At the Marketing Research Association’s Insights & Strategy Conference in Orlando today, Timothy Keiningham of Ipsos Loyalty shared an update on the Ipsos Wallet Allocation Rule method, which won the 2011 NGMR Innovation Award. Traditional customer loyalty measures alone do a poor job of predicting Share of Wallet, the percent of category purchases captured by a specific brand. Ipsos has developed a way to extend such metrics to accurately measure Share of Wallet and drive business growth.
The fact that customer satisfaction alone isn’t an accurate predictor of Share of Wallet has been long known, but in 2007 Timothy and other researchers wrote “The value of different customer satisfaction and loyalty metrics in predicting customer retention, recommendation, and share-of-wallet“. In this paper, the authors demonstrated that customer satisfaction, purchase intention, and recommend intention (as measured by the Net Promoter Score classification) do not correlate to Share of Wallet.
Ipsos, Fordham University and Vanderbilt University staff collaborated to identify a measure that would correlate. What they found was that Share of Wallet was relative. If you are, in Net Promoter terms, a promotor of both Coke and Pepsi then Net Promoter alone can’t predict Share of Wallet. And this holds for whatever your favorite loyalty or satisfaction measure is. Nor can aggregate loyalty for one firm be compared to aggregate loyalty for another — it needs to be compared on a customer-by-customer basis. The researchers found that Share of Wallet could be predicted by the relative ranking of a firm vs. the other firms used by a customer in the category.
This is easy to measure and builds upon your existing loyalty metric.
- Simply ask a respondent to list all the brands that they purchase from in the product category you are analyzing.
- Then ask them to rate each brand using your favorite question (e.g., customer satisfaction, purchase intent, Net Promoter). “Don’t ask them to rank the brands,” Timothy said. “You have to convert the answers into ranks at the customer level.”
- Then estimate Share of Wallet among your customers (if that was your sample) or among category users (if you used a representative sample). To do this, use the Wallet Allocation Rule formula: (1 – Rank / ( Number of Brands + 1 ) ) X ( 2 / Number of Brands). “Don’t be afraid of the math!” Timothy said. In case of a tie, average the rank (e.g., a tie for 1st among 2 brands is a rank of 1.5). Once you have calculated this for every respondent, take the average — that is your Share of Wallet.
Where existing measures alone do not correlate to Share of Wallet, the Wallet Allocation Rule correlates highly: with R’s of .99 for pharmacies and mass merchants to R’s of .78 for airlines and .67 for automobiles. Additionally, now that Ipsos has tracked this over time, it has observed a strong correlation between changes in Wallet Allocation Rule scores and changes in actual Share of Wallet over time, with a .8 correlation. As Timothy observed, “It’s not that the metrics we use are wrong — it’s the way that we use these metrics is wrong.”
How do you grow your business using this measurement? Focus on improving your rank. Probe to understand from your customers why they prefer other brands to yours in specific circumstances and then work to improve those. To start with, go for the easy pickings : “Go after the guy tangentially stealing your share. Reducing the number of brands used improves your share with that customer.” For instance, for a major grocery chain, Ipsos helped them realize that they lost on price to one key competitor. While they couldn’t match the low prices, they could come close enough on the pricing of grocery staples to make it easier for shoppers to justify purchasing them in the store rather than making a separate shopping trip for the now more marginal savings. For this firm, a 6% increase in being the first choice translated into a 7-point increase in Share of Wallet. For the grocery store, this was equivalent to shifting $62 million from competitors to their own firm.
For more, see Timothy’s presentation, Customer Loyalty Measurement is Broken: Let’s Fix It. Soon you’ll be growing your own business accordingly.