rowDedication This book is dedicated to Professors Andrew Ehrenberg and Gerald Goodhardt who collaboratively worked to establish many of marketing’s first scientific laws. The building block of science is empirical generalization. (Frank Bass, 1992) Buen in a field supposed io be dominated by people’ impulses 10 buy—that of marketing —there are striking regularities... [yet] people seldom expect there to be law-like regularities in social science (‘Is ita science®’), and therefore do not even look for them. (Andkew Ehrenberg, 1993)what marketers don't know Byron Sharp and the researchers of the Ehrenberg-Bass Institute OXFORD UNIVERSITY PRESS ‘AUSTRALIA & NEW ZEALANDOXFORD UNIVERSITY PRESS Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries, Published in Australia by Oxford University Press 253 Normanby Road, South Melbourne, Victoria 3205, Australia | © Byron Sharp 2010 ] | ‘The moral rights of the author have been asserted First published 2010 Reprinted 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018 | All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence, or under terms agreed with the reprographics rights organisation. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. National Library of Australia Cataloguing-in-Publication data | Sharp, Byron. How brands grow: what marketers don’t know / Byron Sharp. ISBN 978 0 19 557356 5 (pbk) Bibliography. Marketing. Branding (Marketing) Brand name products—Management. 658.83 Reproduction and communication for educational purposes ‘The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced andjor communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. 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Oxford disclaims any responsibility for the materials contained in any third party website referenced in this workContents List of Laws Contributors Proface Acknowledgments 1 Evidence-based Marketing 2 How Brands Grow 3 How to Grow Your Customer Base 4 Which Customers Matter Most? 5 Our Buyers Are Different 6 Who Do You Really Compete With? 7 Passionate Consumer Commitment 8 Differentiation versus Distinctiveness 9 How Advertising Really Works 10 = What Price Promotions Really Do 11 Why Loyalty Programs Don’t Work 12 Mental and Physical Availability 13. A Final Word Bibliography vit xt xut 16 28 39 56 74 89 112 134 153 171 180 215 218List of Laws The law-like patterns (empirical generalisations) that are introduced in this book are: Double jeopardy law: Brands with less market share have far fewer buyers, and these buyers are slightly less loyal (in their buying and attitudes). See Chapter 2. Retention double jeopardy: All brands lose some buyers; this loss is proportionate to their market share (i.e. big brands lose more customers; though these represent a smaller proportion of their total customer base). See Chapter 3. Pareto law: 60/20: Slightly more than half a brand’s sales come from the top 20% of its customers. The remaining sales come from the bottom 80% of its customers (i.e. the Pareto law is not 80/20). See Chapter 4. Law of buyer moderation: In subsequent time periods heavy buyers buy less often than in the base period that was used to categorise them as heavy buyers. Also, light buyers buy more often and some non-buyers become buyers. This ‘regression to the mean’ phenomenon occurs even when there has been no real change in buyer behaviour. See Chapter 4. Natural monopoly law: Brands with more market share attract a greater proportion of light category buyers. See Chapter 7. User bases seldom vary: Rival brands sell to very similar customer bases. See Chapter 5.viii LIST OF LAWS Attitudes and brand beliefs reflect behavioural loyalty: Consumers know and say more about brands they use, and think and say little about brands they do not use. Therefore, larger brands always score higher on surveys that assess attitudes to brands because they have more users (who are also slightly more loyal). Usage drives attitude (or I love my Mum and you love yours): Buyers of different brands express very similar attitudes and perceptions about their respective brands. See Chapter 5. Law of prototypicality: Image attributes that describe the product category score higher (i.e. are more commonly associated with a brand) than less prototypical attributes. See Chapter 8. Duplication of purchase law: A brand’s customer base overlaps with rival brands in line with its market share (i.e. in a time period a brand will share more of its customers with large brands and fewer with small brands). If 30% of a brand's buyers also bought brand A in a period, then 30% of every rival brand’s customers also bought brand A. See Chapter 6. NBD-Dirichlet: A mathematical model of how buyers vary in their purchase propensities (i.e. how often they buy the category and which brands they buy). It correctly describes and explains many of the above laws. The Dirichlet is one of marketing’s few true scientific theories. For more technical information on this mathematical model (and related software) visit the Ehrenberg- Bass Institute’s website .Contributors Byron Sharp Professor Byron Sharp is the Director of the Ehrenberg-Bass Institute for Marketing Science at the University of South Australia. The institute’s research is used and financially supported by many of the world’s leading corporations, including Coca-Cola, Kraft, Kellogg’s, British Airways, Procter & Gamble, Nielsen, TNS, Turner Broadcasting, Network Ten, Simplot and Mars. Byron has published over 100 academic papers and is on the editorial board of five journals. He recently co-hosted a conference at the Wharton Business School on the laws of advertising, and with Professor Jerry Wind he edited the 