The Australian marketing science professor criticised Dunnhumby’s report – trailed in a Campaign column by its authors earlier this week – which suggested so-called "heavy" or loyal brand purchasers contribute more to total sales than is currently believed.
The smaller the brand, Dunnhumby suggests, the more they are reliant on sales from heavy customers.
The Dunnhumby findings are at odds with marketing theory outlined in Sharp’s famous book How Brands Grow. His marketing theory inverts the so-called "Pareto principle" because 80% of a brand’s customers only deliver 20% of a brand’s sales. According to Sharp, this ratio is more like 60/40 than 80/20 because the bottom 80%, in fact, deliver almost half of a brand’s current sales.
In response, published today (25 January) on the Ehrenberg-Bass Institute's website, Sharp and co-author Charles Graham argue: "... most brand buyers are light/occasional customers yet they still account for 40% of long-run turnover. It will therefore take serious marketing attention to keep them coming back. "
Pareto shares are more extreme for smaller brands but this does not mean that they enjoy higher loyalty, Sharp and Graham said, but because shares can look mild over short period of time or with infrequently bought categories.
"In longer time periods the Pareto Share is higher as heavier buyers make repeat purchases and more light buyers enter the data set by making a single purchase. Over very long time periods there is the problem that some customers effectively "drop out" (move house, exit the category, die) this makes these customers look very light, inflating the value of the remaining customers," the academics said.
'A flawed sample isn't fixed by making it bigger'
Sharp and Graham also criticised Dunnhumby’s methodology for using data from a single retailer, in this instance Tesco.
"This is probably why even their single year Pareto Share looks a bit high. In any period their Pareto Share calculation will be contaminated by people who have moved house and are mainly now shopping at another chain," Sharp and Graham argue.
"These households will now look very light when in reality they are simply buying the brand at a different store…. Even households who move to Tesco will be misrepresented. This bias gets worse over time. It’s a reminder that a flawed sample isn’t fixed by making it bigger."
For marketers, this means that the bottom 80% of customers will always be worth more next year than they were this year: "…this year’s top 20% of buyers will be worth less than the 60% of sales they generated this year (i.e. about 45%). Those who are statistically minded will recognise this regresssion-to-the mean.
"Given that most marketing plans are about the future, not the past, it’s best then to consider the 60/20 law as an over-statement, this year’s heaviest buyers will be worth less in the future (and our lightest will be worth more)."
They conclude: "... the old 'target your loyalists for efficiency' strategy look[s] like a near complete dead-end."
'Many light buyers stop buying altogether'
The authors of the Dunnhumby report, head of media Adam Smith and data science manager Nick Blair, said the company’s ownership by Tesco is a "red herring" to the evidence presented and that using a single retailer was relevant because the supermarket operates in a market equilibrium against its rivals.
"The research simply presents a transparent, unedited view of the proportional sales distribution of customers across a broad range of brands over time, using a robust and extended sample of purchasing behaviour. The sample of 800,000 customers is a continuous panel over five years," they added.
With regard to Sharp and Graham’s main criticism, Smith and Blair said: "We are excited about the potential to debate further the supposed ‘fact’ that the current bottom 80% of buyers in one year will always be worth ‘more than they were worth this year’, as they regress to the mean. This is not our general observation.
"We see many light buyers stop buying altogether, rather than naturally moderate upwards. That is why we see existing moderate and heavy buyers become increasingly important as time goes by, and is why a balanced and specific acquisition and retention strategy is required, tailored to heavy, light and non-buyers accordingly."