Customer Loyalty Is Overrated
Why do companies routinely succumb to the lure of rebranding? The answer, say A.G. Lafley and Roger L. Martin, the authors of “Customer Loyalty Is Overrated,” is rooted in serious misperceptions about the nature of competitive advantage—namely, that companies need to continually update their business models, strategies, and communications to respond to the explosion of options that sophisticated consumers face.
Research suggests that what makes competitive advantage truly sustainable is helping consumers avoid having to make a choice. They choose the leading product in the market primarily because that is the easiest thing to do. And each time they select it, its advantage increases over that of the products or services they didn’t choose, creating what the authors call cumulative advantage.
Lafley and Martin offer guidance for building cumulative advantage:
Become popular early. Back in 1946, Procter & Gamble gave away a box of Tide with every washing machine sold in America.
Design for habit. When P&G introduced Febreze, consumers liked it but didn’t use it much. The problem, it turned out, was that the product came in what looked like a glass-cleaner bottle, so users kept it under the sink. When the company redesigned the bottle so that customers would keep it in a more visible spot, they ended up using it more often.
Innovate inside the brand. Efforts to “relaunch” brands can lead people to break their habits. Changes in product features should be introduced in a way that retains cumulative advantage. For customers, “improved” is much more comfortable than “new.”
Keep communication simple. A clever ad may win awards, but if its message is too complex, it will backfire.
Rita Gunther McGrath takes issue with some of this thinking. In “Old Habits Die Hard, but They Do Die,” she argues that although the theory of cumulative advantage makes sense in industries that are predictable, that condition no longer applies for many companies. Habits, like other elements of the environment, can shift.
Consider how Dollar Shave Club’s subscription model snatched market share from Gillette. Executives, McGrath says, must balance the power of cumulative advantage with the need to refresh their approach. One tactic is to leverage an organization’s core skills or capabilities, but in a new format—as Dayton Hudson did when it became Target. The better executives become at understanding the motivations behind unconscious choices, the more likely they are to succeed at building habitual behavior among their customers—and, just as important, the more likely they are to see how those habits might change.
How does the theory of cumulative advantage play out for companies other than Procter & Gamble? Jørgen Vig Knudstorp, cochairman of the LEGO Brand Group, built his company’s cumulative advantage by mining the emotional connection that so many people have with the colorful blocks. “If you can make your brand a value—a part of someone’s identity—you have a really powerful competitive advantage,” he says. “But it all begins with making your brand a habit.”
Intuit chairman Scott Cook attributes much of his company’s success to an early decision to design Quicken, Intuit’s personal-finance software, to look and operate like a checkbook. As Cook puts it, Quicken is “a product that lets people hold on to their habits.”
Late in the spring of 2016 Facebook’s category-leading photo-sharing application, Instagram, abandoned its original icon, a retro camera familiar to the app’s 400- million-plus users, and replaced it with a flat modernist design that, as the head of design explained, “suggests a camera.” At a time when Instagram was under a growing threat from its rival Snapchat, he offered this rationale for the switch: The icon “was beginning to feel…not reflective of the community, and we thought we could make it better.”
The assessment of AdWeek, the marketing industry bible, was clear from its headline: “Instagram’s New Logo Is a Travesty. Can We Change it Back? Please?” In GQ’s article “Logo Change No One Wanted Just Came to Instagram,” the magazine’s panel of designers called the new icon “honestly horrible,” “so ugly,” and “trash,” and summarized the change thus: “Instagram spent YEARS building up visual brand equity with its existing logo, training users where to tap, and now instead of iterating on that, it’s flushing it all down the toilet for the homescreen equivalent of a Starburst.”
It’s too soon to tell whether the design change will actually have commercial consequences for Instagram, but this is not the first time a company has experienced such a reaction to a rebranding or a relaunch. PepsiCo’s introduction of its aspartame-free Diet Pepsi was—like the infamous New Coke debacle—a botched attempt at reinvention that resulted in serious revenue losses and had to be reversed. The interesting question, therefore, is: Why do well-performing companies routinely succumb to the lure of radical rebranding? One could understand the temptation to adopt such a strategy in the face of disaster, but Instagram, PepsiCo, and Coke were hardly staring into the abyss. (It’s worth noting that Snapchat, whose market share among young users is now particularly strong, has assiduously stuck to its familiar ghost icon. Full disclosure: A.G. Lafley serves on the board of Snap Inc.)
The answer, we believe, is rooted in some serious misperceptions about the nature of competitive advantage. Much new thinking in strategy argues that the fast pace of change in modern business (perhaps nowhere more obvious than in the app world) means no competitive advantage is sustainable, so companies must continually update their business models, strategies, and communications to respond in real time to the explosion of choice that ever more sophisticated consumers now face. To keep your customers—and to attract new ones—you need to remain relevant and superior. Hence Instagram was doing exactly what it was supposed to do: changing proactively.
That’s an edgy thought, to be sure; but a lot of evidence contradicts it. Consider Southwest Airlines, Vanguard, and IKEA, all featured in Michael Porter’s classic 1996 HBR article “What Is Strategy?” as exemplars of long-lived competitive advantage. A full two decades later those companies are still at the top of their respective industries, pursuing largely unchanged strategies and branding. And although Google, Facebook, or Amazon might stumble and be crushed by some upstart, the competitive positions of those giants hardly look fleeting. Closer to home (one author of this article is part of the P&G family), it would strike the Tide or Head & Shoulders brand managers of the past 50 years as rather odd to hear that their half-century advantages have not been or are not sustainable. (No doubt the Unilever managers of long-standing consumer favorites such as Dove soap and Hellmann’s mayonnaise would feel the same.)
