Its a Dirichlet World

Modeling Individuals Loyalties Reveals How Brands Compete, Grow, and Decline
Byron Sharp Ehrenberg Bass Institute byron.sharp@ marketingscience.info Malcolm Wright Massey University and Ehrenberg-Bass Institute m.j.wright@massey.ac.nz John Dawes Ehrenberg-Bass Institute john.dawes@ marketingscience.info Carl Driesener Ehrenberg-Bass Institute carl.driesener@ marketingscience.info Lars Meyer-Waarden EM Business School Strasbourg meyerwaarden@unistra.fr Lara Stocchi Ehrenberg-Bass Institute Lara.Stocchi@ MarketingScience.info Philip Stern Loughborough University and Ehrenberg-Bass Institute p.stern@lboro.ac.uk Ehrenbergs models are a fundamental part of our reporting to our consumer packaged goods clients and retailers. Michael Kruger, executive vice president R&D at SymphonyIRI Group Double Jeopardy (see Ehrenberg, Goodhardt, and Barwise, 1990), which describes both consumer attitudes and behaviors, is undoubtedly marketings most famous empirical law. It states that small brands suffer twicefewer people buy them, and those who do buy them do so less often. The Double Jeopardy law aligns with many other patterns in consumer brand choice, and these are so lawlike (holding across different product categories, DOI: 10.2501/JAR-52-2-203-213 A common misconception about the Dirichlet is that it implies there is no such thing as loyalty and that consumers are all alike. In fact, the opposite is true. The Dirichlet implies that consumers do not randomly allocate their purchasing among all June 2012 JOURNAL discuss how consumer loyalties reveal themselves; examine the assumption of stable loyalties underpinning the model; and explain how the Dirichlet allows underlying changes in loyalty to be detected and quantified. Dirichlet-based models play a very important role in our analytical services. Phil Parker, vice-president product management and development, Nielsen Company AN INTRODUCTION TO THE DIRICHLET WORLD Whether were predicting or analyzing market share, the foundation for the analysis is the Dirichlet. Greg Rogers, associate director of market research, Procter & Gamble countries, and time) that they can be predicted by a single functional form (Goodhardt, Ehrenberg, and Chatfield, 1984). This model, widely known as the Dirichlet, describes the variation in individuals loyalties across the category buying population. The Dirichlet gives detailed insights into how consumers behave and how brands compete (see Ehrenberg, Uncles, and Goodhardt, 2004), it is widely used (see Bound, 2009, and Kennedy and McColl, 2012 for practical guides to its application), and yet it is often misunderstood. In particular, critics claim it cannot adequately describe the changes in loyalty typically observed in consumer markets. In the current study, the authors

The Dirichlet is one of the most important theoretical achievements of marketing science. It provides insights into the distribution of consumer loyalties and is used widely in industry for benchmarking and interpreting brand performance. The Dirichlets implications run counter to some well-entrenched marketing pedagogy and so, unsurprisingly, it has attracted criticism arguing that it cannot adequately reflect the dynamic nature of consumer choice. The authors address these criticisms by discussing how consumer loyalties are manifested and examining whether changes in consumer loyalties do, in fact, disrupt Dirichlet buying patterns. To the best of our disciplines knowledge, based on extensive empirical and theoretical work, brands compete in a Dirichlet world.

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brands in a category but do so in a biased fashion. In other words, all buyers favor particular brands with their custom, all buyers have their own particular loyalties. Further, the Dirichlet assumes people differ from one another in both their rate of category purchase and in the composition of their purchase repertoires. These differences result in great heterogeneity between consumers, which the Dirichlet describes very accurately. This is neatly illustrated by the observation that other peoples supermarket baskets look different from ones own. They have a collection of brands that looks strange and unfamiliar; each shopper has a different repertoire. These loyalties are quite enduring and, in a years time, an individual households shopping basket still will look quite similar. It will not look exactly the same on each shopping trip, however, as consumers are polygamously loyal to a number of brands in most categories. Swapping between these favored brands is normal and an everyday occurrence for most shoppers. This does not happen because consumers were persuaded to change their mind about which brand is best but rather as serendipitous events (such as exposure to an advertisement the night before) play tiny, as-if random, roles in nudging consumer choice. As with any model, the Dirichlet is a simplification of the world, but it describes markets made up of real-world consumers so well because the central assumptions are close to reality. In effect these are as follows: Loyalties are distributed across consumers with little differentiation between brands, such that each brand in effect sells to all category buyers rather than a particular segment (see Uncles et al., 2012). Most vegetarian pizzas are sold to non-vegetarians, and Diet Coke still A

