Ever since Fred Reicheld and Bain & Co analysed the benefit gained by companies which increased their customer retention rates, the loyalty bandwagon has been gaining momentum. Most marketers simply take it for granted that increased loyalty equals in-creased profitability – and therefore is “a good thing”.
Prepare to think again. Work over many years by Professor Andrew Ehrenberg, now at South Bank University, shows what a dodgy assumption this is. Indeed, if Ehrenberg is right, it’s almost a general law of fmcg markets that the bigger the brand, the less “loyal” its customers are.
As he explained at a recent seminar, heavy category users tend to have a repertoire of brands, and big brands are big because, within that repertoire, they are purchased more frequently – say 3.5 times a year – than the number two brand which is purchased, say, three times a year.
On the other hand, the brand’s most “loyal” customers are almost invariably the least valuable. They buy the category once a year and always choose brand X. By normal definitions they are 100 per cent loyal – but a complete waste of time. “Your best customers are mostly other people’s customers who occasionally buy you,” says Ehrenberg.
Ogilvy & Mather database marketing guru Garth Hallberg delivers a few more unsettling messages in his new book, All consumers are not created equal, which is published this month.
One common and reassuring assumption among marketers is that if you are a market leader your customer base is relatively secure and your progress is steady and stable.
But look under the surface, as Hallberg has been doing with brands in the US and you’ll find turmoil and chaos. Take US yoghurt brand YopleX. In one year, 51 per cent of its users were new and 45 per cent of its previous users stopped buying. New users accounted for 54 per cent of sales volume, compared with existing users who started buying more, and soaked up 32 per cent of sales. Existing buyers who bought less accounted for 28 per cent of sales loss and defectors, 34 per cent.
According to Hallberg, this incredible shift is by no means unusual. Kellogg’s Corn Flakes had 42 per cent new customers and 40 per cent defectors in one year.
On average, only 35 per cent of car owners (90 per cent of whom insist they are “satisfied” with their current brand) repeat buy.
Another Hallberg target is mass marketing. If you study the dynamics of any category you’ll find that “the profits of mass markets do not come from mass market brands”, he declares.
Take YopleX again. If you divide its customer base into three equal categories of heavy, medium and low users, you’ll find that the heavy users are concentrated in just 16 per cent of all households. Yet they account for 83 per cent of the brand’s volume and 110 per cent of its profits.
No. That’s not a misprint. Sixteen per cent of households account for 110 per cent of the brand’s profits. Hallberg gets this figure by factoring in the cost of what he calls “the mass media tax”: the marketing spend that reaches the 52 per cent of households who don’t buy YopleX at all. They represent a charge against profits, slicing around 20 per cent off the total. Low users, who only buy the brand about once a year, also end up costing the brand profits as the cost of marketing to them outweighs the tiny revenues they generate.
Again, YopleX is not an oddity. According to Hallberg, in the US, five per cent of households buy 85 per cent of Levi’s jeans; eight per cent of households buy 84 per cent of Diet Coke; 21 per cent of cinema-goers account for 80 per cent of attendance. The top third of personal long-distance callers account for 68 per cent of billing and the top third of credit cardholders account for 66 per cent of charges and come from just 15 per cent of all households.
Most brands, it seems, display similar characteristics. The implication? Mass marketing never really existed in the first place. So why continue using its techniques?
Until now, of course, marketers haven’t had the information or insight to do anything else. But now that the information is becoming available, Hallberg recommends three things. First, use it to redirect a reduced ad budget towards known heavy users – a far better media-planning strategy than traditional demographics, psychographics and so on, he claims.
Second, rethink promotions. Traditional indiscriminate, price-related promotions heavily subsidise those consumers who would buy the product anyway. They reduce heavy users’ net profitability by 35 per cent, he says. Instead, concentrate a slashed promotional budget on incentivising those consumers identified as most likely to produce the most profitable sales uplift (NOT the biggest volume increase.)
Third, redirect the saved marketing funds into a tightly targeted, direct marketing-based loyalty scheme for heavy users only. And make sure it focuses more on “added value” information about the brand – children’s nutrition, dieting, etc. – than on promotions. Results from experiments so far suggest an average sales uplift of 25 per cent. Blue chip companies like Kraft, Unilever, Kimberly-Clark and P&G are all taking note.
Differential marketing, as Hallberg calls it, has its drawbacks. Identifying high users and building a database around them isn’t easy or cheap. The likely sales boosts may well be one-off rather than repeating. And the concept is probably best applied to brands with mega budgets, relatively high margins and high degrees of consumer interest. But how many of these still exist?
In his more enthusiastic moments, Hallberg looks forward to the time when supermarkets will combine store card data with manufacturers’ loyalty data so that both sides can develop fine-tuned marketing programmes based on differential pricing, differential distribution strategies and even differential product development. In the longer term, he sees differential marketing leading to one-to-one marketing via the information superhighway.
Dramatic shifts are taking place in the heartland of marketing. But how many marketing departments’ day-to-day activities remotely reflect this?