In this article we draw on modern behavioral research to offer a theory about what makes competitive advantage last. It explains both missteps like Instagram’s and success stories like Tide’s. We argue that performance is sustained not by offering customers the perfect choice but by offering them the easy one. So even if a value proposition is what first attracted them, it is not necessarily what keeps them coming.
In this alternative worldview, holding on to customers is not a matter of continually adapting to changing needs in order to remain the rational or emotional best fit. It’s about helping customers avoid having to make yet another choice. To do that, you have to create what we call cumulative advantage.
Let’s begin by exploring what our brains actually do when we shop.
The conventional wisdom about competitive advantage is that successful companies pick a position, target a set of consumers, and configure activities to serve them better. The goal is to make customers repeat their purchases by matching the value proposition to their needs. By fending off competitors through ever-evolving uniqueness and personalization, the company can achieve sustainable competitive advantage.
An assumption implicit in that definition is that consumers are making deliberate, perhaps even rational, decisions. Their reasons for buying products and services may be emotional, but they always result from somewhat conscious logic. Therefore a good strategy figures out and responds to that logic.
But the idea that purchase decisions arise from conscious choice flies in the face of much research in behavioral psychology. The brain, it turns out, is not so much an analytical machine as a gap-filling machine: It takes noisy, incomplete information from the world and quickly fills in the missing pieces on the basis of past experience. Intuition—thoughts, opinions, and preferences that come to mind quickly and without reflection but are strong enough to act on—is the product of this process. It’s not just what gets filled in that determines our intuitive judgments, however. They are heavily influenced by the speed and ease of the filling-in process itself, a phenomenon psychologists call processing fluency. When we describe making a decision because it “just feels right,” the processing leading to the decision has been fluent.
Processing fluency is itself the product of repeated experience, and it increases relentlessly with the number of times we have the experience. Prior exposure to an object improves the ability to perceive and identify that object. As an object is presented repeatedly, the neurons that code features not essential for recognizing the object dampen their responses, and the neural network becomes more selective and efficient at object identification. In other words, repeated stimuli have lower perceptual-identification thresholds, require less attention to be noticed, and are faster and more accurately named or read. What’s more, consumers tend to prefer them to new stimuli.
In short, research into the workings of the human brain suggests that the mind loves automaticity more than just about anything else—certainly more than engaging in conscious consideration. Given a choice, it would like to do the same things over and over again. If the mind develops a view over time that Tide gets clothes cleaner, and Tide is available and accessible on the store shelf or the web page, the easy, familiar thing to do is to buy Tide yet another time.
A driving reason to choose the leading product in the market, therefore, is simply that it is the easiest thing to do: In whatever distribution channel you shop, it will be the most prominent offering. In the supermarket, the mass merchandiser, or the drugstore, it will dominate the shelf. In addition, you have probably bought it before from that very shelf. Doing so again is the easiest possible action you can take. Not only that, but every time you buy another unit of the brand in question, you make it easier to do—for which the mind applauds you.
Each time you choose a product, it gains advantage over those you didn’t choose.
Meanwhile, it becomes ever so slightly harder to buy the products you didn’t choose, and that gap widens with every purchase—as long, of course, as the chosen product consistently fulfills your expectations. This logic holds as much in the new economy as in the old. If you make Facebook your home page, every aspect of that page will be totally familiar to you, and the impact will be as powerful as facing a wall of Tide in a store—or more so.
Buying the biggest, easiest brand creates a cycle in which share leadership is continually increased over time. Each time you select and use a given product or service, its advantage over the products or services you didn’t choose cumulates.
The growth of cumulative advantage—absent changes that force conscious reappraisal—is nearly inexorable. Thirty years ago Tide enjoyed a small lead of 33% to 28% over Unilever’s Surf in the lucrative U.S. laundry detergent market. Consumers at the time slowly but surely formed habits that put Tide further ahead of Surf. Every year, the habit differential increased and the share gap widened. In 2008 Unilever exited the business and sold its brands to what was then a private-label detergent manufacturer. Now Tide enjoys a greater than 40% market share, making it the runaway leader in the U.S. detergent market. Its largest branded competitor has a share of less than 10%. (For a discussion of why small brands even survive in this environment, see the sidebar “The Perverse Upside of Customer Disloyalty.”)
If consumers are slaves of habit, it’s hard to argue that they are “loyal” customers in the sense that they consciously attach themselves to a brand on the assumption that it meets rational or emotional needs. In fact, customers are much more fickle than many marketers assume: Often the brands that are believed to depend on loyal customers achieve the lowest loyalty scores.
For example, Colgate and Crest are the leading toothpaste brands in the U.S. market, with about 75% of it between them. Customers for both are loyal 50% of the time (their preferred brand accounts for 50% of their annual toothpaste purchases). Tom’s toothpaste, a niche “natural” brand based in Maine, has a 1% market share and is thought to have a fanatical customer following. One might expect the data to show that the 1% are mostly repeat buyers. But in fact Tom’s customers are loyal only 25% of the time—half the rate of the big brands.
So why do fringe brands like Tom’s survive? The answer, perhaps perversely, is that with big-brand loyalty rates at 50%, just enough customers will buy small brands from time to time to keep the latter in business. But the small brands can’t overcome the familiarity barrier, and although entirely new brands do enter categories and become leaders, it is extremely rare for a small fringe brand to successfully take on an established leader.
We don’t claim that consumer choice is never conscious, or that the quality of a value proposition is irrelevant. To the contrary: People must have a reason to buy a product in the first place. And sometimes a new technology or a new regulation enables a company to radically lower a product’s price or to offer new features or a wholly new solution to a customer need in a way that demands consumers’ consideration.