2009 special issue of the Journal of Advertising Research on laws of advertising. For more information about Byron, visit his website . John Dawes Dr John Dawes is Associate Professor at the Ehrenberg-Bass Institute for Marketing Science, University of South Australia, John has an extensive background in sales and marketing prior to becoming an academic researcher. He has published in journals such as the Journal of Services Research, Wall Street Journal, International Journal of Market Research, and the Journal of Brand Management. John is the editor of the Journal of Empirical Generalisations in Marketing Science (EMPGENS) .x CONTRIBUTORS Jenni Romaniuk Dr Jenni Romaniuk is Associate Research Professor at the Ehrenberg-Bass Institute. Jenni’s research covers brand salience, brand image tracking, how to use advertising to build brands, brand positioning, customer defection, and how to understand and use the brand perception-behaviour link. Jenni has published in journals such as the Journal of Marketing Management, Marketing Theory, European Journal of Marketing, Inter- national Journal of Market Research, Journal of Advertising Research and the Journal of Financial Services Marketing. For the past eight years she has been providing advice on brand development strategies to companies in industries as diverse as retail, food, tourism, financial services, insurance, telecommunications, universities, event management and government departments. John Scriven John Scriven is Director of the Ehrenberg Centre at London South Bank University. The Ehrenberg Centre works in partnership with the Ehrenberg-Bass Institute to run the Corporate Sponsor Program. This is a special program of research into marketing that is supported by companies actoss the globe including Coca-Cola, Kraft, Kellogg's, British Airways, Procter & Gamble, Nielsen, TNS, Turner Broadcasting, Network Ten, Simplot and Mars. John specialises in the study of brand performance measures and the effects of marketing inputs, particularly price and advertising. He has over 20 years experience in marketing, market research and marketing planni United Biscuits, RJR/Nabisco and Pepsico. g; he has held marketing positions with three major corporations:ce Marketing is a creative profession. So is architecture: architects design masterpieces like the Taj Mahal and the Sydney Opera House, but archi- tects use their creativity within a framework of physical laws. Architects must design buildings that will not collapse under their own weight or blow over in a breeze; they cannot choose to ignore the law of gravity, or hope their building is immune to the laws of physics. Marketers, even senior marketing academics, like to say that there can be no laws concerned with marketing. These people argue that consumers are far too individual and unpredictable.! Research has shown this is utter nonsense. This ill-founded belief stops academics doing their job and searching for law-like patterns in buying behaviour and marketing effects. Tt also allows marketers to carry on with ‘anything goes’ marketing plans. Imagine if architects designed ‘anything goes’ plans (‘Let's build out of fairy-floss!’, ‘Let's add another 68 floors!) Marketers argue with each other about things that have nothing to do with the creativity of the discipline; about things that should be known for certain. It’s time for this to stop. This book reveals the predictable patterns in how buyers buy, and how sales grow—things all marketers should know, not argue about. 1 Ieisa common mistake to associate the concept of randomness with unpredictability, yet as any casino owner knows, random events lead to great predictability. A casino cannot predict who will win what, but they can predict with pin-point accuracy how many wins and loses there will be overall (and so how much money the casino will make)PREFACE These patterns are valuable knowledge. It’s often thought that great marketing strategy is obvious—with hindsight everyone can see what you did and copy you. This might be true for new products or some advertis- ing campaigns, but in reality marketing offers the ability to outperform competitors while they scratch their heads wondering why on earth you are doing so well. Unfortunately, marketers themselves often have no idea why one of their own campaigns worked and others did not. Their expla- nations as to what they got right or wrong are often wide of the mark because their assumptions (the theories in their head) are wrong, This book is for marketers who are willing to learn new things based on classical science, and to shake off the superstition (and unfounded speculation) that today passes for marketing theory. Read the assumptions in Table 1 below. Table 4: Marketing assumptions Differentiating our brand is a vital marketing task. Loyalty metrics reflect the strength, not size, of our brand. Customer retention is cheaper than acquisition. Price promotions boost penetration not loyalty. Who we compete with depends on the positioning of our brand image. Mass marketing is dead and no longer competitive. Buyers have a special reason to buy our brand, Our consumers are a distinctive type of person. 20% of our heaviest customers deliver at. least 80% of our sales.PREFACE xiii If you believe that most of these are true, you are operating under many false assumptions. This book will give you the evidence. Ifit changes your mind it might revolutionise your marketing. Table 2: Towards a new view of marketing priorities Past Message Unique Retional (ELE) Positioning Differentiation comprehen- selling Persuasion Teaching involved Pro sion propositions viewers Refreshing ae Relevant. 