competes very directly with regular Coca-Cola. Consumers do not alter their loyalties often, but they may revise their loyalties over decade-long time spans, largely due to changes in their livesas they grow up, leave home, get married, have children, move house, move jobs; economic trends change income; technological change makes some products obsolete. Few consumers, however, will change loyalties within typical brand-planning periods. The assumption of stable loyalties turns out to be largely true for most of us, at least in the medium term and often longer. Certainly there are some brands people buy all their life and even pass the loyalty on to their children. simple explanation weaves the

timing of individuals exposures to particular marketing activities forms part of the vast random background of influences that nudge consumers, producing wobble in an individuals brand purchases. Market share will change in a Dirichlet world if a brand secures additional mental and/or physical availability. This may come about as a result of superior marketing or through some innovation that leads to real changes in loyalties and, hence, brand growth. Yet, the brand will still be competing with the same rivals and selling to the same sort of consumers. The overall distribution of purchase propensities should still follow the Dirichlet model, which provides benchmarks to help analyze these market changes (as shown by McCabe, Stern, and Dacko, 2012). Despite these well-established patterns, the Dirichlet is often criticized as an unrealistic description of the brand switching, variable loyalty, and non-stationarity thought to characterize consumer markets. Even when the Dirichlet conception of loyalty is recognized as accurate, critics are prone to claim the model cannot explain the ongoing changes observed in most markets. Therefore, this study examines and rebuts some of the most common objections to the Dirichlet approach to modeling markets. It shows that individual brand switching lies within ranges expected from the Dirichlet model; aggregate loyalty to brands changes very little over time; and the parameters of the model are in fact quite stable. SEEING THROUGH THE RANDOM VARIATION Although the Dirichlet is less famous than the laws that it predicts (such as the Double Jeopardy or Duplication of Purchase laws), it is used daily within marketing corporations to benchmark brand metrics

Dirichlet s laws togetherthat brands compete for custom primarily in terms of mental and physical availability (Sharp, 2010). This Dirichlet world is one where buyers are busy cognitive misers. They are naturally loyal but polygamously so; their mental and physical availability determines the brands they loyally buy over and over. The Dirichlet world is also one where marketing is very important, as brands continually battle for attention. Branding helps consumers exercise their natural tendency to be loyal while clever creative advertising reminds people to keep buying brands they rarely think about. Consequently, a media strategy that maximizes reach and coverage over time is needed. The search for persuasion breakthroughs that can change what consumers think of a brand is a small part of marketingand often a distraction from the important tasks. Rather, much of the effect of marketing is to counter competitors, to refresh and maintain existing loyalties, and to maintain and increase the mental and physical availability of a brand. The

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against the models stationary and nonpartitioned norms. For example, managers can determine whether their brands purchase frequency is high, low, or normal given its market share. This is valuable in the hands of knowledgeable managers. Because the structure of Dirichlet markets is well understood, deviations from Dirichlet norms are easily diagnosed, and their causes can usually be identified. The Dirichlet underpins many of our specialised marketing models because it tells us what we expect to happen, we can then quickly identify the exceptions which provide useful insights. Ian Hewitt, CMI director-marketing science, Unilever The Dirichlet allows the business to understand which brands are unusual and differ from the expected pattern. This provides genuine learning about the category and helps to dispel myths about which brands are special or different. Tom Lloyd, director, Metametrics UK Without the Dirichlet benchmarks, consumer buyingeven in a market where no changes are occurringlooks chaotic, almost completely random or subject to enormous changes in preference. For example, brands in repertoire categories such as grocery products seem to lose vast numbers of their customers each year and win most of these individuals back the next. The Dirichlet is a powerful tool that allows

Consumers are habitual but not robotic. There are thousands of things that cause variation in purchases from period to period, such as weather, a sports event, a visit from a friend, cooking a new meal, dropping a jar, price promotions, out-ofstocks, competitions, sampling, seeing an advertisement close to the shopping encounter, bumping into a friend in a supermarket, being late for dinner, a trolley blocking the supermarket aisle for some seconds, and so on. All can sway purchase events but rarely produce any ongoing change in loyalty. In 1974, in the pages of the Journal of Marketing Research, Frank Bass even speculated that the brain might have a stochastic element. There is support for this in the way that consumers reply to attitudinal questions (see Castleberry, Barnard, Barwise, Ehrenberg, and DallOlmo Riley, 1994; DallOlmo Riley, Ehrenberg, and Castleberry, 1997; Rungie, Laurent, DallOlmo Riley, Morrison, and Roy, 2005). That is, individual respondents often do not say the same thing in sequential surveys, even if they are only separated by a few minutesperhaps simply because memory does not deliver perfect recall.

