The Loyalty Fallacy by 2CV Research
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1. While loyalty is often seen as a key priority for marketing departments, the evidence shows that potential gains from new customer acquisition are typically higher than gains from increased loyalty alone. 2. Customer loyalty varies only slightly across brands and is primarily determined by a brand's market penetration, making it difficult to achieve significantly higher loyalty levels. 3. For most brands, growth comes more from winning new customers rather than extracting more from existing loyal customers, as loyalty increases only minimally even for fast-growing brands. The primary role of marketing should be customer acquisition, not loyalty improvement.
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The Loyalty Fallacy by 2CV Research
- 1. The Loyalty Fallacy James Redden, Managing Director @ 2CV Asia Pacific April 28th 2016
- 2. 2 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. 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:
- 4. 4 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. 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
- 6. 6 Common beliefs justifying a focus on increasing customer loyalty Increasing loyalty increases profitability
- 7. 7 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. 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’
- 10. 10 There is strong evidence that loyalty shouldn’t be the focus THE CONTRARIAN VIEW: 3 2 1 Customers don’t want deep engagement with your brand Potential gains via acquisition higher than via loyalty Loyalty varies minimally & higher loyalty hard to achieve
- 11. 11 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*)
- 12. 12 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
- 13. 13 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”
- 14. 14 3. Loyalty varies minimally & above average loyalty is difficult to achieve ‘Double Jeopardy (DJ)’ effect Small brands have fewer customers & (slightly) lower loyalty Penetration Customer loyalty Loyalty is therefore primarily a function of a brand’s penetration
- 15. 15 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
- 16. 16 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
- 17. 17 3. Loyalty varies minimally & above average loyalty is difficult to achieve 0% 10% 20% 30% 40% 50% 60% 70% 0% 5% 10% 15% 20% 25% 30% 35% Customerretention Market share Auto (France) Looking at it another way:
- 18. 18 3. Loyalty varies minimally & above average loyalty is difficult to achieve 0.0 0.5 1.0 1.5 2.0 2.5 3.0 0% 5% 10% 15% 20% Purchasefrequency Market share Toothpaste (China) 0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% 50% 60% 70% Retentionrates Penetration Personal Banking (Indonesia) 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
- 19. 19 3. Loyalty varies minimally & above average loyalty is difficult to achieve 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0% 5% 10% 15% 20% 25% 30% Ave.no.ofpurchasesp/buyer % buying over 12 month period Instant Coffee (USA) 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0% 5% 10% 15% 20% 25% 30% 35% Shareofwallet Market share Sportswear (UK) 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
- 21. 21 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
- 22. 22 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%
- 23. 23 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% 2.9 CHANGE YR 1-4 60% 16% Major dairy brand (US)῀ Plenty of other research*:
- 25. 25 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”*
- 26. 26 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?
- 27. 27 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
- 28. 28 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
- 29. 29 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.
Editor's Notes
- Talking today about loyalty. Before we start – I am talking about behavioural loyalty (e.g. repeat purchases, share of wallet, re-subscription, etc.), rather than emotional loyalty. So using the term loyalty broadly – any measure that looks to measure how much value a company is extracting from individual customers
- Various assumptions exist around loyalty – namely… Keep these assumptions in mind as we go through this presentation and we will re-visit them later
- Let’s use this as a case study – a brand that has shown impressive growth in its customer base. It’s market share and penetration grew strongly, but what about it’s customer loyalty measures? I will show the results later
- Two broad strategies – extract more from your existing customers or gain more customers Combination of both typical, but which will deliver the most?