2 Se, Salience _Distinctiveness id building” Reaching distracted emotional associations memory viewers response structures The most important knowledge contained in this book Decades of research into how buyers buy and how brands compete has led to these surprising conclusions: 1 Growth in market share comes by increasing popularity; that is, by gaining many more buyers (of all types), most of whom are light customers buying the brand only occasionally. Brands, even though they are usually slightly differentiated, mainly compete as if they are near lookalikes; but they vary in ix) popularity (and hence market share). 3. Brand competition and growth is largely about building two market-based assets: physical availability and mental availability. Brands that are easier to buy—for more people, in more situations— have more market share. Innovation and differentiation (when they work) build market-based assets, which last after competitors copy the innovation. Therefore, marketers need to improve the branding of their product (ve. it needs to stand out) and to continuously reach large audiences of light buyers cost effectively. Marketers need to know what their distinctive brand assets are (colours, logos, tone, fonts, etc.); they need to use andxiv PREFACE protect these. They also need to know how buyers buy their brand, when they think of and notice it, and how it fits into their lives. They need to manage media and distribution in line with these facts. ‘Advertising works largely by refreshing, and occasionally building, memory structures. Marketers need to research these memory structures and ensure that their advertising refreshes these structures by consistently using the brand’s distinctive assets. In short, there is a great deal to learn, and much to be discovered, about sophisticated mass marketing. ‘Tables 3, 4 and 5 below summarise old and new attitudes to different aspects of marketing. Table 3: Consumer behaviour Aatitude ale Deeply Rational, drives Brand loyals committed lnvolvement involved switchers behaviour buyers viewers Uncaring Emotional, Behaviour Loyal Loyal Gives attude switchers switchers “™BNe Hewistes distracted misers viewers Table 4: Brand performance a ae Unpredictable, Price ee We Le targetin confusing promotions win marketing compete on Differentiation view % brand metrics new customers positioning brand loyals Sry) Growth Predictable Pnee Sophisticated Me compete PP) crvougy ——reanngtal— OTOUONE mass eee Distinctiveness we reach existing brands in the penetration brand metrics 2) customers marketing category Table 5: Advertising cog ; Message Unique selling Campaign i Postonné Comprehension propositions Persuasion Teaching he Getting noticed, Refreshing and Selience emotional eer tuuiding memory Reaching Contnuous associations presence response structuresPREFACE xv Examples in this book The scientific laws presented in this book apply to many categories: * products and services + industrial products and supermarket packaged goods + national and retailer brands + brand buying and store choice. The laws apply across countries and have held for decades. This is why they can provide useful predictions. I’ve tried to demonstrate the breadth of generalisation by deliberately using diverse examples; for example, retention levels for cars in France and banks in Australia. I am grateful to Nielsen and TNS for providing data spanning many countries. Please don’t infer that just because the example refers to, say, UK store brands, that the law doesn’t apply to your category. If you are in doubt, please refer to the cited references, as these will provide further examples that illustrate the breadth of the law.Acknowledgments The laws in this book might not been discovered without the years of research that has been funded by corporations around the world. I thank the following corporations for their many years of continuing support: ABC ANZ National Financial Group AOL (UK) Australian Central Credit Union Australian Research Council Bank of New Zealand BankSA. BASES. Bayer Consumer Care Boots Healthcare Boral BP Bristol-Myers Squibb British Airways Br Cadbury Caxton Publishers & Printers CBS Channel 4 Clemenger BBDO Coca-Cola Colgate-Palmolive Commonwealth Bank of Australia ConAgra Foods Dairy Farmers SA Department for Environment and Heritage DDB Worldwide Communications Group Diageo Distell Dulux dunnhumby Elders ESPN FirstRand Fonterra Brands Foster's Wine Estates General Mills General Motors Goodman Fielder Hamilton Laboratories Hills Industriesrr + Insurance Australia Group + IPC Magazines > ITV + J Walter Thompson + Kellogg’s + Kraft * Leo Burnett + London South Bank University + Marks & Spencer + Mars Inc + Meat & Livestock Australia + Mediaedge:cia * Media Trust * Millward Brown * Molson + Mountainview Learning * MTV * National Pharmacies + Network Ten + News International + Ogilvy & Mather * Origin Energy + PepsiCo + Pfizer Consumer Healthcare * Procter & Gamble * PZ Cussons * Reckitt Benckiser + Research International Special thanks t ACKNOWLEDGMENTS xvii Roy Morgan Research SABMiller St.George Bank S.C. Johnson Selleys Simplot Australia South Australian R&D Institute South Australian Tourism Commission Standard Life TD Canada Trast The Edrington Group The Queen Elizabeth Hospital Research Foundation The Nielsen Company The Walt Disney Company TNS Tourism Australia Tourism New Zealand Turner Broadcasting TVNZ Unilever University of South Australia Wm. Wrigley Jz. Company Wyeth Consumer Healthcare Young & Rubicam T would like to especially thank my gifted and hard working colleagues in the Ehrenberg-Bass Institute, University of South Australia, and the Ehrenberg Centre at London SouthBank University. Special thanks also to Dr Thomas Bayne at Mountainview Learning for working with me to show marketing executives around the world how scientific discoveries can revolutionise their strategies,al 7@ ite Evidence-based Marketing Byron Sharp magine you are the Insights Director of Colgate Palmolive. Margaret, the Senior Category Manager for toothpaste, is standing at your office door and she is obviously distressed. She is waving a recently received report from your global market research supplier, and this is what it shows:! Figure 1.1: Toothpaste brands: US market shares 30 20 10 Source: Spaeth & Hess, 1989. 