Introduction
The Natural Monopoly law is that big brands tend to ‘monopolise’ the purchases of the lightest, least frequent buyers of a product category. In other words, the people who rarely buy a category, when they do buy, tend to gravitate towards the market-leading brands. In turn this helps explain why big brands are big: they have done a better job at creating exposure among the large pool of people who know or care little about a product category. When those infrequent, less knowledgeable people enter the market they are favourably influenced by that brand’s familiarity, and are more likely to buy it (even more likely than the heavy category buyers are).
Natural Monopoly was documented by McPhee (1963) in a book titled Theories of Mass Behaviour. He gave an example in the book based on radio personalities: householders who could name only one radio star tended to only know of a famous one. Whereas those who could name several, knew of the obscure ones.
Why is it important?
Natural Monopoly law is important because it explains the famous Double Jeopardy law. Paraphrasing Ehrenberg (1990), those who buy the category a little, tend to know only about the biggest brands – so they tend to buy them, but they are also more loyal to them because they don’t know much about the other brands! Whereas those who buy the category a lot know about many more brands, so they are familiar with the smaller brands – but since they also know about the bigger ones, devote less of their requirements to those smaller brands. The plain implication is that building widespread mental and physical availability for a brand is the route to growth.
What evidence is there?
First, we hunted through the marketing literature for studies that included data relating to Natural Monopoly. There are different ways in which Natural Monopoly can manifest. One would be brands’ market shares among light, medium and heavy buyers; but there are no past studies showing this information. Another is the rate at which each brand’s buyers buy the product category: On average, smaller brands should have heavier category buying rates, whilst bigger brands should have lighter. We found 13 studies that showed this type of information.
We summarise the available evidence in Table 1. We then calculated a simple ‘strength of effect’ measure for Natural Monopoly, by dividing the category purchase rate for the smallest two brands into the rate for the biggest two brands. For example, in the Gruneklee, Rundle-Thiel and Kubacki study in Table 1, the category purchase rate for the smallest two brands was 13, whereas it was 10 for the largest two. And, 10 divided into 13 is 1.33, in other words there is a 33% difference between the two category purchase rates.
Table 1 – past studies on Natural Monopoly
aNote, the Elberse study grouped DVD’s into deciles of popularity and the average number of titles rented by buyers who bought at least one item in the decile.
bThe 80% figures is for DVD’s. The study also included movies, but the category purchase rate was not reported for them.
The overall average result, taking into account that a couple of studies found no difference or almost no difference in the category buying rate, is 25%. That is, buyers of market leading brands buy the category at a rate about 25% lower than buyers of small brands. This is a non-trivial difference.
It’s important to note that Natural Monopoly doesn’t mean light buyers only buy the biggest brands and heavy buyers only buy small ones. Many of both types of buyers buy big, medium and small brands but the lightest buyers, when they do buy, tend to favour the bigger ones.
To this point we have summarised a range of diverse studies which happened to show some data about Natural Monopoly. However, that was not the primary focus of any of those studies. And some of them are based on very few brands or observations. So, there is scope for more knowledge about this phenomenon.
Natural Monopoly is an important concept for marketers to understand as it helps to comprehend how brands can grow. As McPhee would have put it, the big brands are big because they have built exposure among the vast pool of category buyers. As How Brands Grow (Sharp, 2010) puts it, growth comes from building more mental and physical availability. So Natural Monopoly appears to tell us an important lesson on how brand growth can occur. But we don’t have enough evidence, based on Table 1, to confidently say Natural Monopoly is a near-universally appearing phenomena. Furthermore, while these past studies indicate it is a moderately strong effect on average, there was certainly some variation across studies. Can more evidence be assembled?
We therefore pose two questions:
- How prevalent is the Natural Monopoly effect – does it manifest in all categories?
- How strong is the effect? – Are the buyers of market-leading brands only a little lighter for buying the category, or a lot lighter?
To address these two questions we ran a study across 28 consumer goods categories as a starting point. We used panel data for a European country kindly provided by GfK.
We selected the top 20 brands in each category to avoid results being biased by very small brands with small numbers of purchases. We calculated the category purchase rate for the buyers of each brand, in each of these categories. For example, buyers of the large brand, Pedigree, bought from the dog food category on average 18 times per year, while buyers of the much smaller brand bought the category 24 times per year.
Here are several graphs to illustrate the Natural Monopoly effect: for yoghurt, crisps and washing liquid. We see the effect quite clearly: bigger brands’ buyers on average, are lighter category buyers.
Figures 1,2,3: examples of Natural Monopoly in action
Bigger brands have a buyer base that comprises lighter category buyers, on average.
How prevalent is the Natural Monopoly effect?
To answer the first question, about the prevalence of the effect, we calculated the simple correlation between the brand’s penetration and the average rate at which its buyers bought the category. We expect this correlation to be negative (larger brands have a buyer base that buy the category fewer times). The average correlation across the 28 categories was indeed negative, at r=-.36. This is a moderately strong correlation in the social sciences. Furthermore, it was negative at below the -0.3 level in 21 of the 28 categories, which tells us the Natural Monopoly effect is quite prevalent.
How strong is the effect?
We calculated the category purchase rate for the top two brands in each category and the smallest two (i.e. the 19th and 20th sized brands). We found the category purchase rate is on average 25% lower for the two market-leader brands compared to their smaller counterparts. At face value this seems a fairly strong effect. To illustrate further, if the smaller brands in a category have an average category purchase rate of say, 20 occasions per year, then the market leading brands will have an average category purchase rate of around 15 occasions per year. It’s pleasing that the 25% we find from this analysis is spot on with our summarised result of past work which also produced a figure of 25%.
These results tell us that if a brand is to move from being very small to a market leader its buyer base will slowly shift in a non-trivial way in terms of the average extent to which its buyers buy the category. In other words, it must build mental availability among more people who know or care little about the product category; and build physical availability, so that it is very easy for them to notice and purchase the brand in all sorts of buying situations.
Conclusions
In the first part of this study we summarised past work and found a pervasive and reasonably strong Natural Monopoly law in a range of diverse market scenarios, from entertainment products, to packaged goods, to leisure activities. In the second part, from a dedicated empirical analysis, we found the same overall result. That is, the brands with the highest market share unduly appealed to lighter buyers of the product category; the brands with the smallest market share tended to appeal to heavier category buyers.
The importance of the Natural Monopoly law is that it helps us understand why some brands are much bigger than others – over time they have simply done a better job at building familiarity among the vast pool of people who know or care little about any particular product category. So, when those people do occasionally enter the category, the brands they are familiar with are likely to be the biggest ones, who therefore have a higher chance of being bought. What this means is, smaller brands that are aspiring to grow need to mimic the strategy of the market leaders, by investing in mental availability and physical availability. They can do this by designing marketing communications that is noticed and remembered by people who know or care little about the category or the brands in it; and by ensuring the product is available in all the places people might want to buy it.
Lastly, the fact that market leaders are comparatively more popular among the lightest buyers also tells us that a selective focus on heavy category buyers is misplaced if a brand is to grow.
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[1] Thanks to Dr Zac Anesbury who provided an exhaustive list of studies about Double Jeopardy from which we identified many instances of Natural Monopoly. Zac also made many other valuable suggestions to improve a previous version of this report. Thanks also to Miranda Stocco for proof-reading.