- Improving loyalty is often the priority – it is widely discussed in marketing circles, research and conferences are dedicated to it, companies sell solutions to improve it. Also seen in surveys of CEOs and CMOs – loyalty is typically of high importance
- So why the focus on loyalty? This has been driven by a series of beliefs that have become ‘common wisdom’. You’ve already probably heard these over the years – many of which come from the aforementioned Harvard Business Review study (plus other similar pieces of research). First two relate to the idea that extracting more from existing customers is cheaper and easier to achieve than winning new customers. The next two relate broadly to profitability And finally the idea that customers do want deeper engagement with brands
- This quite famous paper in the Harvard Business Review has been widely read and quoted – argued that significant increases in profitability are possible with even small improvements in customer loyalty
- The use of ‘loyalty’ has in some ways been superseded by the more fashionable term ‘engagement’, which has particularly come to the fore since the rise of social media. I’d argue this is closely linked to loyalty in a broad sense – extracting more from your existing customers
- But there is another school of thought on this – that focusing on loyalty is not a path to growth. Let’s look at this view in detail
- Here are the contrarian arguments. Customers care less about your brand than marketers believe. There is much bigger scope to grow via acquisition than loyalty Loyalty typically varies only minimally across brands and higher loyalty is hard to achieve Let’s look at these arguments
- Point number 1 – customers don’t want deep engagement with brands Plenty of evidence that we don’t want what many marketers are trying to achieve – deep relationships are what we have with people, less so with brands Another example is social media – a Forrester study showed that the average rate of engagement among a brand’s Facebook fans is 7 in 10,000. So only a tiny percentage what ongoing engagement with brands
- Point number 2 – gains via acquisition are much higher than via increased loyalty This very comprehensive IPA (marketing trade body of the UK) research shows that gains via loyalty are rare
- More evidence – a 10 year study of pharma brands showed that brands tended to grow and shrink due to higher or lower acquisition – not changes in loyalty
- Point number 3 – loyalty varies minimally across brands and it is hard to affect. While larger brands have many more customers than smaller brands, they typically only have slightly higher loyalty. So very hard to ‘move the needle’ on loyalty as loyalty tends to be similar across brands, and only grows as your penetration grows
- Another way to view the double jeopardy law. Most brands sit near the double jeopardy line. For example a study 450 repeat purchase brands across emerging markets showed that only 10% of brands substantially deviated from expected loyalty level (HBG 2: page 13. Truong (2014).
- Double jeopardy has been shown to exist across many categories and countries Here is one example from the car market in France. Clear correlation between market share and loyalty measure. And while market share varies significantly, loyalty varies much less Can be seen more clearly with the rankings Sharpe & Dawes 2002
- Looking at the same data in another way. Shows a clear correlation. But the line is noticeably flat – this is due to the more minor variations we see in loyalty, relative to market share or penetration
- Not just a developed or Western market trend – evident in Asia and emerging markets in other regions such as Africa I do have some more examples in the full report – including sportswear & instant coffee.
- Very similar patterns – loyalty correlated with market share/penetration, with loyalty varying to a lesser degree
- There is no support for these – in fact the evidence points to the opposite – customer acquisition is the way to grow and growth via increased loyalty is unusual
- Back to the earlier example – this is a very typical pattern of a brand that grows – it’s due to winning more customers, rather than increased loyalty This pattern has been shown repeatedly in other research into brands that have grown or declined (more examples are in the full report)
- And that isn’t an isolated case – there exists plenty of academic research showing the same patterns
- With limited time and budget, marketing efforts in general should avoid activities that explicitly target loyalty & prioritise activities that will boost penetration. It doesn’t mean once you win a customer to ignore them – negative word of mouth will naturally impact acquisition. But the first role of marketing is to bring in more users
- Important to analyse your brand’s loyalty to understand where it sits relative to your brand’s penetration and take appropriate action. But numbers 2 & 3 are unusual and unlikely to apply to your brand
- So if you are looking to reach non-customers, marketing needs to emphasise reach Important to capture the attention of people who aren’t using your brand currently Associate your brand with key category needs Do this by favouring mediums that reach the most buyers Ensure your brand is memorable – for example via great emotion-based advertising Be consistent – if you change your brand’s message often it will only confuse buyers
- Loyalty programs will make sense in many cases, but marketers need to have their eyes wide open about them. Generally they won’t deliver superior loyalty performance, but they can be necessary for other reasons – e.g. acquisition, retaining high value customers, collecting data