Think you’re going to grow your B2B brand by focusing on customer loyalty? According to the law of double jeopardy, you’re wrong, and that has implications for everything from growth KPIs to marketing strategy.
A major new study by Ehrenberg-Bass Institute’s Professor Jenni Romaniuk, Professor John Dawes and Sahar Faghidno for the LinkedIn B2B Institute confirms the marketing law of double jeopardy applies to B2B brands just as much as B2C, and therefore the only clear path towards growth for B2B brands is through customer acquisition.
It also outlines how B2B marketers can apply these lessons practically to their growth strategies.
The law of double jeopardy, which was first discovered in the 1960s, reveals that loyalty is largely a predictable function of market share, increasing as brands grow the size of their customer base. It is therefore normal for smaller brands to suffer twice as much compared to their larger competitors, by having fewer users who are also less loyal.
While previous research has shown the law of double jeopardy does apply to B2B brands, Romaniuk’s study further illustrates the phenomenon with new examples of the law taking effect across two B2B markets – UK business banking and US business insurance.
The research focuses on loyalty metrics for UK banking and defection metrics (the probability of a customer switching away from the current brand at next renewal) for US business insurance.
In both instances, brands with fewer customers have lower loyalty or higher defection levels (see tables above and below).
In the UK, Barclays serves 42% of potential B2B customers, the highest penetration in the market. Some 27% of those customers are ‘solely loyal’, using Barclays for all banking products, while 31% say it is their favourite provider.
At the other end of the spectrum, Metro serves 11% of potential B2B customers. Just 3% of those are solely loyal, while 15% say it is their favourite.
What double jeopardy simply says is that we can’t engineer loyalty, and focusing on loyalty isn’t the route to sustainable growth.
Jenni Romaniuk, Ehrenberg-Bass Institute
In the US, Allstate is the leading provider of B2B accident and health insurance, reaching 15% of customers. The brand has an average likely defection rate of 2.1. Meanwhile, AIG reaches 7% of customers and has an average likely defection rate of 3.4.
Based on this evidence, claims that brands can grow through cross- or up-selling, or through customer retention, are part of an “imagined world” dreamt up by “fanciful consultants”, Romaniuk argues. The “real world” shows that the only path to growth is getting more customers to buy from you.
“What double jeopardy simply says is that we can’t engineer loyalty, and focusing on loyalty isn’t the route to sustainable growth,” Romaniuk tells Marketing Week. “It gives us a clear strategic path of how brands grow, and that’s what its power is.”
Moreover, she dismisses the idea that any brand can have already extended its customer base as far as it can go.
“So you’re saying it’s saturated the market and it’s got 100% market share? That’s called a monopoly and usually there’s governments that get in the way,” she says.
“Sometimes people talk about this over a long time frame and they go, ‘well over a year everybody buys us so we can’t grow on penetration’. That’s because you’re looking over a year. What about over a quarter or over a month? Penetration and loyalty are time-bound metrics and so it really is a matter of how you look at them.”
Yet, in a recent LinkedIn survey of B2B marketers, 65% said the way brands grow is by increasing customer loyalty, not by focusing on customer acquisition.
Peter Weinberg, one of two global leads at the LinkedIn B2B institute, says: “Most B2B and B2C marketers believe there’s two viable paths to growth, focusing on loyalty or focusing on acquisition. I think what Jenni [Romaniuk]’s paper shows pretty clearly is that there are not two viable paths. There’s one viable path, which is increasing customer acquisition.”
The double jeopardy pattern does not just apply to B2B services, the paper points out, with previous research having observed its presence in concrete and airline markets.
There are some deviations to the rules, as seen in the tables above. But these are rare, the study finds. Usually, a company with ‘excess loyalty’ is suffering from a deficit in penetration, which means it is neglecting or cutting some category buyers out of its potential acquisition base and putting a “ceiling” on its growth potential.
With this in mind, Romaniuk says marketers are setting limits on company growth by pursuing a loyalty-first strategy, as the data shows a business can only get so much out of its existing customers. She worries, however, that marketers will be too afraid to let loyalty go.
“There’s just so much opportunity out there for those who are willing to be ambitious. I think a lot of loyalty marketing is fear. Fear of losing what you’ve got,” she says.
“That fear is even more poignant in B2B because there is a contract breaking, ‘sorry we’re not renewing’, type of relationship. I think often it’s easier to take that more personally and be more fearful of that happening, than [worrying about] someone who forgets to buy Colgate and Colgate doesn’t even notice at the individual level.”
Psychologically, she hopes this new data will help marketers take a new perspective on growth and to also understand that in growing a brand and gaining new customers, they’ll also likely keep the customers they have.
“It’s not an either/or trade off. Going for acquisition doesn’t mean your customers are going to start walking out the door. It just means more will be walking in,” she says.
There are a number of ways in which B2B marketers and brands can take the lessons of the double jeopardy law and apply it practically to their growth strategies. Most importantly, they must identify and remove any barriers to acquisition, whether mental (what you are salient for offering) or physical (where, how or what potential customers can buy from you).
Marketers should also rethink the metrics they track and move their focus away from loyalty metrics, says the LinkedIn B2B Institute’s other global lead, Jon Lombardo. “All the evidence here says you need to grow your customer base. That’s the number one thing you should be tracking,” he says.
“So don’t focus on loyalty, don’t focus on retention, don’t focus on churn, until you have first focused on growing the size of your customer base, or your market penetration.”
Weinberg adds that in order to effectively grow their customer base, marketer should make sure their targeting is broad and skewed towards net new customers, not towards existing customers.
There’s just so much opportunity out there for those who are willing to be ambitious. I think a lot of loyalty marketing is fear.
Jenni Romaniuk, Ehrenberg-Bass Institute
This could mean advertising in an industry magazine to reach a different set of non-customers, rather than sending out an email from your existing marketing database. It could also mean switching out one in four calls to existing customers to targeting non-customers.
“I also think there’s an implication for sales teams not just marketing, which is that sales teams should definitely be trying to talk to net new customers versus existing customers,” he adds.
And when it comes to those loyalty metrics, using the law of double jeopardy can help marketers to ensure they are setting realistic targets, as it reveals clear boundaries for the loyalty that can be expected for a company based on the size of its market share.
Romaniuk explains: “We can predict what is normal in loyalty and if we can predict something, you know that then it’s bounded in what it can be. So setting goals that would take you to a loyalty that was out of those bounds, is really not a feasible objective.”
Without the knowledge the law of double jeopardy offers, marketers may set themselves up to fail by choosing loyalty targets that aren’t realistic, Weinberg adds.
“Marketers, in some cases, get to set their own objectives, and if they’re setting a totally unrealistic loyalty objective that they’re not going to hit, it’s not going to reflect well on them personally,” he points out.
However, Romaniuk warns that one risk with pursuing growth through any means is that you can make short-term gains for long-term damage, and advises marketers to pursue sustainable growth.
“You can do some pretty awful things and get a short-term bump in sales, and [then] move on quickly to your next job,” she notes. “But it’s what you leave behind and the legacy of your marketing and that’s often not thought about in that context.”
The LinkedIn B2B Institute will be discussing how to apply the law of Double Jeopardy in a webinar this evening (29 April). Register to watch here.