Consumer Behaviour BHO2434

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Week 8: Market Structure and Loyalty
Issues
East, Wright & Vanhuele (2009)

What is loyalty
Discuss with the person next to you what
you believe the definition of customer
loyalty to be:
What is it?
How would you measure it?
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Behavioural loyalty
Whether you return to purchase the same brand
again (and again?)
Attitudinal loyalty
Whether you respond to nice statements about the
brand
Repertoires
A small group of brands that consumers tend to
purchase from (and therefore are loyal to?)
Penetration (b in formula)
The percentage of consumers in a market who buy
a brand
AKA Market Share
SCR (Share of Category Requirements)
The proportion of all purchases a particular brand
makes over time
E.g. I went to McDonalds 6 out of the last 10 visits to
fast food outlets. Therefore my SCR for McDonalds
is 60%
BHO2434 Week 8 4
Purchase frequency (w)
Average number of purchases made by those who
purchased at least once in any period
Mean population purchase rate (m)
The number of purchases made by an average
member of the population

Dirichlet: m=bw
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Quite a lot!
Purchase frequency
follows a gamma
distribution
What does this tell
you about your
market?
Paretos rule:
80% of purchases
made by 20% of
customers?
0
5
10
15
20
25
30
35
40
45
1 2 3 4 5 6
# of purchases
P
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r
c
e
n
t
a
g
e

o
f

b
u
y
e
r
s

m
a
k
i
n
g
.
.
.
BHO2434 Week 8
Consumer Behaviour BHO2434
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Be positively disposed toward the brand
Satisfaction
Repurchase intent
measured by survey
Assumes link to actual future loyal behaviour
But weve already discussed the problems using such
measures to predict behaviour
People may like a brand but not buy it
E.g how many of you like Porsches?

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Sole loyalty
i.e. 100% of purchases go to one brand
Share-of-category requirement (SCR)
Retention in a subscription market
Measured with panel data, survey or loyalty tracking
through a loyalty programme
Can be used to predict probability of purchase
BHO2434 Week 8 8
Biased
Non random
Behavioural response
Actual purchase
Expressed over time
Allegiance
By some decision-making unit
Measured on households or persons
With respect to one or more alternative brands
Preference
Which is a function of psychological processes.
Attitude
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Typically between 10-20% per annum
E.g. Reicheld (1996);
East and Hammond (1996) found
similar variation across categories
light and heavy buyers showed similar defection
rates
brand leaders had lower customer defection
(consider with DJ effect?)
BHO2434 Week 8 10
Richeld (1996):

5 times more to acquire a customer than
keep a customer. Loyal customers:
Have no acquisition costs, unlike new customers
Buy more (in some industries)
Are more resilient to failures, price increases
Introduce more new customers (referral)

Customer loyalty apparently of crucial
importance
BHO2434 Week 8 11
0 1 2 3 4 5 6 7
Year
Annual
Customer
Profit
Price premium
Referrals
Cost savings
Revenue growth
Base profit
Acquisition cost
BHO2434 Week 8
Reichheld
(1996) claims
that referrals
from
recommendation
increase with
customer tenure
Consumer Behaviour BHO2434
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Wouldnt it be more profitable?

Many marketers have been trying to increase
brand loyalty to reduce retention costs
But how do you increase loyalty?
BHO2434 Week 8 13
Raphel & Raphel
(1995) and others
see
recommendation as
the outcome of
relationship
development.
Make them more
satisfied!
Consumers have
relationships with
brands they use
BHO2434 Week 8
Partner
Advocate
Supporter
Client
Customer
Prospect
14
Loyalty programmes
Loyalty programmes are a good
investment for companies
Discuss this
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Some raise service levels
E.g. Qantas Executive Club gets you into airport
lounges
Most give incentives
E.g. FlyBuys
Possible effects
More spend?
Increased market share?
Increased customer retention/loyalty?
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Identify particular customers interests and provide
special offers
Rewards e.g. Tru Energy
Reward current purchasing with vouchers
FlyBuys rewards
Recover customers
Send an offer to customers who have lapsed
Identify customers with more spending potential
who may shop mainly elsewhere (FlyBuys)
Acquire customers.
E.g. identify those not using the store from electoral
register
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Research appears to suggest:
loyalty cards are liked but no effect on share
Sharp and Sharp (1996).
small panel showed little effect on purchase
frequency
subsequent NZ study showed that FlyBuys fuel
supplier resisted a price squeeze better
BHO2434 Week 8 18
Consumer Behaviour BHO2434
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Behaviourists suggest there are two types:
Subscription
You subscribe to a brand for a period of time
E.g. banks, insurance, ISPs, telephone
Repertoire
You cycle through a small number of brands on an as-
if random basis
FMCGs, etc

