Percent First Choice

Given that using the Wallet Allocation Rule focuses on rank as opposed to the absolute satisfaction (or Net Promoter Score) level, it is important to monitor performance in a way that corresponds to this new perspective. Managers must do so in a way that is simple enough for their employees to grasp and at the same time reflective of how customers allocate spending with their brand.

A brand's average rank is not easy for either senior managers or frontline employees to interpret, nor is it easy to rally the organization around. This is because we think of ranks as whole numbers—such as first place, second place, third place, and so on. A firm's average rank, however, is almost never a whole number. As a result, it is hard for managers and frontline employees to internalize.

An easy way to get around this problem is to track the percentage of customers who give your brand their highest satisfaction rating among all brands that they use. In other words, is your brand really a customer's first choice, or do customers view your brand as being the same or worse than competitors? Looking at the percentage of customers who rate a brand better than all other competitors correlates strongly with share of wallet (see Figure 5.1). Although the first choice percentage is not quite as strongly correlated to share of wallet as the complete Wallet Allocation Rule calculation, it provides an easy-to-understand and easy-to-use metric that keeps the focus on where the brand ranks relative to competition.

Average Number of Brands Used

The Wallet Allocation Rule also makes clear that the number of brands used in the category by a customer has a strong impact on share of wallet. As a result, managers need to understand how and where customers allocate their category spending.

Customers have logical reasons for using every brand that they do. Therefore these multibrand users must have certain needs that they perceive are better fulfilled by competing brands. Tracking the number of brands that customers use keeps the focus on reducing customers' perceived needs to use competing brands with the ultimate goal of eliminating competitors from customers' usage sets entirely.

Share of Wallet

Gaining a higher share of customers' category spending is a common goal for managers. But most managers have no idea about the size of the share of wallet customers allocate to their brands and that of their competitors.

To be fair, the data aren't readily available in most industries. After all, companies typically don't share their customers' buying behaviors with their competitors.

Even when share of wallet data is available, it is almost never customer identifiable. This makes it virtually impossible to connect share of wallet information with your brand's customer database. As a result, managers have been hamstrung when developing programs designed to improve their share of customer spending.

Fortunately, it is possible to collect share of wallet information via consumer surveys. Moreover, academic researchers have developed robust systems for aligning and validating survey-based and observed share measures.¹¹

Because the Wallet Allocation Rule is all about growing share of wallet, it is important that managers monitor the share of wallet that customers allocate to their brands. It is also important to know the share of wallet that your brand's customers allocate to competitors (which can be easily determined using the Wallet Allocation Rule).

Because share of wallet is a metric that can be translated directly into dollars, it is imperative to understand precisely how much of your customers' money is going into your competitors' cash registers. To do this, managers need to simply do the following (see Figure 5.2):

1. Divide the total sales revenue that your customers give to your brand by the average share of wallet that your customers give to your brand. This will give you the total dollars your customers spend in the category across all brands (yours and competitors).
2. Multiply your customers' total category spending by the average share of wallet your customers give to each of the brands that they use. This will give you the total dollars your customers spend with each competing brand.

With this information, managers get a real understanding of where their customers' money is going. More important, they can discover where significant opportunities exist to take back share from competitors.

Satisfaction and Market Share

Used together, satisfaction and market share information provides managers with important insight into the nature of their brand and the markets in which they compete. Remember, the relationship between customer satisfaction and market share is negative in many industry categories. Without a good understanding of the nature of the relationship in your industry, and of where your firm stands vis-à-vis competitors, it is very difficult to effectively manage the customer experience in the pursuit of market share.

The place to begin is with an analysis of your customers' levels of satisfaction with your firm and with your competitors' customer satisfaction levels with these competing firms, as well as your and your competitors' market shares (see Figure 5.3). If one or more firms have high market share and low customer satisfaction, the industry most likely demonstrates a negative relationship between customer satisfaction and market share.

Firms with high share and low satisfaction combinations are what we refer to as mass market brands. These firms have a wide range of customers with a diverse set of needs that can be met in large part by the firm. But it's impossible for these brands to precisely meet the needs of all or even most customers. As a result, some core benefit, such as price, convenience, or product assortment, needs to be sufficiently strong for customers to believe sacrificing other desired benefits to be worth the exchange. In many categories, this strategy has proved very successful, which is why many mass market brands represent some of the most well-known brand names: McDonald's, Walmart, and Microsoft Windows.

