Detroit doesn’t have a loyalty problem

Myths continue to abound that US car brands have suffered a collapse in loyalty.  Marketers believe this because they don’t know about the law-like patterns governing loyalty metrics.  Put simply the don’t vary massively between brands, and the variation that does occur depends on marketshare.  Detroit has lost share, but it would have had to lose almost all their market share in order for their repeat-rates to plumment.  I published an article on this earlier this year, with empirical evidence.  Detroit’s real problem is a lack of customer acquisition.

Consumption Situations – some perspective

It’s important to know when consumers consume your brand.  Do they use it largely for a morning snack or for sharing with friends ?

However, some marketers over estimate the degree to which their brand is confined to a particular situation, used for a particular purpose.  Worse, they market in such a ways as to make it a ’self-fulfilling prophecy’ hemming the brand into one situation through advertising nothing else.

In the same way that product categories can be too narrowly defined based on product features (e.g. the chocolate vs vanilla ice-cream categories), categories based on consumption situation can lull marketers into a false sense of limited competition.  e.g. nonsense like “Kit-Kat doesn’t compete with Snickers because Kit-Kat is for taking a break whereas Snickers is to satisfy a hunger craving”.

The reality is that few brands are exclusively bought for specific consumption situations, and which brands are bought for which situation varies between consumers and over time.

Yes the same person in the same situation can choose different brands on different buying times.

What’s wrong with loyalty ladders ?

I’ve written before about how silly loyalty ladders are.  I’ve been asked, aren’t they harmless, just showing the heterogeneity within any brand’s customer base or market (from non buyers to highly loyals) ?

Here is what is wrong with loyalty (conversion) ladders:

The ratios of non-buyers, to light buyers, to medium, to heavy, are perfectly predictable (by the NBD-Dirichlet).  So they are set.  If a brand gains in share/sales, the ratios all move in a predictable way.

All loyalty ladders do is show these ratios – but they imply that you can change the ratios through particular strategies.  This is wrong, they will only change if you increase or decrease in market share.

They imply that you should target particular levels of the ladder.  This is wrong.

They imply that some brands are stronger or weaker – when really they are reporting brand size.

They are a waste of money spent on market research and reporting.  Most of the tiny changes and differences they report are sampling (and other) error.

They imply that awareness is a “once off battle”, that once someone is aware they always notice, recognise, recall your brand – this is nonsense.

They imply that 100% loyals are a brand’s most valuable customers, whereas far more volume comes from heavy category buyers who buy a number of brands.

They distract marketers from the real issue which is how to grow penetration (reach all sorts of category buyers).

The social role of advertising via creating aspirations

Sir Willian Petty (1623-1687) was one of the first to bring mathematics, logic, and empirical observation to economics in the aim of developing scientific laws.  There is interesting coverage of the man in “A Brief History of Economic Genius” by Paul Strathern.

I was struck by a minor observation of Petty’s that if workers were paid above a certain level they did less, not more, work – preferring to spend their time in leisure and drinking instead.  This was his experience as an Irish landowner in the 17th Century, it isn’t the case today.  Although Paul Strathern comments that it may well be true in parts of the 3rd world – “what else would a rural coffee plantation worker be expected to do with his money” ?  And taxi drivers, even in cities like New York, have been observed to work fewer hours on days when the takings are good.

So maybe this is our natural state, earn enough to buy what we want and then stop working.  Sounds reasonable, yet in the modern world hardly anyone works less if they are paid more.  This is because of the role that marketing plays in stimulating economic activity.  I’ve often read claims along these lines, e.g. that advertising drives economic growth, but never fully understood them.  But advertising, and the mass media, and education, and travel all play a combined role in giving people things to aspire to.  Education in particular, seems to create a demand for more education.

So today, our wish lists are pretty long and are continuously being updated and expanded.  This gives us motivation to keep working even when productivity gains mean that we can earn the same money in far fewer hours.  Indeed it also enhances our motivation to seek productivity gains.

Now advertising is also accused of making people want things they don’t really need.  For making them less happy, less content with what they have.  There is probably some truth in this, but it is exaggerated, and advertising is given too much of the blame for what is largely part of the human condition.  Yes advertising (and mass media, e.g. Hollywood) opens people’s eyes to delights such as cosmetic surgery and super-sized burgers – all things which one could easily argue we’d be better off without.  However this is a subjective judgement, who is to decide what should stay and what should go ?  Planned economies, where intelligent and well-meaning (and sometimes not so well meaning) bureaucrats make these decisions, rapidly shudder to an economic halt, leaving their citizens in poverty and/or starvation.

