Factors that Affect Repeat Buying Loyalty

Dag Bennett, London South Bank University

Abstract This paper describes repeat brand-buying behavior across a variety of frequently purchased consumer goods categories. The main finding is that overall repeat buying tends to be higher in categories where the market shares of brands are either very stable or the category is very much dominated by a large brand. In contrast, low repeat-buying associates with unstable market shares and competition amongst many smaller brands. In addition, brands that are much bigger than their nearest rivals tend to have higher repeat buyingor loyalty premiums. These repeat buying rates are predictable using the Duplication of Purchase law (DoP).

1. Introduction --Brand Buying Behavior for Individual Brands For many firms, branding is critical, helping establish the firms identity in the marketplace or build a solid customer franchise (Kapferer 1997, Keller 1998). Brand strength also provides a tool to counter growing retailer power (Barwise & Robertson 1992) even as retailers use private-label brands to build store loyalty (Corstjens & Lal 2000). The ongoing academic and industry discussion surrounding branding often focuses on the benefits of brand loyalty and has evolved from how to measure and assess loyalty (e.g., Cunningham 1956, Fader & Schmittlein 1993, Bhattacharya 1997) to building and managing loyalty (e.g. Reichheld & Sasser 1996, Baldinger & Rubinson 1996, Aaker & Joachimsthaler 2002). And yet, there is little research into the underlying market conditions that might affect repeat buying loyalty. Why should one category have high repeat buying and another low? What should marketers reasonably expect repeat buying to be for their brand, and why? If 40% of customers buy a brand twice in a row, is that high, low or just average? While much has been written about loyalty this research draws on well-established empirical generalizations (Ehrenberg 1972) that primarily focus on within category brand buying regularities as described with the NBD-Dirichlet model (Ehrenberg, Uncles & Goodhardt 2004), the Duplication of purchase law (DoP), (Colombo & Morrison 1989) and by the twopurchase technique (Bennett, Ehrenberg & Goodhardt 2000, Bennett 2004). This new research was one of the first attempts to look at brand buying patterns between categories. It did so by examining factors that might be associated with repeat-buying loyalty levels. The first step was to calculate weighted average repeat buying rates over two consecutive purchases drawn from panel data (TNS superpanel with 15,000 UK households) covering 72 FMCG categories. Each buyer who had made two category purchases was counted as either a repeat-buyer or a switcher. Repeat buying levels could then be compared, as could other measures such as, the average interval between purchases in weeks, market share of the largest brand in the category, the number of brands with over 3% share, the HerfindahlHirschman Index (HHI) (www.dti.gov.uk/files/file17173.pd), and the weighted average percentage change in market share between purchases.

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2. Repeat buying behavior for brands On average, across all categories, 42% of all customers bought the same brand twice in a row when making purchases within a category. Individual category repeat rates ranged from 58% down to 24% as shown in Table 1, column 1 which presents selected categories at the high, middle and low end for repeat buying. These category repeat buying levels were consistent with previous work (e.g. Baldinger & Rubinson 1996, Ehrenberg, Uncles & Goodhardt 2004). One test for whether these data fit with existing theory is the Duplication of Purchase law (Colombo, Ehrenberg & Sabavala 2000), an empirical law-like relationship that says that the proportion of buyers of Brand A who also buy Brand B (denoted bB|A) can be expressed as: bB|A = D x bB In practice, when people buy a brand they are more likely to buy one with high penetration, irrespective of which brand they bought before. The proportionality factor D or Duplication Coefficient reflects the likelihood of switching from the previous brand A to a new brand B, relative to how many people bought B at all. For example if 30% of the population buy brand B, and 45% of brand As buyers buy brand B, the duplication coefficient D, is 45%/30% = 1.5. D is thus a measure of the extent to which individual brands share category buyers and can be used to calculate brand repeat buying with the formula: Repeat Buying Rate = (D * brand penetration) + (1- D) The second column in Table 1 shows predicted average repeat buying rates (labeled T for theoretical) made using the D values calculated for each category.

