These posts are a collection of notes and summaries from the book “How Brands Grow: What marketers don’t know” by professor Byron Sharp. This work is a must read for any marketer. My personal goal when I embarked on this series of posts was to get a deeper understanding of the book and its lessons, and as I have worked through them I have not only gained that understanding, but also an idea of the areas I need to investigate more deeply in the future. Sharp is always very insightful, but I feel the need for more perspectives on many of the topics he covers. You can buy How Brands Grow here.
In this post I will comment on the second chapter from the book “How brands grow”, which has the same name as the book title. The book is consistently thought-provoking and I want to be meticulous when I consolidate my reading.
This section talks about growth and why it is fundamental for companies.
It is quite obvious why companies look for sales growth: increasing sales, which consequently increases profitability.
When I think of the term growth, I think of numerous things: the startup ecosystem, increasing the number of products or services sold by a company, market penetration…
It is a very complex and significant topic and naturally it reminds me of my 20s when in Italy both in the startup ecosystem and influential magazines like Fortune or the Harvard Business Review abused the term “growth hacking”.
As usual the ecosystem was full of fluff, but there were also bold and engaging resources to be found.
One of these resources that comes to mind is the lecture from Alex Schultz about Growth at Stanford University that I have listened to at least 10 times (and I already talked about this lecture in this post).
At the heart of this is the fact that startups are also looking for growth to survive and scale, which is slightly different from existing business launching new products, but not as much as you might think–if the new product doesn’t sell the startup will fail or the new SKU will be delisted.
There are some analogies between existing business launching a new product and a startup
Moreover both startups and new products have to survive in the initial phase of the product life cycle.
Maybe I will come back later on this or in another post, this was more a nostalgic excursion back to the concerns of my 20s, now I will talk about established products in the FMCG.
What drives sales is mainly related to how many customers you have and how often they buy your products.
A naïve intuition is that you can increase sales by increasing the customer base or increasing the buying frequency.
As an example we can have, theoretically, two brands of the same market size, but with different penetration and frequency, one with a lot of customers who rarely buy the product and the other one with less customers who buy the product often.
|Annual Market Penetration (%)||Number of purchases per buyer per annum||Resulting market share (%)|
Reality is very different.
Basically, and it is not hard to believe, if on average Americans or British people buy a shampoo 6 times a year it is hard to change this habit and increase the frequency to 8, and it follows that it’s easier for a brand to increase the customer base, thus penetration.
It’s easier for a brand to increase the customer base
Just for completeness and a better understanding we can define market share and penetration:
- Market share as the % of total sales in an industry generated by a particular company
- Penetration is the ratio between the number of your actual customers and the total potential customers
Significantly, the author showed an important finding: companies with the same market share had the same market penetration and on average similar frequency.
More interesting is the fact that companies with a massive difference in market share had a completely different market penetration, but on average frequency doesn’t change significantly.
Based on the data provided the companies with a higher penetration are the one with a bigger market share, and from these analysis B. Sharp illustrates the “double jeopardy law”:
“Brands with less market share have far fewer buyers and these buyers are slightly less loyal (in their buying attitude)”
I am quite doubtful about his position on loyalty; on this I will take my time to think and to talk with some experts to get a different perspective.
There are still pieces of the puzzle that I have to find to clarify my ideas on loyalty.
To be honest, I recently started reading “Eating the Big Fish”, another great marketing book, and looking at some old data on Instant Coffee consumption in USA, I must conclude that professor Sharp is right. (Link to the book)
Going forward with the chapter, a nice analogy is conducted with architects.
You can’t build a house without knowing the laws of physics or how a steel beam reacts to specific tensions and forces, and this is true also for a marketing strategy.
Your plan can’t have the goal to increase buying frequency (or at least is very hard to do) instead it should focus on increasing penetration.
On this point, quoting Jim Nice, increasing frequency is like swimming upstream.
Who is Jim?
Jim (here the LinkedIn Profile) is a marketing consultant and in the past led the Customer Insight & Strategy department at Kraft and showed two key points:
- 67% of Kraft brands showed that penetration was the dominant driver of sales and market share
- The most successful brand were the ones that focus on increasing penetration, but 56% of their brand plans were trying to swim upstream
Once we agree that penetration is the key factor the next question is “How to increase penetration?”. This is not something the author discusses, at least not in this chapter, but it is a critical aspect.
I was also considering talking about the third chapter, but I will stick to the second one because it is food for thought and the third puts a strain on my past belief on customer retention.
To conclude, the second chapter introduced the Double Jeopardy Law and highlighted the importance of the customer base as a driver for growth.
These are fundamental aspects that you must keep in mind as consultant or marketing manager in your daily work as they will give you a clear direction or at least what can be for sure the wrong one.