At Percolate, our vision is to create technology that builds the world’s best brands. To achieve this, we are building The System of Record for Marketing, equipping brands with a system to grow beyond what they ever thought possible. Marketing requires creativity and thoughtfulness, but it also requires certain standards. In systematizing these standards, marketers can achieve greater creativity and further reach, while crafting more impactful marketing. Here at Percolate, influenced by Byron Sharp’s work at the Ehrenberg-Bass Institute, we take a scientific approach to this systematization of marketing and decided it’s time to break it down for you. How can you thoughtfully grow your brand?

This blog post is the first in a five-part series meant to take an empirical approach to marketing. We will be challenging the most dominant marketing myths out there, using data to explain why they are wrong. In busting some of these myths, we hope to show you how you can grow your own brand.

To begin, we will be looking at why some brands are small and others are market leaders. How can you establish your brand as the latter?

CUSTOMER LOYALTY VS. MARKET PENETRATION

What makes small brands small, and large brands large? This is a question all brands should be asking themselves, as the answer may help them grow. Two major factors must be considered.

First, customer loyalty, which is the average purchase rate per customer. If Tony buys 12 Cokes a year and Kat buys 2, Tony is more loyal to Coke than Kat. Second, market penetration, which is the size of a brand’s buyer market. If Coke has 100 unique buyers per year while Pepsi has 40, Coke has greater penetration. These two elements, loyalty and penetration, covary with brand size; however, one is far more important than the other.

Enter Marketing Myth #1: marketers commonly believe that customer loyalty is the holy grail of growth. Increase customer loyalty and you will become the next Nike. As reported by the Ehrenberg-Bass Institute, data from global market research agencies like Nielsen and TNS show that customer loyalty doesn’t actually vary dramatically across brands. This is to say, brands like Apple and Nike are brand leaders not due to an extremely loyal customer base. However, slight differences in loyalty do exist: in general, larger brands have slightly higher customer loyalty. Customer loyalty, then, doesn’t drive brand size differences, market penetration does.

Large brands have much greater penetration than do smaller ones. For example, in a 2005 study on shampoo brands in the U.S., researchers found that Suave Naturals had 19% market penetration, while its far smaller competitor, Finesse, had only 2%. For these same brands, Suave had an average purchase frequency (or “loyalty”) of 2.0, while Finesse’s was 1.4. This pattern, that smaller brands get hit twice, is referred to as the “double jeopardy” law: smaller brands have far fewer buyers who are less loyal, helping explain their smaller size.

As seen in the graph below, purchase frequency—or loyalty—doesn’t vary dramatically between brands, though it is higher for those with greater market share on the far left than the smaller ones on the far right. At the same time, annual market penetration varies quite neatly with market share, with larger brands on the left having far larger penetration than smaller ones on the right.

HOW DO BRANDS GROW?

Now that we better understand why small brands are small and large brands are large, how do brands grow? Should they increase loyalty or penetration? Growth occurs largely through greater market penetration: for a smaller brand like Finesse to increase sales to the level of Suave Naturals, they must gain market share. Simply getting existing customers to buy more often and buy with 100% loyalty to their brand is unrealistic: no one buys shampoo that often, and no brand commands 100% loyalty. In gaining more buyers, or increasing their penetration, Finesse could gain sales and achieve greater market share.

Market penetration, then, can change in two ways: by 1) increasing customer acquisition or 2) decreasing customer defection. Brands can acquire more customers to increase penetration, or decrease the number of customers they’re losing to effectively increase penetration. But which of these two strategies leads to greatest growth?

CUSTOMER ACQUISITION VS. DEFECTION

Enter Marketing Myth #2: many marketers believe that decreasing customer defection is critical in maintaining brand health, when the true answer lies in customer acquisition. Defection is largely out of a brand’s control, making growth via that strategy extremely difficult. For example, in the 1980s, defection rates for car brands in the UK and France were around 47%. The largest brand, Ford, was at 31%, but even the smallest brand, Honda, was only at 53%. Even today, Ford’s customers are regarded as the most loyal; however, the lowest in the rankings is only a mere 10 percentage points behind them.

So, we can see that defection levels don’t vary dramatically with brand size. That having been said, Honda could, in theory, gain market share by halving their defection rate. But this would be nearly impossible: not even the market leader, Ford, has a 25% defection rate! The easier and cheaper route, then, is to focus on customer acquisition.

(DIS)LOYAL BEHAVIOR

Though we’ve focused on market penetration in large part thus far, a note on loyalty: in general, customers who have used the brand before will be more favorable towards it. So, once they’ve used the brand once, are they loyal customers? Not quite.

Customers do adopt a certain level of loyalty behavior, in that they don’t switch between all brands available; but some degree of brand switching will always occur across all kinds of market categories, consumers, and brands. For car brands, the repeat-buying rate is quite high, at almost 50%. Even still, this number indicates buyers aren’t 100% loyal to one car brand.

In addition, if people have more time to be disloyal, they will be. For example, if a brand is performing analytics on a one-week time frame, it will see little customer disloyalty. This makes sense: Chris only had time to buy All detergent once in that week, ergo he was 100% loyal to the All brand. If All performed analytics on a year-long time frame, it would see far greater disloyalty. Let’s say Chris bought detergent five times in that year, then it’s very likely he bought it from a couple different brands.

Thus, how loyal a customer appears is largely an analytical misattribution, unrelated to “true” loyalty. Not only that, but brand loyalty is divided and changes throughout a customer’s lifecycle. This idea was established as early as the 90s, when Alan Dick and Kunal Basu found that customer loyalty is mediated by social norms and situational factors. It’s a fickle measure, dependent on a variety of outside factors: customer habit, availability, lack of caring. Brand attitudes are the same way. They are divided and change with the consumer’s mood.

BRAND BELIEFS

When asked about their belief about a brand’s image twice, consumers changed their answers 64% of the time. So, less than half of all people agreed with their own brand attitudes over the course of a short period of time! Not only this, but it is well-established that people’s attitudes are often highly incongruent with their actions in the first place. In 2002, Paschal Sheeran concluded that only 28% of intentions explain the resulting behavior. As such, brand loyalty, or even attitude, towards a particular brand is not a helpful metric for growth. Brand beliefs are not absolute or predictive.

In the first of our “marketing myths” blog series, we’ve seen what makes small brands small and large brands large, as well as what factors need to be considered in growing a brand. While smaller brands have fewer customers who are also less loyal, growth will come from an increase in the former. Within penetration, brands should focus their efforts on customer acquisition, rather than defection. In the next post, we will take a closer look at brands’ customer bases, and see whether market segmentation can drive brand growth.