Robust where-to-play and how-to-win choices, therefore, are still essential to strategy. Without a value proposition superior to those of other companies that are attempting to appeal to the same customers, a company has nothing to build on.
But if it is to extend that initial competitive advantage, the company must invest in turning its proposition into a habit rather than a choice. Hence we can formally define cumulative advantage as the layer that a company builds on its initial competitive advantage by making its product or service an ever more instinctively comfortable choice for the customer.
Companies that don’t build cumulative advantage are likely to be overtaken by competitors that succeed in doing so. A good example is Myspace, whose failure is often cited as proof that competitive advantage is inherently unsustainable. Our interpretation is somewhat different.
Launched in August 2003, Myspace became America’s number one social networking site within two years and in 2006 overtook Google to become the most visited site of any kind in the United States. Nevertheless, a mere two years later it was outstripped by Facebook, which demolished it competitively—to the extent that Myspace was sold in 2011 for $35 million, a fraction of the $580 million that News Corp had paid for it in 2005.
Why did Myspace fail? Our answer is that it didn’t even try to achieve cumulative advantage. To begin with, it allowed users to create web pages that expressed their own personal style, so individual pages looked very different to visitors. It also placed advertising in jarring ways—and included ads for indecent services, which riled regulators. When News Corp bought Myspace, it ramped up ad density, further cluttering the site. To entice more users, Myspace rolled out what Bloomberg Businessweek referred to as “a dizzying number of features: communication tools such as instant messaging, a classifieds program, a video player, a music player, a virtual karaoke machine, a self-serve advertising platform, profile-editing tools, security systems, privacy filters, Myspace book lists, and on and on.” So instead of making its site an ever more comfortable and instinctive choice, Myspace kept its users off balance, wondering (if not subconsciously worrying) what was coming next.
Compare that with Facebook. From day one, Facebook has been building cumulative advantage. Initially it had some attractive features that Myspace lacked, making it a good value proposition, but more important to its success has been the consistency of its look and feel. Users conform to its rigid standards, and Facebook conforms to nothing or no one else. When it made its now-famous extension from desktop to mobile, the company ensured that users’ mobile experience was highly consistent with their desktop experience.
To be sure, Facebook has from time to time introduced design changes in order to better leverage its functionality, and it has endured severe criticism in consequence. But in the main, new service introductions don’t jeopardize comfort and familiarity, and the company has often made the changes optional in their initial stages. Even its name conjures up a familiar artifact, the college facebook, whereas Myspace gives the user no familiar reference at all.
Bottom line: By building on familiarity, Facebook has used cumulative advantage to become the most addictive social networking site in the world. That makes its subsidiary Instagram’s decision to change its icon all the more baffling.
Myspace and Facebook nicely illustrate the twin realities that sustainable advantage is both possible and not assured. How, then, might the next Myspace enhance and extend its competitive edge by building a protective layer of cumulative advantage? Here are four basic rules to follow:
This idea is far from new—it is implicit in many of the best and earliest works on strategy, and we can see it in the thinking of Bruce Henderson, the founder of Boston Consulting Group. Henderson’s particular focus was on the beneficial impact of cumulative output on costs—the now-famous experience curve, which suggests that as a company’s experience in making something increases, its cost management becomes more efficient. He argued that companies should price aggressively early on—“ahead of the experience curve,” in his parlance—and thus win sufficient market share to give the company lower costs, higher relative share, and higher profitability. The implication was clear: Early share advantage matters—a lot.
Marketers have long understood the importance of winning early. Launched specifically to serve the fast-growing automatic washing machine market, Tide is one of P&G’s most revered, successful, and profitable brands. When it was introduced, in 1946, it immediately had the heaviest advertising weight in the category. P&G also made sure that no washing machine was sold in America without a free box of Tide to get consumers’ habits started. Tide quickly won the early popularity contest and has never looked back.
BlackBerry may be the best example of a conscious design for addiction.
Free new-product samples to gain trial have always been a popular tactic with marketers. Aggressive pricing, the tactic favored by Henderson, is similarly popular. Samsung has emerged as the market share leader in the smartphone industry worldwide by providing very affordable Android-based phones that carriers can offer free with service contracts. For internet businesses, free is the core tactic for establishing habits. Virtually all the large-scale internet success stories—eBay, Google, Twitter, Instagram, Uber, Airbnb—make their services free so that users will grow and deepen their habits; then providers or advertisers will be willing to pay for access to them.
As we’ve seen, the best outcome is when choosing your offering becomes an automatic consumer response. So design for that—don’t leave the outcome entirely to chance. We’ve seen how Facebook profits from its attention to consistent, habit-forming design, which has made use of its platform go beyond what we think of as habit: Checking for updates has become a real compulsion for a billion people. Of course Facebook benefits from increasingly huge network effects. But the real advantage is that to switch from Facebook also entails breaking a powerful addiction.
The smartphone pioneer BlackBerry is perhaps the best example of a company that consciously designed for addiction. Its founder, Mike Lazaridis, explicitly created the device to make the cycle of feeling a buzz in the holster, slipping out the BlackBerry, checking the message, and thumbing a response on the miniature keyboard as addictive as possible. He succeeded: The device earned the nickname CrackBerry. The habit was so strong that even after BlackBerry had been brought down by the move to app-based and touch-screen smartphones, a core group of BlackBerry customers—who had staunchly refused to adapt—successfully implored the company’s management to bring back a BlackBerry that resembled their previous-generation devices. It was given the comforting name Classic.
As Art Markman, a psychologist at the University of Texas, has pointed out to us, certain rules should be respected in designing for habit. To begin with, you must keep consistent those elements of the product design that can be seen from a distance so that buyers can find your product quickly. Distinctive colors and shapes like Tide’s bright orange and the Doritos logo accomplish this.