1 This is real data from a Chicago single-source panel reported in Spacth & Hess (1989).2 HOW BRANDS GROW WHAT MARKETERS DON'T KNOW The market research shows that Procter & Gamble’s Crest toothpaste has double the market share of Colgate in the US. However, this has long been known and is not the reason why Margaret is upset. It’s the next couple of graphs that have her worried (see Figures 1.2 and 1.3). Figure 1.2: Crest consumer base uiaes nis) ial EST te ter ct Loyats Eis Source: Spaeth & Hess, 1989, Figure 1.3: Colgate consumer base See CV Source: Spaeth & Hess, 1989.CHAPTER 2 EVIDENCE-BASED MARKETING They decompose the sales volume of each rival brand according to the recent repeat-buying behaviour of their consumers. The percentage of Colgate’s sales that came from loyal customers is almost half that of Crest’s ‘loyals’ sales, ‘loyals’ being people who bought the brand for the majority of their toothpaste purchasing during the analysis period. Colgate’s sales come much more from ‘switchers’—people who bought Colgate at least once in the analysis period, although most of their buying was of other brands. Margaret is demanding an explanation. What does this mean? Why is Colgate’s sales base so unhealthy? Is the brand doomed? What does this mean for her ambitious growth targets? How would you answer? OF course, you would call for more research. It’s an Insight Director's prerogative. The additional research breaks down the market share of each company further by analysing the switchers within both the Crest and Colgate customer bases. The additional research consists of a survey; the first question of which asks customers about their attitudinal loyalty. Figure 1.4 reports the percentage of switchers who agrce with the statement, “This is my preferred brand.’ (The switcher group is the interesting one, as we can safely assume that both Crest’s and Colgate’s loyals will report that their brand is their preferred one.) As you can see, Figure 1.4 shows that Crest switchers are substantially more likely to say that Crest is their preferred brand. ‘The survey's second question asks customers about their perceptions of quality. Figure 1.5 reports the quality perceptions of the switchers in each customer base. Both Crest and Colgate buyers perceive both brands to be quality products—as they should, because these are both well researched and4 HOW BRANDS GROW WHAT MARKETERS DON'T KNOW well-made products. People who buy Colgate (who also often buy other brands) are slightly more likely to state that Colgate is a quality brand than Crest. Figure 4.4: Percentage of brand buyers who say, ‘This is my preferred brand’ Dye Dries Cn Crest switchers Colgate switchers Source: Spaeth & Hess, 1989. Figure 1.5: Percentage of brand buyers who say, ‘This is a quality product’ 100 100 =~ —— 80 80 60 i 60 Bey Bote) fect 40 40 ~ — 20 20 0 0 Crest switchers Colgate switchers Source: Spaeth & Hess, 1989.CHAPTER 1 EVIDENCE-BASED MARKETING 5 Here are the ‘brand insights’ the market research agency reports: + Colgate’s sales volume comes mostly from non-loyal buyers + Colgate is 50% more dependent on switchers than Crest * Colgate buyers are less loyal, both behaviourally and attitudinally + Even Colgate buyers think Crest is a quality product + Colgate is a quality product but it has perception problems and lacks loyalty + Colgate is attracting the wrong sort of buyer. ‘These insights are translated into the following action recommen- dations. Colgate needs: * more persuasive advertising that stresses Colgate’s quality * comparative advertisements against Crest + media schedules that emphasise frequency of exposure (to shift attitudes) * research to profile Colgate ‘loyals’ with the aim of attracting more people like this. Alll this sounds perfectly normal. It happens in marketing departments around the world every day. You personally may have come up with a somewhat different marketing strategy, depending on your own experi- ence, preferences, or creativity, but the insights and the strategy appear reasonable, and not unusual. Except that they are wrong. The ‘insights’ suggested here reflect ignorance of relevant scientific laws about buyer behaviour and marketing metrics, laws that we'll cover in this book. Consequently, Colgate’s fictional Insights Director is jumping at shadows, and overly worrying Margaret. Colgate’s loyalty metrics, both attitudinal and behavioural, are normal for a brand with half the market share of Crest. Indeed all the other research findings are essentially repeat- ing the findings of the first graph (Figure 1.1), that is, that Colgate is half the size of Crest in this market. These metrics don't show why it is half the size; they are what they are because of Colgate’s size. All will be explained6 HOW BRANDS GROW WHAT MARKETERS DON'T KNOW in the forthcoming chapters (if you can’t wait, turn to page vii for an explanation of the laws that relate to this Colgate case study). Are marketers bleeding the companies that employ them? Tam in awe of the modern market economy and the diversity and quality of products it delivers. This modern economy is the product of one of the most incredible social experiments: in the twentieth century classical, planned economies were tried alongside more market economies (Hunt & Morgan, 1995). The results were startling. Market economies won by a mile, as they provide people with more choice, fewer queues, and better, cheaper products and services. For example, within a few hundred metres of where I am sitting I have a choice of multiple grocery stores, bakeries, pharmacies, cafes, wine stores, even several fine chocolate shops. Not bad! When I was in Thailand my charming host Professor Tasman Smith asked if we had many Thai restaurants back home in Adelaide, Australia. T did a quick mental count and replied, ‘Yes, there are six within a short walk from our house.’ This illustrates the fact that those who live in developed market economies are spoilt for choice—we can eat pizza in Thailand, or order a curry in Paris, if we want to. This is because today’s marketers do a good job of getting attractive goods to market. But marketing is far from perfect; there is much waste. This matters because marketing activities consume a vast amount of our time—as Robert Louis Stevenson said, ‘Everybody lives by selling something.’ Poor marketing wastes an incalculable amount of resources, and it prevents and slows the uptake of life-enhancing products and social initiatives. Marketing practice, for all its advances, has never been strong on evaluation; there is plenty of ineffectiveness and room for improvement. Response rates to advertising are a good example of marketing ineffi- ciency. However you define a consumer response—from clicking on a web ad to driving to a store—response levels are extremely low and falling. It’s even more scary if you look at the impact of advertising on memory. For example, one of our yet-to-be-published studies on advertisingCHAPTER 1 EVIDENCE-BASED MARKETING = 7 productivity examined 143 ads on Australian television that were screened on consecutive weeknight evenings. That weekend respondents were telephoned and those who watched the programs during which the ads were played were asked if they recognised the particular television com- mercial (i.e. each ad was verbally described to only those people who had an opportunity to see it). The average recognition score for a television ad was barely 40% (i.e. 40% of potential viewers noticed the ad when it aired). Those respondents who recognised the ad were then asked what brand it was for, and on average the correct brand was linked to only approximately 40% of the ads. Consider that for an ad to work it needs to at the very least be noticed, processed and be linked to the correct brand. So only around 16%? of these advertising exposures passed the two necessary hurdles; put another way, there was 84% wastage! Note that the ads’ effectiveness varied widely. Some were noticed by more viewers, and correctly branded too. But most were not. This suggests that there is much to gain from learning how to make better advertising. There is much to learn about marketing. Even educated and very senior marketers believe many things that are wrong, and there are many important facts that simply aren't widely known, Many well-paid marketers are operating with wrong assumptions, so they are making mistakes, and wasting money, without even knowing it. Marketing professionals today are better educated than in the past, and they have access to much more data on buying behaviour. But the study of marketing is so young that we would be arrogant to believe that we know it all, or even that we have got the basics right yet. We can draw an analogy with medical practice. For centuries this noble profession has attracted some of the best and brightest people in society, who were typi- cally far better educated than other professionals. Yet for 2500 years these experts enthusiastically and universally taught and practised bloodletting 2 Near identical results are reported 15 years ago in du Plessis (1994). A figure around 16% is also not uncommon in advertising recall (i.e. where the brand name is the cue for recalling the ad).8 HOW BRANDS GROW WHAT MARKETERS DON'T KNOW (a generally useless and often fatal ‘cure’). Only very recently, about 80 years ago, medical professionals started doing the very opposite, and today blood transfusions save numerous lives every day. Marketing managers operate a bit like Medieval doctors—working on impressions and myth- based explanations. It would be arrogant to think that the current marketing ‘best practice’ does not contain many mistakes and erroneous assumptions. I used to teach some erroneous stuff to my university students; I know how easy it is to parrot nonsense simply because that’s what we were taught to think and it appears to make sense. This book challenges some of the conventional wisdom with empirical evidence. I hope you find this ‘myth- busting’ knowledge as liberating as it is useful. Marketing texts Marketing prides itself on being a practical discipline, so marketing texts (textbooks, marketing magazines, consultant reports, etc.) should be full of answers to practical questions, such as: + What will happen to sales if I change the price of the product? + Why can I see the effect of price promotions in the sales data, but the advertising campaigns barely show up, if at all? Is advertising not generating sales? + What is a reasonable cross-selling target? + Will the new brand cannibalise sales from the current brand? If so, by how much? + Should I pay double for a full-page newspaper ad or buy the half- page ad instead? * When should 15-second television ads be used? Yet it is