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


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

  1. 1. Know Each Customer’s Share-of- Wallet? Understanding Every Customer’s True Potential December |2010
  2. 2. Know Each Customer’s Share-of-Wallet? Understanding EveryCustomer’s True PotentialRegardless of sector, companies across the board struggle to understand the trueexisting potential of each of their customers. Such an understanding is the firststep towards capturing more share-of-wallet of existing customers.In its most basic form, there are two general ways companies in most sectors cangrow their revenues – by either selling more to their existing customers, or byacquiring new customers (taking aside such other bottom-line impacting actionslike increasing retention or reducing operating costs). The latter is generally quitean expensive way to grow revenues, as it costs around five times more to acquirea customer than to retain one already on board.The prior (selling more to existing customers) can also generally be done in one oftwo ways – either through the introduction of new products and services that willthus allow for the growth of each customer’s overall potential spend (i.e. Appleintroducing a brand new product like the iPad tablet PC), or through the increasein 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 acustomer’s spend that is with a given company over a given amount of time. For agas retailer, for example, it’s the number of times a given customer fills up theircar’s gas tank one month at their own pumps divided by the total number of timesthe same customer fills up their car’s gas tank that entire month. So a customerwho fills up his or her car’s gas tank four times a month with three of those fills atone gas retailer is giving that gas retailer 75% share of their wallet.Essentially, any given consumer has dozens, if not hundreds, of shares of walletsthat businesses are after. Our daily coffee spend, our monthly telecom spend, ouryearly insurance spend or even our once every three years new car spend is rarelyconsolidated with one company per category, spread out amongst numerouscompanies in many different sectors.The goal of companies is ultimately to capture 100% share of wallet from eachand every one of their existing customers, a goal that manifests itself into loyaltyprograms that reward customers who hit certain spend levels, or into campaignsthat aim to drive customer spend consolidation with various rewards as theincentive. 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’ walletshare, lacking the business intelligence to be able to predict which customershave potential to spend more, and which ones don’t.
  3. 3. Companies in certain sectors that capture a great deal of data about theircustomers (telecom, banking, automotive, and insurance) as well as those inothers 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 thisknowledge, each customer can then be pursued on a one-to-one level withcustomized 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 keysteps to understanding each customer’s share of wallet:1. Create Profile Groups – The first step is to create profile groups, using bothprofile data regarding the customer base as well as data that can be capturedfrom analyzing the baskets of consumers. By analyzing the demographic data andbaskets of loyalty program members, thousands of profile groups can be createdfor the purpose of trying to identify each customer’s share-of-wallet. An exampleof 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 MemberSome of the above facts (i.e. gender, nationality, age) will be available directly asdemographical data captured through the customer’s application, other facts willneed to be assumed through conducting analysis (i.e. married with one youngchild – assumed as the person in question’s basket has feminine hygiene productsregularly, as well as baby food or diapers). Once profile groups are created,customers are then assigned to one of the thousands of different profile groupsbased on their match to the criteria of one of the profile groups.2. Analyze Profile Groups – Now that profile groups have been created, thenext step is to understand them. The objective is to identify what each person inthe 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 thisprofile 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 sameprofile group, with some purchasing large baskets almost daily and otherspurchasing small baskets monthly, each generating significantly differentrevenues.
  4. 4. For the purpose of defining the concept of full share-of-wallet for every profilegroup, taking the average person in the group is a conservative approach that canbe followed. Those purchasing more than the average customer in a given profilegroup can have individual reasons that analytics cannot decipher as to the reasonthey spend as much as they do –for example, customers at the top end of theprofile group could be having friends over for dinner every night, thus the largerand more frequent baskets.The deviation of any given customer from the average person in the given profilegroup can be considered a conservative approach to estimating that customer’sshare of wallet. So, for a given customer spending 100 USD a month who is in aprofile group where the average is 200 USD a month, a conservative assumptioncan be made that this customer’s share of wallet is 50% – with the rest given toother grocery stores.3. Analyze Individual Past Spend – At this point one estimate can be made inregards to each customer’s share of wallet. A second validating (or moreaccurately defining) analysis should also be conducted for each customer, relatedto their past purchase behavior.By analyzing each customer’s past spend over a given period of time andcomparing it to the current period, an additional estimate can be made regardingthat customer’s share of wallet. A customer who over the past quarter has spent200 USD but has historical quarterly highs of 450 USD can be assumed to havegiven his or her share of wallet elsewhere since that high.We recommend the highest single quarter be discarded for comparison purposeshowever, as there may have been an exceptional reason for that spike (i.e. movedout of the parent’s home into his or her own house, thus the significantdeviation). Rather, the second highest single quarter should be used andcompared to the current spend.With two separate share-of-wallet estimates in place, the version showing thehigher potential should be assigned to each customer. Those customers who havehistorically spent little and still do will likely be assigned a share of wallet estimatefrom their profile group, while those who historically spent significantly more thanthey 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 determinehow to win such customers over – identify what’s missing. To do so, examine thecustomer and identify what he or she is not buying that the average person in theprofile 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 historicalanalysis will also yield such findings for customers who have smaller baskets thanin the past – something’s no longer being purchased.
  5. 5. Whatever is not in the basket of a given customer needs to be identified and thenacted 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 customizedcoupons at the checkout or through mail (an approach revolutionized by Tescowith its Clubcard members).Using the above approach, companies can rather quickly determine whichcustomers to focus on in terms of capturing share-of-wallet, taking their existingmass action tactics down to the individual customer level. With the rightpropositions in place, it’s only a matter of time before consolidation of spendbegins and revenues begin to grow.
  6. 6. About Forte Consultancy GroupForte Consultancy Group delivers fact-based solutions, balancing short and long termimpact as well as benefits for stakeholders. Forte Consultancy Group provides a varietyof service offerings for numerous sectors, approached in three general phases –intelligence, design and implementation. For more information, please contact Forte Consultancy Group | Istanbul Office