How Brands Grow Summary and Review
by Byron Sharp
Looking for a review of How Brands Grow by Byron Sharp? Read this summary first:
What influences marketing professionals to decide how they sell a particular brand?
Is it based on empirical evidence so that they can base it on what’s been proven to work in the past? Or is it simply based on what they’ve been doing for decades?
In How Brands Grow, Byron Sharp argues that they mostly do the latter, i.e., they base their marketing on long-held, conventional beliefs, rather than up-to-date empirical evidence. The goal of How Brands Grow is to correct this by providing the reader with answers to the questions that marketers often ask themselves: whether to put a product on sale, or whether to focus all efforts on retaining existing customers rather than getting new ones?
In this book summary, it’ll become clear why people would rather “satisfice” than optimize their purchasing decisions (and you’ll learn the meaning behind these terms).
It’ll also become clear why advertising isn’t always necessary to keep loyal customers, however, it is necessary for acquiring new ones.
Last, you’ll learn why, whenever you need a caffeine fix, there’s probably a Starbucks nearby.
How Brands Grow Key Idea #1: Marketing should be based on evidence from marketing science, rather than traditional beliefs.
There were thousands of years where medical doctors practiced bloodletting to help their patients—only centuries ago, this was considered the cure-all to every health problem. As science advanced and empirical evidence mounted, it became clear that bloodletting actually has no effect.
In a similar way, long continued practices within the market have operated for a long time on the basis of things that lack empirical foundation.
One such belief is that it’s a requirement for businesses to have an equal amount of customers who are loyal to them and customers who have a tendency to switch between brands (“switchers”).
A great example of this idea is demonstrated through looking at the toothpaste brands Colgate and Crest. In 1989, there was a market analysis that shows that 21 percent of Colgate’s consumer base was loyal customers and 68 percent switchers, while Crest’s comprised 38 percent loyal customers and just 46 percent switchers.
Marketing managers at Colgate saw this evidence and grew worried about the results, leading to them being convinced that they should be more persuasive in their advertising so that they would be able to keep more loyal customers.
However, just like many marketing beliefs, this idea is simply wrong.
Marketing consists of many scientifically proven patterns, one of which being the double jeopardy law, which states that brands which have a smaller market share also have fewer customers, which means, what’s more, that those customers are less loyal than those of bigger brands.
This shows that the purchasing patterns of customers is actually directly related to the size of the brand itself, which means that it was only natural for Colgate, which had a 19 percent market share, to have fewer loyal customers and more switchers than Crest, which has a market share of 37 percent.
This means that Colgate’s marketing department really shouldn’t be concerned, as they aren’t actually the consequence of a weak marketing strategy, but rather simply of the brand’s relative size.
The toothpaste example shows that in order for it to actually be effective, marketing practices should base themselves more heavily on the findings of marketing science. This is because marketing science is able to reveal the actual causes and effects of marketing.
How Brands Grow Key Idea #2: In order to grow your customer base, it’s important to focus your efforts toward obtaining more new customers, rather than convincing existing customers to stay.
Anyone who’s ever sat down and pondered how it is that brands grow has probably come to the conclusion that it’s based on how many customers the business has. But how is it that brands actually increase their customer base?
Generally, a customer base is able to grow in one of two ways: either acquiring new customers, or holding on to existing ones.
However, it’s common, in speaking about marketing, to push the belief that retaining old customers has a greater impact on the company that finding new customers.
A good example for this is that an influential business article that was published in 1990 that focused on how companies should manage their base of customers had the idea that company profits are able to increase by nearly 100 percent for every 5 percent of customers retained.
But that’s wrong.
The argument the article proposed was actually based on nothing more than a thought experiment. More than anything, the inaccurate evidence the article presented was done so in a rather misleading way: instead of it being a 5 percent drop in leavers, the actual decrease was of 5 percentage points – in other words, from 10 percent to 5 percent, which means the actual decrease would be that of 50 percent, instead of 5.
So, instead of trying to keep existing customers, it’s actually more essential to try and acquire new customers in order to grow your brand.
