Life of marketing personnel is driven by and centred on targets. Increasing sales; reaching more customers and; capturing new market share are eternal quests that they are engaged in. There are many ways to measure the growth of sales for a company.
The simplest manner of measuring the growth is obviously to look at the sales volume. Higher the figures, higher the growth! But this can be a very narrow outlook on real growth. Sales performance is a function of many factors like selling and distribution expenses, the price of the product, adding new markets, cross-selling and higher sales to existing customers etc.
Higher sales figure has to be weighed against performance on all these fronts to ascertain the quality of growth. Higher sales with the same level of expenses indicate a real gain in customer confidence and thus marks good on the sales performance of the company. On the other hand, higher sales volume achieved by the proportionate increase in selling and distribution expenses actually doesn’t amount to growth until the sales growth is sustained in subsequent periods.
So, how to measure the sales performance of a company? By sales volume, market share or customer satisfaction? One amongst such many interesting metrics of measuring growth or performance of a company is Share of Wallet.
Share of Wallet (SOW) simply means the share of your products in a customer’s wallet. That means for a given product category that your company deals in, how much money is spent by a customer for your brand of products. So if a customer spends $1000 for different products, and out of those $1000, $200 is spent on your products, then your share of wallet is 20%.
An example will clarify the concept better. E.g. You are a leading, high-end cosmetics brand. Your target market is working women in the age group of 25 to 40 who prefer and can spend on high-quality lipsticks. When your target market goes for shopping lipsticks, they would have different brands to choose from.
So if out of their total budget of cosmetics category, the budget for lipsticks is $20 every month; then out of that $20, how much share, your brand claims is known as Share of Wallet.
Thus, if $10 is spent every month on your brand ‘Charming Queen’ lipsticks, it means you have got 50% Share of Wallet.
Market share generally considers both new and old customers whereas Share of wallet considers only the old customers who are already buying products in the market. It does not consider new customers. In a typical company, share of wallet might be measured for customers as well as for multi brand dealers (Which brand has more share of wallet at the dealer point).
One important way to measure a company’s growth is comparing its market share against that of its competitors. The share of a company in the total market for that product segment is known as market share. Here, your company may be competing for the entire market which comprises of old as well as new customers.
The cost of acquiring new customers is too high and you would have to put in lots more effort to generate that first sale. Thus, market share may be too big a target to aim for a “share of wallet” study. This is true especially for the businesses that are in the start-up phase. In a chase to increase market share, they may miss out on what’s already within their reach – their existing customers.
Customer satisfaction is another parameter that maps a business’s growth. The level of satisfaction of the customers with your product or service or experience determines whether they will come to you again or not. But customer satisfaction is not a very concrete concept. It’s a very fleeting target that keeps on shifting. Even the customers who are highly satisfied may not actually spend on your brand due to various reasons such as poor brand recall, disparate retail presence, one-time buy etc.
Thus, as against both the aforementioned measures, Share of Wallet becomes a more reliable, more consistent measure of growth. It very clearly states how much amount your customer spends for your products exclusively and has the following advantages:
- Share of Wallet is a concrete measure of customer’s spending for your brand, measured over a fixed time interval.
- It helps the business in clearly identifying who its high-value and repeat customers are.
- It assures the company of the success of its marketing and branding strategies.
- It allows the company to focus on its high-value customers as in this era of niche marketing and specialization; it is far more advisable to retain the existing customers and gain bigger shares of their spending rather than acquiring new customers.
- It also helps in forming marketing strategies and product mix that will entice the existing customers to repeat their shopping experience with your brand and trust your brand enough to try the latest products that you introduce in the market.
- This increased spending by existing customers will eventually lead to increase in market share.
- Higher spending and brand loyalty of existing customers may automatically bring in new customers.
- Higher share of customer’s wallet leads to high lifetime value of a customer. Lifetime value means a customer stays with your company for a very long period of time and buys products in more than one category happily.
Wallet Allocation Rule
A marketing study was undertaken by Ipsos Loyalty under which around 17,000 customers were studied for their buying behaviour. The article containing the results of this study has been published in Harvard Business Review in October 2011. It sought to find out which factors had the most bearing on Share of Wallet. And the conclusions of the study are as follows:
- Share of wallet is not dependent upon customer satisfaction. The business cannot assume that a highly satisfied customer will necessarily spend on its brand.
- Share of wallet is directly related to Brand Rank. If your brand is Brand#1 in your customers’ choice of brands, you will definitely win a larger share of their wallet. This is known as Wallet Allocation Rule set by this study. If you are #2, your chances of winning a larger share go down by large margins.
- This happens when there are only a few contenders for #1 position in the market. Say, if there are only two brands in the market, Brand #1 inadvertently wins the higher share of wallet leaving behind Brand#2 with huge gaps between the sales.
- If there are many brands to choose from, all the brands tend to win some Share of Wallet. Here, the company that seeks to gain maximum SOW has to introduce product differentiation in order to get to #1 position in customers’ preference list.
- If there is a tie between two brands for #1 position, that does not help the company in gaining the larger share of wallet as the wallet share is equally divided between the competitors.
- Hence, the only way to claim a bigger share of wallet is to become Brand #1 in that product category.
This was all about the Share of wallet concept. A share of wallet study can give you a very good insight of customer demand for your products as compared to your competitors in the market and it should be carried out by brands regularly.