Background

Managers and insights specialists often examine brand performance metrics including loyalty metrics such as purchase frequency or share of category requirements (SCR). An ongoing point of discussion is that some brands, often small to medium size, can show higher than expected loyalty – that is, higher than rival brands with similar penetration. And if it’s competitor brands that are showing high loyalty, this might be a cause for worry – what are my competitors doing that I am not? What is special about their brand? To allay these concerns, we investigate this issue of apparent excess loyalty.

Small brands with unduly high loyalty are often called ‘Niche’ brands. Technically, this doesn’t mean low market share. It means that for whatever market share the brand has, this market share is made up of a smaller than expected customer base who are buying at a higher than expected rate (higher loyalty). The Double Jeopardy law tells us what levels of penetration and loyalty any brand should have given how big the brand is, and it says that brands of equal market share should have highly similar penetration and loyalty metrics. Note that any brand’s sales in a time period depends on how many people bought the brand (penetration) multiplied by how often they bought of the brand (loyalty). Therefore, if a brand has less penetration than it should for its size, it must have higher loyalty.

Some examples of niche brands or products

A couple of studies indicate that store brands or private label brands can be somewhat niche (Uncles and Ellis, 1989; Bound and Ehrenberg, 1997), but other studies show many of them are not (Pare and Dawes, 2011; Dawes, 2013). Some media are niche – for example specialist TV channels, such as Spanish language channels have been shown – perhaps unsurprisingly – to appeal to Spanish speaking households (but not to households that do not speak Spanish), and within those households, there is quite high viewing loyalty to them (Sharp et al., 2009).

Unique Brand Positioning perhaps?

But why might this excess loyalty occur only for some brands? Is it because they have a unique selling proposition that appeals to a segment of the market? Or because the brand has built deep emotional connections with its buyers that induce them to buy it very frequently? Evidence suggests that these conjectures are unlikely. We know that shoppers habitually buy different brands from within a repertoire, and that brands share customers with competitors approximately in-line with size. So the idea that a brand can build deep connections and loyalty via clever positioning or persuasive advertising doesn’t fit very well with the real world evidence. There must be a better explanation. And having one might save lots of effort by marketing insights departments looking for the reason for excess loyalty.

An explanation for unusually high loyalty

A basic idea in science is that simple explanations are preferred over complex ones. A simple explanation for unusually high loyalty relates to what we call restricted distribution. We mean by this term that some brands are available only in certain places (i.e., retailers, regions). And furthermore, those brands can be quite popular in those places, for example a regional beer could happen to be the #1 brand in its home region, or a supermarket’s own brand could be a big seller in that supermarket chain. This localised popularity means such a brand will also have high loyalty where it is sold, in line with Double Jeopardy.

However, when we calculate brand penetrations for the whole market, the brand with restricted distribution has much smaller penetration market-wide than in its own region or retail chain. But its loyalty metrics stay high, because we only calculate loyalty among people who bought the brand. The upshot is that the brand looks like it has high loyalty, but this is simply an artefact of restricted distribution – along with being fairly popular, at least, within the bounds of its restricted distribution.

Example: Limited Distribution, High Loyalty

Here is a simple worked example. Imagine a market with two regions that have equal populations. In both regions, the category is bought by 80% of the population, and bought on average 8 times per year. In region 1 there are five brands: A, B, C, D, E. In Region 2, those brands are also present, as well as brand F, which happens to have 20% market share in that region. Along with that 20% market share, brand F has 30% penetration, and in-line with Double Jeopardy, it has a purchase frequency of 4.2 occasions per year. These figures are shown in Table 1.

When we calculate the metrics for the total market by aggregating region 1 and 2, brand F becomes a much smaller brand in terms of penetration (and market share) because it has zero sales in Region 1. For the whole market, F’s penetration is only 15% (average of 30 and zero). But its purchase frequency remains 4.2, which is now unusually high given its aggregated penetration figure. As mentioned, purchase frequency stays high because we only count purchase frequency among people who buy the brand.

