WARC from Home is a series to help subscribers brush up on the essentials of marketing during the COVID-19 lockdown. Find all WARC from Home content here.
Penetration versus loyalty – what’s the best way for a brand to grow? There is a keen debate in the marketing industry about the balance of these factors in driving growth. The week’s WARC From Home, our final edition, delves into the crucial arguments about brand growth, how penetration and loyalty interact, and how to quantify brand growth to determine business impact.
What do the experts say?
There’s a host of industry-defining evidence which is bread-and-butter learning for smart marketers, not least Professor Byron Sharp and the Ehrenberg-Bass Institute’s seminal book, ‘How Brands Grow’.
Prior to its release in 2010, loyalty – and the comfort of reliable repeat sales – was considered a relatively safe approach. Sharp, building on the previous work of Andrew Ehrenberg, put forward the thesis that brand growth is more likely to be driven by gaining new users (i.e increasing penetration/customer acquisition) rather than increasing brand loyalty.
In ‘How Brands Grow’, Sharp and his colleagues set out three evidence-based conclusions:
- Growth in market share comes by increasing popularity and gaining buyers of all types, many of whom will be only light buyers of the brand.
- Brands mainly compete as “mere lookalikes”, with consumers not really distinguishing one from another, thus brand loyalty doesn’t really exist.
- Brand growth is, therefore, about building physical availability (via distribution) and mental availability (saliency).
In recent years, customer acquisition as a primary driver of brand growth – as opposed to loyalty – has become a relatively orthodox position, adopted by many brands. It relies on a model known as ‘Dirichlet’, which describes variation in individuals’ loyalties across a category-buying group.
- Byron Sharp on 'How Brands Grow', five years on (WARC Event Reports, September 2015)
The Diri… what?
The Dirichlet model has been used for decades to set targets for brands and new launches, including by many of the world’s biggest brands (P&G, Nielsen, Mondelez, to name just a few).
The model’s central assumptions are as follows:
- Loyalties are distributed across consumers with little differentiation between brands. Each brand effectively sells to all category buyers, rather than its own specific brand loyalists. Coke drinkers tend also to drink Pepsi, and vice-versa.
- Consumers do not alter their loyalties often, but they may revise their loyalties over decade-long time spans, largely due to changes in their lives.
A common criticism about the Dirichlet model is that it implies loyalty doesn’t exist and that customers are mostly similar. Sharp has argued that the opposite is actually true: the Dirichlet implies “that consumers do not randomly allocate their purchasing among all brands in a category but do so in a biased fashion”.
The Dirichlet also assumes people differ by both how often they purchase in the category, and in the composition of their purchases, which results in a heterogeneous customer base.
The thrust of the Dirichlet laws is that brands compete primarily in terms of mental and physical availability, and it is this mental and physical availability that determines the brands customers are loyal to. Market share will change if a brand secures additional mental and/or physical availability. This may come about as a result of superior marketing or through some innovation that leads to real changes in loyalties and, hence, brand growth.
For a deeper dive:
- It's a Dirichlet World: Modeling Individuals' Loyalties Reveals How Brands Compete, Grow, and Decline by Byron Sharp, Malcolm Wright, John Dawes, Carl Driesener, Lars Meyer-Waarden, Lara Stocci and Philip Stern (Journal of Advertising Research, 2012)
Any real-life examples?
Great Northern Brewing Company, an Australian beer brand, needed to boost its mental availability and grow market share for its Super Crisp beer in a crowded but declining category. By evolving its advertising messaging to reflect a new idea of Australian masculinity and pouring more than 70% of its media budget mass media (largely TV and OOH) to reach category buyers, the company grow strongly against the trend of category decline.
To measure mental availability, brands can look at the competitiveness of their brand, as well as mental penetration (the proportion of category buyers who link the brand to at least one of the category entry points) and network size (the number of potential category entry points the brand is associated with).
- Ehrenberg-Bass on how the ‘Laws of Brand Growth’ can deliver short and long-term gains across categories (WARC Exclusive, November 2019)
Surely loyalty matters, though?
Not everyone agrees with Sharp. Researchers from GfK and Kantar Millward Brown have argued that people’s feelings towards a brand (“affinities”, in the words of Josh Samuel of Kantar Millward Brown) matter – though it is more at the level of ‘like’ than ‘love’.
The concept of ‘repertoires’ is important here. Analysis by (who else?) the Ehrenberg-Bass Institute and others suggests consumers purchase in repertoires. In other words, there are several competing brands within a category that may be in their consideration set; loyalty, if it exists, is to a group of brands, not to a single brand.
Others argue that the existence of repertoires does not preclude loyalty – within a repertoire different brands may have different functions depending on a consumer's needs: within sportswear, a consumer may favour Adidas for football, Mizuno for running, Under Armour for American football, TaylorMade for golf.
While penetration and loyalty go hand in hand, Binet and Field argue that loyalty doesn’t increase without penetration. In the pair’s 2016 research, Marketing in the Digital Age, they found that penetration is still three times more likely to be the main driver of growth and profit compared with loyalty.
- How important is brand loyalty? (WARC Evidence, May 2019)
- Marketing in the Digital Age: Binet and Field on how media choices impact effectiveness (WARC Event Report, November 2016)
Any more examples?
If there’s anything Brits are loyal about, it’s tea. British tea drinkers are three times more likely to stick to one tea brand than any average FMCG brand, according to Kantar. But Yorkshire Tea successfully turned to Sharp’s theory to boost its customer base, upping its market share in a declining category by creating fame around its core brand values.
Canon, the photography equipment brand, was facing the decline of camera sales, with smartphones increasingly popular. It knew that, to grow the brand, it needed to reach new customers rather plumb its existing fans. Canon sought to grow awareness of its mirrorless camera portfolio by boosting top-of-mind awareness, launching a which brought new photography fans to the brand by tapping into social media-style user-generated content.
What’s the interaction between reach and targeting?
Debates about penetration and loyalty have implications for media choice. If penetration is the goal, it makes sense to reach as big an audience of category buyers as possible, in order to build mental availability and acquire new customers.
In a 2019 WARC Webinar, Prof. John Dawes and Prof. Jenni Romaniuk of the Ehrenberg-Bass Institute noted that in any category, brands have to compete with every other brand – not a single opponent – to drive growth, and if most buyers are infrequent, then mass advertising becomes critical as an aid to memory.
Les Binet and Peter Field, in their analysis of the IPA database, have also argued for the benefits of media that can reach as many people in a brand’s category as possible as often. They found that campaigns that used TV, outdoor, radio and press were far more likely to report very large business effects than those which did not. The results showed a strong correlation with reach.
Binet and Field also proved that targeting can boost short-term activation campaigns: tight targeting had large activation effects in 50% of campaigns that focused on existing customers. For those targeting non-customers, this dropped to 30%. Though tight targeting can be useful for short-term activation, reach is still favourable for long-term brand-growth strategies.
For a deeper dive:
- Forum: A broader view on brands’ growth and decline (International Journal of Market Research, 2020)
We hope you enjoyed this lesson and found it useful. Please do share any feedback, and get in touch with the WARC team if you would like to find out more.