It’s a story of amazing loyalty – when an American buys a new car there is almost a 50% chance they will buy the same brand they bought last time. Considering that years have passed since their previous purchase, the world is different, their life has changed, car models have changed, and that there are 50+ brands to choose from – the chance they buy the same brand as last time should be infinitesimal. But car buyers consider only a few brands, typically just two, one of which is usually the brand they currently drive. This loyal behaviour is true of car buyers around the world.
So automobile brands enjoy good retention rates, even brands that are losing market share. Yet marketing gurus claim that Detroit has lost customer loyalty, that their customers are abandoning them in droves. This just isn’t true – Detroit’s biggest problem is that it under-performs in acquiring customers.
What’s not well known is that loyalty rates between rival car brands are very similar, and that improving customer retention has a small, extremely limited, impact on market share growth.
Loyalty Hardly Varies
Retention metrics for car brands vary somewhat around the average of about 50% for the US market (JD Power report an average of 49% for 2008). Some brands are a little easier to repeat buy, some a little harder – and this largely explains the comparatively small variation in retention performance between the brands of vastly different market shares. Bigger market share brands tend to have higher retention, because they have more dealers, better geographic coverage, broader product ranges, and bigger advertising budgets. Their mental and physical availability advantage means that they are simply easier to buy, so they have more customers, but these customers also find it easier to repeat buy. If you move interstate odds are that you still aren’t too far from a Chevrolet or Toyota dealership.
JD Power report that the leaders in customer retention are Toyota and Honda at around 60%. Both of these are big brands with 18% and 12% share respectively. Ford and Chevrolet also do above average in the retention stakes.
Small brands like Mazda, Volkswagen, Mitsubishi and Volvo have comparatively low retention levels of around 40%. This is true too for small Korean brand Hyundai-Kia in spite of their great gains in market share in recent years.
In the luxury car market the largest brands (BMW, Mercedes, Lexus) have retention levels around 60%, while tiny brands like Jaguar and Porche have retention levels closer to 30%.
So, in general, smaller market-share brands have far fewer customers and somewhat lower retention rates. This is marketing’s famous Double Jeopardy law and there is nothing unusual about the USA car market, nor has this changed over time. Below is a table showing defection rates for car brands in the UK twenty years ago (car buying across the years 1986 – 1989). As in the USA today each brand shows a defection rate of about 50% (i.e. enjoying a retention rate of also 50%). The Double Jeopardy pattern is quite noticeable – the smaller brands have somewhat lower loyalty (higher defection rates).
Ford, being the largest brand back then, had the lowest defection rate – as the Double Jeopardy law predicts.
Some marketing gurus, like Reichheld and Sasser, have pronounced that companies can radically reduce their defection levels, to zero even, for an extremely low cost. The empirical facts show this is clearly nonsense, doing things that no other brand has been able to do, in spite of their considerable investments in CRM and other customer satisfaction initiatives, is seldom cheap nor easy. Car brands already enjoy rather astonishing loyalty levels, further improvement is extremely difficult and costly.
Product Range Differences Affect Loyalty
Some brands have limited product ranges, and this means that when a consumer’s life situation changes it’s harder to stay with the brand, they are more likely to switch on their next purchase. Hence the Mini Cooper, in spite of the emotional attachment it often earns from its buyers, has one of the lowest retention rates. When a baby arrives in the household it’s a good bet that the next car won’t be another Mini.
Alternatively some brands genuinely fill a niche, for example Toyota’s Prius hybrid, and this can result in higher than expected retention because when a buyer goes to buy another car there is very little choice available to them (few hybrids on the market).
Detroit’s lack of smaller car models has been depressing GM and Chrysler retention rates somewhat, but the real story is that their lack of acquisition has been eroding market share.
The Amazing Maths of Customer Acquisition
The implications of the Double Jeopardy law for growth potential are profound, and can be shown with some simple maths. Consider the current US retention level, it means that each year a car brand gains about half of its sales from new customers and about half from returning customers. If a brand like Ford were to achieve the impossible and reduce its defection rate to zero then it would gain 50% more sales, that’s 7 percentage points of market share. This is the maximum that it can gain from improving retention. But each year about half of new car buyers switch brands, so each year 50 points of market share are up for grabs. This is the most Ford can gain from improving acquisition, a staggering 50 percentage points of share.
And most service industries have defection levels far lower than these examples. Figures of 3-5% are quite normal, so even if a company could reduce defection to zero it would give them only a few percent in sales revenue gain. In market after market the potential gains from acquisition dwarf the potential gains from reducing defection.
Automobile marketing follows the same empirical laws as other product categories. Detroit has largely had its head stuck in the sand refusing to believe and learn from this for decades. Each year competitor brands win more than their fair share of customer acquisition, that’s been the key to their growth, because it is always the key to brand growth.