The Dirichlet assumes that this variation is as-if random wobble around steady ongoing loyalties. To illustrate how much variation there can be, a hypothetical consumer in a Dirichlet market simulation shows a great deal of variation in her purchase (See Table 1). The authors do stress that this is purely a simulated Dirichlet purchase stream with fixed probabilities; it does not show an individual who is changing her loyalties, rather just random wobble around steady loyalties. Gambling provides a useful analogy for this variation around ongoing steady loyalties; casino visitors have a steady ongoing propensity to lose money; on some visits, they actually make money, but the long-run odds remain in the houses favor. Similarly, if we looked at a group of coin tossers, we would see that very few individuals (if any) made a classic run of tosses heads (H), tails (T): HTHTHT. Even in quite long runs of coin tosses, we would see many where heads were not 50percent. This is all just random but, rather a predictable wobble. In fact, each coin has a perfectly divided (50/50) loyalty to both heads and tails.

Table 1 Pure Dirichlet Consumer: Simulated Chocolate Category

Brands 1 1 2 Category Purchases 3 4 5 6 7 8 9 10 1 1 1 June 2012 JOURNAL 1 1 1 1 1 1 1 2 3 4 5 6 7 8 9 10

us to see through the as-if random noise to determine what is really happening. Due to the assumption of stable purchase probabilities, the Dirichlet is a stationary model in which brands do not grow or decline and consumersalthough different from one anotherdo not change their loyalties. It does not assume, however, that we each buy exactly the same this quarter(or year) as we bought last quarter (or year).

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The

Dirichlet

describes

something

promotion, the probability leaps that we will purchase that particular brand (if we are in the market for that category); hence, price promotions cause sales spikes. The instant after the purchase, however, the probability of buying that brand next time reverts to its normal steady propensity. Price promotions are not unusual, buying the brand is not unusual, so there is nothing to change our opinion of the brand, little to alter our memory structures. An individuals purchase propensities, their personal loyalties, remain intact with plenty of random, predictably distributed wobble. The Dirichlet provides the ability to benchmark and, thereby, see through, the stochastic variation that can conceal the underlying loyalties. Without knowledge of the Dirichlet, it is easy to confuse random wobble with real changes in the market. For example: A common mistake is to notice that a customer who bought one year did not buy again the following year and to infer that she or he has defected from the brand (the bucket leaks). In reality, these situations are typically not defections but simply represent light customers who do not buy every year. Most churn, therefore, is simply light customers sometimes buying and sometimes not. Many brandseven large oneshave a majority of customers who only buy the brand every 2 or so years (Sharp, 2010). Due to stochastic wobble, customers who buy infrequently will occasionally skip a year. The Dirichlets stationary benchmarks allow precise estimates of how many of such lapsed customers are really not lost at all (for example, see Wright and Riebe, 2010; and Riebe et al., forthcoming). In 2009, the Chief Marketing Officer Council issued a report announcing
1

a dramatic collapse in loyalty for U.S. packaged goods brands, due to the economic downturn in the previous year (Pointer Media Network, 2009). Advertising Age reported, For the average brand, more than half of consumers52 percentwho were highly loyal to certain package-goods brands in 2007 became markedly less so last year.1 The result was purely due to the stochastic wobble in individuals purchasing. If loyalty could really collapse in such a manner in the course of a single year, there would be universal marketplace chaos. In 2011, Catalina Marketing repeated the same analysis and reported that leading brands, once again, had lost almost half of their loyal customers in a single year (even when they enjoyed revenue growth). Catalina reported, Every year, brands experience a dramatic exodus of previously loyal consumers, resulting in significant reductions in potential volume and share.2 Again, the Dirichlet tells us that this apparent change is perfectly normal, due to the stochastic variation in purchase frequency and brand choice. Few consumers have changed their loyalties, but stochastic wobble can make it look that way. Without the Dirichlets benchmarks for defection/ acquisition metrics, it is not possible to separate the real churn from the normal stochastic wobble. Several years earlier, in the pages of the Journal of Advertising Research, A.L. Baldinger and J. Rubinson (1996) made a very similar observation, reporting nearly identical results (and identical surprise): We were surprised to observe that only 53 percent of high loyals to the brand remained high loyal to
http://adage.com/article/news/cpg-marketing-brandloyalty-recession/137436/ 2 http://adage.com/article/news/catalina-major-packagedgoods-brands-lost-46-loyalists/229640/

