Why a brand's most valuable consumer is the next one it adds.
MARKETERS WHO SEGMENT to find their most profitable consumers to invest against are missing the point. The most profitable consumer a brand has is the next one it adds to its franchise.
But brand managers often want to take the "mass" out of "mass marketing" to improve their return on the marketing communications dollar. One way to do that, they believe, is to waste fewer dollars reaching infrequent or nonbuyers of the brand and to focus marketing resources on the most profitable consumers who provide the greatest revenues and profits per capita or per household. As Schultz and Walters (1997) put it:
The primary value of any behavioral database is to be able to differentiate good customers from bad or mediocre ones.... The key point is to know which customers are important and which are relatively unimportant, and to allocate resources accordingly.
The implications of this line of thinking are clear. Pocus marketing communications on the most valuable consumers and don't waste time, money, and effort on the least valuable ones. The narrower, more exclusive focus on the most profitable consumers will improve marketing productivity, lead to brand growth, and increase overall profit contribution to the company.
The purpose of this paper is to demonstrate the flaws in this argument for frequently marketed consumer goods (FMCGs). The most "valuable" consumers are necessary but not sufficient for growth. Consumers who are dismissed as unimportant, unprofitable, and therefore undeserving of brand communication are vital to a healthy, growing, profitable brand.
WHICH CONSUMERS ARE THE MOST PROFITABLE?
Since different consumers will buy the brand at different rates, it is obvious that some will contribute more revenue and profit than others. The typical buying distribution makes this fact of marketing life very clear. For example, Figure 1 shows the distribution of buyers and of volume they contribute for a brand of shampoo. Here 22 percent of households bought the brand three or more times, accounting for 55 percent of volume for the year. Those 22 percent are clearly more profitable per household than the other 78 percent of buyers. The proportion of users and their volume contribution to a brand, in fact, can be easily measured at any point in time using panel data. As Figure 1 also illustrates, the distribution can be estimated very accurately using the NBD-Dirichlet (Uncles, Ehrenberg, and Hammond, 1995).
1. Even though they are clearly the most valuable per household, heavy buyers are not the major source of brand growth or decline.
2. Rather than being a drain on resources, light and nonbuying households consistently contribute to the bottom line, especially for growing brands.
Although it is obvious that some consumers contribute much more to revenues and profits than do others, it is a mistake to expect brand growth from a plan that focuses narrowly on the most profitable households. It is even a mistake to assume that a plan focusing narrowly on such households will be more "productive" and a better marketing investment. There are several reasons for this.
3. A brand trying to maximize the percent of its profitable consumers will not be maximizing the profit from all its consumers. Those two objectives are incompatible.
Which consumers contribute to brand growth?
Although it's possible at any point in time to know how different types of consumers contribute to volume, the source of future growth is another issue altogether. Allocating the marketing communications budget so that dollars are focused on profitable consumers and not wasted on unprofitable ones assumes the source of future brand growth will come from heavy-buying households, not from light or moderate buyers.
The source of brand growth is an empirical question that can be answered fairly directly. Do successful brands that generate higher revenues and profits have a much larger concentration of heavy buyers than comparable, less-successful brands? As a brand's share grows, is it the more valuable consumer that contributes the most? Are the unimportant light and nonbuying households a complete waste of time, effort, and money because they do not contribute at all to growth or the bottom line?
To answer such questions, we can either examine the buying distributions of similar brands that differ in share, or we can examine a growing brand at two different times to determine how it has grown. The two approaches will give very similar answers that are quite generalizable.
Figure 2 shows the set of buying distributions that are typical in any category. These are haircare brands, but they could as well be brands of cereal, soft drink, coffee, ketchup, dairy, or any FMCG. It is clear by visual inspection that each brand with a greater volume share has more buyers at every level of buying frequency from light to heavy. As a brand gains consumers, its buying distribution becomes more and more similar to that of the whole category, skewing slightly more to heavier buyers as it grows larger. The buying distributions for individual brands are modeled almost perfectly by the NBD-Dirichlet (Ehrenberg, 1988), making it a most useful planning model for understanding consumer contributions to growth.
Figure 3 shows the percent difference in households and the volume they contributed for the 4 share and 7 share brands. Given the focus on the most valuable consumers, it would be reasonable to expect that the major source of volume for the more successful brand would come from heavy-buying households. In this very typical case, however, the difference between a 4 and 7 share is associated with a 76 percent increase in lighter-buying households--those buying one or two times a year--accounting for 47 percent of the increase in volume. Heavier-buying households account for half of the volume difference, but only a quarter of the additional consumers. A brand will not grow by a focus on heavy buyers alone.
