The Wallet Allocation Rule

Chapter 2Eureka! The Discovery of the Wallet Allocation Rule

The greatest obstacle to discovery is not ignorance. It is the illusion of knowledge.¹

—Daniel J. Boorstin, Pulitzer Prize-winning historian

“Satisfaction guaranteed or your money back! ” Montgomery Ward—the inventor of the general merchandise mail order catalog—began using this promise in 1875 to differentiate its mail order catalog from other retailers.² It has become the standard promise of almost every business around the world.

Montgomery Ward recognized that the only way for his business to survive and grow was to build a foundation of satisfied customers. It's just good business. In fact, it is a core component of economic theory. An underlying principle of economics—referred to as Gossen's second law—states: “a person maximizes his utility when he distributes his available money among the various goods so that he obtains the same amount of satisfaction from the last unit of money spent upon each commodity.”³

This idea is so ingrained in our daily lives that it seems self-evident—people buy more from places that do a better job of satisfying them. Moreover, a lot of researchers (including us) have provided scientific evidence that confirms a statistically significant relationship between customer satisfaction and customer spending.⁴

But the problem is that while a statistically significant relationship exists, the strength of that relationship is so incredibly weak that it is managerially irrelevant. As a result, ...