Why BIG brands are BIG and small brands are small

Last week, I tried to smash and shatter the big myths surrounding how we do marketing, I’d like to continue that with some posts influenced by Byron Sharp’s work at the Ehrenberg-Bass Institute, by taking a more scientific approach to  marketing.

Two weeks ago, I started this series wth the question “what should I do next” to assist General Managers looking to plan for their new financial year.  Inevitably that plan will have both fewer resources and the challenge to grow volume and/or profits.

Typically there are two starting points for this planning cycle. The first is  “my brand is small” and the first question is “How can I grow” which immediately gets us back into a historical cycle of traditonal growth myths. The question you should ask a small brand is  “why is that brand small?” From this base your next question is “what can I do, in my upcoming plan, to address this?”

One small brand myth is to call your brand a niche brand– this is nice marketing jargon for small, but i enables marketers to forget about it because we designed it to be small.

But if you are a BIG brand, rarely do you ask “why are we big?”, if you are big and successful marketers typically go back to last year and keep doing the same things, without understanding the mechanics of their success.

So, to begin, we will be looking at why some brands are small and others are market leaders and using this knowledge how you can ensure your brand grows or remains BIG.

CUSTOMER LOYALTY VS. MARKET PENETRATION

What makes small brands small, and big brands big?

This is a question all brands should be asking themselves, as the answer may help them grow. Two major factors are typically considered. From my experience I understand brand volume is a factor of the number of people who buy and the amount they buy (penetration x volume). So its stands to reason, that I can either increase the number of users (penetration) or increase the amount customers buy (volume)… right?

First, lets take the number of users or market penetration, which is the size of a brand’s buyer market. If Coke has 100 unique buyers per year while Pepsi has 40, Coke has greater penetration.

Second, lets take customer volume, which is often considered as a measure of loyalty, measured as the average purchase rate per customer. If Bill buys 12 Cokes a year and June buys 2, surely Bill is more loyal to Coke than June.  These two elements, penetration and loyalty both vary with brand size; however, one is far more important than the other.

Lets slay some more Marketing myths: marketers commonly believe that customer loyalty is the holy grail of growth. If you can increase customer loyalty you will become the next Nike CEO.

As reported by the Ehrenberg-Bass Institute, business strtageists Bain, data from global market research agencies like Nielsen and TNS shows that – unlike the myth we sell ourselves- customer loyalty doesn’t actually vary (dramatically) across brands. This is to say, brands like Apple and Nike are brand leaders not because they have an extremely loyal customer base. Slight differences in loyalty do exist: and in general, its the larger brands that always have shown slightly higher customer loyalty or greater incidence of repeat purchase. If, Customer loyalty, then, doesn’t drive brand size differences, what does?

There is the other element in our initial equation- market penetration. Sharp and his team, plus Bain, plus many research companies have shown time and again that focusing just on loyalty, to the detriment of increasing penetration, doesn’t increase customer loyalty and doesn’t make brands bigger. Whereas growing customer penetration does increase the loyalty of your customers as well as increasing the number of buyers.

Big brands are big because they all display much higher customer penetration (numbers of consumer) than do smaller ones. For example, in a 2005 study on shampoo brands in the U.S., (see figure 2 below) researchers found that Suave Naturals had 19% market penetration, while its far smaller competitor, Finesse, had only 2%. For these same brands, Suave had an average purchase frequency (or “loyalty”) of 2.0 (2 packs per year), while Finesse’s was 1.4.

This pattern, that smaller brands get hit twice, is referred to as the “double jeopardy” law: smaller brands have far fewer buyers, who are less loyal, helping explain the brands smaller size. Conversely BIG brands have a greater number of buyers (more penetration) and these buyers are more loyal (buy more per purchase).

This pattern has been seen across 63 categories in 23 countries and over 500 different brands.

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As seen in the figures below, purchase frequency—or loyalty—doesn’t vary dramatically between brands, though it is higher for those with greater market share than the smaller ones. At the same time, annual market penetration correlates quite neatly with market share, with larger brands having far larger penetration than smaller ones.  In this case the correlation does imply causation- brands with higher penetration cause higher purchase frequency and both these drive significant market share.

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HOW DO BRANDS GROW?

Now that we have s snapshot of how to better understand why small brands are small (less penetration –>slightly less loyalty = lower market share) and large brands are large (more penetration –>slightly more loyalty = higher market share), what’s the process of how brands grow?

Should brands focus on increase loyalty or penetration?

Prof. Sharp’s hypothesis is that growth occurs largely through increasing market penetration: for a smaller Shampoo brand like Finesse to increase sales to the level of Suave Naturals, they must gain more shoppers. The hypothesis then states that simply getting existing customers to buy more often and buy with 100% loyalty to their brand is completely unrealistic (in 40 years of empirical studies no brand has achieved this, nor anything close to this). In gaining more buyers, or increasing penetration, Finesse could gain sales and achieve greater market share.

So now thinking about Market penetration, it can positively change in two ways: by 1) by increasing customer acquisition or 2) by decreasing customer defection. Brands can acquire more customers to increase penetration, or decrease the number of customers they’re losing to effectively increase penetration. But which of these two strategies leads to greatest growth?

CUSTOMER ACQUISITION VS. DEFECTION

Enter another Marketing myth : many marketers believe that decreasing customer defection is critical in maintaining brand health, when the true answer lies in growing through investing to boost customer acquisition.

Prof. Sharp’s hypothesis continues that controlling or reducing defection is largely out of our control, making growth via that strategy extremely difficult.

For example, in the 1980s, defection rates for car brands in the UK and France were around 47%. The largest brand, Ford, was at 31%, but even the smallest brand, Honda, was only at 53%. Even today, Ford’s customers are regarded as the most loyal; however, the lowest in the rankings is only a mere 10 percentage points behind them.

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So, we can see that defection levels don’t vary dramatically with brand size. That having been said, Honda could, in theory, gain market share by halving their defection rate. But this would be nearly impossible: not even the market leader, Ford, has a 25% defection rate!  Many companies have focussed on reducing defections but very very few have driven a successful growth strategy around this.

The easier and cheaper route, then, is to focus on customer acquisition.

(DIS)LOYAL BEHAVIOUR

Though we’ve focused on market penetration in large part thus far, here’s a further note on loyalty: in general, customers who have used your brand before will act in a more favourable towards it. So, once they’ve bought your brand once, are they now loyal customers?

Not quite.

Customers do adopt a certain level of loyalty-like behaviour, in that they don’t switch between all brands available all the time; but some degree of brand switching will always occur across all kinds of market categories, consumers, and brands.

For car brands, the repeat-buying rate in the category is quite high, at almost 50%. Even still, this number indicates 100% of buyers aren’t 100% loyal to one car brand.

 

Summary

OK, so now I believe I have proven the hypothesis that smaller brands are small because they have fewer customers and these customers are also slightly less loyal and have slightly higher defection rate than Big Brands. Thus growing your business will come from an increase in customer penetration not by trying to make them more loyal. And within penetration, brands should focus their efforts on customer acquisition, rather than reducing defection.

 

Graphs from A Mitchell, International Commerce Review March 2011