Because people are creatures of habit, they are blind to novelty.
Our brains use heuristics and experience to decide what something is, often skipping over unexpected or novel aspects of a scene. The neuroscientist Moshe Bar posits that the brain “is continuously busy generating predictions that approximate the relevant future.” He says, “We think that when we look at something, the brain asks, What is this? But really it asks, What is this like?” That is, we are matching input from the world to things we have encountered before. This rapid prediction process is the mental equivalent of the old game show Name That Tune. The more you’ve heard the song, the fewer notes it takes to recognize it. The less energy required to recognize something, the better. The goal of the marketer is to get the consumer to buy that brand in just one note. Constantly changing the melody and words won’t help.
The flip side of our blindness to novelty is that the more consistent an object remains, the less work the brain needs to do to identify (and choose) it. As long ago as 1910, researchers called this phenomenon the “warm glow of familiarity”; now there’s neurological evidence that it exists. Tide is a classic example of a product we recognize without much thought. Research has shown that we respond to placement on a store shelf, color, shape, and spatial orientation (in that order). In a process called perceptual priming, the brain relies on those clues. Over time it needs less information and uses less power to recognize a familiar object than to recognize something new.
Apparently this is a closely guarded secret, because marketers spend time and money creating novelty. But new packaging for an established product may not have the intended effect. Change meant to freshen or energize a product line may actually cause consumers to overlook the new design as they search for what they are in the habit of seeing. In a test of this change blindness, product managers were asked to locate a new design for their own brand on a shelf, and they couldn’t easily do it.
Once images have been embedded, the degree to which they stick with us is extraordinary. In one study, David Mitchell, of Kennesaw State University, showed his subjects images similar to A, above, multiple times, priming their implicit memory. Later he showed them fragments (similar to B) of the pictures they had originally seen, along with “novel fragments” of pictures they hadn’t. Subjects were far more likely to recognize the images they had seen before than the new ones.
Here’s the kicker: Mitchell’s follow-up came 17 years after that priming. Some subjects didn’t even recall that they’d taken part in the study. Even years later, people can identify things they’ve encountered before more easily than things they haven’t—which should serve as a warning to marketers who value novelty over habit.
Scott Berinato is a senior editor at HBR.
And you should find ways to make products fit in people’s environments to encourage use. When P&G introduced Febreze, consumers liked the way it worked but did not use it often. Part of the problem, it turned out, was that the container was shaped like a glass-cleaner bottle, signaling that it should be kept under the sink. The bottle was ultimately redesigned to be kept on a counter or in a more visible cabinet, and use after purchase increased.
Unfortunately, the design changes that companies make all too often end up disrupting habits rather than strengthening them. Look for changes that will reinforce habits and encourage repurchase. The Amazon Dash Button provides an excellent example: By creating a simple way for people to reorder products they use often, Amazon helps them develop habits and locks them into a particular distribution channel.
As we’ve already noted, companies engage in initiatives to “relaunch,” “repackage,” or “replatform” at some peril: Such efforts can require customers to break their habits. Of course companies have to keep their products up-to-date, but changes in technology or other features should ideally be introduced in a manner that allows the new version of a product or service to retain the cumulative advantage of the old.
Even the most successful builders of cumulative advantage sometimes forget this rule. P&G, for example, which has increased Tide’s cumulative advantage over 70 years through huge changes, has had to learn some painful lessons along the way. Arguably the first great detergent innovation after Tide’s launch was the development of liquid detergents. P&G’s first response was to launch a new brand, called Era, in 1975. With no cumulative advantage behind it, Era failed to become a major brand despite consumers’ increasing substitution of liquid for powdered detergent.
Recognizing that as the number one brand in the category, Tide had a strong connection with consumers and a powerful cumulative advantage, P&G decided to launch Liquid Tide in 1984, in familiar packaging and with consistent branding. It went on to become the dominant liquid detergent despite its late entry. After that experience, P&G was careful to ensure that further innovations were consistent with the Tide brand. When its scientists figured out how to incorporate bleach into detergent, the product was called Tide Plus Bleach. The breakthrough cold-cleaning technology appeared in Tide Coldwater, and the revolutionary three-in-one pod form was launched as Tide Pods. The branding could not have been simpler or clearer: This is your beloved Tide, with bleach added, for cold water, in pod form. These comfort- and familiarity-laden innovations reinforced rather than diminished the brand’s cumulative advantage. The new products all preserved the look of Tide’s traditional packaging—the brilliant orange and the bull’s-eye logo. The few times in Tide history when that look was altered—such as with blue packaging for the Tide Coldwater launch—the effect on consumers was significantly negative, and the change was quickly reversed.
Of course, sometimes change is absolutely necessary to maintain relevance and advantage. In such situations smart companies succeed by helping customers transition from the old habit to the new one. Netflix began as a service that delivered DVDs to customers by mail. It would be out of business today if it had attempted to maximize continuity by refusing to change. Instead, it has successfully transformed itself into a video streaming service.
Although the new Netflix markets a completely different platform for digital entertainment, involving a new set of activities, Netflix found ways to help its customers by accentuating what did not have to change. It has the same look and feel and is still a subscription service that gives people access to the latest entertainment without leaving their homes. Thus its customers can deal with the necessary aspects of change while maintaining as much of the habit as possible. For customers, “improved” is much more comfortable and less scary than “new,” however awesome “new” sounds to brand managers and advertising agencies.
One of the fathers of behavioral science, Daniel Kahneman, characterized subconscious, habit-driven decision making as “thinking fast” and conscious decision making as “thinking slow.” Marketers and advertisers often seem to live in thinking-slow mode. They are rewarded with industry kudos for the cleverness with which they weave together and highlight the multiple benefits of a new product or service. True, ads that are clever and memorable sometimes move customers to change their habits. The slow-thinking conscious mind, if it decides to pay attention, may well say, “Wow, that is impressive. I can’t wait!”
