Managing Director TERRITORY Influence, a leading full-service influencer marketing agency activating 4 Mio creators for brands in Europe.
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Brand loyalty is undoubtedly an important aspect for companies to maintain or increase their sales. However, over the last 50 years, consumer behavior and brand loyalty have changed dramatically. And new studies and scientific evidence have changed our understanding of brand loyalty and its role in brand growth. Marketers and companies therefore increasingly ask whether it is more important to win new customers or to retain existing ones.
When I began my career in marketing more than 20 years ago, the generally accepted 80/20 rule held that the top 20% of customers accounted for 80% of sales. This 80/20 rule is often referred to as Pareto’s principle, after the Italian economist Vilfredo Pareto. Pareto noted that most of the wealth in a free market economy is concentrated among a relatively small group of people. This principle has since been applied to many business areas, including marketing. A widely recognized priority in marketing, therefore, has been to convince 20% of customers to buy a little more. Large marketing companies have therefore developed extensive customer retention programs to increase loyalty and purchase frequency among these “golden households.”
More than a decade ago, marketing professor Byron Sharp debunked this 80/20 rule in his groundbreaking book How Brands Grow. He found that the heaviest 20% of a brand’s buyers generally account for no more than half of the brand’s sales, while the other half of the brand’s sales always come from the lightest 80% of buyers. In the book, Sharp argues that brands only grow by focusing on attracting these easy or completely new customers, while increasing mental and physical availability. In 2019, Sharp’s additional research with the Ehrenberg-Bass Institute confirmed his original findings.
In 2017 marketing professor Jan-Benedict Steenkamp read Sharp’s book and conducted his own research into the distribution of purchase frequencies of brands in various categories and countries. He also found that the purchase frequency distribution of almost any consumer packaged goods (CPG) brand has the shape of a flipped ice-hockey stick, with the large majority of category buyers being either non-buyers of any given brand or very light buyers. He also found that in most cases, heavy buyers already direct the large majority of their category purchases to your brand. This leaves very little room for brand switching, so to grow, a leading brand has to persuade them to use more of the product. While this is certainly possible for some categories, others, such as dishwashing detergent, are much more restricted. Therefore, similar to Sharp, he recommends marketers spend more effort and budget on the great mass of light buyers and non-buyers.
Kantar recently replicated the same analysis for 200 fast-moving consumer goods (FMCG) categories in the U.K. and identified a similar distribution among category buyers. Based on the frequency distribution, the most common behavior is to not buy a category, followed by shoppers just buying once. There is the same ice-hockey stick shape for categories as seen for brands but less extreme.
A recent study by the LinkedIn B2B Institute in collaboration with the Ehrenberg-Bass Institute showed that a broad target group approach is also more successful for B2B companies than concentrating on specific customer groups. This finding contradicts the common assumption that a narrow focus on specific customers leads to increased sales. Instead, all customers within each company’s category should be targeted to drive growth. Furthermore, the study emphasizes that most buying decisions in B2B are not made by search engines but by internal considerations of buyers.
Based on all these studies and insights, a strong focus on a few particularly loyal customers no longer seems appropriate for B2C or B2B companies. In my view, companies should instead ask themselves how they can make their brand the preferred choice for all shoppers in their category. Marketing strategies should focus on improving brand awareness and increasing visibility on different platforms to attract as many category buyers as possible. Customer relationship management (CRM) programs, on the other hand, should focus less on loyalty and more on customer understanding to gather valuable data and better understand customer needs. With this information, companies can create personalized offers to improve the customer experience and drive more consumers to the brand.
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