Sharp, Wright & Goodhardt (2002)
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Some brands have weak awareness
Do you know what brand of flour you bought
last?
Some consumers seek variety
Sometimes you want a Mars, others you want a
Snickers
A price promotion may switch you one week
To be followed by the other brand on special
offer the following week
Brands occasionally stock out
Most of us will simply turn to another brand
BHO2434 Week 8 20
In portfolio categories, loyalty is measured
by (SCR).
Share loyalty may be explained by:
Genuine portfolio
weak brand awareness (tissues)
variety seeking (biscuits, cereals)
discount purchasing
non-availability
Apparent portfolio
sub-categories (bio and non-bio detergent)
individual preferences in household
BHO2434 Week 8 21
You are now familiar with the term
repertoire
Most consumers do not buy FMCG products
like this:
Brand A A A A A A A A A
But generally buy more like this:
Brand B A C C C B B A B C
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Duplication of purchase refers to the % of
buyers of one brand who purchase another
brand.
E.g 26% of Maxwell House instant coffee
buyers also bought Nescafe
48% of Nescafe buyers also bought Maxwell
House
8% of Nescafe buyers also bought Maxim instant
coffee
BHO2434 Week 8 23
Is there more loyalty?
Is there more loyalty in subscription
markets than repertoire markets?
Why?
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Consumer Behaviour BHO2434
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No more loyalty
We switch at predictable levels
Just that it might be on a weekly basis for
supermarkets, and annually for insurance

Sharp, Wright & Goodhardt (2002)
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Your variations
Write down your brand loyalty for the
following:
Do you buy
only one
brand?
Have you changed
brand in last 12
months?
Why do you buy
your main
brand?
Petrol
Tea
Chocolate
Butter/marg
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Even if you could dramatically improve
customer retention the impact on sales will
always be small compared to the sales
possibilities of acquisition.
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UK 86-89
Penetration
%
Repeat-
buying %
France 86-
89
Penetration
%
Repeat-
buying %
Ford 27 69 7 51
Rover 16 54 2 36
GM 14 58 5 51
Nissan 6 55 - -
VW/Audi 5 54 7 52
Peugeot 5 43 22 55
Renault 4 48 29 61
Fiat 3 50 6 44
Citroen 2 52 12 55
Toyota 2 50 - -
Honda 1 47 - -
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Each year about half of each car brands sales
come from retention, and half from
acquisition.
So if Fiat (in the UK 3% share) improved its retention
rate to 100% (!)
i.e., it would gain an extra 1.5 points of market share
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Each year about half of every car brands
customers switch (ie are acquired by other
brands). So half the market is up for grabs
each year.
So for Fiat (in the UK 3% share) the limit on what it
can gain from acquisition each year is 50 share
points
(i.e., nearly a 20x increase in sales).
BHO2434 Week 8 30
Consumer Behaviour BHO2434
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Loyalty max potential = sales increase 50%

Acquisition max potential = sales increase
1700%
i.e., 33 times more sales potential from acquisition
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To grow you must expand your customer
base
Reach non-customers and light, occasional
customers
Growth or decline
will depend on how many of these customers you
can win/nudge
Aiming to get more sales out of heavier
customers is not the path to growth
BHO2434 Week 8 32
Probability or intention?
Usually conducted using an intention scale
Asks the respondent whether they intend to carry
out a specific behaviour
See writings by Ajzen & Fishbein
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How likely are you to shop at Coles in the
next four weeks:

:

:

:

:
Very
Likely
Likely Unsure Unlikely Very
Unlikely
BHO2434 Week 8
Studies are showing that intentions change
after a behaviour
Respondents under report intention to buy growing
brands
Respondents over report intention to buy dying
brands
Why? Because intention to purchase is an
attitudinal measure that reflects past behaviour
NOT future behaviour!
Consider the following data
BHO2434 Week 8 36
Consumer Behaviour BHO2434
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0
10
20
30
40
50
Time
M
a
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k
e
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S
h
a
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R
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L
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BHO2434 Week 8
Intention for
dying brand lags
Dying brand market share
Intention for
growing brand lags
Growing brand market share
37
What are the implications of the graph
presented on the previous slide?
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Intention scales are better predictors of past
behaviour

Juster scale shown to be more predictive of
behaviour than intention scales
Because rather than asking an attitude (i.e.
intention), it asks the respondent for a probability
BHO2434 Week 8 39
Now we would like you to tell us how
probable it is that you will change financial
institution. We would like you to answer on
a scale of zero to ten. You can think of the
numbers as chances out of 10, for example
3 would mean 3 chances out of 10 that you
will change your financial institution, while
a 7 would mean 7 chances out of 10 and so
on. You can use the following scale to help
you determine how probable it is that you
will change your main financial institution
9= 9 chances out of 10 etc
BHO2434 Week 8 40
While it appears longwinded
The Juster scale allows the respondent to think
about what is probable that they will do
Rather than what theyd like to do
BHO2434 Week 8 41
East, R. & Hammond, K. (1996). The erosion of repeat purchase
loyalty, Marketing Letters, 7(2), 163-172

Raphel, M. & Raphel, N. (1995). Up the loyalty ladder. Progressive
Grocer, 74(4), 21-22.

Reichheld, F.F. (1996) Learning from customer defections, Harvard
Business Review, March/April, 56-69.

Sharp, B & Sharp, A. (1997). Loyalty programmes and their effect on
repeat purchase loyalty patterns. International Journal of Research
in Marketing, 14, 473-486. [article #4025].

Sharp, B., M. Wright, and Goodhardt, G.J. (2002). "Purchase loyalty is
polarised into either repertoire or subscription patterns."
Australasian Marketing Journal. 10(3): 7. [article #7539]
BHO2434 Week 8 42