But if viewers aren’t paying attention (as in the vast majority of cases), an artful communication may backfire. Consider the ad that came out a couple of years ago for the Samsung Galaxy S5. It began by showing successive vignettes of generic-looking smartphones failing to (a) demonstrate water resistance; (b) protect against a young child’s accidentally sending an embarrassing message; and (c) enable an easy change of battery. It then triumphantly pointed out that the Samsung S5, which looked pretty much like the three previous phones, overcame all these flaws. Conscious, slow-thinking viewers, if they watched the whole ad, may have been persuaded that the S5 was different from and superior to other phones. But an arguably greater likelihood was that fast-thinking viewers would subconsciously associate the S5 with the three shortcomings. When making a purchase decision, they might be swayed by a subconscious plea: “Don’t buy the one with the water-resistance, rogue-message, and battery-change problems.” In fact, the ad might even induce them to buy a competitor’s product—such as the iPhone 7—whose message about water resistance is simpler to take in.
Remember: The mind is lazy. It doesn’t want to ramp up attention to absorb a message with a high level of complexity. Simply showing the water resistance of the Samsung S5—or better yet, showing a customer buying an S5 and being told by the sales rep that it was fully water-resistant—would have been much more powerful. The latter would tell fast thinkers what you wanted them to do: go to a store and buy the Samsung S5. Of course, neither of those ads would be likely to win any awards from marketers focused on the cleverness of advertising copy.
Experts have been debating the nature of competitive advantage for years. Below are four standout articles from HBR that articulate the most influential thinking on the subject.
In this classic 1996 article, Porter argues that operational effectiveness, although necessary to superior performance, is not sufficient, because its techniques are easy to imitate. The essence of strategy is choosing a unique and valuable position rooted in activities that are much more difficult to match.
This 2003 article introduced the Net Promoter Score—a simple measure of a customer’s willingness to recommend a product. NPS is a reliable index to loyalty, says Reichheld, and the best predictor of top-line growth.
McGrath contends that business leaders are overly fixated on creating a sustainable competitive advantage. Business today is too turbulent to spend months crafting a long-term strategy, she says in this 2013 article. Rather, leaders need a portfolio of transient advantages that can be built quickly and abandoned just as rapidly.
For decades, businesses have sought competitive advantage in upstream activities related to making new products—bigger factories, cheaper raw materials, efficiency, and so on. But those are all easily copied. Advantage, says Dawar in this 2013 article, increasingly lies in the marketplace. The important question is not “What else can we make?” but “What else can we do for our customers?”
The death of sustainable competitive advantage has been greatly exaggerated. Competitive advantage is as sustainable as it has always been. What is different today is that in a world of infinite communication and innovation, many strategists seem convinced that sustainability can be delivered only by constantly making a company’s value proposition the conscious consumer’s rational or emotional first choice. They have forgotten, or they never understood, the dominance of the subconscious mind in decision making. For fast thinkers, products and services that are easy to access and that reinforce comfortable buying habits will over time trump innovative but unfamiliar alternatives that may be harder to find and require forming new habits.
So beware of falling into the trap of constantly updating your value proposition and branding. And any company, whether it is a large established player, a niche player, or a new entrant, can sustain the initial advantage provided by a superior value proposition by understanding and following the four rules of cumulative advantage.
A.G. Lafley, the recently retired CEO of Procter & Gamble, serves on the board of Snap Inc.
Roger L. Martin is a professor at and the former dean of the Rotman School of Management at the University of Toronto. He is a coauthor of Playing to Win (Harvard Business Review Press, 2013).
I love the notion that customers’ purchase decisions are more closely related to habit and ease than to loyalty—it brings much-needed insight from behavioral science to the study of consumer decisions. And, as Lafley and Martin suggest, it has major implications for how products are developed and brands are managed. I completely agree with the authors that customers’ unconscious minds dominate their decision-making process—and I suspect that any company can benefit from making their routine choices easier, faster, and more convenient. That’s one reason the subscription model has become so popular in so many industries—it eliminates the need for customers to consciously decide about routine purchases and offers providers the lure of effortlessly recurring revenue.
The theory of cumulative advantage makes a lot of sense in what Martin Reeves and his colleagues at BCG call a classical strategic setting—one in which industry boundaries are clearly delineated, the basis of competition is stable, the environment experiences no major disruptions, and a strong competitive position, once created, can be sustained. As BCG has shown, the candy company Mars has enjoyed very long product life cycles: Snickers and M&M’s (introduced in 1930 and 1941, respectively) are among the best-selling candies in the world today. Procter & Gamble has a similarly strong track record with Tide, Unilever with Dove, and PepsiCo with Tropicana orange juice.
Any theory that seeks to explain cause-and-effect relationships operates within a set of constraints. A theory that works beautifully under one set may fall apart under another.
Over the years, we have seen systematic shifts in how companies create a strategically valuable position, often reinforced by the constraints of the systems within which they operate. In the early 1900s, for instance, companies that achieved economies of scope and scale through mass production were dominant, and they remained so right through the period after World War II. Indeed, the Fortune 500 list of 1970 reveals the dominance of huge U.S.-based industrial players such as General Motors, General Electric, Exxon Mobil, and Union Carbide.
With the advent of communications and computational technology, strategic advantage began to shift toward companies that leveraged information technology to provide services in addition to goods, and toward models that placed a value on information utilization in addition to product features and functions. Although the industrial giants remained in place for a long time, companies such as Walmart, AIG, Enron, and Citigroup had joined them on the Fortune 500 list by 1995.
