The Loyalty Fallacy

James Redden, Managing Director @ 2CV Asia PacificApril 28th 2016

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Some ‘truths’ about loyalty?

Extracting more from loyal customers is

the best way to grow

Superior loyalty is a key source of advantage –

marketing departments should aim to drive

loyalty higher

Customer loyalty

varies significantly

across brands

3

The growth journey of a Brazilian toothpaste brand

Market share Household penetration

Year 1 6% 22%

Year 2 10% 31%

Year 3 12% 35%

Year 4 14% 40%

What about its customer loyalty over this period?

124% 82%Change YR 1-4:

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Which brings us to today’s question – how do you grow your brand?

Which to prioritise?

2. Gain more customers

1. Gain more from your existing customers

5

Loyalty is often the priority – a common topic of discussion in marketing

177,000 = number of results when searching for ‘customer loyalty’ on Google Scholar

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Common beliefs justifying a focus on increasing customer loyalty

Customers

want deep

engagement

Increasing loyalty

increases profitability

Loyal customers are

less price sensitive

Easier to sell more to existing

customers

Cheaper to

retain existing

customers

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A well-know piece of research that reinforced the need to focus on loyalty

“Customer defections have a surprisingly powerful impact on the bottom line…Companies can boost profits by almost 100% by retaining just 5% more of their customers”

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Also much talk of ‘engagement’ – a concept closely linked to loyalty

‘Customer Engagement’ = creating closer relationships with customers

To gain higher spend & loyalty & stronger word-of-mouth

Google searches on ‘customer engagement’

The Contrarian View

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There is strong evidence that loyalty shouldn’t be the focus

THE CONTRARIAN VIEW:

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2

1Customers don’t want deep engagement with your brand

Potential gains via acquisition higher than via loyalty

Loyalty varies minimally & higher loyalty hard to achieve

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1. Most customers don’t want deep engagement with your brand

77%

^Havas Media’s Meaningful Brands UK Report 2015. https://www.marketingweek.com/2015/07/22/british-consumers-would-not-care-if-94-of-brands-disappeared/*Freemen, Spenner & Bird (2012). Three Myths about What Customers Want. Harvard Business Review. https://hbr.org/2012/05/three-myths-about-customer-eng/#http://www.mumbrella.asia/2016/04/only-13-of-singaporeans-thinks-brands-are-open-and-honest-finds-cohn-wolfe-study/

Many people simply don’t care about brands!

of brands could disappear without UK consumers caring (Havas^)

87%

94%

of Singaporeans think brands aren’t open and honest (Cohn & Wolfe#)

of people felt they had NO relationships with brands (HBR*)

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2. Potential gains via acquisition much higher than via increased loyalty

See http://www.ipa.co.uk/news/marketing-in-the-era-of-accountability-published-today#.VxdzNTB95nI

Marketing initiatives that aimed to achieve:

Research into 880 marketing case

studies by the IPA in the UK showed:

9% were successful 46% were successful

Increased Loyalty Increased Acquisition

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2. Potential gains via acquisition much higher than via increased loyalty

Conclusions from a study* of pharma brands over 10 years:

*“How to grow a brand: Retain or acquire customers?”, Riebe, Erica; Wright, Malcolm; Stern, Philip; Sharp, Byron, Journal of Business Research. May2014, Vol. 67 Issue 5, p990-997

More evidence:

“…for both growth and decline, unusual acquisition plays a stronger role…

…limits exist on the growth that can be achieved from reducing defection”

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3. Loyalty varies minimally & above average loyalty is difficult to achieve

‘Double Jeopardy (DJ)’ effect Small brands have fewer customers & (slightly) lower loyalty

Larger brandsSmaller Brands

Penetration

Customer loyalty

Loyalty is therefore primarily a function of a brand’s penetration

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3. Loyalty varies minimally & above average loyalty is difficult to achieve

Loyalty rises (slightly) as penetration rises

Difficult to achieve higher loyalty relative to penetration

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Brand Market Share Rank Loyalty Rank

Renault 1 1

Peugeot 2 2

Citroen 3 4

VW 4 3

Ford 5 5

Fiat 6 7

GM 7 6

Rover 8 8

3. Loyalty varies minimally & above average loyalty is difficult to achieve

Brand Market Share % of customers re-buying same brand

Renault 31% 64%

Peugeot 23% 60%

Citroen 12% 55%

VW 8% 56%

Ford 7% 55%

Fiat 6% 46%

GM 5% 53%

Rover 2% 35%

Auto (France)

DJ has been observed across many categories & countries

Largest brand vs. smaller brand: Market share 16x as large Loyalty twice as large

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3. Loyalty varies minimally & above average loyalty is difficult to achieve

0% 5% 10% 15% 20% 25% 30% 35%0%

10%

20%

30%

40%

50%

60%

70%

Auto (France)