Because mass market brands focus on the general needs of a wide audience, they typically find themselves competing with smaller, more focused competitors that better target the needs of specific segments of customers. These niche brand competitors must have higher satisfaction levels to survive. Yet because these firms target a smaller segment of customers, their market share is relatively low. For example, niche brand fast-food burger restaurants such as Five Guys Burgers and Fries have higher satisfaction levels than any of the big three burger chains (i.e., McDonald's, Burger King, and Wendy's) because of their almost exclusive focus on burgers and fries. Clearly this strategy has proved highly successful for Five Guys, but its limited menu also makes it virtually impossible for the chain to achieve market share leadership.

In some categories, there are brands that exhibit both high customer satisfaction and high market share, which we refer to as high-loyalty brands. For example, Google has consistently received higher customer satisfaction ratings than its competitors in Internet search while capturing almost two-thirds of U.S. search activity. High-loyalty brands, however, are similar to mass market brands in that they face competition from niche brands.

How are these brands able to avoid the relatively poor customer satisfaction score that mass market brands typically receive? It is interesting to note that high-loyalty brands often are found in the technology sector, a dynamic market. Competitive intensity combined with rapidly changing and improving product offerings means that these markets are in constant flux. As a result, customers have not habituated to the products offered. But this is a double-edged sword. Because the markets are in a high state of flux, winners can quickly lose ground—as companies such as BlackBerry have discovered.

Some brands, despite relatively low satisfaction and low market share levels, compete successfully. These conditional-use brands, as we refer to them, succeed either because they uniquely offer items needed to complete the consumer's shopping basket in the category or because some market barrier makes using a preferred brand difficult. For example, many retailers and restaurants compete largely through the convenience of their locations relative to competition.

Given that each quadrant of the satisfaction and market share matrix represents a viable business strategy, simply comparing average satisfaction levels across brands in a category offers little real insight. In particular, if larger share brands are likely to have lower satisfaction than smaller brands, how exactly are managers to compare their performance vis-à-vis competition? In our own experience, managers of some the world's largest brands often benchmark their performance against the highest satisfaction brands in the category despite the fact that their share is often significantly smaller. Moreover, senior executives tend to view these levels as attainable targets for their own firms just because a competitor achieved them.

Consultants often go even farther down this path. It is virtually impossible for managers to go through their employment histories without hearing a management guru expound on how their brands should be more like great—but niche—brands such as Harley Davidson, Disney, Cirque du Soleil, and so on. The underlying argument is that customer expectations are not only set by direct competitors' performance but also established by all firms with which customers conduct business. Although there may be a grain of truth to this argument, most of the time it is not managerially relevant. Whereas learning from the experiences of other firms is beneficial, setting target satisfaction levels based on the performance of niche players is not only unrealistic it's a bad business decision.

So how should a 40 percent market share Brand A compare itself to a 10 percent market share Brand B in terms of satisfaction? A simple rule of thumb is to compare satisfaction levels of customers that correspond to equivalent market shares for both. In the case of this example, Brand A would take its top customers, which constitute 25 percent of its revenue (if it had only those customers it would have 10 percent market share), and compare their satisfaction level with that of Brand B (see Figure 5.4). If they are comparable, then Brand A is fine. If, however, it is significantly lower, then Brand A managers need to assess the risk of losing these customers to competitors and work to mitigate that risk.

Satisfaction and First Choice

The overriding reason for managements' focus on customer satisfaction is because they believe it is a source of competitive advantage. At some level, managers expect high satisfaction levels to cause customers to prefer a brand to competitive alternatives.

Clearly, there is some truth to this. As with all management truisms, however, the devil is in the details. It is quite possible in many categories for a brand to have high satisfaction or Net Promoter Score levels and yet not be a customers' undisputed first choice. In other cases, a brand can be a customer's exclusive first choice but have relatively low satisfaction levels. This presents managers with a real problem—what is a good score?

Part of the problem is a general misunderstanding of how satisfaction (and Net Promoter Score) link to customers' buying behaviors. The absolute scores themselves are almost meaningless. What matters is whether or not the customer rating is higher for your brand than for competing brands. The lion's share of a customer's wallet goes to his first-choice brand. Therefore, it is vital to understand how a brand's satisfaction level translates into a position as the customer's first choice.