Economic growth isn’t just about numbers (% increase in GDP), it’s accompanied by qualitative change.  New products and services emerge.  Many of these are frivolous, but only because humans are frivolous (girls, and boys, just wanna have fun).  But along with the frivolous are also life-changing new products, often things that few of our predecessors would have ever put on their wish list simply because they couldn’t imagine them – advertising helps people imagine and form their wish lists and in doing so it encourages people to work – better and smarter.

Economic growth is good.  Without it we’d have far fewer scientists, medical specialists, writers and artists.  “As that perceptive social critic P.J O’Rourke recommended: those who consider any previous age was better to live in than this one should first contemplate the word ‘dentistry’”. (page 140).

US Brands lost half their customers last year – more misleading metrics

Yesterday, Ad Age reported a study showing that US packaged goods brands typically lost more than half of their loyal users last year.  Oh no!  The sky is falling…next year we’ll have no loyal customers left at all!

“I think what’s surprising is the magnitude of some of the effects,” said Eric Anderson, associate professor of marketing at the Kellogg School of Management at Northwestern, who reviewed the study.

Hmm yes surprising.  Let’s put our brains into gear here, are we to accept that all these brands, which are essentially stable in market-share, lost half of their most loyal customers? In spite of the recession this is still nonsense.

The truth is that the analysts misunderstood their own results, because of ignorance of the law-like patterns in brand buying.

The brands haven’t lost most of their loyal customers, the results are simply due to normal random fluctuations in buying, i.e. sampling (in time) variation – something any analyst should be aware of.  Nothing real or unusual is going on here.

Read on if you’d like to know why…

The marketing consultants who did the study used their loyalty program ‘panel’ data.  They classified a consumer as a ‘brand loyalist’ if the brand represented 70% or more of their 2007 repertoire.  If that consumer did not also devote 70%+ of their category buying to that brand in 2008 they  classed them as lost (typically about one third were ‘lost’ completely, while the other 20% still bought the brand but it wasn’t 70% of their repertoire in 2008).

But from one time period to another the brand’s weight in a consumer’s repertoire fluctuates.  And this normal fluctuation is what this study mistook for customer defection.  These loyals aren’t gone, they’ll be back again next year or the next.

Effectively their analysis excluded most heavy category buyers because these households will have larger repertoires, and so it’s much more difficult for one brand to represent 70% of their buying.  Most buyers are light category buyers and these light buyers are more likely to appear 70%+ loyal.  In other words their analysis largely is a report on lots of buyers who bought the brand once out of 1 category purchase, or twice out of 2, or three out of 4 – purchases in the loyalty program stores.

Now, all buyers are subject to random fluctuations in their on-going, steady, purchase patterns.  Sometimes you buy 3 times a year, sometimes 4.  Even if you buy two brands equally it’s seldom ABAB, it’s patterns like ABBABBBAABABAAB.  This stochastic variation is normal and follows predictable patterns.  This variation means that lots of people who were classed as “loyals” in 2007 fall out of this classification in 2008 – when nothing real has changed in their buying behaviour, and nothing has happened to the brand’s market share.

The study was by Catalina Marketing and the CMO Council.  The CMO Council should have known better.  Catalina Marketing sell targeted marketing services based on using this loyalty program data – which is a bit odd because this fluctuation seriously undermines the capacity to target consumers based on their loyalty level.

I’ll leave the last word on the Ad Age article to Professor Gerald Goodhardt (co-discoverer of the Dirichlet model):

“After ‘Some brands lost more than a third…… while others held on to more than 60%……’ I stopped reading!”

Brand value quackery

Ad Age today reports:

Despite the pounding global business is taking, the $2 trillion value of the top 100 brands has held steady, according to Millward Brown’s annual BrandZ report. “Consumers are blaming companies and leaders for the current troubles, not the brands,” said Joanna Seddon, exec VP at Millward Brown, the WPP-owned research company.

Wow, wouldn’t we marketers like to believe that, our assets are still fine, aren’t we good.  But to believe this we have to close our eyes and pretend we are in wonderland.

An asset class that has remained immune to the global recession that has wiped trillions of dollars off the value of companies (the same companies that are made up of these brand assets).  Hmm.  So will WPP stand behind their valuations and be prepared to buy any of these brands at their recession-proof price?!  Ah, no, Sir Martin Sorrell isn’t stupid.

This to me is the 13th stroke of the clock (that makes one wonder about all that came before).  If anyone previously had any faith in the financial quackery that produces Brandz valuations then this should bring you back to reality.  Perhaps I shouldn’t be so mean to single out Millward Brown’s Brandz when there are plenty of other equally fanciful brand equity valuators, it’s just the sort of financial silliness that was practiced by so many (mind you, including some crooks) prior to the bubble bursting.  But what annoys me is that it sheds a poor light on marketers, it makes us look arrogant and stupid.  We don’t know enough about marketing but we think we can take on finance as well.

