7 Rules of Marketing that Get Results
Page 7
Of course, people display loyalty to brands. However, the nature of their loyalty is totally different from what is described by the marketing establishment. As I’ll explain in later chapters, real cause and effect bears no resemblance to the claims made by traditional marketers (details in chapters 46, 47, 48, 49, 50, and 51).
What most marketers think they know about brand differentiation and brand loyalty is the exact opposite of what empirical findings tell us. The result of this misleading information is that most companies are wasting their resources on the wrong approach and implementation.
These two factors that shape the basic beliefs of the marketing world are like believing the sun revolves around the earth. Scientific marketing proves the opposite is true.
24.
Marketing Is about Managing a World of Possibilities (The Origins of Scientific Marketing)
The first social scientist to use scientific methods in the field of marketing was statistician Andrew Ehrenberg (of the Ehrenberg-Bass Institute for Marketing Science). He was the first scientist to examine consumer panel data and discover that people’s shopping behavior was surprisingly ordered. He discovered this pattern in the late 1950s, when his boss asked him to study the consumer panel data of shoppers who purchased Cadbury’s chocolate beverage in the British market over the course of one year.
Looking at the data, Ehrenberg found that most of the consumers bought Cadbury very infrequently. Being a statistician, he experimented with various statistical models before finding that human purchasing behavior was consistent with a model called Negative Binomial Distribution (NBD). This was an unexpected finding. Prior to Ehrenberg, no one had considered that a statistical distribution could explain people’s purchasing behavior. This was invaluable information because if certain parameters were known, by using this distribution formula it would be possible not only to explain what shoppers had done in the past, but also to predict what they would do in the future.
After numerous data-based studies, in 1984, Ehrenberg and his coauthors Gerald Goodhardt and Chris Chatfield published a paper that proved that another statistical model, the Dirichlet distribution (a special form of NBD), explained shopper behavior in almost every product and service category. (See Goodhardt, et al., “The Dirichlet,” in References.) Specifically, according to John Bound, the Dirichlet model predicts the following performance standards for every brand competing in a market:
Percentage of category buyers buying the brand at all (penetration)
Percentage buying the brand once and five times in the designated period
Average number of purchases of the brand per buyer of the brand
Average number and distribution of the numbers of purchases of the category by buyers of the brand
Share of category requirement (the percentage of a specific brand within the total purchase volume)
Percentage of sole buyers (A sole buyer is one who buys only one brand in the category in the period.)
Rate of purchase of sole buyers
Percentage of repeat buying period to period
(For more information, see John Bound’s work in References, and further details in chapter 100)
The Dirichlet model turns real-world observations into meaningful generalizations. It’s a valuable tool that gives marketers a way to measure a brand’s performance criteria—in other words, the norms. Marketing directors can make the best decision by analyzing these norms.
It was the late 1950s before this information first began to disseminate, but even today Dirichlet is a subject about which many marketing professionals (just like me until 2015) are completely unaware. The fact that there is a statistical distribution explaining people’s shopping behavior is still astounding for many marketers. Thus, the majority of people in the field believe that marketing is an art and not a science. In marketing, there is a widespread belief that there are no measurable cause–effect relationships, so no one expects marketing gurus to prove their views with data in this field.
Ehrenberg was later joined by fellow scientists, and finally, in 2005, the Ehrenberg-Bass Institute for Marketing Science was founded. The most valuable contribution that Andrew Ehrenberg and the Ehrenberg-Bass researchers made was demonstrating that empirical generalizations can be made in the marketing field too—and that these generalizations are valid in almost every product category in every country, much like the laws of nature.
Below are the empirical generalizations that I’ll describe in greater detail later in the book.
Every consumer purchases from a repertoire of several brands in most product categories. People generally aren’t loyal to a single brand. They consume more than one brand of clothing, frequent more than one restaurant and shop at more than one supermarket during the same period. People are, at the same time, loyal to all of the brands in the repertoire they’ve created for themselves. As Byron Sharp says, “People are polygamous in their loyalties” (details in chapter 46).
In every brand’s base of users, consumers (customers) who are 100% loyal to a brand—in other words, who don’t purchase any other brand in the category and satisfy all of their needs with this same brand—are people who use the brand very infrequently. They use the brand so infrequently that they have no opportunity to select another brand. The very small percentage of people who are both heavy users and purchase a single brand is negligible (details in chapter 49).
Heavy users are people who buy many brands in that category. Because they are high-volume purchasers, they have opportunities to buy many different brands in the category (details in chapter 28).
People don’t change their brand repertoires over short periods of time. They add or remove a brand from their repertoire when they get married, move, change jobs, have children or experience a significant change in income, or when their lifestyle or tastes change (details in chapter 29).
