Reaching more customers builds businesses – Loyalty doesn’t

The best marketing book I’ve read is Professor Byron Sharp’s “How Brands Grow”. I’m delighted to see that the follow-up book “How Brands Grow: Part 2” is now available in store. There is also a 48 min video available on YouTube summarizing his first book. If you work with marketing or study marketing in any way I consider this book a must read. What I like with Professor Sharp is that he doesn’t favor anything, but rather seeks the truth proven by data.

If you think about growing your business it intuitively sounds like you have two options: 1) have more people by from you (growing penetration), or 2) have people who already buy from you buy more/more often from you (growing loyalty). The essence of what Professor Sharp has proven is that you can only grow your business by growing penetration, i.e. have more people buy from you, not by growing loyalty.

This comes as a shock to many, especially when first facing this proof. Loyalty sounds so great, who wouldn’t want to drive loyalty? The fact of the matter is that within any given industry (and this is valid across industries), the relative loyalty between different players is roughly the same. The biggest players have somewhat higher loyalty than the small ones, but the difference is really small. What differs between the players, and what correlates with revenue, is penetration.

These charts summarizes this proof really well. The first one showing different washing powders, and that the loyalty (purchase frequency) is the same independent of size of brand, while what really varies and correlates with the market share is the penetration.

Washing powder brand

Market share (%)

Penetration (%)

Purchase frequency (loyalty)

Persil

22

41

3.9

Ariel

14

26

3.9

Bold

10

19

3.8

Daz

9

17

3.7

Surf

8

17

3.4

Average

3.7

Another example is insurances, where the loyalty (number of products held by each customer) doesn’t vary between brands, but penetration does. What this means is that the strategy often referred to as “trade across”, i.e. having existing customers buy more of your products, which sounds like a good strategy, in fact isn’t a viable strategy. Instead, for each product in your insurance portfolio you need to reach many people and drive penetration if to grow revenue, not try to build loyalty.

Insurance provider

Penetration (%)

Average no of products (loyalty)

RAA

16

1.5

CGU

14

1.4

SGIC

13

1.5

AAMI

9

1.5

APIA

6

1.4

Average

12

1.5

Professor Sharp has proven that this is the case across industries. This also goes for more iconic brands such as Apple and Harley Davidson. Harley Davidson and Apple buyers are on average not more loyal to Harley Davidson and Apple than they are to Honda and Asus.

So if you want to grow your revenue (and most businesses wants to do that), you need to grow your customer base, and if you want to do that you need to reach more people tomorrow than you did today with your brand advertising/communication.

Now, why is it the case that penetration works but loyalty doesn’t? Well, it’s fairly straight-forward. The reason is that people on average don’t care about your brand. People care about stuff such as sending their kids to school, making ends meet, getting a good night’s sleep, finding love etc. Most of them couldn’t care less about you. Therefore, the vast majority of your revenue will come from people who doesn’t care about your brand. People caring about your brand will only represent a fraction of your revenue, and you don’t really need to advertise towards them since they will find you either way. So any talk about building “love brands” is only imagination, not business strategy. It’s not proven. It doesn’t work. What works is reaching more people with your message. A message that has to add value/be relevant, stand out/be distinct and have a clear sender to maximize the impact of the reach.

If you haven’t read How Brands Grow yet, take the time to do so. It’s worth reading if you’re serious about marketing.

Keep it simple, have fun and think BIG.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s