In a nutshell:
- Share of wallet is the amount of money a consumer spends with a specific brand compared to competitors.
- Calculating share of wallet involves surveying customers and ranking brands.
- Share of wallet helps businesses understand customers and increase brand loyalty.
- Predictive analytics can help increase share of wallet through demand forecasting, upsell/cross-sell, and customer lifetime value predictions.
- Brands can use AI to forecast returns and drive revenue goals.
Share of wallet is the regular amount of money a consumer spends with a specific brand, compared to what they spend with competitors within the same category. Customers likely have a set budget they will spend on a type of product or a product category or service. Therefore, share of wallet (SOW) is the percentage of that customer’s budget spent with one brand instead of competing brands.
Share of wallet is a metric typically used by business-to-consumer (B2C) or direct-to-consumer (D2C) companies.
How Do You Calculate Share of Wallet?
Determining share of wallet is a complex calculation, but not impossible. As explained in the Harvard Business Review, one calculation method is what’s known as the Wallet Allocation Rule. According to the rule, you need only two pieces of data to calculate share of wallet.
- List the competitors/brands within the category you want to analyze
- Survey your customers and gather their loyalty and satisfaction scores, then rank the brands according to the customers’ responses. In the case of a tie, take the average.
The clothing brand “Clothes for Less” can figure out its SOW as follows:
Step 1: In a survey of their customers, they ask each person to rank Clothes for Less alongside their competitors. The customers’ ranking might look like the below table.
Clothes for LessRight Price ClothingStylish ThreadsJimmy213Billy123Susan312Step 2: Using the Wallet Allocation Rule, they calculate their SOW for each customer.Clothes for LessRight Price ClothingStylish ThreadsJimmy33%50%17%Billy50%33%17%Susan17%50%33%SOW33%44%22%According to this rule, it looks like “Clothes for Less” has a 33% share of wallet among their customer base.Why is Share of Wallet Important?
Share of wallet helps business teams better understand their customers, which clarifies objectives and strategies. For example, if brands track their SOW ranking, they can implement strategies and incentives to boost their ranking.
With this approach, business teams know more about what influences customers’ perceptions, purchase behavior, and, ultimately, their brand loyalty. These insights will undoubtedly help increase share of wallet and eventually amplify market share.
How Can You Increase Share of Wallet with Predictive Analytics?
There are a variety of strategic initiatives brands can implement to increase their share of wallet. These can range from creating product line extensions to leveraging promotional incentives to drive sales. These initiatives, however, come with risks.
To minimize risk, many brands are turning to AI and predictive analytics to forecast returns among their customer base. Some widely used applications where predictive analytics has increased share of wallet include:
- Demand forecasting: Predicting demand allows you to anticipate customer interest for a product or service in advance, including seasonal, geographic, and SKU-level variations.
- Upsell/cross-sell: Predictive analytics for cross-sell/upsell is one of the best ways to increase how much a customer spends and, simultaneously, share of wallet. Predicting when customers will likely buy more complementary products or upgrade their services will also help you drive revenue goals.
- Customer lifetime value: AI and machine learning make it possible to predict customer lifetime value at the start of your relationship with a new customer. With predictive LTV, you can segment and prioritize your customers based on the value they create. Then, you can work toward increasing not just LTV but also the share of wallet each existing customer dedicates to your brand. This approach can also deepen customer loyalty and reinforce loyal customers’ relationships.
Ready to see what these applications of AI can do for your company’s share of wallet? If you are interested in how Pecan AI can support your business, contact us or schedule a demo.
