Lifetime Value vs. Share of Wallet: Which is the Right Metric for Customer Retention?

For banks, knowing who customers are and will be is increasingly difficult. While two key marketing metrics — share of wallet and customer lifetime value — aim to help financial institutions grasp the Holy Grail, they're being pressured by radical shifts in the financial services landscape.

A bank’s most valuable asset is its customers. Yet the majority of financial institutions struggle to understand the products and services their clients need and want — both now and in the future — and to pinpoint prospective customers. While locking down on that Holy Grail has always been critical to marketing, sales, expansion and profitability, the task is now complicated by a complex inflection point — with major consequences for the rapidly evolving financial services industry.

What might be called the veil over the grail consists of the convergence of seven new factors that make it both tougher and even more critical for traditional banks to understand their current and future customer bases if they are to survive and thrive. The veil is woven of intertwining threads:

  • The rise of nonbank lenders, neo-banks and financial technology companies;
  • The growth of new platforms like Amazon Pay, Apple Pay and PayPal;
  • The digital shift to mobile and online banking;
  • The growth of robo-advisor investing services from firms such as $40 billion startup Betterment to stalwart Fidelity;
  • Regulatory shifts following the collapse of Silicon Valley Bank and Signature Bank in March 2023;
  • Lingering economic uncertainty as inflation slows, wages outpace rising consumer prices and the Federal Reserve weighs interest rate cuts after 11 consecutive hikes;
  • The growing propensity of consumers to use multiple financial service providers.

Banks have long relied on increasingly complex mathematical models to predict the profitability of their clients. But while these two key metrics — the widely used share of wallet, and the newer customer lifetime value (CLV) — are closely related, they present core differences in their assumptions about how to maximize return on customer retention, acquisition and marketing. Add in the 7 factors reshaping the financial landscape, and a major question emerges: Which metric is the most useful?

Contextualizing Share of Wallet Versus Customer Lifetime Value

Share of wallet refers to the percentage of total spending that a consumer devotes to a particular company. An indicator of brand loyalty, the metric reflects the degree to which a company has reached its target audience and cemented its position in the competitive landscape.

The concept took off in 2011, when a novel formula known as the Wallet Allocation Rule emerged. By considering the number of brands (stores, companies) a consumer uses, along with how they rank them, it privileges rank over absolute performance. One real-world application for banks seeking to maximize returns from user acquisition and marketing: The results of customer satisfaction surveys are less important than whether a customer ranks their bank in the top spot.

Share of wallet focuses primarily on current, not future, clients, and for a reason: Marketing research cited by PwC shows that companies in all industries can generate a 70% return on initiatives that target existing customers and their wallets, vs. the roughly 10% that comes from zeroing in on prospective ones. The flip side of that: It costs six to seven times more to acquire a new customer than it does to retain current customers, according to research by Ali Cudby, a customer-retention researcher and author, cited by Wharton. Boosting retention by just 5% can increase profitability by 25% or more.

The Real Debate: New or Existing?:

It can cost up to seven times more to acquire a new bank customer than it is to keep the current customers engaged.

For banks, that data point is particularly key: Financial institutions typically own just 10% to 20% of a customer’s wallet, according to PwC, with the most successful banks having a hold on at most 60%.

According to research cited by Payments Journal, the average American had 5.3 bank accounts in 2019. In reality, many Americans have 30–40 different financial relationships, spanning banks, brokerage accounts, retirement accounts, digital payment apps like Venmo and PayPal, buy-now-pay-later programs, gift cards and personal finance sites like Credit Karma and Mint, says Ron Shevlin, a managing director and chief research officer at financial institutions consulting firm Cornerstone Advisors.

“Share of wallet is the big bugaboo right now,” he says. “You got to understand your institution’s place in your customer’s financial life, because you’re not the center of it anymore.”

Like the financial services industry itself, share of wallet is an evolving concept. Customer mindshare, which McKinsey calls “the new battleground in U.S. retail banking, consists of the customer experience, a bank’s physical footprint, digital sophistication and marketing presence. Those four variables are “an effective predictor of a bank’s ability to acquire new customers and expand share of wallet with existing customers,” McKinsey says.

In simple terms, (CLV) is the total amount of money that a customer can be expected to spend with a given company over the course of their relationship. Banks aim to develop long-term relationships with clients by offering products and services for every stage of their financial lives, from checking accounts and car loans to mortgages and estate planning services.

“You cannot not get to an accurate lifetime value calculation if you do not have a good perspective on share of wallet.”
— Ron Shevlin

A customer with a higher CLV score will produce more revenue and be more profitable for a bank — if the institution can nail that client’s additional business through targeted marketing that cross-sells and upsells products and services.

The CLV concept, which emerged in the late 1980s amid the rise of statistical models dubbed “Buy Till You Die,” got a major overhaul in 2005 in a widely read academic paper by three marketing scholars at the Wharton School of the University of Pennsylvania and London Business School. Titled “Counting Your Customers the Easy Way: An Alternative to the Pareto/NBD Model,” the influential paper took what had been theoretical academic concept and tweaked it to become a simplified model that was quickly adopted across many industries.

Its core insight: that customers can stop being customers — become “inactive” — immediately after they make a purchase, rather than at any point in time. That thesis is why banks now spend significant dollars to hit up customers with offers of, say, a new car loan just as their old one is paid of, rather than during random time periods corresponding to other factors like seasonal discounts, tax credits or warm-weather driving.

No Silver Bullet Answer

Amid the shifts, there’s no silver-bullet answer on whether CLV or wallet share is the single most important metric for banks.

“CLV for sure. Never a doubt about it,” says Peter Fader, a marketing professor at The Wharton School of the University of Pennsylvania and a co-author of the 2005 paper that created a simplified CLV formula. The reason: CLV zeroes in on a single behavior — the point at which a consumer “drops out” — rather trying to surface multiple behaviors that push someone to become inactive over a broader period of time.

But Shevlin says CLV is not that cut and dried — especially given that banks have a hard time determining just where customers are putting their non-bank dollars.

“You cannot not get to an accurate lifetime value calculation if you do not have a good perspective on share of wallet,” he says.

At the same time, he adds, as banks have increased their focus on share of wallet over the past 5–10 years, they’ve “come to really begin to understand this fantasy of having customers consolidate all their accounts. I think they finally recognize that’s not going to happen, especially with today’s technology and capabilities” that let consumers send money through Venmo and open a Roth IRA outside their bank.

“I don’t think it’s either-or,” says Shevlin of the two metrics. “You have to look at both.”

Lynnley Browning is an award-winning business editor and writer who has worked at Bloomberg, The New York Times, Financial Planning magazine, and Reuters, in New York and Moscow. She has a deep background in investing, tax, personal finance, retirement, wealth management and asset management.

This article was originally published on . All content © 2024 by The Financial Brand and may not be reproduced by any means without permission.