

Chapter 6: Making It Happen

Key Takeaway:

Rather than end this book with a cheerleader's call to “Go, Fight, Win!” we instead want to focus on this all too important fact: Without proper execution, good ideas can and often do fail. The Wallet Allocation Rule is no exception. We end by identifying the most common failure points, and what you can do to avoid them.

Rule 1: Get the Data Right

Rule 2: Set the Right Performance Standards

The Next Disruption

Notes

Afterward: What's Next?

Establish That You Need It

Get Help

Let's Talk

Connect with Us

Visit www.walletrule.com

Notes

Appendix A: Quick Start Guide

What Is the Wallet Allocation Rule?

Wallet Allocation Rule Strategy

Identifying Opportunities for Improving Share of Wallet

An Example in the Credit Union Industry

Conclusion

Notes

Appendix B: Frequently Asked Questions

When Is It Appropriate to Use the Wallet Allocation Rule?

Does the Wallet Allocation Rule Work with All Satisfaction Metrics?

Is There a Preferred Metric We Should Use to Determine a Brand's Rank?

How Do I Ensure That All Relevant Competitors Are Ranked?

What Metrics Should Be on My “Dashboard” Related to the Wallet Allocation Rule?

Why Does the Wallet Allocation Rule Work?

Will Relative Net Promoter Score Work?

Isn't Share of Wallet Just a Function of a Brand's Reach (i.e., Penetration)?

Visit www.walletrule.com

Notes

Acknowledgments

Principal Contributors

Notes

About the Authors

Timothy Keiningham, PhD

Lerzan Aksoy, PhD

Luke Williams

Alexander Buoye, PhD

Index

End User License Agreement

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Guide

Cover

Table of Contents

Preface

Begin Reading

List of Illustrations

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Praise for The Wallet Allocation Rule

Praise from Business Leaders

This is it! Finally, something definitive about what it takes to win the battle for share of customers' hearts, minds, and wallets. Backed by rock-solid science, The Wallet Allocation Rule is a definite must-read.

—Peter Jueptner, executive vice president of Strategy and New Business Development, Esteé Lauder Inc.

The authors expose Net Promoter as The Emperor's New Clothes and explain a superior metric that brings in the dimension of competition, providing managers with an effective way to drive beyond traditional customer satisfaction to achieve goals for profitability, market share, and growth. Groundbreaking work for marketing leaders and a must-read. The Wallet Allocation Rule is the next big thing!

—Jim Welch, director, PwC's PRTM Management Consulting

Living in the world of big data analytics, we strive to turn customer satisfaction into customer retention using measured techniques every single day. The Wallet Allocation Rule delivers a concrete approach to trace our value to our enterprise clients, giving us structure to increasing market capture. This is groundbreaking indeed.

—Rama S. Moorthy, CEO, Hatha Systems

The Wallet Allocation Rule is brilliant. Managers need to change their thinking on the importance of rank and how they can position their brand to meet their financial goals. The simplicity of the mathematical model underscores the common sense of the Wallet Allocation Rule. I have a feeling this concept will be applied effectively by enlightened organizations. I enjoyed reading this book and kept thinking that this has a Freakonomics-like quality to it.

—Tom D'Orazio, CEO, Superna Life Sciences

The Wallet Allocation Rule is groundbreaking research with clear, practical applications. It is well written and thought provoking. I'll never look at general marketing assumptions the same again. A must-read!

—Kevin P. Kaseff, president, Titan Real Estate Investment Group, Inc.

Satisfaction from your customers means nothing if it doesn't increase your share of wallet! The Wallet Allocation Rule gives you the hard facts and fills the void in how to do exactly that. Not just stories but real strategies to grow your business, your brand, and wow your customers. Just read it!

—Chester Elton, New York Times best-selling author of All In and What Motivates Me

I like this book. The authors bring data and analyses to demolish widely held but misplaced beliefs in the efficacy of the Net Promoter Score, customer satisfaction, customer loyalty, and other popular measures in causing improvements in growth, market share, and profitability. They put the Wallet Allocation Rule to the test, and it performs. The book is an easy and fast read, with great case studies and charts. The appendices should be helpful to those wishing to put the rule to the test in their own companies.