Every brand sells to all consumers in its own category. For example, most consumers of vegetarian pizza aren’t vegetarians, but they are pizza eaters; and most consumers of diet cola aren’t generally on a diet, but they do like cola or low-calorie drinks (details in chapter 44).
Even in the sectors where consumers don’t often make new purchase decisions, such as their electric company, cell phone provider, banking and insurance, the Dirichlet patterns hold true but may not be observed in a short period of time (details in chapter 36).
In real life, no shopper is confined to a single brand. The purchase of a brand by a shopper is the realization of a single possibility from a myriad of different options. Thus, consumer behavior is subject to probabilities. Therefore, the most important task that every marketing director should undertake is to increase the probability that their own brand will be chosen by shoppers.
All marketers should be asking themselves three basic questions:
How should I advertise my brand so that people make it part of their repertoire?
How can I ensure they remember my brand when they go shopping?
Since the brand I am marketing has characteristics similar to those of rival brands and is priced about the same, what can I do to make it easier for shoppers to purchase my brand at points of sale?
Managing the marketing of a brand is essentially managing this world of possibilities.
25.
Marketing Is a Science
Newton’s theory is an explanation of the universal attraction between objects. This theory is valid in every corner of the world all the time. Scientific theories not only explain what has happened but also predict what will happen in the future under certain conditions.
As Byron Sharp says, any discipline that’s not enlightened by science is dominated by people’s beliefs and personal views, and these are generally a long way from the truth. Until Copernicus, people believed that the world was the center of the universe. Everyone thought that the sun orbited the earth.
Thirty years ago, no one knew what caused ulcers. In 1982, the Australian microbiologist Barry Marshall found that a bacterium (Helicobacter pylori) was responsible. However, the medical community in general, and internationally renowned gastroenterologists in particular, accused Marshall of charlatanism. Even though he defended his theory at numerous medical conferences, Marshall was ignored because all doctors were “sure” that ulcers were caused by too much acid in the stomach, spicy food and stress, etc.
Marshall was unable to convince anyone, so in 1984 he performed an endoscopy in the presence of witnesses to prove that his stomach was healthy. Then in the presence of witnesses he drank a glass of water containing the bacteria (Helicobacter pylori) and showed them the ulcer that quickly formed in his stomach—after which he cured himself with a one-week course of antibiotics. In 2005, Marshall and his assistant Robin Warren won the Nobel Prize. Now, doctors around the world treat people with ulcers using a course of antibiotics. There is no longer any difference of opinion among doctors when it comes to this issue. The scientific method put an end to this controversy.
However, scientific practices are still lacking in certain areas of medicine. For example, nutrition and diet are areas that have still not been fully illuminated by science. Therefore, every doctor and specialist has their own opinion or belief. What one recommends is prohibited by another. This is similar to the ulcer controversy of 30 years ago, and it will obviously continue until a scientific theory proves itself in this field.
Marketing is a field where scientific enlightenment has only recently begun. However, this field is, unfortunately, dominated by the “opinions” and “beliefs” of internationally acclaimed professors and authors. There is no scientific evidence that their prescriptions work, but almost everyone accepts and practices what they preach.
The success of unscientific prescriptions in any field depends entirely on chance and circumstance. Although such methods may occasionally provide good results, they aren’t consistent or sustainable. Yet, we’ve all accepted the “views” of the internationally acclaimed marketing gurus and implemented them.
I believe that the marketing laws developed by the Ehrenberg-Bass Institute have started a revolution in the world of marketing. In the following pages, I’ll elaborate on the laws found in Byron Sharp’s book titled How Brands Grow. I sincerely recommend that anyone interested in marketing study these laws and update their approach accordingly.
26.
Double Jeopardy Law (Law 1)
According to Sharp, this law is the fundamental law of marketing. All of the other laws are derived from this one.
Double Jeopardy Law: Small brands both have fewer customers (consumers) and suffer from lower rates of customer loyalty.
This phenomenon had been noted as early as 1963, when sociologist William McPhee observed that the least known Hollywood film stars were also the least liked. McPhee had encountered a similar phenomenon in his research on radio listeners. A radio station with a smaller audience had slightly fewer loyal listeners than the average. Later, Andrew Ehrenberg would encounter the same phenomenon in the world of brands. His research found that smaller brands had a smaller percentage of loyal users than large brands.
When I first started doing market research, I discovered this same fact while studying Turkey’s most popular vocal artists. When I asked people which artists they knew and which ones they liked, I was surprised to find that the most well-known artists were also the most liked artists, while the least well-known were also the least liked.
