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.

– Loyalty ladders imply that you should target particular levels of the ladder.  This is wrong.

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

– Loyalty ladders 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.

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

– Loyalty ladders 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.

– AND REALLY IMPORTANTLY…..Loyalty ladders distract marketers from the real issue which is how to grow penetration (reach all sorts of category buyers).

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? There may be a recession on but 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.

 

PS 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.

PPS 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!”

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.

www.MarketingScience.info

Reasons not to buy

Evaluation is over-rated. Brands largely compete in terms of mental and physical availability. See Sharp 2006, Corporate Member report 39. This isn’t to say that product features, and consumer evaluation, aren’t important – just that they operate within this ‘battle for attention’.

When a person goes to buy a brand, a huge part of the choice process, yet a part they hardly notice (they don’t even think of it as part of the choice decision), is the act of not considering most options. Evaluation occurs between a very limited number of brands, the ones that are noticed or recalled – which often can be a single brand.

So while positive features/perceptions do help a brand get chosen they do so after this massive culling of brands. Over time, however feature advantages can build salience, with time they assist in gaining mental and physical availability.

This means that product feature advantages, while important, are far less so than the business press makes out. This is especially true for established brands with significant market-based assets.

Another way of putting this, is that brands that are easier to buy for more people, get bought more. Which reminds me that reasons not to buy, can therefore be much more important (to sales) than reasons to buy. Generally marketers are quite sensitive to ‘reasons not to buy’, or at least to negative publicity. Yet it is not uncommon for marketers to spend much effort trying to communicate a “reason to buy” (“value proposition”, USP, differentiating factor etc) and yet be quite blasé about features that turn some consumers away.

For example, there are still many food products that contain Trans Fats when they don’t need to. In some countries they means they have to carry a small warning (like “contains hydrogenated fat”) – you’d think this would be enough to catch their markers attention and concern.

It’s very difficult to get consumers to notice your brand, when you succeed consumers reward you with a degree of loyalty (largely due to habit and inertia), but you can ruin this if they see a reason not to buy. Smart marketers should always be on the look out for such features. This is one of the reasons that differentiation needs to be approached with caution, being different while appealing to one group in the market can sometimes turn other consumers away.

www.MarketingScience.info