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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”
8
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 [email protected] Singapore