How Brands Grow

Highlights

• In the real world, two brands of about equal market share have around equal market penetration, and so they must also get bought by their buyers at a similar average rate.
• when you look at brands of markedly different sizes you typically see that their penetration metrics differ a lot,13 while their average purchase rate varies little. Put another way: loyalty doesn’t vary much.
• This pattern is known as the ‘double jeopardy’ law because smaller brands get ‘hit twice’: their sales are lower because they have fewer buyers who buy the brand less often.
• Advertising works best when it tells us things we already believe.  It’s strongest at refreshing existing memory structures, not building new, non-obvious ones.
• In short, the aim of growing category purchases through presenting new uses often turns out to be a pipe-dream. That’s why marketers who want to increase sales need to win more market share and/or enter new markets.
• Cross-selling metrics are another measurement of loyalty, so once again we find the double jeopardy law applies. There is very little difference in cross-selling metrics between competing brands, and the small differences that do exist tend to reflect market share – not whether or not they have dedicated cross-selling programs.
• I call this the ‘Heavy Buyer Fallacy’ because the misguided logic confuses past/current buying with growth potential – when it’s more reasonable to think that heavy customers are already buying all that they ever will.
• No doubt you have heard the old maxim that it costs five times as much to win a new customer as it does to stop one leaving. There is no empirical support for this idea. In reality, permanently reducing defection rates is difficult and expensive, because defection rates (another loyalty measure) also follow the double jeopardy law.
• Double jeopardy shows that it isn’t possible to radically alter defection rates without massively shifting market share.
• Halving defections is neither easy nor cheap, and permanently reducing customer defection to zero is fantasy. Also, the growth potential from customer acquisition is much higher.
• growth is due to extraordinary acquisition. Contraction is due to dismal acquisition.
• Research examining the reasons for customer defection (Bogomolova & Romaniuk 2005, 2009; Lees, Garland & Wright 2007; Bogomolova 2010, East et al 2012) has shown that much defection occurs for reasons entirely beyond the firm’s control (e.g. moving house, no longer needing the service, being directed by head office, etc.).
• At the very extreme, the buyer who drinks Coca-Cola morning, noon, and night has a very well ingrained habit. They are locked in their ways and may even be a little bit addicted to the product category22. One could argue there is little need to market to these buyers at all, especially considering that they are comparatively non-responsive to advertising (i.e. their behaviour tends not to change in response to advertising; their buying neither increases nor decreases).
• Besides the logic is flawed, what matters is not so much the weight of a buyer as their propensity to change in reaction to marketing. And how many of these customers there are; what they are worth in total?
• When marketing succeeds in increasing a brand’s market share, then buying propensities change across the board. This tells us that marketing has the best chance of being successful when it has as much reach as possible. Marketing is particularly successful when it reaches light and non-buyers of a brand.
• Price promotions, in contrast, do increase sales, but they are also skewed towards heavier buyers. In spite of a lot of volume being sold on deal, promotions stimulate far less incremental volume (see Chapter 10).
• A skew from the category norm needs to be checked carefully. The question is whether to market in line with this skew or to go with the category norm. Usually the answer will be the latter.
• Readers of duplication tables need to note that they refer to a particular period, there is never an absolute metric; one can’t simply say, ‘70% of Pepsi buyers drink Coke’ – it’s 70% in a year.
• The first two patterns reflect what is known as the duplication of purchase law. This law says that all brands, within a category, share their customer base with other brands in line with the size of those other brands.
• Even consumption situation-based category definitions (e.g. for snacking, for sharing, for gifting) commonly result in artificial overly narrow category definitions. The reality is that few brands are exclusively bought for specific consumption situations, and which brands are bought for which situation varies between consumers and over time.
• Narrow category definitions lull brand managers into a false sense of security and can result in unduly conservative growth targets. Brand managers prefer category definitions that make their brand appear to have a substantial market share – no one like to be ranked seventeenth. Therefore, narrow category definitions are commonly adopted. These also make growth potential, particularly penetration potential, appear more limited than it really is.