difficult to find answers to such practical questions, let alone to find explanatory and predictive theories that can be used to provide the solutions. A good colleague of mine, Scott Armstrong, Professor at the Wharton School, once put marketing principles texts to the test (Armstrong &CHAPTER 1 EVIDENCE-BASED MARKETING Schultz, 1992, pp. 253-65). He asked four doctoral students to independ- ently go through nine leading texts looking for managerial principles. They found many (566) normative (‘you should do’) statements, but the texts failed to accompany the statements with supporting empirical evidence. The students only found twenty statements that were clear and meaning- ful. When these twenty statements were sent to marketing professors they rated only half as true, and said they knew of supporting evidence for only two. Only one single statement was universally rated as true, supported by evidence, as well as being considered managerially useful—but this principle was also rated as ‘unsurprising, even to someone who had never taken a marketing course’? We could dismiss our texts as harmless introductions to marketing practice, but marketing texts aren't harmless, because they routinely lead managers astray. Texts tell us what to worry about (customer satisfac- tion, image perceptions, brand equity, loyalty), what we should be doing (segmentation, targeting), what techniques to use, and what metrics to measure. Marketing texts largely reflect and reinforce current practice and existing beliefs. They contain a lot of good basic information, like telling us that if we want to advertise we should remember to book the media. But texts are also full of myths; the sort of myths that sap the effectiveness and productivity of marketing departments. Many of the things that marketing people think are important, such as loyalty programs, aren't (see Chapter 11). Many of the ‘facts’ marketing people believe, particularly about brand buying, are incorrect. Furthermore, many marketers lack the deep knowledge necessary to ask the questions that will iead to new valuable insights. ‘Take the following test on strategic assumptions (Table 1.1). Marketing professionals agree that these assumptions really matter; they underpin strategic marketing decisions that are linked to substantial expenditure. How would you and your marketing colleagues answer these questions? 3 The statement said that in conducting advertising experiments, test cities should be isolated so that promotions in one city don’t influence sales in another.10 HOW BRANDS GROW WHAT MARKETERS DON’T KNOW Would there be consensus? If your answers were questioned, could you point to anything more than anecdotes to support your view? Table 1.1: Strategic assumptions test Oe LL ce Differentiating our brand is a vital marketing task. Loyalty metrics reflect the strength, not size, of our brand. Retention is cheaper than acquisition. Price promotions boost penetration not loyalty. Who we compete with depends on the positioning of our brand image. Mass marketing is dead or, at the very least, no longer competitive. Buyers have a special reason why they buy our brand. Our buyers are a distinctive type of person. 20% of our buyers deliver at least 80% of our sales. Ifyou answer true to most of the questions above then you are operating under false assumptions. This book will give you the evidence. As Mark Twain wrote in his notebook in 1898, ‘Education consists mainly of what we have unlearned.’ False assumptions have led us astray in the past Science’s systematic approach to discovery is a relatively recent practice that didn’t really get going until around the 1700s. Prior to that, knowledge largely came from myth, folk-tale, and from experts in authority (chiefs, priests, kings and queens). How these ‘experts’ acquired their knowledge no-one knew or dared ask. Most of the time their understanding was wrong, and there were glaring gaps. This lack of accurate knowledge meant we didn't think to ask useful questions. So for millions of yearsCHAPTER 4 EVIDENCE-BASED MARKETING humans made little progress; life was typically short, painful and we were hungry and cold much of the time. In the past few hundred years we've made extraordinary progress. Our combined knowledge has grown in leaps and bounds, and we live in comparative luxury. Let’s return for a moment to the case of our learned but bloodletting doctors. For centuries they bled patients for almost every possible ailment, indeed many advocated bleeding simply to maintain good health. For most of the last millennium bloodletting was as trusted and popular in Europe as aspirin is today (Starr, 1998).4 Over the years, doctors must have killed hundreds of thousands of patients. Among them was US President George Washington, who died when his doctors bled him vigorously to cure a sore throat. The doctor of another US legislator once wrote that he had treated his patient by relieving him of 165 ounces of blood in five days (almost all the blood in his body!). The doctor wrote, ‘he died ... had we taken a still greater quantity [of blood] the event might perhaps have been. more fortunate’ (Starr, 1998). Apart for a few rare medical conditions, bleeding does no good whatsoever. So how did these well-meaning and well-educated doctors get it so terribly wrong for so long? First, it was because they believed untested theories that advocated bleeding. Like all practitioners they were, probably without realising it, deeply theoretical. The ancient Greeks (e.g. Hippocrates) developed a theory that all illness resulted from an imbalance of humours; bleeding and purging were common ways of addressing such imbalances. This humoural