The defection rate of a company’s customers is closely related to the company’s size – which means that it’s difficult to control. Market share has a lot to do with customers’ brand loyalty, so the market leader will naturally have the lowest defection rate, while the smallest company will have the highest.
A study that serves as a good example of this focused on the defection rate of Australian banks. It discovered that CBA – Australia’s biggest bank, with a 32 percent market share – had a rate of just 3.4 percent. Conversely, the smallest of Australia’s banks included in the study – Adelaide Bank, with its 0.8 percent market share – had a much higher defection rate of 8 percent.
So, due to the fact that brands don’t have much control over the amount of customers they retain, they should instead focus their efforts on getting new customers.
How Brands Grow Key Idea #3: Less than half of a company’s sales come from non-frequent users.
How often do you buy Coca-Cola? Every day? Once a week? Once a year?
When it comes to consumption, there are two kinds of buyers: light and heavy. Light buyers only buy specific items on occasion, while heavy buyers are more frequent purchasers of that item.
For example, with Coca-Cola, some people are heavy buyers, meaning they purchase it regularly – that is, on a daily or weekly basis. Other people only purchase soft drinks on special occasions, such as when they go out to see a movie.
Many brands operate based on the idea that this light to heavy ratio of buyers follows Pareto’s Law, i.e., the mathematical formula that states that 80 percent of the effects are produced by 20 percent of the causes. When we apply this formula to sales, it suggests that the heavy buyers of a product (the top 20 percent of customers) are actually responsible for the majority (80 percent) of sales. Based on this, the marketing efforts of most brands focus on maintaining the heavy buyers that purchase their products.
However, evidence actually shows that when it comes to sales, this ratio isn’t so extreme: rather than 80/20, research suggests that the ratio is approximately 60/20. This means that a little more than half of a brand’s sales come from the heavy buyers, while light buyers are responsible for the remaining sales.
In fact, a 2007 study investigated the presence of this ratio when it came to the sales of body sprays and deodorant products of various brands, such as Dove, Nivea, and Adidas. This study found that the heaviest buyers (the top 20 percent) were only accountable for between 46 and 53 percent of sales.
Many marketers focus mostly on retaining the heavy buyers, thus neglecting light buyers who they assume only account for 20 percent of sales. However, those light buyers actually account for up to 50 percent of sales, so it would probably benefit marketers to make these purchasers a bigger part of their marketing strategy.
How Brands Grow Key Idea #4: The attitudinal commitment of purchasers to certain brands is weaker than marketing mythology makes it out to be.
An incredibly popular marketing strategy used by many brands is to create a relationship with its customers to increase their loyal. The main idea behind this strategy is the belief that branding has a huge influence over customer preferences.
A good example is a famous study that dealt with consumer preferences in which subjects participated in a blind taste test and decided which drink they preferred: Coca-Cola or Pepsi.
During the study, subjects were presented with two samples of soda: one sample was labeled as either Coke or Pepsi, while the other was unspecified but could only be either Coke or Pepsi. The truth, though, was that both samples were exactly the same.
When the sample with the label said that it was Coke, the majority of subjects identified that they preferred it to the non-labeled sample. Conversely, when the label said that it was Pepsi, subjects decided that they preferred the non-labeled soda.
The explanation for this phenomenon was said to be based on the loyalty of Coca-Cola’s customer base, which comes from Coke’s successful marketing campaigns.
However, the reality is that the emotional bond between customers and the brands they like is actually weaker than many people assume.
For one thing, people’s beliefs are inconsistent: really, if you asked the exact same question to people on two separate occasions, only about 50 percent of them will give the same answer the second time around.
For example, there was a survey that dealt with Australian financial service brands in which people were asked on two separate occasions whether or not they agreed with the statement that the brand in question “would value me as a whole person, not just a transaction.”
When the brand in question was ANZ or NAB, 11 percent of people agreed with the statement the first time they were asked.
However, the second time around, only 53 percent of people who’d agreed previously agreed with the statement again in terms of ANZ, and a mere 44 percent of the previous agreeing population agreed again with the statement when it concerned NAB.