much more complex than coin tossing. It assumes category purchase and brand loyalties have steady probabilities but that these vary between individuals. Also, an individuals buying will exhibit stochastic wobble around the steady-state probabilities. In the long run, buyers with a 0.1 probability of buying the brand will buy it on 10 percent of category purchase occasions. This buying, however, will happen in an as-if random fashion and independently of the brand they bought on last occasion. So, individual brand purchasing for short periods may show stochastic variation rather than change in underlying patterns of loyalty. Although individual consumers category purchase rates and brand loyalties might be quite stable, anyone looking at their buying would find it difficult to see these patterns. Imagine consumers who have an ongoing propensity to buy chocolate eight times a year and to buy Snickers once of every four chocolate bar purchases; we would expect them (on average) to buy a Snickers bar twice a year, but some years they buy more chocolate and some years less. It is quite reasonable that, even though they did not buy any chocolate last quarter, they still have an ongoing probability of buying it eight times a year on averagealthough some years they buy chocolate only once or twice, some years 12 times. On top of this, sometimes they buy Snickers two of four purchases; sometimes none of four. So, this consumer can conceivably buy six Snickers bars one year and the following year none. This sort of variation is unremarkable and unlikely to be noticed by the consumers themselves. Tactical marketing certainly has an effect on buying, with price promotions massively affecting the purchase propensities of those individuals who buy the category during the promotion. If we see that one of the brands in our repertoire is on

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the brand a year later. Their finding led the authors to mistakenly conclude that attitudes determined who would switch and who would not. Stochastic wobble means that categorizing customers as heavies, loyals, or defectors based on a period of their purchasing will misclassify many people. Each of the preceding examples suffered from this effect. If an analyst takes a group of heavy buyers (e.g., the top 20 percent) from a customer database, they are likely to note that, in a subsequent period, their purchasing is lighter than before, easily leading to the incorrect conclusion that real changes in loyalty have occurred. Stochastic wobble also means that some of the people who were previously classed as heavy simply had an upward fluctuation in their purchase rate for the base period, so regression-to-the-mean occurs in the next period. The same effect occurs with opposite valence for light buyers, and it is normal that many zero buyers from one period may come into the market the following periodagain, regression to the mean. The Dirichlet can quantify the degree of regression to the mean that will occur under a no-change condition, enabling analysts to see how much of the variation represents genuine dynamic change. Real changes in loyalties do occur, but, without the Dirichlet, they are hard to spot. A purchase run of AABB is likely from a person with a repertoire that features 50 percent purchases of brand A and 50 percent brand B, but it is tempting to misinterpret such a purchase run as a consumer who was loyal to brand A switching to brand B. Without a benchmark such as the Dirichlet, it is simply not possible to sort the real changes in loyalties from the stochastic wobble. An examination of repeat-purchase levels from month to month using the

Dirichlet, documented about 15-percent annual erosion in repeat-rates for individual brands (East and Hammond, 1996). This change was largely due to consumers changing the weight of a brand in their repertoire (adjusting their loyalties) rather than wholesale switching from one brand to another. This leads to the next question: if loyalty to individual brands is more stable than commonly thought, is loyalty eroding in aggregate instead? EROSION OF CONSUMER LOYALTY WITHIN A CATEGORY IS RARE AND SLOW There is a long-held view that consumer loyalty in most established product categories is eroding, which is contrary to the assumptions on which the Dirichlet is based. For example, in 1992, J. S. Dubows research suggested a decline in loyalty for Coca-Cola dating back to the 1960s. More recently another report stated To say that brand loyalty is in decline today is, at the very least, an understatement (Kapferer, 2005). Industry publications often report that the retail sector is being threatened by an alarming decline in customer loyalty and that shoppers are becoming less brand loyal (Gerzema and Lebar, 2008; Lincoln, 2006) and, as noted earlier, Catalina Marketing and the Chief Marketing Officer Council announced that loyalty erosion and defection are increasing dramatically (Pointer Media Network, 2009, page2). If brand loyalty, indeed is declining, it would be a major issue for marketers. Lower loyalty would mean that, to stay the same size, the average brand would require a larger customer base but one that buys the brand less regularly than in the past. The important marketing task of remindingand nudging buying propensitieswould be harder, and the scope for customers to forget about any particular brand would be wider.