imbalance theory dominated medical thinking in Europe and the Middle East for 2000 years because no one tested if this really was the cause of illness. Second, bleeding continued because no one conducted systematic research into its effects. If patients recovered from their illness then bleed- ing was credited as the cure, if they died ... well they were sick after all! 4 Aspirin was not only one of the very first drugs to actually have proven affect, it was also the first to benefit from mass marketing. Every doctor in the UK was mailed information on the new drug which dramatically sped its adoption, much to the relief of early patients. at12 HOW BRANDS GROW WHAT MARKETERS DON’T KNOW Doctors worked using their impressions, assumptions, commonsense, accepted wisdom, and scattered bits of data. This is very similar to the working practice of marketing managers today. Adding to the danger, doctors overestimated how much blood was in the human body—no one checked properly. And they underestimated how long it would take the body to manufacture new blood—again no one checked. Douglas Starr (1998) argues that bleeding was also popular because it gave doctors a sense of control. It produced dramatic results—patients fainted (for a long while this was considered a good thing). Patients demanded that doctors be seen to do something, and bleeding fulfilled this requirement. It’s not hard to see similarities with many marketing interventions (like price promotions, bursts of advertising, and rushing into ‘new media’ like proverbial lemmings).’ The scientific revolution transformed medical practice as doctors, and statisticians such as Florence Nightingale, started compiling detailed records and case histories. The numbers they recorded started to generate insight into causes and effects, and germ theory eventually triumphed over humourial imbalance theory. Medical experiments gradually started sepa- rating the effectual from the ineffectual and the downright dangerous. Today marketing managers operate a bit like nineteenth century doc- tors; they are affected by the scientific revolution, but are not yet governed by it. Even ‘best practice’ is still dominated by impressions and untested assumptions. Texts still contain untested, ungrounded theories and myths. And serious experimentation is rare. The marketing equivalent of humourial imbalance theory may be the Kotierian ‘differentiate or die’ world view where marketing success is entirely about creating superior products, selling these at a premium price, targeting the most likely buyers, and advertising to bring people’s minds around to the product’s superiority. 5 Actually, itis a myth that lemmings commit mass suicide.CHAPTER 1 EVIDENCE-BASED MARKETING 13 You are reading a book about real-world facts and law-like relationships that challenge the fundamental tenets of modern marketing theory; the widespread beliefs that affect not just the decisions of marketing managers, but also how marketers see the world. Commonplace marketing mistakes Even the most intelligent marketers, in the best organisations, routinely make mistakes. Because many marketers operate using incorrect assump- tions about how buyers buy and how marketing works, they emphasise the wrong things and ignore important points, consequently making mistakes such as: + changing packaging in ways that confuse customers and reduce the brand's ability to be noticed * creating advertising that doesn’t build or refresh relevant memory structures * failing to research what memory structures are devoted to the brand * failing to research what makes the brand distinctive and noticeable * creating advertising that isn’t branded (other than a flash of the brand name) * investing countless hours and many dollars on pointless tracking research that informs no decisions * over-investing in already highly loyal consumers, while neglecting to reach new buyers * pricing too high then trying to compensate with very regular price discounts * teaching consumers te buy when the brand is discounted * burning media dollars in advertising bursts then going silent for long periods (when consumers are still buying) + paying premiums for low-reach media. It’s not that there is anything wrong with the intelligence of marketers, but like all professionals they need some empirically grounded guidance.14 HOW BRANDS GROW WHAT MARKETERS DON'T KNOW Law-like reoccurring patterns ‘The research that underpins this book is different from commercial market research because it focuses on finding fundamental patterns, not one-off events. These are findings that have a long use-by date because they have been found to hold for long periods of time, across all sorts of conditions (including across product and service categories, and countries). This research is also very different from most academic research, where each study is typically based on one single set of data, collected in one particular set of conditions, and so tells us almost nothing about the generalisability of the finding (where it holds and where it does not). Uncovering patterns that generalise is the fundamental work of science. It is only because we know that these scientific laws hold across a wide range of conditions that they can be used for prediction. And by knowing the many factors that do not affect the laws, and maybe the few that do, we gain deep explanatory insight into why things are the way they are, and how things work. This is how science works. Where do these discoveries come from? This book draws largely from the work of researchers at the Ehrenberg- Bass Institute for Marketing Science. The early discoveries come from work started by Professor Andrew Ehrenberg