It’s also important to mention that most people don’t actually care all that much about the brands they purchase. However, it’s also true that while so many customers only appear loyal to a certain brand, it’s actually due to the quality of the product, not the brand itself.
How Brands Grow Key Idea #5: Marketing should be based on helping brands become more noticeable, rater than trying to make them seem different from competitors.
So many people have wandered around in a city we’re visiting with out stomachs grumbling, merely settling on eating at the nearest fast food restaurant. However, have you ever thought about why it is you choose a certain brand over another in this situation?
Oftentimes, marketers focus more on capturing your utmost attention with uniquely different products than anything else.
This differentiation basically means that the products companies try and sell are meant to be unique. There are so many brands out there trying to get our attention, so being unique helps them stand out.
For instance, McDonald’s, Pizza Hut and KFC each market one very specific product: burgers, pizza, or fried chicken, respectively. Due to the fact that these products are different from each other, they’re not supposed to compete with each other, but rather, are meant to appeal to different customers.
However, within a particular market sector, brands aren’t all that different from each other: although McDonald’s, Pizza Hut and KFC sell different food products, they still compete as fast food brands.
According to the logic of brand differentiation, McDonald’s is actually only competing with other restaurants that sell burgers, like Burger King, and not with KFC and Pizza Hut. However, the reality is that every brand listed above is actually in competition with each other in the crowded market of fast food.
So, instead of aiming to differentiate a brand, they should try instead to make a brand more visible in the marketplace, And this is made possible by giving the brand distinctive characteristics.
Offering unique products doesn’t actually distinguish a brand in the marketplace, so brands should try to stand out from each other by other means like using noticeable and recognizable logos and colors, such as Coca-Cola’s red background or McDonald’s golden arch.
So, if you’re in an unfamiliar place and find yourself looking for a fast food restaurant, you probably aren’t going to have a particular type of food in mind, and rather, will simply choose the first fast food chain you find. In this type of situation, McDonald’s highly visible golden arch might be a determining factor when it comes to your choice, as it’s both easy to notice and to recognize.
How Brands Grow Key Idea #6: Advertisements are often so successful because of how they affect people’s memories, and should work to target mostly light buyers.
In the previous book summaries, it’s suggested that advertising might not be as effective as marketers commonly believe.
To figure out the reason behind this phenomenon, it’s important to focus on how advertising actually affects the minds of consumers.
The entire point of advertising is to influence people’s buying habits by having a lasting effect on the memory of the consumer. The way that this is achieved is through constructing and renewing what are known as memory structures.
Simply put, a memory structure is consists of ever association that a person has with specific brands, meaning that the more positive an association someone has, the more likely they’ll be to purchase a brand’s products.
On top of this, it’s important to renew these memory structures on a regular basis. People change over time, so it’s important that brands then stay up to date with people’s buying needs in order to stay relevant in a consumer’s mind. This is even important for well-established brands, such as Coca-Cola, which is the reason behind their regularly updated advertisements.
In the past, Coca-Cola was sold in drug stores around the U.S., which meant that their main demographic was teenagers who were going to purchase the drink during their fun and carefree months off from school.
Now, Coca-Cola works to create nostalgia, reminding consumers of the fun times in their past when they drank Coca-Cola – like a night out with friends when everyone was drinking rum and Cokes.
Both types of advertisements work to trigger the happy memories consumers might associate with drinking Coca-Cola, which will encourage them to purchase the product again.
However, it’s important to note that brands don’t need to target their entire consumer base with their advertisements, especially since it’s usually just light buyers who are actually influenced by them.
Heavy buyers usually don’t need persuasion when it comes to continuing to purchase a certain product, as they tend to stick to one brand regardless of advertising. On the other hand, light buyers are more likely to change their minds fairly constantly when it comes to what they purchase, so ultimately, their decisions are informed by lots of different factors, including the advertisements a company produces.
Light buyers are influenced by advertisements in that they work to make sure that the customer doesn’t forget the brand. So, the job of advertisers is to target the memories of light buyers who associate drinking a Coke with having a good time.
How Brands Grow Key Idea #7: Marketers should be cautious when it comes to using price promotions as a marketing strategy.