Past evidence, however, suggests brand loyalty is quite stable over time. In 1984, T. Johnson, in the Journal of Advertising Research examined 50 major brands in 20 U.S. product categories over a period of approximately 8 years. He found some decline in loyalty for certain brands but noted the decline often accompanied category growth. That is, growth in the category attracted new brands, which broadened consumer repertoires. Johnson concluded there was some evidence of loyalty decline, but its magnitude was small. More recently, another study examined 21 categories in Holland for time periods of 1 to 2 years and concluded that there was little evidence of loyalty change (Dekimpe, Steenkamp, Mellens, Abeele, 1997). This section now looks at loyalty change over a long period, using more recent data gathered across two countries.3 There were some years for which data were unavailable for some of the U.K. categories. Where actual data for before and after the missing years were available, the missing values were interpolated (See Table 2, italics). Share of category requirements (SCR) was used as the loyalty measure. SCR is a widely used and intuitively understandable empirical metric computed as the average number of times buyers of brand X buy that brand, divided by the average number of times they buy the category. SCR is highly correlated with other loyalty metrics, both behavioral and attitudinal. It is also a loyalty metric that is predicted by the Dirichlet. The SCR was calculated for each brand over fixed 52-week periods; the overall average was then taken for the respective category. The process was repeated for eight U.K. categories for periods of between 11 and 13 years and for six U.S. categories over 6 years (See Tables 2 and 3).
3

Kantar provided data for the United Kingdom; Nielsen provided data for the United States.

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Table 2 Loyalty Metrics for Eight UK Categories 19982010

Average Brand share of requirements in this category: Bodysprays and Deodorants Instant Standard Coffee Tea Bags Toothpaste Margarine Breakfast Cereals Laundry Detergents Dog Food Year (52-week period JulyJune) 98 35 34 27 15 31 99 33 34 26 15 31 00 27 33 34 27 21 15 31 19 01 29 33 34 27 22 15 30 20 02 28 33 34 26 22 15 30 19 03 27 34 34 26 22 15 29 19 04 27 36 34 27 22 15 33 20 05 27 36 34 26 23 15 34 21 06 30 35 35 25 24 17 34 20 07 25 34 33 24 22 17 33 19 08 25 32 33 25 20 13 30 21 09 22 30 33 24 18 13 31 20 10 22 30 31 23 19 13 30 19 Average annual change in SCR 0.5 0.4 0.3 0.3 0.2 0.2 0.1 0.0

Average year-on-year change over all categories: 0.2% p.a.

Table 3 Loyalty Metrics for Six U.S. Categories 20052010

Average Brand share of requirements in this category: Yogurt Shampoo Deodorant Cat Food Breakfast Cereals Margarine Year (52-week period JulyJune) 05 24 35 36 19 11 31 06 22 30 36 21 11 33 07 23 30 37 20 12 33 08 21 31 37 18 11 33 09 20 34 35 21 11 33 10 20 33 36 20 12 33 Average annual change in SCR 0.8 0.4 0.0 0.2 0.2 0.4

trend downward. Loyalty metrics for individual brands, however, were found to be quite stable. Market share change, when it occurred, was reflected in changing brand penetrations, with much smaller accompanying changes in loyaltyquite consistent with the Dirichlet models predictions (Goodhardt et al., 1984). MARKET STRUCTURE IS LARGELY STABLE FROM PERIOD TO PERIOD The Dirichlets assumption of stable consumer loyalties means it represents a stationary market, without substantial category growth or change in the heterogeneity of category purchase rates or brand shares. The current study provides evidence from six product categories4 over 2 years to show that the underlying parameters of the modelM, K and Phi, described in Table 4are, in fact, quite stable. This contrasts with other marketing science and econometric models that often show considerable instability or generate parameters that are not stationary over time. For example, unstable parameters
4

