Share of Wallet

I came across an interesting article in HBR where authors define wallet allocation rule. I always felt that understanding real share of wallet is a complex phenomenon as each product fights not only with various brands within its segment but also with various other product categories, which share the money available in a consumer wallet. Authors in the article “Customer Loyalty Isn’t Enough Grow Your Share of Wallet” simplify share of wallet in following formula:

Share of Wallet= (1-Rank/ (Number of Brands+1)) x (2/Number of Brands)

This formula is a simple allocation of wallet based on perceived ranking of various brands in consideration. This also shows a significant variation in share of wallet among brands with different rankings. For example, suppose we are interested to know share of wallet in a category where there are only two brands. In such a case brand with high ranking will have 67% of share of wallet. Another intriguing point is that the perceived rankings may or may not be in-line with the actual market share.

To make real use of share of wallet rule, let us try to understand the allocation of consumer money at every stage of decision making before final selection. Share of wallet is a zero sum game. And hence competition starts at product category itself. To understand this let us take one example from building material industry. Suppose a customer in interested in renovating his home with fixed budget and suppose this budget is to be utilised between renovating and decorating wall and floor only. Though share of wallet is a zero sum game, here the customer would choose both but may allocate different share of her budget. Let us also assume that a ceramic tile brand A is interested to define its strategy based on share of wallet analysis.

Level 1: The first fight is at much broader level i.e between wall and floor. Based on the perceived ranking of consumer between two, her initial budget would be allocated. Customer’s actual preference would define actual perceived ranking of wall and floor. For example a customer focusing on beautification would rank wall high. In such case various brands of decorative paints, wall paper etc would have an opportunity to sell their premium products. For ceramic tile brand A, this level is less in control. However, with established innovative products focusing both functionality and beauty, brand A would stand a chance. Still this level is more driven by whole category. Let’s take perceived ranking of floor as a broad category is 2nd. For floor Share of wallet of customer’s initial budget would be 33%.

Level 2: Now the budget of floor can be shared between various flooring options, again at category level. Let’s assume only three flooring options are available, say wooden floors, marbles and ceramic tiles. Once again the perceived ranking would depend on consumer preferences on functionality, look feel and other recommendations available to her. Let’s assume that the perceived ranking for ceramic tile in this case in 1st. Share of ceramic tile as a category at this level would be 50%. This is 16.5% (33% of level 1 x 50% of level 2) of customer’s initial budget.

Level 3: Once the flooring option is zeroed down to ceramic, the fight would start between various ceramic brands. Let us assume there are 7 brands available in this example and perceived ranking of brand A is 2nd. Share of wallet of brand A at this level would be 21%. This is 3.5% of customer’s initial budget defined in level 3 (33% in level 1 x 50% in level 2 x 21% in level 3). Perceived ranking at this level would be primarily based on overall brand performance, quality perceptions, customer experiences, overall word of mouth etc.

There are interesting inferences of above analysis:

1. Let us take if brand A improves its perceived ranking in level 3, its share of wallet would increase from 21% to 25% only (a typical case where number of brands in a particular industry segment are significant). However for other brand in lower rankings this would be significant.

2. To get a bigger pie of the initial budget ranking must improve in level 1 and level 2. Since this is in the interest of whole industry, all players jointly must build perception for the category itself. We see example like promotion of milk, gold etc by common associations focusing on bigger pie; milk positioning for health drink and gold for investment.

3. Investment in creating no. 1 brand choice will pay off in all future share of wallet. This incentive is much high for brands with lower ranks.

The above example is simulated for limited categories and limited brands. In real terms fighting for share is with all products consumer is willing to invest. It would be a wise decision to decide the level and make strategy accordingly. To address a fair future share of wallet, companies must devise product and brand strategies at least to a level where threat of substitute exists.


Strategy of Making ‘Transparent Strategy’

In the context of communicating strategy to employees and other stake holders, I believe that the best method is to make organisation strategy absolutely transparent to all employees and stake holders. Some people may argue that a select group should drive strategy and transfer same in the form of activities down the line. Though advantages and disadvantages of both of these methods can be debated for long, I would like to present my point of view in favor of making strategy transparent. In fact in my views making strategy transparent is a kind of strategy in itself.

To make a strategy transparent needs a lot of courage and conviction. And this starts from conviction in the strategy itself. Is my strategy a real differentiator? Are our products, services or offerings differentiated enough to attract target audience? Is my workforce capable enough to implement and deliver the outcome of my strategy? If I have to make my strategy known to everyone, I would have to compel myself first to answer above questions. The advantage is the outcome; my strategy would address real capability of organisation to deliver, my strategy would address the desired solution my product or service going to deliver to the target audience, my strategy would be guiding principle for HR managers and functional heads to build capabilities of work force exactly in line with the strategy. Most important the outcome this method results in is ‘a single focused strategy’ for the organisation

However, it would not be a secret for the world outside organisation to know about such transparent plans. Very soon competitors would discover this and could react in advance. My argument is; is it a real risk? In fact this could work in our favor  The competitions, if react, along with addressing their capabilities, have to alter their original strategy. Finally it would result in modification or change in organisational strengths, products, services etc. In most of the cases it would end up in multiple strategies focusing excessively on competition which is a definite recipe for disaster. A.G. Lafley and Roger Martin mention six common strategic errors in “Playing to Win: How Strategy Really Works, Harvard Business Review Press

1. There is the Do-It-All strategy, shorthand for failing to make real choices about priorities.

2. The Don Quixote strategy unwisely attacks the company’s strongest competitor first.

3. The Waterloo strategy pursues war on too many fronts at once.

4. The Something-For-Everyone tries to capture every sort of customer at once, rather than prioritizing.

5. The Programme-Of-The-Month eschews distinctiveness for whatever strategy is currently fashionable in an industry.

6. The Dreams-That-Never-Come-True strategy never translates ambitious mission statements into clear choices about which markets to compete in and how to win in them.

In one of the survey by Booz and Company more than two third of executives who responded to the survey from various companies agreed that their biggest frustration is ‘having too many conflicting priorities’ (As published in HBR blog “Making your strategy more relevant” by by Paul Leinwand and Cesare Mainardi). It seems more relevant to have focused transparent strategy, but it is not easy. In a competitive environment the easiest strategy is to play safe and in such situation most of the companies end up working on multiple strategies.

Michael Porter explaining his five forces model in one of the interviews says competitive rivalry is not a zero sum game. Everyone in an industry can work on product and services to create a differentiated value and collectively can increase the pie in the first place. Still there would be a fair competition. However, customers would have an option to choose between products based on their merits and not merely based on competitive pricing. This would uplift industry profitability. And that is the biggest incentive for investment in research and development. A win- win recipe for both the consumer and company.