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• The duplication of purchase law also shows up in customer defection and acquisition. A brand will gain most of its new customers from the largest brands, and will also lose more of its customers to larger brands.
• Marketers should also worry about the total portfolio effects of price promotions. When one of a company’s brands is on special, this not only takes full-priced sales that would have happened anyway, it also steals full-priced sales from the company’s other brands.
• Brand loyalty is part of every market, even in so called commodity categories. Rather than thinking of loyalty as a market imperfection, it is more appropriately considered to be a sensible buyer strategy, one of many developed by human beings in order to balance risk and avoid wasting the precious commodity of time.
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• Loyalty is everywhere but it’s seldom exclusive – buyers purchase more than one brand, and the more purchases an individual makes the more brands he or she buys. Polygamous or divided loyalty is quite the norm. So no brand should expect its buyers to be 100% loyal.
• Light, occasional buyers favour the bigger brands. This isn’t that they particularly prefer larger brands, it is purely a statistical effect and is known as the ‘Natural Monopoly Law’ (i.e. larger brands have a monopoly on light buyers).
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• Targeting the heaviest buyers of the category (‘super consumers’) is a bit like saying “let’s be a small brand”.
• Loyalty certainly exists, but it is tempered by opportunity. People who buy from a category less often have less opportunity to be disloyal. Similarly, people who shop from stores that stock few brands also appear more loyal (e.g. people who live in smaller towns).
• Brands are a necessary evil: they add a layer of complexity to the buying decision, but they also allow for routines (“Ah, there’s my brand” or, “Oh yes, I’ve heard of that one”); such habits make buying easier – automatic even. From cars to canned soup, routine results in passionless48 brand loyalty.
• We each have a steady, ongoing propensity to think something, and for most of our beliefs that propensity is not 100%. Not surprisingly, whether or not we recall a belief is highly dependent on the situation, and is very much affected by the cues that are used to elicit the belief, and can change depending on what other things were going through our head at the time.
• The key discovery is that most of what we think about brands is not absolute. It is natural to tick the survey box that says we are completely satisfied with the brand and one hour later tick the ‘only somewhat satisfied’ box. Indeed, most of what we think about brands is so trivial, so barely thought through, that we will happily change our mind in a second
• Within every brand’s customer base there are a few people who feel much more attitudinally committed to the brand. It may be part of their self-image, used to signal what sort of person they are to themselves and to others. But the marketing consequences of these brand fan(atic)s turn out to be very limited.
• Most of a brand’s customers think and care little about the brand, but the brand manager should care about these people because they represent most of the brand’s sales; the brand needs these people if it is to increase its sales.
• In spite of nearly every textbook telling marketers to strive for differentiation, real world competition is largely about competitive matching rather than avoiding competitors by delivering differences. Furthermore, textbooks offer no evidence that differentiation leads to brand growth or profitability.
• But brand personality perceptions score very poorly – it turns out that consumers are reluctant to view brands as people (i.e. only 5% think brand X is rugged)59 – see Romaniuk & Ehrenberg 2012. These perceptions, that are weakly held by the population, are also weakly held by individuals (of the 5% who think the brand is rugged in one interview, only about a quarter of these people (about 1%) will repeat the assertion when re-interviewed).
• This body of theory and empirical evidence does not support the traditional role of differentiation presented in much marketing literature, nor does it support a ‘perfect competition’ (commodity) model. Differentiation undoubtedly exists, but empirically grounded theory suggests differentiation is best thought of as a category level (rather than brand level) phenomenon.
• The empirical data is clear, most of the successful brands in the world have very low perceived differentiation, yet they have loyal customers, they earn profits, and many of them have done so for many decades. And will continue to do so, and with low perceived differentiation.
• Marketers and agencies tend not to research and, therefore, they massively over-estimate the strength of their distinctive assets. In turn, this leads to both overestimating the degree of branding that really exists in advertising copy and over-estimating how easy a brand is to notice on shelf.
• Distinctive assets make it easier for consumers to notice, recognise, recall and (importantly) buy the brand. An emphasis on distinctiveness means less of trying to find unique selling propositions and more trying to find unique identifying characteristics.
