WTF is share of wallet and HTF do you measure it?
By: Julia Morrongiello
Tags: VC, Startup, Marketplaces

When we talk about building and scaling a marketplace, the main topic of focus is usually how to crack the chicken and egg problem i.e. building initial liquidity (I wrote about this in my previous post WTF is marketplace liquidity?). What is less often discussed is how to go from initial liquidity to a high share of wallet on both the demand and supply side (also known as the share of earnings on the supply side). In other words, how does a marketplace go from being one of many options for a buyer looking to purchase a specific type of good or service to becoming their main option? On the flip side, how do marketplaces go from being one of several revenue streams for a supplier to becoming their most significant revenue stream?

The aim of the following post is to define what we mean by share of wallet (SOW), why it matters, and to dive into a couple of strategies for how to measure it. I hope that it will be a useful tool for marketplace entrepreneurs and operators who are trying to better understand and measure some of the dynamics of their platform. 🤓

WTF is share of wallet and why does it matter?

Let’s start by defining the share of wallet as the percentage of a buyer’s spending (or a supplier’s earnings) within a given category that is captured by a marketplace as opposed to alternative channels. For the purpose of this post, I will use share of wallet as a catch-all term for both buyer spending and supplier earnings.

Share of wallet is a reflection of how important your platform is to your buyers or suppliers. The higher the share of wallet, the more dependent your suppliers are on your marketplace for their income and the more reliant your buyers are on your marketplace when it comes to sourcing a specific good or service. Optimising for a high share of wallet can be one of the most important growth levers for marketplaces. Not only, does it give marketplaces more leverage when it comes to pricing (since users become dependent on the platform), but it is also the key to unlocking SaaS style retention. In a further post, I’ll dive into strategies to increase SoW but for the time being, let’s understand how we can measure it.

So, HTF do we measure share of wallet?

Despite the importance of share of wallet, most early-stage startups (and many later-stage startups) don’t know how to measure it. To be honest, neither did I, until a couple of conversations with our portfolio companies prompted me to look deeper into the topic.

The key to figuring out your marketplace’s share of wallet is to be able to answer the following questions:

For buyers: what proportion of their total spend on x goes to your marketplace?

For sellers: what proportion of their total revenue comes from your marketplace?

With x being the type of goods or services that your marketplace offers.

Sound easy? Let’s dive into it:

1. Start by defining your average buyer (or supplier) profile 🙋🏻‍♀️

For buyers: How much does an average buyer usually spend on buying x?

For suppliers: How much revenue does an average supplier make selling x?

You can get this data in a number of ways:

For a high-level view: industry reports and statistics For new customers: ask the above questions systematically during your sales or onboarding process For existing customers: send out surveys For more qualitative data: spend a day or two with your buyers or suppliers to get a granular view of their workflow (quite a few our B2B marketplaces have done this) For the pros: extract the data from your existing toolset. Some marketplace (eg. Farfetch) have built inventory management tools into their platform, this gives them an overview of supplier transactions that are happening both on and off-platform. Once you have this, measuring the share of wallet is easy.

2. Compare the total amount spent (or earned) to the amount spent (or earned) on your platform to get the share of wallet 💰

Level 1: do it on a case by case basis

At an early stage, when you only have a handful of buyers or sellers on your platform, you can measure the share of wallet on a per buyer or per seller basis using the following formula.

Share of Wallet = amount that buyer spends on your platform ÷ amount that a buyer spends in total on your category x 100

Share of Earnings = amount that supplier earns on your platform ÷ amount that supplier earns in total from your category x 100

Ideally, you should track this number on a monthly basis to get a sense of whether or not share of wallet is increasing.

cargo.one*, a marketplace for air freight which connects airlines (sellers) with freight forwarders (buyers) looks at this on an individual supplier (airline) basis as shown in the graph below.

Level 2: do it on an aggregate level

As the number of buyers and suppliers on your platform increases it’s worth looking at the share of wallet on an aggregate level. A scrappy way of doing this for the demand side of your platform is to divide the average monthly spend on your marketplace by the total buyer spend.

