Around the holidays, I always like to pay attention to people’s spending habits. This includes myself, my family and friends, and people generally out and about doing their last-minute holiday shopping. I try to notice which delivery trucks are driving around my neighborhood, how many of them there are, how frequently they’re making deliveries, etc. Finally, I pay extra attention to the marketing materials I’m seeing to get a better sense of the tactics and strategies businesses are using to attract and retain customers.
In general, what I’m looking for is where and how people are spending their hard-earned money. I want to know how brands are trying to attract new customers during this peak season, but more importantly, what drives my curiosity is whether or not a brand’s existing customers are spending more with them. In other words, I’m looking to see how the holiday season affects companies’ Share of Wallet.
Share of Wallet refers to the percentage that a customer spends . . .
1) On a particular brand
2) In a particular category
3) In relation to that brand’s competitors
For example, if I spend $500 dollars on holiday shopping, and $400 of that is spent at Target—with the other $100 spread around to other random retailers—Target would have an 80% share of my holiday spending “wallet”. Which, you might imagine, would be pretty darn good. Overall, Share of Wallet is a helpful metric for gauging a business’ competitive position, as well as evaluating customer loyalty.
Holiday Season Observations
Below are a couple of my holiday season observations:
Observation #1: Share of Wallet increases as pressure mounts (i.e. the importance of trust, familiarity, and reliability)
- What I observed:
- As December 25th approaches, are we more likely to browse through stores and catalogs that we’re unfamiliar with? Unlikely. I know that personally, when I needed a few last-minute stocking-stuffers, I headed over for a quick trip to Target, where I had a pretty clear idea of what I could find there and how much it would cost me. I didn’t have the time nor the patience to stop at a store I was less familiar with.
- Also, when we were trying to get some work done on our house, our contractor needed to rent some equipment, and knew that at Home Depot and Lowes, these items were frequently out of stock, especially around the holidays. So instead, they contacted their go-to distributor and were able to work with their contacts to get exactly what they needed.
- What it means:
- This suggests that as buying pressure increases—such as when budgets are tight, supplies are limited, or a deadline is approaching—the importance of qualitative factors like familiarity, reliability, and trust can play a heightened role. And these aren’t things that can be activated on-demand. They need to be established and cultivated during low-stress, low-pressure periods, so that customers can fall back on them when they don’t have the time or desire to explore unfamiliar waters.
Observation #2: Share of Wallet increases with omni-channel capabilities (i.e., the importance of convenience)
- What I observed:
- I was chatting with my friend, and he mentioned that leading up to Christmas, he had been looking for an extra gift for his daughter. She had only asked for one item, but my friend had wanted to get her something else—a “surprise”. While he was trying to think of what to get her, he found something that Amazon had recommended as part of its “Customers who bought this item also bought . . .” algorithm. It turned out that this random find ended up being his daughter’s favorite Christmas present. Go figure.
- When my brother recently moved into his new home, he told me about all of the “new homeowner” mailers he was getting. A number of them were for home security systems, but only one of these companies actually sent an in-person rep to his door to talk through the different options that were available to him, including bundling various home security services for a discounted rate. Finally, when my brother said he wanted to consider his options, this rep continued to stay in touch with my brother via email, answering questions and providing more information. The multiple touch points, along with the benefits of the service bundle, eventually sealed the deal for my brother.
- What it means:
- These anecdotes highlight the fact that the convenience of omni-channel capabilities enables Share of Wallet optimization. It makes sense that tactics such as cross-selling, bundling, and incentive promotions are made easier when customers have the option to communicate and buy from you in a number of different ways. Not only will you be able to attract a greater breadth of customers (market share), but you’ll also likely find new avenues to increase customer spend (wallet share). And in the process, you can enhance communication with your customers, improving the all-important familiarity and trust (see above).
Share of Wallet —> Customer Loyalty
Customer satisfaction is great. Who doesn’t want their customers to enjoy and recommend their brand? However, even if customers like and remain loyal to your brand, this doesn’t always equate to increases in your top line. What does correlate, however, is how your customers feel about your brand in relation to your competitors. In fact, a 2011 study shared in the Harvard Business Review pointed out that while customer satisfaction (which we’ll use a proxy for generic customer loyalty) was not highly correlated to Share of Wallet, customer preference was.
The authors of the study found that what they called the Wallet Allocation Rule—where a brand’s rank in a customer’s mind is compared to the other brands in the same category/industry—essentially could determine a brand’s share of a customer’s wallet. In other words, Share of Wallet can tell you the depth of customer loyalty to your brand, which can be a more powerful indicator than broad, generic loyalty numbers.
Let’s imagine that Customer A has continued to do roughly Y amount of business with you year after year. That would seem to suggest that the customer is remaining loyal to your organization. However, what if Customer A has been growing their own business 20% year-over-year, but still only spending Y with you (rather than Y times 1.2^n years)? Where might that growth be ending up, or trickling down to, if not with your organization? If that extra 20% per year is being spent with your competitors, suddenly Customer A might not seem quite so loyal. In fact, you could argue that this customer’s loyalty to your brand is actually in decline.
When taken together, it’s clear that the distinction between customer loyalty and share of wallet is an important one. Because while it’s true that increasing customer retention rates by 5% can produce more than a 25% gain in profits, these gains will only come to fruition if you’re able to sustain them. And to do that, you’ll need to find ways to make sure your customers don’t just continue doing business with you, but that they continue doing more business with you.
One way to achieve this is by focusing on the middle 60% of your customers, rather than on your top buyers. This may seem counterintuitive, considering what we know about the Pareto Principle and the 80/20 rule. However, in general, a 5% increase from your middle 60% can generate 70% more revenue than the same 5% bump from your top customers. It’s this middle 60%—the ones who are loyal but may be lacking strong engagement—who have the greatest potential for Share of Wallet increase.