Today the dynamics of competitive advantage have shifted once more. Companies are achieving advantage through access to assets rather than ownership of them. In addition, a whole new category of “platform” companies, such as Google, Apple, and Facebook, have emerged, and the very size of their customer base creates a reinforcing virtuous cycle. Often called network effects, these dynamics mean that the more customers a company has, the more valuable it is to each additional customer. In such cases being an early mover can result in a formidable advantage.
The point is that every theory has its constraints. Attempting to apply it outside those conditions can lead to disaster.
But for a growing number of companies, those conditions don’t apply. Their industry boundaries aren’t clearly delineated—in fact, they’re totally blurry. Just ask anyone in retail, entertainment, or telecommunications. Their environments aren’t stable—companies can be disrupted by entrants from below, as Clayton Christensen has pointed out, but also by competitors using a different business model or moving over from an adjacent industry. And long-standing competitive strengths can be upended almost overnight by someone who has digitized your physical business (hello, Encyclopaedia Britannica) or turned your product into a service (see Zipcar, Airbnb, and Uber). Apple and Google didn’t necessarily intend to disrupt point-and-shoot cameras, stand-alone GPS devices, TV advertising, or the Weather Channel, but they did so nonetheless.
For some time my argument has been that we need a new way of thinking about strategy in environments where traditional barriers to entry are eroding, or in which emerging technologies weaken constraints. Andy Grove’s phrase inflection point captures this situation nicely. A strategic inflection point, he says, is “a time in the life of a business when its fundamentals are about to change.” Inflection points are difficult for traditional strategy tools to address, because they usually don’t look important at first. The Wright brothers proved it was possible to fly safely in 1903. Nobody took that seriously until 1908. Even with the 1914 launch of the first commercial flight, few realized that airplanes would upend industries as varied as railroads, steamships, and package delivery.
Consumer habits can be powerful aids to sustaining a competitive advantage, as Lafley and Martin quite correctly point out. But habits, like other elements of the environment, can change. And when new technologies make new business models viable, habits can change very fast.
Consider the powerful forces that were unleashed from 2004 to 2007 by four separate but linked business developments. In 2004 Facebook was founded. In 2005 YouTube was founded. In 2006 Amazon launched Amazon Web Services (AWS). In 2007 Apple’s iPhone and Google’s Android operating system were commercially released. As the technology analyst Ben Thompson points out, AWS made it easy and cheap to start an online company, YouTube made it easy and cheap to upload videos, and Facebook offered a ready-made channel for sharing such videos. I’d add that the wild popularity of mobile phones made all that available to ordinary people. Now a couple of guys with an idea and access to programming skills can rival global giants in days or weeks, not months or years—with practically no assets.
And that’s exactly what happened with the 2012 launch of DollarShaveClub.com. The brand promise was simple: great razors with few frills, for a low subscription price, delivered to your door automatically. Not only did you save money, but you didn’t have to visit a store or risk running out. This was all the more attractive because habitual buying behavior had already been disrupted: Razor blades are expensive and easy to steal, so it has become common for them to be kept under lock and key in stores. Today, although Dollar Shave Club has an 8% share of the $3 billion U.S. market for blades and razors, the far more important number is its “share of cartridge.” That, according to recent sources, is an astonishing 15% of all cartridges sold.
In 2010 Gillette had 70% of the global shaving market and legions of loyal customers who reliably traded up as the next generation of products, with higher prices, were released. Procter & Gamble had acquired the brand in 2005 for a reported $57 billion. It was a classic high-market-share, high-quality business—and we can only assume from their track records that both Gillette and P&G were extremely good at getting customers to buy habitually. Clearly they had a strong cumulative advantage. But that wasn’t enough, because the business had hit an inflection point.
In July 2016 Unilever agreed to buy Dollar Shave Club for about $1 billion in cash. The founding entrepreneurs are happy. Their investors are happy. Their customers are clearly happy. The incumbents? Not so much. According to the Wall Street Journal, P&G’s share of men’s razors and blades had fallen to 59% in 2015. One of its responses was to launch the Gillette Shave Club. Having seen the potentially habit-destroying effects of the subscription model, P&G now offers subscription and delivery for other products—including expensive Tide Pods.
Twenty years ago it would have been inconceivable that a marketing message could reach 20 million people in a matter of weeks without massive spending on television and other advertising. But Dollar Shave Club accomplished that with an entertaining launch video, promotion on social media channels, and a group of enthusiastic brand ambassadors who provided feet on the ground to promote its products—free.
The point of this story is that even a company as storied as P&G can be taken by surprise. Which brings me to the tricky question, How can executives balance the formidable power of cumulative advantage and habit, often associated with a brand, with the need to refresh their approach?
One practical tactic is to leverage the core skills or capabilities of an organization in a new format. Target offers an illustrative case. The company’s roots were in a traditional department store, Dayton’s, which became Dayton Hudson and eventually Marshall Field’s. In 1960 its leadership saw an opportunity to reach a market segment that appeared to be growing but wasn’t well served by the existing format. That segment consisted of value-conscious consumers who nonetheless appreciated good design and a reasonably pleasant shopping experience. To protect the then-dominant department store brand, the new venture was branded separately. Its iconic bull’s-eye logo was meant to represent the notion of hitting the target of convenience, price, and customer experience.
How can leaders balance cumulative advantage with the need for a fresh approach?
By the mid-1970s Target stores were outselling the company’s department stores. In 2000 Dayton Hudson changed its name to Target to reflect the reality of its now-core business. In 2004 the company sold its department store brands, completing an extraordinary retail transformation.
