For those who missed the previous instalment of this column, I’m doing a small series on laws in marketing strategy. These laws are remarkable regularities in the way markets work. As a result, they are critical to any company’s long-term economic and social success. The first one we discussed is the law of 50/20. It states that in most markets, 50% of the volume of a certain product or service category is bought by 20% of all buyers. Consequently, any company’s sales come from roughly 20% of its customers. To grow, one must find a way to convert the 80% of non-frequent buyers, who represent 50% of market volume. This is something almost every company must think about.

The second law, today’s topic, looks at the difference between big and small brands, and provides guidance for growth. The second law states that big volume brands have more individual customers than smaller brands, and these customers repurchase the brand only a bit more frequently. Stated differently, big and small brands differ strongly in the number of customers, but little in terms of customer loyalty. Brands grow their market share primarily by improving their market penetration rate. Conversely, when brands decline, their numbers of customers show much faster decreases than their average loyalty rates.

One consequence of the second marketing law is that increasing volume by boosting loyalty and purchase frequency is generally difficult, except when you have a strong customer lock-in or brand-switching barriers. Like the first one, the second law was established by Andrew Ehrenberg, in 1969. Subsequent studies by Ehrenberg and others have confirmed it to be a law-like pattern.

The key to understanding it lies in two often-overlooked facts, that in most industries over longer periods of time: (a) brands share a large part of the customer population of the category and (b) the purchase timing of customers is irregular. In short, customers in most industries are irregular polygamous buyers (not regular monogamous ones) so that brands basically share the category’s customer population over time. If purchase timings are irregular, this year’s heavy users can be next year’s light users.

This would hold equally for all competitors in the industry, unless one has significant competitive advantages. As a result, competing brands in most industries serve similar people in terms of demographics, psychographics, values, attitude towards their favourite brands, etc. Naturally, brands with different price and quality levels usually do have different user profiles. But they then operate in a different segment within the category.

What does this mean? It means that to build sustainably high yearly volumes, most companies in most industries must focus on building high penetration across the entire customer population of the segment or industry, not just heavy users. As the difference between big and small brands is primarily in market penetration, not loyalty, the key to becoming and staying big is to focus on increasing and maintaining your long-term market penetration rather than count too much on loyalty programmes aimed at your best customers.

If you are a sports brand like Adidas, for instance, suppose your market share in India would be relatively stable at say 35%. Yet, over a period of three years, around 60% of all sports apparel customers may have bought something of your brand at least once. For huge brands like Coca-Cola, penetration can approach 100% over long time periods. Almost all soft drink users—even Pepsi and Fanta fans—will have bought Coke at least once in a period of, say, three years. Coca-Cola would need to increase the propensity to buy Coke among close to 100% of the customer population.

Building market-wide penetration is a task of long term, positioning, product and service development, distribution management, communication, etc. Loyalty programmes generally use quickly changing promotional activities to persuade extra sales out of current users, reaching only a small part of the customer population. Instead, they ought to be aimed far beyond your current users, to include the light users and current non-users of the category.

Of course, loyalty can be increased structurally by increasing switching costs. Apple computer users, for example, must change their software if they would switch to a Windows-based machine. This locks them in and results in increased loyalty. Companies do not like to switch banks because the required changes in administrative procedures creates a lot of hassle, increasing loyalty. But these forms of loyalty are not created through loyalty programmes, but result from structural characteristics of the product or the way services are provided. If you can create them, they can increase your market share consistently.

Otherwise, even if you are not the market leader, all marketing is mass marketing.

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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