A look at a growing brand over time shows a similar picture. Table 1 shows data for a major dairy brand that grew 57 percent over a four-year period in a category that did not show much growth. Given the traditional argument, one would expect growth to come from a large increase in frequency of use as the brand increased its profitable heavy users. The table shows a very typical pattern associated with share growth: a large increase in the number of households that buy during the year (36 percent) is accompanied by an important but substantially smaller increase in the frequency of buying (16 percent). Volume bought per occasion is virtually a constant. As the brand grew in revenues and profits, it acquired more buyers and the average buyer bought somewhat more often. The much more rapid increase in buying households than in frequency of purchase, of course, reveals the source of growth--light- and moderate-buying households.
Both across brands at one time and within a growing brand over time, it is clear that the profitable heavy-buying segment is necessary but not sufficient for brand growth. Rather than being an unproductive waste of time and money, lighter-buying households are essential to growth and brand health.
Are nonbrand buyers a complete waste of advertising dollars?
Here, the evidence is also very clear but contrary to received wisdom. Surprisingly, even nonbuyers this year will contribute substantially to volume next year.
What about those people who don't buy the brand at all? Isn't advertising that reaches them a waste of money, especially for an established brand?
Table 2 shows the results of a two-year analysis of the ketchup category based on IRI panel data. The brand in question was the leading brand in the category with extremely high brand-name recognition as well as market share. First, we analyzed only those consumers who bought the category in both years. Next we categorized consumers in year 1 into groups that differed in volume contribution and value to the brand--typical in determining the most profitable segments. Nonbuyers were the largest group, comprising 45 percent of consumers. By definition, they did not buy the brand at all in year 1. Light buyers bought one time and contributed about 14 percent of brand volume. Medium buyers bought two to four times and contributed 43 percent of volume. Heavy buyers who bought five or more times during the year comprised only 9 percent of consumers but contributed about 43 percent of the brand's volume. After "segmenting" the consumers based on their value contribution to the brand in year 1, we asked a very simple question: what percent bought the brand in year 2, and how often did they buy it?
Nonbuyers in year 1 accounted for 14 percent of volume in year 2. Light and nonbuyers together who contributed only 14 percent of brand volume in year 1 accounted for about 29 percent of volume the following year. Conversely, although still very important for volume, the moderate- and heavy-buying households' volume contributions in year 2 were considerably less than in year 1. There was a noticeable regression toward the mean that always occurs when respondents are classified based on their frequency of buying.
Is this a general finding or just the profile of a stagnant established brand that is losing heavy users while gaining light and moderate users? In fact, the brand's share declined very slightly from one year to the next. These findings, however, are very generalizable.
Table 3 shows the actual percent repeat and frequency of buying for each buyer group in year 2 based on their classification in year 1. The Conditional Trend Analysis that is an integral part of the NBD estimates the percent of repeat and frequency of buying numbers almost perfectly. The only real exception is the slight underestimate of the frequency of buying by the heavy-user group. This illustrates not just the accuracy and usefulness of the NBD and the Dirichlet distributions for understanding consumer behavior but the generality of the findings. We should expect light and nonbuyers in one period to contribute substantially to brand volume in the following period. Category buyers who are light and nonbuyers of the brand in one period are an important source of future brand volume. This is the case for the very large brand that we examined here, and it is even more the case for brands with smaller shares. In fact, the smaller the brand, the more nonbuyers this year will contribute to volume next year. Si milarly, the mare a brand grows, the more nonbuyers this year will contribute to volume next year.
Should a brand try to maximize its percent of profitable consumers or its consumer profits?
In suggesting that a brand target a small group of profitable households, marketers want to ignore the large number of low-volume households, believing that increasing the small number of high-volume households is the route to growth. But dismissing the greater number of light- and moderate-buying households that are critical to brand growth as "less valuable" is similar to dismissing a high-volume, low-margin brand as less valuable to a company's bottom line than a high-margin brand that sells very little. While generating less profit per unit, the total number of units sold compensates for the lower margins contributing to the tremendous revenue and profit success of high-volume mass-marketed products. It is the combination of margin and quantity sold that produces a profitable bottom line, not margin alone.
Similarly, while generating less revenue or profit per household, the much larger number of lighter and moderate brand users make them an important source of brand growth and, certainly, marketing communications attention. This will be true of every frequently bought consumer brand that demonstrates the typical buying distribution shown in Figures 1 and 2.