Another fascinating transformation that leveraged the core skills of a parent company is the relentless digitization pursued by the newspaper publisher Schibsted, of Norway. Unlike many other newspaper publishers, Schibsted saw the encroachment of digital classified advertisements as an opportunity rather than a threat to its business. Beginning in the late 1990s, its leaders aggressively courted classified advertisers to list with its digital properties. This became a crusade. As Sverre Munck observed when he was the EVP for strategy and international editorial, “The Internet was made for classifieds and classifieds were made for the Internet.” Long a traditional media company, Schibsted was able to leverage deep ties with its advertisers with a model that permitted economies of scale in editorial and communication activities across its media brands. These were supplemented by a significant commitment to bringing technological capabilities into the very core of the media business, ending the tug-of-war between conventional editorial processes and the logic of digital transformation.
In 2012 I wrote an HBR piece titled “How the Growth Outliers Do It.” That analysis, which looked at 10 years of net income data from 2000 to 2009, found that out of 2,347 of the publicly traded firms with a market capitalization of more than $1 billion, only 10 had successfully grown net income by 5% or more in every one of those 10 years. (Although performance can be measured in many ways, this seems to me to be one that tests the idea of sustainable advantage consistently.) The first conclusion is obvious: Steady, sustained profit growth is hard to achieve, particularly in a period that includes the Great Recession of 2008. The second, however, is that some companies do manage to achieve it for relatively long periods of time. I found that those companies balanced elements of stability (culture, relationships, leadership, and even strategy) with elements of dynamism (rapid resource mobilization, marketplace experiments, and people mobility).
I spoke recently with Malcolm Frank, a senior executive at Cognizant, which appears on both my original list and one that I’ve updated through the end of 2015 (for which I used modified criteria: If a company was over the threshold for any year in the previous 10 years, it was included on the list, which totaled roughly 5,300). Frank told me that his organization lives and breathes the idea that in many cases competitive advantage is not going to last. “For us, what was the ceiling five years ago is going to be the floor five years from now,” he said. Cognizant is also disciplined about exiting slow-growth or underperforming operations. But it is remarkably stable. Francisco D’Souza has been CEO since 2007, and the most recent addition to the leadership team joined in 2005. Cognizant’s culture, too, reflects what its leaders call a “well-established set of cultural values,” as demonstrated in their written documents, public statements, and go-to-market strategies.
But let’s return to the really important insight that underlies the argument of Lafley and Martin: Most of the time, we are all unaware of the true motivations behind the choices we make. The better strategists and marketers become at understanding those motivations, the more likely they are to succeed at building habitual behavior among consumers—and, just as important, the more likely they are to see how those habits might change. Clayton Christensen’s “jobs to be done” theory may come in handy here. He has famously said that when we buy products, we are actually hiring them to do a job for us. And the “jobs” underlying most product purchases are remarkably stable. Take communication: From smoke signals to the pony express to the telegraph to the telephone to the communications technologies of today, our basic job—to send messages to other human beings—has not changed. But how that job gets done has changed dramatically. If incumbent companies stay focused on the job itself—rather than on the specifics of how it gets done at this moment in time—they may be able to invent a better way before the competition does.
This is a point that company leaders often miss. Customers can easily “hire” another solution that does a given job better—just as vast numbers of them are currently doing with razors bought by subscription.
Rita Gunther McGrath, a professor of management at Columbia Business School, is a globally recognized expert on strategy, innovation, and growth with an emphasis on corporate entrepreneurship.
HBR: Do you think people’s loyalty to LEGO is a function of habit?
Knudstorp: I think it’s more than habit. When I became CEO, 13 years ago, and the LEGO Group was in crisis, people wrote letters to me and said, “Please don’t die. The world would be a poorer place without LEGO.” When customers have an emotional connection with your brand, they’ll make an effort to get it, which I think means that they’re making a conscious choice. People don’t line up for days to get the iPhone 7 because it’s the automatic choice.
Of course, not all products can hope to create an emotional connection with the consumer. Airlines and hotels have loyalty programs to force us to be loyal because we don’t feel an emotional connection that would make us choose them. It’s hard to see many people thinking of themselves as “Holiday Inn people.” And if you’re marketing a practical product like Tide, you absolutely need to appeal to the unconscious mind, because the choice of what detergent to buy is usually made unconsciously.
But a product like ours, which is about play and children and learning, can be more than just a safe or easy option. It can be a conscious statement of values or identity. Of course, children don’t go around thinking they’re LEGO people—they just want to play—but they can grow up to become LEGO people and have their own children. It’s a lot easier to persuade parents who got the LEGO habit themselves as kids, which is one reason we have to work harder in emerging markets, where we’re mostly talking to first-generation users.
Does habit have a role in this emotional connection?
Absolutely. Habit is how we build the connection. People develop habits by doing the same things repeatedly. But the habits eventually turn into values. If we teach our children to brush their teeth every night before they go to bed, in the beginning it’s just an action we force upon them. Then over time they feel uncomfortable going to bed without having brushed their teeth. Eventually they start to feel that brushing your teeth is the right thing to do. If you can make your brand a value—a part of someone’s identity—you have a really powerful competitive advantage. But it all begins with making your brand a habit.
How does that work at the LEGO Group?
You need to give people some simple routines they can practice to get habituated to building with the bricks. As the things they build become more complicated, they start developing their own habits and techniques. But they’ll be open to changing those routines if someone shows them a neater, simpler way. There are hundreds of LEGO conventions every year, all around the world, showcasing new ways of using existing elements that we as a company have never thought about. Go on YouTube, and you’ll see the amazing things people build. I’m sitting here with a structure of about 20 bricks, and I or anyone else could use the same 20 bricks to create millions of different structures. Building is a really fundamental need—we all want to make things that are our own—and we offer a platform for that.