Average year-on-year change over all categories: 0.06% p.a. The results show there is some gradual decline in brand loyalty in some categoriesbut the magnitude is very small. The biggest year-on-year loyalty change over the period was the Yogurt category in the United Stateswith SCR declining by 0.8 percentage points per year. The next largest change was for Bodysprays and Deodorants in the United Kingdomon average, only 0.5 percentage points per year. Both these two categories have exhibited robust growth over the time period. Johnsons 1984 work also linked category growth to a small decline in loyalty, with the explanation that growth attracts new brands, which, in turn, broadens consumer choice. The other categories in Tables 2 and 3 show zero, or almost zero, loyalty change. Given the reported rise in temporary promotions, brand proliferation, and the global financial crisis, these categories show remarkable stability in average loyalty. It should be noted that stable brand loyalty for a category, overall, does not mean stability for each brand. For example, some brandsin theory, at leastcould be trending upward in loyalty, whereas others

Data provided by Kantar.

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Table 4 Description of the Dirichlet Models Parameters

Parameter K Meaning Exponent of the NBD component of the model. Models the distribution of category purchase rates. Scale parameter of the NBD component of the model. This measures the weight of purchasing... relative to the heterogeneity in category latent selection rates (Driesener 2005, p.63). Mean of the product class purchasing rate, as determined by K and A. This is related to the other parameters as M = AK. Sum of the individual brand alphas, measures heterogeneity of latent brand selection rates (loyalty). Brand share is alpha/S. Managerial Implications Can be used for customer concentration analysis and analyzing the distribution of light versus heavy category buyers. This parameter shows how seasonality and demand fluctuations are reflected in the weight (frequency) of purchases. It can help anticipate expected purchase frequency and penetration. The average buying rate of all shoppers (including nonbuyers) for a specified period. Theoretical Stability Stable

Varies proportionally with time. Varies with seasonality

Varies proportionally with time. Varies with seasonality

Stable Describes degree of divided loyalty generally present in the market. In its standardized form (Phi), it provides a description of heterogeneity in loyalty. then examined coefficients of variation, and conducted formal tests of stationarity (See Figures 1, 2, and 3).

have been reported for the Bass model (Tigert and Farivar, 1981), for exponential trial-growth models (Fader, Hardie, and Zeithammer, 2003), and for marketing mix models estimated from scanner data (Blattberg and George, 1991; Montgomery and Rossi, 1999; Bemmaor and Franses, 2005). There is also evidence of widespread non-stationarity 1994). The over-time stability of K, M, and Phi is now examined (the standardized version of the parameter S where Phi = 1/ (1 + S)). The parameter A was not included as the identity M = AK links these three parameters. The categories analyzed varied in purchase rate and seasonality. These were: confectionary; breakfast cereals; canned beans; toothpaste; deodorant; and canned soup. In each case, the top 30 brands were includedaccounting for approximately 80 percent of the marketand 24 months of data starting from January were analyzed. (The one exception was canned soup, for which only 23 months of data were available.) in econometric time series parameters (Stock and Watson,

The authors fit the Dirichlet model to each month of data for each category and plotted time-series of the parameters and

Confectionery 3 2.5 2 1.5 1 0.5 0 Cereals

Beans Toothpaste

Deodorant Soup

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Note: Figure 1 plots the stability of the average buying rate M parameter. This is the parameter in which most variation is expected as it is responsive to seasonal and promotion effects. Figure 1 demonstrates there was relatively little period-to-period variation in Malthough, unsurprisingly, in December (time 12), people bought more confectionery and less cereal; beans and soup both show evidence of some broad seasonal cycles.

Figure 1 24-Month Time Series of the M Parameter

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Linear plots are useful overviews but do 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Note: The K parameter shows the mix of light and heavy categories buyers. Here again, there is stability except for toothpaste. The upward fluctuations in the K parameter for toothpaste indicate the presence of a greater proportion of lighter buyers (or conversely a lesser proportion of heavy buyers). Each one is accompanied by a reduction in the rate of category buying and also less brand switching. Such a pattern of change is consistent with a no-promotion period in a heavily promoted category; this would result in a reduction in the overall buying rate, a reduction in the relative proportion of heavy buyers, and reduced brand switching, all of which are seen in this category.

