Answering critics

Our critics have been few, and rather kind (nothing of substance has been raised).

Now and then a marketing guru issues a thinly disguised advertisement for their consulting services that tries to have a go at the laws and strategy conclusions in How Brands Grow.  They usually say something like:

“Our data confirms that larger market share brands have much higher market penetration BUT our whizz-bang proprietary metric also correlates with market share, and this proves that it drives sales growth, profits, share price, and whether or not you will be promoted to CMO”.

Often some obscure statistical analysis is vaguely mentioned, along with colourful charts, and buzzwords like:
machine learning
emotional resonance

And sexy sounding (but meaningless) metrics along the lines of:
brand love
growth keys
brand velocity
true commitment
loyalty intensity

All of this should raise warning bells amongst all but the most gullible.

Let me explain the common mistakes….

Ehrenberg-Bass say brands grow only by recruiting new customers.
These critics somehow missed the word “double” in Double Jeopardy.  Larger brands have higher penetration, and all their loyalty metrics are a bit higher too, including any attitudinal metrics like satisfaction, trust, bonding… you name it.

Brands with more sales in any time period, are bought by more people in that time period.  So if you want to grow you must increase this penetration level.  In subscription markets (like home loans, insurance, some medicines) where each buyer has a repertoire of around 1, then penetration growth comes entirely from recruiting new customers to the brand.  In repertoire markets penetration growth comes from recruitment and increasing the buying frequency of the many extremely light customers who don’t buy you every period.

The “double” in Double Jeopardy tells us that some of the sales growth also comes from existing, heavier customers becoming a little more frequent, a little more brand loyal.  Also their attitudes towards the brand will improve a bit, as attitudes follow behaviour.

Improved mental and physical availability across the whole market are the main real world causes of the changes in these metrics.  The brand has become easier to buy for many of the buyers in the market, it is more regularly in their eyesight to be chosen, and more regularly present in their subconscious, ready to be recalled at the moment of choice.

Why does it matter anyway? Can’t we just build loyalty AND penetration?
Yes, that’s what Double Jeopardy says will happen if you grow.

Loyalty and penetration metrics are intrinsically linked.  They reflect the buying propensities of people in the market – propensities that follow the NBD-Dirichlet distribution and Ehrenberg’s law of buying frequencies.  Growth comes from nudging everyone’s propensity up just a little bit.  Because the vast majority of buyers in the market are very light buyers of your brand this nudge in propensities is seen largely amongst this group – a lot go from buying you zero times in the period to buying you once, so your penetration metric moves upwards (as do all other metrics, including attitudes).

For a typical brand hitting even modest sales/share targets requires doubling or tripling quarterly penetration, while only lifting average purchase rate by a fraction of one purchase occasion.  That tells us that we need to seriously reach out beyond ‘loyalists’, indeed beyond current customers, if we are to grow.

When budgets are limited (i.e. always) it’s tempting to think small and go for low reach, but this isn’t a recipe for growth, or even maintenance.

A focus on penetration ignores emotional decision making.
This is odd logic.  A focus on mental and physical availability explicitly realises that consumers are quick emotional decision makers, who make fast largely unthinking decisions to buy, but who if asked will then rationalise their decision afterwards.

Ehrenberg-Bass say there is no loyalty.
On page 92 of “How Brands Grow” we write:
“Brand loyalty – a natural part of buying behaviour.  Brand loyalty is part of every market”.

On page 38 of our textbook  “Marketing: theory, evidence, practice” we write:
“Loyalty is everywhere.  We observe loyal behaviour in all categories” followed by extensive discussion of this natural behaviour.

In FMCG categories, buyers are regularly and measurably loyal – but to a repertoire of brands, not to a single brand.  And they are more loyal to the brands they see a bit more regularly, and buy a bit more regularly.

All brands enjoy loyalty, bigger brands enjoy a little bit more.

Ehrenberg-Bass analysis was only cross-sectional.
Actually, we published our first longitudinal analysis way back in 2003 (McDonald & Ehrenberg) titled “What happens when brands lose or gain share?”.  This showed, unsurprisingly, that brands that grew or lost share mainly experienced large change in their penetration.  This report also analysed which rival brands these customers were lost to or gained from.

In 2012 Charles Graham undertook probably the largest longitudinal analysis ever of buying behaviour, examining more than six years of changes in individual-level buying that accompanied brand growth and decline.  This highlighted the sales importance of extremely light buyers.

In 2014 we published a landmark article in the Journal of Business Research showing that sales and profit growth/decline was largely due to over or under performance in customer acquisition, not performance in retaining customers.  Far earlier we had explained that US car manufacturers did not experience a collapse in their customer retention when Japanese brands arrived, they each suffered a collapse in their customer acquisition rates.

But if we can change attitudes then surely that will unlock growth?

It’s rare that it’s a perceptual problem holding a brand back.  Few buyers reject any particular brand (and even most of these can be converted without changing their minds first).  The big impediment to growth is usually that most buyers seldom notice or think of our brand, and that the brand’s physical presence is less than ideal.