Book review: “On Being Certain: believing you are right even when you’re not” by Robert A. Burton

This is a book for people (like me) interested in non-conscious thinking.  It deals with the important topic of the feeling of conviction.

“The feelings of knowing, familiarity, strangeness, and realness…don’t fit neatly into standard categories of mental functions – emotions, moods, or thoughts.  Collectively they represent aspects of a separate type of mental activity: an internal monitoring systems that makes us aware of and colors, judges, and accesses our thoughts” (page 216).  We have evolved an awareness of our thinking, and a reward system for encouraging as yet unproven thoughts, speculations that eventually may become useful new ideas “the brain has developed a constellation of mental sensations that feel like thoughts but aren’t” (page 217).

The most interesting aspect of the book is the explanation that much of our thinking is non-conscious; we can’t observe this thinking and consequently we don’t (can’t ever) know ourselves as well as we probably think we do.  Also it leads to feelings that we know something even when we aren’t sure why, and even when we are shown that we are wrong.

Burton criticises Malcolm Gladwell’s book Blink for continuing the myth that we can train our unconscious to make better decisions.  And, of course, for promoting the idea that some people can know when their intuition is right.

As a general read though this is a book only for people really interested in the topic, there are a few nuggets of wisdom tucked into a meandering essay without a very clear message – cutting the length by half might help.  Advice for the reader, read the first few chapters then the last.

Laws of Advertising – Wharton Conference

Next week I’m co-hosting a special conference with Professor Jerry Wind.  Held at the Wharton School, University of Pennsylvania, Dec 4-5, 2008, the conference will bring together some of the world’s best minds in advertising, from industry and academia.

The conference is part of the SEI Center at Wharton’s “Future of Advertising” project which Jerry is heading.  The conference theme is empirical generalisations in advertising and media.  The aim is to take stock of what we do, and don’t, know about advertising, and use this as a base to try to understand how advertising might work in the future.  This is important because advertising landscape is being altered radically by the digital revolution.

For more information on the conference theme click here.  And now the conference has a blog which will be updated live during the conference.

Do smart marketers avoid price premiums ?

When questioned about Apple’s plans for the future in face of increasing iPhone competition, CEO Steve Jobs suggested that they would continue to aggressively price the iPhone and make ongoing improvements:

“Well, I think we have to be the best and I think we have to not leave a price umbrella underneath us, and we are working very hard to fulfil both of those goals.”

At Oct 21 conference call for financial analysts where Apple announced US1.18 billion profit for Q4.

Cadbury Gorilla Advertising Gets It Right – at last.

Cadbury’s TV Commercial featuring the drum playing gorilla is a wonderful, and now much awarded piece of creative.  But it’s not perfect advertising by a long shot.

1) It grabs attention. Tick.

2) It’s worth watching, over and over. Tick.

3) People do realise it is for Cadbury. Tick.  The brand is far from being the star but the commercial creates tension “what’s this all about ?” which makes people look for the brand, and fortunately Cadbury do own a distinctive asset in the colour purple (shown in the background behind the Gorilla).  So the branding does work, at least in Cadbury dominant countries like the UK, Australia and New Zealand.  It would be far less effective elsewhere.

4) It refreshes and/or builds appropriate memory structures that make the brand easier to come to mind of be noticed in buying situations.  Ahh, no.  This is the commercial’s BIG weakness.  It builds a link between Cadbury and the Gorilla, and few of us think of gorillas when in potential chocolate buying situations.  Perhaps today when people think of gorillas (e.g. at the zoo) they are more likely to think of eating a Cadbury chocolate bar but that’s going to make a trivial effect on sales.

That’s why the TV commercial has not been a roaring sales success.  It’s played its little part in helping Cadbury recover from the lows of its salmonella contamination but the brand was already bouncing back before ‘the Gorilla Ad’.

So what Cadbury needs to do is get its gorilla, a distinctive asset they now own, close to purchase situations.  And I now see that they are – see below for a photo from my local supermarket.  The competition is just an excuse to get the gorilla into a prominent position close to the chocolate display (or at least I hope the marketers realise this is the important objective).

PS If anyone tells you that the Gorilla ad works for the brand because it taps the brand’s core essence of joy run from the psychobabble.

How to nudge

When a brand is successful in gaining market share it shows up as small changes in buying propensity across many consumers.  Based on this empirical fact Professor Andrew Ehrenberg described successful advertising as ‘nudging’ (in contrast to persuading or converting).