In fact, a brand that generates greater revenue and profits for a company in the aggregate will have a lower concentration of "profitable" consumers than a smaller, less profitable competitive brand. Table 4 illustrates this for two categories. As a brand's share increases, the percent of volume accounted for by the percent of households buying 3+ times decreases. In general, smaller-share brands in a category have a higher percent of volume contributed by a small number of heavy buyers than is true for larger, more successful, brands (Anschuetz, 1997). Within a specific category, the large, successful brand will always face the apparent "problem" of not having as great a percent of profitable consumers among its users as the third- or fourth-ranked brand--even though it will have a greater number of profitable heavy-buying consumers than its competitors. Larger brands will always appear to be marketing less efficiently by this measure.
So, in determining which consumers are most valuable to a brand, marketers must consider the net impact on the bottom line, not just the revenue generated per household. A brand needs to focus on generating the greatest revenue and profits within its budget. That will mean generating purchase interest in the brand among light-, moderate-, and heavy-buying households--even nonbuyers. A brand needs to focus on increasing its profits from category consumers, not just on increasing the percent of its buyers that are the most profitable per household. An examination of what actually happens as a brand grows to success makes that very clear.
This provides an interesting twist to the search for the most profitable consumer.
Who is the brand's most valuable consumer?
There is a great irony in the answer to this question. On the one hand, it is obvious that the most valuable consumer is the one who buys the brand the most during any given time period. On the other hand, the facts also make it clear that as a brand grows, it acquires a larger number of consumers across all levels of usage who buy the brand, on average, slightly more often. This is the well-documented phenomenon of "Double Jeopardy" (Ehrenberg, Goodhardt, and Barwise, 1990). As a brand grows, the whole distribution is lifted, as is suggested in Figure 2, closer to the category distribution of buying.
So, it follows in a very important and practical sense that the brand's most valuable consumer is the next one it adds to the franchise. This is not to be taken literally, of course, because we know that a growing brand will add consumers at every level of buying frequency. But a brand that wants to win "profitable" consumers must also plan to attract less profitable ones as well. Consumer profitability grows as the brand becomes increasingly attractive across the entire mix of consumers, not just to a narrow group of consumers who currently buy the brand quite often.
Implications for advertising strategy
There are many interesting implications that follow from the point of view outlined above. There are two common objections, however, that I'd like to address, one focusing on media and the other on the message.
How can we afford to reach everyone?
The first argument is that "We can't afford to reach everyone, so we will reach a small group to be more efficient and effective."
The brand, however, does not need to reach everyone to grow. A brand just needs to reach a number larger than those it currently has. Settling for anything less is a recipe for stagnation or decline, not growth.
Budget limitations affect every marketing decision. Not every brand can afford to increase distribution, a larger sales force, or major capital investments required for growth. If a brand does want to grow, however, it must make the investment to become accessible to more and more consumers. At some point, increased distribution, a larger sales force, or additional manufacturing capacity will be essential for growth, and the brand will have to invest in that. The same holds true with marketing communications. A brand with a smaller budget will have to focus on reaching fewer consumers until its budget becomes large enough, through growth, to reach even more. There is no question that brands with large marketing budgets have a decided competitive advantage. A smaller brand has to face this reality and make every dollar work as hard as possible. It still has to grow the total number of category users who buy the brand, including light-and moderate-buying households, not just focus narrowly on a small segment o f "profitable" households.
How can the brand be everything to everybody?" The second argument is "The brand can't be all things to all people. It must stand for something among a smaller number of profitable consumers."
Of course a brand cannot mean all things to all people. An unfocused message, one that is not vivid and does not have a consistent point of view, will be unmemorable and lost on consumers of every type. Complexity or confusion will never sell a brand.
Brands that grow, however, mean something specific to more than just a small group of their most profitable consumers. The truly successful growth brands that become leaders in their categories stand for something very clear, vivid, and specific--among nearly all users in the category (and often even among those who are not). Every consumer in the category knows what Budweiser, McDonald's, Michelin, and Pepsi stand for. Those very specific and vivid impressions are not exclusively the possession of a small group of superheavy users or brand fanatics. Leading brands have such vivid meanings to consumers that they become cultural icons--broadly popular, meaningful, and evocative symbols that nearly everyone understands.
Rather than "being all things to all people," a successful brand need only stand for one very important, vivid, memorable thing to nearly everyone interested in the category.
This is why it makes sense for a brand to target inclusively, that is to craft a clear, vivid message that deeply connects with category users across a wide range of usage, from heavy to light users. Brands that are exclusive in their media or message simply will not be positioned for growth, but for stagnation and decline.