• “Advertising troubles both sociologists and financial directors: the former because they think it works, the latter because they think it does not”
• “The sales of a brand are like the height at which an airplane flies. Advertising spend is like its engines: while the engines are running everything is fine, but when the engines stop, the descent eventually starts”.
• But most advertising affects people who won’t buy the brand for weeks, so the sales effects are spread far into the future. Hence, the effect on sales is spread so thinly over a week’s sales figures, that a change in weight of advertising delivers no visible change in sales trajectory.
• Coke’s advertisements are mostly reminding us of things we already know. By doing this, Coke is trying to increase our (very low) probability of buying it tomorrow. If it works, it changes our probability of buying tomorrow from almost nothing (say 1 chance in 400) to slightly more than almost nothing (say 2 chances in 400). This is a change in probability that is so slight we’d hardly notice, which is why people say that advertising doesn’t affect them, because it’s too subtle for them to notice. But if every person who is exposed to a single Coca-Cola ad increases his or her buying propensity from 1 chance in 400 to 2 chances in 400, Coke’s sales among this group double! 70 Therefore, even advertising that says nothing persuasive and gives no new reasons to buy can have a dramatic impact on sales – without causing people to rethink their opinion of a brand, and largely without them even noticing.
• Advertising’s effect on purchase probability occurs through the effect on memories, and memories have some ability to last.73 Whereas price discounts affect purchase probability because we like a better deal, if one of the brands that we use and notice is on sale then the chance leaps that we choose it over the other brands in our repertoire – but our purchase probabilities return to normal immediately afterwards.
• •media strategy that achieves greater reach is particularly effective; reach is more important than frequency of exposure; continuous advertising is more effective than bursts followed by long gaps, because it counteracts memory decay.
• As people screen out so much advertising, the challenge is to get past the brain’s screening mechanisms and to generate that little emotional reaction in the direction of acceptance: ‘I will pay attention to this’. Therefore, the primary task of advertising agencies is to generate outstanding creative ideas that viewers will notice and will be willing to process over and over.
• People watch movies, listen to music and read books largely for an emotional ride. They enjoy gaining the same from advertising and when they get it they pay more attention.
• Remember consumers don’t see most things in store, and its terribly difficult for new brands to be seen, let alone understood. Advertising’s crucial role is in shaping people’s brains so that the brand can be seen.
• Yet it’s commonly assumed that without persuasion advertising can’t cause sales, but this is not true. Memory structures, even if they don’t result in intentions, still cause sales – decades of research (e.g. Juster 1960) shows that sales can mostly come from people who had no intention of buying.
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• Spending money on advertising signals that a company is financially secure and/or their products are good, which is particularly important for services.
• The economist John Kay (1993) asserts that most people are inherently cynical about truth in advertising and that they automatically discount claims about quality made in advertisements that cannot be objectively assessed. In this circumstance, he argues (exaggerating somewhat), the only thing advertising can convey is the quality and quantity of the advertising itself.
• A simple (but not easy) recipe for effective advertising is: •reach all the category buyers •don’t have lapses in advertising •get noticed, not screened out, by consumers •use clear brand links – a brand’s distinctive assets indirectly brand advertising; mentioning (verbally and/or visually) the brand name is crucial; showing the product and showing the product in use is important •refresh and build memory structures that make a brand more likely to come to mind and be easier to notice •if there is a piece of information that is genuinely persuasive, then say it, so long as it does not interfere with achieving the previous objectives.
• Price promotions have an immediate and positive effect on sales. But the effect does not last; it ends when the price discount ends.
• However, research into actual buying behaviour shows that consumers do not confine themselves to one price category. Most consumers buy across a range of prices – over time they will buy the same brand at different prices and also buy brands that sit at different prices.
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• So in any particular market, there are consumers who habitually buy a range of brands and pay a range of prices. It is therefore hard to successfully target an exclusively ‘low price buyer’ segment with price promotions, because such a segment doesn’t usually exist.
• There is little scope for a permanent or semi-permanent behavioural change. In summary, what price promotions do (for established brands) is to jolt the short-term buying propensities of mainly infrequent buyers who take the opportunity to buy the brand cheaply and then resume their normal purchase behaviour afterwards (i.e. to buy it sometimes as part of a wider repertoire).