Given this is what happens when advertising works, it’s odd when campaigns try to hit consumers with a sledgehammer approach – by this I mean some advertising campaigns ask for a leap not a nudge.  The whole idea of a USP is about hitting consumers with a super compelling argument why they should radically change their buying behaviour to favour that brand.  Trying to achieve a sort of religious conversion (there is even a market research product, the Conversion Model, based on religious conversion).

I suppose that some advertisers feel that a sledgehammer gives best chance of achieving a nudge, given that lots of other things may go wrong with the campaign (e.g. the media strategy).  But as most consumers aren’t going to make a huge change in their behaviour, and they know it, how do they react to claims telling them they should ?  For example, if you overtly tell people they are doing the wrong thing and should change.  The risk is that many people simply reject the message – they conclude that the message is wrong, not them.  Cognitive dissonance in action.

So it’s not true that USP sledgehammers necessarily produce bigger nudges.

If you want to nudge maybe you should ask for something small – ‘please consider trying our brand, it’s nice’.  Sounds wimpy but it fits with the behavioural evidence.  And explains why many soft image ads with no persuasion attempt can be highly sales effective.

Book Review: “The 22 Immutable Laws of Marketing – Violate Them At Your Own Risk!” by Al Ries and Jack Trout

It’s easy to criticise this book and yet there are still a few interesting hypotheses here.

How to join as a Corporate Sponsor of the Ehrenberg-Bass Institute

Readers of this blog have reminded me that I’ve never mentioned how to join as a member.

Sponsors pay an annual contribution which is pooled into a serious R&D budget.  For this sponsorship you gain immediate access to all the Institute’s reports and in-house briefings (plus gain direct access to the researchers).  We normally provide one live in-house briefing per year, but more can be arranged.

This web page has more details.

Here is a list of the Ehrenberg-Bass Institute’s sponsors from around the world.

Net Promoter Score (NPS) Does Not Predict Growth – it’s fake science

“Managers have adopted the Net Promoter Score on the basis that solid science underpins the technique and that it is superior to other metrics.

We find no support that for the claim that Net Promoter is the “single most reliable indicator of a company’s ability to grow.”

The above quote is from a Journal of Marketing article and winner of the Marketing Science Institute /H.Paul Root Award “A Longitudinal Examination of Net Promoter and Firm Revenue Growth”, Journal of Marketing (2007), Vol.71, by Tim Keiningham et al.

The Net Promoter Score was developed by Frederick Reichheld a consultant now well known for making headline grabbing conclusions based on sloppy research and thinking.

I previously pointed out what was wrong with his claim that small reductions in customer defection cause massive profit increases.

Then in 2004 he is said to have had an epiphany describing his prevous work on loyalty as “powerful but useless”. Keeping customers didn’t matter so much, having customers who would recommend you was everything.

So the latest myth he peddles is that asking customers their likelihood of recommending the company predicts company growth. He claims it does so much better than traditional metrics such as customer satisfaction.

Actually, if you read Reichheld’s Harvard Business Review article carefully you can see he employs the same sort of sleight of hand he did in his customer defection work. Pay careful attention to the dates, Reichheld in 2003 writes that starting in the first quarter of 2001 consultancy firm Satmetrix began collecting customer likelihood-to-recommend responses via email survey. Each quarter collected 10-15,000 responses gradually building a small dataset covering 400 companies in a dozen industries. Reichheld then calculated a Net Promoter score for each company and compared this to the company’s growth rate over 3 years (1999 to 2002). Yes, that’s the previous 3 years.

Yes, so the correlation he reports says that firms that score higher now have previously been growing.

Reicheld admits on his website that the statistical analysis in his book was sloppy but says that since then the consultany company he worked for (Bain & co) has done more extensive analysis showing no correlations between satisfaction scores and company growth, but excellent correlation for the NPS. However, Keiningham et al’s Journal of Marketing article perfectly repeated Reicheld’s analysis and they found the same or better correlation between satisfacation and growth (hence the quote above).

Such correlations say little about causality (especially when they are backwards in time), as Reichheld tries to use in his defence, but then why on earth did he select these cases to ‘prove’ his case ? He even admitted he’d selected amongst the very best examples!

In sum, this is snake oil, fake science. It’s scary how many CEOs fell for this.

Marketing Guide: marketing in a recession

Are you wondering if you should change your marketing plans? Is there pressure to cut budgets (again)? How should you react to the recession?

Here is a report from the Ehrenberg-Bass Institute on marketing in a recession.

I wrote this with guidance from my colleagues as an “informed opinion piece”, i.e. different from usual Institute reports for our corporate sponsors that are about discoveries. It covers questions such as:

Can I get away with lowering my advertising spend?
Will premium brands suffer more?
Should I lower my price?
Is a recession a good time to launch a new product?
Will private labels gain further share?

To download the article “Marketing Guide: what to do in a recession” click here.