Loyalty is important, all marketers want this quarter’s sales to re-occur next quarter and so on. Yet the loyalty obsession often leads marketers astray. Loyalty actually follows empirical laws (established by decades of scientific marketing research). Marketers who don’t know these laws end up misinterpreting their own metrics and falling prey to consultants touting exotic proprietary loyalty metrics.
Over the last decade many marketers spent heavily on ‘loyalty marketing’ realising miserable returns. While other marketers, like Apple and HSBC, who have moved away from narrow loyalty marketing, work within a handful of empirical brand loyalty laws to their advantage. These are the marketers who embrace sophisticated mass marketing to build larger, more profitable brands.
Bigger brands have many more customers
Brand managers want more customers, buying more often. They routinely track these two metrics (penetration & purchase frequency) which together make up the brand’s sales and market share. Few marketers realise that these metrics always vary together (as do all loyalty metrics). This is the Double Jeopardy law discovered decades ago. It has held in every market ever since. Double Jeopardy says that bigger brands have many more customers who buy slightly more often[1]. Small brands with high loyalty (i.e. “loyalty beyond reason”) simply do not exist.
This means that to double sales, a brand needs almost twice as many customers, who will purchase slightly more often. Brand ‘loyalty’ strategies that attempt to grow sales without growing the customer base, (i.e. by getting existing customers to buy twice as often), would mean changing the way marketing works. This never happens.
But, loyalty metrics do rise slightly when a brand grows its customer base. This is because growth in penetration comes from extending a brand’s mental & physical availability, thereby making the brand easier to buy for more people. A classic example is gaining distribution in a new outlet, but a better (wider reaching) media strategy can also build penetration, as can advertisements that are so good they are noticed by non-customers. Gains in mental & physical availability also reinforce and encourage the existing behaviour of heavier buyers, but not by much. – there is a ceiling effect: when the brand is already stocked in the stores you shop in, and when it is already very salient for you there’s little that marketing can do to facilitate you buying more.
Beware of meaningless metrics
The Double Jeopardy law means that loyalty metrics (behavioural and attitudinal) depend on a brand’s size. Complicated ‘loyalty ladders’ and ‘loyalty pyramids’ aren’t necessary. Similarly attitudinal loyalty metrics are backwards looking, they tell you if people buy and know of the brand. A decline in a brand’s mental and/or physical availability will result in a loss of sales, and only consequently a decline in attitudinal loyalty and intentions. Loyalty consultants’ cannot use a special measure of attitudinal loyalty to predict your brand’s future. A brand’s mental and physical availability are far more useful metrics.
The dangers of targeting based on ROI
The Double Jeopardy law is underpinned by the predictable distribution of consumers’ behavioral preferences for the various brands in the category, i.e. their loyalties. Loyalty distributions are always skewed: a brand has lots of very light, occasional buyers and a few very heavy buyers. This pattern is evident in all brands (both big and small), and all markets (packaged food, pharmaceuticals, cars, banking, etc), all over the world. To grow brand share you need a lot more light buyers and a few more heavy buyers. Strategies that concentrate only on your ‘most loyal’ or ‘most valuable’ customers will not turn a small brand into a big one.
Even what sounds like a sensible strategy, e.g. “maximise ROI by targeting only the heaviest category buyers”, limits growth. Firstly, because most buyers are lighter buyers of the category, so this strategy ignores most people (and therefore a lot of sales potential). Secondly, because of the Natural Monopoly law: as a brand grows share, an increasing proportion of its customer base will be made up of light category buyers. If you aim for a customer base made up largely of heavy category buyers you are aiming to be a really small brand.
The Natural Monopoly law occurs because heavy category buyers buy a lot of brands, even the small brands that hardly anyone else buys. Like Double Jeopardy, this law holds empirically across a multitude of marketing contexts. Consider natural monopoly in TV viewing:
Question: who watches the really low rating TV programs?
Answer: people who watch everything.
This example of the Natural Monopoly law has profound implications for advertisers as it illustrates the value of high rating shows.
