A discussion on loyalty


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Loyalty can be defined from verity of angles, such as repeat purchase vs. weight of purchase, or from the attitudinal stand point to be an aspired brand. This article advocate’s the use of weight of purchase as the most legitimate Loyalty measure for FMCG categories. It is usually measured via SOR which is derived from household panel data

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A discussion on loyalty

  1. 1. A question of loyalty: Not all loyal consumers are profitableMuhammad Zubair is CEO of Foresight Research (Pvt.) Ltd. He can be reached atmuhammad.zubair@foresight.com.pkLand line: (+92-213) 4527302, 4527402 Ext. 100Cell: (+92) 321-2007179We all are fully aware with the importance of loyalty in building and growing brands.Loyal consumers purchase your brand in larger quantity and more frequently. Theyalso spread positive word of mouth for you, and make purchases to your brands inother product categories. They fight with the competition on your behalf (serves as astrong barrier to entry and provides your brand security/guarantee), and for thefinance guys, they are the one who are willing to a pay a little extra for your brands.If above are not enough to prove the importance of the loyal consumers, it is a wellestablished fact that it costs 7-10 times more to recruit a new customer than to keepan existing one.What is Brand Loyalty?It is not surprising that there exists so many definitions of loyalty – naturally given itsimportance; both academics and professionals have given it their attention. Inliterature on consumer behavior, we find debates on attitudinal loyalty vs. behavioralloyalty. However, marketers around the world have always been more interested inbehavioral loyalty – something that’s easily translates into dollar value.We define loyalty in the context of FMCG as “the percentage of total category spendwhich users of the brand allocate to the brand.” To explain this definition, let’s takethe hypothetical data of 5 households in table 1: Table 1: household spending on skin cleansing by 5 households Household # Lux Dettol Safeguard Total 1 2 1 2 5 2 - - 4 4 3 - 5 - 5 4 3 1 1 5 5 1 3 2 6 Total 6 10 9 25
  2. 2. So, household 1 spends total of 5 rupees on the category and she distributes thembetween 3 brands (Lux: 2 rupees, Dettol: 1 rupee and Safeguard: 2 rupees). Whilehousehold 3 also spends 5 rupees on the category but spend it all on Dettol – thisdifference is the basis of loyalty, i.e. how consumers allocate their spending ondifferent brands.So, loyalty for Lux is: total spending on Lux * 100 total category spending by Lux users = 6 * 100 = 37.5%, 16(To arrive at total category spending by Lux users, add the total categoryconsumption by Lux users, i.e. total consumption of households’ number 1,4 & 5:5+5+6 = 16).Similarly loyalty for Dettol is: 47.6% and for Safeguard it remained 45%. So, Dettolusers were more loyal to it than both of Lux and Safeguard.Globally this is called SOR (share of requirement). This looks into the householdpurchase pattern to analyze if the household is using a single brand or multiplebrands at a time.Typically, consumers start with a trial purchase of the brand and, after satisfaction,tend to form habits and continue purchasing the same brand because the product issafe and familiar.Loyalty is not repeat purchaseQuite often marketers take repeat purchase as a synonym of loyalty. While all loyalconsumers are repeat purchasers, reverse is not true. Let’s take an example fromdetergents category. A consumer could be buying a sachet of Ariel every month – soshe is a repeat purchaser of the brand. However, she uses it only for washing herexpensive clothes, while for her regular laundry she uses Bonus. So, every monthshe spends about 10 rupees on Ariel while about 60 rupees on Bonus. Which brandis she loyal to? Definitely not to Ariel!
