The Value of Being No. 1
By Michelle Krebs May 21, 2007Much ado was made last month when Toyota surpassed General Motors as No. 1 in global sales for the first time.
Now a story in todayâs New York Times business section suggests leapfrogging from 2nd place to 1st may have substantial and quantifiable benefits on revenue.
Jan H. Hofmeyr, an expert on consumer behavior at Synovate, the market research arm of Aegis, conducted a study of brand preferences and spending habits of consumers. The study demonstrated the relative benefits of moving up in the rankings. A product that leaps from 2nd to 1st in a category can really affect a companyâs bottom line, Hofmeyr concluded, while the advantage of moving up to, say, No. 5 from No. 6 is much smaller.
âMarketers have always known itâs better to be No. 1 than No. 2, but now you can attach a revenue consequence to that,â Hofmeyr told The New York Times.
Hofmeyer's study used Zipf's law, a formula to measure the probability of occurrences more common to analyzing the relationship between the size and frequency of such things as earthquakes.
Before being adopted by Synovate, Hofmeyrâs ideas were tested in Australia on two product categories: toilet paper and instant coffee. Consumers were asked to identify the brands they used and to rank them in order of preference.
According to his model, consumers who used four brands of toilet paper might have been expected to spend about 53 percent of their toilet paper budget on the top choice, 27 percent on the second brand, 13 percent on the third and 7 percent on the fourth.
In the Australian test case, consumers actually spent 50 percent on the top choice, 33 percent on the second, 9 percent on the third and 8 percent on the fourth. Averaged over hundreds of consumers, Hofmeyr said, the study showed an unusually high correlation between stated preferences and actual purchase decisions.
âWith this approach, the moment you determine a brandâs ranking, you can predict the market share,â he said.
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Zipf's law pops up every now and then in marketing. The only problem is it doesn't work. It says that the difference between the top brand and 2nd brand will be greater than the difference between the 2nd and 3rd, and so on. In real markets this is hardly every true (when it is, it's simply a fluke). The same applies for the share of brands within individual's personal repertoires. Correlations are a totally inappropriate way of testing the fit of Zipf's law.
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