• So, will a temporary price promotion have negative after-effects for a brand? The answer is no, but repetitively doing it may have negative after-effects. This is because if consumers commonly encounter low prices and ‘deal’ signals for a brand, their reference price for it will be lowered. Also, customers will get used to seeing price-related information for the brand, which will raise the salience of price (and/or on-deal stickers) and possibly lower the salience of other important brand attributes.
• US studies (Mela, Gupta & Lehmann 1997; Mela, Jedidi & Bowman 1998) found that more frequent promotions result in heightened sensitivity to price among consumers, as well as slightly longer interpurchase times and slightly higher purchase quantities.
• Studies have found a reasonable degree of consistency in the average elasticity for temporary promotions. Danaher and Brodie (2000, p. 923) found an average price elasticity of -2.3 across 26 categories, with almost all the price changes examined being for temporary promotions.
• People are more likely to switch from brand A to brand B when B becomes cheaper than A (where previously, B was more expensive). Changing relative price positions is far more effective than just narrowing the price gap.
• Empirical results from a series of experiments (Scriven & Ehrenberg 2004) show that price increases have a bigger effect on volume than cuts do – if we consider the sole effect of a price change, divorced from extra effects of signalling or in-store support.
• An important point to make is that even very large increases in volume may still not make any extra contribution to profit. This is because, when a price is cut, the contribution margin for each item is cut even more. For example, if the normal contribution margin on a product is 50%, a 10% price cut shaves 20% off the contribution margin.
• Because the contribution margin is reduced by an exponentially increasing rate from larger discounts, the implication for managers employing price promotions is that they should make them as shallow as possible (e.g. 10% off, not 20% off). Even if this does not result in such high volume increases, at least the volume is making more contribution to profit.
• There is another factor that can impinge on the short-term profitability of a price promotion: unit sales may decline immediately afterwards. This can happen because the promotion has induced some consumers to accelerate their purchases.
• Loyalty programs produce very slight loyalty effects, and do practically nothing to drive growth. The consequent effect on profits is presumably negative.
• As you have probably suspected, loyalty programs are good at recruiting existing buyers of a brand (both heavy and light category buyers) but lousy at recruiting heavy category buyers who are not current buyers of a brand.
• Loyalty programs are not good at affecting loyalty. They are more suited to being used to build a database of consumers, creating a new channel to talk to consumers and a way of monitoring their buying in-store.
• Most loyalty programs need to collect or utilise this data if they are to recoup their investment. Unfortunately, this data is biased; it comes from more loyal buyers.
• The key marketing task is to make a brand always easy to buy for every buyer; this requires building mental and physical availability. Everything else is secondary.
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• buyers, in effect, ‘decide’ not to consider the vast majority of brands on the market. Instead they notice a few and quite often, only one – this underpins their loyalty.
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• Given how small buyers’ consideration sets are, a brand has more than a ‘sporting chance’ of being bought if it is noticed and considered. So, a brand’s sales are primarily determined by how many consideration sets it failed to enter.
• But differences in perceived product features (or brand image/positioning) only marginally explain why one brand is chosen more or less than another. It is screening out behaviour (and physical availability) that largely explains the vast and continuing market share differences that exist between even highly similar brands.
• Buyers simply know and like the brands they buy, and they are vastly more likely to notice, consider and buy these brands over others. Regardless of a lack of differentiation at a brand level or added values, brands have real market-based assets and loyal buyers.
• •Buyers are polygamously loyal; they have personal repertoires of brands that they purchase repeatedly; they are seldom 100% loyal, and are never exclusively loyal in the long term.
• These empirical patterns show that brands largely compete as branded versions of the product category, with their function, image and price differentiation (within limits) being of surprisingly low importance.
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• Buyers have a network of information (also referred to as brand associations) linked to a brand name. For example, McDonald’s is associated with hamburgers, yellow arches and fast food. These links are developed and refreshed through experiences such as buying and using the brand, being exposed to marketing activities (such as advertising) and hearing about other people’s experiences.