—George Stalk, senior advisor, The Boston Consulting Group

The Wallet Allocation Rule is that rare, valuable combination of being strategically insightful and empirically powerful. This creates a path forward for better, data-driven decisions on how to capture more share of wallet while not getting caught in any of the classic pitfalls of satisfying customers without seeing impact.

—James Mendelsohn, chief marketing officer, CAN Capital

Assumption, so the saying goes, is the mother of all f**k-ups. And yet, as demonstrated in The Wallet Allocation Rule, marketers have been happily throwing money at customer experience management despite the absence of hard evidence of a correlation between customer satisfaction and share of wallet. Over the course of this thought-provoking book, authors Keiningham, Aksoy, Williams, and Buoye convincingly pick apart the suitability of existing satisfaction and reputational metrics at predicting customer spend and posit a potential solution to the problem—the Wallet Allocation Rule. Explaining the scientific foundation for the rule and its practical applications, readers finally have the missing link within their grasp—the ability to link their existing customer metrics to share of wallet.

—Neil Davey, editor, MyCustomer.com

I've been following Timothy Keiningham's research and thought-provoking books for over a decade due to our mutual interest in customer loyalty. His most recent book, The Wallet Allocation Rule, is simply brilliant. After years of arguing about which metric is best, this groundbreaking book reveals what really matters: how your brand compares to your competitors' in your customer's mind.

—Bob Thompson, CEO, CustomerThink and author of Hooked On Customers: The Five Habits of Legendary Customer-Centric Companies

The Wallet Allocation Rule addresses one of the largest challenges I see running Loyalty360. We are privileged to speak to CMOs [chief marketing officers] on a daily basis, and the biggest challenge they face is keeping up with the disparate technology challenges they are confounded with today. The clarion call is metrics; brands are confounded with the best internal metrics, as well as competitive benchmarking metrics by which to gauge the efficacy of their efforts; The Wallet Allocation Rule is one of the best books I have seen that addresses the metrics and insights needed to gauge said efficacy. Having known Tim for many years, the passion he has for brands to enable them to create truly (behaviorally based) loyal customers (advocates) has never wavered, and this book is the zenith of this passion.

—Mark Johnson, CEO and CMO of Loyalty360

Companies need to focus on customer metrics that drive business results. The Wallet Allocation Rule does a nice job of putting people's attitudes in context of their real-world choices, which, in turn, provides a more direct connection with actual customer behavior.

—Bruce Temkin, managing partner of Temkin Group, cofounder and chair of the Customer Experience Professionals Association (CXPA)

To achieve better business results, it's essential to rise above the myths and common practices, to adopt superior insights and methods. This book walks you through the fallacies in current thinking and shows empirical evidence that explains incorrect assumptions and proves correct interpretations. Readers will discover revolutionary insights and techniques that can propel them out of their customer experience ROI [return on investment] plateau to achieving strong growth.

—Lynn Hunsaker, founder and head of ClearAction Customer Experience Optimization

Praise from Academic Leaders

The Wallet Allocation Rule convincingly dispels well-established myths about customer satisfaction and provides a new metric for predicting market share growth across competing brands. The authors demonstrate through examples, data, and cases that customer satisfaction and NPS [Net Promoter Score] alone are not enough. These must be measured relative to competitors, and the Wallet Allocation Rule is the way to do this. If your goal is market share leadership, this book is a must-read!

—Mary Jo Bitner, professor and Edward M. Carson Chair, Arizona State University, Editor, Journal of Service Research

The Wallet Allocation Rule is an unabashed challenge to the current state of marketing within organizations. It eviscerates the navel-gazing customer satisfaction focus of most organizations seeking growth through customer experience management. But the book isn't just a critique of current practice. It provides a real, scientifically vetted solution to the problem—something sorely lacking for the highly touted but soon discounted management buzzwords. This book is certain to be one of the most important business books of the decade.