What do you have to do to get the process started?
It’s all about keeping the basics simple and easy to get used to. A neuroscientist recently told me that our brains have the equivalent of 20 megabytes of RAM—enough to process just four photos on a smartphone. And it gets worse the older you get: Recent research out of NASA suggests that when people reach the age of 25, they’ve retained only about 5% of the capacity for creative thinking that they had when they were five. This means they’re easily overloaded.
Let me illustrate how we manage that. We have a product line called LEGO Creator 3 in 1—kits that each offer instructions for building three models with the one kit. In fact you can make many more models with a single kit. Twelve years ago we would have offered 12 suggestions. But so much variety actually put people off. So we simplified it to just three. You also have to make the routines fun, because play is how kids learn and get habituated to new routines.
Novelty—having the next cool thing—is important in the toy business. But habit is about predictability. How do you balance the two?
You’re absolutely right that novelty is important for children, which is why 60% of the LEGO sets that we put on the market in any given year are new. But that’s not a trade-off with familiarity, because LEGO System of Play is a platform—perhaps the only toy in the world that offers a platform for play. Each new set not only brings 12 or so new possible models but also can be combined with what you already have to lift your total number of potential structures by orders of magnitude. This has a terrific network effect. If a child already has a LEGO set, getting another LEGO product is more valuable than just the incremental purchase—it extends his or her platform for play in an exponential way. And it’s infectious: The more kids who get the LEGO habit, the more others want to as well, and they can mix and match their LEGO collections.
David Champion is a senior editor at HBR.
HBR: What role have consumer habits played in your company’s success?
Cook: We paid really close attention to how people actually went about managing their personal finances before we created our first product—and we got the user interface to mimic those routines. Quicken was designed to look like a checkbook. And it wasn’t just about appearance—the interface operated like a check register. You put the next transaction at the bottom, for example, just as you do with a check register. Nobody else offered such a familiar interface.
We followed people’s routines as we built out the product’s functionality. Back in 1984 people paid bills by check. So we made sure that Quicken could print checks on a printer very easily. That sounds straightforward now, but at the time, people were using the old continuous Epson inkjet printers, which made aligning check stock to print on the lines of the checks hugely difficult. We actually invented and patented an alignment technique to make printers do it correctly. No one else seems to have thought of doing that.
What made you bet so heavily on consumer routines?
It was Apple. I asked an employee there to show me a Lisa, and I saw that its desktop interface looked very much like the physical artifacts office people worked with—files and so forth. I remember leaving the Apple headquarters and driving to the closest restaurant just so I could sit down and take notes about what I’d observed that was so powerful in the design.
“Later, at the launch of the Mac, I was struck by something Steve Jobs said about making computers as easy to use as a telephone. Think about that a minute. How easy was a phone to use back then? You had to memorize seven- or 10-digit numbers. If you dialed the wrong number, the system charged you, which was very expensive for long-distance, and then you had to start from scratch. If the line was busy, you got an unpleasant beeping sound. Phones had a really awful interface. So why did Jobs—a byword for elegant design—say he wanted to make Macs as easy as the telephone?
Because everyone was used to it.
Correct. Because of habit. People were used to typing these strings of seven or 10 digits.
Now, whose habits do you pick? When we launched QuickBooks, for small businesses, accounting software was universally designed with accountants in mind, and users had to speak their language. But nine out of 10 small businesses had no accountant on staff—their books were kept by a civilian, who probably couldn’t tell a debit from a credit and didn’t want to learn. We discovered this by observing Quicken customers and decided to design the first accounting product with no accounting in it; we called it QuickBooks. Despite a flawed launch, we were the market leader in two months, because we had designed it to work with people’s habits. Now that a lot of small businesses use QuickBooks, their auditors have gotten used to it as well and are advising new clients to use it, producing a snowball effect. That’s all built on a product that lets people hold on to their habits.
But don’t you find that habits change quickly in the digital space?
Yes. People will adjust to a radical change if it offers a habit from some other context to relate to—particularly in the digital space.
We’re now trying to make many habits—which are really just a way of simplifying your life—redundant. Take a typical freelancer, such as an Uber driver. Freelancers need to keep track of their expenses so that they can offset them against taxes. But it’s a pain to keep and categorize all your receipts and to list odometer readings and mileage for every business drive. Most freelancers don’t, and they lose thousands in tax deductions. So we’ve launched a service called QuickBooks Self-Employed that takes credit card and bank feeds and automatically categorizes expenses according to the merchant codes. It also automatically lists every time you drive, so you just swipe the business drives. Then, at tax time, all the information flows right to your tax preparer or tax software.
If you’re making the habits that got you started redundant, where will your next advantage come from?
It’s about network effects now, which is why we’re working on leveraging communities of users. With TurboTax, for example, we’re getting customers to answer people’s tax questions. We’ve created the largest and best source of answers on taxes—if you go to Google and put in a tax question, the link at the top will often be our answer. This is tapping a newer habit from the digital age: participating in online communities. But we couldn’t have created the community if we hadn’t worked with people’s routines in the first place.
David Champion is a senior editor at HBR.
A.G. Lafley, the recently retired CEO of Procter & Gamble, serves on the board of Snap Inc.
Roger L. Martin is the director of the Martin Prosperity Institute and a former dean of the Rotman School of Management at the University of Toronto. He is a coauthor of Creating Great Choices: A Leader’s Guide to Integrative Thinking (Harvard Business Review Press, 2017) and of Playing to Win: How Strategy Really Works (Harvard Business Review Press, 2013).
Customer Loyalty Is Overrated
Research & References of Customer Loyalty Is Overrated|A&C Accounting And Tax Services