Why small businesses have it worse

That small businesses are getting the brunt of the stay-at-home orders is no surprise. What is surprising is the role brand identity plays and whether they’ll survive. Contrary to popular belief, this woman in the photo above is not ensuring she buys the same brand bananas again. Or even from the same store.

Research from the excellent Will Rogers suggests in the book “Eat Your Greens” that “heavy buyers” of a product contribute the most to sales. A person who buys a lot of beer contributes the most to revenue. But most heavy buyers only buy a product from a category a handful of times a year. Even heavy beer drinkers (excluding alcoholics) likely only buy beer 12-15 times a year. A family of six is a heavy buyer of detergent, but they still only buy it a dozen times a year.

“Half the annual customer base bought a brand just once or twice, to deliver only 12% of sales”. Meaning heavy buyers, the people who are often most brand-loyal, represents a lot of work for not a lot of reward.

If you take buyers of a product and group them by purchase frequencies, we start to see how much brand loyalty people have. Among well-known brands, like McDonalds or Miracle Whip, “75% of buyers only bought five times or less, or about 30% of sales.” The same goes for shoes, computers, Mexican food, video games, etc. You probably only buy these things a handful of times a year. Maybe even just once in the case of technology.

Meaning 70% of a brand or company’s sales come from “infrequent buyers”. 

There’s a notion in business that customers behave consistently and always purchase the same brand. When in reality, the pesto, mayo, toothpaste, bread, cereal, shoes, and so on that you buy are likely whatever’s on the shelf, on sale, in a good spot in the store closest to your house, or made by some other factor.

For small businesses, restaurants, and brands struggling right now you can’t rely on your loyal customers. They likely don’t make up more than 15% of your overall revenue. Instead, you have to rely on new customers. The “light buyers”, of which for many businesses there are even less of right now.

There’s a name for this: “Negative Binomial Distribution”. Every brand has this, and it boils down to “light buyers matter a lot”. And light buyers are the least loyal to brands.

Additionally, “buyer moderation” is thrown into whack right now. Households don’t buy toilet paper, as we’ve seen, at the same rate all the time. Frequency isn’t fixed, even if they are somewhat seasonal, like in sporting goods. 

For restaurants these new customers are tourists, people passing through, families visiting someone who lives nearby, etc. And without that happening, restaurants are easily susceptible to complete collapse.

For retail and product brands, the focus should be on pursuing new customers. So when normal operations resume you’re best positioned to regain sales. As always, it is better to target all category buyers in your advertising. So don’t target your beer to just beer drinkers, target it to all alcohol drinkers and socialites. 

This is why targeted advertising on Facebook is lousy for most brands. Budgets are thin, so people target down to a very specific group. But as we’ve seen, this group is the most work. They provide the least overall revenue. And they were likely to buy from you again anyway. To be blunt, most brands don’t devote the kind of money to ad spend they really need to target a whole category of customers. This sets people up for further decline later because of decreased brand awareness. I argue social media advertising is, for most businesses, likely what’s keeping them small. 

Not always, of course. Restaurants could do well to advertise on Facebook to everyone in a zip code above the age of 21. That targets the category, light buyers, and isn’t expensive.

As Rogers suggests, “Big brands are proportionally less dependent on light buyers, but also have the highest number of buyers.” This is where small businesses get hammered twice. “They have fewer buyers overall, and those buyers are overall less loyal.” 

Andrew Ehrenberg wrote, “Of the thousand and one variables which might affect buyer behavior it is found that 99% do not matter. Many aspects of buyer behavior can be predicted simply from the penetration and the average purchase frequency of the items.”

You can increase penetration by attracting more light buyers. And you attract more light buyers by focusing on three things:

  1. How your product or service is better (e.g., better tasting, faster, etc.)
  2. Stealing them from your competitors
  3. And encouraging people to understand the benefits of your category (e.g., encouraging people to bicycle increases bicycle sales.)

And that requires immense creativity, ad spend, having a genuinely more innovative product or service, or all three. Pick at least one.

About the author

Justin Harter

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