A customer who buys your coffee every month looks loyal in your data. Your data can’t see the two other brands in her cupboard. Share of wallet, the share of a customer’s category spending that comes to you, is the first number to know before adding a category, because it says how much growth is left in the one you have.

Your best customers aren’t where the headroom is

The obvious guess is that your biggest spenders are loyal and your small spenders are the opportunity. Rex Du, Wagner Kamakura and Carl Mela found in 2007 that it doesn’t hold: the volume of customers’ transactions with the firm had little correlation with the volume of their transactions with competitors, and a small share of customers accounted for a large part of all the transactions that went elsewhere Published. Some of your modest customers are big spenders in the category who give most of it to someone else. You can’t find them in your order data. You have to ask.

Rank predicts share

Timothy Keiningham and his colleagues went looking for the survey question that predicts share of wallet. Satisfaction and Net Promoter scores, they wrote in Harvard Business Review in 2011, “correlate poorly with what matters most: share of wallet” Published. What did predict it was rank: where a customer places your brand among the brands they buy in the category. Their Wallet Allocation Rule turns that into a share with two inputs, your rank and the number of brands the customer uses:

PublishedKeiningham, Aksoy, Williams and Buoye, The Wallet Allocation Rule, 2015. The authors describe the underlying work as a two-year study of more than 17,000 consumers in more than a dozen industries and nine countries Reported.

DerivedFrom the formula above.

Treat the rule as a starting point, not a law. Most of its evidence comes from the authors’ own studies, and it assumes customers can rank brands they buy for different reasons. Check it on your data: survey a few hundred customers on category spend and rank, and compare their stated share with what they spend with you. If the two roughly agree, rank becomes your share-of-wallet tracker. The survey is in Appendix B.

A customer who ranks you second of three gives you about a third of their spend, and feels loyal while doing it.

What headroom is worth

Say a brand has 20,000 active customers. Its survey says a typical customer spends $300 a year in the category, uses three brands and ranks this one second. The brand gets about $90 a year from each, a 30% share, a little under the rule’s 33% for second place. If it could move three in ten customers from second to first, their predicted share would go from 33% to 50%: about $50 more per customer a year, or $300,000 across 6,000 customers Derived. No new product, no new inventory, no new supplier.

If the next category’s plan says $250,000 in year one, before development and stock, the core is the bigger opportunity, and the cheaper one.

With the defaults, the brand holds a 30% share, the rule predicts 33% for second place, and moving three in ten customers to first is worth $300,000 a year, 1.2 times the new category’s year-one plan.

Moving up a rank

You move up a rank by finding out why customers put someone else first, and removing the reason. Ask the customers who rank you second what the first brand does better. The answers tend to be practical: a size you don’t sell, a worse price per unit, a flavor you discontinued. Those are core fixes, usually cheaper than a launch. The mechanics of later orders are in The Second Order.

Do this

• Survey 300 or more active customers this month with the three questions in Appendix B: category spend, brands bought, rank. Join the answers to their order history.
• Run the calculator with the medians, then again for your top spending decile. Write both headroom numbers above the next category’s plan in the launch brief.