Ironically, the real threat of inefficiency is in reaching too narrow rather than too broad a target, either in media or the message. A target audience too narrowly defined is or will be more expensive to reach. A message designed to appeal to a small homogeneous group of consumers is a waste of money if placed in media that will reach far more--and more diverse prospects. An overly narrow targeting plan will exclude consumers who will be important sources of future brand volume. This is a different but very real kind of media and creative waste--missed opportunity driven by a fear of reaching or connecting with "less profitable" buyers.
CONCLUSION AND IMPLICATIONS
1. The most valuable consumers a brand currently has are necessary but not sufficient for growth. "Less valuable" consumers will always be critical to grow a brand's revenues and profits.
2. In a very practical sense, the most profitable consumer will be the next consumer the brand adds to its franchise. The next consumer added will not literally be the most profitable since the franchise of a growing brand will draw from a broad spectrum of users. But as a brand grows, its average frequency of use will also grow, increasing the average revenue and profits per consumer. The profitability of the whole mix of consumers increases as the group grows larger.
3. A successful, growing brand needs to target inclusively to bring in revenue and profit from increasingly larger numbers of consumers. An exclusive, narrow focus on a brand's current profitable households is a strategy that will not contribute to brand health or growth and may instead lead to brand decline.
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TABLE 1 As a Brand Grows, the Number of Households Increases More Than the Frequency of Buying Year % Change Major Dairy Brand 1 2 3 4 from Year 1 Volume Share 2.5% 3.4% 3.9% 4.0% 57% %HH 26.0% 31.1% 33.6% 35.4% 36% Frequency 2.50 2.78 2.96 2.89 16% Volume/Occ 0.62 0.63 0.63 0.64 3% Price/Lb. $3.60 $3.57 $3.87 $4.05 13% Source: IRI Panel Data TABLE 2 Light and Nonbuyers in Year 1 Contributed 29% of Volume in Year 2 Frequency Brand Volume Buyer Group % of Sample Year 1 Year 1 Year 2 Nonbuyer 45% 0 0% 14% Light 22% 1 14% 15% Medium 25% 2-4 43% 36% Heavy 9% 5+ 43% 34% Total 100% 100% 100% Source: IRI Panel Data TABLE 3 The Period-to-Period Volume Contribution of Loyalty Groups Can Be Predicted Very Well Nonbuyers Light Buyers Medium Buyers Percent Frequency Percent Frequency Percent Year 2 Observed 31% 1.5 57% 1.8 79% NBD Estimate 28% 1.5 57% 1.9 80% Medium Heavy Buyers Buyers Frequency Percent Frequency Year 2 Observed 2.7 96% 5.9 NBD Estimate 2.7 97% 5.2 TABLE 4 As Share Increases, the Concentration of the "Most Valuable" Households Decreases Share %Vol/%HH Buying 3+ Ketchup 9% 2.3 17% 2.2 56% 2.0 Hair Care 1% 3.0 3% 2.6 5% 2.3 11% 2.2 18% 2.1 Sources: AC Nielsen, IRI Panel Data
ANSCHUETZ, NED. "Building Brand Popularity: The Myth of Segmenting to Brand Success." Journal of Advertising Research 37, 1 (1997a): 63-66.
_____. "Profiting from the "80-20 Rule of Thumb." Journal of Advertising Research 37, 6 (1997b): 51-56.
EHRENBERG, A. S. C. Repeat Buying. London: Charles Griffin Company, 1988.
_____, GERALD GOODHARDT, and T. PATRICK BARWISE. "Double Jeopardy Revisited." Journal of Marketing 54, 3 (1990): 82-91.
SCHULTZ, DON E., and JEFFREY S. WALTERS. Measuring Brand Communication ROI. New York: ANA, 1997.
UNCLES, M.D., K.A. HAMMOND, A.S.C. EHRENBERG, and R.E. DAVIS. "A Replication Study of Two Brand-Loyalty Measures." European Journal of Operational Research 76, 2 (1994): 375-84.
_____, A.S.C. EHRENBERG, and K.A. HAMMOND. "Patterns of Buyer Behavior: Regularities, Models and Extensions." Marketing Science 14, 3 (1995).
NED ANSCHUETZ is a senior vice president, group strategic planning director at DDB. His research interests include consumer buying behavior, brand loyalty, brand leadership, and global branding. He currently leads DDB's Brand Capital project, a worldwide study of brand perceptions and consumer life styles.
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|Comment:||Why a brand's most valuable consumer is the next one it adds.|
|Publication:||Journal of Advertising Research|
|Date:||Jan 1, 2002|
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