For more on “Marketing’s Attitude Problem” see chapter 2 of “Marketing: theory, evidence, practice” (Oxford University Press, 2013.

Attitudes can predict (some) behaviour change.  Light buyers with strong brand attitude were more likely to increase their buying next year.  And heavy buses with weak brand attitude were more likely to decrease their buying next year.

The real discovery here is that a snapshot of buying behaviour (even a year) misclassifies quite a few people.  Some of the lights are normally heavier but were light that particular year.  Some of the heavies were just heavy that year (kids party, friends visited, someone dropped a bottle) and next year revert closer to their normal behaviour.  Note: for many product categories just a couple of purchases is needed to move someone into, or out of, the heavy buyer group.

Attitudes tend to reflect any buyer’s longer-term norm.  So someone who is oddly heavy in buying this year will tend to be less attitudinally loyal to the brand than ‘regular’ heavies.  Someone who is oddly light this year will tend to be more attitudinally loyal to the brand.  Next year, odds are, their buying moves closer to their norm and their expressed attitude.

This statistical ‘regression to the mean’ is not real longer-term change in behaviour of the kind marketers try to create.  Nor does this show that attitudes cause behaviour – their real influence is very weak, while the effect of behaviour on attitudes is much stronger.

Ehrenberg-Bass analysis is very linear reductionist, whereas we take a quadratic holistic approach.
Really not sure what these critics are talking about, nor perhaps do they.  This is pseudo-science.

I have a super large, super special data set.
Please put the data in the public domain, or at least show the world some easy-to-understand tables of data.  If you want us to consider your claims seriously then please don’t hide behind obscure statistics and jargon.

I have data that shows Ehrenberg-Bass are wrong, but can’t show it.

Less is known about advertising than we think

It strikes me as very odd when people say things like “we have much to learn about [insert new media], it’s not like TV that we know so well”.

Know so well?!?  How many marketers have heard of the ‘Duplication of Viewing Law’ (Goodhardt, 1966*) ?  How many can predict a repeat-viewing rate for a program, time-slot, or channel?  Even what is known isn’t well known (nor used).

There are so many unanswered questions.  Even simple questions like is an ad spot on the left hand side of a page is worth less or more than one on the right?  And how much?

Not enough is known about how we should best use media to expose category buyers to our advertising.  Let alone how these exposures reach brains.  And this is true for even ‘old media’ like TV and print.  So much that needs to be researched.  It’s extraordinary how ignorant many marketers (and marketing academics) are about our discipline’s fundamental ignorance.

Byron Sharp, July 2015.

* Published in the most cited journal in the world, Nature (and yes the date is correct, 1966).  Yet try to find a marketing textbook that covers it (not counting this one).

What causes the Double Jeopardy law?

I was recently asked for a causal explanation of marketing’s Double Jeopardy pattern.

This is discussed in How Brands Grow (e.g. table 3.3 and surrounding text). Also see page 113 of my textbook. Though the most complete explanation is in the forthcoming “How Brands Grow part 2”.

It’s worth noting that causal explanations turn out to be ‘in the eye of the beholder’… e.g. what caused that window to break?
… the speed and mass of the ball resulting in sufficient force to break the molecular bonds in the glass of that window
… Jonny playing baseball on the front lawn when his Mum told him not to
… the wind, the pitch, the sun in Jonny’s eyes
… the Smith’s skimping and not installing double glazing ignoring their builder’s advice

All are better or worse explanations, depending on your point of view.

It’s the same for Double Jeopardy.

One explanation is simply that it’s a scientific law, it describes a bit of the universe, and that’s it… it’s simply how the world is. We don’t tend to ask why is there an opposite and equal reaction for every action (Newton’s first law), there just is.

The statistical explanation of Double Jeopardy is that it is a selection effect. Because  brand share depends largely on mental and physical availability, rather than differentiated appeals of different brands.  For marketers this is pretty important, pretty insightful, we wouldn’t get Double Jeopardy if brands were highly differentiated appealing to different segments of the market.  Since we do see Double Jeopardy all over the place that suggests that real-world differentiation is pretty mild.  Mental and physical availability must be a much bigger story than differentiation.  That’s a very important insight.

Conflicts in the marketing system

I do sometimes hear an ad agency people say “we don’t care about creative awards, we are totally dedicated to each client’s business objectives”, especially when in front of clients.  It makes me wonder whether they are lying (that’s bad), or that they are deluding themselves (which may even be worse), or if they are admitting that they simply aren’t good enough to win creative awards (and that’s not good either).

I think it is important to be grown-up, honest and up-front about conflicts of interest.e.g. Martin Sorrell wants to sell marketers stuff, his empire (like his competitors) will sell whatever marketers will buy that he can deliver profitably.  This matters far more to the agency than whether or not it is the best way to build their clients’ brands.

Creatives want to win awards.  And if this doesn’t sell a single extra of your product they aren’t really worried.

