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Are we in a marketing reformation?

Martin Luther nailed 95 theses to the church door in Wittenberg in 1517, starting the Reformation that created Protestant Churches. He attacked the incumbent Church’s practices and beliefs, particularly selling indulgences that granted absolution to rich sinners.

Ten years ago, the marketing industry had its Luther moment when Byron Sharp nailed ‘How Brands Grow’ to a publisher’s door in Adelaide, South Australia, with equivalent religious fervour and a set of Marketing theses that challenge the Segmentation, Targeting and Positioning (STP) doctrine of Marketing.

Over the centuries, Catholics and Protestants have come to co-exist and ease up on the bloodletting. Marketing is slowly undergoing a similar accommodation, though pre-emptive strikes on the establishment are still being launched in peer-reviewed Marketing Journals1 .

Luther said his marriage to an ex-nun would “please his father, rile the Pope, cause the angels to laugh, and the devils to weep.” This discussion has more modest reconciliation objectives, but you get the point

Context

The renowned Ehrenberg-Bass Institute for Marketing Science has proven that businesses and products thrive by establishing strong ‘customer mental models’ (a clear understanding and trust in the product) and ensuring ‘accessibility’ (readily available in local stores or online and stands out on the shelves). Brands that are both mentally and physically accessible are chosen more often, as customers tend to stick to their routine purchase decisions. This is why these businesses dominate the market: Qantas, Woolworths, Cadburys Chocolate, and Coca-Cola.

Products with the best mental and physical availability grow to be the largest in their category; they are famous. As their model is dominant among more customers, they also have the highest rates of customer loyalty. The ‘Double Jeopardy Law’ states that the largest businesses have the most loyal customers, and smaller brands have fewer, less loyal customers.

The Institute is sceptical of loyalty programs; the mental models that attract customers hold them anyway, so they consider programs a waste of effort. Their published research reports only weak Loyalty Program effects, and they claim that companies must attract more loyal customers rather than focus on making existing customers loyal. ‘They’ concede that loyalty programs can have an effect; the launch of Tesco’s Clubcard and Boots Advantage saw dramatic short-term gains in market share, 2% and 4%. Both gains were too rapid to be the result of increased customer loyalty; it appears the loyalty offer strengthened the mental models of light buyers from Tesco and Boots.

Discussion

Advertising and traditional brand-building activities build mental models – we will call them purchasing ‘habits’ as customers are often unaware they are influencing their choices.

Customers have a small number of these models for the repertoire of products/companies they buy from in each category, and they interact with physical availability. The model that ‘wins’ more often becomes the customers’ favourite, emotional focus (if any), and most common purchase.

Loyalty Marketing / Loyalty Programs contribute to this competition to be the customers’ dominant habit in at least two ways.

1. Adding Behaviouralist mechanics to the model through rewards

Business mental models that include vested value, typically loyalty points, strengthen customers’ biases, helping them to dominate. These biases include the desire to avoid loss, the fear of missing out, goal gradient effects and the Stimulus-Response mechanisms of Skinner and Pavlov.

Habits are established by associating a purchase with a reward, frequently enough for this link to become an inherent part of the brand’s mental model for the customer. B.F. Skinner labelled this Operant Conditioning, and Aristocrat and Bally have confirmed that the stimulus–reward link is a potent influence on human behaviour through their poker machines. The lesson learned is to reward customer purchases early and often to promote the formation of habit.

Secondary reinforcement is important; other stimuli can be associated with the reward and be just as motivating. Skinner’s mice would press the lever to hear a tone once it had been sufficiently linked to food rewards3. Loyalty program members feel emotional pride in their growing point balance independent of the reward that initiated their engagement (e.g., a free flight). The secondary reinforcer adds to the model’s strength and the brand’s mental availability, making program members more likely to choose this brand from their repertoire.

The key stimulus-reward mechanics are the size of the reward (‘amplitude’) and the time between rewards (‘interval’). The strongest habits are formed by variable interval and variable amplitude rewards. If your program can only afford low-value rewards, such as $10 coupons, shorten the interval and make them frequent. If the reward value is large (e.g., a free family holiday), rewards can be less frequent such as every two years, and secondary reinforcers are more important to maintain the habit.

Either way, rewards boost the brand’s mental availability when the decision to buy is underway…

2. Timing Matters

The mental model (like physical availability) works best if it is the most available at the time of the customer’s decision. Not all customers are in the ‘deciding to buy’ state at any point in time, so advertising frequently is important to coincidentally overlap with enough customers who are, to be current when it matters.