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Table 1 Weighted Average Repeat Purchase Rates and Other Measures Wtd Ave % Repeat O (T) 58 (60) 56 (58) 56 (56) 55 (57) 54 (56) 43 42 42 41 41 41 29 28 25 25 24 (44) (41) (44) (40) (35) (40) (30) (30) (25) (25) (26) Ave % Share change 9 7 5 8 7 13 10 17 6 10 8 25 26 17 18 24 12% Largest Brand % share 20 24 26 68 55 24 18 26 14 21 11 22 43 24 19 16 24% Purchase Interval (weeks) 8 5 5 3 32 2 1 14 3 15 16 9 13 11 26 12 9 Brands over 3% share 11 9 8 5 8 7 9 12 12 9 13 11 8 11 10 10 9

Product Category Packet Tea Margarine Butter Crisps Thick Brown Sauce Sugar Confectionary Carbonates with lemonade Instant porridge Everyday Biscuits Marmalade Shampoo Premium Ice Cream Body Sprays Child Lollies Cough lozenges Ice-cream filled Cones Overall Average

42% (42%)

At first sight Table 1 shows that observed and theoretical repeat buying levels are close, and in fact the correlation between the two is r = .97. Thus whether a category is characterized by high or low repeat buying, the level is closely predicted by the duplication of purchase law, which is based on the measurement of penetration and so brand share.

3. Factors associated with lower repeat buying rates One question raised by Table 1 is; what accounts for the variation in loyalty? For example, Packet Tea and Margarine have high repeat buying rates, while Ice-Cream filled Cones and Cough Lozenges have low rates. With the information on hand a correlation matrix was constructed to examine what factors might be associated with repeat purchase rates, shown in Table 2 below. Higher positive correlations are outlined, negative ones shaded.

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Table 2. Correlations between Repeat Purchase and other Category Measures

wt ave rep 1.00 -.73 -.18 .23 .35 -.23 .16 .11 Wt ave % change 1.00 .06 -.03 -.09 .05 .00 .01 Wks/ ints lgst brand HHI no >3% Dom prem

wt ave repeat wt ave % change wks/interval largest brand HHI No. brands >3% Domination Premium

1.00 .18 .17 .04 .19 .16

1.00 .91 -.56 .83 .58

1.00 -.56 .78 .50

1.00 -.38 -.32

1.00 .70

1.00

In the first column the only high correlation is between the weighted average repeat rate and weighted average percent change in brand share (r = -.73). This shows that categories in which brand shares are unstable tend to have lower repeat purchase rates. This relationship was hinted at in Table 1, where lower repeat categories also had higher average share changes and can be seen clearly in Graph 1. This negative association between share instability and repeat buying is consistent with other work on dynamics (e.g. Kato & Honjo 2006, Habel & Rungie 2005, Dekimpe et al. 1997) and with meta analysis of survey data (Bennett, 2007). The second and third columns show that weighted average percent share change and weeks per purchase interval have no strong associationsit matters little to FMCG repeat buying whether a customer buys weekly or yearly. Graph 1. Weighted Average Category Repeat Buying Declines with Brand Instability
Weighted Ave Repeat 70 60 50 40 30 20 10 0 0 5 10 15 20 25 30 Weighted Ave % Change in Shares

Repeat Buying and Change in Brand Share

4. Factors Associated with Higher Repeat Rates The largest brand column shows high associations, both positive and negative as does the HHI column (the Herfindahl-Hirschman Index is the sum of the brand shares squared and is used to assess industry concentration, usually to decide whether a merger or acquisition should be allowed). These associations between largest brand and HHI and the number of brands of over 3% share are largely autocorrelation. But there is also a high correlation (r = .83) with 672