not provide a formal analysis. Moreover, Confectionery Beans Deodorant Cereals Toothpaste Soup they will exhibit exactly the kind of stochastic wobble described earlier. Therefore, following traditional analysis of time series values (e.g., Bass and Leone, 1983), the authors calculated the ratio of the standard deviations to the means of the parameters (the coefficient of variation). This allows comparison of parameter values across categories, as it is a measure of dispersion that is independent of the units of observation (See Table 5). The grand average of all coefficients of variation in Table 5 was 0.16, which is low in the context of time series analysis. Nonetheless, as might be expected (See Figure 2), the K parameter for toothpaste is an outlier (the only one from 18 coefficients of variation), with nearly triple the coefficient of variation of the next most volatile time series. Aside from this outlier, dispersion around the average parameter values is low. To detect trends, the authors calculated Confectionery Cereals Beans Toothpaste Deodorant Soup regression lines for the parameter time series and, for this analysis, the 23 months of data for the soup time series were truncated to 12 months to avoid spuri1 ous trends from seasonal variations. Only three instances of non-stationarity were found. The intercepts and unstandardized

Figure 2 24-Month Time Series of the K Parameter

1.2

0.8 0.6 0.4 0.2 0

Table 5 Coefficients of Variation for the Parameters M, K, and Phi

M Confectionery Cereal Beans 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Toothpaste Deodorant Soup Average 0.09 0.07 0.08 0.07 0.15 0.30 0.12 K 0.07 0.05 0.11 0.70 0.10 0.26 0.22 Phi 0.23 0.09 0.04 0.26 0.16 0.07 0.14

Note: Figure 3 examines stability in the heterogeneity of brand choice using the Phi parameter. Again, there is stability but with more period-to-period variation than typical for other parameters. The fluctuations in the value of Phi for toothpaste match those already found for the K parameter.

Figure 3 24-Month Time Series of the Phi Parameter

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The Dirichlets assumption of stable consumer loyalties means it represents a stationary market, without substantial category growth or change in the heterogeneity of category purchase rates or brand shares.

the Dirichlet has disbelievers who argue that the model cannot adequately reflect the dynamic nature of consumer choice. This paper addresses some of the primary misconceptions about the Dirichlet that have developed over the 30 (or so) years since the model was introduced to the world. Although the Dirichlet is most commonly used to provide benchmarks and predictions of brand performance metrics, it actually models the distribution of individual consumers loyalties.

coefficients for these three times series were Beans (K) Deodorant (Phi) Intercept Slope

Finally, using the augmented DickeyFuller test allowed the authors to control for twelfth-order (annual) seasonal lag and for drift, although initialization of the lag halved the data available for estimation. In this case, no cases of deterministic trend or drift were detected, and seasonality was detected only for the M parameter for deodorant (t = 4.5) and the K parameter for toothpaste (t = 4.7), although this latter finding likely was due to the combination of extreme variability and a truncated data set, rather than to true seasonality. From this suite of tests, it is clear that non-stationarity in parameters is both rare and minor, giving empirical support for the assumption of stable loyalties. Either consumer loyalties are very stable, or (less plausibly) changes in one consumers loyalties are inversely matched by changes in anothers. The model is robust to minor seasonal variations and accurately describes buying behavior over time. CONCLUSION The Dirichlet is one of marketing sciences most important theoretical achievements and also one of its most practical tools. It provides detailed insight into the distribution of consumer loyalties and is used widely in industry for benchmarking and interpreting brand performance. The insights derived from the model run counter to some well-entrenched marketing mythology, and so, unsurprisingly,

Brand-performance metrics are calculated from these distributions of loyalties. As shown, without using the Dirichlet, real changes in loyalty cannot be isolated from the effects of stochastic variationand so mistakes are easily made. Although it is a model of stationary loyaltiesand, therefore, stationary brands the Dirichlet can be used to analyze market change through benchmarking. Nonetheless, as the current paper demonstrates, such structural market change is rare. Both average loyalty and the structural parameters of the Dirichlet show remarkable stability over time. This is not to say that the Dirichlet provides a perfect explanation. Just as with Newtonian mechanics and Boyles law, there are some well-documented exceptions. It is a sign of a mature scientific theory that such boundary conditions are known. Future research can be directed toward explaining such conditions and possibly improving or replacing the base theory along the way. To compete, however, any replacement model would need to show equivalent explanatory power over the wide range of conditions for which the Dirichlet already performs exceptionally well. Although the Dirichlet (like any model) does not represent the absolute truth about markets, it is a sufficiently close approximation that all marketers should be very familiar with Dirichlet behaviors and loyalties. June 2012 JOURNAL