  3. 3. Is loyalty (SOR) data for FMCG products available in Pakistan?Foresight Research (Pvt.) Ltd. runs the only household panel in Pakistan. The panelcurrently covers about 25 FMCG categories on the National Pakistan basis, i.e. bothurban and rural Pakistan are covered. It provides facts on household behavior likepenetration, loyalty, source of gain/loss, retained/lapsed users, etc.Loyalty for all brands/ skus/ variants is available with Foresight for the 25 productcategories.How loyalty (SOR) explains brand strength?We looked at household panel data and compared the loyalty distribution of 3detergents brand: Surf Excel, Ariel and Brite. The splits were 0-50, 51+%, where 0-50 shows the percentage of buyers who allocate 0-50% of their category spendingon the analyzed product. These groups were labeled as; non-loyal and loyal buyers,respectively.Volume share of these brands as per Foresight household panel, are shown in chartA below. Chart A: Volume share trend: Foresight Household Panel 40.0 35.0 33.8 30.0 25.0 Surf Excel 20.0 Ariel 17.5 15.0 Brite 10.0 9.1 8.2 5.6 5.0 5.7 6.1 5.0 4.8 1.9 2.9 2.7 0.0 Oct 03 Oct 05 Oct 07 Oct 09Over the period of 6 years, Surf Excel has increased its volume share 4 times(33.8% up from 8.2% in October 2003), Brite has also increased its volume sharewhile Ariel had declined. (Market definition also includes loose/ unbranded andhome-kit powders). In below we analyze how loyalty has contributed in brand growth/decline.
  4. 4. Table 2 below shows the distribution of brand users into loyal and non-loyal users.For example, 56% of Ariel users were loyal to it in October 2003, while only 43%remained loyal to the brand in the October 2009.Table 2: Distribution of users into Loyal/ Non-loyal consumers Ariel Brite SXL Penetration % Oct 03 Oct 09 Oct 03 Oct 09 Oct 03 Oct 09Monthly penetration - % 14 7 13 17 19 52% of: Loyal 56 43 39 31 63 60 Non-Loyal 44 57 61 69 37 40Table 3 shows the volume contribution to the brand from loyal and non-loyalconsumers. In October 2003, loyal consumers account for 75% of Ariel volume,which shrunk to 65% in October 2009.Table 3: Volume contribution from Loyal/ Non-loyal consumers Ariel Brite SXL Penetration % Oct 03 Oct 09 Oct 03 Oct 09 Oct 03 Oct 09% of brand volume from: Loyal 75 65 26 61 81 80 Non-Loyal 25 35 74 39 19 20Comparing tables 2 and 3, we can very easily comprehend the factors behind SurfExcel phenomenal growth: while it increased its user base (from 19% to 52%: table2), it maintained the proportion of loyal users in its repertoire and 4/5th of its volumecontinues to come from such consumers.Brite’s volume share had also increased - brand is increasingly dependent on itsloyal consumers (contribution of loyal users gas increased to 61% from 26%).In case of Ariel, both the proportion of loyal users and their contribution in Arialvolume have declined – resulting in the share loss for the brand.
  5. 5. Is there a competition brand becoming a potential threat – SOR Matrix?Few consumers use a single brand – even loyal consumers do flirt with other brandsoccasionally. So, it is important to monitor what other products fill your consumershopping basket. This is also important, as loyalty for your brand may remain thesame over the period of time, a competition brand may become stronger in yourhouseholds. For instance, we produce Foresight Household Panel data for skincleansing category for the period of Q2’ 04 till Q2’ 05 in table 4 below.Reading table 4: in quarter II ‘04, share of various brands in Lifebuoy householdswere: Lifebuoy 45%, Lux 18%, Safeguard 6% share, etc.Table 4: SOR matrix Lifebuoy (share of other brands in Lifebuoy-user households) Qtr II 04 Qtr III 04 Qtr IV 04 Qtr I 05 Qtr II 05Lifebuoy SOR - % 45 44 45 44 45Share of other brands in Lifebuoy users households - % Lux 18 17 18 18 15 Safeguard 6 8 10 11 15 Capri 3 3 3 3 3 Palmolive 2 3 2 2 2 Tibet 5 5 4 5 7 Dettol 1 2 2 3 4SOR matrix above rings the early alarm for Lifebuoy: while its loyalty remained un-changed, Safeguard is becoming very active among its users, at the moment it iseating up other brands from the Lifebuoy repertoire – however, if the trend continuesit will start challenging Lifebuoy in its own households. This is what exactly happenedin later years. So, this kind of analysis actually warns you if you are heading to adisaster.
  6. 6. Does all loyal consumers equally important?Not necessarily all loyal consumers are important. There is a direct relationshipbetween heaviness of spend and number of brands purchased, i.e. heavy users ofthe category will buy more number of brands than light users of the category. So, alight category buyer is more likely to be the loyal user of the brand, but notnecessarily as profitable to the company as a heavy category buyer with relativelylower loyalty towards brand.So, while designing strategies to reward your loyal users – think to reward onlyprofitable loyal consumers.ConclusionLoyalty is how much you spend on the brand vis-à-vis total category; it is definitelynot the repeat purchase only. For FMCG categories, it is usually measured via SORwhich is derived from household panel data – this data is available in Pakistan fromForesight Research (Pvt.) Ltd.