By analyzing your customers' levels of satisfaction and their corresponding first-choice selection, you can place each of them into one of four categories, as shown in the matrix “Satisfaction and First Choice” (see Figure 5.5).

If your customers both are highly satisfied and prefer your brand to all others, you are the star brand in the category. Here the strategy is simple—continue to delight these customers.

At the opposite end of the spectrum are brands that are low in satisfaction and in first-choice preference. This environment gives rise to the conditional-use brands we discussed earlier. The strategy for these brands is to maintain unique items that would be difficult or unprofitable for competitors to incorporate into their offering or to find ways to erect market barriers that make access to a preferred brand difficult.

For those customers whose satisfaction is high but first choice is low, high satisfaction levels are masking customers' real perceptions of the brand. Managers typically tout the fact that customers are highly satisfied, but the reality is that the brand is one of several that the customer uses and views as being basically equivalent, which is why we refer to these brands as parity brands. Although being at parity may sound like no big deal, there are no multiple gold medal winners in business. Rather, you evenly divide your customers' share of spending with your strongest competitors. The strategy for these brands must be differentiation from core competitors—in other words, you must give customers a reason to believe your brand is uniquely better than competitors.

There are also brands that despite low satisfaction still represent customers' first choice. These low service category brands compete successfully either because the category has few competitors or because these brands compete largely on price leadership. These brands can succeed provided sufficient entry barriers for competitors exist or significant price leadership can be maintained. This, however, is an inherently difficult position to maintain. In an era of open access to information, wide access to markets, and easy price comparisons, cost leadership strategies often come at the expense of acceptable financial returns. As a result, competitive markets tend to pressure firms to raise their satisfaction levels to remain customers' first-choice brand.

Key Drivers¹³

When it comes to using the Wallet Allocation rule, the most important question that managers want answered is “Where should I focus my efforts?” Because managers have many potential improvement opportunities, they need to be able to prioritize them based on their potential financial return.

Managers have traditionally relied on key driver analysis to guide them about the most important issues affecting customer satisfaction (or Net Promoter Score). Traditional driver analyses examine the relationship between customers' satisfaction with specific attributes of the service experience and their overall satisfaction levels.

Traditional driver analyses, however, will not work with the Wallet Allocation Rule. With the Wallet Allocation Rule, satisfaction is not measured in a vacuum. What's important here is the rank of a brand's satisfaction level compared with that of its competitors. Specifically, overall satisfaction ratings for all brands that a customer uses are required in order to establish the proper context.

As a result, to understand the drivers of rank, the attributes of the service experience must be determined in relation to the competition. This represents a major departure from traditional driver approaches.

The most comprehensive approach to achieve this is to ask all respondents to rate all brands used on all attributes, then convert the attribute ratings into ranks just as we do with overall satisfaction. Unfortunately, asking a full battery of questions for every brand a customer uses is at times impractical.

When that is the case, managers can still place attributes in a relative framework by presenting customers with a checklist of options rather than having them rate each attribute (see Figure 5.6). This involves using a grid with one column for each brand that a customer uses and one row for each driver attribute. The objective is to have respondents select the brand(s) that perform best on that attribute.

Although this approach cannot provide a set of ranks on the driver attributes that can be run against the overall rank, it is consistent with the philosophy of striving to be number one. Remember, the greatest share of wallet is allocated to the brand that occupies the number one space.

Distinguishing between the drivers of satisfaction and the drivers of rank would be unnecessary if both sets of drivers pointed to the same opportunities for improvement. That, however, is most definitely not the case. An analysis by Alex Buoye, a coauthor of this book, clearly demonstrates the stark difference between these two types of drivers.¹⁴

A simple regression analysis revealed that the top driver of satisfaction with grocery retailers was product range (followed closely by customer service). Of course, this makes total sense. Carrying the products your customers want is the raison d'étre for any retailer, especially one dealing in regularly purchased staples, like groceries. If you were to ask a customer why she shops at a particular store, it would not be surprising to hear her say that the store simply has the products she wants. In addition, providing friendly customer service is almost always a good way to boost satisfaction scores; good customer service produces positive sentiment. But if you really think about it, are product range and customer service the main reasons someone decides to shop at a particular grocery store?

