I wanted to share more about “How Brands Grow” by Byron Sharp. In his book, the belief is that brands usually work on the basis of long-held, conventional beliefs rather than up-to-date empirical evidence. He proposes that marketers shouldn’t just blindly follow marketing myths because they’re conventional or because they might’ve worked out at some point in the past. Instead, they should consider the empirical evidence of marketing science and do what’s already been proven to work, as this will increase their chances.
To move forward, marketing practice should use evidence provided by marketing science, not rely on traditional beliefs. One of these established beliefs is that brands need to have an equal amount of loyal customers and customers who switch between brands (“switchers”). Take, for example, the toothpaste brands Colgate and Crest. In 1989, a market analysis revealed that Colgate’s consumer base was made up of 21 percent loyal customers and 68 percent switchers, while Crest’s comprised 38 percent loyal customers and just 46 percent switchers. For the marketing managers at Colgate, this data was worrisome enough to convince them that they should produce more persuasive advertising to keep their customers loyal.
However, like many maxims of marketing, this belief is wrong. In marketing, there is a scientifically proven pattern known as the double jeopardy law which states that brands with a smaller market share have fewer customers and, what’s more, that those customers are less loyal than those of bigger brands.
This reveals that the buying behavior of customers is related to a brand’s size, and that it’s therefore only natural that Colgate, with its 19 percent market share, has fewer loyal customers and more switchers than Crest, which has a market share of 37 percent. Thus, these figures shouldn’t concern Colgate’s marketing department, as they aren’t the consequence of a weak marketing strategy, but simply of the brand’s relative size.
Another key learning point is that to grow your customer base, focus efforts on getting new customers, not on stopping existing customers from leaving. If you’ve ever considered how brands grow, you probably came to the correct conclusion that it all comes down to how many customers they have. But how exactly do brands increase their customer base?
In general, a customer base grows in two ways: acquiring new customers and holding on to existing ones. However, one of the established maxims of marketing is that retaining customers has a greater impact on a company’s growth than acquiring new ones.
For instance, an influential business article published in 1990 focusing on how companies should manage their customer base proposed that company profits can increase by nearly 100 percent for every 5 percent of customers retained.
But that’s wrong.
The argument was based solely on a thought experiment. Moreover, the inaccurate evidence was presented in a misleading way: rather than a 5 percent drop in leavers, the decrease was of 5 percentage points – in other words, from 10 percent to 5 percent, which amounts to an actual decrease of 50 percent, not 5 percent.
In contrast to retaining existing customers, acquiring new customers is absolutely essential to growing a brand. The defection rate of a company’s customers is largely determined by its size – which means that it’s difficult to control. Brand loyalty is dependent on market share, so the market leader will have the lowest defection rate, while the smallest company will have the highest.
Driving increased purchases by the light buyers segment is another interesting point. In terms of consumption, there are two kinds of buyers: light and heavy. Light buyers purchase a given item only occasionally, while heavy buyers purchase it more frequently.
For example, some people are heavy buyers of Coca-Cola, meaning they purchase it regularly – that is, on a daily or weekly basis. Others buy such soft drinks on only a handful of occasions throughout the year – for instance, when they go to the cinema.
Most brands operate on the principle that the ratio of light to heavy buyers follows Pareto’s Law, i.e., the mathematical formula that states that 80 percent of the effects are produced by 20 percent of the causes. When this formula is applied to sales, it suggests that the heavy buyers of a product (the top 20 percent of customers) are responsible for the majority (80 percent) of sales. On this basis, the marketing efforts of most brands are focused on maintaining the consumption of heavy buyers.
But evidence indicates that, in sales, the ratio is not so extreme: rather than 80/20, research suggests that the ratio is approximately 60/20. In other words, a little more than half of a brand’s sales come from the heavy buyers among its customers, while light buyers are responsible for the remaining sales.
In fact, one 2007 study investigated the presence of this ratio in the sales of body sprays and deodorant products of various brands, such as Dove, Nivea and Adidas, and found that the heaviest buyers (the top 20 percent) were accountable for between only 46 and 53 percent of sales.
Marketers usually focus their efforts on retaining heavy buyers, and neglect light buyers who they assume account for just 20 percent of sales. But those light buyers actually account for up to 50 percent of sales, so marketers would do well to consider this.
Finally, marketers should be careful when using price promotions as a strategy. We’ve all seen “ON SALE!” signs in store windows throughout our lives. But have you ever wondered why brands use these price promotions? Because their effect on sales is directly visible, usually resulting in a short-term spike in sales.
This occurs because these promotions attract non-frequent buyers. Such buyers tend to switch between brands and might buy whichever has the cheapest products. Thus, the effect on sales that’s prompted by price promotions is only short term: once the promotion is over, the brand’s product pricing returns to normal and sales return to their regular level.
However, more sales don’t necessarily translate into higher profits. When you decrease a product’s price, you also decrease its profit margin. So for brands to make a profit on sale items, they have to calculate the price reduction on the basis of a product’s contribution margin, which is the revenue the product must generate to cover its costs.
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