Average share of wallet = Average spend per buyer on your platform ÷ average total spend per buyer x 100

The same goes for the supplier side of things:

Average share of earnings = Average amount earned per supplier on your platform ÷ average total earnings per supplier x 100

Level 3: look at things on a cohort level

The problem with Level 2 is that it can easily be skewed by users that are not properly onboarded or users that have churned. To avoid this problem and to get a more accurate view of the share of wallet, I recommend looking at it on a cohort by cohort basis (for a quick refresher on cohorts, check out my colleague Christoph’s post). At the seed stage, this is not super necessary, but once you start to have more data, I highly recommend it. 🙂

To begin with, take a look at your number of retained users on a monthly basis as well as the GMV per cohort per month as shown in the two tables below:

Once you have these two tables ready, calculate the share of wallet for cohorts overtime after a specific amount of months that they’ve been using the platform. The assumption here is that as buyers get more comfortable with using the platform, they will order more from it. As a result, the share of wallet should increase over time.

In this example, let’s look at each cohort 4 months after onboarding. For the cohort that started in February 2020, this will be May 2020, for the one that started in March, this will be June 2020, and so on.

To find the share of wallet for the February supplier cohort, we would take the May 2020 GMV and divide it by the number of customers active in that month to get an average revenue/earnings of $1,067. We can then divide that by the average total earned by a supplier (which in this example is $3,000) to get a share of wallet of 35.6%. To look at the calculations in more detail, feel free to play around with this sheet.

You can then do the same exercise across different cohorts i.e. compare the share of wallet of the cohorts that started in January vs the cohorts that started in May to get a view of how the share of wallet is changing over time (left image). Likewise, you can measure the share of wallet across a specific cohort over time (right image). In an ideal world, both of these should increase as your product improves and the liquidity on your platform increases.

Level 4: segment your users

For both level 2 and level 3, there is always a risk that average spend could be heavily concentrated amongst a subset of sellers on the platform and, as a result, may not be indicative of share of wallet across your entire user base. To overcome this issue, I recommend segmenting your buyer and supplier base and only calculating the share of wallet for those users that really matter to your platform. For instance, you could focus on the suppliers that earn over $1,000 per month or buyers that spend over $500 per month. The logic here is that in many marketplaces, you tend to have users that are not very active and don’t really add value to your platform. The key is to really focus on the ones that do.

3. Focus on measuring the side of the market that is constrained 👑

Whilst its good practice to always think about both sides of the marketplace, when it comes to increasing the share of wallet, the key is to focus on the side that is constrained. In other words, focus on the side which acts as the biggest constraint to driving additional transactions.

Uber and Airbnb, for instance, are examples of marketplaces that are supply-constrained. It is significantly harder for them to acquire drivers or houses than it is to acquire users. On the flip side, marketplaces such as Convoy or DemandStar, whose buyers include Fortune 500 companies and governments tend to be demand-constrained. It’s much harder for them to acquire these large buyers compared to their suppliers which tend to be smaller and more fragmented.

A large majority of marketplaces are supply-constrained as opposed to demand-constrained (more on this here). This suggests that most marketplaces should focus on measuring and improving the share of wallet on the supplier side (aka. share of earnings) as opposed to the share of wallet on the demand side. Why? Because optimising for happiness and stickiness on the side that is constrained is the key to ensuring liquidity. If you have the best, most reliable suppliers on your platform (in a supply-constrained market), you should be able to easily rake in the demand.

4. Focus on the serviceable available SOW, but don’t forget the total available SOW 🌍

Most marketplaces, particularly in the early days, are limited in their scope both in terms of products/services and geographical coverage. Airbnb, for instance, was only available in certain geographies, to begin with, whilst Metalshub* only had certain types of metal listed on its platform. When measuring the share of wallet, it’s important to take this into account and to focus on measuring the total buyer spend and supplier earnings that are relevant for the category of goods or services on your marketplace and the geographies that you cover. This is your serviceable available SOW. Focusing on too large of a total wallet (e.g. large buyers that are purchasing on a global level) might lead you to undervalue the stickiness of your customers.

On the flip side, it’s worth keeping the total available share of wallet at the back of your mind. Once you start getting to a high service available share of wallet, it might be an indication that it’s time to start expanding either in terms of geography or types of products or services you offer so as to tap into a broader share of wallet. The best businesses are not only able to unlock buyer demand and find other buckets of spend to go after, but are also able to expand the buyer’s spend by offering more inventory and making the discovery/transaction process more seamless. For example, Material Bank, a materials marketplace in the architecture and design industry started by sampling interior design materials and tackling sampling spend, they’ve since expanded their share of wallet by going after marketing spend and fulfilment spend, amongst other things.