By contrast, you probably would be surprised if a customer told you the best thing about the store was its location. The research uncovered that the most important driver of share, however, was in fact the perceived convenience of the location (see Figure 5.7). When comparing stores where one shops, better location doesn't do much to differentiate the satisfied from the dissatisfied customers. In fact, it was dead last among the list of drivers of satisfaction that were examined! But it makes a huge difference in determining how much one shops there.

A separate analysis grouping retailers into categories based on dominant store formats (supermarket, “fresh,” mass merchant, warehouse, limited assortment) sheds more light on the issue (see Figure 5.8).

When looking at the brands one uses, drivers of satisfaction actually form the basis for competitive positioning. It isn't simply about being “better” at one particular thing but rather understanding how to maximize your advantage on the things you do well while mitigating your competitors' relative strengths. Traditional supermarkets (e.g., Kroger, Safeway) and fresh markets (e.g., Whole Foods) are typically characterized by better customer service and more welcoming stores, whereas limited assortment stores (e.g., Aldi) generally have location (and price) advantages. Mass merchants/supercenters (e.g., Walmart) win on product range—not necessarily in terms of groceries specifically, but across multiple retail categories, capturing customers' grocery spending while they shop for other goods without groceries necessarily being the reason why they shop there.

So, when competing with other supermarkets, a traditional grocer may be able to win back some of its customers' spending by focusing on the things that they both do well. But when competing with a mass merchant, the key driver to be addressed may be quite different. Understanding the key drivers of share requires knowing who your main competitors are and what is driving their satisfaction and share among your shared customers. As with the Wallet Allocation Score itself, it is not enough to look only at your own brand. This idea is not new; it's just somewhat foreign in most current discussions about managing customer experience, especially when the focus has been placed on improving a single number.

Barriers

Another common reason that customers use multiple brands is structural barriers that distort demand. In other words, there is some market force that causes people to buy something other than their preferred brand. These market barriers can dramatically influence customers' willingness and ability to devote a greater share of their business to their preferred brand.

In Alex's study of grocery retailers, two prominent structural barriers were found, each affecting different types of stores (see Figure 5.9).

The substantially larger footprint of mass merchants and wholesale club/warehouse stores makes it nearly impossible to compete with smaller stores on convenience of location. This issue is not simply a case of store address or number of locations; customers reported that shopping at these types of stores often took “too long.” That it takes longer to make one's way through a larger store with “more stuff” is just a physical fact. Conversely, respondents indicated that they could not do “all” their shopping with supermarket- and fresh-format stores because of cost. Although there is almost certainly some room for improvement with clever innovations or targeted pricing strategy, these are realities for which the different players need to prepare.

Often these barriers reflect the power of the distribution channel to limit choice. For example, McDonald's, Burger King, and Wendy's sign exclusive contracts with Coca-Cola or Pepsi to distribute their products—all three currently distribute Coke products in the United States. As a result, loyal Pepsi drinkers dining at these restaurants are forced to substitute a Coke product if they want a soda, or do without entirely.

The most common market barrier is affordability.¹⁵ Although relative price can be a key driver of customers' decisions to use one brand more frequently than another, price also puts many preferred brands out of the usage set entirely. Think of it this way: Most of us would be driving a different car if money were no object.

Another common barrier is that the final buying decision reflects the needs of multiple individuals.¹⁶ In other words, we balance our needs with the needs of others—as a result, we don't purchase the brand we would buy if the decision were entirely our own to make.

Shared decision making is so common in family purchase decisions that it has become a well-worn wedding joke:

A man was interviewed on his 75^th wedding anniversary. “Amazing, 75 years,” gushed the interviewer. “What's the secret to such a long, happy marriage?” “It's like this,” replied the husband. “The man makes all the big decisions . . . and the woman makes the little decisions.” “Does that really work?” asked the interviewer, a little taken aback. “Oh, yes,” he said proudly. “Seventy-five years and not one big decision so far.”¹⁷

Although this little tale is obviously designed for a laugh, all of us have at some point compromised on getting exactly what we wanted to meet the needs or desires of others. Overcoming this barrier requires that a brand appeal to multiple decision makers, which requires managers to really understand how consumers choose brands when multiple individuals have input on the final decision.

Market barriers are a factor that managers cannot ignore. The hard reality for managers is that improving customers' experience with the brand will have little impact on share of wallet until the barriers to purchasing the brand are removed. Addressing market barriers are often some of the most difficult tasks.