Know Each Customer’s Share-of-Wallet? Understanding Every Customer’s True Potential

Regardless of sector, companies across the board struggle to understand the true existing potential of each of their customers. Such an understanding is the first step towards capturing more share-of-wallet of existing customers.

In its most basic form, there are two general ways companies in most sectors can grow their revenues – by either selling more to their existing customers, or by acquiring new customers (taking aside such other bottom-line impacting actions like increasing retention or reducing operating costs). The latter is generally quite an expensive way to grow revenues, as it costs around five times more to acquire a customer than to retain one already on board.

The prior (selling more to existing customers) can also generally be done in one of two ways – either through the introduction of new products and services that will thus allow for the growth of each customer’s overall potential spend (i.e. Apple introducing a brand new product like the iPad tablet PC), or through the increase in spend of existing customers who are not giving the company their full share-of-wallet. The focus of this article will be on this strategy.

The term “share-of-wallet” is really a simple one – it’s the percentage of a customer’s spend that is with a given company over a given amount of time. For a gas retailer, for example, it’s the number of times a given customer fills up their car’s gas tank one month at their own pumps divided by the total number of times the same customer fills up their car’s gas tank that entire month. So a customer who fills up his or her car’s gas tank four times a month with three of those fills at one gas retailer is giving that gas retailer 75% share of their wallet.

Essentially, any given consumer has dozens, if not hundreds, of shares of wallets that businesses are after. Our daily coffee spend, our monthly telecom spend, our yearly insurance spend or even our once every three years new car spend is rarely consolidated with one company per category, spread out amongst numerous companies in many different sectors.

The goal of companies is ultimately to capture 100% share of wallet from each and every one of their existing customers, a goal that manifests itself into loyalty programs that reward customers who hit certain spend levels, or into campaigns that aim to drive customer spend consolidation with various rewards as the incentive. Such efforts have traditionally been conducted above-the-line, appealing to the entire customer base, with little to no targeting in place. Why? Because most companies can only guesstimate each of their customers’ wallet share, lacking the business intelligence to be able to predict which customers have potential to spend more, and which ones don’t.

Companies in certain sectors that capture a great deal of data about their customers (telecom, banking, automotive, and insurance) as well as those in others that have their own loyalty programs (retail, restaurant, grocery store, etc.) can, in fact, estimate the share-of-wallet of each of their customers. With this knowledge, each customer can then be pursued on a one-to-one level with customized offers aimed at consolidating spend and thus capturing full share-of-wallet.

So how? By using the grocery sector as an example, we’ll explain the five key steps to understanding each customer’s share of wallet:

1. Create Profile Groups – The first step is to create profile groups, using both profile data regarding the customer base as well as data that can be captured from analyzing the baskets of consumers. By analyzing the demographic data and baskets of loyalty program members, thousands of profile groups can be created for the purpose of trying to identify each customer’s share-of-wallet. An example of a profile group that would emerge would be the following:

  • Male
  • Asian
  • Age Between 25 – 29
  • Married with One Young Child
  • Gourmet Shopper Segment
  • 2+ Years Loyalty Program Member

Some of the above facts (i.e. gender, nationality, age) will be available directly as demographical data captured through the customer’s application, other facts will need to be assumed through conducting analysis (i.e. married with one young child – assumed as the person in question’s basket has feminine hygiene products regularly, as well as baby food or diapers). Once profile groups are created, customers are then assigned to one of the thousands of different profile groups based on their match to the criteria of one of the profile groups.

2. Analyze Profile Groups – Now that profile groups have been created, the next step is to understand them. The objective is to identify what each person in the profile group purchases (as in what their basket contains in their purchases), and the amount they purchase (as in quantity of each product) at what frequency.

The purpose of this analysis is to be able to understand what someone in this profile group should be spending if they were to give their full share-of-wallet. The analysis will show that there is quite a range between customers in the same profile group, with some purchasing large baskets almost daily and others purchasing small baskets monthly, each generating significantly different revenues.

For the purpose of defining the concept of full share-of-wallet for every profile group, taking the average person in the group is a conservative approach that can be followed. Those purchasing more than the average customer in a given profile group can have individual reasons that analytics cannot decipher as to the reason they spend as much as they do –for example, customers at the top end of the profile group could be having friends over for dinner every night, thus the larger and more frequent baskets.

The deviation of any given customer from the average person in the given profile group can be considered a conservative approach to estimating that customer’s share of wallet. So, for a given customer spending 100 USD a month who is in a profile group where the average is 200 USD a month, a conservative assumption can be made that this customer’s share of wallet is 50% – with the rest given to other grocery stores.

3. Analyze Individual Past Spend – At this point one estimate can be made in regards to each customer’s share of wallet. A second validating (or more accurately defining) analysis should also be conducted for each customer, related to their past purchase behavior.

By analyzing each customer’s past spend over a given period of time and comparing it to the current period, an additional estimate can be made regarding that customer’s share of wallet. A customer who over the past quarter has spent 200 USD but has historical quarterly highs of 450 USD can be assumed to have given his or her share of wallet elsewhere since that high.

We recommend the highest single quarter be discarded for comparison purposes however, as there may have been an exceptional reason for that spike (i.e. moved out of the parent’s home into his or her own house, thus the significant deviation). Rather, the second highest single quarter should be used and compared to the current spend.

With two separate share-of-wallet estimates in place, the version showing the higher potential should be assigned to each customer. Those customers who have historically spent little and still do will likely be assigned a share of wallet estimate from their profile group, while those who historically spent significantly more than they do not will be assigned a share of wallet estimate from their historical spend.

4. Taking Action – With a share-of-wallet estimate in place for every customer, the next step is about convincing them to consolidate their spend.

We recommend that companies conduct one additional analysis to determine how to win such customers over – identify what’s missing. To do so, examine the customer and identify what he or she is not buying that the average person in the profile group is – maybe it’s milk, maybe it’s shampoo, or maybe it’s detergent – for every profile group the items will be different, but definable. A historical analysis will also yield such findings for customers who have smaller baskets than in the past – something’s no longer being purchased.

Whatever is not in the basket of a given customer needs to be identified and then acted upon with one-to-one offers to drive a change in the customer’s behavior. The most effective way of doing this is through giving customers customized coupons at the checkout or through mail (an approach revolutionized by Tesco with its Clubcard members).

Using the above approach, companies can rather quickly determine which customers to focus on in terms of capturing share-of-wallet, taking their existing mass action tactics down to the individual customer level. With the right propositions in place, it’s only a matter of time before consolidation of spend begins and revenues begin to grow.

To learn more about understanding the share-of-wallet of your own customers, please contact info@forteconsultancy.com.

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