5. Additional indicators 🛍

Aside from digging into your cohorts, there are a couple of other metrics which can act as good proxies for your share of wallet.

1. Unique buyer/supplier pairings

This is a great proxy for SOW on both the buyer and seller side of things. For instance, if a supplier is only transacting with three buyers in month one and ten buyers in month five, this is likely a good indicator that the platform is accounting for a greater SOW (unless the buyer spends less with 10 suppliers than he did with 3 before, which is very unlikely).

2. Number of orders per buyer/supplier

This is best measured on a cohort basis and is a pretty good reflection of how SOW is changing over time. As the number of orders per supplier increases, so does SOW of the platform.

3. Net revenue retention

As a reminder, net revenue retention is the percentage of recurring revenue retained from existing buyers in a given time period, usually 12 months. It captures the lost revenue from churned customers, but also the positive impact of an increase in usage. For marketplaces, it can be calculated as follows:

a) Monthly GMV from a specific cohort 12 months ago

b) The current GMV from that same cohort today

Annual net revenue retention = a ÷ b

Net revenue retention is a reflection of how much customers need and love your product. The higher the net revenue retention, the higher the spend of your cohorts. This is an indication that the share of wallet for that cohort is increasing (unless their total spend is growing as well, in which case SOW wouldn’t necessarily increase).

For what it’s worth, we’ve seen B2B marketplaces with net revenue retention ranging from 160% to 900% after 12 months, which is another reason to be VERY bullish on B2B marketplaces. They get addictive!

4. Utilization rate

On the supply side, the utilization rate is a good proxy for share of wallet (I talked about this a little in my post WTF is marketplace liquidity?). For instance, if we were looking at Uber, we could try and measure what proportion of drivers are making more than $1,000 per month (i.e. working for Uber as a full-time job). Preply*, a marketplace for language tutors, looks at this by benchmarking the average revenue a tutor makes on Preply versus the country household income per capita in a specific country as shown below.

What classifies as a good share of wallet? 💸

What classifies as a good share of wallet is highly dependent on the type of buyers and sellers you are going after and tends to be specific to each marketplace. If your sellers/buyers are SMBs with limited purchasing power (eg. restaurants in the case of Rekki*) it’s feasible to aim for 80–100% share of wallet. If on the flip side, your buyers/sellers are large multinational companies (e.g. airlines in the case of cargo.one) then even getting to 5–10% share of wallet could be good enough. The key in these cases is to look at the share of wallet on a per department, subcategory or specific buyer/seller basis within that company.

One way to figure out what classifies as “good” is to find out what is the minimum share of wallet required to keep the side that is constrained sufficiently happy so that they continuously transact on the platform (e.g. at least once per week). Once you’ve achieved minimum viable happiness, you can start pushing on acquisition and growth. Pushing for growth before you’ve achieved that point risks resulting in a leaky bucket (ie. high churn). cargo.one*, for instance, decided to hold back on growth till they were able to get their supply-side interacting a certain amount of times per week and, as a result, increase their share of wallet to a certain point. Once they’d reached that inflection point they were able to push on growth.

One thing worth noting is that unlike marketplace liquidity, the share of wallet is not the be-all and end-all for marketplaces. In certain cases, it may be worth optimising for other metrics e.g. growth or NPS as opposed to solely chasing after a high share of wallet. Over indexing for a high share of wallet (particularly in cases where there are a high number of SKUs) could end up slowing you down and lead founders to focus on pleasing and retaining a small niche at the expense of optimising for growth.

These are just a couple of my thoughts on share of wallet, but as most of you out there, I’m still learning and would love to hear any other examples of how you’ve gone about doing this 🤗 Please feel free to reach out or comment in the section below if you have any ideas. I’m always open to speaking to marketplace founders (especially B2B ones), so don’t hesitate to get in touch! My Twitter DM is always open.

Stay tuned for my next post where I’ll dive into a couple of strategies for how to go about increasing your marketplaces’ share of wallet.

Big thanks to my colleague Louis Coppey for helping me think through this post. Thanks to all my marketplace brainstorm buddies for giving me great feedback on it: Hunter from Nosara Capital, Theresa from Avenir Capital, Dhruv from Bessemer Venture Partners, Angela from Version One and Arne from FJ Labs and Merritt from Bain Capital Ventures amongst many others.

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