Market share

Cust

omer

rete

ntion

Looking at it another way:

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3. Loyalty varies minimally & above average loyalty is difficult to achieve

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%0.0

0.5

1.0

1.5

2.0

2.5

3.0

Toothpaste (China)

Market share

Purc

hase

freq

uenc

y

10% 20% 30% 40% 50% 60% 70%0%

20%

40%

60%

80%

100%

Personal Banking (Indonesia)

Penetration

Rete

ntion

rate

s

More examples from Asia:

Largest brand vs. smaller brand: Market share 10x as large Loyalty twice as large

Largest brand vs. smaller brand: Market share 3x as large Loyalty 1.4x as large

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3. Loyalty varies minimally & above average loyalty is difficult to achieve

5% 10% 15% 20% 25%0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Instant Coffee (USA)

% buying over 12 month period

Ave.

no.

of p

urch

ases

p/b

uyer

0% 5% 10% 15% 20% 25% 30% 35%0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Sportswear (UK)

Market share

Shar

e of

wal

let

More examples from the US & UK:

Largest brand vs. smaller brand: Market share 4x as large Loyalty twice as large

Largest brand vs. smaller brand: Market share 17x as large Loyalty 1.4x as large

Revisiting Loyalty ‘Truths’

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Revisiting our loyalty ‘truths’

Customer loyalty varies significantly across brands

Instead the evidence shows:Growth likely via customer acquisition – not higher loyalty

Extracting more from your brand’s loyal customers is the best way to grow

Superior loyalty is a key source of advantage – marketing departments should aim to drive loyalty higher

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Back to our Brazilian toothpaste

Market share Household penetration

Average purchase frequency

Average share of category

requirements

Year 1 6% 22% 2.3 16

Year 2 10% 31% 2.8 19

Year 3 12% 35% 2.9 20

Year 4 14% 40% 3.1 22

Despite more than doubling market share, loyalty varied minimally

Source: Nielsen Household Panel Brazil

124%Changes YR 1-4: 82% 35% 38%

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More evidence that acquisition (rather than loyalty) drives growth

Among 12 US packaged good brands that grew significantly over 3 years:

11 of them grew primarily due to acquisition

Loyalty typically grew minimally (or not at all)#

῀Anschuetz (2002). Why a brand’s most valuable consumer is the next one it adds. Journal of Advertising Research#Dawes (2009). You Need More Customers. Marketing Research Magazine. http://www.cockrellenovation.com/blog/you-need-more-customers/*Other examples include: 1). McDonald & Ehrenberg (2003). What happens when brands gain or lose share? Ehrenberg Bass Institute for Marketing Science. 2) Baldinger et al (2002). Why brands grow. Journal of Advertising Research

Year Volume share Average purchase frequency

1 2.5% 2.5

2 3.4% 2.8

3 3.9% 3.0

4 4% 2.9CHANGE YR 1-4 60% 16%

Major dairy brand (US)῀

Plenty of other research*:

Implications for Marketing

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Implications | What is the primary role of marketing then?

Winning customers!

*Ehrenberg, Goodhardt & Barwise. (1990) Double Jeopardy Revisited. Journal of Marketing

But doesn’t mean ignore current customers! If they are unhappy, this will impede acquisition

“…product formulation, price, distribution, advertising, promotions…give brands their different sales levels…

but rarely cause big additional differences in loyalty”*

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Implications | Be informed & realistic about your brand’s loyalty

Analyse your brand’s loyalty:

1. Is it in-line with your penetration? If so, your loyalty levels are normal & aren’t worth focusing on

2. Does your brand have ‘excess’ loyalty? Try to understand why (and maintain)

3. Does your brand have relatively low loyalty?

Understand why & address – e.g. are there loyalty barriers?

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Implications | Marketing activities should emphasise reach

To win customers, ‘cast the net’ as widely as

possible

Aim to reach all buyers – particularly potential

customers

How?

SALIENT: Associate your brand with common category needs

REACH: Advertise via mediums that reach the most buyers

MEMORABLE: Stand-out – e.g. via compelling advertising

CONSISTENT: Don’t frequently change how you promote your brand

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Implications | Be wary of loyalty programs

Ask yourself:

Are there other benefits – e.g.

collecting customer data?

If aim is to retain high value

customers, what % of your sales come from this group?

Is it a ‘competitive necessity’?

(i.e. competitors all offer one)

Will it attract new

customers?

But if objective is to outperform competitors on loyalty, likely to be ineffective

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Final thought

“That retention is better than acquisition is one of the most enduring myths of marketing... potential gains from acquisition dwarf the potential gains from retention." (Sharp & Newstead 2010)

Sharp & Newstead (2010). Green Badge Fatigue. ADMAP.

Thank youJames.Redden@2cv.com2CV Singapore