and Professor Gerald Goodhardt five decades ago. Today this fundamental research continues at the Ehrenberg-Bass Institute at the University of South Australia, and the Ehrenberg Centre at London South Bank University. There are also plenty of like-minded researchers working inside and outside universities 6 Itsacommon mistake, made even by senior academics, to think that statistical significance tests tell us something about generalisability. They don't, and this isn't their purpose. They merely tell us something about the possibility that our result is really due to random sampling variation, that is, because we examined a small sample of the population not everyone. Statistical significance tests dontt tell us which population our result might represent, or anything about the conditions where the result would vary.CHAPTER 4 EVIDENCE-BASED MARKETING 15 around the world. These efforts receive encouragement and financial support from progressive corporations around the world including Turner Broadcasting, Mars, Colgate, Kraft, Procter & Gamble, General Motors, Network Ten, Mountain View Learning and many others. We are very grateful for this ongoing support. Many of the findings in this book are emotionally confronting, because they clash with conventional wisdom. In order to make readers feel more psychologically comfortable with this ‘myth busting’ I have attempted to give a good feel for the empirical data’ and how the analysis was done. T've done this by completely avoiding complicated obscuring statistics and algebra; there are no ‘black box’ (or ‘trust me’) techniques used, and references are supplied so that interested readers can delve further. There is much potential for science to improve the effectiveness of marketing. The great advances in marketing that will be made this century won't be due to computers or sophisticated statistics. As in other profes- sions, the real advances will come from the development and application of well established scientific laws (empirical generalisations). On behalf of my colleagues and co-authors I hope you find the new knowledge presented in this book exciting; I hope it also changes the way you see, and do, marketing. 7 All the tables in this book try to conform to Andrew Ehrenberg’s principles of data reduction; see Ehrenberg (1998, 1999, 2000).4 2 How Brands Grow Byron Sharp ‘hat is the secret key to growth? All the global market research agencies claim to provide an exclusive service that can tell if your brand is heading up or down. Every strategy consultancy says that only it can take you on the path to profitable share growth. Econometric modellers say they can quantify precisely which marketing mix will deliver maximum growth. This is all nonsense. If growth were that easy then all marketing directors would be out of a job, or paid a pittance of their current salary. No one can guarantee growth. That said, this book does reveal a great deal about how brands grow. Marketing science has been chipping away at the problem for decades. ‘There have already been some breakthroughs that every professional marketing person should know about. The desire for growth Have you ever met a marketer who was not interested in sales growth or, at the very least, interested in preventing losses? Growth is an ingrained part of our business culture. Marketing departments are expected to plan for and deliver growth. Marketing initiatives have to be justified in terms of growth potential. The main reason for this obsession with growth is the substantial fixed costs of most firms; this means that companiesCHAPTER 2 HOW BRANDS GROW experience dramatic increases in profitability if they increase sales, and profits can be wiped out by comparatively small sales losses. So growth is very attractive. However, market share growth is difficult. Markets are more com- petitive than ever. Marketers have to work very hard just to retain their current market share position; run very fast just to stand still. For example, the scope for price promotions to deliver any more growth is limited by the fact that we are running about as many promotions as the retail system can handle. ‘There is plenty to debate about whether an obsession with sales growth is good for profits in the long run, but let’s accept the idea that it would be good to know more about how to deliver market share growth and prevent decline. The difference between large and small brands A sensible starting point in understanding growth is to compare com- peting brands that have different market shares. A million brands have attempted to grow—some have been successful and some not. Can we use these trillions of dollars worth of natural experiments to discover some- thing universal about the differences between large and small brands? Yes; the difference between large and small brands, and growing and declining brands, is very revealing. Again and again it appears in numerous product categories, markets and countries that there is a fundamental law of brand size:* big brands have markedly larger customer bases. 1 Much of this research was conducted by Andrew Ehrenberg and Gerald Goodhardt and associated colleagues from the 1960s onwards. It has also been verified by commercial analysts within large marketing firms such as Kraft, P&G and Unilever and the large research houses such as’TNS and Nielsen. The law has also been recently independently rediscovered in an analysis of 10 000 brands in the US by researchers with no prior knowledge of the law (Hall & Stamp, 2004), and in an analysis of growing brands by Research International (presented by Jim Findlay in 2003 Advertising Research Foundation (ARF) ‘Week of workshops’). 17