—Edward C. Malthouse, Theodore R. and Annie Laurie Sills Professor of Integrated Marketing Communications, Northwestern University

In today's metrics-driven age, a new metric that companies will benefit from knowing is how high up they are in their customers' shopping budgets. The historically popular metrics of satisfaction and purchase intent have been shown to have little or no predictive power in gauging actual purchases/repurchases. These metrics also do not offer managers information on what proportion of money consumers are willing to spend on their brand and whether their competitors are being chosen over them. After all, a pat on the wallet is a better proof of the pudding than a pat on the back. The Wallet Allocation Rule presents revolutionary insights that redefine the measurement of customer loyalty. With the help of this book, managers can not only gain a new perspective on the wallet share their brands command but also learn tools they can implement to maximize this share and cement their spot in their customer's shopping lists.

—V. Kumar, Regents Professor and Richard and Susan Lenny Distinguished Chair, Georgia State University

The Wallet Allocation Rule cogently debunks commonly held beliefs about the merits of conventional CSAT metrics and offers a simple—yet powerful—alternative for capturing and capitalizing on how customers actually allocate their spending among competing brands. Succinctly written and filled with easy-to-grasp illustrations, this thought-provoking book is a must-read for anyone interested in understanding the determinants of market share and revenue growth.

—A. Parasuraman, James W. McLamore Chair of Marketing, University of Miami

This book challenges the strongly held belief that customer satisfaction and its various derivatives, such as Net Promoter Score, are leading indicators of firm performance. Using rigorous research, the authors show that there is a weak correlation between satisfaction (and its variants) and consumers' purchase behavior. What matters is satisfaction relative to competition, not absolute satisfaction scores that almost all companies rely on. The authors translate this idea into a simple but powerful Wallet Allocation Rule. This book will change the way you think about customer satisfaction.

—Sunil Gupta, Edward W. Carter Professor of Business Administration, Harvard Business School

Keiningham and colleagues lay bare the “managerially correct” fallacy that by merely improving customer satisfaction and Net Promoter Score levels, firms will automatically see market share growth and higher customer spending. This well-researched book blasts these myths. More important, it shows managers precisely what to do (and how to do it!) to improve their firm's share. Grounded in strong research, The Wallet Allocation Rule is destined to have a lasting impact on both the science and practice of management.

—Katherine N. Lemon, Accenture Professor of Marketing, Carroll School of Management, Boston College

The Wallet Allocation Rule is a thought-provoking book that will change the way leading enterprises will measure and manage customer satisfaction. And I love that this book is based on solid academic research that will pass the test of time.

—Jochen Wirtz, professor of Marketing, National University of Singapore

The Wallet Allocation Rule focuses on a very important strategic issue for all business executives—how to win the battle for share of wallet. Backed by numerous examples and solid research, this book provides a new lens for viewing marketing decisions. The authors convincingly show that a focus on satisfaction is a recipe for financial disaster. Using the Wallet Allocation Rule, managers can finally make the critical link to share of wallet.

—Bo Edvardsson, professor and founder of CTF-Service Research Center and Vice Rector Karlstad

If you cannot measure it, you cannot manage it. In this book Keiningham, Aksoy, and Williams let managers become real managers by employing KPIs [key performance indicators] that measure what really matters: investments that drive share of wallet. I wish I wrote this book. I am delighted I read it!

—Tor W. Andreassen, professor of Marketing and director of the Center for Service Innovation at NHH Norwegian School Economics

This book is essential reading for anyone who wants to know how to improve customers' buying behavior. The Wallet Allocation Rule is an insightful strategy for those business executives who have the task of guiding their companies toward a new understanding of their customers' spending patterns. I am sure this book will be on every executive's desk.

—Jay Kandampully, professor in Services Management and Hospitality, The Ohio State University, Editor, Journal of Service Management

Customer satisfaction is hugely important, but its relationship to share of wallet depends in large part on the competition. Superstar consultant Tim Keiningham and his colleagues at Ipsos Loyalty have teamed with academic Lerzan Aksoy to help unlock exactly how it is that satisfaction relates to share of wallet. Based in large part on actual corporate applications, The Wallet Allocation Rule is a readable book that should be valuable to all managers who want satisfying their customers to pay off.

