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.


When to kill a product?

Usually, when a product manager takes a decision to kill a product, service or a segment we assume that a proper analysis must be in place on financial, organizational and strategic factors. This means such products are at the end or at least towards the end of their life cycle. In other words the key performance indicators (KPI) of the product are not healthy. Would you be surprised, if I say that a decision of killing a product should not only depend on the product KPI but also on the business objectives? Rather, a business objective is bigger than the KPI of a product. This means, product managers could often take a decision to kill even their performing products.

So, when is the right time to kill a particular product or service? Based on the observations made on fall of various products in various industries, I have categorized the reasons to kill (or save) a product in three broad parameters which need to be assessed before taking a final call. The notable thing is that the sales and revenue of a product is the part of the first parameter only which may not be appropriate if considered as only parameter. The three broad parameters are:

Product KPI: This is the most visible parameter and product manager often get carried away with the observations made in this category. Declining sales, declining market price because of competition and declining market share are the reasons enough to believe that the product is at the end of its life cycle. In some advance analysis, increasing input cost of the low KPI product can also be considered as the reason.

Brand KPI: We often fail to asses performance indicators of brand while making an assessment of product performance. Brand image especially in the segment in which a product is in question, representation of company in the category and level of customer satisfaction. If you have low brand KPI, it is very difficult to find the root cause of low product KPI. One of the easiest measurements of brand performance is the change in working capital of all the channel partners. If it is declining, it is even more dangerous for a company than the performance of a particular product.

Business Objective of the company: I assume that most of the companies are rational enough to think for a longer term. Short term fluctuations in sales, country’s economy and business environment should not alter the business objectives set for a longer period. Before taking a call on a product company must evaluate the alternatives, alignment of alternatives to company objective and foreseen changes in technology. Driven by business objective, there are companies which replaced their performing products with new innovative and differentiated products and offerings.

Any one or more than one strong observations from the above parameters can be a trigger for a removal of a product from the portfolio. All I suggest is to analyze all three before taking a call. Beware of the fact that some times, a symptom can divert you from the root cause.

Correlation between new product introduction and share of market

Lot of companies use new product introduction as their key strategy to increase there market share. Recently two companies LG and SONY announced same strategy. (You may refer following links from Economic Times for the news: LG and SONY) . Though the strategy is commonly use by various companies, I tried to validate the hypothesis that new product introductions boost market share and found following parameters (related with new product introduction only ) determine correlation between new product introduction and market share growth:

1. New product introduction helps in companies top line growth as product realization increases with speed of introduction. It is simply correlated with the differentiation till the point when the new variant becomes commodity in market. Companies with strong R&D leverage it with new products all time. Because of differentiation they fetch better price too. However, competition catches very fast especially in consumer durable industry and so the price advantage of innovation starts eroding. New product introduction should be a continuous process for the companies having strong R&D.

2. Even though top line grows in revenue term in point no. 1 above, it does not guarantee growth in market share in terms of volume of turnover. Two factors determine change in market share. One the selling capability of the channel which could be measured by working capital of sellers which in totality remains constant. If working capital of a dealer is constant it will cannibalize existing product in very first stage itself. Two is the cannibalization, which if planned properly, can help to reduce competitors’ shelf share in multi franchise sellers’ network. To increase working capital of selling network, companies should focus on wider distribution by exploring new markets through efficient supply chain management.

3. Whether the new product is introduced in one of the existing categories in which company is present or in a new category itself. If it is in existing categories it should be targeted for better profit than market share. Introduction in new category can give incremental revenue subject to capability of selling network including the organization itself in terms of knowledge, experience, working capital, coverage and branding.

4. It’s not only quantity of new introduction which matters but also the speed at which it is introduced to end consumer. Assuming if the period required by competition to replicate the product after announcement of launch is fixed, a better speed of sampling, consumer awareness activities and distribution will uplift the revenue in launch to uptake period of product life before maturity, the point at which competitor enters with similar product.

There could me many more strategies to define growth in market share, however; the above argument is only limited to issues related with new product introduction only.