Bad news marketers – all your efforts to connect the customer satisfaction ratings and Net Promoter Score (NPS) to a solid return on investment for your business are doomed to fail, according to Timothy Keiningham, the global chief strategy officer of Ipsos Loyalty.

That’s what Keiningham argues in the first chapter of his new book The Wallet Allocation Rule due to hit shelves next month from WileyIn fact, marketing executives might find the first sentence pretty bleak: “CEOs around the world have stopped trusting their chief marketing officers.”

That’s an issue for marketers Keiningham says, and at its core is a fundamental problem with how marketers are evaluating their own success. Marketers are concerned with satisfied customers, but that does not lead to a greater share of that customer’s wallet, according to research conducted by Ipsos Loyalty and Harvard Business School. In fact, there’s data to suggest that high customer satisfaction levels are negatively related to share of wallet.

Instead, marketers should be trying to ascertain how customers rank them compared to the competition. Keiningham shows in his forthcoming book how this can be used to demonstrate what share of the customer’s wallet a company will win. But since you can’t read it until next month, we asked him a few questions to get the gist.

Book author Timothy Keiningham is also Ipsos Loyalty's global strategy officer and a PhD holder.
Book author Timothy Keiningham is also Ipsos Loyalty’s global strategy officer and a PhD holder.

Here’s an edited transcript of our interview with Keiningham:

What’s the problem with marketers tracking customer satisfaction or Net Promoter Score as metrics indicating success?

“We’re not saying customer satisfaction is not important, because of course you want people to be happy. But most people are measuring satisfaction with ‘a higher-scores-lead-to-growth mentality,’ and that isn’t true. Basically there’s two big reasons this is true, higher satisfaction scores at a firm level tend to equate to lower market shares in almost every category. The largest, bigger player always has lower satisfaction than the smaller player. That makes sense because the niche player has to provide a good experience to a smaller group of customers, or else they’d go to the bigger player.

If you just look at the customer satisfaction score and the relationship to how they rank your brand, it’s so statistically weak that its managerially irrelevant. We have to rethink how customer satisfaction and NPS fits into our corporate strategy. It can still be a put of it, but this pursuit of higher scores isn’t scientifically linked to more market share.”

You say that higher customer satisfaction can even lead to lower market share in most cases. Can you explain how this can happen?

“Just think about Wal-Mart. Wal-Mart dominates most of the categories that it competes in. If you look at mass market retail in general, it dominates compared to competitors. It has the largest share of groceries in the U.S. market too. They also have substantially lower satisfaction, even if you compare it to a similar brand like Target. The reason for this opposite relationship is that if you’re a mass market brand, you end up with multiple market groups coming in the door. The more diverse the customers, the less likely you are to give each customer exactly what they want. So to grow market share, I have to actually increase my base of customers. I have to go after the business of the people where I’m not exactly sure what they want, but they end up shopping with me because I’m often still the best choice. With Wal-Mart, the reason for that might be its prices.

If you go to a more niche player, it might appeal to a smaller more homogenous group. They will have a group that doesn’t consider Wal-Mart as the main alternative, and they will go to the store and be satisfied with their needs being met. But, by definition that means they are going after a niche market.”

But if a company like Wal-Mart were to improve its customer satisfaction, then wouldn’t its business improve?

“Wal-Mart actually thought what you just said, but it’s not the case. During the recession, they were one of the players that were truly winning. The Targets of the world, and the Nordstroms were really tanking because service becomes less important and everyone is more price sensitive in a recession. So Wal-Mart launched Project Impact to make a friendlier experience, a cleaner better store, to change what Wal-Mart is. So they rolled that out, and as soon as they did, two things happened. They had record levels for customer satisfaction, and they had the longest same-store customer decline in company history. Some people estimate they lost $2 billion in sales. The CEO of Wal-Mart said something like ‘they loved the experience, they just weren’t spending any money, and generally that’s not a good long time strategy.’

The improvement of the experience isn’t just about making people happier, it’s about giving them fewer reasons to use the competition.

Tell me about what you’re talking about with allocation of wallet. What do you mean with this phrase?

We discovered this relationship we named the wallet allocation rule. People tend to divide the spending among the brands they use in similar ways. It follows a scientific law that most of us wouldn’t think apply. It’s not really your satisfaction or net promotion score, it’s really a brand’s relative rank vis-a-vis the other brands a customer uses. So, if you have two customers and both of them rank you a nine on a 10 point scale. That’s good. But the problem is if they’re using another brand, then they’re probably giving them a nine out of 10 as well, or maybe even a 10 out of 10. So then you find out you’re not winning, you’re a parity brand. So the fact that you’re tied or you’re losing to a competing brand has a huge implication about how they’re spending with your brand vs. other brands they use. If two brands are tied, then they divide the amount they spend among the two evenly.

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Author Timothy Keiningham says the above equation should be used to marketers to ascertain their brand’s ‘share of wallet.’

Your equation showing how to calculate allocation of wallet involves how customers rank a company compared to others in the category. How do marketers find out that information?

The nice thing is they are already asking about their customer’s level of satisfaction. The problem is they don’t also ask how satisfied they are with other brands. You don’t ask your customers to assign a rank because it’s nice to make it easy to have ties. But what we really want is to find out is who’s really the best, who is tied, and who is the worst. We should be asking how satisfied they are with other brands and then convert them to ranks. Basically you’re going to ask what brands a customer uses in the category. Then you ask how satisfied they are with that, find out how positively they feel about that brand.

Now there’s a very simple formula to use and it predicts share that companies will allocate to these brands very well. What you’re trying to do is get at the customer’s share of wallet allocated to the different brands they use.

Can you point me to a brand that is doing the right things to boost its “share of wallet” with its customers?

A great example in tech is Microsoft when there were all these niche players entering the market. Microsoft would just incorporate that into the operating system, just like when they brought in Internet Explorer to take out Netscape. They got into a very dominant market share position. Why? Because you had no real reason to use a competitor’s product. The bundling effort made it more convenient and cost effective for the consumer.

Google is doing thing things very well to increase share of use. They think about how to minimize your need to use the competition’s features. They think about how the customer uses the product, how they use the competitor’s product, and what they can incorporate into their product so everyone else becomes less and less prominent.

Why should marketers care about this?

Satisfaction and Net Promoter Scores are very inward looking. They revolve around what about your brand promise that causes people to come to me anyway. A great example of this is credit unions. Credit unions in the U.S. have among the highest customer satisfaction ratings everywhere, but they have very low market share. It’s not because they have high fees or bad interest rates, those are great. But they don’t have very good access for their customers. So asking the customers about what they’re happy about isn’t going to show you the fact they still need to go somewhere else. If you still need to go somewhere else, then you’re splitting your share of wallet.

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