Everyone has preferences.

Some people like Coke; others like Pepsi.

Some people prefer ketchup; others, mustard.

Some people enjoy black licorice; others have taste buds that work like they're supposed to.

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For consumers, there's no shortage of choices, but there's a limitation of money. People pick and choose brands they rely on, and will allocate portions of their budget to companies they trust. This metric is called, "share of wallet," and it helps brands determine how popular they are amongst their competitors.

Let's dive in on what exactly that figure means and how to calculate it for your business.

What Is Share of Wallet?

Share of wallet represents how much a consumer regularly spends on a specific brand as opposed to its competitors. If a customer has allocated a portion of their budget to spend on a specific kind of product or service, share of wallet is the percentage of money that goes to that brand instead of its competitors.

For the sake of being folksy, you can think of it as a brand's competitive "share" of the money a consumer has chosen to spend from their "wallet" on the product that brand makes.

For example, imagine a consumer allocates $50 per month to spend on laundry detergent and they need a new bottle of detergent every two weeks. There are two competing brands vying for that consumer's business and both companies charge $25 for a bottle of detergent.

If the consumer buys one brand at the beginning of the month and the other two weeks later, both brands have 50% share of wallet for that month.

Increasing an individual customers' share of wallet can be as reliable and profitable as trying to bring in new customers. That's why businesses often focus on increasing their share of wallet for repeat customers as much or more than winning new ones. This individual approach highlights the difference between share of wallet and market share.

Improving your company's share of wallet can often be as simple as offering a broader range of high-quality products. For example, let's imagine a fast food chain — we'll call it "Clint's."

Clint's is looking for ways to improve its share of wallet. It has a solid base of customers that spend most of their fast food budget on his chain. How can the company sway them to spend more? Clint's could add or cycle through new items to its menu on a consistent basis.

Clint's might add products that keep up with the time of year, like Cajun fries for Mardi Gras or tree-shaped chicken nuggets for Arbor day. It might even add new, out-there options like egg rolls or lobster bisque. The point is, the franchise would be finding new ways to engage its customers which leads to them spending more money at Clint's.

Boosting share of wallet can also mean borrowing from other companies. If a particular menu item is selling well for one of Clint's competitors, the chain may consider selling their own version. That way, customers will be less inclined to spend money at one of Clint's competitors because they can get the same product from a franchise they know and trust.

But, how can you tell whether customers are relying on your business more than others?

How to Calculate Share of Wallet

The most effective way to calculate share of wallet is known as "The Wallet Allocation Rule." The formula relies on two factors: the number of brands within the specific category and how those brands rank in terms of customer preference. These are the steps to finding your share of wallet.

1. Determine the number of brands

The first step in calculating share of wallet is establishing the number of brands you're looking to analyze.

2. See how the customer ranks them

Survey the customer you want to analyze and rank the brands in question. If they rank two brands in the same position, take the average between that position and the one after it and assign that as their ranks. For instance, if a consumer has two brands at number one, those brands will both rank at 1.5.

3. Use The Wallet Application Rule formula

Plug a brand's rank and number of total brands in its category into the formula below to calculate share of wallet.

Wallet Application Rule to calculate share of wallet

For instance, say out of five fast-food restaurants, a consumer ranks Clint's second. According to the Wallet application rule, Clint's has a 26.7% share of wallet for this customer.

People are always going to have preferences. They're going to try new things and rely on the ones that resonate with them. It's important to make sure your brand can capitalize on both of those tendencies.

That's why share of wallet is a reliable, practical metric that's worth keeping track of. It could inform viable and effective strategies to drive revenue from existing customers or give your business some context as to what it could be doing better.

For more ways to measure customer service, read about customer retention metrics

 Customer Service Metrics

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Originally published Feb 6, 2020 8:00:00 AM, updated May 05 2020

Topics:

Customer Segmentation