• When a brand scores well on traditional awareness measures but its sales are disappointing, the common conclusion is that buyers don’t like the brand. However, the problem can be that, while buyers know of the brand (and find it acceptable), they seldom think of it or notice it when they are in buying situations.
• When marketers think of competitors they often think of functional look-alikes. However, it is better to think of competitors as ‘cue competitors’. Competitors are all other options linked to the cue, as these are most likely to be thought of and compete for selection.
• Extending physical availability can be increasingly expensive, for example gaining distribution in the major supermarkets may give a grocery brand substantial availability while gaining beyond this will involve pushing into convenience stores which is logistically far more complex.
• Building mental availability requires distinctiveness and clear branding, while brands seldom compete on meaningful differentiation. This means that marketing attention should be focused on building these assets so that a brand is easier to buy, for more people and in more buying situations.
• To corporations (and their investors), these market-based assets provide security – next year’s sales will be not too dissimilar to this year’s. This is very valuable, though it also creates problems in evaluating marketing actions. Every action is moderated by these assets, so marketplace reactions become sluggish.
• Yes you are a bit differentiated, all brands are. But your main marketing battle is to win more mental and physical availability – not to be more differentiated.
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• Physical and mental availability drive market share because they make the brand easier to buy, for more people, in more situations, across time and space. This requires research to appreciate how consumers buy, and how they fit the brand into their lives.
• This means we may notice a brand on the shelf, and feel slightly more positive about it, simply because we have seen it more (or its advertising more) without the slightest realisation that this has happened.
• Even if a brand’s advertising is noticed it can’t work unless it refreshes or creates useful memory structures for the brand.
• For new brands, the emphasis must be on building the memories that consumers use to buy the brand; for example, what the brand actually does, what it looks like, what the brand name is, where it is sold and where and when it is consumed.
• A brand’s distinctive devices and sounds are processed very quickly by viewers; they are primarily used for recognition, to help work out what is going on and to assist people’s brains to access and file information. This is why distinctive brand assets work. This is branding.
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• Evaluation is over-rated. Brands largely compete in terms of mental and physical availability.
• A brand should be priced competitively: this doesn’t mean cheap and it doesn’t mean it needs to be given away on special. A competitive price is enough to attract and retain customers.
• There is no magic key to growth. It’s difficult because the potential returns are great and all your competitors are trying to grow too (at your brand’s expense). But you are much more likely to succeed when it’s understood that the key objective is to build its market-based assets.
• Growth is possible – all the laws of marketing in this book support this – and it doesn’t just depend on new products. Better advertising, better branding, better media strategy, better in-store displays by following the seven rules presented above – these are all paths to growth.
• One thing that emerges from the law-like patterns discussed in this book is that everything varies together. As brands get bigger (i.e. gain market share) their metrics move in the opposite direction to the metrics of brands that are shrinking.
• •Double jeopardy law: Brands with less market share have far fewer buyers, and these buyers are slightly less loyal (in their buying and attitudes).
• •Retention double jeopardy: All brands lose some buyers; this loss is proportionate to their market share (i.e. big brands lose more customers; though these represent a smaller proportion of their total customer base).
• Law of buyer moderation: In subsequent time periods heavy buyers buy less often (than in the base period that was used to categorise them as heavy buyers). While light buyers buy more often and some non-buyers become buyers. This ‘regression to the mean’ phenomenon reflects no real change in buyer behaviour, and happens for stable brands.
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• •Duplication of purchase law: A brand’s customer base overlaps rival brands’ customer bases in line with their market share (i.e. in a time period a brand will share more of its customers with large brands and fewer with small brands).
• Is nudging someone from one purchase to two increasing their loyalty? Yes exactly. And someone moving from buying once a quarter to twice a quarter is the same, this means that they now add to the brand’s quarterly penetration every quarter, whereas before they did so only every second quarter.
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• It’s important to remember that partitioning, while common, is usually slight. That’s why we call them partitions, not separate markets. They often require no marketing reaction, for example just because there is a partition does not mean you need to have a separate SKU or brand to service it, your existing brand may already compete very well in that partition as well as the rest of the market.
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