Deodorant (M) 0.285 0.003 0.308 0.003 0.449 0.004

It is commonly agreed that non-stationarity is present if a time series changes by more than 5 percent over a 12-month period. These slopes translate to annual changes of 11 percent, 10 percent, and 9 percent. Thus, though 3 of 18 time series of Dirichletmodel parameters showed nonstationarity, the rate of change did not exceed 1 percent per month. It is notable that, though the K parameter for toothpaste had a higher coefficient of variation, it showed no evidence of a trend in the parameter value. A more formal approach to time series stability is the Dickey-Fuller test. This is usually applied to longer time series, and test values are published only for time series of length 25, 50, 100, and so on. Nonetheless, the authors applied the Dickey-Fuller test to their time series of length 24 (23 for soup) and found only two cases of a deterministic trendfor the Phi parameter for deodorant (consistent with the regression above) and the M parameter for cereal. The t values were 2.90 and 2.92, only just exceeding the published critical value for time series of length 25, so again these effects are not large.

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To the best of our disciplines knowledgeand based on extensive empirical and theoretical workbrands compete in a Dirichlet world.

Lars Meyer-Waarden is a professor of marketing at the EM Business School Strasbourg and at the IAE-Graduate School of Management Toulouse. He has published research about Customer Relationship Management, loyalty, and loyalty programs in academic journals such

Bass, F. M., A. Jeuland, and G. P. Wright. Equilibrium Stochastic Choice and Market Penetration Theories: Derivations and Comparisons. Management Science 22, 10 June (1976): 10511063. Bemmaor, A. C., and P. Hans Franses. The Diffusion of Marketing Science in the Practitioners Community: Opening the Black Box. Applied Stochastic Models in Business and Industry 21, 4-5 (2005): 289301.

Byron Sharp is professor of marketing science at the University of South Australia. He is director of the Universitys Ehrenberg-Bass Institute which is sponsored by many of the worlds leading marketing corporations, such as Turner Broadcasting, Coca-Cola, Mars, CBS, Unilever, and Nielsen. He is the author of How Brands Grow (Oxford University Press). With Professor Jerry Wind at Wharton and the Advertising Research Foundation he is organizing a 2012 conference assembling lawlike knowledge about advertising in the new digital environment.

as Journal of the Academy of Marketing Science and Journal of Retailing. Prior to joining academia, he worked for many years as a marketing manager within the LORAL Group.

Lara Stocchi is a research associate at the EhrenbergBass Institute at the University of South Australia and has just submitted a PhD in Marketing. Previously, she studied at Universit Carlo Cattaneo LIUC, in Italy (Bachelor in Business Administration and Postgraduate studies in Marketing). From July 2012, she will be holding a lecturing position at the School of Business and Economics at the University of Loughborough,

Blattberg, R. C., and E. L. George. Shrinkage Estimation of Price and Promotional Elasticities: Seemingly Unrelated Equations. Journal of the American Statistical Association 86, 414 (1991): 304315. Bongers, M., and J. Hofmey. Why Modeling Averages Is Not Good EnoughA Critique of Double Jeopardy. Journal of Advertising Research 50, 3 (2010): 323333. Bound, J. Users Guide to DIRICHLET.

Malcolm Wright is professor of marketing at Massey University and adjunct professor at the Ehrenberg-Bass Institute of the University of South Australia. He applies empirical principles to marketing problems and has made interrelated discoveries about brand loyalty, the use of probability scales, new product forecasting, and optimizing the advertising budget. He has also published many articles critically examining the foundations of popular marketing knowledge.

UK. Her key areas of research are: Dirichlet modeling, analysis of consumer behavior, tracking brand performance, tracking brand equity and brand salience, memory and cognitive structures.

Philip Stern is professor of marketing at Loughborough University School of Business and Economics and adjunct Professor at the Ehrenberg-Bass Institute. He is one of a long list of Andrew Ehrenbergs PhD students and his research is currently focused on healthcare.

Marketing Bulletin (2009): 20. Cameron, A. C., and P. K. Trivedi. Regression analysis of Count Data. Cambridge, UK: Cambridge University Press, 1998. Castleberry, S. B., N. R. Barnard, T. P. Bar-

John Dawes is a senior researcher at the Ehrenberg-Bass Institute, University of South Australia. The Institute is sponsored by many leading corporations including Mars, Elders, ESPN, General Motors, and ANZ Bank. His research interests are pricing and promotions, brand performance metrics, and competitive market structure. He regularly undertakes research projects on these issues for industry partners.

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