The following table and graph show the effect of restricted distribution for Brand F, and how it artificially heightens its brand loyalty. Note, we used the Dirichlet model to derive expected (Double Jeopardy law) purchase frequencies for each brand in each region, given the category purchase rate and brand market shares in each.

Table 1. The Effect of Restricted Distribution on Brand Loyalty metrics

Here is the result from Table 1 in a series of charts. We see that in Region 1 and 2, the brands look ‘normal’ – the Double Jeopardy pattern is apparent, with no marked deviations. But then in the third chart, we see that once the data for the two markets are aggregated, brand F has unduly high loyalty.

Brands look normal in each region …

Chart 1Chart 2But when we aggregate the data, we see artificially high loyalty for the brand with restricted distribution, F – which is sold only in one region.

Chart 3

Managerial implication.

Sometimes managers worry that competitor brands appear to have unduly high loyalty.  We show that there may be no need to worry (and probably no reason to gloat if one’s own brand has excess loyalty!).  There is usually a simple explanation, namely that a brand’s apparent high loyalty is an artefact of restricted physical availability – such as being popular in one geographic region.  Put simply, a brand that has reasonably high penetration where it’s sold also enjoys higher loyalty where it’s sold – but when we total up the whole market, its penetration is smaller but its loyalty metrics stay high.  This is an appealingly simple explanation.  In fact, there are few alternative explanations that bear up to scrutiny.

Restricted distribution may be tangibly physical, such as presence in a local geographic region, or in a certain retail chain or store.  It may also occur in the virtual world, such as a brand being sold only via one online store.  Likewise, it may also occur as an appeal to a specific part of the population, as is the case with Spanish language TV in the USA, or newspapers designed for an age group, ethnic minority, or the business community (e.g. Wall St Journal).

What can we do if we have restricted availability?

So, a niche position for a brand (deficit penetration/excess loyalty) can often turn out to be perfectly understandable.  However, this doesn’t mean it will always be acceptable.  There may be ways of fixing the brand’s restricted availability, or niche appeal.  Here are two illustrations, taken from page 41 of How Brands Grow: part 2:

America’s biggest Hispanic-owned food company, Goya Foods began in 1936 as a specialty distributor of basic products like beans to Hispanic immigrants.  Today it is one of the USA’s fastest growing food companies introducing all sorts of Americans to a wide range Hispanic-inspired foods.  “We like to say we don’t market to Latinos, we market as Latinos,” says CEO Bob Unanue (Wentz, 2013).

In the UK, the brand Quorn offers a wide range of meat-free protein dishes.  It could have targeted vegetarians, these are the people for whom the brand had the most obvious appeal.  Instead, as its management wrote: “We started to transform the brand’s positioning from a vegetarian substitute (relevant to around 7% of UK households) to a broader healthy eating brand (relevant to around 70% of UK households), thus opening up a significantly larger penetration- led growth opportunity”.  By the end of 2011 Quorn was responsible for delivering 62% of category growth with sales up £6.8 million (Wragg, 2012).

Research implications 

Another implication is that it’s important clearly define the appropriate geographical market when researching or analysing brand metrics.  Otherwise you run the risk of your brand, or competitor brands, seemingly appearing as niche / excess loyalty brands.  For example, if you only operate in a specific region and you receive panel data or survey data based on a whole-country sample, your loyalty metrics will probably be skewed upward and therefore will be misleading.

Think deficit penetration, not excess loyalty

A final point is that the manager’s default position should be to view apparent instances of excess loyalty as actually being a deficit in penetration. This altered mindset should focus the brand manager’s attention on what decisions they have taken that may have (perhaps needlessly) restricted their purchasing from a greater number of potential customers.

Note: Corporate Sponsors of the Institute who wish to examine their brands to see if they are normal, deficit penetration, or deficit loyalty can access our Laws of Growth service.

Endnote: Early in the report we noted some store brands show excess loyalty and some do not. The question might arise as to why. The answer is that a store brand needs to account for a lot of sales in the retailer’s category for this to occur. If it is only a small brand in the category for the retailer, its penetration within that retailer will be low, and therefore so will its purchase frequency.