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.