—Roland T. Rust, Distinguished University Professor and David Bruce Smith Chair in Marketing, University of Maryland

This is a fantastic book that will help organizations better manage, monitor, and understand their customers from the perspective of better managing their profits. It advances the conversation from customer satisfaction and Net Promoter Score to share of wallet thereby paving the way to linking behavioral metrics to financial metrics. The intellectual advances in the book will be relevant for both academics and practitioners, not just today but for decades to come.

—Vikas Mittal, J. Hugh Liedtke Professor of Marketing, Jones Graduate School of Business, Rice University

The Wallet Allocation Rule

Winning the Battle for Share

Timothy Keiningham • Lerzan Aksoy • Luke Williams

with Alexander Buoye

Cover image: © iStock.com/JoKMedia

Cover design: Michael J. Freeland

Copyright © 2015 by Timothy Keiningham, Lerzan Aksoy, Luke Williams, and Alexander Buoye.

All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

Designations used by companies to distinguish their products are often claimed by trademarks. In all instances where the author or publisher is aware of a claim, the product names appear in Initial Capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with the respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for damages arising herefrom.

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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)

Customers have a logical reason for using every brand that they do. Therefore, the secret to success lies in giving customers fewer reasons to use the competition.

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

—John Seely Brown, cochairman of the Deloitte Center for the Edge and past chief scientist for Xerox Corporation

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,2Return on Quality,3The 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.

Notes

1

 Brown, John Seely. “Research That Reinvents the Corporation.”

Harvard Business Review

69, no. 1 (January/February 1991): 102–111. Quote on page 109.

2

 Keiningham, Timothy L., Terry G. Vavra, Lerzan Aksoy, and Henri Wallard.

Loyalty Myths: Hyped Strategies That Will Put You Out of Business

. Hoboken, NJ: John Wiley & Sons, 2005.

3

 Rust, Roland T., Anthony J. Zahorik, and Timothy L. Keiningham.

Return on Quality: Measuring the Financial Impact of Your Company's Quest for Quality

. Burr Ridge, IL: Irwin Professional Publishing, 1994.

4

 Keiningham, Timothy L., and Terry G. Vavra.

The Customer Delight Principle: Exceeding Customers' Expectations for Bottom-line Success

. New York, NY: McGraw-Hill/American Marketing Association, 2001.

5

 Keiningham, Timothy, Lerzan Aksoy, and Luke Williams.

Why Loyalty Matters

. Dallas, TX: BenBella Books, 2009.

6

 Keiningham, Timothy L., Lerzan Aksoy, Alexander Buoye, and Bruce Cooil. “Customer Loyalty Isn't Enough. Grow Your Share of Wallet,”

Harvard Business Review

89 (2011, October): 29–31.

7

 “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

.

8

 Examples include Aksoy, Lerzan. “Linking Satisfaction to Share of Deposits: An Application of the Wallet Allocation Rule.”

International Journal of Bank Marketing

32, no. 1 (2013): 28–42; and Keiningham, Timothy L., Bruce Cooil, Edward C. Malthouse, Alexander Buoye, Lerzan Aksoy, Arne De Keyser, and Bart Larivière. “Perceptions Are Relative: An Examination of the Relationship between Relative Satisfaction Metrics and Share of Wallet.”

Journal of Service Management

, 26, no. 1 (2015), forthcoming.

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.

Henri Wallard

Deputy CEO, Ipsos

Chairman of Ipsos Loyalty, Ipsos MediaCT, and Ipsos Public Affairs

Ralf Ganzenmueller

CEO, Ipsos Loyalty

Chapter 1It's “Oh My God!” Bad

Marketing is too important to be left to the marketing department.