Domination (share of the largest brand divided by the next largest) and Loyalty Premium (r=.58) (repeat rate of the largest brand divided by the average repeat rate), showing that when categories have very large brands, and therefore high HHI, the categorys largest brand also tends to have a repeat rate higher than its competitors. That larger brands have higher repeat rates was not unexpected. This is a standard Double Jeopardy effect (Ehrenberg, Uncles & Goodhardt 2004). Nor was it surprising that the effect was sometimes higher than predicted, indicating there might be a loyalty premium for very big brands. Fader and Schmittlein (1993) argued that heterogeneity in brand choice is the likely cause of the excess brand loyalty (i.e. greater than double jeopardy predicts) and that this effect is accentuated for larger brands. Most categories however, did not have a huge brand (the mode for largest brand was 24%). The question then focused on whether there was an association between the relative size of the largest brand (domination) and repeat buying. For example if the largest brand was much larger than its rivals. That is, if a 10% brand is twice as big as its nearest rival, as opposed to a 20% share brand with an 18% competitor, what might be expected for category repeat rate. The degree of domination when correlated against the weighted average category repeat rate for each category gave a weak positive correlation of r = .16. So domination was associated with repeat buying, but weakly, and the effect was probably overshadowed by the simple size effect. Highly dominated categories are not necessarily high repeat rate categories.

Graph 2, Brands that Dominate their Rivals Tend to Enjoy Loyalty Premiums
Repeat Rate of largest brand divided by repeat of next largest 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Share of Largest Brand divided by Share of next largest

Domination and Loyalty Premium

However, there was a strong positive relationship (r = .70) between domination and loyalty premium. In other words, brands that are much bigger than their nearest rivals tend to have above average repeat buying rates, and the higher the dominance, the higher the premium (see Graph 2). Note that the calculations for loyalty premium and dominance are independent of whether the category has high or low overall repeat rate and show that for brands, while it is good to be big, in terms of loyalty premium it is better to be bigger than ones rivals.

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Multiple regression analysis was performed to examine further the relationship between variables. However, the results were difficult to interpret, except insofar as they confirmed the overall importance of (in)stability of market share in determining overall category repeat purchase rates. This will be explored further in future.

5. Conclusions These brand repurchase findings are new because they compare repeat buying rates across categories. The results show that repeat buying is largely a function of brand size, moderated by the stability of the category. Moreover, they are predictable using the DoP law. The analysis was greatly assisted by the availability of prior knowledge of loyalty and switching patterns and serves to confirm those patterns through differentiated replication. Some categories had average inter-purchase times of two or three days, while others had many weeks between purchases, but this had little affect on repurchasing. Instead, dynamic categories where shares were unstable had lower average repurchase rates, while categories with very large or dominant brands had higher repurchase rates. In addition, dominance was strongly associated with the largest brand obtaining a loyalty premium. The findings have both conceptual and practical significance. Conceptually, the analysis lays out simple descriptive regularities associated with repeat buying. Despite wide academic and practitioner focus on customer retention and loyalty, little had previously been done to analyze factors associated with high or low levels of repeat buying. It also sets the stage for further analysisfor example, it might be possible to explore whether repeat buying rates for brands indicate any market polarization, or the presence of niche brands. In practical terms, the comparative study of widely differing markets or categories may lead to a greater understanding of brand buying behaviour and to broader generalizations about consumer behavior.

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Kato, M., Honjo, Y., 2006. Market Share Instability and the Dynamics of Competition: a Panel Data Analysis of Japanese Manufacturing Industries, Review of Industrial Organization, March, vol. 28, Issue 2, p165-182 Kapferer, N., 1997. Strategic Brand Management, 2nd edition,: Kogan Page, London Keller, K., 1998. Strategic Brand Management, Prentice Hall, Upper Saddle River, New Jersey, USA Reichheld, FF., Sasser, WE., 1996. The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value, Harvard Business School Press, Boston MA. www.dti.gov.uk/files/file17173.pd, UK Department of Trade and Industry, reference site for the DTIs use of the Herfindahl-Hirschman Index. For a useful explanation and calculator, see http://www.unclaw.com/chin/teaching/antitrust/herfindahl.htm

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