The battle for new customer remains core for any company to increase sales revenue. But, it is evident that marketers believe that generating more sales from existing customers is far easier and less expensive for company. The underplaying belief is that, existing customers understand brand value and company offerings which reduces the time and cost of cash conversion cycle.
But of course, retention of customer is not costless. Therefore in order to determine an effective marketing strategy to increase repeat customer sales surely indicates a trade-off between New Customer Acquisition and Existing Customer Revenue Share. Keeping this principal in mind, marketers need to address the question of what share of wallet a brand is having for a given customer.
What is Share of Wallet (SOW)?
Share of wallet (SOW) is a marketing metric used to calculate the percentage of a customer’s spending for a type of product or service that goes to a particular company. It can also be understood as the percentage or share of the wallet or expenses of a customer for a certain product that goes in the direction of a business company or seller. Every firm in the same industry or different industries does its best to get the maximum wallet share of customers by following several marketing and sales tactics.
The concept of wallet share is mostly used in the banking and finance industries and increasing the SOW influence positively increasing the lifetime value of a customer. In many cases, increasing wallet share is considered simpler than increasing market share. Some common strategies that are aimed at increasing the wallet share of a customer include increasing amount the customer spends each time, encouraging him/her to visit the store or website more often and trying to get customer retention and loyalty, etc. The process of wallet share is very beneficial for businesses as it helps them improve their performance and thereby leads to accumulation of more profit.
The Wallet Allocation Rule
The “Wallet Allocation Rule” is a term used to refer to the rank the consumers or customers assign to a brand in comparison to other brands and its link to the wallet share of the customer. The rule developed by Timothy L. Keiningham, Lerzan Aksoy, Alexander Buoye, and Bruce Cooil is based on the brand’s rank among the number of brands a customer uses for a particular product or service (i.e. is your brand the customer’s first choice? Second? Third? etc.) This rule is a formula that helps to calculate wallet share based on the rank the customers give to a company in comparison to others. This is a very useful concept and formula since from industry to industry and from company to company; the relation between wallet share and a company’s wallet allocation rule is very consistent.
Six-step measurement and improvement process
The authors recommend following six steps in the Wallet Allocation Rule process:
1. Survey your customers to find out how they rank you and the competitors they also purchase from. The ranking is based on their satisfaction, NPS or a similar metric. Since this ranking is the numerator, it is fair to say that the overall equation represents a sophisticated manipulation and improvement of the satisfaction or NPS score. Note in passing that the authors disagree strongly with what I have just written, but I believe no other logical conclusion is possible.
2. Apply the Wallet Allocation Rule to establish the share of wallet for each competitor.
3. Determine how many of your customers use each competitor.
4. Calculate the revenue that goes from your customers to each of your competitors.
5 .Identify the primary reasons your customers use your competitors.
6. Prioritize improvement opportunities.
Three Implications of Wallet Allocation Rule
The rule implies significant values to the marketer for overall strategy formulation. The most significant implications of the wallet allocation rule are given below:
1. The most important implication of the rule is that being number one brand is better for recurring customers and more rewarding than being the number two brand. What happens is that by being the number one brand in a customer’s mind, a company can easily calculate and apply the wallet allocation rule.
2. Another implication that is related to this rule is that the more the number of competitors used in a particular category, the lower will be the scope or opportunity for each and everyone. The money or profit in this rule doesn’t only go to the toppers, but everyone gets some share of the wallet of a customer. This means that for a particular brand, the more the number of brands, the less will be their share from the customer’s profit.
3. In the world of business, one concept that everyone must understand is that no two people in the same field can get gold medals. Parity hurts and tying up with another brand would not be as beneficial as being on your own.
The Wallet Allocation Rule method to be fundamentally different to the Net Promoter System. I like the fact that it relies on competitive rankings, and these should be part of a good relationship survey process in the Net Promoter System too. The calculations make the Wallet Allocation Rule more difficult to explain. The book makes questionable references and assumptions about NPS. The difference between the two methods is that NPS takes a supplier-side view and the Wallet Allocation Method takes a customer-share-of-wallet view. They should produce similar predictions in stable markets. In software and other dynamic markets, I believe NPS will produce better predictions because it counts competitors that customers may not currently be using.
Read the First Part of the Article: The Battle for Customer: Fundamental of CAC and CLV (First Part)
Read the Final Part of the Article: The Battle for Customer: Implication of CLV & SOW in Strategic Marketing (Final Part)
A great selection of ideas. Our company has been engaging customers with more traditional methods – plenty of competitions and strong customer support service. They’re very handy, too, if you want to keep things ticking over nicely. Naturally, a good service is important. Which ties in nicely with your point on convenience!
Thanks for the appriciation.
Indeed a great article. By understanding customer purchase behaviour, a retailer can truly achieve the intended lifetime customer value. Online retail is becoming competitive day by day & in order to achieve higher ROI from marketing campaigns it is important to use intelligent growth & marketing tool which allows customer segmentation based on behavioral aspects such Recency, Frequency, monetary value, when was the customer seen last on site &
other parameters. By truly understanding the significance of customer segmentation, retailers can achieve a much higher e-commerce conversion. By using omni-channel personalization tools retailers can get a much higher sales revenue from their existing traffic. Retailers can add a great value to the consumer experience by understanding their needs and helping them in purchase journey.
Nice Thought. Thanks for comment.
Customer relationships are important for every business, playing a crucial role in the company’s growth. One of the important metrics to understand is customer lifetime value (LTV) — the net profit attributed to the entire future relationship between the company and the client. The more users consume the product and the longer they continue to use it, contributing to profit, the higher the LTV.
Agreed. Thanks for comment.
Customer lifetime value is a term that describes how much your customer is worth to your business from their first purchase to when the stops spending on your product or service. It’s an important metric to track, considering research has shown that profit is maximized in this stage.
Agreed. In addition to the profit maximizing analytical tool… it act as the fundamental parameter to segment customers and design retention strategy accordingly.