It’s the same for very low share brands, they are mostly bought by the heaviest category buyers who buy practically everything. So if you want to be big you need lots more customers and most of these new customers will be light occasional buyers of the category (and your brand).
Your next customer is your most valuable
100% loyal customers are special, but not because they are worth more, they are different from other buyers because they don’t buy the category very often. Light category buyers don’t buy many brands because they don’t do much buying – their ‘brand loyalty’ is an illusion. For instance, if you only eat out at a restaurant once a year then you only buy one brand (100% loyalty). Heavy category buyers, who do a lot of buying, buy a lot of different brands. They are more likely to be more valuable to you, but also to your competitors.
Who is your most profitable customer? Because all firms have a fixed cost base (including costs like management salaries) the answer is the next customer you win[2].
Acquisition really matters
“Retention is better than acquisition” is one of the most enduring myths of marketing. Fanciful equations to value customer retention are a recent fad amongst marketing engineers. In reality potential gains from customer acquisition dwarf the potential gains from retention.
In category after category (including services like credit cards and telecos) only a very small proportion of customers defect from the brand each year. Therefore the potential share gains from reducing defection are small. And most defection is due to reasons marketers cannot control (e.g. customers leave the category, move city, or die) [3]. The amount of customers who enter the category for the first time or switch from other brands collectively is a comparatively huge pool of potential new buyers.
When brands lose sales and share it’s not because customers are leaving them in droves. Quite the opposite, declining brands have rather normal retention rates. For years US car brands have shown healthy normal retention rates, Detroit’s problem has been miserable customer acquisition rates compared to the rising Japanese and Korean brands [4].
Loyalty is Everywhere
Loyalty is ubiquitous, we see it in every product/service category that we have ever studied, over time and across countries [5]. Loyalty is fundamental human behaviour. We adopt preferences and heuristics, repeat-buying a favoured few brands out of the many available to us. As consumers this makes our life easier, so we can get on with other things more important than brand choice.
Tonight, you’ll most probably eat a meal that you’ve eaten many times before. A meal that you eat regularly. You’re not boring — you’re just a normal human being. Loyalty makes our lives easier because it saves us from having to think.
Brand managers must accept this and concentrate on making it easier for more customers to buy the brand more often. Consistency and presence are what builds loyalty. Vainly trying to convert consumers to passionate “brand champions” does not.
Reach Builds Loyalty
Like any other profession (engineering, medicine etc), marketers who understand fundamental scientific laws are vastly better at their job.
The loyalty laws we describe here were discovered more than forty years ago, and have held across every product/ service categories that we have ever analysed. The key take-out from these laws is that the vast bulk of category buyers are light or non-buyers of your brand. To grow, you must reach these many people. This isn’t easy. Light and non-buyers have far weaker mental structures for your brand. They don’t notice your advertising or your brand on the shelf and it doesn’t come to mind in buying situations. They may not even know where to buy your brand, or they might shop where your brand is not available. These are the main challenges to brand growth, and they require a reach strategy rather than a strategy based on engaging and rewarding/bribing the most loyal customers.
To become a bigger brand, you need many more customers and most of these will be light buyers of the category and light buyers of your brand. They won’t think about you much and they won’t love you – but you’ll make lots of money. And overall your brand loyalty metrics will be slightly higher too.
Bibliography
- Ehrenberg, A.S.C., G. Goodhardt, and T.P. Barwise, Double Jeopardy revisited. Journal of Marketing, 1990. 54(3): p. 82-91.
- Anschuetz, N., Why a Brand’s Most Valuable Customer is the Next One it Adds. Journal of Advertising Research, 2002. 42(1): p. 15-21.
- Bogomolova, S. and J. Romaniuk, Brand defection in a business-to-business financial service. Journal of Business Research, 2009. 62(3): p. 291-296.
- Sharp, B., Detroit’s real problem: its customer acquisition, not loyalty. Marketing Research, 2009. Spring: p. 26-27.
- Sharp, B., How Brands Grow. 2010, South Melbourne: Oxford University Press. 160.