Furthermore, I realized this phenomenon applied not only to celebrities but to every issue I studied. I found that the most sold brands had a greater percentage of loyal customers. However, nobody expects a relationship between brand loyalty and the size of the brand; in fact, one may think that a small brand is positioned perfectly to have a more loyal customer base than a large brand. But my researches demonstrated repeatedly that small brands did not generate more loyalty than large brands. This “formula” held true in all of the research I conducted and was in fact driven by a marketing law. I didn’t realize this until I read Byron Sharp’s book How Brands Grow.
To illustrate this law, Byron Sharp gives an example from the US shampoo market. The market share of the largest brand (A) is 12%, and the market share of the smallest brand (Z) is 1%. Although there is a huge difference in market share between the two brands, when we examine the repeat purchase (loyalty) of these brands, we find that there’s not a large difference. Brand A was purchased on average twice a year, while Brand Z was purchased on average 1.2 times per year. There is a twelvefold difference in market share between the largest brand and the smallest brand, but the difference in purchase frequency (loyalty) between the two brands is less than twofold. From this, we deduce that the reason a large brand is bigger isn’t because it sells more to the same people, but because it sells to a greater number of people.
When we compare large and small brands in any product category anywhere in the world, we find two things to be true:
Large brands have a “much higher” number of consumers than small brands.
The percentage of loyal customers of large brands isn’t very different from that of small ones, yet it’s always “a little” higher.
For every brand there are two sources of growth. The first is the number of buyers, and the second is the repeat purchase of every single buyer. What essentially separates a large brand from a small brand competing in the same market is the number of customers (consumers) they have. The loyalty achieved by large brands contributes to their growth, but it has a limited effect because large brands only generate “a little” more loyalty than the category average.
First McPhee and later Ehrenberg gave the name “Double Jeopardy” to this phenomenon of small brands having both fewer users and slightly fewer loyal customers. According to the Double Jeopardy Law, small brands take a double hit.
Again, for emphasis:
Double Jeopardy Law: Small brands both have fewer customers (consumers) and suffer from lower rates of customer loyalty.
As Byron Sharp says, this extremely straightforward law is the most important law of marketing. I would suggest that those who think this law is overly simple remember that this is, in fact, the primary purpose of science—namely, to establish very simple cause–effect relationships between phenomena that appear to be very complex.
One day while I was writing this book, I tweeted the following sentence on Twitter: “The reason large brands are large is because they have more customers.” A former customer for whom I used to regularly conduct market research sarcastically replied, “Horses have four legs.” He took a derisive tone with me as if I had stated an axiomatic truth, such as “Rain makes you wet” or “The sun generates heat.” As Byron Sharp says, when science starts to illuminate any field, most people believe the fallacy that scientific laws are too simple. Yes, scientific truths are frustratingly simple compared to the myths, but, for instance, this extremely simple Double Jeopardy Law has the power to debunk all of the myths propagated by traditional marketing.
The Double Jeopardy Law applies to every product category in every country. According to Ehrenberg, the double advantage of bigger brands is due to “selection effect.” Whatever is larger attracts more attention, is more popular and is preferred more often.
Thus, according to the Double Jeopardy Law, no brand can increase its customer loyalty without increasing the number of users (market penetration). As a result, brands that
want to improve customer loyalty must first achieve greater market penetration, which means reaching more users.
27.
Large Brands Lose a Smaller Percentage of Customers (Law 2)
Large brands lose a greater number of customers, but this loss represents a smaller percentage of their customer base.
It’s impossible for any brand to retain all of its customers (consumers). Even brands that achieve healthy growth lose customers. Scientific studies have shown that companies can’t totally prevent customer losses by improving their products and services or by providing users with additional benefits, because approximately half of every company’s losses are beyond their control. People stop buying certain brands because of changes in their life conditions, such as retirement, moving, marriage or changing needs and tastes (details in chapter 29).
In particular, companies operating in product categories such as cell phone operators, banking, insurance and digital platforms expend a lot of effort to retain customers. They regularly track how many customers they lose, how many they gain, which competitors they came from and which competitor they go to. It’s important for every company to understand the customer gain–loss dynamic, no matter what category they’re operating in.
To illustrate this dynamic, let’s assume that there are only two brands, one bigger than the other, competing in a single market that’s not expanding. Because customer churn in this sort of setting will be between just two brands, the small brand and the large brand will both gain and lose the same number of customers, because one’s loss is the other’s gain. However, this movement will be a larger percentage of the small brand’s base and a smaller percentage of the large brand’s base. Obviously, real life is far more complex than this simple example. Numerous brands exist in every market, the total market is not static and some brands shrink while others expand, but this basic dynamic is always in play.