Media agencies want to do what they know, what’s easy, and they have to sell media space they have committed previously to buy.

Market research agencies want to sell standardised products, ideally that use automated data collection and analysis, or low-level people.  They can’t make big profits from stuff that requires in-depth analysis by expensive people.  They do far more R&D into reducing data collection costs than into better research.

Retailers want to win share from other retailers.  They don’t care if this means selling another box of your product or not.

So partners yes.  But there are conflicts in the system.  This is fine, so long as everyone understands the conflicts then they can be managed – it’s possible for everyone to win.  But pretending these don’t exist is dangerous.

Professor Byron Sharp

July 2014.

Apple could charge a lot more – but should they?

Most of the things we own are OK, but a few special few are works of great craftsmanship, things of beauty. They give us pleasure in the same way that some houses, some architecture, is beautiful to look at. It’s something about being human that just looking at a building can be pleasurable yet we aren’t benefiting in any way from its function, we don’t own it, and may never even step inside it.

Beautifully crafted things usually cost more, which is understandable. In fact they often cost a great deal more – we have to pay a lot for small increases in quality, especially at the top end.

So luxury watches, handbags, wines (even business schools) cost an awful lot more even though functionally they may be rather similar to much cheaper alternatives. Luxury watches still cost tens of thousands of dollars more than throwaway watches that now are just as accurate at timekeeping.

Apple, under the guidance of chief designer Sir Jonathan Ives, makes beautifully crafted products. No tablet comes close to the build quality and sleek lines of the iPad Air, and the new Mac Pro looks like something developed using futuristic superior alien technology.

If these products came out from a company in the LMVH empire they would be priced many times higher. So why doesn’t Apple charge more? Even just a little bit more would do little to dampen demand and would add dramatically to profits. So why not?

Firstly, because Apple is in the technology business, where product features are very important and where it’s difficult to gain much of a technological advantage, certainly not one that lasts for any time. In handbags it’s taken for granted that they can all hold stuff, so design (both looks and build) matter enormously. In technology, basic functional factors like speed and screen size really matter, and Apple will never be far ahead of competitors.

Secondly, because Apple wants to build penetration and scale. They want lots of customers for their beautiful products who will then buy music, movies, books and apps from Apple – and of course future products. Getting an Apple product into someone’s pocket or bag gives Apple a medium through which to build mental availability for other Apple products. This is the same reason Amazon massively subsidies their Kindle price.

Thirdly, because Steve Jobs hated price premiums. He always wanted a lower price. Not a discount – he understood the need for profits to fund new product development and marketing, but as low a price as possible to still be profitable. He wanted his products to change the world, which meant getting them into as many hands as possible. Like Jonathan Ives he wanted people to see his art.

Anyone can have a price premium, it isn’t necessarily a sign of strength or good strategy.

So there are arguments in both directions, Apple should lower its prices and more aggressively chase share (closer to the Amazon Kindle strategy), or Apple should increase its prices and reap enormous profits. I guess from their perspective that means their prices are where they should be.

Out-take for marketers: a price premium might be nice for profits today but it holds back reach and scale, and that increases the riskiness of future profits.

PS A related interesting question is whether they should launch a cheap, minimal feature smartphone to bring kids and ‘light users’ into their fold? But they already sell the iPod touch and still have the iPhone 4S on the market so maybe this simply wouldn’t do much for them?

The heavy buyer fallacy

It seems obvious, a brand’s currently heaviest buyers generate more sales and profits (per customer) so they should be the primary target for marketing.

This is commonly held misconception. The rise of direct marketing and CRM gave this fallacy a big plug, after all it can be hard to justify sending expensive letters to light customers.

But if our aim is to grow sales then our efforts should be directed at those most likely to increase their buying as a result of our attention. It takes only a moment of thought to realise that customers who already buy our brand frequently are going to be difficult to nudge even higher.

If, instead, our aim is to prevent sales losses then heavier customers would seem more promising – after all they represent a lot of sales we might lose. But then again, they are more loyal, other brands make up less of their repertoire, their habit to buy our brand is more ingrained, our brand has rather good mental and physical availability for them. In short, they aren’t particularly at great risk of defecting nor of downgrading.

So the idea that heavy buyers of your brand (“golden households” or “super consumers”) are your best target is flawed. Dangerously simplistic.

Apple’s mythical price premium

I’ve written previously questioning the marketing orthodoxy to aim for a price premium, and specifically on the myth of Apple’s price premium.

Here is another nice quote from Steve Jobs, interviewed on stage alongside Tim Cook (current CEO). He was asked if Apple’s goal was to win back dominant share of the PC market

“I’ll tell you what our goal is…to make the best personal computers in the world and products we are proud to sell and would recommend to our family and friends. And we want to do that [raises voice] at the lowest prices we can, but I have to tell you there is some stuff out there in our industry that we wouldn’t be proud to ship, that we wouldn’t be proud to recommend to our family and friends…and we just can’t do it, we can’t ship junk”.