Customer Loyalty in CPG - Fantasy Vs Reality

For the most part, customer loyalty is a farce for consumer packaged goods. The concept is overvalued within marketing teams. And too many resources get sucked up into something that is largely out of the brand's control.

Loyalty Is Fragile

We can all agree that loyalty ties to the quality of the product. If you create a great product, people are more likely to be loyal to your brand.

But people are fickle and change their consumer choices on a dime. A few situational examples:

#1 - Your manufacturer shits the bed and misses a production run.

Thus, your product goes out of stock. Your support team sends a shipping delay email to your “loyal” subscription customers. These customers then cancel their orders and look for a competitor that's available for purchase.

#2 - You change your brand's packaging

Your "loyal" grocery shopper heads to the store. She shuffles down the aisle, quickly scanning the shelves for your familiar brand assets (colors, logo, etc.). Her eyes look over your new packaging but she doesn't recognize it. And given that she's in a rush, she picks up a competitor brand that she's heard about before. Don't believe this can happen? Read this.

#3 - Your "loyal" customer hears about a competitor from a trusted source

This can occur in many forms. Her new dietician recommends a competitor. Friends tell her about another brand they like. She's a diehard Dr. Oz fan, and he does a segment featuring his recommended product. A trusted source (regardless of their actual trustworthiness) usually trumps whatever "brand equity" you believe you have.

#4 - Your "loyal" customer no longer needs your product

Let’s say you own an alcohol brand and your customer decides to stop drinking. Or you own a shaving brand and your customer decides to grow a beard. Or you own a health brand and your customer's doctor recommends that they change diets. I could keep going but you get the point.

In these situations, product quality is effectively neutered when a consumer makes a purchasing decision. And given that consumer choices are subject to frequent change. it begs the question if it's worth devoting resources to optimizing for retention.

The reality is that a customer defecting from a brand is largely out of the company's control. So what is a marketer to do?

Extraordinary Acquisition Trumps Loyalty

If you want to grow your brand, you need to obsess over customer acquisition. It can get sideways quick if you lose sight of this.

I've seen this firsthand in Kettle & Fire's e-commerce business. In early 2019, we had to temporarily reduce our advertising budget due to cash flow constraints. We didn't foresee this being a huge issue given that we had a large (and loyal) subscription customer base. Our team figured we could skate by through sales promotions to our email list and optimizing for retention. Oh, how wrong we were.

In a matter of weeks, it was clear that we were going to miss our monthly revenue target. While our loyal subscription customers kept buying, we weren't adding new customers at the same rate as before. And to make matters worse, we didn't foresee the longer-term sales impact of not running as many ads.

Per Byron Sharp's excellent book How Brands Grow:

"The sales of a brand are like the height at which an airplane flies. Ad spend is like its engines: while the engines are running everything is fine, but when the engines stop, the descent eventually starts."

Ads cause sales even when sales figures don't change. This concept is hard to grasp because it seems counter-intuitive. Again, from How Brands Grow:

"Much advertising is aimed at preventing a competitor’s advertising from stealing future sales. This prevention means a brand gets sales, over a long period of time, that it would not have obtained if it had not advertised. So advertising causes sales even if a brand’s sales figures are flat."

It's why huge brands like Coke and Budweiser continue plowing billions into advertising. It allows them to hold onto their buyers while preventing competitors from taking their market share.

So tying this back to our unfortunate situation: While we were busy trying to figure out how to reduce defection rates from our existing customer base, our lack of advertising opened up the door for competitors to steal more market share.

Luckily, we quickly got out of our cash flow crunch and resumed normal advertising spend. And voila, revenue growth began increasing again. It was a hard lesson but an important one.

Fantasy: Revenue growth is dependent on increasing loyalty amongst your existing customer base

Reality: Revenue growth is largely dependent on growing the size of your customer base, by acquiring new customers at an extraordinary pace.

On Virtue Signaling

Per Geoffrey Miller's Spent: Sex, Evolution, and Consumer Behavior:

"Roughly, products fall into two overlapping categories: (1) things that display our desirable traits and bring us “status” when others see that we own them, and (2) things that push our pleasure buttons and bring us satisfaction even if no one else knows we have them.

For every aspect of human nature, for every dimension of variation in human personality, intelligence, virtues, and values, there exists a vast market of product sets that we can draw from to broadcast our personal traits to others."

This concept is more widely known as virtue signaling. Whether we're willing to accept it or not, virtue signaling influences many of our consumer purchases.

And in many scenarios, virtue signaling is being misinterpreted as customer loyalty.

Take for instance a decision that every newly minted entrepreneur must make: Whether or not they decide to buy a Tesla.

Now a newly minted entrepreneur will argue that they purchased the Tesla due to the car's 0-60 acceleration, autopilot functionality, and the environmental impact of zero emissions. Which are all great functional reasons to buy a Tesla, if said entrepreneur actually values these things. But I do wonder if these logical reasons actually influenced their decision

Did they actually buy a Tesla because it signals wealth, intelligence and success to both themselves and their peers?

I believe these virtue-signaling factors play a much larger role than we’d like to admit. And in many cases, consumer's status-seeking purchases are a false positive to them being "loyal" to a brand.

On Tribalism

In Tim Urban's masterpiece The Cook & The Chef he notes that "Humans also long for the comfort and safety of certainty, and nowhere is conviction more present than in the groupthink of blind tribalism."

Blind tribalism and pro sports go hand-in-hand. Look no further than the perennially terrible Cleveland Browns. The Browns, one of the oldest NFL teams, have bulldozed through 30 starting quarterbacks and 11 head coaches since 2000. In that time span, they’ve lost more games than any other team in the league.

After experiencing years of futility, the franchise is still worth $2.1 billion and sells most of its home game tickets. While some fans have thrown in the towel, most continue watching their dumpster fire of an organization.

An economist would be befuddled by such blind tribalism. To maximize one’s utility (in this case, winning games), the rational decision is to simply switch allegiance to a better team. But instead, most Cleavanders have blindly stuck by their team and commiserate together each and every week.

Regardless of how good or bad the product is, some customers will always remain “loyal” to the brand if there’s a built-in amount of certainty and comfort in their decision. In the Browns scenario, that comfort comes in the form of knowing that others just like them are also gearing up for another week of disappointment. What’s uncertain is how they’d be perceived by their tribe if they decided to sport a Patriots jersey.

People like knowing what they’re going to get. It’s why you see a line wrapped around the block at Starbucks while local coffee shops nearby struggle to compete. Is that true customer loyalty or just blind tribalism?

Keep Giving A Shit About Your Customers (But Find More Of Them)

While customer defection is largely out of a brand’s control, it’s still incredibly important to provide a top-notch customer experience. As I pointed out in another post, your first customers are your super fans and more likely to tell their friends about your products.

But to truly grow your brand, you need to find more of them. Not only to generate more business but to replace whatever business is lost by current customers who stop buying.

So don’t pull your hair out when a long-time subscriber decides that your product is no longer needed. Thank them for being loyal up until this point and wish them well. Now go find more of them.