We’re all been walking down the street when we get bombarded by the words “ON SALE!” printed on signs in store windows. However, has it ever crossed your mind why it is that brands choose to use price promotions?
Marketers often choose to use this as a strategy because their effect on sales is directly visible, which usually results in a short term spike in sales.
This happens because these types of promotions bring in non-frequent buyers. This happens because certain buyers switch between brands and tend to buy whatever is the cheapest product on the market. This means, though, that the effect price promotions have on sales is merely short term: once the promotion ends, the product pricing returns to normal, which means sales will return to their regular level.
However, it’s necessary to note that more sales doesn’t necessarily mean the company is making a higher profit. When you lower the price of a product, you also decrease its profit margin.
So, in order for a brand to profit from an item placed on sale, they have to calculate the price reduction on the basis of a product’s contribution margin, which refers to the revenue that the product generates for the company in order to cover its cost of production.
For example, if a sweater is usually sold with a 30 percent contribution margin, then dropping its price by 10 percent would mean that you must sell 50 percent more sweaters in order to make up for its drop in price.
There is another issue with price promotions, which is that they have a negative effect on the sale period.
This is because consumers have a reference price when it comes to certain products – a rough expectation of what a product’s price should be. This means, when a brand reduces the price of a product for a long period of time, the reference price of the product in the mind of a customer decreases.
This means that if a sweater is sold at a discounted price that’s 10 percent less than its normal price, customers may get used to this price, which will cause them to not be willing to ever purchase it at its full price.
A brand might welcome this effect – if they can manage to maintain their profit margins. If they’re unable to hold onto the discounted price for a longer period of time due to higher production costs, they’ll ultimately end up bankrupt.
How Brands Grow Key Idea #8: Sales tend to increase when most customers find products easier to buy.
Increases in profit depend on the customer base growing, so good marketers focus their efforts toward attracting and bringing in new customers.
However, getting new customers to notice you can prove quite difficult.
A huge contributor to this is the media—which people are consuming more of now than ever. A 2005 study that focused on U.S. media consumption discovered that the average person spent about 30 percent of their day listening to, watching, or reading media. This included all types of media, from TV to online content and newspapers.
This means that people are exposed to up to several hundred advertisements daily, which means that the impact one advertisement has on a person is relatively small.
On top of this, consumers tend to “satisfice” rather than optimize their purchasing decisions. In other words, people are more likely to settle when it comes to purchasing simply to get a product that’s considered satisfactory, rather than putting more energy and time into searching for the perfect product.
So, how can brands work to increase their customer base? Well, the most effective way to do this is to actually make your products easier to buy.
There are two factors that come into play: mental and physical availability.
Mental availability deals with how likely it is that a customer will think of your brand when they’re trying to figure out which brand’s product to buy. This means that the larger the market share a brand has, the higher the probability that a certain brand will come to mind when a potential customer is thinking about making a purchase.
A great example of this is to think about going out for coffee. Which brand are you most likely to think of first? For many people, the first name that comes to mind is Starbucks.
The second part of product availability is making your brand physically available to potential customers. It’s not quite sufficient to simply make it so that consumers think of your brand when trying to make a purchasing decision—that brand also has to be available to buy whenever a consumer might want it. Otherwise, no sale can be made.
Going back to thinking about coffee, if “Starbucks” is the brand that automatically comes to mind, but you’re in an area where there is no Starbucks, you’ll likely settle for whatever coffee shop is around. This is why every big city has a Starbucks every couple blocks.
In Review: How Brands Grow Book Summary
The key message in this book:
When it comes to marketing a product, marketers shouldn’t simply follow common marketing myths just because they’re what’s always been practiced or because they might’ve worked out at some point in the past. Instead, it’s important that they consider the empirical evidence of marketing science and follow strategies that have already been proven to work, as this will increase their chances of success.
Make your brand stand out.
When it comes to creating a brand, you have to figure out what will get you noticed amongst the competition. Oftentimes, brands believe that it’s most important to make their products vastly different from those of other, similar brands. But that’s wrong. It’s more important, actually, to work to make your brand stand out, which could come in many forms: from giving your product bright packaging to your brand having a memorable name.