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Every month, I set aside a budget for streaming services, dividing it between Netflix and Amazon Prime. The money I spend on each of these services contributes to their share of wallet, which is essentially the percentage of my total streaming budget that each service captures.
So if I spend $30 a month on streaming, with $20 going to Netflix and $10 to Amazon Prime, Netflix’s share of wallet would be larger, since it gets a bigger slice of my overall spending on entertainment. This helps each service understand how much of my total budget it’s receiving compared to competitors.
Let's dive in on what exactly share of wallet means and how to calculate it for your business.
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What Is Share of Wallet?
Share of wallet is the amount an existing 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 the brand makes.
For example, imagine you allocate $50 per month to spend on laundry detergent, and you need a new bottle of detergent every two weeks. There are two competing brands vying for your business, and both companies charge $25 for a bottle of detergent.
If you buy one brand at the beginning of the month and the other two weeks later, both brands have a 50% share of wallet for that month.
Share of Wallet Example
Let’s say you’ve created a cruelty-free skincare brand specializing in brightening cleansers and soaps called Glow. You’d like to improve your share of wallet among your existing customers and decide to roll out some new products like a moisturizer, serum, and sunscreen.
By offering new products that your customers can use alongside existing ones they already love can help increase your share of wallet. You can also use this tactic to build brand loyalty by offering loyal customers dibs on trying out the new products before they hit the shelves.
Increasing an individual customer‘s 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.
For more ways to measure customer service, read about customer retention metrics.
Share of Wallet vs. Market Share
Market share is the percentage of a market that a single company controls by revenue or number of customers. Share of wallet is how much a specific customer spends on a brand relative to its competitors. Acquiring new customers boosts market share while getting existing customers to spend more improves share of wallet.
Improving your company's share of wallet can often be as simple as offering a broader range of high-quality products like the skincare example above. Additionally, boosting share of wallet can also mean borrowing from other companies.
Think about when set off a that inspired other fast food chains to create their own version or revamp existing sandwiches on their menus.
If a particular menu item is selling well for a brand's competitor, it may consider selling its own version. That way, customers will be less inclined to spend money on one of its competitors because they can get the same product from a brand they know and trust.
But, how can you tell whether customers are relying on your business more than others?
Share of Wallet Formula
The share of wallet formula helps businesses understand what percentage of a customer’s total spending in a category goes to their brand. Here’s what it looks like:
Share of Wallet = (Customer’s spend on your brand/Customer’s total spend in the category) x 100
Let’s say I run a chain of coffee shops, and I want to figure out my share of wallet for a loyal customer, Mike. Mike spends $200 each month on coffee from different places, including mine. After checking his purchase history, I find that he spends $75 per month at my coffee shop on average.
I would calculate my share of wallet like this:
Share of Wallet = (75/200) x 100 = 37.5%
Knowing that my coffee shops capture 37.5% of Mike’s total monthly spending on coffee, I could strategize ways to increase my share, such as offering loyalty rewards or personalized promotions.
How to Calculate Share of Wallet
The most effective way I’ve found to calculate share of wallet is through what's called The Wallet Allocation Rule. This formula uses two key factors: the number of brands within a specific category and how those brands rank in terms of customer preference.
Here’s how I go about finding my share of wallet with this method.
- Determine the number of brands. The first thing I do is figure out how many brands I‘m analyzing. For example, if I were running a laundry detergent company, I’d include other well-known brands like Gain and Tide in the analysis.
- See how the customer ranks them. Next, I survey the customer(s) I’m focusing on and ask them to rank these brands. If they rank two brands equally, I take the average between that position and the one after it to assign their ranks. For instance, if a customer ranks two brands in the top spot, I give both of them a rank of 1.5.
- Use The Wallet Allocation Rule formula. Finally, I plug in the brand’s rank and the total number of brands in its category into the formula to calculate share of wallet:
For instance, if I ran a fast-food restaurant called Clint's and a customer ranked my restaurant second out of five fast-food chains, I’d use the formula:
(1 - 2/6) x (2/5)
0.67 x 0.4 = 0.268 or 26.8%
That gives Clint's a 26.8% share of wallet for this customer. Once I have this figure, I can start thinking about ways to boost it.
Marketing to Grow Share of Wallet
In order to increase share of wallet, you'll need to ensure your marketing efforts are optimized for the task. Look at your competitors. Are they better priced? Are their products higher quality?
To be successful, you‘ll need to hone in on what your competitors are doing and how you can improve your strategy to snag some of their share of wallet. For example, at Clint’s fast-food chain, I may notice that my competitors lack healthier options, which is something I can capitalize on by offering grab-and-go salads.
From there, I get the word out to my customers, letting them know about the new options and the convenience they provide. I could even offer free salads to a set amount of loyal customers and have them review to create some word-of mouth-buzz.
Customer Loyalty Isn't Enough
After studying share of wallet, I realized that having loyal customers is important, but it’s not the only factor that drives revenue. People, including myself, have their preferences and will always try new products or stick with the ones that resonate most with them. It's essential to ensure that my brand can capitalize on those tendencies.
Before, I used to think that brands simply added my spending to their revenue. Now, I understand that they are calculating how much they get from me compared to what their competitors get to be truly profitable.
That’s why share of wallet is a practical, reliable metric. It can help inform effective strategies to increase revenue from existing customers or show what areas could be improved to capture a greater spending share.
Editor's note: This article was originally published in May 2020 and has been updated for comprehensiveness.
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- Customer Acquisition Cost
- Customer Lifetime Value
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- And More!
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