When well executed, loyalty programs provide enough customer-specific data to predict when a customer is in the decision-making process. A brand message or offer delivered at that time has maximum impact because it is available and recent. The same offer is indeed high value or spam, depending on whether it is delivered before or after purchase.

Implications for Loyalty Managers

There is evidence for this, as consumer advocates are pointing out. Two examples:

  1. Regulators in Australia contend that strong mental models for the grocery loyalty programs Everyday Rewards and Flybuys restrict consumers’ ability to make informed pricing decisions in their own best fiscal interests.
  2. Establishing a brand’s mental availability takes time and consistent reinforcement, so once established, it can be a significant barrier to new entrants. Scandinavian air travel regulators famously banned the incumbent airline from offering a loyalty program until a start-up competitor airline had time to establish its own mental model for travellers.

Loyalty Programs have always worked best when they are consistent with and strengthen the brand proposition of the business and its products. Ehrenberg-Bass gives us an empirical explanation for why this is true. Effective programs enhance the strength and competitive superiority of a business’s mental models to the extent that they are integrated for the customer.

At the extremes, the loyalty program dominates the mental model and overtakes customer thinking; frequent flier point collection overwhelms service details like aircraft models and (sometimes) airfares.

The imperative must be to make the loyalty program an integrated, critical part of the overall brand proposition so it increases the probability you become the customers’ purchase habit. Consider the implications of this for the structure of your marketing teams; independent loyalty teams may not always be such a clever idea.

Creating consumer habits requires repetition, an uncontentious advertising principle. Habits are strengthened when associated with rewards, so it makes sense to consistently link brand value and loyalty program benefits in communications. Businesses should invest in one mental model, not two.

Rewarding customers early in their involvement with the business increases the likelihood of establishing a positive mental model, so onboarding programs are critical to program growth. For example, an enrolment points gift helps begin the process of making loyalty points a persistent secondary reward.

The Marketing Laws (Sharp’s Theses)

The Laws of Marketing, from Ehrenberg, Binet, Sharp et al.

  • Double Jeopardy Law: Brands with lower market share have fewer buyers, and they are less loyal. The mental models that make brands large continue to hold customers better than models that achieve less share.
  • Retention Double Jeopardy: Brands lose buyers proportionately to their market share, so large brands lose more customers (but these represent a smaller relative proportion of their base).
  • Pareto Law: It’s 60/20, not the commonly held 80/20. 60% of a brand’s sales come from 20% of buyers. Now 50/20 in the latest research.
  • Law of Buyer Moderation: Highlights the problem of taking ‘point in time’ measures of customer bases: in subsequent time periods, heavy users buy less often, light buyers buy more, and non-buyers buy the brand. The base regresses to the mean.
  • Natural Monopoly Law: Brands with more market share have a greater proportion of light buyers in their customer base.
  • Customer Bases Seldom Vary: Rival brands sell to very similar customers.
  • Attitudes Reflect Behavioural Loyalty: Consumers know and say more about the brands they use. Conversely, they think and say little about brands they do not use. Market researchers take note.
  • Usage Drives Attitude: Buyers of different brands express similar attitudes about their respective brands (or “I love my mum, you love yours”). Customers love the brand they buy, or “we are scared because we run from the bear”.
  • Duplication of Purchase Law: A brand’s customer base overlaps rivals in line with their market share, i.e., in any given time period, it will share more of its customers with large-share brands than small-share brands.


Marketing Rules
 resulting from these Laws aim to create mental and physical availability for the brand.

  • Continuously reach all buyers physically and through communications.
  • Make the brand easy to buy.
  • Get noticed often.
  • Refresh and build brand-linked memory structures.
  • Create distinctive communications assets.
  • Be consistent but fresh and interesting.
  • Stay competitive; give no reasons not to buy.
  • Do not sell indulgences to rich sinners. (Just kidding)

So do not throw the baby out with the holy water. Sharp is not all wrong, but he is not all right either and loyalty programs are incredibly powerful marketing tools that achieve/reinforce many of the things Sharp says marketers need to do to grow their brands.

We are Ellipsis, the Loyalty Experts. We help you measure, manage and grow customer loyalty​. We’re here to help, please get in touch

References:

https://marketingscience.info/how-brands-grow/

  1. Sharp, Dawes & Victory “The market-based assets theory of brand competition” Journal of Retailing and Consumer Services 76 (2024)
  2. Dan White post on LinkedIn.
  3. Pavlov’s dogs, bells and salivation are the most often quoted example.
Ellipsis
Author: Ellipsis

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