Man at crossroads 150x150 1 - The loyalty paradox

Why our obsession with creating loyal customers may be a fool’s errand

If we think about it, it’s very rare to buy more than we really need (at least on purpose). Unless we are a collector (or highly paid footballer), we don’t tend to buy more cars than we can drive, nor do we buy more fridges we can fit in our kitchen and we rarely buy more bottles of olive oil than we realistically need for a given time period. Sure, we might sometimes, by mistake, buy the extra packet of rice when we already have one, but in those cases we try to compensate by skipping that item during the next shopping trip. As consumers we generally tend to buy what we need, when we need it.

At the same time we rarely stick to the same brand. If our preferred brand of cheese is not available, or maybe we simply don’t see it on the shelf, we buy another equivalent product. If a brand of premium orange juice is on offer we might try it out as long as we feel it’s safe to do so. In wine, part of the joy of the category is exploring and switching between brands, varietals and regions rather than always sticking to the same product.

Yet, if consumers don’t buy more than they need and naturally swap between brands, it seems strange that marketers spend a lot of their time thinking about fostering loyal customers. Can we make our customers buy us more even if they don’t need to? Can we expect them to stick religiously to our brand? Academic research has been grappling with this issue for many years, and the answer tends to be a fairly consistent “no”. This was the conclusion of the late Andrew Ehrenberg, whose work in the field of consumer behaviour has become the touchpoint for all researchers investigating the area of loyalty.

We defined an experiment in the wine category using measures developed by Ehrenberg’s research:

  • Share of category requirements (SCR) is the % of a consumer repertoire that a brand fulfils. For example, if the SCR is >50% it means that a brands accounts for more than half an individual purchases, this would indicate high loyalty to that product.
  • 100% loyalty is the % of consumers who only buy your brand.

In our Vinitrac surveys we ask regular (monthly) wine drinkers which wine brands they have bought in the past 3 months. By analysing the data from recent surveys in the US and the UK we can see that consumers indeed seem to have a fairly consistent repertoire of brands. While it is clear that the US and UK wine markets represent very different propositions – different channels, brands, regulations etc – our data shows the size of their brand purchase repertoire, on average, is virtually identical: around 3.8 wine brands (US) and 3.7 brands (UK) over a three month period.

From this data we can theorise that a given wine brand represents around a quarter of a typical consumer’s repertoire (as we know they tend to buy four different ones). This yields an SCR score of 26% in the US, and 24% in the UK. This finding recurs in many consumer goods categories and was best expressed by Ehrenberg himself: “Your customers are mostly other people’s customers who occasionally buy you”.

A more fascinating insight is that the SCR doesn’t vary that much between wine brands, as we see on the table below. Consumers have different brands in their repertoire, but any brand typically represents a similar proportion of the total repertoire. Each consumer has a similar sized repertoire but with very different wines in it (that’s why perhaps wine shops need to stock so many SKUs, to account for so many different individual repertories).

If we analyse the “100% loyalty”, ie the proportion of consumers who only buy a given brand, we see that this type of consumer is not at all common and not that relevant. The findings are also strikingly similar between markets, on average US brands have only 5% of consumers who only buy them exclusively, and in the UK this figure is 4%. As we said at the beginning consumers rarely stick to one brand only, and if they do, it normally means that they buy wine very infrequently (only once) rather than them expressing high loyalty.

Larger brands tend to have a higher SCR and slightly higher 100% loyalty, and the reason for this is that larger brands tend to share fewer consumers with other brands. The exception is perhaps Carlo Rossi in the US which has higher than expected loyalty metrics, but even in this case, the difference is not that large compared to the average.

NN - The loyalty paradox

If brands don’t differ much in their loyalty metrics and if 100% loyalty is not common after all… what is the main driver of success for brands? The answer is in the first column: overall purchase rate. The proportion of consumers who buy a brand is the main factor explaining differing sales. And as readers of previous Network News articles in this area know all too well, the main driver of purchase rate is. ..salience, and to be part of as many individual repertoires as possible. To paraphrase an old business saying: if you want loyalty, don’t work in marketing.

Author: Juan Park