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2.5 Share of Requirements

Purpose: To understand the source of market share in terms of breadth and depth of consumer franchise, as well as the extent of relative category usage (heavy users/larger customers versus light users/smaller customers).


Share of Requirements: A given brand's share of purchases in its category, measured solely among customers who have already purchased that brand. Also known as share of wallet.

When calculating share of requirements, marketers may consider either dollars or units. They must ensure, however, that their heavy usage index is consistent with this choice.

    Unit Share of Requirements (%) = Brand Purchases (#)/Total Category Purchases by Brand Buyers (#)

    Revenue Share of Requirements (%) = Brand Purchases ($)/Total Category Purchases by Brand Buyers ($)

The best way to think about share of requirements is as the average market share enjoyed by a product among the customers who buy it.

Example: In a given month, the unit purchases of AloeHa brand sunscreen ran 1,000,000 bottles. Among the households that bought AloeHa, total purchases of sunscreen came to 2,000,000 bottles.

    Share of Requirements = AloeHa Purchases/Category Purchases by AloeHa Customers = 1,000,000/2,000,0005 = 50%

Share of requirements is also useful in analyzing overall market share. As previously noted, it is part of an important formulation of market share.

    Market Share = Penetration Share * Share of Requirements * Heavy Usage Index

Share of requirements can thus be calculated indirectly by decomposing market share.

    Share of Requirements (%) 5 Market Share (%)/[Penetration Share (%) * Heavy Usage Index (I)]

Example: Eat Wheats brand cereal has a market share in Urbanopolis of 8%. The heavy usage index for Eat Wheats in Urbanopolis is 1. The brand's penetration share in Urbanopolis is 20%. On this basis, we can calculate Eat Wheats' share of requirements in Urbanopolis:

    Share of Requirements = Market Share/(Heavy Usage Index * Penetration Share) =8%/(1 * 20%) = 8%/20%5 40%

Note that in this example, market share and heavy usage index must both be defined in the same terms (units or revenue). Depending on the definition of these two metrics, the calculated share of requirements will be either unit share of requirements (%) or revenue share of requirements (%).

Data Sources, Complications, and Cautions

Double Jeopardy: Some marketers strive for a "niche" positioning that yields high market share through a combination of low penetration and high share of requirements. That is, they seek relatively few customers but very loyal ones. Before embarking on this strategy, however, a phenomenon known as "double jeopardy" should be considered. Generally, the evidence suggests that it's difficult to achieve a high share of requirements without also attaining a high penetration share. One reason is that products with high market share generally have high availability, whereas those with low market share may not. Therefore, it can be difficult for customers to maintain loyalty to brands with low market share.

Related Metrics and Concepts

    Sole Usage: The fraction of a brand's customers who use only the brand in question.

    Sole Usage Percentage: The proportion of a brand's customers who use only that brand's products and do not buy from competitors. Sole users may be die-hard, loyal customers. Alternatively, they may not have access to other options, perhaps because they live in remote areas. Where sole use is 100%, the share of wallet is 100%.

    Sole Usage (%) = Customers Who Buy Only the Brand in Question (#)/Total Brand Customers (#)

Number of Brands Purchased: During a given period, some customers may buy only a single brand within a category, whereas others buy two or more. In evaluating loyalty to a given brand, marketers can consider the average number of brands purchased by consumers of that brand versus the average number purchased by all customers in that category.

Example: Among 10 customers for cat food, 7 bought the Arda brand, 5 bought Bella, and 3 bought Constanza. Thus, the 10 customers made a total of 15 brand purchases (7 1 5 1 3), yielding an average of 1.5 brands per customer.

Seeking to evaluate customer loyalty, a Bella brand manager notes that of his firm's five customers, 3 bought only Bella, whereas two bought both Arda and Bella. None of Bella's customers bought Constanza. Thus, the five Bella customers made seven brand purchases (1 1 1 1 1 1 2 1 2), yielding an average of 1.4 (that is, 7/5) brands per Bella customer. Compared to the average category purchaser, who buys 1.5 brands, Bella buyers are slightly more loyal.

    Repeat Rate: The percentage of brand customers in a given period who are also brand customers in the subsequent period.

    Repurchase Rate: The percentage of customers for a brand who repurchase that brand on their next purchase occasion.

Confusion abounds in this area. In these definitions, we have tried to distinguish a metric based on calendar time (repeat rate) from one based on "customer time" (repurchase rate). In Chapter 5, "Customer Profitability," we will describe a related metric, retention, which is used in contractual situations in which the first non-renewal (non-purchase) signals the end of a customer relationship. Although we suggest that the term retention be applied only in contractual situations, you will often see repeat rates and repurchase rates referred to as "retention rates." Due to a lack consensus on the use of these terms, marketers are advised not to rely on the names of these metrics as perfect indicators of how they are calculated.

The importance of repeat rate depends on the time period covered. Looking at one week's worth of purchases is unlikely to be very illuminating. In a given category, most consumers only buy one brand in a week. By contrast, over a period of years, consumers may buy several brands that they do not prefer, on occasions when they can't find the brand to which they seek to be loyal. Consequently, the right period to consider depends on the product under study and the frequency with which it is bought. Marketers are advised to take care to choose a meaningful period.

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