BackMarketing rules to dominate the world
Reaching the large numbers of infrequent buyers efficiently and effectively is a key challenge for every company
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Wouldn’t it be great if the field of marketing had a few laws or rules that companies could follow to be successful? With India’s markets growing and Indian companies venturing abroad, such laws would come in handy. The social sciences have often been accused of “physics envy". That is that social scientists are trying to imitate the hard scientific laws of physics despite the fact—these critics argue—that no hard laws exist in the social sciences. But this is a strange criticism. In economics, for example, there certainly are a few “law-like regularities" as they are sometimes called.
One is the inverse relationship between price and the quantity bought. The higher the price, the lower the demand. Another one is the law of one price, which states that, in general, market forces will ensure that an identical product will be sold at the same price across different markets—or arbitrage will take place. Another is the counter-intuitive principle of comparative advantage from international trade, which states that countries will specialize in the production of those products in which they have the biggest relative advantage over other countries— even if that country could produce all products it wants more efficiently and effectively than other countries.
Interestingly, within the field of business strategy and marketing there are a few laws as well. Obviously, these are of great commercial value. Yet, apart from a few notable exceptions, marketers around the world are generally oblivious of their existence. These laws are generally also not taught as laws at universities and business schools. I for one would have been enormously helped, had I learned them at the start. So I have decided to write a few instalments of this column on these laws of marketing. Here we go.
The first law to be discussed was discovered by Andrew Ehrenberg (1926-2010), an eminent marketing scientist, who established it in 1959. What Ehrenberg found was that the purchase frequency of brands—across categories and countries— follows what is called a negative binomial distribution. Stated in everyday language, a small group of buyers accounts for a large portion of the sales volume. Rather than Pareto’s 80/20 rule, Ehrenberg established the law of 50/20. He found that in most markets, 50% of the market volume is bought by only 20% of its buyers.
It means, for example, that 50% of all domestic flights in India are made by around 20% of the total number of people who fly domestically. The law also holds for individual companies within the industry. So, around 50% of IndiGo’s seats are sold to around 20% of its customer population.
One aspect that makes the 50/20 rule so interesting is that it has been found to hold well across different product categories and geographies. It truly is a law-like regularity. To be sure, the exact volume bought by the top 20% of buyers varies a bit from category to category—although in a reasonably predictable way. For instance, when customers show widely different frequencies of purchase, the top 20% of customers generally account for less than 50% of the volume and there is a longer tail of light users. On the other hand, if customers in a category have more similar frequencies of purchase, the top 20% can account for up to 70% of the sales volume. So, it is important to verify the Pareto volume in your own category.
The consequences of Ehrenberg’s first law (he found more) are rather dramatic for increasing a company’s economic profits. One way to increase the value of the company is to generate revenue growth. And Ehrenberg’s law has a direct implication for that. The law implies, to state it with some hyperbole, that all marketing is mass marketing. Significant value creation through revenue growth cannot be achieved through a focus on the top 20% of buyers alone. Every brand with growth ambitions must also actively convert the 80% of light users in their category, as these people generally account for another 50% of total industry sales. Obviously, selling to large cohorts of infrequent buyers requires a different approach than dealing with a small group of heavy users. Reaching the large numbers of infrequent buyers efficiently and effectively is therefore a key challenge for every company. Even if you operate in a so-called niche, you still need to reach the 80% of light users in your niche. Even niche marketing is mass marketing.
This goes somewhat against the conventional wisdom that brands, in order to grow, should focus on increasing loyalty and getting even more sales from their heavy users. While that is not necessarily wrong, Jet or IndiGo or any other airline could never reach market dominance without a high penetration among the approximately 80% infrequent fliers who buy half of all seats on domestic planes. The same goes for other industries and categories. What is more, Ehrenberg found another law which supports the focus on market penetration rather than customer loyalty. This second law is the subject of the next column. Stay tuned.
Tjaco Walvis is managing director of brand consulting and advertising agency THEY India, and a speaker at the Outstanding Speakers’ Bureau. He writes a fortnightly column on the softer cultural aspects of marketing that often tend to be ignored by marketers.
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