1

—David Packard, cofounder and past chairman, chief executive officer (CEO) and president of Hewlett-Packard

“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)

2

CEOs around the world have stopped trusting their chief marketing officers (CMOs). Our research proves it.3 The findings are sobering. The majority of CEOs can't bring themselves to say that marketing is strategically relevant.4 Oh my God!

This is a major problem. Marketing's job is to bring the voice of the customer to the company. Customers are the only reason companies exist, and marketing is charged with overseeing the customer experience. In fact, 90 percent of CMOs are personally responsible for the overall customer experience management efforts of their firms.5

Unfortunately, for many corporate leaders marketing has become, to quote the CEO of an Italian telecom, a “function not on the top of my everyday priority list.”6 Or worse! CEOs often view marketing as a money pit. To quote the CEO of one U.S. retailer, “Marketing [has] great ideas but no clue how to measure its impact on what really counts How can I allocate them a budget that disappears into a black box while others can deliver me an ROI for every dollar I give them?”7

Marketing's detractors likely don't see a problem at all—and to be sure, there are lots of detractors. Ironically, for a management science charged with managing the reputation of their companies, marketing has a terrible reputation among consumers and business professionals.8 Only 10 percent of the population has a positive impression of marketing. By contrast, 62 percent have a negative opinion of marketing. Moreover, detractors can rightfully point out that companies still exist and that companies must, by definition, have customers. So companies can exist just fine without much help from marketing. What difference does it make that marketing has lost strategic relevance with CEOs?

The reason is best summed up in the words of Peter Drucker, the father of modern management.

There is only one valid definition of business purpose: To create a customer Because it is its purpose to create a customer, any business enterprise has two—and only these two—basic functions: marketing and innovation. They are the entrepreneurial functions. Marketing is the distinguishing, the unique function of the business. Any organization in which marketing is either absent or incidental is not a business and should never be run as if it were one.9

Marketing's failure will ultimately be reflected in the customer experience. In fact, it already is. Given the current CEO-CMO breakdown, it's not surprising to find a corresponding breakdown between the way senior executives view their companies and the way their customers do. After all, it's marketing's job to be the champion of the customer for the CEO. What is surprising, however, is the enormity of the gap. A study reported in the Harvard Management Update finds that 80 percent of company executives believe that their companies provide a “superior” customer experience. Only 8 percent of their customers agree.10 This finding is confirmed in the Temkin Group report, “The State of Customer Experience Management, 2014,” which found that only 10 percent of firms are customer centric.11

Of course, positive change for customers will happen only when CEOs view their companies from their customers' perspective. After all, there's no need to change things when you believe you are already doing a superior job.

It is easy to blame CEOs for being shortsighted. The sad truth is that CEOs' complaints about marketing are valid. Marketers do a terrible job of linking their efforts to tangible business outcomes. To be fair to CMOs, it isn't for lack of desire or effort. The problem is more pernicious. All too often, the expected linkage isn't there—and it never was! The underlying assumptions CMOs use to justify most of their investments in improving the customer experience are wrong.

Growth Is Hard to Find

CEOs at every public company are obsessed with achieving two outcomes: profits and growth. The reason for profits is obvious: Profits determine a company's viability.

It is growth, however, that is the lifeblood of companies. It is arguably the most important gauge of a company's long-term success. It is what creates economic value for shareholders. As a result, growth is the common goal of every CEO of a public company and one of the most important metrics by which the board of directors will assess a CEO's performance.

Unfortunately, growth is a goal that is seldom achieved. An investigation of 4,793 public companies reported in the Harvard Business Review found that fewer than 5 percent achieved net income growth of at least 5 percent every year for five years.12 Furthermore, once growth stalls, the odds of ever resurrecting even marginal growth rates are very low.13 Consequently, although there is no question that growth is the imperative, the dismal results for most companies prove that it's hard to know just how to make it happen.

Deconstructing Market Share

If the goal is market share growth, then we need to begin by understanding what actually drives market share. Strangely, although growth is the goal of virtually every CEO of every public company, few managers know the main components of market share. Virtually all managers calculate market share as follows: